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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
Commission file number 1-8491
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HECLA MINING COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 82-0126240
- ------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6500 Mineral Drive, Suite 200
Coeur d'Alene, Idaho 83815-9408
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(Address of principal executive offices) (Zip Code)
208-769-4100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes XX . No .
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Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes XX . No .
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Shares Outstanding November 3, 2004
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Common stock, par value 118,299,861
$0.25 per share
Hecla Mining Company and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2004
I N D E X*
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Page
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PART I. - Financial Information
Item l - Condensed Financial Statements (unaudited)
- Consolidated Balance Sheets -
September 30, 2004 and December 31, 2003 3
- Consolidated Statements of Operations and Comprehensive
Loss - Three Months and Nine Months Ended
September 30, 2004 and 2003 4
- Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2004 and 2003 5
- Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 22
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 44
Item 4 - Controls and Procedures 46
PART II. - Other Information
Item 1 - Legal Proceedings 48
Item 3 - Defaults Upon Senior Securities 48
Item 6 - Exhibits 48
*Certain items are omitted as they are not applicable.
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Part I - Financial Information
Hecla Mining Company and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(In thousands, except shares)
September 30, December 31,
2004 2003
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 71,607 $ 105,387
Short-term investments 21,590 18,003
Accounts and notes receivable 21,748 16,318
Inventories 17,866 16,936
Deferred income taxes 334 1,427
Other current assets 6,371 3,174
------------ ------------
Total current assets 139,516 161,245
Investments 1,745 722
Restricted cash and investments 19,528 6,447
Properties, plants and equipment, net 107,961 95,315
Deferred income taxes -- 896
Other non-current assets 14,478 13,570
------------ ------------
Total assets $ 283,228 $ 278,195
============ ============
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 18,102 $ 13,847
Accrued payroll and related benefits 9,440 7,307
Current portion of long-term debt - - 2,332
Accrued taxes 2,576 3,193
Current portion of accrued reclamation and closure costs 8,193 7,400
------------ ------------
Total current liabilities 38,311 34,079
Long-term debt - - 2,341
Accrued reclamation and closure costs 66,376 63,232
Other non-current liabilities 6,836 7,114
------------ ------------
Total liabilities 111,523 106,766
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SHAREHOLDERS' EQUITY
Preferred stock, $0.25 par value, authorized 5,000,000 shares; issued
2004 - 157,816 shares, issued 2003 - 464,777 shares,
liquidation preference 2004 - $10,238 and 2003 - $28,932 39 116
Common stock, $0.25 par value, authorized 200,000,000 shares;
issued 2004 - 118,299,861 shares, issued 2003 - 115,543,695 shares 29,575 28,886
Capital surplus 506,715 504,858
Accumulated deficit (363,924) (361,560)
Accumulated other comprehensive loss (582) (753)
Less treasury stock, at cost; 2004 and 2003 - 8,274 common shares (118) (118)
------------ ------------
Total shareholders' equity 171,705 171,429
------------ ------------
Total liabilities and shareholders' equity $ 283,228 $ 278,195
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
(Dollars and shares in thousands, except for per-share amounts)
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Sales of products $ 33,718 $ 28,079 $ 102,080 $ 84,723
--------- --------- --------- ---------
Cost of sales and other direct production costs 21,552 12,528 53,957 42,448
Depreciation, depletion and amortization 5,261 5,161 17,739 15,285
--------- --------- --------- ---------
26,813 17,689 71,696 57,733
--------- --------- --------- ---------
Gross profit 6,905 10,390 30,384 26,990
--------- --------- --------- ---------
Other operating expenses:
General and administrative 2,071 1,841 6,169 6,103
Exploration 5,656 2,468 11,476 7,285
Pre-development 518 94 1,541 1,048
Depreciation and amortization 89 69 238 268
Other operating expense (income) 1,290 818 1,716 (2,552)
Provision for closed operations and environmental matters 8,515 23,284 9,970 23,488
--------- --------- --------- ---------
18,139 28,574 31,110 35,640
--------- --------- --------- ---------
Loss from operations (11,234) (18,184) (726) (8,650)
--------- --------- --------- ---------
Other income (expense):
Interest income 446 1,263 1,212 2,227
Interest expense (80) (233) (457) (914)
--------- --------- --------- ---------
366 1,030 755 1,313
--------- --------- --------- ---------
Income (loss) from operations before income taxes and
cumulative effect of change in accounting principle (10,868) (17,154) 29 (7,337)
Income tax provision (424) (306) (2,393) (1,922)
--------- --------- --------- ---------
Loss from operations before cumulative effect of
change in accounting principle (11,292) (17,460) (2,364) (9,259)
Cumulative effect of change in accounting principle,
net of income tax -- -- -- 1,072
--------- --------- --------- ---------
Net loss (11,292) (17,460) (2,364) (8,187)
Preferred stock dividends (138) (659) (11,464) (1,977)
--------- --------- --------- ---------
Loss applicable to common shareholders $ (11,430) $ (18,119) $ (13,828) $ (10,164)
========= ========= ========= =========
Comprehensive loss:
Net loss $ (11,292) $ (17,460) $ (2,364) $ (8,187)
Unrealized loss on derivative instruments (527) -- (527) --
Unrealized holding gains on securities 208 289 677 488
Other 5 10 21 28
--------- --------- --------- ---------
Comprehensive loss $ (11,606) $ (17,161) $ (2,193) $ (7,671)
========= ========= ========= =========
Basic and diluted income (loss) per common share:
Loss from operations after preferred dividends $ (0.10) $ (0.16) $ (0.12) $ (0.10)
Cumulative effect of change in accounting principle -- -- -- 0.01
--------- --------- --------- ---------
Basic and diluted loss per common share $ (0.10) $ (0.16) $ (0.12) $ (0.09)
========= ========= ========= =========
Basic and diluted weighted average number of
common shares outstanding 118,285 110,221 117,955 109,656
========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
-4-
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine Months Ended
----------------------------
September 30, September 30,
2004 2003
------------- -------------
Operating activities:
Net loss $ (2,364) $ (8,187)
Non-cash elements included in net loss:
Depreciation, depletion and amortization 17,977 15,553
Cumulative effect of change in accounting principle -- (1,072)
Gain on disposition of properties, plants and equipment (105) (306)
Provision for reclamation and closure costs 9,438 23,530
Deferred income taxes 1,989 1,475
Stock compensation 300 --
Change in assets and liabilities:
Accounts and notes receivable (5,430) (5,462)
Inventories (930) (3,638)
Other current and non-current assets (4,219) (1,368)
Accounts payable and accrued expenses 4,242 357
Accrued payroll and related benefits 2,389 (82)
Accrued taxes (617) 1,184
Accrued reclamation and closure costs and other non-current liabilities (5,388) (4,376)
--------- ---------
Net cash provided by operating activities 17,282 17,608
--------- ---------
Investing activities:
Purchase of held-to-maturity securities (24,619) (12,258)
Proceeds from maturity of held-to-maturity securities 21,032 --
Additions to properties, plants and equipment (30,893) (12,618)
Proceeds from disposition of properties, plants and equipment 98 486
Increase in restricted investments (13,427) (14)
Other, net -- 50
--------- ---------
Net cash used by investing activities (47,809) (24,354)
--------- ---------
Financing activities:
Common stock issued under warrants and stock option plans 1,420 3,377
Common stock issued, net of offering costs -- 91,235
Borrowings on debt 2,430 1,350
Repayments on debt (7,103) (5,938)
--------- ---------
Net cash provided (used) by financing activities (3,253) 90,024
--------- ---------
Net increase (decrease) in cash and cash equivalents (33,780) 83,278
Cash and cash equivalents at beginning of period 105,387 19,542
--------- ---------
Cash and cash equivalents at end of period $ 71,607 $ 102,820
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
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Notes to Consolidated Financial Statements
NOTE 1. BASIS OF PREPARATION OF FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
balance sheets, consolidated statements of operations and comprehensive loss,
consolidated statements of cash flows and notes to consolidated financial
statements contain all adjustments, consisting only of normal recurring
accruals, necessary to present fairly, in all material respects, the financial
position of Hecla Mining Company and its consolidated subsidiaries ("we" or
"our" or "us").
The results of operations for the periods presented may not be
indicative of those which may be expected for a full year. These unaudited
interim consolidated financial statements should be read in conjunction with our
audited consolidated financial statements and related footnotes as set forth in
our annual report filed on Form 10-K for the year ended December 31, 2003.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted as permitted by such rules and regulations.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the financial statements, the reported
amounts of revenues and expenses during the reporting period and the disclosures
of contingent liabilities. Accordingly, ultimate results could differ materially
from those estimates.
NOTE 2. INVESTMENTS AND RESTRICTED CASH
SHORT-TERM INVESTMENTS
Short-term investments included certificates of deposit and
held-to-maturity securities, which are carried at amortized cost. Due to the
short-term nature of these investments, the amortized cost approximates fair
market value. All of these investments are due within the next twelve months,
and consisted of the following as of September 30, 2004, and December 31, 2003
(in thousands):
September 30, December 31,
2004 2003
------------- ------------
Current Investments:
Certificates of deposit $8,083 $3,094
United States government and
federal agency securities 9,500 5,616
Municipal securities 1,999 6,091
Corporate bonds 2,008 3,202
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$21,590 $18,003
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RESTRICTED INVESTMENTS
Various laws applicable to us and certain of our permits require that
we put financial assurances in place for certain environmental and reclamation
obligations and other potential liabilities. Our restricted investments are
primarily investments in money market funds and bonds of U.S. government
agencies. These investments are restricted primarily for reclamation funding or
surety bonds and were $19.5 million at September 30, 2004, and $6.4 million at
December 31, 2003. The $13.1 million variance from the end of 2003 to September
30, 2004, is discussed in the paragraphs below.
During the third quarter of 2003, the parties to the Greens Creek joint
venture determined it would be necessary to replace existing surety requirements
with a $26.6 million restricted trust for future reclamation funding. Our 29.73%
share of the restricted trust at September 30, 2004, is $7.8 million, which is
included in restricted investments on the consolidated balance sheet.
In April 2004, we posted a cash deposit with the Superior Tax Court in
Venezuela of approximately $4.3 million related to alleged unpaid tax
liabilities that predate our purchase of the La Camorra unit. The former owner
has assumed defense of the pending tax case. For more information, see Note 5.
We have received notification of approval of the federal permits needed
from the Bureau of Land Management ("BLM") for the Hollister Development Block
exploration project in Nevada. The BLM reviewed the necessary bonding
calculations associated with this project and in March 2004, required us to post
a bond of approximately $1.0 million. In order to secure the bond, we deposited
this amount in a restricted account as collateral for this bond.
NOTE 3. INCOME TAXES
For the three and nine months ended September 30, 2004, we recorded a
$0.4 million and $2.4 million tax provision, respectively, for foreign income
taxes, consisting primarily of a deferred tax provision on the reduction of
deferred tax assets resulting from the utilization of tax net operating loss
carryforwards in Mexico and current provisions for accrued Mexican and
Venezuelan withholding taxes on interest expense related to intercompany debt.
For the three and nine months ended September 30, 2003, we recorded a $0.3
million and $1.9 million tax provision, respectively, for foreign income taxes,
consisting primarily of deferred taxes and a current provision for accrued
Mexican withholding taxes on interest expense.
The income tax provision for the first nine months of 2004 varies from
the amount that would have been provided by applying the statutory income tax
rate to our income before income taxes primarily due to the benefit from
utilization of a tax loss for currency devaluation net of inflation gains in
Venezuela, and the benefit of a 1% rate differential in Mexico net of an
increase in the valuation allowance on net deferred tax assets in Mexico. The
income tax provision for the first nine months of 2003 varies from the amount
that would have been provided by applying the statutory rate to the income
before income taxes primarily due to the availability and utilization of net
operating losses in Mexico and Venezuela.
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The net current deferred tax asset at September 30, 2004, is comprised
of a Mexican tax net operating loss carryforward and differences in tax basis of
assets. We recorded a valuation allowance to reflect the estimated amount of
deferred tax assets which may not be realized.
NOTE 4. INVENTORIES
Inventories consist of the following (in thousands):
September 30, December 31,
2004 2003
------------- -------------
Concentrates, bullion, metals
in transit and other products $ 6,510 $ 7,788
Materials and supplies 11,356 9,148
------------- -------------
$ 17,866 $ 16,936
============= =============
In accordance with our risk management policy, in July 2004 we entered
into forward contracts for 7,425 metric tons of lead, to hedge lead produced at
the Lucky Friday unit to protect against the risk that its market price may
decline and decrease our future cash flows. The contracts represent
approximately 38% of our lead production for the contract period, or August 2004
to June 2005. These contracts are required to be accounted for as derivatives
under SFAS No. 133. As such, we have designated these contracts as cash flow
hedges. Decreases in cash flow from the sale of lead will be highly correlated
against increases in cash flows from the forward contract. These forward
contracts expose us to certain losses, generally the amount by which the
contract price exceeds the spot price of a commodity in the event of
nonperformance by the counterparties to the agreement.
At September 30, 2004, 6,075 metric tons of lead remained outstanding
under the above-mentioned contracts. The contract price of the contracts was
$4.9 million and the fair market value of the contracts was approximately $5.5
million, which represents the amount we would have to pay the counterparty if
the contract was terminated. At September 30, 2004, we have recognized a net
loss of $0.5 million associated with these contracts in comprehensive loss.
Additionally, during the third quarter of 2004, we recognized a $0.1 million
loss in the consolidated statement of operations under other operating expense
(income) for the ineffective portion of the above described hedge contracts.
At September 30, 2004, we had forward sales contracts through December
31, 2004, for 11,330 ounces of gold at an average price of $288.25 per ounce,
compared to 63,828 ounces at September 30, 2003. These contracts meet the
criteria to be treated as normal sales in accordance with SFAS 138 and, as a
result, these contracts are not required to be accounted for as derivatives
under SFAS 133. These forward sales contracts expose us to certain losses,
generally the amount by which the contract price exceeds the spot price of a
commodity, in the event of nonperformance by the counterparties to these
agreements. The London Final gold price at September 30, 2004, was $415.65 per
ounce, and $388.00 per ounce at September 30, 2003.
-8-
NOTE 5. CONTINGENCIES
BUNKER HILL SUPERFUND SITE
In 1994, we, as a potentially responsible party under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"),
entered into a consent decree with the Environmental Protection Agency ("EPA")
and the State of Idaho, concerning environmental remediation obligations at the
Bunker Hill Superfund site located in the Kellogg, Idaho area. The 1994 Consent
Decree (the "1994 Decree") settled our response-cost responsibility under CERCLA
at the Bunker Hill 21-square mile site. In August 2000, Sunshine Mining and
Refining Company, which was also a party to the 1994 Decree, filed for Chapter
11 bankruptcy and in January 2001, the Federal District Court approved a new
Consent Decree between Sunshine, the U.S. Government and the Coeur d'Alene
Indian Tribe which settled Sunshine's environmental liabilities in the Coeur
d'Alene Basin lawsuits described below and released Sunshine from further
obligations under the 1994 Decree.
In response to a request by us and ASARCO Incorporated, the United
States Federal District Court in Idaho, having jurisdiction over the 1994
Decree, issued an Order in September 2001 that the 1994 Decree should be
modified in light of a significant change in factual circumstances not
reasonably anticipated by the mining companies at the time they signed the 1994
Decree. In its Order, the Court reserved the final ruling on the appropriate
modification to the 1994 Decree until after the issuance by the EPA of a Record
of Decision ("ROD") on the Basin-wide Remedial Investigation/Feasibility Study.
The EPA issued the ROD on the Basin in September 2002, proposing a $359 million
Basin clean-up plan to be implemented over 30 years. The ROD also establishes a
review process at the end of the 30-year period to determine if further
remediation would be appropriate. Based on the 2001 Order issued by the Court,
in April 2003, we requested the Court release Hecla and ASARCO from future work
under the 1994 Decree within the Bunker Hill site. On November 18, 2003, the
Idaho Federal District Court issued its order on ASARCO's and our request for
final relief on the motion to modify the 1994 Decree. The Court held that we and
ASARCO were entitled to a reduction of $7.0 million from the remaining work or
costs under the 1994 Decree. Pursuant to the Court's order, the parties to the
1994 Decree have negotiated an agreement for crediting this reduction against
the government's past cost claims and future work and payments under the 1994
Decree. In January 2004, both the United States and the State of Idaho filed
notice of their appeal of the Federal District Court's order modifying the 1994
Consent Decree.
On February 2, 2003, ASARCO entered into a Consent Decree with the
United States relating to a transfer of certain assets to its parent
corporation, Grupo de Mexico, S.A. de C.V. The Consent Decree also addresses
ASARCO's environmental liabilities on a number of sites in the United States,
including the Bunker Hill site. The provisions of the Consent Decree could limit
ASARCO's annual obligation at the Bunker Hill site for 2003 to 2005.
As of September 30, 2004, we have estimated and accrued a liability for
remedial activity costs at the Bunker Hill site of $4.4 million, which are
anticipated to be made over the next three to four years. Although we believe
the accrual is adequate based upon our current estimates of
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aggregate costs, it is reasonably possible that our estimate may change in the
future due to the assumptions and estimates inherent in the accrual.
COEUR D'ALENE RIVER BASIN ENVIRONMENTAL CLAIMS
COEUR D'ALENE INDIAN TRIBE CLAIMS
In July 1991, the Coeur d'Alene Indian Tribe brought a lawsuit, under
CERCLA, in Idaho Federal District Court against us, ASARCO and a number of other
mining companies asserting claims for damages to natural resources downstream
from the Bunker Hill site over which the Tribe alleges some ownership or
control. The Tribe's natural resource damage litigation has been consolidated
with the United States' litigation described below. Because of various
bankruptcies and settlements of other defendants, we are the only remaining
defendant in the Tribe's NRD case.
U.S. GOVERNMENT CLAIMS
In March 1996, the United States filed a lawsuit in Idaho Federal
District Court against certain mining companies that conducted historic mining
operations in the Silver Valley of northern Idaho, including us. The lawsuit
asserts claims under CERCLA and the Clean Water Act and seeks recovery for
alleged damages to or loss of natural resources located in the Coeur d'Alene
River Basin in northern Idaho for which the United States asserts it is the
trustee under CERCLA. The lawsuit claims that the defendants' historic mining
activity resulted in releases of hazardous substances and damaged natural
resources within the Basin. The suit also seeks declaratory relief that we and
other defendants are jointly and severally liable for response costs under
CERCLA for historic mining impacts in the Basin outside the Bunker Hill site. We
have asserted a number of defenses to the United States' claims.
As discussed above, in May 1998, the EPA announced that it had
commenced a Remedial Investigation/Feasibility Study under CERCLA for the entire
Basin, including Lake Coeur d'Alene, in support of its response cost claims
asserted in its March 1996 lawsuit. In October 2001, the EPA issued its proposed
clean-up plan for the Basin. The EPA issued the ROD on the Basin in September
2002, proposing a $359 million Basin clean-up plan to be implemented over 30
years. The ROD also establishes a review process at the end of the 30-year
period to determine if further remediation would be appropriate.
During 2000 and into 2001, we were involved in settlement negotiations
with representatives of the U.S. Government and the Coeur d'Alene Indian Tribe.
We also participated with certain of the other defendants in the litigation in a
State of Idaho-led settlement effort. In August 2001, we entered into a now
terminated Agreement in Principle with the United States and the State of Idaho
to settle the governments' claims for natural resource damages and clean-up
costs related to the historic mining practices in the Coeur d'Alene Basin in
northern Idaho. In August 2002, because the parties were making no progress
toward a final settlement under the terms of the Agreement in Principle, the
United States, the State of Idaho and we agreed to discontinue utilizing the
Agreement in Principle as a settlement vehicle. However, we may participate in
further settlement negotiations with the United States, the State of Idaho and
the Coeur d'Alene Indian Tribe in the future.
-10-
The first phase of the trial commenced on the consolidated Coeur
d'Alene Indian Tribe's and the United States' claims in January 2001, and was
concluded in July 2001. The first phase of the trial addressed the extent of
liability, if any, of the defendants and the allocation of liability among the
defendants and others, including the U.S. Government. In September 2003, the
Court issued its Phase I ruling, holding that we have some liability for Coeur
d'Alene Basin environmental conditions. The Court refused to hold the defendants
jointly and severally liable for historic tailings releases and instead
allocated a 31% share of liability to us for impacts resulting from these
releases. The damages, past costs and clean-up costs to which this 31% applies
and the Court's determination of an appropriate clean-up plan will be addressed
in the Phase II trial, which is tentatively scheduled to commence in April 2005.
The Court also left for the Phase II trial issues on the deference, if any, to
be afforded the Government's clean-up plan.
The Court also found that while certain Basin natural resources had
been injured, "there has been an exaggerated overstatement" by the plaintiffs of
Basin environmental conditions and the mining impact. The Court also
significantly limited the scope of the trustee plaintiffs' resource trusteeship
and will require proof in the Phase II trial of the trustees' percentage of
trusteeship in co-managed resources. The U.S. Government and the Coeur d'Alene
Tribe are re-evaluating their claims for natural resource damages for the Phase
II trial. Although we believe, because of the actions of the Court described
above, we have limited liability for natural resource damages, such claims may
be in the range of $2.0 billion and $3.4 billion. Because of a number of factors
relating to the quality and uncertainty of the U.S. Government's and Tribe's
natural resources damage claims, we are currently unable to estimate any
liability or range of liability for these claims.
In expert reports exchanged with the defendants in August and September
2004, the U.S. Government claimed to have incurred approximately $87 million for
past environmental study, remediation and legal costs associated with the Coeur
d'Alene Basin for which it is alleging it is entitled to reimbursement in the
Phase II trial. A portion of these costs is also included in the work to be done
under the ROD. With respect to the U.S. Government's past cost claims, we have
determined a potential range of liability between $5.6 million and $13.6
million, with no amount in the range being more likely than any other amount. At
September 30, 2004, we recorded an accrual for the U.S. Government past cost
claim of $5.6 million.
The Phase II trial is currently scheduled to commence in April 2005.
Two of the defendant mining companies, Coeur d'Alene Mines Corporation and
Sunshine Mining and Refining Company, settled their liabilities under the
litigation during the first quarter of 2001. We and ASARCO are the only
defendants remaining in the United States' litigation.
Although the U.S. Government has previously issued its ROD proposing a
clean-up plan totaling approximately $359 million and the U.S. Government's past
cost claim is $87 million, based upon the Court's prior orders, including its
September 2003 order and other factors and issues to be addressed by the Court
in the Phase II trial, we currently estimate, including the September 2004
accrual of $5.6 million for past response costs, the range of our potential
-11-
liability for both past costs and remediation (but not natural resource damages
as discussed above) in the Basin to be $23.6 million to $72.0 million, with no
amount in the range being more likely than any other number at this time. Based
upon generally accepted accounting principles, we have accrued the minimum
liability within this range, which at September 30, 2004, was $23.6 million. It
is reasonably possible that our ability to estimate what, if any, additional
liability we may have relating to the Coeur d'Alene Basin may change in the
future depending on a number of factors, including information obtained or
developed by us prior to the Phase II trial, any interim court determinations
and the outcome of the Phase II trial.
CLASS ACTION LITIGATION
On January 7, 2002, a class action complaint was filed in the Idaho District
Court, County of Kootenai, against several corporate defendants, including
Hecla. We were served with the complaint on January 29, 2002. The complaint
seeks certification of three plaintiff classes of Coeur d'Alene Basin residents
and current and former property owners to pursue three types of relief: various
medical monitoring programs, real property remediation and restoration programs,
and damages for diminution in property value, plus other damages and costs they
allege resulted from historic mining and transportation practices of the
defendants in the Coeur d'Alene Basin. On August 18, 2004, the District Court of
Kootenai County issued its Opinion and Order with respect to a number of Summary
Judgment Motions filed by the defendants in the litigation. In the Order, the
Judge dismissed all of the plaintiff's claims against the defendants, asserting
that in each case the applicable statute of limitations had been exceeded prior
to filing the lawsuit. The Court held that Hecla Mining Company had completely
ceased discharging mill tailings into the South Fork of the Coeur d'Alene River
in 1968 and that all mill tailings were deposited on lands within ten years of
that date or by 1978. The Court stated that the action was brought in 2002, and
the four-year statute of limitations had expired. Therefore, the Court held that
the lawsuit against Hecla was time barred. In September 2004, the plaintiffs
filed a Notice of Appeal, appealing the District Court's dismissal decision to
the Idaho Supreme Court.
INSURANCE COVERAGE LITIGATION
In 1991, we initiated litigation in the Idaho District Court, County of
Kootenai, against a number of insurance companies that provided comprehensive
general liability insurance coverage to us and our predecessors. We believe the
insurance companies have a duty to defend and indemnify us under their policies
of insurance for all liabilities and claims asserted against us by the EPA and
the Tribe under CERCLA related to the Bunker Hill site and the Basin in northern
Idaho. In 1992, the Idaho State District Court ruled that the primary insurance
companies had a duty to defend us in the Tribe's lawsuit. During 1995 and 1996,
we entered into settlement agreements with a number of the insurance carriers
named in the litigation. We have received a total of approximately $7.2 million
under the terms of the settlement agreements. Thirty percent of these
settlements were paid to the EPA to reimburse the U.S. Government for past costs
under the 1994 Decree. Litigation is still pending against one insurer with
trial suspended until the underlying environmental claims against us are
resolved or settled. The remaining insurer in the litigation, along with a
second insurer not named in the litigation, is providing us with a partial
defense in all Basin environmental litigation. As of September 30,
-12-
2004, we have not reduced our accrual or recorded a receivable for reclamation
and closure costs to reflect the receipt of any potential insurance proceeds.
INDEPENDENCE LEAD MINES LITIGATION
In March 2002, Independence Lead Mines Company ("Independence"), the
holder of a net 18.52% interest in the Gold Hunter or DIA unitized area of the
Lucky Friday unit, notified us of certain alleged defaults by us under the 1968
lease agreement between the unit owners (Independence and us under the terms of
the 1968 DIA Unitization Agreement) as lessors and defaults by us as lessee and
operator of the properties. We are a net 81.48% interest holder under these
Agreements. Independence alleged that we violated the "prudent operator
obligations" implied under the lease by undertaking the Gold Hunter project and
violated certain other provisions of the Agreement with respect to milling
equipment and calculating net profits and losses. Under the lease agreement, we
have the exclusive right to manage, control and operate the DIA properties, and
our decisions with respect to the character of work are final. In June 2002,
Independence filed a lawsuit in Idaho State District Court seeking termination
of the lease agreement and requesting unspecified damages. Trial of the case
occurred from March 23 through April 1, 2004. On July 19, 2004, the Court issued
a decision that found in our favor on all issues and subsequently awarded us
approximately $0.1 million in attorney fees and certain costs, which
Independence has paid. On August 10, 2004, Independence filed its Notice of
Appeal that is currently pending before the Supreme Court of Idaho. We believe
that we have complied in all material respects with all of our obligations under
the 1968 lease agreement and intend to continue defending our right to operate
the property under the lease agreement.
MEXICO LITIGATION
In Mexico, our subsidiary, Minera Hecla, was involved in litigation in
Mexico City concerning a lien on certain major components of the Velardena mill
that predated the sale of the mill to Minera Hecla. At the time of the purchase,
the lien amount was believed to be approximately $590,000, which was deposited
by the prior owner of the mill with the Court. In January 2003, Minera Hecla
deposited $145,000, which represented the amount of accrued interest since the
date of sale, and the Court in Mexico City canceled the lien. In September 2003,
the lien holder filed the last in a series of unsuccessful appeals before a
federal appeals court in Mexico City. In February 2004, the federal appeals
court in Mexico City upheld the lower court decisions that the lien had been
canceled. We believe that the lien has been fully satisfied and the lien holder
has exhausted all appeals.
Minera Hecla is also involved in other litigation in state and federal
courts located within the State of Durango, Mexico, concerning the Velardena
mill. In October 2003, representatives from Minera William, S.A. de C.V. (an
affiliate of the prior owner of the Velardena mill and subsidiary of ECU Silver
Mining, a Canadian company) presented to Minera Hecla court documents from a
state court in Durango, Mexico, that purported to award custody of the mill to
Minera William to satisfy an alleged unpaid debt by the prior owner. Minera
Hecla was not a party to and did not have any notice of the legal proceeding in
Durango. In October 2003, Minera Hecla obtained a temporary restraining order
from a federal court in Durango to preserve our possession of the mill. In
February 2004, Minera Hecla obtained a permanent restraining
-13-
order that prohibits further interference with our operation and possession of
the mill. Minera William is pursuing an appeal of the permanent restraining
order that is currently pending in the Court of Appeals in the City and State of
Durango. We believe the claim of Minera William is without merit and it has no
right to any portion of the Velardena mill. We intend to zealously defend our
ownership interest.
The court proceedings discussed above do not affect Minera Hecla's San
Sebastian mine, located approximately 65 miles from the Velardena mill. The
above-mentioned dispute could result in future disruption of operations at the
Velardena mill. Although there can be no assurance as to the outcome of these
proceedings, we believe an adverse ruling will not have a material adverse
effect on our financial condition.
VENEZUELA LITIGATION
In February 2004, the Venezuelan National Guard impounded a shipment of
approximately 5,000 ounces of gold dore produced from the La Camorra unit that
is owned and operated by our wholly owned subsidiary, Minera Hecla Venezolana,
C.A. ("MHV"). The impoundment was allegedly made due to irregularities in
documentation that accompanied that shipment. That shipment was stored at the
Central Bank of Venezuela until its return to us in July 2004. All subsequent
shipments of gold dore have been exported without intervention by Venezuelan
government authorities. In March 2004, we filed with the Superior Tax Court in
Bolivar City, State of Bolivar an injunction action against the National Guard
to release the impounded gold dore. In April 2004, that Court granted our
request for an injunction but conditioned release of the gold pending resolution
of an unrelated matter involving the Venezuelan tax authority (SENIAT) that was
proceeding in the Third Superior Tax Court in Caracas. In June 2004, the third
Superior Tax Court in Caracas ordered return of the impounded gold to Hecla,
which was in fact returned to us in July 2004 and was shipped to our refiner for
further processing and sale by us. We believe we are in material compliance with
our export license and all applicable Venezuelan laws.
MHV is also involved in litigation in Venezuela with SENIAT concerning
alleged unpaid tax liabilities that predate our purchase of the La Camorra unit
from Monarch Resources Investments Limited ("Monarch") in 1999. Pursuant to our
Purchase Agreement, Monarch has assumed defense of and responsibility for that
pending tax case in the Superior Tax Court in Caracas. On or about April 2,
2004, SENIAT filed with the Third Superior Tax Court in Bolivar City, State of
Bolivar an embargo action against all of MHV's assets in Venezuela to secure the
alleged unpaid tax liabilities. In order to prevent the embargo, on April 7,
2004, MHV made a cash deposit with the Court of approximately $4.3 million. In
June 2004, the Superior Tax Court in Caracas ordered suspension and revocation
of the embargo action filed by the SENIAT. Although the Company believes the
cash deposit will continue to prevent any further action by SENIAT with respect
to the embargo, there can be no assurances as to the outcome of this proceeding.
If the tax court in Caracas or an appellate court were to subsequently award
SENIAT all of its requested embargo, it could disrupt our operations in
Venezuela and have a material adverse effect on our financial condition.
-14-
OTHER
In October 2004, the employees at the Velardena mill in Mexico went on strike
after presenting a list of what we believe are unfounded accusations relating to
the labor agreement. Although there can be no assurance as to the outcome or
length of the strike, production may be affected during the fourth quarter of
2004. We currently believe the strike will not materially affect our operations
or longer-term expected production. The mine is stockpiling ore until the strike
is resolved.
We are subject to other legal proceedings and claims not disclosed
above which have arisen in the ordinary course of our business and have not been
finally adjudicated. Although there can be no assurance as to the ultimate
disposition of these other matters, it is the opinion of our management that the
outcome of these other proceedings will not have a material adverse effect on
our financial condition.
NOTE 6. LONG-TERM DEBT AND CREDIT AGREEMENTS
In February 2004, we made a final payment of $0.5 million on the
outstanding balance of a pre-existing credit agreement used to provide project
financing at the La Camorra mine, and a final payment of $1.0 million on a
subordinated loan agreement entered into in connection with the project
financing agreement. Additionally, approximately $0.9 million in interest was
paid at the same time under these agreements. As a result of the final payment,
our debt under these agreements has been fully discharged.
In August 2004, we made a final payment of $2.7 million, including
approximately $30,000 in interest, on the outstanding balance of a project loan
used to acquire a processing mill to process ore mined from the San Sebastian
mine. As a result of the final payment, our debt under this agreement has been
fully discharged.
At September 30, 2004, we had no debt outstanding.
-15-
NOTE 7. LOSS PER COMMON SHARE
The following table presents a reconciliation of the numerators and
denominators used in the basic and diluted loss per common share computations.
Also shown is the effect that has been given to cumulative preferred dividends
in arriving at the loss applicable to common shareholders for the three months
and nine months ended September 30, 2004 and 2003, used in computing basic and
diluted loss per common share (dollars and shares in thousands, except per-share
amounts).
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 30, September 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Loss from operations before cumulative effect of
change in accounting principle and preferred
stock dividends $ (11,292) $ (17,460) $ (2,364) $ (9,259)
Cumulative effect of change in accounting
principle, net of income tax -- -- -- 1,072
Preferred stock dividends (138) (659) (11,464) (1,977)
----------- ----------- ----------- -----------
Basic loss applicable to common shareholders $ (11,430) $ (18,119) $ (13,828) $ (10,164)
Basic and diluted weighted average number of
common shares outstanding 118,285 110,221 117,955 109,656
----------- ----------- ----------- -----------
Basic and diluted loss per common share $ (0.10) $ (0.16) $ (0.12) $ (0.09)
=========== =========== =========== ===========
These calculations of diluted loss per share for the three months and
nine months ended September 30, 2004 and 2003 exclude the effects of convertible
preferred stock ($7.9 million in 2004 and $37.6 million in 2003), as well as
common stock issuable upon the exercise of various stock options as their
conversion and exercise would be anti-dilutive. For the three and nine months
ended September 30, 2004 and 2003, 3,255,670 and 3,086,197 stock options and
restricted and deferred stock units, respectively, were excluded in the
calculation of diluted loss per share.
NOTE 8. BUSINESS SEGMENTS
We are organized and managed in three segments, which represent the
geographical areas in which we operate: Venezuela (the La Camorra unit and
various exploration projects), Mexico (the San Sebastian unit and various
exploration projects) and the United States (the Greens Creek unit, the Lucky
Friday unit, and various exploration projects). Prior to the fourth quarter of
2003, we were organized into a silver segment and a gold segment. We have
changed our reportable segments to better reflect the economic characteristics
of our operating properties and have restated the corresponding information for
all periods presented. General corporate activities not associated with
operating units, as well as idle properties, are presented as Other. Interest
expense, interest income and income taxes are considered a general corporate
expense and are not allocated to the segments.
-16-
The following tables present information about reportable segments for
the three and nine months ended September 30, 2004 and 2003 (in thousands):
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 30, September 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net sales to unaffiliated customers:
United States $ 15,152 $ 11,093 $ 38,259 $ 30,528
Venezuela 11,476 8,611 36,730 28,522
Mexico 7,138 8,392 27,195 25,153
Other (48) (17) (104) 520
----------- ----------- ----------- -----------
$ 33,718 $ 28,079 $ 102,080 $ 84,723
=========== =========== =========== ===========
Income (loss) from operations:
United States $ 2,572 $ 1,841 $ 6,445 $ 1,209
Venezuela (34) 2,587 6,073 8,441
Mexico (1,320) 3,404 5,437 9,671
Other (12,452) (26,016) (18,681) (27,971)
----------- ----------- ----------- -----------
$ (11,234) $ (18,184) $ (726) $ (8,650)
=========== =========== =========== ===========
The following table presents identifiable assets by reportable segment
as of September 30, 2004 and December 31, 2003 (in thousands):
September 30, December 31,
2004 2003
--------------- ---------------
Identifiable assets:
United States $ 76,378 $ 72,713
Venezuela 74,628 47,538
Mexico 18,366 17,837
Other 113,856 140,107
--------------- ---------------
$ 283,228 $ 278,195
=============== ===============
-17-
NOTE 9. SHAREHOLDERS' EQUITY
In February 2004, we reduced the number of Series B preferred shares
outstanding by 273,961 shares, or 58.9%, pursuant to an exchange offer. This
exchange offer allowed participating shareholders to receive 7.94 shares of
common stock for each preferred share exchanged, which resulted in the issuance
of a total of 2,175,237 common shares. During March 2004, we entered into
privately negotiated exchange agreements with holders of approximately 17% of
the then outstanding preferred stock (190,816 preferred shares) to exchange such
shares for shares of common stock. A total of 33,000 preferred shares were
exchanged for 260,861 common shares as a result of the privately negotiated
exchange agreements. As of September 30, 2004, a total of 157,816 shares of
preferred stock remain issued and outstanding.
Included in the loss applicable to common shareholders for the nine
months ended September 30, 2004, were preferred stock dividends of $11.5
million, which included non-cash dividend charges of approximately $10.9 million
related to the exchanges of preferred stock for common stock discussed above.
The non-cash dividends represent the difference between the value of the common
stock issued in the exchange transactions and the value of the shares of common
stock that would have been issued if the shares of the preferred stock had been
converted into common stock pursuant to their original conversion terms. The
non-cash dividend had no net impact on our total shareholders' equity. Following
the exchanges, the total of cumulative preferred dividends in arrears was $2.3
million as of September 30, 2004.
-18-
NOTE 10. STOCK-BASED PLANS
At September 30, 2004, executives, key employees and directors had been
granted options to purchase our common shares or were credited with common
shares under the stock-based plans below. We have adopted the disclosure-only
provisions of SFAS No. 123. No compensation expense was recognized during the
three and nine months ended September 30, 2004 and 2003 for unexercised options
related to the stock-based plans. Had compensation expense for our stock-based
plans been determined based on the fair market value at the grant date for
awards during these periods consistent with the provisions of SFAS No. 123, our
loss and per share loss applicable to common shareholders would have been
increased to the pro forma amounts indicated below (in thousands, except per
share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
-------- -------- -------- --------
Loss applicable to common shareholders
As reported $(11,430) $(18,119) $(13,828) $(10,164)
Stock-based employee compensation expense
included in reported loss 1,060 363 681 953
Total stock-based employee compensation
expense determined under fair value
based methods for all awards (1,171) (1,026) (2,879) (3,220)
-------- -------- -------- --------
Pro forma loss applicable to
common shareholders $(11,541) $(18,782) $(16,026) $(12,431)
======== ======== ======== ========
Loss applicable to common shareholders
Per common share:
As reported $ (0.10) $ (0.16) $ (0.12) $ (0.09)
Pro forma $ (0.10) $ (0.17) $ (0.14) $ (0.11)
NOTE 11. ASSET RETIREMENT OBLIGATIONS
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which became effective January 1, 2003. This statement
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. Subsequently, reclamation costs will be allocated to
expense over the life of the related assets and will be adjusted for changes
resulting from the passage of time and changes to either the timing or amount of
the original fair value estimate underlying the obligation. The sum of our
estimated reclamation and abandonment costs was discounted using a credit
adjusted, risk-free interest rate of 6% from the time we expect to pay the
retirement obligation to the time we incurred the obligation. Upon initial
application of SFAS No. 143 on January 1, 2003, we recorded the following:
-19-
1. An increase of approximately $0.7 million to accrued reclamation and
closure costs to reflect the estimated present value of reclamation
liabilities based on the discounted fair market value of future cash
flows to settle the obligation;
2. An increase to the carrying amounts of the associated long-lived assets
of approximately $3.3 million to capitalize the present value of the
liabilities as of the date the obligation occurred, offset by $1.5
million of accumulated depletion through January 1, 2003; and
3. A cumulative effect of change in accounting principle of $1.1 million
gain, reflecting the difference between those amounts and amounts
previously recorded in our consolidated financial statements at January
1, 2003.
The following is a reconciliation of our total liability for asset
retirement obligations (in thousands):
Balance January 1, 2003 $6,053
Revisions in estimated cash flows 1,031
Accretion expense 747
Cash payments (200)
------
Balance December 31, 2003 7,631
Revisions in estimated cash flows (349)
Accretion expense 504
Cash payments (12)
------
Balance September 30, 2004 $7,774
======
NOTE 12. NEW ACCOUNTING PRONOUNCEMENTS
In April 2004, the Financial Accounting Standards Board ("FASB")
ratified Emerging Issues Task Force ("EITF") Issue No. 04-2, which amends
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" to the extent all mineral rights are to be considered tangible
assets for accounting purposes. There has been diversity in practice related to
the application of SFAS No. 141 to certain mineral rights held by mining
entities that are not within the scope of SFAS No. 19 "Financial Accounting and
Reporting by Oil and Gas Producing Companies." The SEC staff's position
previously was entities outside the scope of SFAS No. 19 should account for
mineral rights as intangible assets in accordance with SFAS No. 142 "Goodwill
and Other Intangible Assets." At March 31, 2004, we reclassified the net cost of
mineral interests and associated accumulated amortization to property, plant and
equipment of $5.1 million, and reclassified the amount recorded at December 31,
2003, of $5.3 million.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46)
"Consolidation of Variable Interest Entities." In December 2003, the FASB issued
a revision to this interpretation (FIN 46(r)). FIN 46(r) clarifies the
application of Accounting Research Bulletin
-20-
(ARB) No. 51, "Consolidated Financial Statements." FIN 46 clarifies the
application of ARB No. 51 to certain entities in which equity investors do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. We adopted FIN
46(r) in its entirety in the first quarter of 2004, which did not have a
material effect on our consolidated financial statements.
-21-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN STATEMENTS CONTAINED IN OUR MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND QUANTITATIVE AND
QUALITATIVE DISCLOSURE ABOUT MARKET RISK ARE INTENDED TO BE COVERED BY THE SAFE
HARBOR PROVIDED FOR UNDER SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED,
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OUR
FORWARD-LOOKING STATEMENTS INCLUDE OUR CURRENT EXPECTATIONS AND PROJECTIONS
ABOUT FUTURE RESULTS, PERFORMANCE, RESULTS OF LITIGATION, PROSPECTS AND
OPPORTUNITIES. WE HAVE TRIED TO IDENTIFY THESE FORWARD-LOOKING STATEMENTS BY
USING WORDS SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "BELIEVE," "FEEL,"
"INTEND," "PLAN," "ESTIMATE" AND SIMILAR EXPRESSIONS. THESE FORWARD-LOOKING
STATEMENTS ARE BASED ON INFORMATION CURRENTLY AVAILABLE TO US AND ARE EXPRESSED
IN GOOD FAITH AND BELIEVED TO HAVE A REASONABLE BASIS. HOWEVER, OUR
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A NUMBER OF RISKS, UNCERTAINTIES AND
OTHER FACTORS THAT COULD CAUSE OUR ACTUAL RESULTS, PERFORMANCE, PROSPECTS OR
OPPORTUNITIES TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, THESE
FORWARD-LOOKING STATEMENTS.
THESE RISKS, UNCERTAINTIES AND OTHER FACTORS INCLUDE, BUT ARE NOT
LIMITED TO, THOSE SET FORTH UNDER ITEM 1 - BUSINESS - RISK FACTORS IN OUR ANNUAL
REPORT FILED ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003. GIVEN THESE
RISKS AND UNCERTAINTIES, READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
OUR FORWARD-LOOKING STATEMENTS. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING
STATEMENTS ATTRIBUTABLE TO HECLA MINING COMPANY OR TO PERSONS ACTING ON OUR
BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THESE CAUTIONARY STATEMENTS.
EXCEPT AS REQUIRED BY FEDERAL SECURITIES LAWS, WE DO NOT INTEND TO UPDATE OR
REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION,
FUTURE EVENTS OR OTHERWISE.
OVERVIEW
Hecla Mining Company is a precious metals company originally
incorporated in 1891 (in this report, "we" or "our" or "us" refers to Hecla
Mining Company and/or our affiliates and subsidiaries). We are engaged in the
exploration, development, mining and processing of silver, gold, lead and zinc,
and own or have interests in a number of precious and nonferrous metals
properties. Our business is to discover, acquire, develop, produce and market
mineral resources. In doing so, we intend to:
o Manage all our business activities in a safe, environmentally
responsible and cost-effective manner;
o Give preference to projects where we will be the manager of
the operation;
o Provide a work environment that promotes personal excellence
and growth for all our employees; and
o Conduct our business with integrity and honesty.
Our strategy for growth is to focus our efforts and resources on
expanding our precious metals reserves through exploration efforts, primarily on
properties we currently own and through future potential acquisitions.
-22-
We are organized and managed in three segments, which represent the
geographical areas in which we operate: Venezuela (the La Camorra unit and
various exploration projects), Mexico (the San Sebastian unit and various
exploration projects) and the United States (the Greens Creek unit, the Lucky
Friday unit, and various exploration projects. The maps below indicate the
locations of our operating units. For GAAP purposes and in accordance with SFAS
No. 131 "Disclosures About Segments of an Enterprise and Related Information,"
we are organized into three segments: Venezuela (the La Camorra unit and various
exploration projects), Mexico (the San Sebastian unit and various exploration
projects) and the United States (the Greens Creek unit, the Lucky Friday unit,
and various exploration projects) as of September 30, 2004.
[MAP APPEARS HERE]
We produce both metal concentrates, which we sell to custom smelters on
contract, and unrefined gold and silver bullion bars (dore), which is further
refined before sale to metals traders. Our revenue is derived from the sale of
silver, gold, lead and zinc and, as a result, our earnings are directly related
to the prices of these metals. Silver, gold, lead and zinc prices fluctuate
widely and are affected by numerous factors beyond our control. During the first
nine months of 2004, we have seen the prices of the metals we produce continue
to rise over those within the last few years. In the event these metals prices
decline, we feel our low cost properties and strong balance sheet will allow us
to continue to be successful.
For the first nine months of 2004 compared to the same period in 2003,
the average price of silver increased 36%, our average realized price of gold
increased 13%, and the average prices of lead and zinc, both of which are
important by-products at our Greens Creek and Lucky Friday units, increased 81%
and 29%, respectively. Gross profit during the first nine months increased 13%
over the comparable period in 2003, primarily due to increased prices of all
metals we mine; however, this increase was offset by rising costs at all of our
operating units, including the effects of increased fuel, steel prices and lower
production from lower ore grades at San Sebastian, Greens Creek and Lucky
Friday. Our
-23-
exploration expenditures increased 58% for the first nine months of 2004 over
the 2003 period. We believe these increased expenditures are consistent with our
corporate objectives to grow and expand production in the future. Our balance
sheet continues to be strong, with approximately $72.0 million in cash and $22.0
million in investments maturing within the next twelve months. At September 30,
2004, we have no debt outstanding.
For the third quarter and first nine months of 2004, we recorded net
losses of $11.3 million and $2.4 million, respectively, compared to losses of
$17.5 million and $8.2 million during the third quarter and first nine months of
2003. At September 30, 2004 and 2003, we recorded adjustments totaling $8.4
million and $23.1 million, respectively, for future environmental and
reclamation expenditures, primarily to increase our current estimated liability
in Idaho's Coeur d'Alene Basin ($5.6 million and $16.0 million, respectively)
and for the Grouse Creek mine cleanup in central Idaho ($2.9 million and $6.8
million, respectively). The 2004 accrual of $5.6 million for the Coeur d'Alene
Basin was recorded for past response costs claimed by the federal government for
its litigation and related costs (for additional details, see Note 5 of Notes to
the Consolidated Financial Statements). The $2.9 million recorded for Grouse
Creek represents an additional year of dewatering costs due to increased water
quality compliance standards.
In February 2004, we reduced the number of Series B preferred shares
outstanding by 273,961 shares pursuant to an exchange offer. This exchange offer
allowed participating shareholders to receive 7.94 shares of common stock for
each preferred share exchanged which resulted in the issuance of a total of
2,175,237 common shares. During March 2004, we entered into privately negotiated
exchange agreements with holders of approximately 17% of the then outstanding
preferred stock to exchange such shares for shares of common stock. A total of
33,000 preferred shares were exchanged for 260,861 common shares as a result of
the privately negotiated exchange agreements. As of September 30, 2004, a total
of 157,816 shares of preferred stock remain issued and outstanding. In order to
eliminate the effect of our dividend arrearages on our capital raising
activities, we intend to evaluate and potentially implement further programs to
reduce the number of remaining preferred shares outstanding, including the
possible redemption of all outstanding preferred shares. As of October 1, 2004,
redemption of the remaining preferred shares would cost approximately $10.2
million.
The following table displays our actual silver and gold ounce
production by operational unit for the three and nine months ended September 30,
2004 and 2003, and projected silver and gold production for the year ending
December 31, 2004.
Three Months Ended Nine Months Ended
September 30, September 30,
Projected ------------------ -------------------
2004 2004 2003 2004 2003
------ ------ ----- ------
Silver ounces produced (in thousands):
San Sebastian (1) 2,400 472 1,104 1,956 3,135
Greens Creek (2) 3,100 767 1,046 2,182 2,620
Lucky Friday 2,200 511 493 1,512 1,731
-----------------------------------------------------------------
Total silver ounces 7,700 1,750 2,643 5,650 7,486
=================================================================
-24-
Three Months Ended Nine Months Ended
September 30, September 30,
Projected ------------------ -------------------
2004 2004 2003 2004 2003
------ ------ ----- ------
Gold ounces produced (in thousands):
La Camorra (3) 134 28 28 102 95
San Sebastian (1) 43 10 12 32 35
Greens Creek (2) 26 7 7 20 22
-----------------------------------------------------------------
Total gold ounces 203 45 47 154 152
=================================================================
(1) In October, the employees at the Velardena mill went on strike after
presenting a list of what we believe are unfounded accusations relating
to the labor agreement. Although there can be no assurance as to the
outcome or length of the strike, production may be affected during the
fourth quarter of 2004.
(2) Reflects our 29.73% portion.
(3) During the third quarter and first nine months of 2004, a total of
1,658 ounces and 2,949 ounces, respectively, were produced from
third-party mining operations located near the La Camorra mine and
included in our total ounces produced for the La Camorra unit.
Total cash and average metals prices were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
2004 2003 2004 2003
------- ------- ------- --------
Total cash costs of silver production (1,2) $ 4,068 $ 3,515 $10,249 $ 11,371
Total cash costs per ounce ($/oz.) (1,2) 2.32 1.33 1.81 1.52
Total cash costs of gold production (2) $ 5,684 $ 4,496 $ 16,280 $ 13,736
Total cash costs per ounce ($/oz.) (2,3,4) 211 161 165 145
Average Metals Prices:
Silver-Handy & Harman ($/oz.) 6.50 5.03 6.50 4.78
Gold-Realized ($/oz) 378 337 375 332
Gold-London Final ($/oz.) 401 363 401 354
Lead-LME Cash ($/pound) 0.423 0.232 0.391 0.216
Zinc-LME Cash ($/pound) 0.444 0.372 0.465 0.360
(1) The increased costs per silver ounce during the third quarter and first
nine months of 2004 compared to the same periods in 2003 are due
primarily to increased mining and processing costs, and decreasing
silver ounces as a result of lower grades. The increased expenditures
at San Sebastian were offset by an increase in by-product credits of
16% and 18%, respectively, for the third quarter and first nine months
of 2004 over the same periods in 2003, primarily from the Lucky Friday
and Greens Creek units due to the strong prices of lead and zinc.
(2) Cash costs per ounce of silver or gold represent non-GAAP measurements
that management uses to monitor and evaluate the performance of its
mining operations. We believe cash costs per ounce of silver or gold
provide an indicator of cash flow generation at each location and on a
consolidated basis, as well as providing a meaningful basis to compare
our results to those of other mining companies and other mining
operating properties. A reconciliation of this non-GAAP measure to cost
of sales and other direct production costs, the most comparable GAAP
measure, can be found below under
-25-
Reconciliation of Total Cash Costs (non-GAAP) to Costs of Sales and
Other Direct Production Costs (GAAP).
(3) Costs per ounce of gold are based on the gold produced from gold
operating properties only. Gold produced from San Sebastian and Greens
Creek is treated as a by-product credit in calculating silver costs per
ounce. Our costs per ounce amounts are calculated pursuant to the
standards of The Gold Institute.
(4) Costs per ounce of gold are based on the gold produced from La Camorra
mine only. During the third quarter and first nine months of 2004, a
total of 1,658 ounces and 2,949 ounces of gold, respectively, were
produced from third-party mining operations located near the la Camorra
mine. The revenue from these gold ounces were treated as a by-product
credit and included in the calculation of gold costs per ounce.
Included in total cash costs for the third quarter and first nine
months of 2004 were the costs to purchase the ore of approximately $1.0
million and $1.7 million, respectively.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with GAAP
requires management to make a wide variety of estimates and assumptions that
affect: (i) the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements,
and (ii) the reported amounts of revenues and expenses during the reporting
periods covered by the financial statements. Our management routinely makes
judgments and estimates about the effect of matters that are inherently
uncertain. As the number of variables and assumptions affecting the future
resolution of the uncertainties increases, these judgments become even more
subjective and complex. Our accounting policies are described in Note 1 of the
Consolidated Financial Statements in our annual report filed on Form 10-K for
the year ended December 31, 2003. We have identified our most critical
accounting policies below that are most important to the portrayal of our
current financial condition and results of operations. Management has discussed
the development and selection of these critical accounting policies with the
audit committee of our board of directors and the audit committee has reviewed
the disclosures presented below.
REVENUE RECOGNITION
Sale of metals products sold directly to smelters are recorded when
title and risk of loss transfer to the smelter at current spot metals prices.
Due to the time elapsed from the transfer to the smelter and the final
settlement with the smelter (generally three months), we must estimate the price
at which our metals will be sold in reporting our profitability and cash flow.
Recorded values are adjusted monthly until final settlement at month-end metals
prices. If there were a significant variance in estimated metals prices or
assays compared to the final actual metals prices and assays, our monthly
results of operations could be affected. Sales of metal in products tolled,
rather than sold to smelters, are recorded at contractual amounts when title and
risk of loss transfer to the buyer.
Sales of concentrates and precipitates from the Greens Creek, Lucky
Friday and San Sebastian units are sold directly to smelters, with recorded
amounts adjusted to month-end metals prices until final settlement.
-26-
Changes in the market price of metals significantly affect our
revenues, profitability and cash flow. Metals prices can and often do fluctuate
widely and are affected by numerous factors beyond our control, such as
political and economic conditions, demand, forward selling by producers,
expectations for inflation, central bank sales, custom smelter activities, the
relative exchange rate of the U.S. dollar, purchases and lending, investor
sentiment and global mine production levels. The aggregate effect of these
factors is impossible to predict. Because our revenue is derived from the sale
of silver, gold, lead and zinc, our earnings are directly related to the prices
of these metals. If the market prices for these metals fall below our total
production costs, we will experience losses on such sales.
PROVEN AND PROBABLE ORE RESERVES
On a periodic basis, management reviews the reserves used to estimate
the quantities and grades of ore at our mines which management believes can be
recovered and sold economically. Management's calculation of proven and probable
ore reserves are based on in-house engineering and geological estimates using
current operating costs and metals prices. Periodically, management obtains
external audits of reserves.
Reserve estimates will change as existing reserves are depleted through
production and as production costs and/or metals prices change. Changes in
reserves may also reflect that actual grades of ore processed may be different
from stated reserve grades because of variation in grades in areas mined, mining
dilution and other factors. Reserves estimated for properties that have not yet
commenced production may require revision based on actual production experience.
Declines in the market price of metals, increased production or capital
costs, reduction in the grade or tonnage of the deposit or an increase in the
dilution of the ore or reduced recovery rates may render ore reserves uneconomic
to exploit unless the utilization of forward sales contracts or other hedging
techniques is sufficient to offset such effects. If our realized price for the
metals we produce, including hedging benefits, were to decline substantially
below the levels set for calculation of reserves for an extended period, there
could be material delays in the development of new projects, net losses, reduced
cash flow, restatements or reductions in reserves and asset write-downs in the
applicable accounting periods. Reserves should not be interpreted as assurances
of mine life or of the profitability of current or future operations. No
assurance can be given that the estimate of the amount of metal or the indicated
level of recovery of these metals will be realized.
DEPRECIATION AND DEPLETION
The mining industry is extremely capital intensive. We capitalize
property, plant, and equipment and depreciate consistently with industry
standards. The cost of property, plant and equipment is charged to depreciation
expense based on the estimated useful lives of the assets using straight-line
and unit-of-production methods. Depletion is computed using the
unit-of-production method. As discussed above, our estimates of proven and
probable ore reserves may change, possibly in the near term, resulting in
changes to depreciation, depletion and amortization rates in future reporting
periods.
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IMPAIRMENT OF LONG-LIVED ASSETS
Management reviews the net carrying value of all facilities, including
idle facilities, on a periodic basis. We estimate the net realizable value of
each property based on the estimated undiscounted future cash flows that will be
generated from operations at each property, the estimated salvage value of the
surface plant and equipment and the value associated with property interests.
These estimates of undiscounted future cash flows are dependent upon the future
metals price estimates over the estimated remaining mine life. If undiscounted
cash flows are less than the carrying value of a property, an impairment loss is
recognized based upon the estimated expected future cash flows from the property
discounted at an interest rate commensurate with the risk involved.
Management's estimates of metals prices, recoverable proven and
probable ore reserves, and operating, capital and reclamation costs are subject
to risks and uncertainties of change affecting the recoverability of our
investment in various projects. Although management believes it has made a
reasonable estimate of these factors based on current conditions and
information, it is reasonably possible that changes could occur in the near term
which could adversely affect management's estimate of net cash flows expected to
be generated from our operating properties and the need for asset impairment
write-downs.
ENVIRONMENTAL MATTERS
Our operations are subject to extensive federal, state and local
environmental laws and regulations. The major environmental laws to which we are
subject include, among others, the Federal Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA," also known as the Superfund law).
CERCLA can impose joint and several liability for cleanup and investigation
costs, without regard to fault or legality of the original conduct, on current
and predecessor owners and operators of a site, as well as those who generate,
or arrange for the disposal of, hazardous substances. The risk of incurring
environmental liability is inherent in the mining industry. We own or operate
property, or have owned and operated property, used for industrial purposes. Use
of these properties may subject us to potential material liabilities relating to
the investigation and cleanup of contaminants, claims alleging personal injury
or property damage as the result of exposures to, or release of, hazardous
substances.
At our operating properties, we accrue costs associated with
environmental remediation obligations in accordance with SFAS No. 143
"Accounting for Asset Retirement Obligations." SFAS No. 143 requires us to
record a liability for the present value of our estimated environmental
remediation costs and the related asset created with it in the period in which
the liability is incurred. The liability will be accreted and the asset will be
depreciated over the life of the related asset. Adjustments for changes
resulting from the passage of time and changes to either the timing or amount of
the original present value estimate underlying the obligation will be made.
At our non-operating properties, we accrue costs associated with
environmental remediation obligations when it is probable that such costs will
be incurred and they are reasonably estimable. Accruals for estimated losses
from environmental remediation obligations have historically been recognized no
later than completion of the remedial feasibility study for such facility and
are charged to provision for closed operations and environmental matters.
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We periodically review our accrued liabilities for remediation costs as
evidence becomes available indicating that our remediation liabilities have
potentially changed. Such costs are based on management's current estimate of
amounts expected to be incurred when the remediation work is performed within
current laws and regulations. Recoveries of environmental remediation costs from
other parties are recorded as assets when their receipt is deemed probable.
Future closure, reclamation and environment-related expenditures are
difficult to estimate in many circumstances due to the early stages of
investigation, uncertainties associated with defining the nature and extent of
environmental contamination, the uncertainties relating to specific reclamation
and remediation methods and costs, application and changing of environmental
laws, regulations and interpretations by regulatory authorities and the possible
participation of other potentially responsible parties. Reserves for closure
costs, reclamation and environmental matters totaled $74.6 million at September
30, 2004, and we anticipate that some expenditures relating to these reserves
will be made over the next 30 years. This amount was derived from a range of
reasonable estimates in accordance with SFAS No. 5 "Accounting for
Contingencies." It is reasonably possible that the ultimate cost of remediation
could change in the future and that changes to these estimates could have a
material effect on future operating results as new information becomes known.
For environmental remediation sites known as of September 30, 2004, if the
highest estimate from the range (based upon information presently available)
were recorded, the total estimated liability would be increased by approximately
$48.0 million. For additional information, see Note 5 of Notes to the
Consolidated Financial Statements.
FOREIGN EXCHANGE GAINS IN VENEZUELA
The Venezuelan government has fixed the exchange rate of their currency
to the U.S. dollar at 1,920 bolivares to $1 (as of February 7, 2004, formerly
1,600 bolivares to $1 since February 2003); which is the exchange rate we
utilize to translate the financial statements of our Venezuelan subsidiary
included in our consolidated financial statements. Rules and regulations
regarding the implementation of exchange controls in Venezuela have been
published and periodically revised and/or updated.
Due to the exchange controls in place, the La Camorra unit recognized a
foreign exchange gain of $9.6 million during the first nine months of 2004,
compared to $3.6 million during the same 2003 period, as a reduction to cost of
sales, exploration and capital expenditures due to the use of multiple exchange
rates in valuing U.S. dollar denominated transactions. As discussed above, the
Venezuelan government has fixed the exchange rate of the bolivar to the U.S.
dollar at 1,920 to $1; however, markets outside of Venezuela reflect a
devaluation of the Venezuelan currency by approximately 43%.
BY-PRODUCT CREDITS AT THE SAN SEBASTIAN UNIT IN MEXICO
Cash costs per ounce of silver at the San Sebastian unit include
significant by-product credits from gold production and the strength of the
price of gold. Cash costs per ounce are calculated pursuant to standards of The
Gold Institute and are consistent with how costs per ounce are calculated within
the mining industry. Total cash costs were $1.20 per silver ounce for the
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third quarter of 2004 and $0.22 per silver ounce for the nine months ended
September 30, 2004, compared to negative $0.22 per silver ounce and negative
$0.04 per silver ounce during the third quarter and first nine months of 2003.
For the third quarters in 2004 and 2003, gold by-product credits were $8.76 per
silver ounce and $3.94 per silver ounce, respectively. For the nine months ended
September 30, 2004 and 2003, gold by-product credits were approximately $6.53
per silver ounce and $3.95 per silver ounce, respectively. By-product credits at
the San Sebastian unit are deducted from operating costs in the calculation of
cash costs per ounce. If our accounting policy were changed to treat gold
production as a co-product, the following total cash costs per ounce would be
reported:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2004 2003 2004 2003
---- ---- ---- ----
Silver $4.24 $2.08 $3.38 $1.77
Gold 262 150 208 159
Cash costs per ounce of silver or gold represent non-U.S. Generally
Accepted Accounting Principles ("GAAP") measurements that management uses to
monitor and evaluate the performance of its mining operations. We believe cash
costs per ounce of silver or gold produced provide an indicator of cash flow
generation at each location and on a consolidated basis, as well as providing a
meaningful basis to compare our results to those of other mining companies and
other mining operating properties. A reconciliation of this non-GAAP measure to
cost of sales and other direct production costs, the most comparable GAAP
measure, can be found under Reconciliation of Total Cash Costs to Costs of Sales
and Other Direct Production Costs.
VALUE-ADDED TAXES
Value-added taxes (VAT) are assessed in Venezuela on purchases of
materials and services. VAT is recorded as an account receivable on our
consolidated balance sheet, with a balance of $7.4 million (net of a reserve for
anticipated discounts totaling $1.9 million) at September 30, 2004, and $3.4
million at December 31, 2003 (net of a reserve for anticipated discounts of $0.9
million)
As an exporter from Venezuela, Hecla is eligible for refunds from the
government for payment of VAT, and Hecla prepares a monthly filing to obtain
this refund. Refunds are given by the government in the form of tax
certificates, which are marketable in Venezuela, generally for approximately 95%
of face value. Hecla received its most recent certificate from the Venezuelan
government in September 2002. While we believe that we will receive certificates
for all outstanding VAT from the Venezuelan government, issuance of certificates
is slow and likelihood of recovery at recorded value may diminish over time. We
have established a reserve of 21% of face value at September 30, 2004 and
December 31, 2003.
RESULTS OF OPERATIONS
For the third quarter and first nine months of 2004, we recorded losses
applicable to common shareholders of $11.4 million and $13.8 million, or $0.10
and $0.12 loss per common
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share, respectively, compared to losses applicable to common shareholders of
$18.1 million and $10.2 million, or $0.16 and $0.09 loss per common share,
respectively, during the third quarter and first nine months of 2003. Included
in the losses for the third quarters and first nine months of 2004 and 2003 were
preferred stock dividends of $0.1 million and $0.7 million, respectively, and
$11.5 million and $2.0 million, respectively. The 2004 loss for the first nine
months includes non-cash dividend charges of approximately $10.9 million related
to the exchanges of preferred stock for common stock, discussed previously. The
non-cash dividends represent the difference between the value of the common
stock issued in the exchange transactions and the value of the shares of common
stock that would have been issued if the shares of the preferred stock had been
converted into common stock pursuant to their terms. For more information, see
Note 9 of Notes to the Consolidated Financial Statements.
THE MEXICO SEGMENT
The San Sebastian unit, located in the State of Durango, Mexico,
reported sales of $7.1 million in the third quarter of 2004 and $27.2 million
for the nine months ended September 30, 2004, compared to $8.4 million and $25.2
million during the same periods in 2003, primarily due to lower silver
production of 57% for the third quarter and 38% in the first nine months of
2004, compared to the prior year, due to lower ore grades, offset by increased
prices of silver and gold. Costs of sales and other direct production costs as a
percentage of sales increased to 65.3% in the third quarter of 2004, from 30.2%
in the 2003 period, and increased to 47.0% for the first nine months of 2004,
from 38.2% during the 2003 period.
San Sebastian reported a loss from operations of approximately $16,000
during the third quarter of 2004, compared to income of $3.4 million during the
third quarter of 2003, primarily due to the above-mentioned factors, as well as
a 20% increase in exploration expenditures focused primarily in the Francine and
Don Sergio areas. Income from operations decreased 30% during the first nine
months of 2004 to $6.7 million, compared to income of $9.7 million during the
same period in 2003. Exploration during the first nine months was approximately
$4.2 million, a 34% increase over the same period in 2003.
Production during the third quarter of 2004 totaled approximately 0.5
million ounces of silver and 10,000 ounces of gold, respectively, compared to
1.1 million ounces of silver and 12,000 ounces of gold, respectively, during the
third quarter of 2003. For the first nine months of 2004, production totaled
approximately 2.0 million ounces of silver and 32,000 ounces of gold,
respectively, compared to 2003 production in the same period of approximately
3.1 million ounces of silver and 35,000 ounces of gold, respectively. Tons
milled increased in the third quarter and first nine months of 2004 by 1% and
9%, respectively, over the same periods in 2003, however, the silver grade
decreased to 13.3 ounces per ton in the third quarter of 2004, from 29.1 ounces
per ton in the same period last year, and to 18.1 ounces per ton in the first
nine months of 2004, from 29.7 ounces per ton in 2003. The decreased grade is
primarily due to lower ore grades in the last year of proven and probable
reserves at the Francine vein. San Sebastian's gold grades were 0.28 ounce per
ton in the third quarter of 2004 and 0.29 ounce per ton in the first nine months
of 2004, down from 0.32 ounce per ton and 0.34 ounce per ton during the same
periods in 2003. We estimate production of between 2.3 million and 2.4 million
ounces of silver, and between 42,000 and 43,000 ounces of gold, for the year
ending December 31, 2004.
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The total cash costs per silver ounce increased to $1.20 in the third
quarter of 2004, from a negative $0.22 in the 2003 period, and to $0.22 per
ounce for the nine months in 2004, compared to a negative $0.04 per ounce in the
same period in 2003. The increase is due to higher mining costs resulting from
deeper mining, increased processing costs due to rising reagent requirements, as
well as decreasing silver ounces produced. The mine is more expansive compared
to a year ago, requiring additional equipment use and increased labor expenses
to reach expected production levels.
In October 2004, the employees at the Velardena mill went on strike
after presenting a list of what we believe are unfounded accusations relating to
the labor agreement. Although there can be no assurance as to the outcome or
length of the strike, production may be affected during the fourth quarter of
2004. We currently believe the strike will not materially affect our operations
or longer-term expected production. The mine is stockpiling ore until the strike
is resolved.
For further details on our cash costs per ounce, please see
RECONCILIATION OF TOTAL CASH COSTS (NON-GAAP) TO COST OF SALES AND OTHER DIRECT
PRODUCTION COSTS (GAAP), below.
THE UNITED STATES SEGMENT
GREENS CREEK
The Greens Creek unit, a 29.73%-owned joint-venture arrangement with
Kennecott Greens Creek Mining Company located on Admiralty Island, near Juneau,
Alaska, reported sales of $10.1 million and $24.5 million for our account during
the third quarter and first nine months of 2004, as compared to $8.3 million and
$21.6 million during the comparable 2003 periods. Our income from operations
from the Greens Creek unit increased to $2.1 million and $5.5 million for the
third quarter and nine-month period ended September 30, 2004, respectively, from
$2.1 million and $2.4 million for the same periods in 2003, respectively, a
result of increased sales due to higher average metals prices offset by negative
variances of 26.7% and 16.7% in silver production quarter-on-quarter,
year-on-year, respectively.
Cost of sales and other direct production costs as a percentage of
sales increased to 59.6% in the third quarter of 2004, from 44.4% in the 2003
period, due primarily to increased costs of production associated with increased
fuel prices. On a year-to-date basis, metal prices increases outweighed the
effects of the negative variance in silver production and increased operating
costs, as cost of sales and other direct production costs as a percentage of
sales decreased to 53.0% for the first nine months of 2004, from 56.7% during
the 2003 period.
Silver production totaled approximately 0.8 million ounces during the
third quarter of 2004 and 2.2 million ounces for the first nine months of 2004,
compared to 1.0 million ounces and 2.6 million ounces during the same 2003
periods, primarily due to negative silver ore grade variances of 19.0% and
13.7%, respectively, due to production from lower-grade ore zones. While volume
mined has kept pace with our expectations, and ore milled has remained at
approximately the same levels of those during the 2003 periods (approximately
60,000 tons during the third quarters of 2004 and 2003, and 177,000 tons during
the first nine months of 2004 compared to 174,000 tons in the
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2003 period), ore grades have decreased ounces produced as the joint venture has
been unable to mine as much volume as expected from areas with higher silver
grades. During the third quarter and first nine months of 2004, Greens Creek
produced approximately 6,000 ounces and 20,000 ounces of gold, respectively,
compared to 7,000 ounces and 22,000 ounces of gold, respectively, during the
same periods in 2003.
Given the metal price environment during 2004, both lead and zinc are
significant by-products produced at the Greens Creek unit. During the third
quarter and first nine months of 2004 when compared to the same periods in 2003,
the prices of lead and zinc increased 82.3% and 81.0%, respectively, and 19.4%
and 29.2%, respectively. Greens Creek produced approximately 1,800 tons and
5,500 tons of lead, respectively, during the third quarter and first nine months
of 2004, compared to 2,000 tons and 6,200 tons, respectively, during the 2003
periods, and 5,600 tons and 16,700 tons of zinc in 2004, respectively, compared
to 4,200 tons and 17,000 tons of zinc, respectively, during the third quarter
and first nine months of 2003.
The total cash costs per silver ounce increased by 36.0% to $1.55 in
the third quarter of 2004, from $1.14 in the 2003 period. The increase is due to
lower production and higher operating costs, as discussed above, offset by an
8.7% increase in by-product credits from higher average gold, lead and zinc
prices. For the nine months ended September 30, 2004, the total cash cost per
ounce decreased by 16.8% to $1.04 per silver ounce, from $1.25 per ounce in the
first nine months of 2003, as the effects of increased costs were outweighed by
a 13.2% increase in by-product credits. For the year ending December 31, 2004,
production is forecasted to total between 3.0 million and 3.1 million silver
ounces, between 25,000 and 26,000 ounces of gold, 7,000 tons of lead, and 22,000
tons of zinc.
For further details on our cash costs per ounce, please see
RECONCILIATION OF TOTAL CASH COSTS (NON-GAAP) TO COST OF SALES AND OTHER DIRECT
PRODUCTION COSTS (GAAP), below.
LUCKY FRIDAY
The Lucky Friday unit, located in northern Idaho and a producing mine
for Hecla since 1958, reported sales of approximately $5.1 million during the
third quarter of 2004 and $13.8 million during the first nine months of the
year, compared to $2.8 million and $8.9 million during the comparable 2003
periods. Income from operations of $1.0 million and $2.5 million were recorded
for the third quarter and nine months of 2004, improvements for both periods
from losses from operations of $0.1 million and $0.1 million, respectively,
during the third quarter and first nine months of 2003. The increases in both
sales and income from operations during the 2004 periods over 2003 are due
primarily to the increases in metals prices, including favorable increases in
the prices of lead and zinc, which are important by-products at the Lucky Friday
unit.
While silver ounces produced during the third quarter of 2004 were
slightly higher than the same period in 2003, 511,000 ounces compared to 493,000
ounces, respectively, silver production during the first nine months of 2004 was
approximately 13% less, or 1.5 million ounces compared to 1.7 million ounces,
respectively, when compared to the first nine months of 2003. The silver ore
grade for the third quarter and nine-month period of 2004 was 12.9 and 13.3
ounces per ton, respectively, a 13.7% and 16.0% decrease, compared to 14.9 and
15.9 ounces per ton, respectively,
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during the third quarter and first nine months of 2003. These factors are
primarily attributable to overall deeper mining resulting in longer haulage,
fewer tons mined in early 2004 due to ore pass pocket repair, and higher-grade
mining that took place during 2003.
Development continues on the 5900 level of the Gold Hunter deposit,
which has advanced approximately 3,700 feet, or about two-thirds of the way to
the orebody. Full production on the new level is expected to begin in early
2006.
Cost of sales and other direct production costs as a percentage of
sales from products decreased to 76.5% during the third quarter of 2004, from
98.5% during the third quarter of 2003, primarily due to an increase in sales,
offset by increased maintenance and development cost, and an increase in payroll
overhead costs, as compared to the third quarter of 2003. During the comparable
nine-months periods, cost of sales and other direct production costs as a
percentage of sales from product decreased from 99.3% in the 2003 period to
80.4% in 2004, driven by the same factors that contributed to the variances in
the third quarters.
The total cash cost per silver ounce decreased during the third quarter
of 2004 to $4.53, from $5.20 during the third quarter of 2003, primarily due to
a 116.3% increase in by-product credits from the increased price of lead and
zinc, offset by increased production costs. The total cash cost per silver
ounce increased to $4.98 per ounce in the first nine months of 2004, from $4.75
per ounce in the same period of 2003, primarily due to decreased silver
production and increased production costs, offset by an 88.2% increase in
by-product credits. For the year ending December 31, 2004, production is
forecasted to total between 2.1 million and 2.2 million silver ounces and
approximately 12,000 tons of lead.
For further details on our cash costs per ounce, please see
RECONCILIATION OF TOTAL CASH COSTS (NON-GAAP) TO COST OF SALES AND OTHER DIRECT
PRODUCTION COSTS (GAAP), below.
THE VENEZUELA SEGMENT
We currently operate the La Camorra unit, located in the eastern
Venezuelan State of Bolivar, approximately 120 miles southeast of Puerto Ordaz.
The La Camorra unit refers to our Venezuelan operating properties and
exploration projects, currently comprised of the La Camorra mine and Block B
concessions. At the present time, the La Camorra unit is our sole designated
gold operation.
Sales increased to $11.5 million in the third quarter of 2004, or by
33%, from $8.6 million in the third quarter of 2003, and to $36.7 million in the
first nine months of 2004, or by 29%, from $28.5 million in the first nine
months of 2003. The increases in both periods were primarily due to higher
realized gold prices ($363 in the third quarter of 2004 versus $324 in the same
period of 2003, and $361 for the first nine months of 2004 versus $322 for the
first nine months of 2003). In addition, gold grades increased during both
periods, to an average of 0.69 ounce per ton in the third quarter of 2004, from
0.58 ounce per ton in 2003, and to 0.78 ounce per ton for the first nine months
of 2004, from 0.69 ounce per ton in the first nine months of 2003. Our realized
gold prices were less than the average London Final prices ($378 per ounce in
the third quarter of 2004 versus $337 per ounce in the third quarter of 2003,
and $401 per ounce for the first nine months of 2004 compared to $332 per ounce
in the first nine months of
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2003) due to forward gold sales commitments at $288.25 per ounce for a portion
of our production. As of September 30, 2004, a total of 11,330 ounces of gold
remain subject to these forward contracts, all scheduled for delivery by the end
of 2004.
Loss from operations totaled approximately $34,000 during the third
quarter of 2004, although income of $6.1 million was reported during the first
nine months of 2004, compared to income of $2.6 million during the third quarter
of 2003 and $8.4 million in the first nine months of 2003. Compared to results
for the third quarter of 2003, operating income for the third quarter of 2004
was strengthened by the increase in realized gold price as discussed above, as
well as increased production, however was offset by a 187% increase in
exploration costs. The decrease in operating income for the first nine months of
2004 compared to the same period in 2003 is attributable to those same factors
affecting the third quarter, including an 8% increase in gold ounces produced,
offset by a 63% increase in exploration costs.
Cost of sales and other direct production costs as a percentage of
sales from products increased during both reporting periods to 61.0% during the
third quarter of 2004, from 41.0% during the same period in 2003, and to 46.6%
during the first nine months of 2004, from 39.2% during the same period in 2003,
due primarily to higher production costs as the mine gets deeper, including
truck haul times which have increased over the third quarter and first nine
months of 2004 compared to the same periods a year ago. Inflation, as well as
rising steel costs, have also increased material expenses at the mine.
The La Camorra unit produced approximately 28,000 gold ounces during
the third quarter and 102,000 gold ounces during the first nine months of 2004,
at total cash costs of $211 per ounce in the third quarter and $165 per ounce
for the first nine months, compared to approximately 28,000 gold ounces in the
third quarter of 2003, at a total cash cost of $161 per ounce, and 95,000 gold
ounces in the first nine months of 2003, at a total cash cost of $145 per ounce.
Total gold production for the La Camorra unit is projected to reach
approximately 134,000 ounces for the year ending December 31, 2004.
Contributing toward the 2004 production were approximately 1,658 ounces
and 2,949 ounces, respectively, of gold produced during the third quarter and
year-to-date period from third-party mining operations located near the La
Camorra mine, the revenue from which is treated as a by-product credit in the
calculation of gold costs per ounce. For further details on our cash costs per
ounce, please see RECONCILIATION OF TOTAL CASH COSTS (NON-GAAP) TO COST OF SALES
AND OTHER DIRECT PRODUCTION COSTS (GAAP), below.
We continue to maintain low costs in part due to the weak Venezuelan
currency, the bolivar. The Venezuelan government has fixed the exchange rate of
their currency to the U.S. dollar at 1,920 bolivares to $1 (as of February 7,
2004, formerly 1,600 bolivares to $1 since February 2003); which is the exchange
rate we utilize to translate the financial statements of our Venezuelan
subsidiary included in our consolidated financial statements. Rules and
regulations regarding the implementation of exchange controls in Venezuela have
been published and periodically revised and/or updated. However, markets outside
of Venezuela reflect a devaluation of the Venezuelan currency at approximately
43%, which benefits our cost structure, as a portion of the gains are offset
against costs of sales, exploration and capital expenditures.
-35-
Because of the exchange controls in place and their impact on local
suppliers, some supplies, equipment parts and other items we previously
purchased in Venezuela have been ordered outside the country. Increased lead
times in receiving orders from outside Venezuela have continued to require an
increase in supply inventory, including an increase of 30% as of the end of
September 2004 compared to December 31, 2003, and prepayments to vendors, which
have increased by $2.5 million since December 31, 2003.
As previously reported in a press release in March 2004, approximately
5,000 ounces of gold production, valued at a cost of $1.0 million, was
provisionally withheld from export from Venezuela by the Venezuelan government,
pending an administrative review. In July 2004, the gold was released by the
government from the Central Bank of Venezuela and was shipped to our refiner for
further processing and sale by us. All subsequent shipments of gold dore have
been exported without intervention by Venezuelan government authorities.
Venezuela experienced political unrest that resulted in a severe
economic downturn since the third quarter of 2002. Although we believe we will
be able to manage and operate the La Camorra unit and related exploration
projects successfully, due to the continued political, regulatory and economic
uncertainty, exportation and exchange controls, and the effect of all of these
on our operations including, among other things, litigation, labor stoppages and
the impact on our supplies of oil, gas and other products, there can be no
assurance we will be able to operate without interruptions to our operations.
CORPORATE MATTERS
The provision for closed operations and environmental matters decreased
$14.8 million and $13.5 million, respectively, during the third quarter and
first nine months of 2004, compared to the same periods in 2003. During the
third quarters of 2004 and 2003, we recorded provisions for future reclamation
and other closure costs of $8.4 million and $23.1 million, respectively,
primarily for estimated liabilities in Idaho's Coeur d'Alene Basin and for the
Grouse Creek mine clean-up in central Idaho. For additional information, see
Note 5 of Notes to the Consolidated Financial Statements.
Other operating expense, net of other operating income, increased $0.5
million and $4.3 million, respectively, during the third quarter and first nine
months of 2004, compared to the same periods in 2003. The third quarter variance
is primarily due to accruals for variable accounting on employee stock option
plans, which also affected the year-to-date variance. Included in other
operating income in the nine-month 2003 period was a cash settlement from Zemex
Corporation received during the first quarter of that year ($4.0 million).
Exploration expense increased $3.2 million and $4.2 million,
respectively, during the third quarter and nine months of 2004, compared to the
same periods in 2003, primarily due to increased exploration expenditures in
Mexico ($1.5 million and $2.4 million, respectively) and in Venezuela at or near
the La Camorra mine and Canaima resource ($1.0 million and $0.8 million,
respectively) and the Block B concessions ($0.2 million and $0.8 million,
respectively). During the fourth
-36-
quarter of 2004, we currently anticipate spending an additional $2.2 million to
$2.6 million in exploration activity.
Activity at the Hollister Development Block in Nevada, or
pre-development expense on the statements of operations, was approximately $0.5
million and $0.1 million, respectively, during the third quarters of 2004 and
2003, and approximately $1.5 million and $1.0 million, respectively, during the
first nine months of 2004 and 2003. Final permits have been issued, and surface
and underground construction has commenced.
Included in the net loss for the first nine months of 2003 is a
positive cumulative effect of a change in accounting principle of $1.1 million
relating to the adoption of SFAS No. 143 "Accounting for Asset Retirement
Obligations." For additional information, see Note 11 of Notes to the
Consolidated Financial Statements.
Interest income decreased $0.8 million and $1.0 million, respectively,
during the third quarter and first nine months of 2004, compared to the same
periods in 2003, primarily due to interest income received during the second and
third quarters of 2003 from the Mexican government for interest on unpaid
value-added tax receivables ($1.0 million and $1.3 million, respectively),
offset by increased income generated from short-term investments ($0.1 million
and $0.2 million, respectively).
The provision for income taxes was increased by $0.1 million during the
third quarter of 2004 compared to the same period in 2003, and increased by $0.5
million in the first nine months of 2004 compared to the comparable 2003 period,
due to routine assessment of our deferred tax asset related to Mexico, and
withholding tax accrued on additional interest expense in Venezuela.
Interest expense decreased $0.2 million and $0.5 million, respectively,
during the third quarter and first nine months of 2004, compared to the same
periods in 2003, principally due to lower average borrowings. At September 30,
2004, we had no outstanding debt.
General and administrative expenses increased $0.2 million in the third
quarter of 2004 compared to the same period in 2003, for a nine-month total of
approximately $6.2 million and $6.1 million, respectively, in 2004 and 2003.
RECONCILIATION OF TOTAL CASH COSTS (NON-GAAP) TO COST OF SALES AND OTHER DIRECT
PRODUCTION COSTS (GAAP)
The following tables present reconciliations between non-GAAP total
cash costs to cost of sales and other direct production costs (GAAP) for our
gold (the Venezuela segment only) and combined silver operations (the Mexico and
United States segments), as well as a reconciliation for each individual silver
operating property, for the quarters and nine months ended September 30, 2004
and 2003 (in thousands, except costs per ounce). We believe cash costs per ounce
of silver or gold provide an indicator of cash flow generation at each location
and on a consolidated basis, as well as providing a meaningful basis to compare
our results to those of other mining companies and other operating mining
properties. Cost of sales and other direct production costs is the most
comparable financial measure calculated in accordance with GAAP to total cash
costs. The sum of the cost of sales and other direct production costs for our
silver and gold operating properties in the
-37-
tables below, as well as the cost of sales and other direct production costs
associated with our former industrial minerals segment, is presented in our
Consolidated Statement of Operations and Comprehensive Loss.
Venezuela Segment (1)
--------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Total cash costs $ 5,684 $ 4,496 $ 16,380 $ 13,736
Divided by gold ounces produced 27 28 99 95
-------- -------- -------- --------
Total cash cost per ounce produced $ 211 $ 161 $ 165 $ 145
======== ======== ======== ========
Reconciliation to GAAP:
Total cash costs 5,684 4,496 16,380 13,736
Treatment & freight costs (427) (370) (1,462) (1,175)
By-product credits 652 -- 1,146 --
Change in product inventory 1,096 (586) 951 (1,428)
Reclamation and other costs -- (8) 105 53
-------- -------- -------- --------
COST OF SALES AND OTHER DIRECT
PRODUCTION COSTS (GAAP) $ 7,005 $ 3,532 $ 17,120 $ 11,186
======== ======== ======== ========
(1) Costs per ounce of gold are based on the gold produced by the La Camorra
mine only. During the third quarter and first nine months of 2004, a total of
1,658 ounces and 2,949 ounces of gold, respectively, were produced from
third-party mining operations located near the La Camorra mine. The revenues
from these gold ounces were treated as a by-product credit and included in the
calculation of gold costs per ounce. Included in total cash costs for the third
quarter and first nine months of 2004 were the costs to purchase the ore of
approximately $1.0 million and $1.7 million, respectively.
Combined Silver Properties
--------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Total cash costs $ 4,068 $ 3,515 $ 10,249 $ 11,371
Divided by silver ounces produced 1,750 2,643 5,650 7,486
-------- -------- -------- --------
Total cash cost per ounce produced $ 2.32 $ 1.33 $ 1.81 $ 1.52
======== ======== ======== ========
Reconciliation to GAAP:
Total cash costs 4,068 3,515 10,249 11,371
Treatment & freight costs (4,715) (4,498) (14,280) (13,753)
By-product credits 13,291 11,452 39,747 33,674
Change in product inventory 1,674 (1,640) 544 (1,012)
Reclamation and other costs 229 143 577 415
-------- -------- -------- --------
COST OF SALES AND OTHER DIRECT
PRODUCTION COSTS (GAAP) $ 14,547 $ 8,972 $ 36,837 $ 30,695
======== ======== ======== ========
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San Sebastian Unit (1)
--------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Total cash costs $ 565 $ (247) $ 432 $ (112)
Divided by silver ounces produced 472 1,104 1,956 3,135
-------- -------- -------- --------
Total cash cost per ounce produced $ 1.20 $ (0.22) $ 0.22 $ (0.04)
======== ======== ======== ========
Reconciliation to GAAP:
Total cash costs 565 (247) 432 (112)
Treatment & freight costs (208) (578) (1,037) (1,594)
By-product credits 4,133 4,347 12,773 12,383
Change in product inventory 53 (1,067) 356 (1,292)
Reclamation and other costs 118 75 268 216
-------- -------- -------- --------
COST OF SALES AND OTHER DIRECT
PRODUCTION COSTS (GAAP) $ 4,661 $ 2,530 $ 12,792 $ 9,601
======== ======== ======== ========
(1) Gold is accounted for as a by-product at the San Sebastian unit whereby
revenues from gold are deducted from operating costs in the calculation
of cash costs per ounce. If our accounting policy were changed to treat
gold production as a co-product, the following costs per ounce would be
reported:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2004 2003 2004 2003
------- ------- ------- -------
Total cash costs $ 4,697 $ 4,101 $13,205 $12,271
Revenues
Silver 42.6% 56.1% 49.9% 54.7%
Gold 57.4% 43.9% 50.1% 45.3%
Ounces produced
Silver 472 1,104 1,956 3,135
Gold 10 12 32 35
Total cash cost per ounce
Silver $ 4.24 $ 2.08 $ 3.38 $ 1.77
Gold 262 150 208 159
-39-
Greens Creek Unit
--------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Total cash costs $ 1,190 $ 1,196 $ 2,280 $ 3,264
Divided by silver ounces produced
767 1,046 2,182 2,620
-------- -------- -------- --------
Total cash cost per ounce produced $ 1.55 $ 1.14 $ 1.04 $ 1.25
======== ======== ======== ========
Reconciliation to GAAP:
Total cash costs 1,190 1,196 2,280 3,264
Treatment & freight costs (3,063) (2,940) (9,341) (9,008)
By-product credits 6,272 5,771 19,759 17,458
Change in product inventory 1,541 (406) 32 383
Reclamation and other costs 59 57 237 170
-------- -------- -------- --------
COST OF SALES AND OTHER DIRECT
PRODUCTION COSTS (GAAP) $ 5,999 $ 3,678 $ 12,967 $ 12,267
======== ======== ======== ========
Lucky Friday Unit
--------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Total cash costs $ 2,313 $ 2,566 $ 7,537 $ 8,219
Divided by silver ounces produced 511 493 1,512 1,731
-------- -------- -------- --------
Total cash cost per ounce produced $ 4.53 $ 5.20 $ 4.98 $ 4.75
======== ======== ======== ========
Reconciliation to GAAP:
Total cash costs 2,313 2,566 7,537 8,219
Treatment & freight costs (1,444) (980) (3,902) (3,151)
By-product credits 2,886 1,334 7,215 3,833
Change in product inventory 80 (167) 156 (103)
Reclamation and other costs 52 11 72 29
-------- -------- -------- --------
COST OF SALES AND OTHER DIRECT
PRODUCTION COSTS (GAAP) $ 3,887 $ 2,764 $ 11,078 $ 8,827
======== ======== ======== ========
FINANCIAL CONDITION AND LIQUIDITY
Our financial condition continues to be strong, with cash and cash
equivalents of $71.6 million and $21.6 million in short-term investments with
maturities due within the next twelve months. Our cash needs over the next year
will be primarily related to capital expenditures, exploration activities,
reclamation expenditures, and the possibility of further investment
opportunities or future acquisitions, and will be funded through a combination
of current cash, maturities or sales of investments, future cash flows from
operations and/or future borrowings or debt or equity security issuances.
Although we believe existing cash and cash equivalents are adequate, we cannot
project the cash impact of possible future investment
-40-
opportunities or acquisitions, and our operating properties may require more
cash than forecasted.
CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS
The table below presents our fixed, non-cancelable contractual
obligations and commitments primarily with regards to our earn-in agreement
obligations, certain capital expenditures and lease arrangements as of September
30, 2004. At September 30, 2004, we had no debt outstanding.
Payments Due By Period (in thousands)
---------------------------------------------------------
Less than After
1 year 1-3 years 4-5 years 5 years Total
--------- --------- --------- ------- -------
Purchase obligations (1,2) 12,559 -- -- -- 12,559
Earn-in agreement (2,3) 6,720 -- -- -- 6,720
Operating lease commitments (4) 1,533 1,449 156 720 3,814
------- ------- ------- ------- -------
Total contractual cash obligations $20,812 $ 1,449 $ 156 $ 720 $23,093
======= ======= ======= ======= =======
(1) As of September 30, 2004, we were committed to approximately $0.8
million for the construction of a shaft at the La Camorra mine.
(2) In July 2004, we entered into an earn-in agreement with Pacific
Intermountain Gold Corporation where we have the right to acquire a
100% interest in its Stonewall property in Nye County, Nevada. We have
agreed to make a series of minimum work expenditures with respect to
the property and advanced royalty payments to Pacific Intermountain
Gold Corporation to acquire the property. We are obligated to spend
$0.2 million on work expenditures and advanced royalty payments of
$25,000 within the first year of the agreement.
(3) In August 2002, we entered into an earn-in agreement with Rodeo Creek
Gold, Inc., a wholly owned subsidiary of Great Basin Gold Ltd. ("Great
Basin"), concerning exploration, development and production on Great
Basin's Hollister Development Block gold property. The agreement
provides us with an option to earn a 50% working interest in the
Hollister Development Block in return for funding a two-stage, advanced
exploration and development program leading to commercial production.
As of September 30, 2004, we were contractually committed to invest
approximately $6.5 million, which represents the remaining portion of
the first stage of the agreement. The $6.5 million has not been
recorded in our Consolidated Financial Statements; although project to
date, we have incurred expenditures of $3.8 million, which has been
recorded on our Consolidated Financial Statements as pre-development
expenditures.
(4) We enter into operating leases in the normal course of business.
Substantially all lease agreements have fixed payment terms based on
the passage of time. Some lease agreements provide us with the option
to renew the lease or purchase the leased property. Our future
operating lease obligations would change if we exercised these renewal
options and if we entered into additional operating lease arrangements.
We maintain reserves for costs associated with mine closure,
reclamation of land and other environmental matters. At September 30, 2004, our
reserves for these matters totaled $74.6 million, for which no contractual or
commitment obligations exist. Future expenditures related to closure,
reclamation and environmental expenditures are difficult to estimate, although
we anticipate we will make expenditures relating to these obligations over the
next thirty years. During the fourth quarter of 2004, expenditures for
environmental remediation and reclamation are estimated to be in the range of
$1.8 million and $2.1 million. For additional information relating to our
environmental obligations, see Note 5 of Notes to the Consolidated Financial
Statements.
-41-
OPERATING ACTIVITIES
Operating activities provided approximately $17.3 million in cash
during the first nine months of 2004, compared to $17.6 million at September 30,
2003, primarily from cash provided by our operating properties. Net cash from
operating activities was improved by increased accounts payable and accrued
payroll expenses primarily in Venezuela ($3.7 million), Mexico ($0.9 million),
at the corporate office ($0.8 million) and at the Lucky Friday unit ($0.6
million). Cash provided by operating activities was decreased by cash required
for reclamation activities and other noncurrent liabilities ($5.4 million),
increased value-added tax receivables ($3.9 million in Venezuela, offset by a
$2.1 million decrease in Mexico), advances to small third-party milling
operations in the Block B concessions ($1.6 million), increased receivables at
the corporate office related to future reimbursement by various third parties
for expenditures related to the Coeur d'Alene Basin litigation ($1.5 million),
increased materials inventories ($2.0 million) offset by lower product inventory
in Venezuela ($1.0 million), and prepayments to various suppliers in Venezuela
($2.5 million).
We have recorded the value added taxes we paid in Venezuela and Mexico
as recoverable assets. At September 30, 2004, value added tax receivables
totaled $7.4 million in Venezuela and $1.9 million in Mexico. We periodically
evaluate the recoverability of these receivables and have established a reserve
against future collection of 21% in Venezuela.
Positive non-cash elements incurred in the first nine months of 2004
included charges for depreciation, depletion and amortization ($18.0 million),
provisions for reclamation and closure costs ($9.4 million) and a change in
deferred income taxes primarily a result of utilization of deferred tax assets
in Mexico ($2.0 million).
INVESTING ACTIVITIES
Investing activities required $47.8 million in cash during the first
nine months of 2004, primarily for additions to properties, plants and equipment
($30.9 million), the purchase of short-term investments ($24.6 million), the
completion of a restricted trust for future reclamation at Greens Creek ($7.8
million), commitment of funds as surety on tax obligations in Venezuela ($4.3
million) and surety bond collateral for the Hollister Development Block ($1.0
million), offset by maturities of investments ($21.0 million). Capital
expenditures during the first nine months of 2004 consisted of additions in
Venezuela of $23.4 million, including construction of a new shaft and mine
development at the La Camorra mine and mine construction activities at the
Isidora mine, mine development at the Lucky Friday unit ($3.4 million) and mine
equipment and development, as well as additions to the mine and mill
infrastructure, at the Greens Creek unit ($2.9 million).
During the fourth quarter of 2004, we estimate our capital expenditures
will be in the range of $10.0 million to $13.0 million, which represents
sustaining capital at our existing operations and expansion capital for shaft
construction at the La Camorra mine, equipment and development at the Isidora
mine, and development at the Lucky Friday unit. There can be no assurance that
our estimated capital expenditures for the remainder of 2004 will be in the
range we have projected.
-42-
FINANCING ACTIVITIES
During the first nine months of 2004, financing activities used
approximately $3.3 million in cash due to repayment of debt ($7.1 million),
including $2.7 million on the outstanding balance of a project loan used to
purchase the Velardena mill in Mexico, $2.4 million on a revolving loan in
Venezuela and final payment of $1.5 million on the outstanding balances of
credit agreements used to provide project financing at the La Camorra mine.
Offsetting the use of cash for debt repayment were $2.4 million borrowed on a
revolving loan in Venezuela (repaid in the second quarter of 2004) and proceeds
of $1.4 million received upon exercise of employee stock options (299,234
shares).
OTHER
In October 2004, the employees at the Velardena mill in Mexico went on
strike after presenting a list of what we believe are unfounded accusations
relating to the labor agreement. Although there can be no assurance as to the
outcome or length of the strike, production may be affected during the fourth
quarter of 2004. We currently believe the strike will not materially affect our
operations or longer-term expected production. The mine is stockpiling ore until
the strike is resolved.
In February 2004, we reduced the number of Series B preferred shares
outstanding by 273,961 shares, or 58.9%, pursuant to an exchange offer. This
exchange offer allowed participating shareholders to receive 7.94 shares of
common stock for each preferred share exchanged, which resulted in the issuance
of a total of 2,175,237 common shares. The completed exchange offer eliminated
$3.4 million in accumulated dividends on the preferred stock, and reduced the
annual dividend payable on the preferred stock by $1.0 million to $0.7 million.
During March 2004, we entered into exchange agreements with holders of
approximately 17% of the then outstanding preferred stock (190,816 preferred
shares) to exchange such shares for shares of common stock. A total of 33,000
preferred shares were exchanged for 260,861 common shares as a result of these
privately negotiated exchanges. As a result of the February and March exchanges,
we recorded non-cash dividends of approximately $10.9 million during the first
quarter of 2004. As of September 30, 2004, a total of 157,816 shares of
preferred stock remain issued and outstanding. In order to eliminate the effect
of our dividend arrearages on our capital raising activities, we intend to
evaluate and potentially implement further programs to reduce the number of
remaining preferred shares outstanding, including the possible redemption of
shares.
Holders of our Series B preferred stock are entitled to receive
cumulative cash dividends at the annual rate of $3.50 per share, payable
quarterly, when and if declared by the board of directors. As of January 31,
2002, we had not declared and paid the equivalent of six quarterly dividends,
entitling holders of the preferred stock to elect two directors at our annual
shareholders' meeting. On May 10, 2002, holders of the preferred stock, voting
as a class, elected two additional directors. As of October 1, 2004, we have not
declared or paid $2.3 million of preferred stock dividends.
-43-
We are subject to legal proceedings and claims that have not been
finally adjudicated. The ultimate disposition of these matters and various other
pending legal actions and claims is not presently determinable. For information
on legal proceedings and claims, see Note 5 of Notes to the Consolidated
Financial Statements.
For information on hedged positions and derivative instruments, see
Item 3 - "Quantitative and Qualitative Disclosures About Market Risk."
NEW ACCOUNTING PRONOUNCEMENTS
In April 2004, the Financial Accounting Standards Board ("FASB")
ratified Emerging Issues Task Force ("EITF") Issue No. 04-2, which amends
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" to the extent all mineral rights are to be considered tangible
assets for accounting purposes. There has been diversity in practice related to
the application of SFAS No. 141 to certain mineral rights held by mining
entities that are not within the scope of SFAS No. 19 "Financial Accounting and
Reporting by Oil and Gas Producing Companies." The SEC staff's position
previously was entities outside the scope of SFAS No. 19 should account for
mineral rights as intangible assets in accordance with SFAS No. 142 "Goodwill
and Other Intangible Assets." At March 31, 2004, we reclassified the net cost of
mineral interests and associated accumulated amortization to property, plant and
equipment of $5.1 million, and reclassified the amount recorded at December 31,
2003, of $5.3 million.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46)
"Consolidation of Variable Interest Entities." In December 2003, the FASB issued
a revision to this interpretation (FIN 46(r)). FIN 46(r) clarifies the
application of Accounting Research Bulletin (ARB) No. 51, "Consolidated
Financial Statements." FIN 46 clarifies the application of ARB No. 51 to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. We adopted FIN 46(r) in its entirety in the first
quarter of 2004, which did not have a material effect on our consolidated
financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our risk-management activities includes
forward-looking statements that involve risk and uncertainties, as well as
summarizes the financial instruments and derivative instruments held by us at
September 30, 2004, which are sensitive to changes in commodity prices and are
not held for trading purposes. Actual results could differ materially from those
projected in the forward-looking statements. We believe there has not been a
material change in our market risk since the end of our last fiscal year. In the
normal course of business, we also face risks that are either non-financial or
non-quantifiable (see Part I, Item 1 - Risk Factors in our Form 10-K for the
year ended December 31, 2003).
-44-
INTEREST-RATE RISK MANAGEMENT
The following table presents principal cash flows (in thousands) for
short-term investments at September 30, 2004, by maturity date and the related
average interest rate.
Expected Maturity Date
---------------------------------------------- Fair
2004 2005 2006 2007 2008 Total Value
---- ---- ---- ---- ---- -------- -------
Short-term investments $ 3,100 $ 18,490 -- -- -- $ 21,590 $21,590
Average interest rate 1.48% 1.45% -- -- --
COMMODITY PRICE RISK MANAGEMENT
At times, we use commodity forward sales commitments, commodity swap
contracts and commodity put and call option contracts to manage our exposure to
fluctuation in the prices of certain metals which we produce. Contract positions
are designed to ensure that we will receive a defined minimum price for certain
quantities of our production. We use these instruments to reduce risk by
offsetting market exposures. We are exposed to certain losses, generally the
amount by which the contract price exceeds the spot price of a commodity, in the
event of nonperformance by the counterparties to these agreements. The
instruments held by us are not leveraged and are held for purposes other than
trading.
In accordance with our risk management policy, in July 2004 we entered
into forward contracts for 7,425 metric tons of lead to hedge lead produced
at the Lucky Friday unit to protect against the risk that its market price may
decline and decrease our future cash flows. The contracts represent
approximately 38% of our lead production for the contract period, from August
2004 to June 2005. These contracts are required to be accounted for as
derivatives under SFAS No. 133. As such, we have designated these contracts as
cash flow hedges. Decreases in cash flow from the sale of lead will be highly
correlated against increases in cash flows from the forward contract.
At September 30, 2004, 6,075 metric tons of lead remained outstanding
under the above-discussed contracts. The table below presents information about
our outstanding lead forward sales and includes the notional amount in metric
tons, the average forward sales price, the total dollar contract amount expected
by the maturity dates, which will occur by the end of June 2005, the estimated
fair value and the estimated percentage of production committed to the contracts
over the contract term.
-45-
Maturity Maturity
Date Date
2004 2005
--------- ---------
Lead contract (metric tons) 2,025 4,050
Future price (per pound) $ 0.382 0.355
Contract amount (in thousands) $ 1,703 3,169
Estimated fair value (in thousands) $ 1,915 3,593
Estimated % of production
committed to contracts 38% 38%
The following table provides information about our gold forward sales
contracts at September 30, 2004. These contracts meet the criteria to be treated
as normal sales in accordance with SFAS No. 138 and as a result, these contracts
are not required to be accounted for as derivatives under SFAS No. 133. The
table presents the notional amount in ounces, the average forward sales price,
the total-dollar contract amount expected by the maturity dates, which will
occur by December 31, 2004, the estimated fair value and the estimated
percentage of production over the remaining contract term.
Maturity
Date
2004
---------
Gold sales (ounces) 11,330
Future price (per ounce) $ 288.25
Contract amount (in thousands) $ 3,266
Estimated fair value $ (1,493)
Estimated % of production
committed to contracts 21%
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of our management, including the Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO"), of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on that evaluation,
our management, including the CEO and CFO, concluded that disclosure controls
and procedures were effective as of September 30, 2004, in ensuring that all
material information required to be filed in this quarterly report has been made
known to them in a timely fashion.
There has been no change in our internal control over financial
reporting during the quarter ended September 30, 2004, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
-46-
The Securities and Exchange Commission, as directed by Section 404 of
the Sarbanes-Oxley Act of 2002, adopted rules requiring each public company to
include in its annual report on Form 10-K an assessment by management of the
effectiveness of the company's internal controls over financial reporting. In
addition, the company's independent auditors must attest to and report on
management's assessment. This requirement will first apply to our Annual Report
on Form 10-K for the fiscal year ending December 31, 2004.
With the assistance of internal audit consultants for each of our
segments, we are currently working to perform a system and process evaluation,
including testing as required to comply with Section 404. While we currently
anticipate being able to fully implement the requirements relating to internal
controls and all other aspects of Section 404, we cannot be certain we will be
able to complete all of our evaluation, testing and remediation actions by
December 31, 2004. If we are unable to complete this process in a timely manner,
we may be unable to conclude that our controls over financial reporting are
effective as defined under Section 404. In addition, even if we are able to
conclude our controls over financial reporting are effective, if our independent
auditors are not satisfied with our internal controls over financial reporting
or the level at which these controls are documented, designed, operated or
reviewed, or if the independent auditors interpret the requirements, rules, or
regulations differently from us, then our independent auditors may decline to
attest to management's assessment or may issue a report that is qualified.
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Part II - Other Information
Hecla Mining Company and Subsidiaries
ITEM 1. LEGAL PROCEEDINGS
For information concerning legal proceedings, refer to Note 5 of Notes
to the Consolidated Financial Statements, which is incorporated by reference
into this Item 1.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of November 5, 2004, we have not declared or paid $2.3 million of
Series B Convertible Preferred stock dividends.
ITEM 6. EXHIBITS
(a) Exhibits
See the exhibit index to this Form 10-Q for the list of
exhibits.
ITEMS 2, 4 AND 5 OF PART II ARE NOT APPLICABLE AND ARE OMITTED FROM THIS REPORT.
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Hecla Mining Company and Subsidiaries
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HECLA MINING COMPANY
(Registrant)
Date: November 9, 2004 By /s/ Phillips S. Baker, Jr.
---------------------------------------
Phillips S. Baker, Jr., President,
Chief Executive Officer and Director
Date: November 9, 2004 By /s/ Lewis E. Walde
---------------------------------------
Lewis E. Walde, Vice President and
Chief Financial Officer
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Exhibit Index
3.1 Certificate of Incorporation of the Registrant as amended to
date. Filed as exhibit 3.1 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003 (File No.
1-8491) and incorporated herein by reference.
3.2 By-Laws of the Registrant as amended to date. Filed as exhibit
3(ii) to Registrant's Current Report on Form 8-K dated
November 13, 1998 (File No. 1-8491) and incorporated herein by
reference.
4.1(a) Certificate of Designations, Preferences and Rights of Series
A Junior Participating Preferred Stock of the Registrant.
Filed as exhibit 4.1(d)(e) to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1993 (File No.
1-8491) and incorporated herein by reference.
4.1(b) Certificate of Designations, Preferences and Rights of Series
B Cumulative Convertible Preferred Stock of the Registrant.
Filed as exhibit 4.5 to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1993 (File No. 1-8491) and
incorporated herein by reference.
4.2 Rights Agreement dated as of May 10, 1996, between Hecla
Mining Company and American Stock Transfer & Trust Company,
which includes the form of Rights Certificate of Designation
setting forth the terms of the Series A Junior Participating
Preferred Stock of Hecla Mining Company as Exhibit A and the
summary of Rights to Purchase Preferred Shares as Exhibit B.
Filed as exhibit 4 to Registrant's Current Report on Form 8-K
dated May 10, 1996 (File No. 1-8491) and incorporated herein
by reference.
4.3 Stock Purchase Agreement dated as of August 27, 2001, between
Hecla Mining Company and Copper Mountain Trust. Filed as
exhibit 4.3 to Registrant's Registration Statement on Form S-1
filed on October 7, 2002 (File No. 333 - 100395) and
incorporated herein by reference.
4.4 Warrant Agreement dated August 2, 2002, between Hecla Mining
Company and Great Basin Gold Ltd. Filed as exhibit 4.4 to
Registrant's Registration Statement on Form S-1 filed on
October 7, 2002 (File No. 333 - 100395) and incorporated
herein by reference.
4.5 Registration Rights Agreement dated August 2, 2002, between
Hecla Mining Company and Great Basin Gold Ltd. Filed as
exhibit 4.5 to Registrant's Registration Statement on Form S-1
filed on October 7, 2002 (File No. 333 - 100395) and
incorporated herein by reference.
10.1 Employment agreement dated November 6, 2001, between Hecla
Mining Company and Phillips S. Baker, Jr. (Registrant has
substantially identical
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agreements with each of Messrs. Thomas F. Fudge, Jr., Michael
H. Callahan, Ronald W. Clayton, Lewis E. Walde and Ms. Vicki
Veltkamp. Such substantially identical agreements are not
included as separate exhibits.) Filed as exhibit 10.2 to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003 (File No. 1-8491) and incorporated herein
by reference. (1)
10.2(a) 1987 Nonstatutory Stock Option Plan of the Registrant. Filed
as exhibit B to Registrant's Proxy Statement dated March 20,
1987 (File No. 1-8491) and incorporated herein by reference.
(1)
10.2(b) Hecla Mining Company 1995 Stock Incentive Plan, as amended.
Filed as exhibit 99.1 to Registrant's Preliminary Proxy
Statement dated April 8, 2002 (File No. 1-8491) and
incorporated herein by reference. (1)
10.2(c) Hecla Mining Company Stock Plan for Nonemployee Directors, as
amended. Filed as exhibit 99.1 to Registrant's Preliminary
Proxy Statement dated April 8, 2002 (File No. 1-8491) and
incorporated herein by reference. (1)
10.2(d) Hecla Mining Company Key Employee Deferred Compensation Plan.
Filed as exhibit 4.3 to Registrant's Registration Statement on
Form S-8 filed on July 24, 2002 (File No. 333-96995) and
incorporated herein by reference. (1)
10.2(e) Hecla Mining Company form of Non-Qualified Stock Option
Agreement (Under the Key Employee Deferred Compensation Plan)
entered into between Hecla Mining Company and participants
under the Key Employee Deferred Compensation Company. (1)*
10.3(a) Hecla Mining Company Retirement Plan for Employees and
Supplemental Retirement and Death Benefit Plan. Filed as
exhibit 10.11(a) to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1985 (File No. 1-8491) and
incorporated herein by reference. (1)
10.3(b) Supplemental Excess Retirement Master Plan Documents. Filed as
exhibit 10.5(b) to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994 (File No. 1-8491) and
incorporated herein by reference. (1)
10.3(c) Hecla Mining Company Nonqualified Plans Master Trust
Agreement. Filed as exhibit 10.5(c) to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994 (File
No. 1-8491) and incorporated herein by reference. (1)
10.4 Form of Indemnification Agreement dated May 27, 1987, between
Hecla Mining Company and each of its Directors and Officers.
Filed as exhibit
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10.15 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1987 (File No. 1-8491) and incorporated
herein by reference. (1)
10.5 Summary of Short-term Performance Payment Plan. Filed as
exhibit 10.7 to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994 (File No. 1-8491) and
incorporated herein by reference. (1)
10.6(a) Amended and Restated Golden Eagle Earn-in Agreement between
Kinross Gold Corporation (formerly Echo Bay Mines Ltd.,
successor in interest to Newmont Mining Corp./Santa Fe Pacific
Gold Corp.) and Hecla Mining Company dated September 6, 1996.
Filed as exhibit 10.11(a) to Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996 (File No.
1-8491) and incorporated herein by reference.
10.6(b) Golden Eagle Operating Agreement between Kinross Gold
Corporation (formerly Echo Bay Mines Ltd., successor in
interest to Newmont Mining Corp./Santa Fe Pacific Gold Corp.)
and Hecla Mining Company dated September 6, 1996. Filed as
exhibit 10.11(b) to Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996 (File No. 1-8491) and
incorporated herein by reference.
10.6(c) First Amendment to the Amended and Restated Golden Eagle
Earn-in Agreement effective September 5, 2002, by and between
Kinross Gold Corporation (formerly Echo Bay Mines Ltd.) and
Hecla Mining Company. Filed as exhibit 10.6(c) to Registrant's
Registration Statement on Form S-1 filed on October 7, 2002
(File No. 333 - 100395) and incorporated herein by reference.
10.7 Restated Mining Venture Agreement among Kennecott Greens Creek
Mining Company, Hecla Mining Company and CSX Alaska Mining
Inc. dated May 6, 1994. Filed as exhibit 99.A to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1994 (File No. 1-8491) and incorporated herein by reference.
10.8 Stock Purchase Agreement dated February 27, 2001, between
Hecla Mining Company and Imerys USA, Inc. Filed as exhibit 99
to Registrant's Current Report on Form 8-K dated March 27,
2001 (File No. 1-8491) and incorporated herein by reference.
10.9 Real Estate Purchase and Sale Agreement between Hecla Mining
Company and JDL Enterprises, LLC, dated October 19, 2001.
Filed as exhibit 10.21 to Registrant's Annual Report on Form
10-K for the year ended December 31, 2001 (File No. 1-8491)
and incorporated herein by reference.
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10.10 Earn-in Agreement dated August 2, 2002, between Hecla Ventures
Corp. and Rodeo Creek Gold Inc. Filed as exhibit 10.19 to
Registrant's Registration Statement on Form S-1 filed on
October 7, 2002 (File No. 333 - 100395) and incorporated
herein by reference.
10.11 Lease Agreement dated September 5, 2002 between Hecla Mining
Company and CVG-Minerven. Filed as exhibit 10.20 to
Registrant's Registration Statement on Form S-1 filed on
October 7, 2002 (File No. 333 - 100395) and incorporated
herein by reference.
10.12 Agreement No. C-020 between Minera Hecla Venezolana, C.A. and
Redpath Venezolana, C.A., dated October 31, 2003, for the
construction of the La Camorra mine production shaft facility.
Filed as exhibit 10.2 to Registrant's Quarterly Report on Form
10-Q for the quarter ended March 31, 2004 (File No. 1-8491)
and incorporated herein by reference.
10.13(a) Preferred Stock Exchange Agreement between Hecla Mining
Company and Langley Partners L.P., dated November 19, 2003.
Filed as exhibit 12(d)(17) to Registrant's Schedule Tender
Offer dated January 16, 2004 (File No. 5-35201) and
incorporated herein by reference.
10.13(b) Preferred Stock Exchange Agreement between Hecla Mining
Company and Cohanzick Credit Opportunities Fund Ltd., dated
November 20, 2003. Filed as exhibit 12(d)(18) to Registrant's
Schedule Tender Offer dated January 16, 2004 (File No.
5-35201) and incorporated herein by reference.
10.13(c) Preferred Stock Exchange Agreement between Hecla Mining
Company and Ariel Fund, Ltd., dated November 20, 2003. Filed
as exhibit 12(d)(19) to Registrant's Schedule Tender Offer
dated January 16, 2004 (File No. 5-35201) and incorporated
herein by reference.
10.13(d) Preferred Stock Exchange Agreement between Hecla Mining
Company and Gabriel Capital, L.P., dated November 20, 2003.
Filed as exhibit 12(d)(20) to Registrant's Schedule Tender
Offer dated January 16, 2004 (File No. 5-35201) and
incorporated herein by reference.
10.13(e) Preferred Stock Exchange Agreement between Hecla Mining
Company and Cohanzick High Yield Partners L.P., dated November
20, 2003. Filed as exhibit 12(d)(21) to Registrant's Schedule
Tender Offer dated January 16, 2004 (File No. 5-35201) and
incorporated herein by reference.
10.13(f) Preferred Stock Exchange Agreement between Hecla Mining
Company and JMB Capital Partners, L.P., dated December 1,
2003. Filed as exhibit 12(d)(22) to Registrant's Schedule
Tender Offer dated January 16, 2004 (File No. 5-35201) and
incorporated herein by reference.
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10.13(g) Preferred Stock Exchange Agreement between Hecla Mining
Company and Lonestar Partners, L.P., dated December 1, 2003.
Filed as exhibit 12(d)(23) to Registrant's Schedule Tender
Offer dated January 16, 2004 (File No. 5-35201) and
incorporated herein by reference.
10.13(h) Preferred Stock Exchange Agreement between Hecla Mining
Company and JMB Capital Partners, L.P., dated December 1,
2003. Filed as exhibit 12(d)(24) to Registrant's Schedule
Tender Offer dated January 16, 2004 (File No. 5-35201) and
incorporated herein by reference.
10.13(i) Preferred Stock Exchange Agreement between Hecla Mining
Company and Generic Trading of Philadelphia, LLC, dated
December 8, 2003. Filed as exhibit 12(d)(25) to Registrant's
Schedule Tender Offer dated January 16, 2004 (File No.
5-35201) and incorporated herein by reference.
10.13(j) Preferred Stock Exchange Agreement between Hecla Mining
Company and Smith Barney Inc., dated December 10, 2003. Filed
as exhibit 12(d)(26) to Registrant's Schedule Tender Offer
dated January 16, 2004 (File No. 5-35201) and incorporated
herein by reference.
10.13(k) Preferred Stock Exchange Agreement between Hecla Mining
Company and Maxim Group, dated December 17, 2003. Filed as
exhibit 12(d)(27) to Registrant's Schedule Tender Offer dated
January 16, 2004 (File No. 5-35201) and incorporated herein by
reference.
10.13(l) Preferred Stock Exchange Agreement between Hecla Mining
Company and Generic Trading of Philadelphia, LLC, dated
December 30, 2003. Filed as exhibit 12(d)(28) to Registrant's
Schedule Tender Offer dated January 16, 2004 (File No.
5-35201) and incorporated herein by reference.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.*
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.*
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(1) Indicates a management contract or compensatory plan or arrangement.
* Filed herewith.
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