1
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 June 30, 2002
Commission file number 1-8491
-----------------------------------------
HECLA MINING COMPANY
- -------------------------------------------------------------------------------
(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 83815-8788
- -------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
208-769-4100
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(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 .
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding August 8, 2002
- ------------------------ -------------------------
Common stock, par value 85,971,224 shares
$0.25 per share
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Hecla Mining Company and Subsidiaries
Form 10-Q
For the Quarter Ended June 30, 2002
I N D E X*
Page
PART I. - Financial Information
Item l - Consolidated Balance Sheets - June 30,
2002 and December 31, 2001
- Consolidated Statements of Operations and
Comprehensive Income (Loss) - Three Months and
Six Months Ended June 30, 2002 and 2001
- Consolidated Statements of Cash Flows - Six
Months Ended June 30, 2002 and 2001
- Notes to Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. - Other Information
Item 1 - Legal Proceedings
Item 4 - Annual Meeting of Shareholders
Item 6 - Exhibits and Reports on Form 8-K
*Items omitted are not applicable.
3
Part I - Financial Information
Hecla Mining Company and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
June 30, December 31,
2002 2001
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 13,073 $ 7,560
Accounts and notes receivable 12,750 6,648
Inventories 14,288 10,868
Other current assets 2,122 1,426
Net assets of discontinued operations 401 2,714
---------- ----------
Total current assets 42,634 29,216
Investments 123 69
Restricted investments 6,375 6,375
Properties, plants and equipment, net 94,049 104,593
Other noncurrent assets 13,047 12,863
---------- ----------
Total assets $ 156,228 $ 153,116
========== ==========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $ 8,039 $ 7,938
Accrued payroll and related benefits 7,967 7,832
Current portion of long-term debt 6,545 7,043
Accrued taxes 924 787
Current portion of accrued reclamation and closure costs 6,810 6,026
---------- ----------
Total current liabilities 30,285 29,626
Deferred income taxes 300 300
Long-term debt 7,545 11,948
Accrued reclamation and closure costs 44,925 46,455
Other noncurrent liabilities 6,977 6,823
---------- ----------
Total liabilities 90,032 95,152
---------- ----------
SHAREHOLDERS' EQUITY
Preferred stock, $0.25 par value, authorized 5,000,000 shares; issued
and outstanding - 2,300,000 shares, liquidation preference 2002 -
$131,100 and 2001 - $127,075 575 575
Common stock, $0.25 par value, authorized 200,000,000 shares;
issued 2002 - 75,153,312 shares, issued 2001 - 73,068,796 shares 18,788 18,267
Capital surplus 406,122 404,354
Accumulated deficit (358,940) (364,183)
Accumulated other comprehensive income (loss) (8) 173
Less stock held by grantor trust; 2002 - 61,278 common shares,
2001 - 102,114 common shares (198) (330)
Less stock held as unearned compensation; 2002 - 57,106 common shares,
2001 - 19,035 common shares (25) (6)
Less treasury stock, at cost; 2002 - 8,274 common shares, 2001 -
62,116 common shares (118) (886)
---------- ----------
Total shareholders' equity 66,196 57,964
---------- ----------
Total liabilities and shareholders' equity $ 156,228 $ 153,116
========== ==========
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 Income (Loss)(Unaudited)
(Dollars and shares in thousands, except for per-share amounts)
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Continuing Operations:
Sales of products $ 28,663 $ 24,561 $ 52,045 $ 40,978
-------- -------- -------- --------
Cost of sales and other direct production costs 14,675 16,832 28,766 28,004
Depreciation, depletion and amortization 6,131 5,371 11,689 9,765
-------- -------- -------- --------
20,806 22,203 40,455 37,769
-------- -------- -------- --------
Gross profit 7,857 2,358 11,590 3,209
-------- -------- -------- --------
Other operating expenses:
General and administrative 1,767 1,808 3,645 3,322
Exploration 1,206 778 1,730 1,294
Depreciation and amortization 15 68 67 136
Provision for closed operations and
environmental matters 148 418 257 991
-------- -------- -------- --------
3,136 3,072 5,699 5,743
-------- -------- -------- --------
Income (loss) from operations 4,721 (714) 5,891 (2,534)
-------- -------- -------- --------
Other income (expense):
Interest and other income 685 472 1,094 1,100
Miscellaneous, net 237 (435) 91 (848)
Interest expense (473) (611) (937) (2,616)
-------- -------- -------- --------
449 (574) 248 (2,364)
-------- -------- -------- --------
Income (loss) from continuing operations before
income taxes 5,170 (1,288) 6,139 (4,898)
Income tax provision (112) - - (112) - -
-------- -------- -------- --------
Income (loss) from continuing operations 5,058 (1,288) 6,027 (4,898)
Discontinued operations:
Income (loss), net of income tax (303) (2) (786) 160
Gain (loss) on disposal, net of income tax - - (265) - - 12,718
-------- -------- -------- --------
Net income (loss) 4,755 (1,555) 5,241 7,980
Preferred stock dividends (2,013) (2,013) (4,025) (4,025)
-------- -------- -------- --------
Income (loss) applicable to common shareholders 2,742 (3,568) 1,216 3,955
-------- -------- -------- --------
Other comprehensive income (loss), net of income tax:
Change in derivative contracts - - - - (256) - -
Cumulative effect of a change in accounting
principle - - - - - - (136)
Reclassification adjustment of loss included in
net income (loss) 10 10 20 20
Unrealized holding gains (losses) on securities 36 (33) 55 11
Change in foreign currency items - - - - - - 4,898
-------- -------- -------- --------
Other comprehensive income (loss) 46 (23) (181) 4,793
-------- -------- -------- --------
Comprehensive income (loss) applicable to
common shareholders $ 2,788 $ (3,591) $ 1,035 $ 8,748
======== ======== ======== ========
Basic and diluted income (loss) per common share:
Income (loss) from continuing operations $ 0.04 $ (0.05) $ 0.03 $ (0.13)
Income (loss) from discontinued operations - - - - (0.01) 0.19
-------- -------- -------- --------
Basic and diluted income (loss) per common share $ 0.04 $ (0.05) $ 0.02 $ 0.06
======== ======== ======== ========
Weighted average number of common shares outstanding 75,010 66,839 74,426 66,818
======== ======== ======== ========
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 Cash Flows (Unaudited)
(In thousands)
Six Months Ended
-----------------------------
June 30, 2002 June 30, 2001
------------- -------------
Operating activities:
Net income $ 5,241 $ 7,980
Noncash elements included in net income:
Depreciation, depletion and amortization 11,756 9,901
Gain on sale of discontinued operations - - (12,718)
Gain (loss) on disposition of properties,
plants and equipment (185) 17
Provision for reclamation and closure costs 751 476
Change in net assets of discontinued operations 858 1,316
Change in assets and liabilities:
Accounts and notes receivable (6,102) 1,258
Inventories (3,420) (1,256)
Other current and noncurrent assets (886) (338)
Accounts payable and accrued expenses 102 614
Accrued payroll and related benefits 574 451
Accrued taxes 137 131
Accrued reclamation and closure costs and other
noncurrent liabilities (2,247) (3,824)
--------- ---------
Net cash provided by operating activities 6,579 4,008
--------- ---------
Investing activities:
Proceeds from sale of discontinued operations 1,585 59,761
Additions to properties, plants and equipment (6,070) (12,740)
Proceeds from disposition of properties,
plants and equipment 5,622 239
Increase in restricted investments - - (296)
Purchase of investments and change in cash
surrender value of life insurance, net - - 313
Other, net 137 (97)
--------- ---------
Net cash provided by investing activities 1,274 47,180
--------- ---------
Financing activities:
Common stock issued under warrants and stock option plans 2,561 - -
Common stock issuance, other - - 38
Borrowings on debt 3,300 10,609
Repayments on debt (8,201) (59,803)
--------- ---------
Net cash used by financing activities (2,340) (49,156)
--------- ---------
Net increase in cash and cash equivalents 5,513 2,032
Cash and cash equivalents at beginning of period 7,560 1,373
--------- ---------
Cash and cash equivalents at end of period $ 13,073 $ 3,405
========= =========
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
Notes to Consolidated Financial Statements
Note 1. Basis of Preparation of Financial Statements
In the opinion of management, the accompanying unaudited consolidated
balance sheet, consolidated statements of operations and consolidated statements
of cash flows contain all adjustments, consisting only of normal recurring
accruals, necessary to present fairly, in all material respects, the financial
position of Hecla Mining Company (the "Company"). These unaudited interim
consolidated financial statements should be read in conjunction with the
Company's audited consolidated financial statements and related footnotes as set
forth in the Company's annual report filed on Form 10-K for the year ended
December 31, 2001.
Note 2. Discontinued Operations
On March 5, 2002, Hecla completed the sale of its pet operations of the
Colorado Aggregate Division (CAC) of MWCA for $1.6 million in cash. The sale of
the CAC pet division did not result in a gain or loss. Hecla continues to
pursue a sale of the remaining assets of the industrial minerals segment,
although there can be no assurance that a sales transaction will be completed.
At June 30, 2002, the remaining net assets of CAC are approximately $0.4
million. Hecla recorded a loss from discontinued operations of approximately
$0.3 million in the second quarter of 2002 compared to a loss of $0.3 million in
the same period in 2001. Hecla recorded a loss from discontinued operations of
approximately $0.8 million in the first six months of 2001, or $0.01 per common
share, compared to income of approximately $12.9 million, or $0.19 per common
share, in the same period in 2001 due to a $13.0 million gain on the sale of the
Kentucky-Tennessee Clay Company, K-T Feldspar Corporation, K-T Clay de Mexico
and certain other minor inactive industrial minerals companies (collectively the
K-T Group) in March 2001.
Note 3. Income Taxes
Hecla's income tax provision for the first six months of 2002 and 2001
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 of net
operating losses that can be utilized in Mexico and in Venezuela. For the three
months and six months ended June 30, 2002, Hecla recognized a $112,000 provision
for foreign income taxes.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Note 4. Inventories
Inventories consist of the following (in thousands):
June 30, Dec. 31,
2002 2001
--------- --------
Concentrates, bullion, metals
in transit and other products $ 6,162 $ 4,211
Materials and supplies 8,126 6,657
-------- --------
$ 14,288 $ 10,868
======== ========
At June 30, 2002, Hecla had forward sales commitments through December 31,
2004, for 139,342 ounces of gold at an average price of $288.25 per ounce.
Hecla intends to physically deliver metals in accordance with the terms of the
forward sales contracts. As such, Hecla has elected to designate the contracts
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. Hecla is
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
counter parties to these agreements. The London Final gold price at June 28,
2002 was $319.05 per ounce.
Note 5. Contingencies
Bunker Hill Superfund Site
In 1994, the Company, 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 at Kellogg, Idaho. The consent decree
settled Hecla's response-cost liability under CERCLA at the Bunker Hill site.
In August 2000, Sunshine Mining and Refining Company, which was also a party to
the 1994 Consent 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 Consent Decree.
In response to a request by the Company and ASARCO Incorporated, the United
States Federal District Court in Idaho, having jurisdiction over
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
the 1994 Consent Decree ("1994 Decree") issued an Order in September 2001 that
the 1994 Consent 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 of the Record of Decision on the Basin-Wide Remedial
Investigation/Feasibility Study. The EPA has indicated that the Record of
Decision will be issued later in 2002. Based on the 2001 Order issued by the
Court, the Company believes it is entitled to relief from the 2002 work program
under the 1994 Decree within the Bunker Hill site. Hecla and ASARCO have
negotiated a reduced 2002 work program with the EPA and the state of Idaho
pending the outcome of a final ruling of the Court. As of June 30, 2002, Hecla
has estimated and accrued an allowance for liability for remedial activity costs
at the Bunker Hill site of $9.3 million, which does not reflect the potential
modification of the 1994 Decree. These estimated expenditures are anticipated
to be made over the next three to five years. Although Hecla believes the
accrual is adequate based upon current estimates of aggregate costs, it is
reasonably possible that Hecla's estimate of its obligations may change in the
near or long term.
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 Hecla 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.
- 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 Hecla. 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 to be the trustee under
CERCLA. The lawsuit asserts 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 Hecla 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. Hecla has
asserted a number of defenses to the United States' claims.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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 cleanup plan for the
Basin, and EPA's Record of Decision on the cleanup plan is expected to be issued
by EPA later in 2002.
The first phase of the trial commenced on the consolidated Coeur d'Alene
Indian Tribe's and the Federal District Court cases on January 22, 2001, and was
concluded on July 30, 2001. In the first phase of the trial, the Court has been
asked to determine the extent of liability, if any, of the defendants for the
plaintiffs' CERCLA claims. The Court has also been asked to determine the
liability of the United States for its historic involvement in the Basin. No
decision on the issues before the Court in the first phase of the litigation has
been issued. If liability is determined in the first phase, a second trial will
be scheduled for 2002 or 2003 to address damages and remedy selection. 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. Hecla and ASARCO are the only defendants
remaining in the litigation.
During 2000 and into 2001, Hecla was involved in settlement negotiations
with representatives of the U.S. Government and the Coeur d'Alene Indian Tribe.
The Company also participated with certain of the other defendants in the
litigation in a State of Idaho led settlement effort. On August 16, 2001, the
Company entered into an Agreement in Principle with the United States and the
State of Idaho to settle the governments' claims for natural resource damages
and cleanup costs related to the historic mining practices in the Coeur d'Alene
Basin in northern Idaho. Since August 2001, the Company and EPA have continued
to negotiate a final consent decree based upon the terms set forth in the
Agreement in Principle. Due to a number of changes that have occurred since the
signing of the Agreement in Principle, including improvements in the
environmental conditions at Grouse Creek and lower estimated cleanup costs in
the Coeur d'Alene Basin as well as the Company's improved financial condition,
the terms of the multiple properties settlement approach set forth in the
Agreement in Principle appear no longer favorable to the Company. It is
expected that utilizing the Agreement in Principle as a settlement vehicle will
likely be discontinued. However, Hecla continues to negotiate the terms of a
settlement with the United States and the State of Idaho that would be limited
to resolving its environmental cleanup liabilities for historic mining practices
in the Coeur d'Alene Basin.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
As of June 30, 2002, the Company has accrued $41.8 million related to
Grouse Creek, Yellow Pine, the Bunker Hill Superfund site and other properties
located with the Coeur d'Alene Basin. These properties are included in the
Agreement in Principle, which has not and will likely not be finalized into a
final settlement agreement and Consent Decree. The Company has accrued what
management believes is the best estimate of the liability as of June 30, 2002.
However, it is reasonably possible that Hecla's obligation may change in the
near or long term depending on a number of factors, including finalization of
ongoing negotiations toward a Basin settlement. In addition, an adverse ruling
against Hecla for liability and damages in this matter could have a material
adverse effect on the Company.
Private Class Action Litigation
On or about January 7, 2002, a class action complaint was filed in this
matter in the Idaho District Court, County of Kootenai, against several
corporate defendants, including the Company. The Company was 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, a real property remediation and restoration programs, and damages for
diminution in property value, plus other damages and costs. The Company
believes the Complaint is subject to challenge on a number of bases and intends
to vigorously defend itself in this litigation. On April 23, 2002, the Company
filed a motion with the Court to dismiss the claims for relief relating to the
medical monitoring programs and the remediation and restoration programs. A
hearing on this motion and other pretrial matters is expected to be scheduled in
late August or September 2002.
Insurance Coverage Litigation
In 1991, Hecla initiated litigation in the Idaho District Court, County of
Kootenai, against a number of insurance companies that provided comprehensive
general liability insurance coverage to the Company and its predecessors. Hecla
believes the insurance companies have a duty to defend and indemnify Hecla under
their policies of insurance for all liabilities and claims asserted against
Hecla 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 Hecla in the Tribe's
lawsuit. During 1995 and 1996, Hecla entered into settlement agreements with a
number of the insurance carriers named in the litigation. Hecla has 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
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
the U.S. Government for past costs under the Bunker Hill site Consent Decree.
Litigation is still pending against one insurer with trial suspended until the
underlying environmental claims against Hecla are resolved or settled. The
remaining insurer in the litigation, along with a second insurer not named in
the litigation, is providing Hecla with a partial defense in all Basin
environmental litigation. As of June 30, 2002, Hecla had not reduced its
accrual for reclamation and closure costs to reflect the receipt of any
potential insurance proceeds.
Other Claims
In 1997, Hecla's then subsidiary, Kentucky-Tennessee Clay Company (K-T
Clay), terminated shipments (comprising approximately 1% of annual ball clay
production) sold to animal feed producers, when the Food and Drug Administration
determined trace elements of dioxin were present in poultry. Dioxin is
inherently present in ball clays generally. On September 22, 1999, Riceland
Foods (the primary purchaser of ball clay from K-T Clay used in animal feed)
commenced litigation against K-T Clay in State Court in Arkansas to recover its
losses and its insurance company's payments to downstream users of its animal
feed. The complaint alleged negligence, strict liability and breach of implied
warranties and seeks damages in excess of $7.0 million. Legal counsel retained
by the insurance company for K-T Clay had the case removed to Federal District
Court in Arkansas. In July 2000, a second complaint was filed against K-T Clay
and Hecla in State Court in Arkansas by Townsends, Inc., another purchaser of
animal feed containing ball clay sold by K-T Clay. A third complaint was filed
in the Federal District Court in Arkansas on August 31, 2000, by Archer Daniels
Midland Company, a successor in interest to Quincy Soybean Company, a third
purchaser of ball clay sold by K-T Clay and used in the animal feed industry.
The Townsends' and Archer Daniels' lawsuits allege damages totaling
approximately $300,000 and $1.4 million, respectively. These complaints contain
similar allegations to the Riceland Foods' case and legal counsel retained by
the insurance carrier is defending K-T Clay and Hecla in these lawsuits. The
Company believes that these claims comprise substantially all the potential
claims related to this matter. In January 2001, Hecla was dismissed from the
only lawsuit in which it had been named as a defendant. In March 2001, prior to
trial, K-T Clay settled the Riceland Foods' litigation against K-T Clay through
settlement payment substantially funded by K-T Clay's insurance carrier. K-T
Clay contributed $230,000 toward the Riceland Foods' settlement. In August 2001,
the Federal District Court dismissed the Archer Daniels' litigation; however, a
similar lawsuit based upon implied warranty was refiled by Archer Daniels
against K-T Clay on October 24, 2001, in Arkansas Federal Court. The defense of
the Townsends' lawsuit is being covered by insurance. The Company believes that
K-T Clay's
12
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
insurance coverage is available to cover the remaining claims. On March 27,
2001, Hecla sold its interest in K-T Clay. However, Hecla agreed to indemnify
the purchaser of K-T Clay from all liability resulting from these dioxin claims
and litigation to the extent not covered by insurance. In July 2002, K-T Clay,
through its insurance carrier, negotiated settlements of both remaining
lawsuits. The settlement payments will be funded 100% by K-T Clay's insurance
carrier. The settlement agreements, when finalized will be submitted to the
respective courts and Hecla anticipates both cases to be dismissed later in
2002.
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 mine, notified Hecla of certain alleged defaults by Hecla under the 1968
Lease Agreement between the unit owners (Independence and Hecla under the terms
of the 1968 DIA Unitization Agreement) as lessors and defaults by Hecla as
lessee and operator of the properties. Hecla is a net 81.48% interest holder
under these Agreements. Independence alleges that Hecla 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. The remedy requested
by Independence is the termination of Hecla's lease of the DIA/Gold Hunter
properties. Under the Lease Agreement, Hecla has the exclusive right to manage,
control and operate the DIA properties, and its decisions with respect to the
character of work are final. On June 17, 2002, Independence filed a lawsuit in
Idaho State District Court seeking termination of the Lease Agreement and
requesting unspecified damages. Hecla believes that it has fully complied with
all obligations of the 1968 Lease Agreement and will be able to successfully
defend its right to continue to operate the property under the Lease Agreement.
In Mexico, a claim has been made, in one court, as to the validity of the
ownership of the Velardena mill and, in another court, the validity of a lien
that predates acquisition of the mill by Hecla's subsidiary. Although the
Company believes it holds good title to the mill, there is no assurance that
Hecla will prevail in this litigation. In addition, IIG Capital, LLC, the
lender to the project loan used to acquire the mill, agreed to indemnify Hecla
for all obligations or losses relating to these liens or claims. However,
losing the litigation could result in an interruption of production or even the
loss of the mill.
Note 6. Long-Term Debt and Credit Agreements
As of June 30, 2002, Hecla's wholly owned subsidiary Hecla Resource
Investments Limited (HRIL), had $5.0 million outstanding
13
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
under a credit agreement used to provide project financing at the La Camorra
mine. The project financing agreement is repayable in semiannual payments
ending December 31, 2004, and had an interest rate of 4.9% at June 30, 2002.
HRIL must maintain compliance with certain financial and other restrictive
covenants related to the available ore reserves and performance of the La
Camorra mine. The Company is required to maintain hedged gold positions
sufficient to cover all dollar loans, operating expenditures, taxes, royalties
and similar fees projected for the project. At June 30, 2002, there were
139,342 ounces of gold sold forward. The forward sales agreement assumes the
ounces of gold committed to forward sales at the end of each quarter can be
leased at a rate of 1.5% for each following quarter. The Company maintains a
Gold Lease Rate Swap at a fixed rate of 1.5% on the outstanding notional volume
of the flat forward sale, with settlement being made quarterly with the Company
receiving the fixed rate and paying the current floating gold lease rate.
As of June 30, 2002, the Company has a $3.0 million outstanding
subordinated loan due in three equal semiannual payments commencing in June of
2003. The loan agreement gives the Company the option to capitalize interest
payments by adding them to the principal amount of the loan. At June 30, 2002,
the interest amount added to principal was approximately $0.6 million. The
interest rate on the subordinated debt was 6.05% as of June 30, 2002.
At June 30, 2002, Hecla's wholly owned subsidiary, Minera Hecla, S.A. de
C.V. (Minera Hecla), had $6.1 million outstanding under a project loan used to
acquire a processing mill at Velardena, Mexico, to process ore mined from the
San Sebastian mine near Durango, Mexico. Under the terms of the credit
facility, Minera Hecla will make monthly payments for principal and interest
over 63 months. The loan bears interest at the rate of 13%.
On March 27, 2002, Hecla entered into a $7.5 million revolving bank
agreement due in March of 2004. Amounts under the bank agreement are available
for general corporate purposes and are collateralized by Hecla's interest in the
Greens Creek Joint Venture. At June 30, 2002, there was no amount outstanding
under the revolving bank agreement.
On April 8, 2002, Hecla completed a sales transaction for its headquarters
building, terminating a $3.0 million revolving bank agreement collateralized by
the building. For additional information relating to the sale of the
headquarters building, see Note 9 of Notes to Consolidated Financial Statements.
14
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Note 7. Income (Loss) per Common Share
The following table presents a reconciliation of the numerators (net income
(loss)) and denominators (shares) used in the basic and diluted income (loss)
per common share computations. Also shown is the effect that has been given to
undeclared cumulative preferred dividends in arriving at income (loss)
applicable to common shareholders for the three months and six months ended June
30, 2002 and 2001, in computing basic and diluted income (loss) per common share
(dollars and shares in thousands, except per-share amounts). For the three
months and six months ended June 30, 2002 and 2001, the $2.0 million and $4.0
million dividends, respectively, have not been declared or paid.
Three Months Ended June 30,
-------------------------------------------------------------------------
2002 2001
------------------------------------ ----------------------------------
Weighted Weighted
Net Average Per-Share Net Average Per-Share
Income (Loss) Shares Amount Income (Loss) Shares Amount
------------- ------ ------ ------------- ------ ------
Income (loss) before preferred
stock dividends $ 4,755 $ (1,555)
Less: Preferred
stock dividends (2,013) (2,013)
--------- ---------
Basic income (loss) per common share:
Basic income (loss) applicable
to common shareholders $ 2,742 75,010 $ 0.04 $ (3,568) 66,839 $ (0.05)
Effect of dilutive securities - - 16 - - - - - - - -
--------- ------ ------- ---------- ------ -------
Diluted income (loss) per
common share $ 2,742 75,226 $ 0.04 $ (3,568) 66,839 $ (0.05)
========= ====== ======= ========== ====== =======
Six Months Ended June 30,
------------------------------------------------------------------------
2002 2001
----------------------------------- ---------------------------------
Weighted Weighted
Net Average Per-Share Net Average Per-Share
Income Shares Amount Income (Loss) Shares Amount
------ ------ ------ ------------- ------ ------
Income before preferred stock
dividends $ 5,241 $ 7,980
Less: Preferred
stock dividends (4,025) (4,025)
--------- ----------
Basic income per common share:
Basic income applicable to common
shareholders $ 1,216 74,426 $ 0.02 $ 3,955 66,818 $ 0.06
Effect of dilutive securities - - 428 - - - - 568 - -
--------- ------ ------- ---------- ------ -------
Diluted income per common share $ 1,216 74,854 $ 0.02 $ 3,955 66,386 $ 0.06
========= ====== ======= ========== ====== =======
15
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
These calculations of diluted earnings per share for the three months and
six months ended June 30, 2002 and 2001 exclude the effects of $115.0 million of
convertible preferred stock as such conversion would be antidilutive.
Subsequent to June 30, 2002, $77.3 million of the convertible preferred stock
was converted to common stock (for additional information regarding the
preferred stock conversion, see Note 10 of Notes to Consolidated Financial
Statements). Also excluded from these calculations are the effects of common
stock issuable upon exercise of various stock options as of June 30, 2002 and
2001, as their exercise would be antidilutive, as follows:
Three Months Ended Six Months Ended
---------------------- ----------------------
June 30, June 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
1,034,500 2,356,500 1,034,500 2,356,500
Note 8. Business Segments
Hecla is organized and managed primarily on the basis of the principal
products being produced from its gold and silver operating units. One of the
operating units has been aggregated into the Gold segment and three of the
operating units have been aggregated into the Silver segment. General corporate
activities not associated with operating units as well as idle properties are
presented as Other.
The following tables present information about reportable segments for the
three months and six months ended June 30 (in thousands):
16
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Three Months Ended Six Months Ended
--------------------- ---------------------
June 30, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales to unaffiliated customers:
Gold $ 12,037 $ 11,410 $ 23,310 $ 18,107
Silver 16,626 13,151 28,735 22,871
--------- --------- --------- ---------
$ 28,663 $ 24,561 $ 52,045 $ 40,978
========= ========= ========= =========
Three Months Ended Six Months Ended
--------------------- ---------------------
June 30, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Income (loss) from operations:
Gold $ 4,464 $ 2,798 $ 7,209 $ 4,068
Silver 2,187 (1,221) 2,651 (2,221)
Other (1,930) (2,291) (3,969) (4,381) --
--------- --------- --------- ---------
$ 4,721 $ (714) $ 5,891 $ (2,534)
========= ========= ========= =========
The following table presents identifiable assets by reportable segment as of
June 30, 2002, and December 31, 2001 (in thousands):
June 30, December 31,
2002 2001
--------- -----------
Identifiable assets:
Gold $ 39,674 $ 40,489
Silver 86,298 84,845
Discontinued operations 401 2,714
Other 29,855 25,068
--------- ---------
$ 156,228 $ 153,116
========= =========
Note 9. Sale of Fixed Assets
On April 8, 2002, Hecla completed a sale of its headquarters building in
Coeur d'Alene, Idaho, for $5.6 million in cash. Proceeds from the sale are for
general corporate purposes. Hecla has leased a portion of the building over a
period of five years
17
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
and will amortize the gain on the sale of $0.6 million over the lease term.
Hecla has agreed to a five-year lease, including leasing approximately 50% of
the building for two years, at which time the Company can elect to reduce the
amount of lease space to 25% for the remaining three years. The landlord may
terminate the lease during the first two years of the lease subject to certain
restrictions.
Note 10. Subsequent Events
On June 13, 2002, Hecla announced its intent to offer to holders of its
Series B Cumulative Convertible Preferred stock to exchange each of their
Preferred shares for seven shares of Hecla Common stock. Holders of the Series
B Cumulative Convertible Preferred stock had until July 25, 2002, to tender
their preferred shares. A total of 1.55 million shares were validly tendered
and exchanged, representing approximately 67.0% of the total number of preferred
shares outstanding, into 10.8 million shares of the Company's common stock.
In the third quarter of 2002, the Company expects to incur a non-cash
dividend charge of approximately $17.6 million related to the completed exchange
offering. The $17.6 million dividend represents the difference between the
value of the common stock issued in the exchange offer and the value of the
shares that were issuable under the stated conversion terms of the preferred
stock. The non-cash dividend charge will have no impact on the Company's total
shareholders' equity as the offset will be an increase in common stock and paid-
in-capital. As a result of the completed exchange offering, the total charge to
cumulative preferred dividends is anticipated to be $23.4 million for the year
ending December 31, 2002. Beginning in 2003, the $8.0 million annual cumulative
preferred dividends that have historically been included in income (loss)
applicable to common shareholders will be reduced to approximately $2.6 million.
The completed exchange offering also eliminated $10.9 million of previously
undeclared and unpaid preferred stock dividends.
Note 11. New Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations," which amends SFAS No. 19, and establishes a uniform
methodology for accounting for estimated reclamation and abandonment costs.
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. The statement is required to be
adopted by January 1, 2003, and the Company will record the estimated present
value of reclamation liabilities and increase the carrying value of related
assets. Subsequently, reclamation costs will be allocated to expense over the
life of
18
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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 present value
estimate underlying the obligation. The Company is currently in the process of
quantifying the effect the adoption of this statement will have on the Company's
consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 updates, clarifies and simplifies existing
accounting pronouncements, by rescinding SFAS No. 4, which required all gains
and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effects. As a
result, the criteria in Accounting Principles Board Opinion No. 30 will now be
used to classify those gains and losses. Additionally, SFAS No. 145 amends SFAS
No. 13 to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. Finally, SFAS No. 145 also makes technical
corrections to existing pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting practice.
The provision of SFAS No. 145 that amend SFAS No. 13 is effective for
transactions occurring after May 15, 2002, with all other provisions of SFAS No.
145 being required to be adopted by the Company in its consolidated financial
statements for the first quarter of fiscal 2003. Management currently believes
that the adoption of SFAS No. 145 will not have a material impact on the
Company's consolidated financial statements.
On July 30, 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing or other exit or disposal activity. SFAS
No. 146 replaces the prior guidance that was provided by EITF Issue No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002.
19
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial
- ------ -------------------------------------------------
Condition and Results of Operations
-----------------------------------
A 111-year-old company, Hecla Mining Company has long been known as a
precious metals producer and is involved in the mining, processing, development
and exploration of gold, silver, lead and zinc. The Company is operated and
organized into two segments, gold and silver, and has a small industrial
minerals subsidiary, which is being marketed for sale.
Hecla produced significantly more gold in the second quarter of 2002 than
at any time in its history, while continuing to be a low-cost silver producer.
Although Hecla is positively impacted by increases in metals prices, its low
cost operations and improvements in production, cash position and reduced debt
enhances the Company's ability to operate even in a low precious metals price
environment.
RESULTS OF OPERATIONS
- ---------------------
Hecla recorded net income, before preferred stock dividends, of
approximately $5.2 million ($0.07 per common share) and $8.0 million ($0.12 per
common share) in the first six months of 2002 and 2001, respectively. Before
preferred stock dividends, Hecla recorded net income of approximately $4.8
million ($0.06 per common share) in the second quarter of 2002 compared to a net
loss of approximately $1.6 million ($0.02 per common share) in the second
quarter of 2001.
The Company's net income for the six months ended June 30, 2002 and 2001,
includes a loss from discontinued operations of approximately $0.8 million
($0.01 per common share) in the first six months of 2002 and income of
approximately $12.9 million ($0.19 per common share) in the same period in 2001.
The income from discontinued operations in 2001 is principally due to a gain of
$13.0 recognized on the sale of the majority of Hecla's industrial minerals
segment in March 2001. Hecla recorded a loss from discontinued operations of
approximately $0.3 million and $0.3 million in the second quarters of 2002 and
2001, respectively.
On March 27, 2001, Hecla completed a sale of the Kentucky-Tennessee Clay
Company, Kentucky-Tennessee Feldspar Corporation, Kentucky-Tennessee Clay de
Mexico and certain other minor inactive industrial minerals companies
(collectively the K-T Group) and recorded a gain of $13.0 million in the first
quarter of 2001. On March 5, 2002, Hecla completed a sale of the pet operations
of Colorado Aggregate division (CAC) of MWCA, a wholly owned subsidiary of
Hecla, for $1.6 million in cash. The sale of the pet operations did not result
in a gain or loss.
20
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
The quarters and six months ended June 30, 2002 and 2001 included $2.0
million and $4.0 million, respectively, in dividends to holders of Hecla's
Series B Cumulative Convertible Preferred Stock. Although Hecla has elected not
to declare or pay the dividends for the quarters and six months ended June 30,
2002 and 2001, because these dividends are cumulative, the effects of the
undeclared dividends are reflected in the income (loss) applicable to common
shareholders.
Hecla recorded income applicable to common shareholders of approximately
$1.2 million ($0.02 per common share) and $4.0 million ($0.06 per common share)
in the first six months of 2002 and 2001, respectively. Hecla recorded income
applicable to common shareholders of approximately $2.7 million ($0.04 per
common share) in the second quarter of 2002 compared to a loss applicable to
common shareholders of approximately $3.6 million ($0.02 per common share) in
the second quarter of 2001.
Gold Operations
- ---------------
Currently Hecla operates the La Camorra mine, located in the eastern
Venezuelan State of Bolivar, approximately 120 miles southeast of Puerto Ordaz.
At the present time, La Camorra is Hecla's sole gold operating unit.
Sales of product increased by $0.6 million and cost of sales and other
direct production costs as a percentage of sales from products decreased to
32.5% during the second quarter of 2002 from 48.3% in the second quarter of
2001. Sales of product increased by $5.2 million and cost of sales and other
direct production costs as a percentage of sales from products decreased to
40.7% in the first six months of 2002 from 48.4% in the first six months of
2001. The improvement to sales, as well as to cost of sales and other direct
production costs as a percentage of sales, for the quarter and six-month period
are primarily due to increased mine equipment availability and improvements to
the crushing, milling and adsorption capacities, creating increases in tons
milled and gold ounces produced. Also contributing to the improvements were
increases in the average market price of gold, which increased 17% and 14%,
respectively, in the second quarter and six months ended June 30, 2002, as
compared to the same periods in 2001.
During the first six months of 2002, La Camorra has produced approximately
86,000 ounces of gold at a total cash cost of $134 per gold ounce, a 27%
increase in gold production when compared to approximately 68,000 ounces at a
total cash cost of $137 during the first six months of 2001. Gold production at
La Camorra is projected at approximately 150,000 ounces for the year ending
December 31, 2002.
21
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Total gold ounces produced, total cash and total production costs and
average gold realized and London Final prices were as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- -----
Gold ounces produced:
La Camorra 46 40 86 68
San Sebastian 11 4 20 5
Greens Creek(1) 9 6 16 13
Total cash costs per ounce ($/oz.) 131 131 134 137
Total production costs per ounce ($/oz.) 201 203 204 208
Average Metals Prices:
Gold-Realized ($/oz.) 304 277 300 278
Gold-London Final ($/oz.) 313 268 302 266
(1) Reflects Hecla's portion.
Silver Operations
- -----------------
For the quarter and six months ended June 30, 2002, the segment reported
gross profits of $2.8 million and $3.4 million compared to gross losses of $0.8
million and $1.5 million, respectively, for the quarter and six months ended
June 30, 2001. Sales of products increased by $3.5 million and cost of sales and
other direct production costs as a percentage of sales from products decreased
to 65.0% in the second quarter of 2002 from 85.8% in the second quarter of 2001.
Sales of products increased by $5.9 million and cost of sales and other direct
production costs as a percentage of sales from products decreased to 67.3% in
the first six months of 2002 from 84.1% in the first six months of 2001.
The consolidated improvements in the silver segment primarily are a result
of reducing production from the higher cost Lucky Friday mine, increasing
production from the lower cost San Sebastian mine and lower costs at the Greens
Creek mine. Hecla's silver production totaled 2.3 million and 4.3 million
ounces, respectively, for the quarter and six months ended June 30, 2002, as
compared to 2.0 million and 4.1 million silver ounces, respectively, in the same
periods during 2001. The average total cash cost decreased 39% and 33%,
respectively, during the second quarter and six months ended June 30, 2002, when
compared to the same periods during 2001.
22
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Total silver ounces produced, total cash and total production costs and
average metals prices were as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2001 2002 2001
------ ------ ------ ------
Silver ounces produced 2,334 1,970 4,344 4,098
Total cash costs per ounce ($/oz.)(1) 2.00 3.30 2.17 3.23
Total production costs per ounce ($/oz.)(1) 3.44 4.71 3.66 4.57
Average Metals Prices:
Silver-Handy & Harman ($/oz.) 4.75 4.40 4.63 4.48
Gold-London Final ($/oz.) 313 268 302 266
Lead-LME Cash ($/pound) 0.216 0.223 0.214 0.217
Zinc-LME Cash ($/pound) 0.363 0.453 0.357 0.443
(1) During the quarter and six months ended June 30, 2002,
approximately $0.2 million and $0.4 million, respectively, of
costs were classified as care-and-maintenance costs and
excluded in the determination of the cost per ounce at Lucky
Friday. Including the care-and-maintenance costs, the total
cash and total production costs per ounce total $2.09 and
$3.52, respectively, for the second quarter of 2002 and $2.26
and $3.75, respectively, for the first six months of 2002.
For the quarter and six months ended June 30, 2002, the San
Sebastian mine, located in the State of Durango, Mexico, reported
sales of $6.7 million and $12.1 million, compared to $2.5 million
and $2.5 million in the same periods of 2001, the result of the
commencement of operations in May 2001. During the first six
months of 2002, San Sebastian has produced approximately 1.6
million ounces of silver at a low total cash cost of $1.38 per
silver ounce. Silver and gold production at San Sebastian are
estimated to be approximately 3.2 million ounces and 37,000
ounces, respectively, for the year ended December 31, 2002.
The Greens Creek mine, a 29.73%-owned joint-venture
arrangement with Kennecott Greens Creek Mining Company located on
Admiralty Island, near Juneau, Alaska, reported sales of $7.0
million and $11.7 million for the quarter and six months ended
June 30, 2002, as compared to $6.1 million and $10.5 million
during the same periods in 2001, primarily due to higher tonnage
throughput resulting in higher concentrate tons produced and
better recoveries in the gravity circuit, leading to improved
lead/silver/gold distributions. Although Greens Creek's silver
production remained approximately the same at 1.7 million ounces
for the first six months of 2002 and 2001, production of gold
ounces and lead and zinc tons all increased by about 20%. The
total cash cost per silver ounce decreased from $2.11 in the
first six months of 2001 to $1.68 in the first six months of
2002. For the year ending December 31, 2002, production is
forecasted to total approximately 3.1 million silver ounces,
28,000 ounces of gold and 8,000 and 24,000 tons of lead and zinc,
respectively.
23
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
The Lucky Friday mine, located in northern Idaho and a
producing mine for Hecla since 1958, reported sales of
approximately $3.0 million during the second quarter of 2002, as
compared to $4.6 million during the second quarter of 2001. For
the six months ended 2002, Lucky Friday reported sales of $4.9
million, compared with $10.0 million during the same period in
2001. The improvements in the quarter and six months ended
June 30, 2002, are a reflection of the reduction to approximately
30% of historical production beginning October 2001, a decision
made based on the continuous decline over a ten-year period of
silver and lead prices.
Upon the decision to curtail production in October 2001,
management estimated the currently developed area of the mine
could sustain the lower production levels for up to 24 months and
would continue as long as the cost of operating was less than
putting the property on care and maintenance. During the second
quarter of 2002, the total cash cost per silver ounce decreased
20% to $3.91, from $4.90 during the second quarter of 2001. The
total cash cost per silver ounce decreased from $4.71 in the
first six months of 2001 to $4.29 in the first six months of
2002. During the second quarter and the first six months of
2002, approximately $0.2 million and $0.4 million, respectively,
of costs were classified as care-and-maintenance costs and
excluded from the determination of the costs per ounce at Lucky
Friday. Including the care-and-maintenance costs, the total cash
cost per ounce total $4.25 for the second quarter and $4.70 for
the six months ended. For the year ending December 31, 2002,
production is forecasted to total approximately 1.7 million
silver ounces and 9,000 tons of lead, as compared with total
actual production for the year ended December 31, 2001, of 3.2
million silver ounces and 21,000 tons of lead, respectively.
Corporate Matters
- -----------------
Exploration expense increased $0.4 million (55%) and $0.4
million (34%), in the quarter and six months ending June 30,
2002, compared to the same periods in 2001, primarily due to
increased exploration expenditures in Venezuela ($0.5 million and
$0.7 million, respectively), at Greens Creek ($0.2 million and
$0.2 million, respectively), partly offset by decreased
expenditures in Mexico ($0.2 million and $0.3 million,
respectively).
Hecla's provision for closed operations and environmental
matters decreased $0.3 million (65%) and $0.7 million (74%), in
the quarter and six months ending June 30, 2002, as compared to
the same periods in 2001, principally due to decreased
expenditures relating to the Coeur d'Alene Basin Litigation ($0.3
million and $0.6 million, respectively).
24
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Interest expense decreased $1.7 million, or 64%, in the
first six months of 2002, compared to the first six months of
2001, primarily the result of repayment of a $55.0 million term
loan facility in March 2001. Interest expense decreased $0.1
million in the second quarter 2002 as compared to the second
quarter of 2001.
Miscellaneous expense decreased $0.7 million (155%) and $0.9
million (111%), in the quarter and six months ending June 30,
2002, compared to the same periods in 2001, primarily due to a
foreign exchange gain ($1.4 million and $1.6 million,
respectively) in 2002 due to the devaluation of the Venezuelan
Bolivar, offset by accruals for tax offset bonuses on employee
stock option plans ($0.5 million and $0.5 million, respectively)
and legal, consulting and accounting expenses regarding the
Company's preferred stock tender offer and various other
corporate matters.
EXPLORATION ACTIVITIES
- ----------------------
On June 10, 2002, Hecla and Great Basin Gold Ltd. ("Great
Basin") announced that the two companies have entered into a
Joint-Venture Agreement ("Agreement") concerning exploration,
development and production on Great Basin's Hollister Development
Block high-grade gold property, located on the Carlin Trend of
Nevada, one of the world's premier gold mining districts. The
Agreement provides Hecla 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, estimated to cost $21.8 million. Upon
earn-in, Hecla will operate the mine. On August 5, 2002, the two
companies signed the final Earn-In and Joint Operating
Agreements.
At the La Camorra gold mine, underground exploration
drilling continues to explore the Main Zone and Betzy veins at
depth. Results indicate that both Betzy and Main Zone ore shoots
extend down-dip and plunge. Fourteen holes of the mid-level
exploration program were undertaken for a total of 4,796 meters.
Year-to-date, nineteen holes have been drilled for a total of
6,629 meters.
In March, Hecla announced it had been awarded a lease on
Block B concessions in Venezuela's El Callao gold mining
district. This lease is subject to signing a definitive
agreement with CVG-Minerven, the Venezuelan government-owned gold
mining company.
In Mexico, development drilling continues at San Sebastian
on the Francine vein to provide additional information for mine
25
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
planning and to test high-grade trends that appear to extend
beyond current ore boundaries. The Company also continues its
exploration efforts at its Cerro Pedernalillo silver/gold
exploration project, located on the San Sebastian property.
During the second quarter of this year, thirty-six drill holes
were completed and the program explored 200 meters of strike
length along the Don Sergio vein to a depth of 200 meters, and
250 meters of strike length along the Andrea vein to a depth of
135 meters. Six of these holes intersected banded quartz vein
that assayed over 9.5 gpt gold equivalent over a horizontal width
of 2.0 meters. Drilling to-date at Cerro Pedernalillo has
identified three veins covering more than 1.5 kilometers in
strike length. Veins could still be open to the southeast and
more drilling may follow after interpretation of faulting in this
area.
At the Greens Creek mine, definition drilling continues in
the Northwest West zone and in the Southwest Zone West Bench area
to confirm reserves and determine ore limits. During the second
quarter, two underground platforms were completed and exploration
drilling commenced on projections of the 200 South and 5250
orebodies. A total of 16,000 feet of exploration drilling is
planned in this area. Other areas are also targeted for both
surface and underground drilling to test the Greens Creek system
for possible extensions and fault offsets.
Hecla estimates that exploration expenditures for the
remainder of 2002 will be in the range of $3.0 to $4.0 million,
principally for the activities mentioned above. The amount could
be higher depending on the permitting process of the Hollister
Development Block and reaching a definitive agreement with CVG-
Minerven with respect to the Block B concessions in Venezuela.
ENVIRONMENTAL
- -------------
As of June 30, 2002, the Company has accrued $41.8 million
related to Grouse Creek, Yellow Pine, the Bunker Hill Superfund
site and other properties located within the Coeur d'Alene Basin.
These properties are included in the August 2001 Agreement in
Principle with the United States and the State of Idaho to settle
the governments' claims for natural resource damages and cleanup
costs related to historic mining practices in the Coeur d'Alene
Basin in northern Idaho. However due to a number of changed
circumstances since August 2001, the Agreement in Principle has
not and will not like be finalized into a final settlement
agreement and Consent Decree. The Company continues to negotiate
a settlement with the United States and the State of Idaho that
would be limited to resolving its environmental cleanup
liabilities for historic mining practices in the Coeur d'Alene
Basin. Hecla has accrued what management believes is the best
26
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
estimate of the liability as of June 30, 2002, however, it is
reasonably possible that Hecla's obligation may change in the
near or long term depending on a number of factors, including
finalization of settlement terms or a ruling from the courts. In
addition, an adverse ruling against Hecla for liability and
damages in this matter could have a material adverse effect on
the Company. For additional information, see Note 5 of the Notes
to Consolidated Financial Statements.
Reserves for closure costs, reclamation and environmental
matters totaled $51.7 million at June 30, 2002. Hecla
anticipates that expenditures relating to these reserves will be
made over the next several years. Although Hecla believes the
reserve is adequate based on current estimates of aggregate
costs, Hecla periodically reassesses its environmental and
reclamation obligations as new information is developed.
Depending on the results of the reassessment, it is reasonably
possible that Hecla's estimate of its obligations may change in
the near or long term.
Expenditures for environmental remediation and reclamation
for the remainder of 2002 are estimated in the range of $4.5 to
$5.2 million, principally for activities at the Grouse Creek
property and the Bunker Hill Superfund site.
FINANCIAL CONDITION AND LIQUIDITY
- ---------------------------------
Hecla's financial condition continues to improve, with a
current ratio of 1.4 to 1 at June 30, 2002, compared to 1 to 1 at
December 31, 2001, and cash and cash equivalents of $13.1 million
at June 30, 2002, an increase of $5.5 million from December 31,
2001. Hecla believes cash requirements over the remainder of
2002 will be funded through a combination of current cash, future
cash flows from operations, amounts available under existing loan
agreements and/or future debt or equity security issuances.
Hecla's ability to raise capital is highly dependent upon
the commercial viability of its projects and the associated
prices of metals Hecla produces. Because of the significant
impact that changes in the prices of gold, silver, lead and zinc
have on Hecla's financial condition, declines in these metals
prices may negatively impact short-term liquidity and Hecla's
ability to raise additional funding for long-term projects.
There can be no assurance that Hecla will be successful in
generating adequate funding for planned capital expenditures,
environmental remediation and reclamation expenditures and for
exploration expenditures.
27
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Operating Activities
- --------------------
Operating activities provided approximately $6.6 million of
cash during the first six months of 2002. Significant sources of
cash included cash provided by La Camorra and San Sebastian and
changes in accrued payroll and related benefits of $0.6 million.
Significant uses of cash included changes in accounts and notes
receivable ($6.1 million), changes in inventories ($3.4 million),
cash required for reclamation activities and other noncurrent
liabilities ($2.2 million) and changes in other current and
noncurrent assets ($0.9 million). Principal noncash elements
included charges for depreciation, depletion and amortization of
$11.8 million, a change in the net assets of discontinued
operations ($0.9 million) and an increase in the provision for
reclamation and closure costs ($0.8 million).
Investing Activities
- --------------------
Investing activities provided $1.3 million of cash during
the first six months of 2002. The major use of cash was for
additions to properties, plants and equipment ($6.1 million),
primarily at the La Camorra, Greens Creek and San Sebastian
mines. Hecla currently anticipates that capital expenditures for
the remainder of 2002 will be in the range of $6.0 million to
$6.5 million, principally for expenditures at the La Camorra,
Greens Creek and San Sebastian mines.
The cash used for additions to properties, plants and
equipment is partially offset by proceeds received on the sale of
the corporate headquarters building, which was completed on
April 8, 2002, located in Coeur d'Alene, Idaho ($5.6 million), as
well as the sale of the pet operations of CAC during the first
quarter of 2002 for $1.6 million in cash. The Company continues
to pursue the sale of the remaining assets of CAC, although there
can be no assurance a sales transaction will take place.
Financing Activities
- --------------------
During the first six months of 2002, financing activities
used approximately $2.3 million in cash, primarily for the
repayment of debt of $8.2 million. The repayment of debt was
partly offset by borrowings of $3.3 million and proceeds of $2.6
million for common stock issued for outstanding warrants and
employee stock options exercised.
28
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
As of June 30, 2002, Hecla had outstanding debt of $14.1
million, including $6.5 million due to be repaid in the next
twelve months. The outstanding debt included project financing
facilities for the La Camorra mine in Venezuela ($5.0 million)
and the Velardena mill at the San Sebastian mine in Mexico ($6.1
million) and a $3.0 million subordinated loan.
OTHER
- -----
On June 13, 2002, Hecla announced its intent to offer to
holders of its Series B Cumulative Convertible Preferred stock to
exchange each of their Preferred shares for seven shares of Hecla
Common stock. Holders of the Series B Cumulative Convertible
Preferred stock had until July 25, 2002, to tender their
preferred shares. Approximately 1.55 million shares were validly
tendered and exchanged, representing approximately 67.0% of the
total number of preferred shares outstanding (2.3 million), into
approximately 10.8 million shares of the Company's common stock.
In the third quarter of 2002, the Company expects to incur a
non-cash dividend charge of approximately $17.6 million related
to the completed exchange offering. The $17.6 million dividend
represents the difference between the value of the common stock
issued in the exchange offer and the value of the shares that
were issuable under the stated conversion terms of the preferred
stock. The non-cash dividend charge will have no impact on the
Company's total shareholders' equity as the offset will be an
increase in common stock and paid-in-capital. As a result of the
completed exchange offering, the total charge to cumulative
preferred dividends is anticipated to be $23.4 million for the
year ending December 31, 2002. Beginning in 2003, the $8.0
million annual cumulative preferred dividends that have
historically been included in income (loss) applicable to common
shareholders will be reduced to approximately $2.6 million. The
completed exchange offering also eliminated $10.9 million of
previously undeclared and unpaid preferred stock dividends.
Holders of the Preferred Shares 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
and have voting rights related to certain amendments to Hecla's
Articles of Incorporation. As of July 31, 2002, Hecla has not
declared and paid the equivalent of eight quarterly dividends,
entitling holders of the Preferred Shares to elect two directors
at Hecla's annual shareholders' meeting. On May 10, 2002,
holders of the Preferred Shares, voting as a class, elected two
additional directors.
29
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Pursuant to a Registration Statement filed with the
Securities and Exchange Commission and declared effective in the
third quarter of 1995, Hecla can, at its option, issue debt
securities, common shares, preferred shares or warrants in an
amount not to exceed $100.0 million in the aggregate. As of
June 30, 2002, Hecla has issued $62.2 million of Hecla's common
shares and warrants under the Registration Statement. Due to the
nonpayment by the Company of certain dividends on its Series B
Convertible Preferred Stock, there can be no assurance as to the
availability of this Registration Statement.
For information on hedged positions and derivative
instruments, see Item 3 "Quantitative and Qualitative Disclosure
About Market Risk."
Hecla is subject to legal proceedings and claims that have
not been finally adjudicated (see Part II. Item 1. Legal
Proceedings and Note 5 of Notes to Consolidated Financial
Statements). The ultimate disposition of these matters and
various other pending legal actions and claims is not presently
determinable. However, an adverse determination in certain of
these matters may have a material adverse effect on the financial
position of Hecla and its subsidiaries.
FORWARD-LOOKING AND OTHER STATEMENTS
- ------------------------------------
Except for the historical information, the matters discussed
in this Management's Discussion and Analysis of Financial
Condition and Results of Operations are forward-looking
statements that involve risks and uncertainties, including the
timely development of existing properties and reserves and future
projects, the impact of metals prices and metal production
volatility, political risk, changing market conditions and the
regulatory environment, limited access to capital markets,
settlement of environmental litigation and other risks detailed
from time to time in Hecla's Form 10-K and Form 10-Q's filed with
the Securities and Exchange Commission (see also "Investment
Considerations" of Part I, Item 1 of Hecla's 2001 Form 10-K).
These statements and potentially others are not guarantees of
future performance and actual results may differ materially from
those projected, forecasted or implied. These forward-looking
statements represent Hecla's judgment as of the date of this
filing. Hecla disclaims, however, any intent or obligation to
update these forward-looking statements as circumstances may
change or develop.
30
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Item 3. Quantitative and Qualitative Disclosure About Market Risk
- -------------------------------------------------------------------
The following discussion about Hecla's risk-management
activities includes "forward-looking statements" that involve
risk and uncertainties, as well as summarize the financial
instruments and derivative instruments held by Hecla at June 30,
2002, which are sensitive to changes in interest rates and
commodity prices. Actual results could differ materially from
those projected in the forward-looking statements. Hecla
believes there has not been a material change in its market risk
since the end of its last fiscal year. In the normal course of
business, Hecla also faces risks that are either nonfinancial or
nonquantifiable (See "Investment Considerations" of Part I,
Item 1 of Hecla's 2001 Annual Report on Form 10-K).
Interest-Rate Risk Management
At June 30, 2002, Hecla's debt was subject to changes in
market interest rates and was sensitive to those changes. Hecla
currently has no derivative instruments to offset the risk of
interest rate changes. Hecla may choose to use derivative
instruments, such as interest rate swaps, to manage the risk
associated with interest rate changes.
The following table presents principal cash flows for debt
outstanding at June 30, 2002, by maturity date and the related
average interest rate. The variable rates are estimated based on
implied forward rates in the yield curve at the reporting date.
(in thousands)
Fair
2002 2003 2004 2005 Thereafter Total Value
-------- -------- -------- -------- ---------- ------- -------
Subordinated debt $ - - $ 2,000 $ 1,000 $ - - $ - - $ 3,000 $ 3,000
Average interest rate 5.9% 7.0% 8.5%
Project financing debt $ 1,500 $ 3,000 $ 500 $ - - $ - - $ 5,000 $ 5,000
Average interest rate 4.4% 5.5% 7.0%
Project financing debt $ 642 $ 2,283 $ 837 $ 1,368 $ 960 $ 6,090 $ 6,090
Average interest rate 13% 13% 13% 13% 13%
31
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Commodity-Price Risk Management
Hecla uses commodity forward sales commitments, commodity
swap contracts and commodity put and call option contracts to
manage its exposure to fluctuation in the prices of certain
metals which it produces. Contract positions are designed to
ensure that Hecla will receive a defined minimum price for
certain quantities of its production. Hecla uses these
instruments to reduce risk by offsetting market exposures. Hecla
is 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 counter parties to these
agreements. The instruments held by Hecla are not leveraged and
are held for purposes other than trading. Hecla intends to
physically deliver metals in accordance with the terms of the
forward sales contracts. As such, Hecla has elected to designate
the contracts 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.
The following table provides information about Hecla's
forward sales contracts at June 30, 2002. The table presents the
notional amount in ounces, the average forward sales price and
the total-dollar contract amount expected by the maturity dates,
which occur between July 8, 2002, and December 31, 2004. As of
June 30, 2002, the mark to market value of the contracts was a
loss of $4.7 million. Hecla is subject to a margin free limit of
$10.0 million. At June 28, 2002, the London Final gold price was
$319.05.
Expected Expected Expected Estimated
Maturity Maturity Maturity Fair
2002 2003 2004 Value
--------- --------- --------- ---------
Forward contracts:
Gold sales (ounces) 30,612 59,802 48,928
Future price (per ounce) $ 288 $ 288 $ 288
Contract amount (in $000's) $ 8,824 $ 17,238 $ 14,103 $ (4,700)
In addition to the above contracts, Hecla has a quarterly
Gold Lease Rate Swap at a fixed rate of 1.5% on 123,786 ounces of
the above gold forward contracts. The ounces covered under the
swap are adjusted each quarter, in accordance with the expiration
of the gold forward contracts. To close out the Gold Lease Rate
Swap at June 30, 2002, the estimated income to the Company was
approximately $313,000.
32
Part II - Other Information
Hecla Mining Company and Subsidiaries
Item 1. Legal Proceedings
- ------ -----------------
For information concerning legal proceedings, refer to Note
5 to Consolidated Financial Statements of this Form 10-Q.
33
Part II - Other Information (Continued)
Hecla Mining Company and Subsidiaries
Item 4. Annual Meeting of Shareholders
- ------ ------------------------------
At the annual meeting of shareholders held on May 10, 2002,
the following matters were voted on by Hecla's shareholders:
Election of One Director:
Votes Votes
For Withheld
---------- --------
Phillips S. Baker, Jr. 62,034,374 931,174
To approve the amendment to the Certificate of Incorporation
of the Corporation increasing the number of authorized shares of
Common Stock of the Corporation.
Votes Votes
For Against Abstentions
---------- --------- -----------
57,515,544 5,149,910 300,094
Approval of selection of BDO Seidman, LLP as Hecla's
Auditors for 2002.
Votes Votes
For Against Abstentions
---------- --------- -----------
61,673,366 741,092 551,090
To approve the amendment to the Corporation's 1995 Stock
Incentive Plan to increase the maximum number of the shares of
common stock that may be issued under the plan from 3,000,000 to
6,000,000 and extend the term of the 1995 Stock Incentive Plan
from 10 years to 15 years.
Votes Votes
For Against Abstentions
---------- --------- -----------
29,228,912 9,580,365 726,855
34
Part II - Other Information (Continued)
Hecla Mining Company and Subsidiaries
To approve the amendment of the Corporation's Stock Plan for
Nonemployee Directors to increase the maximum number of shares of
Common Stock that may be issued under the plan from 120,000 to
1,000,000 and change the number of shares of Common Stock to be
delivered to each nonemployee director annually.
Votes Votes
For Against Abstentions
---------- ---------- -----------
28,243,149 10,528,172 764,811
To approve adoption of a Key Employee Deferred Compensation
Plan and to authorize a total of 6,000,000 shares of Common Stock
of the Corporation to be issued under the Plan.
Votes Votes
For Against Abstentions
---------- ---------- -----------
28,540,632 10,276,350 719,230
35
Part II - Other Information (Continued)
Hecla Mining Company and Subsidiaries
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits*
12 - Fixed Charge Coverage Ratio Calculation
(b) Reports on Form 8-K
None
Items 2, 3 and 5 of Part II are omitted from this report as
inapplicable.
__________________________
*Certain long-term debt instruments of the registrant or its
subsidiaries, the authorized principal amount of which does not
exceed 10% of the registrant's consolidated assets, are not filed
pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The
registrant agrees to furnish a copy of any such instrument to the
Commission upon request.
36
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: August 14, 2002 By /s/ Arthur Brown
-------------------------------
Arthur Brown, Chairman and
Chief Executive Officer
Date: August 14, 2002 By /s/ Phillips S. Baker, Jr.
--------------------------------
Phillips S. Baker, Jr., President,
Chief Operating Officer and Chief
Financial Officer
Date: August 14, 2002 By /s/ Lewis E. Walde
---------------------------------
Lewis E. Walde, Vice President -
Controller
(Chief Accounting Officer)
37
Exhibit Index
-------------
Exhibit No. Description
- ---------- -----------------
12 Fixed Charge Coverage Ratio Calculation