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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, 2003
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
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(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
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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 the past 90 days.
Yes _XX_. No __.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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 Shares Outstanding November 7, 2003
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Common stock, par value 110,482,552
$0.25 per share
Hecla Mining Company and Subsidiaries
Form 10-Q
For the Quarter Ended September 30, 2003
I N D E X*
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Page
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PART I. - Financial Information
Item l - Financial Statements
- Consolidated Balance Sheets -
September 30, 2003 (unaudited) and December 31, 2002 3
- Consolidated Statements of Operations and Comprehensive
Loss - Three Months and Nine Months Ended
September 30, 2003 and 2002 (unaudited) 4
- Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2003 and 2002 (unaudited) 5
- Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 23
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 46
Item 4 - Controls and Procedures 48
PART II. - Other Information
Item 1 - Legal Proceedings 49
Item 3 - Defaults Upon Senior Securities 49
Item 6 - Exhibits and Reports on Form 8-K 49
*Items omitted are not applicable.
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Part I - Financial Information
Item 1 - Financial Statements
Hecla Mining Company and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share data)
September 30,
2003 December 31,
(Unaudited) 2002
--------- ---------
ASSETS
------
Current assets:
Cash and cash equivalents $ 102,820 $ 19,542
Short-term investments 12,258 --
Accounts and notes receivable 15,616 10,154
Inventories 18,396 14,758
Deferred income taxes 675 2,700
Other current assets 2,466 1,780
--------- ---------
Total current assets 152,231 48,934
Investments 564 76
Restricted investments 6,442 6,428
Properties, plants and equipment, net 86,013 86,725
Mineral interests, net 4,988 5,640
Deferred income taxes 850 300
Other noncurrent assets 12,720 12,038
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Total assets $ 263,808 $ 160,141
========= =========
LIABILITIES
-----------
Current liabilities:
Accounts payable and accrued expenses $ 12,060 $ 11,731
Accrued payroll and related benefits 6,871 7,603
Current portion of long-term debt 4,805 7,296
Accrued taxes 2,756 1,572
Current portion of accrued reclamation and closure costs 7,500 7,005
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Total current liabilities 33,992 35,207
Long-term debt 2,560 4,657
Accrued reclamation and closure costs 62,781 42,718
Other noncurrent liabilities 4,876 5,629
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Total liabilities 104,209 88,211
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SHAREHOLDERS' EQUITY
--------------------
Preferred stock, $0.25 par value, authorized 5,000,000 shares; issued 2003 -
752,752 shares, issued 2002 - 753,402 shares
liquidation preference 2003 - $46,239 and 2002 - $44,262 188 188
Common stock, $0.25 par value, authorized 200,000,000 shares;
issued 2003 - 110,490,826 shares, issued 2002 - 86,187,468 shares 27,623 21,547
Capital surplus 495,157 405,959
Accumulated deficit (363,731) (355,544)
Accumulated other comprehensive income (loss) 480 (36)
Less stock held by grantor trust; 2002 - 81,696 common shares -- (66)
Less treasury stock, at cost; 2003 and 2002 - 8,274 common shares (118) (118)
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Total shareholders' equity 159,599 71,930
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Total liabilities and shareholders' equity $ 263,808 $ 160,141
========= =========
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,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Continuing Operations:
Sales of products $ 28,079 $ 27,790 $ 84,723 $ 79,836
--------------- --------------- --------------- ---------------
Cost of sales and other direct production costs 12,528 15,482 42,448 44,248
Depreciation, depletion and amortization 5,161 5,894 15,285 17,583
--------------- --------------- --------------- ---------------
17,689 21,376 57,733 61,831
--------------- --------------- --------------- ---------------
Gross profit 10,390 6,414 26,990 18,005
--------------- --------------- --------------- ---------------
Other operating expenses:
General and administrative 1,841 1,493 6,103 5,137
Exploration 2,562 1,257 8,333 2,987
Depreciation and amortization 69 22 268 90
Provision for closed operations and
environmental matters 23,284 510 23,488 768
--------------- --------------- --------------- ---------------
27,756 3,282 38,192 8,982
--------------- --------------- --------------- ---------------
Income (loss) from operations (17,366) 3,132 (11,202) 9,023
--------------- --------------- --------------- ---------------
Other income (expense):
Interest and other income 1,434 367 6,993 1,461
Miscellaneous expense (989) (933) (2,214) (842)
Interest expense (233) (437) (914) (1,374)
--------------- --------------- --------------- ---------------
212 (1,003) 3,865 (755)
--------------- --------------- --------------- ---------------
Income (loss) from operations before income
taxes and cumulative effect of change in
accounting principle (17,154) 2,129 (7,337) 8,268
Income tax provision (306) (56) (1,922) (168)
--------------- --------------- --------------- ---------------
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle (17,460) 2,073 (9,259) 8,100
Cumulative effect of change in accounting
principle, net of income tax -- -- 1,072 --
Discontinued operations, net of income tax -- (540) -- (1,326)
--------------- --------------- --------------- ---------------
Net income (loss) (17,460) 1,533 (8,187) 6,774
Preferred stock dividends (659) (18,568) (1,977) (22,593)
--------------- --------------- --------------- ---------------
Loss applicable to common shareholders $ (18,119) $ (17,035) $ (10,164) $ (15,819)
=============== =============== =============== ===============
Net income (loss) $ (17,460) $ 1,533 $ (8,187) $ 6,774
Change in derivative contracts -- -- -- (256)
Reclassification adjustment of loss
included in net income (loss) 10 10 28 30
Unrealized holding gains (losses) on securities 289 (26) 488 29
--------------- --------------- --------------- ---------------
Comprehensive income (loss) $ (17,161) $ 1,517 $ (7,671) $ 6,577
=============== =============== =============== ===============
Basic and diluted income (loss) per common share:
Loss from operations after preferred stock dividends $ (0.16) $ (0.19) $ (0.10) $ (0.18)
Cumulative effect of change in accounting principle -- -- 0.01 --
Loss from discontinued operations -- (0.01) -- (0.02)
--------------- --------------- --------------- ---------------
Basic and diluted loss per common share $ (0.16) $ (0.20) $ (0.09) $ (0.20)
=============== =============== =============== ===============
Weighted average number of common shares outstanding 110,221 86,031 109,656 78,294
=============== =============== =============== ===============
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, 2003 September 30, 2002
------------------ ------------------
Operating activities:
Net income (loss) $ (8,187) $ 6,774
Noncash elements included in net income (loss):
Depreciation, depletion and amortization 15,553 17,673
Cumulative effect of change in accounting principle (1,072) --
Gain on disposition of properties, plants and equipment (306) (299)
Provision for reclamation and closure costs 23,530 1,445
Deferred income taxes 1,475 --
Change in net assets of discontinued operations -- 884
Change in assets and liabilities:
Accounts and notes receivable (5,462) (3,706)
Inventories (3,638) (3,156)
Other current and noncurrent assets (1,368) (594)
Accounts payable and accrued expenses 357 (584)
Accrued payroll and related benefits (82) (385)
Accrued taxes 1,184 141
Accrued reclamation and closure costs and other
noncurrent liabilities (4,376) (3,546)
---------------- ----------------
Net cash provided by operating activities 17,608 14,647
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Investing activities:
Purchase of short-term investments (12,258) --
Proceeds from sale of discontinued operations -- 1,585
Additions to properties, plants and equipment (12,618) (9,095)
Proceeds from disposition of properties, plants and equipment 486 5,705
Increase in restricted investments (14) (3)
Other, net 50 (40)
---------------- ----------------
Net cash used by investing activities (24,354) (1,848)
---------------- ----------------
Financing activities:
Common stock issued for warrants and stock option plans 3,377 2,635
Common stock issuance, net of offering costs 91,235 --
Borrowings on long-term debt 1,350 3,317
Repayments on long-term debt (5,938) (8,516)
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Net cash provided (used) by financing activities 90,024 (2,564)
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Net increase in cash and cash equivalents 83,278 10,235
Cash and cash equivalents at beginning of period 19,542 7,560
---------------- ----------------
Cash and cash equivalents at end of period $ 102,820 $ 17,795
================ ================
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 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 items,
necessary to present fairly, in all material respects, the financial position of
Hecla Mining Company ("we" or "our"). 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, 2002.
Note 2. Discontinued Operations
During 2000, in furtherance of our determination to focus our
operations on silver and gold mining and to raise cash to retire debt and
provide working capital, our board of directors made the decision to sell our
industrial minerals segment. In March 2003, we sold the remaining inventories of
the briquette division of the Colorado Aggregate division ("CAC") of MWCA, Inc.,
and no longer produce or sell any product from our former industrial minerals
segment. The briquette division of CAC represented the remaining portion of our
industrial minerals segment, which reported a loss from operations of
approximately $48,000 and $70,000, respectively, for the third quarter and first
nine months of 2003. We did not record any gain or loss from discontinued
operations during the third quarter and first nine months of 2003, compared to a
loss of $0.5 million ($0.01 per common share) and $1.3 million ($0.02 per common
share), respectively, during the third quarter and first nine months of 2002.
All activity associated with the former industrial minerals segment during the
third quarter and first nine months of 2003 is considered a general corporate
activity and is presented as "other" where appropriate.
Note 3. Income Taxes
The income tax provision for the first nine months of 2003 and 2002
varies from the amount that would have been provided by applying the statutory
rate to the income (loss) before income taxes primarily due to the availability
and utilization of net operating losses in Mexico and Venezuela. 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 tax payable on interest expense. For the three and nine months ended
September 30, 2002, we recognized a $0.1 million and $0.2 million provision,
respectively, for foreign income taxes due to Mexican withholding tax payable on
interest expense.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Note 4. Inventories
Inventories consist of the following (in thousands):
September 30, December 31,
2003 2002
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Concentrates, bullion, metals
in transit and other products $ 9,299 $ 7,034
Materials and supplies 9,097 7,724
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$ 18,396 $ 14,758
============= =============
At September 30, 2003, we had forward sales contracts through December
31, 2004, for 63,828 ounces of gold at an average price of $288.25 per ounce.
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, 2003 was
$388.00 per ounce.
We have a quarterly Gold Lease Rate Swap at a fixed rate of 1.5% on
48,928 ounces of the above gold forward contracts. The ounces covered under the
swap are adjusted each quarter as the gold forward contracts expire. At
September 30, 2003, the fair market value of the Gold Lease Rate Swap was
approximately $218,000, which represents the amount the counterparty would have
to pay us if the contract was terminated.
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 Kellogg, Idaho. 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
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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 to
release Hecla and ASARCO from future work under the 1994 Decree within the
Bunker Hill site. We were unsuccessful in negotiating an agreement with the
State of Idaho and the United States for the 2003 summer work program under the
1994 Decree and elected to implement a $1.5 million annual work plan without
state or federal approval of the $1.5 million limit on our expenditures.
Meanwhile, we have submitted our dispute with the U.S. government and the State
of Idaho concerning our obligations for the 2003 work under the 1994 Decree to
the Idaho Federal District Court for final determination. We expect the work
program for 2003 will be subject to a final decision on modification of the 1994
Decree by the Court.
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, 2003, we have estimated and accrued a liability for
remedial activity costs at the Bunker Hill site of $7.4 million, which are
anticipated to be made over the next four to five years. Although we believe the
accrual is adequate based upon our current estimates of 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.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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. On August 16, 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 cleanup
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.
The first phase of the trial commenced on the consolidated Coeur
d'Alene Indian Tribe's and the United States' claims on January 22, 2001, and
was concluded on July 30, 2001. The first phase of the trial addressed the
extent of liability, if any, of the defendants and the allocation of liability
amongst the defendants and others, including the U.S. government. On September
3, 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 these releases. The
natural resource damages to which this 31% applies and the Court's determination
of an appropriate cleanup plan will be addressed in the Phase II trial.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
The Court also found that while certain Basin natural resources had
been injured, the Court stated that "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 Court also
left for the Phase II trial issues on the deference, if any, to be afforded the
government's cleanup plan and on defendants' constitutional due
process/retroactivity defense. The Phase II trial is scheduled to commence on
January 18, 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 Record of
Decision proposing a cleanup plan totaling approximately $359 million, based
upon the Court's prior orders, including its September 3, 2003 order and other
factors and issues to be addressed by the Court in the Phase II trial, we
estimated the range of our potential liability in the Basin to be $18.0 million
to $58.0 million, with no amount in the range being more likely than any other
number at this time. Based upon generally accepted accounting principles (GAAP),
we accrued the minimum liability within the range. As of September 30, 2003, we
have estimated and accrued a potential liability for claims in the Coeur d'Alene
Basin litigation of $18.0 million. It is reasonably possible that our ability to
estimate what, if any, liability we may have relating to the Coeur d'Alene Basin
may change in the future depending on a number of factors, including the outcome
of the Phase II trial.
Class Action Litigation
On or about 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. On April 23, 2002, we filed a motion with the Court to
dismiss the claims for relief relating to any medical monitoring programs and
the remediation and restoration programs. At a hearing before the Idaho District
Court on our and other defendants' motions held October 16, 2002, the Judge
struck the complaint filed by the plaintiffs in January 2002 and instructed the
plaintiffs to re-file the complaint limiting the relief requested by the
plaintiffs to wholly private damages. The Court also dismissed the medical
monitoring claim as a separate cause of action and stated that any requested
remedy that encroached upon the EPA's cleanup in the Silver Valley would be
precluded by the pending Federal Court case described above. The plaintiffs
re-filed their amended complaint on January 9, 2003. As ordered by the Court,
the amended complaint omits any cause of action for medical monitoring and no
longer requests relief in the form of real property remediation or restoration
programs. At a hearing on May 7, 2003, the Court vacated the entire amended
complaint, and gave Plaintiffs' counsel until June 30, 2003, to re-file an
amended complaint that complies with Idaho law. Plaintiffs submitted a second
amended complaint on June 9, 2003, which we have answered. Discovery on the
issue of class
-10-
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
certification is proceeding. We believe the claims alleged against us are
subject to challenge on a number of bases and we intend to vigorously defend
this litigation.
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, 2003, we have
not reduced our accrual or recorded a receivable for reclamation and closure
costs to reflect the receipt of any potential insurance proceeds.
Other Claims
Zemex Litigation
On November 17, 2000, we entered into an agreement with Zemex U.S.
Corporation guaranteed by its parent, Zemex Corporation of Toronto, Canada, to
sell the Kentucky-Tennessee Clay Company, Kentucky-Tennessee Clay de Mexico and
certain other minor inactive industrial minerals companies (collectively the K-T
Group) for a price of $68.0 million. On January 18, 2001, Zemex U.S. Corporation
failed to close on the transaction, and on January 22, 2001, we brought suit in
the United States District Court for the Northern District of Illinois, Eastern
Division, against the parent, Zemex Corporation, under its guarantee for its
subsidiary's failure to close on the purchase and meet its obligations under the
November 2000 agreement. In January 2003, the parties reached an agreement to
settle our claims in full for $3,950,000. The payment was recorded as other
income during the first quarter of 2003.
Independence 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 mine, 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 alleges 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
-11-
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
the DIA properties, and our 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. On March 18, 2003, Independence filed a motion for partial summary
judgment or in the alternative, for preliminary injunction ("Motion"). The
Motion requests that the Court terminate our leasehold interest in property
owned by Independence within the DIA area, rule that we have committed waste
while mining ore within property owned by Independence, and prohibit us from any
further mining within property owned by Independence. We filed our response to
the Motion on May 28, 2003 and a hearing was held in July 2003 on the Motion. By
order dated August 8, 2003 the court denied Plaintiff's motion and set trial for
January, 2004. We believe that we have fully complied with all of our
obligations under the 1968 Lease Agreement and intend to defend our right to
operate the property under the Lease Agreement.
Velardena Mill Litigation
In Mexico, our subsidiary, Minera Hecla, S.A. de C.V. ("Minera Hecla"),
is involved in litigation in Mexico City concerning a lien on certain major
components of the Velardena mill at the San Sebastian mine 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. On January 23, 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. On September 17, 2003, the
lien holder filed the last in a series of unsuccessful appeals before a federal
appeals court in Mexico City, which is expected to issue a final ruling before
the end of the year. We believe that the lien has been fully satisfied and
intend to continue to defend the suit.
Minera Hecla is also involved in other litigation in the State of
Durango, Mexico concerning the Velardena mill. On October 10, 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. On October
21, 2003, Minera Hecla obtained a temporary restraining order from a federal
court in Durango to preserve our possession of the mill. A hearing for a
permanent restraining order will be held on November 18, 2003 in Durango. We
believe the claim of Minera William is without merit and they have no right to
any portion of the Velardena mill. We intend to zealously defend our rightful
ownership interest.
The court order discussed above does not affect Minera Hecla's San
Sebastian mine, which is 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.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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
As of September 30, 2003, our wholly owned subsidiary, Hecla Resources
Investments Limited ("HRIL"), had $2.0 million outstanding under a credit
agreement used to provide project financing at the La Camorra mine. The project
financing agreement is repayable in semiannual payments, including $1.5 million
on December 31, 2003 and $0.5 million on June 30, 2004, and had an interest rate
of 3.7% at September 30, 2003.
HRIL must comply with financial and other restrictive covenants related
to the available ore reserves and performance of the La Camorra mine. We are
required to maintain hedged gold positions sufficient to cover all dollar loans,
operating expenditures, taxes, royalties and similar fees projected for the
project. At September 30, 2003, we had forward sales contracts for 63,828 ounces
of gold. The forward sales contracts assume 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. We maintain 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 us receiving the fixed rate and paying the
current floating gold lease rate.
In connection with the project financing agreement, we have outstanding
a $2.0 million subordinated loan agreement, repayable in equal installments on
December 31, 2003, and June 30, 2004. The loan agreement gives us the option to
capitalize interest payments by adding them to the principal amount of the loan.
At September 30, 2003, the interest amount added to principal was approximately
$0.7 million and is included in accrued expenses on our consolidated balance
sheets. The interest rate under the subordinated loan agreement was 5.3% as of
September 30, 2003.
At September 30, 2003, our wholly owned subsidiary, Minera Hecla, S.A.
de C.V. ("Minera Hecla"), had $3.4 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. The credit facility is nonrecourse to
us. Under the terms of the credit facility, Minera Hecla will make monthly
payments for principal and interest over 63 months at a fixed interest rate
equal to 13%. The loan is collateralized by the mill at Velardena and the
Saladillo, Saladillo 1 and Saladillo 5 mining concessions.
In March 2003, we canceled a $7.5 million revolving bank agreement
established in March 2002. At the time of cancellation, no amount was
outstanding under the agreement.
Note 7. Investments
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Current Investments
At September 30, 2003, short-term investments included certificates of
deposit and held-to-maturity securities, which are carried at amortized cost,
which approximates fair value. All of these investments are due within the next
twelve months and consisted of the following:
2003 2002
---------- ----------
Current Investments:
Certificates of deposit $ 1,600 $ --
United States government and federal
agency securities 4,225 --
Municipal securities 5,612 --
Corporate bonds 821 --
---------- ----------
$ 12,258 $ --
========== ==========
Non-current Investments
As of September 30, 2003, non-current investments consisted of
marketable equity securities categorized as available for sale and carried at
quoted market value. Realized gains and losses on the sale of such securities
are recognized on a specific identification basis. Unrealized gains and losses
are included as a component of accumulated other comprehensive income (loss),
net of related deferred income taxes, unless a permanent impairment in value has
occurred, which is then charged to operations.
Restricted Investments
Restricted investments primarily represent investments in money market
funds and bonds of U.S. Government Agencies. These investments are restricted
primarily for reclamation funding or surety bonds.
Note 8. 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, 2003 and 2002, 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,
2003 2002 2003 2002
--------- --------- --------- ---------
Income (loss) from continuing operations
before cumulative effect of change in
accounting principle $ (17,460) $ 2,073 $ (9,259) $ 8,100
Cumulative effect of change in accounting
principle, net of income tax -- -- 1,072 --
Discontinued operations, net of income taxes -- (540) -- (1,326)
Preferred stock dividends (659) (18,568) (1,977) (22,593)
--------- --------- --------- ---------
Basic and diluted loss applicable to
common shareholders $ (18,119) $ (17,035) $ (10,164) $ (15,819)
Weighted average number of common
shares outstanding 110,221 86,031 109,656 78,294
--------- --------- --------- ---------
Basic and diluted loss per common share $ (0.16) $ (0.20) $ (0.09) $ (0.20)
========= ========= ========= =========
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
These calculations of diluted loss per share for the three months and
nine months ended September 30, 2003 and 2002 exclude the effects of convertible
preferred stock ($37.6 million in 2003 and $37.7 million in 2002), as well as
common stock issuable upon the exercise of various stock options as their
conversion and exercise would be antidilutive. For the three and nine months
ended September 30, 2003 and 2002, 2,889,236 and 2,817,335 stock options,
respectively, were excluded in the calculation of diluted loss per share as they
are antidilutive.
Note 9. Business Segments
We are organized and managed primarily on the basis of the principal
products being produced from our operating units. Three of our operating units
have been aggregated into the silver segment and one into the gold 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 nine months ended September 30, 2003 and 2002 (in
thousands):
Three Months Ended Nine Months Ended
-------------------- --------------------
September 30, September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Net sales to unaffiliated customers:
Silver $ 19,485 $ 13,983 $ 55,681 $ 42,718
Gold 8,611 13,807 28,522 37,118
Other (17) -- 520 --
-------- -------- -------- --------
$ 28,079 $ 27,790 $ 84,723 $ 79,836
======== ======== ======== ========
Income (loss) from operations:
Silver $ 6,343 $ (85) $ 12,567 $ 2,567
Gold 1,539 5,242 6,166 12,451
Other (25,248) (2,025) (29,935) (5,995)
-------- -------- -------- --------
$(17,366) $ 3,132 $(11,202) $ 9,023
======== ======== ======== ========
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
The following table presents identifiable assets by reportable segment
as of September 30, 2003 and December 31, 2002 (in thousands):
September 30, December 31,
2003 2002
--------------- ---------------
Identifiable assets:
Silver $ 87,779 $ 82,522
Gold 39,063 40,004
Other 136,966 37,615
--------------- ---------------
$ 263,808 $ 160,141
=============== ===============
Note 10. Shareholders' Equity
In January 2003, we completed an underwritten public offering of 23.0
million shares of our common stock. The public offering also included 2.0
million shares offered by the Hecla Mining Company Retirement Plan and the Lucky
Friday Pension Plan ("the benefit plans"). We received net proceeds from the
offering totaling approximately $91.2 million, which will be used to fund future
exploration and development, working capital requirements, capital expenditures,
possible future acquisitions and for other general corporate purposes. Our
benefit plans realized net proceeds of approximately $8.0 million from the sale
of the 2.0 million shares included in the public offering.
We also filed a Registration Statement with the Securities and Exchange
Commission covering 1,394,883 shares of our common stock offered by the benefit
plans and 2.0 million shares of our common stock issuable upon exercise of a
warrant issued to Great Basin Gold Ltd. ("Great Basin") pursuant to an Earn-in
Agreement concerning exploration, development and production in an area of Great
Basin's Hollister Development Block gold property, located on the Carlin Trend
in Nevada. The Registration Statement became effective in January 2003.
In July 2002, 1,546,598 preferred shares were exchanged for shares of
our common stock (each preferred share was exchanged for seven shares of our
common stock) in an exchange offering meant to reduce cumulative preferred
dividends that are included in the calculation of earnings applicable to common
shareholders. As of September 30, 2003, 752,752 shares of preferred stock remain
outstanding and we have not declared or paid $8.6 million in cumulative
preferred dividends. We are currently not planning to reinstate the preferred
stock dividend.
Note 11. Stock-Based Plans
At September 30, 2003, 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, except
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
for the impact of tax offset bonuses. No compensation expense was recognized
during the three and nine months ended September 30, 2003 and 2002 for 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):
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Loss applicable to common shareholders
As reported $ (18,119) $ (17,035) $ (10,164) $ (15,819)
Stock-based employee compensation expense
included in reported income (loss) 363 (77) 953 530
Total stock-based employee compensation
expense determined under fair value
based methods for all awards (1,026) (4) (3,220) (1,931)
---------- ---------- ---------- ----------
Pro forma $ (18,782) $ (17,116) $ (12,431) $ (17,220)
========== ========== ========== ==========
Loss applicable to common shareholders per common share:
As reported $ (0.16) $ (0.20) $ (0.09) $ (0.20)
Pro forma $ (0.17) $ (0.20) $ (0.11) $ (0.22)
Note 12. Asset Retirement Obligations
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. 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.
Upon initial application of SFAS No. 143 on January 1, 2003, we
recorded the following:
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
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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 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.
The following is a reconciliation of the total liability for asset
retirement obligations (in thousands):
Balance January 1, 2003 $ 6,088
Accretion expense 295
Cash payments (222)
------------
Balance September 30, 2003 $ 6,161
============
There are no assets legally restricted for purposes of settling asset
retirement obligations at September 30, 2003.
The following table presents the pro forma effects of the application
of SFAS No. 143 for the three and nine months ended September 30, 2002, as if
the Statement had been in effect for those periods (in thousands, except per
share data):
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2002
------------------ -----------------
Loss applicable to common shareholders $ (17,035) $ (15,819)
Cost of sales and other direct production
costs 270 812
Depreciation, depletion and amortization (132) (392)
--------------- --------------
Pro forma $ (16,897) $ (15,399)
================ ==============
Basic and diluted earnings per share:
As reported $ (0.20) $ (0.20)
Pro forma $ (0.20) $ (0.20)
Note 13. New Accounting Pronouncements
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). SFAS No. 145 updates, clarifies and simplifies
existing accounting pronouncements, by rescinding SFAS No. 4, which required all
gains and losses from extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. 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 provisions of SFAS No. 145 that amend SFAS No. 13 were effective for
transactions occurring after May 15, 2002, with all other provisions of SFAS No.
145 being required to be adopted by us in January 2003. The adoption of SFAS No.
145 did not have a material impact on our 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
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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. The adoption of SFAS No. 146 did
not have a material impact on our consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45,
Guarantor's Accounting for Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34,
Disclosure of Indirect Guarantees of Indebtedness of Others ("FIN 45"). FIN 45
clarifies the requirements for a guarantor's accounting for and disclosure of
certain guarantees issued and outstanding. It also requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. This interpretation also
incorporates without reconsideration the guidance in FASB Interpretation No. 34,
which is being superseded. The adoption of FIN 45 did not have a material effect
on our consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148 "Accounting for
Stock-Based Compensation, Transition and Disclosure, an amendment of FASB
Statement No. 123." SFAS No. 148 provides alternative methods of transition for
an entity that voluntarily changes to the fair value based method of accounting
for stock-based employee compensation. It also amends the disclosure provisions
of SFAS No. 123 to require prominent disclosure about the effects of reported
net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. Finally, this statement amends APB Opinion
No. 28, "Interim Financial Reporting," to require disclosure about those effects
in interim financial information. The amendments to SFAS No. 123, which provides
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation is
effective for financial statements for fiscal years ending after December 15,
2002. The amendment to SFAS No. 123 relating to disclosures and the amendment to
Opinion 28 is effective for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. We have
adopted the disclosure-only provisions of SFAS No. 123 and do not intend to
adopt the fair value accounting provisions of SFAS No. 123. The adoption of SFAS
No. 148 did not have a material impact on our consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46)
"Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin (ARB) No. 51, Consolidated Financial Statements." FIN 46
clarifies the application of ARB No. 51 to certain
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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. The adoption of FIN 46 did not have a material
effect on our consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133 "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 149 is effective for all contracts created or modified
after June 30, 2003. The adoption of this standard did not have a material
effect on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 establishes standards on the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. The
provisions of SFAS No. 150 are effective for financial instruments entered into
or modified after May 31, 2003, and to all other instruments that exist as of
the beginning of the first interim financial reporting period beginning after
June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on
our consolidated financial statements.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
CERTAIN STATEMENTS CONTAINED IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK ARE FORWARD-LOOKING STATEMENTS THAT REFLECT OUR
CURRENT EXPECTATIONS AND PROJECTIONS ABOUT OUR 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," "INTEND," "PLAN," "ESTIMATE" AND SIMILAR EXPRESSIONS.
THESE FORWARD-LOOKING STATEMENTS ARE BASED ON INFORMATION CURRENTLY AVAILABLE TO
US AND 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, 2002.
OTHER MATTERS, INCLUDING UNANTICIPATED EVENTS AND CONDITIONS, ALSO MAY
CAUSE OUR ACTUAL FUTURE RESULTS TO DIFFER MATERIALLY FROM THESE FORWARD-LOOKING
STATEMENTS. THERE CAN BE NO ASSURANCE THAT OUR EXPECTATIONS WILL PROVE TO BE
CORRECT AND UNDUE RELIANCE SHOULD NOT BE PLACED ON THESE FORWARD-LOOKING
STATEMENTS. ALL OF THESE FORWARD-LOOKING STATEMENTS ARE BASED ON OUR
EXPECTATIONS AS OF THE DATE OF THIS FILING. 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.
A 112-year-old company, we have long been known as a precious metals
producer and are principally engaged in the exploration, development, mining and
processing of silver, gold, lead and zinc. We are operated and organized into
two segments, silver and gold, with three operating properties included in the
silver segment (San Sebastian, Greens Creek and Lucky Friday) and one in the
gold segment (La Camorra). The following maps indicate the locations of our
operations as well as the Hollister Development Block, an exploration property:
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
[MAP]
We also own or have interests in a number of precious and nonferrous
metals properties. 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. We will also consider acquisition opportunities
as a component of our growth strategy.
RESULTS OF OPERATIONS
In January 2003, we completed an underwritten public offering of 23.0
million shares of our common stock, resulting in net cash proceeds totaling
approximately $91.2 million to be used to fund future exploration and
development, working capital requirements, capital expenditures, possible future
acquisitions and for other general corporate purposes. For additional
information regarding the public offering, see Note 10 of Notes to Consolidated
Financial Statements.
At September 30, 2003, we recorded adjustments totaling $23.1 million
for future environmental and reclamation expenditures, primarily for future
anticipated expenditures in Idaho's Coeur d'Alene Basin ($16.0 million) and for
the Grouse Creek mine cleanup in central Idaho ($6.8 million). The adjustment
for the Coeur d'Alene Basin was recorded in response to a United States District
Court ruling on September 3, 2003, which held that we had some liability for
yet-to-be determined natural resource damages and response costs due to our
historic mining practices. Although the U.S. Government has previously issued
its Record of Decision proposing a cleanup plan totaling approximately
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
$359 million, based upon the Court's prior orders, including its September 3,
2003 order and other factors and issues to be addressed by the Court in the
Phase II trial, we estimated the range of our potential liability in the Basin
to be $18.0 million to $58.0 million, with no amount in the range being more
likely than any other number at this time. Based upon generally accepted
accounting principles (GAAP), we accrued the minimum liability within the range.
As of September 30, 2003, we have estimated and accrued a potential liability
for claims in the Coeur d'Alene Basin litigation of $18.0 million. For
additional information on the Coeur d'Alene Basin and Court ruling, see Note 5
of Notes to Consolidated Financial Statements.
At the Grouse Creek mine, which suspended operations in 1997, we have
developed a revised reclamation cost estimate. The estimate was based on a
conceptual reclamation plan submitted to the regulatory authorities in 2003. To
date, we have commenced dewatering of the tailings impoundment and developed a
conceptual 15-year closure plan that has provided the basis for the increase in
estimated costs. As of September 30, 2003, we have estimated and accrued a
liability for reclamation activities at the Grouse Creek mine of $32.6 million.
During the third quarter and first nine months of 2003, we recorded
losses applicable to common shareholders of approximately $18.1 million and
$10.2 million, or $0.16 and $0.09 per common share, respectively, compared to
losses applicable to common shareholders of $17.0 million and $15.8 million, or
$0.20 and $0.20 per common share, respectively, during the third quarter and
first nine months of 2002.
Included in the losses applicable to common shareholders were
undeclared and unpaid preferred stock dividends of $0.7 million and $2.0
million, respectively, during the third quarter and first nine months of 2003,
compared to dividends of $18.6 million and $22.6 million, respectively, during
the same periods in 2002. The variance in preferred stock dividends during the
2003 and 2002 comparative periods is due to a preferred stock exchange offer
completed during the third quarter of 2002, pursuant to which 67.2% of the
preferred shares outstanding at the time (2.3 million) were exchanged for shares
of common stock (seven shares of common for every share of preferred). During
the third quarter of 2002, we incurred a non-cash dividend of approximately
$17.6 million, which represented 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.
Included in the loss for the nine months ended September 30, 2003, is a
$4.0 million cash settlement received from Zemex Corporation during the first
quarter of 2003 for its subsidiary's failure to close on its agreement to
purchase the Kentucky-Tennessee Clay Company, Kentucky-Tennessee Clay de Mexico
and certain other minor inactive industrial minerals companies (collectively the
K-T Group) in January 2001. In November 2000, we entered into an agreement with
Zemex U.S. Corporation, guaranteed by its parent, Zemex Corporation of Toronto,
Canada, to sell the stock of the K-T Group for a price of $68.0 million. For
additional information on the settlement from Zemex Corporation, see Note 5 of
Notes to Consolidated Financial Statements.
Also included in the loss for the nine months ended September 30, 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." This statement was adopted on January 1, 2003, and
required that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred. The gain of $1.1 million
recognized represents the
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
difference between the amounts determined under SFAS No. 143 and amounts
previously recorded in our consolidated financial statements. For additional
information, see Note 12 of Notes to Consolidated Financial Statements.
Reflected in the losses applicable to common shareholders during the
third quarter and first nine months of 2002 is a loss from discontinued
operations of $0.5 million and $1.3 million, respectively. In March 2003, we
sold the remaining inventories of the briquette division of the Colorado
Aggregate division ("CAC") of MWCA, Inc., and no longer produce or sell any
product from our former industrial minerals segment. The briquette division of
CAC represented the remaining portion of our industrial minerals segment, which
reported a loss from operations of approximately $48,000 and $70,000,
respectively, for the third quarter and first nine months of 2003. All activity
associated with the former industrial minerals segment during the third quarter
and first nine months of 2003 is considered a general corporate activity and is
presented as "other" where appropriate. For additional information, see Note 2
of Notes to Consolidated Financial Statements.
Silver Operations and Production
For the three and nine months ended September 30, 2003, the silver
segment reported income from operations of $6.3 million and $12.6 million,
respectively, compared to a loss from operations of $0.1 million during the
third quarter of 2002 and income of $2.6 million during the first nine months of
2002. Sales of products increased by $5.5 million and cost of sales and other
direct production costs as a percentage of sales from products decreased to
46.0% in the third quarter of 2003, from 75.7% in the third quarter of 2002.
During the nine-month period, sales of products increased by $13.0 million and
cost of sales and other direct production costs as a percentage of sales from
products decreased to 55.1% in 2003 from 70.2% in the first nine months of 2002.
Factors contributing to these changes for both the third quarter and nine-month
periods are in the discussion of each operating property following the table
below.
Silver production during the third quarter and first nine months of
2003 totaled 2.6 million ounces and 7.5 million ounces, respectively, compared
to 2.1 million ounces and 6.4 million ounces, respectively, during the same
periods in 2002. The average total cash cost per ounce decreased 46%, from $2.44
per silver ounce during the third quarter of 2002 to $1.33 per silver ounce
during the third quarter of 2003. During the first nine months of 2003, the
average total cash cost per ounce decreased 35% compared to the same period in
2002, from $2.32 per silver ounce during the first nine months in 2002 to $1.52
per silver ounce in 2003. Gold produced at our silver operations had a
significant impact on our average total cash cost per ounce. Because it is
considered a by-product of our silver production, it contributed to the decrease
in average total cash costs during the comparable periods due primarily to a
higher average gold price, as well as increased gold production.
-26-
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
The following table presents total production, total cash costs, total
production costs and average metals prices as they pertain to our silver
operations for the periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
2003 2002 2003 2002
------------------------- --------------------------
Silver ounces produced (in thousands):
San Sebastian 1,104 823 3,135 2,472
Greens Creek 1,046 827 2,620 2,515
Lucky Friday 493 429 1,731 1,436
Gold ounces produced:
San Sebastian 11,988 10,112 35,047 29,928
Greens Creek 7,401 7,333 22,355 23,049
Lead produced (tons):
Greens Creek 2,047 1,839 6,158 6,194
Lucky Friday 2,942 2,135 9,865 7,100
Zinc produced (tons):
Greens Creek 4,163 5,665 16,980 17,856
Lucky Friday 648 497 1,835 1,673
Total cash costs per ounce ($/oz.) (1,2) 1.33 2.44 1.52 2.32
Total production costs per ounce ($/oz.) (1,2) 2.64 3.85 2.76 3.78
Average Metals Prices:
Silver-Handy & Harman ($/oz.) 5.03 4.70 4.78 4.65
Gold-London Final ($/oz.) 363 314 354 306
Lead-LME Cash ($/pound) 0.232 0.195 0.216 0.208
Zinc-LME Cash ($/pound) 0.372 0.347 0.360 0.354
(1) Includes by-product credits from gold, lead and zinc production and are
calculated pursuant to standards of the Gold Institute.
(2) 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 provide an indicator of
profitability and efficiency 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 Reconciliation of Total Cash Costs to Costs of
Sales and Other Direct Production Costs.
-27-
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
San Sebastian
For the third quarter and first nine months of 2003, the San Sebastian
mine, located in the State of Durango, Mexico, reported sales of $8.4 million
and $25.2 million, respectively, compared to $5.5 million and $17.6 million,
respectively, during the same periods in 2002. These increases are primarily due
to increased production resulting from significantly higher silver and gold ore
grades, combined with higher average metals prices. San Sebastian commenced
mining operations in May 2001 and reached full capacity during the second
quarter of 2002.
The grade of silver ore at San Sebastian improved to approximately 29
ounces per ton during the third quarter of 2003, compared to 24 ounces per ton
during the third quarter of 2002, and to approximately 30 ounces per ton during
the first nine months of 2003, compared to approximately 24 ounces per ton
during the first nine months of 2002. San Sebastian had an average grade of 0.32
ounce of gold per ton during the third quarter of 2003 and an average grade of
0.34 ounce of gold per ton during the first nine months of 2003, a 6% and 16%
increase, respectively, over the same periods in 2002. For the three and nine
months ended September 30, 2003, silver production increased 34% and 27%,
respectively, over the same periods a year ago, while gold production increased
19% and 17%, respectively, in the 2003 periods from the third quarter and first
nine months of 2002.
The total cash cost at San Sebastian decreased by approximately 120%
and 103%, respectively, from the third quarter and first nine months of 2002, to
a negative $0.22 and negative $0.04 per silver ounce during the third quarter
and first nine months of 2003, primarily due to significant by-product credits
from increased gold production and a higher average gold price. Silver and gold
production at San Sebastian is estimated to be approximately 3.9 million ounces
and 46,000 ounces, respectively, for the year ended December 31, 2003.
Greens Creek
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 $8.3 million and $21.6 million, respectively, for our
account during the third quarter and first nine months of 2003, as compared to
$6.5 million and $18.2 million, respectively, during the same periods in 2002,
primarily due to higher average metals prices. During the third quarter of 2003,
Greens Creek reported a 10% increase in tons milled, a 9% increase in the silver
ore grade and an increase of 26% in silver production, partially offset by lower
zinc production, when compared to the third quarter of 2002. Silver production
during the first nine months of 2003 was slightly higher than its comparable
period in 2002 (4%), while gold, lead and zinc production was lower (3%, 1% and
5%, respectively).
The total cash costs per silver ounce decreased by approximately 41%
and 29%, respectively, from $1.93 and $1.76 per silver ounce during the third
quarter and first nine months of
-28-
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
2002, to $1.14 and $1.25 per silver ounce, respectively, during the third
quarter and first nine months of 2003. The decreases in costs per ounce are
primarily due to the increased by-product credits primarily from a higher
average gold price during 2003. For the year ending December 31, 2003,
production is forecasted to total approximately 3.4 million silver ounces,
29,000 ounces of gold and 7,500 and 22,500 tons of lead and zinc, respectively.
Lucky Friday
The Lucky Friday mine, located in northern Idaho and a producing mine
for Hecla since 1958, reported sales of approximately $2.8 million and $8.9
million, respectively, during the third quarter and first nine months of 2003,
compared to $2.0 million and $6.9 million, respectively, during the same periods
in 2002. The 40% increase in sales during the third quarter of 2003 over the
third quarter in 2002 is due primarily to an increase in metals prices and a 32%
increase in the silver ore grade resulting in a 15% increase in silver
production, offset slightly by a 13% decrease in tons milled. During the first
nine months of 2003, Lucky Friday reported approximately the same tons milled,
or 116,000 tons, a 19% increase in the silver ore grade, resulting in a 21%
increase in silver ounces produced over the first nine months of 2002. Also
contributing to the increase in sales during both comparable periods is an
increase in lead and zinc production, as well as increases in their prices.
Due primarily to the increase in silver production, the total cash
costs per silver ounce for the third quarter and first nine months of 2003
decreased to $5.20 and $4.75, respectively, compared to $5.96 and $5.08 per
silver ounce during the same periods in 2002. For the year ending December 31,
2003, production is forecasted to total approximately 2.0 million silver ounces
and 12,000 tons of lead.
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
silver operations in total, as well as for each individual operating property,
for the three months and nine months ended September 30, 2003 and 2002 (in
thousands, except costs per ounce). We believe cash costs per ounce of silver or
gold provide an indicator of profitability and efficiency 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. 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
gold and silver segments is presented in our Consolidated Statement of
Operations and Comprehensive Loss.
-29-
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
TOTAL SILVER SEGMENT
Total cash costs $ 3,515 $ 5,068 $ 11,371 $ 14,901
Divided by silver ounces produced 2,643 2,079 7,486 6,423
-------- -------- -------- --------
Total cash cost per ounce produced $ 1.33 $ 2.44 $ 1.52 $ 2.32
======== ======== ======== ========
Reconciliation to GAAP:
Total cash costs 3,515 5,068 11,371 14,901
Treatment & freight costs (4,498) (4,114) (13,753) (13,403)
By-product credits 11,452 8,949 33,674 27,803
Change in product inventory (1,640) 419 (1,012) (200)
Reclamation and other costs 143 271 415 838
-------- -------- -------- --------
Cost of sales and other direct
production costs (GAAP) $ 8,972 $ 10,593 $ 30,695 $ 29,939
======== ======== ======== ========
SAN SEBASTIAN
Total cash costs $ (247) $ 914 $ (112) $ 3,184
Divided by silver ounces produced 1,104 823 3,135 2,472
-------- -------- -------- --------
Total cash cost per ounce produced $ (0.22) $ 1.11 $ (0.04) $ 1.29
======== ======== ======== ========
Reconciliation to GAAP:
Total cash costs (247) 914 (112) 3,184
Treatment & freight costs (578) (560) (1,594) (1,743)
By-product credits 4,347 3,177 12,383 9,182
Change in product inventory (1,067) (641) (1,292) (621)
Reclamation and other costs 75 89 216 308
-------- -------- -------- --------
Cost of sales and other direct
production costs (GAAP) $ 2,530 $ 2,979 $ 9,601 $ 10,310
======== ======== ======== ========
-30-
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
GREENS CREEK
Total cash costs $ 1,196 $ 1,596 $ 3,264 $ 4,426
Divided by silver ounces produced 1,046 827 2,620 2,515
-------- -------- -------- --------
Total cash cost per ounce produced $ 1.14 $ 1.93 $ 1.25 $ 1.76
======== ======== ======== ========
Reconciliation to GAAP:
Total cash costs 1,196 1,596 3,264 4,426
Treatment & freight costs (2,940) (2,852) (9,008) (9,261)
By-product credits 5,771 4,970 17,458 15,975
Change in product inventory (406) 1,083 383 326
Reclamation and other costs 57 155 170 455
-------- -------- -------- --------
Cost of sales and other direct
production costs (GAAP) $ 3,678 $ 4,952 $ 12,267 $ 11,921
======== ======== ======== ========
LUCKY FRIDAY
Total cash costs $ 2,566 $ 2,558 $ 8,219 $ 7,291
Divided by silver ounces produced 493 429 1,731 1,436
-------- -------- -------- --------
Total cash cost per ounce produced $ 5.20 $ 5.96 $ 4.75 $ 5.08
======== ======== ======== ========
Reconciliation to GAAP:
Total cash costs 2,566 2,558 8,219 7,291
Treatment & freight costs (980) (702) (3,151) (2,399)
By-product credits 1,334 802 3,833 2,646
Change in product inventory (167) (23) (103) 95
Reclamation and other costs 11 27 29 75
-------- -------- -------- --------
Cost of sales and other direct
production costs (GAAP) $ 2,764 $ 2,662 $ 8,827 $ 7,708
======== ======== ======== ========
Gold Operations and Production
We currently operate 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 our sole gold operating unit.
Sales of product decreased by $5.2 million (38%) and $8.5 million
(23%), respectively, during the third quarter and first nine months of 2003,
compared with the same periods in 2002,
-31-
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
primarily due to decreases in gold ounces produced (42% and 29%, respectively)
due to lower grade ore, offset by increases in the realized price of gold, which
increased 10% during both the quarter and nine-month comparative periods. Our
realized gold price per ounce for the third quarter and nine months of 2003 was
$337 and $332, respectively, compared to the London Final gold price per ounce
of $363 and $354, respectively. Our realized gold prices were less than the
London Final prices due to our forward gold sales commitments at $288 per ounce.
For the three and nine months ended September 30, 2003, income from operations
decreased $3.7 million and $6.3 million, respectively, or 71% and 50%, compared
to the three and nine months ended September 30, 2002, primarily due to the
above-mentioned decrease in sales, as well as an increase in exploration
expenditures.
During the third quarter and first nine months of 2003, La Camorra
produced approximately 28,000 and 95,000 gold ounces, respectively, at a total
cash cost of $161 and $145 per ounce, compared to approximately 48,000 and
134,000 gold ounces, respectively, at total cash costs of $121 and $130 per
ounce during the same periods in 2002. La Camorra had a record-breaking year in
2002, producing gold at an average grade of 1.03 ounces of gold per ton during
the third quarter and 0.93 ounce of gold per ton in the first nine months. In
2003, La Camorra had an average grade of 0.58 ounce of gold per ton during the
third quarter, with an average grade of 0.69 ounce of gold per ton for the first
nine months. For the year ended December 31, 2002, La Camorra produced over
167,000 ounces of gold. Gold production is projected to reach approximately
122,000 to 124,000 ounces for the year ending December 31, 2003.
The lower ore grade during the third quarter of 2003 at La Camorra
resulted from development of fewer high grade tons on the Betzy vein than the
reserve model estimated. Development of the Betzy vein on the recently started
minus 440 meter level, and drilling between this elevation and minus 550 meters,
leads management to be encouraged regarding the development of higher grade ore
on deeper levels. These factors, along with other information obtained from the
2003 drilling programs and mining experience, will be evaluated during the
fourth quarter in order to calculate ore reserves at the end of the year.
Cost of sales and other direct production costs as a percentage of
sales from products increased to 43.8% during the third quarter of 2003, from
35.8% during the third quarter of 2002, and increased to 40.4% during the first
nine months of 2003, from 38.9% during the same period in 2002. We have been
able to maintain low costs during 2003 as compared to 2002 despite the lower
production levels, in part due to the weakening of the Venezuelan currency, the
bolivar.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
As described below, the Venezuelan government has fixed the exchange rate of the
bolivar to the U.S. dollar at 1,600 to 1; however, markets outside of Venezuela
reflect a devaluation of the Venezuelan currency at approximately 30%, which has
benefited our cost structure despite the lower production levels during the
first nine months of 2003.
Beginning late in the fourth quarter of 2002, Venezuela experienced a
general strike that ended in February 2003. The result of the strike included
shortages of oil and gas supplies in Venezuela and a severe economic downturn.
We continued to operate the La Camorra mine during the general strike and were
able to obtain adequate supplies, including oil and gas for our operations.
Although we believe we will be able to manage and operate our La Camorra mine
and related exploration projects successfully, due to the continued political,
regulatory and economic uncertainty and its ramifications on exchange controls,
labor stoppages and supplies of oil, gas and other products, there can be no
assurance we will be able to operate without interruptions to our operations.
Following the general strike in Venezuela, the Venezuelan government
announced its intent to implement exchange controls on foreign currency
transactions. Rules and regulations regarding the implementation of exchange
controls in Venezuela have been published and periodically revised/updated.
Since February 2003, the Venezuelan government-fixed exchange rate has been
1,600 bolivares to one U.S. dollar, which is the exchange rate we have utilized
to translate the financial statements of our Venezuelan subsidiary included in
our consolidated financial statements. Because of the exchange controls in place
and their impact on local suppliers, some supplies, equipment parts and other
items once purchased in Venezuela have been ordered outside the country due to
lack of local inventories. Increased lead times in receiving orders from outside
Venezuela has created an increased supply inventory at September 30, 2003,
compared to December 31, 2002. Although management is actively monitoring
exchange controls in Venezuela, there can be no assurance that the exchange
controls will not further affect our operations in Venezuela in the future.
Reconciliation of Total Cash Costs (non-GAAP) to Cost of Sales and Other Direct
Production Costs (GAAP)
The following table presents a reconciliation between non-GAAP total
cash costs to cost of sales and other direct production costs (GAAP) for the La
Camorra mine for the three months and nine months ended September 30, 2003 and
2002 (in thousands, except costs per ounce). We believe cash costs per ounce of
silver or gold provide an indicator of profitability and efficiency 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. The sum of the cost of sales and other direct production
costs for our gold and silver segments is presented in our Consolidated
Statement of Operations and Comprehensive Loss.
-33-
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Total cash costs $ 4,496 $ 5,802 $ 13,736 $ 17,359
Divided by gold ounces produced 28 48 95 134
-------- -------- -------- --------
Total cash cost per ounce produced $ 161 $ 121 $ 145 $ 130
======== ======== ======== ========
Reconciliation to GAAP:
Total cash costs 4,496 5,802 13,736 17,359
Treatment & freight costs (370) (512) (1,175) (1,404)
Change in product inventory (586) (505) (1,428) (2,007)
Reclamation and other costs (8) 112 53 316
-------- -------- -------- --------
Cost of sales and other direct
production costs (GAAP) $ 3,532 $ 4,897 $ 11,186 $ 14,264
======== ======== ======== ========
Corporate Matters
The provision for closed operations and environmental matters increased
$22.8 million and $22.7 million, respectively, during the third quarter and
first nine months of 2003, compared to the same periods in 2002, principally due
to a provision for future reclamation and other closure costs during the third
quarter of 2003 ($23.1 million), primarily for future anticipated expenditures
in Idaho's Coeur d'Alene Basin ($16.0 million) and for the Grouse Creek mine
cleanup in central Idaho ($6.8 million). For additional information, see "Item 2
- - Results of Operations."
Interest and other income increased $5.5 million, from $1.5 million to
$7.0 million, during the first nine months of 2003, compared to the same period
in 2002, primarily due to a cash settlement from Zemex Corporation during the
first quarter of 2003 for its subsidiary's failure to close on the sale of the
K-T Group in 2001 ($4.0 million), interest income received during the second and
third quarters of 2003 from the Mexican government for interest on unpaid
value-added tax receivables ($1.3 million), as well as interest income generated
from an increased cash balance due to the public offering in January 2003 ($0.8
million). Lower mark to market adjustments on our outstanding gold lease rate
swap offset the positive variance described above during the first nine months
of 2003 ($0.5 million). Interest and other income increased $1.1 million during
the third quarter of 2003 when compared to the third quarter of 2002 primarily
due to the receipt of interest income on unpaid value-added tax receivables from
the Mexican government ($1.0 million) and interest income generated from an
increased cash balance ($0.3 million).
Exploration expense increased $1.3 million and $5.3 million,
respectively, during the third quarter and first nine months of 2003, compared
to the same periods in 2002, primarily due to
-34-
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
increased exploration expenditures in Mexico on the Don Sergio vein ($0.4
million and $1.2 million, respectively) and other areas at or near the San
Sebastian mine ($0.3 million and $0.9 million, respectively); and in Venezuela
on the Block B concessions ($0.7 million and $1.6 million, respectively) and the
Canaima resource ($48,000 and $0.6 million, respectively), offset by lower
expenditures at or near the La Camorra mine ($0.5 million and $0.7 million,
respectively). Exploration at the Hollister Development Block in Nevada during
the third quarters of 2003 and 2002 was approximately the same, or $0.1 million,
during both periods, however for the first nine months of 2003, exploration
increased $1.0 million compared to the same period in 2002. Also included in the
increased exploration expenditures during the first nine months of 2003 are
increased project evaluation costs ($0.1 million and $0.5 million, respectively)
and increased exploration expenditures at the Lucky Friday mine ($0.2 million
and $0.2 million, respectively).
We estimate that exploration expenditures for the remainder of 2003
will be in the range of $2.0 million to $3.0 million, principally for continued
drilling in Venezuela and Mexico and permitting activities at the Hollister
Development Block in Nevada. In Venezuela, exploration will focus on the Main
and Betzy veins at La Camorra, at Mina Isidora located on the Block B
concessions and at the Canaima property, located approximately five miles from
La Camorra. Block B and Canaima are both within trucking distance of the La
Camorra mill. In October 2003, we completed an acquisition of a pre-existing
lease within the Block B area for $750,000 in cash plus the assumption of $1.3
million in debt, which we paid. We are currently evaluating whether this new
property, which includes an incline shaft and eliminates the need for a barrier
pillar, will provide earlier access to the adjacent Mina Isidora orebody. We
also continue to evaluate the development of an underground ramp to access the
Mina Isidora orebody and a decision to commence development could be made by the
end of 2003. We have also previously announced plans to commence construction of
a production shaft to access the lower areas of the Main and Betzy veins at La
Camorra. In Mexico, exploration will focus on the Don Sergio vein, which has
completed ramp preparation, surface facilities and an access road, and other
targets surrounding the San Sebastian mine. First access to the Don Sergio vein
has been completed and we anticipate commencing commercial production during the
fourth quarter of 2003. Permitting continues at the Hollister Development Block
and, although difficult to predict, we anticipate the approval of all permits
necessary to begin the underground exploration ramp sometime during the first
quarter of 2004.
Provision for income taxes increased $0.3 million and $1.8 million,
respectively, during the third quarter and first nine months of 2003, compared
to the same periods in 2002, primarily a result of utilization of deferred tax
assets in Mexico and accrued Mexican withholding tax payable on interest
expense. For further information see Note 3 of Notes to Consolidated Financial
Statements.
Miscellaneous expense increased $1.4 million during the first nine
months of 2003, compared to the same period in 2002, primarily due to a foreign
exchange gain in 2002 due to the devaluation of the Venezuelan bolivar ($0.8
million), a foreign exchange variance in Mexico ($0.6 million) and increased
corporate insurance expense ($0.3 million), offset by accruals for tax offset
bonuses on employee stock option plans ($0.2 million). During the third quarter
of 2003, miscellaneous expense increased $0.1 million over the same period in
2002.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
General and administrative expenses increased $0.3 million and $1.0
million, respectively, during the third quarter and first nine months of 2003,
compared to the same periods in 2002, primarily due to accruals for employee
incentive compensation during 2003.
Interest expense decreased $0.2 million and $0.5 million, respectively,
during the third quarter and first nine months of 2003, compared to the same
periods in 2002, principally due to lower average borrowings and lower interest
rates on debt.
FINANCIAL CONDITION AND LIQUIDITY
Our financial condition has improved considerably since the beginning
of 2003 due to operating performance and the completion of a public offering,
which resulted in net cash proceeds of approximately $91.2 million. At September
30, 2003, we held cash and cash equivalents of $102.8 million (compared to $19.5
million at December 31, 2002) and $12.3 million in securities due within the
next twelve months, with a current ratio of 4.5 to 1. For additional information
regarding the public offering, see Note 10 of Notes to Consolidated Financial
Statements.
We believe cash requirements over the next twelve months will be funded
through a combination of current cash, future cash flows from operations and/or
future 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 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 future contractual obligations and
commitments primarily with regards to payment of debt, certain capital
expenditures and lease arrangements as of September 30, 2003 (in thousands). For
additional information on outstanding debt, see Note 6 of Notes to Consolidated
Financial Statements.
Payments Due By Period
--------------------------------------------------------------------
Contractual obligations 2003 2004 2005 2006 2007 Total
------- -------- ------- ------- ----- --------
Debt $ 2,708 $ 2,332 $ 1,366 $ 959 $ -- $ 7,365
Capital expenditure commitments(1) 4,461 -- -- -- -- 4,461
Earn-in agreement 420 8,094 85 -- -- 8,599
Operating lease commitments 157 553 526 501 122 1,859
------- -------- ------- ------- ----- --------
Total contractual cash obligations $ 7,746 $ 10,979 $ 1,977 $ 1,460 $ 122 $ 22,284
======= ======== ======= ======= ===== ========
(1) As of September 30, 2003, we were committed to approximately $0.6
million for the commencement of a project to sink a shaft at the
La Camorra mine. On November 1, 2003, we signed a contract committing
ourselves further by an additional $5.4 million, also in regards to
the shaft at La Camorra.
-36-
Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
We maintain reserves for costs associated with mine closure,
reclamation of land and other environmental matters. At September 30, 2003, our
reserves for these matters totaled $70.3 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 reserves over the next
thirty years. During 2003, expenditures for environmental remediation and
reclamation are estimated to be in the range of $6.0 million and $6.5 million.
For additional information relating to our environmental obligations, see Notes
5 and 12 of Notes to Consolidated Financial Statements.
Operating Activities
Operating activities provided approximately $17.6 million in cash
during the first nine months of 2003, primarily from cash provided by La
Camorra, San Sebastian and Greens Creek. Net cash provided by operating
activities was negatively affected by increases in accounts and notes receivable
($5.5 million), cash required for reclamation activities and other noncurrent
liabilities ($4.4 million), increases in inventories ($3.6 million) and changes
in other current and noncurrent assets ($1.4 million), offset by an increase in
accrued taxes payable ($1.2 million) and increases in accounts payable and other
accrued expenses ($0.4 million). Positive noncash elements included provisions
for reclamation and closure costs ($23.5 million), which includes the third
quarter accrual of $23.1 million related to the Coeur d'Alene Basin and Grouse
Greek mine cleanup, charges for depreciation, depletion and amortization ($15.6
million) and a change in deferred income taxes ($1.5 million), offset by a gain
on the disposition of fixed assets ($0.3 million) and a cumulative effect of
change in accounting principle upon adoption of SFAS No. 143 ($1.1 million).
Beginning late in the fourth quarter of 2002, Venezuela experienced a
general strike that ended in February 2003. The result of the strike included
shortages of oil and gas supplies in Venezuela and a severe economic downturn.
We continued to operate the La Camorra mine during the general strike and were
able to obtain adequate supplies, including oil and gas for our operations.
Although we believe we will be able to manage and operate our La Camorra mine
and related exploration projects successfully, due to the continued political,
regulatory and economic uncertainty and its ramifications on exchange controls,
labor stoppages and supplies of oil, gas and other products, there can be no
assurance we will be able to operate without interruptions to our operations.
Following the general strike in Venezuela, the Venezuelan government
announced its intent to implement exchange controls on foreign currency
transactions. Rules and regulations regarding the implementation of exchange
controls in Venezuela have been published and periodically revised/updated.
Since February 2003, the Venezuelan government-fixed exchange rate has been
1,600 bolivares to one U.S. dollar, which is the exchange rate we have utilized
to translate the financial statements of our Venezuelan subsidiary included in
our consolidated
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
financial statements. Because of the exchange controls in place and their impact
on local suppliers, some supplies, equipment parts and other items once
purchased in Venezuela have been ordered outside the country due to lack of
local inventories. Increased lead times in receiving orders from outside
Venezuela has created an increased supply inventory at September 30, 2003,
compared to December 31, 2002. Although management is actively monitoring
exchange controls in Venezuela, there can be no assurance that the exchange
controls will not further affect our operations in Venezuela in the future.
Investing Activities
Investing activities required $24.4 million in cash during the first
nine months of 2003 primarily for additions to properties, plants and equipment
of ($12.6 million) and the purchase of short term investments ($12.3 million),
offset by proceeds received on the sale of fixed assets of $0.5 million. Capital
expenditures during 2003 consist of additions at the La Camorra mine ($6.5
million), the San Sebastian mine ($3.6 million), the Greens Creek mine ($0.9
million), the commencement of a sampling plant in Venezuela ($0.8 million) and
capital additions at the Hollister Development Block ($0.7 million).
Commencing in the fourth quarter of 2003, the Greens Creek joint
venture will establish a $26.6 million restricted trust for reclamation funding
in the future. The $26.6 million will be funded from operating cash flows over
the next twelve months, with approximately $14.0 million anticipated to be
funded during the fourth quarter. Our 29.73% portion of the $26.6 million will
be approximately $7.9 million, including $4.2 million anticipated to be funded
in the fourth quarter of 2003, which will be recorded as a noncurrent,
restricted investment on our consolidated balance sheet.
In 2003, we estimate our capital expenditures will be in the range of
$19.0 to $24.0 million, which represents sustaining capital at our existing
operations, equipment acquisitions at the San Sebastian mine in Mexico and at
the Hollister Development Block in Nevada, development expenditures at the Don
Sergio vein in Mexico and a custom milling project at the La Camorra mine in
Venezuela. The estimate also includes commencement of a project to sink a shaft
at the La Camorra mine and for equipment and potential development at Mina
Isidora, located on the Block B concessions in Venezuela. Also included in the
estimate of capital expenditures is the October 2003 acquisition of a
pre-existing lease within the Block B area for $750,000 in cash plus the
assumption of $1.3 million in debt, which we paid. There can be no assurance
that our estimated capital expenditures for 2003 will be in the range we have
projected.
Financing Activities
During the first nine months of 2003, financing activities generated
approximately $90.0 million in cash due to the public offering in January for
$91.2 million, proceeds of $3.4 million
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
for common stock issued upon exercise of employee stock options and short-term
borrowings on a line of credit for national currency in Venezuela ($1.4
million), offset slightly by the repayment of project financing debt ($5.9
million), including the line of credit in Venezuela.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles (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. We have identified certain accounting
policies that are most important to the portrayal of our current financial
condition and results of operations.
Revenue Recognition
Sales 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 assay
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 was 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.
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, 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 a significant portion of our revenues 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 price for these metals falls below our total
production costs, we will experience losses on such sales.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Proven and Probable Ore Reserves
On a periodic basis, management reviews the reserves that reflect
estimates of the quantities and grades of ore at our mines which management
believes can be recovered and sold at prices in excess of the total cost
associated with extraction and processing the ore. Management's calculations of
Proven and Probable ore reserves are based on in-house engineering and
geological estimates using current operating costs, metals prices and demand for
our products. Periodically, management obtains external determinations of
reserves.
Reserve estimates will change as existing reserves are depleted through
production, as well as changes in estimates caused by changing production cost
and/or metals prices. 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, as well as increased production
or capital costs 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
Depreciation is based on the estimated useful lives of the assets and
is computed using straight-line and unit-of-production methods. Depletion is
computed using the unit-of-production method. The unit-of-production method is
based on Proven and Probable ore reserves. As discussed above, our estimates of
Proven and Probable ore reserves may change, possibly in the near term,
resulting in changes to depreciation, depletion, amortization and reclamation
accrual rates in future reporting periods.
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
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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
On January 1, 2003, we adopted SFAS No. 143 "Accounting for Asset
Retirement Obligations," which requires that the fair value of a liability for
an environmental remediation obligation, or an asset retirement obligation
(ARO), at our operating properties be recognized in the period in which it is
incurred. Reclamation costs are 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 present value
estimate underlying the obligation.
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 operation and environmental matters.
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
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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 $70.3
million at September 30, 2003. We anticipate that expenditures relating to these
reserves will be made over the next thirty years. 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.
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. The
statement was required to be adopted by January 1, 2003. For information
regarding the impact to our consolidated financial statements upon adoption, see
Note 11 of Notes to 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). SFAS No. 145 updates, clarifies and simplifies
existing accounting pronouncements, by rescinding SFAS No. 4, which required all
gains and losses from extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. 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 provisions of SFAS No. 145 that amend SFAS No. 13 were effective for
transactions occurring after May 15, 2002, with all other provisions of SFAS No.
145 being required to be adopted by us in January 2003. The adoption of SFAS No.
145 did not have a material impact on our 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
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Incurred in a Restructuring)." SFAS No. 146 is to be applied prospectively to
exit or disposal activities initiated after December 31, 2002. The adoption of
SFAS No. 146 did not have a material impact on our consolidated financial
statements.
In November 2002, the FASB issued FASB Interpretation No. 45,
Guarantor's Accounting for Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34,
Disclosure of Indirect Guarantees of Indebtedness of Others ("FIN 45"). FIN 45
clarifies the requirements for a guarantor's accounting for and disclosure of
certain guarantees issued and outstanding. It also requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. This interpretation also
incorporates without reconsideration the guidance in FASB Interpretation No. 34,
which is being superseded. The adoption of FIN 45 did not have a material effect
on our consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148 "Accounting for
Stock-Based Compensation, Transition and Disclosure, an amendment of FASB
Statement No. 123." SFAS No. 148 provides alternative methods of transition for
an entity that voluntarily changes to the fair value based method of accounting
for stock-based employee compensation. It also amends the disclosure provisions
of SFAS No. 123 to require prominent disclosure about the effects of reported
net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. Finally, this statement amends APB Opinion
No. 28, "Interim Financial Reporting," to require disclosure about those effects
in interim financial information. The amendments to SFAS No. 123, which provides
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation is
effective for financial statements for fiscal years ending after December 15,
2002. The amendment to SFAS No. 123 relating to disclosures and the amendment to
Opinion 28 is effective for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. We have
adopted the disclosure-only provisions of SFAS No. 123 and do not intend to
adopt the fair value accounting provisions of SFAS No. 123. The adoption of SFAS
No. 148 did not have a material impact on our consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46)
"Consolidation of Variable Interest Entities, an interpretation 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
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
subordinated financial support from other parties. The adoption of FIN 46 did
not have a material effect on our consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133 "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 149 is effective for all contracts created or modified
after June 30, 2003. The adoption of this standard did not have a material
effect on our consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 establishes standards on the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. The
provisions of SFAS No. 150 are effective for financial instruments entered into
or modified after May 31, 2003, and to all other instruments that exist as of
the beginning of the first interim financial reporting period beginning after
June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on
our consolidated financial statements.
OTHER
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 September 30, 2003, we have
not declared or paid $8.6 million of preferred stock dividends. We are currently
not planning to reinstate the preferred stock dividend.
We filed a Registration Statement with the Securities and Exchange
Commission (SEC) covering 1,394,883 shares of our common stock held by the Hecla
Mining Company Retirement Plan and the Lucky Friday Pension Plan (the "benefit
plans") and 2.0 million shares of our common stock issuable upon exercise of a
warrant issued to Great Basin Gold Ltd. (Great Basin) pursuant to an Earn-in
Agreement concerning exploration, development and production in an area of Great
Basin's Hollister Development Block gold property, located on the Carlin Trend
in Nevada. The warrant to purchase our common stock is exercisable on or before
August 1, 2004 at $3.73 per share. The Registration Statement became effective
in January 2003. For additional information, see Note 10 of Notes to
Consolidated Financial Statements.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
For information on hedged positions and derivative instruments, see
Item 3 "Quantitative and Qualitative Disclosures About Market Risk."
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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, 2003, which are sensitive to changes in interest rates and
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 nonfinancial or nonquantifiable (See Part I, Item 1 - Risk Factors in
our 2002 Annual Report on Form 10-K).
Interest-Rate Risk Management
At September 30, 2003, our debt and short-term investments were subject
to changes in market interest rates and was sensitive to those changes. We
currently have no derivative instruments to offset the risk of interest rate
changes. We may choose to use derivative instruments in the future, such as
interest rate swaps, to manage the risk associated with interest rate changes.
The following table presents principal cash flows (in thousands) for
debt outstanding and short-term investments at September 30, 2003, 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.
Expected Maturity Date
----------------------------------------------------------- Fair
2003 2004 2005 2006 2007 Total Value
------- ------- ------- ------- ------- ------- -------
Subordinated debt $ 1,000 $ 1,000 -- -- -- $ 2,000 $ 2,000
Average interest rate 5.2% 5.7% -- -- --
Project financing debt $ 1,500 $ 500 -- -- -- $ 2,000 $ 2,000
Average interest rate 3.7% 4.2% -- -- --
Project financing debt $ 208 $ 832 $ 1,366 $ 959 -- $ 3,365 $ 3,365
Average interest rate 13% 13% 13% 13% --
Short-term investments $ 8 $12,250 -- -- -- $12,258 $12,206
Average interest rate 1.12% 1.32% -- -- --
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
Commodity-Price Risk Management
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. 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 following table provides information about our forward sales
contracts at September 30, 2003. 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 December 31, 2003, and
December 31, 2004.
Expected Maturity Date Estimated
----------------------- Fair
2003 2004 Value
-------- --------- ---------
Forward contracts:
Gold sales (ounces) 14,900 48,928
Future price (per ounce) $ 288 $ 288
Contract amount (in $000's) $ 4,295 $ 14,103 $ (6,305)
Estimated % of annual production
committed to contracts 30% 25%
In addition to the above contracts, we have a quarterly Gold Lease Rate
Swap at a fixed rate of 1.5% on 48,928 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. At September 30,
2003, the fair market value of the Gold Lease Rate Swap was approximately
$218,000, which represents the amount the counterparty would have to pay us if
the contract was terminated.
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Part I - Financial Information (Continued)
Hecla Mining Company and Subsidiaries
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, 2003, 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 have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
September 30, 2003.
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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 Consolidated Financial Statements.
Item 3. Defaults Upon Senior Securities
As of September 30, 2003, we have not declared or paid $8.6 million of
Series B Convertible Preferred stock dividends.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See the exhibit index to this Form 10-Q for the list of
exhibits.
(b) Reports on Form 8-K filed during the quarter ended September
30, 2003
Form 8-K dated September 3, 2003, announcing the Judge's
ruling in the first phase of the Coeur d'Alene Basin trial in
a news release.
Items 2, 4 and 5 of Part II are not applicable and are omitted from this report.
-49-
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 14, 2003 By /s/ Phillips S. Baker, Jr.
--------------------------------------------
Phillips S. Baker, Jr., President,
Chief Executive Officer and Director
Date: November 14, 2003 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.
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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.
Certain instruments defining the rights of holders of
long-term debt of the Registrant and its consolidated
subsidiaries, where the total amount of securities
authorized under any such instrument does not exceed 10%
of the Registrant's consolidated total assets, are not
filed herewith pursuant to Item 601(b)(ii)(A) of
Regulation S-K. The Registrant agrees to furnish a copy
of any such instrument to the Commission upon request.
10.2 Employment agreement dated November 6, 2001, between
Hecla Mining Company and Phillips S. Baker, Jr.
(Registrant has substantially identical 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 by herein by reference.
10.3(a) Form of Executive Deferral Plan Master Document, as
amended, effective November 13, 1993. Filed as exhibit
10.3(a) to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1998 (File No. 1-8491) and
incorporated herein by reference.
10.3(b) Form of Director Deferral Plan Master Plan Document
effective January 1, 1995. Filed as exhibit 10.3(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.
10.4(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.
10.4(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.
10.4(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.
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10.4(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.
10.5(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.
10.5(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.
10.5(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.
10.6 Form of Indemnification Agreement dated May 27, 1987,
between Hecla Mining Company and each of its Directors
and Officers. Filed as exhibit 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.
10.7 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.
10.8(a) Amended and Restated Golden Eagle Earn-in Agreement
between 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.
10.8(b) Golden Eagle Operating Agreement between 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.
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10.8(c) First Amendment to the Amended and Restated Golden Eagle
Earn-in Agreement effective September 5, 2002, by and
between 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.
10.10 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.
10.11 Credit Agreement dated as of June 25, 1999, among
Monarch Resources Investments Limited as Borrower,
Monarch Minera Suramericana, C.A. as an additional
obligor and Standard Bank of London Limited as
Collateral and Administrative Agent. Filed as exhibit
10.3 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999 (File No. 1-8491) and
incorporated herein by reference.
10.12 Subordinated Loan Agreement dated as of June 25, 1999,
among Hecla Mining Company as Borrower and Standard Bank
of London Limited as Initial Lender, Collateral and
Administrative Agent. Filed as exhibit 10.4 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 (File No. 1-8491) and
incorporated herein by reference.
10.13 Subordination Agreement dated as of June 25, 1999, among
NationsBank, N.A. as Senior Creditor, Standard Bank of
London Limited as Subordinated Creditor and Hecla Mining
Company. Filed as exhibit 10.5 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999
(File No. 1-8491) and incorporated herein by reference.
10.14 Subordinated Loan Agreement dated June 29, 2000, among
Hecla Mining Company as Borrower and Standard Bank of
London Limited as Lender. Filed as exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000 (File No. 1-8491) and
incorporated herein by reference.
10.15 Subordination Agreement dated June 29, 2000, among Hecla
Mining Company and Standard Bank of London Limited as
Senior Creditor and Subordinated Creditor. Filed as
exhibit 10.2 to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000 (File No.
1-8491) and incorporated herein by reference.
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10.16 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.
10.19 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.
10.21 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.
10.22 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.
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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* Filed herewith.
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