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, 2017

 

 

Commission file number

1-8491

 

HECLA MINING COMPANY

(Exact name of registrant as specified in its charter)

 

 

	Delaware		77-0664171
	(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
	(Address of principal executive offices)		(Zip Code)
208-769-4100
(Registrant's telephone number, including area code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes XX .    No       .

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes XX .    No___.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act (check one):

Large Accelerated Filer   XX.	Accelerated Filer     .
Non-Accelerated Filer      . (Do not check if a smaller reporting company)	Smaller Reporting Company     .
Emerging growth company     .

                                                                                     

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     .

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes      .    No XX.

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class		Shares Outstanding November 3, 2017
Common stock, par value $0.25 per share		399,018,708

 

 

Hecla Mining Company and Subsidiaries

 

Form 10-Q

 

For the Quarter Ended September 30, 2017

 

INDEX*

 

		Page
PART I - Financial Information
	Item 1 – Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets - September 30, 2017 and December 31, 2016	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss - Three Months Ended and Nine Months Ended September 30, 2017 and 2016	4
	Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2017 and 2016	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	30
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	59
	Item 4. Controls and Procedures	62
PART II - Other Information
	Item 1 – Legal Proceedings	62
	Item 1A – Risk Factors	62
	Item 4 – Mine Safety Disclosures	62
	Item 6 – Exhibits	62
	Signatures	63
	Exhibits	64
*Items 2, 3 and 5 of Part II are omitted as they are not applicable.

 

 

Part I - Financial Information

 

Item 1. Financial Statements

 

 

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except shares)

 

		September 30, 2017				December 31, 2016
ASSETS
Current assets:
Cash and cash equivalents		$	172,923			$	169,777
Investments			32,973				29,117
Accounts receivable:
Trade			6,982				20,082
Taxes			10,382				187
Other, net			9,031				9,780
Inventories:
Concentrates, doré, and stockpiled ore			38,064				25,944
Materials and supplies			24,663				24,079
Other current assets			16,317				12,125
Total current assets			311,335				291,091
Non-current investments			7,098				5,002
Non-current restricted cash and investments			1,076				2,200
Properties, plants, equipment and mineral interests, net			2,025,607				2,032,685
Non-current deferred income taxes			44,683				35,815
Other non-current assets and deferred charges			6,384				4,884
Total assets		$	2,396,183			$	2,371,677
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities		$	46,847			$	60,064
Accrued payroll and related benefits			29,085				36,515
Accrued taxes			5,081				9,061
Current portion of capital leases			5,852				5,653
Current portion of debt			—				470
Current portion of accrued reclamation and closure costs			6,514				5,653
Accrued interest			14,450				5,745
Other current liabilities			7,968				3,064
Total current liabilities			115,797				126,225
Capital leases			7,436				5,838
Accrued reclamation and closure costs			80,758				79,927
Long-term debt			501,917				500,979
Non-current deferred tax liability			122,723				122,855
Non-current pension liability			43,451				44,491
Other noncurrent liabilities			11,160				11,518
Total liabilities			883,242				891,833
Commitments and contingencies (Notes 2, 4, 7, 9, and 11)
SHAREHOLDERS’ EQUITY
Preferred stock, 5,000,000 shares authorized:
Series B preferred stock, $0.25 par value, 157,816 shares issued and outstanding, liquidation preference — $7,891			39				39
Common stock, $0.25 par value, authorized 750,000,000 shares; issued and outstanding 2017 — 399,018,708 shares and 2016 — 395,286,875 shares			100,886				99,806
Capital surplus			1,617,669				1,597,212
Accumulated deficit			(166,602	)			(167,437	)
Accumulated other comprehensive loss			(20,884	)			(34,602	)
Less treasury stock, at cost; 2017 — 4,529,450 and 2016 — 3,941,210 shares issued and held in treasury			(18,167	)			(15,174	)
Total shareholders’ equity			1,512,941				1,479,844
Total liabilities and shareholders’ equity		$	2,396,183			$	2,371,677

 

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

 

 

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)

(Dollars and shares in thousands, except for per-share amounts)

 

		Three Months Ended								Nine Months Ended
		September 30, 2017				September 30, 2016				September 30, 2017				September 30, 2016
Sales of products		$	140,839			$	179,393			$	417,662			$	481,712
Cost of sales and other direct production costs			68,358				90,529				224,537				249,162
Depreciation, depletion and amortization			28,844				30,179				83,365				84,592
Total cost of sales			97,202				120,708				307,902				333,754
Gross profit			43,637				58,685				109,760				147,958
Other operating expenses:
General and administrative			9,529				11,155				29,044				31,728
Exploration			7,255				3,859				17,622				10,171
Pre-development			1,757				550				4,061				1,475
Research and development			1,130				—				2,125				—
Other operating expense			134				962				1,615				2,535
Gain on disposition of properties, plants, equipment and mineral interests			(4,830	)			(8	)			(4,924	)			(319	)
Provision for closed operations and reclamation			2,940				2,162				5,044				4,779
Lucky Friday suspension-related costs			4,780				—				14,385				—
Acquisition costs			—				1,765				—				2,167
Total other operating expense			22,695				20,445				68,972				52,536
Income from operations			20,942				38,240				40,788				95,422
Other income (expense):
(Loss) gain on derivative contracts			(11,226	)			7				(16,548	)			—
Loss on disposition of investments			—				—				(167	)			—
Unrealized (loss) gain on investments			(124	)			49				(73	)			488
Foreign exchange (loss) gain			(4,764	)			2,375				(10,909	)			(7,713	)
Interest and other income			541				145				1,185				346
Interest expense, net of amount capitalized			(9,358	)			(5,574	)			(28,423	)			(16,655	)
Total other expense			(24,931	)			(2,998	)			(54,935	)			(23,534	)
(Loss) income before income taxes			(3,989	)			35,242				(14,147	)			71,888
Income tax benefit (provision)			5,401				(9,453	)			18,377				(22,603	)
Net income			1,412				25,789				4,230				49,285
Preferred stock dividends			(138	)			(138	)			(414	)			(414	)
Income applicable to common shareholders		$	1,274			$	25,651			$	3,816			$	48,871
Comprehensive income:
Net income		$	1,412			$	25,789			$	4,230			$	49,285
Reclassification of loss on disposition or impairment of marketable securities included in net income			—				—				167				1,000
Unrealized loss and amortization of prior service on pension plans			(16	)			—				—				—
Change in fair value of derivative contracts designated as hedge transactions			6,760				(1,602	)			12,068				(1,556	)
Unrealized holding gains on investments			892				987				1,483				2,245
Comprehensive income		$	9,048			$	25,174			$	17,948			$	50,974
Basic income per common share after preferred dividends		$	0.00			$	0.07			$	0.01			$	0.13
Diluted income per common share after preferred dividends		$	0.00			$	0.07			$	0.01			$	0.13
Weighted average number of common shares outstanding - basic			398,848				387,578				396,809				383,458
Weighted average number of common shares outstanding - diluted			401,258				389,918				400,176				386,318
Cash dividends declared per common share		$	0.0025			$	0.0025			$	0.0075			$	0.0075

 

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

 

 

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

		Nine Months Ended
		September 30, 2017				September 30, 2016
Operating activities:
Net income		$	4,230			$	49,285
Non-cash elements included in net income:
Depreciation, depletion and amortization			87,634				83,900
Loss on disposition of investments			167				—
Unrealized loss (gain) on investments			73				(488	)
Gain on disposition of properties, plants, equipment, and mineral interests			(4,924	)			(319	)
Provision for reclamation and closure costs			3,379				3,685
Stock compensation			4,943				4,814
Acquisition costs			—				1,048
Deferred income taxes			(24,280	)			10,330
Amortization of loan origination fees			1,415				1,397
Loss on derivative contracts			16,718				337
Foreign exchange loss			11,171				7,555
Other non-cash items, net			(1	)			5
Change in assets and liabilities, net of business acquisitions:
Accounts receivable			4,903				5,776
Inventories			(9,611	)			(44	)
Other current and non-current assets			(2,685	)			(539	)
Accounts payable and accrued liabilities			(7,759	)			2,042
Accrued payroll and related benefits			(913	)			8,621
Accrued taxes			(4,469	)			(2,894	)
Accrued reclamation and closure costs and other non-current liabilities			(5,876	)			(1,397	)
Cash provided by operating activities			74,115				173,114
Investing activities:
Additions to properties, plants, equipment and mineral interests			(70,390	)			(120,236	)
Acquisitions of other companies, net of cash acquired			—				(3,931	)
Proceeds from disposition of properties, plants, equipment and mineral interests			151				348
Insurance proceeds received for damaged property			5,628				—
Purchases of investments			(36,916	)			(32,847	)
Maturities of investments			31,169				7,240
Changes in restricted cash and investment balances			1,124				(3,900	)
Net cash used in investing activities			(69,234	)			(153,326	)
Financing activities:
Proceeds from sale of common stock, net of offering costs			9,610				8,121
Acquisition of treasury shares			(2,993	)			(4,363	)
Dividends paid to common shareholders			(2,978	)			(2,882	)
Dividends paid to preferred shareholders			(414	)			(414	)
Credit availability and debt issuance fees			(476	)			(107	)
Repayments of debt			(470	)			(1,807	)
Repayments of capital leases			(5,065	)			(6,328	)
Net cash used in financing activities			(2,786	)			(7,780	)
Effect of exchange rates on cash			1,051				627
Net increase in cash and cash equivalents			3,146				12,635
Cash and cash equivalents at beginning of period			169,777				155,209
Cash and cash equivalents at end of period		$	172,923			$	167,844
Significant non-cash investing and financing activities:
Addition of capital lease obligations		$	6,439			$	2,297
Common stock issued for the acquisition of other companies		$	—			$	48,109
Payment of accrued compensation in restricted stock units		$	4,240			$	5,511

 

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

 

 

Note 1.    Basis of Preparation of Financial Statements

 

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements and notes to the unaudited interim condensed consolidated financial statements contain all adjustments, consisting of normal recurring items and items which are nonrecurring, necessary to present fairly, in all material respects, the financial position of Hecla Mining Company and its consolidated subsidiaries (except as the context otherwise requires, “we” or “our” or “us”).  These unaudited interim condensed 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, 2016, as it may be amended from time to time.

 

The results of operations for the periods presented may not be indicative of those which may be expected for a full year.  The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC").  Certain information and footnote disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures are adequate for the information not to be misleading.

 

Certain condensed consolidated financial statement amounts for the prior period have been reclassified to conform to the current period presentation. These reclassifications had no effect on the net income, comprehensive income, or accumulated deficit as previously reported.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting period, and the disclosures of contingent liabilities.  Accordingly, ultimate results could differ materially from those estimates.     

 

On September 13, 2016, we completed the acquisition of Mines Management, Inc. ("Mines Management"), giving us ownership of the Montanore project in Northwest Montana. The unaudited interim condensed consolidated financial statements included herein reflect our ownership of the assets previously held by Mines Management as of the September 13, 2016 acquisition date.

 

Note 2.    Investments

 

Investments

 

Our current investments, which are classified as "available for sale" and consist of bonds having maturities of greater than 90 days and less than 365 days, had a fair value and cost basis of $33.0 million and $29.1 million at September 30, 2017 and December 31, 2016, respectively. During the first nine months of 2017, we had purchases of such investments of $35.3 million and maturities of $31.2 million. Our current investments at September 30, 2017 and December 31, 2016 consisted of the following (in thousands):

 

 

		September 30, 2017												December 31, 2016
		Amortized cost				Unrealized loss				Fair value				Amortized cost				Unrealized loss				Fair value
Corporate bonds		$	32,987			$	(14	)		$	32,973			$	22,100			$	(46	)		$	22,054
Municipal bonds			—				—				—				3,727				(1	)			3,726
Agency bonds			—				—								3,339				(2	)			3,337
Total		$	32,987			$	(14	)		$	32,973			$	29,166			$	(49	)		$	29,117

 

 

At September 30, 2017 and December 31, 2016, the fair value of our non-current investments was $7.1 million and $5.0 million, respectively.  Our non-current investments consist of marketable equity securities which are carried at fair value, and are primarily classified as “available-for-sale.” The cost basis of our non-current investments was approximately $5.7 million and $4.0 million at September 30, 2017 and December 31, 2016, respectively. In the first nine months of 2017 and 2016, we acquired marketable equity securities having a cost basis of $1.6 million and $0.9 million, respectively. During the first quarter of 2016, we recognized an impairment charge against current earnings of $1.0 million, as we determined the impairment to be other-than-temporary.

 

 

Note 3.   Income Taxes

 

Major components of our income tax (benefit) provision for the three and nine months ended September 30, 2017 and 2016 are as follows (in thousands):

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2017				2016				2017				2016
Current:
Domestic		$	—			$	4,123			$	(12,797	)		$	4,122
Foreign			(3,959	)			5,773				17,491				8,416
Total current income tax (benefit) provision			(3,959	)			9,896				4,694				12,538
Deferred:
Domestic			1,980				(5,723	)			(13,958	)			3,642
Foreign			(3,422	)			5,280				(9,113	)			6,423
Total deferred income tax (benefit) provision			(1,442	)			(443	)			(23,071	)			10,065
Total income tax (benefit) provision		$	(5,401	)		$	9,453			$	(18,377	)		$	22,603

 

As of September 30, 2017, we have a net deferred tax asset in the U.S. of $44.7 million and a net deferred tax liability in Canada of $122.7 million, for a consolidated worldwide net deferred tax liability of $78.0 million. Our ability to utilize our deferred tax assets depends on future taxable income generated from operations. In the first quarter of 2017, we received consent from the Internal Revenue Service to permit us to take a different income tax position relating to the timing of deductions for the #4 Shaft development costs at Lucky Friday. This tax accounting method change substantially revised the timing of deductions for these costs for regular tax and Alternative Minimum Tax ("AMT") relative to our projected life of mine and projected taxable income. These timing changes caused us to revise our assessment of the ability to generate sufficient future taxable income to realize our deferred tax assets, resulting in a valuation allowance release of approximately $15 million. At September 30, 2017 and December 31, 2016, the balances of the valuation allowances on our deferred tax assets were $72 million and $100 million, respectively, primarily for net operating losses and tax credit carryforwards. The amount of the deferred tax asset considered recoverable, however, could be reduced in the near term if estimates of future taxable income are reduced.

 

The current income tax provisions for the three and nine months ended September 30, 2017 and 2016 vary from the amounts that would have resulted from applying the statutory income tax rate to pre-tax income due primarily to the impact of the change in accounting method treatment of the #4 Shaft development costs described above, the impact of taxation in foreign jurisdictions, and the Company's status as an indefinite AMT taxpayer.

 

We have historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate ("AETR") for the full fiscal year to “ordinary” pretax income or loss (excluding unusual or infrequently occurring discrete items) for the reporting period. We have determined that since small changes in estimated annual “ordinary” pre-tax income would result in significant changes in the estimated AETR, the AETR method would not provide a reliable estimate for the fiscal three- and nine-month periods ended September 30, 2017. Therefore, we have used a discrete effective tax rate method to calculate taxes for the fiscal three- and nine-month periods ended September 30, 2017.

 

 

Note 4.    Commitments, Contingencies and Obligations

 

General

 

We follow GAAP guidance in determining our accruals and disclosures with respect to loss contingencies, and evaluate such accruals and contingencies for each reporting period. Accordingly, estimated losses from loss contingencies are accrued by a charge to income when information available prior to issuance of the financial statements indicates that it is probable that a liability could be incurred and the amount of the loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred. If a loss contingency is not probable or reasonably estimable, disclosure of the loss contingency is made in the financial statements when it is at least reasonably possible that a material loss could be incurred.

 

Rio Grande Silver Guaranty

 

Our wholly-owned subsidiary, Rio Grande Silver Inc. (“Rio”), is party to a joint venture with Emerald Mining & Leasing, LLC (“EML”) and certain other parties with respect to a land package in the Creede Mining District of Colorado that is adjacent to other land held by Rio. Rio holds a 70% interest in the joint venture. In connection with the joint venture, we are required to guarantee certain environmental remediation-related obligations of EML to a third party up to a maximum liability to us of $2.5 million. As of September 30, 2017, we have not been required to make any payments pursuant to the guaranty. We may be required to make payments in the future, limited to the $2.5 million maximum liability, should EML fail to meet its obligations to the third party. However, to the extent that any payments are made by us under the guaranty, EML, in addition to other parties, has jointly and severally agreed to reimburse and indemnify us for any such payments. We have not recorded a liability relating to the guaranty as of September 30, 2017.

 

Lucky Friday Water Permit Matters

 

In the past, the Lucky Friday unit experienced multiple regulatory issues relating to its water discharge permits and water management more generally. All of these issues have been resolved except for one: in December 2013, the EPA issued to Hecla Limited a request for information under Section 308 of the Clean Water Act directing Hecla Limited to undertake a comprehensive groundwater investigation of Lucky Friday’s tailings pond no. 3 to evaluate whether the pond is causing the discharge of pollutants via seepage to groundwater that is discharging to surface water. We completed the investigation mandated by the EPA and submitted a draft report to the agency in December 2015. We are waiting for the EPA’s response and we cannot predict what the impact of the investigation will be.

 

Hecla Limited strives to maintain its water discharges at the Lucky Friday unit in full compliance with its permits and applicable laws, however, we cannot provide assurance that in the future it will be able to fully comply with the permit limits and other regulatory requirements regarding water management.

 

 

Johnny M Mine Area near San Mateo, McKinley County, New Mexico

 

In May 2011, the EPA made a formal request to Hecla Mining Company for information regarding the Johnny M Mine Area near San Mateo, McKinley County, New Mexico, and asserted that Hecla Mining Company may be responsible under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") for environmental remediation and past costs the EPA has incurred at the site. Mining at the Johnny M was conducted for a limited period of time by a predecessor of our subsidiary, Hecla Limited. In August 2012, Hecla Limited and the EPA entered into a Settlement Agreement and Administrative Order on Consent for Removal Action (“Consent Order”), pursuant to which Hecla Limited agreed to pay (i) $1.1 million to the EPA for its past response costs at the site and (ii) any future response costs at the site under the Consent Order, in exchange for a covenant not to sue by the EPA. Hecla Limited paid the $1.1 million to the EPA for its past response costs and in December 2014, submitted to EPA the Engineering Evaluation and Cost Analysis (“EE/CA”) for the site. The EE/CA evaluates three alternative response actions: 1) no action, 2) off-site disposal, and 3) on-site disposal. The range in estimated costs of these alternatives is $0 to $221 million. In the EE/CA, Hecla Limited recommended that EPA approve on-site disposal, which is currently estimated to cost $5.6 million, on the basis that it is the most appropriate response action under CERCLA. In June 2015, the EPA approved the EE/CA, with a few minor conditions. The EPA still needs to publish the EE/CA for public notice and comment, and the agency will not make a final decision on the appropriate response action until the public comment process is complete. It is anticipated that Hecla Limited will implement the response action selected by the EPA pursuant to an amendment to the Consent Order or a new order. Based on the foregoing, we believe it is probable that Hecla Limited will incur a liability for remediation at the site. In the fourth quarter of 2014, we accrued $5.6 million, which continues to be our best estimate of that liability as of the date of this report. There can be no assurance that Hecla Limited’s liability will not be more than $5.6 million, or that its ultimate liability will not have a material adverse effect on Hecla Limited’s or our results of operations or financial position.

 

In September 2016, Hecla Limited was served with a lawsuit filed by an individual in state court in New Mexico alleging personal injury claims of several millions of dollars arising from alleged exposure to contaminants as a result of allegedly living on land adjacent to the Johnny M Mine site.  The case was subsequently removed to federal court in New Mexico, and Hecla Limited filed a motion to dismiss. We do not yet have enough information to conclude if Hecla Limited has any liability or to estimate any loss that it may incur.

 

Carpenter Snow Creek and Barker-Hughesville Sites in Montana

 

In July 2010, the EPA made a formal request to Hecla Mining Company for information regarding the Carpenter Snow Creek Superfund site located in Cascade County, Montana. The Carpenter Snow Creek site is located in a historic mining district, and in the early 1980s Hecla Limited leased 6 mining claims and performed limited exploration activities at the site. Hecla Limited terminated the mining lease in 1988.

 

In June 2011, the EPA informed Hecla Limited that it believes Hecla Limited, among several other viable companies, may be liable for cleanup of the site or for costs incurred by the EPA in cleaning up the site. The EPA stated in the June 2011 letter that it has incurred approximately $4.5 million in response costs and estimated that total remediation costs may exceed $100 million. Hecla Limited cannot with reasonable certainty estimate the amount or range of liability, if any, relating to this matter because of, among other reasons, the lack of information concerning the site.

 

In February 2017, the EPA made a formal request to Hecla Mining Company for information regarding the Barker-Hughesville Mining District Superfund site located in Judith Basin and Cascade Counties, Montana. The Barker-Hughesville site is located in a historic mining district, and between approximately June and December 1983, Hecla Limited was party to an agreement with another mining company under which limited exploration activities occurred at or near the site. Neither the EPA nor any other party has made any claims against Hecla Limited (or Hecla Mining Company), however, it is possible that such a claim will be made in the future. Unless and until such a claim is made, Hecla Limited cannot estimate the amount or range of liability, if any, relating to this matter.

 

Senior Notes

 

On April 12, 2013, we completed an offering of $500 million aggregate principal amount of 6.875% Senior Notes due 2021. The net proceeds from the offering of the Senior Notes were used to partially fund the acquisition of Aurizon Mines Ltd. ("Aurizon") and for general corporate purposes, including expenses related to the Aurizon acquisition. Through the acquisition of Aurizon, we acquired our Casa Berardi mine and other interests in Quebec, Canada. In 2014, we completed additional issuances of our Senior Notes in the aggregate principal amount of $6.5 million, which were contributed to one of our pension plans to satisfy the funding requirement for 2014. Interest on the Senior Notes is payable on May 1 and November 1 of each year, commencing November 1, 2013. See Note 9 for more information.

 

 

Other Commitments

 

Our contractual obligations as of September 30, 2017 included approximately $0.5 million for various costs. In addition, our open purchase orders at September 30, 2017 included approximately $0.3 million, $1.9 million and $20.9 million for various capital and non-capital items at the Lucky Friday, Casa Berardi and Greens Creek units, respectively. We also have total commitments of approximately $14.1 million relating to scheduled payments on capital leases, including interest, primarily for equipment at our Greens Creek, Lucky Friday and Casa Berardi units (see Note 9 for more information). As part of our ongoing business and operations, we are required to provide surety bonds, bank letters of credit, and restricted deposits for various purposes, including financial support for environmental reclamation obligations and workers compensation programs. As of September 30, 2017, we had surety bonds totaling $117.4 million in place as financial support for future reclamation and closure costs, self-insurance, and employee benefit plans. The obligations associated with these instruments are generally related to performance requirements that we address through ongoing operations. As the requirements are met, the beneficiary of the associated instruments cancels or returns the instrument to the issuing entity. Certain of these instruments are associated with operating sites with long-lived assets and will remain outstanding until closure of the sites. We believe we are in compliance with all applicable bonding requirements and will be able to satisfy future bonding requirements as they arise.

 

Other Contingencies

 

We also have certain other contingencies resulting from litigation, claims, EPA investigations, and other commitments and are subject to a variety of environmental and safety laws and regulations incident to the ordinary course of business. We currently expect that the resolution of such contingencies will not materially affect our financial position, results of operations or cash flows. However, in the future, there may be changes to these contingencies, or additional contingencies may occur, any of which might result in an accrual or a change in current accruals recorded by us, and there can be no assurance that their ultimate disposition will not have a material adverse effect on our financial position, results of operations or cash flows.

 

 

Note 5.    Earnings Per Common Share

 

We are authorized to issue 750,000,000 shares of common stock, $0.25 par value per share. At September 30, 2017, there were 403,548,158 shares of our common stock issued and 4,529,450 shares issued and held in treasury, for a net of 399,018,708 shares outstanding. Basic and diluted income per common share, after preferred dividends, was $0.00 and $0.01 for the three- and nine-month periods ended September 30, 2017, respectively. Basic and diluted income per common share, after preferred dividends, was $0.07 and $0.13 for the three- and nine-month periods ended September 30, 2016, respectively.

 

Diluted income per share for the three and nine months ended September 30, 2017 and 2016 excludes the potential effects of outstanding shares of our convertible preferred stock, as their conversion would have no effect on the calculation of dilutive shares.

 

For the three-month and nine-month periods ended September 30, 2017, 3,591,697 restricted stock units that were unvested or which vested in the current period and 1,509,159 deferred shares were included in the calculation of diluted income per share. For the three-month and nine-month periods ended September 30, 2016, 4,309,440 restricted stock units that were unvested or which vested in the current period and 635,602 deferred shares were included in the calculation of diluted income per share. There were no options or warrants outstanding as of September 30, 2017 or September 30, 2016.

 

 

Note 6.    Business Segments

 

We are currently organized and managed in four reporting segments: the Greens Creek unit, the Lucky Friday unit, the Casa Berardi unit and the San Sebastian unit.

 

 

General corporate activities not associated with operating units and their various exploration activities, as well as discontinued operations and idle properties, are presented as “other.”  Interest expense, interest income and income taxes are considered general corporate items, and are not allocated to our segments.

 

The following tables present information about reportable segments for the three and nine months ended September 30, 2017 and 2016 (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Net sales to unaffiliated customers:
Greens Creek		$	61,061			$	85,804			$	191,250			$	199,260
Lucky Friday (1)			199				26,140				20,022				70,152
Casa Berardi			53,990				41,131				139,524				126,614
San Sebastian			25,589				26,318				66,866				85,686
		$	140,839			$	179,393			$	417,662			$	481,712
Income (loss) from operations:
Greens Creek		$	16,575			$	26,498			$	46,107			$	49,407
Lucky Friday			(4,642	)			6,652				(8,974	)			13,442
Casa Berardi			2,882				3,691				(1,071	)			16,246
San Sebastian			17,017				18,415				42,363				58,911
Other			(10,890	)			(17,016	)			(37,637	)			(42,584	)
		$	20,942			$	38,240			$	40,788			$	95,422

 

⁽¹⁾ The $0.2 million in sales reported for Lucky Friday for the third quarter of 2017 represents gains on base metal derivatives contracts.

 

The following table presents identifiable assets by reportable segment as of September 30, 2017 and December 31, 2016 (in thousands):

 

		September 30, 2017				December 31, 2016
Identifiable assets:
Greens Creek		$	666,463			$	681,303
Lucky Friday			432,752				442,829
Casa Berardi			814,053				806,044
San Sebastian			55,395				33,608
Other			427,520				407,893
		$	2,396,183			$	2,371,677

 

The sales and income (loss) from operations amounts reported above include results from our Lucky Friday segment. The Lucky Friday mine is our only operation where some of our employees are subject to a collective bargaining agreement, and the most recent agreement expired on April 30, 2016. On February 19, 2017, the unionized employees voted against our contract offer. On March 13, 2017, the unionized employees went on strike and have been on strike since that time. Production at Lucky Friday was suspended from the start of the strike until July 2017, when limited production resumed. For the first nine months of 2017, suspension costs not related to production of $11.1 million, along with $3.3 million in non-cash depreciation expense, are reported in a separate line item on our unaudited condensed consolidated statement of operations. We cannot predict how long the strike will last or whether an agreement will be reached. As a result of the strike or other related events, operations at Lucky Friday could continue to be disrupted, which could adversely affect our financial condition and results of operations.

 

 

Note 7.   Employee Benefit Plans

 

We sponsor defined benefit pension plans covering substantially all U.S. employees.  Net periodic pension cost for the plans consisted of the following for the three and nine months ended September 30, 2017 and 2016 (in thousands):

 

		Three Months Ended September 30,
		2017				2016
Service cost		$	1,196			$	1,077
Interest cost			1,339				1,307
Expected return on plan assets			(1,462	)			(1,325	)
Amortization of prior service cost			(84	)			(84	)
Amortization of net loss			1,033				1,093
Net periodic pension cost		$	2,022			$	2,068

 

 

		Nine Months Ended September 30,
		2017				2016
Service cost		$	3,588			$	3,231
Interest cost			4,017				3,921
Expected return on plan assets			(4,386	)			(3,975	)
Amortization of prior service cost			(252	)			(252	)
Amortization of net loss			3,099				3,279
Net periodic pension cost		$	6,066			$	6,204

 

We made cash contributions to our defined benefit plans of $1.2 million in April 2017 and $5.7 million in July 2017. We expect to contribute approximately $0.4 million to our unfunded supplemental executive retirement plan during 2017.

 

 

Note 8.    Shareholders’ Equity

 

Stock-based Compensation Plans

 

We periodically grant restricted stock unit awards, performance-based share awards and shares of common stock to our employees and directors as part of their compensation. We measure compensation cost for restricted stock units and stock grants at the closing price of our stock at the time of grant. We measure compensation cost for performance-based grants using a Monte Carlo simulation to estimate their value at grant date. Restricted stock unit and performance-based share grants vest after a specified period with compensation cost amortized over that period. Although we have no current plans to issue stock options, we may do so in the future.

 

In March 2017, the Board of Directors granted 641,406 shares of common stock to employees for payment of annual and long-term incentive compensation for the period ended December 31, 2016. The shares were distributed in March 2017, and $4.2 million in expense related to the stock awards was recognized in the periods prior to March 31, 2017.

 

In June 2017, the Board of Directors granted the following restricted stock unit awards to employees:

 

•

775,379 restricted stock units, with one third of those vesting in June 2018, one third vesting in June 2019, and one third vesting in June 2020;

•

93,691 restricted stock units, with one half of those vesting in June 2018 and one-half vesting in June 2019; and

•

15,336 restricted stock units that vest in June 2018.

 

 

The $1.9 million in expense related to the unit awards discussed above vesting in 2018 will be recognized on a straight-line basis over the twelve months following the date of the award. The $1.8 million in expense related to the unit awards discussed above vesting in 2019 will be recognized on a straight-line basis over the twenty-four months following the date of the award. The $1.5 million in expense related to the unit awards discussed above vesting in 2020 will be recognized on a straight-line basis over the thirty-six-month period following the date of the award.

 

In June 2017, the Board of Directors granted performance-based share awards to certain executive employees. The value of the awards will be based on the ranking of the market performance of our common stock relative to the performance of the common stock of a group of peer companies over the three-year measurement period ending December 31, 2019. The number of shares to be issued will be based on the value of the awards divided by the share price at grant date. The $0.6 million in expense related to the performance-based awards will be recognized on a straight-line base over the thirty months following the date of the award.

 

Stock-based compensation expense for restricted stock unit and performance-based grants to employees and shares issued to nonemployee directors recorded in the first nine months of 2017 totaled $4.9 million, compared to $4.8 million in the same period last year.

 

In connection with the vesting of restricted stock units and other stock grants, employees have in the past, at their election and when permitted by us, chosen to satisfy their minimum tax withholding obligations through net share settlement, pursuant to which the Company withholds the number of shares necessary to satisfy such withholding obligations.  As a result, in the first nine months of 2017 we withheld 588,240 shares valued at approximately $3.0 million, or approximately $5.09 per share. In the first nine months of 2016 we withheld 1,010,509 shares valued at approximately $3.5 million, or approximately $3.44 per share.

 

Common Stock Dividends

 

In September 2011 and February 2012, our Board of Directors adopted a common stock dividend policy that has two components: (1) a dividend that links the amount of dividends on our common stock to our average quarterly realized silver price in the preceding quarter, and (2) a minimum annual dividend of $0.01 per share of common stock, in each case, payable quarterly, when and if declared. For illustrative purposes only, the table below summarizes potential per share dividend amounts at different quarterly average realized price levels according to the first component of the policy:

 

Quarterly average realized silver price per ounce				Quarterly dividend per share				Annualized dividend per share
$	30			$	0.01			$	0.04
$	35			$	0.02			$	0.08
$	40			$	0.03			$	0.12
$	45			$	0.04			$	0.16
$	50			$	0.05			$	0.20

 

On November 7, 2017, our Board of Directors declared a common stock dividend, pursuant to the minimum annual dividend component of the policy described above, of $0.0025 per share, for a total dividend of $1.0 million payable in December 2017. Because the average realized silver price for the third quarter of 2017 was $17.01 per ounce, below the minimum threshold of $30 according to the policy, no silver-price-linked component was declared or paid. The declaration and payment of common stock dividends is at the sole discretion of our Board of Directors.

 

 

At-The-Market Equity Distribution Agreement

 

Pursuant to an equity distribution agreement dated February 23, 2016, we may issue and sell shares of our common stock from time to time through ordinary broker transactions having an aggregate offering price of up to $75 million, with the net proceeds available for general corporate purposes. The terms of sales transactions under the agreement, including trading day(s), number of shares sold in the aggregate, number of shares sold per trading day, and the floor selling price per share, are proposed by us to the sales agent. Whether or not we engage in sales from time to time may depend on a variety of factors, including share price, our cash resources, customary black-out restrictions, and whether we have any material inside information. The agreement can be terminated by us at any time. The shares issued under the equity distribution agreement are registered under the Securities Act of 1933, as amended, pursuant to our shelf registration statement on Form S-3, which was filed with the Securities and Exchange Commission ("SEC") on February 23, 2016. As of September 30, 2017, we had sold 4,608,847 shares under the agreement for total proceeds of approximately $17.7 million, net of commissions and fees of approximately $362 thousand. Of those amounts, 1,828,760 shares were sold in the first nine months of 2017 for total proceeds of approximately $9.6 million, net of commissions and fees of approximately $196 thousand.

 

Common Stock Repurchase Program

 

On May 8, 2012, we announced that our Board of Directors approved a stock repurchase program.  Under the program, we are authorized to repurchase up to 20 million shares of our outstanding common stock from time to time in open market or privately negotiated transactions, depending on prevailing market conditions and other factors.  The repurchase program may be modified, suspended or discontinued by us at any time. Whether or not we engage in repurchases from time to time may depend on a variety of factors, including not only price and cash resources, but customary black-out restrictions, whether we have any material inside information, limitations on share repurchases or cash usage that may be imposed by our credit agreement or in connection with issuances of securities, alternative uses for cash, applicable law, and other investment opportunities from time to time. As of September 30, 2017, 934,100 shares have been purchased at an average price of $3.99 per share, leaving 19.1 million shares that may yet be purchased under the program. No shares were purchased during the nine months ended September 30, 2017. The closing price of our common stock at November 3, 2017, was $4.45 per share.

 

 

Note 9.    Senior Notes, Credit Facility and Capital Leases

 

Senior Notes

 

On April 12, 2013, we completed an offering of $500 million in aggregate principal amount of our Senior Notes due May 1, 2021 in a private placement conducted pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended, and in 2014, an additional $6.5 million aggregate principal amount of the Senior Notes were issued to one of our pension plans. The Senior Notes were subsequently exchanged for substantially identical Senior Notes registered with the SEC. The Senior Notes are governed by the Indenture, dated as of April 12, 2013, as amended (the "Indenture"), among Hecla Mining Company ("Hecla") and certain of our subsidiaries and The Bank of New York Mellon Trust Company, N.A., as trustee. The net proceeds from the initial offering of the Senior Notes ($490 million) were used to partially fund the acquisition of Aurizon and for general corporate purposes, including expenses related to the Aurizon acquisition.

 

The Senior Notes are recorded net of a 2% initial purchaser discount totaling $10 million at the time of the April 2013 issuance and having an unamortized balance of $4.6 million as of September 30, 2017. The Senior Notes bear interest at a rate of 6.875% per year from the date of original issuance or from the most recent payment date on which interest has been paid or provided for.  Interest on the Senior Notes is payable on May 1 and November 1 of each year, commencing November 1, 2013. During the nine months ended September 30, 2017 and 2016, interest expense related to the Senior Notes, including amortization of the initial purchaser discount and fees related to the issuances of the Senior Notes, was $26.3 million and $15.2 million, respectively. The interest expense related to the Senior Notes for the nine months ended September 30, 2017 and 2016 was net of $0.9 million and $12.0 million, respectively, in capitalized interest, primarily related to the #4 Shaft project at our Lucky Friday unit which was completed in January 2017. Interest expense for the nine months ended September 30, 2017 also includes $0.9 million in costs related to our proposed private offering of new Senior Notes in June 2017 and concurrent tender offer to purchase our existing Senior Notes, which were not completed.

 

 

The Senior Notes are guaranteed on a senior unsecured basis by certain of our subsidiaries (the "Guarantors").   The Senior Notes and the guarantees are, respectively, Hecla's and the Guarantors' general senior unsecured obligations and are subordinated to all of Hecla's and the Guarantors' existing and future secured debt to the extent of the assets securing that secured debt.  In addition, the Senior Notes are effectively subordinated to all of the liabilities of Hecla's subsidiaries that are not guaranteeing the Senior Notes, to the extent of the assets of those subsidiaries.

 

The Senior Notes became redeemable in whole or in part, at any time and from time to time after May 1, 2016, on the redemption dates and at the redemption prices specified in the Indenture, plus accrued and unpaid interest, if any, to the date of redemption.

 

Upon the occurrence of a change of control (as defined in the Indenture), each holder of Senior Notes will have the right to require us to purchase all or a portion of such holder's Senior Notes pursuant to a change of control offer (as defined in the Indenture), at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase, subject to the rights of holders of the Senior Notes on the relevant record date to receive interest due on the relevant interest payment date.

 

Credit Facility

 

In May 2016, we entered into a $100 million senior secured revolving credit facility with a three-year term, which was amended in July 2017 to extend the term until July 14, 2020. The credit facility is collateralized by the shares of common stock held in our material domestic subsidiaries and by our joint venture interests in the Greens Creek mine, all of our rights and interests in the joint venture agreement, and all of our rights and interests in the assets of the joint venture.  Below is information on the interest rates, standby fee, and financial covenant terms under our credit facility:

 

Interest rates:
Spread over the London Interbank Offer Rate			2.25	-	3.25%
Spread over alternative base rate			1.25	-	2.25%
Standby fee per annum on undrawn amounts				0.50%
Covenant financial ratios:
Senior leverage ratio (debt secured by liens/EBITDA)			not more than 2.50:1
Leverage ratio (total debt less unencumbered cash/EBITDA)			not more than 4.00:1
Interest coverage ratio (EBITDA/interest expense)			not more than 3.00:1

 

We are also able to obtain letters of credit under the facility, and for any such letters we are required to pay a participation fee of between 2.25% and 3.25% based on our total leverage ratio, as well as a fronting fee to each issuing bank of 0.20% annually on the average daily dollar amount of any outstanding letters of credit.

 

We believe we were in compliance with all covenants under the credit agreement and no amounts were outstanding as of September 30, 2017.  With the exception of $2.6 million in letters of credit outstanding as of September 30, 2017, we have not drawn funds on the current revolving credit facility as of the filing date of this report.

 

Capital Leases

 

We have entered into various lease agreements, primarily for equipment at our Greens Creek, Lucky Friday, and Casa Berardi units, which we have determined to be capital leases.  At September 30, 2017, the total liability balance associated with capital leases, including certain purchase option amounts, was $13.3 million, with $5.9 million of the liability classified as current and the remaining $7.4 million classified as non-current. At December 31, 2016, the total liability balance associated with capital leases was $11.5 million, with $5.7 million of the liability classified as current and $5.8 million classified as non-current. The total obligation for future minimum lease payments was $14.1 million at September 30, 2017, with $0.8 million attributed to interest.

 

 

At September 30, 2017, the annual maturities of capital lease commitments, including interest, are (in thousands):

 

Twelve-month period ending September 30,
2018		$	6,293
2019			4,179
2020			2,369
2021			1,260
Total			14,101
Less: imputed interest			(813	)
Net capital lease obligation		$	13,288

 

 

Note 10.    Developments in Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09 Revenue Recognition, replacing guidance currently codified in Subtopic 605-10 Revenue Recognition-Overall with various SEC Staff Accounting Bulletins providing interpretive guidance. The new ASU establishes a new five step principles-based framework in an effort to significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. In August 2015, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. ASU No. 2015-14 defers the effective date of ASU No. 2014-09 until annual and interim reporting periods beginning after December 15, 2017.

 

We have performed an assessment of the impact of implementation of ASU No. 2014-09, and do not believe it will change the timing of revenue recognition or amounts of revenue recognized compared to how we recognize revenue under our current policies. Our revenues involve a relatively limited number of types of contracts and customers. In addition, our revenue contracts do not involve multiple types of performance obligations. Revenues from doré are recognized, and the transaction price is known, at the time the metals sold are delivered to the customer. Concentrate revenues are generally recognized at the time of shipment. Concentrates sold at our Lucky Friday unit typically leave the mine and are received by the customer within the same day. There is a period of time between shipment of concentrates from our Greens Creek unit and their physical receipt by the customer. However, based on our assessment, we believe control of the concentrate parcels is generally obtained by the customer at the time of shipment.

 

Our concentrate sales involve variable consideration, as they are subject to changes in metals prices between the time of shipment and their final settlement. However, we are able to reasonably estimate the transaction price for the concentrate sales at the time of shipment using forward prices for the month of settlement, and we then adjust the values each period until final settlement. Also, it is unlikely a significant reversal of revenue for any one concentrate parcel will occur.

 

ASU No. 2014-09 will require additional disclosures, where applicable, on (i) contracts with customers, (ii) significant judgments and changes in judgments in determining the timing of satisfaction of performance obligations and the transaction price, and (iii) assets recognized for costs to obtain or fulfill contracts. We are in the process of assessing the impact of these additional requirements on our disclosure.

 

In July 2015, the FASB issued ASU No. 2015-11 Inventory (Topic 330): Simplifying the Measurement of Inventory. The update provides for inventory to be measured at the lower of cost and net realizable value, and is effective for fiscal years beginning after December 15, 2016. We adopted this update effective January 1, 2017, and it did not have a material impact on our consolidated financial statements.

 

 

In November 2015, the FASB issued ASU No. 2015-17 Income Taxes - Balance Sheet Classification of Deferred Taxes (Topic 740). The update is designed to reduce complexity of reporting deferred income tax liabilities and assets into current and non-current amounts in a balance sheet. ASU No. 2015-17 requires the presentation of deferred income taxes, changes to deferred tax liabilities and assets be classified as non-current in the statement of financial position. The update is effective for fiscal years beginning after December 15, 2016. We have elected to implement ASU No. 2015-17 retrospectively, and our deferred tax asset and liability balances are classified as non-current. Deferred tax assets of $12.3 million and deferred tax liabilities of $1.3 million previously classified as current as of December 31, 2016 are now classified as non-current on our condensed consolidated balance sheet.

 

In January 2016, the FASB issued ASU No. 2016-01 Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance requires entities to measure equity investments that are not accounted for under the equity method at fair value, with any changes in fair value included in current earnings, and updates certain disclosure requirements. The update is effective for fiscal years beginning after December 15, 2017. Adoption will be accounted for using the modified-retrospective approach, with a cumulative-effect adjustment to our balance sheet as of January 1, 2018. At September 30, 2017, we had net unrealized gains related to equity investments of $3.2 million included in accumulated other comprehensive loss.

 

In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842). The update modifies the classification criteria and requires lessees to recognize the assets and liabilities on the balance sheet for most leases. The update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact of implementing this update on our consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09 Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The update simplifies the accounting for stock-based compensation, including income tax consequences and balance sheet and cash flow statement classification of awards. The update is effective for fiscal years beginning after December 15, 2016. We adopted this update effective January 1, 2017, and it did not have a material impact on our consolidated financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update provides guidance on classification for cash receipts and payments related to eight specific issues. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the potential impact of implementing this update on our consolidated financial statements.

 

In November 2016, the FASB issued ASU No. 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash. The update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the potential impact of implementing this update on our consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business. The update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We will apply the applicable provisions of the update to any acquisitions occurring after the effective date.

 

In March 2017, the FASB issued ASU No. 2017-07 Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Period Postretirement Benefit Cost. The update provides specific requirements for classification and disclosure regarding the service cost component and other components of net benefit cost related to pension plans. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We are currently evaluating the potential impact of implementing this update on our consolidated financial statements.

 

 

In August 2017, the FASB issued ASU No. 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The objective of the update is to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements, and simplify the application of existing hedge accounting guidance. The update is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the potential impact of implementing this update on our consolidated financial statements.

 

 

Note 11.    Derivative Instruments

 

Foreign Currency

 

Our wholly-owned subsidiaries owning the Casa Berardi and San Sebastian mines are U.S. dollar ("USD")-functional entities which routinely incur expenses denominated in Canadian dollars ("CAD") and Mexican pesos ("MXN"), and such expenses expose us to exchange rate fluctuations between the USD and CAD and MXN. In April 2016, we initiated a program to manage our exposure to fluctuations in the exchange rate between the USD and CAD and the impact on our future operating costs denominated in CAD. In October 2016, we also initiated a program to manage our exposure to the impact of fluctuations in the exchange rate between the USD and MXN on our future operating costs denominated in MXN. The programs utilize forward contracts to buy CAD and MXN, and each contract is designated as a cash flow hedge. As of September 30, 2017, we have 94 forward contracts outstanding to buy CAD$200.1 million having a notational amount of US$154.0 million, and 6 forward contracts outstanding to buy MXN$43.3 million having a notional amount of USD$2.2 million. The CAD contracts are related to forecasted cash operating costs at Casa Berardi to be incurred from 2017 through 2020 and have USD-to-CAD exchange rates ranging between 1.2787 and 1.3380. The MXN contracts are related to forecasted cash operating costs at San Sebastian for 2017 and have MXN-to-USD exchange rates ranging between 19.5910 and 21.0000. Our risk management policy provides for up to 75% of our planned cost exposure for five years into the future to be hedged under such programs, and for potential additional programs to manage other foreign currency-related exposure areas.

 

As of September 30, 2017, we recorded the following balances for the fair value of the contracts:

 

•

a current asset of $2.8 million, which is included in other current assets; and

•

a non-current asset of $3.7 million, which is included in other non-current assets.

 

Net unrealized gains of approximately $6.8 million related to the effective portion of the hedges were included in accumulated other comprehensive income as of September 30, 2017. Unrealized gains and losses will be transferred from accumulated other comprehensive loss to current earnings as the underlying operating expenses are recognized. We estimate approximately $2.9 million in net unrealized gains included in accumulated other comprehensive income as of September 30, 2017 would be reclassified to current earnings in the next twelve months. Net realized gains of approximately $0.4 million on contracts related to underlying expenses which have been recognized were transferred from accumulated other comprehensive loss and included in cost of sales and other direct production costs for the nine months ended September 30, 2017. Net unrealized gains of approximately $2 thousand related to ineffectiveness of the hedges were included in current earnings for the nine months ended September 30, 2017.

 

Metals Prices

 

At times, we use commodity forward sales commitments, commodity swap contracts and commodity put and call option contracts to manage our exposure to fluctuations in the prices of certain metals we produce. Contract positions are designed to ensure that we will receive a defined minimum price for certain quantities of our production, thereby partially offsetting our exposure to fluctuations in the market. These instruments do, however, expose us to (i) credit risk in the form of possible non-performance by counterparties for contracts in which the contract price exceeds the spot price of a commodity and (ii) price risk to the extent that the spot price exceeds the contract price for quantities of our production covered under contract positions.

 

 

We are currently using financially-settled forward contracts to manage the exposure to changes in prices of silver, gold, zinc and lead contained in our concentrate shipments between the time of shipment and final settlement. In addition, we currently use financially-settled forward contracts to manage the exposure to changes in prices of zinc and lead (but not silver and gold) contained in our forecasted future concentrate shipments. These contracts are not designated as hedges and are marked-to-market through earnings each period.  As of September 30, 2017, we recorded the following balances for the fair value of the contracts:

 

•

a current asset of $0.4 million, which is net of $0.1 million for contracts in a liability position and included in other current assets;

•

a current liability of $7.9 million, which is net of $0.2 million for contracts in an asset position and included in other current liabilities; and

•

a non-current liability of $4.0 million, which is included in other non-current liabilities.

 

We recognized a $3.9 million net loss during the first nine months of 2017 on the contracts utilized to manage exposure to prices of metals in our concentrate shipments, which is included in sales of products.  The net loss recognized on the contracts offsets gains related to price adjustments on our provisional concentrate sales due to changes to silver, gold, lead and zinc prices between the time of sale and final settlement.

 

We recognized a $16.5 million net loss during the first nine months of 2017 on the contracts utilized to manage exposure to prices for forecasted future concentrate shipments. The net loss on these contracts is included as a separate line item under other income (expense), as they relate to forecasted future shipments, as opposed to sales that have already taken place but are subject to final pricing as discussed in the preceding paragraph.  The net loss for the first nine months of 2017 is the result of higher zinc and lead prices. This program, when utilized, is designed to mitigate the impact of potential future declines in lead and zinc prices from the price levels established in the contracts (see average price information below). When those prices increase compared to the contract prices, we recognize losses.

 

 

The following tables summarize the quantities of metals committed under forward sales contracts at September 30, 2017 and December 31, 2016:

 

 

September 30, 2017		Ounces/pounds under contract (in 000's)																Average price per ounce/pound
		Silver				Gold				Zinc				Lead				Silver				Gold				Zinc				Lead
		(ounces)				(ounces)				(pounds)				(pounds)				(ounces)				(ounces)				(pounds)				(pounds)
Contracts on provisional sales
2017 settlements			1,399				5				19,070				2,535			$	17.18			$	1,298			$	1.33			$	1.07
2018 settlements			—				—				2,370				—				N/A				N/A			$	1.38				N/A
Contracts on forecasted sales
2017 settlements			—				—				441				2,866				N/A				N/A			$	1.23			$	1.05
2018 settlements			—				—				39,463				17,968				N/A				N/A			$	1.27			$	1.05
2019 settlements			—				—				14,330				8,267				N/A				N/A			$	1.30			$	1.07
2020 settlements			—				—				3,307				2,205				N/A				N/A			$	1.27			$	1.07

 

 

December 31, 2016		Ounces/pounds under contract (in 000's)																Average price per ounce/pound
		Silver				Gold				Zinc				Lead				Silver				Gold				Zinc				Lead
		(ounces)				(ounces)				(pounds)				(pounds)				(ounces)				(ounces)				(pounds)				(pounds)
Contracts on provisional sales
2017 settlements			1,295				4				19,070				7,441			$	16.29			$	1,172			$	1.18			$	0.97
Contracts on forecasted sales
2017 settlements			—				—				35,384				17,637				N/A				N/A			$	1.19			$	1.03
2018 settlements			—				—				13,779				5,732				N/A				N/A			$	1.21			$	1.05

 

Our concentrate sales are based on a provisional sales price containing an embedded derivative that is required to be separated from the host contract for accounting purposes. The host contract is the receivable from the sale of the concentrates at the forward price at the time of the sale. The embedded derivative, which does not qualify for hedge accounting, is adjusted to market through earnings each period prior to final settlement.

 

Credit-risk-related Contingent Features

 

Certain of our derivative contracts contain cross default provisions which provide that a default under our revolving credit agreement would cause a default under the derivative contracts. As of September 30, 2017, we have not posted any collateral related to these agreements. The fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $14.4 million as of September 30, 2017. If we were in breach of any derivative contracts at September 30, 2017, we could have been required to settle our obligations under the agreements at their termination value of $14.4 million.

 

 

Note 12.    Fair Value Measurement

 

The table below sets forth our assets and liabilities that were accounted for at fair value on a recurring basis and the fair value calculation input hierarchy level that we have determined applies to each asset and liability category (in thousands).

 

Description		Balance at September 30, 2017				Balance at December 31, 2016			Input Hierarchy Level
Assets:
Cash and cash equivalents:
Money market funds and other bank deposits		$	172,923			$	169,777		Level 1
Available for sale securities:
Debt securities - municipal and corporate bonds			32,973				29,117		Level 2
Equity securities – mining industry			7,098				5,002		Level 1
Trade accounts receivable:
Receivables from provisional concentrate sales			6,982				20,082		Level 2
Restricted cash balances:
Certificates of deposit and other bank deposits			1,076				2,200		Level 1
Derivative contracts:
Foreign exchange contracts			6,533				27		Level 2
Metal forward contracts			394				5,403		Level 2
Total assets		$	227,979			$	231,608
Liabilities:
Derivative contracts:
Foreign exchange contracts		$	—			$	5,288		Level 2
Metal forward contracts			11,902				192		Level 2
Total liabilities		$	11,902			$	5,480

 

Cash and cash equivalents consist primarily of money market funds and are valued at cost, which approximates fair value, and a small portion consists of municipal bonds having maturities of less than 90 days, which are recorded at fair value.

 

Current available-for-sale securities consist of municipal and corporate bonds having maturities of more than 90 days, which are recorded at fair value.

 

Current and non-current restricted cash balances consist primarily of certificates of deposit, U.S. Treasury securities, and other deposits and are valued at cost, which approximates fair value.

 

Our non-current available for sale securities consist of marketable equity securities of companies in the mining industry which are valued using quoted market prices for each security.

 

Trade accounts receivable include amounts due to us for shipments of concentrates, doré and precipitate sold to customers.  Revenues and the corresponding accounts receivable for sales of metals products are recorded when title and risk of loss transfer to the customer (generally at the time of loading on truck or ship).  Sales of concentrates are recorded using estimated forward prices for the anticipated month of settlement applied to our estimate of payable metal quantities contained in each shipment.  Sales are recorded net of estimated treatment and refining charges, which are also impacted by changes in metals prices and quantities of contained metals.  We estimate the prices at which sales of our concentrates will be settled due to the time elapsed between shipment and final settlement with the customer.  Receivables for previously recorded concentrate sales are adjusted to reflect estimated forward metals prices at the end of each period until final settlement by the customer.  We obtain the forward metals prices used each period from a pricing service.  Changes in metal prices between shipment and final settlement result in changes to revenues previously recorded upon shipment.  The embedded derivative contained in our concentrate sales is adjusted to fair market value through earnings each period prior to final settlement.

 

 

We use financially-settled forward contracts to manage exposure to changes in the exchange rate between the USD and CAD and MXN, and the impact on CAD- and MXN-denominated operating costs incurred at our Casa Berardi and San Sebastian units (see Note 11 for more information). These contracts qualify for hedge accounting, with unrealized gains and losses related to the effective portion of the contracts included in accumulated other comprehensive loss, and unrealized gains and losses related to the ineffective portion of the contracts included in earnings each period. The fair value of each contract represents the present value of the difference between the forward exchange rate for the contract settlement period as of the measurement date and the contract settlement exchange rate.

 

We use financially-settled forward contracts to manage the exposure to changes in prices of silver, gold, zinc and lead contained in our concentrate shipments that have not reached final settlement.  We also use financially-settled forward contracts to manage the exposure to changes in prices of zinc and lead contained in our forecasted future concentrate shipments (see Note 11 for more information).  These contracts do not qualify for hedge accounting, and are marked-to-market through earnings each period.  The fair value of each contract represents the present value of the difference between the forward metal price for the contract settlement period as of the measurement date and the contract settlement metal price.

 

Our Senior Notes issued in April 2013, which were recorded at their carrying value of $501.9 million, net of unamortized initial purchaser discount at September 30, 2017 of $4.6 million, had a fair value of $524.6 million at September 30, 2017. Quoted market prices, which we consider to be Level 1 inputs, are utilized to estimate fair values of the Senior Notes. See Note 9 for more information.

 

 

Note 13.    Guarantor Subsidiaries

 

Presented below are Hecla’s unaudited interim condensed consolidating financial statements as required by Rule 3-10 of Regulation S-X of the Securities Exchange Act of 1934, as amended, resulting from the guarantees by certain of Hecla's subsidiaries (the "Guarantors") of the Senior Notes (see Note 9 for more information). The Guarantors consist of the following of Hecla's 100%-owned subsidiaries: Hecla Limited; Silver Hunter Mining Company; Rio Grande Silver, Inc.; Hecla MC Subsidiary, LLC; Hecla Silver Valley, Inc.; Burke Trading, Inc.; Hecla Montana, Inc.; Revett Silver Company; RC Resources, Inc.; Troy Mine Inc.; Revett Exploration, Inc.; Revett Holdings, Inc.; Mines Management, Inc.; Newhi Corp.; Montanore Minerals Corp.; Hecla Alaska LLC; Hecla Greens Creek Mining Company; Hecla Admiralty Company; and Hecla Juneau Mining Company. We completed the initial offering of the Senior Notes on April 12, 2013, and a related exchange offer for virtually identical notes registered with the SEC on January 3, 2014.

 

The unaudited interim condensed consolidating financial statements below have been prepared from our financial information on the same basis of accounting as the unaudited interim condensed consolidated financial statements set forth elsewhere in this report. Investments in the subsidiaries are accounted for under the equity method. Accordingly, the entries necessary to consolidate Hecla, the Guarantors, and our non-guarantor subsidiaries are reflected in the intercompany eliminations column. In the course of preparing consolidated financial statements, we eliminate the effects of various transactions conducted between Hecla and its subsidiaries and among the subsidiaries. While valid at an individual subsidiary level, such activities are eliminated in consolidation because, when taken as a whole, they do not represent business activity with third-party customers, vendors, and other parties. Examples of such eliminations include the following:

 

•

Investments in subsidiaries. The acquisition of a company results in an investment in debt or equity capital on the records of the parent company and a contribution to debt or equity capital on the records of the subsidiary. Such investments and capital contributions are eliminated in consolidation.

 

•

Capital contributions. Certain of Hecla's subsidiaries do not generate cash flow, either at all or sufficient to meet their capital needs, and their cash requirements are routinely met with inter-company advances from their parent companies. On at least an annual basis, when not otherwise intended as debt, the boards of directors of such parent companies declare contributions of capital to their subsidiary companies, which increase the parents' investment and the subsidiaries' additional paid-in capital. In consolidation, investments in subsidiaries and related additional paid-in capital are eliminated.

 

 

•

Debt. Inter-company debt agreements have been established between certain of Hecla's subsidiaries and their parents. The related debt liability and receivable balances, accrued interest expense (if any) and income activity (if any), and payments of principal and accrued interest amounts (if any) by the subsidiary companies to their parents are eliminated in consolidation.

 

•

Dividends. Certain of Hecla's subsidiaries which generate cash flow routinely provide cash to their parent companies through inter-company transfers. On at least an annual basis, the boards of directors of such subsidiary companies declare dividends to their parent companies, which reduces the subsidiaries' retained earnings and increases the parents' dividend income. In consolidation, such activity is eliminated.

 

•

Deferred taxes. Our ability to realize deferred tax assets and liabilities is considered on a consolidated basis for subsidiaries within the United States, with all subsidiaries' estimated future taxable income contributing to the ability to realize all such assets and liabilities. However, when Hecla's subsidiaries are viewed independently, we use the separate return method to assess the realizability of each subsidiary's deferred tax assets and whether a valuation allowance is required against such deferred tax assets. In some instances, a parent company or subsidiary may possess deferred tax assets whose realization depends on the future taxable incomes of other subsidiaries on a consolidated-return basis, but would not be considered realizable if such parent or subsidiary filed on a separate stand-alone basis. In such a situation, a valuation allowance is assessed on that subsidiary's deferred tax assets, with the resulting adjustment reported in the eliminations column of the guarantor and parent's financial statements, as is the case in the unaudited interim financial statements set forth below. The separate return method can result in significant eliminations of deferred tax assets and liabilities and related income tax provisions and benefits. Non-current deferred tax asset balances are included in other non-current assets on the consolidating balance sheets and make up a large portion of that item, particularly for the guarantor balances.

 

Separate financial statements of the Guarantors are not presented because the guarantees by the Guarantors are joint and several and full and unconditional, except for certain customary release provisions, including: (1) the sale or disposal of all or substantially all of the assets of the Guarantor; (2) the sale or other disposition of the capital stock of the Guarantor; (3) the Guarantor is designated as an unrestricted entity in accordance with the applicable provisions of the indenture; (4) Hecla ceases to be a borrower as defined in the indenture; and (5) upon legal or covenant defeasance or satisfaction and discharge of the indenture.

 

Effective December 31, 2015, Hecla Limited (our wholly owned subsidiary) sold 100% of its ownership of Hecla Alaska LLC (its wholly owned subsidiary) to Hecla Mining Company for consideration totaling approximately $240.8 million.  The consideration consisted of satisfaction of inter-company debt between Hecla Limited and Hecla Mining Company and an obligation by Hecla Mining Company, under certain circumstances, to fund a limited amount of the capital requirements of Hecla Limited for up to five years.  Hecla Alaska LLC owns a 29.7331% interest in the joint venture which owns the Greens Creek mine. The presentation of unaudited interim condensed consolidating financial statements below reflects the effective date for accounting purposes of January 1, 2016.

 

 

Condensed Consolidating Balance Sheets

 

		As of September 30, 2017
		Parent				Guarantors				Non-Guarantors				Eliminations				Consolidated
		(in thousands)
Assets
Cash and cash equivalents		$	101,061			$	18,124			$	53,738			$	—			$	172,923
Other current assets			47,514				51,190				40,283				(575	)			138,412
Properties, plants, and equipment - net			1,964				1,248,762				774,881				—				2,025,607
Intercompany receivable (payable)			461,542				(222,677	)			(351,019	)			112,154				—
Investments in subsidiaries			1,491,449				—				—				(1,491,449	)			—
Other non-current assets			6,321				199,794				6,906				(153,780	)			59,241
Total assets		$	2,109,851			$	1,295,193			$	524,789			$	(1,533,650	)		$	2,396,183
Liabilities and Stockholders' Equity
Current liabilities		$	46,720			$	56,189			$	38,183			$	(25,295	)		$	115,797
Long-term debt			501,917				3,115				4,321				—				509,353
Non-current portion of accrued reclamation			—				61,964				18,794				—				80,758
Non-current deferred tax liability			—				13,349				126,280				(16,906	)			122,723
Other non-current liabilities			48,273				5,363				975				—				54,611
Shareholders' equity			1,512,941				1,155,213				336,236				(1,491,449	)			1,512,941
Total liabilities and stockholders' equity		$	2,109,851			$	1,295,193			$	524,789			$	(1,533,650	)		$	2,396,183

 

 

		As of December 31, 2016
		Parent				Guarantors				Non-Guarantors				Eliminations				Consolidated
		(in thousands)
Assets
Cash and cash equivalents		$	113,275			$	24,388			$	32,114			$	—			$	169,777
Other current assets			33,950				52,400				35,537				(573	)			121,314
Properties, plants, and equipment - net			2,103				1,258,890				771,692				—				2,032,685
Intercompany receivable (payable)			404,121				(222,072	)			(307,018	)			124,969				—
Investments in subsidiaries			1,496,787				—				—				(1,496,787	)			—
Other non-current assets			4,186				199,957				5,337				(161,579	)			47,901
Total assets		$	2,054,422			$	1,313,563			$	537,662			$	(1,533,970	)		$	2,371,677
Liabilities and Stockholders' Equity
Current liabilities		$	22,401			$	86,730			$	40,093			$	(22,999	)		$	126,225
Long-term debt			500,979				3,065				2,773				—				506,817
Non-current portion of accrued reclamation			—				63,025				16,902				—				79,927
Non-current deferred tax liability			—				14,212				122,855				(14,212	)			122,855
Other non-current liabilities			51,198				5,108				(325	)			28				56,009
Stockholders' equity			1,479,844				1,141,423				355,364				(1,496,787	)			1,479,844
Total liabilities and stockholders' equity		$	2,054,422			$	1,313,563			$	537,662			$	(1,533,970	)		$	2,371,677

 

 

Condensed Consolidating Statements of Operations

 

		Three Months Ended September 30, 2017
		Parent				Guarantors				Non-Guarantors				Eliminations				Consolidated
		(in thousands)
Revenues		$	(626	)		$	61,887			$	79,578			$	—			$	140,839
Cost of sales			687				(29,320	)			(39,725	)			—				(68,358	)
Depreciation, depletion, amortization			—				(12,607	)			(16,237	)			—				(28,844	)
General and administrative			(4,217	)			(4,464	)			(848	)			—				(9,529	)
Exploration and pre-development			(129	)			(4,339	)			(4,544	)			—				(9,012	)
Research and development			—				(1,130	)			—				—				(1,130	)
Loss on derivative contracts			(11,226	)			—				—				—				(11,226	)
Foreign exchange gain (loss)			12,153				—				(16,917	)			—				(4,764	)
Lucky Friday suspension-related costs			—				(4,780	)			—				—				(4,780	)
Equity in earnings of subsidiaries			(6,271	)			—				—				6,271				—
Other (expense) income			11,041				1,202				(4,676	)			(14,752	)			(7,185	)
Income (loss) before income taxes			1,412				6,449				(3,369	)			(8,481	)			(3,989	)
(Provision) benefit from income taxes			—				(1,338	)			(8,013	)			14,752				5,401
Net income (loss)			1,412				5,111				(11,382	)			6,271				1,412
Preferred stock dividends			(138	)			—				—				—				(138	)
Income (loss) applicable to common shareholders			1,274				5,111				(11,382	)			6,271				1,274
Net income (loss)			1,412				5,111				(11,382	)			6,271				1,412
Changes in comprehensive income (loss)			7,636				—				1,022				(1,022	)			7,636
Comprehensive income (loss)		$	9,048			$	5,111			$	(10,360	)		$	5,249			$	9,048

 

 

		Nine Months Ended September 30, 2017
		Parent				Guarantors				Non-Guarantors				Eliminations				Consolidated
		(in thousands)
Revenues		$	(3,912	)		$	215,184			$	206,390			$	—			$	417,662
Cost of sales			353				(112,908	)			(111,982	)			—				(224,537	)
Depreciation, depletion, amortization			—				(41,875	)			(41,490	)			—				(83,365	)
General and administrative			(16,407	)			(10,877	)			(1,760	)			—				(29,044	)
Exploration and pre-development			(439	)			(8,736	)			(12,508	)			—				(21,683	)
Research and development			—				(2,125	)			—				—				(2,125	)
Loss on derivative contracts			(16,548	)			—				—				—				(16,548	)
Foreign exchange gain (loss)			22,286				(43	)			(33,152	)			—				(10,909	)
Lucky Friday suspension-related costs			—				(14,385	)			—				—				(14,385	)
Equity in earnings of subsidiaries			(5,925	)			—				—				5,925				—
Other (expense) income			24,822				(1,207	)			(14,146	)			(38,682	)			(29,213	)
Income (loss) before income taxes			4,230				23,028				(8,648	)			(32,757	)			(14,147	)
(Provision) benefit from income taxes			—				(9,239	)			(11,066	)			38,682				18,377
Net income (loss)			4,230				13,789				(19,714	)			5,925				4,230
Preferred stock dividends			(414	)			—				—				—				(414	)
Income (loss) applicable to common shareholders			3,816				13,789				(19,714	)			5,925				3,816
Net income (loss)			4,230				13,789				(19,714	)			5,925				4,230
Changes in comprehensive income (loss)			13,718				—				1,780				(1,780	)			13,718
Comprehensive income (loss)		$	17,948			$	13,789			$	(17,934	)		$	4,145			$	17,948

 

 

		Three Months Ended September 30, 2016
		Parent				Guarantors				Non-Guarantors				Eliminations				Consolidated
		(in thousands)
Revenues		$	(4,072	)		$	116,016			$	67,449			$	—			$	179,393
Cost of sales			—				(58,844	)			(31,685	)			—				(90,529	)
Depreciation, depletion, amortization			—				(19,036	)			(11,143	)			—				(30,179	)
General and administrative			(5,355	)			(5,469	)			(331	)			—				(11,155	)
Exploration and pre-development			(33	)			(1,343	)			(3,033	)			—				(4,409	)
Gain on derivative contracts			7				—				—				—				7
Acquisition costs			(1,766	)			1				—				—				(1,765	)
Equity in earnings of subsidiaries			52,606				—				—				(52,606	)			—
Other expense			(15,597	)			1,187				1,211				7,078				(6,121	)
Income (loss) before income taxes			25,790				32,512				22,468				(45,528	)			35,242
(Provision) benefit from income taxes			—				(8,994	)			6,621				(7,080	)			(9,453	)
Net income (loss)			25,790				23,518				29,089				(52,608	)			25,789
Preferred stock dividends			(138	)			—				—				—				(138	)
Income (loss) applicable to common shareholders			25,652				23,518				29,089				(52,608	)			25,651
Net income (loss)			25,790				23,518				29,089				(52,608	)			25,789
Changes in comprehensive income (loss)			(615	)			—				985				(985	)			(615	)
Comprehensive income (loss)		$	25,175			$	23,518			$	30,074			$	(53,593	)		$	25,174

 

 

		Nine Months Ended September 30, 2016
		Parent				Guarantors				Non-Guarantors				Eliminations				Consolidated
		(in thousands)
Revenues		$	(15,866	)		$	285,277			$	212,301			$	—			$	481,712
Cost of sales			—				(154,160	)			(95,002	)			—				(249,162	)
Depreciation, depletion, amortization			—				(49,521	)			(35,071	)			—				(84,592	)
General and administrative			(17,069	)			(13,671	)			(988	)			—				(31,728	)
Exploration and pre-development			(191	)			(3,990	)			(7,465	)			—				(11,646	)
Acquisition costs			(2,160	)			(7	)			—				—				(2,167	)
Equity in earnings of subsidiaries			68,727				—				—				(68,727	)			—
Other (expense) income			15,844				8,147				(43,039	)			(11,481	)			(30,529	)
Income (loss) before income taxes			49,285				72,075				30,736				(80,208	)			71,888
(Provision) benefit from income taxes			—				(22,213	)			(11,871	)			11,481				(22,603	)
Net income (loss)			49,285				49,862				18,865				(68,727	)			49,285
Preferred stock dividends			(414	)			—				—				—				(414	)
Income (loss) applicable to common shareholders			48,871				49,862				18,865				(68,727	)			48,871
Net income (loss)			49,285				49,862				18,865				(68,727	)			49,285
Changes in comprehensive income (loss)			1,689				8				3,238				(3,246	)			1,689
Comprehensive income (loss)		$	50,974			$	49,870			$	22,103			$	(71,973	)		$	50,974

 

Condensed Consolidating Statements of Cash Flows

 

		Nine Months Ended September 30, 2017
		Parent				Guarantors				Non-Guarantors				Eliminations				Consolidated
Cash flows from operating activities		$	35,764			$	41,071			$	21,435			$	(24,155	)		$	74,115
Cash flows from investing activities:
Additions to properties, plants, and equipment			—				(28,220	)			(42,170	)			—				(70,390	)
Other investing activities, net			176				6,903				(584	)			(5,339	)			1,156
Cash flows from financing activities:
Dividends paid to shareholders			(3,392	)			—				—				—				(3,392	)
Proceeds from (payments on) debt			—				(4,518	)			(1,017	)			—				(5,535	)
Other financing activity, net			(44,762	)			(21,500	)			42,909				29,494				6,141
Effect of exchange rates on cash			—				—				1,051				—				1,051
Changes in cash and cash equivalents			(12,214	)			(6,264	)			21,624				—				3,146
Beginning cash and cash equivalents			113,275				24,388				32,114				—				169,777
Ending cash and cash equivalents		$	101,061			$	18,124			$	53,738			$	—			$	172,923

 

 

		Nine Months Ended September 30, 2016
		Parent				Guarantors				Non-Guarantors				Eliminations				Consolidated
		(in thousands)
Cash flows from operating activities		$	14,525			$	51,599			$	61,710			$	45,280			$	173,114
Cash flows from investing activities:
Additions to properties, plants, and equipment			(348	)			(71,265	)			(48,623	)			—				(120,236	)
Acquisitions of other companies, net of cash acquired			(3,931	)							—				—				(3,931	)
Other investing activities, net			(24,696	)			(816	)			(3,647	)			—				(29,159	)
Cash flows from financing activities:
Dividends paid to shareholders			(3,296	)			—				—				—				(3,296	)
Proceeds from (payments on) debt			—				(7,477	)			(658	)			—				(8,135	)
Other financing activity, net			33,335				24,522				(8,926	)			(45,280	)			3,651
Effect of exchange rates on cash			—				—				627				—				627
Changes in cash and cash equivalents			15,589				(3,437	)			483				—				12,635
Beginning cash and cash equivalents			94,167				42,692				18,350				—				155,209
Ending cash and cash equivalents		$	109,756			$	39,255			$	18,833			$	—			$	167,844

 

 

 

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Certain statements contained in this Form 10-Q, including in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosure About Market Risk, are intended to be covered by the safe harbor provided for under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Our forward-looking statements include our current expectations and projections about future results, performance, results of litigation, prospects and opportunities, including reserves and other mineralization. We have tried to identify these forward-looking statements by using words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “feel,” “plan,” “estimate,” “project,” “forecast” and similar expressions.  These forward-looking statements are based on information currently available to us and are expressed in good faith and believed to have a reasonable basis.  However, our forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements.

 

These risks, uncertainties and other factors include, but are not limited to, those set forth under Part I, Item 1A. – Business – Risk Factors in our annual report filed on Form 10-K for the year ended December 31, 2016. Given these risks and uncertainties, readers are cautioned not to place undue reliance on our forward-looking statements.  All subsequent written and oral forward-looking statements attributable to Hecla Mining Company or to persons acting on our behalf are expressly qualified in their entirety by these cautionary statements.  Except as required by federal securities laws, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

 

Overview

 

Hecla Mining Company and our subsidiaries have provided precious and base metals to the U.S. and worldwide since 1891. We discover, acquire, develop, produce and market silver, gold, lead and zinc.

 

 

We produce lead, zinc and bulk concentrates, which we sell to custom smelters and brokers, and unrefined precipitate and bullion bars (doré) containing gold and silver, which are further refined before sale to precious metals traders.  We are organized into four segments that encompass our operating and development units:  Greens Creek, Lucky Friday, Casa Berardi, and San Sebastian. The map below shows the locations of our operating units, our exploration and pre-development projects, and our corporate offices located in Coeur d'Alene, Idaho and Vancouver, British Columbia.

 

 

 

 

Our current business strategy is to focus our financial and human resources in the following areas:

 

•

operating our properties safely, in an environmentally responsible manner, and cost-effectively;

•

continuing to optimize and improve operations at each of our units;

•

expanding our proven and probable reserves and production capacity at our operating properties;

•

conducting our business with financial stewardship to preserve our financial position in varying metals price environments;

•

advancing permitting of the Rock Creek and Montanore projects. We acquired Rock Creek as part of the acquisition of Revett Mining Company, Inc. ("Revett") in June 2015, and we acquired Montanore through the acquisition of Mines Management, Inc. ("Mines Management") in September 2016;

•

maintaining and investing in exploration and pre-development projects in the vicinities of six mining districts and projects we believe to be under-explored and under-invested: North Idaho's Silver Valley in the historic Coeur d'Alene Mining District; our Greens Creek unit on Alaska's Admiralty Island located near Juneau; the silver-producing district near Durango, Mexico; the Abitibi region of northwestern Quebec, Canada; the Rock Creek and Montanore projects in northwestern Montana; and the Creede district of Southwestern Colorado; and

•

continuing to seek opportunities to acquire or invest in mining properties and companies.

 

 

A number of key factors may impact the execution of our strategy, including regulatory issues and metals prices. Metals prices can be very volatile. As discussed in the Critical Accounting Estimates section below, metals prices are influenced by a number of factors beyond our control. Average market prices of silver and gold were slightly lower, with prices for lead and zinc higher, in the first nine months of 2017 compared to the same period last year, as illustrated by the table in Results of Operations below. While we believe current global economic and industrial trends could result in continued demand for the metals we produce, prices have been volatile and there can be no assurance that current prices will continue.

 

The total principal amount of our Senior Notes due May 1, 2021 is $506.5 million and they bear interest at a rate of 6.875% per year. The net proceeds from the Senior Notes were primarily used for the acquisition of Aurizon in June 2013 (see Note 9 of Notes to Condensed Consolidated Financial Statements (Unaudited)). As discussed in the Financial Liquidity and Capital Resources section below, we believe that we will be able to meet the obligations associated with the Senior Notes; however, a number of factors could impact our ability to meet the debt obligations and fund our other projects. In June 2017, we announced a private offering under Rule 144A of $500 million in Senior Notes due 2025 and a concurrent tender offer to purchase our existing Senior Notes. Both the private offering of the notes and the tender offer were abandoned in June 2017, as available terms and conditions were not sufficiently attractive to us to complete the proposed transactions. Our ability to restructure or refinance our debt will depend on the condition of capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. There can be no assurance that we will be able to restructure or refinance our debt in the future on terms and conditions favorable to us.

 

On June 15, 2015, we completed the acquisition of Revett, giving us 100% ownership of the Rock Creek project, a significant undeveloped silver and copper deposit in northwestern Montana. In addition, on September 13, 2016, we completed the acquisition of Mines Management, giving us 100% ownership of the Montanore project, another significant undeveloped silver and copper deposit located approximately 10 miles from our Rock Creek project. Development of Rock Creek and Montanore has been challenged by conservation groups at various times, and there can be no assurance that we will be able to obtain the permits required to develop these projects. See Legal challenges could prevent the Rock Creek or Montanore projects from ever being developed in Part I, Item 1A. – Risk Factors in our annual report filed on Form 10-K for the year ended December 31, 2016 for more information. In May 2017, the Montana Federal District Court issued Opinions and Orders in three lawsuits challenging previously granted environmental approvals for the Montanore project. The Orders overturned the approvals for the project granted by the United States Forest Service and the United States Fish and Wildlife Service, and remanded the Record of Decision ("ROD") and associated planning documents for further review by the agencies consistent with its Opinions. In June 2017, the Court vacated the agencies' approvals for the project. As a result, additional work must be performed by the agencies to address the deficiencies in the ROD and associated planning documents identified by the Court, and new approvals must be granted, before the project may proceed beyond certain preliminary actions.

 

As further discussed in the Lucky Friday Segment section below, the union employees at Lucky Friday have been on strike since March 13, 2017. Production at Lucky Friday was suspended from the start of the strike until July 2017, with limited production by salary employees commencing at that time. We cannot predict how long the strike will last or whether an agreement will be reached. We expect to incur cash expenditures of approximately $1.0 million to $1.5 million per month to advance engineering and infrastructure for the restart of full production, in addition to costs related to limited interim production. As a result of the strike or other related events, operations at Lucky Friday could continue to be disrupted, which could adversely affect our financial condition and results of operations.

 

During the third quarter of 2015, we made a development decision to mine near surface, high grade portions of silver and gold deposits at our San Sebastian project in Mexico. Ore production commenced in the fourth quarter of 2015 and has continued since that time.  In addition, work began in the first quarter of 2017 to develop and rehabilitate underground access which is expected to allow us to mine deeper portions of the deposits at San Sebastian. See the San Sebastian Segment section below for more information. We have generated positive cash flows at San Sebastian since the start of production there, and we currently believe that will continue until early or mid-2020.  However, our ability to generate positive cash flows at San Sebastian may be impacted by changes in costs, precious metals prices, or other factors, and there can be no assurance that we will be able to develop and operate San Sebastian as currently anticipated.

 

 

We strive to operate our properties safely, in an environmentally responsible manner and as cost-effectively as possible. We seek to achieve safe and environmentally sound practices through extensive employee training in safe work practices; establishing, following and improving safety standards with the active participation of employees; investigating accidents, incidents and losses to avoid recurrence; and participation in the National Mining Association’s CORESafety program. We attempt to implement reasonable best practices for mine safety and emergency preparedness. Additionally, we work with the U.S. Mine Safety and Health Administration (“MSHA”) to address issues outlined in inspections and investigations, and continually evaluate our safety practices.

 

Another challenge for us is the risk associated with environmental litigation and ongoing reclamation activities. As described in Part I, Item 1A. – Risk Factors of our annual report filed on Form 10-K for the year ended December 31, 2016 and Note 4 of Notes to Condensed Consolidated Financial Statements (Unaudited), it is possible that our estimate of these liabilities (and our ability to estimate liabilities in general) may change in the future, affecting our strategic plans.  We are involved in various environmental legal matters and the estimate of our environmental liabilities and liquidity needs, as wells as our strategic plans, may be significantly impacted as a result of these matters or new matters that may arise. We strive to ensure that our activities are conducted in compliance with applicable laws and regulations and attempt to resolve environmental litigation on as favorable terms as possible.

 

 

Results of Operations

 

Sales of products by metal for the three- and nine-month periods ended September 30, 2017 and 2016 were as follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
(in thousands)		2017				2016				2017				2016
Silver		$	43,228			$	83,668			$	140,662			$	211,825
Gold			73,603				67,534				203,279				203,455
Lead			6,373				17,141				28,093				46,194
Zinc			24,327				27,469				74,692				67,840
Less: Smelter and refining charges			(6,692	)			(16,419	)			(29,064	)			(47,602	)
Sales of products		$	140,839			$	179,393			$	417,662			$	481,712

 

 

The $38.6 million and $64.1 million decreases in sales of products in the third quarter and first nine months of 2017, respectively, compared to the same periods of 2016 are primarily due to:

 

•

Lower quantities of silver, zinc and lead sold, due to lower production of those metals and the timing of concentrate shipments at Greens Creek, partially offset by higher gold volumes. See the The Greens Creek Segment, The Lucky Friday Segment, The Casa Berardi Segment, and The San Sebastian Segment sections below for more information on metal production and sales volumes at each of our operating segments. Total metals production and sales volumes for each period are shown in the following table:

 

			Three Months Ended September 30,								Nine Months Ended September 30,
			2017				2016				2017				2016
Silver -	Ounces produced			3,323,157				4,316,663				9,500,058				13,200,765
	Payable ounces sold			2,540,817				4,284,842				8,098,652				12,222,084
Gold -	Ounces produced			63,046				52,126				171,720				170,779
	Payable ounces sold			57,380				50,348				161,921				161,217
Lead -	Tons produced			5,370				10,411				18,426				31,840
	Payable tons sold			2,936				9,967				13,612				28,380
Zinc -	Tons produced			14,497				14,825				43,000				50,321
	Payable tons sold			8,444				13,596				29,269				37,948

 

 

The difference between what we report as "ounces/tons produced" and "payable ounces/tons sold" is attributable to the difference between the quantities of metals contained in the concentrates we produce versus the portion of those metals actually paid for by our customers according to the terms of our sales contracts. Differences can also arise from inventory changes incidental to shipping schedules, or variances in ore grades which impact the amount of metals contained in concentrates produced and sold. The difference in payable quantities sold for the 2017 periods compared to 2016 is due mainly to timing of concentrate shipments, primarily at Greens Creek.

 

•

Lower average silver and gold prices, partially offset by higher lead and zinc prices, in the third quarter of 2017 compared to the same period in 2016. For the first nine months of 2017, average silver and gold prices varied slightly, while average lead and zinc prices were higher, compared to the same period of 2016. These price variances are illustrated in the table below.

 

			Three Months Ended September 30,								Nine Months Ended September 30,
			2017				2016				2017				2016
Silver –	London PM Fix ($/ounce)		$	16.83			$	19.62			$	17.17			$	17.08
	Realized price per ounce		$	17.01			$	19.53			$	17.37			$	17.33
Gold –	London PM Fix ($/ounce)		$	1,278			$	1,335			$	1,251			$	1,258
	Realized price per ounce		$	1,283			$	1,341			$	1,255			$	1,262
Lead –	LME Final Cash Buyer ($/pound)		$	1.06			$	0.85			$	1.02			$	0.81
	Realized price per pound		$	1.09			$	0.86			$	1.03			$	0.81
Zinc –	LME Final Cash Buyer ($/pound)		$	1.34			$	1.02			$	1.26			$	0.89
	Realized price per pound		$	1.44			$	1.01			$	1.28			$	0.89

 

Average realized prices typically differ from average market prices primarily because concentrate sales are generally recorded as revenues at the time of shipment at forward prices for the estimated month of settlement, which differ from average market prices.  Due to the time elapsed between shipment of concentrates and final settlement with the customers, we must estimate the prices at which sales of our metals will be settled.  Previously recorded sales are adjusted to estimated settlement metals prices each period through final settlement.  For the third quarter and first nine months of 2017, we recorded net positive price adjustments to provisional settlements of $1.2 million and $0.6 million, respectively, compared to negative price adjustments to provisional settlements of $1.1 million and positive price adjustments of $0.4 million, respectively, in the third quarter and first nine months of 2016. The price adjustments related to silver, gold, lead and zinc contained in our concentrate shipments were largely offset by gains and losses on forward contracts for those metals for each period (see Note 11 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information).  The gains and losses on these contracts are included in revenues and impact the realized prices for silver, gold, lead and zinc.  Realized prices are calculated by dividing gross revenues for each metal (which include the price adjustments and gains and losses on the forward contracts discussed above) by the payable quantities of each metal included in concentrate and doré shipped during the period.

 

 

For the third quarter and first nine months of 2017, we recorded income applicable to common shareholders of $1.3 million ($0.00 per basic common share) and $3.8 million ($0.01 per basic common share), respectively, compared to $25.7 million ($0.07 per basic common share) and $48.9 million ($0.13 per basic common share), respectively, for the third quarter and first nine months of 2016. The following factors impacted the results for the third quarter and first nine months of 2017 compared to the same periods in 2016:

 

•

Lower gross profit for the third quarter and first nine months of 2017 compared to the same periods in 2016 at our San Sebastian unit by $0.9 million and $13.8 million, respectively; Lucky Friday unit by $6.5 million and $8.0 million, respectively; and Greens Creek unit by $8.3 million and $1.3 million, respectively. Gross profit for the first nine months of 2017 was also lower at our Casa Berardi unit compared to 2016 by $15.2 million; however, it was higher by $0.6 million for the third quarter of 2017 compared to the same period of 2016. See The Greens Creek Segment, The Lucky Friday Segment, The Casa Berardi Segment, and The San Sebastian Segment sections below.

•

Losses on base metal derivatives contracts of $11.2 million and $16.5 million, respectively, in the third quarter and first nine months of 2017, with no net activity on base metal derivative contracts for the third quarter and first nine months of 2016. See Note 11 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information.

•

Lucky Friday suspension costs of $4.8 million and $14.4 million in the third quarter and first nine months of 2017, respectively. These costs, which include $1.1 million and $3.3 million in non-cash depreciation expense, were incurred during the suspension of full production resulting from the strike, which started in March 2017.

•

Higher interest expense by $3.8 million and $11.8 million in the third quarter and first nine months of 2017, respectively, compared to the same periods of 2016. Interest expense in the first nine months of 2017 and 2016 was net of $0.9 million and $12.0 million, respectively, in capitalized interest primarily related to the #4 Shaft project, with the decrease due to completion of the #4 Shaft in January 2017. In addition, interest expense for the nine months ended September 30, 2017 included $0.9 million in costs related to our proposed private offering of new Senior Notes in June 2017 and concurrent tender offer to purchase our existing Senior Notes, which were not completed.

•

Exploration and pre-development expense increased by $4.6 million and $10.0 million, respectively, in the third quarter and first nine months of 2017 compared to the same periods in 2016. In 2017, we have continued exploration work at our Greens Creek, San Sebastian and Casa Berardi units, and at our other projects in Quebec, Canada. "Pre-development expense" is defined as costs incurred in the exploration stage that may ultimately benefit production, such as underground ramp development, which are expensed due to the lack of proven and probable reserves. Pre-development expense of $1.8 million and $4.1 million in the third quarter and first nine months of 2017, respectively, was related to advancement of our Montanore and Rock Creek projects.

•

Net foreign exchange losses in the third quarter and first nine months of 2017 of $4.8 million and $10.9 million, respectively, versus a net gain of $2.4 million in the third quarter of 2016 and net loss of $7.7 million in the first nine months of 2016. The variances are primarily related to the impact of changes in the CAD-to-USD exchange rate on the remeasurement of our net monetary liabilities in Quebec. During the first nine months of 2017, the applicable CAD-to-USD exchange rate decreased from 1.3426 to 1.2480, compared to a decrease in the rate from 1.3841 to 1.3116 during the first nine months of 2016.

•

Research and development expense of $1.1 million and $2.1 million in the third quarter and first nine months of 2017, respectively, related to evaluation and development of technologies that would be new to our operations.

•

Lower general and administrative expense by $1.6 million and $2.7 million, respectively, for the third quarter and first nine months of 2017 compared to the same periods of 2016 primarily due to lower accruals for incentive compensation.

•

Gain on disposal of properties, plants, equipment and mineral interests of $4.8 million recognized in the third quarter of 2017 primarily related to insurance proceeds received for collapse of the mill building at the Troy mine in February 2017 due to snow.

•

Income tax benefits of $5.4 million and $18.4 million, in the third quarter and first nine months of 2017, respectively, compared to provisions of $9.5 million of $22.6 million, respectively, in the comparable 2016 periods. The benefit for the first nine months of 2017 includes a benefit from a change in income tax position recognized in the first quarter of 2017 relating to the timing of deduction for #4 Shaft development costs at Lucky Friday. See Corporate Matters below for more information.

 

 

The Greens Creek Segment

Dollars are in thousands (except per ounce and per ton amounts)		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Sales		$	61,061			$	85,804			$	191,250			$	199,260
Cost of sales and other direct production costs			(29,320	)			(42,306	)			(100,799	)			(106,238	)
Depreciation, depletion and amortization			(12,607	)			(16,091	)			(39,442	)			(40,746	)
Cost of sales and other direct production costs and depreciation, depletion and amortization			(41,927	)			(58,397	)			(140,241	)			(146,984	)
Gross profit		$	19,134			$	27,407			$	51,009			$	52,276
Tons of ore milled			219,983				202,523				627,900				610,879
Production:
Silver (ounces)			2,344,315				2,445,328				6,205,659				7,020,688
Gold (ounces)			12,563				11,988				39,289				39,497
Zinc (tons)			14,325				12,144				40,697				42,330
Lead (tons)			4,851				4,803				14,080				15,236
Payable metal quantities sold:
Silver (ounces)			1,569,092				2,603,165				4,930,946				6,370,660
Gold (ounces)			7,862				12,364				30,920				35,883
Zinc (tons)			8,445				11,318				27,582				31,370
Lead (tons)			2,935				4,710				10,015				12,580
Ore grades:
Silver ounces per ton			13.65				15.40				12.84				14.61
Gold ounces per ton			0.09				0.09				0.10				0.10
Zinc percent			7.47				6.86				7.49				7.90
Lead percent			2.77				2.92				2.83				3.05
Mining cost per ton		$	69.46			$	69.66			$	69.64			$	69.20
Milling cost per ton		$	31.01			$	31.55			$	32.38			$	31.07
Total Cash Cost, After By-product Credits, Per Silver Ounce (1)		$	(0.15	)		$	4.80			$	0.73			$	4.68
All-In Sustaining Costs ("AISC"), After By-Product Credits, per Silver Ounce (1)		$	4.47			$	11.02			$	5.60			$	10.18

 

(1)

A reconciliation of these non-GAAP measures to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found below in Reconciliation of Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP) to Cash Cost, Before By-product Credits and Cash Cost, After By-product Credits (non-GAAP) and All-In Sustaining Cost, Before By-product Credits and All-In Sustaining Cost, After By-product Credits (non-GAAP).

 

 

The $8.3 million and $1.3 million decreases in gross profit during the third quarter and first nine months of 2017, respectively, compared to the same 2016 periods were primarily a result of lower metals sales volumes due to the timing of concentrate shipments and lower silver ore grades and recoveries, partially offset by higher mill throughput. As a result of differences in the timing of shipments, there were 13,822 tons of concentrate in inventory, including 5,991 tons of higher-valued lead concentrate, having a value of approximately $26.1 million and cost of $15.2 million at September 30, 2017, compared to 3,617 tons (including 1,355 tons of lead concentrate) having a value of approximately $4.7 million and cost of $3.9 million at September 30, 2016. Results for the third quarter of 2017 were also impacted by lower average realized prices for silver and gold, partially offset by higher prices for zinc and lead, compared to the third quarter of 2016. For the first nine months of 2017, silver and gold prices varied only slightly, while prices for zinc and lead were higher, compared to 2016. Gross profit at Greens Creek was affected by positive price adjustments to revenues of $1.0 million and $0.5 million for the third quarter and first nine months of 2017, respectively, compared to negative price adjustments of $1.0 million and positive price adjustments of $0.3 million for the third quarter and first nine months of 2016, respectively. Price adjustments to revenues result from changes in metals prices between transfer of title of concentrates to buyers and final settlements during the period. The price adjustments related to silver, gold, zinc and lead contained in concentrate shipments were net of gains and losses on forward contracts for those metals for each period. The price adjustments and gains and losses on forward contracts discussed above are included in sales.

 

 Mining costs per ton stayed relatively constant for the third quarter and first nine months of 2017 compared to the same periods in 2016. Milling costs per ton decreased 2% in the third quarter of 2017 compared to the same period in 2016 mainly due to higher tonnage. Milling costs per ton increased 4% for the first nine months of 2017 compared to the same period in 2016 due to an increase in power costs, partially offset by higher tonnage.

 

The chart below illustrates the factors contributing to the variances in Cash Cost, After By-product Credits, Per Silver Ounce for the third quarter and first nine months of 2017 versus the same periods in 2016:

 

 

The following table summarizes the components of Cash Cost, After By-product Credits, per Silver Ounce:

 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Cash Cost, Before By-product Credits, per Silver Ounce		$	20.75			$	20.15			$	22.94			$	20.88
By-product credits			(20.90	)			(15.35	)			(22.21	)			(16.20	)
Cash Cost, After By-product Credits, per Silver Ounce		$	(0.15	)		$	4.80			$	0.73			$	4.68

 

 

The following table summarizes the components of AISC, After By-product Credits, per Silver Ounce:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
AISC, Before By-product Credits, per Silver Ounce		$	25.37			$	26.37			$	27.81			$	26.38
By-product credits			(20.90	)			(15.35	)			(22.21	)			(16.20	)
AISC, After By-product Credits, per Silver Ounce		$	4.47			$	11.02			$	5.60			$	10.18

 

The decrease in Cash Cost, After By-product Credits, per Silver Ounce for the third quarter and first nine months of 2017 was primarily the result of higher by-product credits, partially offset by lower silver production. The decrease in AISC, After By-Product Credits, per Silver Ounce was due to the same factors, along with lower capital spending.

 

Mining and milling costs increased in the third quarter and first nine months of 2017 compared to 2016 on a per-ounce basis due primarily to lower silver production resulting from reduced silver grades.

 

Other cash costs per ounce for the third quarter and first nine months of 2017 were higher compared to 2016 due to the effect of lower silver production.

 

Treatment costs were lower in the third quarter and first nine months of 2017 compared to 2016 as a result of improved payment terms from smelters, partially offset by lower silver production. Treatment costs were also impacted by silver price variances, as treatment costs include the value of silver not payable to us through the smelting process. The silver not payable to us is either recovered by the smelters through further processing or ultimately not recovered and included in the smelters' waste material.

 

By-product credits per ounce were higher in the third quarter and first nine months of 2017 compared to 2016 due to higher zinc and lead prices.

 

The difference between what we report as "production" and "payable metal quantities sold" is attributable to the difference between the quantities of metals contained in the concentrates we produce versus the portion of those metals actually paid for by our customers according to the terms of our sales contracts. Differences can also arise from inventory changes incidental to shipping schedules, or variances in ore grades which impact the amount of metals contained in concentrates produced and sold. The difference in payable quantities sold for 2017 compared to 2016 is due mainly to timing of concentrate shipments.

 

While revenue from zinc, lead and gold by-products is significant, we believe that identification of silver as the primary product of the Greens Creek unit is appropriate because:

 

•

silver has historically accounted for a higher proportion of revenue than any other metal and is expected to do so in the future;

•

we have historically presented Greens Creek as a producer primarily of silver, based on the original analysis that justified putting the project into production, and believe that consistency in disclosure is important to our investors regardless of the relationships of metals prices and production from year to year;

•

metallurgical treatment maximizes silver recovery;

•

the Greens Creek deposit is a massive sulfide deposit containing an unusually high proportion of silver; and

•

in most of its working areas, Greens Creek utilizes selective mining methods in which silver is the metal targeted for highest recovery.

 

Likewise, we believe the identification of gold, lead and zinc as by-product credits is appropriate because of their lower economic value compared to silver and due to the fact that silver is the primary product we intend to produce. In addition, we do not receive sufficient revenue from any single by-product metal to warrant classification of such as a co-product.

 

 

We periodically review our revenues to ensure that reporting of primary products and by-products is appropriate.  Because we consider zinc, lead and gold to be by-products of our silver production, the values of these metals offset operating costs within our calculations of Cash Cost, After By-product Credits, per Silver Ounce and AISC, After By-product Credits, per Silver Ounce.

 

The Lucky Friday Segment

 

Dollars are in thousands (except per ounce and per ton amounts)		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Sales		$	199			$	26,140			$	20,022			$	70,152
Cost of sales and other direct production costs			—				(16,538	)			(12,109	)			(47,921	)
Depreciation, depletion and amortization			—				(2,946	)			(2,433	)			(8,775	)
Cost of sales and other direct production costs and depreciation, depletion and amortization			—				(19,484	)			(14,542	)			(56,696	)
Gross profit (loss)		$	199			$	6,656			$	5,479			$	13,456
Tons of ore milled			7,302				74,397				64,371				216,247
Production:
Silver (ounces)			88,298				887,364				769,080				2,721,991
Lead (tons)			519				5,608				4,346				16,604
Zinc (tons)			172				2,681				2,303				7,991
Payable metal quantities sold:
Silver (ounces)			—				829,364				641,004				2,617,130
Lead (tons)			—				5,257				3,596				15,800
Zinc (tons)			—				2,279				1,688				6,578
Ore grades:
Silver ounces per ton			12.87				12.40				12.45				13.05
Lead percent			7.68				7.89				7.12				8.01
Zinc percent			3.21				3.85				3.90				3.94
Mining cost per ton		$	150.89			$	99.13			$	112.60			$	99.27
Milling cost per ton		$	13.15			$	25.99			$	22.93			$	24.77
Cash Cost, After By-product Credits, per Silver Ounce (1)		$	11.60			$	9.07			$	6.58			$	9.34
AISC, After By-product Credits, per Silver Ounce (1)		$	13.37			$	20.22			$	12.21			$	21.35

 

(1)

A reconciliation of these non-GAAP measures to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found below in Reconciliation of Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP) to Cash Cost, Before By-product Credits and Cash Cost, After By-product Credits (non-GAAP) and All-In Sustaining Cost, Before By-product Credits and All-In Sustaining Cost, After By-product Credits (non-GAAP).

 

Gross profit decreased by $6.5 million and $8.0 million in the third quarter and first nine months of 2017, respectively, compared to the same periods in 2016. The $0.2 million in sales reported for the third quarter of 2017 represents gains on base metal derivatives contracts. Although there was limited concentrate production during the third quarter of 2017, we have opted to defer shipments until a later period. There were 1,489 tons of concentrate in inventory at September 30, 2017. The variance in gross profit for the first nine months of 2017 was primarily due to reduced metal production resulting from the strike by unionized employees starting in mid-March 2017, discussed further below, and the lack of concentrate shipments during the third quarter. Silver and lead production was also impacted by lower ore grades in the first quarter of 2017. These factors were partially offset by higher average realized silver, lead and zinc prices realized during the first quarter of 2017, prior to the strike.

 

 

Mining cost per ton was higher by 13% in the first nine months of 2017 compared to the same periods in 2016 due primarily to lower tonnage as a result of the strike discussed below. Milling cost per ton was lower by 7% in the first nine months of 2017 compared to 2016. Mining and milling cost per ton for the third quarter of 2017 are not indicative of future operating results under full production, as there was reduced mill throughput during the quarter. The mill was idle for most of the third quarter of 2017, and only operated when the limited mine production provided a sufficient ore stockpile. In addition, costs not directly related to mining and processing ore have been classified as suspension costs during the strike period, and excluded from the calculations of mining and milling cost per ton for the third quarter and first nine months of 2017.

 

The chart below illustrates the factors contributing to the variances in Cash Cost, After By-product Credits, Per Silver Ounce for the third quarter and first nine months of 2017 compared to the same periods of 2016:

 

 

The following table summarizes the components of Cash Cost, After By-product Credits, per Silver Ounce:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Cash Cost, Before By-product Credits, per Silver Ounce		$	27.44			$	24.26			$	23.42			$	22.63
By-product credits			(15.84	)			(15.19	)			(16.84	)			(13.29	)
Cash Cost, After By-product Credits, per Silver Ounce		$	11.60			$	9.07			$	6.58			$	9.34

 

The following table summarizes the components of AISC, After By-product Credits, per Silver Ounce:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
AISC, Before By-product Credits, per Silver Ounce		$	29.21			$	35.41			$	29.05			$	34.64
By-product credits			(15.84	)			(15.19	)			(16.84	)			(13.29	)
AISC, After By-product Credits, per Silver Ounce		$	13.37			$	20.22			$	12.21			$	21.35

 

 

The increase in Cash Cost, After By-product Credits, per Silver Ounce in the third quarter was the result of lower silver production due to the strike. The decrease in Cash Cost, After By-product Credits, per Silver Ounce for the first nine months of 2017 compared to the same period in 2016 was due to higher by-product credits due to higher lead and zinc prices, partially offset by lower silver production. The decrease in AISC, After By-product Credits, per Silver Ounce in the third quarter and first nine months of 2017 was the result of lower capital costs primarily as a result of completion of the #4 Shaft project in January 2017 and higher by-product credits, partially offset by lower silver production. During the strike period, only costs directly related to the limited production are included in the calculations of Cash Cost, After By-product Credits and AISC, After By-product Credits, per Silver Ounce, and suspension-related costs are excluded from those calculations.

 

Similar to the Greens Creek segment, the difference between what we report as “production” and “payable metal quantities sold” is due to the difference between the quantities of metals contained in the concentrates we produce versus the portion of those metals actually paid for by our customers according to the terms of our sales contracts.

 

While value from lead and zinc is significant, we believe that identification of silver as the primary product of the Lucky Friday unit is appropriate because:

 

•

silver has historically accounted for a higher proportion of revenue than any other metal and is expected to do so in the future;

•

the Lucky Friday unit is situated in a mining district long associated with silver production; and

•

the Lucky Friday unit generally utilizes selective mining methods to target silver production.

 

Likewise, we believe the identification of lead and zinc as by-product credits is appropriate because of their lower economic value compared to silver and due to the fact that silver is the primary product we intend to produce. In addition, we do not receive sufficient revenue from any single by-product metal to warrant classification of such as a co-product.

 

We periodically review our revenues to ensure that reporting of primary products and by-products is appropriate.  Because we consider zinc and lead to be by-products of our silver production, the values of these metals offset operating costs within our calculations of Cash Cost, After By-product Credits, per Silver Ounce.

 

Many of the employees at our Lucky Friday unit are represented by a union, and the most recent collective bargaining agreement with the union expired on April 30, 2016. On February 19, 2017, the unionized employees voted against our contract offer. On March 13, 2017, the unionized employees went on strike, and have been on strike since that time. Production at Lucky Friday was suspended from the start of the strike, until limited production by salary personnel commenced in July 2017. Suspension costs during the strike totaled $3.7 million and $11.1 million in the third quarter and first nine months of 2017, respectively. These costs are combined with non-cash depreciation expense of $1.1 million and $3.3 million for those periods and reported in a separate line item on our condensed consolidated statement of operations. These suspension costs are excluded from the calculation of gross profit, Cash Cost, After By-product Credits, per Silver Ounce and AISC, After By-product Credits, per Silver Ounce. We cannot predict how long the strike will last or whether an agreement will be reached. As a result of the strike or other related events, operations at Lucky Friday could continue to be disrupted, which could adversely affect our financial condition and results of operations.

 

See Note 4 of Notes to Condensed Consolidated Financial Statements (Unaudited) for contingencies related to various events occurring at the Lucky Friday mine in prior periods.

 

 

The Casa Berardi Segment

 

Dollars are in thousands (except per ounce and per ton amounts)		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Sales		$	53,990			$	41,131			$	139,524			$	126,614
Cost of sales and other direct production costs			(32,999	)			(25,830	)			(95,288	)			(74,076	)
Depreciation, depletion and amortization			(15,596	)			(10,465	)			(39,454	)			(32,563	)
Cost of sales and other direct production costs and depreciation, depletion and amortization			(48,595	)			(36,295	)			(134,742	)			(106,639	)
Gross profit (loss)		$	5,395			$	4,836			$	4,782			$	19,975
Tons of ore milled			326,145				258,100				949,946				693,288
Production:
Gold (ounces)			44,141				31,949				113,209				104,282
Silver (ounces)			9,659				8,361				26,681				24,034
Payable metal quantities sold:
Gold (ounces)			42,053				30,769				111,046				100,960
Silver (ounces)			8,725				9,076				26,952				24,506
Ore grades:
Gold ounces per ton			0.153				0.141				0.137				0.172
Silver ounces per ton			0.03				0.04				0.03				0.04
Mining cost per ton		$	82.95			$	92.17			$	81.95			$	90.53
Milling cost per ton		$	16.19			$	18.07			$	16.28			$	18.88
Cash Cost, After By-product Credits, per Gold Ounce (1)		$	750			$	915			$	858			$	750
AISC, After By-product Credits, per Gold Ounce (1)		$	1,091			$	1,442			$	1,226			$	1,243

 

(1)

A reconciliation of these non-GAAP measures to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found below in Reconciliation of Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP) to Cash Cost, Before By-product Credits and Cash Cost, After By-product Credits (non-GAAP) and All-In Sustaining Cost, Before By-product Credits and All-In Sustaining Cost, After By-product Credits (non-GAAP).

 

Gross profit increased by $0.6 million and decreased by $15.2 million for the third quarter and first nine months of 2017, respectively, compared to the same periods in 2016. The increase for the third quarter was primarily due to increased gold production due to higher ore throughput and gold grades, partially offset by lower gold prices. The decrease in gross profit for the first nine months of 2017 compared to 2016 was primarily due to lower ore grades and higher stripping costs in the first half of the year, partially offset by higher ore throughput. The lower grades were due to the addition of production from the East Mine Crown Pillar ("EMCP") pit, which commenced in July 2016, and underground mine sequencing. The increase in ore throughput was also a result of the addition of the EMCP pit. Grades improved in the third quarter of 2017 as higher-grade areas of the underground mine become available for production, and we expect the higher grades to continue in the fourth quarter of 2017.

 

Mining costs per ton were lower by 10% and 9% and milling unit costs decreased by 10% and 14% in the third quarter and first nine months of 2017, respectively, compared to the same periods in 2016 due primarily to higher ore production.

 

 

The chart below illustrates the factors contributing to Cash Cost, After By-product Credits, Per Gold Ounce for the third quarter and first nine months of 2017 and 2016:

 

 

The following table summarizes the components of Cash Cost, After By-product Credits, per Gold Ounce:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Cash Cost, Before By-product Credits, per Gold Ounce		$	754			$	920			$	862			$	754
By-product credits			(4	)			(5	)			(4	)			(4	)
Cash Cost, After By-product Credits, per Gold Ounce		$	750			$	915			$	858			$	750

 

The following table summarizes the components of AISC, After By-product Credits, per Gold Ounce:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
AISC, Before By-product Credits, per Gold Ounce		$	1,095			$	1,447			$	1,230			$	1,247
By-product credits			(4	)			(5	)			(4	)			(4	)
AISC, After By-product Credits, per Gold Ounce		$	1,091			$	1,442			$	1,226			$	1,243

 

The decrease in Cash Cost, After By-product Credits, per Gold Ounce for the third quarter of 2017 compared to the same period of 2016 was primarily due to higher gold production. AISC, After By-product Credits, per Gold Ounce was also lower in the third quarter of 2017 compared to the third quarter of 2016 due to the higher gold production, along with lower capital spending. The increase in Cash Cost, After By-product Credits, per Gold Ounce for the first nine months of 2017 compared to 2016 was primarily the result of higher stripping costs in the first half of the year, partially offset by higher gold production. AISC, After By-product Credits, per Gold Ounce was lower for the first nine months of 2017 compared to 2016 due to lower capital spending and higher gold production, partially offset by the increased stripping in the first half of the year.

 

The difference between what we report as "production" and "payable metal quantities sold" is mainly attributable to inventory changes incidental to the timing of sales of refined metals and shipping schedules.

 

We believe the identification of silver as a by-product credit is appropriate at Casa Berardi because of its lower economic value compared to gold and due to the fact that gold is the primary product we intend to produce there. In addition, we do not receive sufficient revenue from silver at Casa Berardi to warrant classification of such as a co-product. Because we consider silver to be a by-product of our gold production at Casa Berardi, the value of silver offsets operating costs within our calculations of Cash Cost, After By-product Credits, per Gold Ounce.

 

 

The San Sebastian Segment

 

Dollars are in thousands (except per ounce and per ton amounts)		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Sales		$	25,589			$	26,318			$	66,866			$	85,686
Cost of sales and other direct production costs			(6,039	)			(5,855	)			(16,341	)			(20,927	)
Depreciation, depletion and amortization			(641	)			(677	)			(2,036	)			(2,508	)
Cost of sales and other direct production costs and depreciation, depletion and amortization			(6,680	)			(6,532	)			(18,377	)			(23,435	)
Gross profit		$	18,909			$	19,786			$	48,489			$	62,251
Tons of ore milled			36,482				40,192				111,623				108,750
Production:
Silver (ounces)			880,885				975,610				2,498,638				3,434,052
Gold (ounces)			6,342				8,189				19,222				27,000
Payable metal quantities sold:
Silver (ounces)			963,000				843,238				2,499,750				3,209,788
Gold (ounces)			7,465				7,215				19,955				24,374
Ore grades:
Silver ounces per ton			25.48				25.77				23.71				33.70
Gold ounces per ton			0.18				0.22				0.18				0.27
Mining cost per ton		$	35.69			$	59.49			$	38.70			$	83.31
Milling cost per ton		$	69.42			$	66.88			$	66.64			$	68.52
Cash Cost, After By-product Credits, per Silver Ounce (1)		$	(3.12	)		$	(4.03	)		$	(3.23	)		$	(3.40	)
AISC, After By-product Credits, per Silver Ounce (1)		$	(0.83	)		$	(2.39	)		$	(0.14	)		$	(2.25	)

 

(1)

A reconciliation of these non-GAAP measures to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found below in Reconciliation of Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP) to Cash Cost, Before By-product Credits and Cash Cost, After By-product Credits (non-GAAP) and All-In Sustaining Cost, Before By-product Credits and All-In Sustaining Cost, After By-product Credits (non-GAAP).

 

The $0.9 million decrease in gross profit for the third quarter of 2017 compared to the third quarter of 2016 was primarily due to lower silver and gold production and prices. The reduction in silver and gold production was a result of lower ore throughput and grades. The $13.8 million decrease in gross profit for the first nine months of 2017 compared to the same period in 2016 was primarily due to lower silver and gold production as a result of lower ore grades, partially offset by higher ore throughput. The ore processed in the first half of 2016 had considerably higher grades than anticipated over the mine life.

 

 

The chart below illustrates the factors contributing to Cash Cost, After By-product Credits, Per Silver Ounce for the third quarter and first nine months of 2017 and 2016:

 

 

The following table summarizes the components of Cash Cost, After By-product Credits, per Silver Ounce:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
Cash Cost, Before By-product Credits, per Silver Ounce		$	6.07			$	7.16			$	6.39			$	6.49
By-product credits			(9.19	)			(11.19	)			(9.62	)			(9.89	)
Cash Cost, After By-product Credits, per Silver Ounce		$	(3.12	)		$	(4.03	)		$	(3.23	)		$	(3.40	)

 

The following table summarizes the components of AISC, After By-product Credits, per Silver Ounce:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2017				2016				2017				2016
AISC, Before By-product Credits, per Silver Ounce		$	8.36			$	8.80			$	9.48			$	7.64
By-product credits			(9.19	)			(11.19	)			(9.62	)			(9.89	)
AISC, After By-product Credits, per Silver Ounce		$	(0.83	)		$	(2.39	)		$	(0.14	)		$	(2.25	)

 

The increase in Cash Cost, After By-product Credits, per Silver Ounce in the third quarter and first nine months of 2017 compared to the same periods of 2016 was primarily the result of lower by-product credits due to lower gold production and prices, partially offset by lower mining costs as a result of reduced mining of waste and the impact of lower silver production on the calculation. The same factors, along with higher exploration and capital spending, resulted in the increases in AISC, After By-product Credits, per Silver Ounce for the third quarter and first nine months of 2017 compared to 2016.

 

The difference between what we report as "production" and "payable metal quantities sold" is mainly attributable to inventory changes incidental to the timing of sales of refined metals and shipping schedules.

 

We believe the identification of gold as a by-product credit is appropriate at San Sebastian because of its anticipated lower economic value compared to silver over the life of the mine. In addition, we do not receive sufficient revenue from gold at San Sebastian to warrant classification of such as a co-product. Because we consider gold to be a by-product of our silver production at San Sebastian, the value of gold offsets operating costs within our calculations of Cash Cost, After By-product Credits, per Silver Ounce and AISC, After By-product Credits, per Silver Ounce. In addition to the impact of the by-product credits from gold, Cash Cost, After By-product Credits, per Silver Ounce and AISC, After By-product Credits, per silver Ounce at San Sebastian are lower compared to our other operations due to the orebody being near surface and having higher precious metal grades, resulting in a lower Cash Cost, Before By-product Credits, per Silver Ounce and AISC, After By-product Credits, per Silver Ounce.

 

 

In the first quarter of 2017, we began construction of a new underground ramp and rehabilitation of the historical underground access. Once completed, these underground accesses should allow us to mine deeper portions of the deposits at San Sebastian, and we anticipate underground ore production to begin in the first quarter of 2018. Capital costs related to the underground development are expected to total approximately $5.0 million in 2017.

 

 

Corporate Matters

 

Employee Benefit Plans

 

Our defined benefit pension plans provide a significant benefit to our employees, but also represent a significant liability to us. The liability recorded for the funded status of our plans was $43.9 million and $44.9 million as of September 30, 2017 and December 31, 2016, respectively. We made cash contributions to our defined benefit plans of $1.2 million in April 2017 and $5.7 million in July 2017. While the economic variables which will determine future funding requirements are uncertain, we expect contributions to continue to be required in future years under current plan provisions, and we periodically examine the plans for affordability and competitiveness. See Note 7 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information.

 

Income Taxes

 

The income tax expense for the three- and nine-month periods ended September 30, 2017 has been computed using a discrete effective tax rate method. We have historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate ("AETR") for the full fiscal year to “ordinary” pretax income or loss (excluding unusual or infrequently occurring discrete items) for the reporting period. However, small changes to estimated annual “ordinary” pre-tax income cause significant volatility to the estimated AETR, due to near break-even levels of pre-tax income and significant permanent differences in the U.S. and Canada. Therefore, we determined that the AETR method would not provide a reliable estimate for the fiscal three- and nine-month periods ended September 30, 2017. As a result of this change in method, an amount representing a recovery of income tax expense reported in the first and second quarters was recorded in this period.

 

Each reporting period we assess our deferred tax assets utilizing long-range forecasts to provide reasonable assurance that they will be realized through future earnings.  We continue to have a net deferred tax asset in the U.S. and a net deferred tax liability in Canada.

 

Our U.S. net deferred tax asset at September 30, 2017 totaled $44.7 million, or 2% of total assets, an increase of $8.9 million from the $35.8 million net deferred tax asset at December 31, 2016. The largest component of the deferred tax asset is net operating loss carryforwards. The next largest component is reclamation costs. We have previously determined that we are an indefinite AMT taxpayer, resulting in additional valuation allowance primarily related to forecasted utilization of regular net operating loss carryforwards and the effect of re-measuring temporary deferred tax assets using a tax rate of 20% which differed from the previous rate of 35%. During the fourth quarter of 2016, we determined that we were eligible to take a different income tax position relating to the timing of deductions for #4 Shaft development costs at Lucky Friday. We filed with the Internal Revenue Service ("IRS") a request for approval to use this method, which was approved in the first quarter of 2017. The change resulted in additional deductions of approximately $203 million and $110 million for regular tax and AMT, respectively, resulting in a current tax benefit of approximately $10.7 million for the reduction in AMT payable for 2016. In addition, this change in tax position substantially changes the timing of additional deductions for these costs for regular tax and AMT relative to our projected life of mine and projected taxable income. These timing changes caused us to change our assessment of the ability to generate sufficient future taxable income to realize our deferred tax assets, resulting in a valuation allowance decrease and deferred tax benefit of approximately $15.1 million in the first quarter of 2017. At September 30, 2017, we retained a valuation allowance on U.S. deferred tax assets of approximately $66 million, primarily for net operating loss carryforwards.

 

 

Our net Canadian deferred tax liability at September 30, 2017 was $122.7 million, a decrease of $0.2 million from the $122.9 million net deferred tax liability at December 31, 2016. The deferred tax liability is primarily related to the excess of the carrying value of the mineral resource assets over the tax bases of those assets for Canadian tax reporting.

 

We had no Mexican deferred tax asset or liability at September 30, 2017 or December 31, 2016. We expect to have unremitted earnings in Mexico by the end 2017; however, we anticipate being able to fully offset any U.S. tax impact of repatriating any Mexican earnings with foreign tax credits that are available for use under both regular tax and AMT. Accordingly, we estimate the net U.S. income tax impact of unremitted earnings to be zero. A $5.8 million valuation allowance remains on deferred tax assets in foreign jurisdictions.

 

 

Reconciliation of Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP) to Cash Cost, Before By-product Credits and Cash Cost, After By-product Credits (non-GAAP) and All-In Sustaining Cost, Before By-product Credits and All-In Sustaining Cost, After By-product Credits (non-GAAP)

 

The tables below present reconciliations between the most comparable GAAP measure of cost of sales and other direct production costs and depreciation, depletion and amortization to the non-GAAP measures of (i) Cash Cost, Before By-product Credits, (ii) Cash Cost, After By-product Credits, (iii) AISC, Before By-product Credits and (iv) AISC, After By-product Credits for our operations at the Greens Creek, Lucky Friday, San Sebastian and Casa Berardi units and for the Company for the three- and nine-month periods ended September 30, 2017 and 2016.

 

Cash Cost, After By-product Credits, per Ounce and AISC, After By-product Credits, per Ounce are measures developed by precious metals companies (including the Silver Institute and/or the World Gold Council) in an effort to provide a uniform standard for comparison purposes. There can be no assurance, however, that these non-GAAP measures as we report them are the same as those reported by other mining companies.

 

Cash Cost, After By-product Credits, per Ounce is an important operating statistic that we utilize to measure each mine's operating performance. We have recently started reporting AISC, After By-product Credits, per Ounce which we use as a measure of our mines' net cash flow after costs for exploration, pre-development, reclamation, and sustaining capital. This is similar to the Cash Cost, After By-product Credits, per Ounce non-GAAP measure we report, but also includes on-site exploration, reclamation, and sustaining capital costs. Current GAAP measures used in the mining industry, such as cost of goods sold, do not capture all the expenditures incurred to discover, develop and sustain silver and gold production. Cash Cost, After By-product Credits, per Ounce and AISC, After By-product Credits, per Ounce also allow us to benchmark the performance of each of our mines versus those of our competitors. As a primary silver mining company, we also use these statistics on an aggregate basis - aggregating the Greens Creek, Lucky Friday and San Sebastian mines - to compare our performance with that of other primary silver mining companies. With regard to Casa Berardi, we use Cash Cost, After By-product Credits, per Gold Ounce and AISC, After By-product Credits, per Gold Ounce to compare its performance with other gold mines. Similarly, these statistics are useful in identifying acquisition and investment opportunities as they provide a common tool for measuring the financial performance of other mines with varying geologic, metallurgical and operating characteristics.

 

Cash Cost, Before By-product Credits and AISC, Before By-product Credits include all direct and indirect operating cash costs related directly to the physical activities of producing metals, including mining, processing and other plant costs, third-party refining expense, on-site general and administrative costs, royalties and mining production taxes. AISC, Before By-product Credits for each mine also includes on-site exploration, reclamation, and sustaining capital costs. AISC, Before By-product Credits for our consolidated silver properties also includes corporate costs for general and administrative expense, exploration and sustaining capital projects. By-product credits include revenues earned from all metals other than the primary metal produced at each unit. As depicted in the tables below, by-product credits comprise an essential element of our silver unit cost structure, distinguishing our silver operations due to the polymetallic nature of their orebodies.

 

 

In addition to the uses described above, Cash Cost, After By-product Credits, per Ounce and AISC, After By-product Credits, per Ounce provide management and investors an indication of operating cash flow, after consideration of the average price received from production. We also use these measurements for the comparative monitoring of performance of our mining operations period-to-period from a cash flow perspective.

 

The Casa Berardi information below reports Cash Cost, After By-product Credits, per Gold Ounce and AISC, After By-product Credits, per Gold Ounce for the production of gold, its primary product, and by-product revenues earned from silver, which is a by-product at Casa Berardi. Only costs and ounces produced relating to units with the same primary product are combined to represent Cash Cost, After By-product Credits, per Ounce and AISC, After By-product Credits, per Ounce. Thus, the gold produced at our Casa Berardi unit is not included as a by-product credit when calculating Cash Cost, After By-product Credits, per Silver Ounce and AISC, After By-product Credits, per Silver Ounce for the total of Greens Creek, Lucky Friday and San Sebastian, our combined silver properties. Similarly, the silver produced at our other three units is not included as a by-product credit when calculating the gold metrics for Casa Berardi.

 

 

In thousands (except per ounce amounts)		Three Months Ended September 30, 2017
		Greens Creek				Lucky Friday(2)				San Sebastian				Corporate(3)				Total Silver				Casa Berardi (Gold)				Total
Cost of sales and other direct production costs and depreciation, depletion and amortization		$	41,927				—			$	6,680							$	48,607			$	48,595			$	97,202
Depreciation, depletion and amortization			(12,607	)			—				(641	)							(13,248	)			(15,596	)			(28,844	)
Treatment costs			12,067				440				422								12,929				682				13,611
Change in product inventory			7,675				1,960				(627	)							9,008				(288	)			8,720
Reclamation and other costs			(394	)			18				(494	)							(870	)			(124	)			(994	)
Cash Cost, Before By-product Credits (1)			48,668				2,418				5,340								56,426				33,269				89,695
Reclamation and other costs			666				38				117								821				123				944
Exploration			1,944				(2	)			1,495				477				3,914				1,161				5,075
Sustaining capital			8,210				119				402				1,105				9,836				13,775				23,611
General and administrative															9,529				9,529								9,529
AISC, Before By-product Credits (1)			59,488				2,573				7,354								80,526				48,328				128,854
By-product credits:
Zinc			(27,046	)			(293	)											(27,339	)							(27,339	)
Gold			(13,907	)							(8,088	)							(21,995	)							(21,995	)
Lead			(8,067	)			(1,102	)											(9,169	)							(9,169	)
Silver																							(161	)			(161	)
Total By-product credits			(49,020	)			(1,395	)			(8,088	)							(58,503	)			(161	)			(58,664	)
Cash Cost, After By-product Credits		$	(352	)		$	1,023			$	(2,748	)						$	(2,077	)		$	33,108			$	31,031
AISC, After By-product Credits		$	10,468			$	1,178			$	(734	)						$	22,023			$	48,167			$	70,190
Divided by ounces produced			2,344				88				880								3,312				44
Cash Cost, Before By-product Credits, per Ounce		$	20.75			$	27.44			$	6.07							$	17.03			$	753.70
By-product credits per ounce			(20.90	)			(15.84	)			(9.19	)							(17.66	)			(3.65	)
Cash Cost, After By-product Credits, per Ounce		$	(0.15	)		$	11.60			$	(3.12	)						$	(0.63	)		$	750.05
AISC, Before By-product Credits, per Ounce		$	25.37			$	29.21			$	8.36							$	24.31			$	1,094.86
By-product credits per ounce			(20.90	)			(15.84	)			(9.19	)							(17.66	)			(3.65	)
AISC, After By-product Credits, per Ounce		$	4.47			$	13.37			$	(0.83	)						$	6.65			$	1,091.21

 

 

In thousands (except per ounce amounts)		Three Months Ended September 30, 2016
		Greens Creek				Lucky Friday(2)				San Sebastian				Corporate(3)				Total Silver				Casa Berardi (Gold)				Total
Cost of sales and other direct production costs and depreciation, depletion and amortization		$	58,397			$	19,484			$	6,532							$	84,413			$	36,295			$	120,708
Depreciation, depletion and amortization			(16,091	)			(2,946	)			(677	)							(19,714	)			(10,465	)			(30,179	)
Treatment costs			15,114				5,211				348								20,673				218				20,891
Change in product inventory			(10,407	)			(46	)			930								(9,523	)			3,460				(6,063	)
Reclamation and other costs			2,273				(171	)			(140	)							1,962				(115	)			1,847
Cash Cost, Before By-product Credits (1)			49,286				21,532				6,993								77,811				29,393				107,204
Reclamation and other costs			682				165				42								889				117				1,006
Exploration			349				—				1,051				421				1,821				655				2,476
Sustaining capital			14,162				9,725				506				76				24,469				16,078				40,547
General and administrative															11,155				11,155								11,155
AISC, Before By-product Credits (1)			64,479				31,422				8,592								116,145				46,243				162,388
By-product credits:
Zinc			(17,152	)			(4,201	)											(21,353	)							(21,353	)
Gold			(13,807	)							(10,922	)							(24,729	)							(24,729	)
Lead			(6,577	)			(9,284	)											(15,861	)							(15,861	)
Silver																							(162	)			(162	)
Total By-product credits			(37,536	)			(13,485	)			(10,922	)							(61,943	)			(162	)			(62,105	)
Cash Cost, After By-product Credits		$	11,750			$	8,047			$	(3,929	)						$	15,868			$	29,231			$	45,099
AISC, After By-product Credits		$	26,943			$	17,937			$	(2,330	)						$	54,202			$	46,081			$	100,283
Divided by ounces produced			2,445				887				976								4,308				32
Cash Cost, Before By-product Credits, per Ounce		$	20.15			$	24.26			$	7.16							$	18.06			$	920.00
By-product credits per ounce			(15.35	)			(15.19	)			(11.19	)							(14.38	)			(5.07	)
Cash Cost, After By-product Credits, per Ounce		$	4.80			$	9.07			$	(4.03	)						$	3.68			$	914.93
AISC, Before By-product Credits, per Ounce		$	26.37			$	35.41			$	8.80							$	26.96			$	1,447.40
By-product credits per ounce			(15.35	)			(15.19	)			(11.19	)							(14.38	)			(5.07	)
AISC, After By-product Credits, per Ounce		$	11.02			$	20.22			$	(2.39	)						$	12.58			$	1,442.33

 

 

In thousands (except per ounce amounts)		Nine Months Ended September 30, 2017
		Greens Creek				Lucky Friday(2)				San Sebastian				Corporate(3)				Total Silver				Casa Berardi (Gold)				Total
Cost of sales and other direct production costs and depreciation, depletion and amortization		$	140,241			$	14,542			$	18,377							$	173,160			$	134,742			$	307,902
Depreciation, depletion and amortization			(39,442	)			(2,433	)			(2,036	)							(43,911	)			(39,454	)			(83,365	)
Treatment costs			37,621				4,257				906								42,784				1,774				44,558
Change in product inventory			5,398				1,811				(192	)							7,017				881				7,898
Reclamation and other costs			(1,474	)			(163	)			(1,089	)							(2,726	)			(354	)			(3,080	)
Cash Cost, Before By-product Credits (1)			142,344				18,014				15,966								176,324				97,589				273,913
Reclamation and other costs			1,999				217				351								2,567				353				2,920
Exploration			3,339				(1	)			4,984				1,307				9,629				3,029				12,658
Sustaining capital			24,895				4,109				2,379				2,275				33,658				38,245				71,903
General and administrative															29,044				29,044								29,044
AISC, Before By-product Credits (1)			172,577				22,339				23,680								251,222				139,216				390,438
By-product credits:
Zinc			(72,472	)			(4,353	)											(76,825	)							(76,825	)
Gold			(42,675	)							(24,032	)							(66,707	)							(66,707	)
Lead			(22,696	)			(8,599	)											(31,295	)							(31,295	)
Silver																							(450	)			(450	)
Total By-product credits			(137,843	)			(12,952	)			(24,032	)							(174,827	)			(450	)			(175,277	)
Cash Cost, After By-product Credits		$	4,501			$	5,062			$	(8,066	)						$	1,497			$	97,139			$	98,636
AISC, After By-product Credits		$	34,734			$	9,387			$	(352	)						$	76,395			$	138,766			$	215,161
Divided by ounces produced			6,206				769				2,498								9,473				113
Cash Cost, Before By-product Credits, per Ounce		$	22.94			$	23.42			$	6.39							$	18.62			$	862.02
By-product credits per ounce			(22.21	)			(16.84	)			(9.62	)							(18.46	)			(3.97	)
Cash Cost, After By-product Credits, per Ounce		$	0.73			$	6.58			$	(3.23	)						$	0.16			$	858.05
AISC, Before By-product Credits, per Ounce		$	27.81			$	29.05			$	9.48							$	26.52			$	1,229.72
By-product credits per ounce			(22.21	)			(16.84	)			(9.62	)							(18.46	)			(3.97	)
AISC, After By-product Credits, per Ounce		$	5.60			$	12.21			$	(0.14	)						$	8.06			$	1,225.75

 

 

In thousands (except per ounce amounts)		Nine Months Ended September 30, 2016
		Greens Creek				Lucky Friday(2)				San Sebastian				Corporate(3)				Total Silver				Casa Berardi (Gold)				Total
Cost of sales and other direct production costs and depreciation, depletion and amortization		$	146,984			$	56,696			$	23,435							$	227,115			$	106,639			$	333,754
Depreciation, depletion and amortization			(40,746	)			(8,775	)			(2,508	)							(52,029	)			(32,563	)			(84,592	)
Treatment costs			46,069				15,323				1,193								62,585				627				63,212
Change in product inventory			(6,083	)			(1,102	)			1,743								(5,442	)			4,212				(1,230	)
Reclamation and other costs			348				(556	)			(1,583	)							(1,791	)			(344	)			(2,135	)
Cash Cost, Before By-product Credits (1)			146,572				61,586				22,280								230,438				78,571				309,009
Reclamation and other costs			2,045				495				126								2,666				345				3,011
Exploration			1,368				—				2,349				1,286				5,003				2,280				7,283
Sustaining capital			35,199				32,203				1,494				486				69,382				48,860				118,242
General and administrative															31,728				31,728								31,728
AISC, Before By-product Credits (1)			185,184				94,284				26,249								339,217				130,056				469,273
By-product credits:
Zinc			(52,104	)			(10,685	)											(62,789	)							(62,789	)
Gold			(42,017	)							(33,961	)							(75,978	)							(75,978	)
Lead			(19,598	)			(25,485	)											(45,083	)							(45,083	)
Silver																							(409	)			(409	)
Total By-product credits			(113,719	)			(36,170	)			(33,961	)							(183,850	)			(409	)			(184,259	)
Cash Cost, After By-product Credits		$	32,853			$	25,416			$	(11,681	)						$	46,588			$	78,162			$	124,750
AISC, After By-product Credits		$	71,465			$	58,114			$	(7,712	)						$	155,367			$	129,647			$	285,014
Divided by ounces produced			7,021				2,722				3,434								13,177				104
Cash Cost, Before By-product Credits, per Ounce		$	20.88			$	22.63			$	6.49							$	17.49			$	753.45
By-product credits per ounce			(16.20	)			(13.29	)			(9.89	)							(13.95	)			(3.92	)
Cash Cost, After By-product Credits, per Ounce		$	4.68			$	9.34			$	(3.40	)						$	3.54			$	749.53
AISC, Before By-product Credits, per Ounce		$	26.38			$	34.64			$	7.64							$	25.74			$	1,247.15
By-product credits per ounce			(16.20	)			(13.29	)			(9.89	)							(13.95	)			(3.92	)
AISC, After By-product Credits, per Ounce		$	10.18			$	21.35			$	(2.25	)						$	11.79			$	1,243.23

 

(1)

Includes all direct and indirect operating costs related to the physical activities of producing metals, including mining, processing and other plant costs, third-party refining and marketing expense, on-site general and administrative costs, royalties and mining production taxes, before by-product revenues earned from all metals other than the primary metal produced at each unit. AISC, Before By-product Credits also includes on-site exploration, reclamation, and sustaining capital costs.

 

(2)

The unionized employees at Lucky Friday have been on strike since March 13, 2017, and production at Lucky Friday has been limited since that time. For the first nine months of 2017, costs related to suspension of full production totaling approximately $11.1 million, along with $3.3 million in non-cash depreciation expense for that period, have been excluded from the calculations of cost of sales and other direct production costs and depreciation, depletion and amortization, Cash Cost, Before By-product Credits, Cash Cost, After By-product Credits, AISC, Before By-product Credits, and AISC, After By-product Credits.

 

(3)	AISC, Before By-product Credits for our consolidated silver properties includes corporate costs for general and administrative expense, exploration and sustaining capital.

 

 

Financial Liquidity and Capital Resources

 

Our liquid assets include (in millions):

 

		September 30, 2017				December 31, 2016
Cash and cash equivalents held in U.S. dollars		$	146.4			$	156.1
Cash and cash equivalents held in foreign currency			26.5				13.7
Total cash and cash equivalents			172.9				169.8
Marketable debt securities - current			33.0				29.1
Marketable equity securities - non-current			7.1				5.0
Total cash, cash equivalents and investments		$	213.0			$	203.9

 

Cash and cash equivalents increased by $3.1 million in the first nine months of 2017, as discussed below. Cash held in foreign currencies represents balances in Canadian dollars and Mexican pesos, with the $12.8 million increase in the first nine months of 2017 resulting from increases in both currencies held. Current marketable debt securities increased by $3.9 million (discussed below) and non-current marketable equity securities increased by $2.1 million (see Note 2 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information).

 

As discussed in Note 9 of Notes to Condensed Consolidated Financial Statements (Unaudited), on April 12, 2013, we completed an offering of Senior Notes in the total principal amount of US$500 million, which have a total principal balance of $506.5 million as of September 30, 2017. The Senior Notes are due May 1, 2021 and bear interest at a rate of 6.875% per year from the most recent payment date to which interest has been paid or provided for.  Interest on the Senior Notes is payable on May 1 and November 1 of each year, commencing November 1, 2013, and we have made all interest payments payable to date.

 

In the third quarter of 2015, we made a development decision to mine near surface, high grade portions of the silver and gold deposits at our San Sebastian project in Mexico and commenced ore production at the end of 2015.  As a result, San Sebastian has generated positive cash flows since the start of production there. In January 2017, we initiated work to develop and rehabilitate underground access which, upon completion, is expected to allow us to mine deeper portions of the deposits at San Sebastian. We currently anticipate San Sebastian will continue to generate positive cash flows until early or mid-2020.  However, our costs could change, and our ability to generate cash flow at San Sebastian could be impacted by changes in precious metals prices or other factors, and there can be no assurance that we will be able to develop and operate San Sebastian as anticipated.

 

As further discussed in the Lucky Friday Segment section above, the union employees at Lucky Friday have been on strike since March 13, 2017. Production at Lucky Friday was suspended from the start of the strike until July 2017, with limited production resuming at that time. We cannot predict how long the strike will last or whether an agreement will be reached. We expect to incur cash expenditures of approximately $1.0 million to $1.5 million per month to advance engineering and infrastructure for the restart of full production, in addition to costs related to limited interim production. As a result of the strike or other related events, operations at Lucky Friday could continue to be disrupted, which could adversely affect our financial condition and results of operations.

 

As discussed in Note 8 of Notes to Condensed Consolidated Financial Statements (Unaudited), in February 2016 we entered into an equity distribution agreement under which we may issue and sell shares of our common stock from time to time having an aggregate offering price of up to $75 million, with the net proceeds available for general corporate purposes. Whether or not we engage in sales from time to time may depend on a variety of factors, including share price, our cash resources, customary black-out restrictions, and whether we have any material inside information, and the agreement can be terminated by us at any time. As of September 30, 2017, we had sold 4,608,847 shares through the at-the-market program for net proceeds of $17.7 million, including 1,828,760 shares sold in the first nine months of 2017 for total proceeds of approximately $9.6 million. In July 2017, we used $5.7 million of the proceeds from shares sold in the second quarter of 2017 to fund contributions to our defined benefit pension plans.

 

 

Pursuant to our common stock dividend policy described in Note 8 of Notes to Condensed Consolidated Financial Statements (Unaudited), our Board of Directors declared and paid dividends on common stock totaling $3.0 million and $2.9 million in the first nine months of 2017 and 2016, respectively. On November 7, 2017, our Board of Directors declared a dividend on common stock totaling $1.0 million payable in December 2017. Our dividend policy has a silver-price-linked component which ties the amount of declared common stock dividends to our realized silver price for the preceding quarter. Another component of our common stock dividend policy anticipates paying an annual minimum dividend. The declaration and payment of dividends on common stock is at the sole discretion of our board of directors, and there can be no assurance that we will continue to declare and pay common stock dividends in the future.

 

On May 8, 2012, we announced that our board of directors approved a stock repurchase program.  Under the program, we are authorized to repurchase up to 20 million shares of our outstanding common stock from time to time in open market or privately negotiated transactions, depending on prevailing market conditions and other factors.  The repurchase program may be modified, suspended or discontinued by us at any time. Whether or not we engage in repurchases from time to time may depend on a variety of factors, including not only price and cash resources, but customary black-out restrictions, whether we have any material inside information, limitations on share repurchases or cash usage that may be imposed by our credit agreement or in connection with issuances of securities, alternative uses for cash, applicable law, and other investment opportunities from time to time. As of September 30, 2017, 934,100 shares have been purchased in prior periods at an average price of $3.99 per share, leaving 19.1 million shares that may yet be purchased under the program. The closing price of our common stock at November 3, 2017, was $4.45 per share.

 

We may defer some capital investment and/or exploration and pre-development activities, engage in asset sales or secure additional capital if necessary to maintain liquidity. We also may pursue additional acquisition opportunities, which could require additional equity issuances or other forms of financing. There can be no assurance that such financing will be available to us.

 

As a result of our current cash balances, the performance of our current and expected operations, current metals prices, proceeds from potential at-the-market sales of common stock, and availability of approximately $97 million of our revolving credit facility, we believe our cash, cash equivalents, investments, projected cash from operations, and availability of financing, if needed, will be adequate to meet our obligations and other potential cash requirements during the next 12 months. Our obligations and other uses of cash may include, but are not limited to: debt service obligations related to the Senior Notes, capital expenditures at our operations, potential acquisitions of other mining companies or properties, regulatory matters, litigation, potential repurchases of our common stock under the program described above, and payment of dividends on common stock, if declared by our board of directors.  We estimate capital expenditures will total between $105 and $110 million in 2017, including $70.4 million already incurred as of September 30, 2017.  We estimate combined exploration and pre-development expenditures will total between $25 million and $30 million in 2017, including $21.7 million already incurred as of September 30, 2017. However, capital, exploration, and pre-development expenditures may change based upon our financial position, metals prices, and other considerations. Our ability to fund the activities described above will depend on our operating performance, metals prices, our costs (and our ability to estimate future costs), sources of liquidity available to us, and other factors. A sustained downturn in metals prices or significant increase in operational or capital costs, other uses of cash, or other factors beyond our control could impact our plans.

 

		Nine Months Ended
		September 30, 2017				September 30, 2016
Cash provided by operating activities (in millions)		$	74.1			$	173.1

 

 

Cash provided by operating activities in the first nine months of 2017 decreased by $99.0 million compared to the same period in 2016 due to lower income, as adjusted for non-cash items, resulting primarily from reduced gross profit at our San Sebastian, Casa Berardi and Lucky Friday units. In addition, working capital and other operating asset and liability changes resulted in a net cash flow decrease of $26.4 million in the first nine months of 2017 compared to a net increase of $11.6 million in the first nine months of 2016.  The $38.0 million variance in working capital changes is primarily attributable to (i) estimated income tax payments in Mexico in 2017, (ii) higher product inventory due primarily to the timing of shipments at Greens Creek and the strike at Lucky Friday, (iii) lower accruals for incentive compensation, and (iv) reduced accounts payable at Lucky Friday due to completion of the #4 Shaft and the strike. Those factors were partially offset by lower accounts receivable, also due to the timing of shipments at Greens Creek and the strike at Lucky Friday. In addition, in the third quarter of 2016, we reached a settlement on the insurance policy for reclamation at the Troy mine resulting in cash proceeds to us of $16.0 million, which was partially offset by payment of $6.0 million in August 2016 by one of our subsidiaries for settlement of its liability for response costs at a CERCLA/Superfund site.

 

		Nine Months Ended
		September 30, 2017				September 30, 2016
Cash used in investing activities (in millions)		$	(69.2	)		$	(153.3	)

 

During the first nine months of 2017, we invested $70.4 million in capital expenditures, not including $6.4 million in non-cash capital lease additions, a decrease of $49.8 million compared to the same period in 2016 primarily due to lower costs for (i) the #4 Shaft project, which was completed in January 2017, (ii) construction of the tailings facility at Greens Creek, and (iii) development of the EMCP pit at Casa Berardi.  In the first nine months of 2017 and 2016, we purchased bonds having maturities of greater than 90 days and less than 365 days with a cost basis of $35.3 million and $31.9 million, respectively, and bonds valued at $31.2 million and $7.2 million matured during the first nine months of 2017 and 2016, respectively. We purchased marketable equity securities having a cost basis of $1.6 million and $0.9 million during the first nine months of 2017 and 2016, respectively. During the first nine months of 2017, we received $5.6 million in insurance proceeds related collapse of the mill building at the Troy mine in February 2017 due to snow. We recognized a cash outflow for the acquisition of Mines Management, net of cash acquired, of $3.9 million in September 2016. We reduced restricted cash by $1.1 million during the first nine months of 2017 as a result of replacing cash collateral for future reclamation costs with non-cash bonding. During the first nine months of 2016, we incurred an increase in restricted cash of $3.9 million related to the settlement of a CERCLA claim for response costs at a CERCLA/Superfund site by one of our subsidiaries.

 

		Nine Months Ended
		September 30, 2017				September 30, 2016
Cash used in financing activities (in millions)		$	(2.8	)		$	(7.8	)

 

During the first nine months of 2017 and 2016, we received $9.6 million and $8.1 million, respectively, in net proceeds from the sale of shares of our common stock under the equity distribution agreement discussed above. We made repayments on our capital leases of $5.1 million and $6.3 million in the nine-month periods ended September 30, 2017 and 2016, respectively. We also made repayments of debt totaling $0.5 million and $1.8 million in the first nine months of 2017 and 2016, respectively. During the first nine months of 2017 and 2016, we paid cash dividends on our common stock totaling $3.0 million and $2.9 million, respectively, and cash dividends of $0.4 million in each period on our Series B Preferred Stock. We acquired treasury shares for $3.0 million and $4.4 million in the first nine months of 2017 and 2016, respectively, resulting primarily from our employees' elections to utilize net share settlement to satisfy their tax withholding obligations related to incentive compensation paid in stock and vesting of restricted stock units. See Note 8 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information.

 

Exchange rate fluctuations between the U.S. dollar and the Canadian dollar and Mexican peso resulted in increases in our cash balance of $1.1 million and $0.6 million, respectively, during the nine months ended September 30, 2017 and 2016.

 

 

Contractual Obligations, Contingent Liabilities and Commitments

 

The table below presents our fixed, non-cancelable contractual obligations and commitments primarily related to our Senior Notes, outstanding purchase orders, certain capital expenditures, our credit facility and lease arrangements as of September 30, 2017 (in thousands):

 

		Payments Due By Period
		Less than 1 year				1-3 years				4-5 years				More than 5 years				Total
Purchase obligations (1)		$	23,100			$	—			$	—			$	—			$	23,100
Commitment fees (2)			500				942				—				—				1,442
Contractual obligations (3)			471				—				—				—				471
Capital lease commitments (4)			6,293				6,548				1,260				—				14,101
Operating lease commitments (5)			2,993				2,337				1,377				159				6,866
Supplemental executive retirement plan (6)			444				1,061				1,439				3,730				6,674
Senior Notes (7)			34,822				69,644				526,813				—				631,279
Total contractual cash obligations		$	68,623			$	80,532			$	530,889			$	3,889			$	683,933

 

 

(1)

Consists of open purchase orders of approximately $20.9 million at the Greens Creek unit, $0.3 million at the Lucky Friday unit and $1.9 million as the Casa Berardi unit.

 

(2)

We have a $100 million revolving credit agreement under which we are required to pay a standby fee of 0.5% per annum on undrawn amounts under the revolving credit agreement. There was no amount due under the revolving credit agreement as of September 30, 2017, and the amounts above assume no amounts will be due during the agreement's term.  For more information on our credit facility, see Note 9 of Notes to Condensed Consolidated Financial Statements (Unaudited).

 

(3)

As of September 30, 2017, we were committed to approximately $0.5 million for various items at Greens Creek.

 

(4)

Includes scheduled capital lease payments of $2.9 million, $3.8 million, and $7.4 million (including interest) for equipment at our Greens Creek, Lucky Friday and Casa Berardi units, respectively.  These leases have fixed payment terms and contain bargain purchase options at the end of the lease periods (see Note 9 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information).

 

(5)

We enter into operating leases in the normal course of business.  Substantially all lease agreements have fixed payment terms based on the passage of time.  Some lease agreements provide us with the option to renew the lease or purchase the leased property.  Our future operating lease obligations would change if we exercised these renewal options and if we entered into additional operating lease arrangements.

 

(6)

These amounts represent our estimate of the future funding requirements for the supplemental executive retirement plan.  See Note 7 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information.

 

(7)

On April 12, 2013, we completed an offering of $500 million in aggregate principal amount of our Senior Notes due May 1, 2021. See Note 9 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information. The Senior Notes bear interest at a rate of 6.875% per year from the most recent payment date to which interest has been paid or provided for.  Interest on the Senior Notes is payable on May 1 and November 1 of each year, commencing November 1, 2013, and we have made all interest payments payable to date. Since the initial offering, we have issued an additional $6.5 million in aggregate principal amount of the Senior Notes to fund obligations under our defined benefit pension plans. See Note 7 and Note 9 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information.

 

 

We record liabilities for costs associated with mine closure, reclamation of land and other environmental matters.  At September 30, 2017, our liabilities for these matters totaled $87.3 million.  Future expenditures related to closure, reclamation and environmental expenditures at our sites are difficult to estimate, and we anticipate we will incur expenditures relating to these obligations over the next 30 years. For additional information relating to certain of our environmental obligations, see Note 4 of Notes to Condensed Consolidated Financial Statements (Unaudited).

 

 

Off-Balance Sheet Arrangements

 

At September 30, 2017, we had no existing off-balance sheet arrangements, as defined under SEC regulations, that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be material to investors.

 

 

Critical Accounting Estimates

 

Our significant accounting policies are described in Part IV, Note 1 of Notes to Consolidated Financial Statements in our annual report filed on Form 10-K for the year ended December 31, 2016. As described in Note 1 of the annual report, we are required to make estimates and assumptions that affect the reported amounts and related disclosures of assets, liabilities, revenue, and expenses. Our estimates are based on our experience and our interpretation of economic, political, regulatory, and other factors that affect our business prospects. Actual results may differ significantly from our estimates.

 

We believe that our most critical accounting estimates are related to future metals prices; obligations for environmental, reclamation, and closure matters; mineral reserves; and accounting for business combinations, as they require us to make assumptions that are highly uncertain at the time the accounting estimates are made and changes in them are reasonably likely to occur from period to period. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed the disclosures presented below. In addition, there are other items within our financial statements that require estimation, but are not deemed to be critical. However, changes in estimates used in these and other items could have a material impact on our financial statements.

 

Future Metals Prices

 

Metals prices are key components in estimates that determine the valuation of some of our significant assets and liabilities, including properties, plants and equipment, deferred tax assets, and certain accounts receivable. Metals prices are also an important component in the estimation of reserves.  As shown under Part I, Item 1A. – Risk Factors in our annual report filed on Form 10-K for the year ended December 31, 2016, metals prices have historically been volatile. Silver demand arises from investment demand, particularly in exchange-traded funds, industrial demand, and consumer demand. Gold demand arises primarily from investment and consumer demand.  Investment demand for silver and gold can be influenced by several factors, including:  the value of the U.S. dollar and other currencies, changing U.S. budget deficits, widening availability of exchange-traded funds, interest rate levels, the health of credit markets, and inflationary expectations.  Uncertainty related to the political environment in the U.S., Britain's exit from the European Union and a global economic recovery, including recent uncertainty in China, could result in continued investment demand for precious metals.  Industrial demand for silver is closely linked to world Gross Domestic Product growth and industrial fabrication levels, as it is difficult to substitute for silver in industrial fabrication.  Consumer demand is driven significantly by demand for jewelry and other retail products. We believe that long-term industrial and economic trends, including urbanization and growth of the middle class in countries such as China and India, will result in continued consumer demand for silver and gold and industrial demand for silver.  However, China has recently experienced a lower rate of economic growth which could continue in the near term. There can be no assurance whether these trends will continue or how they will impact prices of the metals we produce. In the past, we have recorded impairments to our asset carrying value because of low prices, and we can offer no assurance that prices will either remain at their current levels or increase. 

 

 

Processes supporting valuation of our assets and liabilities that are most significantly affected by prices include analysis of asset carrying values, depreciation, reserves, and deferred income taxes. On at least an annual basis - and more frequently if circumstances warrant - we examine our depreciation rates, reserve estimates, and the valuation allowances on our deferred tax assets. We examine the carrying values of our assets as changes in facts and circumstances warrant.  In our evaluation of carrying values and deferred taxes, we apply several pricing views to our forecasting model, including current prices, analyst price estimates, forward-curve prices, and historical prices (see Mineral Reserves, below, regarding prices used for reserve estimates). Using applicable accounting guidance and our view of metals markets, we use the probability-weighted average of the various methods to determine whether the values of our assets are fairly stated, and to determine the level of valuation allowances, if any, on our deferred tax assets.  In addition, estimates of future metals prices are used in the valuation of certain assets in the determination of the purchase price allocations for our acquisitions (see Business Combinations below).

 

 Sales of concentrates sold directly to customers are recorded as revenues when title and risk of loss transfer to the customer (generally at the time of shipment) using estimated forward metals prices for the estimated month of settlement. Due to the time elapsed between shipment of concentrates to the customer and final settlement with the customer, we must estimate the prices at which sales of our metals will be settled. Previously recorded sales and trade accounts receivable are adjusted to estimated settlement prices until final settlement by the customer. Changes in metals prices between shipment and final settlement result in changes to revenues and accounts receivable previously recorded upon shipment.  As a result, our trade accounts receivable balances related to concentrate sales are subject to changes in metals prices until final settlement occurs.  For more information, see part N. Revenue Recognition of Note 1 of Notes to Consolidated Financial Statements in our annual report filed on Form 10-K for the year ended December 31, 2016.

 

We utilize financially-settled forward contracts to manage our exposure to changes in prices for silver, gold, zinc and lead.  See Item 7A. – Quantitative and Qualitative Disclosures About Market Risk - Commodity-Price Risk Management below for more information on our contract programs.  These contracts do not qualify for hedge accounting and are therefore marked-to-market through earnings each period.  Changes in silver, gold, zinc and lead prices between the dates that the contracts are entered into and their settlements will result in changes to the fair value asset or liability associated with the contracts, with a corresponding gain or loss recognized in earnings.

 

Obligations for Environmental, Reclamation and Closure Matters

 

Accrued reclamation and closure costs can represent a significant and variable liability on our balance sheet. We have estimated our liabilities under appropriate accounting guidance, and on at least an annual basis - and more frequently if warranted - management reviews our liabilities with our Audit Committee. However, the ranges of liability could exceed the liabilities recognized. If substantial damages were awarded, claims were settled, or remediation costs incurred in excess of our accruals, our financial results or condition could be materially adversely affected.

 

Mineral Reserves

 

Critical estimates are inherent in the process of determining our reserves. Our reserves are affected largely by our assessment of future metals prices, as well as by engineering and geological estimates of ore grade, accessibility and production cost. Metals prices are estimated at long-term averages, as described in Part I, Item 2. – Properties in our annual report filed on Form 10-K for the year ended December 31, 2016. Our assessment of reserves occurs at least annually, and periodically utilizes external audits.

 

 

Reserves are a key component in the valuation of our properties, plants and equipment. Reserve estimates are used in determining appropriate rates of units-of-production depreciation, with net book value of many assets depreciated over remaining estimated reserves. Reserves are also a key component in forecasts, with which we compare future cash flows to current asset values in an effort to ensure that carrying values are reported appropriately. Our forecasts are also used in determining the level of valuation allowances on our deferred tax assets. Reserves also play a key role in the valuation of certain assets in the determination of the purchase price allocations for acquisitions. Annual reserve estimates are also used to determine conversions of mineral assets beyond the known reserve resulting from business combinations to depreciable reserves, in periods subsequent to the business combinations (see Business Combinations below).  Reserves are a culmination of many estimates and are not guarantees that we will recover the indicated quantities of metals or that we will do so at a profitable level.

 

Business Combinations

 

We are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date.  The valuation of assets acquired and liabilities assumed requires management to make significant estimates and assumptions, especially with respect to long-lived assets (including mineral assets beyond the known reserve). These estimates include future metals prices and mineral reserves, as discussed above.  Management may also be required to make estimates related to the valuation of deferred tax assets or liabilities as part of the purchase price allocation for business combinations. In some cases, we use third-party appraisers to determine the fair values and lives of property and other identifiable assets. In addition, costs related to business combinations are included in earnings as incurred, and our financial results for periods in which business combinations are pursued could be adversely affected as a result.

 

 

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, and summarizes the financial instruments held by us at September 30, 2017, which are sensitive to changes in commodity prices and foreign exchange rates and are not held for trading purposes.  Actual results could differ materially from those projected in the forward-looking statements.  In the normal course of business, we also face risks that are either non-financial or non-quantifiable (See Part I, Item 1A. – Risk Factors of our annual report filed on Form 10-K for the year ended December 31, 2016).

 

Provisional Sales

 

Sales of all metals products sold directly to customers, including by-product metals, are recorded as revenues when title and risk of loss transfers to the customer (generally at the time of shipment) at forward prices for the estimated month of settlement. Due to the time elapsed between shipment to the customer and the final settlement with the customer, we must estimate the prices at which sales of our metals will be settled. Previously recorded sales are adjusted to estimated settlement prices until final settlement by the customer.  Changes in metals prices between shipment and final settlement will result in changes to revenues previously recorded upon shipment.  Metals prices can and often do fluctuate widely and are affected by numerous factors beyond our control (see Part I, Item 1A. – Risk Factors – A substantial or extended decline in metals prices would have a material adverse effect on us in our annual report filed on Form 10-K for the year ended December 31, 2016).  At September 30, 2017, metals contained in concentrates and exposed to future price changes totaled approximately 1.5 million ounces of silver, 5,536 ounces of gold, 9,974 tons of zinc, and 1,423 tons of lead.  If the price for each metal were to change by 10%, the change in the total value of the concentrates sold would be approximately $6.4 million.  However, as discussed in Commodity-Price Risk Management below, we utilize a program designed and intended to mitigate the risk of negative price adjustments with limited mark-to-market financially-settled forward contracts for our silver, gold, zinc and lead sales.

 

Commodity-Price Risk Management

 

At times, we use commodity forward sales commitments, commodity swap contracts and commodity put and call option contracts to manage our exposure to fluctuation in the prices of certain metals which we produce. Contract positions are designed to ensure that we will receive a defined minimum price for certain quantities of our production, thereby partially offsetting our exposure to fluctuations in the market. Our risk management policy allows for up to 75% of our planned metals price exposure for five years into the future, with certain other limitations, to be hedged under such programs. These instruments do, however, expose us to (i) credit risk in the form of possible non-performance by counterparties for contracts in which the contract price exceeds the spot price of a commodity and (ii) price risk to the extent that the spot price exceeds the contract price for quantities of our production covered under contract positions.

 

 

We are currently using financially-settled forward contracts to manage the exposure to changes in prices of silver, gold, zinc and lead contained in our concentrate shipments between the time of shipment and final settlement. In addition, we are using financially-settled forward contracts to manage the exposure to changes in prices of zinc and lead (but not silver and gold) contained in our forecasted future concentrate shipments. These contracts do not qualify for hedge accounting and are marked-to-market through earnings each period.

 

As of September 30, 2017, we recorded the following balances for the fair value of the contracts:

 

•

a current asset of $0.4 million, which is net of $0.1 million for contracts in a liability position and included in other current assets;

•

a current liability of $7.9 million, which is net of $0.2 million for contracts in an asset position and included in other current liabilities; and

•

a non-current liability of $4.0 million, which is included in other non-current liabilities.

 

We recognized a $3.9 million net loss during the first nine months of 2017 on the contracts utilized to manage exposure to prices of metals in our concentrate shipments, which is included in sales of products.  The net loss recognized on the contracts offsets gains related to price adjustments on our provisional concentrate sales due to changes to silver, gold, lead and zinc prices between the time of sale and final settlement.

 

We recognized a $16.5 million net loss during the first nine months of 2017 on the contracts utilized to manage exposure to prices for forecasted future concentrate shipments. The net loss on these contracts is included as a separate line item under other income (expense), as they relate to forecasted future shipments, as opposed to sales that have already taken place but are subject to final pricing as discussed in the preceding paragraph.  The net loss for the first nine months of 2017 is the result of higher zinc and lead prices. This program, when utilized, is designed to mitigate the impact of potential future declines in lead and zinc prices from the price levels established in the contracts (see average price information below). When those prices increase compared to the contract prices, we recognize losses.

 

The following tables summarize the quantities of metals committed under forward sales contracts at September 30, 2017 and December 31, 2016:

 

 

September 30, 2017		Ounces/pounds under contract (in 000's)																Average price per ounce/pound
		Silver				Gold				Zinc				Lead				Silver				Gold				Zinc				Lead
		(ounces)				(ounces)				(pounds)				(pounds)				(ounces)				(ounces)				(pounds)				(pounds)
Contracts on provisional sales
2017 settlements			1,399				5				19,070				2,535			$	17.18			$	1,298			$	1.33			$	1.07
2018 settlements			—				—				2,370				—				N/A				N/A			$	1.38				N/A
Contracts on forecasted sales
2017 settlements			—				—				441				2,866				N/A				N/A			$	1.23			$	1.05
2018 settlements			—				—				39,463				17,968				N/A				N/A			$	1.27			$	1.05
2019 settlements			—				—				14,330				8,267				N/A				N/A			$	1.30			$	1.07
2020 settlements			—				—				3,307				2,205				N/A				N/A			$	1.27			$	1.07

 

 

December 31, 2016		Ounces/pounds under contract (in 000's)																Average price per ounce/pound
		Silver				Gold				Zinc				Lead				Silver				Gold				Zinc				Lead
		(ounces)				(ounces)				(pounds)				(pounds)				(ounces)				(ounces)				(pounds)				(pounds)
Contracts on provisional sales
2017 settlements			1,295				4				19,070				7,441			$	16.29			$	1,172			$	1.18			$	0.97
Contracts on forecasted sales
2017 settlements			—				—				35,384				17,637				N/A				N/A			$	1.19			$	1.03
2018 settlements			—				—				13,779				5,732				N/A				N/A			$	1.21			$	1.05

 

Our concentrate sales are based on a provisional sales price containing an embedded derivative that is required to be separated from the host contract for accounting purposes. The host contract is the receivable from the sale of the concentrates at the forward price at the time of the sale. The embedded derivative, which does not qualify for hedge accounting, is marked-to-market through earnings each period prior to final settlement.

 

Foreign Currency

 

We operate or have mining interests in Canada and Mexico, which exposes us to risks associated with fluctuations in the exchange rates between the U.S. dollar ("USD") and the Canadian dollar ("CAD") and Mexican peso ("MXN"). We have determined that the functional currency for our Canadian and Mexican operations is the USD. As such, foreign exchange gains and losses associated with the re-measurement of monetary assets and liabilities from CAD and MXN to USD are recorded to earnings each period. For the nine months ended September 30, 2017, we recognized a net foreign exchange loss of $10.9 million. Foreign currency exchange rates are influenced by a number of factors beyond our control. A 10% change in the exchange rate between the USD and CAD from the rate at September 30, 2017 would have resulted in a change of approximately $11.8 million in our net foreign exchange gain or loss. A 10% change in the exchange rate between the USD and MXN from the rate at September 30, 2017 would have resulted in a change of approximately $0.9 million in our net foreign exchange gain or loss.

 

In April 2016, we initiated a program to manage our exposure to fluctuations in the exchange rate between the USD and CAD and the impact on our future operating costs denominated in CAD. In October 2016, we also initiated a program to manage our exposure to the impact of fluctuations in the exchange rate between the USD and MXN on our future operating costs denominated in MXN. The programs utilize forward contracts to buy CAD and MXN, and each contract is designated as a cash flow hedge. As of September 30, 2017, we have 94 forward contracts outstanding to buy CAD$200.1 million having a notional amount of US$154.0 million, and 6 forward contracts outstanding to buy MXN$43.3 million having a notional amount of USD$2.2 million. The CAD contracts are related to forecasted cash operating costs at Casa Berardi to be incurred from 2017 through 2020 and have CAD-to-USD exchange rates ranging between 1.2787 and 1.3380. The MXN contracts are related to forecasted cash operating costs at San Sebastian for 2017 and have MXN-to-USD exchange rates ranging between 19.5910 and 21.0000. Our risk management policy allows for up to 75% of our planned cost exposure for five years into the future to be hedged under such programs, and for potential additional programs to manage other foreign currency-related exposure areas.

 

As of September 30, 2017, we recorded the following balances for the fair value of the contracts:

 

•

a current asset of $2.8 million, which is included in other current assets; and

•

a non-current asset of $3.7 million, which is included in other non-current assets.

 

Net unrealized gains of approximately $6.8 million related to the effective portion of the hedges were included in accumulated other comprehensive income as of September 30, 2017. Unrealized gains and losses will be transferred from accumulated other comprehensive loss to current earnings as the underlying operating expenses are recognized. We estimate approximately $2.9 million in net unrealized gains included in accumulated other comprehensive income as of September 30, 2017 would be reclassified to current earnings in the next twelve months. Net realized gains of approximately $0.4 million on contracts related to underlying expenses which have been recognized were transferred from accumulated other comprehensive loss and included in cost of sales and other direct production costs for the nine months ended September 30, 2017. Net unrealized gains of approximately $2 thousand related to ineffectiveness of the hedges were included in current earnings for the nine months ended September 30, 2017.

 

 

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 as defined by Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report.  Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures, including controls and procedures designed to ensure that information required to be disclosed by us is accumulated and communicated to our management (including our CEO and CFO), were effective, as of September 30, 2017, in assuring them in a timely manner that material information required to be disclosed in this report has been properly recorded, processed, summarized and reported. There were no changes in our internal control over financial reporting during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Internal control systems, no matter how well designed and operated, have inherent limitations. Therefore, even a system which is determined to be effective cannot provide absolute assurance that all control issues have been detected or prevented. Our systems of internal controls are designed to provide reasonable assurance with respect to financial statement preparation and presentation.

 

 

 

Part II - Other Information

 

 

 

Item 1.    Legal Proceedings

 

For information concerning legal proceedings, refer to Note 4 of Notes to Condensed Consolidated Financial Statements (Unaudited), which is incorporated by reference into this Item 1.

 

Item 1A.    Risk Factors

 

Part I, Item 1A. – Risk Factors of our annual report filed on Form 10-K for the year ended December 31, 2016 sets forth information relating to important risks and uncertainties that could materially adversely affect our business, financial condition or operating results.  Those risk factors continue to be relevant to an understanding of our business, financial condition and operating results.

 

Item 4. Mine Safety Disclosures

 

The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in exhibit 95 to this Quarterly Report.

 

Item 6.    Exhibits

 

See the exhibit index to this Form 10-Q for the list of exhibits.

 

Items 2, 3 and 5 of Part II are not applicable and are omitted from this report.

 

 

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 7, 2017	By:	/s/ Phillips S. Baker, Jr.
			Phillips S. Baker, Jr., President,
			Chief Executive Officer and Director
Date:	November 7, 2017	By:	/s/ Lindsay A. Hall
			Lindsay A. Hall, Senior Vice President and
			Chief Financial Officer

 

 

Hecla Mining Company and Subsidiaries

Form 10-Q – September 30, 2017

Index to Exhibits

 

3.1	Restated Certificate of Incorporation of the Registrant. Filed as exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 (File No. 1-8491), and incorporated herein by reference.

 

3.2	Bylaws of the Registrant as amended to date. Filed as exhibit 3.1 to Registrant's Current Report on Form 8-K filed on August 22, 2014 (File No. 1-8491), and incorporated herein by reference.

 

4.1

Designations, Preferences and Rights of Series B Cumulative Convertible Preferred Stock of the Registrant. Included as Annex II to Restated Certificate of Incorporation of Registrant filed as exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 (File No. 1-8491), and incorporated herein by reference.

 

4.2(a)

Indenture dated as of April 12, 2013 among Hecla Mining Company, as Issuer, certain subsidiaries of Hecla Mining Company, as Guarantors thereto, and The Bank of New York Mellon Trust Company, N.A., as Trustee. Filed as exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on April 15, 2013 (File No. 1-8491), and incorporated herein by reference.

 

4.2(b)

Supplemental Indenture, dated as of April 14, 2014, among Hecla Mining Company, as Issuer, certain subsidiaries of Hecla Mining Company, as Guarantors thereto, and The Bank of New York Mellon Trust Company, N.A., as Trustee. Filed as exhibit 4.2 to Registrant’s Registration Statement on Form S-3ASR filed on April 14, 2014 (File No. 1-8491), and incorporated herein by reference.

 

4.2(c)

Supplemental Indenture, dated August 5, 2015, among Revett Mining Company, Inc., Revett Silver Company, Troy Mine, Inc., RC Resources, Inc., Revett Exploration, Inc., and Revett Holdings, Inc., as Guaranteeing Subsidiaries, and The Bank of New York Mellon Trust Company, N.A., as Trustee.  Filed as exhibit 4.2(d) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015 (File No. 1-8491), and incorporated herein by reference.

 

4.2(d)

Supplemental Indenture, dated October 26, 2016, among Mines Management Inc., Newhi, Inc., Montanore Minerals Corp., as Guaranteeing Subsidiaries, and The Bank of New York Mellon Trust, N.A., as Trustee. Filed as exhibit 4.2(e) to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 1-8491), and incorporated herein by reference.

 

10.1

Fourth Amended and Restated Credit Agreement effective May 20, 2016, by and among Hecla Mining Company, Hecla Limited, Hecla Alaska LLC, Hecla Greens Creek Mining Company, and Hecla Juneau Mining Company, as the Borrowers, The Bank of Nova Scotia, as the Administrative Agent for the Lenders, and various Lenders. Filed as exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on May 25, 2016 (File No. 1-8491), and incorporated herein by reference.

 

 

10.2

First Amendment to Fourth Amended and Restated Credit Agreement effective July 14, 2017, by and among Hecla Mining Company, Hecla Limited, Hecla Alaska LLC, Hecla Greens Creek Mining Company, and Hecla Juneau Mining Company, as the Borrowers, The Bank of Nova Scotia, as the Administrative Agent for the Lenders, and various Lenders. Filed as exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 (File No. 1-8491), 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. *

 

95	Mine safety information listed in Section 1503 of the Dodd-Frank Act. *

 

101.INS

XBRL Instance. **

 

101.SCH

XBRL Taxonomy Extension Schema.**

 

101.CAL

XBRL Taxonomy Extension Calculation.**

 

101.DEF

XBRL Taxonomy Extension Definition.**

 

101.LAB

XBRL Taxonomy Extension Labels.**

 

101.PRE

XBRL Taxonomy Extension Presentation.**

 

 

___________________

 

* Filed herewith.

 

** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

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