1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------- ----------------- Commission file number 1-8491 --------------------------------------------- HECLA MINING COMPANY - -------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 82-0126240 - --------------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6500 Mineral Drive Coeur d'Alene, Idaho 83814-8788 - ---------------------------------------- ------------------------ (Address of principal executive offices) (Zip Code) 208-769-4100 - --------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for at least the past 90 days. Yes XX . No . ---- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding April 30, 1996 - --------------------------------------- -------------------------- Common stock, par value $0.25 per share 51,130,248 shares
2 HECLA MINING COMPANY and SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 I N D E X PAGE PART I. - Financial Information Item l - Consolidated Balance Sheets - March 31, 1996 and December 31, 1995 3 - Consolidated Statements of Operations - Three Months Ended March 31, 1996 and 1995 4 - Consolidated Statements of Cash Flows - Three Months Ended March 31, 1996 and 1995 5 - Notes to Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II. - Other Information Item 1 - Legal Proceedings 22 Item 6 - Exhibits and Reports on Form 8-K 25 -2-
3 PART I - FINANCIAL INFORMATION HECLA MINING COMPANY and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) <TABLE> <CAPTION> March 31, 1996 December 31, (Unaudited) 1995 ------------- ------------ ASSETS <S> <C> <C> Current assets: Cash and cash equivalents $ 5,018 $ 4,024 Accounts and notes receivable 34,698 25,571 Income tax refund receivable 762 737 Inventories 21,304 20,915 Other current assets 2,462 2,038 ---------- --------- Total current assets 64,244 53,285 Investments 2,260 2,200 Restricted investments 16,358 16,254 Properties, plants and equipment, net 179,474 177,374 Other noncurrent assets 9,537 9,077 ---------- --------- Total assets $ 271,873 $ 258,190 ========== ========= LIABILITIES Current liabilities: Accounts payable and accrued expenses $ 15,677 $ 14,145 Accrued payroll and related benefits 2,566 3,217 Preferred stock dividends payable 2,012 2,012 Accrued taxes 1,303 1,042 Accrued reclamation costs 5,549 5,549 ---------- --------- Total current liabilities 27,107 25,965 Deferred income taxes 359 359 Long-term debt 25,699 36,104 Accrued reclamation costs 27,821 26,782 Other noncurrent liabilities 5,221 4,864 ---------- --------- Total liabilities 86,207 94,074 ---------- --------- SHAREHOLDERS' EQUITY Preferred stock, $0.25 par value, authorized 5,000,000 shares, issued and outstanding - 2,300,000 shares, liquidation preference $117,012 575 575 Common stock, $0.25 par value, authorized 100,000,000 shares; issued 1996 - 51,192,324; issued 1995 - 48,317,324 12,798 12,079 Capital surplus 351,606 330,352 Accumulated deficit (173,743) (173,206) Net unrealized gain on investments 214 100 Foreign currency translation adjustment (4,898) (4,898) Less common stock reacquired at cost; 1996 - 62,076 shares, 1995 - 62,072 shares (886) (886) ---------- --------- Total shareholders' equity 185,666 164,116 ---------- --------- Total liabilities and shareholders' equity $ 271,873 $ 258,190 ========== ========= The accompanying notes are an integral part of the consolidated financial statements. </TABLE> -3-
4 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Dollars and shares in thousands, except for per-share data) <TABLE> <CAPTION> Three Months Ended -------------------------------- March 31, 1996 March 31, 1995 -------------- -------------- <S> <C> <C> Sales of products $ 42,947 $ 35,710 --------- --------- Cost of sales and other direct production costs 33,553 30,230 Depreciation, depletion and amortization 5,459 5,642 --------- --------- 39,012 35,872 --------- --------- Gross profit (loss) 3,935 (162) --------- --------- Other operating expenses: General and administrative 2,271 2,330 Exploration 803 1,043 Depreciation and amortization 89 83 Provision for closed operations and environmental matters (183) 56 --------- --------- 2,980 3,512 --------- --------- Income (loss) from operations 955 (3,674) --------- --------- Other income (expense): Interest and other income 694 1,443 Foreign exchange loss (14) (197) Gain on investments 20 121 Interest expense: Total interest cost (621) (165) Less amount capitalized 477 58 --------- --------- 556 1,260 --------- --------- Income (loss) before income taxes 1,511 (2,414) Income tax provision (36) (50) --------- --------- Net income (loss) 1,475 (2,464) Preferred stock dividends 2,012 2,012 --------- --------- Loss applicable to common shareholders $ (537) $ (4,476) ========= ========= Loss per common share $ (0.01) $ (0.09) ========= ========= Cash dividends per common share $ - - $ - - ========= ========= Weighted average number of common shares outstanding 51,130 48,107 ========= ========= The accompanying notes are an integral part of the consolidated financial statements. </TABLE> -4-
5 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) <TABLE> <CAPTION> Three Months Ended -------------------------------- March 31, 1996 March 31, 1995 -------------- -------------- <S> <C> <C> Operating activities: Net income (loss) $ 1,475 $ (2,464) Noncash elements included in net income (loss): Depreciation, depletion and amortization 5,548 5,725 Loss (gain) on disposition of properties, plants and equipment 59 (265) Gain on sale of investments (20) (121) Provision for reclamation and closure costs 1,199 220 Change in: Accounts and notes receivable (9,127) (5,029) Income tax refund receivable (25) (2) Inventories (389) (185) Other current assets (424) (95) Accounts payable and accrued expenses 1,532 (1,294) Accrued payroll and related benefits (651) (630) Accrued taxes 261 528 Accrued reclamation and other noncurrent liabilities 197 2,677 --------- --------- Net cash used by operating activities (365) (935) --------- --------- Investing activities: Additions to properties, plants and equipment (7,739) (6,961) Proceeds from disposition of properties, plants and equipment 74 314 Proceeds from the sales of investments 20 126 Increase in restricted investments (104) (48) Purchase of investments and increase in cash surrender value of life insurance (146) (195) Other, net (502) (835) --------- --------- Net cash used by investing activities (8,397) (7,599) --------- --------- Financing activities: Proceeds from the exercise of stock warrants - - 1,208 Issuance of common stock, net of offering costs 21,973 - - Dividends on preferred stock (2,012) (2,012) Borrowings against cash surrender value of life insurance 200 - - Borrowings on long-term debt 11,500 11,000 Payments on long-term debt (21,905) (3,884) --------- --------- Net cash provided by financing activities 9,756 6,312 --------- --------- Increase (decrease) in cash and cash equivalents 994 (2,222) Cash and cash equivalents at beginning of period 4,024 7,278 --------- --------- Cash and cash equivalents at end of period $ 5,018 $ 5,056 ========= ========= The accompanying notes are an integral part of the consolidated financial statements. </TABLE> -5-
6 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. The notes to the consolidated financial statements as of December 31, 1995, as set forth in the Company's 1995 Annual Report on Form 10-K, substantially apply to these interim consolidated financial statements and are not repeated here. Note 2. The financial information given in the accompanying unaudited interim consolidated financial statements reflects all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods reported. All such adjustments are of a normal recurring nature. All financial statements presented herein are unaudited. However, the balance sheet as of December 31, 1995, was derived from the audited consolidated balance sheet described in Note 1 above. Certain consolidated financial statement amounts have been reclassified to conform to the 1996 presentation. These reclassifications had no effect on the net loss or accumulated deficit as previously reported. Note 3. The components of the income tax provision for the three months ended March 31, 1996 and 1995 are as follows (in thousands): 1996 1995 -------- -------- Current: State income taxes $ 70 $ 50 Federal income tax benefit (34) - - ------- -------- Total current provision 36 50 Deferred provision - - - - -------- -------- Total $ 36 $ 50 ======== ======== The Company's income tax provision for the first three months of 1996 and 1995 varies from the amount that would have been provided by applying the statutory rate to the income or loss before income taxes primarily due to reversal of temporary differences in 1996 and the nonutilization of net operating losses in 1995. -6-
7 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES Note 4. Inventories consist of the following (in thousands): March 31, Dec. 31, 1996 1995 --------- --------- Concentrates and metals in transit and other products $ 3,287 $ 2,519 Industrial mineral products 8,080 8,671 Materials and supplies 9,937 9,725 -------- -------- $ 21,304 $ 20,915 ======== ======== Note 5. In July 1991, the Coeur d'Alene Indian Tribe (the Tribe) brought a lawsuit, under the Comprehensive Environmental Response Liability Act of 1980 (CERCLA), in Idaho Federal District Court against the Company and a number of other mining companies asserting claims for damages to natural resources located downstream from the Bunker Hill Superfund Site located at Kellogg, Idaho, over which the Tribe alleges some ownership or control. The Company has answered the Tribe's complaint denying liability for natural resource damages and asserted a number of defenses to the Tribe's claims, including a defense that the Tribe has no ownership or control over the natural resources they assert have been damaged. In July 1992, in a separate action between the Tribe and the State of Idaho, the Idaho Federal District Court determined that the Tribe does not own the beds, banks and waters of Lake Coeur d'Alene and the lower portion of its tributaries, the ownership of which is the primary basis for the natural resource damage claims asserted by the Tribe against the Company. Based upon the Tribe's appeal of the July 1992 District Court ownership decision to the 9th Circuit U.S. Court of Appeals, the Court in the natural resource damage litigation issued an order on October 30, 1992, staying the court proceedings in the natural resource damage litigation until a final decision is handed down on the question of the Tribe's title. On December 9, 1994, the 9th Circuit Court reversed the decision of the Idaho Federal District Court and remanded the case of the Tribe's ownership for trial before the Idaho Federal District Court. In April 1996, the U.S. Supreme Court granted the State the right to appeal the 9th Circuit Court decision to the U.S. Supreme Court. In July 1994, the United States, as Trustee for the Coeur d'Alene Tribe, initiated a separate suit in Idaho Federal District Court seeking a determination that the Coeur d'Alene Tribe owns approximately the lower one-third of Lake Coeur d'Alene. The State has denied the Tribe's ownership of any portion of Lake Coeur d'Alene and its tributaries. The legal proceedings related to the -7-
8 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES Tribe's natural resource damages claim against the Company and other mining companies continue to be stayed. On March 22, 1996, the federal government brought a lawsuit in Idaho Federal District Court against the Company and a number of other mining companies which is similar to the above described Tribe's lawsuit. The lawsuit is being brought by the federal government asserting claims under CERCLA and the Clean Water Act and seeks recovery for damages to natural resources located in the Coeur d'Alene River Basin in North Idaho over which the federal government asserts to be the trustee. The suit also seeks declaratory relief that the Company and other defendants are jointly and severally liable for response costs under CERCLA for historic mining impacts in the Coeur d'Alene River Basin outside the Bunker Hill Superfund Site. The Company's answer to the complaint is required to be filed by May 17, 1996. The Company believes it has a number of defenses to the federal government's claims. On March 22, 1996, the Company entered into an agreement (the Agreement) with the State of Idaho pursuant to which the Company agreed to continue certain financial contributions to environmental cleanup work in the Coeur d'Alene River Basin being undertaken by a State Trustees group. In return, the State agreed not to sue the Company for damage to natural resources for which the State is a trustee for a period of five years, to pursue settlement with the Company of the State's natural resource damage claims and to grant the Company credit against any such State claims for all expenditures made under the Agreement and certain other Company contributions and expenditures for environmental cleanup in the Coeur d'Alene Basin. In connection with the Agreement, the Company increased its accrual for closed operations and environmental matters by $0.5 million during the first quarter of 1996. In 1991, the Company initiated litigation in the Idaho State District Court in Kootenai County, Idaho, against a number of insurance companies which provided comprehensive general liability insurance coverage to the Company and its predecessors. The Company believes that the insurance companies have a duty to defend and indemnify the Company under their policies of insurance for all liabilities and claims asserted against the Company by the Environmental Protection Agency (EPA) and the Tribe under CERCLA related to the Bunker Hill Superfund Site and Coeur d'Alene River Basin in northern Idaho. In 1992, the Court ruled that the primary -8-
9 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES insurance companies had a duty to defend the Company in the Tribe's lawsuit. During 1995 and in January 1996, the Company entered into settlement agreements with a number of the insurance carriers named in the litigation. The Company has received a total of $4.5 million under the terms of the settlement agreements. Thirty percent of these settlements is payable to the EPA to reimburse the U.S. Government for past costs under the Bunker Hill Superfund Site Consent Decree previously entered into by the Company. Litigation is still pending against other insurers with trial scheduled for October 1996. The remaining insurance carriers are providing the Company a partial defense in all Coeur d'Alene River Basin environmental litigation. As of March 31, 1996, the Company had not reduced its accrual for reclamation and closure costs to reflect the receipt of any anticipated insurance proceeds. In June 1994, a judgment was entered against the Company in Idaho State District Court in the amount of $10.0 million in compensatory damages and $10.0 million in punitive damages based on a jury verdict rendered in late May 1994 with respect to a lawsuit previously filed against the Company by Star Phoenix Mining Company (Star Phoenix), a former lessee of the Star Morning Mine, over a dispute between the Company and Star Phoenix concerning the Company's November 1990 termination of the Star Phoenix lease of the Star Morning Mine property. A number of other claims by Star Phoenix and certain principals of Star Phoenix against the Company in the lawsuit were dismissed by the State District Court. On May 3, 1995, the District Court issued its final opinion and order on a number of post-trial issues pending before the Court. The opinion and order included the Court's denial of the post-trial motions filed by Star Phoenix and certain of its principals regarding claims which had been previously dismissed by the Court during trial. The Court also awarded Star Phoenix approximately $300,000 in attorneys' fees and costs. The Company's post-trial motions were denied by the State District Court, and the Company has appealed the District Court judgment to the Idaho State Supreme Court. Star Phoenix has cross-appealed certain trial court discovery determinations. Briefing on both appeals has been completed and oral argument was presented to the Idaho Supreme Court on April 10, 1996. A decision from the Idaho Supreme Court is expected in late 1996. Post- judgment interest will accrue during the appeal period; the current interest rate is 10.875%. In order to stay the ability of Star Phoenix to collect on the judgment during the pendency of the appeal, the Company has posted an appeal bond in the -9-
10 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES amount of $27.2 million representing 136% of the District Court judgment. The Company pledged U.S. Treasury Securities totaling $10.0 million as collateral for the appeal bond. This collateral amount is included in restricted investments at March 31, 1996 and December 31, 1995. The Company has vigorously pursued its appeal to the Idaho Supreme Court and it has been the Company's position, and at the current time it remains the Company's position, that it will not enter into a settlement with Star Phoenix for any material amount. Although the ultimate outcome of the appeal of the Idaho District Court judgment is subject to the inherent uncertainties of any legal proceeding, based upon the Company's analysis of the factual and legal issues associated with the proceeding before the Idaho District Court and based on the opinions of outside counsel, as of the date hereof, it is management's belief that the Company should ultimately prevail in this matter, although there can be no assurance in this regard. Accordingly, the Company has not accrued any liability associated with this litigation. The Company is subject to other legal proceedings and claims which have arisen in the ordinary course of its business and have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition of these matters and the proceedings disclosed above, it is the opinion of the Company's management, based upon the information available at this time, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the results of operations and financial condition of the Company and its subsidiaries. Note 6. At March 31, 1996, there was $25.0 million outstanding under the Company's revolving and term loan facility classified as long-term debt. Note 7. In January 1996, the Company issued 2,875,000 shares of its common stock realizing proceeds of approximately $22.0 million, net of underwriting discount and issuance costs of approximately $1.7 million. The Company used $21.0 million of the net proceeds to pay down debt under its existing revolving and term loan credit facility. -10-
11 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Hecla Mining Company (Hecla or the Company) is primarily involved in the exploration, development, mining, and processing of gold, silver, lead, zinc, and industrial minerals. As such, the Company's revenues and profitability are strongly influenced by world prices of gold, silver, lead, and zinc, which fluctuate widely and are affected by numerous factors beyond the Company's control, including inflation and worldwide forces of supply and demand. The aggregate effect of these factors is not possible to accurately predict. In the following descriptions, where there are changes that are attributable to more than one factor, the Company presents each attribute in descending order relative to the attribute's importance to the overall change. Except for the historical information contained herein, the matters discussed are forward-looking statements that involve risks and uncertainties, including the timely development of existing properties and reserves (such as Greens Creek) and future projects (such as the Rosebud project), the impact of metals prices and metal production volatility, changing market conditions and regulatory environment and the other risks detailed from time to time in the Company's Form 10-K and Form 10-Qs filed with the Securities and Exchange Commission (see also "Investment Considerations" of Part I, Item 1 of the Company's 1995 Annual Report on Form 10-K). Actual results may differ materially from those projected. These forward- looking statements represent the Company's judgment as of the date of this filing. The Company disclaims, however, any intent or obligation to update these forward-looking statements. The Company incurred losses applicable to common shareholders for each of the past three years in the period ended December 31, 1995. If the Company's estimates of market prices of gold, silver, lead, and zinc are realized in 1996, the Company expects to record income or loss in the range of a $(3.0) million loss to income of $2.0 million after the expected dividends to preferred shareholders totaling approximately $8.0 million for the year ending December 31, 1996. Due to the volatility of metals prices and the significant impact metals price changes have on the Company's operations, there can be no assurance that the actual results of operations for 1996 will be as projected. -11-
12 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES The variability of metals prices requires that the Company, in assessing the impact of prices on recoverability of its assets, exercise judgment as to whether price changes are temporary or are likely to persist. The Company performs a comprehensive evaluation of the recoverability of its assets on a periodic basis. The evaluation includes a review of estimated future net cash flows against the carrying value of the assets. Moreover, a review is made on a quarterly basis to assess the impact of significant changes in market conditions and other factors. Asset write-downs may occur if the Company determines that the carrying values attributed to individual assets are not recoverable given reasonable expectations for future production and market conditions. On April 17, 1996, the Company announced that it expects to continue mining the Sunbeam pit at the Grouse Creek mine, in which the Company has an 80% interest, through the first quarter of 1997. However, a two-month shutdown of milling operations and a one-month shutdown of mining operations will be required to enlarge the tailings impoundment, which reached capacity earlier than expected due to heavy snowfall and spring runoff. The temporary shutdown of milling operations commenced in late April 1996, with mining operations expected to continue until late May 1996 at which time mining activities will also be suspended. Both mining and milling activities are expected to resume in June 1996, although there can be no assurance that mining and milling activities will resume as planned. The Company is currently performing further ore confirmation drilling of the Grouse deposit to evaluate the feasibility of mining operations beyond the first quarter of 1997. The Company's Board of Directors is currently expected to make a decision by the end of 1996 whether to continue further development and operation of the Grouse Creek mine beyond the first quarter of 1997. If the Grouse Creek mine is not further developed and operations wind down in the first quarter of 1997, the property will either be placed on a care-and-maintenance basis (pending an improvement in metals prices or other developments) or shut down permanently. Annual holding costs on a care-and-maintenance basis are estimated at $3.0 to $5.0 million. If the decision is made to shut the property down, an accrual for closed operations and environmental matters in the estimated range of $16.0 to $20.0 million would be necessary at that time. A detailed study has not been performed to establish this -12-
13 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES estimated range for closed operations and environmental matters, and, as such, the actual costs could be higher. The American Girl gold mine in southern California had cash costs in the first quarter of 1996 of approximately $431 per ounce of gold recovered. The Company holds a 47% interest in the mine through a joint venture with MK Gold, the operator of the property. First quarter 1996 results from the Oro Cruz ore body, which is now being mined, have been unsatisfactory to the Company. A technical team consisting of experts from both companies has been formed to address the problems at the property. The Company's interest in the carrying value of the American Girl gold mine property, plant and equipment totaled $7.7 million at March 31, 1996. In 1996, the Company expects to produce between 140,000 and 165,000 ounces of gold compared to actual 1995 gold production of 170,000 ounces of gold. The 1996 estimated production includes 70,000 to 80,000 ounces from the La Choya mine, 40,000 to 50,000 ounces from the Company's 80% interest in the Grouse Creek mine, 25,000 to 30,000 ounces from the Company's 47% interest in the American Girl mine, and an additional 5,000 ounces from other sources. The Company's share of silver production for 1996 is expected to be between 2.0 and 2.4 million ounces compared to 1995 production of 2.2 million ounces. In 1995, the Company shipped 991,000 tons of industrial minerals, including ball clay, kaolin, feldspar, and specialty aggregates. The Company's shipments of industrial minerals are expected to increase in 1996 to 1,067,000 tons. Additionally, the Company expects to ship 950,000 cubic yards of landscape material from Mountain West Products in 1996 compared to 867,000 cubic yards in 1995. RESULTS OF OPERATIONS The Company recorded net income of approximately $1.5 million, or $0.03 per common share, in the first three months of 1996 compared to a net loss of approximately $2.5 million, or $0.05 per common share, in the same period of 1995. After $2.0 million in dividends to holders of the Company's Series B Cumulative Convertible Preferred Stock, the Company's net loss applicable to common shareholders for the first quarter of 1996 was $0.5 million, or $0.01 per common share, compared to $4.5 million, or $0.09 per common share, in the comparable 1995 period. -13-
14 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES Sales of the Company's products increased by approximately $7.2 million, or 20.3%, in the first three months of 1996 as compared to the same period in 1995, principally the result of increased product sales totaling approximately $10.0 million, most notably from the La Choya mine where gold production increased significantly, as well as the Lucky Friday mine due to increased production of silver, lead and zinc. In the first quarter of 1995, personnel at the Lucky Friday mine worked to achieve normal production levels after resuming operations in December 1994 as a result of the temporary suspension of operations caused by the August 30, 1994 ore- conveyance accident. Sales at the K-T Clay kaolin division also increased due to the acquisition of the Langley kaolin plant in June 1995. These factors were partially offset by decreased sales of $2.8 million at other operating properties, including the Republic gold mine where operations ceased in February 1995 following the completion of mining and milling operations, the Apex facility, which was sold in September 1995, the Cactus mine, and the K-T ball clay division. Comparing the average metal prices for the first quarter of 1996 with the comparable 1995 period, gold increased by 5.5% to $400 per ounce from $379 per ounce, silver increased by 17.9% to $5.54 per ounce from $4.70 per ounce, lead increased by 25.3% to $0.347 per pound from $0.277 per pound, and zinc decreased by 2.7% to $0.472 per pound from $0.485 per pound. Cost of sales and other direct production costs increased approximately $3.3 million, or 11.0%, from the first three months of 1995 to the comparable 1996 period primarily due to (1) increased production costs at the Lucky Friday mine totaling approximately $1.7 million due to increased production of silver, lead and zinc where in 1995, production at the mine was returning to normal production levels after the temporary suspension of operation as discussed above; (2) increased costs at the K-T Clay kaolin division of $1.6 million as a result of the acquisition of the Langley kaolin plant in June 1995; (3) increased costs of $1.4 million at the La Choya mine as a result of increased gold production; (4) increased costs at the American Girl mine of $0.9 million; and (5) increased production costs at various other operations totaling approximately $0.7 million. These increases in cost of sales and other direct production costs were partially offset by decreases in operating costs at other operations totaling approximately $3.0 million. These decreases are primarily due to (1) decreased costs at the Apex property of $0.9 million as the result of the sale -14-
15 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES of the processing facility in September 1995; (2) decreased costs at the Grouse Creek mine of $0.8 million where the mine costs were higher than anticipated in 1995 due to start up problems encountered with the milling operation; (3) decreased costs of $0.6 million at the Republic mine where operations were completed in February 1995; and (4) other production cost decreases at other operating properties totaling approximately $0.7 million. Cost of sales and other direct production costs as a percentage of sales from products decreased from 85% in the first quarter of 1995 to 78% in the comparable 1996 period, primarily due to increased sales and production at the La Choya mine. Cash and full production cost per gold ounce decreased from $312 and $416 for the first quarter of 1995 to $260 and $353 for the first quarter of 1996, respectively. The decrease in both the cash and full production cost per gold ounce is primarily attributable to increased gold production at the La Choya mine and decreased costs at the Grouse Creek mine in the 1996 period, offset by increased costs at the American Girl mine. Cash and full production cost per silver ounce decreased from $4.74 and $6.00 in the first quarter of 1995 to $4.66 and $5.89 in the first quarter of 1996, respectively. The decreases in the cost per silver ounce are due primarily to increased production from the Lucky Friday mine and an increase in the average price of lead in the 1996 period. Lead and zinc are by-products of silver, the revenues from which are netted against production costs in the calculation of production cost per ounce of silver. Other operating expenses decreased by $0.5 million, or 15.1%, from the 1995 period to the 1996 period, due principally to (1) decreased exploration costs totaling approximately $0.2 million relating principally to the decreased expenditures at the Grouse Creek property and Mexican exploration properties and (2) decreased provision for closed operations and environmental matters of approximately $0.2 million principally due to the receipt of insurance proceeds relating to the Bunker Hill Superfund site of $0.7 million, offset by additional accruals for environmental matters relating to the Coeur d'Alene Basin area totaling approximately $0.5 million. Other income was approximately $0.6 million in the 1996 period compared to $1.3 million in the 1995 period principally due to decreased interest and other income of -15-
16 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES approximately $0.7 million primarily due to decreased copper royalties. Total interest cost increased approximately $0.5 million due to increased borrowing on the Company's revolving and term loan facility. Interest cost capitalized increased approximately $0.4 million principally due to capitalized interest costs associated with the Greens Creek development, the Rosebud project, the Lucky Friday expansion project, and development at the American Girl mine's Oro Cruz ore body. FINANCIAL CONDITION AND LIQUIDITY A substantial portion of the Company's revenue is derived from the sale of products, the prices of which are affected by numerous factors beyond the Company's control. Prices may change dramatically in short periods of time and such changes have a significant effect on revenues, profits and liquidity of the Company. The Company is subject to many of the same inflationary pressures as the U.S. economy in general. The Company continues to implement cost-cutting measures in an effort to reduce per unit production costs. Management believes, however, that the Company may not be able to continue to offset the impact of inflation over the long term through cost reductions alone. However, the market prices for products produced by the Company have a much greater impact than inflation on the Company's revenues and profitability. Moreover, the discovery, development and acquisition of mineral properties are in many instances unpredictable events. Future metals prices, the success of exploration programs, changes in legal and regulatory requirements, and other property transactions can have a significant impact on the need for capital. At March 31, 1996, assets totaled approximately $271.9 million and shareholders' equity totaled approximately $185.7 million. Cash and cash equivalents increased by $1.0 million to $5.0 million at March 31, 1996 from $4.0 million at the end of 1995. During the first three months of 1996, approximately $9.8 million in cash was provided by financing activities. The major sources of cash were (1) proceeds totaling approximately $22.0 from the issuance of 2.875 million common shares in an underwritten offering completed in January 1996 and (2) proceeds totaling $11.5 million from borrowing on the revolving and term loan facility. The primary uses of cash were (1) repayments on long-term debt totaling approximately $21.9 million and (2) preferred dividend payments totaling approximately $2.0 million. -16-
17 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES The Company's investing activities used $8.4 million of cash during the first three months of 1996. The most significant use of cash was approximately $7.7 million of property, plant, and equipment additions consisting of: a) construction in progress for the Greens Creek mine, the American Girl Oro Cruz ore body, the Lucky Friday expansion project, and the Rosebud project totaling approximately $4.0 million, $1.2 million, $0.8 million, and $0.7 million, respectively, and b) expenditures principally for ongoing development of the tailings dam at the Grouse Creek mine totaling approximately $0.7 million. Operating activities required approximately $0.4 million of cash during the first three months of 1996. The primary sources of cash were from the La Choya mine, the Industrial Minerals operations, and the Lucky Friday mine. Additionally, increases in accounts payable and accrued expenses provided $1.5 million in cash, principally due to increased accounts payable and accrued expenses at Mountain West Products, Colorado Aggregate, and the Grouse Creek mine. Partially offsetting these primary sources was a $9.1 million increase in accounts and notes receivable due to (1) the buildup of receivables at Mountain West Products and Colorado Aggregate of approximately $3.0 million each due principally to the seasonal nature of sales at these properties and (2) increased receivables at the Lucky Friday mine due to increased production and improved lead prices. Principal noncash charges included in operating activities include depreciation, depletion, and amortization of approximately $5.5 million and a $1.2 million provision for reclamation and closure costs. The Company estimates that remaining capital expenditures to be incurred in the balance of 1996 will be approximately $30.7 million, including $1.9 million of capitalized interest. These expenditures are expected to consist primarily of (1) the Company's share of development expenditures at the Greens Creek project expected to total approximately $15.0 million and (2) development expenditures at the Rosebud project, the Grouse Creek mine and the Lucky Friday mine totaling approximately $4.8 million, $4.3 million and $2.8 million, respectively. If the decision is made to further develop and operate the Grouse Creek mine beyond the first quarter of 1997, the Company estimates additional capital expenditures totaling approximately $4.0 million in 1996 and another $4.0 million in 1997, principally for the development of the Grouse deposit. The Company intends to finance these capital expenditures -17-
18 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES through a combination of (1) existing cash and cash equivalents and (2) cash flow from operating activities. In addition, the Company may borrow funds from its revolving and term loan facility which, subject to certain conditions, provides for borrowings up to a maximum of $55.0 million. The expected 1996 capital expenditures referred to above for the Rosebud project totaling $4.8 million, represent an estimate of costs to maintain the present status of the project until a decision is made to develop the property as well as some final engineering costs. Construction of the Rosebud project has been deferred until adequate financing arrangements can be made. The Company is presently evaluating different financing alternatives including project financing and joint venture arrangements. Construction costs for the Rosebud project are currently estimated to be $55.0 to $58.0 million over the 14- to 18-month period needed to bring the property into production once construction commences. The Company's estimate of its capital expenditure requirements assumes, with respect to the Greens Creek property, that the Company's joint venture partner will not default with respect to its portion of development costs and capital expenditures. However, with respect to the Grouse Creek mine, the Company has been advised that its joint venture partner Great Lakes Minerals Inc. will elect to dilute its joint venture interest rather than pay its share of any future capital expenditure requirements. Accordingly, projections for Grouse Creek are based on the assumption that the Company will be funding 100% of those requirements. Pursuant to a Registration Statement filed with the Securities and Exchange Commission and declared effective in the third quarter of 1995, the Company can, at its option, issue debt securities, common shares, preferred shares or warrants in an amount not to exceed $100.0 million in the aggregate. In January 1996, the Company issued 2.875 million common shares to facilitate the funding of the Company's capital expenditures in 1996. The Company used $21.0 million of the net proceeds of approximately $22.0 million from the sale of its common shares to pay down debt under its existing revolving and term loan credit facility thus increasing its borrowing capacity under the facility. As of March 31, 1996, a total of $30.0 million remained available under the bank facility. -18-
19 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES The Company's planned environmental and reclamation expenditures for the balance of 1996 are expected to be approximately $5.0 to $6.0 million, principally for environmental and reclamation activities at the Bunker Hill Superfund Site, Republic mine, Coeur d'Alene River Basin, and the Cactus mine. Exploration expenditures for the balance of 1996 are estimated to be approximately $4.0 to $5.0 million. The Company's exploration strategy is to focus further exploration at or in the vicinity of its currently owned properties. Accordingly, these exploration expenditures will be incurred principally at Rosebud, Greens Creek, La Choya, American Girl, Lucky Friday, and Mexican exploration targets. In the normal course of its business, the Company uses forward sales commitments and commodity put and call option contracts to manage its exposure to fluctuations in the prices of certain metals which it produces. Contract positions are designed to ensure that the Company will receive a defined minimum price for certain quantities of its production. Gains and losses, and the related costs paid or premium received, for contracts which hedge the sales prices of commodities are deferred and included in income as part of the hedged transaction. Revenues from the aforementioned contracts are recognized at the time contracts are closed out by delivery of the underlying commodity or settlement of the net position in cash. The Company is exposed to certain losses, generally the amount by which the contract price exceeds the spot price of a commodity, in the event of nonperformance by the counterparties to these agreements. As of March 31, 1996, the Company had forward sales commitments through January 31, 1997, for 10,000 ounces of gold at an average price of $412 per ounce. The estimated fair value of these forward sales commitments was $94,000 as of March 31, 1996. The Company has also purchased options to put 61,950 ounces of gold to counterparties to such options at an average price of $395 per ounce. Concurrently, the Company sold options to allow counterparties to such options to call 61,950 ounces of gold from the Company at an average price of $462 per ounce. There was no net cost associated with the purchase and sale of these options which expire on a monthly basis through December 1997. The London Final gold price at March 31, 1996, was $396.35. At March 31, 1996, the estimated fair value of the Company's purchased gold put options was approximately $527,000. If the Company had chosen to close its offsetting short call option position, it would have incurred a liability of -19-
20 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES approximately $235,000. Additionally, the Company has entered into spot deferred sales commitments for 12,000 ounces of gold at $399 per ounce. The nature and purpose of the forward sales and option contracts, however, do not presently expose the Company to any significant net loss. All of the aforementioned contracts were designated as hedges as of March 31, 1996. Prior declines in the Mexican peso did not significantly impacted results at the La Choya mine or K-T Clay de Mexico, S.A. de C.V. as both funding for operations and sales are denominated in dollars. In the first three months of 1996, a net foreign exchange loss totaling $14,000 was recorded relating to both of the Company's Mexican operations. However, further declines in the Mexican peso could adversely impact the Company's Mexican operations. As described in Note 5 of Notes to Consolidated Financial Statements, the Company is a defendant in a legal action filed in November 1990 by Star Phoenix and certain principals of Star Phoenix, asserting that the Company breached the terms of Star Phoenix's lease agreement for the Company's Star Morning Mine and that the Company interfered with certain contractual relationships of Star Phoenix relating to the Company's 1990 termination of such lease agreement. In June 1994, a judgment was entered by the Idaho State District Court against the Company in the legal proceeding in the amount of $10.0 million in compensatory damages and $10.0 million in punitive damages based on a jury verdict rendered in the case in late May 1994. The Company's post-trial motions were denied by the District Court, and the Company appealed the judgment to the Idaho State Supreme Court. Briefing on the appeal has been completed and oral argument was presented to the Idaho State Supreme Court on April 10, 1996. A decision from the Idaho State Supreme Court is expected in late 1996. Post-judgment interest will accrue during the appeal period; the current interest rate is 10.875%. In order to stay the ability of Star Phoenix to collect on the judgment during the pendency of the appeal, the Company posted an appeal bond in the amount of $27.2 million representing 136% of the District Court judgment. The Company pledged U.S. Treasury Securities totaling $10.0 million as collateral for the $27.2 million bond. Although the ultimate outcome of the appeal of the judgment is subject to the inherent uncertainties of any legal proceeding, based on the Company's analysis of the factual and legal issues associated with the proceeding before the District Court and based upon the opinions of outside counsel, as of the -20-
21 PART I - FINANCIAL INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES date hereof, it is management's belief that the Company should ultimately prevail in this matter, although there can be no assurance in this regard. In the event of an unfavorable outcome in this proceeding, the judgment would be paid from the pledged collateral totaling $10.0 million with the remaining balance to be paid from bank borrowings, other potential financing arrangements or proceeds from certain asset sales. Although the ultimate disposition of this matter and various other pending legal actions and claims is not presently determinable, it is the opinion of the Company's management, based upon the information available at this time, that the outcome of these suits and proceedings will not have a material adverse effect on the results of operations and financial condition of the Company and its subsidiaries. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). SFAS No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. SFAS No. 123 encourages all entities to adopt a fair value based method of accounting, but allows an entity to continue to measure compensation cost for those plans using the intrinsic value method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Company will comply with the provisions of SFAS No. 123 on January 1, 1996, by presenting the pro-forma disclosure requirements of SFAS No. 123 in its 1996 annual financial statements. -21-
22 PART II - OTHER INFORMATION HECLA MINING COMPANY and SUBSIDIARIES ITEM 1. LEGAL PROCEEDINGS In July 1991, the Coeur d'Alene Indian Tribe (the Tribe) brought a lawsuit, under the Comprehensive Environmental Response Liability Act of 1980 (CERCLA), in Idaho Federal District Court against the Company and a number of other mining companies asserting claims for damages to natural resources located downstream from the Bunker Hill Superfund Site located at Kellogg, Idaho, over which the Tribe alleges some ownership or control. The Company has answered the Tribe's complaint denying liability for natural resource damages and asserted a number of defenses to the Tribe's claims, including a defense that the Tribe has no ownership or control over the natural resources they assert have been damaged. In July 1992, in a separate action between the Tribe and the State of Idaho, the Idaho Federal District Court determined that the Tribe does not own the beds, banks and waters of Lake Coeur d'Alene and the lower portion of its tributaries, the ownership of which is the primary basis for the natural resource damage claims asserted by the Tribe against the Company. Based upon the Tribe's appeal of the July 1992 District Court ownership decision to the 9th Circuit U.S. Court of Appeals, the Court in the natural resource damage litigation issued an order on October 30, 1992, staying the court proceedings in the natural resource damage litigation until a final decision is handed down on the question of the Tribe's title. On December 9, 1994, the 9th Circuit Court reversed the decision of the Idaho Federal District Court and remanded the case of the Tribe's ownership for trial before the Idaho Federal District Court. In April 1996, the U.S. Supreme Court granted the State the right to appeal the 9th Circuit Court decision to the U.S. Supreme Court. In July 1994, the United States, as Trustee for the Coeur d'Alene Tribe, initiated a separate suit in Idaho Federal District Court seeking a determination that the Coeur d'Alene Tribe owns approximately the lower one-third of Lake Coeur d'Alene. The State has denied the Tribe's ownership of any portion of Lake Coeur d'Alene and its tributaries. The legal proceedings related to the Tribe's natural resource damages claim against the Company and other mining companies continue to be stayed. On March 22, 1996, the federal government brought a lawsuit in Idaho Federal District Court against the Company and a number of other mining companies which is similar to the above described Tribe's lawsuit. The lawsuit is being brought by the federal government asserting claims under CERCLA and the Clean Water Act and -22-
23 PART II - OTHER INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES seeks recovery for damages to natural resources located in the Coeur d'Alene River Basin in North Idaho over which the federal government asserts to be the trustee. The suit also seeks declaratory relief that the Company and other defendants are jointly and severally liable for response costs under CERCLA for historic mining impacts in the Coeur d'Alene River Basin outside the Bunker Hill Superfund Site. The Company's answer to the complaint is required to be filed by May 17, 1996. The Company believes it has a number of defenses to the federal government's claims. On March 22, 1996, the Company entered into an agreement (the Agreement) with the State of Idaho pursuant to which the Company agreed to continue certain financial contributions to environmental cleanup work in the Coeur d'Alene River Basin being undertaken by a State Trustees group. In return, the State agreed not to sue the Company for damage to natural resources for which the State is a trustee for a period of five years, to pursue settlement with the Company of the State's natural resource damage claims and to grant the Company credit against any such State claims for all expenditures made under the Agreement and certain other Company contributions and expenditures for environmental cleanup in the Coeur d'Alene Basin. In connection with the Agreement, the Company increased its accrual for closed operations and environmental matters by $0.5 million during the first quarter of 1996. In 1991, the Company initiated litigation in the Idaho State District Court in Kootenai County, Idaho, against a number of insurance companies which provided comprehensive general liability insurance coverage to the Company and its predecessors. The Company believes that the insurance companies have a duty to defend and indemnify the Company under their policies of insurance for all liabilities and claims asserted against the Company by the Environmental Protection Agency (EPA) and the Tribe under CERCLA related to the Bunker Hill Superfund Site and Coeur d'Alene River Basin in northern Idaho. In 1992, the Court ruled that the primary insurance companies had a duty to defend the Company in the Tribe's lawsuit. During 1995 and in January 1996, the Company entered into settlement agreements with a number of the insurance carriers named in the litigation. The Company has received a total of $4.5 million under the terms of the settlement agreements. Thirty percent of these settlements is payable to the EPA to reimburse the U.S. Government for past costs under the Bunker Hill Superfund Site Consent Decree previously entered into by -23-
24 PART II - OTHER INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES the Company. Litigation is still pending against other insurers with trial scheduled for October 1996. The remaining insurance carriers are providing the Company a partial defense in all Coeur d'Alene River Basin environmental litigation. As of March 31, 1996, the Company had not reduced its accrual for reclamation and closure costs to reflect the receipt of any anticipated insurance proceeds. In June 1994, a judgment was entered against the Company in Idaho State District Court in the amount of $10.0 million in compensatory damages and $10.0 million in punitive damages based on a jury verdict rendered in late May 1994 with respect to a lawsuit previously filed against the Company by Star Phoenix Mining Company (Star Phoenix), a former lessee of the Star Morning Mine, over a dispute between the Company and Star Phoenix concerning the Company's November 1990 termination of the Star Phoenix lease of the Star Morning Mine property. A number of other claims by Star Phoenix and certain principals of Star Phoenix against the Company in the lawsuit were dismissed by the State District Court. On May 3, 1995, the District Court issued its final opinion and order on a number of post-trial issues pending before the Court. The opinion and order included the Court's denial of the post-trial motions filed by Star Phoenix and certain of its principals regarding claims which had been previously dismissed by the Court during trial. The Court also awarded Star Phoenix approximately $300,000 in attorneys' fees and costs. The Company's post-trial motions were denied by the State District Court, and the Company has appealed the District Court judgment to the Idaho State Supreme Court. Star Phoenix has cross-appealed certain trial court discovery determinations. Briefing on both appeals has been completed and oral argument was presented to the Idaho Supreme Court on April 10, 1996. A decision from the Idaho Supreme Court is expected in late 1996. Post- judgment interest will accrue during the appeal period; the current interest rate is 10.875%. In order to stay the ability of Star Phoenix to collect on the judgment during the pendency of the appeal, the Company has posted an appeal bond in the amount of $27.2 million representing 136% of the District Court judgment. The Company pledged U.S. Treasury Securities totaling $10.0 million as collateral for the appeal bond. This collateral amount is included in restricted investments at March 31, 1996 and December 31, 1995. The Company has vigorously pursued its appeal to the Idaho Supreme Court and it has been the Company's position, and at the current time it remains the Company's position, that it will not enter into a -24-
25 PART II - OTHER INFORMATION (Continued) HECLA MINING COMPANY and SUBSIDIARIES settlement with Star Phoenix for any material amount. Although the ultimate outcome of the appeal of the Idaho District Court judgment is subject to the inherent uncertainties of any legal proceeding, based upon the Company's analysis of the factual and legal issues associated with the proceeding before the Idaho District Court and based on the opinions of outside counsel, as of the date hereof, it is management's belief that the Company should ultimately prevail in this matter, although there can be no assurance in this regard. Accordingly, the Company has not accrued any liability associated with this litigation. The Company is subject to other legal proceedings and claims which have arisen in the ordinary course of its business and have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition of these matters and the proceedings disclosed above, it is the opinion of the Company's management, based upon the information available at this time, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the results of operations and financial condition of the Company and its subsidiaries. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 12 - Statement of Computation of Ratio of Earnings to Fixed Charges 13 - First Quarter Report to Shareholders for the quarter ended March 31, 1996, for release dated April 30, 1996 27 - Financial Data Schedule (b) Reports on Form 8-K Report on Form 8-K dated January 23, 1996, related to the sale by the Company of 2,875,000 shares of the Company's Common Stock, par value $0.25 per share, to Salomon Brothers Inc. Items 2, 3, 4 and 5 of Part II are omitted from this report as inapplicable. -25-
26 HECLA MINING COMPANY and SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HECLA MINING COMPANY ------------------------------------ (Registrant) Date: May 13, 1996 By /s/ Arthur Brown ------------------------------------- Arthur Brown, Chairman, President and Chief Executive Officer Date: May 13, 1996 By /s/ Stanley E. Hilbert ------------------------------------- Stanley E. Hilbert, Corporate Controller (Chief Accounting Officer) -26-