1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended DECEMBER 31, 1995 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 No. 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) Registrant's telephone number, including area code 208-769-4100 ------------------------ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which each class is registered - ----------------------------------------- ------------------------------ ( Common Stock, par value $0.25 per share ) ( Preferred Share Purchase Rights ) ( Series B Cumulative Convertible Preferred) New York Stock Exchange ( Stock par value $0.25 per share ) - ------------------------------------------- ------------------------------ Securities registered pursuant to Section 12(g) of the Act: Warrants to Purchase Shares of Common Stock, $.25 par value per share --------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes XX . No . ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the Registrant's voting Common Stock held by non-affiliates was $440,998,424 as of February 29, 1996. There were 51,130,252 shares of the Registrant's Common Stock outstanding as of February 29, 1996. Documents incorporated by reference herein: To the extent herein specifically referenced in Part III, the information contained in the Proxy Statement for the 1996 Annual Meeting of Shareholders of the Registrant, which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of the Registrant's 1995 fiscal year is incorporated herein by reference. See Part III.
2 PART I ITEM 1. BUSINESS.(1) GENERAL Hecla Mining Company (the Company), originally incorporated in 1891, is principally engaged in the exploration, development and mining of precious and nonferrous metals, including gold, silver, lead and zinc, and certain industrial minerals. The Company owns or has interests in a number of precious and nonferrous metals properties and industrial minerals businesses. In 1995, the Company's attributable gold and silver production was 169,777 ounces and 2,242,309 ounces, respectively. The Company also shipped approximately 991,000 tons of industrial minerals products during 1995, including ball clay, kaolin, feldspar, landscape materials and specialty aggregates. The Company's principal producing metals properties include the Grouse Creek mine, located near Challis, Idaho, a gold and silver mine where operations commenced in December 1994, in which the Company is the operator and owns an 80% interest; the La Choya gold mine, located in Sonora, Mexico, which began operations in February 1994; the American Girl mine, located in Imperial County, California, a gold mine in which the Company owns a 47% interest; and the Lucky Friday silver mine, located near Mullan, Idaho, which is a significant primary producer of silver in North America. In April 1993, operations at the Greens Creek mine, located near Juneau, Alaska, a large polymetallic mine in which the Company owns a 29.7% interest, were suspended by the manager of the mine in response to depressed metals prices. A decision to redevelop the Greens Creek mine was made in 1995, and commercial production is estimated to recommence by early 1997. The following table presents certain information regarding the Company's metal mining and development properties, including their relative percentage contributions to the Company's 1995 revenues: - ----------------------- (1)For definitions of certain mining terms used in this description, see "Glossary of Certain Mining Terms" at the end of Item 1, page 45. -1-
3 <TABLE> <CAPTION> DATE OWNERSHIP PERCENTAGE OF NAME OF PROPERTY ACQUIRED INTEREST 1995 REVENUE(1) - ---------------- -------- --------- ------------ <S> <C> <C> <C> Lucky Friday 1958 100.0% 8.3% Republic(5) 1982 100.0% 0.7% Greens Creek(2) 1988 29.7% - - Cactus 1991 75.0% 0.9% Grouse Creek(3) 1991 80.0% 18.2% La Choya 1991 100.0% 17.7% American Girl(4) 1994 47.0% 5.4% Rosebud(4) 1994 100.0% - - </TABLE> - -------------- (1) Percentages exclude the contributions of the Company's industrial minerals and specialty metals segments. The relative percentage contributions to the Company's 1995 revenue by the industrial minerals and specialty metals segments were 46.0% and 2.8%, respectively. (2) Operations at the Greens Creek mine were suspended in April 1993. A decision has been made to redevelop the Greens Creek mine with commercial production estimated to recommence by early 1997. (3) The Grouse Creek project commenced production in the fourth quarter 1994, with full production achieved in 1995. (4) The Company's interests in the American Girl mine and Rosebud project were acquired in the March 11, 1994 acquisition of Equinox Resources Ltd. (5) The Republic mine completed operations in February 1995. The Company's industrial minerals businesses consist of Kentucky-Tennessee Clay Company (ball clay and kaolin divisions), K-T Feldspar Corporation, K-T Clay de Mexico, S.A. de C.V., Colorado Aggregate Company of New Mexico, and Mountain West Products, Inc. The Company's industrial minerals segment has positioned itself as a significant producer of three of the four basic ingredients required to manufacture ceramic and porcelain products, including sanitaryware, pottery, dinnerware, electric insulators, and tile. At current production rates, the Company has over 20 years of proven and probable mineral reserves of ball clay, kaolin and feldspar. During 1995, the industrial minerals businesses provided approximately $11.5 million of cash from operations. Following completion of the Company's 1995 third quarter, as a result of its periodic review of the status of various mining properties, the Company determined that adjustments were required to properly reflect the estimated net realizable value of properties, plants and equipment for the Company's 80% interest in the Grouse Creek mine. This adjustment totaled $97.0 million reflecting the write-down of the entire carrying value of the Company's 80% interest in the Grouse Creek mine. The Grouse Creek mine carrying value write- down was necessary due to significantly higher than expected operating costs per gold ounce which was due to much lower than anticipated gold grades being realized from the proven and probable ore reserves. This adjustment was reported as a reduction in carrying value of mining properties at September 30, 1995 (see Metals Segment - Grouse Creek Gold Mine - Idaho). -2-
4 The Company has experienced losses from operations for each of the last five years. For the year ended December 31, 1995, the Company reported a loss of approximately $101.7 million (before preferred dividends of $8.0 million) or $2.11 per share of common stock, par value $0.25 per share, of the Company (the Common Stock) compared to a net loss of approximately $24.6 million (before preferred stock dividends of $8.0 million) or $0.56 per share of Common Stock for the year ended December 31, 1994. The 1995 net loss resulted primarily from the write-down of the Company's interest in the Grouse Creek mine in the third quarter of 1995 totaling $97.0 million as described above. The 1994 net loss resulted primarily from nonrecurring asset write-downs and increases in the Company's provision for closed operations and environmental matters. If Company's estimates of the 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 $(2.0) million loss to income of $5.0 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 the year ending December 31, 1996 will be as projected. On March 11, 1994, the Company and two wholly owned Canadian subsidiaries of the Company completed the acquisition of Equinox Resources Ltd. (Equinox), a mining, exploration and development company, incorporated under the laws of the Province of British Columbia. In connection with the acquisition of Equinox, the Company issued approximately 6.3 million Common Stock (including shares issuable upon exercise of outstanding options and warrants) indicating a transaction value of approximately $76.3 million on the date of acquisition. The Company's strategy is to focus its efforts and resources on expanding its gold and silver reserves and industrial minerals operations via a combination of acquisition and exploration efforts. During 1996, priorities include the continued redevelopment of the Greens Creek mine and development of the Gold Hunter ore body at the Company's Lucky Friday mine, evaluating the Grouse Creek mine ore body to determine feasibility of continuing operations (which is expected to be completed in the second quarter of 1996), and evaluating alternatives for the potential development of the Rosebud project. The Company's domestic exploration plan consists primarily of exploring for additional reserves in the vicinity of the Rosebud project and the Lucky Friday mine. In addition, the Company's joint venture participants plan to conduct exploration activities at the Greens Creek mine and the American Girl mine. The Company's foreign exploration plan for 1996 will focus on exploration targets in Mexico. At the same time, the Company will continue to evaluate -3-
5 acquisition and other exploration opportunities, primarily in North America, that will complement its existing operations. The Company's revenues and profitability are strongly influenced by the world prices of silver, gold, lead and zinc. Metals prices 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. Sales of metal concentrates and metal products are made principally to custom smelters and metal traders. Industrial minerals are sold principally to domestic manufacturers and wholesalers. The percentage of revenue contributed by each class of product is reflected in the following table: <TABLE> <CAPTION> Years ------------------------ Product 1995 1994 1993 - -------------------- ---- ---- ---- <S> <C> <C> <C> Gold 41.1% 39.0% 34.3% Silver 5.6 4.4 7.5 Lead 4.2 2.9 3.9 Industrial minerals 36.1 39.7 48.1 All others(1) 13.0 14.0 6.2 </TABLE> - --------------------- (1) All others include zinc, specialty metals and sales from Mountain West Products exclusive of scoria sales. Reference is made to Note 1 of Notes to Consolidated Financial Statements for information with respect to export sales. -4-
6 The table below summarizes the Company's production and average cash and full production cost per ounce for gold and silver for each period indicated: <TABLE> <CAPTION> Years --------------------------------------------------------------------------- Products 1995 1994 1993 1992 1991 - -------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> Gold (ounces)(1) 169,777 127,878 95,907 101,392 147,228 Silver (ounces)(2) 2,242,309 1,642,913 2,992,499 4,738,625 5,326,852 Lead (tons) 16,967 13,214 21,093 26,942 23,957 Zinc (tons) 2,999 2,431 7,838 19,890 15,070 Average Cost per Ounce of Gold Produced: - ---------------------- Cash production costs $288 $273 $229 $191 $191 Full production costs $397 $334 $298 $261 $279 Average Cost per Ounce of Silver Produced: - ---------------------- Cash production costs $4.57 $5.81 $5.45 $4.51 $4.50 Full production costs $5.76 $7.17 $6.85 $5.89 $5.67 Industrial minerals (tons shipped) 991,214 985,639 887,676 879,034 823,214 </TABLE> - ------------------------------ (1) The increase in gold production from 1994 to 1995 is principally due to increased gold production from the Grouse Creek gold mine where gold production increased 64,794 ounces, from 2,093 ounces in 1994 to 66,887 ounces in 1995, and increased gold production from the La Choya gold mine, where gold production increased 24,283 ounces, from 47,861 ounces in 1994 to 72,144 ounces in 1995. The increase in gold production was offset by decreased gold production at the Republic Unit which completed operations in February 1995, and decreased gold production at the American Girl mine due to fewer tons being milled. The increase in gold production from 1993 to 1994 is principally due to the commencement of operations at the La Choya gold mine in February 1994, and the commencement of operations at the Grouse Creek gold mine in December 1994 partially offset by decreased gold production at the Republic mine. The decrease in gold production from 1992 to 1993 is principally due to decreased production at both the Cactus (which was shut down in 1993) and Republic gold mines. The decrease in gold production from 1991 to 1992 is principally due to decreased production at the Republic, Yellow Pine (which was shut down in 1992) and Cactus gold mines. (2) Increased silver, lead and zinc production from 1994 to 1995 is principally due to increased silver production from the Grouse Creek mine which contributed a full year's production in 1995 after commencing operations in December 1994, and increased silver, lead and zinc production from the Lucky Friday mine resulting in part from the effect of the temporary suspension of operations due to an ore conveyance accident on August 30, 1994. The Lucky Friday resumed operations in December 1994. Decreased silver, lead and zinc production from 1993 to 1994 is due to two factors: 1) the suspension of operations at the Greens Creek mine in April 1993; and 2) decreased production at the Lucky Friday mine resulting in part from the temporary suspension of operations due to the ore conveyance accident on August 30, 1994. A decision has been made to redevelop the Greens Creek mine with commercial production estimated to recommence by early 1997. The decrease in silver production from 1992 to 1993 is principally due to the suspension of operations at the Greens Creek mine in April 1993 partially offset by increased silver production at the Lucky Friday mine. The decrease in silver production from 1991 to 1992 is principally due to the sale of Hecla's interest in the Galena mine in 1992. The principal executive offices of the Company are located at 6500 Mineral Drive, Coeur d'Alene, Idaho 83814-8788, telephone (208) 769-4100. -5-
7 METALS SEGMENT GROUSE CREEK GOLD MINE - IDAHO Operations at the Grouse Creek gold mine commenced in December 1994 and full production levels were achieved by June 1995. The Company's 80% interest in the Grouse Creek mine production during 1995 amounted to 66,887 ounces of gold and 541,532 ounces of silver. The mine is located in central Idaho, 27 miles southwest of the town of Challis in the Yankee Fork Mining District. Mineral rights comprising the Grouse Creek gold mine cover 22.3 square miles. The Grouse Creek gold mine consists of 18 patented lode mining claims and two patented placer claims, 43 unpatented millsite claims, and 17 unpatented lode claims for which patent applications are pending. With respect to the 17 unpatented lode claims, the Company has received the first half of a Mineral Entry Final Certificate. Upon certification by a United States Federal Mineral Examiner and issuance of patents for these claims, all of the current proven and probable reserves at the Grouse Creek gold mine will be located within patented mining claims. The remainder of the mineral rights in the Yankee Fork Mining District consist of 950 unpatented claims (see Regulation of Mining Activity). On February 8, 1994, the Company sold to Great Lakes Minerals, Inc. of Toronto (Great Lakes) a 20% undivided interest in the Company's Grouse Creek gold mine. Proceeds received from the sale, totaling $13.3 million, represent the sales price of $6.8 million for 20% of the amount spent by the Company on acquisition, exploration and development of the project through June 30, 1993, including a fixed premium of $1.25 million, plus Great Lakes' pro-rata share of construction costs for Grouse Creek from July 1, 1993 through January 31, 1994. Pursuant to the acquisition and joint venture agreements, Great Lakes is required to fund its 20% pro-rata portion of all capital and operating costs. In addition, these agreements provide that until March 1, 1996, Great Lakes had the option to purchase up to an additional 10% undivided interest in the mine and fund its increased share of capital expenditures. This option expired unexercised on March 1, 1996. During the third quarter of 1995 and continuing into the fourth quarter of 1995, the Grouse Creek mine experienced significantly higher than expected operating costs per ounce of gold produced and significantly less than expected operating margins resulting from higher than expected start-up costs and lower than expected gold ore grade. Mining to date has indicated that mill grade ore occurs in thinner, less continuous structures than originally interpreted. The Company thus determined that a 1995 third quarter carrying value write-down totaling $97.0 million was required to properly reflect net realizable value of its 80% interest in the Grouse Creek Joint Venture. The amount of the adjustment was based on the -6-
8 Company's carrying value of its 80% interest in the Grouse Creek mine in excess of the Company's share of estimated discounted future cash flows. A revised life-of-mine cash flow analysis was developed early in the fourth quarter of 1995 for this purpose which recognizes the geologic complexity of the Sunbeam deposit as determined from mining experience to date and includes a revised interpretation of the geologic data. Two distinct ore deposits have been identified at the Grouse Creek mine: the Sunbeam deposit and the Grouse deposit. Both deposits are mined by open pit methods. The Company currently plans to continue mining on the Sunbeam pit through June 1996 and perform further ore confirmation drilling of the Grouse deposit to evaluate the feasibility of mining operations beyond June 1996. The Company's Board of Directors is currently expected to make a decision during the second quarter of 1996 whether to continue further development and operation of the Grouse Creek mine. If the Grouse Creek mine is not further developed and operations wind down in June 1996, 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 currently estimated at approximately $3.0 to $4.0 million. If the decision is made to shut the property down, an accrual for closed operations and environmental matters in the range of $16.0 to $20.0 million would be necessary at the time the mine is shut down. Based on current plans, the Company's share of additional capital costs for the mine are expected to be between $10.0 and $12.0 million during 1996. The Company estimates that its share of total production at the Grouse Creek gold mine will be from 30,000 to 60,000 ounces of gold in 1996. The upper end of the range for both capital and gold production are contingent upon the Company's decision to further develop and operate the mine beyond June 1996. Pursuant to a November 27, 1995 agreement entered into between the Company and Great Lakes, past due cash calls totaling $2.2 million were forgiven by the Company in exchange for Great Lakes granting the Company certain warrants to purchase Great Lakes' common stock (Great Lakes Warrants) which expire on December 31, 1997, and a royalty totaling $2.3 million payable out of 25% (75% after December 31, 1997) of the proceeds (in excess of cash operating requirements) from Great Lakes' share of Grouse Creek production. As of December 31, 1995, the Company has recorded a receivable from Great Lakes of $1.3 million, which is the Company's estimated present value of the Great Lakes Warrants and the royalty payments owed by Great Lakes. In addition, the Company has been advised that Great Lakes anticipates it will elect to dilute its joint venture interest rather than pay its share of any future capital -7-
9 expenditure requirements for the Grouse Creek mine. Accordingly, projections for Grouse Creek are based on the assumption that the Company will be funding 100% of those requirements. The following table presents the Company's share of the proven and probable mineral reserves for the Grouse Creek gold mine as of the dates indicated: <TABLE> <CAPTION> Year Total Gold Gold Silver Silver End Reserves Avg. Grade Content Avg. Grade Content 12/31 (tons)(2) (oz./ton) (ounces) (oz./ton) (ounces) ----- ---------- ---------- --------- ---------- ---------- <S> <C> <C> <C> <C> <C> 1995(1) 6,872,400(4) 0.044 299,362 1.25 8,571,140 ---- 1994(1) 17,658,000(3) 0.041 721,600 0.92 16,206,080 ---- 1993(1) 12,104,000 0.055 671,200 1.07 12,972,800 ---- 1992(1) 14,467,000 0.057 831,000 1.21 17,474,000 ---- 1991(1) 15,018,600 0.048 719,150 1.20 17,276,810 ---- </TABLE> ----------------------- (1) 1995, 1994 and 1993 proven and probable mineral reserves reflect only the Company's share (80%) pursuant to the February 8, 1994, sale of a 20% interest in its Grouse Creek mine. If the Company had only an 80% interest in 1992 and 1991, the Company's share of contained gold and silver would have been 664,800 and 13,979,200 ounces, respectively, in 1992 and 575,320 and 13,821,448 ounces, respectively, in 1991. (2) For proven and probable mineral reserve assumptions, including assumed metals prices, see Glossary of Certain Mining Terms. (3) The increase in the proven and probable mineral reserves from 1993 to 1994 is principally due to an increase in the metals price assumptions used in 1994 (see assumptions for proven and probable mineral reserves in the Glossary of Certain Mining Terms). This increase was partially offset by a decrease in the Grouse underground reserves totaling 68,000 tons containing 53,000 ounces of gold and 136,000 ounces of silver. The decrease in underground reserves was necessary when 1994 development encountered erratic mineralization which was previously estimated to be continuous. (4) Reserves at the unit decreased from 1994 to 1995 for the following reasons: a) During the year, 1,365,200 tons of ore containing 50,885 troy ounces of gold and 884,385 troy ounces of silver were mined from the Sunbeam pit, and 18,408 tons of ore containing 7,786 troy ounces of gold and 27,428 troy ounces of silver were mined from Grouse underground; b) Recalculation of Sunbeam pit reserves resulting in a decrease of 2,348,880 tons of ore containing 115,207 troy ounces of gold and 580,702 troy ounces of silver; -8-
10 c) Lower-than-expected tonnage and grade in the portion of the pit mined in 1995 leading to a production shortfall of 766,800 tons containing 33,660 troy ounces gold and 4,381 troy ounces of silver; and, d) Increases in cutoff grade for the Sunbeam and Grouse deposits, and decreases in mill recovery applied to the Grouse deposit reserves to match actual operating cost and recovery experience at the unit, resulted in a reduction of 6,285,712 tons containing 214,700 ounces gold and 6,138,044 ounces silver. Currently, the Grouse deposit is undergoing a reevaluation including incorporation of 1995 drill hole information into a mineral inventory estimate and a full metallurgical study. A new mine plan will be completed during the second quarter 1996. The ore reserves for the Grouse Creek unit should be considered preliminary, since changes to the Grouse pit mine plan, together with ongoing evaluation of the Sunbeam pit mine plan could result in significant changes to ore reserves at the unit. Both the Sunbeam deposit and the Grouse deposit use conventional surface mining methods. Blasthole assays are used to determine ore grade material. The material is segregated and hauled by off-highway trucks to the mill. Waste material is hauled to a waste dump or used as construction material in the tailings dam. In both deposits ore is mined on 20-foot benches. The milling process involves a 6,000-ton-per-day gold recovery facility. The recovery process involves crushing and grinding of the ore and recovering approximately 50% of the gold in a gravity circuit. The remaining gold and silver is dissolved in a weak sodium cyanide solution and recovered with carbon adsorption and Merrill-Crowe precipitation. Overall recoveries are currently estimated at 92% gold and 50% silver for ore from the Sunbeam deposit, and 72% gold and 69% silver for ore from the Grouse open pit deposit. A refinery on the property produces a gold/silver dore that is further processed by a commercial refiner. The tailings from the cyanide process are impounded in a 15.5 million ton capacity double-lined tailings pond. All permits for this facility are in good standing. Salmon River Electric Cooperative, Inc. provides electrical power to the Grouse Creek gold mine. The Sunbeam deposit is being mined at a rate of 6,000 tons of ore per day at a current cut-off grade of 0.025 ounce per ton of gold equivalent and a stripping ratio of 3.6:1. The Grouse deposit will be mined at approximately the same rate and will have a cut-off grade of 0.032 ounce per ton of gold equivalent and a stripping ratio of 4.5:1. Reclamation activities include the partial backfill and revegetation of the Sunbeam deposit and the Grouse deposit and covering, recontouring and revegetating the tailings surface and construction of a permanent spillway. The waste dump and haul roads will be recontoured and revegetated. Process facilities will be removed and foundations will be buried. Concurrent reclamation practices will be employed whenever -9-
11 possible. The reclamation plans have been approved by the appropriate state and federal agencies. The Company's share of the reclamation expense recognized in 1995 totaled $1,006,817. As of December 31, 1995, the Company's net book value of Grouse Creek property, plant and equipment was $1.5 million. As of December 31, 1995, there were 200 employees at the Grouse Creek gold mine. The employees are not represented by a bargaining agent. LA CHOYA GOLD MINE - SONORA, MEXICO The La Choya gold mine is located 30 miles south of the U.S. border in the State of Sonora, Mexico, and is 100% owned by the Company through a Mexican subsidiary. The La Choya gold mine is the Company's first operation outside the U.S. and Canada. In May 1992, the Company exercised its option to purchase the Mexican mineral concessions related to this property, which includes a land position of over 16,000 acres. The La Choya gold mine commenced operations in February 1994 and produced approximately 48,000 ounces of gold in 1994 and approximately 72,000 ounces in 1995. The Company expects to produce 60,000 to 65,000 ounces of gold in 1996. Current proven and probable mineral reserves at the La Choya gold mine are expected to be substantially depleted in 1997. The ore is mined via conventional open pit methods at a stripping ratio of 3.3:1 utilizing a cut-off grade of 0.012 ounce of gold per ton, crushed to two inches in size, and then cyanide leached on a leach pad. The gold in the leach solution is processed in a carbon recovery plant to produce a gold/silver dore, which is transported to the U.S. for further refining. The average life of mine recovery of contained gold ounces is estimated at approximately 87%. The Company conducted exploration drilling programs during 1994 and 1995 in an effort to expand the gold reserves and mine life at the La Choya gold mine. Drilling results in 1994 were successful in adding approximately 55,000 ounces of contained gold to the proven and probable reserve category. The 1995 program did not add significantly to the existing ore reserve. -10-
12 Information with respect to production, proven and probable mineral reserves, and average cost per ounce of gold produced as of the dates indicated are set forth in the following table: <TABLE> <CAPTION> Years ----------------------------------------- Production (100%) 1995(4) 1994(1) 1993 ----------------- ---------- --------- ---------- <S> <C> <C> <C> Ore mined (tons) 4,031,274 2,026,381 - - Ore crushed (tons) 2,648,948 1,979,463 - - Gold (ounces) 72,144 47,861 - - Proven and Probable Mineral Reserves(2) -------------------- Total tons 3,538,042 6,138,000 6,138,000 Gold (oz. per ton) 0.028 0.032 0.037 Average Cost per Ounce of Gold Produced ---------------------- Cash production costs(3) $192 $243 - - Full production costs(3) $295 $337 - - </TABLE> ------------------------------------ (1) Production at the La Choya mine commenced in February 1994. (2) For proven and probable mineral reserve assumptions, including assumed metals prices, see Glossary of Certain Mining Terms. (3) Includes approximately $2.1 million in start-up cost expensed in the first quarter of 1994. (4) At December 31, 1995, estimated recoverable gold ounces on the heap leach pad totaling approximately 36,000 gold ounces are not included in ore reserves. These ounces were placed on the pad during 1994 and 1995 and are currently estimated to be recovered over the mine's remaining life. Reclamation activities will be completed at the end of the mine's life and will include rinsing of the heap leach pads, followed by recontouring of the pads, and regrading and revegetating the site. Reclamation expense recognized in 1995 was $579,561. As of December 31, 1995, there were 204 employees at the La Choya gold mine. The National Union of Mine, Metallurgical and Related Workers of the Mexican Republic is the bargaining agent for the La Choya gold mine nonconfidential (hourly) employees. The current labor agreement expires on September 7, 1996. As of December 31, 1995, the Company's net book value of the La Choya mine property, plant and equipment totaled $10.8 million. Electrical power is provided by on-site diesel generators. The recent decline of the Mexican peso has not significantly impacted results at the La Choya mine as both funding for operations and gold -11-
13 sales are denominated in U.S. dollars. Further declines in the Mexican peso, however, could adversely impact the Company's Mexican operations. LUCKY FRIDAY MINE - IDAHO The Lucky Friday, a deep underground silver and lead mine, located in northern Idaho and 100% owned by the Company, has been a producing mine for the Company since 1958. The mine operated continuously until low metals prices and rockburst activity forced the suspension of operations in April 1986. During the shutdown, the Company's engineers began converting portions of the mine to a mechanized underhand mining method designed to increase productivity and reduce rockburst activity. Production was resumed at the Lucky Friday mine in June 1987 and continued uninterrupted until August 30, 1994, when an ore-conveyance accident forced suspension of operations until repairs could be made. Operations resumed on December 5, 1994, and steady-state production was achieved in February 1995. During 1995, the Company recovered its costs and lost operating cash flow resulting from the accident from its insurance carrier. The cash and full production cost per ounce of silver decreased from $5.81 and $7.17, respectively, in 1994 to $4.57 and $5.76, respectively, in 1995. The decreases are due principally to decreased production costs and increased silver production in 1995 compared to 1994, as well as increased by-product credits due to increased lead and zinc production, higher lead prices and improved zinc recovery. Lead and zinc are by-products of the process employed at the Lucky Friday mine, the revenues from which are deducted from production costs in the calculation of production cost per ounce (see Glossary of Certain Mining Terms). The ore-bearing structure at the Lucky Friday mine is the Lucky Friday Vein, a fissure vein typical of many in the Coeur d'Alene Mining District. The ore body is located in the Revett Formation which is known to provide excellent host rocks for a number of ore bodies in the Coeur d'Alene District. The Lucky Friday Vein strikes northeasterly and dips steeply to the south, with an average width of six to seven feet. The principal ore minerals are galena and tetrahedrite, with minor amounts of sphalerite and chalcopyrite. The ore occurs as a single continuous ore body in and along the Lucky Friday Vein. The major part of the ore body has extended from the 1200-foot level to and below the 5750-foot level, which is currently being developed. The principal mining method, underhand cut and fill, was piloted in 1985 and 1986, and has since been fully implemented. This method utilizes mechanized equipment, a ramp system and cemented sand fill. The method has proven effective in reducing mining costs and limiting rockburst activity. However, rockbursting continues to be a concern in the one-mile-deep mine. The ore produced from the mine is processed in a 1,000-ton-per-day conventional flotation mill at a current rate of 700 tons per day at the -12-
14 Lucky Friday mine site. The flotation process produces both a silver-lead concentrate and a zinc concentrate. During 1995 approximately 97.3% of the silver, 97.1% of the lead, and 82.9% of the zinc were recovered. The Lucky Friday mine's mill facility and surface and underground equipment are in good working condition. The mill was originally constructed approximately 34 years ago. The Company maintains and modernizes the plant and equipment on an ongoing basis to keep the plant and equipment in good physical and operating condition. The net book value of the Lucky Friday mine property and its associated plant and equipment was $27.2 million as of December 31, 1995. Reclamation activities are contemplated to include stabilization of tailings ponds and waste rock areas. The current reclamation accrual is in excess of the estimated reclamation costs, and no reclamation expense was recognized in 1995. Even though recent historical total production costs have exceeded revenues realized from the sale of recovered metals, based upon management's estimates of metal to be recovered which includes the possible development of the Gold Hunter property (see following paragraph), and considering estimated future production costs and metal prices, the Company's management believes that the carrying value of the Lucky Friday mine is recoverable from future undiscounted cash flows generated from operations and considering the estimated salvage value of surface plant, equipment and the value associated with property rights. In evaluating the carrying value of the Lucky Friday mine, the Company used fixed metal prices of $5.77 per ounce silver, $0.35 per pound of lead and $0.49 per pound of zinc through 2005, the estimated end of commercial production. These prices were utilized as the Company's management believes that they are reasonable estimates of average prices over the remaining life of the mine. In contrast to longer-term prices used for estimating life-of-mine revenues and resultant cash flows, the Company uses near-term estimates of metal prices to estimate ore reserves as they more closely reflect the current economic conditions at the measurement date. Estimated future production costs were derived from actual production costs currently being experienced at the Lucky Friday mine, adjusted for anticipated changes resulting from the execution of the Company's mine production plan. Based upon these projected factors, the Company currently estimates that future cash and full production costs per ounce of silver produced over the remaining life of mine would be approximately $3.79 and $4.75, respectively. As these amounts are derived from numerous estimates, the most volatile of which are metal prices, there can be no assurance that actual results will correspond to these estimates. The principal reason that cash costs per ounce are assumed to be lower than recent historical amounts is the effect of the development of the Gold Hunter project and lead by-product revenues (which are credited against the production costs of silver produced) at $0.35 per pound which is higher than recent actual prices. If the mineral resource -13-
15 associated with the Gold Hunter property described below is not fully developed by the Company, management of the Company believes that a write-down in the carrying value of the Lucky Friday mine and or the capitalized costs associated with Gold Hunter project may occur depending on the current economic environment at the time the production decision is made on the Gold Hunter. Capitalized expenditures associated with the Gold Hunter project as of December 31, 1995 total approximately $2.8 million. During 1991, the Company discovered several mineralized structures containing some high-grade silver ores in an area known as the Gold Hunter property, about 5,000 feet northwest of the existing Lucky Friday workings. In an extensive exploration program in 1992, the Company undertook an underground evaluation of the Gold Hunter property mineralization. The program referred to now as the "Lucky Friday Expansion Project," discovered mineralization containing significant amounts of silver and lead in an area accessible from the 4050-foot level of the Lucky Friday mine. The exploration program and a preliminary feasibility study were completed during 1993. In 1994, the Company approved the first phase of development of the Lucky Friday Expansion Project. The first phase of development consists primarily of driving an access drift from the 4900-foot level of the Lucky Friday workings which will intersect the Gold Hunter ore zone approximately 850 feet below the presently developed area. The new access drift will require approximately 7,000 feet of development excavation. The access drift advanced 3,000 feet in 1995, and exploratory drilling is scheduled to start in the second quarter of 1996. In 1994 and 1995, $2.6 million was spent on the first phase of the project. A final feasibility study will be completed in 1997, at which time a decision will be made on further development of the Gold Hunter property. If further development is approved, it is presently estimated that an additional $16.0 million ($3.2 million in 1996 and $12.8 million for 1997 through 1999) in capital expenditures will be required to bring the Lucky Friday Expansion Project into full production. If further development is approved, initial production from the project is expected in 1997, and production will increase until full production is achieved upon completion of the entire project in the first quarter of 1999. The Gold Hunter property is controlled by the Company under a long-term operating agreement, which entitles the Company, as operator, to a 79.08% interest in the net profits from operations from the Gold Hunter properties. The Company will be obligated to pay a royalty after it has recouped its costs to explore and develop the properties, which as of December 31, 1995, totaled approximately $12.0 million. The Lucky Friday silver-lead concentrate product is shipped primarily to the ASARCO smelter at East Helena, Montana. The silver contained in the concentrates is returned to the Company under a tolling arrangement. The Company then sells the tolled silver to major metal brokers. The pricing of the silver is based on worldwide bullion markets. The lead and gold contained in the concentrates are sold to ASARCO. The Lucky Friday zinc concentrates are shipped to Cominco's smelter in Trail, -14-
16 British Columbia, Canada, and are sold under an agreement with Cominco Ltd. In the event agreements with ASARCO and Cominco are terminated, the Company believes that new agreements could be negotiated with other smelters. However, at present metal prices, increased costs associated with transporting the concentrate product a greater distance to other smelters may render operations at the Lucky Friday mine uneconomical resulting in possible mine closure. If this were to occur, the Company may be required to write down all or a part of its investment in the Lucky Friday mine. Based on the Company's experience in operating deep mines in the Coeur d'Alene Mining District, where the persistence of mineralization to greater depths may be reliably inferred from operating experience and geological data, the Company's policy is to develop new levels at a minimum rate consistent with the requirements for uninterrupted and efficient ore production. A new level is developed and brought into production only to replace diminishing ore reserves from levels being mined out. The length and strength of the ore body have not materially diminished on the lowest developed level of the mine. Based upon this factor, drilling data and extensive knowledge of the geologic character of the deposit, and many years of operating experience in the Lucky Friday mine and Coeur d'Alene Mining District, there are no geologic factors known at present which appear to prevent the assumed continuation of the Lucky Friday ore body for a considerable distance below the lowermost working level. Although there can be no assurance of the extent and quality of the mineralization which may be developed at greater depths, the existing data and operating experience justify, in the opinion of the Company's management and based upon industry standards, the conclusion that the mineralization will extend well below the 6200-foot level, which is the existing bottom of the mine's Silver Shaft. -15-
17 Information with respect to production, proven and probable mineral reserves, and average cost per ounce of silver produced for the past five years is set forth in the table below: <TABLE> <CAPTION> Years --------------------------------------------------------- Production (100%) 1995 1994(2) 1993 1992 1991 - ----------------- --------- --------- --------- --------- --------- <S> <c <C> <C> <C> <C> Ore milled (tons) 158,874 124,986 179,579 175,170 152,150 Silver (ounces) 1,662,706 1,306,884 2,122,738 2,031,779 1,850,531 Gold (ounces) 830 605 972 965 928 Lead (tons) 16,967 13,214 19,795 21,336 18,857 Zinc (tons) 2,999 2,431 4,385 4,213 3,164 Proven and Probable Mineral Reserves(1) - ------------------- Total tons 468,590 450,685 414,315 446,105 440,060 Silver (oz. per ton)(3) 11.7 13.9 14.4 14.3 13.6 Lead (percent)(3) 11.6 13.9 14.3 13.4 12.8 Zinc (percent)(3) 1.8 2.9 3.0 2.3 2.8 Average Cost per Ounce of Silver Produced - ---------------------- Cash production costs $ 4.57 $ 5.81 $ 5.54 $ 4.12 $ 5.01 Full production costs $ 5.76 $ 7.17 $ 6.77 $ 5.35 $ 6.20 </TABLE> - ------------------------------------ (1) At the Lucky Friday mine, reserves lying above or between developed levels are classified as proven reserves. Reserves lying below the lowest developed level, projected to 100 feet below the lowest level or to one- half the exposed strike length, whichever is less, are classified as probable reserves. Mineralization known to exist from drill-hole intercepts does not meet the Company's current proven or probable reserve criteria and is excluded from these reserve categories. For additional proven and probable mineral reserve assumptions, including assumed metals prices, see Glossary of Certain Mining Terms. (2) Production decreases in 1994 are due primarily to the suspension of operations resulting from the August 30, 1994 ore-conveyance accident. (3) Decreased grades for silver, lead and zinc in 1995 versus 1994 are the result of an adjustment to mining dilution factors to represent current mining practices, changes in mining method that require more dilution in some of the planned stopes, decrease in vein width and grade in current mining areas, and completion of mining in certain internal ore blocks, around which no additional reserves can be projected. At December 31, 1995, there were 154 employees at the Lucky Friday mine. The United Steelworkers of America is the bargaining agent for the Lucky Friday hourly employees. The current labor agreement has been extended to June 12, 1999. The bargaining agent has the option to request the Company to negotiate wages and time off during the extended period of the labor agreement. Washington Water Power Company supplies electrical power to the Lucky Friday mine. -16-
18 GREENS CREEK MINE - ADMIRALTY ISLAND, ALASKA At December 31, 1995, the Company held a 29.7% interest in the Greens Creek mine, located on Admiralty Island, near Juneau, Alaska, through a joint venture arrangement with Kennecott Greens Creek Mining Company, the manager of the mine, a wholly owned subsidiary of Kennecott Corporation. Greens Creek is a polymetallic deposit containing silver, zinc, gold, and lead. Greens Creek lies within the Admiralty Island National Monument, an environmentally sensitive area. The Greens Creek property includes 17 patented lode claims, and one patented millsite claim in addition to property leased from the U.S. Forest Service. The entire project is accessed and served by 13 miles of road and consists of the mine, an ore concentrating mill, a tailings impoundment area, a ship-loading facility and a ferry dock. In February 1993, as a result of depressed metal prices and a glut in world concentrate markets, the decision was made to place the mine on a temporary shutdown. Commercial production ceased in April 1993, and the mine and mill were placed on a care-and-maintenance basis. Exploration and mine development activities continued at the mine during the shutdown. Follow-up drilling on previously identified targets was successful in identifying a new ore zone, the Southwest Extension. In January 1994, a feasibility study was initiated to determine the advisability of placing the mine back into production. The feasibility study was completed in the fourth quarter of 1994 and in 1995 the decision was made to reopen the Greens Creek Mine, with commercial production estimated to recommence by early 1997. The reopening project includes development of the Southwest ore body, purchase of new mine equipment, upgrading of ancillary facilities, improvement of environmental control systems and modification of the process plant. Environmental permitting progress for the reopening project during 1995 included: the Forest Service approval of the General Plan of Operations and Phase I Construction Plan of Operations; and the City and Borough of Juneau approval of the Large Mine Permit. Permits that were in-progress at the end of 1995 included the Forest Service Phase II Construction Plan of Operations (CPO) and the Alaska Department of Environmental Control solid waste permit for the tailings disposal. Renewal of the mine waste-water discharge and air quality permits were also in progress at the end of the year. Current plans call for 1,320 tons per day underground mining operations in the Southwest ore zone, beginning in the fourth quarter of 1996. Ore from the underground trackless mine will be milled at the mine site. The mill will produce gold/silver dore; and lead, zinc and bulk concentrates. The dore will be marketed to -17-
19 a precious metal refiner and the three concentrate products will be predominantly sold to a number of major smelters worldwide. A lesser amount of the concentrates will be sold to metal merchants under short-term agreements. The concentrates will be shipped from a marine terminal located about nine miles from the mine site. Improvements to the mill include modifications designed to allow increased throughput and to recover higher grades of zinc from the Southwest and West ore zones. Additionally, the reopening project includes recommissioning and deferred maintenance of all process equipment. Ancillary project work includes an expansion of the tailings disposal facility, upgrade of the power generating capacity, and purchase of surface equipment to replace contractors with mine employees. The capital investment in ancillary facilities will allow the mine to increase efficiency as well as metal production. Environmental projects are focused on improving the performance of water treatment systems at the mine site. Two new water treatment plants, associated ponds and pipelines will allow the mine staff more assurance of meeting more stringent environmental standards. In 1995, the Company's portion of capitalized expenditures to redevelop the Greens Creek mine totaled $10.6 million. The Company's share of 1996 capitalized expenditures is estimated to be $21.2 million. At December 31, 1995, the Company's interest in the net book value of the Greens Creek mine property and its associated plant and equipment was $59.7 million. Even though historical production costs have exceeded revenues realized from the sale of recovered metals, based upon management's estimates of metal to be recovered and considering estimated future production costs and metal prices, the Company's management believes that the carrying value of the Greens Creek mine is recoverable from future undiscounted cash flows generated from operations. In evaluating the carrying value of the Greens Creek mine, the Company used fixed metal prices of $411 per ounce of gold, $5.77 per ounce of silver, $0.35 per pound of lead and $0.49 per pound of zinc through 2014, the estimated end of commercial production. These prices were utilized as the Company's management believes that they are reasonable estimates of average prices over the remaining life of the mine. In contrast to longer-term prices used for estimating life-of-mine revenues and resultant cash flows, the Company uses near-term estimates of metal prices to estimate ore reserves as they more closely reflect the current economic conditions at the measurement date. Estimated future production costs were derived from actual production costs experienced at the mine, adjusted, as necessary, for anticipated changes resulting from the execution of the mine manager's mine production plan. Based upon these projected factors, the Company estimates that future cash and full production costs per ounce of silver produced over the remaining life of the mine would be $2.39 -18-
20 and $4.32, respectively. As these amounts are derived from numerous estimates, the most volatile of which are metal prices, there can be no assurance that actual results will correspond to these estimates. The principal reason that cash costs per ounce are assumed to be less than historical amounts is a forecasted increase in the grade of ore processed. The Greens Creek deposit consists of zinc, lead, and iron sulfides and copper- silver sulfides and sulfosalts with substantial contained gold and silver values, having a vein-like to blanket-like form of variable thickness. The ore is thought to have been laid down by an "exhalative" process (i.e., volcanic- related rifts or vents deposited base and precious metals onto an ocean floor). Subsequently, the mineralization was folded and faulted by multiple generations of tectonic events. The estimated mineral reserves for the Greens Creek mine are computed by Kennecott Greens Creek Mining Company's geology and engineering staff with technical support from Kennecott Corporation. Geologic interpretations and reserve methodology are reviewed, but the reserve compilation is not independently confirmed by the Company in its entirety. Information with respect to the Company's share of production, proven and probable mineral reserves, and average cost per ounce of silver produced is set forth in the table below: <TABLE> <CAPTION> Years (Company's Interest (2)) ------------------------------------------------------------------------------------------- Production 1995(1)(29.7%) 1994(1)(29.7%) 1993(1)(29.7%) 1992(28%) 1991(28%) - ---------- -------------- -------------- -------------- ---------- ---------- <S> <S> <C> <C> <C> <C> Ore milled (tons) - - - - 33,638 123,526 120,187 Silver (ounces) - - - - 551,107 1,959,368 2,178,141 Gold (ounces) - - - - 2,826 9,094 10,505 Zinc (tons) - - - - 3,453 11,385 11,906 Lead (tons) - - - - 1,298 4,650 4,863 Proven and Probable Mineral Reserves(3) - ------------------- Total tons 2,585,000 2,585,000 1,911,000 3,422,000 3,876,000 Silver (oz. per ton) 19.2 19.2 16.0 12.7 13.3 Gold (oz. per ton) 0.16 0.16 0.14 0.13 0.12 Zinc (percent) 13.1 13.1 14.4 13.2 12.8 Lead (percent) 4.7 4.7 4.7 4.0 4.0 Average Cost per Ounce of Silver Produced - ------------------------ Cash production costs - - - - $ 5.11 $ 4.82 $ 3.94 Full production costs - - - - $ 7.16 $ 6.54 $ 5.43 </TABLE> - ------------------------------- (1) Operations were suspended in April 1993 and placed on a standby basis. (2) Equity during the period of active production was 28.08%, but was increased to 29.73% by the time of the reserve determination. (3) For proven and probable mineral reserve assumptions and definitions, see Glossary of Certain Mining Terms. -19-
21 Mineral reserve criteria and estimation techniques used for 1995, 1994 and 1993 reserves differed substantially from those used in prior years. Among these changes were the adoption of block modeling techniques in place of the sectional methods for a major section of the mine, a reevaluation of cut-off criteria, and the development of refinements to in-situ net smelter return estimates involving projected smelting terms and distribution or recovery of metals in the three concentrate products and metal price changes. In addition, more rigorous criteria for reserve classification were applied to the probable reserves category. These changes and the deduction for production in 1993 resulted in a reduction in proven and probable mineral reserves from 3.4 million tons at December 31, 1992, to 1.9 million tons at December 31, 1993. In 1993, drilling in the southwest area of the mine encountered an additional mineralized zone containing higher than mine average gold and silver content. Further drilling in the area in 1994 accounts for most of the increase in reserves between 1993 and 1994. As of December 31, 1995, there were 124 employees at the Greens Creek mine. The employees at the Greens Creek mine are not represented by a bargaining agent. The Greens Creek mine uses electrical power provided by diesel-powered generators located on-site. AMERICAN GIRL MINE - CALIFORNIA The Company acquired its 47% interest in the American Girl gold mine in March 1994 as part of the Equinox acquisition. The mine property is located in Imperial County, California. The property includes three mining areas; the Padre-Madre area where mining is nearly complete, the American Girl Canyon area which is presently being mined, and the Oro Cruz area where development began March 1, 1995. Production from the Oro Cruz commenced in late 1995. The cash and full production costs per ounce of gold increased from $344 and $367, respectively, in 1994 to $436 and $483, respectively, in 1995. The increases are principally due to Oro Cruz permitting delays in late 1994 and early 1995. The operations could not operate at full capacity until the Oro Cruz was permitted and developed. Processing of Oro Cruz ores began in December 1995. Geology of the area is well studied. Gold mineralization is hosted along low angle brittle faults (detachment faults) with average dips of 15 to 20 degrees. Gold occurs in the native form, most often along fracture boundaries. The mine is located in an area that has experienced high levels of seismic activity. The mine is managed by MK Gold Company, the Company's joint venture partner. MK Gold receives a monthly management fee of 2% of certain specified costs of the joint venture. Certain matters -20-
22 regarding the joint venture require the approval of the management committee. The Company and MK Gold each have two members on the joint venture management committee. The American Girl mine is held through a combination of patented and unpatented claims either owned outright or through leases. Properties are subject to underlying net smelter return royalties ranging from 3.5% to 12.5% depending upon the lessor, gold price and recovery of capital costs. The property contains several ore bodies from which ore has been and is currently being mined. At the present time, remaining ore is being mined from surface pits and underground production areas in the American Girl Canyon area and two open pits and an underground mine in the Oro Cruz area. Ore is processed by heap leaching and conventional milling in facilities owned by the joint venture. Electric power is generated on-site by equipment owned by the joint venture. The total full-time employees at the site as of December 31, 1995 was 200. Employees at the American Girl mine are not represented by a bargaining agent. The Company's basis in the American Girl mine property, plant and equipment was $6.9 million at December 31, 1995. A portion of reclamation activity is being performed concurrently with operations at the American Girl mine. Reclamation activity includes backfilling mine pits, recontouring and revegetating pits and heap leach pads. Final reclamation will include removal of buildings and closure of underground mine openings. The current reclamation accrual is in excess of estimated reclamation costs, thus 1995 reclamation expense recognized totaled only $18,663. Information with respect to the Company's share of production, proven and probable mineral reserves, and average cost per ounce of gold produced for the dates indicated are set forth in the table below: <TABLE> <CAPTION> Years -------------------------------------- Production (47%) 1995 1994 1993 - ---------------- ---------- ---------- --------- <S> <C> <C> <C> Total ore processed (tons) 783,132 704,489 433,504 Gold (ounces) 21,489 30,624 35,192 Proven and Probable Mineral Reserves (47%)(1) ------------------------- Total tons 2,171,000(3) 3,428,000(2) 1,814,200 Gold (oz. per ton) 0.056 0.049 0.078 Average Cost per Ounce of Gold Produced ---------------------- Cash production costs $ 436 $ 344 $ 257 Full production costs $ 483 $ 367 $ 347 </TABLE> ------------------------------------ -21-
23 (1) For proven and probable mineral reserve assumptions, including assumed metals prices, see Glossary of Certain Mining Terms. (2) The increase in the mineral reserves from 1993 to 1994 is due to additional lower-grade tons being added to the proven and probable category during 1994. (3) The decrease in the mineral reserves from 1994 to 1995 is the result of mining activity in 1995, and the removal of low-grade tons from mineral reserves as Phase I mining of the Tybo pit (low-grade pit) ceased ahead of schedule due to pit stability concerns. The Company anticipates that sufficient ore exists in the American Girl, Oro Cruz and Padre-Madre mine areas to enable surface and underground mining to continue into 1998. The Company's share of annual gold production is expected to be 30,000 to 35,000 ounces of gold. Exploration for additional surface and underground ore, which has been moderately successful in the past, is expected to continue. ROSEBUD GOLD PROJECT - NEVADA The Rosebud gold project is located in the Rosebud Mining District, in Pershing County, Nevada, and was acquired by the Company through the merger with Equinox. The Rosebud gold project consists of a 100% interest in 3 patented lode mining claims and 712 unpatented lode mining claims (the Hecla Claims), and a 52% interest in 48 lode mining claims held under a joint venture with N.A. Degerstrom Inc. (the Degerstrom Claims). The total 772 claims cover approximately 15,950 acres and collectively comprise the "Rosebud Project." Patent application has been made on the 13 claims that contain all of the proven and probable mineral reserves (see Regulation of Mining Activity). The Rosebud Project may be reached from Lovelock, Nevada, by travelling northwest a distance of approximately 58 miles on an all weather gravel road. Capitalized expenditures at the Rosebud Project totaled $15.0 million at December 31, 1995. In 1993, Equinox sold a 2.5% net smelter return royalty and an option to purchase for $2.5 million an additional 1.5% net smelter return royalty on the property to Euro-Nevada Mining Corporation Inc. (Euro-Nevada). The option must be exercised within 30 days after delivery by the Company to Euro-Nevada of a feasibility study on the Rosebud Project, but does not otherwise have an expiration date that is a date certain. Until 1991, all significant gold mineralization and most of the 115,000 feet of drilling in 167 holes had been completed on what was known as the Dozer Hill Zone, a northeast trending zone extending a distance of about 1,500 feet within portions of 10 claims within the Hecla Claims. Further delineation drilling during 1994 resulted in identifying two distinct mineralized zones, -22-
24 the South Zone and the North Zone, within the original Dozer Hill Zone. In 1991, 58,691 feet of drilling was carried out to test exploration targets east of the South Zone and to further evaluate the property. This exploration drilling encountered a new zone of high-grade gold mineralization (the East Zone) about 1,000 feet east of the South Zone contained in portions of three claims within the Hecla Claims. Mineralization appears related to the low angle South Ridge fault which underlies most of the area of interest. Mineralization in the South and North Zones occur above this fault while mineralization in the East Zone occurs within and below this fault. Results to date indicate that gold mineralization in the South, North and East Zones, as in many other volcanic-hosted gold deposits, is erratically distributed with numerous low-grade drill hole intercepts interspersed with higher grade drill hole intercepts over an area of approximately 1,000 feet east-west and 1,000 feet north-south. Drilling has also intersected further mineralization approximately 700 feet east of the East Zone. In 1992, an additional 35,000 feet of drilling in 56 holes was completed on the Rosebud Project. This was followed by preliminary metallurgical studies and permit preparation for an advanced underground exploration program. The underground exploration program commenced in December 1993. During 1994, the Company spent approximately $5.6 million at the Rosebud property. Underground work included completion of 3,600 feet of drifting, 25,000 feet of underground diamond drilling, and 30,000 feet of surface diamond drilling designed to further delineate the ore body. Permitting related work which began during 1994 was substantially completed during 1995. The Bureau of Land Management issued a finding of "No Significant Impacts" and Decision Record on October 26, 1995 as a result of the Environmental Assessment prepared for the Rosebud Project. The 30-day appeal period mandated by the National Environmental Policy Act was completed on November 26, 1995 and the Agency received no comments. The Decision Record allows the project to proceed as planned contingent upon acquiring the necessary state and local permits. Eight of the eleven permits required by the State of Nevada were received during 1995 with the remaining three expected during the first half of 1996. All local permits are confined to normal building permits and will be obtained following a decision by the Company to commence construction. -23-
25 The following table presents the proven and probable mineral reserves for the Rosebud Project as of the dates indicated: <TABLE> <CAPTION> Year Total Gold Gold Silver Silver End Reserves Avg. Grade Content Avg. Grade Content 12/31 (tons)(1) (oz./ton) (ounces) (oz./ton) (ounces) ----- ---------- ---------- --------- ---------- ---------- <S> <C> <C> <C> <C> <C> 1995 1,189,000(2) 0.452 538,000 2.75 3,275,000 ---- 1994 1,641,000(3) 0.356 584,000 2.25 3,694,000 ---- 1993 1,984,000 0.258 512,000 1.81 3,584,000 ---- </TABLE> ----------------------- (1) For proven and probable mineral reserve assumptions, including assumed metals prices, see Glossary of Certain Mining Terms. (2) The decrease in the tons of proven and probable mineral reserves in 1995 compared to 1994 is attributable to refinement of the mine plan, cost estimates, and cut-off grade during the feasibility study completed in November 1995. (3) The decrease in the tons of proven and probable mineral reserves in 1994 compared to 1993 is attributable to further delineation drilling of the ore body during 1994 which resulted in fewer reserve tons. However, this was more than offset by a higher average gold grade per ton. The Company is currently finalizing the feasibility study. The feasibility study includes a comprehensive metallurgical testing program, engineering work related to the design of the underground mine, process plant, tailings facility, and infrastructure, and detailed hydrologic and geotechnical studies. Detailed construction schedules, capital and operating cost estimates, and an economic analysis are included. Although a decision to proceed with the project has not been made by the Company, if a determination is made to develop the project, capital costs are currently expected to be $50.0 to $55.0 million. REPUBLIC MINE - REPUBLIC, WASHINGTON The Company owns the Republic mine located in the Republic Mining District near Republic, Washington, which consists of several associated properties, a mill and ancillary surface facilities. In February 1995, the Company completed operations at the Republic mine and has commenced certain reclamation work in connection with the mine and mill closure. The Company's land position in the Republic area consists of approximately five square miles. The property has been optioned to Santa Fe Pacific Gold who is presently conducting extensive exploration activities. Under the terms of the agreement, Santa Fe Pacific Gold can earn a 70% interest in the project by spending $7.5 million over a three- year period and completing a feasibility study. -24-
26 In 1994, the Company recorded an additional reclamation and closure costs accrual of $7.3 million. At December 31, 1995, the accrued reclamation and closure costs balance totaled $6.9 million. Reclamation and closure efforts commenced in 1995. During 1995 no additional reclamation expense was recorded. Reclamation and closure costs expenditures totaling $1,516,000 during 1995 were charged against the previously established reclamation and closure cost accrual. Also in 1994, based on its periodic reviews of the status of various mining properties, the Company determined that certain adjustments were appropriate to properly reflect the estimated net realizable value of the Republic mine's property, plant and equipment. The adjustments totaled $7.2 million as a write- down of property, plant, equipment, and supplies inventory of the Republic mine (see Note 4 of Notes to Consolidated Financial Statements). The remaining net book value of the Republic mine property and its associated plant and equipment was approximately $2.5 million representing the estimated residual value as of December 31, 1995. Information with respect to production, proven and probable mineral reserves, and average cost per ounce of gold produced for the past five years is set forth in the table below: <TABLE> <CAPTION> Years ------------------------------------------------------ Production (100%) 1995(3) 1994 1993 1992 1991 - ----------------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> Ore milled (tons) - - 120,165 110,846 102,631 96,562 Gold (ounces) 3,098 39,085 49,601 58,343 77,736 Silver (ounces) 15,320 283,326 276,688 299,957 311,445 Proven and Probable Mineral Reserves(1) - ------------------------ Total tons - - - - 103,533(2) 269,736 401,318 Gold (oz. per ton) - - - - 0.43 0.52 0.53 Silver (oz. per ton) - - - - 2.7 3.2 3.2 Average Cost per Ounce of Gold Produced - ---------------------- Cash production costs $ 307 $ 250 $ 207 $ 176 $ 143 Full production costs $ 307 $ 306 $ 262 $ 221 $ 176 </TABLE> - ------------------------------- (1) Reserves represent diluted in-place grades and do not reflect losses in the recovery processes. Dilution was effected through application of 1.0 foot on either side of the vein for any sample thicker than 2.1 feet. For samples thinner than 2.1 feet, dilution was effected with whatever thickness was necessary to equal 4.0 feet. For additional proven and probable mineral reserve assumptions, including assumed metals prices, see Glossary of Certain Mining Terms. (2) In 1993 a negative mineral reserve adjustment was made totaling approximately 39,000 ounces of gold and 235,000 ounces of silver. Most of the adjustment was necessary when development encountered erratic -25-
27 mineralization in an upper level ore zone which was previously estimated to be continuous reducing the tonnage available for mining by 33,765 tons. Other various adjustments attributable to the reduction totaled 867 tons. (3) The 1995 metal production figures represent milling of stockpiled low- grade ore and secondary recovery efforts. Therefore, tons milled are not presented. There were 11 people employed by the Company at the Republic mine at December 31, 1995. Employees at Republic are not represented by a bargaining agent. CACTUS MINE - CALIFORNIA The Cactus mine consists of approximately 1,600 acres of leasehold lands, mining claims and millsites, located approximately 85 miles northeast of Los Angeles, California, in the Mojave Mining District. The property is readily accessible year-round by all-weather roads. The Company currently has a 63.75% effective interest in Cactus Gold Mines Company (Cactus) and manages Cactus' two open-pit heap leach mines, the Middle Buttes and Shumake. The Company, as manager of Cactus, receives a management fee equal to 2% of net revenues of Cactus as defined in the mining venture agreement and is reimbursed for costs incurred on behalf of Cactus. The Middle Buttes mine began production in August 1986. During 1991, mining operations were completed at the Middle Buttes mine, and the remaining ore with recoverable gold was processed. Development of the Shumake mine was completed in November 1988, with commercial production beginning in December 1988. Mining operations at the Shumake mine were completed in February 1992. Nominal gold production is expected during 1996 as heap rinsing operations are completed. Reclamation efforts are ongoing. Reclamation expense of $39,304 was recognized in 1995. The book value of the Company's interest in the Cactus mine property and its associated plant and equipment was fully depreciated as of December 31, 1993. Southern CalEdison supplies electrical power to the Cactus mine. As of December 31, 1995, there were 14 employees at the Cactus mine. Employees at the Cactus mine are not represented by a bargaining agent. Cactus is owned 75% by Middle Buttes Partners Limited (MBPL) and 25% by Compass Mining Inc. MBPL is a limited partnership in which the Company is both the sole general partner (52.50%) and a limited partner (11.25%). The Company, as general partner of MBPL, receives 75% of the production from Cactus subject to payment of 11.25% of the net cash flows to the other limited partner of MBPL. The following table sets forth the information with respect to the Company's share of production, proven and probable mineral -26-
28 reserves, and average cost per ounce of gold produced for the past five years: <TABLE> <CAPTION> Years ---------------------------------------------------- Production (75%) 1995(1) 1994(1) 1993(1) 1992(1) 1991 - ------------------ ------- ------- ------- -------- --------- <S> <C> <C> <C> <C> <C> Ore processed (tons) - - - - - - 315,328 1,760,714 Gold (ounces) 4,444 7,610 7,316 27,212 40,434 Silver (ounces) 1,743 19,555 24,165 114,415 162,760 Proven and Probable Mineral Reserves - ------------------- Total tons - - - - - - - - 234,140 Gold (oz. per ton) - - - - - - - - 0.04 Average Cost per Ounce of Gold Produced - ---------------------- Cash production costs $ 284 $ 217 $ 242 $ 213 $ 246 Full production costs $ 296 $ 217 $ 309 $ 337 $ 437 </TABLE> - ------------------------------- (1) Mining operations were completed in February 1992. Gold recovery from the heap continued through 1995, but is expected to be completed in 1996. INDUSTRIAL MINERALS SEGMENT The Company's principal industrial minerals assets are its ball clay operations in Kentucky, Tennessee, and Mississippi; its kaolin operations in South Carolina and Georgia; its feldspar operations in North Carolina; its clay slurry plant in Monterrey, Mexico; its lawn and garden products operations in Idaho, western Montana and South Dakota; and its specialty aggregate operations (primarily scoria) in southern Colorado and northern New Mexico. The Company conducts these operations through five wholly owned subsidiaries: (1) Kentucky-Tennessee Clay Company (K-T Clay), which operates its ball clay and kaolin divisions; (2) K-T Feldspar Corporation (K-T Feldspar), which operates the feldspar business; (3) K-T Clay de Mexico, S.A. de C.V. (K-T Mexico), which operates the clay slurry plant business; (4) Mountain West Products, Inc. (Mountain West), which operates a lawn and garden products business; and (5) Colorado Aggregate Company (CAC), which operates the Company's specialty aggregate business. K-T CLAY BALL CLAY DIVISION K-T Clay is one of the nation's major suppliers of premium ball clay. Ball clay is of sedimentary origin and consists of several basic clay minerals along with a slight amount of organic content, a combination of materials that gives ball clay its unique character. The principal use of ball clay is in the ceramic and porcelain fields, which includes use for such items as pottery, -27-
29 dinnerware, tile, electrical insulators and sanitaryware. Ball clay is also used in refractories and abrasives and has applications in other specialty industries as well. Mining of ball clay is accomplished through strip mining methods. The mining activity requires definition drilling and the removal of overburden in order to expose the clay strata to be mined. Mining activity is selective based on clay grade and strata control. The clays are mined with loaders and backhoes, loaded into trucks and hauled to one of K-T Clay's plants for processing. Processing of ball clay consists of shredding and classification of clay by various grades, hammer or roller milling to reduce particle size, drying and packaging. The grades can be shipped in bulk or blended and bagged in order to meet a particular customer's requirements. A particular clay or blend of several clays can also be shipped to customers in slurry form in tanker trucks or rail cars. There are many grades of ball clay which K-T Clay mines, processes and blends to meet the specifications and requirements of its various customers. Different uses may require mixtures of ball clay having substantially different physical properties, and K-T Clay, through many years of experience and ongoing research performed in its laboratories, possesses the expertise that enables it to respond to changes in customer requirements with minimal advance notice. The marketing of ball clays is directed from K-T Clay's headquarters in Mayfield, Kentucky. K-T Clay's marketing personnel are trained in ceramic engineering or related technical fields, which also has enabled K-T Clay to respond to changes in its customer requirements. K-T Clay mines and processes different grades of ball clays in Kentucky, Tennessee and Mississippi. K-T Clay has identified or delineated deposits of ball clay on numerous properties. Such properties are either owned in fee simple or held under long-term lease. The royalties or other holding costs of leased properties are consistent with the industry, and the expiration of any particular lease would not affect K-T Clay's ability to operate at current levels of operations. K-T Clay has sufficient mineral reserve positions to maintain current operations in excess of 20 years. K-T Clay is also continuously exploring for new deposits of ball clay, either to replace certain grades of clay that may become mined out or to locate new deposits that can be mined at lower cost. Minimum standards for strip mining reclamation have been established by various governmental agencies which affect K-T Clay's ball clay mining operations. The Tennessee Surface Mining Law and the Mississippi Geological Economics and Topographical Survey, Division of Mining and Reclamation, require all ball clay producers, including K-T Clay, to post a performance bond on acreage to be disturbed. The release of the bond is dependent on the successful grading, seeding and planting of spoil areas -28-
30 associated with current mining operations. In addition, the United States Environmental Protection Agency has issued guidelines and performance standards which K-T Clay must meet. K-T Clay may be required to obtain other licenses or permits from time to time, but it is not expected that any such requirements will have a material effect upon the Company's results of operations or financial condition. There were 163 people employed by K-T Clay at its ball clay operations as of December 31, 1995. Some of the hourly employees are represented by the United Steelworkers of America. The employment of these employees is subject to a three-year labor agreement which expires on February 8, 1997. The net book value of the K-T ball clay division properties, plants and equipment was $9.0 million at December 31, 1995. K-T CLAY DE MEXICO, S.A. DE C.V. In 1993, K-T Clay completed construction of its clay slurry plant in Monterrey, Mexico, which now supplies clay slurry to the Mexican ceramics industry. Prior to construction of this facility, clay slurry was shipped by rail from K-T Clay's domestic operations. Reducing freight costs, a bulk semi-dry clay weighing substantially less than clay slurry is now shipped by rail from K-T Clay's domestic operations to the K-T Mexico slurry plant in Monterrey. The clay is blended to customer specifications and converted to a slurry form for final shipment to its customers in the region. At December 31, 1995, the net book value of K-T Mexico's property and associated plant and equipment was $3.3 million. K-T Mexico utilizes electrical power from the local public utility. There were 19 people employed by K-T Mexico as of December 31, 1995, represented by the Industrial Labor Union of Nuevo Leon. The labor agreement is renegotiated each year. The present labor agreement expires December 20, 1996. Prior to the second quarter of 1995, K-T Mexico's functional currency was the Mexican peso. During the second quarter of 1995, K-T Mexico commenced invoicing its customers in U.S. dollars instead of the Mexican peso. This change indicated a change in the functional currency from the Mexican peso to the U.S. dollar. The change in the functional currency has been accounted for prospectively commencing in the second quarter of 1995. Translation adjustments from prior periods are included in shareholders' equity. The translated amounts for nonmonetary assets prior to the change have become the accounting basis for those assets. The recent decline of the Mexican peso has not significantly impacted the results at K-T Mexico as both funding for operations and sales are denominated in dollars. Further decline in the -29-
31 Mexican peso, however, could adversely impact the Company's Mexican operations. K-T CLAY KAOLIN DIVISION K-T Clay acquired the kaolin operations and assets of Cyprus Minerals Company's clay division on February 17, 1989, including kaolin mines and plants at Deepstep and Sandersville, Georgia, and Aiken, South Carolina. On June 1, 1995, K-T Clay acquired the operation and assets of the Langley plant of JM Huber Corporation in Langley, South Carolina. Kaolin, or china clay, is a near white clay of sedimentary origin, and is consumed in a variety of end uses including ceramic whiteware, textile grade fiberglass, as rubber and paper filler, and in miscellaneous plastics, adhesives and pigment applications. Kaolin is a unique industrial mineral because of its wide range of chemical and physical properties. The kaolin division of K-T Clay mines, processes, and blends numerous grades of clay to meet the specifications and requirements of its customers. Markets for K-T Clay's kaolin products are similar to ball clay and adverse shifts in market demand could occur due to mineral substitution and decreased demand for end-use products, which could adversely impact the demand for kaolin. Kaolin currently competes with minerals such as calcium carbonate in many filler applications, but the substitution of other minerals for kaolin in ceramic and fiberglass applications is presently limited. The marketing of kaolin to the ceramics industry is carried out by K-T Clay's sales force. Marketing to other industries is done through sales and distribution agents. Mining of kaolin is done by open-pit methods. Ore bodies are identified and delineated by exploration drilling and overburden is removed by scrapers down to favorable clay strata. Select mining of clay is then accomplished by backhoe with over-the-road truck haulage to the processing and stockpiling facilities. K-T Clay operates kaolin mines in Georgia, serving its processing plants located at Sandersville and Deepstep, Georgia. K-T Clay also operates kaolin mines located in South Carolina, serving a processing plant located in Langley, South Carolina. Processing of the clays is completed by the air-floating method where clay is shredded, dried, ground and separated by particle size at the Sandersville, Deepstep and Langley locations. In addition, clay is also processed into a water-slurry mixture at the Sandersville location. K-T Clay's kaolin division holds in excess of 20 years of mineral reserves based on current sales and product mix. Reserves are held on fee simple and leased property. K-T Clay is also continuously exploring for new deposits of kaolin, either to replace certain -30-
32 grades of kaolin that may become mined out or to locate new deposits that can be mined at lower cost. The kaolin division operates its mines in Georgia and South Carolina under mine permits issued by the Environmental Protection Division, Department of Natural Resources of the State of Georgia, and the Land Resource Conservation Commission, Division of Mining and Reclamation of the State of South Carolina. All mines and processing plants have current permit status and are in good standing. There were 118 people employed by K-T Clay at its kaolin division as of December 31, 1995, with less than 25% of the labor force being represented by the Cement, Lime, Gypsum and Allied Workers, Division of International Brotherhood of Boilermakers. The current labor contract at the Sandersville, Georgia operation expires on February 28, 1997. Both the ball clay and kaolin divisions of K-T Clay's plants and equipment have been operational in excess of 27 years. The Company has upgraded and modernized these facilities over the years and has a continuing maintenance program to maintain the plant and equipment in good physical and operating condition. The net book value of the K-T Clay property and its associated plant and equipment was $24.2 million as of December 31, 1995. K-T Clay utilizes power from several public utilities as well as local utility cooperatives located in the vicinity of K-T Clay's operating plants. K-T FELDSPAR CORPORATION The Company acquired the operations and assets of K-T Feldspar on December 13, 1990, including sodium feldspar mines and a processing plant located near Spruce Pine, North Carolina. Feldspars are a mineral group that are the major constituents of igneous rocks and important constituents of other major rock types. The feldspars are the most widespread mineral group and make up 60% of the earth's crust. Chemically the feldspars are aluminosilicates that contain potassium, sodium and calcium. K-T Feldspar mines, processes and blends sodium feldspar and feldspar-silica products. It also produces by-product mica concentrate and construction sand. K-T Feldspar products are primarily used in the ceramic whiteware, glass and paint industries. Markets for feldspar have fluctuated slightly over time as a result of mature market conditions. However, adverse shifts in market demand could occur due to mineral substitution and decreased demand for end-use products. Feldspar currently competes with nepheline syenite in some market segments and substitution between minerals is linked to economics, physical-chemical characteristics and -31-
33 supplier reliability. The marketing of feldspar to the ceramics and filler industries is carried out by K-T Clay's sales force and through sales and distribution agents. Feldspar ore is mined by open-pit methods using a 40-foot bench mining plan. Ore is drilled and blasted, loaded by hydraulic shovel or front-end loader into off-highway dump trucks and transported to the processing plant. K-T Feldspar operates several mine locations in the Spruce Pine, North Carolina area, all serving the centrally located processing plant. Processing of the feldspar ores consists of crushing, grinding, density separation, flotation, drying and high intensity magnetic separation. K-T Feldspar holds in excess of 20 years of mineral reserves based on current sales, product mix and lease terms. Reserves are held on fee simple and leased properties. K-T Feldspar operates its mines and plant under permits issued by the North Carolina Department of Natural Resources and Community Development. All permits are in good standing. K-T Feldspar's plant and equipment have been operational in excess of 27 years. The Company has upgraded and modernized these facilities over the years and has a continuing maintenance program to maintain the plant and equipment in good physical and operating condition. The net book value of the K-T Feldspar property and its associated plant and equipment was $5.3 million as of December 31, 1995. Carolina Power & Light Company, a regulated public utility, provides the electric power utilized for operations at K-T Feldspar. There were 49 employees employed by K-T Feldspar as of December 31, 1995; none of whom are represented by a bargaining agent. MOUNTAIN WEST PRODUCTS, INC. The Company acquired the operations and assets of Mountain West in December 1993, including processing plants in Rexburg, Idaho and Superior, Montana. In April 1995, Mountain West purchased the assets of Western Bark Company, which included processing plants at Kamiah, Idaho, Osburn, Idaho, and Piedmont, South Dakota. Mountain West's primary business is the purchasing, processing and marketing of certain wood waste products from lumber milling operations in the western intermountain region. These products are sold as organic soil amendments, organic landscape mulches and organic decorative ground cover for landscape purposes. The waste products are purchased by Mountain West and transported by truck for processing at its plants. Due to the volatility of lumber mill operations, no assurance can be placed on Mountain West's ability to obtain raw materials from suppliers located near Mountain West operating plants. The plants are located near the -32-
34 sources of the raw materials to reduce transportation costs. The principal customers are lawn and garden retail yards, lawn and garden product distributors and discount retail chain stores. The processing plants are owned by Mountain West and the sources of waste bark supply are held under contracts. Most sales are in the western U.S. and take place in the first six months of the year due to the seasonality of the market. The plants have operated in excess of 15 years at Rexburg, seven years at Superior, eight years at Kamiah, five years at Piedmont, and three years at Osburn. The plants are maintained and upgraded continually and are in good working order. The net book value of the associated plant and equipment was approximately $6.2 million as of December 31, 1995. Utah Power and Light, Montana Power Company, Idaho County Light, Black Hills Power, and Washington Water Power Company provide electrical power utilized by the operations at Rexburg, Superior, Kamiah, Piedmont, and Osburn, respectively. Mountain West had 149 employees as of December 31, 1995; none of whom are represented by a bargaining agent. COLORADO AGGREGATE COMPANY CAC mines and sells volcanic rock (scoria) for use as briquettes in gas barbecue grills, as landscaping mulch and decorative ground cover, and as gravel bedding in aquariums. Volcanic scoria is a lightweight clinker-like material produced during gaseous volcanic eruptions that form cinder cones. These cones occur frequently in the geological environment but are unique by density, texture and color. The Company operates mines at Mesita, Colorado, and in northern New Mexico as well as processing plants at San Acacio and Antonito, Colorado. All mining is open pit with minimal requirements for the removal of overburden. The principal customers for scoria briquettes are manufacturers and retailers of gas barbecue grills. Landscapers, distributors of landscaping materials, lawn and garden retailers and discount chain stores are the principal customers for scoria landscape stone. Pet supply retailers and discount chain stores are the principal customers for aquarium gravel. The Mesita mine is owned by CAC. Due to the seasonal nature of CAC's business, it is usually anticipated that most of its annual sales and profits will be generated in the first two quarters of each calendar year. The Company has over nine years of mineral reserves at the Mesita, Colorado, location and has developed in excess of seven years of mineral reserves at the Red Hill mine in -33-
35 northern New Mexico which is under lease from the Bureau of Land Management. CAC's plants and equipment have been operational in excess of 21 years. The Company has upgraded and modernized these facilities over the years and has a continuing maintenance program to maintain the plant and equipment in good physical and operating condition. The net book value of CAC's property and its associated plants and equipment was $4.0 million as of December 31, 1995. Public Service Company of Colorado and San Luis Valley Electric Co-operative provide the electric power utilized for operations at CAC. CAC had 75 employees as of December 31, 1995; none of whom are represented by a bargaining agent. PROPERTIES ON STANDBY GENERAL Various mining operations of the Company have been placed on a standby basis. Placing a mining property on a standby basis during periods of depressed metals prices, thereby preserving a depletable asset, is common in the mining industry. The significant properties on standby at December 31, 1995 are described below. YELLOW PINE - IDAHO The Yellow Pine gold mine is located in Valley County, Idaho, about 50 miles east of McCall in central Idaho, and is accessed by secondary roads and air. The property consists of 26 patented claims which are held by the Company under lease from the Bradley Mining Company of San Francisco, California, and 57 unpatented claims. The lease provides for production royalties equal to 6% of net smelter returns plus 10% of cumulative cash flow, and also provides for a minimum royalty payment of $3,500 per month reduced by current production royalties. Production from the oxide mineralization ceased in 1992; the operation has been undergoing reclamation since that time. Mineralized sulfide material, estimated at between 15 and 20 million tons containing approximately 0.09 ounce of gold per ton, is also located on the property. The Company continues to seek other parties interested in the further exploration and development of this extensive gold-bearing deposit. The net book value of the Yellow Pine property, plant and equipment as of December 31, 1995, was approximately $165,000. OTHER INTERESTS URANIUM MILL TAILINGS The Company has been involved in remediation of uranium mill tailings sites in Colorado and New Mexico. One site, in New -34-
36 Mexico, has been completely reclaimed and the license released by the Nuclear Regulatory Commission. At a site near Naturita, Colorado, where a Hecla predecessor reprocessed uranium mill tailings under a license from the State of Colorado, remediation activities have been in progress since 1993. The facility was decontaminated in 1993, stabilization of wastes occurred in 1994, earthwork activities were initiated in 1995, and completion of remediation is planned for 1996 and 1997. EXPLORATION The Company conducts exploration activities from its headquarters in Coeur d'Alene, Idaho. The Company owns or controls patented and unpatented mining claims, fee land, mineral concessions, and state and private leases in six states in the United States and two Mexican states. The Company's strategy regarding reserve replacement is to concentrate its efforts on (1) existing operations where an infrastructure already exists, (2) other properties presently being developed and advanced-stage exploration properties that have been identified as having potential for additional discoveries, and (3) advanced-stage exploration acquisition opportunities. The Company is currently concentrating its exploration activities at the Lucky Friday and Greens Creek silver mines, the American Girl gold mine, the Rosebud property and the Pinos gold property in Mexico. The Company also owns 78.45% of the outstanding stock in ConSil Corp., whose primary focus is to explore and develop silver properties in the United States and Mexico. The Company remains active in other exploration areas and is seeking advanced-stage acquisition opportunities principally in the United States and Mexico. Mineral exploration, particularly for gold and silver, is highly speculative in nature, involves many risks and frequently is nonproductive. There can be no assurance that the Company's mineral exploration efforts will be successful. Once mineralization is discovered, it may take a number of years from the initial phases of drilling until production is possible, during which time the economic feasibility of production may change. Substantial expenditures are required to establish ore reserves through drilling to determine metallurgical processes to extract the metals from the ore, and, in the case of new properties, to construct mining and processing facilities. As a result of these uncertainties, no assurance can be given that the Company's exploration programs will result in the expansion or replacement of existing reserves that are being depleted by current production. Properties are continually being added to or dropped from this inventory as a result of exploration and acquisition activities. Exploration expenditures for the three years ended December 31, 1995, 1994 and 1993 were approximately $6.3 million, $8.4 million and $5.7 million, respectively. Exploration expenditures for 1996 are estimated to be approximately $4.1 million. -35-
37 HEDGING ACTIVITIES The Company's policy guidelines for hedging gold and silver production permit management to utilize various hedging mechanisms for up to 50% of the Company's annual estimated available metal production. Hedging contracts are restricted to no longer than 24 months without the Board of Director's approval and will be spread among a number of available customers. At December 31, 1995, the Company had 29% of 1996 budgeted gold production hedged utilizing forward sales contracts and option contracts. There were no hedging contracts for silver outstanding. The Company's policy with respect to lead hedging permits management to hedge 30% of estimated annual production of lead for periods not to exceed 12 months. None of the aforementioned activities have been entered into for speculative purposes at December 31, 1995. For further discussion regarding hedging activities, see Notes 1 and 2 of Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. INDUSTRY SEGMENTS Financial information with respect to industry segments is set forth in Note 10 of Notes to the Consolidated Financial Statements. COMPETITION The Company is engaged in the mining and processing of gold, silver and other nonferrous metals and industrial minerals in the United States and Mexico. The Company encounters strong competition from other mining companies in connection with the acquisition of properties producing, or capable of producing, gold, silver and industrial minerals. The Company also competes with other companies both within and outside the mining industry in connection with the recruiting and retention of qualified employees knowledgeable in mining operations. Silver and gold are worldwide commodities and, accordingly, the Company sells its production at world market prices. The Company cannot compare sales from its ball clay mining operations with sales of other ball clay producers because the principal competitors are either family-owned or divisions of larger, diversified companies, but the Company believes that K-T Clay is one of the more significant producers of ball clay in the United States. With the acquisition of kaolin assets from Cyprus Minerals Company in 1989 and JM Huber Corporation in 1995, the Company has also become an important producer in the United States of ceramic-grade kaolin. The principal competitors of the Company in the ball clay industry are H. C. Spinks Clay Company, Watts Blake Bearne & Company, and Old Hickory Clay Company. The principal competitors of the Company in the kaolin industry, are Albion Kaolin Company, Evans Clay Company, JM Huber Corporation, English China Clay Company and Dry Branch Kaolin Company. The -36-
38 Company, with the acquisition of Indusmin Incorporated's feldspar assets, is also a major producer and supplier of sodium feldspar products. The principal competitors of the Company in the feldspar industry are Feldspar Corporation and Unimin Corporation. The Company competes with other producers of scoria and with manufacturers of ceramic briquettes in the production and sale of briquettes. The Company has limited information as to the size of the barbecue briquette industry, but believes that it supplies a major portion of the scoria briquettes used in gas barbecue grills. Price and natural product characteristics, such as color, uniformity of size, lack of contained moisture and density, are important competitive considerations. The Company believes that it has a significant portion of the landscape scoria market east of the Continental Divide. Mountain West competes with other producers of lawn and garden and soil products, decorative bark products and landscape mulches. The principal competitors are either privately owned companies or divisions of larger diversified companies that operate in numerous regional markets. The Company has limited information about the sales of competing products in its overall markets but believes it supplies a significant portion of the market for its product in the intermountain region. Because mines have limited lives based on proven ore reserves, the Company is continually seeking to replace and expand its reserves. The Company encounters strong competition from other mining companies in connection with the acquisition of properties producing or capable of producing gold, silver, lead, zinc and industrial minerals. As a result of this competition, some of which is with companies with greater financial resources than the Company, the Company may be unable to acquire attractive mining properties on terms it considers ac- ceptable. In addition, there are a number of uncertainties inherent in any program relating to the location of economic ore reserves, the development of appropriate metallurgical processes, the receipt of necessary governmental permits and the construction of mining and processing facilities. Accordingly, there can be no assurance that the Company's programs will yield new reserves to replace and expand current reserves. REGULATION OF MINING ACTIVITY The mining operations of the Company are subject to inspection and regulation by the Mine Safety and Health Administration of the Department of Labor (MSHA) under provisions of the Federal Mine Safety and Health Act of 1977. It is the Company's policy to comply with the directives and regulations of MSHA. In addition, the Company takes such necessary actions as, in its judgment, are required to provide for the safety and health of its employees. MSHA directives have had no material adverse impact on the -37-
39 Company's results of operations or financial condition, and the Company believes that it is substantially in compliance with the regulations promulgated by MSHA. All of the Company's exploration, development, and production activities in the United States, Mexico, and Canada are subject to regulation by governmental agencies under one or more of the various environmental laws. These laws address emissions to the air, discharges to water, management of wastes, management of hazardous substances, protection of natural resources, protection of antiquities and reclamation of lands which are disturbed. The Company believes that it is in substantial compliance with applicable environmental regulations. Many of the regulations also require permits to be obtained for the Company's activities; these permits normally are subject to public review processes resulting in public approval of the activity. While these laws and regulations govern how the Company conducts many aspects of its business, management of the Company does not believe that they have a material adverse effect on its results of operations or financial condition at this time. The Company's projects are evaluated considering the cost and impact of environmental regulation on the proposed activity. New laws and regulations are evaluated as they develop to determine the impact on, and changes necessary to, the Company's operations. It is possible that future changes in these laws or regulations could have a significant impact on some portion of the Company's business, causing those activities to be economically reevaluated at that time. The Company believes that adequate provision has been made for disposal of mine waste and mill tailings at all of its operating and nonoperating properties in a manner which complies with current federal and state environmental requirements. Environmental laws and regulation may also have an indirect impact on the Company, such as increased cost for electricity due to acid rain provisions of the Clean Air Act Amendments of 1990. Charges by smelters to which the Company sells its metallic concentrates and products have substantially increased over the past several years because of requirements that smelters meet revised environmental quality standards. The Company has no control over the smelters' operations or their compliance with environmental laws and regulations. If the smelting capacity of the United States is significantly further reduced because of environmental requirements, it is possible that the Company's operations could be adversely affected. The Company is also subject to regulations under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA or Superfund) which regulates and establishes liability for the release of hazardous substances, and the Endangered Species Act (ESA), which identifies endangered species of plants and animals and regulates activities to protect these species and their habitats. The Company has been implicated for certain Superfund -38-
40 liabilities (see Note 7 of Notes to Consolidated Financial Statements). Revisions to CERCLA and ESA are being considered by Congress; the impact on the Company of these revisions is not clear at this time. During the past three years, the U.S. Congress considered a number of proposed amendments to the General Mining Law of 1872, as amended (the General Mining Law), which governs mining claims and related activities on federal lands. In 1992, a holding fee of $100 per claim was imposed upon unpatented mining claims located on federal lands. In October 1994, a moratorium on processing of new patent applications was approved. In addition, a variety of legislation is now pending before the United States Congress to further amend the General Mining Law. The proposed legislation would, among other things, change the current patenting procedures, impose royalties, and enact new reclamation, environmental controls and restoration requirements. The royalty proposals range from a 2% royalty on "net profits" from mining claims to an 8% royalty on the modified gross income/net smelter returns. The extent of any such changes is not presently known and the potential impact on the Company as a result of congressional action is difficult to predict. Although a majority of the Company's existing mining operations occur on private or patented property, the proposed changes to the General Mining Law could adversely affect the Company's ability to economically develop mineral resources on federal lands. Approximately 30% of the proven and probable gold reserves and approximately 9% of the proven and probable silver reserves located at the Grouse Creek project are located on fully patented mining claims. The balance of such proven and probable mineral reserves are located within mineral claims for which the Company has applied for patents and has received a first half of Mineral Entry Final Certificate. Upon the determination of the mineral character of these claims by a Federal Mine Examiner, the Company believes patents will be issued to the Company covering these claims. Although there can be no assurance as to the ultimate impact of legislative action on these claims or the Company's ability to patent these claims under the existing General Mining Law, the Company believes that the pending legislation to amend the General Mining Law will not adversely affect the ability of the Company to receive patents for the Grouse Creek unpatented mining claims. The proven and probable mineral reserves at the Oro Cruz and Rosebud properties are located on claims that are unpatented. EMPLOYEES As of December 31, 1995, the Company and its subsidiaries employed 1,259 people. -39-
41 INVESTMENT CONSIDERATIONS METAL PRICE VOLATILITY Because a significant portion of the Company's revenues are derived from the sale of gold, silver, lead and zinc, the Company's earnings are directly related to the prices of these metals. Gold, silver, lead and zinc prices fluctuate widely and are affected by numerous factors beyond the Company's control, including expectations for inflation, speculative activities, the relative exchange rate of the U.S. dollar, global and regional demand and production, political and economic conditions and production costs in major producing re- gions. The aggregate effect of these factors, all of which are beyond the Company's control, is impossible for the Company to predict. If the market price for these metals falls below the Company's full production costs and remains at such level for any sustained period, the Company will experience ad- ditional losses and may determine to discontinue the development of a project or mining at one or more of its properties. While the Company has periodically used limited hedging techniques to reduce a portion of the Company's exposure to the volatility of gold, silver, lead and zinc prices, there can be no assurance that it will be able to do so as effectively in the future (see Hedging Activities). The following table sets forth the average closing prices of the following metals for 1980, 1985, 1990, and each year thereafter and the present year. <TABLE> <CAPTION> 1980 1985 1990 1991 1992 1993 1994 1995 ------- ------- ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Gold(1) (per oz.) $612.56 $317.26 $383.46 $362.18 $343.73 $ 359.77 $384.30 $384.16 Silver(2) (per oz.) 20.63 6.14 4.82 4.04 3.94 4.30 5.28 5.19 Lead(3) (per lb.) 0.41 0.18 0.37 0.25 0.25 0.18 0.22 0.29 Zinc(4) (per lb.) 0.34 0.36 0.69 0.51 0.56 0.44 0.44 0.47 </TABLE> - ------------------------------ (1) London Final. (2) Handy & Harman. (3) London Metals Exchange -- Cash. (4) London Metals Exchange -- Special High Grade -- Cash. VOLATILITY OF METALS PRODUCTION The Company's future gold production will be dependent upon the Company's success in developing new reserves, including the development of the Rosebud gold project as well as exploration efforts at the Grouse Creek, La Choya and the American Girl gold mines (see Project Development Risks and Exploration). The Company's future silver production will be dependent upon the Company's success in developing new reserves, including the -40-
42 continued development of the Lucky Friday Gold Hunter project and the Greens Creek mine. If metals prices decline, the Company could determine that it is not economically feasible to continue development of a project or continue commercial production at some of its properties (see Metal Price Volatility). PROJECT DEVELOPMENT RISKS The Company from time to time engages in the development of new ore bodies both at newly acquired properties and presently existing mining operations (collectively "Development Projects"). The Company's ability to sustain or increase its present level of metals production is dependent in part on the successful development of such new ore bodies and/or expansion of existing mining operations. The economic feasibility of any individual Development Project and all such projects collectively is based upon, among other things, estimates of reserves, metallurgical recoveries, and capital and operating costs of such Development Projects, and future metal prices. Development Projects are also subject to the successful completion of feasibility studies, issuance of necessary permits and receipt of adequate financing. Development Projects may have no operating history upon which to base estimates of future operating costs and capital requirements. Particularly for Development Projects, estimates of reserves, metal recoveries, and cash operating costs are to a large extent based upon the interpretation of geologic data obtained from drill holes and other sampling techniques and feasibility studies which derive estimates of cash operating costs based upon anticipated tonnage and grades of ore to be mined and processed, the configuration of the ore body, expected recovery rates of metals from the ore, comparable facility and equipment costs, anticipated climate conditions and other factors. As a result, it is possible that actual cash operating costs and economic returns of any and all Development Projects may materially differ from the costs and returns currently estimated. The Company's current Development Projects include the Rosebud project, the Gold Hunter project located adjacent to the Company's Lucky Friday mine, and the Greens Creek mine. Development and construction cost requirements to bring the Rosebud project into commercial production are estimated to be in the $50.0- $55.0 million range. The timing and amount of development and construction costs at the Rosebud project are dependent upon the Company's ability to arrange financing for development and construction. The Company estimates development and construction costs of $16.0 million ($3.2 million in 1996, and $12.8 for 1997 through 1999) for the Gold Hunter project, and $21.2 million in 1996, for the Company's 29.7% share of the development expenditures at the Greens Creek mine. The Company's estimated capital expenditures are based upon currently available data and could increase or decrease depending upon a number of factors. One such -41-
43 factor is that construction activities for certain Development Projects may not commence until the Company has secured additional financing and/or environmental approvals. If capital expenditures exceed current estimates, secondary financing may be required. Moreover, there can be no assurance that such addi- tional or secondary financing will be available. The commencement of construc- tion activities at such Development Projects also depends on the receipt of all necessary permits and regulatory approvals. There can be no assurance, however, that all of the necessary permits and regulatory approvals required for such Development Projects will be issued in the time frame contemplated by the Company. Should the Company incur project development and construction costs as estimated, the Company anticipates that it will fund a substantial portion of its currently estimated capital requirements for 1996 through 1997 with operating cash flow and borrowings under its credit facility. The Company is also currently evaluating other financing options including the issuance of debt or equity securities and certain project financing alternatives. There can be no assurance that the Company will be able to obtain the necessary financing, or, if the necessary financing is obtained, that it will be obtained on favorable terms. RESERVES The ore reserve figures presented in this Form 10-K are, in large part, estimates made by the Company's technical personnel, and no assurance can be given that the indicated level of recovery of these metals will be realized. Reserves estimated for properties that have not yet commenced production may require revision based on actual production experience. Market price fluctuations of the various metals mined by the Company, as well as increased production costs or reduced recovery rates, may render ore reserves containing relatively lower grades of mineralization uneconomic and may ultimately result in a restatement of reserves. Moreover, short-term operating factors relating to the ore reserves, such as the need for sequential development of ore bodies and the processing of new or different ore grades, may adversely affect the Company's profitability in any particular accounting period. The metal prices used to determine mineral reserves at a particular mine are typically estimated by the company managing the mine. These metal prices may vary, depending on each company's assessment of metal prices over the near term and other factors that such company believes relevant. The Company estimates metals prices for its mineral reserve calculations, which approximate current market prices, but these metal prices may vary from current market prices based on a number of factors likely to influence metal prices over the near term. For proven and probable mineral reserve assumptions, including assumed metal prices, see Glossary of Certain Mining Terms. -42-
44 Declines in the market price of gold may also render ore reserves containing relatively lower grades of gold mineralization uneconomic to exploit unless the utilization of forward sales contracts or other hedging techniques is sufficient to offset the effects of a drop in the market price of the gold expected to be mined from such reserves. If the Company's realized price per ounce of gold, including hedging benefits, were to decline substantially below the levels set for calculation of reserves for an extended period, there could be material delays in the development of new projects, increased net losses, reduced cash flow, reductions in reserves and asset write-downs. JOINT VENTURE ARRANGEMENTS The Grouse Creek gold mine, the Greens Creek mine, the American Girl gold mine (including the Oro Cruz gold project) are operated through joint ventures. The Company owns an undivided interest in the assets of the ventures. Under the joint venture agreements, the joint venture participants, including the Company, are entitled to indemnification from the other joint venture participants and are severally liable only for the liabilities of the joint venturers in pro- portion to their interest therein. If a joint venture participant defaults on its obligations under the terms of a joint venture agreement (including as a result of insolvency), the Company could incur losses in excess of its pro rata share of the joint venture. In the event any joint venture participant so de- faults, each agreement provides certain rights and remedies to the remaining joint venture participants. These include the right to force a dilution of the percentage interest of the defaulting participant and the right to utilize the proceeds from the sale of the defaulting parties' share of products, or its joint venture interest in the joint venture properties to satisfy the obli- gations of the defaulting participant. Based on the information available to the Company, the Company has no reason to believe that its joint venture participants with respect to the Greens Creek and American Girl properties will be unable to meet its financial obligations under the terms of the respective joint venture agreements. However, because the Grouse Creek mine ore grades have fallen short of expectations (see discussion in Management's Financial Review and Metal Segment - Grouse Creek Gold Mine - Idaho), the Company is not certain of its joint venture partner's, Great Lakes, ability in this project to fund future cash calls. The Company currently estimates its 29.7% share of its remaining development and construction costs at the Greens Creek mine to be $21.2 million in 1996. If the decision is made to further develop and operate the Grouse Creek mine, the Company estimates additional capital expenditures in the range of $10.0 to $12.0 million in 1996. The Company's estimates of its development costs and capital expenditures assume that its joint venture participants will not default in their obligations to contribute their respective portions of such costs and expenditures except with respect to the -43-
45 Grouse Creek gold mine where it is assumed Great Lakes will allow their interest to dilute and not fund capital expenditures. If there is such a default, there can be no assurance that the Company's financial resources will be sufficient to achieve planned levels of expenditures at the joint ventures. Generally, the manager for a particular project controls day-to-day operating decisions and most other major decisions for the project. Disagreement with a joint venture participant as to the major decisions affecting a project's operations may have an adverse impact on the project. Should the Company incur joint venture development and construction costs as estimated, the Company anticipates that it will fund a substantial portion of its currently estimated capital requirements for 1996 through 1997 with operating cash flow and borrowings under its credit facility. The Company is also currently evaluating other financing options including the issuance of debt or equity securities and certain project financing alternatives. There can be no assurance that the Company will be able to obtain the necessary financing, or, if the necessary financing is obtained, that it will be obtained on favorable terms. TITLE TO PROPERTIES The validity of unpatented mining claims, which constitute a significant portion of the Company's undeveloped property holdings in the United States, is often uncertain and may be contested. Although the Company has attempted to acquire satisfactory title to its undeveloped properties, the Company, in accordance with mining industry practice, does not generally obtain title opinions until a decision is made to develop a property, with the attendant risk that some titles, particularly titles to undeveloped properties, may be defective. MINING RISKS AND INSURANCE The business of mining is generally subject to a number of risks and hazards, including environmental hazards, industrial accidents, labor disputes, encountering unusual or unexpected geologic formations, cave-ins, rockbursts, flooding and periodic interruptions due to inclement or hazardous weather conditions. Such risks could result in damage to, or destruction of, mineral properties or producing facilities, personal injury, environmental damage, delays in mining, monetary losses and possible legal liability. Although the Company maintains insurance within ranges of coverage consistent with industry practice, no assurance can be given that such insurance will be available at economically feasible premiums. Insurance against environmental risks (including potential for pollution or other hazards as a result of disposal waste products occurring from exploration and production) is not generally available to the Company or to other companies within the industry. To the ex- tent the Company is subject to -44-
46 environmental liabilities, the payment of such liabilities would reduce the funds available to the Company. Should the Company be unable to fund fully the cost of remedying an environmental problem, the Company might be required to suspend operations or enter into interim compliance measures pending completion of the required remedy. FOREIGN OPERATIONS The Company's La Choya gold mine is located in Sonora, Mexico and the Company's K-T Mexico clay slurry plant is located in Monterrey, Mexico. The Company also has exploration projects and mining investments in Mexico and Canada. Such projects and investments could be adversely affected by exchange controls, currency fluctuations, taxation and laws or policies of either foreign countries or the United States affecting foreign trade, investment and taxation, which, in turn, could affect the Company's current or future foreign operations. GLOSSARY OF CERTAIN MINING TERMS BALL CLAY -- A fine-grained, plastic, white firing clay used principally for bonding in ceramic ware. CASH PRODUCTION COSTS -- Includes all direct and indirect operating cash costs incurred at each operating mine. CASH PRODUCTION COSTS PER OUNCE -- Calculated based upon total cash production costs, as defined herein, net of by-product revenues earned from all metals other than the primary metal produced at each mine, divided by the total ounces of the primary metal produced. DECLINE -- An underground passageway connecting one or more levels in a mine, providing adequate traction for heavy, self-propelled equipment. Such underground openings are often driven in an upward or downward spiral, much the same as a spiral staircase. DEVELOPMENT -- Work carried out for the purpose of opening up a mineral deposit and making the actual ore extraction possible. DORE -- Unrefined gold and silver bullion bars consisting of approximately 90% precious metals which will be further refined to almost pure metal. EXPLORATION -- Work involved in searching for ore, usually by drilling or driving a drift. -45-
47 FELDSPARS -- Aluminosilicates that contain potassium, sodium and calcium. Feldspar products are primarily used in the ceramic whiteware, glass and paint industries. FULL PRODUCTION COSTS -- Includes all cash production costs, as defined, plus depreciation, depletion and amortization relating to each operating mine. FULL PRODUCTION COSTS PER OUNCE -- Calculated based upon total full production costs, as defined, net of by-product revenues earned from all metals other than the primary metal produced at each mine, divided by the total ounces of the primary metal produced. GRADE -- The average assay of a ton of ore, reflecting metal content. HEAP LEACHING -- A process involving the percolation of a cyanide solution through crushed ore heaped on an impervious pad or base to dissolve minerals or metals out of the ore. KAOLIN -- A fine, white clay used as a filler or extender in ceramics and refractories. MILL -- A processing plant that produces a concentrate of the valuable minerals or metals contained in an ore. The concentrate must then be treated in some other type of plant, such as a smelter, to affect recovery of the pure metal. MINERAL-BEARING MATERIAL -- Material for which quantitative estimates are based on inferences from known mineralization, or on drill-hole samples too few in number to allow for classification as probable mineral reserves. ORE -- Material that can be mined and processed at a positive cash flow. PATENTED MINING CLAIM -- A parcel of land originally located on federal lands as an unpatented mining claim under the General Mining Law, the title of which has been conveyed from the federal government to a private party pursuant to the patenting requirements of the General Mining Law. PROVEN AND PROBABLE MINERAL RESERVES -- Reserves that reflect estimates of the quantities and grades of mineralized material at the Company's mines which the Company believes can be recovered and sold at prices in excess of the cash cost of production. The estimates are based largely on current costs and on projected prices and demand for the Company's products. Mineral reserves are stated separately for each of the Company's mines based upon factors relevant to each mine. Reserves represent diluted in- place grades and do not reflect -46-
48 losses in the recovery process. The Company's estimates of proven and probable reserves for the Lucky Friday mine, the Grouse Creek mine and the La Choya mine at December 31, 1995 and 1994 are based on gold prices of $390 and $395 per ounce, silver prices of $5.50 and $5.60 per ounce, lead prices of $0.33 and $0.28 per pound, and zinc prices of $0.50 and $0.46 per pound, respectively. Proven and probable mineral reserves for the Rosebud project at December 31, 1995 and 1994 are based on gold prices of $395 per ounce and silver prices of $5.60 per ounce. Proven and probable mineral reserves for the Greens Creek and American Girl mines are based on calculations of reserves provided to the Company by the operators of these properties that have been reviewed but not independently confirmed by the Company. Kennecott Greens Creek Mining Company's estimates of proven and probable reserves for the Greens Creek mine as of December 1995 and 1994 are derived from successive generations of reserve and feasibility analyses for three different areas of the mine each using a separate assessment of metal prices. The prices used were: <TABLE> <CAPTION> East Ore Area West Ore Area Southwest Ore Area ------------- -------------- ------------------ <S> <C> <C> <C> Gold $ 340 $ 350 $ 360 Silver 4.50 4.75 5.00 Lead 0.33 0.28 0.28 Zinc 0.60 0.57 0.50 </TABLE> Greens Creek Mining Company's estimates of proven and probable reserves at December 31, 1993 are based on silver prices of $4.75 per ounce, gold prices of $350 per ounce, zinc prices of $0.57 per pound, and lead prices of $0.28 per pound. MK Gold's estimates of proven and probable reserves for the American Girl mine at December 31, 1995 and 1994 are based on gold prices of $400 per ounce. Changes in reserves represent general indicators of the results of efforts to develop additional reserves as existing reserves are depleted through production. Grades of ore fed to process may be different from stated reserve grades because of variation in grades in areas mined from time to time, mining dilution and other factors. Reserves should not be interpreted as assurances of mine life or of the profitability of current or future operations. PROBABLE RESERVES -- Resources for which tonnage and grade and/or quality are computed primarily from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation. -47-
49 PROVEN RESERVES -- Resources for which tonnage is computed from dimensions revealed in outcrops, trenches, workings or drill holes and for which the grade and/or quality is computed from the results of detailed sampling. The sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well established. The computed tonnage and grade are judged to be accurate, within limits which are stated, and no such limit is judged to be different from the computed tonnage or grade by more than 20%. RESERVES -- That part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Reserves are customarily stated in terms of "Ore" when dealing with metalliferous minerals. ROCKBURST -- Explosive rock failures caused by the pressure exerted by rock adjacent to mine openings far below the surface. SAND FILL -- The coarser fraction of concentrator tailings, which is conveyed as a slurry in underground pipes to support cavities left by extraction of ore. SHAFT -- A vertical or steeply inclined excavation for the purpose of opening and servicing a mine. It is usually equipped with a hoist at the top which lowers and raises a conveyance for handling personnel and materials. STOPE -- An underground excavation from which ore has been extracted either above or below mine level. TROY OUNCE -- Unit of weight measurement used for all precious metals. The familiar 16-ounce avoirdupois pound equals 14.583 Troy Ounces. UNDERHAND MINING -- The primary mining method employed in the Lucky Friday mine utilizing mechanized equipment, a ramp system and cemented sand fill. The method has proven effective in reducing mining cost and rockburst activity. UNPATENTED MINING CLAIM -- A parcel of property located on federal lands pursuant to the General Mining Law and the requirements of the state in which the unpatented claim is located, the paramount title of which remains with the federal government. The holder of a valid, unpatented lode mining claim is granted certain rights including the right to explore and mine such claim under the General Mining Law. -48-
50 VEIN -- A mineralized zone having a more or less regular development in length, width and depth which clearly separates it from neighboring rock. WASTE -- Barren rock in a mine, or mineralized material that is too low in grade to be mined and milled at a profit. ITEM 2. PROPERTIES. The Company's principal mineral properties are described in Item 1 above. The Company also has interests in a number of other mineral properties in the United States, Canada and Mexico. Although some of such properties are known to contain significant quantities of mineralization, they are not considered material to the Company's operations at the present time. Encouraging results from further exploration or increases in the market prices of certain metals could, in the future, make such properties considerably more important to the business of the Company taken as a whole. The general corporate office of the Company is located in Coeur d'Alene, Idaho, on a tract of land containing approximately 13 acres. The Company also owns and subdivided approximately 70 adjacent acres presently held for sale. The administrative offices of the Company's ball clay, kaolin and feldspar operations are located in Mayfield, Kentucky. Additionally, there are general offices and laboratory facilities at each operating location. The Company also owns approximately 1,600 acres of land principally for use in connection with milling and storage operations for the industrial minerals operations. The administrative offices of K-T Clay de Mexico are located with the clay slurry processing facility on a parcel of land near Monterrey, Mexico. The general offices of the scoria operations are located in Alamosa, Colorado. The Company owns a parcel of land of approximately 20 acres in the vicinity of Blanca, Colorado, on which are located building, storage and shipping facilities utilized in its scoria business, and a bagging plant for landscape scoria. An additional bagging facility, utilized for scoria briquettes, is located at San Acacio, Colorado. The general offices of Mountain West Products, Inc. are located in Rexburg, Idaho. Processing facilities are located in Rexburg, Kamiah and Osburn, Idaho; Superior, Montana; and Piedmont, South Dakota. -49-
51 ITEM 3. LEGAL PROCEEDINGS. Contingencies 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 District Court and remanded the case of the Tribe's ownership for trial before the District Court. The Company has been advised that the State will seek an appeal of 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 July 18, 1995, the Department of Interior (DOI) notified the Company and six other companies (several with assets and resources greater than the Company) that the federal natural resource trustees (Fish and Wildlife Service and U.S. Forest Service) identified the Company and the other six companies as potentially responsible parties (PRPs) for damages resulting from injury to federal natural resources with respect to the Coeur d'Alene River Basin in North Idaho. The DOI letter further notifies the Company that the federal trustees intend to bring suit against these companies to recover the alleged damages under CERCLA. In September 1995, the Company, together with the other PRPs, entered into a tolling agreement with the United States pursuant to which -50-
52 the United States agreed not to initiate litigation in this matter until March 8, 1996, so long as the parties are pursuing settlement opportunities in good faith. In this connection, the PRPs agreed not to assert the statute of limitation as a defense if it were to occur during this period. In 1991, the Company initiated litigation in the Idaho State District Court in Kootenai County, Idaho, against a number of insurance carriers 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 two separate decisions issued in August 1992 and March 1993, the Court ruled that the primary insurance companies had a duty to defend the Company in the Tribe's lawsuit, but that no carrier had a duty to defend the Company in the EPA proceeding. 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 $3.755 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. At December 31, 1995, the Company has not reduced its accrual for reclamation and closure costs to reflect 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 -51-
53 discovery determinations. Briefing on both appeals has been completed and the Idaho Supreme Court has scheduled oral argument before the Court on the appeals for early April 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 pending 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 December 31, 1995. The Company intends to vigorously pursue 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. -52-
54 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) (i) Shares of the Common Stock are traded on the New York Stock Exchange, Inc., New York, New York. (ii) The price range of the Common Stock on the New York Stock Exchange for the past two years was as follows: <TABLE> <CAPTION> First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- <S> <C> <C> <C> <C> 1995 - High $ 11.75 $ 12.25 $ 12.88 $ 12.38 - Low 8.63 10.13 10.13 6.63 1994 - High $ 15.00 $ 14.38 $ 13.50 $ 13.38 - Low 11.63 9.38 9.25 9.25 </TABLE> (b) As of December 31, 1995, there were 12,210 holders of record of the Common Stock. (c) There were no Common Stock cash dividends paid in 1995 or 1994. The amount and frequency of cash dividends are significantly influenced by metals prices, operating results and the Company's cash requirements. -53-
55 ITEM 6. SELECTED FINANCIAL DATA. (dollars in thousands except for per-share amounts) <TABLE> <CAPTION> Years Ended December 31, --------------------------------------------------------- 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> Total revenue $ 163,968 $ 133,974 $ 96,060 $ 113,986 $ 121,130 ========= ========= ========= ========= ========= Loss before cumulative effect of changes in accounting principles $(101,719) $ (24,613) $ (17,782) $ (55,173) $ (15,521) Cumulative effect of changes in accounting principles - - - - - - (103) - - --------- --------- --------- --------- --------- Net loss (101,719) (24,613) (17,782) (55,276) (15,521) Preferred stock dividends (8,050) (8,050) (4,070) - - - - --------- --------- --------- ---------- --------- Loss applicable to common shareholders $(109,769) $ (32,663) $ (21,852) $ (55,276) $ (15,521) ========= ========= ========= ========= ========= Loss per common share before cumulative effect of changes in accounting principles and after preferred stock dividends $ (2.28) $ (0.74) $ (0.58) $ (1.59) $ (0.46) ========= ========= ========= ========= ========= Loss per common share $ (2.28) $ (0.74) $ (0.58) $ (1.59) $ (0.46) ========= ========= ========= ========= ========= Total assets $ 258,190 $ 334,582 $ 346,153 $ 236,130 $ 276,856 ========= ========= ========= ========== ========= Long-term debt - Notes and contracts payable(1) $ 36,104 $ 1,960 $ 50,009 $ 71,219 $ 80,322 ========= ========= ========= ========= ========= Cash dividends per common share $ - - $ - - $ - - $ - - $ - - ========= ========= ========= ========= ========= Cash dividends per preferred share $ 3.50 $ 3.50 $ 1.77 $ - - $ - - ========= ========= ========= ========= ========= Common shares issued 48,317,324 48,144,274 40,320,761 36,324,517 34,062,328 Shareholders of record 12,210 13,196 13,549 14,859 17,127 Employees 1,259 1,204 919 826 911 </TABLE> - --------------------------------- (1) Includes $94,000 for 1991 of long-term debt which is recorded in other noncurrent liabilities. -54-
56 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(1) 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 Grouse 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. 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 $(2.0) million loss to income of $5.0 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. The variability of metals prices requires that the Company, in assessing the impact of prices on recoverability of its assets, exercises judgment as to whether price changes are temporary or are - --------------------------- 1 For definitions of certain mining terms used in this description, see "Glossary of Certain Mining Terms" at the end of Item 1, page 45. -55-
57 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. During the third quarter of 1995 and continuing into the fourth quarter of 1995, the Grouse Creek mine, which began production in December 1994 and in which the Company has an 80% interest, experienced significantly higher than expected operating costs per ounce of gold produced and significantly less than expected operating margins resulting from higher than expected start-up costs and lower than expected gold ore grade. Mining to date has indicated that mill grade ore occurs in thinner, less continuous structures than originally interpreted in the 1994 life-of-mine plan. The Company thus determined that a 1995 third quarter carrying value adjustment totaling $97.0 million was required to properly reflect net realizable value of its interest in the Grouse Creek Joint Venture. The amount of the adjustment was based on the Company's carrying value of its interest in the Grouse Creek mine in excess of the Company's share of estimated discounted future cash flows. A revised life-of-mine cash flow analysis was developed early in the fourth quarter of 1995 for this purpose. The revised plan recognizes the geologic complexity of the Sunbeam deposit as determined from mining experience to date and includes a revised interpretation of the geologic data. The carrying value adjustment was made in accordance with the provisions of Statement of Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" which the Company adopted effective January 1, 1995. The Company currently plans to continue mining on the Sunbeam pit through June 1996 and perform further ore confirmation drilling of the Grouse deposit to evaluate the feasibility of mining operations beyond June 1996. The Company's Board of Directors is currently expected to make a decision during the second quarter of 1996 whether to continue further development and operation of the Grouse Creek mine. If the Grouse Creek mine is not further developed and operations wind down in June 1996, 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 $4.0 million. If the decision is made to shut the property down, an accrual for closed operations and environmental matters in the range of $16.0 to $20.0 million would be necessary at the time the mine is shut down. -56-
58 In 1996, the Company expects to produce between 125,000 and 165,000 ounces of gold compared to actual 1995 gold production of 170,000 ounces of gold. The 1996 estimated production includes 60,000 to 65,000 ounces from the La Choya mine, 30,000 to 35,000 ounces from the Company's interest in the American Girl mine, 30,000 to 60,000 ounces from the Company's 80% interest in the Grouse Creek mine, and an additional 5,000 ounces from other sources. The high end of the Grouse Creek mine estimated production is contingent upon the Company's decision to further develop and operate the mine beyond June 1996. 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 1,086,000 tons. Additionally, the Company expects to ship 878,000 cubic yards of landscape material from Mountain West Products in 1996 compared to 867,000 cubic yards in 1995. RESULTS OF OPERATIONS - --------------------- 1995 vs 1994 - ------------ The Company incurred a net loss of approximately $101.7 million ($2.11 per common share) in 1995 compared to a net loss of approximately $24.6 million ($0.56 per common share) in 1994. After $8.1 million in dividends to holders of the Company's Series B Cumulative Convertible Preferred Stock, the Company's loss applicable to common shareholders for 1995 was approximately $109.8 million, or $2.28 per common share compared to $32.7 million, or $0.74 per common share in 1994. The 1995 loss was due to a variety of factors, the most significant of which was the third quarter write-down of the Company's interest in the Grouse Creek mine. Sales of the Company's products increased by approximately $27.1 million, or 21.1%, in 1995 as compared to 1994, principally the result of (1) increased product sales totaling $49.7 million, most notably from the Grouse Creek mine where gold and silver production commenced in December 1994, and increased production at the La Choya and Lucky Friday mines as well as from several industrial minerals operations; and (2) an increase in the average price of lead. These two factors were partially offset by decreased sales of approximately $23.5 million attributable to (1) decreased gold and silver production in 1995 at the Republic gold mine which completed operations in February 1995; and (2) decreased gold production at the American Girl mine due to the completion of most underground mining operations there in February 1995. Comparing the average metals prices for 1994 with 1995, gold remained fairly constant at $384 per ounce, silver decreased by -57-
59 1.7% from $5.28 per ounce to $5.19 per ounce, lead increased by 16% from $0.25 per pound to $0.29 per pound, and zinc increased by 4% from $0.45 to $0.47 per pound. Cost of sales and other direct production costs increased approximately $21.1 million, or 20.2%, in 1995 compared to 1994, primarily a result of (1) increased production costs of $25.8 million incurred at the Grouse Creek mine in 1995 where production commenced in December 1994; (2) production cost increases at Mountain West Products ($4.3 million) due principally to increased production as well as increased freight and raw materials costs; (3) production cost increases at Kentucky-Tennessee Clay Company's (K-T Clay's) kaolin and ball clay divisions totaling approximately $4.0 million, principally due to the Langley kaolin acquisition in 1995; (4) production cost increases at La Choya ($2.7 million) primarily due to increased production; (5) production cost increases at Colorado Aggregate Company ($1.2 million) related principally to a change in product mix requirements; and (6) increased production costs at Lucky Friday of $1.2 million due to increased production in 1995. These increases in cost of sales and other direct production costs were partially offset by decreases in operating costs at other operations, the three most notable of which are (1) decreased production costs of $10.4 million at the Republic mine due to completion of operations in February 1995; (2) decreased standby costs at the Greens Creek mine totaling $2.6 million in the 1995 period, a direct result of management's decision to further develop the mine and recommence production in early 1997; and (3) decreased cost of sales in 1995 at the American Girl mine totaling $2.6 million due to decreased gold production. Cost of sales and other direct production costs as a percentage of sales from products improved slightly from 81.3% in 1994 to 80.7% in 1995. Management does not believe that the Company's cost of sales and other direct production costs are materially different from industry norms. Depreciation, depletion and amortization increased $9.2 million or 64.8% from 1994 to 1995 principally due to (1) increased depreciation at the Grouse Creek mine ($8.6 million) which commenced production in December 1994; and (2) increased depreciation at the La Choya mine ($2.4 million) due to increased production; both of which were partially offset by decreased depreciation at the Republic mine ($2.2 million) due to the curtailment of operations in February 1995. Cash and full production costs per gold ounce increased from $273 and $334 in 1994, to $288 and $397 in 1995, respectively. The increases are mainly attributed to the increased per ounce production costs at the Grouse Creek and American Girl mines during 1995, partially offset by decreased per ounce production costs at the La Choya mine. -58-
60 Cash and full production costs per silver ounce decreased from $5.81 and $7.17 in 1994 to $4.57 and $5.76 in 1995, respectively. The decreases are due primarily to (1) increased production in 1995 at the Lucky Friday mine; and (2) increased average prices of lead and zinc in 1995. Lead and zinc are by- products at the Lucky Friday mine, the net revenues of which are deducted from production costs in the calculation of productions cost per silver ounce. Other operating expenses increased by approximately $79.6 million, or 203% from 1994 to 1995, due principally to (1) the third quarter 1995 reduction in carrying value of the Company's interest in the Grouse Creek mine ($97.0 million) and the Company's interest in the ConSil Corp.'s Silver Summit mine ($0.4 million); and (2) the third quarter 1995 adjustment to increase the Company's liability for environmental remediation activity costs at the Bunker Hill Superfund Site ($3.4 million) and the Coeur d'Alene Mining District ($0.3 million). These increases were partially offset by (1) the 1994 increase in the provision for closed operations and environmental matters related to the reclamation accruals for the Republic mine and the Coeur d'Alene Mining District totaling $7.3 million and $1.1 million, respectively; (2) the 1994 $7.9 million reduction in carrying value of mining properties adjustment related to the Republic mine ($7.2 million), the Zenda property ($0.4 million), and exploration equipment ($0.3 million); (3) decreased general and administrative costs of $1.8 million in 1995, primarily due to the nonrecurring 1994 expenses of approximately $2.1 million related to the acquisition of Equinox Resources Ltd.; and (4) a decrease of approximately $1.3 million in exploration expense in 1995. Other income was approximately $10.8 million in 1995 compared to $5.2 million in 1994. The increase was primarily due to (1) the 1995 gain of $4.0 million on the sales of certain common stock investments; and (2) the 1995 gain of $3.2 million on the sale of the Apex processing facility; both of which were partially offset by (1) the 1995 write-down of $1.1 million for certain common stock investments; and (2) the 1994 gain on the sale of certain common stock investments. Total interest cost decreased $0.6 million in 1995, principally due to the June 1994 retirement of long-term debt, partially offset by interest expense during 1995 related to new borrowings under the Company's revolving and term credit facility (described below). In 1994, the Company recorded an extraordinary loss totaling approximately $0.8 million on the early retirement of long-term debt. The loss related principally to the write-off of the unamortized balance of deferred issuance costs related to the debt. Income taxes reflect a provision of $0.3 million in 1995 compared to a benefit of $0.5 million in 1994. The provision in 1995 primarily reflects the provisions for U.S. and foreign taxes due as a result of certain asset and certain common stock investment -59-
61 dispositions made during 1995, as well as a provision for state income taxes, partially offset by the carryback of certain 1995 expenditures to reduce income taxes previously provided. The benefit in 1994 primarily reflects the carryback of 1994 and prior year net operating losses to reduce income taxes previously provided, partially offset by an Internal Revenue Service settlement and a provision for state income taxes. RESULTS OF OPERATIONS - --------------------- 1994 vs 1993 - ------------ The Company incurred a net loss of approximately $24.6 million ($0.56 per common share) in 1994 compared to a net loss of approximately $17.8 million ($0.47 per common share) in 1993. After $8.1 million in dividends to holders of the Company's Series B Cumulative Convertible Preferred Stock, the loss applicable to common shareholders for 1994 was approximately $32.7 million, or $0.74 per common share compared to $21.9 million, or $0.58 per common share in 1993 after a $4.1 million preferred stock dividend. Sales of the Company's products increased by approximately $35.9 million, or 38.6%, in 1994 as compared to 1993, principally the result of (1) increased product sales totaling $42.3 million, most notably from the La Choya gold mine in Mexico, which commenced production in February 1994, and Mountain West Products, which was acquired in December 1993; and (2) increased average prices of lead and gold. These two factors were partially offset by decreased sales of approximately $9.4 million in the metals segment attributable to (1) suspension of operations at the Greens Creek mine in April 1993; (2) decreased gold production in 1994 at the Republic gold mine due to lower-grade ore being mined and processed; and (3) decreased lead, silver and zinc production at the Lucky Friday mine resulting in part from the temporary suspension of operations due to the ore-conveyance accident on August 30, 1994. The Lucky Friday mine resumed operations in December 1994. Comparing the average metals prices for 1993 with 1994, gold increased by 7% from $360 per ounce to $384 per ounce, silver increased by 23% from $4.30 per ounce to $5.28 per ounce, and lead increased by 39% from $0.18 per pound to $0.25 per pound. Cost of sales and other direct production costs increased approximately $24.5 million, or 30.6%, in 1994 compared to 1993, primarily a result of (1) production costs at the La Choya mine and K-T Clay de Mexico during 1994 totaling approximately $11.7 million and $2.9 million, respectively, due to the commencement of operations at these locations in early 1994; (2) increased production costs in 1994 at Mountain West Products (acquired in December 1993) totaling approximately $10.4 million; and (3) increased operating costs at various other operations totaling -60-
62 approximately $7.8 million. These increases were partially offset by decreases in operating costs at other operations totaling approximately $8.3 million, the two most notable of which are (1) the Greens Creek mine totaling $4.1 million, where decreased operating costs are the result of the suspension of operations in April 1993; and (2) the Lucky Friday mine resulting from the temporary suspension of operations due to the ore-conveyance accident on August 30, 1994. Cost of sales and other direct production costs as a percentage of sales from products improved from 86% in 1993 to 81% in 1994, primarily due to increases in production and average metals prices realized in the metals division, as well as improved sales within the industrial minerals segment during 1994. Management does not believe that the Company's cost of sales and other direct production costs are materially different from industry norms. Cash and full production costs per gold ounce increased from $229 and $298 in 1993, to $273 and $334 in 1994, respectively. The increases are mainly attributed to the initial start-up costs at the Grouse Creek and La Choya gold mines and decreased gold production from the Republic and American Girl gold mines due to declining ore grades. Cash and full production costs per silver ounce increased from $5.45 and $6.85 in 1993 to $5.81 and $7.17 in 1994, respectively. The increases are primarily due to decreased ore grade as well as lower lead, silver, and zinc production from the Lucky Friday mine in 1994. These were partially offset by an increase in the average price of lead and zinc in 1994. Lead and zinc are by-products at the Lucky Friday mine, the net revenues of which are deducted from production costs in the calculation of production costs per ounce. Other operating expenses increased by approximately $19.8 million, or 101.4% from 1993 to 1994, principally due to (1) an increase in the provision for closed operations and environmental matters totaling $9.0 million related principally to the 1994 reclamation accruals for the Republic gold mine and the Coeur d'Alene Mining District totaling $7.3 million and $1.1 million, respectively; (2) an increase totaling $5.3 million in 1994 carrying value adjustments to certain properties, plants, equipment, and supplies inventory totaling $7.9 million; (3) an increase in exploration expenditures of $2.7 million principally due to increased exploration activity during 1994 at the Greens Creek, Grouse Creek and La Choya mines; and (4) an increase in general and administrative costs of $3.0 million primarily attributable to costs totaling approximately $2.2 million incurred in connection with the March 11, 1994 acquisition of Equinox. Other income was approximately $5.2 million in 1994 compared to $1.6 million in 1993. The increase is primarily due to (1) an increase in royalty income of approximately $2.8 million in 1994; -61-
63 (2) decreased interest costs totaling $2.6 million due to the June 1994 retirement of long-term debt; and (3) the January 1994 sale of the Company's investment in Granduc Mines Ltd. resulting in a gain of $1.3 million. In 1994, the Company recorded an extraordinary loss totaling approximately $0.8 million on the early retirement of long-term debt. The loss related principally to the write-off of the unamortized balance of deferred issuance costs related to the debt. Income taxes reflect a benefit of $0.5 million in 1994 compared to a $0.9 million benefit in 1993. The benefit in 1994 primarily reflects the carryback of net operating losses to reduce income taxes previously provided, partially offset by an Internal Revenue Service settlement and a provision for state income taxes. The benefit in 1993 primarily reflects a decrease in the deferred tax provision due to utilization of net operating loss carryovers. 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 December 31, 1995, assets totaled approximately $258.2 million and shareholders' equity totaled approximately $164.1 million. Cash, cash equivalents and short-term investments decreased by $3.3 million to $4.0 million - at December 31, 1995 from $7.3 million at the end of 1994. Operating activities provided $11.8 million of cash during 1995. The primary sources were from the La Choya mine and the industrial minerals segment. Partially offsetting these sources was a $2.3 million increase in inventories, primarily in the industrial minerals segment. The Company's $101.7 million net loss for 1995 includes net noncash charges of $122.7 million. The primary noncash charges were (1) reduction in carrying value of the Company's interests in the Grouse Creek mine and ConSil Corp.'s Silver Summit mine (aggregating $97.4 million); (2) depreciation, -62-
64 depletion and amortization of $23.8 million; and (3) the provision for reclamation and closure costs of $8.1 million. The Company's investing activities used $42.4 million of cash during 1995. The most significant use of cash was $45.3 million for property, plant and equipment additions described below and the transfer of $2.7 million to restricted investments for additional reclamation surety bonding collateral requirements related to ongoing operations. These uses were partially offset by proceeds from sales of certain common stock investments ($5.2 million) and proceeds from the sales of assets ($3.8 million), primarily the Apex processing facility. During 1995, the most significant asset additions were $10.6 million at the Greens Creek mine, $8.7 million at the K-T Clay ball clay and kaolin industrial minerals divisions, $6.8 million at the Rosebud project, $6.3 million at the Grouse Creek mine, $5.0 million at the American Girl mine, $2.3 million at the La Choya mine and other Mexico metals properties, and $2.0 million each at Mountain West Products and the Lucky Friday Expansion Project (formerly referred to as the Lucky Friday-Gold Hunter project). Included in the K-T Clay ball clay and kaolin industrial minerals additions was the $6.3 million acquisition of the property, plant and equipment of J. M. Huber Corporation's kaolin operation in Langley, South Carolina. Included in the Mountain West Products amount is the $1.6 million acquisition of the property, plant and equipment of the Western Bark operations in Idaho and South Dakota. During 1995, $27.4 million of cash was provided from financing activities. The major sources of cash were borrowings against the Company's revolving and term credit agreement of $48.0 million and proceeds from the exercise of stock warrants and options of $1.3 million. The primary uses of cash were for repayments against the bank borrowings ($13.0 million) and payment of the $8.1 million preferred stock dividend. The Company estimates that capital expenditures to be incurred in 1996 will be approximately $32.9 million, including $2.6 million of capitalized interest. These expenditures consist primarily of (1) development expenditures at the Greens Creek mine ($21.2 million), the Lucky Friday expansion project ($3.2 million), the Rosebud project ($2.6 million) and the American Girl mine ($1.5 million); and (2) expenditures at other operating locations totaling $4.4 million. If the decision is made to further develop and operate the Grouse Creek mine, the Company estimates additional capital expenditures in the range of $10.0 to $12.0 million in 1996. The Company intends to finance these capital expenditures through a combination of (1) existing cash and cash equivalents; (2) cash flow from operating activities; and (3) amounts available under its revolving and term credit facility which, subject to certain conditions, provides for borrowings up to a maximum of $55.0 million. -63-
65 The expected 1996 capital expenditures referred to above for the Rosebud project totaling $2.6 million, represent an estimate of costs to maintain the present status of the project until a decision is made to develop the property. 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 $50.0 to $55.0 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 and the American Girl properties, that the Company's joint-venture partners will not default with respect to their respective portions of development costs and capital expenditures. However, because the Grouse Creek mine ore grades have fallen far short of expectations as discussed above, the Company is not certain of its joint-venture partner's, Great Lakes Minerals Inc. (Great Lakes), ability in this project to fund future cash calls. Pursuant to a November 27, 1995 agreement entered into between the Company and Great Lakes, past due cash calls totaling $2.2 million were forgiven by the Company in exchange for Great Lakes granting the Company certain warrants to purchase Great Lakes' common stock (Great Lakes Warrants) which expire on December 31, 1997, and a royalty totaling $2.3 million payable out of 25% (75% after December 31, 1997) of the proceeds (in excess of cash operating requirements) from Great Lakes' share of Grouse Creek production. As of December 31, 1995, the Company has recorded a receivable from Great Lakes of $1.3 million, which is the Company's estimated present value of the Great Lakes Warrants and the royalty payments owed by Great Lakes. In addition, the Company has been advised that Great Lakes anticipates it will elect to dilute its joint- venture interest rather than pay its share of any future capital expenditure requirements for the Grouse Creek mine. 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 shares of its Common Stock 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 Common Stock initially to pay down debt under its existing bank revolving credit facility. After the January 1996 pay down of debt using the proceeds from the offering, a total of $34.0 million remained available under the bank facility. -64-
66 On October 1, 1995, the Company amended the terms of its August 30, 1994 unsecured revolving and term loan facility. Under the amended terms, the Company can borrow up to $55.0 million. Amounts may be borrowed on a revolving credit basis through July 31, 1998, and are repayable in eight quarterly installments beginning on October 31, 1998. At December 31, 1995, there was $35.0 million outstanding under the Company's revolving and term loan facility classified as long-term debt. On February 7, 1996, the Company entered into a second amendment to the credit facility whereby it will continue to be able to borrow up to $55.0 million. Under the amended terms, the Company will continue to be able to select a floating rate based on the primary bank's prime interest rate or fixed interest rates for up to six months. The revised fixed interest rates are based on LIBOR or the CD rate and range from LIBOR +1.175% or the CD rate +1.175%, to LIBOR +1.775% or the CD rate +1.775%, depending on the level of outstanding borrowings. The amended terms provide for the facility to be collateralized, including the pledging of 100% of the stock of certain of the Company's subsidiaries and providing the lenders under the credit facility a security interest in accounts receivable. To maintain compliance with the covenants of the credit facility, the Company must maintain a 1.5 to 1.0 current ratio and a defined fixed charge coverage ratio of 1.2 to 1.0 through June 30, 1997, then 1.5 to 1.0 thereafter. In addition, the Company must maintain a minimum tangible net worth of $150.0 million, plus 50% of net income earned, and 100% of equity raised after December 31, 1995. Amounts available under the amended facility are based on a debt to cash flow calculation, which must not exceed a maximum of 3.75 to 1.0 through December 31, 1996, then 3.5 to 1.0 through December 31, 1997, then 3.0 to 1.0 thereafter. The Company's planned environmental and reclamation expenditures for 1996 are expected to be approximately $5.5 million, principally for environmental and reclamation activities at the Bunker Hill Superfund Site and the Republic property. Exploration expenditures for 1996 are estimated to be approximately $4.1 million. The Company's exploration strategy is to focus further exploration at or in the vicinity of its currently owned domestic and foreign properties. Accordingly, 1996 domestic exploration expenditures will be incurred principally at the Greens Creek, Rosebud, American Girl and Lucky Friday properties. Foreign exploration efforts in 1996 will center primarily on targets in Mexico. 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 -65-
67 costs paid or premiums received, for option contracts which hedge the sales prices of commodities are deferred and subsequently included in income as part of the hedged transaction. Revenues from the aforementioned contracts are recognized at the time metal is available for delivery to the refineries. 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. At December 31, 1995, the Company had forward sales commitments through January 31, 1997 for 13,000 ounces of gold at an average price of $412 per ounce. The estimated fair value of these forward sales commitments was $228,000 at December 31, 1995. The Company has also purchased options to put 51,120 ounces of gold to the counterparties at an average price of $389 per ounce. Concurrently, the Company sold options to allow the counterparties to call 51,120 ounces of gold from the Company at an average price of $468 per ounce. There was no net cost associated with the purchase and sale of these options which expire, in tandem, on a monthly basis through December 1997. At December 31, 1995, the estimated fair value of the Company's purchased gold put options was approximately $436,000. If the Company had chosen to close its offsetting short gold call option position it would have incurred a liability of approximately $134,000. All of the aforementioned contracts are designated as hedges at December 31, 1995. The London Final gold price at year end was $387 per ounce. In February 1996, the Company purchased options to put 18,000 ounces of gold to the counterparties at an average price of $410 per ounce. Concurrently, the Company sold options to allow the counterparties to call 18,000 ounces of gold from the Company at an average price of $448 per ounce. These options also expire, in tandem, on a monthly basis through December 1997. Additionally, in January 1996, the Company entered into spot deferred forward sales commitments for 12,000 ounces of gold at $397 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. The decline of the Mexican peso has 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. Further declines in the Mexican peso, however, could adversely impact the Company's Mexican operations. In November 1994, the Company entered into a Court approved Consent Decree requiring the Company and certain other mining companies to undertake specific remediation work with respect to the Bunker Hill Superfund Site in northern Idaho. At December 31, 1995, the Company's allowance for superfund site remedial action costs was approximately $12.3 million, which the Company believes is adequate based on current estimates of aggregate costs. -66-
68 In addition, as described in Note 7 of Notes to Consolidated Financial Statements, the Company is a defendant in an action filed in November 1990 by Star Phoenix Mining Company (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, 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 has appealed the judgment to the Idaho State Supreme Court. Briefing on the appeal has been completed and the Idaho State Supreme Court has scheduled oral argument before the Court for early April 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 pending 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 appeal bond. The Company intends to vigorously pursue 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 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 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 unlikely 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 there can be no assurance as to the ultimate outcome of the above matter and the other proceedings disclosed in Note 7 of Notes to Consolidated Financial Statements, 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. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). The Statement -67-
69 establishes financial accounting and reporting standards for stock-based employee compensation plans. The Statement 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 is required to implement SFAS No. 123 on January 1, 1996. Management does not plan to adopt the measurement provisions of SFAS No. 123 although the Company will comply with the pro-forma disclosure requirements of the Statement in its 1996 annual financial statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Item 14 of this Report for information with respect to the financial statements filed as a part hereof, including financial statements filed pursuant to the requirements of this Item 8. SELECTED QUARTERLY DATA (dollars in thousands except for per-share amounts) <TABLE> <CAPTION> First Second Third Fourth 1995: Quarter Quarter Quarter Quarter Total - ---- --------- --------- ---------- --------- --------- <S> <C> <C> <C> <C> <C> Sales of products $ 35,710 $ 42,241 $ 41,203 $ 36,725 $ 155,879 Gross profit (loss) $ (162) $ 1,008 $ 1,775 $ 3,986 $ 6,607 Net income (loss) $ (2,464) $ 2,242 $(102,723) $ 1,226 $(101,719) Preferred stock dividends $ (2,012) $ (2,013) $ (2,013) $ (2,012) $ (8,050) Loss applicable to common shareholders $ (4,476) $ 229 $(104,736) $ (786) $(109,769) Loss per common share $ (0.09) $ 0.01 $ (2.17) $ (0.02) $ (2.28) 1994: - ---- Sales of products $ 26,339 $ 38,048 $ 35,279 $ 29,081 $ 128,747 Gross profit (loss) $ (951) $ 4,021 $ 5,846 $ 915 $ 9,831 Net income (loss) $ (5,651) $ 702 $ 806 $(20,470) $ (24,613) Preferred stock dividends $ (2,012) $ (2,013) $ (2,013) $ (2,012) $ (8,050) Loss applicable to common shareholders $ (7,663) $ (1,311) $ (1,207) $(22,482) $ (32,663) Loss per common share $ (0.19) $ (0.03) $ (0.03) $ (0.47) $ (0.74) </TABLE> ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES. None. -68-
70 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Reference is made to the information with respect to the directors of the Company set forth under the caption "Election of Directors" in the Company's proxy statement to be filed pursuant to Regulation 14A for the annual meeting scheduled to be held on May 10, 1996 (the Proxy Statement), which information is incorporated herein by reference. Information with respect to executive officers of the Company is set forth as follows: <TABLE> <CAPTION> Age at May 10, Name 1996 Position and Term Served ------------------- ------ ------------------------------------------- <S> <C> <C> William B. Booth 45 Vice President - Investor and Public Affairs since May 1994; various administrative functions with the Company since December 1985. Arthur Brown 55 Chairman since June 1987; Chief Executive Officer since May 1987; President since May 1986; Chief Operating Officer from May 1986 to May 1987; Executive Vice President from May 1985 to May 1986; held various positions as an officer since 1980; employed by the Company since 1967. Joseph T. Heatherly 65 Vice President - Controller since May 1989; Controller from May 1987 to May 1989; various administrative functions with the Company since May 1983. Retired effective February 1, 1996. J. Gary Childress 48 Vice President - Industrial Minerals since February 1994; President and General Manager of Kentucky-Tennessee Clay Company from 1987 to 1994; Senior Vice President of Kentucky- Tennessee Clay Company from 1986 to 1987. </TABLE> -69-
71 <TABLE> <CAPTION> Age at May 10, Name 1996 Position and Term Served ------------------- ------ --------------------------------------------- <S> <C> <C> Ralph R. Noyes 48 Vice President - Metal Mining since May 1988; Manager Metal Mining from June 1987 to May 1988; prior thereto, since 1976, held various administrative positions with the Company and Day Mines, Inc. Resigned effective January 1, 1996. John P. Stilwell 43 Vice President - Finance and Treasurer since May 1994; Treasurer since June 1991; held various administrative positions with the Company since May 1985. Michael B. White 45 Vice President - General Counsel and Secretary since May 1992; Secretary since November 1991; Assistant Secretary from March 1981 to November 1991; General Counsel since June 1986; various administrative positions since 1980. </TABLE> There are no family relationships between any of the executive officers. ITEM 11. EXECUTIVE COMPENSATION. Reference is made to the information set forth under the caption "Compensation of Executive Officers" in the Proxy Statement (except the Report on the Compensation Committee on Executive Compensation set forth therein) to be filed pursuant to Regulation 14A, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Reference is made to the information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement to be filed pursuant to Regulation 14A, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Reference is made to the information set forth under the caption "Other Transactions" in the Proxy Statement to be filed pursuant to Regulation 14A, which information is incorporated herein by reference. -70-
72 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) Financial Statements See Index to Financial Statements on Page F-1 (a)(2) Financial Statement Schedules See Index to Financial Statements on Page F-1 (a)(3) Exhibits See Exhibit Index following the financial statements (b) Reports on Form 8-K Report on Form 8-K dated October 25, 1995, related to disappointing results at the Grouse Creek mine. -71-
73 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 11, 1996. HECLA MINING COMPANY By /s/ Arthur Brown ---------------------------------- Arthur Brown, Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. <TABLE> <S> <C> /s/ Arthur Brown 3/11/96 /s/ Theodore Crumley 3/11/96 - -------------------------------- --------------------------------- Arthur Brown Date Theodore Crumley Date Chairman and Director Director (principal executive officer) /s/ Stanley E. Hilbert 3/11/96 /s/ Leland O. Erdahl 3/11/96 - -------------------------------- --------------------------------- Stanley E. Hilbert Date Leland O. Erdahl Date Corporate Controller Director (principal accounting officer) /s/ John P. Stilwell 3/11/96 /s/ William A. Griffith 3/11/96 - -------------------------------- --------------------------------- John P. Stilwell Date William A. Griffith Date Vice President - Finance and Director Treasurer (principal financial officer) /s/ John E. Clute 3/11/96 /s/ Charles L. McAlpine 3/11/96 - -------------------------------- --------------------------------- John E. Clute Date Charles L. McAlpine Date Director Director /s/ Joe Coors, Jr. 3/11/96 Jorge E. Ordonez 3/11/96 - -------------------------------- --------------------------------- Joe Coors, Jr. Date Jorge E. Ordonez Date Director Director </TABLE> -72-
74 INDEX TO FINANCIAL STATEMENTS Page ---- Financial Statements Report of Independent Accountants F-2 Consolidated Balance Sheets at December 31, 1995 and 1994 F-3 Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993 F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 F-5 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 F-6 Notes to Consolidated Financial Statements F-7 to F-35 Report of Deloitte & Touche, Chartered Accountants F-36 Financial Statement Schedules* - ----------------------------- *Financial statement schedules have been omitted as not applicable F-1
75 REPORT OF INDEPENDENT ACCOUNTANTS - --------------------------------- The Board of Directors and Shareholders Hecla Mining Company We have audited the accompanying consolidated balance sheets of Hecla Mining Company and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Equinox Resources Ltd. (Equinox) which statements reflect total revenues constituting 12% and net loss constituting 34% for the year ended December 31, 1993, of the related consolidated totals. Separate financial statements of Equinox included in the consolidated financial statements were audited and reported on separately by other auditors, whose report dated February 28, 1994, expressed an unqualified opinion on those statements before adjustments, which were audited by us, to convert Canadian dollars to U.S. dollars and to conform certain Equinox accounting policies to U.S. generally accepted accounting principles consistent with those of Hecla Mining Company. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hecla Mining Company and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Notes 1 and 3 to the consolidated financial statements, the Company changed its method of accounting for the impairment of long-lived assets as of January 1, 1995, and its method of accounting for investments as of January 1, 1994. The changes were required by Statements of Financial Accounting Standards issued by the Financial Accounting Standards Board. /s/ COOPERS & LYBRAND L.L.P. Spokane, Washington February 2, 1996, except for the last paragraph of Note 6, as to which the date is February 7, 1996 F-2
76 HECLA MINING COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands) __________ ASSETS <TABLE> <CAPTION> December 31, --------------------------- 1995 1994 ---------- --------- <S> <C> <C> Current assets Cash and cash equivalents $ 4,024 $ 7,278 Accounts and notes receivable 25,571 23,516 Income tax refund receivable 737 247 Inventories 20,915 18,616 Other current assets 2,038 1,597 ---------- --------- Total current assets 53,285 51,254 Investments 2,200 6,476 Restricted investments 16,254 13,553 Properties, plants and equipment, net 177,374 257,908 Other noncurrent assets 9,077 5,391 ---------- --------- Total assets $ 258,190 $ 334,582 ========== ========= LIABILITIES Current liabilities Accounts payable and accrued expenses $ 14,145 $ 13,570 Accrued payroll and related benefits 3,217 2,724 Preferred stock dividends payable 2,012 2,012 Accrued taxes 1,042 925 Accrued reclamation and closure costs 5,549 4,254 ---------- --------- Total current liabilities 25,965 23,485 Deferred income taxes 359 359 Long-term debt 36,104 1,960 Accrued reclamation and closure costs 26,782 27,162 Other noncurrent liabilities 4,864 4,098 ---------- --------- Total liabilities 94,074 57,064 ---------- --------- Commitments and contingencies (Notes 1, 2 and 7) 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 1995 - 48,317,324, issued 1994 - 48,144,274 12,079 12,036 Capital surplus 330,352 328,995 Accumulated deficit (173,206) (63,437) Net unrealized gain on investments 100 3,396 Foreign currency translation adjustment (4,898) (3,158) Less treasury stock, at cost; 1995 - 62,072 common shares, 1994 - 62,355 common shares (886) (889) ---------- --------- Total shareholders' equity 164,116 277,518 ---------- --------- Total liabilities and shareholders' equity $ 258,190 $ 334,582 ========== ========= </TABLE> The accompanying notes are an integral part of the consolidated financial statements. F-3
77 HECLA MINING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (dollars and shares in thousands, except per share amounts) __________ <TABLE> <CAPTION> Year Ended December 31, ------------------------------------ 1995 1994 1993 --------- -------- --------- <S> <C> <C> <C> Sales of products $ 155,879 $128,747 $ 92,888 --------- -------- --------- Cost of sales and other direct production costs 125,810 104,683 80,141 Depreciation, depletion and amortization 23,462 14,233 13,526 --------- -------- --------- 149,272 118,916 93,667 --------- -------- --------- Gross profit (loss) 6,607 9,831 (779) --------- -------- --------- Other operating expenses General and administrative 9,371 11,132 8,140 Exploration 7,109 8,397 5,656 Research - - - - 150 Depreciation and amortization 367 524 669 Provision for closed operations and environmental matters 4,615 11,353 2,327 Reduction in carrying value of mining properties 97,387 7,864 2,561 --------- -------- --------- 118,849 39,270 19,503 --------- -------- --------- Loss from operations (112,242) (29,439) (20,282) --------- -------- --------- Other income (expense) Interest and other income 8,089 5,227 3,172 Miscellaneous income (expense) 18 (234) 102 Gain (loss) on investments 3,169 1,053 (64) Minority interest - - - - 43 Interest expense Total interest costs (1,960) (2,606) (5,224) Less amount capitalized 1,516 1,751 3,533 --------- -------- --------- 10,832 5,191 1,562 --------- -------- --------- Loss before extraordinary item and income taxes (101,410) (24,248) (18,720) Income tax benefit (provision) (309) 468 938 --------- -------- --------- Loss before extraordinary item (101,719) (23,780) (17,782) Extraordinary loss on retirement of long-term debt - - (833) - - --------- -------- --------- Net loss (101,719) (24,613) (17,782) Preferred stock dividends (8,050) (8,050) (4,070) --------- -------- --------- Loss applicable to common shareholders $(109,769) $(32,663) $ (21,852) ========= ======== ========= Loss per common share Loss before extraordinary item $(2.28) $(0.72) $(0.58) Extraordinary item - - (0.02) - - ------ ------ ------ $(2.28) $(0.74) $(0.58) ====== ====== ====== Weighted average number of common shares outstanding 48,192 43,944 37,872 ====== ====== ====== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. F-4
78 HECLA MINING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) <TABLE> <CAPTION> Year Ended December 31, ------------------------------------------- 1995 1994 1993 ----------- ---------- ---------- <S> <C> <C> <C> Operating activities Net loss $ (101,719) $ (24,613) $ (17,782) Noncash elements included in net loss Depreciation, depletion and amortization 23,829 14,757 14,195 Deferred income tax benefit - - - - (964) (Gain) loss on disposition of properties, plants and equipment (3,417) (354) 1,336 (Gain) loss on investments (3,169) (1,053) 64 Accretion of interest on long-term debt - - 2,495 4,465 Provision for reclamation and closure costs 8,071 11,353 1,635 Reduction in carrying value of mining properties 97,387 7,864 3,432 (Gain) loss on retirement of long-term debt - - 833 (323) Minority interest in net loss of subsidiary - - - - 43 Change in Accounts and notes receivable (849) (4,675) (2,360) Income tax refund receivable (490) (247) 390 Inventories (2,299) (4,086) (669) Other current assets (441) 406 (554) Accounts payable and accrued expenses 575 (4,088) 5,848 Accrued payroll and related benefits 493 668 (83) Accrued taxes 117 (3) (343) Accrued reclamation and closure costs and noncurrent liabilities (6,326) (4,608) (3,058) ----------- ---------- ---------- Net cash provided (used) by operating activities 11,762 (5,351) 5,272 ----------- ---------- ---------- Investing activities Purchase of investments and change in cash surrender value of life insurance, net (1,047) 114 (593) Purchase of short-term investments, net - - - - (27,578) Proceeds from sale of investments and subsidiary 5,196 32,067 273 Purchase of restricted investments (2,701) (13,553) - - Additions to properties, plants and equipment (45,308) (66,559) (56,836) Proceeds from disposition of properties, plants and equipment 3,822 13,809 1,511 Other, net (2,407) (325) (2,162) ----------- ---------- ---------- Net cash used by investing activities (42,445) (34,447) (85,385) ----------- ---------- ---------- Financing activities Repayment of long-term debt (13,856) - - - - Borrowing on long-term debt 48,000 - - - - Common stock issued under stock option plans and warrants 1,335 1,765 1,425 Preferred stock issuance, net of issuance costs - - - - 110,346 Preferred stock dividends (8,050) (8,050) (2,058) Common stock issuance, net of issuance costs - - 63,499 6,464 Retirement of long-term debt including $16,283 of accreted interest in 1994 - - (50,169) - - ----------- ---------- ---------- Net cash provided by financing activities 27,429 7,045 116,177 ----------- ---------- ---------- Change in cash and cash equivalents Net increase (decrease) in cash and cash equivalents (3,254) (32,753) 36,064 Cash and cash equivalents at beginning of year 7,278 40,031 3,967 ----------- ---------- ---------- Cash and cash equivalents at end of year $ 4,024 $ 7,278 $ 40,031 =========== ========== ========== Supplemental disclosure of cash flow information Cash paid during year for: Interest (net of amount capitalized), including $16,283 of accreted interest in 1994 $ (136) $ 16,528 $ 347 =========== ========== ========== Income tax payments, net $ 216 $ 436 $ 325 =========== ========== ========== </TABLE> See Notes 4 and 6 for noncash investing and financing activities. The accompanying notes are an integral part of the consolidated financial statements. F-5
79 HECLA MINING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended December 31, 1995, 1994 and 1993 (dollars and shares in thousands, except per share amounts) _______________ <TABLE> <CAPTION> Unrealized Foreign Gain Currency Preferred Stock Common Stock Capital Accumulated (Loss) on Translation Treasury Shares Amount Shares Amount Surplus Deficit Investments Adjustment Stock --------- ------- ------- -------- -------- ----------- ----------- ----------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Balances, December 31, 1992 - - $ - - 36,325 $ 9,080 $ 118,206 $ (8,922) $ (16) $ - - $ (910) Net loss (17,782) Preferred stock issuance, net of issuance costs 2,300 575 109,771 Preferred stock dividends ($1.77 per share) (4,070) Stock issued under stock option plans 227 57 1,368 Stock issued for Mountain West Products, Inc. 655 164 6,141 Stock issued to retire long-term debt 2,200 550 23,870 Stock issued for property acquisition 13 4 92 Stock issued for cash, net of issuance costs 900 225 6,239 Net change in unrealized gain (loss) on investments 8 Treasury stock issued net of purchase 22 ----- ------ ------ ------- -------- --------- ------- ------- Balances, December 31, 1993 2,300 575 40,320 10,080 265,687 (30,774) (8) - - (888) Effect of change in accounting for investments 635 Net loss (24,613) Preferred stock dividends ($3.50 per share) (8,050) Stock issued under stock option plans and exercise of warrants 349 87 1,678 Stock issued for cash, net of issuance costs 7,475 1,869 61,630 Net change in unrealized gain (loss) on investments 2,769 Net change in foreign currency translation adjustment (3,158) Treasury stock purchased (1) ----- ------ ------ ------- -------- --------- ------- ------- Balances, December 31, 1994 2,300 575 48,144 12,036 328,995 (63,437) 3,396 (3,158) (889) Net loss (101,719) Preferred stock dividends ($3.50 per share) (8,050) Stock issued under stock option plans and exercise of warrants 166 41 1,294 Stock issued to directors 7 2 63 Net change in unrealized gain (loss) on investments (3,296) Net change in foreign currency translation (1,740) adjustment Treasury stock issued 3 ----- ------ ------ ------- -------- --------- ------- ------- Balances, December 31, 1995 2,300 $ 575 48,317 $12,079 $ 330,352 $(173,206) $ 100 $(4,898) $ (886) ===== ====== ====== ======= ======== ========= ======= ======= </TABLE> The accompanying notes are an integral part of the consolidated financial statements. F-6
80 HECLA MINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ________ NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. BASIS OF PRESENTATION -- The accompanying consolidated financial statements include the accounts of Hecla Mining Company (Hecla or the Company), its majority-owned subsidiaries and its proportionate share of the accounts of the joint ventures in which it participates. All significant intercompany transactions and accounts are eliminated in consolidation. The financial statements give effect to the amalgamation involving Equinox Resources Ltd. (Equinox) on March 11, 1994, which was accounted for as a pooling of interests. The Company's revenues and profitability are strongly influenced by world prices for 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. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. B. COMPANY'S BUSINESS AND CONCENTRATIONS OF CREDIT RISK -- The Company is engaged in mining and mineral processing activities, including exploration, extraction, processing and reclamation. The Company's principal products are metals (primarily gold, silver, lead and zinc) and industrial minerals (primarily clay and aggregate products). Substantially all of the Company's operations are conducted in the United States and Mexico. Sales of metals products are made principally to domestic and foreign custom smelters and metal traders. The Company sells substantially all of its metallic concentrates to smelters which are subject to extensive regulations including environmental protection laws. The Company has no control over the smelters' operations or their compliance with environmental laws and regulations. If the smelting capacity available to the Company was significantly reduced because of environmental requirements or otherwise, it is possible that the Company's silver operation could be adversely affected. Industrial minerals are sold principally to domestic and Mexican manufacturers and wholesalers. Sales to significant metals customers, as a percentage of total sales of metals, were as follows: F-7
81 <TABLE> <CAPTION> 1995 1994 1993 ---- ---- ---- <S> <C> <C> <C> Custom smelters 8.9% 9.3% 24.0% Custom metal traders Customer A 32.8% 38.3% 15.1% Customer B 30.6% 19.2% 14.8% Customer C 11.6% 12.9% 13.7% Customer D 7.9% 11.9% 11.7% Customer E 4.4% 8.4% 7.6% </TABLE> During 1995, 1994 and 1993, the Company sold 7.0%, 13.0% and 16.7%, respectively, of its products to companies in foreign countries. The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. The Company places its cash and temporary cash investments with institutions of high credit-worthiness. At times such investments may be in excess of the FDIC insurance limit. The Company routinely assesses the financial strength of its customers and, as a consequence, believes that its trade accounts receivable credit risk exposure is limited. C. INVENTORIES -- Inventories are stated at the lower of average cost or estimated net realizable value. D. INVESTMENTS -- The Company uses the equity method to account for investments in common stock of operating companies 20% to 50% owned. Investments in nonoperating companies that are not intended for resale or are not readily marketable are valued at the lower of cost or net realizable value. Marketable equity securities have been categorized as available for sale and are stated at market value. Realized gains and losses on the sale of these securities are recognized in the period they are sold on a specific identification basis. Unrealized gains and losses are included as a component of shareholders' equity net of related deferred income taxes, unless a permanent impairment in value has occurred, which is then charged to operations. Restricted investments held at December 31, 1995 and 1994, primarily represent investments in money market funds and a U.S. Treasury Note at 4 5/8% interest due in February 1996. The investments are recorded at amortized cost, plus accrued interest, which approximates market value. E. PROPERTIES, PLANTS AND EQUIPMENT -- Properties, plants and equipment are stated at the lower of cost or estimated net realizable value. Maintenance, repairs and renewals are charged to operations. Betterments of a major nature are capitalized. When assets are retired or sold, the costs and related allowances for depreciation and amortization are eliminated from the accounts and F-8
82 any resulting gain or loss is reflected in operations. Idle facilities, placed on a standby basis, are carried at the lower of net book value or estimated net realizable value. Management of the Company reviews the net carrying value of all facilities, including idle facilities, on a regular, periodic basis. These reviews consider, among other factors, (1) the net realizable value of each major type of asset, on a property-by-property basis, to reach a judgment concerning possible permanent impairment of value and any need for a write-down in asset value; (2) the ability of the Company to fund all care, maintenance and standby costs; (3) the status and usage of the assets, while in a standby mode, to thereby determine whether some form of amortization is appropriate; and (4) current estimates of metals prices that affect the decision to reopen or make a disposition of the assets. The Company estimates the net realizable value of each property based on the estimated undiscounted future cash flows that will be generated from operations at each property, the estimated salvage value of the surface plant and equipment and the value associated with property interests. These estimates of undiscounted future cash flows are dependent upon estimates of metal to be recovered from proven and probable ore reserves and, where appropriate, from the continuity of existing, developed ore bodies, future production costs and future metals prices over the estimated remaining mine life. If undiscounted cash flows are less than the carrying value of a property, an impairment loss is recognized based upon the estimated expected future net cash flows from the property discounted at an interest rate commensurate with the risk involved. The Company adopted the provisions of Statement of Financial Accounting Standards, No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121) effective January 1, 1995. The adoption of the provisions of SFAS No. 121 had no material effect on the results of operations, financial condition, or cash flows of the Company. Management's estimates of metals prices, recoverable proven and probable ore reserves, and operating, capital and reclamation costs are subject to risks and uncertainties of change affecting the recoverability of the Company's investment in various projects. Although management has made its best estimate of these factors based on current conditions, it is reasonably possible that changes could occur in the near term which could adversely affect management's estimate of net cash flows expected to be generated from its operating properties and the need for asset impairment write-downs. Depreciation is based on the estimated useful lives of the assets and is computed using straight-line, declining-balance, and unit-of-production methods. Depletion is computed using the unit-of-production method. F-9
83 Management's calculations of proven and probable ore reserves are based on engineering and geological estimates including minerals prices and operating costs. Changes in the geological and engineering interpretation of various ore bodies, minerals prices and operating costs may change the Company's estimates of proven and probable reserves. It is reasonably possible that certain of the Company's estimates of proven and probable reserves will change in the near term resulting in a change to amortization and liability accrual rates in future reporting periods. F. MINE EXPLORATION AND DEVELOPMENT -- Exploration costs are charged to operations as incurred, as are normal development costs at operating mines. Major mine development expenditures at operating properties and at new mining properties not yet producing are capitalized. G. RECLAMATION OF MINING AREAS -- All of the Company's operations are subject to reclamation and closure requirements. Minimum standards for mine reclamation have been established by various governmental agencies which affect certain operations of the Company. A reserve for mine reclamation costs has been established for restoring certain abandoned and currently disturbed mining areas based upon estimates of cost to comply with existing reclamation standards. Mine reclamation costs for operating properties are accrued using the unit-of-production method. The estimated amount of metals or minerals to be recovered from a mine site is based on internal and external geological data and is reviewed by management on a periodic basis. Changes in such estimated amounts which affect reclamation cost accrual rates are reflected on a prospective basis unless they indicate there is a current impairment of an asset's carrying value and a decision is made to permanently close the property, in which case they are recognized currently. It is reasonably possible that the Company's estimate of its ultimate accrual for reclamation costs will change in the near term due to possible changes in laws and regulations, and interpretations thereof, and changes in cost estimates. H. REMEDIATION OF MINING AREAS -- The Company accrues costs associated with environmental remediation obligations when it is probable that such costs will be incurred and they are reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Costs of future expenditures for environmental remediation are not discounted to their present value; such costs are based on management's current estimate of amounts that are expected to be incurred when the remediation work is performed within current laws and regulations. It is reasonably possible that, due to uncertainties associated with defining the nature and extent of environmental contamination, application of laws and regulations by regulatory authorities, and changes in remediation technology, the ultimate cost of remediation F-10
84 could change in the future. The Company will continue to review its accrued liabilities for such remediation costs as evidence becomes available indicating that its remediation liability has changed. I. INCOME TAXES -- The Company records deferred tax liabilities and assets for the expected future income tax consequences of events that have been recognized in its financial statements. Deferred tax liabilities and assets are determined based on the temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse. J. LOSS PER COMMON SHARE -- Loss per common share is computed by adding preferred stock dividends to the net loss and dividing the result by the weighted average number of shares of common stock and common stock equivalents (stock options and warrants) outstanding during each reporting period unless the common stock equivalents are anti-dilutive. Due to the losses in 1995, 1994 and 1993, common stock equivalents are anti-dilutive and therefore have been excluded from the computation. K. REVENUE RECOGNITION -- Sales of metals products sold directly to smelters are recorded when they are received by the smelter, at estimated metals prices. Recorded values are adjusted periodically and upon final settlement. Metal in products tolled (rather than sold to smelters) is sold under contracts for future delivery; such sales are recorded at contractual amounts when products are available to be processed by the smelter or refinery. Sales of industrial minerals are recognized as the minerals are delivered. L. INTEREST EXPENSE -- Interest costs incurred during the construction of qualifying assets are capitalized as part of the asset cost. M. CASH EQUIVALENTS -- The Company considers cash equivalents to consist of highly liquid investments with a remaining maturity of three months or less when purchased. N. FOREIGN CURRENCY TRANSLATION -- The Company operates in Mexico with its two wholly owned subsidiaries: Minera Hecla S.A. de C.V. (Minera Hecla) and K-T Clay de Mexico S.A. de C.V. (K-T Mexico). The functional currency for Minera Hecla and K-T Mexico is the U.S. dollar. Accordingly, the Company translates the monetary assets and liabilities of both subsidiaries at the year-end exchange rate while nonmonetary assets and liabilities are translated at historical rates. Income and expense accounts are translated at the average exchange rate for each period. Translation adjustments and transaction gains and losses are reflected in the net loss for the period. F-11
85 Prior to the second quarter of 1995, K-T Mexico's functional currency was the Mexican peso. During the second quarter of 1995, K-T Mexico commenced invoicing its customers in U.S. dollars instead of the Mexican peso. This change indicated a change in the functional currency from the Mexican peso to the U.S. dollar. The change in the functional currency has been accounted for prospectively commencing in the second quarter of 1995. Translation adjustments from prior periods are included in shareholders' equity. The translated amounts for nonmonetary assets prior to the change have become the accounting basis for those assets. O. RISK MANAGEMENT CONTRACTS -- 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 subsequently included in income as part of the hedged transaction. Revenues from the aforementioned contracts are recognized at the time metals are available for shipment to the refineries. 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. NOTE 2: INVENTORIES Inventories consist of the following (in thousands): <TABLE> <CAPTION> December 31, ------------------ 1995 1994 -------- -------- <S> <C> <C> Concentrates, bullion, metals in transit and other products $ 2,519 $ 5,568 Industrial minerals products 8,671 5,995 Materials and supplies 9,725 7,053 -------- -------- $ 20,915 $ 18,616 ======== ======== </TABLE> At December 31, 1995, the Company had forward sales commitments through January 31, 1997, for 13,000 ounces of gold at an average price of $412 per ounce. The Company has also purchased options to put 51,120 ounces of gold to the counterparties at an average price of $389 per ounce. Concurrently, the Company sold options to allow the counterparties to call 51,120 ounces of gold from the Company at an average price of $468 per ounce. There was no net cost associated with the purchase and sale of these options which expire, in tandem, on a monthly basis through December 1997. All of the aforementioned contracts are designated as hedges at December 31, 1995. The London Final gold price at year end was F-12
86 $387 per ounce. In February 1996, the Company purchased options to put 18,000 ounces of gold to the counterparties at an average price of $410 per ounce. Concurrently, the Company sold options to allow the counterparties to call 18,000 ounces of gold from the Company at an average price of $448 per ounce. These options also expire, in tandem, on a monthly basis through December 1997. Additionally, in January 1996, the Company entered into spot deferred forward sales commitments for 12,000 ounces of gold at $397. The nature and purpose of the forward sales and option contracts do not presently expose the Company to any significant net loss. NOTE 3: INVESTMENTS The Company adopted the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," effective January 1, 1994. At December 31, 1995 and 1994, marketable equity securities have been categorized as available for sale and are stated at quoted market value. Other investments were recorded at cost at December 31, 1995 and 1994. Investments consist of the following components (in thousands): <TABLE> <CAPTION> Gross Gross Unrealized Unrealized Carrying Cost Gains Losses Value ------- ---------- ---------- --------- <S> <C> <C> <C> <C> December 31, 1995 - ----------------- Equity securities investments available for sale $ 355 $ 204 $ (104) $ 455 Other investments 1,745 - - - - 1,745 ------- ------- ------- ------- $ 2,100 $ 204 $ (104) $ 2,200 ======= ======= ======= ======= December 31, 1994 - ----------------- Equity securities investments available for sale $ 1,880 $ 3,608 $ (212) $ 5,276 Other investments 1,200 - - - - 1,200 ------- ------- ------- ------- $ 3,080 $ 3,608 $ (212) $ 6,476 ======= ======= ======= ======= </TABLE> The other investments are principally large blocks of common and preferred stock in several mining companies, investments in various ventures, and cash surrender value of life insurance policies. The securities are generally restricted as to trading or marketability, although some are traded on various exchanges. Proceeds from the sales of investment securities in 1995 totaled $5,196,000; gross realized gains and losses on such sales were $4,240,000 and $1,071,000, respectively. Proceeds from the sales of investment securities in 1994 totaled $2,970,000; gross realized gains and losses on such sales were $1,366,000 and $313,000, respectively. F-13
87 NOTE 4: PROPERTIES, PLANTS AND EQUIPMENT The major components of properties, plants and equipment are (in thousands): <TABLE> <CAPTION> December 31, -------------------- 1995 1994 --------- --------- <S> <C> <C> Mining properties $ 45,023 $ 53,304 Deferred development costs 122,842 161,645 Plants and equipment 209,100 224,914 Land 6,501 6,305 --------- --------- 383,466 446,168 Less accumulated depreciation, depletion and amortization 206,092 188,260 --------- --------- Net carrying value $ 177,374 $ 257,908 ========= ========= </TABLE> In the third quarter of 1995, based on its periodic reviews of the status of various mining properties, the Company determined that certain adjustments were appropriate to properly reflect estimated net realizable values. These adjustments, totaling $97.4 million, consisted of write-downs of properties, plants and equipment for the Company's interest in the Grouse Creek mine ($97.0 million) and the Company's interest in the ConSil Corp.'s Silver Summit mine ($0.4 million). The Grouse Creek write-down was necessary due to significantly higher than expected operating costs per gold ounce which was due to much lower than anticipated gold grades being realized from the proven and probable ore reserves. In 1994, the major portion of the $7.9 million adjustment was related to the $7.2 million write-down of property, plant, equipment and supplies inventory at the Republic mine, which completed operations in February 1995. Also included was a $0.3 million write-down of exploration equipment and a $0.4 million write- down of the Zenda property. In 1993, the principal portion of the $2.6 million write-down was $1.7 million related to the American Girl/Oro Cruz Joint Venture to reflect updated information regarding reserves and operating costs. An additional $0.7 million was recorded as a write-down of the Zenda property. The net carrying values of the major mining properties of the Company that were on a standby or idle basis at December 31, 1995 and 1994, were approximately $7.6 million and $53.0 million, respectively. On September 27, 1995, the Company sold its Apex Unit processing facility for $8.0 million, plus certain working capital items totaling an additional $1.4 million, recognizing a gain on the sale F-14
88 totaling approximately $3.2 million. The Company received $4.4 million in cash at closing (including the $1.4 million in certain working capital items) and accepted a note receivable for the remaining $5.0 million. Under the note, $3.0 million, plus accrued interest at NationsBank's published Prime Rate, is due on September 27, 1996, and the balance of $2.0 million, plus accrued interest at NationsBank's published Prime Rate plus one percent, is due on September 27, 1997. On February 8, 1994, the Company sold a 20% interest in its Grouse Creek gold project to Great Lakes Minerals Inc. of Toronto, Ontario (Great Lakes). The purchase price of $6.8 million represents 20% of the amount spent by the Company on acquisition, exploration and development of the project through June 30, 1993, including a fixed premium of $1.25 million. In addition, Great Lakes funded its pro-rata share of the total construction cost for Grouse Creek from July 1, 1993 to the completion of the project and has the option to increase its ownership to a maximum of 30% by contributing additional funds on a proportional basis. This option expires in March 1996. At December 31, 1995, the Company had recorded a receivable from Great Lakes totaling $1.3 million. NOTE 5: INCOME TAXES Major components of the Company's income tax provision (benefit) are (in thousands): <TABLE> <CAPTION> December 31, ----------------------------- 1995 1994 1993 ------- ------ ------ <S> <C> <C> <C> Current Federal $ (298) $ (805) $ (200) State 307 337 226 Foreign 300 - - - - ------ ------ ------ Total current 309 (468) 26 ------ ------ ------ Deferred Federal - - - - (728) State - - - - (236) Foreign - - - - - - ------ ------ ------ Total deferred - - - - (964) ------ ------ ------ Income tax provision (benefit) $ 309 $ (468) $ (938) ===== ====== ====== </TABLE> During 1994, for income tax purposes, the Company carried back current operating losses to offset income recorded in prior years and recorded income tax refunds of approximately $1,009,000. F-15
89 The components of the net deferred tax liability as of December 31, 1995 and 1994, were as follows (in thousands): <TABLE> <CAPTION> December 31, -------------------- 1995 1994 -------- -------- <S> <C> <C> Deferred tax assets Accrued reclamation costs $ 10,832 $ 10,692 Investment valuation differences 1,969 864 Capital loss carryover 3,431 4,330 Postretirement benefits other than pensions 898 852 Other liabilities 230 53 Deferred compensation 612 417 Accounts receivable 456 456 Properties, plants and equipment 10,969 - - Foreign net operating losses 2,314 3,609 Federal net operating losses 57,398 55,414 State net operating losses 4,867 4,426 Tax credit carryforwards 3,435 3,435 Miscellaneous 2,103 1,441 ------- ------- Total deferred tax assets 99,514 85,989 Valuation allowance (97,705) (67,149) ------- ------- Net deferred tax assets 1,809 18,840 ------- ------- Deferred tax liabilities Properties, plants and equipment - - (17,333) Deferred income (287) (363) Pension costs (624) (556) Inventories (898) - - Deferred state income taxes, net (359) (947) ------- ------- Total deferred tax liabilities (2,168) (19,199) ------- ------- Net deferred tax liability $ (359) $ (359) ======= ======= </TABLE> F-16
90 The Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets which may not be realized principally due to the expiration of net operating losses and tax credit carryforwards. The changes in the valuation allowance for the years ended December 31, 1995 and 1994, are as follows (in thousands): <TABLE> <CAPTION> December 31, -------------------- 1995 1994 -------- --------- <S> <C> <C> Balance at beginning of year $(67,149) $(58,529) Increase related to nonutilization of net operating loss carryforwards and nonrecognition of deferred tax assets due to uncertainty of recovery (30,556) (8,620) -------- -------- Balance at end of year $(97,705) $(67,149) ======== ======== </TABLE> The annual tax provision (benefit) is different from the amount which would be provided by applying the statutory federal income tax rate to the Company's pretax income (loss). The reasons for the difference are (in thousands): <TABLE> <CAPTION> 1995 % 1994 % 1993 % -------- ---- -------- ---- -------- ---- <S> <C> <C> <C> <C> <C> <C> Computed "statutory" benefit $(34,479) (34) $ (8,244) (34) $ (6,365) (34) Nonutilization of net operating losses and effect of foreign tax provisions, if applicable 34,782 34 8,085 33 5,564 30 State income taxes, net of federal tax benefit 6 0 (309) (1) (137) (1) -------- ---- -------- ---- -------- ---- $ 309 0 $ (468) (2) $ (938) (5) ======== ==== ======== ==== ======== ==== </TABLE> F-17
91 Substantially all of the Company's net operating loss carryovers are attributed to preference related items, and therefore are not available to offset alternative minimum taxable income. However, they are available to offset future regular taxable income. At December 31, 1995, the Company had tax basis net operating loss carryovers available to offset future regular and alternative minimum (AMT) and foreign taxable income. These carryovers expire as follows (in thousands): <TABLE> <CAPTION> Regular Foreign Tax Net AMT Net Net Investment Operating Operating Operating Tax Credit Losses Losses Losses Carryovers ---------- --------- ---------- ---------- <S> <C> <C> <C> <C> 1996 $ 268 $ 268 $ - - $ - - 1997 2,020 695 18 84 1998 11,005 308 352 482 1999 6,235 1,199 4,799 310 2000 3,089 789 1,637 240 2001 4,538 1,683 - - 115 2002 2,717 346 - - - - 2003 1,792 623 - - - - 2004 16,406 532 - - - - 2005 10,744 878 - - - - 2006 23,766 3,105 - - - - 2007 27,134 8,285 - - - - 2008 28,179 21,971 - - - - 2009 11,670 7,115 - - - - 2010 18,400 17,800 - - - - --------- --------- --------- --------- $ 167,963 $ 65,597 $ 6,806 $ 1,231 ========= ========= ========= ========= </TABLE> At December 31, 1995, for income tax purposes, the Company had approximately $17.9 million and $8.5 million, respectively, of regular and alternative minimum tax net operating losses carrying over from Equinox Resources Ltd. and CoCa Mines Inc. Due to these mergers, there will be limitations on the amount of these net operating losses that can be utilized in any given year to reduce certain future taxable income. The Company has approximately $2.0 million in alternative minimum tax credit carryovers eligible to reduce future regular tax liabilities. F-18
92 NOTE 6: LONG-TERM DEBT AND CREDIT AGREEMENT Long-term debt consists of the following (in thousands): <TABLE> <CAPTION> December 31, ----------------------- 1995 1994 --------- ---------- <S> <C> <C> Bank line of credit $ 35,000 $ - - Notes payable - Sunbeam 692 1,038 Production notes payable 609 1,185 Other long-term debt 149 83 --------- ---------- 36,450 2,306 Less current portion (346) (346) --------- ---------- $ 36,104 $ 1,960 ========= ========== </TABLE> Zero Coupon Convertible Notes On June 13, 1994, the Company redeemed its Zero Coupon Convertible Notes with a face value of approximately $50.2 million. The Company recorded an extraordinary loss on retirement of long-term debt totaling approximately $0.8 million, which related principally to the write-off of the unamortized balance of deferred issuance costs of the notes. Notes Payable - Sunbeam The notes are non-interest bearing, discounted at 15% and payable in three annual equal amounts from the date of commercial production of the Grouse Creek property. The first installment of the notes, totaling approximately $346,000, was paid in January 1995. Production Notes Payable When the Company acquired Equinox in March 1994, the then outstanding production participating preferred shares were converted to production notes and recorded as long-term debt. The attributes of the production notes are identical to their predecessor production participating preferred shares. The valuation of the production notes as long-term debt is based on the present value of the estimated cumulative net cash flow discounted at 10% from the American Girl/Oro Cruz project. Based upon the repayment terms of the production notes, the Company expects to pay the notes in full during 1997. Revolving Credit Agreement On October 1, 1995, the Company amended the terms of its unsecured revolving and term loan facility (the Agreement). Under the F-19
93 amended terms, the Company can borrow up to $55.0 million. Amounts may be borrowed on a revolving credit basis through July 31, 1998, and are repayable in eight quarterly installments beginning on October 31, 1998. Borrowings bear interest at floating rates depending on the type of advance. The Company may select fixed interest rates for up to six months at a range of LIBOR +.8%, or the CD rate +.8% to LIBOR +1.55% or the CD rate +1.55%, depending on the level of outstanding borrowings. During the commitment period, the Company is obligated to pay an annual fee of $178,750. The Agreement contains certain restrictive covenants, the most restrictive of which relate to maintenance of a current ratio, fixed charge coverage ratio and limitations on the issuance of additional indebtedness. To maintain compliance with the covenants of the Agreement, the Company must maintain a 1.5 to 1.0 current ratio and maintain a defined fixed charge coverage ratio of 1.5 to 1.0. As of December 31, 1995, the Company was in compliance with all restrictive covenants of the Agreement. Amounts available under the Agreement are based on a debt to cash flow calculation which must not exceed a maximum of 4.0 to 1.0. At December 31, 1995, there were $35.0 million in borrowings outstanding under the Agreement. On February 7, 1996, the Company entered into a second amendment to the Agreement whereby it will continue to be able to borrow up to $55.0 million. Under the amended terms, the Company will continue to be able to select a floating rate based on the primary bank's prime interest rate or fixed interest rates for up to six months. The revised fixed interest rates are based on LIBOR or the CD rate and range from LIBOR +1.175% or the CD rate +1.175%, to LIBOR +1.775% or the CD rate +1.775%, depending on the level of outstanding borrowings. The amended terms provide for the Agreement to be collateralized, including the pledging of 100% of the stock of certain of the Company's subsidiaries and providing the lenders under the Agreement a security interest in accounts receivable. To maintain compliance with the covenants of the Agreement, the Company must maintain a 1.5 to 1.0 current ratio and a defined fixed charge coverage ratio of 1.2 to 1.0 through June 30, 1997, then 1.5 to 1.0 thereafter. In addition, the Company must maintain a minimum tangible net worth of $150.0 million, plus 50% of net income earned, and 100% of equity raised after December 31, 1995. Amounts available under the amended Agreement are based on a debt to cash flow calculation, which must not exceed a maximum of 3.75 to 1.0 through December 31, 1996, then 3.5 to 1.0 through December 31, 1997, then 3.0 to 1.0 thereafter. NOTE 7: COMMITMENTS AND CONTINGENCIES Commitments The Company leases various facilities and equipment under noncancelable operating lease arrangements. The major facilities and equipment leases are for terms of three to ten years. Future F-20
94 minimum lease payments under these noncancelable operating leases as of December 31, 1995 are as follows (in thousands): <TABLE> <CAPTION> <S> <C> 1996 $ 3,212 1997 2,760 1998 2,636 1999 2,387 2000 2,113 Thereafter 2,560 -------- Total minimum lease payments $ 15,668 ======== </TABLE> Approximately $10.0 million of the above minimum lease payments relate to equipment used at the Company's Grouse Creek mine which was written down by $97.0 million in 1995 (see Note 4). Although the Company currently intends to continue operating the mine, if a determination is made in the future to close the Grouse Creek mine, some or all of the remaining lease obligations would need to be accrued and charged to operations. Rent expense incurred for the above leases during the years ended December 31, 1995 and 1994 was $3.8 million and $2.2 million, respectively. Contingencies 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 District Court and remanded the case of the Tribe's ownership for trial before the District Court. The Company has F-21
95 been advised that the State will seek an appeal of 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 July 18, 1995, the Department of Interior (DOI) notified the Company and six other companies (several with assets and resources greater than the Company) that the federal natural resource trustees (Fish and Wildlife Service and U.S. Forest Service) identified the Company and the other six companies as potentially responsible parties (PRPs) for damages resulting from injury to federal natural resources with respect to the Coeur d'Alene River Basin in North Idaho. The DOI letter further notifies the Company that the federal trustees intend to bring suit against these companies to recover the alleged damages under CERCLA. In September 1995, the Company, together with the other PRPs, entered into a tolling agreement with the United States pursuant to which the United States agreed not to initiate litigation in this matter until March 8, 1996, so long as the parties are pursuing settlement opportunities in good faith. In this connection, the PRPs agreed not to assert the statute of limitation as a defense if it were to occur during this period. In 1991, the Company initiated litigation in the Idaho State District Court in Kootenai County, Idaho, against a number of insurance carriers 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 two separate decisions issued in August 1992 and March 1993, the Court ruled that the primary insurance companies had a duty to defend the Company in the Tribe's lawsuit, but that no carrier had a duty to defend the Company in the EPA proceeding. 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 $3.755 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. At December 31, 1995, the Company has not reduced its accrual for F-22
96 reclamation and closure costs to reflect 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 the Idaho Supreme Court has scheduled oral argument before the Court on the appeals for early April 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 pending 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 December 31, 1995. The Company intends to vigorously pursue 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 F-23
97 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 8: EMPLOYEE BENEFIT PLANS The Company and certain subsidiaries have defined benefit pension plans covering substantially all employees. One plan covering eligible salaried and hourly employees provides retirement benefits and is based on the employee's compensation during the highest 36 months of the last 120 months before retirement. Three other pension plans covering eligible hourly employees provide benefits of stated amounts for each year of service. It is the Company's policy to make contributions to these plans sufficient to meet the minimum funding requirements of applicable laws and regulations, plus such additional amounts, if any, as the Company and its actuarial consultants consider appropriate. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Plan assets for these plans consist principally of equity securities, insurance contracts and corporate and U.S. government obligations. F-24
98 Net periodic pension cost (income) for the plans consisted of the following in 1995, 1994 and 1993 (in thousands): <TABLE> <CAPTION> 1995 1994 1993 -------- -------- -------- <S> <C> <C> <C> Service cost $ 778 $ 938 $ 961 Interest cost 2,021 1,938 1,899 Return on plan assets (2,607) (2,737) (2,924) Amortization of transition asset (434) (434) (434) Amortization of unrecognized prior service cost 70 70 45 Amortization of unrecognized net (gain) loss from earlier periods (12) (4) 6 -------- -------- --------- Net pension income $ (184) $ (229) $ (447) ======== ======== ========= </TABLE> The following table sets forth the funded status of the plans and amounts recognized in the Company's consolidated balance sheets (in thousands): <TABLE> <CAPTION> December 31, ------------------------ 1995 1994 -------- -------- <S> <C> <C> Actuarial present value of benefit obligations Vested benefits $ 30,203 $ 24,429 Nonvested benefits 155 300 -------- --------- Accumulated benefit obligations 30,358 24,729 Effect of projected future salary and wage increases 2,014 1,500 -------- --------- Projected benefit obligations $ 32,372 $ 26,229 ======== ========= Plan assets $ 39,881 $ 33,550 Projected benefit obligations (32,372) (26,229) -------- --------- Plan assets in excess of projected benefit obligations 7,509 7,321 Unrecognized net gain (3,976) (3,314) Unrecognized prior service cost 932 708 Unrecognized net asset at January 1 (2,647) (3,081) -------- --------- Pension asset recognized in consolidated balance sheets $ 1,818 $ 1,634 ======== ========= </TABLE> The projected benefit obligation was calculated applying the following average rates: <TABLE> <CAPTION> 1995 1994 ------- ------- <S> <C> <C> Discount rate 7.00% 8.00% Long-term compensation increase 4.00% 5.00% Long-term rate of return on plan assets 8.00% 8.00% </TABLE> The Company provides certain postretirement benefits, principally health care and life insurance benefits for qualifying retired employees. The costs of these benefits are being funded out of general corporate funds and are accrued over the period in which active employees provide services to the Company. Net periodic F-25
99 postretirement benefit cost included the following components (in thousands): <TABLE> <CAPTION> 1995 1994 1993 ------- ------- ------- <S> <C> <C> <C> Service cost $ 13 $ 24 $ 28 Interest cost 154 141 164 Amortization of gain (18) (13) - - ------- ------- ------- Net postretirement benefit cost $ 149 $ 152 $ 192 ======= ======= ======= </TABLE> The following table sets forth the status of the postretirement benefits programs (other than pensions) and amounts recognized in the Company's consolidated balance sheets (in thousands): <TABLE> <CAPTION> December 31, -------------------- 1995 1994 -------- -------- <S> <C> <C> Accumulated postretirement benefit obligation Retirees $ 1,353 $ 1,317 Fully eligible, active plan participants 400 314 Other active plan participants 310 290 -------- -------- 2,063 1,921 Unrecognized net gain 374 470 -------- -------- Accumulated postretirement benefit obligations recognized in consolidated balance sheets $ 2,437 $ 2,391 ======== ======== </TABLE> The actuarial assumptions used in determining the Company's accumulated postretirement benefit obligation are provided in the table below. Due to the short period which the Company provides medical benefits to its retirees, the increases in medical costs are assumed to be 6% in each year. A 1% change in the assumed health care cost trend rate would not have a significant impact on the accumulated postretirement benefit obligation or the aggregate of service and interest cost for 1995 or 1994. <TABLE> <CAPTION> 1995 1994 ----- ----- <S> <C> <C> Discount rate 7.00% 8.00% Trend rate for medical benefits 6.00% 6.00% </TABLE> The Company has a nonqualified deferred compensation plan which permits eligible officers, directors and key employees to defer a portion of their compensation. The deferred compensation, which together with Company matching amounts and accumulated interest is accrued and partially funded, is distributable in cash after retirement or termination of employment, and at December 31, 1995 and 1994, amounted to approximately $1.8 and $1.2 million, F-26
100 respectively. The Company amended the Deferred Compensation Plan effective January 1, 1995. The amended plan allows the participants to defer up to a maximum of 50% of base salary and up to 100% of annual bonuses. The participant may elect to receive such deferred amounts, together with interest at the Moody's Corporate Bond Yield rate, in one payment at retirement, or on any plan anniversary after the completion of three years, as elected. The Company has an employees' Capital Accumulation Plan which is available to all salaried and certain hourly employees after completion of six months of service. Employees may contribute from 2% to 10% of their compensation to the plan. Nonhighly compensated employees may contribute up to 15%. The Company makes a matching contribution of 25% of an employee's contribution up to, but not exceeding, 5% of the employee's earnings. The Company's contribution was $173,000 in 1995, $170,000 in 1994, and $158,000 in 1993. NOTE 9: SHAREHOLDERS' EQUITY Preferred Stock The Company has 2.3 million shares of Series B Cumulative Convertible Preferred Stock (the Preferred Shares) outstanding. Holders of the Preferred Shares are entitled to receive cumulative cash dividends at the annual rate of $3.50 per share payable quarterly, when and if declared by the Board of Directors. The Preferred Shares are convertible, in whole or in part, at the option of the holders thereof, into shares of common stock at an initial conversion price of $15.55 per share of common stock. The Preferred Shares are not redeemable by the Company prior to July 1, 1996. After such date, the shares will be redeemable at the option of the Company at any time, in whole or in part, initially at $52.45 per share and thereafter at prices declining ratably on each July 1 to $50 per share on or after July 1, 2003. Holders of the Preferred Shares have no voting rights except if the Company fails to pay the equivalent of six quarterly dividends. If these dividends are not paid, the holders of Preferred Shares, voting as a class, shall be entitled to elect two additional directors. The holders of Preferred Shares also have voting rights related to certain amendments to the Company's Articles of Incorporation. The Preferred Shares rank senior to the common stock and any outstanding shares of Series A Preferred Shares. The Preferred Shares have a liquidation preference of $50 per share plus all accrued and unpaid dividends which amounted to $117,012,000 at December 31, 1995. F-27
101 Shareholder Rights Plan In 1986, the Company adopted a Shareholder Rights Plan. Pursuant to this plan, holders of common stock received one preferred share purchase right for each common share held. The rights will be triggered once an Acquiring Person, as defined in the plan, acquires 15% or more of the Company's outstanding common shares. The 15% triggering threshold may be reduced by the Board of Directors to not less than 10%. When exercisable, the right would, subject to certain adjustments and alternatives, entitle rightholders, other than the Acquiring Person or group, to purchase common stock of the Company or the acquiring company having a market value of twice the $47.50 exercise price of the right. The rights are nonvoting, may be redeemed at any time at a price of 5 cents per right prior to the tenth day after an Acquiring Person acquires 15% of the Company's common stock, and expire in May 1996. Additional details are set forth in the Rights Agreement filed with the Securities and Exchange Commission on May 19, 1986, and in the amendments dated November 29, 1990, and September 30, 1991. Stock Option Plans The Company adopted a nonstatutory stock option plan in 1987. The plan provides that options may be granted to certain officers and key employees to purchase common stock at a price of not less than 50% of the fair market value at the date of grant. The plan also provides that options may be granted with a corresponding number of stock appreciation rights and/or tax offset bonuses to assist the optionee in paying the income tax liability that may exist upon exercise of the options. All of the outstanding stock options under the 1987 plan were granted at an exercise price equal to the fair market value at the date of grant and with an associated tax offset bonus. Outstanding options under the 1987 plan are immediately exercisable for periods up to ten years. At December 31, 1995, there were 6,748 shares available for grant in the future under the plan. The plan expires in 1997. In 1995, the Company adopted the new Hecla Mining Company Stock Plan for Nonemployee Directors (the Directors' Stock Plan), which is subject to termination by the Board of Directors at any time. Each nonemployee director is credited with 1,000 shares of the common stock of the Company on May 30 of each year. Nonemployee directors joining the Board of Directors after May 30 of any year are credited with a pro-rata number of shares based upon the date they join the Board. All credited shares are held in trust for the benefit of each director until delivered to the Director. Delivery of the shares from the trust occurs upon the earlier of (1) death or disability; (2) retirement; (3) a cessation of the director's service for any other reason; or (4) a change in control of the Company. Subject to certain restrictions, directors may elect to receive the delivery of shares on such date or in annual installments thereafter over 5, 10 or 15 years. The shares of F-28
102 common stock credited to nonemployee directors pursuant to the Directors' Stock Plan may not be sold until at least six months following the date they are delivered. The maximum number of shares of common stock which may be granted pursuant to the Directors' Stock Plan is 120,000. During 1995, 6,539 shares were credited to the nonemployee directors. In 1995, the shareholders of the Company approved the 1995 Stock Incentive Plan which provides for a variety of stock-based grants to the Company's officers and key employees. The plan provides for the grant of stock options, stock appreciation rights, restricted stock and performance units to eligible officers and key employees of the Company. Stock options under the plan are required to be granted at 100% of the market value of the stock on the date of the grant. The terms of such options shall be no longer than ten years from the date of grant. No options were granted under this plan in 1995. F-29
103 Transactions concerning stock options are summarized as follows: <TABLE> <CAPTION> Exercise Shares Price --------- ------------ <S> <C> <C> Outstanding, December 31, 1992 406,603 $ 7.12-18.26 Year ended December 31, 1993 Exercised (86,443) 7.12-12.25 Expired (18,500) 10.38-12.25 ------- Outstanding, December 31, 1993 301,660 7.12-18.26 Year ended December 31, 1994 Granted 120,000 9.63 Exercised (61,037) 7.25-10.50 Expired (13,123) 12.25 ------- Outstanding, December 31, 1994 347,500 7.12-18.26 Year ended December 31, 1995 Granted 15,000 9.38 Exercised (12,500) 9.63-10.38 Expired (33,508) 8.54- 9.32 ------- Outstanding, December 31, 1995 316,492 $ 7.12-18.26 ======= </TABLE> The aggregate amounts charged (credited) to operations in connection with the plans were $(21,000), $(23,000) and $309,000 in 1995, 1994 and 1993, respectively. As a result of the acquisition of Equinox, the outstanding options under the Equinox stock option plan became exercisable for Hecla common shares. Transactions concerning the Equinox options, giving effect to the common share exchange ratio, are as follows: F-30
104 <TABLE> <CAPTION> Exercise Shares Price --------- ------------ <S> <C> <C> Outstanding, December 31, 1992 315,000 $ 3.78-19.56 Year ended December 31, 1993 Granted 25,500 6.00- 6.52 Exercised (88,200) 3.80- 6.55 ------- Outstanding, December 31, 1993 252,300 3.78-19.56 Year ended December 31, 1994 Exercised (251,400) 3.45-17.82 ------- Outstanding, December 31, 1994 900 17.82 Year ended December 31, 1995 Expired (900) 17.82 ------- Outstanding, December 31, 1995 - - - - ======= </TABLE> In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). This Statement establishes financial accounting and reporting standards for stock-based employee compensation plans. The Statement 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 based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Company must implement SFAS No. 123 on January 1, 1996. Management does not plan to adopt the measurement provisions of SFAS No. 123, although the Company will comply with the pro-forma disclosure requirements of the Statement in its 1996 annual financial statements. Warrants As a result of the acquisition of Equinox, outstanding Equinox warrants became exercisable for Hecla common shares. At December 31, 1995, there were warrants outstanding to acquire 225,651 Hecla common shares at $8.30 per share, which expire in August 1996. If the Company's shares trade at a price of $12.58 per share or above for 20 consecutive trading days, upon Hecla's election and notice to warrant holders, the holders of Equinox warrants must exercise their warrants or lose their right to exercise. F-31
105 1996 Common Stock Offering On January 23, 1996, 2,875,000 shares of the Company's common stock were sold under the Company's existing Registration Statement which provides for the issuance of up to $100.0 million of equity and debt securities. The net proceeds from the offering of $22.0 million were used principally to reduce the outstanding borrowings under the Company's bank credit agreement. F-32
106 NOTE 10: BUSINESS SEGMENTS (in thousands) <TABLE> <CAPTION> 1995 1994 1993 ---------- ---------- ---------- <S> <C> <C> <C> Net sales to unaffiliated customers Metals (including $27,729 and $18,493 in Mexico in 1995 and 1994) $ 79,810 $ 60,828 $ 45,892 Industrial minerals (including $2,664, $2,885 and $368 in Mexico in 1995, 1994 and 1993) 71,655 63,634 44,953 Specialty metals 4,414 4,285 2,043 --------- --------- --------- $ 155,879 $ 128,747 $ 92,888 ========= ========= ========= Income (loss) from operations Metals (including $6,396 and $2,307 in Mexico in 1995 and 1994) $(109,449) $ (24,658) $ (15,418) Industrial minerals (including $(341), $(810) and $9 in Mexico in 1995, 1994 and 1993) 6,690 6,872 4,449 Specialty metals 255 3 (504) General corporate (9,738) (11,656) (8,809) --------- --------- --------- $(112,242) $ (29,439) $ (20,282) ========= ========= ========= Capital expenditures Metals (including $2,319, $466 and $12,826 in Mexico in 1995, 1994 and 1993) $ 32,838 $ 62,002 $ 45,961 Industrial minerals (including $183, $1,352 and $5,800 in Mexico in 1995, 1994 and 1993) 11,811 3,615 11,938 Specialty metals 81 453 - - General corporate assets 578 489 548 --------- --------- --------- $ 45,308 $ 66,559 $ 58,447 ========= ========= ========= Depreciation, depletion and amortization Metals $ 18,859 $ 9,699 $ 10,052 Industrial minerals 4,580 4,501 3,718 Specialty metals 23 33 33 General corporate assets 367 524 392 --------- --------- --------- $ 23,829 $ 14,757 $ 14,195 ========= ========= ========= Identifiable assets Metals (including $15,702, $19,241 and $21,028 in Mexico in 1995, 1994 and 1993) $ 144,246 $ 179,258 $ 136,735 Industrial minerals (including $4,888, $6,192 and $7,054 in Mexico in 1995, 1994 and 1993) 71,163 59,502 68,068 Specialty metals - - 6,288 4,197 General corporate assets 35,998 36,507 81,486 Idle facilities 6,783 53,027 55,667 --------- --------- --------- $ 258,190 $ 334,582 $ 346,153 ========= ========= ========= </TABLE> Net sales and identifiable assets of each segment are those that are directly identified with those operations. General corporate assets consist primarily of cash, receivables, investments and F-33
107 corporate property, plant and equipment. As a result of depressed metals prices, operations were suspended at the Greens Creek mine in April 1993, and the property was placed on a care-and-maintenance basis pending resumption of operations. At December 31, 1994 and 1993, the Company's recorded net book value of identifiable assets of the Greens Creek mine was approximately $50.3 million. These amounts have been classified in the idle facilities category at December 31, 1994 and 1993. On May 17, 1995, the Company announced plans for the redevelopment of the Greens Creek mine and at December 31, 1995, the recorded net book value of identifiable assets at the Greens Creek mine is classified in the metals category. NOTE 11: FAIR VALUE OF FINANCIAL INSTRUMENTS The following estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data and to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Potential income tax ramifications related to the realization of unrealized gains and losses that would be incurred in an actual sale or settlement have not been taken into consideration. The carrying amounts for cash and cash equivalents, accounts and notes receivable, restricted investments and current liabilities are a reasonable estimate of their fair values. Fair value for equity securities investments available for sale is determined by quoted market prices. The fair value of long-term debt is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for debt with similar remaining maturities. F-34
108 The estimated fair values of financial instruments are as follows (in thousands): <TABLE> <CAPTION> December 31, ----------------------------------------------- 1995 1994 --------------------- --------------------- Carrying Fair Carrying Fair Amounts Value Amounts Value --------- -------- --------- -------- <S> <C> <C> <C> <C> Financial assets Cash and cash equivalents $ 4,024 $ 4,024 $ 7,278 $ 7,278 Accounts and notes receivable 25,571 25,571 23,516 23,516 Investments Equity securities available for sale 455 455 5,276 5,276 Restricted 16,254 16,254 13,553 13,553 Gold forward sales contracts - - 228 - - (A) Gold put options - - 436 - - 621 Financial liabilities Current liabilities 25,965 25,965 23,485 23,485 Long-term debt - principal 36,104 35,563 1,960 1,804 Gold call options - - 134 - - 599 </TABLE> (A) Fair value information is not available. F-35
109 [Deloitte & Touche Letterhead] AUDITORS' REPORT To the Directors of Equinox Resources Ltd. We have audited the consolidated statements of loss and deficit and changes in financial position of Equinox Resources, Ltd. for the year ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards in Canada. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the results of the Company's operations and the changes in its financial position for the year ended December 31, 1993 in accordance with generally accepted accounting principles in Canada applied on a consistent basis. /s/ Deloitte & Touche CHARTERED ACCOUNTANTS Vancouver, Canada February 28, 1994 F-36
110 HECLA MINING COMPANY and WHOLLY OWNED SUBSIDIARIES FORM 10-K - December 31, 1995 INDEX TO EXHIBITS <TABLE> <CAPTION> Number and Description of Exhibits ---------------------------------- <S> <C> 3.1(a) Certificate of Incorporation of the Registrant as amended to date.2 3.1(b) Certificate of Amendment of Certificate of Incorporation of the Registrant, dated as of May 16, 1991.2 3.2 By-Laws of the Registrant as amended to date.2 4.1(a) Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of the Registrant.2 4.1(b) Certificate of Designations, Preferences and Rights of Series B Cumulative Convertible Preferred Stock of the Registrant.2 4.2(a) Rights Agreement dated as of May 9, 1986 between Hecla Mining Company and Manufac- turers Hanover Trust Company, which includes the form of Certificate of Designation setting forth the terms of the Series A Junior Participating Preferred Stock of Hecla Mining Company as Exhibit A, the form of Right Certificate as Exhibit B and the summary of Rights to Purchase Preferred Shares as Exhibit C.2 4.2(b) Amendment, dated as of November 9, 1990 to the Rights Agreement dated as of May 9, 1986 between Hecla Mining Company and Manufacturers Hanover Trust Company.2 4.2(c) Second Amendment to Rights Agreement dated September 30, 1991, between Hecla Mining Company and Manufacturers Hanover Trust Company.2 </TABLE>
111 INDEX TO EXHIBITS (continued) <TABLE> <CAPTION> Number and Description of Exhibits ---------------------------------- <S> <C> <C> 4.2(d) Hecla Mining Company Notice Letter to Shareholders, being holders of Rights Certificates, appointing American Stock Transfer & Trust Company as Rights Agent, successor to Manufacturers Hanover Trust Company, effective September 30, 1991, pursuant to Section 21 of the Rights Agreement.2 10.1(a) Credit Agreement dated as of August 30, 1994, among Registrant and Certain Subsidiaries and NationsBank of Texas, N.A., as Agent, and Certain Banks as Lenders.2 10.1(b) First Amendment to Credit Agreement dated October 1, 1995.2 10.1(c) Second Amendment to Credit Agreement dated February 7, 1996. Attached 10.2 Employment agreement dated November 10, 1989 between Hecla Mining Company and Arthur Brown. (Registrant has substantially identical agreements with each of Messrs. William B. Booth, J. Gary Childress, Joseph T. Heatherly, Jon T. Langstaff, John P. Stilwell, and Michael B. White. Such substantially identical agreements are not included as separate Exhibits.)1,2 10.3(a) Form of Executive Deferral Plan Master Document effective January 1, 1995.1,2 10.3(b) Form of Director Deferral Plan Master Plan Document effective January 1, 1995.1,2 10.4(a) 1987 Nonstatutory Stock Option Plan of the Registrant.1,2 10.4(b) Hecla Mining Company 1995 Stock Incentive Plan.1,2 10.4(c) Hecla Mining Company Stock Plan for Non- employee Directors.1,2 </TABLE>
112 INDEX TO EXHIBITS (continued) <TABLE> <CAPTION> Number and Description of Exhibits ---------------------------------- <S> <C> <C> 10.5(a) Hecla Mining Company Retirement Plan for Employees and Supplemental Retirement and Death Benefit Plan.1,2 10.5(b) Supplemental Excess Retirement Master Plan Document.1,2 10.5(c) Hecla Mining Company Nonqualified Plans Master Trust Agreement.1,2 10.6 Form of Indemnification Agreement dated May 27, 1987 between Hecla Mining Company and each of its Directors and Officers.1,2 10.7 Summary of Short-term Performance Payment Plan.1,2 10.8 Acquisition Agreement dated as of December 29, 1993, by and among Registrant and B.P.Y.A. 1193 Holdings Ltd., 1057451 Ontario Limited and Equinox Resources Ltd.2 10.9(a) Acquisition Agreement - Grouse Creek Project, dated January 21, 1994, among Registrant, Great Lakes Idaho Inc. and Great Lakes Minerals Inc.2 10.9(b) Mining Venture Agreement dated as of February 8, 1994, between Registrant and Great Lakes Idaho Inc.2 10.10 Purchase and Sale Agreement between Hecla Mining Company and Mooney Chemicals Inc., dated August 2, 1995, related to the sale of the Apex Unit refining facility located near St. George, Utah. Attached 11. Computation of weighted average number of common shares outstanding. Attached 12. Statement of Computation of Ratio of Earnings to Fixed Charges Attached 13.1 Hecla Mining Company Fourth Quarter and Year-End Results for the Period Ended December 31, 1995 Attached </TABLE>
113 INDEXH TO EXHIBITS (continued) <TABLE> <CAPTION> Number and Description of Exhibits ---------------------------------- <S> <C> <C> 21. List of subsidiaries of the registrant. Attached 23.1 Consent of Coopers & Lybrand to incorpor- ation by reference of their report dated February 2, 1996, except for the last paragraph of Note 6, as to which the date is February 7, 1996, on the Consolidated Financial Statements of the Registrant in the Registrant's Registration Statements on Form S-3, No. 33-72832, and No. 33-59659, Form S-8, No. 33-7833, No. 33-41833, No. 33-14758, No. 33-40691, No. 33-60095 and No. 33-60099. Attached 23.2 Consent of Deloitte & Touche to incorpor- ation by reference of their report dated February 28, 1994 on the consolidated financial statements of Equinox Resources Ltd. in the Registrant's Registration Statements on Form S-3, No. 33-72832, and No. 33-59659, Forms S-8, No. 33-7833, No. 33-41833, No. 33-14758, No. 33-40691, No. 33-60095 and No. 33-60099. Attached 27. Financial Data Schedule Attached </TABLE> ________________________ 1. Indicates a management contract or compensatory plan or arrangement. 2. These exhibits were filed in SEC File No. 1-8491 as indicated on the following page and are incorporated herein by this reference thereto.
114 <TABLE> <CAPTION> Corresponding Exhibit in Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K, Proxy Statement or Registration Statement, as Indicated Exhibit in Below; All References are to SEC File this Report No. 1-8491. - ----------- -------------------------------------------- <S> <C> 3.1(a) & (b) 3.1 (10-K for 1987) 3.2 2 (Current Report on Form 8-K dated November 9, 1990) 4.1(a) & (b) 4.1(d)(c) and 4.5 (Quarterly Report on Form 10-Q dated June 30, 1993) 4.2(a) 1 (Current Report on Form 8-K dated May 23, 1986) 4.2(b) 1 (Current Report on Form 8-K dated November 9, 1990) 4.2(c) 4.1(c)(10-K for 1991) 4.2(d) 4.1(d)(10-K for 1991) 10.1(a) 10.1(a)(Quarterly Report on Form 10-Q dated September 30, 1994) 10.1(b) 10.1(b)(Quarterly Report on Form 10-Q dated September 30, 1995) 10.2 10.2(b) (10-K for 1989) 10.3(a) 3 (10-K for 1994) 10.3(b) 10.3(b) (10-K for 1994) 10.4(a) B (Proxy Statement dated March 20, 1987) 10.4(b) A (Proxy Statement dated March 27, 1995) 10.4(c) B (Proxy Statement dated March 27, 1995) 10.5(a) 10.11(a) (10-K for 1985) 10.5(b) 10.5(b) (10-K for 1994) 10.5(c) 10.5(c) (10-K for 1994) 10.6 10.15 (10-K for 1987) 10.7 10.7 (10-K for 1994) 10.8 2 (Schedule 13D dated January 7, 1993 - filed by Registrant with respect to Equinox Resources Ltd.) 10.9(a) (c)1(Current Report on Form 8-K dated February 10, 1994) 10.9(b) (c)2(Current Report on Form 8-K dated February 10, 1994) 23.1 23 (10-K for 1994) 23.2 23.1 (10-K/A for 1994) 23.3 23.2 (10-K/A for 1994) </TABLE>