HECLA MINING CO/DE/ - Quarter Report: 2016 June (Form 10-Q)

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		June 30, 2016				December 31, 2015
ASSETS
Current assets:
Cash and cash equivalents		$	143,613			$	155,209
Investments			15,070				—
Accounts receivable:
Trade			25,667				13,490
Taxes			12,142				11,458
Other, net			32,952				16,401
Inventories:
Concentrates, doré, and stockpiled ore			28,336				22,441
Materials and supplies			23,070				23,101
Current deferred income taxes			18,386				17,980
Current restricted cash			3,900				—
Other current assets			7,999				9,453
Total current assets			311,135				269,533
Non-current investments			4,453				1,515
Non-current restricted cash and investments			999				999
Properties, plants, equipment and mineral interests, net			1,926,158				1,896,811
Non-current deferred income taxes			24,427				36,589
Reclamation insurance asset			—				13,695
Other non-current assets and deferred charges			3,638				2,783
Total assets		$	2,270,810			$	2,221,925
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities		$	57,702			$	51,277
Accrued payroll and related benefits			23,712				27,563
Accrued taxes			4,344				8,915
Current portion of capital leases			7,761				8,735
Current portion of debt			1,852				2,721
Other current liabilities			10,290				6,884
Current portion of accrued reclamation and closure costs			24,127				20,989
Total current liabilities			129,788				127,084
Capital leases			7,316				8,841
Accrued reclamation and closure costs			73,019				74,549
Long-term debt			500,354				500,199
Non-current deferred tax liability			127,413				119,623
Non-current pension liability			47,880				46,513
Other non-current liabilities			5,362				6,190
Total liabilities			891,132				882,999
Commitments and contingencies (Notes 2, 4, 7, 9, and 11)
SHAREHOLDERS’ EQUITY
Preferred stock, 5,000,000 shares authorized:
Series B preferred stock, $0.25 par value, 157,816 shares issued and outstanding, liquidation preference — $7,891			39				39
Common stock, $0.25 par value, authorized 500,000,000 shares; issued and outstanding 2016 — 385,066,800 shares and 2015 — 378,112,840 shares			97,207				95,219
Capital surplus			1,538,148				1,519,598
Accumulated deficit			(211,258	)			(232,565	)
Accumulated other comprehensive loss			(30,327	)			(32,631	)
Less treasury stock, at cost; 2016 — 3,733,742 shares and 2015 — 2,435,518 shares issued and held in treasury			(14,131	)			(10,734	)
Total shareholders’ equity			1,379,678				1,338,926
Total liabilities and shareholders’ equity		$	2,270,810			$	2,221,925

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		Three Months Ended								Six Months Ended
		June 30, 2016				June 30, 2015				June 30, 2016				June 30, 2015
Sales of products		$	171,302			$	104,197			$	302,319			$	223,289
Cost of sales and other direct production costs			82,953				67,567				157,273				141,532
Depreciation, depletion and amortization			29,897				27,166				55,772				52,420
			112,850				94,733				213,045				193,952
Gross profit			58,452				9,464				89,274				29,337
Other operating expenses:
General and administrative			10,359				8,296				20,573				17,016
Exploration			3,362				4,592				6,312				9,208
Pre-development			521				1,618				925				2,138
Other operating expense			622				766				1,262				1,394
Provision for closed operations and environmental matters			1,576				9,335				2,617				9,802
Acquisition costs			402				2,147				402				2,147
			16,842				26,754				32,091				41,705
Income (loss) from operations			41,610				(17,290	)			57,183				(12,368	)
Other income (expense):
Loss on disposition of investments			—				(166	)			—				(166	)
Unrealized gain (loss) on investments			1,150				(117	)			439				(2,960	)
(Loss) gain on derivative contracts			(6	)			(887	)			(6	)			4,905
Net foreign exchange (loss) gain			(1,885	)			(1,833	)			(10,088	)			10,441
Interest and other income			113				35				201				73
Interest expense, net of amount capitalized			(5,370	)			(6,541	)			(11,081	)			(12,733	)
			(5,998	)			(9,509	)			(20,535	)			(440	)
Income (loss) before income taxes			35,612				(26,799	)			36,648				(12,808	)
Income tax (provision) benefit			(11,496	)			132				(13,150	)			(1,307	)
Net income (loss)			24,116				(26,667	)			23,498				(14,115	)
Preferred stock dividends			(138	)			(138	)			(276	)			(276	)
Income (loss) applicable to common shareholders		$	23,978			$	(26,805	)		$	23,222			$	(14,391	)
Comprehensive income (loss):
Net income (loss)		$	24,116			$	(26,667	)		$	23,498			$	(14,115	)
Change in fair value of derivative contracts designated as hedge transactions			46				—				46				—
Reclassification of loss on disposition or impairment of marketable securities included in net income (loss)			—				166				1,000				2,993
Unrealized holding (losses) gains on investments			1,193				(1,321	)			1,258				(2,212	)
Comprehensive income (loss)		$	25,355			$	(27,822	)		$	25,802			$	(13,334	)
Basic income (loss) per common share after preferred dividends		$	0.06			$	(0.07	)		$	0.06			$	(0.04	)
Diluted income (loss) per common share after preferred dividends		$	0.06			$	(0.07	)		$	0.06			$	(0.04	)
Weighted average number of common shares outstanding - basic			383,790				371,295				381,389				370,042
Weighted average number of common shares outstanding - diluted			387,512				371,295				384,685				370,042
Cash dividends declared per common share		$	0.0025			$	0.0025			$	0.0050			$	0.0050

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		Six Months Ended
		June 30, 2016				June 30, 2015
Operating activities:
Net income (loss)		$	23,498			$	(14,115	)
Non-cash elements included in net income (loss):
Depreciation, depletion and amortization			56,968				52,966
(Gain) loss on investments			(439	)			3,043
(Gain) loss on disposition of properties, plants, equipment, and mineral interests			(311	)			190
Provision for reclamation and closure costs			2,005				10,256
Stock compensation			3,467				2,261
Deferred income taxes			10,652				(705	)
Amortization of loan origination fees			926				910
Loss on derivative contracts			5,419				7,812
Foreign exchange loss (gain)			9,721				(9,672	)
Other non-cash charges, net			17				25
Change in assets and liabilities, net of business acquired:
Accounts receivable			(15,910	)			2,469
Inventories			(5,802	)			(3,417	)
Other current and non-current assets			268				(3,904	)
Accounts payable and accrued liabilities			(3,820	)			(4,210	)
Accrued payroll and related benefits			3,135				803
Accrued taxes			(4,591	)			(1,938	)
Accrued reclamation and closure costs and other non-current liabilities			935				9,399
Cash provided by operating activities			86,138				52,173
Investing activities:
Additions to properties, plants, equipment and mineral interests			(76,960	)			(58,272	)
Acquisition of Revett, net of cash acquired			—				(809	)
Proceeds from disposition of properties, plants and equipment			317				153
Purchases of investments			(16,088	)			(947	)
Maturities of investments			840				—
Changes in restricted cash and investment balances			(3,900	)			—
Net cash used in investing activities			(95,791	)			(59,875	)
Financing activities:
Proceeds from sale of common stock, net of offering costs			8,121				—
Acquisition of treasury shares			(3,384	)			(941	)
Dividends paid to common shareholders			(1,914	)			(1,850	)
Dividends paid to preferred shareholders			(276	)			(276	)
Credit availability and debt issuance fees paid			(83	)			(123	)
Repayments of debt			(1,339	)			—
Repayments of capital leases			(4,356	)			(4,940	)
Net cash used in financing activities			(3,231	)			(8,130	)
Effect of exchange rates on cash			1,288				(2,259	)
Net decrease in cash and cash equivalents			(11,596	)			(18,091	)
Cash and cash equivalents at beginning of period			155,209				209,665
Cash and cash equivalents at end of period		$	143,613			$	191,574
Significant non-cash investing and financing activities:
Addition of capital lease obligations		$	1,631			$	2,369
Common stock issued for the acquisition of Revett		$	—			$	19,133
Payment of accrued compensation in stock		$	5,511			$	3,016

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Note 1.    Basis of Preparation of Financial Statements

 

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements and notes to the interim condensed consolidated financial statements contain all adjustments, consisting of normal recurring items and items which are nonrecurring, necessary to present fairly, in all material respects, the financial position of Hecla Mining Company and its consolidated subsidiaries (“we” or “our” or “us”).  See Note 4 and Note 13 for information on adjustments which are nonrecurring contained in the accompanying unaudited interim condensed consolidated financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related footnotes as set forth in our annual report filed on Form 10-K for the year ended December 31, 2015, as it may be amended from time to time.

 

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

 

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

 

Note 2.    Investments and Restricted Cash

 

Investments

 

Our current investments, which are classified as "available for sale" and consist of bonds having maturities of greater than 90 days, had a fair value and cost basis of $15.1 million at June 30, 2016. We held no such investments as of December 31, 2015.

 

At June 30, 2016 and December 31, 2015, the fair value of our non-current investments was $4.5 million and $1.5 million, respectively.  Our non-current investments consist of marketable equity securities which are carried at fair value, and are primarily classified as “available-for-sale.”  The cost basis of our non-current investments was approximately $3.2 million and $4.0 million at June 30, 2016 and December 31, 2015, respectively. During the first quarters of 2016 and 2015, we recognized impairment charges against current earnings of $1.0 million and $2.8 million, respectively, as we determined the impairments to be other-than-temporary.

 

Restricted Cash and Investments

 

Various laws, permits, and covenants require that funds be in place for certain environmental and reclamation obligations and other potential liabilities.  We had a current restricted cash balance of $3.9 million as of June 30, 2016 representing funds deposited in escrow to be applied towards a potential settlement of environmental matters for the South Dakota and Colorado Superfund sites related to CoCa Mines, Inc. (see Note 4 for more information). Our non-current restricted investments are used primarily for reclamation funding or for funding surety bonds, and were $1.0 million at each of June 30, 2016 and December 31, 2015. Non-current restricted investments primarily represent investments in money market funds and certificates of deposit.

 

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Note 3.   Income Taxes

 

Major components of our income tax provision (benefit) for the three and six months ended June 30, 2016 and 2015 are as follows (in thousands):

 

  

As of June 30, 2016, we have a net deferred tax asset in the U.S. of $33.5 million, a net deferred tax liability in Canada of $128.4 million, and a net deferred tax asset in Mexico of $9.3 million, for a consolidated worldwide net deferred tax liability of $85.6 million. Our ability to utilize our deferred tax assets depends on future taxable income generated from operations. At June 30, 2016 and December 31, 2015, the balances of the valuation allowances on our deferred tax assets were $110 million and $116 million, respectively, primarily for net operating losses and tax credit carryforwards. The amount of the deferred tax asset considered recoverable, however, could be reduced in the near term if estimates of future taxable income are reduced.

 

During the quarter ended June 30, 2016, there was a change in judgment about the realizability of our deferred tax assets in Mexico. Based on revised projections of future taxable income, tax net operating losses are now projected to be fully utilized. The valuation allowance in Mexico decreased to $1.3 million based on this change in judgment.

 

The current income tax provisions for the three months ended June 30, 2016 and 2015 vary from the amounts that would have resulted from applying the statutory income tax rate to pre-tax income due primarily to the effects of percentage depletion for all periods presented and the impact of taxation in foreign jurisdictions. 

 

Note 4.    Commitments, Contingencies and Obligations

 

General

 

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

 

 

 

Rio Grande Silver Guaranty

 

Our wholly-owned subsidiary, Rio Grande Silver Inc. (“Rio”), is party to a joint venture with Emerald Mining & Leasing, LLC (“EML”) and certain other parties with respect to a land package in the Creede Mining District of Colorado that is adjacent to other land held by Rio. Rio holds a 70% interest in the joint venture. In connection with the joint venture, we are required to guarantee certain environmental remediation-related obligations of EML to a third party up to a maximum liability to us of $2.5 million. As of June 30, 2016, we have not been required to make any payments pursuant to the guaranty. We may be required to make payments in the future, limited to the $2.5 million maximum liability, should EML fail to meet its obligations to the third party. However, to the extent that any payments are made by us under the guaranty, EML, in addition to other parties, has jointly and severally agreed to reimburse and indemnify us for any such payments. We have not recorded a liability relating to the guaranty as of June 30, 2016.

 

Lucky Friday Water Permit Matters

 

Over the last several years, the Lucky Friday unit has experienced several regulatory issues relating to its water discharge permits and water management more generally. In December 2013, the EPA issued to Hecla Limited a notice of violation (“2013 NOV”) alleging certain storm water reporting violations under Lucky Friday’s Clean Water Act Multi-Sector General Stormwater Permit for Industrial Activities. The alleged violations were resolved. The 2013 NOV also contained a request for information under Section 308 of the Clean Water Act directing Hecla Limited to undertake a comprehensive groundwater investigation of Lucky Friday’s tailings pond no. 3 to evaluate whether the pond is causing the discharge of pollutants via seepage to groundwater that is discharging to surface water.

 

We completed the investigation mandated by the EPA and submitted a draft report to the agency in December 2015. We are waiting for the EPA’s response, and until such time as the process is complete, we cannot predict what the impact of the investigation will be.

 

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

 

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

 

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

 

                In August 2016, we learned that an individual filed a lawsuit against Hecla Limited and certain affiliates in state court in New Mexico alleging personal injury claims arising from alleged exposure to contaminants as a result of allegedly living on land adjacent to the Johnny M mine site.  We do not yet have enough information to conclude if Hecla Limited has any liability or to estimate any loss that it may incur.    

 

 

Carpenter Snow Creek Site, Cascade County, Montana

 

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

 

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

 

South Dakota and Colorado Superfund Sites Related to CoCa Mines, Inc.

 

In 1991, Hecla Limited acquired all of the outstanding common stock of CoCa Mines, Inc. (“CoCa”).  CoCa is alleged to have held prior property interests and undertaken exploration activities at the Gilt Edge Mine Superfund site in Lawrence County, South Dakota, and to have been engaged in exploration and mining activities at or near the Nelson Tunnel/Commodore Waste Rock Pile Superfund site in Creede, Colorado.  The United States and the State of South Dakota have alleged that CoCa, along with other parties, is a potentially responsible party (“PRP”) under CERCLA at the Gilt Edge site.  In addition, the United States and the State of Colorado have alleged that CoCa is a PRP at the Nelson Tunnel/Commodore site. The United States, South Dakota and Colorado base their claims of liability on allegations of CoCa’s historical relationship to each site, and that CoCa has succeeded to the liabilities of one or more predecessor entities that may have held certain property interests at the sites or undertaken certain activities.

 

The United States alleges that it has, to date, incurred $118 million, plus interest, in response costs at the Gilt Edge site. At the Nelson Tunnel/Commodore site, the EPA alleges that it has, to date, incurred $10 million, plus interest, in response costs.

 

As a result of ongoing settlement discussions, Consent Decrees were lodged with the United States District Court in Colorado on April 14, 2016, that would settle the Nelson Tunnel/Commodore Waste Rock Pile Superfund site matter, and in South Dakota on April 15, 2016, that would settle the Gilt Edge Superfund site matter.  The Consent Decrees resolve CoCa’s alleged liabilities for past and future response costs with respect to each site, and include combined net payments in the aggregate of $9.9 million by CoCa.  With respect to Gilt Edge, the proposed financial terms require that CoCa pay $3.9 million, as well as up to $700,000 in any proceeds from a lawsuit CoCa has filed against an uncooperative insurer.  The remainder of the settlement amount ($6.4 million) would be paid by insurance companies and another PRP.  With respect to the Nelson Tunnel site, the proposed financial terms require that CoCa pay $6 million.

 

As a result, in the second quarter of 2015 we accrued $9.9 million by recording a liability for the total amount that would be paid by CoCa and an asset for the estimated amount that would be recovered by CoCa from insurers and the other party to the Gilt Edge settlement.

 

The Consent Decrees were published in the Federal Register on April 26, 2016, which began a 30-day public comment period for each Consent Decree.  No comments were received and the United States has sought Court approval and entry of each Consent Decree. The Court entered the Nelson Tunnel/Commodore Waste Rock Pile Consent Decree on June 15, 2016, and CoCa is required to pay $6 million by August 12, 2016. The Court has not yet entered the Gilt Edge Consent Decree. If the Court does enter the Gilt Edge Consent Decree, then CoCa will be obligated to pay $3.9 million within 60 days , and at that point CoCa will have resolved the claims of (i) the United States and the State of South Dakota with respect to the Gilt Edge site, and (ii) the United States and the State of Colorado with respect to the Nelson Tunnel site, in each case under CERCLA and certain relevant state statutes, for all past and future response costs at each site.

 

There can be no assurance that the Gilt Edge Consent Decree will be entered by the Court and become final and binding.  Accordingly, in the event that matter is not settled, our accrual could materially change.

 

 

 

Senior Notes

 

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

 

Other Commitments

 

Our contractual obligations as of June 30, 2016 included approximately $1.2 million for various costs. In addition, our open purchase orders at June 30, 2016 included approximately $1.1 million, $1.9 million and $7.2 million, respectively, for various capital items at the Lucky Friday, Casa Berardi and Greens Creek units, and approximately $0.6 million, $1.2 million, and $2.8 million, respectively, for various non-capital costs at the Lucky Friday, Casa Berardi and Greens Creek units. We also have total commitments of approximately $15.4 million relating to scheduled payments on capital leases, including interest, primarily for equipment at our Greens Creek, Lucky Friday and Casa Berardi units (see Note 9 for more information). As part of our ongoing business and operations, we are required to provide surety bonds, bank letters of credit, and restricted deposits for various purposes, including financial support for environmental reclamation obligations and workers compensation programs. As of June 30, 2016, we had surety bonds totaling $111.2 million in place as financial support for future reclamation and closure costs, self insurance, and employee benefit plans. We also held a $6.5 million restricted deposit at June 30, 2016 as financial support for reclamation of the Troy mine acquired as part of the acquisition of Revett Mining Company, Inc.. The obligations associated with these instruments are generally related to performance requirements that we address through ongoing operations. As the requirements are met, the beneficiary of the associated instruments cancels or returns the instrument to the issuing entity. Certain of these instruments are associated with operating sites with long-lived assets and will remain outstanding until closure of the sites. We believe we are in compliance with all applicable bonding requirements and will be able to satisfy future bonding requirements as they arise.

 

Other Contingencies

 

On April 12, 2013, the family of Larry Marek, an employee of Hecla Limited who was fatally injured in an April 2011 accident, filed a lawsuit against us and certain of our officers and employees seeking damages for, among other claims, wrongful death and infliction of emotional distress. No dollar amount of damages is specified in the complaint, which was filed in state court in Idaho (Kootenai County District Court). On April 21, 2015, the judge hearing the case granted Hecla’s motion for summary judgment and dismissed the case. The plaintiffs have appealed the decision to the Idaho Supreme Court. We cannot predict the outcome of this matter, however, we believe the case is without merit and are vigorously defending this lawsuit.

 

On December 11, 2013, four employees of Hecla Limited who were injured in a December 2011 rock burst filed a lawsuit against us and certain of our employees seeking damages for, among other claims, intentional and willful injury and infliction of emotional distress. The plaintiffs seek damages in excess of $1,000,000, as claimed in the complaint, which was filed in state court in Idaho (Kootenai County District Court). On August 28, 2015, the judge hearing the case granted Hecla’s motion for summary judgment and dismissed the case. The plaintiffs have appealed the decision to the Idaho Supreme Court. We cannot predict the outcome of this matter, however, we believe the case is without merit and intend to vigorously defend this lawsuit.

 

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

 

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Note 5.    Income (Loss) Per Common Share

 

We are authorized to issue 500,000,000 shares of common stock, $0.25 par value per share. At June 30, 2016, there were 388,800,542 shares of our common stock issued and 3,733,742 shares issued and held in treasury, for a net of 385,066,800 shares outstanding.

 

For the three-month and six-month periods ended June 30, 2015, all outstanding options, restricted share units, and warrants were excluded from the computation of diluted loss per share, as our reported net losses for those periods would cause their conversion and exercise to have no effect on the calculation of loss per share. For the three-month and six-month periods ended June 30, 2016, 3,515,356 restricted stock units that are unvested or vested in the current period are included in the calculation of diluted income per share. There were no options outstanding as of June 30, 2016.

 

Note 6.    Business Segments

 

We are currently organized and managed in four reporting segments: the Greens Creek unit, the Lucky Friday unit, the Casa Berardi unit, and the San Sebastian unit. The San Sebastian unit, a historic operating property for Hecla, resumed commercial production in the fourth quarter of 2015 and was added as a new reporting segment in 2015.

 

The following tables present information about reportable segments for the three and six months ended June 30, 2016 and 2015 (in thousands): 

 

 

 

  

The following table presents identifiable assets by reportable segment as of June 30, 2016 and December 31, 2015 (in thousands):

 

  

Note 7.   Employee Benefit Plans

 

We sponsor defined benefit pension plans covering substantially all U.S. employees.  Net periodic pension cost for the plans consisted of the following for the three and six months ended June 30, 2016 and 2015 (in thousands): 

 

  

  

We contributed approximately $2.6 million in shares of our common stock and cash to our defined benefit plans in February 2016, and $6.1 million in shares of our common stock in July 2016, with no additional contributions anticipated in 2016. We expect to contribute approximately $0.4 million to our unfunded supplemental executive retirement plan during 2016. 

 

Note 8.    Shareholders’ Equity

 

Stock-based Compensation Plans

 

We periodically grant restricted stock unit awards and/or shares of common stock to our employees and directors. We measure compensation cost for restricted stock units and stock grants at the closing price of our stock at the time of grant. Restricted stock unit grants vest after a specified period with compensation cost amortized over that period. Although we have no current plans to issue stock options, we may do so in the future.

 

 

 

In March 2016, the Board of Directors granted 2,335,196 shares of common stock to employees for payment of annual and long-term incentive compensation for the period ended December 31, 2015. The shares were distributed in March 2016, and $5.5 million in expense related to the stock awards was recognized in the periods prior to March 31, 2016. 

 

In June 2016, the Board of Directors granted the following restricted stock unit awards to employees:

 

•

952,612 restricted stock units, with one third of those vesting in June 2017, one third vesting in June 2018, and one third vesting in June 2019;

•

87,493 restricted stock units, with one half of those vesting in June 2017 and one half vesting in June 2018; and

•

43,187 restricted stock units that vest in June 2017.

 

The $1.8 million in expense related to the unit awards discussed above vesting in 2017 will be recognized on a straight-line basis over the twelve months following the date of the award. The $1.6 million in expense related to the unit awards discussed above vesting in 2018 will be recognized on a straight-line basis over the twenty-four months following the date of the award. The $1.4 million in expense related to the unit awards discussed above vesting in 2019 will be recognized on a straight-line basis over the thirty-six month period following the date of the award.

 

In the second quarter of 2016, a total of 185,353 shares of common stock were granted to nonemployee directors. We granted a total of 48,246 shares of common stock to nonemployee directors in the second quarter of 2015.

 

Stock-based compensation expense for restricted stock unit grants to employees and shares issued to nonemployee directors recorded in the first six months of 2016 totaled $3.5 million, compared to $2.3 million in the same period last year.

 

In connection with the vesting of restricted stock units and other stock grants, employees have in the past, at their election and when permitted by us, chosen to satisfy their minimum tax withholding obligations through net share settlement, pursuant to which the Company withholds the number of shares necessary to satisfy such withholding obligations.  As a result, in the first six months of 2016 we withheld 997,678 shares valued at approximately $3.4 million, or approximately $3.40 per share. In the first six months of 2015 we withheld 284,243 shares valued at approximately $0.9 million, or approximately $3.31 per share.

 

Common Stock Dividends

 

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

 

 

 

  

On August 3, 2016, our Board of Directors declared a common stock dividend, pursuant to the minimum annual dividend component of the policy described above, of $0.0025 per share, for a total dividend of $1.0 million payable in September 2016. Because the average realized silver price for the second quarter of 2016 was $17.26 per ounce, below the minimum threshold of $30 according to the policy, no silver-price-linked component was declared or paid. The declaration and payment of common stock dividends is at the sole discretion of our Board of Directors.

 

At-The-Market Equity Distribution Agreement

 

Pursuant to an equity distribution agreement dated February 23, 2016, we may issue and sell shares of our common stock from time to time through ordinary broker transactions having an aggregate offering price of up to $75 million, with the net proceeds available for general corporate purposes. The terms of sales transactions under the agreement, including trading day(s), number of shares sold in the aggregate, number of shares sold per trading day, and the floor selling price per share, are proposed by us to the sales agent. Whether or not we engage in sales from time to time may depend on a variety of factors, including share price, our cash resources, customary black-out restrictions, and whether we have any material inside information. The agreement can be terminated by us at any time. The shares issued under the equity distribution agreement are registered under the Securities Act of 1933, as amended, pursuant to our shelf registration statement on Form S-3, which was filed with the SEC on February 23, 2016. As of June 30, 2016, we had sold 2,780,087 shares under the agreement for total proceeds of approximately $8.1 million, net of commissions and fees of approximately $166 thousand. Of those amounts, 2,042,812 shares were sold in the second quarter of 2016 for total proceeds of approximately $6.1 million, net of commissions and fees of approximately $124 thousand.

 

Common Stock Repurchase Program

 

On May 8, 2012, we announced that our Board of Directors approved a stock repurchase program.  Under the program, we are authorized to repurchase up to 20 million shares of our outstanding common stock from time to time in open market or privately negotiated transactions, depending on prevailing market conditions and other factors.  The repurchase program may be modified, suspended or discontinued by us at any time. Whether or not we engage in repurchases from time to time may depend on a variety of factors, including not only price and cash resources, but customary black-out restrictions, whether we have any material inside information, limitations on share repurchases or cash usage that may be imposed by our credit agreement or in connection with issuances of securities, alternative uses for cash, applicable law, and other investment opportunities from time to time. As of June 30, 2016, 934,100 shares have been purchased at an average price of $3.99 per share, leaving 19.1 million shares that may yet be purchased under the program. The closing price of our common stock at August 2, 2016, was $6.55 per share.

 

Warrants

 

At December 31, 2015, we had 2,249,550 warrants outstanding, with each warrant exercisable for 0.1622 of a share of our common stock at an exercise price of $6.17 per share. All of the warrants expired in March 2016, and there were no warrants outstanding as of June 30, 2016. 

 

Note 9.    Senior Notes, Credit Facilities, Note Payable and Capital Leases

 

Senior Notes

 

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

 

 

 

The Senior Notes are recorded net of a 2% initial purchaser discount totaling $10 million at the time of the April 2013 issuance and having an unamortized balance of $6.1 million as of June 30, 2016. The Senior Notes bear interest at a rate of 6.875% per year from the date of original issuance or from the most recent payment date on which interest has been paid or provided for.  Interest on the Senior Notes is payable on May 1 and November 1 of each year, commencing November 1, 2013. During the six months ended June 30, 2016 and 2015, interest expense related to the Senior Notes and amortization of the initial purchaser discount and fees related to the issuance of the Senior Notes, net of $7.9 million and $6.6 million, respectively, in capitalized interest, totaled $10.2 million and $11.6 million, respectively.

 

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

 

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

 

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

 

Credit Facilities

 

In May 2016, we entered into a $100 million senior secured revolving credit facility with a three year term. The credit facility is collateralized by the shares of common stock held in our material domestic subsidiaries and by our joint venture interests in the Greens Creek mine, all of our rights and interests in the joint venture agreement, and all of our rights and interests in the assets of the joint venture.  This credit facility replaced our previous $100 million credit facility which had the same terms of collateral as described above. Below is information on the interest rates, standby fee, and financial covenant terms under our current credit facility: 

 

  

⁽¹⁾ The leverage ratio will decrease to 4.00:1 in 2017.          

 

 

 

We are also able to obtain letters of credit under the facility, and for any such letters we are required to pay a participation fee of between 2.25% and 3.25% based on our total leverage ratio, as well as a fronting fee to each issuing bank of 0.20% annually on the average daily dollar amount of any outstanding letters of credit. There were $2.6 million in letters of credit outstanding as of June 30, 2016.

 

We believe we were in compliance with all covenants under the credit agreement and no amounts were outstanding as of June 30, 2016.  We have not drawn funds on the current revolving credit facility as of the filing date of this report.

 

Capital Leases

 

We have entered into various lease agreements, primarily for equipment at our Greens Creek, Lucky Friday, and Casa Berardi units, which we have determined to be capital leases.  At June 30, 2016, the total liability balance associated with capital leases, including certain purchase option amounts, was $15.1 million, with $7.8 million of the liability classified as current and the remaining $7.3 million classified as non-current. At December 31, 2015, the total liability balance associated with capital leases was $17.6 million, with $8.7 million of the liability classified as current and $8.8 million classified as non-current. The total obligation for future minimum lease payments was $15.4 million at June 30, 2016, with $0.7 million attributed to interest.

 

At June 30, 2016, the annual maturities of capital lease commitments, including interest, are (in thousands): 

 

  

Note 10.    Developments in Accounting Pronouncements

 

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

 

In April 2015, the FASB issued ASU No. 2015-03 Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The update requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. Debt disclosures will include the face amount of the debt liability and the effective interest rate. The update requires retrospective application and represents a change in accounting principle. The update is effective for fiscal years beginning after December 15, 2015. ASU No. 2015-03 has not had a material impact on our consolidated financial statements.

 

 

 

In July 2015, the FASB issued ASU 2015-11 Inventory (Topic 330): Simplifying the Measurement of Inventory. The update provides for inventory to be measured at the lower of cost and net realizable value, and is effective for the fiscal years beginning after December 15, 2016. We are currently evaluating the potential impact of implementing this update on our consolidated financial statements.

 

In September 2015, the FASB issued ASU No. 2015-16 Simplifying the Accounting for Measurement-Period Adjustments (Topic 805) which eliminates the requirement for an acquirer to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. These changes become effective for fiscal years beginning after December 15, 2016, and as such they are not expected to have a material impact on prior periods.

 

In November 2015, the FASB issued ASU No. 2015-17 Income Taxes - Balance Sheet Classification of Deferred Taxes (Topic 740). The update is designed to reduce complexity of reporting deferred income tax liabilities and assets into current and non-current amounts in a statement of financial position. The FASB has proposed the presentation of deferred income taxes, changes to deferred tax liabilities and assets be classified as non-current in the statement of financial position. The update is effective for fiscal years beginning after December 15, 2016. ASU No. 2015-17 is not expected to have a material impact on our consolidated financial statements. Our current deferred tax asset balance at June 30, 2016 was $18.4 million.

 

In January 2016, the FASB issued ASU No. 2016-01 Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The update makes several modifications to Subtopic 825-10, including the elimination of the available-for-sale classification of equity investments, and requires equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. The update is effective for fiscal years beginning after December 15, 2017. We are currently evaluating the impact of the guidance on our consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02 Leases (Subtopic 842), which will require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by most leases. The update is effective for annual and interim reporting periods beginning after December 15, 2018. We are currently evaluating the impact of the guidance on our consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09 Compensation - Stock Compensation (Topic 718). The objective of the update is to simplify several aspects of accounting for share-based payment transactions, including the income tax consequences and financial statement classification. The update is effective for annual and interim reporting periods beginning after December 15, 2016. We are currently evaluating the impact of the guidance on our consolidated financial statements.

 

Note 11.    Derivative Instruments

 

Foreign Currency

 

Our wholly-owned subsidiary owning the Casa Berardi mine is a U.S. dollar ("USD")-functional entity which routinely incurs expenses denominated in Canadian dollars ("CAD"), and such expenses expose us to exchange rate fluctuations between the USD and CAD. In April 2016, we initiated a program to manage our exposure to fluctuations in the exchange rate between the USD and CAD and the impact on our future operating costs denominated in CAD. The program utilizes forward contracts to sell CAD, and each contract is designated as a cash flow hedge. As of June 30, 2016, we have 70 forward contracts outstanding to sell CAD$175 million having a notational amount of US$135.9 million. These contracts represent between 20% and 44% of our forecasted cash operating costs at Casa Berardi from 2017 through 2020 and have USD-to-CAD exchange rates ranging between 1.2787 and 1.3031. Our risk management policy provides for up to 75% of our forecasted CAD-denominated operating costs for five years into the future to be hedged under such programs, and for potential additional programs to manage other foreign currency-related exposure areas.

 

 

 

As of June 30, 2016, we recorded the following balances for the fair value of the contracts:

 

•

a non-current asset of $0.5 million, which is included in other non-current assets;

•

a current liability of $0.1 million, which is included in other current liabilities, and

•

a non-current liability of $0.4 million, which is included in other non-current liabilities.

 

Net unrealized gains of approximately $46,000 related to the effective portion of the hedges were included in accumulated other comprehensive income as of June 30, 2016. Unrealized gains and losses will be transferred from accumulated other comprehensive loss to current earnings as the underlying operating expenses are recognized. We estimate approximately $0.1 million in net unrealized losses included in accumulated other comprehensive income as of June 30, 2016 would be reclassified to current earnings in the next twelve months. Net unrealized losses of approximately $6,000 related to ineffectiveness of the hedges were included in current earnings for the six months ended June 30, 2016.

 

Metals Prices

 

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

 

We are currently using financially-settled forward contracts to manage the exposure to changes in prices of silver, gold, zinc and lead contained in our concentrate shipments between the time of shipment and final settlement. In addition, at times we use financially-settled forward contracts to manage the exposure to changes in prices of zinc and lead (but not silver and gold) contained in our forecasted future concentrate shipments; however, there were no open contracts related to this latter program as of June 30, 2016 or December 31, 2015. These contracts are not designated as hedges and are marked-to-market through earnings each period.  At June 30, 2016, we recorded a current liability of $3.4 million on the contracts utilized to manage exposure to prices of metals in our concentrate shipments, which is included in other current liabilities.

 

We recognized a $11.8 million net loss during the first six months of 2016 on the contracts utilized to manage exposure to prices of metals in our concentrate shipments, which is included in sales of products.  The net loss recognized on the contracts offsets gains related to price adjustments on our provisional concentrate sales due to changes to silver, gold, lead and zinc prices between the time of sale and final settlement.

 

The following tables summarize the quantities of metals committed under forward sales contracts at June 30, 2016 and December 31, 2015: 

 

 

 

  

 

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

 

Credit-risk-related Contingent Features

 

We have agreements with certain counterparties that contain a provision whereby we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to our default on the indebtedness. As of June 30, 2016, we have not posted any collateral related to these agreements. The fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $3.9 million as of June 30, 2016. If we had breached any of these provisions at June 30, 2016, we could have been required to settle our obligations under the agreements at their termination value of $3.8 million. 

 

Note 12.    Fair Value Measurement

 

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

 

 

 

  

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Our Senior Notes issued in April 2013, which were recorded at their carrying value of $500.4 million, net of unamortized initial purchaser discount at June 30, 2016, had a fair value of $492.6 million at June 30, 2016. Quoted market prices, which we consider to be Level 1 inputs, are utilized to estimate fair values of the Senior Notes. See Note 9 for more information. 

 

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Table Of Contents

Note 13.    Acquisitions

 

Proposed Acquisition of Mines Management, Inc.

 

On May 23, 2016, we and Mines Management, Inc. ("Mines Management") entered into a merger agreement pursuant to which we would acquire all of the issued and outstanding common stock of Mines Management. Mines Management holds 100% ownership of the Montanore project in Northwest Montana, a significant undeveloped silver and copper deposit located approximately ten miles from our Rock Creek project. In the proposed merger, each outstanding common share of Mines Management would be exchanged for 0.2218 of a share of our common stock, which had an estimated value of $0.94 per Mines Management common share based on the closing price of Hecla's common stock of $4.24 per share on May 20, 2016, the last full trading day before the merger agreement was entered into. The actual value of consideration transferred will be based on the market price of Hecla's common stock on the date the merger is consummated. Based on the closing price of Hecla stock of $6.55 per share on August 2, 2016, total consideration would be $59.1 million. A 10% change in the price per share of Hecla stock from its closing price on August 2, 2016 would result in a $5.9 million change in the amount of consideration transferred in the merger. Estimated consideration is based on us issuing approximately 9,030,010 shares of our common stock to Mines Management shareholders in the merger. All consideration given to Mines Management stockholders will be in newly issued Hecla stock. The proposed merger is subject to approval by Mine Management's stockholders. No assurance can be given as to whether the merger will be approved and consummated.

 

In May 2016, we entered into a term loan and security agreement with Mines Management pursuant to which we agreed to provide one or more secured loans to Mines Management in an aggregate amount not to exceed $2.3 million. The loans bear interest at a rate per annum equal to LIBOR plus 5% and will be due and payable the earlier of September 30, 2016, the date the merger is consummated, or the date of other specified events. The loans are secured by substantially all of the assets of Mines Management. The balance of the note as of June 30, 2016 was $1.4 million.

 

Takeover Bid of Dolly Varden Silver Corporation

 

On June 27, 2016, we announced a takeover bid for all of the outstanding shares of Dolly Varden Silver Corporation ("Dolly Varden") not owned by us and our affiliates for cash of CAD$0.69 per share. Dolly Varden owns 100% of the Dolly Varden historic silver property in Northwestern British Columbia, Canada. Our wholly owned subsidiary owns 2,620,291 Dolly Varden shares and warrants to purchase 1,250,000 Dolly Varden shares, representing approximately 19.8% of Dolly Varden's shares outstanding on a partially diluted basis. Based on Dolly Varden's outstanding shares and options and warrants to acquire Dolly Varden shares, and excluding shares and warrants held by us and our affiliates, total consideration would be approximately CAD$13.6 million. In late July 2016, we withdrew the bid due to the failure of a required condition precedent to its consummation. 

 

Note 14.    Guarantor Subsidiaries

 

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

 

The unaudited interim condensed consolidating financial statements below have been prepared from our financial information on the same basis of accounting as the unaudited interim consolidated financial statements set forth elsewhere in this Form 10-Q. Investments in the subsidiaries are accounted for under the equity method. Accordingly, the entries necessary to consolidate Hecla, the Guarantors, and Non-Guarantors are reflected in the intercompany eliminations column. In the course of preparing consolidated financial statements, we eliminate the effects of various transactions conducted between Hecla and its subsidiaries and among the subsidiaries. While valid at an individual subsidiary level, such activities are eliminated in consolidation because, when taken as a whole, they do not represent business activity with third-party customers, vendors, and other parties. Examples of such eliminations include the following:

 

•

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

 

 

 

•

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

 

•

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

 

•

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

 

•

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

 

 

  

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

 

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

 

Unaudited Interim Condensed Consolidating Balance Sheets

 

 

 

 

 

 

Unaudited Interim Condensed Consolidating Statements of Operations

 

 

 

 

 

 

 

 

 

 

  

Unaudited Interim Condensed Consolidating Statements of Cash Flows