HECLA MINING CO/DE/ - Quarter Report: 2018 June (Form 10-Q)

 

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		June 30, 2018				December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents		$	239,722			$	186,107
Investments			5,556				33,758
Accounts receivable:
Trade			9,717				14,805
Taxes			10,382				10,382
Other, net			8,925				7,003
Inventories:
Concentrates, doré, and stockpiled ore			35,169				28,455
Materials and supplies			25,885				26,100
Other current assets			17,006				13,715
Total current assets			352,362				320,325
Non-current investments			7,449				7,561
Non-current restricted cash and investments			1,005				1,032
Properties, plants, equipment and mineral interests, net			2,006,592				2,020,021
Non-current deferred income taxes			1,179				1,509
Other non-current assets and deferred charges			24,007				14,509
Total assets		$	2,392,594			$	2,364,957
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities		$	53,835			$	46,549
Accrued payroll and related benefits			23,661				31,259
Accrued taxes			6,143				5,919
Current portion of capital leases			6,015				5,608
Accrued interest			5,976				5,745
Other current liabilities			1,388				10,371
Current portion of accrued reclamation and closure costs			8,315				6,679
Total current liabilities			105,333				112,130
Capital leases			8,757				6,193
Accrued reclamation and closure costs			78,102				79,366
Long-term debt			533,230				502,229
Non-current deferred tax liability			112,462				121,546
Non-current pension liability			48,973				46,628
Other non-current liabilities			4,438				12,983
Total liabilities			891,295				881,075
Commitments and contingencies (Notes 2, 4, 7, 9, and 11)
SHAREHOLDERS’ EQUITY
Preferred stock, 5,000,000 shares authorized:
Series B preferred stock, $0.25 par value, 157,816 shares issued and outstanding, liquidation preference — $7,891			39				39
Common stock, $0.25 par value, authorized 750,000,000 shares; issued and outstanding 2018 — 401,322,377 shares and 2017 — 399,176,425 shares			101,643				100,926
Capital surplus			1,628,440				1,619,816
Accumulated deficit			(176,158	)			(195,484	)
Accumulated other comprehensive loss			(31,929	)			(23,373	)
Less treasury stock, at cost; 2018 — 5,226,791 shares and 2017 — 4,529,450 shares issued and held in treasury			(20,736	)			(18,042	)
Total shareholders’ equity			1,501,299				1,483,882
Total liabilities and shareholders’ equity		$	2,392,594			$	2,364,957

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		Three Months Ended								Six Months Ended
		June 30, 2018				June 30, 2017				June 30, 2018				June 30, 2017
Sales of products		$	147,259			$	134,279			$	286,968			$	276,823
Cost of sales and other direct production costs			80,440				77,503				153,309				156,179
Depreciation, depletion and amortization			31,817				25,569				59,871				54,521
Total cost of sales			112,257				103,072				213,180				210,700
Gross profit			35,002				31,207				73,788				66,123
Other operating expenses:
General and administrative			9,787				10,309				17,522				19,515
Exploration			7,838				5,853				15,198				10,367
Pre-development			1,415				1,052				2,420				2,304
Research and development			2,337				312				3,773				995
Other operating expense			638				699				1,153				1,362
Provision for closed operations and environmental matters			1,420				985				2,682				2,104
Lucky Friday suspension-related costs			6,801				8,024				11,818				9,605
Acquisition costs			1,010				(2	)			3,517				25
Total other operating expenses			31,246				27,232				58,083				46,277
Income from operations			3,756				3,975				15,705				19,846
Other income (expense):
Loss on disposition of investments			—				—				—				(167	)
Unrealized (loss) gain on investments			(564	)			(276	)			(254	)			51
Gain (loss) on derivative contracts			16,804				2,487				20,811				(5,322	)
Net foreign exchange gain (loss)			2,476				(3,883	)			5,068				(6,145	)
Interest income and other income and expense			108				319				52				644
Interest expense, net of amount capitalized			(10,079	)			(10,543	)			(19,873	)			(19,065	)
Total other income (expense)			8,745				(11,896	)			5,804				(30,004	)
Income (loss) before income taxes			12,501				(7,921	)			21,509				(10,158	)
Income tax (provision) benefit			(427	)			(16,095	)			(1,195	)			12,976
Net income (loss)			12,074				(24,016	)			20,314				2,818
Preferred stock dividends			(138	)			(138	)			(276	)			(276	)
Income (loss) applicable to common shareholders		$	11,936			$	(24,154	)		$	20,038			$	2,542
Comprehensive income (loss):
Net income (loss)		$	12,074			$	(24,016	)		$	20,314			$	2,818
Unrealized loss and amortization of prior service on pension plans			—				(16	)			—				16
Change in fair value of derivative contracts designated as hedge transactions			(5,203	)			2,047				(7,276	)			5,308
Reclassification of loss on disposition or impairment of marketable securities included in net (loss) income			—				—				—				167
Unrealized holding (losses) gains on investments			41				847				10				591
Comprehensive income (loss)		$	6,912			$	(21,138	)		$	13,048			$	8,900
Basic income (loss) per common share after preferred dividends		$	0.03			$	(0.06	)		$	0.05			$	0.01
Diluted income (loss) per common share after preferred dividends		$	0.03			$	(0.06	)		$	0.05			$	0.01
Weighted average number of common shares outstanding - basic			400,619				396,178				399,972				395,774
Weighted average number of common shares outstanding - diluted			403,610				396,178				402,873				399,236
Cash dividends declared per common share		$	0.0025			$	0.0025			$	0.0050			$	0.0050

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		Six Months Ended
		June 30, 2018				June 30, 2017
Operating activities:
Net income		$	20,314			$	2,818
Non-cash elements included in net income:
Depreciation, depletion and amortization			62,852				56,908
Loss on investments			254				117
Gain on disposition of properties, plants, equipment, and mineral interests			(166	)			(94	)
Provision for reclamation and closure costs			2,640				2,247
Stock compensation			2,441				2,831
Deferred income taxes			(2,977	)			(22,113	)
Amortization of loan origination fees			898				967
(Gain) loss on derivative contracts			(30,236	)			5,386
Foreign exchange (gain) loss			(5,348	)			5,201
Other non-cash items, net			(35	)			2
Change in assets and liabilities:
Accounts receivable			2,471				(1,150	)
Inventories			(6,865	)			1,594
Other current and non-current assets			(2,507	)			3,896
Accounts payable and accrued liabilities			8,701				(10,937	)
Accrued payroll and related benefits			(337	)			(4,901	)
Accrued taxes			(672	)			4,408
Accrued reclamation and closure costs and other non-current liabilities			(4,410	)			(1,359	)
Cash provided by operating activities			47,018				45,821
Investing activities:
Additions to properties, plants, equipment and mineral interests			(43,304	)			(45,964	)
Proceeds from disposition of properties, plants and equipment			463				142
Purchases of investments			(31,682	)			(23,280	)
Maturities of investments			59,336				14,356
Net cash used in investing activities			(15,187	)			(54,746	)
Financing activities:
Proceeds from sale of common stock, net of offering costs			—				9,610
Acquisition of treasury shares			(2,694	)			(2,474	)
Dividends paid to common shareholders			(2,000	)			(1,981	)
Dividends paid to preferred shareholders			(276	)			(276	)
Credit availability and debt issuance fees paid			(3	)			(91	)
Issuance of debt			31,024				—
Repayments of debt			—				(470	)
Repayments of capital leases			(3,762	)			(3,245	)
Net cash provided by financing activities			22,289				1,073
Effect of exchange rates on cash			(532	)			1,086
Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents			53,588				(6,766	)
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period			187,139				171,977
Cash, cash equivalents and restricted cash and cash equivalents at end of period		$	240,727			$	165,211
Significant non-cash investing and financing activities:
Addition of capital lease obligations		$	7,008			$	4,645
Payment of accrued compensation in stock		$	4,863			$	4,240

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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 unaudited interim condensed consolidated financial statements contain all adjustments, consisting of normal recurring items and items which are nonrecurring, necessary to present fairly, in all material respects, the financial position of Hecla Mining Company and its consolidated subsidiaries ("Hecla" or "the Company" or “we” or “our” or “us”).  These unaudited interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and related footnotes as set forth in our annual report filed on Form 10-K for the year ended December 31, 2017, 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.

 

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

 

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

 

 

Note 2.    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 $5.6 million and $33.8 million, respectively, at June 30, 2018 and December 31, 2017. During the first six months of 2018 and 2017, we had purchases of such investments of $31.2 million and $23.3 million, respectively, and maturities of $59.3 million and $14.4 million, respectively. Our current investments at June 30, 2018 and December 31, 2017 consisted of the following (in thousands):

 

 

 

At June 30, 2018 and December 31, 2017, the fair value of our non-current investments was $7.4 million and $7.6 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 $6.0 million and $5.7 million at June 30, 2018 and December 31, 2017, respectively. During the six months ended June 30, 2018, we recognized $0.3 million in net unrealized losses in current earnings. During the six months ended June 30, 2017, we recognized $0.6 million in net unrealized gains on equity investments in other comprehensive income and $0.1 million in net unrealized gains in current earnings.

 

 

 

Note 3.   Income Taxes

 

Major components of our income tax provision (benefit) for the three and six months ended June 30, 2018 and 2017 are as follows (in thousands):

 

 

The current income tax provisions for the three and six months ended June 30, 2018 and 2017 vary from the amounts that would have resulted from applying the statutory income tax rate to pre-tax income due primarily to the full valuation allowance in the U.S. in 2018, the impact of taxation in foreign jurisdictions and the impact of the change in accounting method treatment of the #4 Shaft development costs in 2017.

 

As of June 30, 2018, we have a net deferred tax liability in the U.S. of $0.3 million, a net deferred tax liability in Canada of $112.5 million, and a net deferred tax asset in Mexico of $1.5 million, for a consolidated worldwide net deferred tax liability of $111.3 million. We recorded a full valuation allowance in the U.S. in December 2017 as a result of U.S. tax reform. Our circumstances at June 30, 2018 continue to support a full valuation allowance in the U.S. where our domestic tax provision is zero. In the first quarter of 2017, we received consent from the Internal Revenue Service to permit us to take a different income tax position relating to the timing of deductions for the #4 Shaft development costs at Lucky Friday. This tax accounting method change substantially revised the timing of deductions for these costs for regular tax and Alternative Minimum Tax ("AMT") relative to our projected life of mine and projected taxable income. These timing changes caused us to revise our assessment of the ability to generate sufficient future taxable income to realize our deferred tax assets, resulting in a valuation allowance release of approximately $15 million. At June 30, 2018 and December 31, 2017, the balance of the valuation allowances on our deferred tax assets was $79.4 million and $78.7 million, respectively.

 

Note 4.    Commitments, Contingencies and Obligations

 

General

 

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

 

 

Rio Grande Silver Guaranty

 

Our wholly-owned subsidiary, Rio Grande Silver Inc. (“Rio”), is party to a joint venture with Emerald Mining & Leasing, LLC (“EML”) and certain other parties with respect to a land package in the Creede Mining District of Colorado that is adjacent to other land held by Rio. Rio holds a 70% interest in the joint venture. In connection with the joint venture, we are required to guarantee certain environmental remediation-related obligations of EML to a third party up to a maximum liability to us of $2.5 million. As of June 30, 2018, 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, 2018.

 

Lucky Friday Water Permit Matters

 

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

 

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

 

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

 

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

 

 

The Johnny M Mine is in an area known as the San Mateo Creek Basin (“SMCB”), which is an approximately 321 square mile area in New Mexico that contains numerous legacy uranium mines and mills. The EPA is considering listing the entire SMCB on CERCLA’s National Priorities List in order to address perceived groundwater issues within the SMCB. The EE/CA discussed above relates primarily to contaminated rock and soil, not groundwater. In the event that the SMCB is listed as a Superfund site, or for other reasons, it is possible that Hecla Limited’s liability at the Johnny M Site, as well as any other sites within the SMCB at which predecessor companies of Hecla Limited may have been involved, will be greater than our current accrual of $5.6 million due to the increased scope of required remediation.

 

In July 2018, the EPA informed Hecla Limited that it believes Hecla Limited, among several other potentially responsible parties ("PRPs"), 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 letter that it has incurred approximately $9.6 million in response costs. 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, including the relative contributions, if any, of contamination by the various PRPs.

 

Carpenter Snow Creek and Barker-Hughesville Sites in Montana

 

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

 

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

 

In February 2017, the EPA made a formal request to Hecla Mining Company for information regarding the Barker-Hughesville Mining District Superfund site located in Judith Basin and Cascade Counties, Montana. Hecla Limited submitted a response in April 2017. The Barker-Hughesville site is located in a historic mining district, and between approximately June and December 1983, Hecla Limited was party to an agreement with another mining company under which limited exploration activities occurred at or near the site.

 

In August 2018, the EPA informed Hecla Limited that it believes Hecla Limited, among several other PRPs, may be liable for cleanup of the site or for costs incurred by the EPA in cleaning up the site. The EPA did not include an amount of its alleged response costs to date.  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 past or anticipated future costs at the site, and the relative contributions, if any, of contamination by the various PRPs.

 

Debt

 

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

 

On March 5, 2018, we entered into a note purchase agreement pursuant to which we issued CAD$40 million (approximately USD$30.8 million at the time of the transaction) in aggregate principal amount of our Series 2018-A Senior Notes due May 1, 2021 (the “Notes”) to Ressources Québec, a subsidiary of Investissment Québec, a financing arm of the Québec government. The Notes were issued at a discount of 0.58%, and bear interest at a rate of 4.68% per year, payable on May 1 and November 1 of each year, commencing May 1, 2018. The Notes are senior and unsecured and are pari passu in all material respects with the Senior Notes, including with respect to guarantees of the Notes by certain of our subsidiaries. The net proceeds from the Notes are required to be used for development and expansion of our Casa Berardi mine.

 

 

See Note 9 and Note 13 for more information.

 

Other Commitments

 

Our contractual obligations as of June 30, 2018 included approximately $4.1 million for various costs. In addition, our open purchase orders at June 30, 2018 included approximately $0.7 million, $2.1 million and $7.4 million for various capital and non-capital items at the Lucky Friday, Casa Berardi and Greens Creek units, respectively. We also have total commitments of approximately $15.8 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, 2018, we had surety bonds totaling $117.0 million in place as financial support for future reclamation and closure costs, self-insurance, and employee benefit plans. The obligations associated with these instruments are generally related to performance requirements that we address through ongoing operations. As the requirements are met, the beneficiary of the associated instruments cancels or returns the instrument to the issuing entity. Certain of these instruments are associated with operating sites with long-lived assets and will remain outstanding until closure of the sites. We believe we are in compliance with all applicable bonding requirements and will be able to satisfy future bonding requirements as they arise.

 

Other Contingencies

 

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

 

Note 5.    Earnings (Loss) Per Common Share

 

We are authorized to issue 750,000,000 shares of common stock, $0.25 par value per share. At June 30, 2018, there were 406,549,168 shares of our common stock issued and 5,226,791 shares issued and held in treasury, for a net of 401,322,377 shares outstanding.

 

Diluted income (loss) per share for the three and six months ended June 30, 2018 and 2017 excludes the potential effects of outstanding shares of our convertible preferred stock, as their conversion would have no effect on the calculation of dilutive shares.

 

For the three-month and six-month periods ended June 30, 2018, the calculation of diluted income per share included dilutive (i) restricted stock units that were unvested or which vested in the current period of 1,268,601 and 1,179,086, respectively, and (ii) deferred shares of 1,721,932 for each period. For the three-month period ended June 30, 2017, all restricted share units and deferred shares were excluded from the computation of diluted loss per share, as our reported loss for that period would cause them to have no effect on the calculation of loss per share. For the six-month period ended June 30, 2017, dilutive restricted stock units that were unvested or which vested in the current period of 2,109,789 and deferred shares of 1,352,470 were included in the calculation of diluted income per share.

 

Note 6.    Business Segments and Sales of Products

 

We discover, acquire, develop, produce, and market concentrates and doré containing silver, gold, lead and zinc. We are currently organized and managed in four segments, which represent our operating units: the Greens Creek unit, the Lucky Friday unit, the Casa Berardi unit, and the San Sebastian unit.

 

 

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

 

The following tables present information about reportable segments for the three and six months ended June 30, 2018 and 2017 (in thousands):

 

 

The following table presents identifiable assets by reportable segment as of June 30, 2018 and December 31, 2017 (in thousands):

 

 

Our products consist of both metal concentrates, which we sell to custom smelters and brokers, and unrefined bullion bars (doré), which may be sold as doré or further refined before sale to precious metals traders. Revenue is recognized upon the completion of the performance obligations and transfer of control of the product to the customer.

 

For sales of metals from refined doré, the performance obligation is met and revenue is recognized at the time of transfer of control of the agreed-upon metal quantities to the customer by the refiner. For sales of doré, the performance obligation is met, the transaction price is known, and revenue is recognized at the time of transfer of title and control of the doré containing the agreed-upon metal quantities to the customer. Refining, selling and shipping costs related to sales of doré and metals from doré are recorded to cost of sales as incurred.

 

 

For concentrate sales, which we currently have at our Greens Creek and Lucky Friday units, the performance obligation is met, the transaction price can be reasonably estimated, and revenue is recognized generally at the time of shipment. Concentrates sold at our Lucky Friday unit typically leave the mine and are received by the customer within the same day. However, there is a period of time between shipment of concentrates from our Greens Creek unit and their physical receipt by the customer, and judgment is required in determining when control has been transferred to the customer for those shipments. We have determined the performance obligation is met and title is transferred to the customer upon shipment of concentrate parcels from Greens Creek because, at that time, 1) legal title is transferred to the customer, 2) the customer has accepted the parcel and obtained the ability to realize all of the benefits from the product, 3) the concentrate content specifications are known, have been communicated to the customer, and the customer has the significant risks and rewards of ownership of it, 4) it is very unlikely a concentrate parcel from Greens Creek will be rejected by a customer upon physical receipt, and 5) we have the right to payment for the parcel.

 

Judgment is also required in identifying the performance obligations for our concentrate sales. Most of our concentrate sales involve “frame contracts” with smelters that can cover multiple years and specify certain terms under which individual parcels of concentrates are sold. However, some terms are not specified in the frame contracts and/or can be renegotiated as part of annual amendments to the frame contract. We have determined parcel shipments represent individual performance obligations satisfied at a point in time when control of the shipment is transferred to the customer.

 

The consideration we receive for our concentrate sales fluctuates due to changes in metals prices between the time of shipment and their final settlement. However, we are able to reasonably estimate the transaction price for the concentrate sales at the time of shipment using forward prices for the month of settlement, and previously recorded sales and accounts receivable are adjusted to estimated settlement metals prices until final settlement with the customer. Also, it is unlikely a significant reversal of revenue for any one concentrate parcel will occur. As such, we use the expected value method to price the parcels until the final settlement date occurs, at which time the final transaction price is known. At June 30, 2018, metals contained in concentrates and exposed to future price changes totaled 1.2 million ounces of silver, 5,842 ounces of gold, 11,696 tons of zinc, and 2,792 tons of lead.  However, as discussed in Note 11, we seek to mitigate the risk of negative price adjustments by using financially-settled forward contracts for some of our sales.

 

Sales and accounts receivable for concentrate shipments are recorded net of charges for treatment, refining, smelting losses, and other charges negotiated by us with the customers, which represent components of the transaction price. Charges are estimated by us upon shipment of concentrates based on contractual terms, and actual charges typically do not vary materially from our estimates. Costs charged by customers include fixed treatment and refining costs per ton of concentrate and may include price escalators which allow the customers to participate in the increase of lead and zinc prices above a negotiated baseline. Costs for shipping concentrates to customers are recorded to cost of sales as incurred.

 

Sales of metal concentrates and metal products are made principally to custom smelters, brokers and metals traders. The percentage of sales contributed by each segment is reflected in the following table:

 

 

 

 

Sales of products by metal for the three- and six-month periods ended June 30, 2018 and 2017 were as follows (in thousands):

 

 

The following is sales information by geographic area based on the location of smelters and brokers (for concentrate shipments) and location of parent companies (for doré sales to metals traders) for the three- and six-month periods ended June 30, 2018 and 2017 (in thousands):

 

 

Sales by significant product type for the three- and six-month periods ended June 30, 2018 and 2017 were as follows (in thousands):

 

 

Sales of products for the three- and six-month periods ended June 30, 2018 included net gains of $2.7 million and $3.3 million, respectively, on financially-settled forward contracts for silver, gold, lead and zinc contained in our concentrate sales. Sales of products for the three- and six-month periods ended June 30, 2017 included net gains of $0.8 million and net losses of $3.2 million, respectively, on the forward contracts. See Note 11 for more information.

 

 

Sales of products to significant customers as a percentage of total sales were as follows for the three- and six-month periods ended June 30, 2018 and 2017:

 

 

 

 

Our trade accounts receivable balance related to contracts with customers was $9.7 million at June 30, 2018 and $14.8 million at December 31, 2017, and included no allowance for doubtful accounts.

 

We have determined our contracts do not include a significant financing component. For doré sales and sales of metal from doré, payment is received at the time the performance obligation is satisfied. The amount of consideration for concentrate sales is variable, and we receive payment for a significant portion of the estimated value of concentrate parcels within a relatively short period of time after the performance obligation is satisfied.

 

We do not incur significant costs to obtain contracts, nor costs to fulfill contracts which are not addressed by other accounting standards. Therefore, we have not recognized an asset for such costs as of June 30, 2018 or December 31, 2017.

 

The sales and income (loss) from operations amounts reported above include results from our Lucky Friday segment. The Lucky Friday mine is our only operation where some of our employees are subject to a collective bargaining agreement, and the most recent agreement expired on April 30, 2016. On February 19, 2017, the unionized employees voted against our contract offer, and on March 13, 2017 went on strike and have been on strike since that time. Production at Lucky Friday was suspended from the start of the strike until July 2017, when limited production resumed. For the first six months of 2018 and 2017, suspension costs not related to production of $9.4 million and $7.6 million, respectively, along with $2.4 million and $2.0 million, respectively, in non-cash depreciation expense, are reported in a separate line item on our consolidated statements of operations. We cannot predict how long the strike will last or whether an agreement will be reached. As a result of the strike or other related events, operations at Lucky Friday could continue to be disrupted, which could adversely affect our financial condition and results of operations. If the strike continues for a further extended period or it is determined an eventual resolution is unlikely, it may be appropriate in the future to review the carrying value of properties, plants, equipment and mineral interests at Lucky Friday. Under such review, if estimated undiscounted cash flows from Lucky Friday were less than its carrying value, an impairment loss would be recognized for the difference between the carrying value and the estimated fair value. The carrying value of properties, plants, equipment and mineral interests at Lucky Friday as of June 30, 2018 was approximately $428.1 million. However, Lucky Friday has significant identified reserves and mineralized material and a current estimated mine life of approximately 22 years.

 

On April 30, 2018, we settled with the National Labor Relations Board ("NLRB") an unfair labor practice claim made by the union. As part of the settlement, Hecla Limited rescinded its last, best and final contract offer implemented in March 2017. We do not believe the settlement with the NLRB will resolve any of the key differences in the ongoing labor dispute. On May 4, 2018, we gave notice to the union that the parties to the labor dispute are at impasse, and implemented portions of our revised final offer presented in December 2017.

 

 

 

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, 2018 and 2017 (in thousands):

 

 

 

 

 

For the three- and six-month periods ended June 30, 2018, the service cost component of net periodic pension cost is included in the same line items of our condensed consolidated financial statements as other employee compensation costs, and the net expense of $0.7 million and $1.4 million, respectively, related to all other components of net periodic pension cost is included in other (expense) income on our condensed consolidated statements of operations and comprehensive income (loss). For the three- and six-month periods ended June 30, 2017, all components of net periodic pension cost are included in the same line items of our condensed consolidated financial statements as other employee compensation costs.

 

In April 2018, we contributed $1.3 million in cash to our defined benefit plans, and expect to contribute an additional $2.6 million in cash or shares of our common stock to our defined benefit plans in 2018. We expect to contribute approximately $0.5 million to our unfunded supplemental executive retirement plan during 2018.

 

 

Note 8.    Shareholders’ Equity

 

Stock-based Compensation Plans

 

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

 

In March 2018, the Board of Directors granted 1,237,369 shares of common stock to employees for payment of long-term incentive compensation for the period ended December 31, 2017. The shares were distributed in March 2018, and $4.9 million in expense related to the stock awards was recognized in the periods prior to March 31, 2018.

 

 

In June 2018, the Board of Directors granted the following restricted stock unit awards to employees resulting in a total expense of $5.6 million:

 

•

1,322,461 restricted stock units, with one third of those vesting in June 2019, one third vesting in June 2020, and one third vesting in June 2021;

•

96,604 restricted stock units, with one half of those vesting in June 2019 and one-half vesting in June 2020; and

•

28,721 restricted stock units that vest in June 2019.

 

An expense of $2.0 million related to the unit awards discussed above vesting in 2019 will be recognized on a straight-line basis over the twelve months following the date of the award. An expense of $1.9 million related to the unit awards discussed above vesting in 2020 will be recognized on a straight-line basis over the twenty-four months following the date of the award. An expense of $1.7 million related to the unit awards discussed above vesting in 2021 will be recognized on a straight-line basis over the thirty-six-month period following the date of the award.

 

In June 2018, the Board of Directors granted performance-based share awards to certain executive employees. The value of the awards will be based on the ranking of the market performance of our common stock relative to the performance of the common stock of a group of peer companies over the three-year measurement period ending December 31, 2020. The number of shares to be issued will be based on the value of the awards divided by the share price at grant date. The expense related to the performance-based awards will be recognized on a straight-line base over the thirty months following the date of the award.

 

Stock-based compensation expense for restricted stock unit and performance-based grants to employees and shares issued to nonemployee directors recorded in the first six months of 2018 totaled $2.4 million, compared to $2.8 million in the same period last year.

 

In connection with the vesting of restricted stock units and other stock grants, employees have in the past, at their election and when permitted by us, chosen to satisfy their minimum tax withholding obligations through net share settlement, pursuant to which the Company withholds the number of shares necessary to satisfy such withholding obligations and pays the obligations in cash.  As a result, in the first six months of 2018 we withheld 697,341 shares valued at approximately $2.7 million, or approximately $3.86 per share. In the first six months of 2017 we withheld 488,634 shares valued at approximately $2.5 million, or approximately $5.06 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, if and when 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 8, 2018, 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 approximately $1.0 million payable in September 2018. Because the average realized silver price for the second quarter of 2018 was $16.61 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, 2018, we had sold 4,608,847 shares under the agreement for total proceeds of approximately $17.7 million, net of commissions of approximately $0.4 million. No shares were sold under the agreement during the first six months of 2018.

 

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, 2018, 934,100 shares have been purchased at an average price of $3.99 per share, leaving approximately 19.1 million shares that may yet be purchased under the program. The closing price of our common stock at August 7, 2018, was $2.92 per share.

 

Note 9.    Debt, Credit Facilities 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 $3.6 million as of June 30, 2018. 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, 2018 and 2017, interest expense related to the Senior Notes and amortization of the initial purchaser discount and fees related to the issuance of the Senior Notes totaled $18.1 million and $17.2 million, respectively. The interest expense related to the Senior Notes for the six months ended June 30, 2017 was net of $0.9 million in capitalized interest, primarily related to the #4 Shaft project at our Lucky Friday unit which was completed in January 2017. Interest expense for the six months ended June 30, 2017 also included $1.1 million in costs related to our private offering of new Senior Notes in June 2017 and concurrent tender offer to purchase our existing Senior Notes, which were not completed.

 

 

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

 

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

 

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

 

Ressources Québec Notes

 

On March 5, 2018, we entered into a note purchase agreement pursuant to which we issued CAD$40 million (approximately USD$30.8 million at the time of the transaction) in aggregate principal amount of our Series 2018-A Senior Notes due May 1, 2021 (the “RQ Notes”) to Ressources Québec, a subsidiary of Investissment Québec, a financing arm of the Québec government. The RQ Notes were issued at a discount of 0.58%, or CAD$0.2 million, and bear interest at a rate of 4.68% per year, payable on May 1 and November 1 of each year, commencing May 1, 2018. The RQ Notes are senior and unsecured and are pari passu in all material respects with the Senior Notes, including with respect to guarantees of the RQ Notes by certain of our subsidiaries. The net proceeds from the RQ Notes are required to be used for development and expansion of our Casa Berardi mine. During the six months ended June 30, 2018, interest expense related to the RQ Notes, including discount and origination fees, totaled $0.7 million.

 

Credit Facilities

 

In May 2016, we entered into a $100 million senior secured revolving credit facility with a three-year term, which was amended in July 2017 to extend the term until July 14, 2020. The credit facility is collateralized by the shares of common stock held in our material domestic subsidiaries and by our joint venture interests in the Greens Creek mine, all of our rights and interests in the joint venture agreement, and all of our rights and interests in the assets of the joint venture.  Below is information on the interest rates, standby fee, and financial covenant terms under our credit facility in place as of June 30, 2018:

 

 

 

 

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 $3.0 million in letters of credit outstanding as of June 30, 2018.

 

We believe we were in compliance with all covenants under the credit agreement and no amounts were outstanding as of June 30, 2018.  With the exception of the $3.0 million in letters of credit outstanding, we had not drawn funds on the revolving credit facility as of June 30, 2018. However, as discussed in Note 13, we entered into a $200 million revolving credit facility in July 2018, which we expect to be increased to $250 million upon meeting certain conditions, and have drawn $47.0 million on the facility which is outstanding 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, 2018, the total liability balance associated with capital leases, including certain purchase option amounts, was $14.8 million, with $6.0 million of the liability classified as current and the remaining $8.8 million classified as non-current. At December 31, 2017, the total liability balance associated with capital leases was $11.8 million, with $5.6 million of the liability classified as current and $6.2 million classified as non-current. The total obligation for future minimum lease payments was $15.8 million at June 30, 2018, with $1.0 million attributed to interest.

 

At June 30, 2018, the annual maturities of capital lease commitments, including interest, are (in thousands):

 

 

 

 

Note 10.    Developments in Accounting Pronouncements

 

Accounting Standards Updates Adopted

 

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09 Revenue Recognition, replacing guidance currently codified in Subtopic 605-10 Revenue Recognition-Overall. The new ASU establishes a new five step principles-based framework in an effort to significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. In August 2015, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. ASU No. 2015-14 deferred the effective date of ASU No. 2014-09 until annual and interim reporting periods beginning after December 15, 2017. We adopted ASU No. 2014-09 as of January 1, 2018 using the modified-retrospective transition approach. The impact of adoption of the update to our consolidated financial statements for the six months ended June 30, 2017 would have been a reclassification of $1.1 million in doré refining costs from sales of products to cost of sales and other direct production costs.

 

 

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

 

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

 

Adoption of ASU No. 2014-09 involves additional disclosures, where applicable, on (i) contracts with customers, (ii) significant judgments and changes in judgments in determining the timing of satisfaction of performance obligations and the transaction price, and (iii) assets recognized for costs to obtain or fulfill contracts. See Note 6 for information on our sales of products.

 

In January 2016, the FASB issued ASU No. 2016-01 Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance requires entities to measure equity investments that are not accounted for under the equity method at fair value, with any changes in fair value included in current earnings, and updates certain disclosure requirements. The update is effective for fiscal years beginning after December 15, 2017. We adopted ASU No. 2016-01 as of January 1, 2018 using the modified-retrospective approach, with a cumulative-effect adjustment from accumulated other comprehensive loss to retained deficit on our balance sheet of $1.3 million, net of the income tax effect.

 

In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update provides guidance on classification for cash receipts and payments related to eight specific issues. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. We adopted this update as of January 1, 2018.

 

In November 2016, the FASB issued ASU No. 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash. The update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. We adopted this update as of January 1, 2018. Cash, cash equivalents, and restricted cash and cash equivalents on the condensed consolidated statement of cash flows includes restricted cash and cash equivalents of $1.0 million as of June 30, 2018 and December 31, 2017, $1.1 million as of June 30, 2017 and $2.2 million as of December 31, 2016, as well as amounts previously reported for cash and cash equivalents.

 

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

 

In March 2017, the FASB issued ASU No. 2017-07 Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Period Postretirement Benefit Cost. The update provides specific requirements for classification and disclosure regarding the service cost component and other components of net benefit cost related to pension plans. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We have implemented this update effective January 1, 2018. For the full year of 2018, a total net expense of approximately $2.8 million for the components of net benefit cost except service cost is expected to be included in other income (expense) on our consolidated statements of operations, and not reported in the same line items as other employee compensation costs.

 

 

Accounting Standards Updates to Become Effective in Future Periods

 

In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842). The update modifies the classification criteria and requires lessees to recognize the assets and liabilities on the balance sheet for most leases. The update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are currently reviewing our leases and compiling the information required to implement the new guidance. See Note 9 for information on future commitments related to our operating leases; the present value of these leases will be recognized on our balance sheet upon implementation of the new guidance. We are currently evaluating the potential impact of implementing this update on our consolidated financial statements.

 

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

 

Note 11.    Derivative Instruments

 

Foreign Currency

 

Our wholly-owned subsidiaries owning the Casa Berardi and San Sebastian mines are U.S. dollar ("USD")-functional entities which routinely incur expenses denominated in Canadian dollars ("CAD") and Mexican pesos ("MXN"), and such expenses expose us to exchange rate fluctuations between the USD and CAD and MXN. In April 2016, we initiated a program to manage our exposure to fluctuations in the exchange rate between the USD and CAD and the impact on our future operating costs denominated in CAD. In October 2016, we also initiated a program to manage our exposure to the impact of fluctuations in the exchange rate between the USD and MXN on our future operating costs denominated in MXN. The programs utilize forward contracts to buy CAD and MXN, and each contract is designated as a cash flow hedge. As of June 30, 2018, we have 107 forward contracts outstanding to buy CAD$256.0 million having a notational amount of US$198.0 million, and 33 forward contracts outstanding to buy MXN$226.3 million having a notional amount of USD$11.3 million. The CAD contracts are related to forecasted cash operating costs at Casa Berardi to be incurred from 2018 through 2021 and have USD-to-CAD exchange rates ranging between 1.2729 and 1.3335. The MXN contracts are related to forecasted cash operating costs at San Sebastian for 2018 through 2020 and have MXN-to-USD exchange rates ranging between 19.4000 and 20.8550. Our risk management policy provides for up to 75% of our planned cost exposure for five years into the future to be hedged under such programs, and for potential additional programs to manage other foreign currency-related exposure areas.

 

As of June 30, 2018, we recorded the following balances for the fair value of the contracts:

•

a current asset of $0.1 million, which is included in other current assets;

•

a non-current asset of $0.1 million, which is included in other non-current assets;

•

a current liability of $1.4 million, which is included in other current liabilities; and

•

a non-current liability of $1.0 million, which is included in other non-current liabilities.

 

Net unrealized losses of approximately $2.2 million related to the effective portion of the hedges were included in accumulated other comprehensive loss as of June 30, 2018, and are net of deferred taxes. 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 $1.3 million in net unrealized losses included in accumulated other comprehensive loss as of June 30, 2018 would be reclassified to current earnings in the next twelve months. Net realized gains of approximately $0.4 million on contracts related to underlying expenses which have been recognized were transferred from accumulated other comprehensive loss and included in cost of sales and other direct production costs for the six months ended June 30, 2018. Net unrealized gains of approximately $10 thousand related to ineffectiveness of the hedges were included in current earnings for the six months ended June 30, 2018.

 

 

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

 

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

 

As of June 30, 2018, we recorded the following balances for the fair value of the contracts:

 

•

a current asset of $2.4 million, which is included in other current assets and is net of $1.2 million for contracts in a fair value current liability position; and

•

a non-current asset of $12.3 million, which is included in other non-current assets and is net of $0.2 million for contracts in a fair value non-current liability position.

 

We recognized a $3.3 million net gain during the first six months of 2018 on the contracts utilized to manage exposure to prices of metals in our concentrate shipments, which is included in sales of products.  The net gain recognized on the contracts offsets losses related to price adjustments on our provisional concentrate sales due to changes to silver, gold, lead and zinc prices between the time of sale and final settlement.

 

We recognized a $20.8 million net gain during the first half of 2018 on the contracts utilized to manage exposure to prices for forecasted future concentrate shipments. The net gain on these contracts is included as a separate line item under other income (expense), as they relate to forecasted future shipments, as opposed to sales that have already taken place but are subject to final pricing as discussed in the preceding paragraph.  The net gain for the first half of 2018 is the result of decreasing zinc and lead prices. This program, when utilized, is designed to mitigate the impact of potential future declines in lead and zinc prices from the price levels established in the contracts (see average price information below). When those prices increase compared to the contracts, we incur losses on the contracts.

 

 

The following tables summarize the quantities of metals committed under forward sales contracts at June 30, 2018 and December 31, 2017:

 

 

 

 

 

Credit-risk-related Contingent Features

 

Certain of our derivative contracts contain cross default provisions which provide that a default under our revolving credit agreement would cause a default under the derivative contract. As of June 30, 2018, 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 $3.7 million as of June 30, 2018. If we were in breach of any of these provisions at June 30, 2018, we could have been required to settle our obligations under the agreements at their termination value of $3.7 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 and doré 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 ship loading, or at the time of customer arrival for trucked products).  Sales of concentrates are recorded using estimated forward prices for the anticipated month of settlement applied to our estimate of payable metal quantities contained in each shipment.  Sales are recorded net of estimated treatment and refining charges, which are also impacted by changes in metals prices and quantities of contained metals.  We estimate the prices at which sales of our concentrates will be settled due to the time elapsed between shipment and final settlement with the customer.  Receivables for previously recorded concentrate sales are adjusted to reflect estimated forward metals prices at the end of each period until final settlement by the customer.  We obtain the forward metals prices used each period from a pricing service.  Changes in metal prices between shipment and final settlement result in changes to revenues previously recorded upon shipment.  The embedded derivative contained in our concentrate sales is adjusted to fair market value through earnings each period prior to final settlement.

 

 

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

 

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

 

Our Senior Notes, which were recorded at their carrying value of $502.9 million, net of unamortized initial purchaser discount at June 30, 2018 of $3.6 million, had a fair value of $511.8 million at June 30, 2018. Quoted market prices, which we consider to be Level 1 inputs, are utilized to estimate fair values of the Senior Notes. See Note 9 for more information.

 

Note 13. Subsequent Events

 

Acquisition of Klondex Mines Ltd.

 

On July 20, 2018, we acquired all of the issued and outstanding common shares of Klondex Mines Ltd. ("Klondex") for consideration valued at $2.24 per Klondex share (the "Arrangement"). Under the terms of the Arrangement, each holder of Klondex common shares had the option to receive either (i) $2.47 in cash (the “Cash Alternative”), (ii) 0.6272 of a Hecla share per Klondex share (the “Share Alternative”), or (iii) US$0.8411 in cash and 0.4136 of a Hecla share per Klondex share (the “Combined Alternative”), subject in the case of the Cash Alternative and the Share Alternative to pro-ration based on a maximum cash consideration of $153.2 million and a maximum number of Hecla shares issued of 75,276,176. Klondex shareholders also received shares of a newly formed company which holds the Canadian assets of Klondex. Klondex had 180,499,319 issued and outstanding common shares prior to consummation of the Arrangement. An additional 1,549,626 Klondex common shares were issued immediately prior to consummation of the Arrangement related to conversion of in-the-money Klondex share options and certain outstanding restricted share units, resulting in a total of 182,048,945 issued and outstanding Klondex common shares at the time of consummation of the Arrangement. In connection with the Arrangement, we also issued an aggregate of 4,136,000 warrants to purchase one share of our common stock (“Hecla Warrants”) to holders of warrants to purchase Klondex’s common stock. An aggregate of 2,068,000 Hecla Warrants have an exercise price of $8.02 and expire in April 2032. An aggregate of 2,068,000 Hecla Warrants have an exercise price of $1.57 and expire in February 2029. In addition, we settled share-based payment awards held by Klondex directors and employees for cash of $2.0 million. Consideration transferred to consummate the Arrangement was comprised of total cash paid by us of $155.2 million, issuance of 75,276,176 shares of our common stock valued at $242.4 million, and issuance of the Hecla Warrants valued at $10.1 million, for total estimated consideration of $407.7 million. The calculation of consideration is preliminary and subject to change upon completion of the detailed valuation of assets acquired and liabilities assumed through the Arrangement.

 

Under the Arrangement, we also subscribed for $7.0 million of common shares of a new company which holds the Canadian assets previously owned by Klondex.

 

 

Revolving Credit Facility

 

On July 16, 2018, we entered into a $200 million senior secured revolving credit facility which replaced our previous $100 million credit facility and has a term ending on June 14, 2022, provided, however, that if we do not refinance our outstanding Senior Notes due May 1, 2021 by November 1, 2020, the term of the credit facility ends on November 1, 2020. We expect the credit facility to increase to $250 million upon meeting certain conditions, including adding certain subsidiaries of Klondex as borrowers under the credit facility and pledging the assets of those subsidiaries as additional collateral under the credit facility. The credit facility is collateralized by the shares of common stock held in our material domestic subsidiaries and by our joint venture interests in the Greens Creek mine, all of our rights and interests in the joint venture agreement, and all of our rights and interests in the assets of the joint venture.  Below is information on the interest rates, standby fee, and financial covenant terms under our current credit facility:

 

 

⁽¹⁾ The leverage ratio will change to 4.50:1 from September 30, 2018 to December 31, 2019, and will revert back to 4.00:1 effective January 1, 2020.          

 

Since entering into the new credit facility we have drawn funds totaling $47.0 million, which is outstanding as of the filing date of this report. Interest on borrowings on the credit facility is payable on March 31, June 30, September 30, and December 31 of each year. 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 $3.0 million in letters of credit outstanding as of the filing date of this report.

 

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 and the RQ Notes (see Note 9 for more information). The Guarantors consist of the following of Hecla's 100%-owned subsidiaries: Hecla Limited; Silver Hunter Mining Company; Rio Grande Silver, Inc.; Hecla MC Subsidiary, LLC; Hecla Silver Valley, Inc.; Burke Trading, Inc.; Hecla Montana, Inc.; Revett Silver Company; RC Resources, Inc.; Troy Mine Inc.; Revett Exploration, Inc.; Revett Holdings, Inc.; Mines Management, Inc.; Newhi Corp.; Montanore Minerals Corp.; Hecla Alaska LLC; Hecla Greens Creek Mining Company; Hecla Admiralty Company; and Hecla Juneau Mining Company. We completed the initial offering of the Senior Notes on April 12, 2013, and a related exchange offer for virtually identical notes registered with the SEC on January 3, 2014. We issued the RQ Notes on March 5, 2018.

 

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

 

•

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

 

 

•

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

 

•

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

 

•

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

 

•

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

 

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

 

 

Unaudited Interim Condensed Consolidating Balance Sheets

 

 

 

 

 

Unaudited Interim Condensed Consolidating Statements of Operations

 

 

 

 

 

 

 

 

Unaudited Interim Condensed Consolidating Statements of Cash Flows