Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

 

[X]           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2017

 

 

Commission file number

 

1-8491

 

 

HECLA MINING COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

 

77-0664171

 
 

(State or other jurisdiction of

 

(I.R.S. Employer

 
 

incorporation or organization)

 

Identification No.)

 
         
 

6500 Mineral Drive, Suite 200

     
 

Coeur d'Alene, Idaho

 

83815-9408

 
 

(Address of principal executive offices)

 

(Zip Code)

 
         

208-769-4100

(Registrant's telephone number, including area code)

 

 

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

Yes XX .    No      .

 

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

Yes XX .    No___.

 

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

Large Accelerated Filer   XX.                                                                                     Accelerated Filer     .

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

Emerging growth company     .

 

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

 

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

Yes      .    No XX.

 

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

 

Class

 

Shares Outstanding May 4, 2017

Common stock, par value

$0.25 per share

 

395,992,936

 

 

Hecla Mining Company and Subsidiaries

 

Form 10-Q

 

For the Quarter Ended March 31, 2017

 

INDEX*

 

     

Page

PART I - Financial Information

 
       
   

Item 1 – Condensed Consolidated Financial Statements (Unaudited)

3
       
   

Condensed Consolidated Balance Sheets - March 31, 2017 and December 31, 2016

3
       
   

Condensed Consolidated Statements of Operations and Comprehensive Income - Three Months Ended March 31, 2017 and 2016

4
       
   

Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2017 and 2016

5
       
   

Notes to Condensed Consolidated Financial Statements (Unaudited)

6
       
   

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

26
       
   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

51
       
   

Item 4. Controls and Procedures

53
       

PART II - Other Information

 
       
   

Item 1 – Legal Proceedings

54
       
   

Item 1A – Risk Factors

54
       
   

Item 4 – Mine Safety Disclosures

54
       
   

Item 6 – Exhibits

54
       
   

Signatures

55
       
   

Exhibits

56
       
       

*Items 2, 3 and 5 of Part II are omitted as they are not applicable.

 

 

 

Part I - Financial Information

 

Item 1. Financial Statements

 

 

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except shares)

 

   

March 31,

2017

   

December 31,

2016

 

ASSETS

 

Current assets:

               

Cash and cash equivalents

  $ 176,786     $ 169,777  

Short-term investments

    36,505       29,117  

Accounts receivable:

               

Trade

    17,210       20,082  

Other, net

    22,234       9,967  

Inventories:

               

Concentrates, doré, and stockpiled ore

    30,816       25,944  

Materials and supplies

    23,348       24,079  

Other current assets

    8,256       12,125  

Total current assets

    315,155       291,091  

Non-current investments

    5,104       5,002  

Non-current restricted cash and investments

    2,200       2,200  

Properties, plants, equipment and mineral interests, net

    2,032,983       2,032,685  

Non-current deferred income taxes

    48,410       35,815  

Other non-current assets

    2,609       4,884  

Total assets

  $ 2,406,461     $ 2,371,677  

LIABILITIES

 

Current liabilities:

               

Accounts payable and accrued liabilities

  $ 51,739     $ 60,064  

Accrued payroll and related benefits

    38,554       36,515  

Accrued taxes

    11,089       9,061  

Current portion of capital leases

    5,647       5,653  

Current portion of accrued reclamation and closure costs

    7,453       5,653  

Current portion of debt

          470  

Other current liabilities

    18,173       8,809  

Total current liabilities

    132,655       126,225  

Capital leases

    6,088       5,838  

Accrued reclamation and closure costs

    79,334       79,927  

Long-term debt

    501,292       500,979  

Non-current deferred tax liability

    121,025       122,855  

Non-current pension liability

    46,443       44,491  

Other non-current liabilities

    5,321       11,518  

Total liabilities

    892,158       891,833  

Commitments and contingencies (Notes 2, 4, 7, 9, and 11)

               

STOCKHOLDERS’ 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, 500,000,000 shares authorized; issued and outstanding 2017 — 395,825,410 shares and 2016 — 395,286,875 shares

    99,973       99,806  

Capital surplus

    1,603,324       1,597,212  

Accumulated deficit

    (141,730

)

    (167,437

)

Accumulated other comprehensive loss

    (31,398

)

    (34,602

)

Less treasury stock, at cost; 2017 - 4,085,599 and 2016 - 3,941,210 shares issued and held in treasury

    (15,905

)

    (15,174

)

Total stockholders’ equity

    1,514,303       1,479,844  

Total liabilities and stockholders’ equity

  $ 2,406,461     $ 2,371,677  

 

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

 

 

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)

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

 

   

Three Months Ended

 
   

March 31, 2017

   

March 31, 2016

 

Sales of products

  $ 142,544     $ 131,017  

Cost of sales and other direct production costs

    78,676       74,320  

Depreciation, depletion and amortization

    28,952       25,875  

Total cost of sales

    107,628       100,195  

Gross profit

    34,916       30,822  

Other operating expenses:

               

General and administrative

    9,206       10,214  

Exploration

    4,514       2,950  

Pre-development

    1,252       404  

Research and development

    683        

Other operating expense

    690       640  

Lucky Friday suspension-related costs

    1,581        

Provision for closed operations and environmental matters

    1,119       1,041  

Total other operating expense

    19,045       15,249  

Income from operations

    15,871       15,573  

Other income (expense):

               

Loss on disposal of investments

    (167

)

     

Unrealized income (loss) on investments

    327       (711

)

Loss on derivative contracts

    (7,809

)

     

Net foreign exchange loss

    (2,262

)

    (8,203

)

Interest and other income

    325       88  

Interest expense, net of amounts capitalized

    (8,522

)

    (5,711

)

Total other expense

    (18,108

)

    (14,537

)

(Loss) income before income taxes

    (2,237

)

    1,036  

Income tax benefit (provision)

    29,071       (1,654

)

Net income (loss)

    26,834       (618

)

Preferred stock dividends

    (138

)

    (138

)

Income (loss) applicable to common stockholders

  $ 26,696     $ (756

)

Comprehensive income:

               

Net income (loss)

  $ 26,834     $ (618

)

Reclassification of disposal and impairment of investments included in net income

    167       1,000  

Unrealized holding (losses) gains on investments

    (256

)

    65  

Unrealized gain (loss) and amortization of prior service on pension plans

    32        

Change in fair value of derivative contracts designated as hedge transactions

    3,261        

Comprehensive income

  $ 30,038     $ 447  

Basic income per common share after preferred dividends

  $ 0.07     $  

Diluted income per common share after preferred dividends

  $ 0.07     $  

Weighted average number of common shares outstanding - basic

    395,370       379,022  

Weighted average number of common shares outstanding - diluted

    398,149       379,022  

 

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

 

 

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

   

Three Months Ended

 
   

March 31, 2017

   

March 31, 2016

 

Operating activities:

               

Net income (loss)

  $ 26,834     $ (618

)

Non-cash elements included in net income (loss):

               

Depreciation, depletion and amortization

    29,590       26,153  

Unrealized (gain) loss on investments

    (327

)

    711  

Loss on disposal of investments

    167        

Gain on disposition of properties, plants, equipment, and mineral interests

    (32

)

    (210

)

Provision for reclamation and closure costs

    1,026       999  

Stock compensation

    1,349       1,231  

Deferred income taxes

    (21,234

)

    3,320  

Amortization of loan origination fees

    480       459  

Loss on derivative contracts

    7,343       170  

Foreign exchange loss

    506       7,989  

Other non-cash gains, net

    2       6  

Change in assets and liabilities:

               

Accounts receivable

    (8,738

)

    (20,036

)

Inventories

    (3,358

)

    (5,922

)

Other current and non-current assets

    1,363       (619

)

Accounts payable and accrued liabilities

    (1,510

)

    10,036  

Accrued payroll and related benefits

    6,881       (2,826

)

Accrued taxes

    1,754       (37

)

Accrued reclamation and closure costs and other non-current liabilities

    (3,811

)

    (2,058

)

Cash provided by operating activities

    38,285       18,748  

Investing activities:

               

Additions to properties, plants, equipment and mineral interests

    (21,658

)

    (34,654

)

Proceeds from disposition of properties, plants and equipment

    61       215  

Purchases of investments

    (11,113

)

     

Maturities of investments

    3,634        

Addition to restricted cash for environmental matters

          (3,900

)

Net cash used in investing activities

    (29,076

)

    (38,339

)

Financing activities:

               

Proceeds from sale of common stock, net of offering costs

          2,052  

Acquisition of treasury shares

    (731

)

    (1,256

)

Dividends paid to common stockholders

    (989

)

    (952

)

Dividends paid to preferred stockholders

    (138

)

    (138

)

Credit facility fees paid

    (91

)

    (59

)

Repayments of debt

    (470

)

    (664

)

Repayments of capital leases

    (1,595

)

    (2,118

)

Net cash used in financing activities

    (4,014

)

    (3,135

)

Effect of exchange rates on cash

    1,814       1,535  

Net increase (decrease) in cash and cash equivalents

    7,009       (21,191

)

Cash and cash equivalents at beginning of period

    169,777       155,209  

Cash and cash equivalents at end of period

  $ 176,786     $ 134,018  

Significant non-cash investing and financing activities:

               

Addition of capital lease obligations

  $ 1,798     $  

Payment of accrued compensation in stock

  $ 4,240     $ 5,511  

 

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

 

 

Note 1.    Basis of Preparation of Financial Statements

 

In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements and notes to the unaudited interim condensed consolidated financial statements contain all adjustments, consisting of normal recurring items and items which are nonrecurring, necessary to present fairly, in all material respects, the financial position of Hecla Mining Company and its consolidated subsidiaries ("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, 2016, as it may be amended from time to time.

 

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

 

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 and less than 365 days, had a fair value of $36.5 million and $29.1 million, respectively, at March 31, 2017 and December 31, 2016. During the first quarter of 2017, we had purchases of such investments of $11.1 million and maturities of $3.6 million. We held no such investments during the first quarter of 2016. Our current investments at March 31, 2017 and December 31, 2016 consisted of the following:

 

 

   

March 31, 2017

   

December 31, 2016

 
   

Amortized

cost

   

Unrealized

loss

   

Fair market

value

   

Amortized

cost

   

Unrealized

loss

   

Fair market

value

 

Corporate bonds

  $ 30,077     $ (38

)

  $ 30,039     $ 22,100     $ (46

)

  $ 22,054  

Municipal bonds

    3,138             3,138       3,727       (1

)

    3,726  

Agency bonds

    3,331       (3

)

    3,328       3,339       (2

)

    3,337  

Total

  $ 36,546     $ (41

)

  $ 36,505     $ 29,166     $ (49

)

  $ 29,117  

 

At March 31, 2017 and December 31, 2016, the fair value of our non-current investments was $5.1 million and $5.0 million, respectively.  Our non-current investments consist of marketable equity securities which are carried at fair value, and are primarily classified as “available-for-sale.” The cost basis of our non-current investments was approximately $3.9 million and $4.1 million, respectively, at March 31, 2017 and December 31, 2016. In the first quarter of 2016, we recognized total impairment charges against earnings of $1.0 million, as we determined the impairments to be other-than-temporary.

 

 

Note 3.   Income Taxes

 

Major components of our income tax provision for the three months ended March 31, 2017 and 2016 are as follows (in thousands):

 

   

Three Months Ended

 
   

March 31,

 
   

2017

   

2016

 

Current:

               

Domestic

  $ (12,797

)

  $ (2,506

)

Foreign

    5,515       1,015  

Total current income tax benefit

    (7,282

)

    (1,491

)

                 

Deferred:

               

Domestic

    (18,903

)

    588  

Foreign

    (2,886

)

    2,557  

Total deferred income tax (benefit) provision

    (21,789

)

    3,145  

Total income tax (benefit) provision

  $ (29,071

)

  $ 1,654  

 

 

As of March 31, 2017, we have a net deferred tax asset in the U.S. of $48.4 million and a net deferred tax liability in Canada of $121.0 million, for a consolidated worldwide net deferred tax liability of $72.6 million. Our ability to utilize our deferred tax assets depends on future taxable income generated from operations and various tax planning strategies. 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 March 31, 2017 and December 31, 2016, the balances of the valuation allowances on our deferred tax assets were approximately $81 million and $100 million, respectively, primarily for net operating losses and tax credit carryforwards. The amount of the deferred tax asset considered recoverable, however, could be reduced in the near term if estimates of future taxable income are reduced.

 

The current income tax provisions for the three months ended March 31, 2017 and 2016 vary from the amounts that would have resulted from applying the statutory income tax rate to pre-tax income due primarily to the impact of the change in accounting method treatment of the #4 Shaft development costs described above, as well as the effects of percentage depletion and the impact of taxation in foreign jurisdictions.

 

 

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 March 31, 2017, we have not been required to make any payments pursuant to the guaranty. We may be required to make payments in the future, limited to the $2.5 million maximum liability, should EML fail to meet its obligations to the third party. However, to the extent that any payments are made by us under the guaranty, EML, in addition to other parties, has jointly and severally agreed to reimburse and indemnify us for any such payments. We have not recorded a liability relating to the guaranty as of March 31, 2017.

 

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

 

Carpenter Snow Creek 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.

 

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. Aurizon held our Casa Berardi mine and other interests in Quebec, Canada. In 2014, we completed additional issuances of our Senior Notes in the aggregate principal amount of $6.5 million, which were contributed to one of our pension plans to satisfy the funding requirement for 2014. Interest on the Senior Notes is payable on May 1 and November 1 of each year, commencing November 1, 2013. See Note 9 for more information.

 

Other Commitments

 

Our contractual obligations as of March 31, 2017 included approximately $1.8 million for various costs. In addition, our open purchase orders at March 31, 2017 included approximately $0.2 million, $2.1 million and $9.5 million, respectively, for various capital and non-capital items at the Lucky Friday, Casa Berardi and Greens Creek units. We also have total commitments of approximately $12.3 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 March 31, 2017, we had surety bonds totaling $112.8 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

 

When we acquired Revett Mining Company, Inc. (now known as Hecla Montana, Inc.) in June 2015, it was the subject of a lawsuit filed in Montana state court by a former employee of its wholly owned subsidiary, Troy Mine, Inc., alleging that Revett was responsible for injuries he suffered while working for Troy Mine. The case is continuing with plaintiff claiming injuries totaling several millions of dollars. Although we are vigorously defending the suit, it is possible that Revett faces some liability in the case; however, we are unable to estimate the amount or range of any potential liability. Insurance is currently providing a defense to Revett, however there is no guarantee it would provide coverage for any losses incurred.

 

  

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

 

 

Note 5.    Earnings (Loss) Per Common Share

 

We are authorized to issue 500,000,000 shares of common stock, $0.25 par value per share. At March 31, 2017, there were 399,911,009 shares of our common stock issued and 4,085,599 shares issued and held in treasury, for a net of 395,825,410 shares outstanding.

 

Diluted income (loss) per share for the three months ended March 31, 2017 and 2016 excludes the potential effects of outstanding shares of our convertible preferred stock, as their conversion would have no effect on the calculation of dilutive shares.

 

For the three months ended March 31, 2017, 2,735,569 restricted stock units that were unvested during the quarter and 727,262 in deferred shares were included in the calculation of diluted earnings (loss) per share. For the three-month period ended March 31, 2016, all outstanding restricted share units and warrants were excluded from the computation of diluted earnings (loss) per share, as our reported net loss for that period would cause their vesting and exercise to have no effect on the calculation of earnings (loss) per share. There were no warrants outstanding during the three months ended March 31, 2017.

 

 

Note 6.    Business Segments

 

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 months ended March 31, 2017 and 2016 (in thousands):

 

   

Three Months Ended

March 31,

 
   

2017

   

2016

 

Net sales to unaffiliated customers:

               

Greens Creek

  $ 58,850     $ 53,882  

Lucky Friday

    20,010       21,252  

Casa Berardi

    41,712       32,198  

San Sebastian

    21,972       23,685  
    $ 142,544     $ 131,017  

Income (loss) from operations:

               

Greens Creek

  $ 14,114     $ 8,078  

Lucky Friday

    3,880       2,743  

Casa Berardi

    (2,245

)

    1,934  

San Sebastian

    13,454       14,912  

Other

    (13,332

)

    (12,094

)

    $ 15,871     $ 15,573  

  

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

 

   

March 31,

2017

   

December 31,

2016

 

Identifiable assets:

               

Greens Creek

  $ 681,266     $ 681,303  

Lucky Friday

    439,991       442,829  

Casa Berardi

    804,886       806,044  

San Sebastian

    47,561       33,608  

Other

    432,757       407,893  
    $ 2,406,461     $ 2,371,677  

 

The sales and income (loss) from operations amounts reported above include results from our Lucky Friday segment. The Lucky Friday mine is our only operation where some of our employees are subject to a collective bargaining agreement, and the most recent agreement expired on April 30, 2016. On February 19, 2017, the unionized employees voted against our contract offer and on March 13, 2017 went on strike and have been on strike since that time. Production at the Lucky Friday has been suspended since the start of the strike. Costs related to care-and-maintenance of the mine during the strike period are reported in a separate line item on our condensed consolidated statement of operations and totaled $1.6 million in the first quarter of 2017. We cannot predict how long the strike will last or whether an agreement will be reached. As a result of the strike or other events related to labor at the Lucky Friday, operations at Lucky Friday could continue to be disrupted, which could adversely affect our financial condition and results of operations.

 

 

Note 7.   Employee Benefit Plans

 

We sponsor defined benefit pension plans covering substantially all U.S. employees.  Net periodic pension cost for the plans consisted of the following for the three months ended March 31, 2017 and 2016 (in thousands):

 

   

Three Months Ended

March 31,

 
   

2017

   

2016

 

Service cost

  $ 1,196     $ 1,077  

Interest cost

    1,339       1,307  

Expected return on plan assets

    (1,462

)

    (1,325

)

Amortization of prior service benefit

    (84

)

    (84

)

Amortization of net loss

    1,033       1,093  

Net periodic benefit cost

  $ 2,022     $ 2,068  

 

In April 2017, we contributed $1.2 million in cash to our defined benefit plans, and expect to contribute an additional $2.8 million in cash or shares of our common stock to our defined benefit plans in 2017. We expect to contribute approximately $0.4 million to our unfunded supplemental executive retirement plan during 2017.

 

 

Note 8.    Stockholders’ 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 2017, the Board of Directors granted 641,406 shares of common stock to employees for payment of annual and long-term incentive compensation for the period ended December 31, 2016. The shares were distributed in March 2017, and $4.2 million in expense related to the stock awards was recognized in the periods prior to March 31, 2017.

 

Stock-based compensation expense for vesting restricted stock unit grants to employees and shares issued to nonemployee directors recorded in the first three months of 2017 totaled $1.3 million, compared to $1.2 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 three months of 2017 we withheld 154,933 shares valued at approximately $0.7 million, or approximately $4.67 per share. In the first three months of 2016 we withheld 532,157 shares valued at approximately $1.3 million, or approximately $2.36 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:

 

Quarterly average realized silver price

per ounce

   

Quarterly dividend per

share

   

Annualized dividend

per share

 
  $30       $0.01       $0.04  
  $35       $0.02       $0.08  
  $40       $0.03       $0.12  
  $45       $0.04       $0.16  
  $50       $0.05       $0.20  

 

On May 4, 2017, our Board of Directors declared a common stock dividend, pursuant to the minimum annual dividend component of the policy described above, of $0.0025 per share, for a total dividend of approximately $1.0 million payable in June 2017. Because the average realized silver price for the first quarter of 2017 was $17.90 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 March 31, 2017, we had sold 2,780,087 shares under the agreement for total proceeds of approximately $8.1 million, net of commissions of approximately $166 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 March 31, 2017, 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 May 4, 2017, was $5.14 per share.

 

 

Note 9.    Senior Notes, 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 $5.2 million as of March 31, 2017. The Senior Notes bear interest at a rate of 6.875% per year from the date of original issuance or from the most recent payment date on which interest has been paid or provided for.  Interest on the Senior Notes is payable on May 1 and November 1 of each year, commencing November 1, 2013. During the three months ended March 31, 2017 and 2016, 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 $8.1 million and $5.2 million, respectively. The interest expense related to the Senior Notes for the three months ended March 31, 2017 and 2016 was net of $0.9 million and $3.8 million, respectively, in capitalized interest, primarily related to the #4 Shaft project at our Lucky Friday unit which was completed in January 2017.

 

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:

 

 

Interest rates:

           

Spread over the London Interbank Offer Rate

    2.25 - 3.25%  

Spread over alternative base rate

    1.25 - 2.25%  

Standby fee per annum on undrawn amounts

      0.50%    
             

Covenant financial ratios:

           

Senior leverage ratio (debt secured by liens/EBITDA)

 

not more than 2.50:1

 

Leverage ratio (total debt less unencumbered cash/EBITDA)(1)

 

not more than 4.00:1

 

Interest coverage ratio (EBITDA/interest expense)

 

not more than 3.00:1

 

 

(1) The leverage ratio was amended for to be 5.00:1 for 2016, and reverted back to 4.00:1 effective January 1, 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 March 31, 2017.

 

We believe we were substantially in compliance with all covenants under the credit agreement and no amounts were outstanding as of March 31, 2017.  We have not drawn funds on the current revolving credit facility as of the filing date of this report.

 

Capital Leases

 

We have entered into various lease agreements, primarily for equipment at our Greens Creek, Lucky Friday and Casa Berardi units, which we have determined to be capital leases.  At March 31, 2017, the total liability associated with the capital leases, including certain purchase option amounts, was $11.7 million, with $5.6 million of the liability classified as current and $6.1 million classified as non-current. At December 31, 2016, the total liability balance associated with capital leases was $11.5 million, with $5.7 million of the liability classified as current and $5.8 million classified as non-current. The total obligation for future minimum lease payments was $12.3 million at March 31, 2017, with $0.6 million attributed to interest.

 

At March 31, 2017, the annual maturities of capital lease commitments, including interest, were (in thousands):

 

 

Twelve-month period

ending March 31,

       

2018

  $ 5,988  

2019

    3,946  

2020

    1,771  

2021

    604  

Total

    12,309  

Less: imputed interest

    (585

)

Net capital lease obligation

  $ 11,724  

 

 

Note 10.    Developments in Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09 Revenue Recognition, replacing guidance currently codified in Subtopic 605-10 Revenue Recognition-Overall with various SEC Staff Accounting Bulletins providing interpretive guidance. The new ASU establishes a new five step 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 ASU No. 2014-09 until annual and interim reporting periods beginning after December 15, 2017.

 

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

 

 

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

 

During 2017, we plan to finalize our assessment of the impact of ASU No. 2014-09 on our revenue recognition, and assess the additional disclosure requirements under the new guidance.

 

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

 

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

 

In January 2016, the FASB issued ASU No. 2016-01 Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance requires entities to measure equity investments that are not accounted for under the equity method at fair value, with any changes in fair value included in current earnings, and updates certain disclosure requirements. The update is effective for fiscal years beginning after December 15, 2017. We are currently evaluating the impact of implementing this update on our consolidated financial statements. At March 31, 2017, we had net unrealized gains of $1.1 million related to equity investments included in accumulated other comprehensive loss.

 

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

 

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

 

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

 

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

 

 

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

 

In March 2017, the FASB issued ASU No. 2107-07 Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Period Postretirement Benefit Cost. The update provides specific requirements for classification and disclosure regarding the service cost component and other components of net benefit cost related to pension plans. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We are currently evaluating the potential impact of implementing this update on our consolidated financial statements.

 

 

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 dollar ("CAD") and Mexican peso ("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 March 31, 2017, we have 118 forward contracts outstanding to buy CAD$260.1 million having a notional amount of USD$200.0 million, and 18 forward contracts outstanding to buy MXN$150.0 million having a notional amount of USD$7.6 million. The CAD contracts represent between approximately 20% and 75% of our annual forecasted cash operating costs at Casa Berardi from 2017 through 2020 and have CAD-to-USD exchange rates ranging between 1.2787 and 1.3380. The MXN contracts represent approximately 75% of our forecasted cash operating costs at San Sebastian for 2017 and have MXN-to-USD exchange rates ranging between 19.1956 and 21.0000. Our risk management policy allows for up to 75% of our planned cost exposure for five years into the future to be hedged under such programs, and for potential additional programs to manage other foreign currency-related exposure areas.

 

As of March 31, 2017, we recorded the following balances for the fair value of the contracts:

 

 

a current asset of $0.2 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 $1.6 million, which is included in other current liabilities, and

 

a non-current liability of $1.2 million, which is included in other non-current liabilities.

 

Net unrealized losses of approximately $2.0 million related to the effective portion of the hedges were included in accumulated other comprehensive income as of March 31, 2017, and are net of related 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 $1.4 million in net unrealized losses included in accumulated other comprehensive income as of March 31, 2017 would be reclassified to current earnings in the next twelve months. Net realized losses of approximately $0.1 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 three months ended March 31, 2017. Net unrealized gains of approximately $10 thousand related to ineffectiveness of the hedges were included in gain (loss) on derivatives contracts on our consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2017.

 

 

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 that 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 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, 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 March 31, 2017, we recorded the following balances for the fair value of the contracts:

 

 

a current asset of $0.2 million, which is included in other current assets;

 

a current liability of $2.0 million, which is included in other current liabilities and is net of $0.7 million for contracts in a fair value current asset position; and

 

a non-current liability of $0.4 million, which is included in other non-current liabilities and is net of $0.2 million for contracts in a fair value non-current asset position.

 

We recognized a $4.1 million net loss during the first quarter of 2017 on the contracts utilized to manage exposure to prices of metals in our concentrate shipments, which is included in sales of products.  The net loss recognized on the contracts offsets gains related to price adjustments on our provisional concentrate sales due to changes to silver, gold, lead and zinc prices between the time of sale and final settlement.

 

We recognized a $7.8 million net loss during the first quarter of 2017 on the contracts utilized to manage exposure to prices for forecasted future concentrate shipments. The net loss on these contracts is included as a separate line item under other income (expense), as they relate to forecasted future shipments, as opposed to sales that have already taken place but are subject to final pricing as discussed in the preceding paragraph.  The net loss for the first quarter of 2017 is the result of increasing 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).

 

 

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

 

 

March 31, 2017

 

Ounces/pounds under contract (in 000's)

   

Average price per ounce/pound

 
   

Silver

   

Gold

   

Zinc

   

Lead

   

Silver

   

Gold

   

Zinc

   

Lead

 
   

(ounces)

   

(ounces)

   

(pounds)

   

(pounds)

   

(ounces)

   

(ounces)

   

(pounds)

   

(pounds)

 

Contracts on provisional sales

                                                               

2017 settlements

    1,455       6       20,999       4,079     $ 18.10     $ 1,245     $ 1.27     $ 1.03  

Contracts on forecasted sales

                                                               

2017 settlements

                17,527       11,133       N/A       N/A     $ 1.23     $ 1.05  

2018 settlements

                20,613       9,700       N/A       N/A     $ 1.23     $ 1.06  

2019 settlements

                1,102             N/A       N/A     $ 1.21       N/A  

 

 

December 31, 2016

 

Ounces/pounds under contract (in 000's)

   

Average price per ounce/pound

 
   

Silver

   

Gold

   

Zinc

   

Lead

   

Silver

   

Gold

   

Zinc

   

Lead

 
   

(ounces)

   

(ounces)

   

(pounds)

   

(pounds)

   

(ounces)

   

(ounces)

   

(pounds)

   

(pounds)

 

Contracts on provisional sales

                                                               

2017 settlements

    1,295       4       19,070       7,441     $ 16.29     $ 1,172     $ 1.18     $ 0.97  

Contracts on forecasted sales

                                                               

2017 settlements

                35,384       17,637       N/A       N/A     $ 1.19     $ 1.03  

2018 settlements

                13,779       5,732       N/A       N/A     $ 1.21     $ 1.05  

 

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

 

Credit-risk-related Contingent Features

 

Certain of our derivative contracts contain cross default provisions which provide that a default under our revolving credit agreement would cause a default under the derivative contracts. As of March 31, 2017, we have not posted any collateral related to these agreements. The fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $5.9 million as of March 31, 2017. If we had breached any of these provisions at March 31, 2017, we could have been required to settle our obligations under the agreements at their termination value of approximately $5.9 million.

 

 

Note 12.    Fair Value Measurement

 

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

 

Description

 

Balance at

March 31, 2017

   

Balance at

December 31, 2016

 

Input

Hierarchy Level

Assets:

                 

Cash and cash equivalents:

                 

Money market funds and other bank deposits

  $ 176,786     $ 169,777  

Level 1

Available for sale securities:

                 

Debt securities – municipal and corporate bonds

    36,505       29,117  

Level 2

Equity securities – mining industry

    5,104       5,002  

Level 1

Trade accounts receivable:

                 

Receivables from provisional concentrate sales

    17,210       20,082  

Level 2

Restricted cash balances:

                 

Certificates of deposit and other bank deposits

    2,200       2,200  

Level 1

Derivative contracts:

                 

Metal forward contracts

    254       5,403  

Level 2

Foreign exchange contracts

    364       27  

Level 2

Total assets

  $ 238,423     $ 231,608    
                   

Liabilities:

                 

Derivative contracts:

                 

Metal forward contracts

  $ 2,386     $ 192  

Level 2

Foreign exchange contracts

    2,723       5,288  

Level 2

Total Liabilities

  $ 5,109     $ 5,480    

 

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

 

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

 

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

 

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

 

Trade accounts receivable include amounts due to us for shipments of concentrates, doré and precipitate sold to customers.  Revenues and the corresponding accounts receivable for sales of metals products are recorded when title and risk of loss transfer to the customer (generally at the time of 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 U.S. dollar and Canadian dollar and Mexican peso, and the impact on Canadian dollar and Mexican peso denominated operating costs incurred at our Casa Berardi and San Sebastian units (see Note 11 for more information). These contracts qualify for hedge accounting, with unrealized gains and losses related to the effective portion of the contracts included in accumulated other comprehensive loss, and unrealized gains and losses related to the ineffective portion of the contracts included in earnings each period. The fair value of each contract represents the present value of the difference between the forward exchange rate for the contract settlement period as of the measurement date and the contract settlement exchange rate.

 

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

 

Our Senior Notes issued in April 2013, which were recorded at their carrying value of $501.3 million, net of unamortized initial purchaser discount at March 31, 2017, had a fair value of $509.1 million at March 31, 2017. Quoted market prices, which we consider to be Level 1 inputs, are utilized to estimate fair values of the Senior Notes. See Note 9 for more information.

 

 

Note 13.   Guarantor Subsidiaries

 

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

 

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

 

 

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

 

 

Capital contributions. Certain of Hecla's subsidiaries do not generate cash flow, either at all or sufficient to meet their capital needs, and their cash requirements are routinely met with inter-company advances from their parent companies. On 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. The presentation of unaudited interim condensed consolidating financial statements below reflects the effective date for accounting purposes of January 1, 2016.

 

 

Unaudited Interim Condensed Consolidating Balance Sheets

 

   

As of March 31, 2017

 
   

Parent

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Assets

                                       

Cash and cash equivalents

  $ 104,526     $ 29,783     $ 42,477     $     $ 176,786  

Other current assets

    49,158       51,092       38,693       (574

)

    138,369  

Properties, plants, and equipment - net

    2,031       1,259,079       771,873             2,032,983  

Intercompany receivable (payable)

    453,210       (243,979

)

    (314,308

)

    105,077        

Investments in subsidiaries

    1,499,401                   (1,499,401

)

     

Other non-current assets

    1,761       188,815       5,534       (137,787

)

    58,323  

Total assets

  $ 2,110,087     $ 1,284,790     $ 544,269     $ (1,532,685

)

  $ 2,406,461  
                                         

Liabilities and Stockholders' Equity

                                       

Current liabilities

  $ 47,831     $ 52,762     $ 47,968     $ (15,906

)

  $ 132,655  

Long-term debt

    501,292       3,692       2,396             507,380  

Non-current portion of accrued reclamation

          61,706       17,628             79,334  

Non-current deferred tax liability

          11,767       126,635       (17,377

)

    121,025  

Other non-current liabilities

    46,661       5,328       (225

)

          51,764  

Stockholders' equity

    1,514,303       1,149,535       349,867       (1,499,402

)

    1,514,303  

Total liabilities and stockholders' equity

  $ 2,110,087     $ 1,284,790     $ 544,269     $ (1,532,685

)

  $ 2,406,461  

 

 

   

As of December 31, 2016

 
   

Parent

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Assets

                                       

Cash and cash equivalents

  $ 113,275     $ 24,388     $ 32,114     $     $ 169,777  

Other current assets

    33,950       65,369       35,524       (1,236

)

    133,607  

Properties, plants, and equipment - net

    2,103       1,258,890       771,692             2,032,685  

Intercompany receivable (payable)

    404,121       (222,072

)

    (307,018

)

    124,969        

Investments in subsidiaries

    1,496,787                   (1,496,787

)

     

Other non-current assets

    4,186       186,988       5,350       (160,916

)

    35,608  

Total assets

  $ 2,054,422     $ 1,313,563     $ 537,662     $ (1,533,970

)

  $ 2,371,677  
                                         

Liabilities and Stockholders' Equity

                                       

Current liabilities

  $ 22,401     $ 86,730     $ 41,348     $ (22,999

)

  $ 127,480  

Long-term debt

    500,979       3,065       2,773             506,817  

Non-current portion of accrued reclamation

          63,025       16,902             79,927  

Non-current deferred tax liability

          14,212       121,600       (14,212

)

    121,600  

Other non-current liabilities

    51,198       5,108       (325

)

    28       56,009  

Stockholders' equity

    1,479,844       1,141,423       355,364       (1,496,787

)

    1,479,844  

Total liabilities and stockholders' equity

  $ 2,054,422     $ 1,313,563     $ 537,662     $ (1,533,970

)

  $ 2,371,677  

 

 

Unaudited Interim Condensed Consolidating Statements of Operations

   

Three Months Ended March 31, 2017

 
   

Parent

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Revenues

  $ (4,093

)

  $ 82,953     $ 63,684     $     $ 142,544  

Cost of sales

    (148

)

    (42,772

)

    (35,756

)

          (78,676

)

Depreciation, depletion, amortization

          (15,766

)

    (13,186

)

          (28,952

)

General and administrative

    (6,469

)

    (2,319

)

    (418

)

          (9,206

)

Exploration and pre-development

    (244

)

    (1,901

)

    (3,621

)

          (5,766

)

Gain on derivative contracts

    (7,809

)

                      (7,809

)

Equity in earnings of subsidiaries

    2,701                   (2,701

)

     

Other (expense) income

    42,896       (3,116

)

    (9,332

)

    (44,820

)

    (14,372

)

Income (loss) before income taxes

    26,834       17,079       1,371       (47,521

)

    (2,237

)

(Provision) benefit from income taxes

          (8,969

)

    (6,780

)

    44,820       29,071  

Net income (loss)

    26,834       8,110       (5,409

)

    (2,701

)

    26,834  

Preferred stock dividends

    (138

)

                      (138

)

Income (loss) applicable to common stockholders

    26,696       8,110       (5,409

)

    (2,701

)

    26,696  

Net income (loss)

    26,834       8,110       (5,409

)

    (2,701

)

    26,834  

Changes in comprehensive income (loss)

    3,204             (89

)

    89       3,204  

Comprehensive income (loss)

  $ 30,038     $ 8,110     $ (5,498

)

  $ (2,612

)

  $ 30,038  

 

 

   

Three Months Ended March 31, 2016

 
   

Parent

   

Guarantors

   

Non-

Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Revenues

  $ (6,135

)

  $ 81,269     $ 55,883     $     $ 131,017  

Cost of sales

          (46,753

)

    (27,567

)

          (74,320

)

Depreciation, depletion, amortization

          (16,606

)

    (9,269

)

          (25,875

)

General and administrative

    (5,240

)

    (4,523

)

    (451

)

          (10,214

)

Exploration and pre-development

    (45

)

    (1,287

)

    (2,022

)

          (3,354

)

Gain on derivative contracts

                             

Equity in earnings of subsidiaries

    (20,991

)

                20,991        

Other (expense) income

    31,793       4,336       (35,518

)

    (16,829

)

    (16,218

)

Income (loss) before income taxes

    (618

)

    16,436       (18,944

)

    4,162       1,036  

(Provision) benefit from income taxes

          (4,833

)

    (13,650

)

    16,829       (1,654

)

Net income (loss)

    (618

)

    11,603       (32,594

)

    20,991       (618

)

Preferred stock dividends

    (138

)

                      (138

)

Income (loss) applicable to common stockholders

    (756

)

    11,603       (32,594

)

    20,991       (756

)

Net income (loss)

    (618

)

    11,603       (32,594

)

    20,991       (618

)

Changes in comprehensive income (loss)

    1,065       8       1,060       (1,068

)

    1,065  

Comprehensive income (loss)

  $ 447     $ 11,611     $ (31,534

)

  $ 19,923     $ 447  

 

 

Unaudited Interim Condensed Consolidating Statements of Cash Flows

 

   

Three Months Ended March 31, 2017

 
   

Parent

   

Guarantors

   

Non-

Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Cash flows from operating activities

  $ 40,953     $ 11,508     $ 15,642     $ (29,818

)

  $ 38,285  

Cash flows from investing activities:

                                       

Additions to properties, plants, and equipment

          (7,540

)

    (14,118

)

          (21,658

)

Other investing activities, net

    (7,479

)

    61                   (7,418

)

Cash flows from financing activities:

                                       

Dividends paid to stockholders

    (1,127

)

                      (1,127

)

Payments on debt

          (1,658

)

    (407

)

          (2,065

)

Other financing activity

    (41,096

)

    3,024       7,432       29,818       (822

)

Effect of exchange rate changes on cash

                1,814             1,814  

Changes in cash and cash equivalents

    (8,749

)

    5,395       10,363             7,009  

Beginning cash and cash equivalents

    113,275       24,388       32,114             169,777  

Ending cash and cash equivalents

  $ 104,526     $ 29,783     $ 42,477     $     $ 176,786  

 

 

 

   

Three Months Ended March 31, 2016

 
   

Parent

   

Guarantors

   

Non-

Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Cash flows from operating activities

  $ 7,848     $ (21,658

)

  $ (7,884

)

  $ 40,442     $ 18,748  

Cash flows from investing activities:

                                       

Additions to properties, plants, and equipment

    (53

)

    (18,552

)

    (16,049

)

          (34,654

)

Other investing activities, net

          215       (3,900

)

          (3,685

)

Cash flows from financing activities:

                                       

Dividends paid to stockholders

    (1,090

)

                      (1,090

)

Payments on debt

          (2,556

)

    (226

)

            (2,782

)

Other financing activity

    (9,833

)

    27,189       23,823       (40,442

)

    737  

Effect of exchange rate changes on cash

                1,535             1,535  

Changes in cash and cash equivalents

    (3,128

)

    (15,362

)

    (2,701

)

          (21,191

)

Beginning cash and cash equivalents

    94,167       42,692       18,350             155,209  

Ending cash and cash equivalents

  $ 91,039     $ 27,330     $ 15,649     $     $ 134,018  

 

 

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

 

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

 

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

 

 

Overview

 

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

 

 

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

 

 

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

 

 

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

 

continue optimizing and improving operations at our Greens Creek, Lucky Friday, Casa Berardi, and San Sebastian units;

 

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

 

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

 

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

 

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

 

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

 

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

 

 

The total principal amount of our Senior Notes due May 1, 2021 is $506.5 million and they bear interest at a rate of 6.875% per year. The net proceeds from the Senior Notes were primarily used for the acquisition of Aurizon in June 2013 (see Note 9 of Notes to Condensed Consolidated Financial Statements (Unaudited)). As discussed in the Financial Liquidity and Capital Resources section below, we believe that we will be able to meet the obligations associated with the Senior Notes; however, a number of factors could impact our ability to meet the debt obligations and fund our other projects.

 

On June 15, 2015, we completed the acquisition of Revett, giving us 100% ownership of the Rock Creek project, a significant undeveloped silver and copper deposit in northwestern Montana. In addition, on September 13, 2016, we completed the acquisition of Mines Management, giving us 100% ownership of the Montanore project, another significant undeveloped silver and copper deposit located approximately 10 miles from our Rock Creek project. Development of Rock Creek and Montanore has been challenged by conservation groups at various times, and there can be no assurance that we will be able to obtain the permitting required to develop these projects. In Part I, Item 1A. Risk Factors in our annual report filed on Form 10-K for the year ended December 31, 2016, see Legal challenges could prevent the Rock Creek or Montanore projects from ever being developed for more information.

 

As further discussed in the Lucky Friday Segment section below, the union employees at Lucky Friday have been on strike since March 13, 2017, and production at Lucky Friday has been suspended since that time. 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.

 

During the third quarter of 2015, we made a development decision to mine near surface, high grade portions of silver and gold deposits at our San Sebastian project in Mexico. Ore production commenced in the fourth quarter of 2015 and has continued since that time.  In addition, work began in the first quarter of 2017 to develop and rehabilitate underground access which would allow us to mine deeper portions of the deposits at San Sebastian. See the San Sebastian Segment section below for more information. We have generated positive cash flows at San Sebastian since the start of production there, and we believe that will continue through 2018.  However, our ability to generate positive cash flows at San Sebastian may be impacted by changes in estimated costs, precious metals prices, or other factors, and there can be no assurance that we will be able to develop and operate San Sebastian as anticipated.

 

We strive to achieve excellent mine safety and health performance. We seek to implement this goal by: training employees in safe work practices; establishing, following and improving safety standards; investigating accidents, incidents and losses to avoid recurrence; involving employees in the establishment of safety standards; and participating in the National Mining Association's CORESafety program. We attempt to implement reasonable best practices with respect to mine safety and emergency preparedness. We work with the Mine Safety and Health Administration ("MSHA") to address issues outlined in its investigations and inspections and continue to evaluate our safety practices.

 

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

 

 

Results of Operations

 

Sales of products by metal for the three-month periods ended March 31, 2017 and 2016 were as follows:

 

   

Three Months Ended
March 31,

 

(in thousands)

 

2017

   

2016

 

Silver

  $ 51,357     $ 56,670  

Gold

    62,701       54,892  

Lead

    13,619       13,724  

Zinc

    29,865       22,525  

Less: Smelter and refining charges

    (14,998

)

    (16,794

)

Sales of products

  $ 142,544     $ 131,017  

 

For the first quarter of 2017, we recorded income applicable to common stockholders of $26.7 million ($0.07 per basic common share), compared to a loss of $0.8 million ($0.00 per basic common share) during the first quarter of 2016. The following factors contributed to the results for the first three months of 2017 compared to the same period in 2016:

 

 

An income tax benefit of $29.1 million in first quarter of 2017 compared to an income tax provision of $1.7 million in the first quarter of 2016. The benefit in the 2017 period is primarily the result of a change in income tax position relating to the timing of deduction for #4 Shaft development costs at Lucky Friday, as further discussed in Corporate Matters below.

 

Higher average silver, gold, lead and zinc prices for the first quarter of 2017 compared to the same period in 2016.

 

       

Three months ended March 31,

 
       

2017

   

2016

 

Silver –

 

London PM Fix ($/ounce)

  $ 17.42     $ 14.84  
   

Realized price per ounce

  $ 17.90     $ 14.93  

Gold –

 

London PM Fix ($/ounce)

  $ 1,219     $ 1,181  
   

Realized price per ounce

  $ 1,221     $ 1,187  

Lead –

 

LME Final Cash Buyer ($/pound)

  $ 1.03     $ 0.79  
   

Realized price per pound

  $ 1.06     $ 0.78  

Zinc –

 

LME Final Cash Buyer ($/pound)

  $ 1.26     $ 0.76  
   

Realized price per pound

  $ 1.26     $ 0.79  

 

 

Average realized prices differ from average market prices primarily because concentrate sales are generally recorded as revenues at the time of shipment at forward prices for the estimated month of settlement, which differ from average market prices.  Due to the time elapsed between shipment of concentrates and final settlement with customers, we must estimate the prices at which sales of our metals will be settled.  Previously recorded sales are adjusted to estimated settlement metal prices each period through final settlement.  For the first quarter of 2017, we recorded net positive price adjustments to provisional settlements of $0.6 million compared to net positive price adjustments to provisional settlements of $0.5 million in the first quarter of 2016. The price adjustments related to silver, gold, zinc and lead contained in our concentrate shipments were largely offset by gains and losses on forward contracts for those metals for each period. See Note 11 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information.  The gains and losses on these contracts are included in revenues and impact the realized prices for silver, gold, lead and zinc.  Realized prices are calculated by dividing gross revenues for each metal (which include the price adjustments and gains and losses on the forward contracts discussed above) by the payable quantities of each metal included in concentrate and doré shipped during the period.

 

A net foreign exchange loss in the first quarter of 2017 of $2.3 million versus a net loss of $8.2 million in the same period of 2016, with the variance primarily related to the impact of smaller decreases in the CAD-to-USD exchange rate on the remeasurement of our net monetary liabilities in Quebec. During the first quarter of 2017, the applicable CAD-to-USD exchange rate decreased from 1.3426 to 1.3310, compared to a decrease in the rate from 1.4006 to 1.2987 during the first quarter of 2016.

 

 

 

Increased gross profit at our Greens Creek and Lucky Friday units in the first quarter of 2017 of $5.8 million and $2.7 million, respectively, compared to the first quarter of 2016. This was partially offset by decreases in gross profit of $0.7 million and $3.8 million, respectively, in the first quarter of 2017 at our Casa Berardi and San Sebastian units. See The Greens Creek Segment, The Lucky Friday Segment, The Casa Berardi Segment, and The San Sebastian Segment sections below.

 

Unrealized gains on investments of $0.3 million in the first quarter of 2017 compared to losses of $0.7 million in the first quarter of 2016. The losses in 2016 were the result of impairments of certain investments being deemed to be other-than-temporary.

 

Exploration and pre-development expense increased by $2.4 million in the first quarter of 2017 compared to the first quarter of 2016. In 2017, we have continued exploration work at our Greens Creek, San Sebastian, and Casa Berardi units, and at our other projects in Quebec, Canada. "Pre-development expense" is defined as costs incurred in the exploration stage that may ultimately benefit production, such as underground ramp development, which are expensed due to the lack of proven and probable reserves. Pre-development expense of $1.3 million in the first quarter of 2017 was related to advancement of our Montanore and Rock Creek projects.

 

Higher interest expense by $2.8 million in the first quarter of 2017 compared to the same period of 2016. Interest expense in the first quarters of 2017 and 2016 was net of $0.9 million and $3.8 million, respectively, in capitalized interest primarily related to the #4 Shaft project, with the decrease due to completion of #4 Shaft in January 2017.

 

A loss on base metal derivatives contracts of $7.8 million in the first quarter of 2017, with no net activity on base metal derivative contracts in the first quarter of 2016. See Note 11 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information.

 

 

The Greens Creek Segment

 

Dollars are in thousands (except per ounce and per ton amounts)

 

Three months ended March 31,

 
   

2017

   

2016

 

Sales

  $ 58,850     $ 53,882  

Cost of sales and other direct production costs

    (30,664

)

    (31,252

)

Depreciation, depletion and amortization

    (13,332

)

    (13,601

)

Gross profit

  $ 14,854     $ 9,029  
                 

Tons of ore milled

    197,129       204,968  

Production:

               

Silver (ounces)

    1,929,297       2,458,276  

Gold (ounces)

    14,022       15,981  

Zinc (tons)

    13,406       14,611  

Lead (tons)

    4,809       5,087  

Payable metal quantities sold:

               

Silver (ounces)

    1,439,461       1,901,143  

Gold (ounces)

    10,290       11,420  

Zinc (tons)

    10,159       12,412  

Lead (tons)

    2,830       3,244  

Ore grades:

               

Silver ounces per ton

    12.71       15.17  

Gold ounces per ton

    0.10       0.11  

Zinc percent

    7.82       8.13  

Lead percent

    3.06       3.05  

Mining cost per ton

  $ 71.41     $ 66.96  

Milling cost per ton

  $ 33.72     $ 30.99  

Cash Cost, After By-product Credits, per Silver Ounce (1)

  $ 0.65     $ 3.96  

All-In Sustaining Cost ("AISC"), After By-product Credits, per Silver Ounce (1)

  $ 3.86     $ 7.03  

 

 

(1)

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

 

The $5.8 million increase in gross profit during the first quarter of 2017 compared to the same 2016 period was the result of higher average prices for silver, gold, zinc and lead, impacting sales by approximately $14.4 million. These factors were partially offset by lower sales volume due to the timing of shipments, and decreased ore production, grades and mill recoveries. In addition, gross profit at Greens Creek was impacted by positive price adjustments to revenues of $0.5 million for the first quarter of 2017 compared to positive price adjustments of $0.4 million for the first quarter of 2016. Price adjustments to revenues result from changes in metals prices between transfer of title of concentrates to buyers and final settlements during the period.  The price adjustments related to silver, gold, zinc and lead contained in concentrate shipments were net of gains and losses on forward contracts for those metals for each period. The price adjustments and gains and losses on forward contracts discussed above are included in sales.

 

Mining costs per ton increased by 7% in the first quarter of 2017 compared to the same period in 2016, primarily as a result of higher labor cost, due to higher staffing levels, higher fuel and power costs, and lower milled tons. Milling costs per ton increased 9% in the first quarter of 2017 compared to the same period in 2016 due to lower tons milled and higher power and reagents costs, partially offset by lower labor costs. The increase in cost of hydroelectric power is the result of a price increase per kilowatt-hour purchased from $0.10 to $0.16 in September 2016.

 

 

The chart below illustrates the factors contributing to the variances in Cash Cost, After By-product Credits, per Silver Ounce for the first quarter of 2017 compared to the same period of 2016:

 

 

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

 

   

Three Months Ended March 31,

 
   

2017

   

2016

 

Cash Cost, Before By-product Credits, per Silver Ounce

  $ 24.71     $ 19.58  

By-product credits

    (24.06

)

    (15.62

)

Cash Cost, After By-product Credits, per Silver Ounce

  $ 0.65     $ 3.96  

 

 

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

 

   

Three Months Ended March 31,

 
   

2017

   

2016

 

AISC, Before By-product Credits, per Silver Ounce

  $ 27.92     $ 22.65  

By-product credits

    (24.06

)

    (15.62

)

AISC, After By-product Credits, per Silver Ounce

  $ 3.86     $ 7.03  

  

The decrease in Cash Costs, After By-Product Credits, per Silver Ounce for the first quarter of 2017 compared to 2016 was the result of higher by-product credits, partially offset by lower silver production. The decrease in AISC, After By-Product Credits, per Silver Ounce was due to the same factors impacting Cash Costs, After By-Product Credits, per Silver Ounce, along with lower capital and exploration spending.

 

 

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

 

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

 

Treatment costs were higher in the first quarter of 2017 compared to 2016 as a result of lower silver production and higher silver prices, as treatment costs include the value of silver not payable to us through the smelting process. The silver not payable to us is either recovered by the smelters through further processing or ultimately not recovered and included in the smelters’ waste material.

 

By-product credits per ounce were higher in the first quarter of 2017 compared to 2016 due to higher gold, zinc and lead prices and lower silver production.     

 

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

 

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

 

 

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

 

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

 

metallurgical treatment maximizes silver recovery;

 

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

 

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

 

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

 

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

 

 

The Lucky Friday Segment

 

Dollars are in thousands (except per ounce and per ton amounts)

 

Three Months Ended March 31,

 
   

2017

   

2016

 

Sales

  $ 20,010     $ 21,252  

Cost of sales and other direct production costs

    (12,110

)

    (15,500

)

Depreciation, depletion and amortization

    (2,433

)

    (3,004

)

Gross profit

  $ 5,467     $ 2,748  

Tons of ore milled

    57,069       74,021  

Production:

               

Silver (ounces)

    680,782       977,084  

Lead (tons)

    3,827       5,951  

Zinc (tons)

    2,131       2,753  

Payable metal quantities sold:

               

Silver (ounces)

    641,004       928,801  

Lead (tons)

    3,596       5,507  

Zinc (tons)

    1,688       1,930  

Ore grades:

               

Silver ounces per ton

    12.39       13.67  

Lead percent

    7.05       8.36  

Zinc percent

    3.99       3.97  

Mining cost per ton

  $ 104.72     $ 98.02  

Milling cost per ton

  $ 27.16     $ 23.35  

Cash Cost, After By-product Credits, per Silver Ounce (1)

  $ 5.93     $ 9.05  

AISC, After By-product Credits, per Silver Ounce (1)

  $ 12.06     $ 21.78  

 

 

(1)

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

 

Gross profit increased by $2.7 million in the first quarter of 2017 compared to 2016. The variance is primarily due to higher silver, lead, and zinc prices, partially offset by reduced metal production as a result of the suspension of operations starting in mid-March 2017 due to a strike by unionized employees, discussed further below. Silver and lead production was also impacted by lower ore grades.

 

Mining and milling cost per ton increased by 7% and 16%, respectively, in the first quarter of 2017 compared to the same period in 2016 due primarily to lower ore production as a result of the strike described below.

 

 

The chart below illustrates the factors contributing to the variances in Cash Cost, After By-product Credits, per Silver Ounce for the first quarter of 2017 compared to the same period of 2016:

 

 

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

 

   

Three Months Ended March 31,

 
   

2017

   

2016

 

Cash Cost, Before By-product Credits, per Silver Ounce

  $ 22.90     $ 21.13  

By-product credits

    (16.97

)

    (12.08

)

Cash Cost, After By-product Credits, per Silver Ounce

  $ 5.93     $ 9.05  

  

 

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

 

   

Three Months Ended March 31,

 
   

2017

   

2016

 

AISC, Before By-product Credits, per Silver Ounce

  $ 29.03     $ 33.86  

By-product credits

    (16.97

)

    (12.08

)

AISC, After By-product Credits, per Silver Ounce

  $ 12.06     $ 21.78  

 

The decrease in Cash Cost, After By-product Credits, per Silver Ounce in the first quarter of 2017 compared to the first quarter of 2016 was the result of higher by-product credits due to higher lead and zinc prices, partially offset by lower silver production. The decrease in AISC, After By-product Credits, per Silver Ounce is due to the same factors impacting Cash Cost, After By-product Credits, per Silver Ounce, along with lower capital costs primarily as a result of completion of the #4 Shaft project in January 2017.

 

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

 

 

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

 

 

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

 

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

 

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

 

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

 

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

 

Many of the employees at our Lucky Friday unit are represented by a union, and the most recent collective bargaining agreement with the union expired on April 30, 2016. On February 19, 2017, the unionized employees voted against our contract offer. On March 13, 2017, the unionized employees went on strike, and have been on strike since that time. Production at the Lucky Friday has been suspended since start of the strike. Costs related to care-and-maintenance of the mine during the strike period are reported in a separate line item on our condensed consolidated statement of operations and totaled $1.6 million in the first quarter of 2017. These care-and-maintenance costs are excluded from the calculation of gross profit, Cash Cost, After By-product Credits, per Silver Ounce and AISC, After By-product Credits, per Silver Ounce. We cannot predict how long the strike will last or whether an agreement will be reached. As a result of the strike or other related events, operations at Lucky Friday could continue to be disrupted, which could adversely affect our financial condition and results of operations.

 

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

 

 

The Casa Berardi Segment

 

Dollars are in thousands (except per ounce and per ton amounts)

 

Three Months Ended March 31,

 
   

2017

   

2016

 

Sales

  $ 41,712     $ 32,198  

Cost of sales and other direct production costs

    (29,953

)

    (20,659

)

Depreciation, depletion and amortization

    (12,514

)

    (8,501

)

Gross (loss) profit

  $ (755

)

  $ 3,038  

Tons of ore milled

    293,697       216,962  

Production:

               

Gold (ounces)

    35,807       30,378  

Silver (ounces)

    8,545       7,005  

Payable metal quantities sold:

               

Gold (ounces)

    34,166       27,427  

Silver (ounces)

    7,899       7,864  

Ore grades:

               

Gold ounces per ton

    0.14       0.16  

Silver ounces per ton

    0.03       0.04  

Mining cost per ton

  $ 86.58     $ 87.54  

Milling cost per ton

  $ 17.26     $ 18.91  

Cash Cost, After By-product Credits, per Gold Ounce (1)

  $ 886     $ 781  

AISC, After By-product Credits, per Gold Ounce (1)

  $ 1,256     $ 1,322  

 

 

(1)

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

 

Gross profit decreased by $3.8 million for the first quarter of 2017 compared to the same period in 2016. The decrease is primarily due to increased costs, mainly resulting from the additional costs related to the East Mine Crown Pillar ("EMCP") pit, including ongoing stripping costs, and lower ore grades, partially offset by higher gold prices and ore production. Processing of ore from the EMCP pit began in July 2016, resulting in increased ore volume, but at a lower grade.

 

Mining and milling cost per ton for the first quarter of 2017 were lower than the first quarter of 2016 by 1% and 9%, respectively, primarily due to higher ore production. This was partially offset by foreign exchange differences, as the U.S. dollar was weaker relative to the Canadian dollar in the first quarter of 2017 than it was in the first quarter of 2016.

 

 

The chart below illustrates the factors contributing to Cash Cost, After By-product Credits, per Gold Ounce for the first quarter of 2017 compared to the same period of 2016:

 

 

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

 

   

Three Months Ended March 31,

 
   

2017

   

2016

 

Cash Cost, Before By-product Credits, per Gold Ounce

  $ 890     $ 785  

By-product credits

    (4

)

    (3

)

Cash Cost, After By-product Credits, per Gold Ounce

  $ 886     $ 782  

  

 

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

 

   

Three Months Ended March 31,

 
   

2017

   

2016

 

AISC, Before By-product Credits, per Gold Ounce

  $ 1,260     $ 1,325  

By-product credits

    (4

)

    (3

)

AISC, After By-product Credits, per Gold Ounce

  $ 1,256     $ 1,322  

 

 

The increase in Cash Cost, After By-product Credits, per Gold Ounce for the first quarter of 2017 compared to the first quarter of 2016 was primarily the result of higher costs as a result of addition of production from the EMCP pit, partially offset by higher gold production. The decrease in AISC, After By-product Credits, per Gold Ounce was due to lower capital spending and higher gold production, partially offset by higher production costs.

 

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

 

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

 

 

The San Sebastian Segment

 

Dollars are in thousands (except per ounce and per ton amounts)

 

Three Months Ended March 31,

 
   

2017

   

2016

 

Sales

  $ 21,972     $ 23,685  

Cost of sales and other direct production costs

    (5,950

)

    (6,909

)

Depreciation, depletion and amortization

    (673

)

    (769

)

Gross profit

  $ 15,349     $ 16,007  

Tons of ore milled

    36,663       31,158  

Production:

               

Silver (ounces)

    750,803       1,200,339  

Gold (ounces)

    6,284       9,329  

Payable metal quantities sold:

               

Silver (ounces)

    780,750       958,007  

Gold (ounces)

    6,915       7,413  

Ore grades:

               

Silver ounces per ton

    21.78       41.26  

Gold ounces per ton

    0.183       0.322  

Mining cost per ton

  $ 38.99     $ 103.72  

Milling cost per ton

  $ 64.15     $ 69.62  

Cash Cost, After By-product Credits, per Silver Ounce (1)

  $ (3.27

)

  $ (3.26

)

AISC, After By-product Credits, per Silver Ounce (1)

  $ 0.43     $ (2.28

)

 

 

(1)

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

 

The $0.7 million decrease in gross profit in the first quarter of 2017 compared to the same period of 2016 is primarily due to lower silver and gold production as a result of lower ore grades, partially offset by higher ore throughput. The ore processed in the first quarter of 2016 had considerably higher grades than anticipated over the mine life. The impact of lower metals production was partially offset by higher average silver and gold prices.

 

 

The chart below illustrates the factors contributing to Cash Cost, After By-product Credits, Per Silver Ounce for the first quarter of 2017 compared to the same period of 2016:

 

 

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

 

   

Three Months Ended March 31,

 
   

2017

   

2016

 

Cash Cost, Before By-product Credits, per Silver Ounce

  $ 6.93     $ 6.00  

By-product credits

    (10.20

)

    (9.26

)

Cash Cost, After By-product Credits, per Silver Ounce

  $ (3.27

)

  $ (3.26

)

 

 

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

 

   

Three Months Ended March 31,

 
   

2017

   

2016

 

AISC, Before By-product Credits, per Silver Ounce

  $ 10.63     $ 6.98  

By-product credits

    (10.20

)

    (9.26

)

AISC, After By-product Credits, per Silver Ounce

  $ 0.43     $ (2.28

)

 

The slight decrease in Cash Cost, After By-product Credits, per Silver Ounce in the first quarter of 2017 compared to the same period of 2016 was primarily the result of higher by-product credits per ounce due to higher gold prices and the impact of lower silver production, partially offset by lower gold production, and lower mining costs as a result of reduced mining of waste. The increase in AISC, After By-product Credits, per Silver Ounce was the result of higher exploration and capital spending, partially offset by higher by-product credits per ounce.

 

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

 

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

 

 

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

 

 

Corporate Matters

 

Employee Benefit Plans

 

Our defined benefit pension plans, while affording a significant benefit to our employees, also represent a significant liability to us. The liability recorded for the funded status of our plans was $46.9 million and $44.9 million as of March 31, 2017 and December 31, 2016, respectively. In April 2017, we contributed $1.2 million in cash to our defined benefits plans, and expect to contribute an additional $2.8 million in cash or shares of our common stock to our defined benefit plans in 2017. While the economic variables which will determine future funding requirements are uncertain, we expect contributions to continue to be required in future years under current plan provisions, and we periodically examine the plans for affordability and competitiveness. See Note 7 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information.

 

Income Taxes

 

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

 

Our U.S. net deferred tax asset at March 31, 2017 totaled $48.4 million, or 2% of total assets, an increase of $12.6 million from the $35.8 million net deferred tax asset at December 31, 2016. The largest component of the deferred tax asset is net operating loss carryforwards. The next largest component is deferred foreign exchange losses. We have previously determined that we are an indefinite AMT taxpayer, resulting in additional valuation allowance primarily related to forecasted utilization of regular net operating loss carryforwards and the effect of re-measuring temporary deferred tax assets using a tax rate of 20% which differed from the previous rate of 35%. During the fourth quarter of 2016, we determined that we are eligible to take a different income tax position relating to the timing of deductions for #4 Shaft development costs at Lucky Friday. We filed with the Internal Revenue Service ("IRS") a request for approval to use this method, which was approved in the first quarter of 2017. The change resulted in additional deductions of approximately $203 million and $110 million for regular tax and AMT, respectively, resulting in a current tax benefit of approximately $10.7 million for the reduction in 2016 AMT payable. In addition, this change in tax position substantially changes the timing of additional deductions for these costs for regular tax and AMT relative to our projected life of mine and projected taxable income. These timing changes caused us to change our assessment of the ability to generate sufficient future taxable income to realize our deferred tax assets, resulting in a valuation allowance decrease and deferred tax benefit of approximately $15.1 million in the first quarter of 2017. At March 31, 2017, we retained a valuation allowance on U.S. deferred tax assets of approximately $78 million, primarily for net operating loss carryforwards.

 

Our net Canadian deferred tax liability at March 31, 2017 was $121.0 million, a decrease of $1.9 million from the $122.9 million net deferred tax liability at December 31, 2016. The deferred tax liability is primarily related to the excess of the carrying value of the mineral resource assets over the tax bases of those assets for Canadian tax reporting.

 

We had no Mexican deferred tax asset or liability at March 31, 2017 or December 31, 2016. We expect to have unremitted earnings in Mexico by the end 2017; however, we anticipate being able to fully offset any U.S. tax impact of repatriating any Mexican earnings with foreign tax credits that are available to use for both regular tax and AMT. Accordingly, we estimate the net U.S. income tax impact of unremitted earnings to be zero. A $3.6 million valuation allowance remains on deferred tax assets in foreign jurisdictions.

 

 

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

 

The tables below present reconciliations between the most comparable GAAP measure of cost of sales and other direct production costs and depreciation, depletion and amortization to the non-GAAP measures of Cash Cost, Before By-product Credits, Cash Cost, After By-product Credits, AISC, Before By-product Credits and AISC, After By-product Credits for our operations at the Greens Creek, Lucky Friday, San Sebastian and Casa Berardi units and for the Company for the three-month periods ended March 31, 2017 and 2016.

 

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

 

Cash Cost, Before By-product Credits and AISC, Before By-product Credits include all direct and indirect operating cash costs related directly to the physical activities of producing metals, including mining, processing and other plant costs, third-party refining expense, on-site general and administrative costs, royalties and mining production taxes. AISC, Before By-product Credits for each mine also includes on-site exploration, reclamation, and sustaining capital costs. AISC, Before By-product Credits for our consolidated silver properties also includes corporate costs for general and administrative expense, exploration and sustaining capital projects. By-product credits include revenues earned from all metals other than the primary metal produced at each unit. As depicted in the tables below, by-product credits comprise an essential element of our silver unit cost structure, distinguishing our silver operations due to the polymetallic nature of their orebodies. Cash Cost, After By-product Credits, per Ounce and AISC, After By-product Credits, per Ounce provide management and investors an indication of operating cash flow, after consideration of the average price, received from production. We also use these measurements for the comparative monitoring of performance of our mining operations period-to-period from a cash flow perspective. Cash Cost, After By-product Credits, per Ounce is a measure developed by precious metals companies (including the Silver Institute) in an effort to provide a uniform standard for comparison purposes. There can be no assurance, however, that these non-GAAP measures as we report them are the same as those reported by other mining companies.

 

 

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

 

In thousands (except per ounce amounts)

 

Three Months Ended March 31, 2017

 
   

Greens

Creek

   

Lucky

Friday(2)

   

San

Sebastian

   

Corporate(3)

   

Total

Silver

   

Casa

Berardi

(Gold)

   

Total

 

Cost of sales and other direct production costs and depreciation, depletion and amortization

  $ 43,996     $ 14,543     $ 6,623             $ 65,162     $ 42,466     $ 107,628  

Depreciation, depletion and amortization

    (13,332

)

    (2,433

)

    (673

)

            (16,438

)

    (12,514

)

    (28,952

)

Treatment costs

    14,131       3,817       225               18,173       571       18,744  

Change in product inventory

    3,265       (149

)

    (380

)

            2,736       1,381       4,117  

Reclamation and other costs

    (386

)

    (182

)

    (590

)

            (1,158

)

    (17

)

    (1,175

)

Cash Cost, Before By-product Credits (1)

    47,674       15,596       5,205               68,475       31,887       100,362  

Reclamation and other costs

    666       179       117               962       17       979  

Exploration

    278       1       1,532       378       2,189       797       2,986  

Sustaining capital

    5,234       3,990       1,132       5       10,361       12,411       22,772  

General and administrative

                            9,206       9,206               9,206  

AISC, Before By-product Credits (1)

    53,852       19,766       7,986               91,193       45,112       136,305  

By-product credits:

                                                       

Zinc

    (23,779

)

    (4,060

)

                    (27,839

)

            (27,839

)

Gold

    (14,852

)

            (7,657

)

            (22,509

)

            (22,509

)

Lead

    (7,782

)

    (7,496

)

                    (15,278

)

            (15,278

)

Silver

                                            (147

)

    (147

)

Total By-product credits

    (46,413

)

    (11,556

)

    (7,657

)

            (65,626

)

    (147

)

    (65,773

)

Cash Cost, After By-product Credits

  $ 1,261     $ 4,040     $ (2,452

)

          $ 2,849     $ 31,740     $ 34,589  

AISC, After By-product Credits

  $ 7,439     $ 8,210     $ 329             $ 25,567     $ 44,965     $ 70,532  
                                                         

Divided by ounces produced

    1,929       681       751               3,361       36          

Cash Cost, Before By-product Credits, per Ounce

  $ 24.71     $ 22.90     $ 6.93             $ 20.37     $ 890.53          

By-product credits per ounce

    (24.06

)

    (16.97

)

    (10.20

)

            (19.53

)

    (4.11

)

       

Cash Cost, After By-product Credits, per Ounce

  $ 0.65     $ 5.93     $ (3.27

)

          $ 0.84     $ 886.42          

AISC, Before By-product Credits, per Ounce

  $ 27.92     $ 29.03     $ 10.63             $ 27.13     $ 1,259.87          

By-product credits per ounce

    (24.06

)

    (16.97

)

    (10.20

)

            (19.53

)

    (4.11

)

       

AISC, After By-product Credits, per Ounce

  $ 3.86     $ 12.06     $ 0.43             $ 7.60     $ 1,255.76          

 

 

In thousands (except per ounce amounts)

 

Three Months Ended March 31, 2016

 
   

Greens

Creek

   

Lucky

Friday(2)

   

San

Sebastian

   

Corporate(3)

   

Total

Silver

   

Casa

Berardi

(Gold)

   

Total

 

Cost of sales and other direct production costs and depreciation, depletion and amortization

  $ 44,854     $ 18,505     $ 7,677             $ 71,036     $ 29,159     $ 100,195  

Depreciation, depletion and amortization

    (13,601

)

    (3,004

)

    (769

)

            (17,374

)

    (8,501

)

    (25,875

)

Treatment costs

    15,638       5,334       (9

)

            20,963       171       21,134  

Change in product inventory

    1,640       (21

)

    340               1,959       3,118       5,077  

Reclamation and other costs

    (398

)

    (166

)

    (41

)

            (605

)

    (111

)

    (716

)

Cash Cost, Before By-product Credits (1)

    48,133       20,648       7,198               75,979       23,836       99,815  

Reclamation and other costs

    682       165       42               889       111       1,000  

Exploration

    488             650       473       1,611       717       2,328  

Sustaining capital

    6,376       12,266       490       37       19,169       15,611       34,780  

General and administrative

                            10,214       10,214               10,214  

AISC, Before By-product Credits (1)

    55,679       33,079       8,380               107,862       40,275       148,137  

By-product credits:

                                                       

Zinc

    (15,684

)

    (3,133

)

                    (18,817

)

            (18,817

)

Gold

    (16,340

)

            (11,116

)

            (27,456

)

            (27,456

)

Lead

    (6,384

)

    (8,673

)

                    (15,057

)

            (15,057

)

Silver

                                            (103

)

    (103

)

Total By-product credits

    (38,408

)

    (11,806

)

    (11,116

)

            (61,330

)

    (103

)

    (61,433

)

Cash Cost, After By-product Credits

  $ 9,725     $ 8,842     $ (3,918

)

          $ 14,649     $ 23,733     $ 38,382  

AISC, After By-product Credits

  $ 17,271     $ 21,273     $ (2,736

)

          $ 46,532     $ 40,172     $ 86,704  
                                                         

Divided by ounces produced

    2,458       977       1,200               4,635       30          

Cash Cost, Before By-product Credits, per Ounce

  $ 19.58     $ 21.13     $ 6.00             $ 16.39     $ 784.66          

By-product credits per ounce

    (15.62

)

    (12.08

)

    (9.26

)

            (13.23

)

    (3.39

)

       

Cash Cost, After By-product Credits, per Ounce

  $ 3.96     $ 9.05     $ (3.26

)

          $ 3.16     $ 781.27          

AISC, Before By-product Credits, per Ounce

  $ 22.65     $ 33.86     $ 6.98             $ 23.27     $ 1,325.79          

By-product credits per ounce

    (15.62

)

    (12.08

)

    (9.26

)

            (13.23

)

    (3.39

)

       

AISC, After By-product Credits, per Ounce

  $ 7.03     $ 21.78     $ (2.28

)

          $ 10.04     $ 1,322.40          

 

(1)

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

 

(2)

The unionized employees at Lucky Friday have been on strike since March 13, 2017, and production at Lucky Friday has been suspended since that time. Costs related to the suspension period totaling approximately $1.6 million in the first quarter of 2017 have been excluded from the calculations of cost of sales and other direct production costs and depreciation, depletion and amortization, Cash Cost, Before By-product Credits, Cash Cost, After By-product Credits, AISC, Before By-product Credits, and AISC, After By-product Credits.

 

(3)

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

 

 

Financial Liquidity and Capital Resources

 

Our liquid assets include (in millions):

 

   

March 31,

2017

   

December 31,

2016

 

Cash and cash equivalents held in U.S. dollars

  $ 152.2     $ 156.1  

Cash and cash equivalents held in foreign currency

    24.6       13.7  

Total cash and cash equivalents

    176.8       169.8  

Marketable debt securities, current

    36.5       29.1  

Marketable equity securities, non-current

    5.1       5.0  

Total cash, cash equivalents and investments

  $ 218.4     $ 203.9  

 

Cash and cash equivalents increased by $7.0 million in the first three months of 2017, as discussed below. Cash held in foreign currencies represents balances in Canadian dollars and Mexican pesos, with the $10.9 million increase in the first quarter of 2017 resulting primarily from an increase in Mexican pesos held. Current marketable debt securities increased by $7.4 million (discussed below), and the value of non-current marketable equity securities increased by $0.1 million (see Note 2 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information).

 

As discussed in Note 9 of Notes to Condensed Consolidated Financial Statements (Unaudited), on April 12, 2013, we completed an offering of Senior Notes in the total principal amount of US$500 million, which have a total principal balance of $506.5 million as of March 31, 2017. The Senior Notes are due May 1, 2021 and bear interest at a rate of 6.875% per year from the most recent payment date to which interest has been paid or provided for.  Interest on the Senior Notes is payable on May 1 and November 1 of each year, commencing November 1, 2013, and we have made all interest payments payable to date.

 

In the third quarter of 2015, we made a development decision to mine near surface, high grade portions of the silver and gold deposits at our San Sebastian project in Mexico and commenced ore production at the end of 2015.  As a result, San Sebastian has generated positive cash flows since the start of production there. In January 2017, we initiated work to develop and rehabilitate underground access which, upon completion, would allow us to mine deeper portions of the deposits at San Sebastian. We anticipate San Sebastian will continue to generate positive cash flows in 2017 and 2018.  However, our estimate of costs could change, and our ability to generate cash flow at San Sebastian could be impacted by changes in precious metals prices or other factors, and there can be no assurance that we will be able to develop and operate San Sebastian as anticipated.

 

As further discussed in the Lucky Friday Segment section above, the union employees at Lucky Friday have been on strike since March 13, 2017, and production at Lucky Friday has been suspended since that time. 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.

 

As discussed in Note 8 of Notes to Condensed Consolidated Financial Statements (Unaudited), in February 2016 we entered into an equity distribution agreement under which we may issue and sell shares of our common stock from time to time having an aggregate offering price of up to $75 million, with the net proceeds available for general corporate purposes. Whether or not we engage in sales from time to time may depend on a variety of factors, including share price, our cash resources, customary black-out restrictions, and whether we have any material inside information, and the agreement can be terminated by us at any time. As of March 31, 2017, we had sold 2,780,087 shares through the at-the-market program for net proceeds of $8.1 million.

 

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

 

 

On May 8, 2012, we announced that our board of directors approved a stock repurchase program.  Under the program, we are authorized to repurchase up to 20 million shares of our outstanding common stock from time to time in open market or privately negotiated transactions, depending on prevailing market conditions and other factors.  The repurchase program may be modified, suspended or discontinued by us at any time. Whether or not we engage in repurchases from time to time may depend on a variety of factors, including not only price and cash resources, but customary black-out restrictions, whether we have any material inside information, limitations on share repurchases or cash usage that may be imposed by our credit agreement or in connection with issuances of securities, alternative uses for cash, applicable law, and other investment opportunities from time to time. As of March 31, 2017, 934,100 shares have been purchased in prior periods at an average price of $3.99 per share, leaving 19.1 million shares that may yet be purchased under the program. The closing price of our common stock at May 4, 2017, was $5.14 per share.

 

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

 

As a result of our current cash balances, the performance of our current and expected operations, current metals prices, proceeds from potential at-the-market sales of common stock, and full availability of our $100 million revolving credit facility, we believe our cash, cash equivalents, investments, projected cash from operations, and availability of financing (including equity issuances), if needed, will be adequate to meet our obligations and other potential cash requirements during the next 12 months. Our obligations and other uses of cash may include, but are not limited to: debt service obligations related to the Senior Notes, capital expenditures at our operations, potential acquisitions of other mining companies or properties, regulatory matters, litigation, potential repurchases of our common stock under the program described above, and payment of dividends on common stock, if declared by our board of directors. Capital expenditures are closely tied to operations, and because mining at Lucky Friday has halted due to the strike and we cannot predict how long the strike will last, we currently do not have an estimate of capital expenditures for the full year of 2017. We incurred $21.7 million in capital expenditures in the first three months of March 31, 2017.  We estimate that exploration and pre-development expenditures will total between $25 million and $30 million in 2017, including $5.8 million already incurred as of March 31, 2017. However, capital, exploration, and pre-development expenditures may change based upon our financial position, metals prices, and other considerations. Our ability to fund the activities described above will depend on our operating performance, metals prices, our ability to estimate costs, sources of liquidity available to us, and other factors. A sustained downturn in metals prices or significant increase in operational or capital costs, other uses of cash, or other factors beyond our control could impact our plans.

 

   

Three Months Ended

 
   

March 31,

2017

   

March 31,

2016

 

Cash provided by operating activities (in millions)

  $ 38.3     $ 18.7  

 

Cash provided by operating activities in the first quarter of 2017 increased by $19.6 million compared to the same period in 2016. The increase was primarily due to working capital and other operating asset and liability changes which resulted in a net cash flow increase of $21.7 million in the first three months of 2017 compared to a net decrease in cash flows of $21.5 million in the 2016 period.   The $0.2 million variance in working capital changes is attributed to lower accounts receivable due to the timing of sales at Greens Creek and Casa Berardi and higher payroll accruals due to the timing of payment of incentive compensation related to prior year performance. In addition, income, as adjusted for non-cash items, was higher by $19.5 million, due primarily to higher metals prices.  

 

   

Three Months Ended

 
   

March 31,

2017

   

March 31,

2016

 

Cash used in investing activities (in millions)

  $ (29.1

)

  $ (38.3

)

 

 

During the first quarter of 2017 we invested $21.7 million in capital expenditures, not including $1.8 million in capital lease additions, compared to $34.7 million in the same period in 2016, with the variance primarily due to lower costs for the #4 Shaft project, which was completed in January 2017.  During the first quarter of 2017, we purchased bonds having a cost basis of $11.1 million and maturities of greater than 90 days and less than 365 days. Bonds valued at $3.6 million matured during the first quarter of 2017. We incurred an increase in restricted cash of $3.9 million in the first quarter of 2016 related to the settlement of response costs at the Gilt Edge site by CoCa Mines, Inc., our wholly-owned subsidiary.

 

   

Three Months Ended

 
   

March 31, 2017

   

March 31, 2016

 

Cash used in financing activities (in millions)

  $ (4.0

)

  $ (3.1

)

 

We paid cash dividends of $1.0 million on our common stock and cash dividends of $0.1 million on our Series B Preferred Stock during the first quarter of each of 2017 and 2016. We made repayments on our capital leases of $1.6 million and $2.1 million, respectively, in the first quarter of 2017 and 2016. In the first quarter of 2017 and 2016, we also made repayments of debt totaling $0.5 million and $0.7 million, respectively. In addition, during the first quarter of 2017 and 2016, we acquired treasury shares for $0.7 million and $1.3 million, respectively, as the result of employees' elections to satisfy their tax withholding obligations related to incentive compensation paid in stock through net share settlement. See Note 8 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information. During the first quarter of 2016, we received $2.1 million in proceeds from the sale of shares of our common stock under the equity distribution agreement discussed above.

 

 

Contractual Obligations, Contingent Liabilities and Commitments

 

The table below presents our fixed, non-cancelable contractual obligations and commitments primarily related to our Senior Notes, outstanding purchase orders, certain capital expenditures, our credit facility and lease arrangements as of March 31, 2017 (in thousands):

 

   

Payments Due By Period

 
   

Less than 1

year

   

1-3 years

   

4-5 years

   

More than

5 years

   

Total

 

Purchase obligations (1)

  $ 11,810     $     $     $     $ 11,810  

Commitment fees (2)

    500       317                   817  

Contractual obligations (3)

    1,769                         1,769  

Capital lease commitments (4)

    5,988       5,717       604             12,309  

Operating lease commitments (5)

    4,045       3,074       1,556       476       9,151  

Supplemental executive retirement plan (6)

    428       991       1,296       4,169       6,884  

Defined benefit pension plans (6)

    3,986                         3,986  

Senior Notes (7)

    34,822       69,644       544,224             648,690  

Total contractual cash obligations

  $ 63,348     $ 79,743     $ 547,680     $ 4,645     $ 695,416  

 

 

(1)

Consist of open purchase orders of approximately $9.5 million at the Greens Creek unit, $0.2 million at the Lucky Friday unit and $2.1 million at the Casa Berardi unit.  

 

 

(2)

We have a $100 million revolving credit agreement under which we are required to pay a standby fee of 0.5% per annum on undrawn amounts under the revolving credit agreement. There was no amount drawn under the revolving credit agreement as of March 31, 2017, and the amounts above assume no amounts will be drawn during the agreement's term.  For more information on our credit facility, see Note 9 of Notes to Condensed Consolidated Financial Statements (Unaudited).

 

 

 

(3)

As of March 31, 2017, we were committed to approximately $1.8 million for various items.

 

 

(4)

Includes scheduled capital lease payments of $3.4 million, $4.7 million, and $4.2 million (including interest), respectively, for equipment at our Greens Creek, Lucky Friday and Casa Berardi units.  These leases have fixed payment terms and contain bargain purchase options at the end of the lease periods (see Note 9 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information).

 

 

(5)

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

 

 

(6)

We sponsor defined benefit pension plans covering substantially all U.S. employees and provide certain post-retirement benefits for qualifying retired employees, along with a supplemental executive retirement plan. These amounts represent our estimate of the future funding requirements for these plans.  We believe we will have funding requirements related to our defined benefit plans beyond one year; however, such obligations are not fixed in nature and are difficult to estimate, as they involve significant assumptions. See Note 7 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information.

 

 

(7)

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

 

We record liabilities for costs associated with mine closure, reclamation of land and other environmental matters.  At March 31, 2017, our liabilities for these matters totaled $86.8 million. Future expenditures related to closure, reclamation and environmental expenditures at our sites are difficult to estimate, although we anticipate we will incur expenditures relating to these obligations over the next 30 years. For additional information relating to our environmental obligations, see Note 4 of Notes to Condensed Consolidated Financial Statements (Unaudited).

 

 

Off-Balance Sheet Arrangements

 

At March 31, 2017, we had no existing off-balance sheet arrangements, as defined under SEC regulations, that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

 

Critical Accounting Estimates

 

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

 

 

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

 

Future Metals Prices

 

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

 

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

 

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

 

 

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

 

Obligations for Environmental, Reclamation and Closure Matters

 

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

 

Mineral Reserves

 

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

 

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

 

Business Combinations

 

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

 

 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

 

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

 

Provisional Sales

 

Sales of all metals products sold directly to customers, including by-product metals, are recorded as revenues when title and risk of loss transfers to the customer (generally at the time of shipment) at forward prices for the estimated month of settlement. Due to the time elapsed between shipment to the customer and the final settlement with the customer we must estimate the prices at which sales of our metals will be settled. Previously recorded sales are adjusted to estimated settlement metals prices until final settlement by the customer.  Changes in metals prices between shipment and final settlement will result in changes to revenues previously recorded upon shipment.  Metals prices can and often do fluctuate widely and are affected by numerous factors beyond our control (see Item 1A – Risk Factors – A substantial or extended decline in metals prices would have a material adverse effect on us in our annual report filed on Form 10-K for the year ended December 31, 2016).  At March 31, 2017, metals contained in concentrates and exposed to future price changes totaled approximately 1.5 million ounces of silver, 6,313 ounces of gold, 11,108 tons of zinc, and 2,180 tons of lead.  If the price for each metal were to change by 10%, the change in the total value of the concentrates sold would be approximately $6.7 million.  However, as discussed in Commodity-Price Risk Management below, we utilize a program designed and intended to mitigate the risk of negative price adjustments with limited mark-to-market financially-settled forward contracts for our silver, gold, zinc and lead sales.

 

Commodity-Price Risk Management

 

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

 

As of March 31, 2017, we recorded the following balances for the fair value of the contracts:

 

 

a current asset of $0.2 million, which is included in other current assets;

 

a current liability of $2.0 million, which is included in other current liabilities and is net of $0.7 million for contracts in a fair value current asset position; and

 

a non-current liability of $0.4 million, which is included in other non-current liabilities and is net of $0.2 million for contracts in a fair value non-current asset position.

 

We recognized a $4.1 million net loss during the first quarter of 2017 on the contracts utilized to manage exposure to prices of metals in our concentrate shipments, which is included in sales of products.  The net loss recognized on the contracts offsets gains related to price adjustments on our provisional concentrate sales due to changes to silver, gold, lead and zinc prices between the time of sale and final settlement.

 

 

We recognized a $7.8 million net loss during the first quarter of 2017 on the contracts utilized to manage exposure to prices for forecasted future concentrate shipments. The net loss on these contracts is included as a separate line item under other income (expense), as they relate to forecasted future shipments, as opposed to sales that have already taken place but are subject to final pricing as discussed in the preceding paragraph.  The net loss for the first quarter of 2017 is the result of higher zinc and lead prices. This program, when utilized, is designed to mitigate the impact of potential future declines in lead and zinc prices from the price levels established in the contracts (see average price information below).

 

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

 

 

March 31, 2017

 

Ounces/pounds under contract (in 000's)

   

Average price per ounce/pound

 
   

Silver

   

Gold

   

Zinc

   

Lead

   

Silver

   

Gold

   

Zinc

   

Lead

 
   

(ounces)

   

(ounces)

   

(pounds)

   

(pounds)

   

(ounces)

   

(ounces)

   

(pounds)

   

(pounds)

 

Contracts on provisional sales

                                                               

2017 settlements

    1,455       6       20,999       4,079     $ 18.10     $ 1,245     $ 1.27     $ 1.03  

Contracts on forecasted sales

                                                               

2017 settlements

                17,527       11,133       N/A       N/A     $ 1.23     $ 1.05  

2018 settlements

                20,613       9,700       N/A       N/A     $ 1.23     $ 1.06  

2019 settlements

                1,102             N/A       N/A     $ 1.21       N/A  

 

 

December 31, 2016

 

Ounces/pounds under contract (in 000's)

   

Average price per ounce/pound

 
   

Silver

   

Gold

   

Zinc

   

Lead

   

Silver

   

Gold

   

Zinc

   

Lead

 
   

(ounces)

   

(ounces)

   

(pounds)

   

(pounds)

   

(ounces)

   

(ounces)

   

(pounds)

   

(pounds)

 

Contracts on provisional sales

                                                               

2017 settlements

    1,295       4       19,070       7,441     $ 16.29     $ 1,172     $ 1.18     $ 0.97  

Contracts on forecasted sales

                                                               

2017 settlements

                35,384       17,637       N/A       N/A     $ 1.19     $ 1.03  

2018 settlements

                13,779       5,732       N/A       N/A     $ 1.21     $ 1.05  

 

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

 

Foreign Currency

 

We operate or have mining interests in Canada and Mexico, which exposes us to risks associated with fluctuations in the exchange rates between the U.S. dollar and the Canadian dollar and Mexican peso. We have determined that the functional currency for our Canadian and Mexican operations is the USD. As such, foreign exchange gains and losses associated with the re-measurement of monetary assets and liabilities from CAD and MXN to USD are recorded to earnings each period. For the three months ended March 31, 2017, we recognized a net foreign exchange loss of $2.3 million. Foreign currency exchange rates are influenced by a number of factors beyond our control. A 10% change in the exchange rate between the USD and CAD from the rate at March 31, 2017 would have resulted in a change of approximately $13.7 million in our net foreign exchange gain or loss. A 10% change in the exchange rate between the USD and MXN from the rate at March 31, 2017 would have resulted in a change of approximately $0.9 million in our net foreign exchange gain or loss.

 

 

In April 2016, we initiated a program to manage our exposure to fluctuations in the exchange rate between the USD and CAD and the impact on our future operating costs denominated in CAD. In October 2016, we also initiated a program to manage our exposure to the impact of fluctuations in the exchange rate between the USD and MXN on our future operating costs denominated in MXN. The programs utilize forward contracts to buy CAD and MXN, and each contract is designated as a cash flow hedge. As of March 31, 2017, we have 118 forward contracts outstanding to buy CAD$260.1 million having a notional amount of USD$200.0 million, and 18 forward contracts outstanding to buy MXN$150.0 million having a notional amount of USD$7.6 million. The CAD contracts represent between approximately 20% and 75% of our annual forecasted cash operating costs at Casa Berardi from 2017 through 2020 and have CAD-to-USD exchange rates ranging between 1.2787 and 1.3380. The MXN contracts represent approximately 75% of our forecasted cash operating costs at San Sebastian for 2017 and have MXN-to-USD exchange rates ranging between 19.1956 and 21.0000. Our risk management policy allows for up to 75% of our planned cost exposure for five years into the future to be hedged under such programs, and for potential additional programs to manage other foreign currency-related exposure areas.

 

As of March 31, 2017, we recorded the following balances for the fair value of the contracts:

 

 

a current asset of $0.2 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 $1.6 million, which is included in other current liabilities, and

 

a non-current liability of $1.2 million, which is included in other non-current liabilities.

 

Net unrealized losses of approximately $2.0 million related to the effective portion of the hedges were included in accumulated other comprehensive income as of March 31, 2017, and are net of related 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 $1.4 million in net unrealized losses included in accumulated other comprehensive income as of March 31, 2017 would be reclassified to current earnings in the next twelve months. Net realized losses of approximately $0.1 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 three months ended March 31, 2017. Net unrealized gains of approximately $10 thousand related to ineffectiveness of the hedges were included in gain (loss) on derivatives contracts on our consolidated statements of operations and comprehensive income (loss) for the three months ended March 31, 2017.

 

 

Item 4.    Controls and Procedures

 

An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures as required by Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report.  Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures, including controls and procedures designed to ensure that information required to be disclosed by us is accumulated and communicated to our management (including our CEO and CFO), were effective as of March 31, 2017, in assuring them in a timely manner that material information required to be disclosed in this report has been properly recorded, processed, summarized and reported. There were no changes in our internal control over financial reporting during the quarter ended March 31, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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

 

 

Part II - Other Information

 

Hecla Mining Company and Subsidiaries

 

 

Item 1.    Legal Proceedings

 

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

 

Item 1A.    Risk Factors

 

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

 

Item 4. Mine Safety Disclosures

 

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

 

Item 6.    Exhibits

 

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

 

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

 

 

Hecla Mining Company and Subsidiaries

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

   

HECLA MINING COMPANY

   

   (Registrant)

       

Date:

May 8, 2017

By:

/s/ Phillips S. Baker, Jr.

     

Phillips S. Baker, Jr., President,

     

Chief Executive Officer and Director

       

Date:

May 8, 2017

By:

/s/ Lindsay A. Hall

     

Lindsay A. Hall, Senior Vice President and

     

Chief Financial Officer

 

 

Hecla Mining Company and Wholly Owned Subsidiaries

Form 10-Q – March 31, 2017

Index to Exhibits

 

3.1

Restated Certificate of Incorporation of the Registrant. Filed as exhibit 3.1 to Registrant’s Current Report on Form 8-K filed on December 12, 2014 (File No. 1-8491), and incorporated herein by reference.

 

3.2

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

 

4.1(a)

Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of the Registrant. Filed as exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 (File No 1-8491), and incorporated herein by reference.

 

4.1(b)

Certificate of Designations, Preferences and Rights of Series B Cumulative Convertible Preferred Stock of the Registrant. Filed as exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 (File No. 1-8491), and incorporated herein by reference.

 

4.2(a)

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

 

4.2(b)

Supplemental Indenture, dated as of April 14, 2014, among Hecla Mining Company, as Issuer, certain subsidiaries of Hecla Mining Company, as Guarantors thereto, and The Bank of New York Mellon Trust Company, N.A., as Trustee. Filed as exhibit 4.2 to Registrant’s registration statement on Form S-3ASR filed on April 14, 2014 (Registration No. 333-195246), and incorporated herein by reference.

 

4.2(c)

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

 

4.2(d)

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

 

10.1

Form of Indemnification Agreement, dated January 1, 2017, between Registrant and Catherine J. Boggs. Filed as exhibit 10.7 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (File No. 1-8491), and incorporated herein by reference. (1)

 

10.2

Hecla Mining Company Amended Annual Incentive Plan. (1) *

 

10.3

Hecla Mining Company Executive and Senior Management Long-Term Performance Payment Plan (As Amended and Restated Effective January 1, 2017). (1) *

 

 

31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

 

31.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

 

32.1

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

 

32.2

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

 

95

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

 

101.INS

XBRL Instance. **

 

101.SCH

XBRL Taxonomy Extension Schema.**

 

101.CAL

XBRL Taxonomy Extension Calculation.**

 

101.DEF

XBRL Taxonomy Extension Definition.**

 

101.LAB

XBRL Taxonomy Extension Labels.**

 

101.PRE

XBRL Taxonomy Extension Presentation.**

___________________

 

(1) Indicates a management contract or compensatory plan or arrangement.

 

 

* Filed herewith.

 

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

 

 

57

Exhibit 10.2

 

 

HECLA MINING COMPANY

AMENDED ANNUAL INCENTIVE PLAN

 


 

Introduction

 

Effective as of July 2, 1994, Hecla Mining Company adopted the Hecla Mining Company Performance Pay Compensation Plan (the "Prior Plan"). Effective as of February 20, 2014, pursuant to action of the Board of Directors of Hecla Mining Company (the "Board"), the Prior Plan is hereby amended and restated, and is now known as the Hecla Mining Company Annual Incentive Plan and shall have the terms and conditions set forth herein (the "Plan" or "AIP").

 

Purpose

 

This Plan is designed to provide a significant and variable economic opportunity to selected officers and employees of the Company as a reflection of their individual and group contributions to the success of the Company.

 

Definitions

 

"Annual Incentive Plan Goals" shall mean the performance goals in effect for the Plan Year as recommended by management and approved by the Committee. The Committee may modify the Annual Incentive Plan Goals as it sees fit and will finally approve them to be in effect for that Performance Period. Annual Incentive Plan factors are divided into the following components, which may be modified by the Committee from time to time, including with respect to the relative weights:

 

 

Quantitative corporate performance factors, normally comprising 50% of the overall potential Award;

 

Qualitative set of goals, normally comprising 25% of the overall potential Award; and

 

Discretionary factor as determined by the Committee, normally comprising 25% of the overall potential Award.

 

"Annual Incentive Plan Pay" or "AIP Pay" shall consist of an award from the Company payable to a participant pursuant to the terms of the Plan either in cash or in equity under one of the Company's stock plans.

 

   "Base Salary" is the annual salary approved by the Board for Executives or by the Company for other Plan participants.

 

"Code" shall mean the Internal Revenue Code of 1986, as amended.

 

"Committee" shall mean the Compensation Committee of the Board.

 

 

 

 

"Company" shall mean Hecla Mining Company, a Delaware Corporation, and its subsidiaries.

 

"Disinterested Person" shall mean a member of the Board who qualifies as an “outside director” for purposes of Section 162(m) of the Code.

 

"Participants" shall mean eligible officers and employees who are designated by the Committee for participation in the Plan.

 

"Payment Date" shall mean the date following the conclusion of a particular Performance Period on which the Committee certifies that applicable AIP Goals have been satisfied and authorizes payment of corresponding AIP Pay Awards.

 

"Performance Period" will be determined by the Committee and normally coincides with the Company's fiscal year.

 

"Target Award" shall mean the percentage of each Participant's base salary that is established for achievement of target performance level in consideration of quantitative, qualitative and discretionary factors as determined by the Board. The Target Award for each plan participant will be determined by the Committee prior to each Performance Period. Participants may be awarded up to twice their Target for exceptional performance against all criteria.

 

Administration

 

The AIP shall be administered by the Committee or such other committee of the Board which is composed of not less than two Disinterested Persons, each of whom shall be appointed by and serve at the pleasure of the Board.

 

In administering the Plan, the Committee may at its option employ compensation consultants, accountants and counsel (who may be the independent auditors, outside counsel, or compensation consultants of the Company) and other persons to assist or render advice to the Committee, all at the expense of the Company.

 

Eligibility

 

The Committee shall, in its sole discretion, determine for each Performance Period those officers and employees of the Company who shall be eligible to participate in the AIP (the "Participants") based upon such Participants' opportunity to have a substantial impact on the Company’s operating results. Nothing contained in the Plan shall be construed as or be evidence of any contract or employment with any Participant for a term of any length nor shall participation in the Plan in any Performance Period by any Participant require continued participation by such Participant in any subsequent Performance Period.

 

 

 

 

Determination of Performance Pay

 

The form and amount of Annual Incentive Plan Pay awarded to a Participant shall be determined by and in the discretion of the Committee. The Committee may condition the earning of AIP Pay upon the attainment of specified Performance Goals measured over a period not greater than one year relating to the Participant or the Company, or a subsidiary, division or department of the Company for or within which the Participant is primarily employed, or upon such other factors or criteria as the Committee shall determine, which Performance Goals may be different for each Participant. Annual Incentive Plan Pay payable under the Plan will consist of a cash or equity award from the Company, based upon a degree of achievement of such Performance Goals over the Performance Period.

 

 

The Committee may, in its sole discretion, increase or decrease the amount of any Annual Incentive Plan Pay payable to a Participant and may award Annual Incentive Plan Pay to Participants even though the Annual Incentive Plan Pay is not earned. Annual Incentive Plan Pay earned or otherwise awarded will be paid on the Payment Date.

 

Termination of Employment

 

In the event that a Participant's employment with the Company terminates for any reason prior to the Payment Date, such Participant shall not be eligible to receive any AIP Pay.

 

Amendments and Terminations

 

The Board shall have the right to modify the Plan from time to time without prior approval of the Company's stockholders.

 

Deferral Elections

 

The Participants are permitted to defer the receipt of Annual Incentive Plan Pay payable hereunder in accordance with the Company’s Key Employee Deferred Compensation Plan or any similar plan or program.

 

 

HECLA MINING COMPANY

 

 

 

 

 

 

 

 

 

 

By:

/s/ Phillips S. Baker, Jr.

 

 

 

Phillips S. Baker, Jr.

 

 

 

President and CEO

 

 

 

3

Exhibit 10.3

 

 

HECLA MINING COMPANY EXECUTIVE

AND SENIOR MANAGEMENT

LONG-TERM PERFORMANCE PAYMENT PLAN

(As Amended and Restated Effective January 1, 2017)

 

INTRODUCTION

 

Purpose. The purpose and objectives of the Hecla Mining Company Executive and Senior Management Long-Term Performance Payment Plan (“Plan”) include:

 

 

Focus attention on key activities and initiatives. We want key decision makers to allocate time and energy to those key activities that drive the Company's performance.

 

 

Encourage open and frequent communications. We want key decision makers to openly communicate with their peers regarding their ideas and suggested approaches in order to assist the Company in achieving its goals.

 

 

Establish meaningful, challenging and achievable performance targets. We want to provide a financial incentive for individuals to attain achievable performance targets.

 

 

Recognize contribution to long-term growth objective efforts. Every position is important and contributes to the day-to-day success of the Company. However, a few individuals hold positions that can have long-term and dramatic impact on the future of the Company. Because these efforts are so critical, it is important to recognize both the individual contributions as well as the team contributions.

 

 

Attract and retain high caliber executives and senior management. Compensation is an important consideration in a high caliber leader's willingness to join and stay with a top- performing organization. This Plan helps meet this important objective by providing key leaders the opportunity to earn above industry standard total compensation through personal and organizational performance.

 

 

Link Participant interests to those of the Company's shareholders. Our entire compensation philosophy is based on achieving performance results that are in the best interest of our shareholders and provides them the opportunity to realize wealth through our performance.

 

 
 

 

 

ARTICLE I

DEFINITIONS

 

For the purposes of this Plan, the following terms shall have the meanings indicated unless the context clearly indicates otherwise:

 

Award” means a cash amount or stock award determined by the Committee based on the number of Performance Units awarded and the performance of the Company during the Performance Cycle as measured against the performance goals established by the Committee for a Performance Cycle.

 

Award Payment Date” means the date or dates during the calendar year following the end of a Performance Cycle when Awards made for such Performance Cycle are paid to Participants who earned such Awards.

 

Beneficiary” means the person, persons or entity designated by the Participant to whom the Plan payments shall be made in the event of the Participant’s death. Each such designation shall be filed with the Company in a form acceptable to the Company and shall become effective only when received by the Company. Designated persons or entities shall not be considered Beneficiaries until the death of the Participant. If the Participant is married, the spouse must consent to a beneficiary designation to someone else. If a Participant becomes divorced after having named his or her spouse as a Beneficiary, the prior designation of the spouse as Beneficiary shall be void. After the divorce, the Participant may, in his or her discretion, designate his or her ex-spouse as a Beneficiary by filing a new beneficiary designation form with the Company. If no designated beneficiary survives the Participant, any payments owed to the Participant at that time shall be paid to the Participant’s spouse and if none, the Participant’s surviving children in equal shares and if none, the Participant’s estate.

 

Board” means the Board of Directors of Hecla Mining Company.

 

Cause” means (i) conviction of the Participant for committing a felony under federal law or the law of the state in which such action occurred; (ii) dishonesty in the course of fulfilling the Participant’s employment duties; or (iii) willful and deliberate failure on the part of the Participant to perform his or her employment duties in any material respect, or such other events as shall be determined by the Committee. The Committee shall have the sole discretion to determine whether "Cause" exists, and its determination shall be final and binding on all interested parties.

 

CEO” means Chief Executive Officer of the Company.

 

Change in Control” means the change in ownership of the Company, a change in effective control of the Company or change in the ownership of a substantial portion of the assets of the Company, as defined under Treasury Regulations§ 1.409A-3(i)(5).

 

Code” means the Internal Revenue Code of 1986, as amended from time to time.

 

 
 

 

 

Committee” means the Compensation Committee of the Board.

 

Company” means Hecla Mining Company.

 

Disability” or “Disabled” means (A) the Participant is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months; (B) the Participant is, by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under the Company's long-term disability plan; or (C) the Participant is determined to be totally disabled by the Social Security Administration.

 

Eligible Employee” means any employee of the Company selected to participate on the recommendation of the CEO to the Committee or by the Committee due to being employed in a position determined to be eligible by the Committee.

 

Involuntary Separation from Service” means a Separation from Service due to the Company terminating the Participant’s employment.

 

IRS” means the Internal Revenue Service.

 

Leave of Absence” means any leave of absence required by law.

 

Maximum Award Opportunity” means the amount attributable to the Performance Unit value if the Company achieves or surpasses a defined “maximum” result for a particular performance goal for the applicable Performance Cycle.

 

Participant” means an Eligible Employee who has been designated by the Committee to participate in a Performance Cycle under this Plan in accordance with the provisions of Article III. An Eligible Employee can be a Participant with respect to some Performance Cycles and not others. Eligible Employees are not assured of being a Participant for any particular Performance Cycle, and participation in one Performance Cycle does not guarantee or imply that the Eligible Employee will be selected to participate in any future Performance Cycles.

 

Performance Cycle” means the applicable 36-consecutive month period beginning on January 1 as designated by the Committee. The first Performance Cycle under this restated Plan commences January 1, 2017, and ends December 31, 2019. Performance Cycles can overlap (i.e., the next Performance Cycle can commence January 1, 2018, and end December 31, 2020).

 

Performance Units” means dollar-denominated units whose payment and/or value is contingent upon performance as determined by the Committee. The nominal target value for each performance unit will be determined by the Committee in its discretion.

 

 
 

 

 

Plan” means the nonqualified and unfunded program established and maintained by the Company for the benefit of Participants eligible to participate therein, as set forth in this Plan document, and referred to as the Hecla Mining Company Executive and Senior Management Long-Term Performance Payment Plan.

 

Retirement” means a Separation from Service other than due to death, Disability or for Cause if (1) the Participant begins receiving a distribution from the Hecla Mining Company Retirement Plan and (2) at the time of Separation from Service the Participant is:

 

(A)     At least age sixty (60) and has fifteen (15) or more years of service with the Company,

(B)     At least age sixty-five (65) and has seven (7) or more years of service with the Company, or

(C)     At least age sixty-eight (68).

 

Separation from Service” or “Separate(s) from Service” means a termination of employment with the Company and all entities affiliated with the Company, construed in a manner consistent with Code Section 409A(a)(2)(A)(i) and the Treasury Regulations thereunder and applicable guidance from the IRS.

 

Target Award Opportunity” means the amount attributable to the Performance Unit value if the Company achieves the defined “target” result for a particular performance goal for the Performance Cycle.

 

Threshold Award Opportunity” means the amount attributable to the Performance Unit value if the Company achieves a defined minimum or “threshold” result for a particular performance goal for the Performance Cycle.

 

ARTICLE II

PLAN ADMINISTRATION

 

2.1     Administration. This Plan shall be administered by the Committee. The Committee shall have full discretionary power and authority to determine the amount of any and all Awards, to administer and interpret the Plan, determine all factual and legal questions under the Plan (including but not limited to eligibility for and the amount, terms and conditions of any Threshold, Target or Maximum Award Opportunity). The Committee shall also maintain records of the Plan, and shall be responsible for ensuring that the purposes of the Plan are accomplished. Determinations by the Committee shall be final and binding on all parties with respect to all matters relating to the Plan. The Committee may from time to time adopt such policies and procedures as it deems appropriate to assist in the administration of the Plan. The Committee may delegate all or part of its administrative duties and authority to one or more persons or entities, whether or not such persons or entities are members of the Committee or employees of the Company or affiliates of the Company.

 

 
 

 

 

2.2     Books and Records. The Committee shall maintain records of each Participant’s Awards.

 

2.3     Liability. No current or former member of the Committee and no employee, director, officer or member of the Board of the Company or its affiliates shall be liable to any persons for any actions taken (or not taken) under the Plan, or for any failure to effect any of the objectives or purposes of the Plan, by reason of insolvency or otherwise, except to the extent such person has engaged in willful misconduct with respect to the Plan. Neither the officers nor any current or former member of the Committee or the Board or any of its affiliates in any way secures or guarantees the payment of any benefit or amount that may become due and payable hereunder to or with respect to any Participant or Beneficiary. Each Participant and Beneficiary entitled at any time to payments hereunder shall look solely to the assets of the Company for such payments as an unsecured, general creditor. Nothing herein shall be construed to give a Participant, Beneficiary or any other person or persons any right, title, interest or claim in or to any specific asset, fund, reserve, account or property of any kind whatsoever owned by the Company or in which it may have any right, title or interest now or in the future. After benefits shall have been paid to or with respect to a Participant or Beneficiary (as applicable) and such payment purports to cover in full the benefit hereunder, such former Participant or Beneficiary or other person or persons, as the case may be, shall have no further right or interest in the other assets of the Company in connection with this Plan.

 

ARTICLE III

ELIGIBILITY

 

3.1     Participation in a Performance Cycle. An Eligible Employee shall become a Participant with respect to a Performance Cycle if the Eligible Employee has been designated by the Committee to participate in and is awarded Performance Units for that Performance Cycle. Eligible Employees hired after the beginning of a Performance Cycle has commenced may be eligible to participate in the Plan on a prorated basis for that Performance Cycle as determined by the Committee.

 

3.2     Conditions to Earning of Awards. For a Participant to earn an Award for a particular Performance Cycle a Participant must meet all of the following criteria:

 

 

(a)

The Participant is continuously employed with the Company through the Award Payment Date, unless the Participant Separates from Service due to Disability or Retirement, or has an Involuntary Separation from Service without Cause and executes and does not revoke a separation agreement (which will include a full waiver and release of the Company and its affiliates) in a form prescribed by the Company (“Release”), dies while employed with the Company or there is a Change in Control;

 

 

(b)

The Participant is in full compliance with all of the Participant’s contractual obligations to the Company and its affiliates and obligations imposed by law with respect to the Participant’s employment with the Company through the Award Payment Date; and

 

 
 

 

 

 

(c)

The Participant signs and delivers to the Company all required documents and agreements related to the Award for such Performance Cycle as determined by the Committee in its sole discretion.

 

If any of these criteria are not satisfied, the Participant will not earn or receive the Award. For avoidance of doubt, if a Participant’s employment with the Company terminates before the end of a Performance Cycle for any reason other than death, Disability, Retirement or Involuntary Separation from Service without Cause the Participant will not earn or receive an Award for such Performance Cycle. Furthermore, no Participant earns an Award if he or she has an Involuntary Separation from Service with Cause after the end of the Performance Cycle and before the Award Payment Date.

 

3.3     Termination of Participation. A person shall cease to be a Participant for a particular Performance Cycle upon the earliest to occur of:

 

 

(a)

The effective date of the freezing, amendment or termination of the Plan that ceases the Participant’s active participation in accordance with Article VI; or

 

 

(b)

The death, Disability or Separation of Service of the Participant; or

 

 

(c)

Demotion, position reassignment or change in job scope that transfers the Participant out of an eligible position.

 

ARTICLE IV

AWARDS

 

4.1     Determination of Threshold, Target and Maximum Award Opportunities and Awards. The Award amount shall be determined based on the number of Performance Units awarded to the Participant and the Company’s performance relative to performance goal levels determined by the Committee for each performance goal for that Performance Cycle. To the extent that performance falls between two levels of a performance goal (such as between Threshold and Target), the amount of the Award attributable to that performance goal shall be calculated through interpolation. If performance is below the Threshold Award Opportunity for a particular performance goal, then no value will be attributable to that performance goal for that Performance Cycle.

 

The CEO shall recommend Company-wide performance goals, including Threshold, Maximum and Target Award Opportunities for each performance goal, as well as the number of Performance Units for Participants other than the CEO to the Committee. The Committee shall establish for each Performance Cycle:

 

 

(a)

Company-wide performance goals;

 

 
 

 

 

 

(b)

for each performance goal, a Threshold Award Opportunity, Target Award Opportunity and Maximum Award Opportunity; and

 

 

(c)

for each Participant, the number of Performance Units.

 

Performance goals and Threshold, Maximum and Target Award Opportunities need not be the same for all Performance Cycles but instead may vary from one Performance Cycle to the next.

 

4.2

Prorated Award

 

(a)     Death, Disability, Retirement or Involuntary Separation from Service without Cause. If a Participant dies, becomes Disabled or has a Separation from Service due to Retirement or an Involuntary Separation from Service without Cause during a Performance Cycle while a Participant, the Participant shall be entitled to a prorated amount reflecting proration through the end of the month in which the death, Disability or Separation from Service occurred. The prorated amount (if any) shall be equal to the sum of : (a) the amount that would have been awarded for any complete Performance Cycle while the Participant was employed, and (b) the product of the amount (if any) that would have been awarded absent proration as determined using actual performance of the performance goals for the Performance Cycle the Disability or Separation from Service occurred (for death, the target performance shall be used) multiplied by a fraction, the numerator of which is the number of months in such Performance Cycle during which the individual was a Participant (including the month in which the Participant dies, became Disabled, or Separated from Service) and the denominator of which is 36. Notwithstanding any of the foregoing to the contrary, to be eligible for a prorated Award pursuant to this Section due to Disability, Retirement or Involuntary Separation from Service without Cause, a Participant must properly complete and return a Release and any applicable revocation period must lapse before the Award Payment Date.

 

(b) Transfer out of an Eligible Position. If a Participant is demoted, has a position reassignment or change in job scope that results in the Participant not being employed in an eligible position during a Performance Cycle, the Participant shall be entitled to a prorated amount reflecting proration through the end of the month in which the job change occurred. The prorated amount (if any) shall be equal to the sum of : (a) the amount that would have been awarded for any complete Performance Cycle while the Participant was employed in an eligible position, and (b) the product of the amount (if any) that would have been awarded absent proration as determined using actual performance of the performance goals for the Performance Cycle the job change occurred multiplied by a fraction, the numerator of which is the number of months in such Performance Cycle during which the individual was a Participant employed in an eligible position (including the month of the job change) and the denominator of which is 36.

 

(c) Leave of Absence. If a Participant was on a Leave of Absence during a Performance Cycle (but did not terminate employment), but the conditions set forth in Section 3.2 are otherwise satisfied, any Award the Participant receives for that Performance Cycle shall be a prorated amount reflecting the number of whole months during such Performance Cycle that the Participant was not on a Leave of Absence, unless otherwise required by law. The prorated amount (if any) shall be the product of the amount (if any) that would have been awarded absent proration as determined using actual performance for the entire Performance Cycle multiplied by a fraction, the numerator of which is the number of whole months in such Performance Cycle during which the individual was a Participant not on a Leave of Absence and the denominator of which is 36.

 

 
 

 

 

(d) Change in Control. Notwithstanding any contrary provision of the Plan, if there is a Change in Control during a Performance Cycle, all Awards payable for any Performance Cycle not yet completed shall be prorated based on target performance for the performance goals for each of those Performance Cycles. For Participants employed on the date of the Change in Control, the prorated amount shall be equal to the sum of : (a) the amount that would have been awarded for any complete Performance Cycle while the Participant was employed, and (b) the product of the amount (if any) that would have been awarded absent proration as determined using target performance of the performance goals for the Performance Cycle the Change in Control occurred multiplied by a fraction, the numerator of which is the number of months in such Performance Cycle up to the month of the Change in Control (including the month of the Change in Control) and the denominator of which is 36. For Participants who had become Disabled or had a Separation from Service due to Retirement or an Involuntary Separation from Service without Cause before the Change in Control, payments for those Performance Cycles that had not completed as of the Change in Control shall be prorated as provided in Section 4.2(a) above but the proration shall be based on target performance.

 

ARTICLE V

PAYMENT AMOUNT, TIME AND MANNER

 

5.1     Payment Amount. The amount of the Participant’s Award, if any, shall be determined under Article IV as of the end of the Performance Cycle and within a reasonable period of time before the Award Payment Date.

 

5.2     Time and Manner of Payment. Except as provided below, the Award (less applicable tax withholdings) will be paid on the Award Payment Date to the Participant or Beneficiary, as applicable.

 

(a)      In the event of a Participant’s death, the Award shall be paid within 75 days of the date of death.

 

(b)      In the event of a Change in Control, the Award shall be paid within 75 days of the date of the Change in Control.

 

Payment of Awards due to death or Change in Control shall be made in cash. Payment of all other Awards shall be made in cash, Company stock, or restricted stock units or a combination of any of the three as determined by the Committee in its sole discretion. If Awards are paid in Company stock, shares of stock will be granted under the Company’s 2010 Stock Incentive Plan or any subsequent stock incentive plan approved by the Company’s shareholders.

 

 
 

 

 

5.3     Withholding. The Company shall withhold from any payments any deductions required by law.

 

ARTICLE VI

AMENDMENT; TERMINATION

 

6.1.     Amendment and Termination. The Plan may be amended, discontinued or terminated at any time through action by the Board or by the Committee; provided, however, that no amendment, discontinuance or termination of the Plan will, without the consent of any persons affected thereby, alter or impair the rights or benefits of any Participant or Beneficiary earned before such amendment, discontinuance, or termination. No amendment, discontinuance or termination of the Plan shall affect or otherwise accelerate the timing, form and manner of payments of Awards in existence as of the date such amendment, discontinuance or termination is adopted by the Board or Committee, but instead such payments shall occur in accordance with the terms of the Plan in effect at the time such amendment, discontinuance or termination is adopted.

 

6.2.     Payment. If the IRS issues a final ruling that any amounts deferred under this Plan will be subject to current income tax due to a failure to comply with Code Section 409A, all Award payments to which the ruling applies shall be paid to the Participants in a single cash lump sum within 60 days after such final ruling is issued.

 

ARTICLE VII

CLAIMS

 

Any person claiming a benefit under the Plan or requesting an interpretation, ruling or information under the Plan shall present the request in writing to the Committee. The Committee has the discretionary authority to interpret and administer the Plan. Any interpretation, ruling or determination by the Committee under the Plan (including, without limitation, a determination of entitlement to an Award or the amount of an Award) shall be final and binding on Participants, Beneficiaries and their respective spouses, heirs and estates.

 

ARTICLE VIII

GENERAL PROVISIONS

 

8.1.     Attorneys’ Fees. If suit or action is instituted to enforce any rights under this Plan, the prevailing party may recover from the other party reasonable attorneys’ fees and costs at trial and on any appeal.

 

8.2.     Notices. Any notice under this Plan shall be in writing and shall be effective when actually delivered or, if mailed, when deposited as first class mail postage prepaid. Mail shall be directed to the Company or Committee at the Company’s main administrative offices, to the Participant at the Participant’s last known home address shown in the Company’s records, or to such other address as a party may specify by notice to the other parties.

 

 
 

 

 

8.3.     Nontransferability. The rights of a Participant under this Plan are personal. Except for the rights of Beneficiaries, no interest of a Participant or one claiming through a Participant may be directly or indirectly assigned, alienated, pledged, transferred or encumbered and no such interest shall be subject to seizure by legal process, attachment, garnishment, and execution following judgment or in any other way subjected to the claims of any creditor. The foregoing limitation precludes, among other things, a Participant who may or has become divorced from transferring any portion of his or her interest under this Plan to his or her spouse or ex-spouse.

 

8.4.     Not an Employment Contract. This Plan is not and shall not be deemed to constitute a contract of employment between the Company and any employee or other person, nor shall anything herein contained be deemed to give any employee or other person any right to be retained in the Company’s employ or in any way limit or restrict the Company’s right or power to discharge any employee or other person at any time and to treat him without regard to the effect that such treatment might have upon the employee as a Participant in the Plan. Rather, except to the extent expressly stated otherwise in any individual written employment agreement signed by the employee and by an authorized officer of the Company, all employees of the Company are and remain terminable at will, meaning that either the employee or the Company may terminate the employment relationship at any time, for any reason or no reason, with or without cause, notice or any kind of pre- or post-termination warning, discipline, or procedure.

 

8.5.     Successors. Amounts payable under this Plan shall be solely an obligation of the Company (and not its affiliates), and the Company’s successors and assigns.

 

8.6.     Incompetence. The Committee may decide that because of the mental or physical condition of a person entitled to a payment, or because of other relevant factors, it is in the person’s best interest to make payments to others for the benefit of the person entitled to payment. In that event, the Committee may in its discretion direct those payments to be made to any of the following: (a) to a parent or spouse or a child of legal age; (b) to a legal guardian; or (c) to one furnishing maintenance, support, or hospitalization.

 

8.7     Compliance With Law. If any portion of this Plan is inconsistent in any way with applicable law, all provisions will be interpreted in a manner that would make them consistent with current law.

 

8.8     Section 409A Compliance. This Plan is intended to comply with Code Section 409A (“Section 409A”) or an exemption thereunder and shall be construed and administered in accordance with Section 409A. Notwithstanding any other provision of this Plan, payments provided under this Plan may only be made upon an event and in a manner that complies with Section 409A or an applicable exemption. Notwithstanding the foregoing, the Company makes no representations that the payments and benefits provided under this Plan comply with Section 409A and in no event shall the Company be liable for all or any portion of any taxes, penalties, interest or other expenses that may be incurred by the Participant on account of non-compliance with Section 409A.

 

 
 

 

 

8.9     Governing Law; Severability. Except to the extent that federal law is controlling, the Plan shall be construed and entered in accordance with and governed by the laws of the State of Delaware. Invalidation of any one of the provisions of the Plan for any reason shall in no way affect the other provisions hereof, and all such other provisions shall remain in full force and effect.

 

8.10     Unsecured General Creditor. Any Award under this Plan shall be an unfunded, unsecured promise of the Company to make payments in the future. Participants and their beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interest or claims in any property or assets of the Company. Any and all of the Company’s assets shall be, and remain, the general, unpledged, unrestricted assets of the Company. The Company may, but shall not be required to, establish a reserve of assets to provide funds for payments under this Plan. Establishing a reserve shall have no effect on the operation of this Plan or upon the status of Participants as unsecured general creditors of the Company. Rights to payments will not be limited to assets held in any reserve.

 

 

 

HECLA MINING COMPANY

 

 

 

 

 

 

         
         

 

 

 

 

 

 

By:

 

/s/ Phillips S. Baker, Jr.

 

 

 

 

Phillips S. Baker, Jr.

 

 

 

 

President & CEO

 

 

 

Exhibit 31.1

 

 

CERTIFICATIONS

 

I, Phillips S. Baker, Jr., certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Hecla Mining Company;
   

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

 

Date: May 8, 2017

 

/s/ Phillips S. Baker, Jr.

 

Phillips S. Baker, Jr.

 

President, Chief Executive Officer and Director

 

 

 

Exhibit 31.2

 

 

CERTIFICATIONS

 

I, Lindsay A. Hall, certify that:

 

1.      I have reviewed this quarterly report on Form 10-Q of Hecla Mining Company;

 

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

 

5.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

 

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

 

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

 

Date: May 8, 2017

 

/s/ Lindsay A. Hall

 

Lindsay A. Hall

 

Senior Vice President and Chief Financial Officer

 

 

 

EXHIBIT 32.1

 

 

 

CERTIFICATIONS

 

 

I, Phillips S. Baker, Jr., President, Chief Executive Officer and Director of Hecla Mining Company (“Hecla”), certify that to my knowledge:

 

1.

This quarterly report of Hecla on Form 10-Q (“report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.

The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of Hecla.

 

 

Date: May 8, 2017

 

 

/s/ Phillips S. Baker, Jr.

 

Phillips S. Baker, Jr.

 

President, Chief Executive Officer and Director

 

 

 

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906 has been provided to Hecla Mining Company and will be retained by Hecla and furnished to the Securities and Exchange Commission or its staff upon request.

 


The foregoing certification is being furnished in accordance with Securities and Exchange Commission Release No. 34-47551 and shall not be considered filed as part of the Form 10-Q.

 

  

EXHIBIT 32.2

 

 

 

CERTIFICATIONS

 

 

I, Lindsay A. Hall, Senior Vice President and Chief Financial Officer of Hecla Mining Company (“Hecla”), certify that to my knowledge:

 

1.

This quarterly report of Hecla on Form 10-Q (“report”) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

2.

The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of Hecla.

 

 

 

Date: May 8, 2017

 

 

/s/ Lindsay A. Hall

 

Lindsay A. Hall

 

Senior Vice President and Chief Financial Officer

 

 

 

 

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906 has been provided to Hecla Mining Company and will be retained by Hecla and furnished to the Securities and Exchange Commission or its staff upon request.

 


The foregoing certification is being furnished in accordance with Securities and Exchange Commission Release No. 34-47551 and shall not be considered filed as part of the Form 10-Q.

 

 

 

Exhibit 95

 

Mine Safety Disclosures

 

Our mines are operated subject to the regulation of the Federal Mine Safety and Health Administration (“MSHA”), under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”). In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law, and amended in December 2011. The following mine safety data is provided pursuant to the Dodd-Frank Act.

 

When MSHA believes a violation of the Mine Act has occurred, it may issue a citation for such violation, including a civil penalty or fine, and the mine operator must abate the alleged violation. During the first quarter of 2017, MSHA proposed $6,034 in penalty assessments at the Greens Creek mine, $11,789 in penalty assessments at the Lucky Friday mine, and $232 in penalty assessments at the Troy mine. Hecla has not yet received all penalty assessments related to the citations issued in the first quarter of 2017. We have the opportunity to contest or appeal these penalties.

 

During the first quarter of 2017, MSHA issued the Greens Creek mine 2 citations pursuant to Section 104 of the Mine Act for violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of a mine safety or health hazard, 1 such citation to the Lucky Friday mine, and no such citations at the Troy mine.

 

The Greens Creek mine has 2 legal actions pending before the Federal Mine Safety and Health Review Commission, regarding citations for which penalties have been assessed.

 

The Lucky Friday mine and the Troy mine have no actions pending before the Federal Mine Safety and Health Review Commission, regarding citations for which penalties assessment have been assessed.

 

As required by the reporting requirements of the Dodd-Frank Act, as amended, the table below presents the following information for the three-month period ended March 31, 2017.

 

                                                             

Received

                       
                                                           

Received

Notice of

                       
                                                     

Total

 

Notice of

Potential

 

Legal

                 
                   

Section

                   

Total Dollar

   

Number

 

Pattern of

to have

 

Actions

   

Legal

   

Legal

 
                   

104(d)

                   

Value of

   

Of

 

Violations

Patterns

 

Pending

   

Actions

   

Actions

 
   

Section

   

Section

   

Citations

   

Section

   

Section

   

MSHA

   

Mining

 

Under

Under

 

as of Last

   

Initiated

   

Resolved

 
   

104 S&S

   

104(b)

   

and

   

110(b)(2)

   

107(a)

   

Assessments

   

Related

 

Section

Section

 

Day of

   

During

   

During

 

Mine

 

Citations

   

Orders

   

Orders

   

Violations

   

Orders

   

Proposed

   

Fatalities

 

104(e)

104(e)

 

Period

   

Period

   

Period

 

Greens Creek

    2       0       0                 $   11,789        

no

no

    2       0       0  

Lucky Friday

    1       0       0                 $   6,034        

no

no

    0       0       0  

Troy

    0       0       0                 $   232        

no

no

    0       0       0