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 June 30, 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 August 1, 2017

Common stock, par value

$0.25 per share

 

399,018,708

 

 

Hecla Mining Company and Subsidiaries

 

Form 10-Q

 

For the Quarter Ended June 30, 2017

 

INDEX*

 

     

Page

PART I - Financial Information

 
       
   

Item 1 – Condensed Consolidated Financial Statements (Unaudited)

  3
       
   

Condensed Consolidated Balance Sheets - June 30, 2017 and December 31, 2016

  3
     

 

   

Condensed Consolidated Statements of Operations and Comprehensive Loss - Three Months Ended and Six Months Ended – June 30, 2017 and 2016

4
       
   

Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2017 and 2016

  5
       
   

Notes to Condensed Consolidated Financial Statements

6

       
   

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

29
       
   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

56

       
   

Item 4. Controls and Procedures

59

       

PART II - Other Information

 
       
   

Item 1 – Legal Proceedings

59

       
   

Item 1A – Risk Factors

59

       
   

Item 4 – Mine Safety Disclosures

59

       
   

Item 6 – Exhibits

59

       
   

Signatures

60

       
   

Exhibits

61

       
       

*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)

 

   

June 30, 2017

   

December 31, 2016

 

ASSETS

 

Current assets:

               

Cash and cash equivalents

  $ 164,113     $ 169,777  

Investments

    37,816       29,117  

Accounts receivable:

               

Trade

    9,183       20,082  

Taxes

    10,981       187  

Other, net

    12,307       9,780  

Inventories:

               

Concentrates, doré, and stockpiled ore

    25,125       25,944  

Materials and supplies

    23,278       24,079  

Other current assets

    8,955       12,125  

Total current assets

    291,758       291,091  

Non-current investments

    4,729       5,002  

Non-current restricted cash and investments

    1,098       2,200  

Properties, plants, equipment and mineral interests, net

    2,033,506       2,032,685  

Non-current deferred income taxes

    44,628       35,815  

Other non-current assets and deferred charges

    3,437       4,884  

Total assets

  $ 2,379,156     $ 2,371,677  

LIABILITIES

 

Current liabilities:

               

Accounts payable and accrued liabilities

  $ 47,979     $ 60,064  

Accrued payroll and related benefits

    25,919       36,515  

Accrued taxes

    14,205       9,061  

Current portion of capital leases

    5,885       5,653  

Current portion of debt

          470  

Other current liabilities

    11,268       8,809  

Current portion of accrued reclamation and closure costs

    8,532       5,653  

Total current liabilities

    113,788       126,225  

Capital leases

    7,213       5,838  

Accrued reclamation and closure costs

    79,280       79,927  

Long-term debt

    501,604       500,979  

Non-current deferred tax liability

    121,260       122,855  

Non-current pension liability

    47,211       44,491  

Other non-current liabilities

    6,414       11,518  

Total liabilities

    876,770       891,833  

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

               

SHAREHOLDERS’ EQUITY

 

Preferred stock, 5,000,000 shares authorized:

               

Series B preferred stock, $0.25 par value, 157,816 shares issued and outstanding, liquidation preference — $7,891

    39       39  

Common stock, $0.25 par value, authorized 750,000,000 shares; issued and outstanding 2017 — 398,527,459 shares and 2016 — 395,286,875 shares

    100,739       99,806  

Capital surplus

    1,614,651       1,597,212  

Accumulated deficit

    (166,875

)

    (167,437

)

Accumulated other comprehensive loss

    (28,520

)

    (34,602

)

Less treasury stock, at cost; 2017 — 4,429,844 shares and 2016 — 3,941,210 shares issued and held in treasury

    (17,648

)

    (15,174

)

Total shareholders’ equity

    1,502,386       1,479,844  

Total liabilities and shareholders’ equity

  $ 2,379,156     $ 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 (Loss) Income (Unaudited)

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

 

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30, 2017

   

June 30, 2016

   

June 30, 2017

   

June 30, 2016

 

Sales of products

  $ 134,279     $ 171,302     $ 276,823     $ 302,319  

Cost of sales and other direct production costs

    77,503       82,953       156,179       157,273  

Depreciation, depletion and amortization

    25,569       29,897       54,521       55,772  
Total cost of sales     103,072       112,850       210,700       213,045  

Gross profit

    31,207       58,452       66,123       89,274  

Other operating expenses:

                               

General and administrative

    10,309       10,359       19,515       20,573  

Exploration

    5,853       3,362       10,367       6,312  

Pre-development

    1,052       521       2,304       925  

Research and development

    312             995        

Other operating expense

    697       1,024       1,387       1,664  

Provision for closed operations and environmental matters

    985       1,576       2,104       2,617  

Lucky Friday suspension-related costs

    8,024             9,605        

Total other operating expenses

    27,232       16,842       46,277       32,091  

Income (loss) from operations

    3,975       41,610       19,846       57,183  

Other income (expense):

                               

Loss on disposition of investments

                (167

)

     

Unrealized (loss) gain on investments

    (276

)

    1,150       51       439  

Gain (loss) on derivative contracts

    2,487       (6

)

    (5,322

)

    (6

)

Net foreign exchange (loss) gain

    (3,883

)

    (1,885

)

    (6,145

)

    (10,088

)

Interest and other income

    319       113       644       201  

Interest expense, net of amount capitalized

    (10,543

)

    (5,370

)

    (19,065

)

    (11,081

)

Total other income (expense)

    (11,896

)

    (5,998

)

    (30,004

)

    (20,535

)

(Loss) income before income taxes

    (7,921

)

    35,612       (10,158

)

    36,648  

Income tax (provision) benefit

    (16,095

)

    (11,496

)

    12,976       (13,150

)

Net (loss) income

    (24,016

)

    24,116       2,818       23,498  

Preferred stock dividends

    (138

)

    (138

)

    (276

)

    (276

)

(Loss) income applicable to common shareholders

  $ (24,154

)

  $ 23,978     $ 2,542     $ 23,222  

Comprehensive (loss) income:

                               

Net income (loss)

  $ (24,016

)

  $ 24,116     $ 2,818     $ 23,498  

Unrealized loss and amortization of prior service on pension plans

    (16

)

          16        

Change in fair value of derivative contracts designated as hedge transactions

    2,047       46       5,308       46  

Reclassification of loss on disposition or impairment of marketable securities included in net (loss) income

                167       1,000  

Unrealized holding (losses) gains on investments

    847       1,193       591       1,258  

Comprehensive (loss) income

  $ (21,138

)

  $ 25,355     $ 8,900     $ 25,802  

Basic (loss) income per common share after preferred dividends

  $ (0.06

)

  $ 0.06     $ 0.01     $ 0.06  

Diluted (loss) income per common share after preferred dividends

  $ (0.06

)

  $ 0.06     $ 0.01     $ 0.06  

Weighted average number of common shares outstanding - basic

    396,178       383,790       395,774       381,389  

Weighted average number of common shares outstanding - diluted

    396,178       387,512       399,236       384,685  

Cash dividends declared per common share

  $ 0.0025     $ 0.0025     $ 0.0050     $ 0.0050  

 

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)

 

   

Six Months Ended

 
   

June 30, 2017

   

June 30, 2016

 

Operating activities:

               

Net income (loss)

  $ 2,818     $ 23,498  

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

               

Depreciation, depletion and amortization

    56,908       56,968  

Loss (gain) on investments

    117       (439

)

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

    (94

)

    (311

)

Provision for reclamation and closure costs

    2,247       2,005  

Stock compensation

    2,831       3,467  

Deferred income taxes

    (22,113

)

    10,652  

Amortization of loan origination fees

    967       926  

Loss on derivative contracts

    5,386       5,419  

Foreign exchange loss

    5,201       9,721  

Other non-cash charges, net

    2       17  

Change in assets and liabilities, net of business acquired:

               

Accounts receivable

    (1,150

)

    (15,910

)

Inventories

    1,594       (5,802

)

Other current and non-current assets

    3,896       268  

Accounts payable and accrued liabilities

    (10,937

)

    (3,820

)

Accrued payroll and related benefits

    (4,901

)

    3,135  

Accrued taxes

    4,408

 

    (4,591

)

Accrued reclamation and closure costs and other non-current liabilities

    (1,359

)

    935  

Cash provided by operating activities

    45,821       86,138  

Investing activities:

               

Additions to properties, plants, equipment and mineral interests

    (45,964

)

    (76,960

)

Proceeds from disposition of properties, plants and equipment

    142       317  

Purchases of investments

    (23,280

)

    (16,088

)

Maturities of investments

    14,356       840  

Changes in restricted cash and investment balances

    1,102       (3,900

)

Net cash used in investing activities

    (53,644

)

    (95,791

)

Financing activities:

               

Proceeds from sale of common stock, net of offering costs

    9,610       8,121  

Acquisition of treasury shares

    (2,474

)

    (3,384

)

Dividends paid to common shareholders

    (1,981

)

    (1,914

)

Dividends paid to preferred shareholders

    (276

)

    (276

)

Credit availability and debt issuance fees paid

    (91

)

    (83

)

Repayments of debt

    (470

)

    (1,339

)

Repayments of capital leases

    (3,245

)

    (4,356

)

Net provided by (cash used) in financing activities

    1,073       (3,231

)

Effect of exchange rates on cash

    1,086       1,288  

Net decrease in cash and cash equivalents

    (5,664

)

    (11,596

)

Cash and cash equivalents at beginning of period

    169,777       155,209  

Cash and cash equivalents at end of period

  $ 164,113     $ 143,613  

Significant non-cash investing and financing activities:

               

Addition of capital lease obligations

  $ 4,645     $ 1,631  

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 (except as the context otherwise requires, “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.  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

 

Our current investments, which are classified as "available for sale" and consist of bonds having maturities of greater than 90 days, had a fair value and cost basis of $37.8 million and $29.1 million, respectively, at June 30, 2017 and December 31, 2016. During the first six months of 2017, we had purchases of such investments of $23.3 million and maturities of $14.4 million. Our current investments at June 30, 2017 and December 31, 2016 consisted of the following (in thousands):

 

 

   

June 30, 2017

   

December 31, 2016

 
   

Amortized

cost

   

Unrealized

loss

   

Fair value

   

Amortized

cost

   

Unrealized

loss

   

Fair value

 

Corporate bonds

  $ 34,533     $ (33

)

  $ 34,500     $ 22,100     $ (46

)

  $ 22,054  

Municipal bonds

    1,715             1,715       3,727       (1

)

    3,726  

Agency bonds

    1,601      

 

    1,601       3,339       (2

)

    3,337  

Total

  $ 37,849     $ (33

)

  $ 37,816     $ 29,166     $ (49

)

  $ 29,117  

 

At June 30, 2017 and December 31, 2016, the fair value of our non-current investments was $4.7 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 $4.0 million at June 30, 2017 and December 31, 2016.

 

 

Note 3.

Income Taxes

 

Major components of our income tax provision (benefit) for the three and six months ended June 30, 2017 and 2016 are as follows (in thousands):

 

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2017

   

2016

   

2017

   

2016

 

Current:

                               

Domestic

  $     $ 2,506     $ (12,798

)

  $  

Foreign

    15,935       1,627       21,451       2,642  

Total current income tax provision (benefit)

    15,935       4,133       8,653

 

    2,642  
                                 

Deferred:

                               

Domestic

    2,965       8,777       (15,939

)

    9,365  

Foreign

    (2,805

)

    (1,414

)

    (5,690

)

    1,143  

Total deferred income tax benefit

    160       7,363       (21,629

)

    10,508  

Total income tax provision (benefit)

  $ 16,095     $ 11,496     $ (12,976

)

  $ 13,150  

 

As of June 30, 2017, we have a net deferred tax asset in the U.S. of $44.6 million and a net deferred tax liability in Canada of $121.2 million, for a consolidated worldwide net deferred tax liability of $76.6 million. Our ability to utilize our deferred tax assets depends on future taxable income generated from operations. In the first quarter of 2017, we received consent from the Internal Revenue Service to permit us to take a different income tax position relating to the timing of deductions for the #4 Shaft development costs at Lucky Friday. This tax accounting method change substantially revised the timing of deductions for these costs for regular tax and Alternative Minimum Tax ("AMT") relative to our projected life of mine and projected taxable income. These timing changes caused us to revise our assessment of the ability to generate sufficient future taxable income to realize our deferred tax assets, resulting in a valuation allowance release of approximately $15 million. At June 30, 2017 and December 31, 2016, the balance of the valuation allowances on our deferred tax assets was $83 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 (benefits) for the three and six months ended June 30, 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, the impact of taxation in foreign jurisdictions, and the Company's status as an indefinite AMT taxpayer.

 

 

Note 4.

Commitments, Contingencies and Obligations

 

General

 

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

 

Rio Grande Silver Guaranty

 

Our wholly-owned subsidiary, Rio Grande Silver Inc. (“Rio”), is party to a joint venture with Emerald Mining & Leasing, LLC (“EML”) and certain other parties with respect to a land package in the Creede Mining District of Colorado that is adjacent to other land held by Rio. Rio holds a 70% interest in the joint venture. In connection with the joint venture, we are required to guarantee certain environmental remediation-related obligations of EML to a third party up to a maximum liability to us of $2.5 million. As of June 30, 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 June 30, 2017.

 

 

Lucky Friday Water Permit Matters

 

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

 

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

 

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

 

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

 

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 and Barker-Hughesville Sites in Montana

 

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

 

In June 2011, the EPA informed Hecla Limited that it believes Hecla Limited, among several other viable companies, may be liable for cleanup of the site or for costs incurred by the EPA in cleaning up the site. The EPA stated in the 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.

 

In February 2017, the EPA made a formal request to Hecla Mining Company for information regarding the Barker-Hughesville Mining District Superfund site located in Judith Basin and Cascade Counties, Montana. The Barker-Hughesville site is located in a historic mining district, and between approximately June and December 1983, Hecla Limited was party to an agreement with another mining company under which limited exploration activities occurred at or near the site. Neither the EPA nor any other party has made any claims against Hecla Limited (or Hecla Mining Company), however, it is possible that such a claim will be made in the future. Unless and until such a claim is made, Hecla Limited cannot estimate the amount or range of liability, if any, relating to this matter.

 

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 June 30, 2017 included approximately $1.2 million for various costs. In addition, our open purchase orders at June 30, 2017 included approximately $0.1 million, $1.4 million and $11.0 million for various capital and non-capital items at the Lucky Friday, Casa Berardi and Greens Creek units, respectively. We also have total commitments of approximately $13.8 million relating to scheduled payments on capital leases, including interest, primarily for equipment at our Greens Creek, Lucky Friday and Casa Berardi units (see Note 9 for more information). As part of our ongoing business and operations, we are required to provide surety bonds, bank letters of credit, and restricted deposits for various purposes, including financial support for environmental reclamation obligations and workers compensation programs. As of June 30, 2017, we had surety bonds totaling $116.9 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. - "HMI") 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 HMI 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 HMI, but 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.

Income (Loss) Per Common Share

 

We are authorized to issue 750,000,000 shares of common stock, $0.25 par value per share. At June 30, 2017, there were 402,957,303 shares of our common stock issued and 4,429,844 shares issued and held in treasury, for a net of 398,527,459 shares outstanding.

 

Diluted income (loss) per share for the three and six months ended June 30, 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-month period ended June 30, 2017, all restricted share units and deferred shares were excluded from the computation of diluted loss per share, as our reported loss for that period would cause them to have no effect on the calculation of loss per share. For the six-month period ended June 30, 2017, 3,619,975 restricted stock units that were unvested or which vested in the current period and 1,352,470 deferred shares were included in the calculation of diluted income per share. For the three-month and six-month periods ended June 30, 2016, 3,515,356 restricted stock units that were unvested or which vested in the current period and 635,602 deferred shares were included in the calculation of diluted income per share. There were no options or warrants outstanding as of June 30, 2017 or June 30, 2016.

 

 

Note 6.

Business Segments

 

We are currently organized and managed in four segments: the Greens Creek unit, the Lucky Friday unit, the Casa Berardi unit, and the San Sebastian unit.

 

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

 

 

The following tables present information about reportable segments for the three and six months ended June 30, 2017 and 2016 (in thousands):

 

   

Three Months Ended
June 30,

   

Six Months Ended

June 30,

 
   

2017

   

2016

   

2017

   

2016

 

Net sales to unaffiliated customers:

                               

Greens Creek

  $ 71,339     $ 59,574     $ 130,189     $ 113,456  

Lucky Friday

    (187

)

    22,760       19,823       44,012  

Casa Berardi

    43,822       53,285       85,534       85,483  

San Sebastian

    19,305       35,683       41,277       59,368  
    $ 134,279     $ 171,302     $ 276,823     $ 302,319  

Income (loss) from operations:

                               

Greens Creek

  $ 15,418     $ 14,831     $ 29,532     $ 22,909  

Lucky Friday

    (8,212

)

    4,047       (4,332

)

    6,790  

Casa Berardi

    (1,708

)

    10,622       (3,953

)

    12,556  

San Sebastian

    11,892       25,583       25,346       40,495  

Other

    (13,415

)

    (13,473

)

    (26,747

)

    (25,567

)

    $ 3,975     $ 41,610     $ 19,846     $ 57,183  

 

The following table presents identifiable assets by reportable segment as of June 30, 2017 and December 31, 2016 (in thousands):

 

   

June 30, 2017

   

December 31, 2016

 

Identifiable assets:

               

Greens Creek

  $ 674,210     $ 681,303  

Lucky Friday

    431,331       442,829  

Casa Berardi

    807,180       806,044  

San Sebastian

    43,268       33,608  

Other

    423,167       407,893  
    $ 2,379,156     $ 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 Lucky Friday has been suspended since the start of the strike. For the first six months of 2017, suspension costs during the strike period of $7.6 million, along with $2.0 million in non-cash depreciation expense, are reported in a separate line item on our unaudited condensed consolidated statement of operations. We cannot predict how long the strike will last or whether an agreement will be reached. As a result of the strike or other events related to labor at 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 and six months ended June 30, 2017 and 2016 (in thousands):

 

   

Three Months Ended

June 30,

 
   

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 cost

    (84

)

    (84

)

Amortization of net loss

    1,033       1,093  

Net periodic pension cost

  $ 2,022     $ 2,068  

  

 

   

Six Months Ended

June 30,

 
   

2017

   

2016

 

Service cost

  $ 2,392     $ 2,154  

Interest cost

    2,678       2,614  

Expected return on plan assets

    (2,924

)

    (2,650

)

Amortization of prior service cost

    (168

)

    (168

)

Amortization of net (gain) loss

    2,066       2,186  

Net periodic pension cost

  $ 4,044     $ 4,136  

 

We made cash contributions to our defined benefit plans of $1.2 million in April 2017 and $5.7 million in July 2017. We expect to contribute approximately $0.4 million to our unfunded supplemental executive retirement plan during 2017.

 

 

Note 8.

Shareholders’ Equity

 

Stock-based Compensation Plans

 

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

 

In March 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.

 

In June 2017, the Board of Directors granted the following restricted stock unit awards to employees:

 

 

775,379 restricted stock units, with one third of those vesting in June 2018, one third vesting in June 2019, and one third vesting in June 2020;

 

93,691 restricted stock units, with one half of those vesting in June 2018 and one half vesting in June 2019; and

 

15,336 restricted stock units that vest in June 2018.

 

The $1.9 million in expense related to the unit awards discussed above vesting in 2018 will be recognized on a straight-line basis over the twelve months following the date of the award. The $1.8 million in expense related to the unit awards discussed above vesting in 2019 will be recognized on a straight-line basis over the twenty-four months following the date of the award. The $1.5 million in expense related to the unit awards discussed above vesting in 2020 will be recognized on a straight-line basis over the thirty-six month period following the date of the award.

 

 

In June 2017, the Board of Directors granted performance-based share awards to certain executive employees. The value of the awards will be based on the ranking of the market performance of our common stock relative to the performance of the common stock of a group of peer companies over the three-year measurement period ending December 31, 2019. The number of shares to be issued will be based on the value of the awards divided by the share price at grant date. The expense related to the performance-based awards will be recognized on a straight-line base over the thirty months following the date of the award.

 

Stock-based compensation expense for restricted stock unit and performance-based grants to employees and shares issued to nonemployee directors recorded in the first six months of 2017 totaled $2.8 million, compared to $3.5 million in the same period last year.

 

In connection with the vesting of restricted stock units and other stock grants, employees have in the past, at their election and when permitted by us, chosen to satisfy their minimum tax withholding obligations through net share settlement, pursuant to which the Company withholds the number of shares necessary to satisfy such withholding obligations.  As a result, in the first six months of 2017 we withheld 488,634 shares valued at approximately $2.5 million, or approximately $5.06 per share. In the first six months of 2016 we withheld 997,678 shares valued at approximately $3.4 million, or approximately $3.40 per share.

 

Common Stock Dividends

 

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

 

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 August 3, 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 $1.0 million payable in September 2017. Because the average realized silver price for the second quarter of 2017 was $17.14 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 Securities and Exchange Commission ("SEC") on February 23, 2016. As of June 30, 2017, we had sold 4,608,847 shares under the agreement for total proceeds of approximately $17.7 million, net of commissions and fees of approximately $362 thousand. Of those amounts, 1,828,760 shares were sold in the second quarter of 2017 for total proceeds of approximately $9.6 million, net of commissions and fees of approximately $196 thousand.

 

 

Common Stock Repurchase Program

 

On May 8, 2012, we announced that our Board of Directors approved a stock repurchase program.  Under the program, we are authorized to repurchase up to 20 million shares of our outstanding common stock from time to time in open market or privately negotiated transactions, depending on prevailing market conditions and other factors.  The repurchase program may be modified, suspended or discontinued by us at any time. Whether or not we engage in repurchases from time to time may depend on a variety of factors, including not only price and cash resources, but customary black-out restrictions, whether we have any material inside information, limitations on share repurchases or cash usage that may be imposed by our credit agreement or in connection with issuances of securities, alternative uses for cash, applicable law, and other investment opportunities from time to time. As of June 30, 2017, 934,100 shares have been purchased at an average price of $3.99 per share, leaving 19.1 million shares that may yet be purchased under the program. The closing price of our common stock at August 1, 2017, was $5.54 per share.

 

 

Note 9.

Senior Notes, Credit Facility 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 $4.9 million as of June 30, 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 six months ended June 30, 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 $17.2 million and $10.2 million, respectively. The interest expense related to the Senior Notes for the six months ended June 30, 2017 and 2016 was net of $0.9 million and $7.9 million, respectively, in capitalized interest, primarily related to the #4 Shaft project at our Lucky Friday unit which was completed in January 2017. Interest expense for the six months ended June 30, 2017 also includes $1.1 million in costs related to our private offering of new Senior Notes in June 2017 and concurrent tender offer to purchase our existing Senior Notes, which were not completed.

 

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

 

 

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

 

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

 

Credit Facility

 

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

 

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 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 June 30, 2017.

 

We believe we were in compliance with all covenants under the credit agreement and no amounts were outstanding as of June 30, 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 June 30, 2017, the total liability balance associated with capital leases, including certain purchase option amounts, was $13.1 million, with $5.9 million of the liability classified as current and the remaining $7.2 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 $13.8 million at June 30, 2017, with $0.7 million attributed to interest.

 

 

At June 30, 2017, the annual maturities of capital lease commitments, including interest, are (in thousands):

 

Twelve-month period ending June 30,

       

2018

  $ 6,471  

2019

    4,168  

2020

    2,217  

2021

    981  

Total

    13,837  

Less: imputed interest

    (739

)

Net capital lease obligation

  $ 13,098  

 

 

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. We adopted this update effective January 1, 2017, and it 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 balance sheet. 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 June 30, 2017, we had immaterial net unrealized losses 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. We adopted this update effective January 1, 2017, and it did not have 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 applicable provisions of the update to any acquisitions occurring after the effective date.

 

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

 

 

Note 11.

Derivative Instruments

 

Foreign Currency

 

Our wholly-owned subsidiaries owning the Casa Berardi and San Sebastian mines are U.S. dollar ("USD")-functional entities which routinely incur expenses denominated in Canadian dollars ("CAD") and Mexican pesos ("MXN"), and such expenses expose us to exchange rate fluctuations between the USD and CAD and MXN. In April 2016, we initiated a program to manage our exposure to fluctuations in the exchange rate between the USD and CAD and the impact on our future operating costs denominated in CAD. In October 2016, we also initiated a program to manage our exposure to the impact of fluctuations in the exchange rate between the USD and MXN on our future operating costs denominated in MXN. The programs utilize forward contracts to buy CAD and MXN, and each contract is designated as a cash flow hedge. As of June 30, 2017, we have 106 forward contracts outstanding to buy CAD$230.1 million having a notational amount of US$177.0 million, and 12 forward contracts outstanding to buy MXN$96.0 million having a notional amount of USD$4.8 million. The CAD contracts are related to forecasted cash operating costs at Casa Berardi to be incurred from 2017 through 2020 and have USD-to-CAD exchange rates ranging between 1.2787 and 1.3380. The MXN contracts are related to forecasted cash operating costs at San Sebastian for 2017 and have MXN-to-USD exchange rates ranging between 19.3752 and 21.0000. Our risk management policy provides for up to 75% of our planned cost exposure for five years into the future to be hedged under such programs, and for potential additional programs to manage other foreign currency-related exposure areas.

 

As of June 30, 2017, we recorded the following balances for the fair value of the contracts:

 

 

a current asset of $1.1 million, which is included in other current assets;

 

a non-current asset of $1.1 million, which is included in other non-current assets;

 

a current liability of $0.4 million, which is included in other current liabilities, and

 

a non-current liability of $0.1 million, which is included in other non-current liabilities.

 

Net unrealized gains of approximately $48 thousand related to the effective portion of the hedges were included in accumulated other comprehensive income as of June 30, 2017. Unrealized gains and losses will be transferred from accumulated other comprehensive loss to current earnings as the underlying operating expenses are recognized. We estimate approximately $0.4 million in net unrealized gains included in accumulated other comprehensive income as of June 30, 2017 would be reclassified to current earnings in the next twelve months. Net realized losses of approximately $0.4 million on contracts related to underlying expenses which have been recognized were transferred from accumulated other comprehensive loss and included in cost of sales and other direct production costs for the six months ended June 30, 2017. Net unrealized gains of approximately $2 thousand related to ineffectiveness of the hedges were included in current earnings for the six months ended June 30, 2017.

 

Metals Prices

 

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

 

 

We are currently using financially-settled forward contracts to manage the exposure to changes in prices of silver, gold, zinc and lead contained in our concentrate shipments between the time of shipment and final settlement. In addition, we currently use financially-settled forward contracts to manage the exposure to changes in prices of zinc and lead (but not silver and gold) contained in our forecasted future concentrate shipments. These contracts are not designated as hedges and are marked-to-market through earnings each period.  As of June 30, 2017, we recorded the following balances for the fair value of the contracts:

 

 

a current asset of $1.2 million, which is included in other current assets;

 

a current liability of $1.3 million, which is included in other current liabilities; and

 

a non-current liability of $0.1 million, which is included in other non-current liabilities.

 

We recognized a $3.3 million net loss during the first six months 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 $5.3 million net loss during the first half 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 June 30, 2017 and December 31, 2016: 

 

June 30, 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

    1,379       7       15,873       6,724     $ 17.14     $ 1,259     $ 1.21     $ 0.97  

Contracts on forecasted sales

                                                               

2017 settlements

                6,834       6,504       N/A       N/A     $ 1.26     $ 1.05  

2018 settlements

                28,329       16,314       N/A       N/A     $ 1.23     $ 1.05  

2019 settlements

                1,102       1,102       N/A       N/A     $ 1.21     $ 1.06  

 

 

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 relates to the change in price between sale and settlement, does not qualify for hedge accounting; therefore, it is adjusted to market through earnings each period prior to final settlement.

 

 

Credit-risk-related Contingent Features

 

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 June 30, 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 $3.2 million as of June 30, 2017. If we were in breach of any derivative contracts at June 30, 2017, we could have been required to settle our obligations under the agreements at their termination value of $3.2 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

June 30, 2017

   

Balance at

December 31, 2016

 

Input

Hierarchy Level

Assets:

                 

Cash and cash equivalents:

                 

Money market funds and other bank deposits

  $ 164,113     $ 169,777  

Level 1

Available for sale securities:

                 

Debt securities - municipal and corporate bonds

    37,816       29,117  

Level 2

Equity securities – mining industry

    4,729       5,002  

Level 1

Trade accounts receivable:

                 

Receivables from provisional concentrate sales

    9,183       20,082  

Level 2

Restricted cash balances:

                 

Certificates of deposit and other deposits

    1,098       2,200  

Level 1

Derivative contracts:

                 

Foreign exchange contracts

    2,286       27  

Level 2

Metal forward contracts

    1,208       5,403  

Level 2

Total assets

  $ 220,433     $ 231,608    
                   

Liabilities:

                 

Derivative contracts:

                 

Foreign exchange contracts

  $ 585     $ 5,288  

Level 2

Metal forward contracts

    1,383       192  

Level 2

Total Liabilities

  $ 1,968     $ 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 loading on truck or ship).  Sales of concentrates are recorded using estimated forward prices for the anticipated month of settlement applied to our estimate of payable metal quantities contained in each shipment.  Sales are recorded net of estimated treatment and refining charges, which are also impacted by changes in metals prices and quantities of contained metals.  We estimate the prices at which sales of our concentrates will be settled due to the time elapsed between shipment and final settlement with the customer.  Receivables for previously recorded concentrate sales are adjusted to reflect estimated forward metals prices at the end of each period until final settlement by the customer.  We obtain the forward metals prices used each period from a pricing service.  Changes in metal prices between shipment and final settlement result in changes to revenues previously recorded upon shipment.  The embedded derivative contained in our concentrate sales is adjusted to fair market value through earnings each period prior to final settlement.

 

We use financially-settled forward contracts to manage exposure to changes in the exchange rate between the U.S. dollar and Canadian dollar and 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 $501.6 million, net of unamortized initial purchaser discount at June 30, 2017 of $4.9 million, had a fair value of $524.6 million at June 30, 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.

 

 
22 

Table of Contents
 

 

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 June 30, 2017

 
   

Parent

   

Guarantors

   

Non-

Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Assets

                                       

Cash and cash equivalents

  $ 100,480     $ 26,770     $ 36,863     $     $ 164,113  

Other current assets

    52,728       36,677       38,816       (576

)

    127,645  

Properties, plants, and equipment - net

    1,986       1,256,606       774,914             2,033,506  

Intercompany receivable (payable)

    432,177       (229,725

)

    (330,748

)

    128,296        

Investments in subsidiaries

    1,496,848                   (1,496,848

)

     

Other non-current assets

    2,606       193,833       5,294       (147,841

)

    53,892  

Total assets

  $ 2,086,825     $ 1,284,161     $ 525,139     $ (1,516,969

)

  $ 2,379,156  
                                         

Liabilities and Stockholders' Equity

                                       

Current liabilities

  $ 35,523     $ 51,195     $ 32,735     $ (5,665

)

  $ 113,788  

Long-term debt

    501,604       3,838       3,375             508,817  

Non-current portion of accrued reclamation

          60,849       18,431             79,280  

Non-current deferred tax liability

          12,630       123,086       (14,456

)

    121,260  

Other non-current liabilities

    47,312       5,547       766             53,625  

Stockholders' equity

    1,502,386       1,150,102       346,746       (1,496,848

)

    1,502,386  

Total liabilities and stockholders' equity

  $ 2,086,825     $ 1,284,161     $ 525,139     $ (1,516,969

)

  $ 2,379,156  

 

 

   

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       52,400       35,537       (573

)

    121,314  

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       199,957       5,337       (161,579

)

    47,901  

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     $ 40,093     $ (22,999

)

  $ 126,225  

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       122,855       (14,212

)

    122,855  

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 June 30, 2017

 
   

Parent

   

Guarantors

   

Non-

Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Revenues

  $ 807     $ 70,344     $ 63,128     $     $ 134,279  

Cost of sales

    (186

)

    (40,816

)

    (36,501

)

          (77,503

)

Depreciation, depletion, amortization

          (13,502

)

    (12,067

)

          (25,569

)

General and administrative

    (5,721

)

    (4,094

)

    (494

)

          (10,309

)

Exploration and pre-development

    (66

)

    (2,496

)

    (4,343

)

          (6,905

)

Research and development

          (312

)

                (312

)

Gain on derivative contracts

    2,487                         2,487  

Foreign exchange gain (loss)

    7,666       1       (11,550

)

          (3,883

)

Lucky Friday suspension-related costs

          (8,024

)

                (8,024

)

Equity in earnings of subsidiaries

    (2,355

)

                2,355        

Other (expense) income

    (29,115

)

    (1,557

)

    (2,400

)

    20,890       (12,182

)

Income (loss) before income taxes

    (26,483

)

    (456

)

    (4,227

)

    23,245       (7,921

)

(Provision) benefit from income taxes

          1,068       3,727       (20,890

)

    (16,095

)

Net income (loss)

    (26,483

)

    612       (500

)

    2,355       (24,016

)

Preferred stock dividends

    (138

)

                      (138

)

Income (loss) applicable to common stockholders

    (26,621

)

    612       (500

)

    2,355       (24,154

)

Net income (loss)

    (26,483

)

    612       (500

)

    2,355       (24,016

)

Changes in comprehensive income (loss)

    2,878             847       (847

)

    2,878  

Comprehensive income (loss)

  $ (23,605

)

  $ 612     $ 347     $ 1,508     $ (21,138

)

 

 

   

Six Months Ended June 30, 2017

 
   

Parent

   

Guarantors

   

Non-

Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Revenues

  $ (3,286

)

  $ 153,297     $ 126,812     $     $ 276,823  

Cost of sales

    (334

)

    (83,588

)

    (72,257

)

          (156,179

)

Depreciation, depletion, amortization

          (29,268

)

    (25,253

)

          (54,521

)

General and administrative

    (12,190

)

    (6,413

)

    (912

)

          (19,515

)

Exploration and pre-development

    (310

)

    (4,397

)

    (7,964

)

          (12,671

)

Research and development

          (995

)

                (995

)

Loss on derivative contracts

    (5,322

)

                      (5,322

)

Foreign exchange gain (loss)

    10,133       (43

)

    (16,235

)

          (6,145

)

Lucky Friday suspension-related costs

          (9,605

)

                (9,605

)

Equity in earnings of subsidiaries

    346                   (346

)

     

Other (expense) income

    13,781       (2,409

)

    (9,470

)

    (23,930

)

    (22,028

)

Income (loss) before income taxes

    2,818       16,579       (5,279

)

    (24,276

)

    (10,158

)

(Provision) benefit from income taxes

          (7,901

)

    (3,053

)

    23,930       12,976  

Net income (loss)

    2,818       8,678       (8,332

)

    (346

)

    2,818  

Preferred stock dividends

    (276

)

                      (276

)

Income (loss) applicable to common stockholders

    2,542       8,678       (8,332

)

    (346

)

    2,542  

Net income (loss)

    2,818       8,678       (8,332

)

    (346

)

    2,818  

Changes in comprehensive income (loss)

    6,082             758       (758

)

    6,082  

Comprehensive income (loss)

  $ 8,900     $ 8,678     $ (7,574

)

  $ (1,104

)

  $ 8,900  

 

 

   

Three Months Ended June 30, 2016

 
   

Parent

   

Guarantors

   

Non-

Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Revenues

  $ (5,659

)

  $ 87,992     $ 88,969     $     $ 171,302  

Cost of sales

          (47,203

)

    (35,750

)

          (82,953

)

Depreciation, depletion, amortization

          (15,238

)

    (14,659

)

          (29,897

)

General and administrative

    (6,474

)

    (3,679

)

    (206

)

          (10,359

)

Exploration and pre-development

    (113

)

    (1,360

)

    (2,410

)

          (3,883

)

Loss on derivative contracts

    (6

)

                      (6

)

Acquisition costs

    (394

)

    (8

)

                (402

)

Equity in earnings of subsidiaries

    37,111                   (37,111

)

     

Other (expense) income

    (349

)

    2,623       (8,732

)

    (1,732

)

    (8,190

)

Income (loss) before income taxes

    24,116       23,127       27,212       (38,843

)

    35,612  

(Provision) benefit from income taxes

          (8,386

)

    (4,842

)

    1,732       (11,496

)

Net income (loss)

    24,116       14,741       22,370       (37,111

)

    24,116  

Preferred stock dividends

    (138

)

                      (138

)

Income (loss) applicable to common stockholders

    23,978       14,741       22,370       (37,111

)

    23,978  

Net income (loss)

    24,116       14,741       22,370       (37,111

)

    24,116  

Changes in comprehensive income (loss)

    1,239             1,193       (1,193

)

    1,239  

Comprehensive income (loss)

  $ 25,355     $ 14,741     $ 23,563     $ (38,304

)

  $ 25,355  

 

 

   

Six Months Ended June 30, 2016

 
   

Parent

   

Guarantors

   

Non-

Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Revenues

  $ (11,794

)

  $ 169,261     $ 144,852     $     $ 302,319  

Cost of sales

          (93,956

)

    (63,317

)

          (157,273

)

Depreciation, depletion, amortization

          (31,844

)

    (23,928

)

          (55,772

)

General and administrative

    (11,714

)

    (8,202

)

    (657

)

          (20,573

)

Exploration and pre-development

    (158

)

    (2,647

)

    (4,432

)

          (7,237

)

Loss on derivative contracts

    (6

)

                      (6

)

Acquisition costs

    (394

)

    (8

)

                (402

)

Equity in earnings of subsidiaries

    16,120                   (16,120

)

     

Other (expense) income

    31,444       6,959       (44,250

)

    (18,561

)

    (24,408

)

Income (loss) before income taxes

    23,498       39,563       8,268       (34,681

)

    36,648  

(Provision) benefit from income taxes

          (13,219

)

    (18,492

)

    18,561       (13,150

)

Net income (loss)

    23,498       26,344       (10,224

)

    (16,120

)

    23,498  

Preferred stock dividends

    (276

)

                      (276

)

Income (loss) applicable to common stockholders

    23,222       26,344       (10,224

)

    (16,120

)

    23,222  

Net income (loss)

    23,498       26,344       (10,224

)

    (16,120

)

    23,498  

Changes in comprehensive income (loss)

    2,304       8       2,253       (2,261

)

    2,304  

Comprehensive income (loss)

  $ 25,802     $ 26,352     $ (7,971

)

  $ (18,381

)

  $ 25,802  

 

Unaudited Interim Condensed Consolidating Statements of Cash Flows

 

   

Six Months Ended June 30, 2017

 
   

Parent

   

Guarantors

   

Non-

Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Cash flows from operating activities

  $ 9,131     $ 13,792     $ 10,757     $ 12,141     $ 45,821  

Cash flows from investing activities:

                                       

Additions to properties, plants, and equipment

          (19,132

)

    (26,832

)

            (45,964

)

Other investing activities, net

    (8,500

)

    1,266       (22

)

    (424

)

    (7,680

)

Cash flows from financing activities:

                                       

Dividends paid to stockholders

    (2,257

)

                        (2,257

)

Payments on debt

          (3,044

)

    (671

)

            (3,715

)

Other financing activity

    (11,169

)

    9,501       20,430       (11,717

)

    7,045  

Effect of exchange rate changes on cash

                1,086             1,086  

Changes in cash and cash equivalents

    (12,795

)

    2,383       4,748             (5,664

)

Beginning cash and cash equivalents

    113,275       24,387       32,115             169,777  

Ending cash and cash equivalents

  $ 100,480     $ 26,770     $ 36,863     $     $ 164,113  

 

  

   

Six Months Ended June 30, 2016

 
   

Parent

   

Guarantors

   

Non-

Guarantors

   

Eliminations

   

Consolidated

 
   

(in thousands)

 

Cash flows from operating activities

  $ 22,190     $ (8,639

)

  $ 40,815     $ 31,772     $ 86,138  

Cash flows from investing activities:

                                     

Additions to properties, plants, and equipment

    (40

)

    (43,677

)

    (33,243

)

            (76,960

)

Other investing activities, net

    (15,248

)

    317       (3,900

)

          (18,831

)

Cash flows from financing activities:

                                     

Dividends paid to stockholders

    (2,190

)

                        (2,190

)

Payments on debt

    (1,339

)

    (3,836

)

    (520

)

            (5,695

)

Other financing activity

    4,948       36,863       (5,385

)

    (31,772

)

    4,654  

Effect of exchange rate changes on cash

                1,288             1,288  

Changes in cash and cash equivalents

    8,321       (18,972

)

    (945

)

          (11,596

)

Beginning cash and cash equivalents

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

Ending cash and cash equivalents

  $ 102,488     $ 23,720     $ 17,405     $     $ 143,613  

 

 

 

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, produce and market 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, our exploration and pre-development projects, and 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;

 

continuing to optimize and improve 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;

 

advancing 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 or 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 six 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. In June 2017, we announced a private offering under Rule 144A of $500 million in Senior Notes due 2025 and a concurrent tender offer to purchase our existing Senior Notes. Both the private offering of the notes and the tender offer were abandoned in June 2017, as available terms and conditions were not sufficiently attractive to us to complete the proposed transactions. Our ability to restructure or refinance our debt will depend on the condition of capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. There can be no assurance that we will be able to restructure or refinance our debt in the future on terms and conditions favorable to us.

 

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. See Legal challenges could prevent the Rock Creek or Montanore projects from ever being developed in Part I, Item 1A. – Risk Factors in our annual report filed on Form 10-K for the year ended December 31, 2016 for more information. In May 2017, the Montana Federal District Court issued Opinions and Orders in three lawsuits challenging previously granted environmental approvals for the Montanore project. The Orders overturned the approvals for the project granted by the United States Forest Service and the United States Fish and Wildlife Service, and in each case remanded the Record of Decision ("ROD") and associated planning documents for further review by the agencies consistent with its Opinions. In June 2017, the Court vacated the agencies' approvals for the project. As a result, additional work must be performed by the agencies to address the deficiencies in the ROD and associated planning documents identified by the Court, and new approvals must be granted, before the project may proceed beyond certain preliminary actions.

 

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 we prepare the mine for some interim production and advance the engineering and infrastructure for the restart of full production we expect cash expenditures of about $1.5 million to $2.0 million a month. 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 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 currently anticipated.

 

We strive to operate our properties safely, in an environmentally responsible manner and as cost-effectively as possible. We seek to achieve safe and environmentally sound practices through extensive employee training in safe work practices; establishing, following and improving safety standards with the active participation of employees; investigating accidents, incidents and losses to avoid recurrence; and participation in the National Mining Association’s CORESafety program. We attempt to implement reasonable best practices for mine safety and emergency preparedness. Additionally, we work with the U.S. Mine Safety and Health Administration (“MSHA”) to address issues outlined in inspections and investigations, and continually 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- and six-month periods ended June 30, 2017 and 2016 were as follows:

 

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 

(in thousands)

 

2017

   

2016

   

2017

   

2016

 

Silver

  $ 46,077     $ 71,487     $ 97,434     $ 128,157  

Gold

    66,975       81,028       129,676       135,920  

Lead

    8,101       15,330       21,720       29,053  

Zinc

    20,500       17,846       50,365       40,371  

Less: smelter charges

    (7,374

)

    (14,389

)

    (22,372

)

    (31,182

)

Sales of products

  $ 134,279     $ 171,302     $ 276,823     $ 302,319  

 

We recorded a loss applicable to common shareholders of $24.2 million ($0.06 per basic common share) for the second quarter of 2017 and income applicable to common shareholders of $2.5 million ($0.01 per basic common share) for first six months of 2017, compared to income applicable to common shareholders of $24.0 million ($0.06 per basic common share) and $23.2 million ($0.06 per basic common share) for the second quarter and first six months of 2016, respectively. The following factors contributed to the results for the second quarter and first six months of 2017 compared to the same periods in 2016:

 

 

Gross profit decreased at our San Sebastian, Casa Berardi and Lucky Friday units by $12.2 million, $12.0 million and $4.2 million, respectively, for the second quarter of 2017, and by $12.9 million, $15.8 million and $1.5 million, respectively, for the first six months of 2017 compared to the same periods in 2016. Gross profit at our Greens Creek unit was higher in the second quarter and first half of 2017 compared to the same periods in 2016 by $1.2 million and $7.0 million, respectively. See The Greens Creek Segment, The Lucky Friday Segment, The Casa Berardi Segment, and The San Sebastian Segment sections below.

 

Lucky Friday suspension costs of $6.4 million and $7.6 million in the second quarter and first half of 2017, respectively. These costs, along with $1.6 million and $2.0 in non-cash depreciation expense, were incurred during the suspension of production resulting from the strike, which started in March 2017.

 

Higher interest expense by $5.2 million and $8.0 million in the second quarter and first half of 2017, respectively, compared to the same periods of 2016. Interest expense in the first six months of 2017 and 2016 was net of $0.9 million and $7.9 million, respectively, in capitalized interest primarily related to the #4 Shaft project, with the decrease due to completion of the #4 Shaft in January 2017. In addition, interest expense for the three- and six-months ended June 30, 2017 included $1.1 million in costs related to our private offering of new Senior Notes in June 2017 and concurrent tender offer to purchase our existing Senior Notes, which were not completed.

 

 

 

Exploration and pre-development expense increased by $3.0 million and $5.4 million, respectively, in the second quarter and first half of 2017 compared to the same periods in 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 $1.1 million and $2.3 million in the second quarter and first half of 2017, respectively, was related to advancement of our Montanore and Rock Creek projects.

 

Net foreign exchange losses in the second quarter and first half of 2017 of $3.9 million and $6.1 million, respectively, versus net losses of $1.9 million and $10.1 million in the second quarter and first half of 2016, respectively. The variances are primarily related to the impact of changes in the CAD-to-USD exchange rate on the remeasurement of our net monetary liabilities in Quebec. During the first half of 2017, the applicable CAD-to-USD exchange rate decreased from 1.3426 to 1.2977, compared to a decrease in the rate from 1.3841 to 1.2917 during the first half of 2016.

 

A gain on base metal derivatives contracts of $2.5 million in the second quarter of 2017 and a loss of $5.3 million in the first half of 2017, with no net activity on base metal derivative contracts for the second quarter and first half of 2016. See Note 11 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information.

 

Higher average realized prices for gold, lead and zinc for the second quarter of 2017 compared to the same period in 2016, while average prices for silver were lower in the 2017 period. In the first half of 2017, average realized prices for silver, gold, lead and zinc were higher than in the comparable period of 2016.

 
     

Three Months Ended
June 30,

   

Six Months Ended

June 30,

 
     

2017

   

2016

   

2017

   

2016

 

Silver –

London PM Fix ($/ounce)

  $ 17.26     $ 16.78     $ 17.34     $ 15.81  
 

Realized price per ounce

  $ 17.14     $ 17.26     $ 17.53     $ 16.15  

Gold –

London PM Fix ($/ounce)

  $ 1,257     $ 1,259     $ 1,238     $ 1,220  
 

Realized price per ounce

  $ 1,260     $ 1,254     $ 1,240     $ 1,226  

Lead –

LME Final Cash Buyer ($/pound)

  $ 0.98     $ 0.78     $ 1.01     $ 0.79  
 

Realized price per pound

  $ 0.95     $ 0.79     $ 1.02     $ 0.79  

Zinc –

LME Final Cash Buyer ($/pound)

  $ 1.18     $ 0.87     $ 1.22     $ 0.82  
 

Realized price per pound

  $ 1.14     $ 0.89     $ 1.21     $ 0.83  

 

 

Average realized prices can 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 the customers, we must estimate the prices at which sales of our metals will be settled.  Previously recorded sales are adjusted to estimated settlement metals prices each period through final settlement.  For the second quarter and first six months of 2017, we recorded net negative price adjustments to provisional settlements of $1.3 million and $0.7 million, respectively, compared to net positive price adjustments to provisional settlements of $1.0 million and $1.5 million, respectively, in the second quarter and first six months 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.

 

Income tax provision of $16.1 million for the second quarter of 2017 and benefit of $13.0 million for the six-month period ended June 30, 2017 compared to income tax provisions of $11.5 million and $13.2 million, respectively, for the same periods in 2016. The provision for the second quarter of 2017, despite reporting a loss before income taxes, was primarily due to estimated taxes related to our operations in Mexico and Quebec. The benefit in the first half of 2017 is primarily the result of a change in income tax position recognized in the first quarter of 2017 relating to the timing of deduction for #4 Shaft development costs at Lucky Friday, as further discussed in Corporate Matters below.

 

 

The Greens Creek Segment

 

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

 

Three Months Ended
June 30,

   

Six Months Ended
June 30,

 
   

2017

   

2016

   

2017

   

2016

 

Sales

  $ 71,339     $ 59,574     $ 130,189     $ 113,456  

Cost of sales and other direct production costs

    (40,816

)

    (31,321

)

    (71,478

)

    (62,573

)

Depreciation, depletion and amortization

    (13,503

)

    (12,413

)

    (26,835

)

    (26,014

)

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

    (54,319

)

    (43,734

)

    (98,313

)

    (88,587

)

Gross profit

  $ 17,020     $ 15,840     $ 31,876     $ 24,869  
                                 

Tons of ore milled

    210,788       203,388       407,917       408,356  

Production:

                               

Silver (ounces)

    1,932,047       2,117,084       3,861,344       4,575,360  

Gold (ounces)

    12,704       11,528       26,726       27,509  

Zinc (tons)

    12,966       15,575       26,372       30,186  

Lead (tons)

    4,420       5,346       9,229       10,433  

Payable metal quantities sold:

                               

Silver (ounces)

    1,922,393       1,866,352       3,361,854       3,767,495  

Gold (ounces)

    12,768       12,099       23,058       23,519  

Zinc (tons)

    8,978       7,640       19,137       20,052  

Lead (tons)

    4,250       4,626       7,080       7,870  

Ore grades:

                               

Silver ounces per ton

    12.11       13.25       12.40       14.22  

Gold ounces per ton

    0.10       0.09       0.10       0.10  

Zinc percent

    7.2

%

    8.7

%

    7.5

%

    8.4

%

Lead percent

    2.7

%

    3.2

%

    2.9

%

    3.1

%

Mining cost per ton

  $ 68.17     $ 71.01     $ 69.74     $ 68.98  

Milling cost per ton

  $ 32.56     $ 30.67     $ 33.12     $ 30.83  

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

  $ 1.86     $ 5.38     $ 1.26     $ 4.61  

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

  $ 8.71     $ 12.87     $ 6.28     $ 9.73  

 

 

(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 $1.2 million and $7.0 million increases in gross profit for the second quarter and first six months of 2017, respectively, compared to the same periods in 2016 were the result of higher average realized prices for gold, zinc and lead, impacting sales by $6.5 million and $20.9 million, respectively, partially offset by higher cost of sales and other direct production costs. Average realized prices for silver were also higher in the first half of 2017 compared to the first half of 2016. These factors were partially offset by decreased silver, zinc and lead ore grades. In addition, gross profit at Greens Creek was affected by negative price adjustments to revenues of $1.1 million and $0.6 million for the second quarter and first six months of 2017, respectively, compared to positive price adjustments to revenues of $0.8 million and $1.3 million for the second quarter and first six months of 2016, respectively. 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.  The increase in cost of sales and other direct production costs in the 2017 periods was due to higher power and fuel costs. Additionally, the cost per ton of concentrate sold increased due to the impact of reduced concentrate production resulting from lower zinc and lead grades.

 

Mining costs per ton decreased in the second quarter of 2017 by 4% compared to the same 2016 period, primarily as a result of lower labor costs and higher milled tons partially offset by higher power costs. Mining costs per ton increased by 1% in the first six months of 2017 compared to the same 2016 period, primarily as a result of lower milled tons and higher power costs. Milling costs per ton increased 6% and 7%, respectively, in the second quarter and first half of 2017 compared to the same period in 2016 due to higher power and reagent costs. The increase for the six month period was also a result of lower mill throughput.

 

The chart below illustrates the factors contributing to the variances in Cash Cost, After By-product Credits, Per Silver Ounce for the second quarter and first six months of 2017 compared to the same periods of 2016.

 

 

  

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

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2017

   

2016

   

2017

   

2016

 

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

  $ 23.81     $ 23.22     $ 24.27     $ 21.26  

By-product credits

    (21.95

)

    (17.84

)

    (23.01

)

    (16.65

)

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

  $ 1.86     $ 5.38     $ 1.26     $ 4.61  

  

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

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2017

   

2016

   

2017

   

2016

 

AISC, Before By-product Credits, per Silver Ounce

  $ 30.66     $ 30.71     $ 29.29     $ 26.38  

By-product credits

    (21.95

)

    (17.84

)

    (23.01

)

    (16.65

)

AISC, After By-product Credits, per Silver Ounce

  $ 8.71     $ 12.87     $ 6.28     $ 9.73  

  

The decrease in Cash Costs, After By-product Credits, per Silver Ounce for the second quarter and first six months 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, along with lower capital spending.

 

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

 

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

 

Treatment costs were lower in the second quarter and first six months of 2017 compared to 2016 as a result of improved payment terms from smelters, partially offset by lower silver production. Treatment charges for the first six months of 2017 were also impacted by higher average 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 second quarter and first six months of 2017 compared to 2016 due to higher zinc and lead prices.

 

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
June 30,

   

Six Months Ended
June 30,

 
   

2017

   

2016

   

2017

   

2016

 

Sales

  $ (187

)

  $ 22,760     $ 19,823     $ 44,012  

Cost of sales and other direct production costs

          (15,883

)

    (12,110

)

    (31,383

)

Depreciation, depletion and amortization

          (2,825

)

    (2,433

)

    (5,829

)

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

          (18,708

)

    (14,543

)

    (37,212

)

Gross profit

  $ (187

)

  $ 4,052     $ 5,280     $ 6,800  

Tons of ore milled

          67,829       57,069       141,850  

Production:

                               

Silver (ounces)

          857,543       680,782       1,834,627  

Lead (tons)

          5,045       3,827       10,996  

Zinc (tons)

          2,557       2,131       5,310  

Payable metal quantities sold:

                               

Silver (ounces)

          858,965       641,004       1,787,766  

Lead (tons)

          5,037       3,596       10,543  

Zinc (tons)

          2,370       1,688       4,299  

Ore grades:

                               

Silver ounces per ton

          13.09       12.39       13.39  

Lead percent

   

%

    7.76

%

    7.05

%

    8.07

%

Zinc percent

   

%

    4.02

%

    3.99

%

    4

%

Mining cost per ton

  $     $ 100.77     $ 104.72     $ 99.34  

Milling cost per ton

  $     $ 24.97     $ 27.16     $ 24.13  

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

  $     $ 9.94     $ 5.93     $ 9.47  

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

  $     $ 22.05     $ 12.06     $ 21.90  

 

 

(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 $4.2 million and $1.5 million in the second quarter and first six months of 2017, respectively, compared to the same periods in 2016. The variance is primarily due to the lack of metal production in the second quarter and reduced production in the first quarter of 2017 as a result of the suspension of operations starting in mid-March 2017 due to a strike by the unionized employees, discussed further below. Silver and lead production was also impacted by lower ore grades in the first quarter of 2017. These factors were partially offset by higher average realized silver, lead and zinc prices realized during the first quarter of 2017, prior to the strike.

 

Mining and milling cost per ton were higher by 5% and 13%, respectively, in the first half of 2017 compared to the same period in 2016 due primarily to lower tonnage 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 second quarter of 2016 and first six months of 2017 and 2016:

 

 

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

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2017

   

2016

   

2017

   

2016

 

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

  $     $ 22.63     $ 22.90     $ 21.84  

By-product credits

          (12.69

)

    (16.97

)

    (12.37

)

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

  $     $ 9.94     $ 5.93     $ 9.47  

 

  

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

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2017

   

2016

   

2017

   

2016

 

AISC, Before By-product Credits, per Silver Ounce

  $     $ 34.74     $ 29.03     $ 34.27  

By-product credits

          (12.69

)

    (16.97

)

    (12.37

)

AISC, After By-product Credits, per Silver Ounce

  $     $ 22.05     $ 12.06     $ 21.90  

  

The decrease in Cash Cost, After By-product Credits, per Silver Ounce in the first half of 2017 compared to the same period in 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, 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 Lucky Friday has been suspended since start of the strike. Suspension costs during the strike totaled $6.4 million and $7.6 million in the second quarter and first half of 2017, respectively. These costs are combined with non-cash depreciation expense of $1.6 million and $2.0 million for those periods and reported in a separate line item on our condensed consolidated statement of operations. These suspension 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
June 30,

   

Six Months Ended
June 30,

 
   

2017

   

2016

   

2017

   

2016

 

Sales

  $ 43,822     $ 53,285     $ 85,534     $ 85,483  

Cost of sales and other direct production costs

    (32,336

)

    (27,586

)

    (62,289

)

    (48,245

)

Depreciation, depletion and amortization

    (11,344

)

    (13,597

)

    (23,858

)

    (22,098

)

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

    (43,680

)

    (41,183

)

    (86,147

)

    (70,343

)

Gross profit (loss)

  $ 142     $ 12,102     $ (613

)

  $ 15,140  

Tons of ore milled

    330,109       218,226       623,801       435,188  

Production:

                               

Gold (ounces)

    33,261       41,955       69,068       72,333  

Silver (ounces)

    8,477       8,668       17,022       15,673  

Payable metal quantities sold:

                               

Gold (ounces)

    34,827       42,764       68,993       70,191  

Silver (ounces)

    10,328       7,566       18,227       15,430  

Ore grades:

                               

Gold ounces per ton

    0.12       0.22       0.13       0.19  

Silver ounces per ton

    0.03       0.04       0.03       0.04  

Mining cost per ton

  $ 76.83     $ 91.56     $ 81.42     $ 89.55  

Milling cost per ton

  $ 15.50     $ 19.82     $ 16.33     $ 19.36  

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

  $ 972     $ 601     $ 927     $ 676  

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

  $ 1,373     $ 1,034     $ 1,312     $ 1,155  

 

 

(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 $12.0 million and $15.8 million for the second quarter and first half of 2017, respectively, compared to the same periods of 2016, primarily due to reduced gold production as a result of lower ore grades, partially offset by higher ore throughput. The lower grades were due to the addition of production from the East Mine Crown Pillar ("EMCP") pit, which commenced in July 2016, and underground mine sequencing. The increase in ore throughput was also a result of the addition of the EMCP pit. We expect grades to improve in the second half of 2017 as higher-grade areas of the underground mine become available for production. Lower average realized gold prices also contributed to the decrease in gross profit for the second quarter of 2017; however, average realized gold prices were higher in the first half of 2017 compared to the first half of 2016.

 

Mining costs per ton for the second quarter and first half of 2017 were lower by 16% and 9%, respectively, compared to the same periods of last year due primarily 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 2017 compared to 2016.

 

Milling unit costs decreased by 22% and 16%, respectively, in the second quarter and first half of 2017 compared to the same periods in 2016, mainly due to variances in ore production and foreign exchange differences as noted above.

 

 

The chart below illustrates the factors contributing to Cash Cost, After By-product Credits, Per Gold Ounce for the second quarter and first half of 2017 and 2016:

 

 

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

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2017

   

2016

   

2017

   

2016

 

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

  $ 976     $ 604     $ 931     $ 679  

By-product credits

    (4

)

    (3

)

    (4

)

    (3

)

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

  $ 972     $ 601     $ 927     $ 676  

  

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

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2017

   

2016

   

2017

   

2016

 

AISC, Before By-product Credits, per Gold Ounce

  $ 1,377     $ 1,037     $ 1,316     $ 1,158  

By-product credits

    (4

)

    (3

)

    (4

)

    (3

)

AISC, After By-product Credits, per Gold Ounce

  $ 1,373     $ 1,034     $ 1,312     $ 1,155  

  

The increase in Cash Cost, After By-product Credits, per Gold Ounce for the 2017 periods compared to 2016 was primarily due to lower gold production resulting from lower grades. The increase in AISC, After By-product Credits, per Gold Ounce was also due to lower gold production, partially offset by lower capital spending. In addition to the anticipated increase in grades discussed above, we expect surface mining costs to decrease in the second half of 2017 as a result of reduced stripping.

 

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
June 30,

   

Six Months Ended
June 30,

 
   

2017

   

2016

   

2017

   

2016

 

Sales

  $ 19,305     $ 35,683     $ 41,277     $ 59,368  

Cost of sales and other direct production costs

    (4,352

)

    (8,163

)

    (10,302

)

    (15,072

)

Depreciation, depletion and amortization

    (722

)

    (1,062

)

    (1,395

)

    (1,831

)

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

    (5,074

)

    (9,225

)

    (11,697

)

    (16,903

)

Gross profit

  $ 14,231     $ 26,458     $ 29,580     $ 42,465  

Tons of ore milled

    38,478       37,400       75,141       68,558  

Production:

                               

Silver (ounces)

    866,950       1,258,103       1,617,753       2,458,442  

Gold (ounces)

    6,596       9,482       12,880       18,811  

Payable metal quantities sold:

                               

Silver (ounces)

    756,000       1,408,544       1,536,750       2,366,550  

Gold (ounces)

    5,575       9,746       12,490       17,159  

Ore grades:

                               

Silver ounces per ton

    23.87       35.83       22.85       38.30  

Gold ounces per ton

    0.18       0.27       0.18       0.29  

Mining cost per ton

  $ 41.63     $ 91.89     $ 40.16     $ 97.27  

Milling cost per ton

  $ 66.97     $ 69.35     $ 65.29     $ 69.48  

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

  $ (3.31

)

  $ (3.05

)

  $ (3.29

)

  $ (3.15

)

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

  $ 0.06     $ (2.33

)

  $ 0.24     $ (2.19

)

 

 

(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 $12.2 million and $12.9 million decreases in gross profit for the second quarter and first half of 2017 compared to the same periods in 2016 are 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 second quarter and first half of 2016 had considerably higher grades than anticipated over the mine life. The impact of lower metals production was partially offset by higher average realized silver prices.

 

 

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

 

 

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

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2017

   

2016

   

2017

   

2016

 

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

  $ 6.25     $ 6.43     $ 6.56     $ 6.22  

By-product credits

    (9.56

)

    (9.48

)

    (9.85

)

    (9.37

)

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

  $ (3.31

)

  $ (3.05

)

  $ (3.29

)

  $ (3.15

)

  

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

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2017

   

2016

   

2017

   

2016

 

AISC, Before By-product Credits, per Silver Ounce

  $ 9.62     $ 7.15     $ 10.09     $ 7.18  

By-product credits

    (9.56

)

    (9.48

)

    (9.85

)

    (9.37

)

AISC, After By-product Credits, per Silver Ounce

  $ 0.06     $ (2.33

)

  $ 0.24     $ (2.19

)

 

The decrease in Cash Cost, After By-product Credits, per Silver Ounce in the second quarter and first half of 2017 compared to the same periods of 2016 was primarily the result of lower mining costs as a result of reduced mining of waste and the impact of lower silver production on the calculation. The increase in AISC, After By-product Credits, per Silver Ounce was the result of higher exploration and capital spending and lower silver production, partially offset by lower mining 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 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 do 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 in 2017.

 

 

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 $47.6 million and $44.9 million, respectively, as of June 30, 2017 and December 31, 2016. We made cash contributions to our defined benefit plans of $1.2 million in April 2017 and $5.7 million in July 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 June 30, 2017 totaled $44.6 million, or 2% of total assets, an increase of $8.8 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 were 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 AMT payable for 2016. 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 June 30, 2017, we retained a valuation allowance on U.S. deferred tax assets of approximately $80 million, primarily for net operating loss carryforwards.

 

Our net Canadian deferred tax liability at June 30, 2017 was $121.2 million, a decrease of $1.7 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 June 30, 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 $5.1 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, 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 (i) Cash Cost, Before By-product Credits, (ii) Cash Cost, After By-product Credits, (iii) AISC, Before By-product Credits and (iv) 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- and six-month periods ended June 30, 2017 and 2016.

 

Cash Cost, After By-product Credits, per Ounce and AISC, After By-product Credits, per Ounce are measures developed by precious metals companies (including the Silver Institute and/or the World Gold Council) 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.

 

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.

  

In addition to the uses described above, 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.

 

 

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. Similarly, the silver produced at our other three units is not included as a by-product credit when calculating the gold metrics for Casa Berardi.

  

In thousands (except per ounce amounts)

 

Three Months Ended June 30, 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

  $ 54,319       (1

)

  $ 5,074             $ 59,392     $ 43,680     $ 103,072  

Depreciation, depletion and amortization

    (13,503

)

          (722

)

            (14,225

)

    (11,344

)

    (25,569

)

Treatment costs

    11,423             259               11,682       554       12,236  

Change in product inventory

    (5,542

)

          815               (4,727

)

    (212

)

    (4,939

)

Reclamation and other costs

    (695

)

    1       (5

)

            (699

)

    (212

)

    (911

)

Cash Cost, Before By-product Credits (1)

    46,002             5,421               51,423       32,466       83,889  

Reclamation and other costs

    667               117               784       213       997  

Exploration

    1,117               1,957       452       3,526       1,071       4,597  

Sustaining capital

    11,451               845       256       12,552       12,059       24,611  

General and administrative

                            10,309       10,309               10,309  

AISC, Before By-product Credits (1)

    59,237             8,340               78,594       45,809       124,403  

By-product credits:

                                                       

Zinc

    (21,647

)

                          (21,647

)

            (21,647

)

Gold

    (13,917

)

          (8,287

)

            (22,204

)

            (22,204

)

Lead

    (6,847

)

                          (6,847

)

            (6,847

)

Silver

                                            (142

)

    (142

)

Total By-product credits

    (42,411

)

          (8,287

)

            (50,698

)

    (142

)

    (50,840

)

Cash Cost, After By-product Credits

  $ 3,591     $     $ (2,866

)

          $ 725     $ 32,324     $ 33,049  

AISC, After By-product Credits

  $ 16,826     $     $ 53             $ 27,896     $ 45,667     $ 73,563  
                                                         

Divided by ounces produced

    1,932             867               2,799       33          

Cash Cost, Before By-product Credits, per Ounce

  $ 23.81     $     $ 6.25             $ 18.37     $ 976.07          

By-product credits per ounce

    (21.95

)

          (9.56

)

            (18.11

)

    (4.25

)

       

Cash Cost, After By-product Credits, per Ounce

  $ 1.86     $     $ (3.31

)

          $ 0.26     $ 971.82          

AISC, Before By-product Credits, per Ounce

  $ 30.66     $     $ 9.62             $ 28.08     $ 1,377.21          

By-product credits per ounce

    (21.95

)

          (9.56

)

            (18.11

)

    (4.25

)

       

AISC, After By-product Credits, per Ounce

  $ 8.71     $     $ 0.06             $ 9.97     $ 1,372.96          

 

 

In thousands (except per ounce amounts)

 

Three Months Ended June 30, 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

  $ 43,734     $ 18,708     $ 9,225             $ 71,667     $ 41,183     $ 112,850  

Depreciation, depletion and amortization

    (12,413

)

    (2,825

)

    (1,062

)

            (16,300

)

    (13,597

)

    (29,897

)

Treatment costs

    15,317       4,778       432               20,527       238       20,765  

Change in product inventory

    2,684       (1,035

)

    473               2,122       (2,366

)

    (244

)

Reclamation and other costs

    (169

)

    (221

)

    (979

)

            (1,369

)

    (116

)

    (1,485

)

Cash Cost, Before By-product Credits (1)

    49,153       19,405       8,089               76,647       25,342       101,989  

Reclamation and other costs

    682       165       42               889       117       1,006  

Exploration

    531             660       392       1,583       908       2,491  

Sustaining capital

    14,661       10,228       203       320       25,412       17,171       42,583  

General and administrative

                            10,359       10,359               10,359  

AISC, Before By-product Credits (1)

    65,027       29,798       8,994               114,890       43,538       158,428  

By-product credits:

                                                       

Zinc

    (19,266

)

    (3,352

)

                    (22,618

)

            (22,618

)

Gold

    (11,870

)

            (11,924

)

            (23,794

)

            (23,794

)

Lead

    (6,636

)

    (7,529

)

                    (14,165

)

            (14,165

)

Silver

                                            (144

)

    (144

)

Total By-product credits

    (37,772

)

    (10,881

)

    (11,924

)

            (60,577

)

    (144

)

    (60,721

)

Cash Cost, After By-product Credits

  $ 11,381     $ 8,524     $ (3,835

)

          $ 16,070     $ 25,198     $ 41,268  

AISC, After By-product Credits

  $ 27,255     $ 18,917     $ (2,930

)

          $ 54,313     $ 43,394     $ 97,707  
                                                         

Divided by ounces produced

    2,117       858       1,258               4,233       42          

Cash Cost, Before By-product Credits, per Ounce

  $ 23.22     $ 22.63     $ 6.43             $ 18.11     $ 604.01          

By-product credits per ounce

    (17.84

)

    (12.69

)

    (9.48

)

            (14.31

)

    (3.41

)

       

Cash Cost, After By-product Credits, per Ounce

  $ 5.38     $ 9.94     $ (3.05

)

          $ 3.80     $ 600.60          

AISC, Before By-product Credits, per Ounce

  $ 30.71     $ 34.74     $ 7.15             $ 27.14     $ 1,037.71          

By-product credits per ounce

    (17.84

)

    (12.69

)

    (9.48

)

            (14.31

)

    (3.41

)

       

AISC, After By-product Credits, per Ounce

  $ 12.87     $ 22.05     $ (2.33

)

          $ 12.83     $ 1,034.30          

 

  

In thousands (except per ounce amounts)

 

Six Months Ended June 30, 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

  $ 98,314     $ 14,542     $ 11,697             $ 124,553     $ 86,147     $ 210,700  

Depreciation, depletion and amortization

    (26,835

)

    (2,433

)

    (1,395

)

            (30,663

)

    (23,858

)

    (54,521

)

Treatment costs

    25,554       3,817       484               29,855       1,092       30,947  

Change in product inventory

    (2,277

)

    (149

)

    435               (1,991

)

    1,169       (822

)

Reclamation and other costs

    (1,080

)

    (181

)

    (595

)

            (1,856

)

    (230

)

    (2,086

)

Cash Cost, Before By-product Credits (1)

    93,676       15,596       10,626               119,898       64,320       184,218  

Reclamation and other costs

    1,333       179       234               1,746       230       1,976  

Exploration

    1,395       1       3,489       830       5,715       1,868       7,583  

Sustaining capital

    16,685       3,990       1,977       1,170       23,822       24,470       48,292  

General and administrative

                            19,515       19,515               19,515  

AISC, Before By-product Credits (1)

    113,089       19,766       16,326               170,696       90,888       261,584  

By-product credits:

                                                       

Zinc

    (45,426

)

    (4,060

)

                    (49,486

)

            (49,486

)

Gold

    (28,769

)

            (15,944

)

            (44,713

)

            (44,713

)

Lead

    (14,629

)

    (7,496

)

                    (22,125

)

            (22,125

)

Silver

                                            (289

)

    (289

)

Total By-product credits

    (88,824

)

    (11,556

)

    (15,944

)

            (116,324

)

    (289

)

    (116,613

)

Cash Cost, After By-product Credits

  $ 4,852     $ 4,040     $ (5,318

)

          $ 3,574     $ 64,031     $ 67,605  

AISC, After By-product Credits

  $ 24,265     $ 8,210     $ 382             $ 54,372     $ 90,599     $ 144,971  
                                                         

Divided by ounces produced

    3,861       681       1,618               6,160       69          

Cash Cost, Before By-product Credits, per Ounce

  $ 24.27     $ 22.90     $ 6.56             $ 19.46     $ 931.26          

By-product credits per ounce

    (23.01

)

    (16.97

)

    (9.85

)

            (18.88

)

    (4.18

)

       

Cash Cost, After By-product Credits, per Ounce

  $ 1.26     $ 5.93     $ (3.29

)

          $ 0.58     $ 927.08          

AISC, Before By-product Credits, per Ounce

  $ 29.29     $ 29.03     $ 10.09             $ 27.71     $ 1,315.92          

By-product credits per ounce

    (23.01

)

    (16.97

)

    (9.85

)

            (18.88

)

    (4.18

)

       

AISC, After By-product Credits, per Ounce

  $ 6.28     $ 12.06     $ 0.24             $ 8.83     $ 1,311.74          

 

  

In thousands (except per ounce amounts)

 

Six Months Ended June 30, 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

  $ 88,587     $ 37,212     $ 16,903             $ 142,702     $ 70,343     $ 213,045  

Depreciation, depletion and amortization

    (26,014

)

    (5,829

)

    (1,831

)

            (33,674

)

    (22,098

)

    (55,772

)

Treatment costs

    30,955       10,112       845               41,912       409       42,321  

Change in product inventory

    4,324       (1,056

)

    813               4,081       752       4,833  

Reclamation and other costs

    (566

)

    (386

)

    (1,443

)

            (2,395

)

    (228

)

    (2,623

)

Cash Cost, Before By-product Credits (1)

    97,286       40,053       15,287               152,626       49,178       201,804  

Reclamation and other costs

    1,363       330       84               1,777       228       2,005  

Exploration

    1,019             1,298       865       3,182       1,625       4,807  

Sustaining capital

    21,037       22,478       988       410       44,913       32,782       77,695  

General and administrative

                            20,573       20,573               20,573  

AISC, Before By-product Credits (1)

    120,705       62,861       17,657               223,071       83,813       306,884  

By-product credits:

                                                       

Zinc

    (34,951

)

    (6,484

)

                    (41,435

)

            (41,435

)

Gold

    (28,210

)

            (23,040

)

            (51,250

)

            (51,250

)

Lead

    (13,020

)

    (16,202

)

                    (29,222

)

            (29,222

)

Silver

                                            (247

)

    (247

)

Total By-product credits

    (76,181

)

    (22,686

)

    (23,040

)

            (121,907

)

    (247

)

    (122,154

)

Cash Cost, After By-product Credits

  $ 21,105     $ 17,367     $ (7,753

)

          $ 30,719     $ 48,931     $ 79,650  

AISC, After By-product Credits

  $ 44,524     $ 40,175     $ (5,383

)

          $ 101,164     $ 83,566     $ 184,730  
                                                         

Divided by ounces produced

    4,575       1,835       2,458               8,868       72          

Cash Cost, Before By-product Credits, per Ounce

  $ 21.26     $ 21.84     $ 6.22             $ 17.21     $ 679.38          

By-product credits per ounce

    (16.65

)

    (12.37

)

    (9.37

)

            (13.75

)

    (3.41

)

       

Cash Cost, After By-product Credits, per Ounce

  $ 4.61     $ 9.47     $ (3.15

)

          $ 3.46     $ 675.97          

AISC, Before By-product Credits, per Ounce

  $ 26.38     $ 34.27     $ 7.18             $ 25.16     $ 1,158.71          

By-product credits per ounce

    (16.65

)

    (12.37

)

    (9.37

)

            (13.75

)

    (3.41

)

       

AISC, After By-product Credits, per Ounce

  $ 9.73     $ 21.90     $ (2.19

)

          $ 11.41     $ 1,155.30          

  

 

(1)

Includes all direct and indirect operating costs related 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, before 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. For the first half of 2017, suspension costs totaling approximately $7.6 million, along with $2.0 million in non-cash depreciation expense for that period, 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):

 

   

June 30,

2017

   

December 31,

2016

 

Cash and cash equivalents held in U.S. dollars

  $ 146.1     $ 156.1  

Cash and cash equivalents held in foreign currency

    18.0       13.7  

Total cash and cash equivalents

    164.1       169.8  

Marketable debt securities - current

    37.8       29.1  

Marketable equity securities - non-current

    4.7       5.0  

Total cash, cash equivalents and investments

  $ 206.6     $ 203.9  

 

Cash and cash equivalents decreased by $5.7 million in the first six months of 2017, as discussed below. Cash held in foreign currencies represents balances in Canadian dollars and Mexican pesos, with the $4.3 million increase in the first half of 2017 resulting from increases in both currencies held. Current marketable debt securities increased by $8.7 million (discussed below), and the value of non-current marketable equity securities decreased by $0.3 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 June 30, 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 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 we prepare the mine for some interim production and advance the engineering and infrastructure for the restart of full production we expect cash expenditures of about $1.5 million to $2.0 million a month. 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 June 30, 2017, we had sold 4,608,847 shares through the at-the-market program for net proceeds of $17.7 million, including 1,828,760 shares sold in the second quarter of 2017 for total proceeds of approximately $9.6 million. In July 2017, we used $5.7 million of the proceeds from shares sold in the second quarter of 2017 to fund contributions to our defined benefit pension plans.

 

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 $2.0 million and $1.9 million in the first six months of 2017 and 2016, respectively. On August 3, 2017, our Board of Directors declared a dividend on common stock totaling $1.0 million payable in September 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 June 30, 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 August 1, 2017, was $5.54 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 $46.0 million in capital expenditures in the first six months of 2017.  We estimate that exploration and pre-development expenditures will total between $25 million and $30 million in 2017, including $12.7 million already incurred as of June 30, 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 costs (and our ability to estimate future 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.

 

 

   

Six Months Ended

 
   

June 30, 2017

   

June 30, 2016

 

Cash provided by operating activities (in millions)

  $ 45.8     $ 86.1  

   

Cash provided by operating activities in the first half of 2017 decreased by $40.3 million compared to the same period in 2016 due to lower income, as adjusted for non-cash items, resulting primarily from reduced gross profit at our San Sebastian, Casa Berardi and Lucky Friday units. Working capital and other operating asset and liability changes resulted in a net cash flow decrease of $8.4 million in the first six months of 2017 compared to a net decrease in cash flows of $25.8 million in the 2016 period. The $17.3 million variance in working capital changes is primarily attributable to lower accounts receivable and inventory balances due to the timing of shipments at Greens Creek and the strike at Lucky Friday, partially offset by estimated income tax payments in Mexico in 2017 and reduced accounts payable at Lucky Friday due to completion of the #4 Shaft and the strike.  

 

 

   

Six Months Ended

 
   

June 30, 2017

   

June 30, 2016

 

Cash used in investing activities (in millions)

  $ (53.6

)

  $ (95.8

)

 

 During the first half of 2017, we invested $46.0 million in capital expenditures, not including $4.6 million in non-cash capital lease additions, a decrease of $31.0 million compared to the same period in 2016 primarily due to lower costs for the #4 Shaft project, which was completed in January 2017.  In the first half of 2017, we purchased bonds having maturities of greater than 90 days and less than 365 days having a cost basis of $23.3 million, and bonds valued at $14.4 million matured during the first half of 2017. We reduced restricted cash by $1.1 million during the first half of 2017 as a result of replacing cash collateral for future reclamation costs with non-cash bonding. During the first half of 2016, we incurred increases in restricted cash of $3.9 million related to the settlement of a CERCLA claim for response costs at the Gilt Edge site by CoCa Mines, Inc., our wholly-owned subsidiary.

.

 

   

Six Months Ended

 
   

June 30, 2017

   

June 30, 2016

 

Cash provided by (used in) financing activities (in millions)

  $ 1.1     $ (3.2

)

 

During the first six months of 2017 and 2016, we received $9.6 million and $8.1 million, respectively, in net proceeds from the sale of shares of our common stock under the equity distribution agreement discussed above. We made repayments on our capital leases of $3.2 million and $4.4 million in the six-month periods ended June 30, 2017 and 2016, respectively. In the first half of 2017 and 2016, we also made repayments of debt totaling $0.5 million and $1.3 million, respectively. During the first six months of 2017 and 2016, we paid cash dividends on our common stock totaling $2.0 million and $1.9 million, respectively, and cash dividends of $0.3 million on our Series B Preferred Stock during each of those periods. We acquired treasury shares for $2.5 million and $3.4 million in the first half of 2017 and 2016, respectively, resulting from our 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.

 

 

Contractual Obligations, Contingent Liabilities and Commitments

 

The table below presents our fixed, non-cancelable contractual obligations and commitments, which are primarily related to our Senior Notes, outstanding purchase orders, certain capital expenditures, our credit facility and lease arrangements as of June 30, 2017 (in thousands):

 

 

   

Payments Due By Period

 
   

Less than

1 year

   

1-3 years

   

4-5 years

   

More than

5 years

   

Total

 

Purchase obligation (1)

 

12,610

                $     $ 12,610  

Commitment fees (2)

    500       192                   692  

Contractual obligations (3)

    1,202                         1,202  

Capital lease commitments (4)

    6,471       6,385       981             13,837  

Operating lease commitments (5)

    3,519       2,705       1,467       317       8,008  

Supplemental executive retirement plan (6)

    436       1,026       1,367       3,950       6,779  

Defined benefit pension plans (6)

    3,986                         3,986  

Senior notes (7)

    34,822       69,644       535,518             639,984  
                                         

Total contractual cash obligations

  $ 63,546     $ 79,952     $ 539,333     $ 4,267     $ 687,098  

 

 

 

(1)

Consists of open purchase orders of approximately $11.0 million at the Greens Creek unit, $1.4 million at the Casa Berardi unit, and $0.1 million at the Lucky Friday 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 June 30, 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 June 30, 2017, we were committed to approximately $1.2 million for various items at Greens Creek. 

 

 

(4)

Includes scheduled capital lease payments of $3.6 million, $4.1 million, and $5.4 million (including interest) for equipment at our Greens Creek, Lucky Friday and Casa Berardi units, respectively.  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. 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 7 and 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 June 30, 2017, our liabilities for these matters totaled $87.8 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 June 30, 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 Part IV, 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 are highly uncertain at the time the accounting estimates are 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 Part I, 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 can be influenced by several 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) using estimated forward metals prices for the estimated month of settlement. Due to the time elapsed between 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 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 Part I, Item 2. – Properties 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 estimates include 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 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, and summarizes the financial instruments held by us at June 30, 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 I, 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 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 Part I, 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 June 30, 2017, metals contained in concentrates and exposed to future price changes totaled approximately 1.6 million ounces of silver, 8,366 ounces of gold, 8,332 tons of zinc, and 3,652 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 $6.5 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 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 June 30, 2017, we recorded the following balances for the fair value of the contracts:

 

 

a current asset of $1.2 million, which is included in other current assets;

 

a current liability of $1.3 million, which is included in other current liabilities; and

 

a non-current liability of $0.1 million, which is included in other non-current liabilities.

 

We recognized a $3.3 million net loss during the first half 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 $5.3 million net loss during the first half 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 half 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 June 30, 2017 and December 31, 2016:

 

 

June 30, 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

    1,379       7       15,873       6,724     $ 17.14     $ 1,259     $ 1.21     $ 0.97  

Contracts on forecasted sales

                                                               

2017 settlements

                6,834       6,504       N/A       N/A     $ 1.26     $ 1.05  

2018 settlements

                28,329       16,314       N/A       N/A     $ 1.23     $ 1.05  

2019 settlements

                1,102       1,102       N/A       N/A     $ 1.21     $ 1.06  

 

 

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 six months ended June 30, 2017, we recognized a net foreign exchange loss of $6.1 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 June 30, 2017 would have resulted in a change of approximately $12.6 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 June 30, 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 June 30, 2017, we have 106 forward contracts outstanding to buy CAD$230.1 million having a notional amount of US$177.0 million, and 12 forward contracts outstanding to buy MXN$96.0 million having a notional amount of USD$4.8 million. The CAD contracts are related to forecasted cash operating costs at Casa Berardi to be incurred from 2017 through 2020 and have CAD-to-USD exchange rates ranging between 1.2787 and 1.3380. The MXN contracts are related to forecasted cash operating costs at San Sebastian for 2017 and have MXN-to-USD exchange rates ranging between 19.3752 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 June 30, 2017, we recorded the following balances for the fair value of the contracts:

 

 

a current asset of $1.1 million, which is included in other current assets;

 

a non-current asset of $1.1 million, which is included in other non-current assets;

 

a current liability of $0.4 million, which is included in other current liabilities, and

 

a non-current liability of $0.1 million, which is included in other non-current liabilities.

 

 

Net unrealized gains of approximately $1.4 million related to the effective portion of the hedges were included in accumulated other comprehensive income as of June 30, 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 $0.4 million in net unrealized gains included in accumulated other comprehensive income as of June 30, 2017 would be reclassified to current earnings in the next twelve months. Net realized losses of approximately $0.4 million on contracts related to underlying expenses which have been recognized were transferred from accumulated other comprehensive loss and included in cost of sales and other direct production costs for the six months ended June 30, 2017. Net unrealized gains of approximately $2 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 six months ended June 30, 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 defined 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 June 30, 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 June 30, 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

 

 

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

 

Part I, 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 Quarterly Report for the list of exhibits.

 

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

 

 

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:

August 3, 2017

By:

/s/ Phillips S. Baker, Jr.

     

Phillips S. Baker, Jr., President,

     

Chief Executive Officer and Director

       

Date:

August 3, 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 – June 30, 2017

Index to Exhibits

 

 

 

3.1

Restated Certificate of Incorporation of the Registrant, as amended. *

 

 

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

Fourth Amended and Restated Credit Agreement effective May 20, 2016, by and among Hecla Mining Company, Hecla Limited, Hecla Alaska LLC, Hecla Greens Creek Mining Company, and Hecla Juneau Mining Company, as the Borrowers, The Bank of Nova Scotia, as the Administrative Agent for the Lenders, and various Lenders. Filed as exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on May 25, 2016 (File No.1-8491), and incorporated herein by reference.

 

 

 

10.2

First Amendment to Fourth Amended and Restated Credit Agreement effective July 14, 2017, by and among Hecla Mining Company, Hecla Limited, Hecla Alaska LLC, Hecla Greens Creek Mining Company, and Hecla Juneau Mining Company, as the Borrowers, The Bank of Nova Scotia, as the Administrative Agent for the Lenders, and various Lenders.*

 

 

10.3

Hecla Mining Company Stock Plan for Nonemployee Directors. (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.**

 

___________________

 

* Filed herewith.

 

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

 

** 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.

 

 

62

Exhibit 3.1

 

RESTATED CERTIFICATE OF INCORPORATION

 

OF

 

HECLA MINING COMPANY

 

 

Hecla Mining Company (the “Corporation”), a corporation organized and existing under the laws of the State of Delaware (the “Delaware Law”), hereby certifies as follows:

 

I.     The name of the corporation is Hecla Mining Company. The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on August 7, 2006, and the original name of the Corporation was Hecla Holdings Inc.

 

II.     That this Restated Certificate of Incorporation was duly adopted in accordance with Section 245 of the Delaware Law.

 

III.     That the Restated Certificate of Incorporation restates and integrates only and does not further amend the provisions of the Corporation’s Certificate of Incorporation, as heretofore amended, and there is no discrepancy between those provisions and the provisions of the Restated Certificate of Incorporation.

 

IV.     The Certificate of Incorporation is hereby restated to read as follows:

 

 

* * * * * * * * * * * * * * * * * *

 

ARTICLE I.

 

Name

 

The name of the Corporation shall be HECLA MINING COMPANY.

 

ARTICLE II.

 

Registered Office

 

The address of the registered office of the Corporation in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company.

 

 
1

 

 

ARTICLE III.

 

Purpose

 

The purpose for which the Corporation is formed is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.

 

ARTICLE IV.

 

Capital Stock

 

Section 1. Authorized Capital Stock. The Corporation shall be authorized to issue two classes of shares of Capital Stock to be designated, respectively, “Preferred Stock” and “Common Stock”; the total number of shares of capital stock which the Corporation shall have authority to issue is 505,000,000; the total number of shares of Preferred Stock shall be 5,000,000, and each such share shall have a par value of $0.25; the total number of shares of Common Stock shall be 500,000,000, and each such share shall have a par value of $0.25.

 

Section 2. Issuance of Preferred Stock. Shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors of the Corporation (hereinafter referred to in this Certificate of Incorporation as the “Board”) is hereby authorized to fix the voting rights, if any, designations, powers, preferences and the relative, participating, optional or other rights, if any, and the qualifications, limitations or restrictions thereof, of any unissued series of Preferred Stock; and to fix the number of shares constituting such series, and to increase or decrease the number of shares of any such series (but not below the number of shares thereof then outstanding).

 

Section 3. No Preemptive Rights. Without limiting the power of the Corporation to grant such rights by private contract, no holders of stock of the Corporation shall be entitled as such, as a matter of right, to the preemptive right to purchase or subscribe for any stock which the Corporation may issue or sell, whether or not exchangeable for any stock of the Corporation and whether out of unissued shares authorized by this Certificate of Incorporation as originally filed, or by any amendment hereof, or out of shares of stock of the Corporation acquired by it after the issuance thereof, and whether issued for cash, labor performed, personal property of any kind, including securities of other corporations, real property or interest therein, nor shall any holder of any shares of the capital stock of the Corporation be entitled as such, as a matter of right, to purchase or subscribe for any obligation which the Corporation may issue or sell which shall be attached or appurtenant to any warrant or warrants or any other instrument or instruments that shall confer upon the holder or holders of such obligation the right to subscribe for or purchase from the Corporation any shares of its capital stock.

 

 
2

 

 

Section 4. Voting Rights. Except as otherwise provided by law or by the resolution or resolutions adopted by the Board designating the rights, powers and preferences of any series of Preferred Stock, the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes, each holder of the Common Stock being entitled to one vote for each share held. Whenever this Certificate of Incorporation or the By-Laws of the Corporation shall require the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors (such capital stock is hereinafter referred to in this Certificate of Incorporation as “Voting Stock”), voting together as a single class, for the taking of corporate action: (i) such affirmative vote shall be in addition to any other affirmative vote required by law or by the resolution or resolutions designating the rights, powers and preferences of any outstanding series of Preferred Stock; and (ii) each outstanding share of Common Stock shall be entitled to one vote and each outstanding share of each series of Preferred Stock which is Voting Stock shall be entitled to the number of votes to which it is generally entitled, pursuant to the resolution or resolutions designating the rights, powers and preferences of such series of Preferred Stock, in the election of directors.

 

Section 5. Provisions Related to Series A Junior Participating Preferred Stock. The provisions of the Series A Junior Participating Preferred Stock of the Corporation are set forth in full in Annex I to this Restated Certificate of Incorporation, and they are incorporated herein by this reference thereto.

 

Section 6. Provisions Related to Series B Cumulative Convertible Preferred Stock. The provisions of the Series B Cumulative Convertible Preferred Stock of the Corporation are set forth in full in Annex II to this Restated Certificate of Incorporation, and they are incorporated herein by this reference.

 

ARTICLE V.

 

By-Laws

 

In furtherance and not in limitation of the powers conferred by law, the Board is expressly authorized to make, repeal, alter, amend and rescind the By-Laws of the Corporation by a majority vote of the entire Board at any regular or special meeting of the Board; provided, however that, notwithstanding anything contained in this Certificate of Incorporation or the By-Laws of the Corporation to the contrary, the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of Voting Stock, voting together as a single class, shall be required to (i) alter, amend or repeal any provision of the By-Laws which is substantially identical to and/or implements the last sentence of Article IV, or Articles VI, VII or VIII, of this Certificate of Incorporation or (ii) alter, amend or repeal any provision of this proviso to Article V.

 

 
3

 

 

ARTICLE VI.

 

Board of Directors

 

Section 1. Number, Election and Terms. The business and affairs of the Corporation shall be managed under the direction of a Board of Directors which, subject to any right of the holders of any series of Preferred Stock then outstanding to elect additional directors under specified circumstances shall consist of not less than five nor more than nine persons. The exact number of directors within the minimum and maximum limitations specified in the preceding sentence shall be fixed from time to time by the Board pursuant to a resolution adopted by a majority of the entire Board. The directors shall be divided into three classes, as nearly equal in number as possible, with the term of office of the first class to expire at the 1984 Annual Meeting of Shareholders, the term of office of the second class to expire at the 1985 Annual Meeting of Shareholders and the term of office of the third class to expire at the 1986 Annual Meeting of Shareholders. At each Annual Meeting of Shareholders following such initial classification and election, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding Annual Meeting of Shareholders after their election.

 

Section 2. Newly Created Directorships and Vacancies. Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board resulting from death, resignation, retirement, disqualification, removal from office or other cause shall be filled only by a majority vote of the directors then in office, and directors so chosen shall hold office for a term expiring at the Annual Meeting of Shareholders at which the term of the class to which they have been elected expires. No decrease in the number of directors constituting the Board shall shorten the term of any incumbent director.

 

Section 3. Removal. Subject to the rights of the holders of any series of Preferred Stock then outstanding, any director, or the entire Board may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of the Voting Stock, voting together as a single class.

 

Section 4. Amendment, Repeal, etc. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of Voting Stock, voting together as a single class, shall be required to alter, amend or repeal this Article VI.

 

ARTICLE VII.

 

Actions by Shareholders

 

Any action required or permitted to be taken by the shareholders of the Corporation must be effected at a duly called annual or special meeting of shareholders of the Corporation and may not be effected by any consent in writing by such shareholders. Special meetings of shareholders of the Corporation may be called only by the Board pursuant to a resolution approved by a majority of the entire Board. Notwithstanding anything contained in this Certificate of Incorporate to the contrary, the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of Voting Stock, voting together as a single class, shall be required to alter, amend or repeal this Article VII.

 

 
4

 

 

ARTICLE VIII.

 

Certain Business Combinations

 

Section 1. Vote Required for Certain Business Combinations.

 

A. Higher Vote for Certain Business Combinations. Except as otherwise expressly provided in Section 2 of this Article VIII:

 

(i)     any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (a) any Interested Shareholder (as hereinafter defined) or
(b) any other corporation (whether or not itself an Interested Shareholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Shareholder; or

 

(ii)     any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Shareholder or any Affiliate of any Interested Shareholder of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value (as herein defined) of $1,000,000 or more; or

 

(iii)     the issuance or transfer by the Corporation of any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any subsidiary to any Interested Shareholder or any Affiliate of any Interested Shareholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $1,000,000 or more; or

 

(iv)     the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Shareholder or any Affiliate of any Interested Shareholder; or

 

(v)     any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Shareholder or any affiliate of any Interested Shareholder;

 

shall require the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of Voting Stock, voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise.

 

 
5

 

 

B. Definition of “Business Combination”. The term “Business Combination” as used in this Article VIII shall mean any transaction which is referred to in any one or more of clauses (i) through (v) of paragraph A of this Section 1.

 

Section 2. When Higher Vote is Not Required. The provisions of Section 1 of this Article VIII shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any resolution or resolutions designating the rights, powers and preferences of any outstanding series of Preferred Stock, if all of the conditions specified in either of the following paragraphs A and B are met (it being intended that in the case of a Business Combination not involving any cash or consideration other than cash to be received by the holders of each class or series of outstanding Voting Stock (other than Institutional Voting Stock, as hereinafter defined), the provisions of such Section 1 shall not be applicable only if the condition specified in the following paragraph A is met)”

 

A. Approval by Continuing Directors. The Business Combination shall have been approved by a majority of the Continuing Directors (as hereinafter defined).

 

B. Price and Procedure Requirements. All of the following conditions shall have been met:

 

(i)     The aggregate amount of the cash and the Fair Market Value (as hereinafter defined) as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the highest of the following:

 

(a) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers’ fees) paid by the Interested Shareholder for any shares of Common Stock acquired by it (1) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the “Announcement Date”) or (2) in the transaction in which it became an Interested Shareholder, whichever is higher;

 

(b) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder (such latter date is referred to in this Article VIII as the “Determination Date”), whichever is higher; and

 

(c) (if applicable) the price per share equal to the Fair Market Value per share of Common Stock on the Announcement Date or the Determination Date, whichever is higher, multiplied by the ratio of (1) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers’ fees) paid by the Interested Shareholder for any shares of Common Stock acquired by it within the two-year period immediately prior to the Announcement Date to (2) the Fair Market Value per share of Common Stock on the first day in such two-year period upon which the Interested Shareholder acquired any shares of Common Stock.

 

 
6

 

 

(ii) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any other series of outstanding Voting Stock (other than Institutional Voting Stock, as hereinafter defined) shall be at least equal to the highest of the following (it being intended that the requirements of this paragraph B (ii) shall be required to be met with respect to every series of outstanding Voting Stock (other than Institutional Voting Stock), whether or not the Interested Shareholder has previously acquired any shares of a particular series of Voting Stock):

 

(a) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers’ fees) paid by the Interested Shareholder for any shares of such series of Voting Stock acquired by it (1) within the two-year period immediately prior to the Announcement Date or (2) in the transaction in which it became an Interested Shareholder, whichever is higher;

 

(b) (if applicable) the highest preferential amount per share to which the holders of shares of such series of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation;

 

(c) the Fair Market Value per share of such series of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher; and

 

(d) (if applicable) the price per share equal to the Fair Market Value per share of such series of Voting Stock on the Announcement Date or the Determination Date, whichever is higher, multiplied by the ratio of (1) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers’ fees) paid by the Interested Shareholder for any shares of such series of Voting Stock acquired by it within the two-year period immediately prior to the Announcement Date to (2) the Fair Market Value per share of such series of Voting Stock on the first day in such two-year period upon which the Interested Shareholder acquired any shares of such series of Voting Stock.

 

(iii) The consideration to be received by holders of a particular class (in the case of Common Stock) or series (in the case of Preferred Stock of outstanding Voting Stock shall be in cash or in the same form as the Interested Shareholder has previously paid for shares of such class or series of Voting Stock. If the Interested Shareholder has paid for shares of any class or series of Voting Stock with varying forms of consideration, the form of consideration for such class or series of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class or series of Voting Stock previously acquired by it.

 

 
7

 

 

(iv) After such Interested Shareholder has become an Interested Shareholder and prior to the consummation of such Business Combinations: (a) except as approved by a majority of the Continuing Directors, there shall have been no failure to declare and pay at the regular date therefore any full quarterly dividends (whether or not cumulative) on the outstanding Preferred Stock; (b) there shall have been (1) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Continuing Directors, and (2) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of Common Stock, unless the failure so to increase such annual rate is approved by a majority of the Continuing Directors; and (c) such Interested Shareholder shall have not become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Shareholder becoming an Interested Shareholder.

 

(v) After such Interested Shareholder has become an Interested Shareholder, such Interested Shareholder shall not have received the benefit directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise.

 

(vi) A proxy or information statement describing the proposed business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to public shareholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions).

 

Section 3. Certain Definitions. For the purposes of this Article VIII:

 

 

A.

A “Person” shall mean any individual, firm, corporation or other entity.

 

 
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B.     “Interested Shareholder” shall mean any person (other than the Corporation or any Subsidiary) who or which:

 

(i)     is the beneficial owner, directly or indirectly, of more than 12 ½% of the voting power of the outstanding Voting Stock; or

 

(ii)     if an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 12 ½% or more of the voting power of the then outstanding Voting Stock; or

 

(iii)     if an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Shareholder if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933.

 

 

C.

A person shall be a “beneficial owner” of any Voting Stock:

 

(i)     which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly; or

 

(ii)     which such person or any of its Affiliates or Associates has (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (b) the right to vote pursuant to any agreement, arrangement or understanding; or

 

(iii)     which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring holding, voting or disposing of any shares of Voting Stock.

 

D. For the purpose of determining whether a person is an Interested Shareholder pursuant to paragraph B of this Section 3, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of paragraph C of this Section 3 but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise.

 

E. “Affiliate” or “Associate” shall have the respective meanings ascribed to such terms in rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on March 1, 1983.

 

F.     “Subsidiary” means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Shareholder set forth in paragraph B of this Section 3, the term “Subsidiary” shall mean only a corporation of which a majority of each class of equity security is owned directly or indirectly, by the Corporation.

 

 
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G.     “Continuing Director” means any member of the Board who is unaffiliated with the Interested Shareholder and was a member of the Board prior to the time that the Interested Shareholder became an Interested Shareholder, and any successor of a Continuing Director who is unaffiliated with the Interested Shareholder and is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the Board.

 

H.     “Fair Market Value” means: (i) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange – Listed Stock, or, if such stock is not quoted on the Composite Tape, on the New York Stock exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the Board in good faith; and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by the Board in good faith.

 

I.     “Institutional Voting Stock” shall mean any series of Voting Stock which was issued to and continues to be held solely by one or more insurance companies, pension funds, commercial banks, savings banks or similar financial institutions or institutional investors.

 

J.     In the event of any Business Combination in which the Corporation survives, the phrase “consideration other than cash to be received” as used in Section 2 of this Article VIII shall include the shares of Common Stock and/or the shares of any series of outstanding Voting Stock retained by the holders of such shares.

 

Section 4. Powers of the Board of Directors. A majority of the directors of the Corporation shall have the power and duty to determine for the purposes of this Article VIII, on the basis of information known to them after reasonable inquiry (A) whether a person is an Interested Shareholder, (B) the number of shares of Voting Stock beneficially owned by any person, (c) whether a person is an Affiliate or Associate of another (D) whether a series of Voting Stock is Institutional Voting Stock and (E) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $1,000,000 or more.

 

Section 5. No Effect on Fiduciary Obligations of Interested Shareholders. Nothing contained in this Article VIII shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law.

 

Section 6. Amendment, Repeal, etc. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal this Article VIII.

 

 
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ARTICLE IX.

 

Limitation of Liability and Indemnification

 

Section 1. Limitation of Liability. A director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the Corporation or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit. If the Delaware General Corporation Law is amended after approval by the shareholders of this article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. This paragraph shall not eliminate or limit the liability of a director for any act or omission which occurred prior to the effective date of its adoption. Any repeal or modification of this paragraph by the shareholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification.

 

Section 2. Indemnification and Insurance.

 

A. Right to Indemnification of Directors, Officers and Employees. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he or she is or was a director, officer or employee of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an “indemnitee”), whether the basis of such proceeding is alleged action in an official capacity as a director, officer or employee or in any other capacity while serving as a director, officer or employee shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than permitted prior thereto), against all expense, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a director, officer or employee and shall inure to the benefit of the indemnitees heirs, executors and administrators; provided, however, that except as provided in paragraph B hereof with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the board of directors of the Corporation. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Corporation the expense incurred in defending any such proceeding in advance of its final disposition (hereinafter an “advancement of expenses”); provided however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking (hereinafter an “undertaking”), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a “final adjudication”) that such indemnitee is not entitled to be indemnified for such expenses under this Section or otherwise.

 

 
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B. Right of Indemnitee to Bring Suit. If a claim under paragraph A of this Section is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met the applicable standard of conduct set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its board of directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its board of directors, independent legal counsel, or its shareholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses under this Section or otherwise shall be on the Corporation.

 

C. Non-Exclusivity of Rights. The rights to indemnification and to the advancement of expenses conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, this Certificate of Incorporation, By-Law, agreement, vote of shareholders or disinterested directors or otherwise. The Corporation is authorized to enter into contracts of indemnification.

 

 
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D. Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law.

 

E. Indemnification of Agents of the Corporation. The Corporation may, to the extent authorized from time to time by the board of directors, grant rights to indemnification, and to the advancement of expenses to any agent of the Corporation to the fullest extent of the provisions of this Section with respect to the indemnification and advancement of expenses of directors, officers and employees of the Corporation.

 

ARTICLE X.

 

Amendment of Certificate of Incorporation

 

The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred on shareholders herein are granted subject to this reservation. Notwithstanding the foregoing the provisions set forth in the last sentence of Section 4 of Article IV, and in Articles VI, VII and VIII may not be altered, amended or repealed in any respect unless such alteration, amendment or repeal is approved as specified in each thereof.

 

IN WITNESS WHEREOF, this Restated Certificate of Incorporation is executed on behalf of the Corporation by one of its duly authorized officers and attested by its Assistant Corporate Secretary this 10th day of December, 2014.

 

 

HECLA MINING COMPANY

 

 

 

 

 

 

 

 

 

 

By:

/s/ David C. Sienko

 

 

 

David C. Sienko

 

 

 

Vice President & General Counsel

 

 

ATTEST:

 

 

 

 

 

 

 

By:

/s/ Tami D. Whitman

 

 

Tami D. Whitman

 

 

Assistant Corporate Secretary

 

 

 
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ANNEX I

 

 

DESIGNATIONS, PREFERENCES

AND RIGHTS OF SERIES A JUNIOR

PARTICIPATING PREFERRED STOCK

 

I. Designation and Amount. The shares of this series shall be designated as “Series A Junior Participating Preferred Stock” (the “Series A Preferred Stock”) and the number of shares constituting such series shall be 273,000. Such number of shares may be increased or decreased by resolution of the board of directors; provided, that no decrease shall reduce the number of shares of Series a Preferred Stock to a number less than that of the shares then outstanding.

 

II. Dividends and Distributions.

 

(A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock and of any other junior stock, shall be entitled to receive, when as and if declared by the board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a “Quarterly Dividend Payment Date”), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $10 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of common Stock, par value $0.25 per share, of the Corporation (the “Common Stock”) or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series a Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

 

 
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(B) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any quarterly Dividend Payment Date and the net subsequent Quarterly Dividend Payment Date, a dividend of $10 per share on the Series a preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date.

 

(C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the quarterly Dividend Payment Date net preceding the date of issue of such shares of Series A Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such quarterly Dividend Payment Date, in either of which event such dividends shall begin to accrue and be cumulative from such quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof.

 

III. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights:

 

(A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the shareholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of common Stock outstanding immediately after such event and the denominator of which is the number of shares of common Stock that were outstanding immediately prior to such event.

 

 
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(B) Except as otherwise provided herein or by law, the holders of shares of Series A Preferred Stock and the holders of shares of common Stock shall vote together as one class on all matters submitted to a vote of shareholders of the Corporation.

 

(C) Except as set forth herein holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action.

 

IV. Certain Restrictions.

 

(A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section II are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not:

 

(i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock;

 

(ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;

  

(iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) with the Series A preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or

 

 
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(iv) purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.

 

(B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section IV purchase or otherwise acquire such shares at such time and in such manner.

 

V. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein.

 

VI. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock, or (2) to the holders of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all other such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock), into a greater or lesser number of shares of Common Stock then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the provision in clause (i) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

 

 
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VII. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on Common Stock payable in shares or Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which I the number of shares of common Stock that were outstanding immediately prior to such event.

 

VIII. No Redemption. The shares of Series A Preferred Stock shall not be redeemable.

 

IX. Amendment. The Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock, voting together as a single series.

 

 
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ANNEX II

 

DESIGNATIONS, PREFERENCES AND RIGHTS

OF SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK

(Par Value $0.25 Per Share)

 

Section 1. Number of Shares and Designation. One hundred fifty-seven thousand eight hundred sixteen (157,816) shares of the Preferred Stock, par value $0.25 per share, of the Corporation are hereby constituted as a series of the Preferred Stock designated as Series B Cumulative Convertible Preferred Stock (the “Convertible Preferred Stock”).

 

Section 2. Definitions. For purposes of the Convertible Preferred Stock, the following terms shall have the meanings indicated:

 

“Board of Directors” shall mean the board of directors of the Corporation or any committee authorized by such board of directors to perform any of its responsibilities with respect to the Convertible Preferred Stock.

 

“Business Day” shall mean any day other than a Saturday, Sunday or a day on which state or federally chartered banking institutions in New York, New York are not required to be open.

 

“Common Stock” shall mean the Common Stock of the Corporation, par value $0.25 per share.

 

“Constituent Person” shall have the meaning set forth in paragraph (E) of Section 7 hereof.

 

“Conversion Price” shall mean the conversion price per share of Common Stock for which the Convertible Preferred Stock is convertible; as such Conversion Price may be adjusted pursuant to Section 7 hereof. The initial Conversion Price will be $15.55.

 

“Current Market Price” of publicly traded shares of Common Stock or any other class of capital stock or other security of the Corporation or any other issuer for any day shall mean the last reported sales price, regular way on such day, or, if no sale takes place on such day, the average of the reported closing bid and asked prices on such day, regular way, in either case as reported on the New York Stock Exchange Composite tape or, if such security is not listed or admitted for trading on the New York Stock Exchange (“NYSE”), on the principal national securities exchange on which such security is listed or admitted for trading or, if not listed or admitted for trading on any national securities exchange, on the National Market System of the National Association of Securities Dealers, Inc. Automated Quotations System (“NASDAQ”) or, if such security is not quoted on such National Market System, the average of the closing bid and asked prices on such day in the over-the-counter market as reported by NASDAQ or, if bid and asked prices for such security on such day shall not have been reported through NASDAQ, the average of the bid and asked prices on such day as furnished by any NYSE member firm regularly making a market in such security selected for such purpose by the Board of directors.

 

 
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“Dividend Payment Date” shall mean October 1, January 1, April 1 and July 1 in each year, commencing on October 1, 1993; provided, however, that if any Dividend Payment Date falls on any day other than a Business Day, the dividend payment due on such Dividend Payment Date shall be paid on the Business Day immediately following such Dividend Payment Date.

 

“Dividend Periods” shall mean quarterly dividend periods commencing on October 1, January 1, April 1 and July 1 of each year and ending on and including the day preceding the first day of the next succeeding Dividend Period (other than the initial Dividend Period, which shall commence on the Issue Date and end on and include October 1, 1993).

 

“Fair Market Value” shall mean the average of the daily Current Market Prices of a share of Common Stock during the five (5) consecutive Trading Days selected by the Corporation commencing not more than 20 Trading Days before, and ending not later than, the earlier of the day in question and the day before the “ex” date with respect to the issuance or distribution requiring such computation. The term “’ex’ date”, when used with respect to any issuance or distribution, means the first day on which the Common Stock trades regular way, without the right to receive such issuance or distribution, on the exchange or in the market, as the case may be, used to determine that day’s Current Market Price.

 

“Issue Date” shall mean the first date on which shares of Convertible Preferred Stock are issued and sold.

 

“Junior Stock” shall mean the Common Stock, the Series A Preferred Shares and any other class or series of stock of the Corporation over which the Convertible Preferred Stock has preference or priority in the payment of dividends or in the distribution of assets on any liquidation, dissolution or winding up of the Corporation.

 

“Liquidation Preference” shall have the meaning set forth in paragraph (A) of Section 4 hereof.

 

“LYONS” shall mean the Corporation’s outstanding Liquid Yield Option Notes due 2004.

 

“non-electing share” shall have the meaning set forth in paragraph (E) of Section 7 hereof.

 

 
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“Parity Stock” shall mean any other class or series of stock of the Corporation which ranks on a parity with the Convertible Preferred Stock as to payment of dividends or in the distribution of the assets on any liquidation, dissolution or winding up of the Corporation.

 

“Person” shall mean any individual, firm, partnership, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity.

 

“Preferred Director”” shall mean a director elected pursuant to paragraph (C) of Section 9 hereof.

 

“Redemption Date” shall have the meaning set forth in paragraph (C) of Section 5 hereof.

 

“Rights” shall mean the rights of the Corporation which are issuable under the Corporation’s Rights Agreement dated as of May 19, 1986, and amended from time to time, or rights to purchase any capital stock of the Corporation under any successor shareholder rights plan or plans adopted in replacement of the Corporation’s Rights Agreement.

 

“Securities” shall have the meaning set forth in paragraph (D) (iii) of Section 7 hereof.

 

“Series A Preferred Shares” shall mean the preferred stock of the Corporation, par value $0.25 per share, designated Series A Junior Participating Preferred Shares in the Certificate of Incorporation of the Corporation.

 

“set apart for payment” shall be deemed to include, without any action other than the following, the recording by the Corporation in its accounting ledgers of any accounting or bookkeeping entry which indicates, pursuant to a declaration of dividends or other distribution by the Board of Directors, the allocation of funds to be so paid on any series or class of capital stock of the Corporation; provided, however, that if any funds for any class or series of Junior Stock or any parity stock are placed in a separate account of the Corporation or delivered to a disbursing, paying or other similar agent, then during the period that any such funds remain in such account or with such agent, “set apart for payment” with respect to the Convertible Preferred Stock shall mean placing such funds in a separate account or delivering such funds to a disbursing, paying or other similar agent.

 

“Stated Value” shall have the meaning set forth in paragraph (A) of Section 4 hereof.

 

“Trading Day” shall mean any day on which the securities in question are traded on the NYSE, or if such securities are not listed or admitted for trading on the NYSE, on the principal national securities exchange on which such securities are listed or admitted, or if not listed or admitted for trading in any national securities exchange, on the National Market System of the NASDAQ, or if such securities are not quoted on such National Market System, in the applicable securities market in which the securities are traded.

 

 
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“Transaction” shall have the meaning set forth in paragraph (E) of Section 7 hereof.

 

“Transfer Agent” shall mean American Stock Transfer & Trust Company or such other agent or agents of the Corporation as may be designated by the Board of Directors as the transfer agent for the Convertible Preferred Stock.

 

Section 3. Dividends.

 

(A) The holders of shares of the Convertible Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of assets legally available for that purpose, dividends payable in cash at the rate per annum of $3.50 per share of Convertible Preferred Stock. Such dividends shall be cumulative from the Issue Date, whether or not in any Dividend Period or Dividend Periods there shall be assets of the corporation legally available for the payment of such dividends, and shall be payable quarterly, when, as and if declared by the Board of Directors, in arrears on Dividend Payment Dates, commencing on October 1, 1993. Each such dividend shall be payable in arrears to the holders of record and shares of the Convertible Preferred Stock, as they appear on the stock records of the Corporation at the close of business on such record dates, which shall not be more than 60 days nor less than 10 days preceding the payment dates thereof, as shall be fixed by the Board of Directors. Accrued and unpaid dividends for any past Dividend Periods may be declared and paid at any time, without reference to any Dividend Payment Date, to holders of record on such date, not exceeding 45 days preceding the payment date thereof, as may be fixed by the Board of Directors.

 

(B) The amount of dividends payable for each full Dividend Period for the Convertible Preferred Stock shall be computed by dividing the annual dividend rate by four. The amount of dividends payable for the initial dividend Period, or any other period shorter or longer than a full dividend Period, on the Convertible Preferred Stock shall be computed on the basis of twelve 30-day months and a 360-day year. Holders of shares of Convertible Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or stock, in excess of cumulative dividends, as herein provided, on the Convertible Preferred Stock. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on the Convertible Preferred Stock that may be in arrears.

 

(C) So long as any shares of the Convertible Preferred Stock are outstanding, no dividends, except as described in the next succeeding sentence, shall be declared or paid or set apart for payment on any Parity Stock for any period unless full cumulative dividends have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment on the Convertible Preferred Stock for all Dividend Periods terminating on or prior to the date of payment of the dividend on such Parity Stock. When dividends are not paid in full or a sum sufficient for such payment is not set apart, as aforesaid, all dividends declared upon shares of the Convertible Preferred Stock and all dividends declared upon any parity Stock shall be declared ratably in proportion to the respective amounts of dividends accumulated and unpaid on the Convertible Preferred Stock and accumulated and unpaid on such Parity Stock.

 

 
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(D) So long as any shares of the Convertible Preferred Stock are outstanding, no dividends (other than (i) the Rights and (ii) dividends or distributions paid in shares of, or options, warrants or rights to subscribe for or purchase shares of, Junior Stock) shall be declared or paid or set apart for payment or other distribution declared or made upon Junior Stock, nor shall any Junior Stock or any Parity Stock be redeemed, purchased or otherwise acquired (other than a redemption, purchase or other acquisition of shares of Common Stock made for purposes of an employee incentive or benefit plan of the Corporation or any subsidiary) for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Corporation, directly or indirectly (except by conversion into or exchange for Junior Stock), unless in each case all accrued and unpaid dividends on all outstanding shares of the Convertible Preferred Stock and any Parity Stock shall have been paid or funds have been set apart for payment of such dividends for all past Dividend Periods with respect to the Convertible Preferred Stock and all past Dividend Periods with respect to such Parity Stock.

 

Section 4. Payments upon Liquidation.

 

(A)     In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, before any payment or distribution of the assets of the Corporation (whether capital or surplus) shall be made to or set apart for the holders of Junior Stock, the holders of the shares of Convertible Preferred Stock shall be entitled to receive fifty dollars ($50) per share of Convertible Preferred Stock (the “Stated Value”) plus an amount per share of Convertible Preferred Stock equal to all dividends (whether) or not earned or declared) accrued and unpaid thereon to the date of final distribution to such holders (the “Liquidation Preference”); but such holders shall not be entitled to any further payment. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of the shares of Convertible Preferred Stock shall be insufficient to pay in full and Liquidation Preference and the Liquidation Preference on all other shares of any parity Stock, then such assets, or the proceeds thereof, shall be distributed among the holders of shares of Convertible Preferred Stock and any such other Parity Stock ratably in accordance with the respective amounts that would be payable on such shares of Convertible Preferred Stock and any such other stock if all amounts payable thereon were paid in full. For the purposes of this Section 4, (i) a consolidation, merger or business combination of the corporation with or into one or more corporations, or (ii) a sale or transfer of all or substantially all of the Corporation’s assets, shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary, of the Corporation.

 

 
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(B) Subject to the rights of the holders of Parity Stock, after payment shall have been made to the holders of the Convertible Preferred Stock, and to the fullest extent provided in this Section 4, any other series or class or classes of Junior Stock shall, subject to the respective terms and provisions (if any) applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, and the holders of the Convertible Preferred Stock shall not be entitled to share therein.

 

Section 5. Redemption at the Option of the Corporation.

 

(A) The shares of Convertible Preferred Stock shall be redeemable at the option of the Corporation, in whole, or, from time to time, in part, out of funds legally available for such purpose, at any time or after July 1, 1996, at the following redemption prices per share, if redeemed during the twelve-month period beginning July 1 of the year indicated below, plus, in each case, an amount equal to all dividends accrued and unpaid on the shares of Convertible Preferred Stock up to the date fixed for the redemption, upon giving notice as provided herein below:

 

Year

 

Redemption Price

Per Share

 
         

1996

  $ 52.45  

1997

    52.10  

1998

    51.75  

1999

    51.40  

2000

    51.05  

2001

    50.70  

2002

    50.35  

2003 and thereafter

    50.00  

 

(B) If fewer than all of the outstanding shares of Convertible Preferred Stock are to be redeemed, the number of shares to be redeemed shall be determined by the Board of Directors and the shares to be redeemed shall be determined pro rata or by lot or in such other manner and subject to such regulations as the Board of Directors in its sole discretion shall prescribe.

 

 
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(C) At least 30 days, but not more than 60 days, prior to the date fixed for the redemption of shares of Convertible Preferred Stock, a written notice shall be mailed in postage prepaid envelope to each holder of record of the shares of Convertible Preferred Stock to be redeemed, addressed to such holder at his or her post office address as shown on the records of the Corporation, notifying such holder of the election of the Corporation to redeem such shares, stating the date fixed for redemption thereof (the “Redemption Date”), and calling upon such holder to surrender to the Corporation, on the Redemption Date at the place designated in such notice, his or her certificate or certificates representing the number of shares specified in such notice of redemption. On or after the Redemption Date, such holder of shares of Convertible Preferred Stock to be redeemed shall present and surrender his or her certificate or certificates for such shares to the Corporation at the place designated in such notice and thereupon the redemption price of such shares shall be paid to the order of the person whose name appears on such certificate or certificates as the owner thereof and such surrendered certificate shall be cancelled. In case less than all the shares represented by any such certificates are redeemed, a new certificate shall be issued representing the unredeemed shares.

 

From and after the Redemption Date (unless the Corporation defaults in payment of the redemption price), all dividends on the shares of Convertible Preferred Stock designated for redemption in such notice shall cease to accrue, and all rights of the holders thereof as stockholders of the Corporation, except the right to receive the redemption price of such shares (including an amount equal to all accrued and unpaid dividends up to the Redemption Date) upon the surrender of certificates representing the same, shall cease and terminate and such shares shall not thereafter be transferred (except with the consent of the corporation) on the books of the corporation, and such shares shall not be deemed to be outstanding for any purpose whatsoever; provided however, in the case of the Redemption Date falling after a dividend payment record date and prior to the related Dividend Payment Date, the holders of Convertible Preferred Stock at the close of business on such record date will be entitled to receive the dividend payable on such shares on the corresponding Dividend Payment Date, notwithstanding the redemption of such shares following such dividend payment record date.

 

At its election, the Corporation, prior to the Redemption Date, may deposit the redemption price (including an amount equal to all accrued and unpaid dividends up to the Redemption Date) of the shares of Convertible Preferred Stock so called for redemption in trust for the holders thereof with a bank or trust company having a capital surplus and undivided profits aggregating not less than $50,000,000) in the borough of Manhattan, city and state of New York, or in any other city in which the corporation at the time shall maintain a transfer agency with respect to such shares, in which case the aforesaid notice to holders of shares of Convertible Preferred Stock to be redeemed shall (i) state the date of such deposit, (ii) shall specify the office of such bank or trust company as the place of payment of the redemption price and (iii) shall call upon such holders to surrender the certificates representing such shares at such place on or after the date fixed in such redemption notice (which shall not be later than the Redemption Date) against payment of the redemption price (including an amount equal to all accrued and unpaid dividends up to the Redemption Date). Any interest accrued on such funds shall be paid to the corporation from time to time. Any moneys so deposited which shall remain unclaimed by the holders of such shares of Convertible Preferred Stock at the end of two years after the Redemption Date shall be returned by such bank or trust company to the Corporation.

 

 
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If a notice of redemption has been given pursuant to this section 5 and any holder of shares of Convertible Preferred Stock shall, prior to the close of business on the day preceding the Redemption Date, given written notice to the corporation pursuant to Section 7 below of the conversion of any or all of the shares to be redeemed held by such holder (accompanied by a certificate or certificates for such shares, duly endorsed or assigned to the Corporation, and any necessary transfer tax payment, as required by Section 7 below), then such redemption shall not become effective as to such shares to be converted, such conversion shall become effective as provided in Section 7 below, and any moneys set aside by the Corporation for the redemption of such shares of converted Convertible Preferred Stock shall revert to the general funds of the Corporation.

 

Section 6. Shares to Be Retired. All shares of Convertible Preferred Stock which shall have been issued and reacquired in any manner by the Corporation (excluding, until the corporation elects to retire them, shares which are held as treasury shares) shall be restored to the status of authorized but unissued shares of Preferred Stock, without designation as to series.

 

Section 7. Conversion. Holders of shares of Convertible Preferred Stock shall have the right to convert all or a portion of such shares into shares of Common Stock, as follows:

 

(A) Subject to and upon compliance with the provisions of this Section 7, a holder of shares of Convertible Preferred Stock shall have the right, at his or her option, at any time after the Issue Date, to convert such shares into the number of fully paid and nonassessable shares of Common Stock obtained by dividing the aggregate Stated Value of such shares by the Conversion Price (as in effect on the date provided for in the last paragraph of paragraph (B) of this Section 7) by surrendering such shares to be converted, such surrender to be made in the manner provided in paragraph (B) of this Section 7; provided, however, that the right to convert shares called for redemption pursuant to Section 5 shall terminate at the close of business on the date preceding the Redemption Date, unless the corporation shall default in making payment of the cash payable upon such redemption under Section 5 hereof. Certificates will be issued for the remaining shares of Convertible Preferred Stock in any case in which fewer than all of the shares of Convertible Preferred Stock represented by a certificate are converted.

 

(B) In order to exercise the conversion right, the holder of shares of Convertible Preferred Stock to be converted shall surrender the certificate or certificates representing such shares, duly endorsed or assigned to the Corporation or in blank, at the office of the Transfer Agent in the Borough of Manhattan, City of New York, accompanied by written notice to the Corporation that the holder thereof elects to convert Convertible Preferred Stock. Unless the shares issuable on conversion are to be issued in the same name as the name in which such share of Convertible Preferred Stock is registered, each share surrendered for conversion shall be accompanied by instruments of transfer, in the form satisfactory to the Corporation, duly executed by the holder or such holder’s duly authorized attorney and an amount sufficient to pay any transfer or similar tax (or evidence reasonably satisfactory to the Corporation demonstrating that such taxes have been paid).

 

 
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Holders of shares of Convertible Preferred Stock at the close of business on a dividend payment record date shall be entitled to receive the dividend payable on such shares on the corresponding Dividend Payment Date notwithstanding the conversion thereof following such dividend payment record date and prior to such Dividend Payment Date. However, shares of Convertible Preferred Stock surrendered for conversion during the period between the close of business one any dividend payment record date and the opening of business on the corresponding Dividend Payment Date (except shares converted after the issuance of a notice of redemption with respect to a Redemption Date during such period, which shall be entitled to the benefit of such dividend on the Dividend Payment Date) must be accompanied by payment of an amount equal to the dividend payable on such shares on such Dividend Payment Date. A holder of shares of Convertible Preferred Stock on a dividend payment record date who (or whose transferee) tenders any such shares for conversion into shares of Common Stock on such Dividend Payment Date will receive the dividend payable by the Corporation on such shares of Convertible Preferred Stock on such date, and the converting holder need not include payment of the amount of such dividend upon surrender of shares of Convertible Preferred Stock for conversion. Except as provided above, the Corporation shall make no payment or allowance for unpaid dividends, whether or not in arrears, on converted shares or for dividends on the shares of Common Stock issued upon such conversion.

 

As promptly as practicable after the surrender of certificates for shares of Convertible Preferred Stock as aforesaid, the Corporation shall issue and deliver at such office to such holder, or on his or her written order, a certificate or certificates for the number of full shares of Common Stock issuable upon the conversion of such shares in accordance with the provisions of this Section 7, and any fractional interest in respect of a share of Common Stock arising upon such conversion shall be settled as provided in paragraph (C) of this Section 7.

 

Each conversion shall be deemed to have been effected immediately prior to the close of business on the date on which the certificates for shares of Convertible Preferred Stock shall have been surrendered and such notice (and if applicable payment of an amount equal to the dividend payable on such shares) received by the Corporation as aforesaid, and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby at such time on such date and such conversion shall be at the Conversion Price in effect at such time on such date, unless the stock transfer books of the Corporation shall be closed on that date, in which event such person or persons shall be deemed to have become such holder or holders of record at the close of business on the next succeeding day on which such stock transfer books are open, but such conversion shall be at the Conversion Price in effect on the date upon which such shares shall have been surrendered and such notice received by the Corporation.

 

 
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(C) No fractional shares or scrip representing fractions of shares of Common Stock shall be issued upon conversion of the Convertible Preferred Stock. Instead of any fractional interest in a share of Common Stock that would otherwise be deliverable upon the conversion of a share of Convertible Preferred Stock, the Corporation shall pay to the holder of such share an amount in cash based upon the Current Market Price of Common Stock on the Trading Day immediately preceding the date of conversion. If more than one share shall be surrendered for conversion at one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Convertible Preferred Stock so surrendered.

 

(D) The Conversion Price shall be adjusted from time to time as follows:

 

(i) If the Corporation shall after the Issue Date (A) pay a dividend or make a distribution on its capital stock in shares of its Common Stock, (B) subdivide its outstanding Common Stock into a greater number of shares, (C) combine its outstanding Common Stock into a smaller number of shares or (D) issue any shares of capital stock by reclassification of its Common Stock, the Conversion Price in effect at the opening of business on the day next following the date fixed for the determination of stockholders entitled to receive such dividend or distribution or at the opening of business on the day next following the day on which such subdivision, combination or reclassification becomes effective, as the case may be, shall be adjusted so that the holder of any share of Convertible Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock that such holder would have owned or have been entitled to receive after the happening of any of the events described above had such share been converted immediately prior to the record date in the case of a dividend or distribution or the effective date in the case of a subdivision, combination or reclassification. An adjustment made pursuant to this subparagraph (i) shall become effective immediately after the opening of business on the day next following the record date (except as provided in paragraph (H) below) in the case of a dividend or distribution and shall become effective on the day next following the effective date in the case of a subdivision, combination or reclassification.

 

 
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(ii) If the Corporation shall issue after the Issue Date rights or warrants (in each case, other than the Rights) to all holders of Common Stock entitling them (for a period expiring within 45 days after the record date mentioned below) to subscribe for or purchase Common Stock or Securities which are convertible into Common Stock at a price per share less than the Fair Market Value per share of Common Stock on the record date for the determination of stockholders entitled to receive such rights or warrants, then the Conversion Price in effect at the opening of business on the day next following such record date shall be adjusted to equal the price determined by multiplying (I) the Conversion Price in effect immediately prior to the opening of business on the day next following the date fixed for such determination by (II) a fraction, the numerator of which shall be the sum of (A) the number of shares of Common Stock outstanding on the close of business on the date fixed for such determination and (B) the number of shares that the aggregate proceeds to the Corporation from the exercise of such rights or warrants for Common Stock would purchase at such Fair Market Value, and the denominator of which shall be the sum of (A) the number of shares of Common Stock outstanding on the close of business on the date fixed for such determination and (B) the number of additional shares of Common Stock offered for subscription or purchase pursuant to such rights or warrants Such adjustment shall become effective immediately after the opening of business on the day next following such record date (except as provided in paragraph (H) below). In determining whether any rights or warrants entitle the holders of Common Stock to subscribe for or purchase shares of Common Stock at less than such Fair Market Value, there shall be taken into account any consideration received by the Corporation upon issuance and upon exercise of such rights or warrants, the value of such consideration, if other than cash, to be determined by valuation of the Board of Directors.

 

(iii) If the Corporation shall distribute to all holders of its Common Stock any shares of capital stock of the Corporation (other than Common Stock) or evidence of its indebtedness or assets (excluding any cash dividends or distributions paid from profits or surplus of the Corporation or referred to in subparagraph (i) above or any stock, securities or other property received pursuant to paragraph 7(E) below) or rights or warrants (in each case, other than the Rights) to subscribe for or purchase any of its securities (excluding those rights and warrants issued to all holders of Common Stock entitling them for a period expiring within 45 days after the record date referred to in subparagraph (ii) above to subscribe for or purchase Common Stock, which rights and warrants are referred to in and treated under subparagraph (ii) above) (any of the foregoing being hereinafter in this subparagraph (iii) called the “Securities”), then in each such case the Conversion Price shall be adjusted so that it shall equal the price determined by multiplying (I) the Conversion Price in effect immediately prior to the close of business on the date fixed for the determination of stockholders entitled to receive such distribution by (II) a fraction, the numerator of which shall be the Fair Market Value per share of the Common Stock on the record date mentioned below less the then Fair Market Value (as determined by the Board of Directors, whose determination shall be conclusive) of the portion of the capital stock or assets or evidences of indebtedness so distributed or of such rights or warrants applicable to one share of Common Stock, and the denominator of which shall be the Fair Market Value per share of the Common Stock on the record date mentioned below. Such adjustment shall become effective immediately at the opening of business on the Business Day next following (except as provided in paragraph (H) below) the record date for the determination of shareholders entitled to receive such distribution. For the purposes of this subparagraph (iii), the distribution of a Security, which is distributed not only to the holders of the Common Stock on the date fixed for the determination of stockholders entitled to such distribution of such Security, but also is distributed to the holders of the Convertible Preferred Stock (assuming for purposes of this subparagraph (iii) that such shares of Convertible Preferred Stock have been converted) or reserved for distribution with each share of Common Stock delivered to a person converting a share of Convertible Preferred Stock after such determination date, shall not require an adjustment of the Conversion Price pursuant to this subparagraph (iii); provided that on the date, if any, on which a Person converting a share of Convertible Preferred Stock would no longer be entitled to receive such Security with a share of Common Stock (other than as a result of the termination of all such Securities), a distribution of such Securities shall be deemed to have occurred and the Conversion Price shall be adjusted as provided in this subparagraph (iii) (and such day shall be deemed to be “the date fixed for the determination of the stockholders entitled to receive such distribution” and “the record date” within the meaning of the two preceding sentences).

 

 
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(iv) No adjustment in the Conversion Price shall be required unless such adjustment would require a cumulative increase or decrease of at least 1% in such price; provided, however, that any adjustments that by reason of this subparagraph (iv) are not required to be made shall be carried forward and taken into account in any subsequent adjustment until made; and provided, further, that any adjustment shall be required and made in accordance with the provisions of this Section 7 (other than this subparagraph (iv)) not later than such time as may be required in order to preserve the tax-free nature of a distribution to the holders of shares of Common Stock. Notwithstanding any other provisions of this Section 7, the Corporation shall not be required to make any adjustment of the Conversion Price for the issuance of any shares of Common Stock pursuant to any plan providing for the reinvestment of dividends in securities of the Corporation. All calculations under this Section 7 shall be made to the nearest cent (with $.005 being rounded upward) or to the nearest 1/10 of a share (with .05 of a share being rounded upward), as the case may be. Anything in this paragraph (D) to the contrary notwithstanding, the Corporation shall be entitled, to the extent permitted by law, to make such reductions in the Conversion Price, in addition to those required by this paragraph (D), as it in its discretion shall determine to be advisable in order that any stock dividends, subdivision of shares, reclassification or combination of shares, distribution of rights or warrants to purchase stock or securities, or a distribution of other assets (other than cash dividends) hereafter made by the Corporation to its stockholders shall not be taxable.

 

(v) Anything in this paragraph (D) to the contrary notwithstanding, no adjustment in the Conversion Price shall be required upon the issuance of any shares of Common Stock to holders of the LYONs, upon the conversion or redemption thereof, if any, in the case of any adjustment in the conversion rate for the LYONs, or in the case of any exchange of shares of Common Stock for LYONs.

 

 
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(E) If the Corporation shall be a party to any transaction (including without limitation a merger, consolidation, sale of all or substantially all of the Corporation’s assets or recapitalization of the Common Stock and excluding any transaction as to which subparagraph (D) (i) of this Section 7 applies) (each of the foregoing being referred to herein as a “Transaction”), in each case as a result of which shares of Common Stock shall be converted into the right to receive stock, securities or other property (including cash or any combination thereof), each share of Convertible Preferred Stock which is not converted into the right to receive stock, securities or other property in connection with such Transaction shall thereafter be convertible into the kind and amount of shares of stock, securities and other property (including cash or any combination thereof) receivable upon the consummation of such Transaction by a holder of that number of shares or fraction thereof of Common Stock into which one share of Convertible Preferred Stock was convertible immediately prior to such Transaction, assuming such holder of Common Stock (i) is not a Person with which the Corporation consolidated or into which the Corporation merged or which merged into the Corporation or to which such sale or transfer was made, as the case may be (“Constituent Person”), or an affiliate of a Constituent Person and (ii) failed to exercise his or her rights of election, if any, as to the kind or amount of stock, securities and other property (including cash) receivable upon such Transaction (provided that if the kind or amount of stock, securities and other property (including cash) receivable upon such Transaction is not the same for each share of Common Stock of the Corporation held immediately prior to such Transaction by other than a Constituent Person or an affiliate thereof and in respect of which such rights of election shall not have been exercised (“non-electing share”), than for the purpose of this paragraph (E) the kind and amount of stock, securities and other property (including cash) receivable upon such Transaction by each non-electing share shall be deemed to be the kind and amount so receivable per share by the plurality of the non-electing shares). The Corporation shall not be a party to any Transaction unless the terms of such Transaction are consistent with the provisions of this paragraph (E) and it shall not consent or agree to the occurrence of any Transaction until the Corporation has entered into an agreement with the successor or purchasing entity, as the case may be, for the benefit of the holders of the Convertible Preferred Stock that will contain provisions enabling the holders of the Convertible Preferred Stock that remains outstanding after such Transaction to convert into the consideration received by holders of Common Stock at the Conversion Price in effect immediately prior to such Transaction. The provisions of this paragraph (E) shall similarly apply to successive Transactions.

 

 
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(F) If:

 

(i) the Corporation shall declare a dividend (or any other distribution) on the Common Stock (other than in cash out of profits or surplus and other than the Rights); or

 

(ii) the Corporation shall authorize the granting to the holders of the Common Stock of rights or warrants (other than the Rights) to subscribe for or purchase any shares of any class or any other rights or warrants (other than the Rights); or

 

(iii) there shall be any reclassification of the Common Stock (other than an event to which subparagraph (D) (i) of this Section 7 applies) or any consolidation or merger to which the Corporation is a party and for which approval of any stockholders of the Corporation is required, or the sale or transfer of all or substantially all of the assets of the Corporation as an entirety; or

 

(iv) there shall occur the voluntary or involuntary liquidation, dissolution or winding up of the Corporation,

 

then the Corporation shall cause to be filed with the Transfer Agent and shall cause to be mailed to the holders of shares of the Convertible Preferred Stock at their address as shown on the stock records of the Corporation, as promptly as possible, but at least 15 days prior to the applicable date hereinafter specified, a notice stating (A) the date on which a record is to be taken for the purpose of such dividend, distribution or rights or warrants, or, if a record is not to be taken, the date on which the holders of Common Stock of record to be entitled to such dividend, distribution or rights or warrants are to be determined or (B) the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution or winding p is expected to become effective, and the date on which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution or winding up. Failure to give or receive such notice or any defect therein shall not affect the legality or validity of the proceedings described in this Section 7.

 

(G) Whenever the Conversion Price is adjusted as herein provided, the Corporation shall promptly file with the Transfer Agent an officer’s certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment which certificate shall be prima facie evidence of the correctness of such adjustment. Promptly after delivery of such certificate, the Corporation shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the effective date of such adjustment and shall mail such notice of such adjustment of the Conversion Price to the holder of each share of Convertible Preferred Stock at such holder’s last address as shown on the stock records of the Corporation.

 

 
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(H) In any case in which paragraph (D) of this Section 7 provides that an adjustment shall become effective on the day next following a record date for an event, the Corporation may defer until the occurrence of such event (A) issuing to the holder of any share of Convertible Preferred Stock converted after such record date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the Common Stock issuable upon such conversion before giving effect to such adjustment and (B) paying to such holder any amount in cash in lieu of any fraction pursuant to paragraph (C) of this Section 7.

 

(I) For purposes of this Section 7, the number of shares of Common Stock at any time outstanding shall not include any shares of Common Stock then owned or held by or for the account of the Corporation. The Corporation shall not pay a dividend or make any distribution on shares of Common Stock held in the treasury of the Corporation.

 

(J) There shall be no adjustment of the Conversion Price in case of the issuance of any stock of the Corporation in a reorganization, acquisition or other similar transaction except as specifically set forth in this Section 7. If any action or transaction would require adjustment of the Conversion Price pursuant to more than one paragraph of this Section 7, only one adjustment shall be made and such adjustment shall be the amount of adjustment that has the highest absolute value to the holders of Convertible Preferred Stock as determined by the Board of Directors.

 

(K) If the Corporation shall take any action affecting the Common Stock, other than action described in this Section 7, that in the opinion of the Board of Directors would materially adversely affect the conversion rights of the holders of the shares of Convertible Preferred Stock, the Conversion Price for the Convertible Preferred Stock may be adjusted, to the extent permitted by law, in such manner, if any, and at such time, as the Board of Directors may determine to be equitable in the circumstances.

 

(L) The Corporation covenants that it will at all times reserve and keep available, free from preemptive rights, out of the aggregate of its authorized but unissued shares of Common Stock or its issued shares of Common Stock held in its treasury, or both, for the purpose of effecting conversion of the Convertible Preferred Stock, the full number of shares of Common Stock deliverable upon the conversion of all outstanding shares of Convertible Preferred Stock not theretofore converted. For purposes of this paragraph (L), the number of shares of Common Stock that shall be deliverable upon the conversion of all outstanding shares of Convertible Preferred Stock shall be computed as if at the time of computation all such outstanding shares were held by a single holder.

 

 
33

 

 

The Corporation covenants that any shares of Common Stock issued upon conversion of the Convertible Preferred Stock shall be validly issued, fully paid and non-assessable. Before taking any action that would cause an adjustment reducing the Conversion Price below the then-par value of the shares of Common Stock deliverable upon conversion of the Convertible Preferred Stock, the Corporation will take any corporate action that in the opinion of its counsel, may be necessary in order that the Corporation may validly and legally issue fully paid and non-assessable shares of Common Stock at such adjusted Conversion Price.

 

The Corporation shall endeavor to list the shares of Common Stock required to be delivered upon conversion of the Convertible Preferred Stock, prior to such delivery, upon each national securities exchange, if any, upon which the outstanding Common Stock is listed at the time of such delivery.

 

Prior to the delivery of any securities that the Corporation shall be obligated to deliver upon conversion of the Convertible Preferred Stock, the Corporation shall endeavor to comply with all federal and state laws and regulations thereunder requiring the registration of such securities with, or any approval of or consent to the delivery thereof by, any governmental authority.

 

(M) The Corporation will pay any and all documentary, stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock or other securities or property on conversion of the Convertible Preferred Stock pursuant hereto; provided, however, that the Corporation shall not be required to pay any tax that may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock or other securities or property in a name other than that of the holder of the Convertible Preferred Stock to be converted and no such issue or delivery shall be made unless and until the person requesting any issue or delivery has paid to the Corporation the amount of any such tax or established, to the reasonable satisfaction of the Corporation, that such tax has been paid.

 

Section 8. Ranking. Any class or series of stock of the Corporation shall be deemed to rank:

 

(A) prior to the Convertible Preferred Stock, as to the payment of dividends and as to distributions of assets upon liquidation, dissolution or winding up, if the holders of such class or series shall be entitled to the receipt of dividends and of amounts distributed upon liquidation, dissolution or winding up in preference or priority to the holders of Convertible Preferred Stock;

 

(B) on a parity with the Convertible Preferred Stock, as to the payment of dividends and as to distribution of assets upon liquidation, dissolution or winding up, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share thereof be different from those of the Convertible Preferred Stock if the holders of such class of stock or series and the Convertible Preferred Stock shall be entitled to the receipt of dividends and of amounts distributable upon liquidation, dissolution or winding up in proportion to their respective amounts of accrued and unpaid dividends per share or Liquidation Preferences, without preference or priority one over the other; and

 

 
34

 

 

(C) junior to the Convertible Preferred Stock, as to the payment of dividends or as to the distribution of assets upon liquidation, dissolution or winding up, if such stock or series shall be Common Stock or Series A Preferred Shares or if the holders of Convertible Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up in preference or priority to the holders of shares of such stock or series.

 

Section 9. Voting. (A) Unless the affirmative vote of the holders of a greater number of shares shall then be required by law, the affirmative vote of the holders of at least 66-2/3% of all of the outstanding shares of Convertible Preferred Stock, given in person or by proxy, by a vote at a meeting called for the purpose voting separately as a class, shall be necessary for authorizing, effecting or validating the amendment, alteration or repeal of any of the provisions of the Certificate of Incorporation or of any certificate amendatory thereof or supplement thereto (including any Certificate of Designations, Preferences and rights or any similar document relating to any series of Preferred Stock) which would materially adversely affect the preferences, rights, powers or privileges of the Convertible Preferred Stock; provided, however, that the amendment of the provisions of the Certificate of Incorporation so as to authorize or create, or to increase the authorized amount of, any Junior Stock or Parity Stock shall not be deemed to materially adversely affect the preferences, rights, powers or privileges of Convertible Preferred Stock.

 

(B) Unless the affirmative vote or consent of the holders of a greater number of shares shall then be required by law, the consent of the holders of at least 66-2/3% of all of the outstanding shares of Convertible Preferred Stock and all other series of Parity Stock upon which such voting power shall have been conferred, given in person or by proxy, by a vote at a meeting called for the purpose at which the holders of shares of Convertible Preferred Stock and such Parity Stock shall vote together as a single class without regard to series, shall be necessary for authorizing, effecting or validating the creation, authorization or issue of any shares of any class of stock of the Corporation ranking prior to the Convertible Preferred Stock as to dividends or upon liquidation, dissolution or winding up, or the reclassification of any authorized stock of the Corporation into any such prior shares, or the creation, authorization or issuance of any obligation or security convertible into or evidencing the right to purchase any such prior shares.

 

 
35

 

 

(C) If at the time of any annual meeting of stockholders for the election of directors the Corporation shall be in default on preference dividends (as defined below) on the Convertible Preferred Stock and any other Parity Stock, the number of directors constituting the Board of Directors of the Corporation shall be increased by two, and the holders of the Convertible Preferred Stock together with the holders of such other Parity Stock upon which such voting power shall have been conferred shall have the right at such meeting (and any subsequent meeting if such default shall continue to exist), voting together as a single class without regard to series, to the exclusion of the holders of Common Stock, to elect two additional directors (the “Preferred Directors”) of the Corporation to fill such newly created directorships. Such right shall continue until there are no dividends in arrears upon the Convertible Preferred Stock. Any Preferred Director may be removed without cause by, and shall not be removed without cause except by, the vote of the holders of record of the outstanding shares of Convertible Preferred Stock and Parity Stock with respect to which such a default shall exist, voting together as a single class without regard to series, at a meeting of the stockholders, or of the holders of shares of such stock as to which a default exists, called for the purpose. So long as a default in any preference dividends on such stock shall exist, (a) any vacancy in the office of a Preferred Director may be filled (except as provided in the following clause (b)) pursuant to an instrument in writing signed by the remaining Preferred Director and filed with the Corporation and (b) in the case of the removal of any Preferred Director, the vacancy may be filled by the vote of the holders of the outstanding shares of Convertible Preferred Stock and Parity Stock with respect to which such a default shall exist, voting together as a single class without regard to series, at the same meeting at which such removal shall be voted. Each director appointed as aforesaid by the remaining Preferred Director shall be deemed, for all purposes hereof, to be a Preferred director. Whenever a default in preference dividends shall no longer exist, the term of office of each Preferred Director shall terminate forthwith and the number of directors constituting the Board of Directors of the Corporation shall be reduced by two. For the purposes hereof, a “default on preference dividends” on the Convertible Preferred Stock or Parity Stock shall be deemed to exist whenever the equivalent of six quarterly dividends have not been declared and paid or set apart for payment, whether or not consecutive, and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all accrued dividends on all shares of Convertible Preferred Stock or Parity Stock of each and every series then outstanding shall have been declared and paid or set apart for payment to the end of the last preceding dividend period.

 

(D) For purposes of the foregoing provisions of this Section 9, each share of Convertible Preferred Stock shall have one (1) vote per share. Except as otherwise required by applicable law or as set forth herein, the shares of Convertible Preferred Stock shall not have any relative, participating, optional or other special voting rights and powers and the consent of the holders thereof shall not be required for the taking of any corporate action.

 

Section 10. Determinations by the Board of Directors. Any determinations made in good faith by the Board of Directors of the Corporation under any provision of this Certificate of Designations, Preferences and Rights shall be final and binding on all stockholders (including holders of shares of Convertible Preferred Stock) of the Corporation.

  

Section 11. Record Holders. The Corporation and the Transfer Agent may deem and treat the record holder of any shares of Convertible Preferred Stock as the true and lawful owner thereof for all purposes, and neither the Corporation nor the Transfer Agent shall be affected by any notice to the contrary.

 

 
36

 

 

CERTIFICATE OF AMENDMENT

OF

CERTIFICATE OF INCORPORATION

OF

HECLA MINING COMPANY

 

 

The corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware does hereby certify:

 

FIRST: That at a meeting of the Board of Directors of Hecla Mining Company resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling a meeting of the shareholders of said corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows:

 

RESOLVED, that the Certificate of Incorporation of this corporation be amended by changing the Article thereof numbered “IV” so that as amended, said Article shall be and read as follows:

 

ARTICLE IV.

CAPITAL STOCK

 

Section 1. Authorized Capital Stock. The Corporation will be authorized to issue two classes of shares of Capital Stock to be designated, respectively, “Preferred Stock” and “Common Stock”; the total number of shares of capital stock which the Corporation shall have authority to issue is 755,000,000; the total number of shares of Preferred Stock shall be 5,000,000, and each such share shall have a par value of $0.25; the total number of shares of Common Stock shall be 750,000,000, and each such share shall have a par value of $0.25.

 

SECOND:     An Annual Meeting of the Shareholders of said Corporation was duly called and held on May 25, 2017, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute were voted in favor of the amendment.

 

THIRD: This amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.

 

 
- 1 -

 

 

IN WITNESS WHEREOF, Hecla Mining Company has caused this Certificate of Amendment to be executed this 30th day of May 2017.

 

 

 

 

 

 

 

/s/ David C. Sienko

 

 

 

David C. Sienko

 

 

 

Vice President and General Counsel

 

 

 

 

 

 

 

STATE OF IDAHO

 

 

ss.

County of Kootenai 

 

 

On this 30th day of May 2017, before me, the undersigned, a Notary Public in and for the State of Idaho, personally appeared David C. Sienko, known or identified to me to be the Vice President and General Counsel of Hecla Mining Company, the officer who executed the instrument on behalf of said corporation, and acknowledged to me that such corporation executed the same.

 

IN WITNESS WHEREOF, I have hereunto set my hand and affixed my notarial seal the day and year in this certificate first above written.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

/s/ Tami D. Whitman

 

 

 

Notary Public in and for the State of Idaho

 

 

 

Residing at Priest River, Idaho

My Commission Expires: 9/12/2021

 

 

 

- 2 -

Exhibit 10.2

 

FIRST AMENDMENT TO FOURTH
AMENDED AND RESTATED CREDIT AGREEMENT

 

THIS FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED CREDIT AGREEMENT (this “First Amendment”), dated as of July 14, 2017, is by and among (i) HECLA MINING COMPANY, a Delaware corporation, HECLA LIMITED, a Delaware corporation, HECLA ALASKA LLC, a Delaware limited liability company, HECLA GREENS CREEK MINING COMPANY, a Delaware corporation and HECLA JUNEAU MINING COMPANY, a Delaware corporation (collectively, the “Borrowers”), (ii) each of the other parties identified as “Other Loan Parties” on the signature pages hereto, (iii) each of the banks and other financial institutions identified as “Lenders” on the signature pages hereto (the “Lenders”), and (iv) THE BANK OF NOVA SCOTIA, as the administrative agent for the Lenders (in such capacity, the “Administrative Agent”).

 

W I T N E S S E T H:

 

WHEREAS, pursuant to the Fourth Amended and Restated Credit Agreement, dated as of May 20, 2016 (as amended, supplemented, amended and restated or otherwise modified prior to the date hereof, the “Existing Credit Agreement” and, as amended by this First Amendment, and as the same may be further amended, supplemented, amended or restated or otherwise modified from time to time, the “Credit Agreement”), among the Borrowers, the Loan Parties party thereto, the Lenders party thereto, and the Administrative Agent, the Lenders have made commitments to extend certain credit facilities to the Borrowers; and

 

WHEREAS, the parties hereto desire to further amend the Existing Credit Agreement in accordance with the terms hereof.

 

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in consideration of the agreements herein contained, the parties hereby agree as follows:

 

PART I
DEFINITIONS

 

SUBPART 1.1 Certain Definitions. Unless otherwise defined herein or the context otherwise requires, the following terms used in this First Amendment, including its preamble and recitals, have the following meanings:

 

Administrative Agent” is defined in the recitals.

 

Borrowers” is defined in the preamble.

 

Credit Agreement” is defined in the recitals.

 

Existing Credit Agreement” is defined in the recitals.

 

First Amendment” is defined in the preamble.

 

 

 
1

 

 

First Amendment Effective Date” is defined in Subpart 4.1. “Lenders” is defined in the preamble.

 

SUBPART 1.2 Other Definitions. Unless otherwise defined herein or the context otherwise requires, terms used in this First Amendment, including its preamble and recitals, have the meanings provided in the Credit Agreement.

 

PART II
AMENDMENT TO EXISTING CREDIT AGREEMENT

 

Effective on (and subject to the occurrence of) the First Amendment Effective Date, the Existing Credit Agreement is hereby amended in accordance with this Part II. Except as so amended, the Existing Credit Agreement and the other Loan Documents shall continue in full force and effect.

 

SUBPART 2.1 Amendment. Effective as of the First Amendment Effective Date (as defined below) the Existing Credit Agreement is hereby amended by amending and restating the definition of “Maturity Date” in Section 1.1 of the Existing Credit Agreement in its entirety to read as follows :

 

Maturity Date” means July 14, 2020.

 

PART III

AFFIRMATION AND CONSENT

 

SUBPART 3.1 Affirmation and Consent. Each of the Loan Parties confirms that it has received a copy of this First Amendment and restates, ratifies and reaffirms each and every term and condition set forth in the Credit Agreement and the other Loan Documents to which it is a party, effective as of the date hereof, after giving effect to this First Amendment.

 

PART IV
CONDITIONS TO EFFECTIVENESS

 

 

SUBPART 4.1 Amendment Effective Date. This First Amendment shall be and become effective as of the date (the “First Amendment Effective Date”) when the last of all of the conditions set forth in this Part IV shall have been satisfied.

 

SUBPART 4.2 Execution of Counterparts of First Amendment. The Administrative Agent shall have received counterparts satisfactory to the Administrative Agent of this First Amendment, which collectively shall have been duly executed on behalf of each Borrower, each of the other Loan Parties, each Lender and the Administrative Agent.

 

SUBPART 4.3 Representations and Warranties. The representations and warranties contained in Subpart 6.4 shall be true and correct in all material respects (and, to the extent any of such representations and warranties are qualified by materiality in their own right, such representations and warranties shall be true and correct in all respects) on and as of the First Amendment Effective Date.

 

 
2

 

 

SUBPART 4.4 Costs and Expenses, etc. The Administrative Agent shall have received for its account and the account of each Lender, all fees, costs and expenses due and payable pursuant to Section 9.3 of the Credit Agreement, if then invoiced, or any other Loan Document.

 

PART V
POST CLOSING COVENANT

 

SUBPART 5.1 Post Closing Covenant. No later than seven (7) Business Days after the First Amendment Effective Date, the Administrative Agent shall have received a favorable written opinion of Sheppard, Mullin, Richter & Hampton LLP, U.S. counsel of the Loan Parties, in form and substance reasonably satisfactory to the Administrative Agent, and failure to comply with this provision shall result in an Event of Default under Section 7.1(e) of the Credit Agreement after giving effect to any cure periods provided therein.

 

PART VI
MISCELLANEOUS

 

SUBPART 6.1 Cross-References. References in this First Amendment to any Part or Subpart are, unless otherwise specified, to such Part or Subpart of this First Amendment.

 

SUBPART 6.2 Instrument Pursuant to Existing Credit Agreement. This First Amendment is a Loan Document executed pursuant to the Existing Credit Agreement and shall (unless otherwise expressly indicated therein) be construed, administered and applied in accordance with the terms and provisions of the Existing Credit Agreement.

 

SUBPART 6.3 References in Other Loan Documents. At such time as this First Amendment shall become effective pursuant to the terms of Part IV, all references in the Loan Documents to the “Credit Agreement” shall be deemed to refer to the Credit Agreement as amended by this First Amendment.

 

SUBPART 6.4 Representations and Warranties of the Loan Parties. Each Loan Party hereby represents and warrants that (a) it has the requisite power and authority to execute, deliver and perform this First Amendment, (b) it is duly authorized to, and has been authorized by all necessary action, to execute, deliver and perform this First Amendment, (c) the representations and warranties contained in Article III of the Credit Agreement and applicable to such Loan Party are true and correct in all material respects (and, to the extent any of such representations and warranties are qualified by materiality in their own right, such representations and warranties shall be true and correct in all respects) on and as of the date hereof as though made on and as of such date (except for those which expressly relate to an earlier date) and (d) no Default or Event of Default exists under the Credit Agreement on and as of the date hereof after giving effect to the amendments contained herein.

 

SUBPART 6.5 Counterparts. This First Amendment may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. Delivery of executed counterparts of this First Amendment by telecopy or other electronic transmission shall be effective as an original and shall constitute a representation that an original will be delivered.

 

 
3

 

 

SUBPART 6.6 Full Force and Effect; Limited Amendment. Except as expressly amended or waived hereby, all of the representations, warranties, terms, covenants, conditions and other provisions of the Existing Credit Agreement and the Loan Documents shall remain unchanged and shall continue to be, and shall remain, in full force and effect in accordance with their respective terms. The amendments set forth herein shall be limited precisely as provided for herein to the provisions expressly amended herein and shall not be deemed to be an amendment to, waiver of, consent to or modification of any other term or provision of the Existing Credit Agreement or any other Loan Document or of any transaction or further or future action on the part of any Loan Party which would require the consent of the Lenders under the Existing Credit Agreement or any of the Loan Documents.

 

SUBPART 6.7 Governing Law. THIS FIRST AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

 

SUBPART 6.8 Successors and Assigns. This First Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.

 

* * * * *

 

 
4

 

 

Each of the parties hereto has caused a counterpart of this First Amendment to be duly executed and delivered as of the date first above written.

 

BORROWERS

HECLA ALASKA LLC, a Delaware corporation

 

 

By: Hecla Mining Company,

its Managing Member



By:   /s/ Lawrence P. Radford                    

     Name: Lawrence P. Radford

     Title: Manager

 

HECLA GREENS CREEK MINING COMPANY, a Delaware corporation

 


By:   /s/ Lawrence P. Radford                   

     Name: Lawrence P. Radford

     Title: Vice President

 

HECLA JUNEAU MINING COMPANY, a Delaware corporation


By:   /s/ Lawrence P. Radford                    

     Name: Lawrence P. Radford

     Title: Vice President

 

HECLA LIMITED, a Delaware corporation


By:   /s/ Lawrence P. Radford                    

     Name: Lawrence P. Radford

     Title: Vice President

 

HECLA MINING COMPANY, a Delaware corporation

 

 

By:   /s/ Lawrence P. Radford                      

     Name: Lawrence P. Radford

    Title: Sr. Vice President - Operations

                   

 
5

 

 

OTHER LOAN PARTIES:    

BURKE TRADING INC., a Delaware corporation

 


By:   /s/ Lawrence P. Radford                      

     Name: Lawrence P. Radford

     Title: Vice President

 

 

HECLA ADMIRALTY COMPANY, a Delaware corporation


By:   /s/ Lawrence P. Radford                       

     Name: Lawrence P. Radford

     Title: Vice President

 

 

Silver Hunter Mining Company, a Delaware corporation


By:   /s/ Lawrence P. Radford                       

     Name: Lawrence P. Radford

     Title: Vice President

 

 

RIO GRANDE SILVER, INC., a Delaware corporation

 

 

 

By:   /s/ Lawrence P. Radford                       

     Name: Lawrence P. Radford

     Title: Vice President

 

HECLA SILVER VALLEY, INC., a Delaware corporation

 

 

 

By:   /s/ Lawrence P. Radford                       

     Name: Lawrence P. Radford

     Title: Vice President

          

 
6

 

 

 

HECLA MC SUBSIDIARY, LLC, a Delaware limited liability company

 


By:   /s/ Daniel A. Nelson                               

     Name: Daniel A. Nelson

     Title: President

 

HECLA MONTANA, Inc., a Delaware corporation

 

 

 

By: /s/ Luther J. Russell

     Name: Luther J. Russell
     Title: President

 

REVETT SILVER COMPANY, a Montana corporation

 

 

 

By: /s/ Luther J. Russell

     Name: Luther J. Russell
     Title: President

 

TROY MINE INC., a Montana corporation

 

 

 

By: /s/ Luther J. Russell

     Name: Luther J. Russell
     Title: President

 

RC RESOUrCES, INC., a Montana corporation

 

 

 

By: /s/ Luther J. Russell

     Name: Luther J. Russell
     Title: President

 

 
7

 

 

 

REVETT EXPLORATION, INC., a Montana corporation

 

 

 

By:  /s/ Luther J. Russell

     Name: Luther J. Russell
     Title: President

 

REVETT holdings, inc., a Montana corporation

 

 

 

By:  /s/ Luther J. Russell

     Name: Luther J. Russell
     Title: President

 

MINES MANAGEMENT, INC., an Idaho corporation

 

By:  /s/ Daniel A. Nelson                                   

     Name: Daniel A. Nelson

     Title: Vice President & Treasurer

 

NEWHI, INC., a Washington corporation

 

By:   /s/ Daniel A. Nelson                                   

     Name: Daniel A. Nelson

     Title: President

 

MONTANORE MINERALS CORP., a Delaware corporation

 

By:  /s/ Daniel A. Nelson                                    

     Name: Daniel A. Nelson

     Title: Vice President & Treasurer

 

 
8

 

 

 

THE BANK OF NOVA SCOTIA, as Administrative Agent and as a Lender

 

By:     /s/ Kurt R. Foellmer                                
      Name: Kurt R. Foellmer

      Title:  Director

 

 

By:     /s/ Stephen MacNeil                              
      Name: Stephen MacNeil

      Title: Associate Director

 

 
9

 

 

 

ING CAPITAL LLC, as a Lender

 

 

By:      /s/ Remko van de Water                       
      Name: Remko van de Water

      Title: Managing Director

 

 

By:      /s/ Hans Beekmans                                
      Name: Hans Beekmans

      Title: Director

 

 

10

Exhibit 10.3

 

HECLA MINING COMPANY STOCK PLAN FOR NONEMPLOYEE DIRECTORS

(Approved by shareholders on May 25, 2017)

 

1.     Name of Plan. This plan shall be known as the “Hecla Mining Company Stock Plan for Nonemployee Directors” and is hereinafter referred to as the “Plan.”

 

2.     Purpose of Plan. The purpose of the Plan is to enable Hecla Mining Company, a Delaware corporation (the “Corporation”), to attract and retain qualified persons to serve as members of the Corporation’s Board of Directors (the “Board”) from time to time (each, a “Director”), to enhance the equity interest of Directors in the Corporation and to solidify the common interests of Directors and stockholders of the Corporation (“Stockholders”) in enhancing the value of the Corporation’s common stock, par value $0.25 per share (the “Common Stock”). The Plan seeks to encourage the highest level of Director performance by providing Directors with a proprietary interest in the Corporation’s performance and progress by crediting them with shares of Common Stock annually in satisfaction of their annual retainer.

 

3.     Effective Date and Term. The Plan shall be effective as of February 21, 2017 (the “Effective Date”) (the date that it was approved by the Board), and shall remain in effect until (a) May 15, 2027 if approved by the Stockholders at the 2017 Annual Meeting of Stockholders, or (b) July 17, 2017 if not so approved by the Stockholders.

 

4.     Eligible Participants. Each Director who is not a full-time employee of the Corporation or any of its affiliates (“Nonemployee Director”) shall be a participant (“Participant”) in the Plan. Each credit of shares of Common Stock pursuant to the Plan shall be evidenced by a written agreement duly executed and delivered by or on behalf of the Corporation and a Participant, if such an agreement is required by the Corporation to ensure compliance with applicable laws and regulations. Following the Effective Date, no Participant shall be eligible to receive awards under any other equity compensation plan of the Corporation or an affiliate while a Participant in the Plan.

 

5.     Credit of Shares. (a) Commencing as of the Effective Date, in satisfaction of the annual retainer payable to each Participant for service on the Board (the “Annual Retainer”), each Participant shall be credited with shares of Common Stock subject to applicable restrictions set forth in Section 6 below with respect to payment. Subject to Section 5(b) below, each Participant shall be credited each year for service on the Board with a number of shares of Common Stock determined by dividing the amount of the Annual Retainer for the applicable year by the average closing price for the Common Stock on the New York Stock Exchange (or if not listed on such exchange on any other national securities exchange on which the shares of Common Stock are listed) for the prior calendar year (the “Stock Retainer”). The Stock Retainer for each year shall be credited by September 30 of each year during the term of the Plan (with the actual date of crediting being the “Credit Date”), commencing as of the Effective Date. A minimum of 25% of each Stock Retainer (or a greater percentage up to 100% if the Participant so elects prior to the first day of the year in which the applicable Stock Retainer is to be credited) shall be contributed to a grantor trust established by the Corporation pursuant to Section 6(g) below and subject to its terms (the “Trust Shares”). The portion of the applicable Stock Retainer that is not contributed to a grantor trust shall be transferred to the Participant as soon as administratively practicable following the applicable Credit Date.

 

 

 
1

 

 

(b)     Any person who becomes a Nonemployee Director following the Credit Date of any year during the term of the Plan, whether by appointment or election as a Director or by change in status from a full-time employee, shall be credited, on becoming a Nonemployee Director, with a portion of the compensation to be paid to such Participant until the Corporation’s next Annual Meeting of Stockholders, with a number of shares of Common Stock equal to the product of the number of shares determined pursuant to Section 5(a) above times a fraction, the numerator of which is the number of full weeks remaining until the first anniversary of the Credit Date for the year in which the person becomes a Nonemployee Director and the denominator of which is 52; provided that no fractional shares shall be credited and the number of shares of Common Stock to be credited pursuant to this Section 5(b) shall be rounded up to the next whole number. A minimum of 25% of any Stock Retainer payable pursuant to this Section 5(b) (or a greater percentage up to 100% if the Participant so elects within 30 days after becoming a Participant in the Plan (or such other time period permitted under Section 409A (“Section 409A”) of the Internal Revenue Code of 1986, as amended)) shall be Trust Shares and any portion the applicable Stock Retainer that is not contributed to a grantor trust shall be transferred to the Participant as soon as administratively practicable following the time the Participant becomes a Nonemployee Director.

 

6.     Delivery of Trust Shares. (a) The Trust Shares, together with the “Dividend Equivalent Amount” (as defined in Section 6(c) below) with respect thereto, shall be delivered to the Participant or the Participant’s estate or legal guardian in shares of Common Stock on, or beginning on, the Delivery Date (as defined in Section 6(b) below), in accordance with this Section 6.

 

(b)     The “Delivery Date” means the first date upon which one of the following events occurs:

 

 

(i)

Death of the Participant;

 

 

(ii)

Disability of the Participant as defined in Section 6(f) below;

 

 

(iii)

Retirement of the Participant from service as a Director in accordance with the Corporation’s By-Laws then in effect;

 

 

(iv)

Cessation of service as a Director for any reason other than those specified in clauses (i), (ii) or (iii) immediately above;

 

 

(v)

Change in Control as defined in Section 8 below; or

 

 

(vi)

At a specified date at least 24 months after the applicable Credit Date for the Stock Retainer, pursuant to an election made by the Participant prior to the first day of the year in which the applicable notional shares of Common Stock are credited to the Participant under Section 5 above.

 

(c)     The “Dividend Equivalent Amount” with respect to any Trust Shares means (i) the amount of cash, plus the fair market value as determined by the Board on the date of distribution of any property, other than stock of the Corporation, plus (ii) any shares of stock of the Corporation, in each case which the Participant would have received as dividends or other distributions with respect to the Trust Shares, if the Trust Shares had been delivered to the Participant as shares of Common Stock at the time they were credited to the Participant under this Plan, plus (iii) interest on the amount described in clauses (i) plus (ii) at a rate equal to the Corporation’s cost of funds, from the date or date(s) such dividends or other distributions would have been received through the date the Trust Shares are delivered.

 

 

 
2

 

 

(d)     If a Participant’s Delivery Date is described in clause (iv) (normal cessation of service), clause (v) (Change in Control) or clause (vi) (specified date) of Section 6(b) above, all Trust Shares and all Dividend Equivalent Amounts with respect thereto shall be delivered at one time, as soon as practicable after the Delivery Date. If a Participant’s Delivery Date is described in clause (i) (death), clause (ii) (Disability) or clause (iii) (retirement) of Section 6(b) above, the Trust Shares and the Dividend Equivalent Amounts with respect thereto shall be delivered at one time, as soon as practicable after the Delivery Date, unless the Participant has in effect a valid Installment Delivery Election pursuant to Section 6(e) below to have the Trust Shares and Dividend Equivalent Amounts delivered in yearly installments over 5, 10 or 15 years (the “Applicable Delivery Period”). If the Participant does have in effect a valid Installment Delivery Election, then the Trust Shares, together with the Dividend Equivalent Amounts with respect thereto, shall be delivered in equal yearly installments over the Applicable Delivery Period, with the first such installment being delivered on the first anniversary of the Delivery Date; provided, that if in order to equalize such installments, fractional shares would have to be delivered, such installments shall be adjusted by rounding to the nearest whole share. If any Trust Shares and Dividend Equivalent Amounts of a Participant are to be delivered after the Participant has died or become legally incompetent, they shall be delivered to the Participant’s estate or legal guardian, as the case may be, in accordance with the foregoing schedules; provided, that if the Participant dies with a valid Installment Delivery Election in effect, and the legal representatives of the Participant’s estate so request, the Board may (but shall not be obligated to) deliver all remaining undelivered Trust Shares and Dividend Equivalent Amounts to the Participant’s estate immediately. References to the Participant in this Plan shall be deemed to refer to the Participant’s estate or legal guardian, where appropriate.

 

(e)     An “Installment Delivery Election” means a written election by a Participant, on such form as may be prescribed by the Board, to receive delivery of Trust Shares and Dividend Equivalent Amounts in installments over a period of 5, 10 or 15 years, as more fully described in Section 6(d) above. Once made, an Installment Delivery Election may be superseded by another Installment Delivery Election. However, in order for any initial or superseding Installment Delivery Election to be valid, it must be received by the Corporation prior to the first day of the year in which the applicable shares of Common Stock are credited to the Participant under Section 5. In the case of multiple Installment Delivery Elections and/or revocations by any Participant, the most recent valid Installment Delivery Election or revocation in effect as of the Delivery Date shall be controlling. No Delivery Elections once made can be accelerated and any elections to further defer Delivery Elections must be made in accordance with the following:

 

 

(i)

Such election will not take effect until 12 months after the election is made;

 

 

(ii)

Any subsequent election other than under Section 6(b)(i) or Section 6(b)(ii) above must be for a period of at least 5 years from the date such Delivery Election issuance would otherwise have been made under the Plan; and

 

 

 
3

 

 

 

(iii)

With respect to any Delivery Election issuance to be made at a specified time or pursuant to a fixed schedule pursuant to an election at the time of such initial deferral, such election must be made at least 12 months prior to the date of the first scheduled Delivery Election issuance under such initial election.

 

(f)     “Disability” shall mean (i) 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 12 months, (ii) 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 12 months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering service providers of the Corporation or (iii) any other definition provided under Section 409A. Unless otherwise provided by the Board, in the event that the timing of payments under the Plan (that would otherwise be considered “deferred compensation” subject to Section 409A) would be accelerated upon the occurrence of a Disability, no such acceleration shall be permitted unless the Disability also satisfies the definition of “disability” pursuant to Section 409A.

 

(g)     The Corporation has created a grantor trust (the “Trust”) to assist it in accumulating the shares, cash and other property needed to fulfill its obligations under this Section 6. On each date when a Stock Retainer is credited to a Participant, the Corporation shall contribute Trust Shares to the Trust. However, Participants shall have no beneficial or other interest in the Trust and the assets thereof, and their rights under the Plan shall be as general creditors of the Corporation, unaffected by the existence or nonexistence of the Trust, except that deliveries of Trust Shares and payments of cash and other property to Participants from the Trust shall, to the extent thereof, be treated as satisfying the Corporation’s obligations under this Section 6.

 

7.     Share Certificates; Voting and Other Rights. The certificates for shares delivered to a Participant or the trustee of the Trust, if any (the “Trustee”), pursuant to Section 6 above shall be issued in the name of the Participant or the Trustee, as the case may be, and the Participant or the Trustee, as the case may be, shall be entitled to all rights of a Stockholder with respect to Common Stock for all such shares issued in his name, including the right to vote the shares; provided, however, that the Participant or the Trustee, as the case may be, shall not receive dividends and other distributions paid or made with respect to such shares in addition to the Dividend Equivalent Amounts.

 

 

 
4

 

 

8.     Change in Control. A “Change in Control” shall be deemed to have occurred if any of the following events shall have happened:

 

 

(i)

An acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) (including in connection with a merger, consolidation, purchase or acquisition of Common Stock, or similar business transaction) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either (1) the fair market value of then outstanding shares of Common Stock of the Corporation (the “Outstanding Corporation Common Stock”) or (2) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of Directors (the “Outstanding Corporation Voting Securities”); excluding, however, the following: (1) any acquisition directly from the Corporation, other than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Corporation; (2) any acquisition by the Corporation (other than an increase in the percentage of Common Stock owned by a Person caused as a result of a transaction in which the Corporation acquires its Common Stock in exchange for property); (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any corporation controlled by the Corporation; (4) any acquisition of additional beneficial ownership in Common Stock by a Person that is already considered to own more than 50% of more of the total fair market value or total voting power of the Corporation; or (5) any transaction in which the Common Stock of the Corporation does not remain outstanding after the transaction; or

  

 

(ii)

An acquisition by any Person (including in connection with a merger, consolidation, purchase or acquisition of Common Stock, or similar business transaction) of beneficial ownership of 30% or more of the combined voting power of the Corporation during a 12-month period; excluding, however, the following: (1) any acquisition directly from the Corporation, other than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Corporation; (2) any acquisition by the Corporation (other than an increase in the percentage of Common Stock owned by a Person caused as a result of a transaction in which the Corporation acquires its Common Stock in exchange for property); (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any corporation controlled by the Corporation; or (4) any acquisition of additional beneficial ownership in Common Stock by a Person that is already considered to own more than 30% of more of the total voting power of the Corporation; or

 

 

(iii)

A change in the composition of the Board such that a majority of the Directors (such Directors shall be hereinafter referred to as the “Incumbent Directors”) are replaced during any 12-month period by Directors whose appointment or election is not endorsed by a majority of the Incumbent Directors before the date of the appointment or election; or

 

 

 
5

 

 

 

(iv)

An acquisition by any Person of assets from the Corporation, during a 12-month period, that have a total gross fair market value equal to or more than 40% of the total gross fair market value of all the assets of the Corporation immediately before such acquisition or acquisitions; excluding, however, an acquisition by any Person that is an entity controlled by the shareholders of the Corporation immediately after the transfer (within the meaning of Section 409A).

 

Notwithstanding any provision of this definition to the contrary, in the event that any amount or benefit under the Plan constitutes deferred compensation under Section 409A and the settlement of or distribution of such amount or benefit is to be triggered by a Change in Control, then such settlement or distribution shall be subject to the event constituting the Change in Control also constituting a “change in control event” under Section 409A.

 

9.     General Restrictions. (a) Notwithstanding any other provision of the Plan or agreements made pursuant thereto, the Corporation shall not be required to issue or deliver any certificate or certificates for shares of Common Stock under the Plan prior to fulfillment of all the following conditions:

 

 

(i)

Listing or approval for listing upon notice of issuance of such shares on The New York Stock Exchange, or such other securities exchange as may at the time be the principal market for the Common Stock;

 

 

(ii)

Any registration or other qualification of such shares of the Corporation under any state or federal law or regulation, or maintaining in effect any such registration or other qualification which the Board shall deem necessary or advisable; and

 

 

(iii)

Obtaining any other consent, approval or permit from any state or federal governmental agency which the Board shall determine to be necessary or advisable.

  

(b)     Nothing contained in the Plan shall prevent the Corporation from adopting other or additional compensation arrangements for the Participants.

 

(c)     The Corporation shall not be required to issue or deliver any shares of Common Stock under the Plan if such issuance or delivery would constitute a violation of any provision of any law or regulation of any governmental authority.

 

10.     Shares Available. (a) Subject to Section 11 below, the maximum number of shares of Common Stock which may be credited as Stock Retainers pursuant to the Plan is (i) 1,000,000 as of the Effective Date, and (ii) 3,000,000 as of the Corporation’s 2017 Annual Meeting of Stockholders, subject to the approval of the Stockholders at the 2017 Annual Meeting. Shares of Common Stock issuable under the Plan shall be taken from authorized but unissued shares or from treasury shares of the Corporation as shall from time to time be necessary for issuance pursuant to the Plan.

 

 

 
6

 

 

(b)     The maximum value of Stock Retainers credited during any calendar year to any Nonemployee Director, taken together with any cash fees paid to such Nonemployee Director for Board service during the calendar year and the value of awards granted to the Nonemployee Director under any other equity compensation plan of the Corporation or an affiliate during the calendar year, shall not exceed the following in total value (calculating the value of any Stock Retainers or other equity compensation plan awards based on the grant date fair value for financial reporting purposes): (i) $900,000 for the Chair of the Board and (ii) $675,000 for each Nonemployee Director other than the Chair of the Board; provided, however, that awards granted to Nonemployee Directors upon their initial election to the Board or the board of directors of an affiliate shall not be counted against the limits under this paragraph.

 

11.     Change in Capital Structure. Subject to any required action by the Stockholders, in the event of any change in the Common Stock effected without receipt of consideration by the Corporation, whether by reason of any stock dividend, stock split, split-up, split-off, spin-off, combination of shares, exchange of shares, warrants or rights offering to purchase Common Stock at a price below its fair market value, reclassification, recapitalization, reorganization, reincorporation, merger, consolidation or other change in capitalization, appropriate adjustment shall be made by the Board in the number and kind of shares subject to the Plan and any other relevant provisions of the Plan, in order to prevent dilution or enlargement of Participants’ rights under the Plan.

 

12.     Administration; Amendment. (a) The Board shall have such powers and authorities related to the administration of the Plan as are consistent with the Corporation’s certificate of incorporation and bylaws and applicable law. The Board shall have the power and authority to delegate its responsibilities hereunder to its Compensation Committee or such other committee as determined by the Board (the “Committee”), which shall have full authority to act in accordance with its charter (as in effect from time to time), and with respect to the power and authority of the Board to act hereunder, all references to the Board shall be deemed to include a reference to the Committee, unless such power or authority is specifically reserved by the Board. Except as may be required by applicable law, regulatory requirement or the certificate of incorporation or the bylaws of the Corporation, the Board shall have full power and authority to take all actions and to make all determinations required or provided for under the Plan, and shall have full power and authority to take all such other actions and make all such other determinations that the Board deems to be necessary or appropriate to the administration of the Plan. All actions, determinations and decisions by the Board or the Committee under the Plan shall be in the sole discretion of the Board (or the Committee, as applicable) and shall be final, binding and conclusive on all persons.

 

(b)     The Board may, at any time and from time to time, amend or suspend the Plan. An amendment shall be contingent on approval of the Stockholders to the extent stated by the Board, required by applicable law or required by applicable securities exchange listing requirements. No amendment or suspension of the Plan shall, without the consent of the affected Participant, materially impair rights or obligations of such Participant.

 

(c)     The Board may terminate the Plan at any time subject to the requirements of Section 409A.

 

 

 
7

 

 

13.     Grandfathered Amounts. Notwithstanding anything in this Plan to the contrary, any amounts accrued and vested by Participants under the Plan prior to January 1, 2005 will be paid under the terms of the Plan as then in effect.

 

14.     Miscellaneous. (a) Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any Director for reelection by the Stockholders or to limit the rights of the Stockholders to remove any Director.

 

(b)     The Corporation shall have the right to require, prior to the issuance or delivery of any shares of Common Stock pursuant to the Plan, payment by a Participant of any taxes required by law with respect to the issuance or delivery of such shares.

 

15.     Section 409A. (a) Notwithstanding any provision of the Plan to the contrary, it is intended that the provisions of the Plan comply with Section 409A, and all provisions of the Plan shall be construed and interpreted in a manner consistent with the requirements for avoiding taxes or penalties under Section 409A. Each Participant is solely responsible and liable for the satisfaction of all taxes and penalties that may be imposed on or in respect of such Participant in connection with the Plan (including any taxes and penalties under Section 409A), and the Corporation shall not have any obligation to indemnify or otherwise hold any Participant (or beneficiary) harmless from any or all such taxes or penalties. With respect to any amount under the Plan that is considered “deferred compensation” subject to Section 409A, references in the Plan to “termination of employment” (and substantially similar phrases) shall mean “separation from service” within the meaning of Section 409A. For purposes of Section 409A, each of the payments that may be made under the Plan is designated as a separate payment.

 

(b)     Notwithstanding anything in the Plan to the contrary, if a Participant is a “specified employee” within the meaning of Section 409A, no payments under the Plan that are “deferred compensation” subject to Section 409A and that would otherwise be payable upon the Participant’s “separation from service” (as defined in Section 409A) shall be made to such Participant prior to the date that is six months after the date of such Participant’s “separation from service” or, if earlier, the date of the Participant’s death. Following any applicable six-month delay, all such delayed payments will be paid in a single lump sum on the earliest date permitted under Section 409A that is also a business day.

 

16.     Governing Law. The Plan and all actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Delaware.

 

 

8

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: August 3, 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: August 3, 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: August 3, 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: August 3, 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 second quarter of 2017, MSHA proposed $5,183 in penalty assessments at the Greens Creek mine, $4,538 in penalty assessments at the Lucky Friday mine, and $348 in penalty assessments at the Troy mine. Hecla has not yet received all penalty assessments related to the citations issued in the second quarter of 2017. We have the opportunity to contest or appeal these penalties.

 

During the second quarter of 2017, MSHA issued the Greens Creek mine 3 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, 2 such citations to the Lucky Friday mine, and no such citations at the Troy mine.

 

The Greens Creek, Lucky Friday, and Troy mines have no legal actions pending before the Federal Mine Safety and Health Review Commission, regarding citations for which penalties 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 June 30, 2017.

 

Mine

 

Section 104 S Citations

 

Section 104(b) Orders

 

Section 104(d) Citations and Orders

 

Section 110(b)(2) Violations

 

Section 107(a) Orders

 

Total Dollar 

Value of 

MSHA 

Assessments 

Proposed

 

Total Number Of Mining Related Fatalities

 

Received Notice of Pattern of Violations Under Section 104(e)

 

Received Notice of Potential to have Patterns Under Section 104(e)

 

Legal Actions Pending as of Last Day of Period

 

Legal Actions Initiated During Period

 

Legal Actions Resolved During Period

Greens Creek

  3   0   0       $ 5,183    

no

 

no

  0   0   3

Lucky Friday

  2   0   0       $ 4,538    

no

 

no

  0   0   0

Troy

  0   0   0       $ 348    

no

 

no

  0   0   0