EX-99.4 6 ex_118226.htm EXHIBIT 99.4 ex_118226.htm

 

Exhibit 99.4

 

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

 

The following unaudited pro forma condensed combined financial statements (the “Pro Forma Statements”) give effect to the Arrangement and represent the combined company’s unaudited pro forma condensed combined balance sheet as of March 31, 2018 and the combined company’s unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2018 and the year ended December 31, 2017. The unaudited pro forma condensed combined balance sheet gives effect to the Arrangement as if it had been consummated on the date of such balance sheet. The accompanying unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2018 and year ended December 31, 2017 give effect to the Arrangement as if it had been consummated on January 1, 2017.

 

For accounting purposes, the transaction will be accounted for using the acquisition method, pursuant to which assets and liabilities are recorded at fair value. The valuation of our shares issued as consideration was based upon the closing price of our common stock on July 20, 2018 of $3.22. See Note 2 to these Pro Forma Statements for additional information on the purchase consideration. Differences between preliminary estimates and the final acquisition accounting will occur, and those differences could have a material impact on the Pro Forma Statements.

 

The unaudited pro forma condensed combined balance sheet and statements of operations should be read in conjunction with our consolidated financial statements, including the notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2017 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, and the historical financial statements of Klondex, including the notes thereto, which are included elsewhere in this current report.

 

The Pro Forma Statements are not necessarily indicative of the operating results or financial condition that would have been achieved if the Arrangement had been consummated on the dates or for the periods presented, nor do they purport to project the results of operations or financial position of the combined entities for any future period or as of any future date. Actual amounts recorded will likely differ from those recorded in the Pro Forma Statements. The Pro Forma Statements do not reflect any special items such as integration costs or operating synergies that may be realized as a result of the Arrangement. We cannot assure you that the assumptions used by our management in the preparation of the summary unaudited pro forma combined financial data, which management believes to reasonable, will prove to be accurate.

 

1

 

 

Hecla Mining Company

Unaudited Pro Forma Condensed Combined Balance Sheet

As of March 31, 2018

(in thousands)

 

   

 

Hecla

   

 

Klondex

   

Pro forma adjustments

     

Pro forma combined

 

 

Assets:

                 

(Notes 2, 3

and 5)

           
                                   

Cash and cash equivalents

  $ 212,569     $ 27,814     $ (1,217 ) (a)   $ 43,725  
                      (153,206 ) (b)        
                      (35,235 ) (c)        
                      (7,000 ) (d)        

Investments

    34,358                     34,358  

Accounts receivable

    39,006                     39,006  

Inventories

    62,803       37,739       (4,593 ) (a)     105,584  
                      9,635   (e)        

Other current assets

    17,369       4,457       (494 ) (a)     21,332  

Total current assets

    366,105       70,010       (192,110 )       244,005  

Non-current investments

    7,652             7,000   (d)     14,652  

Non-current restricted cash and investments

    1,005       9,504               10,509  

Properties, plants, equipment and mineral interests, net

    2,008,704       276,040       (49,569 ) (a)     2,464,028  
                      169,351   (e)        
                      59,502   (f)        
                                   

Non-current deferred income taxes

    671       18,696               19,367  

Other non-current asset

    13,954                     13,954  

Total assets

  $ 2,398,091     $ 374,250     $ (5,826 )     $ 2,766,515  

Liabilities:

                                 

Accounts payable and other current liabilities

  $ 101,950     $ 30,362     $ (2,632 ) (a)   $ 123,557  
                      (6,123 ) (c)        

Current portion of capital leases and notes payable

    5,669       873               6,542  

Current portion of accrued reclamation and closure costs

    8,315                     8,315  

Total current liabilities

    115,934       31,235       (8,755 )       138,414  

Accrued reclamation and closure costs

    78,887       21,389       (1,818 ) (a)     98,458  

Deferred tax liabilities

    116,866       17,030       59,502   (f)     190,404  
                      (2,994 ) (g)        

Long-term debt and capital leases

    540,660       35,717               576,377  

Non-current pension liability

    48,459                     48,459  
      2,784       847       (847 ) (c)     2,784  

Total liabilities

    903,590       106,218       45,088         1,054,896  

Shareholders’ Equity

                                 

Series B preferred stock

    39                     39  

Common stock

    101,290             18,819   (h)     120,109  

Capital surplus

    1,626,298       378,435       (100,936 ) (a)     1,849,868  
                      223,570   (h)        
                      (277,499 ) (i)        

Accumulated deficit

    (187,092 )     (89,942 )     51,494   (a)     (212,363 )
                      (28,265 ) (c)        
                      2,994   (g)        
                      38,448   (i)        

Accumulated other comprehensive loss, net

    (26,767 )     (20,461 )     (1,981 ) (a)     (26,767 )
                      22,442   (i)        

Less treasury stock

    (19,267 )                   (19,267 )

Total shareholders’ equity

    1,494,501       268,032       (50,914 )       1,711,619  

Total liabilities and shareholders’ equity

  $ 2,398,091     $ 374,250     $ (5,826 )     $ 2,766,515  

 

See accompanying notes to these unaudited pro forma condensed combined financial statements.

 

2

 

 

Hecla Mining Company

Unaudited Pro Forma Condensed Combined Statement of Operations

For the three months ended March 31, 2018

(in thousands, except per share amounts)

 

   

 

Hecla

   

 

Klondex

   

Pro forma adjustments

     

Pro forma combined

 
                   

(Notes 2, 3,

4 and 6)

           
                                   

Sales of products

  $ 139,709     $ 56,771     $ (6,867 ) (j)   $ 189,613  

Cost of sales and other direct production costs

    72,869       35,449       (8,168 ) (j)     100,150  

Depreciation, depletion and amortization

    28,054       13,103       (2,506 ) (j)     38,651  

Write-down of production inventories

          8,517       (1,460 ) (j)     7,057  
      100,923       57,069       (12,134 )       145,858  

Gross profit

    38,786       (298 )     5,267         43,755  

General and administrative

    7,735       5,824       (1,378 ) (j)     12,181  

Exploration

    7,360       502               7,862  

Pre-development

    1,005                     1,005  

Research and development

    1,436                     1,436  

Provision for closed operations and environmental matters

    1,262       334       (31 ) (j)     1,565  

Lucky Friday suspension related costs

    5,017                     5,017  

Acquisition costs

    2,507       3,616       (6,123 ) (k)      

Other operating (expense) income

    515       20               535  

Income (loss) from operations

    11,949       (10,594 )     12,799         14,154  

Other income (expense):

                                 

Net foreign exchange loss

    2,592       3,185       398   (j)     6,175  

Loss on derivative contracts

    4,007       (128 )             3,879  

Interest expense, net of amounts capitalized

    (9,794 )     (599 )     1   (j)     (10,392 )

Other income (expense)

    254       6               (222 )
                      (482 ) (l)        
      (2,941 )     2,464       (83 )       (560 )

(Loss) income before income taxes

    9,008       (8,130 )     12,716         13,594  

Income tax provision

    (768 )     132       (1,407 ) (m)     (2,043 )

Net (loss) income

    8,240       (7,998 )     11,309         11,551  

Preferred stock dividends

    (138 )                   (138 )

(Loss) income applicable to common shareholders

  $ 8,102     $ (7,998 )   $ 11,309       $ 11,413  

Basic and diluted (loss) income per common share after preferred stock dividends

  $ 0.02                       $ 0.02  

Weighted average number of common shares outstanding - basic

    399,322               75,276   (h)     474,598  

Weighted average number of common shares outstanding - diluted

    401,923               75,276   (h)     477,199  

 

See accompanying notes to these unaudited pro forma condensed combined financial statements.

 

3

 

 

Hecla Mining Company

Unaudited Pro Forma Condensed Combined Statement of Operations

For the year ended December 31, 2017

(in thousands, except per share amounts)

 

   

 

Hecla

   

 

Klondex

   

Pro forma adjustments

     

Pro forma combined

 
                   

(Notes 2, 3,

4 and 6)

           
                                   

Sales of products

  $ 577,775     $ 240,651     $ (32,567 ) (j)   $ 785,859  

Cost of sales and other direct production costs

    304,727       134,311       (28,191 ) (j)     410,847  

Depreciation, depletion and amortization

    116,062       47,778       (7,016 ) (j)     160,680  
                      3,856   (n)        

Write-down of production inventories

          24,766       (13,114 ) (j)     11,652  
      420,789       206,855       (44,465 )       583,179  

Gross profit

    156,986       33,796       11,898         202,680  

General and administrative

    35,611       19,401       (3,980 ) (j)     51,032  

Exploration

    23,510       8,246       (239 ) (j)     31,517  

Pre-development

    5,448       11,674               17,122  

Research and development

    3,276                     3,276  

Provision for closed operations and environmental matters

    6,701       (1,872 )     (51 ) (j)     4,778  

Lucky Friday suspension related costs

    21,301                     21,301  

Other operating (expense) income

    (3,504 )     352       24   (j)     (3,128 )

Income (loss) from operations

    64,643       (4,005 )     16,144         76,782  

Other income (expense):

                                 

Net foreign exchange loss

    (10,300 )     (8,601 )     (918 ) (j)     (19,819 )

Loss on derivative contracts

    (21,250 )     (1,182 )             (22,432 )

Interest expense, net of amounts capitalized

    (38,012 )     (4,117 )     4   (j)     (42,125 )

Other income (expense)

    1,279       (163 )     (36 ) (j)     (383 )
                      (1,463 ) (l)        
      (68,283 )     (14,063 )     (2,413 )       (84,759 )

(Loss) income before income taxes

    (3,640 )     (18,068 )     13,731         (7,977 )

Income tax provision

    (19,879 )     (5,596 )     1,327   (m)     (24,148 )

Net (loss) income

    (23,519 )     (23,664 )     15,058         (32,125 )

Preferred stock dividends

    (552 )                   (552 )

(Loss) income applicable to common shareholders

  $ (24,071 )   $ (23,664 )   $ 15,058       $ (32,677 )

Basic and diluted (loss) income per common share after preferred stock dividends

  $ (0.06 )                     $ (0.07 )

Weighted average number of common shares outstanding - basic

    397,394               75,276   (h)     472,670  

Weighted average number of common shares outstanding - diluted

    397,394               75,276   (h)     472,670  

 

See accompanying notes to these unaudited pro forma condensed combined financial statements.

 

4

 

 

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

Note 1. Basis of presentation

 

Hecla Mining Company (“Hecla”) and Klondex Mines Ltd. (“Klondex”) completed an Arrangement Agreement pursuant to which Hecla acquired all of the issued and outstanding common shares of Klondex (the “Arrangement”) (see Note 2 for more information). It is assumed the Arrangement will be accounted for as a business combination. The Pro Forma Statements are prepared on that basis and are presented to give effect to the acquisition of all of the outstanding common shares of Klondex by Hecla. The Pro Forma Statements represent the Combined Company’s unaudited pro forma condensed combined balance sheet as of March 31, 2018, and unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2018 and the year ended December 31, 2017. The unaudited pro forma condensed combined balance sheet gives effect to the Arrangement as if it occurred on the date of such balance sheet. The unaudited pro forma condensed combined statements of operations give effect to the Arrangement as if it occurred on January 1, 2017. The Pro Forma Statements reflect the acquisition of assets, assumptions of liabilities, and operating activities relating to Klondex’s Nevada properties, and not Klondex’s Canadian properties, as Klondex’s Canadian assets are held by a newly formed entity and not retained by the Combined Company as a result of the Arrangement. Historical information for Hecla and Klondex has been derived from historical consolidated financial statements, which were prepared and presented in accordance with United States Generally Accepted Accounting Principles (“GAAP”). The pro forma adjustments and allocations of the consideration transferred are based on preliminary estimates of the fair value of assets to be acquired and liabilities to be assumed. The Arrangement was completed on July 20, 2018, and the final determination of the allocation of consideration transferred will be completed after asset and liability valuations are finalized. Changes to these adjustments may materially affect both the estimated fair value of the assets and liabilities as presented in the Pro Forma Statements.

 

In preparing the unaudited pro forma condensed combined balance sheet and statements of operations in accordance with GAAP, the following historical information was used:

 

 

Klondex’s Quarterly Report filed on Form 10-Q for the three months ended March 31, 2018;

 

 

Hecla’s Quarterly Report filed on Form 10-Q for the three months ended March 31, 2018;

 

 

Klondex’s Annual Report filed on Form 10-K for the year ended December 31, 2017; and

 

 

Hecla’s Annual Report filed on Form 10-K for the year ended December 31, 2017.

 

The unaudited pro forma condensed combined balance sheet and statements of operations should be read in conjunction with the historical financial statements, including the notes thereto, as listed above. All amounts are stated in U.S. dollars unless otherwise noted.

 

Note 2. Description of the Arrangement

 

On July 20, 2018, Hecla and Klondex completed an Arrangement Agreement pursuant to which Hecla acquired all of the issued and outstanding common shares of Klondex for consideration valued at $2.17 per share. Under the terms of the Arrangement, each holder of Klondex common shares had the election to receive either (i) US$2.47 in cash (the “Cash Alternative”), (ii) 0.6272 of a Hecla share per Klondex share (the “Share Alternative”), or (iii) US$0.8411 in cash and 0.4136 of a Hecla share per Klondex share (the “Combined Alternative”), subject in the case of the Cash Alternative and the Share Alternative to pro-ration based on a maximum total cash consideration of approximately $153.2 million and a maximum total number of Hecla shares issued of  75,276,176. Klondex shareholders also received shares of a newly formed company which holds the Canadian assets of Klondex. Klondex had 180,499,319 issued and outstanding common shares prior to consummation of the arrangement. An additional 1,549,626 Klondex common shares were issued immediately prior to consummation of the Arrangement related to conversion of in-the-money Klondex share options and certain outstanding restricted share units, resulting in a total of 182,048,945 issued and outstanding Klondex common shares at the time of consummation of the Arrangement. For financial accounting purposes, the purchase price allocation is based upon the Hecla paying $153.2 million in cash and issuing 75,276,176 shares of Hecla common stock having a total value of $242.4 million, for total consideration of $395.6 million. The pro forma value of Hecla stock issued as consideration was based upon the closing share price on July 20, 2018 of $3.22 per share.

 

5

 

 

The following represents the preliminary estimated allocation of the consideration to be transferred as if the Arrangement had occurred on March 31, 2018:

 

   

(in thousands)

 

Consideration:

       

Hecla stock issued (75.3M shares @ $3.22 per share)

  $ 242,389  

Cash

    153,206  

Total consideration

  $ 395,595  

Fair value of net assets acquired:

       

Assets:

       

Cash

  $ 26,597  

Inventories

    42,781  

Properties, plants, and equipment and mineral interests

    455,324  

Non-current restricted cash and investments

    9,504  

Deferred tax assets

    18,696  

Other assets

    3,963  

Total assets

    556,865  

Liabilities:

       

Accounts payable

    20,784  

Payroll liabilities

    3,008  

Income taxes payable

    3,203  

Debt and capital leases

    36,590  

Deferred tax liabilities

    76,532  

Accrued reclamation and closure costs

    19,571  

Other liabilities

    1,582  

Total liabilities

    161,270  

Net assets

  $ 395,595  

 

Note 3. Effect of the Arrangement on the unaudited pro forma condensed combined balance sheet

 

The unaudited pro forma condensed combined balance sheet includes the following adjustments:

 

 

a)

To adjust amounts included in the consolidated balance sheet related to the Canadian assets of Klondex, which were transferred to a new entity and not retained by the Combined Company as a result of the Arrangement.

 

 

b)

To record the cash consideration of $153.2 million paid to Klondex shareholders, as discussed above.

 

 

c)

To record payment of estimated costs related to the Arrangement of $35.2 million. The costs include investment banking, legal, advisory, valuation, financial and other professional fees, change-in-control payments under Klondex’s compensation agreements, and settlement of restricted share units, performance share units and deferred share units. This adjustment is not reflected in the pro forma statements of operations, as it is non-recurring.

 

 

 

In connection with the Arrangement, Hecla also issued an aggregate of 4,136,000 warrants to purchase one share of Hecla’s common stock (“Hecla Warrants”) to holders of warrants to purchase Klondex’s common stock. An aggregate of 2,068,000 Hecla Warrants have an exercise price of US$8.02 and expire in April 2032. An aggregate of 2,068,000 Hecla Warrants have an exercise price of $US1.57 and expire in February 2029. The accounting treatment of the Hecla Warrants is being evaluated, and no adjustment has been made to unaudited pro forma condensed combined balance sheet for the Hecla Warrants. However, it is expected that such adjustment will not have a material effect on the Pro Forma Statements.

 

 

d)

To record Hecla’s subscription for $7.0 million in common shares in a new company which holds the Canadian assets of Klondex.

 

6

 

 

 

e)

To recognize the preliminary estimated fair value of Klondex’s assets acquired and liabilities assumed in the Arrangement. The adjustment includes the assumption that the allocation of the estimated difference between consideration and the net fair value of assets acquired and liabilities assumed will be recorded to value beyond proven and probable reserves, with no amount allocated to goodwill. This allocation is preliminary and is subject to change due to several factors, including: (1) detailed valuations of assets and liabilities which have not been completed as of the date of this current report; (2) subsequent changes in the fair values of the assets and liabilities of Klondex up to the closing date of the Arrangement; and 3) an assessment of the extent to which the Combined Company may realize its deferred tax assets.

 

 

 

No adjustment has been made to the unaudited pro forma condensed combined statements of operations for the preliminary estimated fair value adjustment for product inventory. This adjustment, which would decrease the pro forma net income for the three months ended March 31, 2018 by $9.6 million and increase the pro forma net loss for the year ended December 31, 2017 by approximately $3.5 million, is non-recurring.

 

 

f)

To record an increase in non-current deferred tax liabilities and a corresponding increase in mineral interests resulting from the excess of the asset bases for financial reporting over the asset bases for tax reporting. The increased asset bases for financial reporting is the result of an increase in the value of the assets of Klondex to reflect their estimated fair value at the time of the Arrangement, as described in (e) above. See Note 4(m) below for information on tax rate assumptions used.

 

 

g)

To record a decrease to deferred tax liabilities related to the tax benefit of the deductible portion of the costs related to the Arrangement described in Note (c) above. See Note 4(m) below for information on tax rate assumptions used.

 

 

h)

To record the issuance of 75,276,176 shares of Hecla common stock to Klondex shareholders, valued at $3.22 per share, or $242.4 million, as discussed in Note 2 above.

 

 

i)

To eliminate the equity accounts of Klondex.

 

Note 4. The effect of the Arrangement on the unaudited pro forma condensed combined statements of operations

 

The following is information on the unaudited pro forma condensed combined statements of operations:

 

 

j)

To adjust amounts included in the consolidated statements of operations related to the Canadian assets of Klondex, which were transferred to a new entity and not retained by the Combined Company as a result of the Arrangement.

 

 

k)

To adjust for costs related to the Arrangement incurred by Hecla and Klondex in the three months ended March 31, 2018, as they are non-recurring.

 

 

l)

To record an adjustment for the decrease in estimated interest income related to cash used in the Arrangement.

 

 

m)

To record the estimated income tax effect of the pro forma adjustments. Hecla is a taxable entity; therefore, an adjustment is necessary to reflect an income tax provision as if Hecla had acquired Klondex as of January 1, 2017. A combined U.S. federal and state statutory tax rate of 24.95% is applied to the adjustments.

 

 

n)

To adjust depreciation and depletion expense for the year ended December 31, 2017 to reflect the total related to the preliminary fair value of approximately $455.3 million allocated to properties, plants, equipment and mineral interests. For the three months ended March 31, 2018, depreciation and depletion expense recognized by Klondex, adjusted to exclude amounts related to its Canadian assets, is assumed to approximate pro forma depreciation and depletion expense for the Nevada assets under the Combined Company. Depreciation and depletion expense considers the estimated mine lives and related production for the Fire Creek, Midas and Hollister mines. A significant amount of the preliminary estimated consideration is allocated to value beyond proven and probable reserves, which is not immediately depreciable. As the allocation of estimated consideration is preliminary, the estimate of depreciation and depletion expense is subject to change upon completion of the valuation of the properties, plants, equipment and mineral interests of Klondex.

 

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Note 5. Share capital

 

The following is information on the pro forma share capital of the Combined Company which gives effect to common shares of Hecla issued under the Arrangement:

 

 

(in thousands)

 

Common shares outstanding

   

 

Amount

 

Balance at March 31, 2018

    400,301     $ 1,727,588  

Hecla shares to be issued under the Agreement - see Note 3 h)

    75,276       242,389  

Pro forma share capital

    475,577     $ 1,969,977  

 

Note 6. Earnings per share

 

For purposes of the Pro Forma Statements, earnings per share has been calculated using the weighted average number of common shares which would have been outstanding for the three months ended March 31, 2018 and the year ended December 31, 2017 after giving effect to the Arrangement as if it had occurred on January 1, 2017. The following is information on pro forma basic and diluted weighted average common shares outstanding:

 

 

(in thousands)

 

Three months

ended March 31,

2018

   

Year ended

December 31,

2017

 

Hecla actual weighted average common shares outstanding - basic

    399,322       397,394  

Hecla shares to be issued under the Agreement - See Note 3 h)

    75,276       75,276  

Pro forma weighted average common shares outstanding - basic

    474,598       472,670  

Hecla actual weighted average common shares outstanding - diluted

    401,923       397,394  

Hecla shares to be issued under the Agreement - see Note 3 h)

    75,276       75,276  

Pro forma weighted average common shares outstanding - diluted

    477,199       472,670  

 

 

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