Note 11 - Business Segments, Sales of Products and Significant Customers

12 Months Ended

Dec. 31, 2019

Notes to Financial Statements

Segment Reporting Disclosure [Text Block]

Note 11: Business Segments, Sales of Products and Significant Customers

We discover, acquire and develop mines and other mineral interests and produce and market concentrates, carbon material and doré containing silver, gold, lead and zinc.  We are currently organized and managed in five segments, which represent our operating units: the Greens Creek unit, the Lucky Friday unit, the Casa Berardi unit, the San Sebastian unit, and the Nevada Operations unit. The Nevada Operations unit was added as a result of our acquisition of Klondex in July 2018 (see Note 15 for more information).

General corporate activities not associated with operating units and their various exploration activities, as well as 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 tables below present information about our reportable segments as of and for the years ended December 31, 2019, 2018 and 2017 (in thousands).

	2019			2018			2017
Net sales to unaffiliated customers:
Greens Creek	$	299,722		$	265,650		$	278,297
Lucky Friday		16,621			9,750			21,555
Casa Berardi		192,944			210,339			192,165
San Sebastian		56,210			50,224			85,758
Nevada Operations		107,769			31,174			—
Total sales to unaffiliated customers	$	673,266		$	567,137		$	577,775
Income (loss) from operations:
Greens Creek	$	84,868		$	70,293		$	70,132
Lucky Friday		(12,520	)		(20,199	)		(16,037	)
Casa Berardi		(33,499	)		881			(534	)
San Sebastian		569			(14	)		53,591
Nevada Operations		(49,224	)		(26,715	)		—
Other		(47,303	)		(63,372	)		(47,046	)
Total (loss) income from operations	$	(57,109	)	$	(39,126	)	$	60,106
Capital additions (including non-cash additions):
Greens Creek	$	35,829		$	43,631		$	35,255
Lucky Friday		7,861			14,236			6,268
Casa Berardi		33,906			39,816			51,327
San Sebastian		3,906			8,492			9,994
Nevada Operations		42,154			35,721			—
Other		73			4,555			2,908
Total capital additions	$	123,729		$	146,451		$	105,752

Depreciation, depletion and amortization:
Greens Creek	$	47,587		$	46,511		$	56,328
Lucky Friday		1,175			1,012			2,447
Casa Berardi		73,960			71,302			59,131
San Sebastian		9,772			4,602			2,693
Nevada Operations		67,024			10,617			—
Total depreciation, depletion and amortization	$	199,518		$	134,044		$	120,599
Other significant non-cash items:
Greens Creek	$	2,868		$	3,325		$	2,685
Lucky Friday		996			618			2,011
Casa Berardi		5,203			696			33
San Sebastian		492			419			468
Nevada Operations		2,911			8,758			—
Other		(6,595	)		(23,358	)		52,266
Total other significant non-cash items	$	5,875		$	(9,542	)	$	57,463
Identifiable assets:
Greens Creek	$	639,047		$	637,386		$	671,960
Lucky Friday		440,615			437,499			432,400
Casa Berardi		703,511			754,248			784,706
San Sebastian		48,294			44,152			62,198
Nevada Operations		528,466			581,194			—
Other		277,375			249,465			393,894
Total identifiable assets	$	2,637,308		$	2,703,944		$	2,345,158

The following are our long-lived assets by geographic area as of December 31, 2019 and 2018 (in thousands):

	2019		2018
United States	$	1,748,406	$	1,797,441
Canada		660,859		707,473
Mexico		14,433		15,090
Total long-lived assets	$	2,423,698	$	2,520,004

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

For sales of metals from refined doré, which we currently have at our Casa Berardi, San Sebastian and Nevada Operations units, the performance obligation is met, the transaction price is known, and revenue is recognized at the time of transfer of control of the agreed-upon metal quantities to the customer by the refiner. For sales of unrefined doré, the performance obligation is met, the transaction price is known, and revenue is recognized at the time of transfer of title and control of the doré containing the agreed-upon metal quantities to the customer. Refining, selling and shipping costs related to sales of doré and metals from doré are recorded to cost of sales as incurred.

For carbon sales, the performance obligation is met, the transaction price is known, and revenue is recognized generally at the time of transfer of title and control of the carbon containing the agreed-upon metal quantities to the customer.

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

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

The consideration we receive for our concentrate sales fluctuates due to changes in metals prices between the time of shipment and final settlement with the customer. However, we are able to reasonably estimate the transaction price for the concentrate sales at the time of shipment using forward prices for the month of settlement, and previously recorded sales and accounts receivable are adjusted to estimated settlement metals prices until final settlement with the customer. Also, it is unlikely a significant reversal of revenue for any one concentrate parcel will occur. As such, we use the expected value method to price the parcels until the final settlement date occurs, at which time the final transaction price is known. At December 31, 2019, metals contained in concentrates and exposed to future price changes totaled 2.5 million ounces of silver, 10,020 ounces of gold, 11,627 tons of zinc, and 4,939 tons of lead.  However, as discussed in Note 10, we seek to mitigate the risk of negative price adjustments by using financially-settled forward and put option contracts for some of our sales.

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

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

	Year Ended December 31,
	2019			2018			2017
Greens Creek		44.5	%		46.7	%		48.1	%
Lucky Friday		2.5	%		1.8	%		3.8	%
Casa Berardi		28.7	%		37.1	%		33.3	%
San Sebastian		8.3	%		8.9	%		14.8	%
Nevada Operations		16.0	%		5.5	%		—	%
		100	%		100	%		100	%

Sales of products by metal for the years ended December 31, 2019, 2018 and 2017 were as follows (in thousands):

	Year Ended December 31,
	2019			2018			2017
Silver	$	192,235		$	144,609		$	194,813
Gold		388,602			313,076			277,421
Lead		35,777			33,829			37,995
Zinc		89,656			99,800			104,023
Less: Smelter and refining charges		(33,004	)		(24,177	)		(36,477	)
Sales of products	$	673,266		$	567,137		$	577,775

The following is sales information by geographic area based on the location of smelters and metal traders (for concentrate shipments) and the location of parent companies (for doré sales to metal traders) for the years ended December 31, 2019, 2018 and 2017 (in thousands):

	2019		2018		2017
United States	$	53,612	$	48,437	$	16,806
Canada		379,095		322,402		358,663
Japan		48,841		42,885		58,475
Netherlands		38,420		—		—
Korea		154,581		145,263		80,183
China		—		66		69,631
Total, excluding gains/losses on forward contracts	$	674,549	$	559,053	$	583,758

Sales by significant product type for the years ended December 31, 2019, 2018 and 2017 were as follows (in thousands):

	Year Ended December 31,
	2019		2018		2017
Doré and metals from doré	$	340,912	$	306,328	$	292,930
Carbon		37,645		5,239		2,246
Lead concentrate		200,456		148,880		179,143
Zinc concentrate		74,160		80,938		88,688
Bulk concentrate		21,376		17,668		20,751
Total, excluding gains/losses on forward contracts	$	674,549	$	559,053	$	583,758

Sales of products for 2019, 2018 and 2017, included a net loss of $1.3 million, a net gain of $8.1 million, and a net loss of $6.0 million, respectively, on derivative contracts for silver, gold, lead and zinc contained in our sales.  See Note 10 for more information.

Sales from continuing operations to significant metals customers as a percentage of total sales were as follows for the years ended December 31, 2019, 2018 and 2017:

	Year Ended December 31,
	2019			2018			2017
Teck Metals Ltd.		8.2	%		8.4	%		11.3	%
Korea Zinc		17.4	%		17.8	%		16.4	%
Scotia		24.0	%		15.3	%		24.9	%
CIBC		23.1	%		29.7	%		22.8	%

Our trade accounts receivable balance related to contracts with customers was $12.0 million at December 31, 2019 and $4.2 million at December 31, 2018, and included no allowance for doubtful accounts.

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

We do not incur significant costs to obtain contracts or fulfill contracts which are not addressed by other accounting standards. Therefore, we have not recognized an asset for such costs as of December 31, 2019 or December 31, 2018.

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 previous agreement expired on April 30, 2016. After voting against our new contract offer at the time, the unionized employees went on strike on March 13, 2017. They remained on strike until January 7, 2020, when the union ratified a new collective bargaining agreement. Production at Lucky Friday was suspended from the start of the strike until July 2017, when limited production resumed. In 2019, 2018 and 2017, cash suspension costs not related to production of $7.8 million, $14.6 million and $17.1 million, respectively, along with $4.3 million, $5.0 million and $4.2 million, respectively, in non-cash depreciation expense, are reported in a separate line item on our consolidated statements of operations. We expect re-staffing of the mine, which has commenced, to be completed in stages, with a return to full production by the end of 2020. However, the re-staffing process and ramp-up to full production could take longer or be more costly than anticipated.