UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
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HECLA MINING COMPANY
(Exact name of registrant as specified in its Charter)
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Securities registered pursuant to Section 12(b) of the Act:
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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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Accelerated filer ☐. | ||
| Non-accelerated filer ☐. | 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
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 4, 2020 | |
| Common stock, par value | |
Hecla Mining Company and Subsidiaries
Form 10-Q
For the Quarter Ended June 30, 2020
INDEX*
Part I - Financial Information
Item 1. Financial Statements
Hecla Mining Company and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except shares)
| June 30, 2020 | December 31, 2019 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable: | ||||||||
| Trade | ||||||||
| Taxes | ||||||||
| Other, net | ||||||||
| Inventories: | ||||||||
| Concentrates, doré, and stockpiled ore | ||||||||
| Materials and supplies | ||||||||
| Prepaid taxes | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Non-current investments | ||||||||
| Non-current restricted cash and investments | ||||||||
| Properties, plants, equipment and mineral interests, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Non-current deferred income taxes | ||||||||
| Other non-current assets and deferred charges | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Accrued payroll and related benefits | ||||||||
| Accrued taxes | ||||||||
| Current portion of finance leases | ||||||||
| Current portion of operating leases | ||||||||
| Accrued interest | ||||||||
| Current derivatives liabilities | ||||||||
| Other current liabilities | ||||||||
| Current portion of accrued reclamation and closure costs | ||||||||
| Total current liabilities | ||||||||
| Non-current finance leases | ||||||||
| Non-current operating leases | ||||||||
| Accrued reclamation and closure costs | ||||||||
| Long-term debt - Senior Notes | ||||||||
| Long-term debt - revolving credit facility | ||||||||
| Non-current deferred tax liability | ||||||||
| Non-current pension liability | ||||||||
| Non-current derivatives liabilities | ||||||||
| Other non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Notes 2, 4, 7, 9, and 11) | ||||||||
| STOCKHOLDERS' EQUITY | ||||||||
| Preferred stock, shares authorized: | ||||||||
| Series B preferred stock, $ par value, shares issued and outstanding, liquidation preference — $ | ||||||||
| Common stock, $ par value, authorized shares; issued June 30, 2020 — shares and December 31, 2019 — shares | ||||||||
| Capital surplus | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Less treasury stock, at cost; June 30, 2020 — shares and December 31, 2019 — shares issued and held in treasury | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
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 |
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| June 30, 2020 |
June 30, 2019 |
June 30, 2020 |
June 30, 2019 |
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| Sales of products |
$ | $ | $ | $ | ||||||||||||
| Cost of sales and other direct production costs |
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| Depreciation, depletion and amortization |
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| Total cost of sales |
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| Gross profit (loss) |
( |
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| Other operating expenses: |
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| General and administrative |
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| Exploration |
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| Pre-development |
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| Research and development |
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| Other operating expense |
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| Loss on disposition or impairment of properties, plants, equipment and mineral interests |
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| Provision for closed operations and environmental matters |
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| Ramp-up and suspension costs |
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| Foundation grant |
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| Acquisition costs |
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| Total other operating expenses |
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| Income (loss) from operations |
( |
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| Other income (expense): |
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| Unrealized gain (loss) on investments |
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| (Loss) gain on derivative contracts |
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| Net foreign exchange (loss) gain |
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| Other expense |
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| Interest expense |
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| Total other expense |
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| Loss before income taxes |
( |
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| Income tax (provision) benefit |
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| Net loss |
( |
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| Preferred stock dividends |
( |
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| Loss applicable to common shareholders |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
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| Comprehensive loss: |
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| Net loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
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| Change in fair value of derivative contracts designated as hedge transactions |
( |
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| Comprehensive loss |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
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| Basic loss per common share after preferred dividends |
$ | ( |
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) | $ | ( |
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| Diluted loss per common share after preferred dividends |
$ | ( |
) | $ | ( |
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| Weighted average number of common shares outstanding - basic |
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| Weighted average number of common shares outstanding - diluted |
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| Cash dividends declared per common share |
$ | $ | $ | $ | ||||||||||||
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 |
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| June 30, 2020 |
June 30, 2019 |
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| Operating activities: |
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| Net loss |
$ | ( |
) | $ | ( |
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| Non-cash elements included in net loss: |
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| Depreciation, depletion and amortization |
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| Adjustment of inventory to market value |
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| Unrealized (gain) loss on investments |
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| Loss on disposition of properties, plants, equipment, and mineral interests |
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| Provision for reclamation and closure costs |
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| Stock compensation |
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| Deferred income taxes |
( |
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| Amortization of loan origination fees and loss on extinguishment of debt |
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| Loss (gain) on derivative contracts |
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| Foreign exchange (gain) loss |
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| Foundation grant |
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| Change in assets and liabilities: |
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| Accounts receivable |
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| Inventories |
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| Other current and non-current assets |
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| Accounts payable and accrued liabilities |
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| Accrued payroll and related benefits |
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| Accrued taxes |
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| Accrued reclamation and closure costs and other non-current liabilities |
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| Cash provided by operating activities |
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| Investing activities: |
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| Additions to properties, plants, equipment and mineral interests |
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| Proceeds from disposition of properties, plants and equipment |
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| Purchases of investments |
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| Net cash used in investing activities |
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| Financing activities: |
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| Acquisition of treasury shares |
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| Dividends paid to common stockholders |
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| Dividends paid to preferred stockholders |
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| Credit facility fees paid |
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| Borrowings on debt |
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| Repayments of debt |
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| Repayments of finance leases |
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| Net cash provided by financing activities |
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| Effect of exchange rates on cash |
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| Net increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents |
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| Cash, cash equivalents and restricted cash and cash equivalents at beginning of period |
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| Cash, cash equivalents and restricted cash and cash equivalents at end of period |
$ | $ | ||||||
| Supplemental disclosure of cash flow information: |
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| Cash paid for interest |
$ | $ | ||||||
| Significant non-cash investing and financing activities: |
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| Addition of finance lease obligations and right-of-use assets |
$ | $ | ||||||
| Recognition of operating lease liabilities and right-of-use assets |
$ | $ | ||||||
| Payment of accrued compensation in stock |
$ | $ | ||||||
The accompanying notes are an integral part of the interim condensed consolidated financial statements.
Hecla Mining Company and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(Dollars are in thousands, except for share and per share amounts)
| Three Months Ended June 30, 2020 | ||||||||||||||||||||||||||||
| Series B | Common | Additional | Accumulated | Accumulated | Treasury | Total | ||||||||||||||||||||||
| Balances, April 1, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net loss | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||
| Restricted stock units granted | — | — | — | — | — | |||||||||||||||||||||||
| Restricted stock units distributed ( shares) | — | ( | ) | — | — | ( | ) | ( | ) | |||||||||||||||||||
| Common stock dividends declared ($ per common share) | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||
| Series B Preferred Stock dividends declared ($ per share) | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||
| Common stock issued for 401(k) match ( shares) | — | — | — | — | ||||||||||||||||||||||||
| Common stock issued for employee incentive compensation ( shares) | — | — | — | ( | ) | |||||||||||||||||||||||
| Common stock issued to pension plans ( shares) | — | — | — | — | ||||||||||||||||||||||||
| Treasury shares issued to charitable foundation ( shares) | — | — | — | ( | ) | — | ||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | |||||||||||||||||||||||
| Balances, June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Three Months Ended June 30, 2019 | ||||||||||||||||||||||||||||
| Series B | Common | Additional | Accumulated | Accumulated | Treasury | Total | ||||||||||||||||||||||
| Balances, April 1, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net loss | — | — | 0 | ( | ) | — | — | ( | ) | |||||||||||||||||||
| Restricted stock units granted | — | — | — | — | — | |||||||||||||||||||||||
| Common stock dividends declared ($ per common share) | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||
| Series B Preferred Stock dividends declared ($ per share) | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||
| Common stock issued for 401(k) match ( shares) | — | — | — | — | ||||||||||||||||||||||||
| Common stock issued for employee incentive compensation ( shares) | — | — | — | ( | ) | |||||||||||||||||||||||
| Common stock issued to pension plans ( shares) | — | — | — | — | ||||||||||||||||||||||||
| Common stock issued to directors ( shares) | — | — | — | — | ||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | |||||||||||||||||||||||
| Balances, June 30, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Six Months Ended June 30, 2020 | ||||||||||||||||||||||||||||
| Series B | Common | Additional | Accumulated | Accumulated | Treasury | Total | ||||||||||||||||||||||
| Balances, January 1, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net loss | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||
| Restricted stock units granted | — | — | — | — | — | |||||||||||||||||||||||
| Restricted stock units distributed ( shares) | — | ( | ) | — | — | ( | ) | ( | ) | |||||||||||||||||||
| Common stock dividends declared ($ per common share) | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||
| Series B Preferred Stock dividends declared ($ per share) | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||
| Common stock issued for 401(k) match ( shares) | — | — | — | — | ||||||||||||||||||||||||
| Common stock issued for employee incentive compensation ( shares) | — | — | — | ( | ) | |||||||||||||||||||||||
| Common stock issued to pension plans (shares) | — | — | — | — | ||||||||||||||||||||||||
| Treasury shares issued to charitable foundation ( shares) | — | — | — | ( | ) | — | ||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balances, June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Six Months Ended June 30, 2019 | ||||||||||||||||||||||||||||
| Series B | Common | Additional | Accumulated | Accumulated | Treasury | Total | ||||||||||||||||||||||
| Balances, January 1, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Net loss | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||
| Restricted stock units granted | — | — | — | — | — | |||||||||||||||||||||||
| Common stock dividends declared ($ per common share) | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||
| Series B Preferred Stock dividends declared ($ per share) | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||
| Common stock issued for 401(k) match ( shares) | — | — | — | — | ||||||||||||||||||||||||
| Adjustment to fair value of warrants issued for purchase of another company | — | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||||
| Common stock issued for employee incentive compensation ( shares) | — | — | — | ( | ) | |||||||||||||||||||||||
| Common stock issued to pension plans ( shares) | — | — | — | — | ||||||||||||||||||||||||
| Common stock issued to directors ( shares) | — | — | — | — | ||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | |||||||||||||||||||||||
| Balances, June 30, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
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 (in this report, "Hecla" or "the Company" or “we” or “our” or “us” refers to Hecla Mining Company and our subsidiaries, unless the context requires otherwise). 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, 2019, as it may be amended from time to time.
The results of operations for the periods presented may not be indicative of those which may be expected for a full year. The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in audited financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures are adequate for the information not to be misleading.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting period and the disclosures of contingent liabilities. Accordingly, ultimate results could differ materially from those estimates.
The 2019 novel strain of coronavirus ("COVID-19") was characterized as a global pandemic by the World Health Organization on March 11, 2020, and COVID-19 has resulted in travel restrictions and business slowdowns or shutdowns in affected areas. In late March 2020, the Government of Quebec ordered the mining industry to reduce to minimum operations as part of the fight against COVID-19, causing us to suspend our Casa Berardi operations from approximately March 24 until April 15, when mining operations resumed. In early April, the Government of Mexico issued a similar order causing us to suspend our San Sebastian operations to May 30. In addition, restrictions imposed by the State of Alaska in late March have caused us to revise the normal operating procedures for staffing operations at Greens Creek. These suspension orders impacted us in the first half of 2020 by curtailing our expected production of gold at Casa Berardi by approximately 5,200 ounces in March 2020 and approximately 6,500 ounces in April 2020, which resulted in a reduction in related revenue. We continued to incur costs at Casa Berardi and San Sebastian while operations were suspended. At Casa Berardi and San Sebastian, suspension costs in the first half of 2020 totaled $
We have taken precautionary measures to mitigate the impacts of COVID-19, including implementing operational plans and practices and increasing our cash reserves through a draw-down of our revolving credit facility (see Note 9 for more information). As long as they are required, the operational practices implemented could have an adverse impact on our operating results due to deferred production and revenues or additional costs. We continue to monitor the rapidly evolving situation and guidance from federal, state, local and foreign governments and public health authorities and may take additional actions based on their recommendations. The extent of the impact of COVID-19 on our business and financial results will also depend on future developments, including the duration and spread of the outbreak within the markets in which we operate and the related impact on prices, demand, creditworthiness and other market conditions and governmental reactions, all of which are highly uncertain.
Note 2. Investments
At June 30, 2020 and December 31, 2019, the fair value of our non-current investments was $
Note 3. Income Taxes
Major components of our income tax benefit (provision) for the three and six months ended June 30, 2020 and 2019 are as follows (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Current: | ||||||||||||||||
| Domestic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Foreign | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total current income tax benefit (provision) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Deferred: | ||||||||||||||||
| Domestic | ||||||||||||||||
| Foreign | ( | ) | ||||||||||||||
| Total deferred income tax benefit (provision) | ||||||||||||||||
| Total income tax benefit (provision) | $ | ( | ) | $ | $ | $ | ||||||||||
The current income tax benefits (provisions) for the three and six months ended June 30, 2020 and 2019 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 taxation in foreign jurisdictions and a valuation allowance on the majority of U.S. deferred tax assets.
In 2018, we acquired through the acquisition of Klondex Mines Ltd. a U.S. consolidated tax group ("Nevada U.S. Group") that did not join the existing consolidated U.S. tax group of Hecla Mining Company and subsidiaries (“Hecla U.S.”). For Hecla U.S., we recorded a full valuation allowance in the U.S. in December 2017 as a result of U.S. tax reform. Our circumstances at June 30, 2020 continued to support a full valuation allowance in the U.S. for the Hecla U.S. group.
As of June 30, 2020, we had a net deferred tax liability in the U.S. of $
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act has not had a material impact on the Company as of June 30, 2020; however we will continue to examine the impacts the CARES Act may have on our business.
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.
Lucky Friday Water Permit Matters
In December 2013, the Environmental Protection Agency ("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 further action, if any, the agency may take.
Johnny M Mine Area near San Mateo, McKinley County and San Mateo Creek Basin, New Mexico
In May 2011, the EPA made a formal request to Hecla Mining Company for information regarding the Johnny M Mine Area near San Mateo, McKinley County, New Mexico, and asserted that Hecla Mining Company may be responsible under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") for environmental remediation and past costs the EPA has incurred at the site. Mining at the Johnny M Mine 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) $
The Johnny M Mine is in an area known as the San Mateo Creek Basin (“SMCB”), which is an approximately 321 square mile area in New Mexico that contains numerous legacy uranium mines and mills. In addition to Johnny M, Hecla Limited's predecessor was involved at other mining sites within the SMCB. The EPA appears to have deferred consideration of listing the SMCB site on CERCLA’s National Priorities List (Superfund) by removing the site from its emphasis list, and is working with various potentially responsible parties ("PRPs") at the site in order to study and potentially address perceived groundwater issues within the SMCB. The EE/CA discussed above relates primarily to contaminated rock and soil at the Johnny M site, not groundwater and not elsewhere within the SMCM site. It is possible that Hecla Limited’s liability at the Johnny M Site, and for any other mine site within the SMCB at which Hecla Limited's predecessor may have operated, will be greater than our current accrual of $6.1 million due to the increased scope of required remediation.
In July 2018, the EPA informed Hecla Limited that it and several other PRPs may be liable for cleanup of the SMCB site or for costs incurred by the EPA in cleaning up the site. The EPA stated it has incurred approximately $
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, and several other PRPs, may be liable for cleanup of the site or for costs incurred by the EPA in cleaning up the site. The EPA stated in the letter that it has incurred approximately $
In February 2017, the EPA made a formal request to Hecla Mining Company for information regarding the Barker-Hughesville Mining District Superfund site located in Judith Basin and Cascade Counties, Montana. Hecla Limited submitted a response in April 2017. The Barker-Hughesville site is located in a historic mining district, and between approximately June and December 1983, Hecla Limited was party to an agreement with another mining company under which limited exploration activities occurred at or near the site.
In August 2018, the EPA informed Hecla Limited that it and several other PRPs may be liable for cleanup of the site or for costs incurred by the EPA in cleaning up the site. The EPA did not include an amount of its alleged response costs to date. Hecla Limited cannot with reasonable certainty estimate the amount or range of liability, if any, relating to this matter because of, among other reasons, the lack of information concerning past or anticipated future costs at the site and the relative contributions of contamination by various other PRPs.
Claim for Indemnification Against CoCa Mines, Inc.
In 1991, Hecla Limited acquired CoCa Mines, Inc. (“CoCa”) and its subsidiary Creede Resources, Inc. (“CRI”). CoCa and CRI previously operated in the State of Colorado, but presently have limited assets and operations. Between 2014 and 2019, a PRP alleged that CoCa and CRI are required by a 1989 agreement to indemnify it for certain environmental costs and liabilities it may incur with respect to the Nelson Tunnel/Commodore Waste Rock Pile Superfund site in Creede, Colorado. In 2016, without admitting any liability, Hecla Limited, CoCa and CRI entered into a Consent Decree with the United States and the State of Colorado settling any regulatory liability they may have had at the site. On October 30, 2019, the PRP filed a lawsuit in Mineral County, Colorado alleging, among other things, that CoCa and CRI are in breach of contract for failure to indemnify the PRP for its liability to the U.S. under CERCLA with respect to the site. In addition, the lawsuit names Hecla Limited as a defendant in its role as the shareholder of CoCa. The PRP seeks in excess of $
Litigation Related to Klondex Acquisition
On September 11, 2018, a lawsuit was filed in the Ontario (Canada) Superior Court of Justice by Waterton Nevada Splitter LLC against Hecla Mining Company, our subsidiary Klondex Mines Unlimited Liability Company and Havilah Mining Corporation, an entity that was formed to own the Canadian assets of Klondex that we did not acquire as part of the Klondex acquisition, and of which we own approximately
On May 24, 2019, a purported Hecla stockholder filed a putative class action lawsuit in U.S. District Court for the Southern District of New York against Hecla and certain of our executive officers, one of whom is also a director. The complaint, purportedly brought on behalf of all purchasers of Hecla common stock from March 19, 2018 through and including May 8, 2019, asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and seeks, among other things, damages and costs and expenses. Specifically, the complaint alleges that Hecla, under the authority and control of the individual defendants, made certain material false and misleading statements and omitted certain material information regarding Hecla’s Nevada Operations unit. The complaint alleges that these misstatements and omissions artificially inflated the market price of Hecla common stock during the class period, thus purportedly harming investors. A second suit was filed on June 19, 2019, alleging virtually identical claims. We cannot predict the outcome of these lawsuits or estimate damages if plaintiffs were to prevail. We believe that these claims are without merit and intend to defend them vigorously.
Related to the above described class action lawsuits, Hecla has been named as a nominal defendant in a shareholder derivative lawsuit which names as defendants members of Hecla’s board of directors and certain officers. The case was filed on July 12, 2019 in the U.S. District Court for the District of Delaware. In general terms, the suit alleges (i) violations of Sections 10(b) and 14(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and (ii) breaches of fiduciary duties by the individual defendants and seeks damages, purportedly on behalf of Hecla.
Debt
As discussed in Note 9, on February 19, 2020, we completed an offering of $
As discussed in Note 9, on July 9, 2020, we entered into a note purchase agreement pursuant to which we will issue million (approximately million at the time of the transaction) in aggregate principal amount of our Series 2020-A Senior Notes due July 9, 2025 (the “IQ Notes”) to Investissment Québec, a financing arm of the Québec government. The net proceeds from the IQ Notes will be available for general corporate purposes, including open market purchases of a portion of the Senior Notes and to pay for capital expenditures at our Casa Berardi unit. The IQ Notes will be issued in
Other Commitments
Our contractual obligations as of June 30, 2020 included approximately $1.3 million for various costs. In addition, our open purchase orders at June 30, 2020 included approximately $2.1 million, $0.3 million, $5.6 million and $2.8 million for various capital and non-capital items at the Lucky Friday, Casa Berardi, Greens Creek and Nevada Operations units, respectively. We also have total commitments of approximately $13.7 million relating to scheduled payments on finance leases, including interest, primarily for equipment at our Greens Creek, Lucky Friday, Casa Berardi and Nevada Operations units and total commitments of approximately $
Other Contingencies
We also have certain other contingencies resulting from litigation, claims, EPA investigations, and other commitments and are subject to a variety of environmental and safety laws and regulations incident to the ordinary course of business. We currently have no basis to conclude that any or all of such contingencies will materially affect our financial position, results of operations or cash flows. However, in the future, there may be changes to these contingencies, or additional contingencies may occur, any of which might result in an accrual or a change in current accruals recorded by us, and there can be no assurance that their ultimate disposition will not have a material adverse effect on our financial position, results of operations or cash flows.
Note 5. Loss Per Common Share
We are authorized to issue
Diluted loss per share for the three and six months ended June 30, 2020 and 2019 excludes the potential effects of outstanding shares of our convertible preferred stock, as their conversion would have no effect on the calculation of dilutive shares.
For the three-month and six-month periods ended June 30, 2020 and 2019, all restricted share units, deferred shares and warrants were excluded from the computation of diluted loss per share, as our reported loss for those periods would cause their conversion and exercise to have no effect on the calculation of loss per share.
Note 6. Business Segments and Sales of Products
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 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.
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 our reportable segments for the three and six months ended June 30, 2020 and 2019 (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Net sales to unaffiliated customers: | ||||||||||||||||
| Greens Creek | $ | $ | $ | $ | ||||||||||||
| Lucky Friday | ||||||||||||||||
| Casa Berardi | ||||||||||||||||
| San Sebastian | ||||||||||||||||
| Nevada Operations | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| Income (loss) from operations: | ||||||||||||||||
| Greens Creek | $ | $ | $ | $ | ||||||||||||
| Lucky Friday | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Casa Berardi | ( | ) | ( | ) | ( | ) | ||||||||||
| San Sebastian | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Nevada Operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Other | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||
The following table presents identifiable assets by reportable segment as of June 30, 2020 and December 31, 2019 (in thousands):
| June 30, 2020 | December 31, 2019 | |||||||
| Identifiable assets: | ||||||||
| Greens Creek | $ | $ | ||||||
| Lucky Friday | ||||||||
| Casa Berardi | ||||||||
| San Sebastian | ||||||||
| Nevada Operations | ||||||||
| Other | ||||||||
| $ | $ | |||||||
Our products consist of metal concentrates and carbon material which we sell to custom smelters, brokers and third-party processors and unrefined bullion bars (doré), which may be sold as doré or further refined before sale to precious metals traders. Revenue is recognized upon the completion of the performance obligations and transfer of control of the product to the customer.
For sales of metals from refined doré, 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 sales of carbon material, the performance obligation is met, the transaction price is known, and revenue is recognized generally at the time of arrival at the customer's facility.
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 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 what the performance obligations for our concentrate sales are. 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 June 30, 2020, metals contained in concentrate sales and exposed to future price changes totaled
Sales and accounts receivable for concentrate shipments are recorded net of charges for treatment, refining, smelting losses, and other charges negotiated by us with the customers, which represent components of the transaction price. Charges are estimated by us upon shipment of concentrates based on contractual terms, and actual charges typically do not vary materially from our estimates. Costs charged by customers include fixed treatment and refining costs per ton of concentrate and may include price escalators which allow the customers to participate in the increase of lead and zinc prices above a negotiated baseline. Costs for shipping concentrates to customers are recorded to cost of sales as incurred.
Sales of metal concentrates and metal products are made principally to custom smelters, brokers, third-party processors and metals traders. The percentage of sales contributed by each segment is reflected in the following table:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Greens Creek | % | % | % | % | ||||||||||||
| Lucky Friday | % | % | % | % | ||||||||||||
| Casa Berardi | % | % | % | % | ||||||||||||
| San Sebastian | % | % | % | % | ||||||||||||
| Nevada Operations | % | % | % | % | ||||||||||||
| % | % | % | % | |||||||||||||
Sales of products by metal for the three- and six-month periods ended June 30, 2020 and 2019 were as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Silver | $ | $ | $ | $ | ||||||||||||
| Gold | ||||||||||||||||
| Lead | ||||||||||||||||
| Zinc | ||||||||||||||||
| Less: Smelter and refining charges | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| $ | $ | $ | $ | |||||||||||||
The following is sales information by geographic area based on the location of smelters and brokers (for concentrate shipments) and location of parent companies (for doré sales to metals traders) for the three- and six-month periods ended June 30, 2020 and 2019 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Canada | $ | $ | $ | $ | ||||||||||||
| Korea | ||||||||||||||||
| Japan | ||||||||||||||||
| Netherlands | ( | ) | ( | ) | ||||||||||||
| China | ||||||||||||||||
| United States | ||||||||||||||||
| Other | ||||||||||||||||
| Total, excluding gains/losses on forward contracts | $ | $ | $ | $ | ||||||||||||
Sales by significant product type for the three- and six-month periods ended June 30, 2020 and 2019 were as follows (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Doré and metals from doré | $ | $ | $ | $ | ||||||||||||
| Carbon | ||||||||||||||||
| Lead concentrate | ||||||||||||||||
| Zinc concentrate | ||||||||||||||||
| Bulk concentrate | ||||||||||||||||
| Total, excluding gains/losses on forward contracts | $ | $ | $ | $ | ||||||||||||
Sales of products included net losses of $
Sales of products to significant customers as a percentage of total sales were as follows for the three- and six-month periods ended June 30, 2020 and 2019:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| CIBC | % | % | % | % | ||||||||||||
| Teck Metals Ltd. | % | % | % | % | ||||||||||||
| Korea Zinc | % | % | % | % | ||||||||||||
| Ocean Partners | % | % | % | % | ||||||||||||
| SIPI | % | % | % | % | ||||||||||||
| Scotia | — | % | % | % | % | |||||||||||
Our trade accounts receivable balance related to contracts with customers was $
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, nor costs to fulfill contracts which are not addressed by other accounting standards. Therefore, we have not recognized an asset for such costs as of June 30, 2020 or December 31, 2019.
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, 2020 and 2019 (in thousands):
| Three Months Ended |
||||||||
| 2020 |
2019 |
|||||||
| Service cost |
$ | $ | ||||||
| Interest cost |
||||||||
| Expected return on plan assets |
( |
) | ( |
) | ||||
| Amortization of prior service cost |
||||||||
| Amortization of net loss |
||||||||
| Net periodic pension cost |
$ | $ | ||||||
| Six Months Ended |
||||||||
| 2020 |
2019 |
|||||||
| Service cost |
$ | $ | ||||||
| Interest cost |
||||||||
| Expected return on plan assets |
( |
) | ( |
) | ||||
| Amortization of prior service cost |
||||||||
| Amortization of net (gain) loss |
||||||||
| Net periodic pension cost |
$ | $ | ||||||
For the three- and six-month periods ended June 30, 2020 and 2019, the service cost component of net periodic pension cost is included in the same line items of our condensed consolidated financial statements as other employee compensation costs. The net expense related to all other components of net periodic pension cost of $
In April 2020, we contributed $
Note 8. Stockholders’ Equity
Stock-based Compensation Plans
We periodically grant restricted stock unit awards, performance-based shares and shares of common stock to our employees and directors. We measure compensation cost for restricted stock units and stock grants at the closing price of our stock at the time of grant. We measure compensation cost for performance-based share 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 2020, the board of directors granted
In June 2020, the board of directors granted the following restricted stock unit awards to employees, which will result in a total expense of $
| • | |
| • | |
| • | |
Expense of $
In June 2020, the board of directors granted performance-based share awards to certain executive employees. The value of the awards (if any) 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, 2022. 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 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 2020 totaled $
In connection with the vesting of restricted stock units and other stock grants, employees have in the past, at their election and when permitted by us, chosen to satisfy their minimum tax withholding obligations through net share settlement, pursuant to which the Company withholds the number of shares necessary to satisfy such withholding obligations and pays the obligations in cash. As a result, in the first six months of 2020 we withheld
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 $
| Quarterly average realized silver price per ounce | Quarterly dividend per share | Annualized dividend per share | ||
| $30 | $ | $ | ||
| $35 | $ | $ | ||
| $40 | $ | $ | ||
| $45 | $ | $ | ||
| $50 | $ | $ |
On May 6, 2020, our board of directors declared a common stock dividend, pursuant to the minimum annual dividend component of the policy described above, of $
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
Warrants
We issued
Common stock contributed to the Hecla Charitable Foundation
In June 2020, we gifted
Note 9. Debt, Credit Facility and Leases
Senior Notes
On February 19, 2020, we completed an offering of $
The Senior Notes are recorded net of a
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 will be redeemable in whole or in part, at any time and from time to time on or after February 15, 2023, 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. Prior to February 15, 2023, we may redeem some or all of the Senior Notes at a redemption price of
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
Investissment Québec Notes
On July 9, 2020, we entered into a note purchase agreement pursuant to which we will issue million (approximately million at the time of the transaction) in aggregate principal amount of our Series 2020-A Senior Notes due July 9, 2025 (the “IQ Notes”) to Investissment Québec, a financing arm of the Québec government. Because the IQ notes are denominated in CAD, the reported USD-equivalent principal balance will change with movements in the exchange rate. The IQ Notes will be issued at a premium of
Ressources Québec Notes
On March 5, 2018, we entered into a note purchase agreement pursuant to which we issued million (approximately million at the time of the transaction) in aggregate principal amount of our Series 2018-A Senior Notes due May 1, 2021 (the “RQ Notes”) to Ressources Québec, a subsidiary of Investissment Québec. Because the RQ notes were denominated in CAD, the reported USD-equivalent principal balance changed with movements in the exchange rate. The RQ Notes were issued at a discount of
Credit Facility
In July 2018, we entered into a $
| Interest rates: | ||||
| Spread over the London Interbank Offered Rate | - | |||
| Spread over alternative base rate | - | |||
| Standby fee per annum on undrawn amounts | - | |||
| Covenant financial ratios: | ||||
| Senior leverage ratio (debt secured by liens/EBITDA) |
| |||
| Leverage ratio (total debt less unencumbered cash/EBITDA) (1) |
| |||
| Interest coverage ratio (EBITDA/interest expense) |
| |||
(1) The leverage ratio changed to effective July 1, 2020.
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
We believe we were in compliance with all covenants under the credit agreement as of June 30, 2020. We drew $
Finance Leases
We have entered into various lease agreements, primarily for equipment at our Greens Creek, Lucky Friday, Casa Berardi and Nevada Operations units, which we have determined to be finance leases. At June 30, 2020, the total liability balance associated with finance leases, including certain purchase option amounts, was $
At June 30, 2020, the annual maturities of finance lease commitments, including interest, were (in thousands):
| Twelve-month period ending June 30, | ||||
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Total | ||||
| Less: imputed interest | ( | ) | ||
| Finance lease liability | $ |
Operating Leases
We have entered into various lease agreements, primarily for equipment, buildings and other facilities, and land at our operating units and corporate offices, which we have determined to be operating leases. Some of the operating leases allow for extension of the lease beyond the current term at our option. We have considered the likelihood and estimated duration of the extension options in determining the lease term for measurement of the liability and right-of-use asset. For our operating leases as of June 30, 2020, we have assumed discount rates of between
At June 30, 2020, the annual maturities of undiscounted operating lease payments, including assumed extensions beyond the current lease terms, were (in thousands):
| Twelve-month period ending June 30, | ||||
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| More than 5 years | ||||
| Total | ||||
| Effect of discounting | ( | ) | ||
| Operating lease liability | $ |
Note 10. Developments in Accounting Pronouncements
Accounting Standards Updates Adopted
In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The update changes how entities will record credit losses from an "incurred loss" approach to an "expected loss" approach. The update was adopted as of January 1, 2020, and its adoption did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The update removes, modifies and makes additions to certain disclosure requirements with respect to fair value measurements. The update was adopted as of January 1, 2020, and its adoption did not have a material impact on our consolidated financial statements.
Accounting Standards Updates to Become Effective in Future Periods
In August 2018, the FASB issued ASU No. 2018-14 Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. The update removes several disclosure requirements, adds two new disclosure requirements, and clarifies other disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The update is effective for fiscal years ending after December 15, 2020, with early adoption permitted. We are evaluating the impact of this update on our disclosures involving our defined benefit pension plans.
In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The update contains a number of provisions intended to simplify the accounting for income taxes. The update is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We are evaluating the impact of this update on our consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The update provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The update is effective as of March 12, 2020 through December 31, 2022. We are evaluating the impact of 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"), respectively, 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 similar program with respect to MXN, which was not in use as of June 30, 2020. When in use, the programs utilize forward contracts to buy CAD and MXN, and each contract is designated as a cash flow hedge. As of June 30, 2020, we had
As of June 30, 2020, we recorded the following balances for the fair value of the contracts:
| • | a current asset of $ |
| • | a non-current asset of $ |
| • | a current liability of $ |
| • | a non-current liability of $ |
Net unrealized losses of approximately $
Metals Prices
We may at times use commodity forward sales commitments, commodity swap contracts and commodity put and call option contracts to manage our exposure to fluctuation in the prices of certain metals we produce. Contract positions are designed to ensure that we will receive a defined minimum price for certain quantities of our production, thereby partially offsetting our exposure to fluctuations in market prices. Our risk management policy allows for up to
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 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. The following tables summarize the quantities of metals committed under forward sales contracts at June 30, 2020 and December 31, 2019:
| June 30, 2020 | 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 | ||||||||||||||||||||||||||||||||
| 2020 settlements | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Contracts on forecasted sales | ||||||||||||||||||||||||||||||||
| 2020 settlements | — | — | N/A | N/A | $ | $ | ||||||||||||||||||||||||||
| 2021 settlements | — | — | N/A | N/A | $ | $ | ||||||||||||||||||||||||||
| December 31, 2019 | 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 | ||||||||||||||||||||||||||||||||
| 2020 settlements | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Contracts on forecasted sales | ||||||||||||||||||||||||||||||||
| 2020 settlements | — | — | N/A | N/A | $ | $ | ||||||||||||||||||||||||||
In June 2019, we began using financially-settled put option contracts to manage the exposure of our forecasted future gold and silver sales to potential declines in market prices for those metals. These put contracts give us the option, but not the obligation, to realize established prices on quantities of silver and gold to be sold in the future. The following tables summarize the quantities of metals for which we have entered into put contracts and the average exercise prices as of June 30, 2020 and December 31, 2019:
| June 30, 2020 | Ounces under contract (in 000's) | Average price per ounce | ||||||||||||||
| Silver | Gold | Silver | Gold | |||||||||||||
| (ounces) | (ounces) | (ounces) | (ounces) | |||||||||||||
| Contracts on forecasted sales | ||||||||||||||||
| 2020 settlements | $ | $ | ||||||||||||||
| December 31, 2019 | Ounces under contract (in 000's) | Average price per ounce | ||||||||||||||
| Silver | Gold | Silver | Gold | |||||||||||||
| (ounces) | (ounces) | (ounces) | (ounces) | |||||||||||||
| Contracts on forecasted sales | ||||||||||||||||
| 2020 settlements | $ | $ | ||||||||||||||
These forward and put option contracts are designated as hedges and are marked-to-market through earnings each period.
As of June 30, 2020, we recorded the following balances for the fair value of the forward and put option contracts held at that time:
| • | a current asset of $ |
| • | a current liability of $ |
We recognized a $
We recognized a $
Credit-risk-related Contingent Features
Certain of our derivative contracts contain cross default provisions which provide that a default under our revolving credit agreement would cause a default under the derivative contract. As of June 30, 2020, we have not posted any collateral related to these contracts. The fair value of derivatives in a net liability position related to these agreements was $
Note 12. Fair Value Measurement
Accounting guidance has established a hierarchy for inputs used to measure assets and liabilities at fair value on a recurring basis. The three levels included in the hierarchy are:
Level 1: quoted prices in active markets for identical assets or liabilities;
Level 2: significant other observable inputs; and
Level 3: significant unobservable inputs.
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 | Balance at | Input | ||||||
| Assets: | |||||||||
| Cash and cash equivalents: | |||||||||
| Money market funds and other bank deposits | $ | $ | Level 1 | ||||||
| Available for sale securities: | |||||||||
| Equity securities – mining industry | Level 1 | ||||||||
| Trade accounts receivable: | |||||||||
| Receivables from provisional concentrate sales | Level 2 | ||||||||
| Restricted cash balances: | |||||||||
| Certificates of deposit and other deposits | Level 1 | ||||||||
| Derivative contracts: | |||||||||
| Foreign exchange contracts | Level 2 | ||||||||
| Metal forward and put option contracts | Level 2 | ||||||||
| Total assets | $ | $ | |||||||
| Liabilities: | |||||||||
| Derivative contracts: | |||||||||
| Foreign exchange contracts | $ | $ | Level 2 | ||||||
| Metal forward and put option contracts | Level 2 | ||||||||
| Total Liabilities | $ | $ | |||||||
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 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 metals sold from doré to customers. Revenues and the corresponding accounts receivable for sales of metals products are recorded when title and risk of loss transfer to the customer (generally at the time of ship loading, or at the time of arrival at the customer for trucked products). Sales of concentrates are recorded using estimated forward prices for the anticipated month of settlement applied to our estimate of payable metal quantities contained in each shipment. Sales are recorded net of estimated treatment and refining charges, which are also impacted by changes in metals prices and quantities of contained metals. We estimate the prices at which sales of our concentrates will be settled due to the time elapsed between shipment and final settlement with the customer. Receivables for previously recorded concentrate sales are adjusted to reflect estimated forward metals prices at the end of each period until final settlement by the customer. We obtain the forward metals prices used each period from a pricing service. Changes in metals 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 USD and CAD and MXN, and the impact on CAD- and MXN-denominated operating costs incurred at our Casa Berardi and San Sebastian units (see Note 11 for more information). These contracts qualify for hedge accounting, with unrealized gains and losses related to the effective portion of the contracts included in accumulated other comprehensive loss, and unrealized gains and losses related to the ineffective portion of the contracts included in earnings each period. The fair value of each contract represents the present value of the difference between the forward exchange rate for the contract settlement period as of the measurement date and the contract settlement exchange rate.
We use financially-settled forward contracts to manage the exposure to changes in prices of silver, gold, zinc and lead contained in our concentrate shipments that have not reached final settlement. We also use financially-settled forward and put option contracts to manage the exposure to changes in prices of silver, gold, zinc and lead contained in our forecasted future sales (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 forward 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. The fair value of each put option contract is measured using the Black-Scholes pricing model, with inputs for the period-end metal price and assumed metal price volatility and discount rate.
Our Senior Notes, which were recorded at their carrying value of $
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 of the Senior Notes and IQ Notes (see Note 9 for more information). The Guarantors consist of the following of Hecla's
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 that is sufficient to meet their capital needs, and their cash requirements are routinely met with inter-company advances from their parent companies. Generally 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. At times, inter-company debt agreements have been established between certain of Hecla's subsidiaries and their parents. The related debt liability and receivable balances, accrued interest expense (if any) and income activity (if any), and payments of principal and accrued interest amounts (if any) by the subsidiary companies to their parents are eliminated in consolidation. |
| • | Dividends. Certain of Hecla's subsidiaries which generate cash flow routinely provide cash to their parent companies through inter-company transfers. On at least an annual basis, the boards of directors of such subsidiary companies declare dividends to their parent companies, which reduces the subsidiaries' retained earnings and increases the parents' dividend income. In consolidation, such activity is eliminated. |
| • | Deferred taxes. Our ability to realize deferred tax assets and liabilities is considered for two consolidated tax groups of subsidiaries within the United States: The Nevada U.S. Group and the Hecla U.S. Group. Within each tax group, all subsidiaries' estimated future taxable income contributes to the ability of their tax group to realize all such assets and liabilities. However, when Hecla's subsidiaries are viewed independently, we use the separate return method to assess the realizability of each subsidiary's deferred tax assets and whether a valuation allowance is required against such deferred tax assets. In some instances, a parent company or subsidiary may possess deferred tax assets whose realization depends on the future taxable incomes of other subsidiaries on a consolidated-return basis, but would not be considered realizable if such parent or subsidiary filed on a separate stand-alone basis. In such a situation, a valuation allowance is assessed on that subsidiary's deferred tax assets, with the resulting adjustment reported in the eliminations column of the guarantor and parent's financial statements, as is the case in the unaudited interim financial statements set forth below. The separate return method can result in significant eliminations of deferred tax assets and liabilities and related income tax provisions and benefits. Non-current deferred tax asset balances are included in other non-current assets on the consolidating balance sheets and make up a large portion of that item, particularly for the guarantor balances. |
Separate financial statements of the Guarantors are not presented because the guarantees by the Guarantors are joint and several and full and unconditional, except for certain customary release provisions, including: (1) the sale or disposal of all or substantially all of the assets of the Guarantor; (2) the sale or other disposition of the capital stock of the Guarantor; (3) the Guarantor is designated as an unrestricted entity in accordance with the applicable provisions of the indenture; (4) Hecla ceases to be a borrower as defined in the indenture; and (5) upon legal or covenant defeasance or satisfaction and discharge of the indenture.
Unaudited Interim Condensed Consolidating Balance Sheets
| As of June 30, 2020 | ||||||||||||||||||||
| Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Other current assets | ( | ) | ||||||||||||||||||
| Properties, plants, equipment and mineral interests, net | ||||||||||||||||||||
| Intercompany receivable (payable) | ( | ) | ( | ) | ||||||||||||||||
| Investments in subsidiaries | ( | ) | ||||||||||||||||||
| Other non-current assets | ( | ) | ( | ) | ||||||||||||||||
| Total assets | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Liabilities and Stockholders' Equity | ||||||||||||||||||||
| Current liabilities | $ | ( | ) | $ | $ | $ | $ | |||||||||||||
| Long-term debt | ||||||||||||||||||||
| Non-current portion of accrued reclamation | ||||||||||||||||||||
| Non-current deferred tax liability | ( | ) | ||||||||||||||||||
| Other non-current liabilities | ||||||||||||||||||||
| Stockholders' equity | ( | ) | ||||||||||||||||||
| Total liabilities and stockholders' equity | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| As of December 31, 2019 | ||||||||||||||||||||
| Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Other current assets | ( | ) | ||||||||||||||||||
| Properties, plants, equipment and mineral interests - net | ||||||||||||||||||||
| Intercompany receivable (payable) | ( | ) | ( | ) | ||||||||||||||||
| Investments in subsidiaries | ( | ) | ||||||||||||||||||
| Other non-current assets | ( | ) | ( | ) | ||||||||||||||||
| Total assets | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
| Liabilities and Stockholders' Equity | ||||||||||||||||||||
| Current liabilities | $ | ( | ) | $ | $ | $ | $ | |||||||||||||
| Long-term debt | ||||||||||||||||||||
| Non-current portion of accrued reclamation | ||||||||||||||||||||
| Non-current deferred tax liability | ( | ) | ||||||||||||||||||
| Other non-current liabilities | ||||||||||||||||||||
| Stockholders' equity | ( | ) | ||||||||||||||||||
| Total liabilities and stockholders' equity | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
Unaudited Interim Condensed Consolidating Statements of Operations
| Three Months Ended June 30, 2020 | ||||||||||||||||||||
| Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Revenues | $ | ( | ) | $ | $ | $ | $ | |||||||||||||
| Cost of sales | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Depreciation, depletion, amortization | ( | ) | ( | ) | ( | ) | ||||||||||||||
| General and administrative | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Exploration and pre-development | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Gain on derivative contracts | ( | ) | ( | ) | ||||||||||||||||
| Acquisition costs | ( | ) | ( | ) | ||||||||||||||||
| Equity in earnings of subsidiaries | ( | ) | ||||||||||||||||||
| Other expense | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Income (loss) before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||||||
| (Provision) benefit from income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Net income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Preferred stock dividends | ( | ) | ( | ) | ||||||||||||||||
| Income (loss) applicable to common stockholders | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Changes in comprehensive income (loss) | ||||||||||||||||||||
| Comprehensive income (loss) | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | |||||||||
| Six Months Ended June 30, 2020 | ||||||||||||||||||||
| Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Revenues | $ | ( | ) | $ | $ | $ | $ | |||||||||||||
| Cost of sales | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Depreciation, depletion, amortization | ( | ) | ( | ) | ( | ) | ||||||||||||||
| General and administrative | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Exploration and pre-development | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Loss on derivative contracts | ( | ) | ( | ) | ||||||||||||||||
| Acquisition costs | ( | ) | ( | ) | ||||||||||||||||
| Equity in earnings of subsidiaries | ( | ) | ||||||||||||||||||
| Other expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Income (loss) before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||||||
| (Provision) benefit from income taxes | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Preferred stock dividends | ( | ) | ( | ) | ||||||||||||||||
| Income (loss) applicable to common stockholders | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Changes in comprehensive income (loss) | ( | ) | ( | ) | ||||||||||||||||
| Comprehensive income (loss) | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Three Months Ended June 30, 2019 | ||||||||||||||||||||
| Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | |||||||||||||||
| Cost of sales | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Depreciation, depletion, amortization | ( | ) | ( | ) | ( | ) | ||||||||||||||
| General and administrative | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Exploration and pre-development | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Research and development | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Gain on derivative contracts | ||||||||||||||||||||
| Acquisition costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Equity in earnings of subsidiaries | ( | ) | ||||||||||||||||||
| Other (expense) income | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Income (loss) before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| (Provision) benefit from income taxes | ( | ) | ||||||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Preferred stock dividends | ( | ) | ( | ) | ||||||||||||||||
| Income (loss) applicable to common stockholders | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Changes in comprehensive income (loss) | ||||||||||||||||||||
| Comprehensive income (loss) | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | |||||||||
| Six Months Ended June 30, 2019 | ||||||||||||||||||||
| Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Revenues | $ | ( | ) | $ | $ | $ | $ | |||||||||||||
| Cost of sales | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Depreciation, depletion, amortization | ( | ) | ( | ) | ( | ) | ||||||||||||||
| General and administrative | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Exploration and pre-development | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Research and development | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Loss on derivative contracts | ||||||||||||||||||||
| Acquisition costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Equity in earnings of subsidiaries | ( | ) | ||||||||||||||||||
| Other (expense) income | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Income (loss) before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| (Provision) benefit from income taxes | ( | ) | ||||||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Preferred stock dividends | ( | ) | ( | ) | ||||||||||||||||
| Income (loss) applicable to common stockholders | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Net income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Changes in comprehensive income (loss) | ||||||||||||||||||||
| Comprehensive income (loss) | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | |||||||||
Unaudited Interim Condensed Consolidating Statements of Cash Flows
| Six Months Ended June 30, 2020 | ||||||||||||||||||||
| Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Cash flows from operating activities | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Additions to properties, plants, and equipment | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Other investing activities, net | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Dividends paid to stockholders | ( | ) | ( | ) | ||||||||||||||||
| Issuance of debt | ||||||||||||||||||||
| Payments on debt | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Other financing activity | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Effect of exchange rate changes on cash | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Changes in cash, cash equivalents and restricted cash and cash equivalents | ( | ) | ||||||||||||||||||
| Beginning cash, cash equivalents and restricted cash and cash equivalents | ||||||||||||||||||||
| Ending cash, cash equivalents and restricted cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Six Months Ended June 30, 2019 | ||||||||||||||||||||
| Parent | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Cash flows from operating activities | $ | ( | ) | $ | $ | $ | $ | |||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Additions to properties, plants, and equipment | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Other investing activities, net | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Dividends paid to stockholders | ( | ) | ( | ) | ||||||||||||||||
| Borrowings on debt | ||||||||||||||||||||
| Payments on debt | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Other financing activity | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Effect of exchange rate changes on cash | ||||||||||||||||||||
| Changes in cash, cash equivalents and restricted cash and cash equivalents | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Beginning cash, cash equivalents and restricted cash and cash equivalents | ||||||||||||||||||||
| Ending cash, cash equivalents and restricted cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
Forward-Looking Statements
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 Disclosures 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. – Risk Factors in our annual report filed on Form 10-K for the year ended December 31, 2019, as updated in Part II, Item 1A. – Risk Factors in our quarterly report on Form 10-Q for the quarter ended March 31, 2020. 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Hecla Mining Company and our subsidiaries have provided precious and base metals to the U.S. and worldwide since 1891. 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 produce lead, zinc and bulk concentrates and carbon material, which we sell to custom smelters, brokers and third-party processors, and unrefined doré containing gold and silver, which is sold to refiners or further refined before sale of the metals to traders. We are organized into five segments that encompass our operating and development units: Greens Creek, Lucky Friday, Casa Berardi, San Sebastian and Nevada Operations. The map below shows the locations of our operating units, our exploration and pre-development projects, as well as our corporate offices located in Coeur d'Alene, Idaho and Vancouver, British Columbia.
Our current business strategy is to focus our financial and human resources in the following areas:
| • |
rapidly responding to the threats from the COVID-19 pandemic to protect our workforce, operations and communities while maintaining liquidity; |
| • |
operating our properties safely, in an environmentally responsible manner, and cost-effectively; |
| • |
improving operations at our units, which includes incurring costs for new technologies and equipment that may not result in measurable benefits; |
| • |
expanding our proven and probable reserves and production capacity at our units; |
| • |
conducting our business with financial stewardship to preserve our financial position in varying metals price and operational environments; |
| • |
advancing permitting of the Rock Creek and Montanore projects; |
| • |
maintaining and investing in exploration and pre-development projects in the vicinities of seven 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; our projects in northern Nevada; 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. |
The COVID-19 outbreak impacted our operations in the first half of 2020, including curtailing our expected production of gold at Casa Berardi. In addition, we have incurred additional costs of approximately $0.2 million per week related to quarantining employees at Greens Creek, which started in late March 2020. See each segment section below for information on how those operations have been impacted by COVID-19. To mitigate the impacts of COVID-19, we have taken precautionary measures, including implementing operational plans and practices and increasing our cash reserves through a draw-down of our revolving credit facility. As long as they are required, the operational practices implemented could continue to have an adverse impact on our operating results due to deferred production and revenues or additional costs. There is uncertainty related to the potential additional impacts COVID-19 could have on our operations and financial results for the year. See Part II, Item IA. Risk Factors - Natural disasters, public health crises, political crises, and other catastrophic events or other events outside of our control may materially and adversely affect our business or financial results in our Form 10-Q for the quarter ended March 31, 2020 for information on how restrictions related to COVID-19 have recently affected some of our operations.
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. The average realized prices of silver and gold were higher, and the average prices for lead and zinc lower, in the first six months of 2020 than their levels from the comparable period last year, as illustrated by the table in Results of Operations below. While we believe longer-term 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 February 15, 2028 ("Senior Notes") is $475 million, and they bear interest at a rate of 7.25% per year. The $469.5 million in net proceeds from the Senior Notes were used, along with cash on hand, to redeem, in March 2020, our previously-outstanding 6.875% Senior Notes that were due in 2021 and had a principal balance of $506.5 million ("2021 Notes"). Also, as a precaution due to uncertainties of the duration, severity and scope of the COVID-19 outbreak, we drew $210 million under our revolving credit facility during the first quarter of 2020; however, we repaid $160 million of that amount in the second quarter of 2020, with the remaining $50 million outstanding as of the end of the quarter. Amounts drawn on the revolving credit facility are subject to a variable rate of interest. In addition, in July 2020 we agreed to issue CAD$50 million (approximately USD$36.8 million at the time of the transaction) in aggregate principal amount of senior unsecured notes to Investissment Québec, a financing arm of the Québec government ("IQ Notes"). The IQ Notes mature in July 2025 and bear interest at a rate of 6.515% per year. The IQ Notes will be issued at a premium of 103.65%, implying an effective annual yield of 5.74% and an aggregate principal amount to be repaid of CAD$48.2 million. The IQ Notes will be issued in four equal installments of CAD$12.5 million in July, August, September and October 2020, with the first installment issued net of CAD$0.6 million in fees. The net proceeds from the IQ Notes will be available for general corporate purposes, including for open market purchases of a portion of the Senior Notes and to pay capital expenditures at our Casa Berardi unit. Under the note purchase agreement for the IQ Notes and subject to a force majeure event, we are required to invest in the aggregate CAD$100 million at the Casa Berardi unit and other exploration and development projects in Quebec over the four-year period commencing on July 9, 2020. See Note 9 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information on our debt arrangements. 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, IQ Notes and amounts drawn on our revolving credit facility; however, a number of factors could impact our ability to meet our debt obligations and fund our other projects.
We generated positive cash flows at San Sebastian each year from 2016 through the first half of 2020. However, that mine currently is expected to end production in the fourth quarter of 2020, and there can be no assurance that we will be able to develop and operate San Sebastian beyond the known mine life as anticipated.
As further discussed in The Lucky Friday Segment section below, the union employees at Lucky Friday were on strike from March 13, 2017 until the strike ended on January 7, 2020. Re-staffing of the mine has been substantially completed, with a return to full production expected by the end of 2020. However, the ramp-up to full production could take longer or be more costly than anticipated, so there can be no assurance we will operate as currently anticipated.
We strive to achieve excellent mine safety and health performance. We seek to implement this goal by: training employees in safe work practices; establishing, following and improving safety standards; investigating accidents, incidents and losses to avoid recurrence; involving employees in the establishment of safety standards; and participating in the National Mining Association’s CORESafety program. We attempt to implement reasonable best practices with respect to mine safety and emergency preparedness. We work with MSHA, the Commission of Labor Standards, Pay Equity and Occupational Health and Safety in Quebec, and the Mexico Ministry of Economy and Mining to address issues outlined in its investigations and inspections and continue to evaluate our safety practices. Achieving and maintaining compliance with regulations will be challenging and may increase our operating costs. See Item 1A. Risk Factors - We face substantial governmental regulation, including the Mine Safety and Health Act, various environmental laws and regulations and the 1872 Mining Law in our annual report filed on Form 10-K for the year ended December 31, 2019.
Another challenge for us is the risk associated with environmental litigation and ongoing reclamation activities. As described in Item 1A. Risk Factors in our annual report filed on Form 10-K for the year ended December 31, 2019 and in 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 and liquidity needs, as well as our 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 terms as favorable to us as possible.
Results of Operations
Sales of products by metal for the three- and six-month periods ended June 30, 2020 and 2019 were as follows:
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| (in thousands) |
2020 |
2019 |
2020 |
2019 |
||||||||||||
| Silver |
$ | 61,756 | $ | 36,298 | $ | 99,328 | $ | 81,804 | ||||||||
| Gold |
89,212 | 78,166 | 179,906 | 157,845 | ||||||||||||
| Lead |
12,454 | 6,670 | 18,874 | 15,695 | ||||||||||||
| Zinc |
21,455 | 22,948 | 38,762 | 47,703 | ||||||||||||
| Less: smelter charges |
(18,522 | ) | (9,910 | ) | (33,590 | ) | (16,258 | ) | ||||||||
| Sales of products |
$ | 166,355 | $ | 134,172 | $ | 303,280 | $ | 286,789 | ||||||||
The fluctuations in sales for the second quarter and first six months of 2020 compared to the same periods of 2019 were primarily due to:
| • |
Higher average realized prices for silver and gold, partially offset by lower realized prices for lead and zinc, in the second quarter and first half of 2020 compared to the same periods of 2019. These price variances are illustrated in the following table: |
| Three Months Ended |
Six Months Ended |
||||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
||||||||||||||
| Silver – |
London PM Fix ($/ounce) |
$ | 16.33 | $ | 14.89 | $ | 16.63 | $ | 15.23 | ||||||||
| Realized price per ounce |
$ | 18.44 | $ | 15.01 | $ | 16.75 | $ | 15.39 | |||||||||
| Gold – |
London PM Fix ($/ounce) |
$ | 1,711 | $ | 1,310 | $ | 1,647 | $ | 1,307 | ||||||||
| Realized price per ounce |
$ | 1,736 | $ | 1,322 | $ | 1,658 | $ | 1,315 | |||||||||
| Lead – |
LME Final Cash Buyer ($/pound) |
$ | 0.76 | $ | 0.85 | $ | 0.80 | $ | 0.89 | ||||||||
| Realized price per pound |
$ | 0.78 | $ | 0.84 | $ | 0.78 | $ | 0.89 | |||||||||
| Zinc – |
LME Final Cash Buyer ($/pound) |
$ | 0.89 | $ | 1.25 | $ | 0.93 | $ | 1.24 | ||||||||
| Realized price per pound |
$ | 0.89 | $ | 1.17 | $ | 0.89 | $ | 1.23 | |||||||||
Average realized prices typically 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 2020, we recorded net positive price adjustments to provisional settlements of $7.0 million and $9.6 million, respectively, compared to net negative price adjustments to provisional settlements of $1.2 million and $0.7 million, respectively, in the second quarter and first six months of 2019. The price adjustments related to silver, gold, zinc and lead contained in our concentrate shipments were partially offset in the 2020 periods, and largely offset in the 2019 periods, by gains and losses on forward contracts for those metals. 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, doré and carbon material shipped during the period. The average realized silver price for the second quarter of 2020 was higher than the average market price for the same period, as silver sales at Greens Creek occurring in March were exposed to changes in prices from the end of the first quarter until their final settlement in the second quarter; the silver price increased during that time, resulting in gains recognized in the second quarter of 2020.
| • |
Higher quantities of silver, lead and zinc sold as a result of higher production of those metals, partially offset by lower gold volume, in the second quarter and first half of 2020. See The Greens Creek Segment, The Lucky Friday Segment, The Casa Berardi Segment, The San Sebastian Segment and The Nevada Operations Segment sections below for more information on metal production and sales volumes at each of our operating segments. Total metals production and sales volumes for each period are shown in the following table: |
| Three Months Ended |
Six Months Ended |
||||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
||||||||||||||
| Silver - |
Ounces produced |
3,403,781 | 3,018,765 | 6,649,250 | 5,941,896 | ||||||||||||
| Payable ounces sold |
3,348,639 | 2,418,586 | 5,930,918 | 5,316,669 | |||||||||||||
| Gold - |
Ounces produced |
59,982 | 60,768 | 118,774 | 120,789 | ||||||||||||
| Payable ounces sold |
51,398 | 59,127 | 108,501 | 120,063 | |||||||||||||
| Lead - |
Tons produced |
8,977 | 5,515 | 14,870 | 11,299 | ||||||||||||
| Payable tons sold |
8,026 | 3,963 | 12,156 | 8,811 | |||||||||||||
| Zinc - |
Tons produced |
17,855 | 13,315 | 30,702 | 27,259 | ||||||||||||
| Payable tons sold |
11,989 | 9,823 | 21,825 | 19,356 | |||||||||||||
The difference between what we report as "ounces/tons produced" and "payable ounces/tons 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.
| • |
In addition, treatment costs at Greens Creek were higher in the second quarter and first half of 2020 by approximately $6.3 million and $14.9 million, respectively, compared to the same periods of 2019, primarily as a result of unfavorable changes in smelter terms. |
We recorded losses applicable to common shareholders of $14.2 million ($0.03 per basic common share) for the second quarter of 2020 and $31.5 million ($0.06 per basic common share) for the first six months of 2020, compared to losses applicable to common shareholders of $46.7 million ($0.10 per basic common share) and $72.3 million ($0.15 per basic common share) for the second quarter and first six months of 2019, respectively. The following factors contributed to the results for the second quarter and first six months of 2020 compared to the same periods in 2019:
| • |
Higher gross profit at our Nevada operations by $21.7 million and $42.8 million, respectively, in the second quarter and first half of 2020. Gross profit at our Casa Berardi unit was higher by $14.1 million and $20.9 million, respectively, in the second quarter and first half of 2020 compared to the same periods of 2019. Gross profit at our San Sebastian unit was higher by $1.1 million and $2.5 million, respectively, in the second quarter and first half of 2020 compared to the same periods in 2019. Gross profit at our Greens Creek unit was higher in the second quarter of 2020 by $17.5 million, but lower in the first half of 2020 by $3.9 million, compared to the same periods in 2019. Gross profit was substantially unchanged at our Lucky Friday unit. See The Greens Creek Segment, The Lucky Friday Segment, The Casa Berardi Segment, The San Sebastian Segment and The Nevada Operations Segment sections below. |
| • |
Exploration and pre-development expense decreased by $2.6 million and $4.8 million in the second quarter and first half of 2020, respectively, compared to the same periods in 2019. In the first half of 2020, exploration was primarily at our San Sebastian and Casa Berardi units. |
| • |
Higher costs related to ramp-up at Lucky Friday and suspension of other operations by $7.3 million and $17.5 million, respectively, in the second quarter and first half of 2020 compared to the same periods of 2019. The increase was due to (i) higher costs at Lucky Friday due to the transition of production between salary and hourly personnel and the recall, hire and training of the returning hourly workforce there, (ii) placement of the Midas and Hollister mines and Aurora mill in Nevada on care-and-maintenance, and (iii) the temporary suspension of operations at Casa Berardi and San Sebastian in response to COVID-19, which lead to lower production at those operations. See The Lucky Friday Segment, The Nevada Operations Segment, The Casa Berardi Segment and The San Sebastian Segment sections below. |
| • |
Losses on base metal derivatives contracts of $14.0 million in the second quarter of 2020 and $6.1 million in the first half of 2020, compared to gains of $3.8 million in the second quarter and $2.0 million in the first half of 2019. See Note 11 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information. |
| • |
Net foreign exchange loss of $3.2 million in the second quarter and a gain of $3.4 million in the first half of 2020, versus net losses of $4.4 million and $7.5 million, respectively, in the second quarter and first half of 2019. 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 2020, the applicable CAD-to-USD exchange rate increased from 1.2989 to 1.3628, compared to a decrease in the rate from 1.3643 to 1.3087 during the first half of 2019. |
| • |
General and administrative expense decreased by $1.9 million and $3.0 million, respectively, in the second quarter and first half of 2020 compared to the same periods of 2019 primarily due to lower incentive compensation and timing of issuance of shares to directors. |
| • |
A $0.7 million loss recognized in the second quarter of 2020 on the write-down of equipment at Nevada Operations determined to be held-for-sale compared to a $4.6 million loss recognized in the second quarter of 2019 on the write-down of exploration interests in Quebec. |
| • |
In June 2020, we gifted 650,000 shares of our common stock valued at $2.0 million at the time of the gift to the Hecla Charitable Foundation (the "Foundation"), and recognized expense for that amount in the second quarter of 2020. The Foundation is a 501(c)(3) entity established in 2007 to provide grants and disburse funds for educational and charitable purposes to qualifying organizations in order to promote the social, environmental and economic sustainability and development of the communities where we have operations and activities. |
| • |
Higher interest expense by $6.1 million in the first half of 2020 compared to the first half of 2019, with the increase resulting from (i) interest recognized on both the Senior Notes and 2021 Notes for an overlapping period of almost one month, as the Senior Notes were issued on February 19, 2020 and the 2021 Notes were redeemed on March 19, 2020, (ii) $1.7 million in unamortized initial purchaser discount on the 2021 Notes recognized as expense upon their redemption and (iii) higher interest related to amounts drawn on our revolving credit facility. |
| • |
Unrealized gains on investments of $6.4 million and $5.4 million, respectively, in the second quarter and first half of 2020 compared to losses of $1.1 million and $1.0 million, respectively, in the same periods of 2019 due to changes in the prices of shares in other mining companies held. |
| • |
Income tax provision of $0.6 million for the second quarter of 2020 and benefit of $0.4 million for the six-month period ended June 30, 2020 compared to income tax benefits of $11.2 million and $18.4 million, respectively, for the same periods in 2019. The benefits in the first half of 2020 and both periods of 2019 are primarily the result of losses in Nevada and Quebec. The provision in the second quarter of 2020 is due to income in Quebec, offset by losses in Nevada. |
The Greens Creek Segment
| Dollars are in thousands (except per ounce and per ton amounts) |
Three Months Ended |
Six Months Ended |
||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| Sales |
$ | 84,890 | $ | 55,398 | $ | 138,724 | $ | 135,527 | ||||||||
| Cost of sales and other direct production costs |
(44,684 | ) | (34,800 | ) | (81,436 | ) | (76,542 | ) | ||||||||
| Depreciation, depletion and amortization |
(12,988 | ) | (10,850 | ) | (25,417 | ) | (23,220 | ) | ||||||||
| Cost of sales and other direct production costs and depreciation, depletion and amortization |
(57,672 | ) | (45,650 | ) | (106,853 | ) | (99,762 | ) | ||||||||
| Gross profit |
$ | 27,218 | $ | 9,748 | $ | 31,871 | $ | 35,765 | ||||||||
| Tons of ore milled |
215,275 | 209,370 | 414,079 | 416,195 | ||||||||||||
| Production: |
||||||||||||||||
| Silver (ounces) |
2,753,919 | 2,372,270 | 5,529,626 | 4,605,017 | ||||||||||||
| Gold (ounces) |
13,104 | 13,257 | 25,377 | 27,585 | ||||||||||||
| Zinc (tons) |
16,184 | 12,739 | 28,671 | 26,257 | ||||||||||||
| Lead (tons) |
5,889 | 4,628 | 11,087 | 9,410 | ||||||||||||
| Payable metal quantities sold: |
||||||||||||||||
| Silver (ounces) |
2,753,736 | 1,738,377 | 4,847,456 | 3,979,549 | ||||||||||||
| Gold (ounces) |
12,355 | 8,739 | 22,676 | 22,603 | ||||||||||||
| Zinc (tons) |
10,650 | 9,462 | 20,302 | 18,995 | ||||||||||||
| Lead (tons) |
5,233 | 2,810 | 8,693 | 7,154 | ||||||||||||
| Ore grades: |
||||||||||||||||
| Silver ounces per ton |
15.56 | 14.36 | 16.19 | 13.91 | ||||||||||||
| Gold ounces per ton |
0.08 | 0.09 | 0.08 | 0.10 | ||||||||||||
| Zinc percent |
8.2 | % |
6.8 | % |
7.6 | % |
7.1 | % |
||||||||
| Lead percent |
3.3 | % |
2.8 | % |
3.2 | % |
2.8 | % |
||||||||
| Mining cost per ton |
$ | 81.16 | $ | 80.41 | $ | 82.40 | $ | 79.62 | ||||||||
| Milling cost per ton |
$ | 34.90 | $ | 35.10 | $ | 38.61 | $ | 35.48 | ||||||||
| Cash Cost, After By-product Credits, Per Silver Ounce (1) |
$ | 5.19 | $ | 2.38 | $ | 5.41 | $ | 1.46 | ||||||||
| All-In Sustaining Costs ("AISC"), After By-Product Credits, per Silver Ounce (1) |
$ | 7.11 | $ | 6.37 | $ | 7.51 | $ | 4.85 | ||||||||
| (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). |
Restrictions imposed by the State of Alaska beginning in late March in response to the COVID-19 pandemic, including the requirement for employees returning to Alaska to self-quarantine for 14 days, changed in June to 7 days, has caused us to revise the normal operating procedures and incur additional costs for staffing operations at Greens Creek. Restrictions could have a material impact if they continue longer than anticipated or become broader.
The $17.5 million increase in gross profit for the second quarter of 2020 compared to the second quarter of 2019 was due to higher metal sales volumes due to the timing of shipments, and also higher grades for silver, zinc and lead, and higher average realized silver and gold prices, partially offset by higher treatment costs and lower zinc and lead prices. The $3.9 million decrease in gross profit for the first six months of 2020 compared to the same period in 2019 was primarily the result of higher treatment costs and lower average realized zinc and lead prices, partially offset by higher metal sales volumes and higher silver and gold prices. Treatment costs were higher by $6.3 million and $14.9 million, respectively, for the second quarter and first half of 2020 compared to the same periods of 2019 primarily due to unfavorable changes in smelter terms. Treatment costs for the first quarter of 2020 were also impacted by failure by a metals trader customer to perform its obligation to purchase a spot sale of concentrate, for which we are seeking remedy, although there can be no assurance we will be successful.
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 2020 compared to the same periods of 2019.
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, |
|||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| Cash Cost, Before By-product Credits, per Silver Ounce |
$ | 22.06 | $ | 20.83 | $ | 21.07 | $ | 21.11 | ||||||||
| By-product credits |
(16.87 | ) | (18.45 | ) | (15.66 | ) | (19.65 | ) | ||||||||
| Cash Cost, After By-product Credits, per Silver Ounce |
$ | 5.19 | $ | 2.38 | $ | 5.41 | $ | 1.46 | ||||||||
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, |
|||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| AISC, Before By-product Credits, per Silver Ounce |
$ | 23.98 | $ | 24.82 | $ | 23.17 | $ | 24.50 | ||||||||
| By-product credits |
(16.87 | ) | (18.45 | ) | (15.66 | ) | (19.65 | ) | ||||||||
| AISC, After By-product Credits, per Silver Ounce |
$ | 7.11 | $ | 6.37 | $ | 7.51 | $ | 4.85 | ||||||||
The increase in Cash Costs and AISC, After By-product Credits, per Silver Ounce for the second quarter and first six months of 2020 compared to 2019 was the result of higher treatment costs and lower by-product credits per ounce, partially offset by lower mining, milling and other costs on a per-ounce basis. For AISC, After By-Product Credits, per Silver Ounce, these factors were partially offset by lower capital spending.
Mining and milling costs per ounce decreased in the second quarter and first half of 2020 compared to 2019 on a per-ounce basis primarily due to higher silver production as a result of higher silver grades.
Other cash costs per ounce for the first six months of 2020 were lower compared to 2019 due to higher silver production, partially offset by higher expense for Alaska mine license tax.
Treatment costs per ounce were higher in the second quarter and first six months of 2020 compared to 2019 as a result of unfavorable changes in terms and higher silver prices, partially offset by higher silver production, with costs in the first quarter of 2020 also impacted by failure by a metals trader customer to perform its obligation to purchase a spot sale of concentrate, as discussed above. 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 lower in the second quarter and first six months of 2020 compared to 2019 due to lower zinc and lead prices and the impact of higher silver production, which causes the by-product credits to be less on a per-silver ounce basis. For the six month period, by-product credits were also impacted by lower gold production in 2020 compared to 2019.
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.
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 |
Six Months Ended |
||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| Sales |
$ | 11,455 | $ | 4,951 | $ | 14,285 | $ | 7,133 | ||||||||
| Cost of sales and other direct production costs |
(9,561 | ) | (4,529 | ) | (12,091 | ) | (6,541 | ) | ||||||||
| Depreciation, depletion and amortization |
(1,894 | ) | (422 | ) | (2,196 | ) | (591 | ) | ||||||||
| Cost of sales and other direct production costs and depreciation, depletion and amortization |
(11,455 | ) | (4,951 | ) | (14,287 | ) | (7,132 | ) | ||||||||
| Gross profit |
$ | — | $ | — | $ | (2 | ) | $ | 1 | |||||||
| Tons of ore milled |
44,682 | 13,697 | 54,901 | 27,500 | ||||||||||||
| Production: |
||||||||||||||||
| Silver (ounces) |
469,537 | 127,147 | 565,285 | 300,774 | ||||||||||||
| Lead (tons) |
3,088 | 887 | 3,783 | 1,889 | ||||||||||||
| Zinc (tons) |
1,671 | 576 | 2,031 | 1,002 | ||||||||||||
| Payable metal quantities sold: |
||||||||||||||||
| Silver (ounces) |
424,348 | 177,266 | 525,449 | 264,111 | ||||||||||||
| Lead (tons) |
2,793 | 1,153 | 3,463 | 1,657 | ||||||||||||
| Zinc (tons) |
1,339 | 361 | 1,523 | 361 | ||||||||||||
| Ore grades: |
||||||||||||||||
| Silver ounces per ton |
10.99 | 10.12 | 10.78 | 11.73 | ||||||||||||
| Lead percent |
7.33 | % |
7.19 | % |
7.31 | % |
7.58 | % |
||||||||
| Zinc percent |
4.07 | % |
5.03 | % |
4.03 | % |
4.28 | % |
||||||||
The increases in ore tonnage and metals production in the second quarter and first six months of 2020 compared to the same periods in 2019 are the result of a ramp-up in production following the strike that ended in January 2020 (discussed further below).
Many of the employees at our Lucky Friday unit are represented by a union, and the previous collective bargaining agreement with the union expired on April 30, 2016. The unionized employees were on strike from March 13, 2017 until January 7, 2020, when the union ratified a new collective bargaining agreement. Salaried personnel performed limited production and capital improvements from July 2017 until the end of the strike. Re-staffing of the mine commenced in the first quarter of 2020, and we have substantially completed the re-staffing process. We anticipate a return to full production by the end of 2020; however, the ramp-up to full production could take longer or be more costly than anticipated. Costs related to ramp-up activities totaled $2.9 million and $9.3 million in the second quarter and first half of 2020, respectively, and suspension-related costs during the strike in the second quarter and first half of 2019 totaled $1.1 million and $3.0 million, respectively. These costs are combined with non-cash depreciation expense of $2.3 million and $4.1 million for the second quarter of first half of 2020, respectively, and $1.2 million and $2.1 million for the second quarter and first half of 2019, respectively, in a separate line item on our consolidated statements of operations. These restart and 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, when presented.
See Note 4 of Notes to Condensed Consolidated Financial Statements (Unaudited) for a contingency related to groundwater monitoring 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 |
Six Months Ended |
||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| Sales |
$ | 50,005 | $ | 45,500 | $ | 96,177 | $ | 85,562 | ||||||||
| Cost of sales and other direct production costs |
(28,301 | ) | (36,591 | ) | (60,229 | ) | (69,517 | ) | ||||||||
| Depreciation, depletion and amortization |
(17,281 | ) | (18,561 | ) | (33,678 | ) | (34,716 | ) | ||||||||
| Cost of sales and other direct production costs and depreciation, depletion and amortization |
(45,582 | ) | (55,152 | ) | (93,907 | ) | (104,233 | ) | ||||||||
| Gross profit (loss) |
$ | 4,423 | $ | (9,652 | ) | $ | 2,270 | $ | (18,671 | ) | ||||||
| Tons of ore milled |
280,420 | 347,596 | 612,038 | 677,347 | ||||||||||||
| Production: |
||||||||||||||||
| Gold (ounces) |
30,756 | 31,270 | 57,508 | 63,069 | ||||||||||||
| Silver (ounces) |
5,495 | 6,164 | 11,429 | 14,404 | ||||||||||||
| Payable metal quantities sold: |
||||||||||||||||
| Gold (ounces) |
28,754 | 34,647 | 57,836 | 65,260 | ||||||||||||
| Silver (ounces) |
4,383 | 4,900 | 12,806 | 13,362 | ||||||||||||
| Ore grades: |
||||||||||||||||
| Gold ounces per ton |
0.13 | 0.11 | 0.12 | 0.12 | ||||||||||||
| Silver ounces per ton |
0.02 | 0.02 | 0.02 | 0.03 | ||||||||||||
| Mining cost per ton |
$ | 71.68 | $ | 76.35 | $ | 74.21 | $ | 81.11 | ||||||||
| Milling cost per ton |
$ | 21.11 | $ | 18.28 | $ | 21.57 | $ | 17.06 | ||||||||
| Cash Cost, After By-product Credits, per Gold Ounce (1) |
$ | 919 | $ | 1,101 | $ | 1,081 | $ | 1,107 | ||||||||
| AISC, After By-product Credits, per Gold Ounce (1) |
$ | 1,077 | $ | 1,437 | $ | 1,327 | $ | 1,387 | ||||||||
| (1) |
A reconciliation of these non-GAAP measures to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found below in Reconciliation of Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP) to Cash Cost, Before By-product Credits and Cash Cost, After By-product Credits (non-GAAP) and All-In Sustaining Cost, Before By-product Credits and All-In Sustaining Cost, After By-product Credits (non-GAAP). |
Gross profit increased by $14.1 million and $20.9 million for the second quarter and first half of 2020, respectively, compared to the same periods of 2019, primarily due to higher average realized prices, partially offset by lower gold volume resulting from reduced mill throughput. The lower mill throughput was due to a government COVID-19-related order. In late March, the Government of Quebec ordered the mining industry to reduce to minimum operations as part of the fight against COVID-19, causing us to suspend our Casa Berardi operations from March 24 until April 15, when mining operations resumed. As a result of the suspension of operations, gold production was approximately 5,200 ounces lower in March 2020 and approximately 6,500 ounces lower in April 2020 than previously-forecasted full production levels. Production may continue to be adversely impacted by the COVID-19 mitigation practices in place until they are no longer required. Suspension-related costs totaling $1.6 million for the first half of 2020 are reported in a separate line item on our consolidated statements of operations and excluded from the calculations of cost of sales and other direct production costs and depreciation, depletion and amortization, mining and milling cost per ton, and Cash Cost and AISC, After By-product Credits, per Gold Ounce.
Mining costs per ton were lower by 6% and 9%, respectively, for the second quarter and first half of 2020 compared to the same periods of last year primarily due to reduced contractor costs, partially offset by lower ore production. Milling costs per ton were higher by 15% and 26%, respectively, for the second quarter and first half of 2020 compared to the same periods of last year due primarily to lower ore production and higher contractor costs.
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 2020 and 2019:
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, |
|||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| Cash Cost, Before By-product Credits, per Gold Ounce |
$ | 922 | $ | 1,104 | $ | 1,084 | $ | 1,110 | ||||||||
| By-product credits |
(3 | ) | (3 | ) | (3 | ) | (3 | ) | ||||||||
| Cash Cost, After By-product Credits, per Gold Ounce |
$ | 919 | $ | 1,101 | $ | 1,081 | $ | 1,107 | ||||||||
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, |
|||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| AISC, Before By-product Credits, per Gold Ounce |
$ | 1,080 | $ | 1,440 | $ | 1,330 | $ | 1,390 | ||||||||
| By-product credits |
(3 | ) | (3 | ) | (3 | ) | (3 | ) | ||||||||
| AISC, After By-product Credits, per Gold Ounce |
$ | 1,077 | $ | 1,437 | $ | 1,327 | $ | 1,387 | ||||||||
The decrease in Cash Cost and AISC, After By-product Credits, per Gold Ounce for the second quarter and first half of 2020 compared to the same periods in 2019 was primarily due to lower mining costs, partially offset by lower gold production. The decrease in AISC, After By-product Credits, per Gold Ounce was attributed to lower capital and exploration spending.
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 |
Six Months Ended |
||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| Sales |
$ | 4,934 | $ | 10,993 | $ | 14,860 | $ | 23,593 | ||||||||
| Cost of sales and other direct production costs |
(3,115 | ) | (9,295 | ) | (9,943 | ) | (19,887 | ) | ||||||||
| Depreciation, depletion and amortization |
(895 | ) | (1,848 | ) | (2,368 | ) | (3,608 | ) | ||||||||
| Cost of sales and other direct production costs and depreciation, depletion and amortization |
(4,010 | ) | (11,143 | ) | (12,311 | ) | (23,495 | ) | ||||||||
| Gross profit (loss) |
$ | 924 | $ | (150 | ) | $ | 2,549 | $ | 98 | |||||||
| Tons of ore milled |
21,647 | 45,869 | 57,123 | 90,344 | ||||||||||||
| Production: |
||||||||||||||||
| Silver (ounces) |
158,842 | 463,735 | 505,467 | 904,814 | ||||||||||||
| Gold (ounces) |
1,331 | 3,547 | 4,133 | 7,077 | ||||||||||||
| Payable metal quantities sold: |
||||||||||||||||
| Silver (ounces) |
162,780 | 441,710 | 516,476 | 938,260 | ||||||||||||
| Gold (ounces) |
1,220 | 3,410 | 4,044 | 7,140 | ||||||||||||
| Ore grades: |
||||||||||||||||
| Silver ounces per ton |
7.96 | 11.03 | 9.63 | 10.99 | ||||||||||||
| Gold ounces per ton |
0.07 | 0.09 | 0.09 | 0.09 | ||||||||||||
| Mining cost per ton |
$ | 31.01 | $ | 108.25 | $ | 67.59 | $ | 116.79 | ||||||||
| Milling cost per ton |
$ | 51.68 | $ | 61.43 | $ | 58.95 | $ | 61.81 | ||||||||
| Cash Cost, After By-product Credits, per Silver Ounce (1) |
$ | 1.14 | $ | 9.22 | $ | 5.09 | $ | 10.20 | ||||||||
| AISC, After By-product Credits, per Silver Ounce (1) |
$ | 1.85 | $ | 15.50 | $ | 5.65 | $ | 16.02 | ||||||||
| (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 $1.1 million and $2.5 million increases in gross profit (loss) for the second quarter and first half of 2020, respectively, compared to the same periods in 2019 are primarily due to higher average silver and gold prices and lower costs, partially offset by lower metal volumes due to lower ore grades and mill throughput.
Mining and milling cost per ton were lower by 71% and 16%, respectively, in the second quarter of 2020 and lower by 42% and 5%, respectively, for the first half of 2020, compared to the same periods of 2019. The decreases were mainly due to lower contractor costs, partially offset by lower ore tonnage.
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 2020 compared to the same periods in 2019:
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, |
|||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| Cash Cost, Before By-product Credits, per Silver Ounce |
$ | 15.61 | $ | 19.23 | $ | 18.39 | $ | 20.42 | ||||||||
| By-product credits |
(14.47 | ) | (10.01 | ) | (13.30 | ) | (10.22 | ) | ||||||||
| Cash Cost, After By-product Credits, per Silver Ounce |
$ | 1.14 | $ | 9.22 | $ | 5.09 | $ | 10.20 | ||||||||
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, |
|||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| AISC, Before By-product Credits, per Silver Ounce |
$ | 16.32 | $ | 25.51 | $ | 18.95 | $ | 26.24 | ||||||||
| By-product credits |
(14.47 | ) | (10.01 | ) | (13.30 | ) | (10.22 | ) | ||||||||
| AISC, After By-product Credits, per Silver Ounce |
$ | 1.85 | $ | 15.50 | $ | 5.65 | $ | 16.02 | ||||||||
The decrease in Cash Cost and AISC, After By-product Credits, per Silver Ounce in the second quarter and first half of 2020 compared to the same periods of 2019 was primarily the result of higher by-product credits per ounce due to higher gold prices, partially offset by lower silver production. The decrease in AISC, After By-product Credits, per Silver Ounce in the second quarter and first half of 2020 compared to the same periods of 2019 is also a result of lower capital and exploration spending.
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 periodically review our revenues to ensure that reporting of primary products and by-products is appropriate. 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 early April 2020, the Government of Mexico issued an order to the mining industry to reduce operations to a minimum level until April 30 in response to COVID-19, and the order was subsequently extended until May 30. Our operations at San Sebastian were suspended during that time. The closure is not expected to have a material impact on full-year production. Suspension-related costs totaling $1.0 million for the first half of 2020 are reported in a separate line item on our consolidated statements of operations and excluded from the calculations of cost of sales and other direct production costs and depreciation, depletion and amortization, mining and milling cost per ton, and Cash Cost and AISC, After By-product Credits, per Gold Ounce.
We continue to study the Hugh Zone and El Toro opportunities at San Sebastian. The Hugh Zone was discovered in 2005 and is the deeper sulfide extension of the past-producing Francine vein, and El Toro is a near-surface oxide deposit discovered in 2019. The remaining work on the Hugh Zone is focused on the ability to generate a third salable concentrate (copper) from the ore, which has a significant impact on the potential return of the project and how the two deposits should be sequenced. The mine currently is expected to end production in the fourth quarter of 2020. We believe the ability to produce a third concentrate, if achieved, could result in a restart of production in 2021 or 2022.
The Nevada Operations Segment
| Dollars are in thousands (except per ounce and per ton amounts) |
Three Months Ended |
Six Months Ended |
||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| Sales |
$ | 15,071 | $ | 17,330 | $ | 39,234 | $ | 34,974 | ||||||||
| Cost of sales and other direct production costs |
(7,192 | ) | (19,723 | ) | (15,041 | ) | (42,837 | ) | ||||||||
| Depreciation, depletion and amortization |
(6,365 | ) | (17,796 | ) | (15,430 | ) | (26,129 | ) | ||||||||
| Cost of sales and other direct production costs and depreciation, depletion and amortization |
(13,557 | ) | (37,519 | ) | (30,471 | ) | (68,966 | ) | ||||||||
| Gross profit (loss) |
$ | 1,514 | $ | (20,189 | ) | $ | 8,763 | $ | (33,992 | ) | ||||||
| Tons of ore milled |
10,686 | 58,417 | 27,984 | 99,782 | ||||||||||||
| Production: |
||||||||||||||||
| Gold (ounces) |
14,791 | 12,694 | 31,756 | 23,058 | ||||||||||||
| Silver (ounces) |
15,988 | 49,449 | 37,443 | 116,887 | ||||||||||||
| Payable metal quantities sold: |
||||||||||||||||
| Gold (ounces) |
9,068 | 12,331 | 23,944 | 25,060 | ||||||||||||
| Silver (ounces) |
3,392 | 56,333 | 28,731 | 121,387 | ||||||||||||
| Ore grades: |
||||||||||||||||
| Gold ounces per ton |
1.519 | 0.259 | 1.232 | 0.276 | ||||||||||||
| Silver ounces per ton |
2.07 | 1.63 | 1.7 | 1.99 | ||||||||||||
| Mining cost per ton |
$ | 403.38 | $ | 129.75 | $ | 402.94 | $ | 164.08 | ||||||||
| Milling cost per ton |
$ | 219.32 | $ | 75.44 | $ | 176.63 | $ | 90.74 | ||||||||
| Cash Cost, After By-product Credits, per Gold Ounce (1) |
$ | 694 | $ | 1,274 | $ | 716 | $ | 1,502 | ||||||||
| AISC, After By-product Credits, per Gold Ounce (1) |
$ | 769 | $ | 2,347 | $ | 787 | $ | 2,666 | ||||||||
| (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 increases in gross profit for the second quarter and first half of 2020 compared to the same periods of 2019 were primarily the result of higher average gold prices and higher gold production, due to higher grades. In addition, cost of sales and other direct production costs for the first half of 2020 included write-downs totaling approximately $1.5 million of the values of stockpile, in-process and finished goods inventory to their net realizable value, with no portion of that amount recognized in the second quarter of 2020, compared to $18.6 million and $28.3 million, respectively, in such write-downs for the second quarter and first half of 2019. The write-downs in the 2019 periods were primarily attributed to development costs incurred at the Fire Creek mine, which were ceased in the second quarter of 2019 when the decision was made to limit near-term production to areas of the mine where development was already completed.
Mining and milling costs per ton were higher by 384% and 191%, respectively, for the second quarter of 2020 and by 184% and 95%, respectively, for the first half of 2020 compared to the same periods of 2019. The increases were primarily the result of lower mill throughput.
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 2020:
The following table summarizes the components of Cash Cost, After By-product Credits, per Gold Ounce:
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| Cash Cost, Before By-product Credits, per Gold Ounce |
$ | 713 | 1,332 | $ | 736 | 1,580 | ||||||||||
| By-product credits |
(19 | ) | (58 | ) | (20 | ) | (78 | ) | ||||||||
| Cash Cost, After By-product Credits, per Gold Ounce |
$ | 694 | $ | 1,274 | $ | 716 | $ | 1,502 | ||||||||
The following table summarizes the components of AISC, After By-product Credits, per Gold Ounce:
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| 2020 |
2019 |
2020 |
2019 |
|||||||||||||
| AISC, Before By-product Credits, per Gold Ounce |
$ | 788 | $ | 2,405 | $ | 807 | $ | 2,744 | ||||||||
| By-product credits |
(19 | ) | (58 | ) | (20 | ) | (78 | ) | ||||||||
| AISC, After By-product Credits, per Gold Ounce |
$ | 769 | $ | 2,347 | $ | 787 | $ | 2,666 | ||||||||
The decreases in Cash Costs and AISC, After By-product Credits, per Gold ounce in the second quarter and first half of 2020 compared to the same periods of 2019 were due to higher gold production resulting from increased grades, with the decreases in AISC, After By-product Credits, per Gold Ounce also attributed to lower exploration and capital spending.
We believe the identification of silver as a by-product credit is appropriate at Nevada Operations 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 Nevada Operations to warrant classification of such as a co-product. Because we consider silver to be a by-product of our gold production at Nevada Operations, 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.
Because total production and capital costs had exceeded sales since acquisition, we conducted a review of our Nevada operations during the second quarter of 2019. The review resulted in (i) a plan to limit near-term mining at Fire Creek to areas where development has already been completed and (ii) suspension of production and development of the Hatter Graben project at Hollister, resulting in lower anticipated near-term production and capitalized development costs. Production at the Midas mine and Aurora mill was suspended in late 2019. Suspension-related costs totaling $6.7 million for the first half of 2020 at Hollister, Midas and Aurora, which are currently on care-and-maintenance, are reported in a separate line item on our consolidated statements of operations and excluded from the calculations of cost of sales and other direct production costs and depreciation, depletion and amortization, mining and milling cost per ton, and Cash Cost and AISC, After By-product Credits, per Gold Ounce.
We determined this review and the resulting plans represented a triggering event requiring an assessment of recoverability of the carrying value of our long-lived assets ("carrying value assessment") in Nevada as of June 30, 2019. In our carrying value assessment, our estimate of undiscounted future cash flows and the estimated value of mineral interests exceeded the carrying value of the Nevada assets, and we concluded impairment was not indicated. There were no subsequent events or changes in circumstances during the remainder of 2019 or the first half of 2020 that indicated the carrying value of our long-term assets in Nevada was not recoverable. We have entered into a third-party ore processing arrangement for a bulk sample of ore, with the potential of establishing a long-term arrangement which could reduce transportation and milling costs. Mining of the bulk sample material commenced in the second quarter of 2020, with costs for mining the material totaling $4.3 million included in stockpiled ore inventory as of June 30, 2020. Additionally, we have commenced studies of the assets in order to determine how to mine them at lower costs. Recoverability of carrying value will be contingent upon the favorable resolution of operational issues, including, but not limited to: (i) ore grade control, (ii) mill recoveries and reconciliation, (iii) the potential availability of third-party processing of ore produced at the Fire Creek mine, (iv) availability of sufficient resources (including funding) to resume and complete necessary development work and drilling on a timely basis, (v) hydrological studies and (vi) permitting. Based on the current mine plan, mining at Fire Creek in areas where development has already been performed is expected to be completed in the third quarter of 2020.
Our estimates of undiscounted future cash flows for our Nevada assets are most sensitive to (i) changes in metal prices and (ii) estimates of metals to be extracted and recovered. If events or changes occur that adversely affect our estimate of undiscounted future cash flows from our Nevada assets, including (i) an increase in expected costs, (ii) a sustained decline in gold prices, or (iii) suspension of production and placement of our Nevada operations on care-and-maintenance due to the inability to resolve the operational issues identified in the preceding paragraph in a timely manner, or other factors, we may be required to again perform a carrying value assessment for our Nevada assets. If a future assessment indicates the carrying value of the assets exceeds the estimated undiscounted future cash flows, an impairment loss, which could be material, would be recognized for the difference between the carrying value and fair value of the assets. The estimate of potential impairment involves significant judgment and assumptions, and no assurance can be given as to whether we will recognize an impairment in the future or the amount of a potential impairment. The carrying value of our properties, plants, equipment and mineral interests in Nevada as of June 30, 2020 was $483.9 million, consisting of the following (in millions):
| Value beyond proven and probable reserves |
$ | 382.2 | ||
| Mills and tailings facilities |
41.5 | |||
| Buildings and equipment |
24.7 | |||
| Development |
19.0 |
|||
| Mineral properties |
10.4 | |||
| Asset retirement obligation asset |
3.1 | |||
| Land |
3.0 | |||
| Total |
$ | 483.9 | ||
See Item 1A. Risk Factors - Operation, Development, Exploration and Acquisition Risks in our annual report filed on Form 10-K for the year ended December 31, 2019 for a discussion of certain risks relating to our recent and ongoing analysis of the carrying value of the Nevada assets.
Corporate Matters
Employee Benefit Plans
Our defined benefit pension plans provide a significant benefit to our employees, but represent a significant liability to us. The liability recorded for the underfunded status of our plans was $59.5 million and $56.8 million as of June 30, 2020 and December 31, 2019, respectively. In April 2020, we contributed $0.4 million in shares of our common stock to our defined benefit plans, and expect to contribute an additional approximately $10.0 million in cash or shares of our common stock in 2020, including $4.8 million to satisfy the remaining minimum funding requirement for the year. 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 balance based on a review of long-range forecasts and quarterly activity. In 2018, through the acquisition of Klondex Mines Ltd., we acquired a U.S. consolidated tax group (the "Nevada U.S. Group") that did not join the existing consolidated U.S. tax group of Hecla Mining Company and subsidiaries (“Hecla U.S.”). We recognized a full valuation allowance on our Hecla U.S. net deferred tax assets at the end of 2017 based on results of tax law changes and maintain a full valuation allowance on Hecla U.S. net deferred tax assets at June 30, 2020.
Our net U.S. deferred tax liability for the Nevada U.S. Group at June 30, 2020 was $35.1 million compared to the $38.3 million net deferred tax liability at December 31, 2019. The $3.2 million decrease is for current period activity in Nevada. 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 U.S. tax reporting.
Our net Canadian deferred tax liability at June 30, 2020 was $93.6 million, a decrease of $6.3 million from the $99.9 million net deferred tax liability at December 31, 2019. The decrease was primarily due to the impact of weakening of the CAD relative to the USD on remeasurement of the deferred tax liability balance. 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.
Our Mexican net deferred tax asset at June 30, 2020 was $3.2 million, a decrease of $0.3 million from the net deferred tax asset of $3.5 million at December 31, 2019. The decrease was primarily due to the impact of weakening of the MXN relative to the USD on remeasurement of the deferred tax asset balance. A $2.2 million partial valuation allowance remains on deferred tax assets in Mexico.
As a result of the Tax Cuts and Jobs Act enacted in December 2017, our remaining Alternative Minimum Tax ("AMT") credit carryforward of $10.7 million became partially refundable through 2020 and fully refundable in 2021. An Alaska AMT refund of $0.5 million was received in the first half of 2020, leaving a net AMT credit receivable of $10.2 million as of June 30, 2020. In March 2020, the U.S. government issued the Coronavirus Aid, Relief and Economic Security Act, which allowed companies to claim immediate refunds of AMT credits. As a result, the remaining $10.2 million AMT credit is classified as a current receivable as of June 30, 2020.
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, Casa Berardi and Nevada Operations units and for the Company for the three- and six-month periods ended June 30, 2020 and 2019.
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 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 use AISC, After By-product Credits, per Ounce 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 silver and gold 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 silver mining companies, and aggregating Casa Berardi and Nevada Operations for comparison with other gold mining companies. 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, Nevada Operations and combined gold properties information 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, their primary product, and by-product revenues earned from silver, which is a by-product at Casa Berardi and Nevada Operations. 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 and Nevada Operations units 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 and Nevada Operations.
| In thousands (except per ounce amounts) |
Three Months Ended June 30, 2020 |
|||||||||||||||||||
| Greens Creek |
Lucky Friday(2) |
San Sebastian (3) |
Corporate(4) |
Total Silver |
||||||||||||||||
| Cost of sales and other direct production costs and depreciation, depletion and amortization |
$ | 57,672 | 11,455 | $ | 4,010 | $ | 73,137 | |||||||||||||
| Depreciation, depletion and amortization |
(12,988 | ) | (1,894 | ) | (895 | ) | (15,777 | ) | ||||||||||||
| Treatment costs |
20,016 | 3,032 | 47 | 23,095 | ||||||||||||||||
| Change in product inventory |
(4,020 | ) | (118 | ) | (398 | ) | (4,536 | ) | ||||||||||||
| Reclamation and other costs |
93 | — | (296 | ) | (203 | ) | ||||||||||||||
| Exclusion of Lucky Friday costs |
— | (12,475 | ) | — | (12,475 | ) | ||||||||||||||
| Cash Cost, Before By-product Credits (1) |
60,773 | — | 2,468 | 63,241 | ||||||||||||||||
| Reclamation and other costs |
789 | 114 | 903 | |||||||||||||||||
| Exploration |
— | — | 314 | 314 | ||||||||||||||||
| Sustaining capital |
4,501 | (1 | ) | — | 4,500 | |||||||||||||||
| General and administrative |
6,979 | 6,979 | ||||||||||||||||||
| AISC, Before By-product Credits (1) |
66,063 | — | 2,581 | 75,937 | ||||||||||||||||
| By-product credits: |
||||||||||||||||||||
| Zinc |
(19,913 | ) | — | (19,913 | ) | |||||||||||||||
| Gold |
(19,427 | ) | — | (2,287 | ) | (21,714 | ) | |||||||||||||
| Lead |
(7,133 | ) | — | (7,133 | ) | |||||||||||||||
| Total By-product credits |
(46,473 | ) | — | (2,287 | ) | (48,760 | ) | |||||||||||||
| Cash Cost, After By-product Credits |
$ | 14,300 | $ | — | $ | 181 | $ | 14,481 | ||||||||||||
| AISC, After By-product Credits |
$ | 19,590 | $ | — | $ | 294 | $ | 27,177 | ||||||||||||
| Divided by ounces produced |
2,754 | — | 158 | 2,912 | ||||||||||||||||
| Cash Cost, Before By-product Credits, per Ounce |
$ | 22.06 | $ | — | $ | 15.61 | $ | 21.71 | ||||||||||||
| By-product credits per ounce |
(16.87 | ) | — | (14.47 | ) | (16.74 | ) | |||||||||||||
| Cash Cost, After By-product Credits, per Ounce |
$ | 5.19 | $ | — | $ | 1.14 | $ | 4.97 | ||||||||||||
| AISC, Before By-product Credits, per Ounce |
$ | 23.98 | $ | — | $ | 16.32 | $ | 26.07 | ||||||||||||
| By-product credits per ounce |
(16.87 | ) | — | (14.47 | ) | (16.74 | ) | |||||||||||||
| AISC, After By-product Credits, per Ounce |
$ | 7.11 | $ | — | $ | 1.85 | $ | 9.33 | ||||||||||||
| In thousands (except per ounce amounts) |
Three months ended June 30, 2020 |
|||||||||||
| Casa Berardi (5) |
Nevada Operations (6) |
Total Gold |
||||||||||
| Cost of sales and other direct production costs and depreciation, depletion and amortization |
$ | 45,582 | $ | 13,557 | $ | 59,139 | ||||||
| Depreciation, depletion and amortization |
(17,281 | ) | (6,365 | ) | (23,646 | ) | ||||||
| Treatment costs |
558 | 19 | 577 | |||||||||
| Change in product inventory |
(400 | ) | 3,669 | 3,269 | ||||||||
| Reclamation and other costs |
(92 | ) | (328 | ) | (420 | ) | ||||||
| Cash Cost, Before By-product Credits (1) |
28,367 | 10,552 | 38,919 | |||||||||
| Reclamation and other costs |
94 | 327 | 421 | |||||||||
| Exploration |
467 | — | 467 | |||||||||
| Sustaining capital |
4,278 | 774 | 5,052 | |||||||||
| AISC, Before By-product Credits (1) |
33,206 | 11,653 | 44,859 | |||||||||
| By-product credits: |
||||||||||||
| Silver |
(92 | ) | (282 | ) | (374 | ) | ||||||
| Total By-product credits |
(92 | ) | (282 | ) | (374 | ) | ||||||
| Cash Cost, After By-product Credits |
$ | 28,275 | $ | 10,270 | $ | 38,545 | ||||||
| AISC, After By-product Credits |
$ | 33,114 | $ | 11,371 | $ | 44,485 | ||||||
| Divided by ounces produced |
31 | 15 | 46 | |||||||||
| Cash Cost, Before By-product Credits, per Ounce |
$ | 922 | $ | 713 | $ | 854 | ||||||
| By-product credits per ounce |
(3 | ) | (19 | ) | (8 | ) | ||||||
| Cash Cost, After By-product Credits, per Ounce |
$ | 919 | $ | 694 | $ | 846 | ||||||
| AISC, Before By-product Credits, per Ounce |
$ | 1,080 | $ | 788 | $ | 985 | ||||||
| By-product credits per ounce |
(3 | ) | (19 | ) | (8 | ) | ||||||
| AISC, After By-product Credits, per Ounce |
$ | 1,077 | $ | 769 | $ | 977 | ||||||
| In thousands (except per ounce amounts) |
Three months ended June 30, 2020 |
|||||||||||
| Total Silver |
Total Gold |
Total |
||||||||||
| Cost of sales and other direct production costs and depreciation, depletion and amortization |
$ | 73,137 | $ | 59,139 | $ | 132,276 | ||||||
| Depreciation, depletion and amortization |
(15,777 | ) | (23,646 | ) | (39,423 | ) | ||||||
| Treatment costs |
23,095 | 577 | 23,672 | |||||||||
| Change in product inventory |
(4,536 | ) | 3,269 | (1,267 | ) | |||||||
| Reclamation and other costs |
(203 | ) | (420 | ) | (623 | ) | ||||||
| Exclusion of Lucky Friday costs |
(12,475 | ) | — | (12,475 | ) | |||||||
| Cash Cost, Before By-product Credits (1) |
63,241 | 38,919 | 102,160 | |||||||||
| Reclamation and other costs |
903 | 421 | 1,324 | |||||||||
| Exploration |
314 | 467 | 781 | |||||||||
| Sustaining capital |
4,500 | 5,052 | 9,552 | |||||||||
| General and administrative |
6,979 | — | 6,979 | |||||||||
| AISC, Before By-product Credits (1) |
75,937 | 44,859 | 120,796 | |||||||||
| By-product credits: |
||||||||||||
| Zinc |
(19,913 | ) | — | (19,913 | ) | |||||||
| Gold |
(21,714 | ) | — | (21,714 | ) | |||||||
| Lead |
(7,133 | ) | — | (7,133 | ) | |||||||
| Silver |
(374 | ) | (374 | ) | ||||||||
| Total By-product credits |
(48,760 | ) | (374 | ) | (49,134 | ) | ||||||
| Cash Cost, After By-product Credits |
$ | 14,481 | $ | 38,545 | $ | 53,026 | ||||||
| AISC, After By-product Credits |
$ | 27,177 | $ | 44,485 | $ | 71,662 | ||||||
| Divided by ounces produced |
2,912 | 46 | ||||||||||
| Cash Cost, Before By-product Credits, per Ounce |
$ | 21.71 | $ | 854 | ||||||||
| By-product credits per ounce |
(16.74 | ) | (8 | ) | ||||||||
| Cash Cost, After By-product Credits, per Ounce |
$ | 4.97 | $ | 846 | ||||||||
| AISC, Before By-product Credits, per Ounce |
$ | 26.07 | $ | 985 | ||||||||
| By-product credits per ounce |
(16.74 | ) | (8 | ) | ||||||||
| AISC, After By-product Credits, per Ounce |
$ | 9.33 | $ | 977 | ||||||||
| In thousands (except per ounce amounts) |
Three Months Ended June 30, 2019 |
|||||||||||||||||||
| Greens Creek |
Lucky Friday(2) |
San Sebastian |
Corporate(4) |
Total Silver |
||||||||||||||||
| Cost of sales and other direct production costs and depreciation, depletion and amortization |
$ | 45,650 | $ | 4,951 | $ | 11,143 | $ | 61,744 | ||||||||||||
| Depreciation, depletion and amortization |
(10,850 | ) | (422 | ) | (1,848 | ) | (13,120 | ) | ||||||||||||
| Treatment costs |
10,964 | 524 | 238 | 11,726 | ||||||||||||||||
| Change in product inventory |
4,577 | (641 | ) | (190 | ) | 3,746 | ||||||||||||||
| Reclamation and other costs |
(933 | ) | — | (422 | ) | (1,355 | ) | |||||||||||||
| Exclusion of Lucky Friday cash costs |
— | (4,412 | ) | — | (4,412 | ) | ||||||||||||||
| Cash Cost, Before By-product Credits (1) |
49,408 | — | 8,921 | 58,329 | ||||||||||||||||
| Reclamation and other costs |
738 | — | 123 | 861 | ||||||||||||||||
| Exploration |
79 | — | 1,483 | 497 | 2,059 | |||||||||||||||
| Sustaining capital |
8,665 | — | 1,308 | 12 | 9,985 | |||||||||||||||
| General and administrative |
8,918 | 8,918 | ||||||||||||||||||
| AISC, Before By-product Credits (1) |
58,890 | — | 11,835 | 80,152 | ||||||||||||||||
| By-product credits: |
||||||||||||||||||||
| Zinc |
(22,221 | ) | — | — | (22,221 | ) | ||||||||||||||
| Gold |
(15,350 | ) | — | (4,645 | ) | (19,995 | ) | |||||||||||||
| Lead |
(6,198 | ) | — | — | (6,198 | ) | ||||||||||||||
| Total By-product credits |
(43,769 | ) | — | (4,645 | ) | (48,414 | ) | |||||||||||||
| Cash Cost, After By-product Credits |
$ | 5,639 | $ | — | $ | 4,276 | $ | 9,915 | ||||||||||||
| AISC, After By-product Credits |
$ | 15,121 | $ | — | $ | 7,190 | $ | 31,738 | ||||||||||||
| Divided by ounces produced |
2,372 | — | 464 | 2,836 | ||||||||||||||||
| Cash Cost, Before By-product Credits, per Ounce |
$ | 20.83 | $ | — | $ | 19.23 | $ | 20.57 | ||||||||||||
| By-product credits per ounce |
(18.45 | ) | — | (10.01 | ) | (17.07 | ) | |||||||||||||
| Cash Cost, After By-product Credits, per Ounce |
$ | 2.38 | $ | — | $ | 9.22 | $ | 3.50 | ||||||||||||
| AISC, Before By-product Credits, per Ounce |
$ | 24.82 | $ | — | $ | 25.51 | $ | 28.23 | ||||||||||||
| By-product credits per ounce |
(18.45 | ) | — | (10.01 | ) | (17.07 | ) | |||||||||||||
| AISC, After By-product Credits, per Ounce |
$ | 6.37 | $ | — | $ | 15.50 | $ | 11.16 | ||||||||||||
| In thousands (except per ounce amounts) |
Three Months Ended June 30, 2019 |
|||||||||||
| Casa Berardi |
Nevada Operations |
Total Gold |
||||||||||
| Cost of sales and other direct production costs and depreciation, depletion and amortization |
$ | 55,152 | $ | 37,519 | $ | 92,671 | ||||||
| Depreciation, depletion and amortization |
(18,561 | ) | (17,796 | ) | (36,357 | ) | ||||||
| Treatment costs |
427 | 36 | 463 | |||||||||
| Change in product inventory |
(2,367 | ) | (1,969 | ) | (4,336 | ) | ||||||
| Reclamation and other costs |
(128 | ) | (885 | ) | (1,013 | ) | ||||||
| Cash Cost, Before By-product Credits (1) |
34,523 | 16,905 | 51,428 | |||||||||
| Reclamation and other costs |
127 | 378 | 505 | |||||||||
| Exploration |
941 | 698 | 1,639 | |||||||||
| Sustaining capital |
9,431 | 12,553 | 21,984 | |||||||||
| AISC, Before By-product Credits (1) |
45,022 | 30,534 | 75,556 | |||||||||
| By-product credits: |
||||||||||||
| Silver |
(91 | ) | (739 | ) | (830 | ) | ||||||
| Total By-product credits |
(91 | ) | (739 | ) | (830 | ) | ||||||
| Cash Cost, After By-product Credits |
$ | 34,432 | $ | 16,166 | $ | 50,598 | ||||||
| AISC, After By-product Credits |
$ | 44,931 | $ | 29,795 | $ | 74,726 | ||||||
| Divided by ounces produced |
31 | 13 | 44 | |||||||||
| Cash Cost, Before By-product Credits, per Ounce |
$ | 1,104 | $ | 1,332 | $ | 1,170 | ||||||
| By-product credits per ounce |
(3 | ) | (58 | ) | (19 | ) | ||||||
| Cash Cost, After By-product Credits, per Ounce |
$ | 1,101 | $ | 1,274 | $ | 1,151 | ||||||
| AISC, Before By-product Credits, per Ounce |
$ | 1,440 | $ | 2,405 | $ | 1,719 | ||||||
| By-product credits per ounce |
(3 | ) | (58 | ) | (19 | ) | ||||||
| AISC, After By-product Credits, per Ounce |
$ | 1,437 | $ | 2,347 | $ | 1,700 | ||||||
| In thousands (except per ounce amounts) |
Three Months Ended June 30, 2019 |
|||||||||||
| Total Silver |
Total Gold |
Total |
||||||||||
| Cost of sales and other direct production costs and depreciation, depletion and amortization |
$ | 61,744 | $ | 92,671 | $ | 154,415 | ||||||
| Depreciation, depletion and amortization |
(13,120 | ) | (36,357 | ) | (49,477 | ) | ||||||
| Treatment costs |
11,726 | 463 | 12,189 | |||||||||
| Change in product inventory |
3,746 | (4,336 | ) | (590 | ) | |||||||
| Reclamation and other costs |
(1,355 | ) | (1,013 | ) | (2,368 | ) | ||||||
| Exclusion of Lucky Friday cash costs |
(4,412 | ) | — | (4,412 | ) | |||||||
| Cash Cost, Before By-product Credits (1) |
58,329 | 51,428 | 109,757 | |||||||||
| Reclamation and other costs |
861 | 505 | 1,366 | |||||||||
| Exploration |
2,059 | 1,639 | 3,698 | |||||||||
| Sustaining capital |
9,985 | 21,984 | 31,969 | |||||||||
| General and administrative |
8,918 | — | 8,918 | |||||||||
| AISC, Before By-product Credits (1) |
80,152 | 75,556 | 155,708 | |||||||||
| By-product credits: |
||||||||||||
| Zinc |
(22,221 | ) | — | (22,221 | ) | |||||||
| Gold |
(19,995 | ) | — | (19,995 | ) | |||||||
| Lead |
(6,198 | ) | — | (6,198 | ) | |||||||
| Silver |
(830 | ) | (830 | ) | ||||||||
| Total By-product credits |
(48,414 | ) | (830 | ) | (49,244 | ) | ||||||
| Cash Cost, After By-product Credits |
$ | 9,915 | $ | 50,598 | $ | 60,513 | ||||||
| AISC, After By-product Credits |
$ | 31,738 | $ | 74,726 | $ | 106,464 | ||||||
| Divided by ounces produced |
2,836 | 44 | ||||||||||
| Cash Cost, Before By-product Credits, per Ounce |
$ | 20.57 | $ | 1,170 | ||||||||
| By-product credits per ounce |
(17.07 | ) | (19 | ) | ||||||||
| Cash Cost, After By-product Credits, per Ounce |
$ | 3.50 | $ | 1,151 | ||||||||
| AISC, Before By-product Credits, per Ounce |
$ | 28.23 | $ | 1,719 | ||||||||
| By-product credits per ounce |
(17.07 | ) | (19 | ) | ||||||||
| AISC, After By-product Credits, per Ounce |
$ | 11.16 | $ | 1,700 | ||||||||
| In thousands (except per ounce amounts) |
Six Months Ended June 30, 2020 |
|||||||||||||||||||
| Greens Creek |
Lucky Friday(2) |
San Sebastian (3) |
Corporate(4) |
Total Silver |
||||||||||||||||
| Cost of sales and other direct production costs and depreciation, depletion and amortization |
$ | 106,853 | $ | 14,287 | $ | 12,311 | $ | 133,451 | ||||||||||||
| Depreciation, depletion and amortization |
(25,417 | ) | (2,196 | ) | (2,368 | ) | (29,981 | ) | ||||||||||||
| Treatment costs |
35,842 | 3,464 | 151 | 39,457 | ||||||||||||||||
| Change in product inventory |
(1,150 | ) | 796 | (145 | ) | (499 | ) | |||||||||||||
| Reclamation and other costs |
413 | — | (658 | ) | (245 | ) | ||||||||||||||
| Exclusion of Lucky Friday costs |
— | (16,351 | ) | — | (16,351 | ) | ||||||||||||||
| Cash Cost, Before By-product Credits (1) |
116,541 | — | 9,291 | 125,832 | ||||||||||||||||
| Reclamation and other costs |
1,577 | — | 228 | 1,805 | ||||||||||||||||
| Exploration |
4 | — | — | 664 | 668 | |||||||||||||||
| Sustaining capital |
10,011 | — | 55 | — | 10,066 | |||||||||||||||
| General and administrative |
15,918 | 15,918 | ||||||||||||||||||
| AISC, Before By-product Credits (1) |
128,133 | — | 9,574 | 154,289 | ||||||||||||||||
| By-product credits: |
||||||||||||||||||||
| Zinc |
(35,939 | ) | — | (35,939 | ) | |||||||||||||||
| Gold |
(36,624 | ) | (6,716 | ) | (43,340 | ) | ||||||||||||||
| Lead |
(14,059 | ) | — | (14,059 | ) | |||||||||||||||
| Total By-product credits |
(86,622 | ) | — | (6,716 | ) | (93,338 | ) | |||||||||||||
| Cash Cost, After By-product Credits |
$ | 29,919 | $ | — | $ | 2,575 | $ | 32,494 | ||||||||||||
| AISC, After By-product Credits |
$ | 41,511 | $ | — | $ | 2,858 | $ | 60,951 | ||||||||||||
| Divided by ounces produced |
5,530 | — | 505 | 6,035 | ||||||||||||||||
| Cash Cost, Before By-product Credits, per Ounce |
$ | 21.07 | $ | — | $ | 18.39 | $ | 20.85 | ||||||||||||
| By-product credits per ounce |
(15.66 | ) | — | (13.30 | ) | (15.47 | ) | |||||||||||||
| Cash Cost, After By-product Credits, per Ounce |
$ | 5.41 | $ | — | $ | 5.09 | $ | 5.38 | ||||||||||||
| AISC, Before By-product Credits, per Ounce |
$ | 23.17 | $ | — | $ | 18.95 | $ | 25.57 | ||||||||||||
| By-product credits per ounce |
(15.66 | ) | — | (13.30 | ) | (15.47 | ) | |||||||||||||
| AISC, After By-product Credits, per Ounce |
$ | 7.51 | $ | — | $ | 5.65 | $ | 10.10 | ||||||||||||
| In thousands (except per ounce amounts) |
Six Months Ended June 30, 2020 |
|||||||||||
| Casa Berardi (5) |
Nevada Operations (6) |
Total Gold |
||||||||||
| Cost of sales and other direct production costs and depreciation, depletion and amortization |
$ | 93,907 | $ | 30,471 | $ | 124,378 | ||||||
| Depreciation, depletion and amortization |
(33,678 | ) | (15,430 | ) | (49,108 | ) | ||||||
| Treatment costs |
1,132 | 45 | 1,177 | |||||||||
| Change in product inventory |
1,208 | 8,949 | 10,157 | |||||||||
| Reclamation and other costs |
(189 | ) | (654 | ) | (843 | ) | ||||||
| Cash Cost, Before By-product Credits (1) |
62,380 | 23,381 | 85,761 | |||||||||
| Reclamation and other costs |
190 | 654 | 844 | |||||||||
| Exploration |
1,158 | — | 1,158 | |||||||||
| Sustaining capital |
12,784 | 1,600 | 14,384 | |||||||||
| AISC, Before By-product Credits (1) |
76,512 | 25,635 | 102,147 | |||||||||
| By-product credits: |
||||||||||||
| Silver |
(192 | ) | (635 | ) | (827 | ) | ||||||
| Total By-product credits |
(192 | ) | (635 | ) | (827 | ) | ||||||
| Cash Cost, After By-product Credits |
$ | 62,188 | $ | 22,746 | $ | 84,934 | ||||||
| AISC, After By-product Credits |
$ | 76,320 | $ | 25,000 | $ | 101,320 | ||||||
| Divided by ounces produced |
58 | 32 | 90 | |||||||||
| Cash Cost, Before By-product Credits, per Ounce |
$ | 1,084 | $ | 736 | $ | 961 | ||||||
| By-product credits per ounce |
(3 | ) | (20 | ) | (9 | ) | ||||||
| Cash Cost, After By-product Credits, per Ounce |
$ | 1,081 | $ | 716 | $ | 952 | ||||||
| AISC, Before By-product Credits, per Ounce |
$ | 1,330 | $ | 807 | $ | 1,144 | ||||||
| By-product credits per ounce |
(3 | ) | (20 | ) | (9 | ) | ||||||
| AISC, After By-product Credits, per Ounce |
$ | 1,327 | $ | 787 | $ | 1,135 | ||||||
| In thousands (except per ounce amounts) |
Six Months Ended June 30, 2020 |
|||||||||||
| Total Silver |
Total Gold |
Total |
||||||||||
| Cost of sales and other direct production costs and depreciation, depletion and amortization |
$ | 133,451 | $ | 124,378 | $ | 257,829 | ||||||
| Depreciation, depletion and amortization |
(29,981 | ) | (49,108 | ) | (79,089 | ) | ||||||
| Treatment costs |
39,457 | 1,177 | 40,634 | |||||||||
| Change in product inventory |
(499 | ) | 10,157 | 9,658 | ||||||||
| Reclamation and other costs |
(245 | ) | (843 | ) | (1,088 | ) | ||||||
| Exclusion of Lucky Friday costs |
(16,351 | ) | — | (16,351 | ) | |||||||
| Cash Cost, Before By-product Credits (1) |
125,832 | 85,761 | 211,593 | |||||||||
| Reclamation and other costs |
1,805 | 844 | 2,649 | |||||||||
| Exploration |
668 | 1,158 | 1,826 | |||||||||
| Sustaining capital |
10,066 | 14,384 | 24,450 | |||||||||
| General and administrative |
15,918 | — | 15,918 | |||||||||
| AISC, Before By-product Credits (1) |
154,289 | 102,147 | 256,436 | |||||||||
| By-product credits: |
||||||||||||
| Zinc |
(35,939 | ) | — | (35,939 | ) | |||||||
| Gold |
(43,340 | ) | — | (43,340 | ) | |||||||
| Lead |
(14,059 | ) | — | (14,059 | ) | |||||||
| Silver |
(827 | ) | (827 | ) | ||||||||
| Total By-product credits |
(93,338 | ) | (827 | ) | (94,165 | ) | ||||||
| Cash Cost, After By-product Credits |
$ | 32,494 | $ | 84,934 | $ | 117,428 | ||||||
| AISC, After By-product Credits |
$ | 60,951 | $ | 101,320 | $ | 162,271 | ||||||
| Divided by ounces produced |
6,035 | 90 | ||||||||||
| Cash Cost, Before By-product Credits, per Ounce |
$ | 20.85 | $ | 961 | ||||||||
| By-product credits per ounce |
(15.47 | ) | (9 | ) | ||||||||
| Cash Cost, After By-product Credits, per Ounce |
$ | 5.38 | $ | 952 | ||||||||
| AISC, Before By-product Credits, per Ounce |
$ | 25.57 | $ | 1,144 | ||||||||
| By-product credits per ounce |
(15.47 | ) | (9 | ) | ||||||||
| AISC, After By-product Credits, per Ounce |
$ | 10.10 | $ | 1,135 | ||||||||
| In thousands (except per ounce amounts) |
Six Months Ended June 30, 2019 |
|||||||||||||||||||
| Greens Creek |
Lucky Friday(2) |
San Sebastian |
Corporate(4) |
Total Silver |
||||||||||||||||
| Cost of sales and other direct production costs and depreciation, depletion and amortization |
$ | 99,762 | $ | 7,132 | $ | 23,495 | $ | 130,389 | ||||||||||||
| Depreciation, depletion and amortization |
(23,220 | ) | (591 | ) | (3,608 | ) | (27,419 | ) | ||||||||||||
| Treatment costs |
21,316 | 1,334 | 369 | 23,019 | ||||||||||||||||
| Change in product inventory |
712 | 842 | (1,043 | ) | 511 | |||||||||||||||
| Reclamation and other costs |
(1,347 | ) | — | (735 | ) | (2,082 | ) | |||||||||||||
| Exclusion of Lucky Friday cash costs |
— | (8,717 | ) | — | (8,717 | ) | ||||||||||||||
| Cash Cost, Before By-product Credits (1) |
97,223 | — | 18,478 | 115,701 | ||||||||||||||||
| Reclamation and other costs |
1,475 | — | 246 | 1,721 | ||||||||||||||||
| Exploration |
160 | — | 3,200 | 938 | 4,298 | |||||||||||||||
| Sustaining capital |
13,977 | — | 1,814 | 73 | 15,864 | |||||||||||||||
| General and administrative |
18,877 | 18,877 | ||||||||||||||||||
| AISC, Before By-product Credits (1) |
112,835 | — | 23,738 | 156,461 | ||||||||||||||||
| By-product credits: |
||||||||||||||||||||
| Zinc |
(45,506 | ) | — | — | (45,506 | ) | ||||||||||||||
| Gold |
(31,868 | ) | (9,247 | ) | (41,115 | ) | ||||||||||||||
| Lead |
(13,115 | ) | — | — | (13,115 | ) | ||||||||||||||
| Total By-product credits |
(90,489 | ) | — | (9,247 | ) | (99,736 | ) | |||||||||||||
| Cash Cost, After By-product Credits |
$ | 6,734 | $ | — | $ | 9,231 | $ | 15,965 | ||||||||||||
| AISC, After By-product Credits |
$ | 22,346 | $ | — | $ | 14,491 | $ | 56,725 | ||||||||||||
| Divided by ounces produced |
4,605 | — | 905 | 5,510 | ||||||||||||||||
| Cash Cost, Before By-product Credits, per Ounce |
$ | 21.11 | $ | — | $ | 20.42 | $ | 21.00 | ||||||||||||
| By-product credits per ounce |
(19.65 | ) | — | (10.22 | ) | (18.10 | ) | |||||||||||||
| Cash Cost, After By-product Credits, per Ounce |
$ | 1.46 | $ | — | $ | 10.20 | $ | 2.90 | ||||||||||||
| AISC, Before By-product Credits, per Ounce |
$ | 24.50 | $ | — | $ | 26.24 | $ | 28.39 | ||||||||||||
| By-product credits per ounce |
(19.65 | ) | — | (10.22 | ) | (18.10 | ) | |||||||||||||
| AISC, After By-product Credits, per Ounce |
$ | 4.85 | $ | — | $ | 16.02 | $ | 10.29 | ||||||||||||
| In thousands (except per ounce amounts) |
Six Months Ended June 30, 2019 |
|||||||||||
| Casa Berardi |
Nevada Operations |
Total Gold |
||||||||||
| Cost of sales and other direct production costs and depreciation, depletion and amortization |
$ | 104,233 | $ | 68,966 | $ | 173,199 | ||||||
| Depreciation, depletion and amortization |
(34,716 | ) | (26,129 | ) | (60,845 | ) | ||||||
| Treatment costs |
869 | 74 | 943 | |||||||||
| Change in product inventory |
(99 | ) | (5,215 | ) | (5,314 | ) | ||||||
| Reclamation and other costs |
(257 | ) | (1,264 | ) | (1,521 | ) | ||||||
| Cash Cost, Before By-product Credits (1) |
70,030 | 36,432 | 106,462 | |||||||||
| Reclamation and other costs |
256 | 756 | 1,012 | |||||||||
| Exploration |
2,287 | 816 | 3,103 | |||||||||
| Sustaining capital |
15,123 | 25,260 | 40,383 | |||||||||
| AISC, Before By-product Credits (1) |
87,696 | 63,264 | 150,960 | |||||||||
| By-product credits: |
||||||||||||
| Silver |
(217 | ) | (1,796 | ) | (2,013 | ) | ||||||
| Total By-product credits |
(217 | ) | (1,796 | ) | (2,013 | ) | ||||||
| Cash Cost, After By-product Credits |
$ | 69,813 | $ | 34,636 | $ | 104,449 | ||||||
| AISC, After By-product Credits |
$ | 87,479 | $ | 61,468 | $ | 148,947 | ||||||
| Divided by ounces produced |
63 | 23 | 86 | |||||||||
| Cash Cost, Before By-product Credits, per Ounce |
$ | 1,110 | $ | 1,580 | $ | 1,236 | ||||||
| By-product credits per ounce |
(3 | ) | (78 | ) | (23 | ) | ||||||
| Cash Cost, After By-product Credits, per Ounce |
$ | 1,107 | $ | 1,502 | $ | 1,213 | ||||||
| AISC, Before By-product Credits, per Ounce |
$ | 1,390 | $ | 2,744 | $ | 1,752 | ||||||
| By-product credits per ounce |
(3 | ) | (78 | ) | (23 | ) | ||||||
| AISC, After By-product Credits, per Ounce |
$ | 1,387 | $ | 2,666 | $ | 1,729 | ||||||
| In thousands (except per ounce amounts) |
Six Months Ended June 30, 2019 |
|||||||||||
| Total Silver |
Total Gold |
Total |
||||||||||
| Cost of sales and other direct production costs and depreciation, depletion and amortization |
$ | 130,389 | $ | 173,199 | $ | 303,588 | ||||||
| Depreciation, depletion and amortization |
(27,419 | ) | (60,845 | ) | (88,264 | ) | ||||||
| Treatment costs |
23,019 | 943 | 23,962 | |||||||||
| Change in product inventory |
511 | (5,314 | ) | (4,803 | ) | |||||||
| Reclamation and other costs |
(2,082 | ) | (1,521 | ) | (3,603 | ) | ||||||
| Exclusion of Lucky Friday cash costs |
(8,717 | ) | — | (8,717 | ) | |||||||
| Cash Cost, Before By-product Credits (1) |
115,701 | 106,462 | 222,163 | |||||||||
| Reclamation and other costs |
1,721 | 1,012 | 2,733 | |||||||||
| Exploration |
4,298 | 3,103 | 7,401 | |||||||||
| Sustaining capital |
15,864 | 40,383 | 56,247 | |||||||||
| General and administrative |
18,877 | — | 18,877 | |||||||||
| AISC, Before By-product Credits (1) |
156,461 | 150,960 | 307,421 | |||||||||
| By-product credits: |
||||||||||||
| Zinc |
(45,506 | ) | — | (45,506 | ) | |||||||
| Gold |
(41,115 | ) | — | (41,115 | ) | |||||||
| Lead |
(13,115 | ) | — | (13,115 | ) | |||||||
| Silver |
(2,013 | ) | (2,013 | ) | ||||||||
| Total By-product credits |
(99,736 | ) | (2,013 | ) | (101,749 | ) | ||||||
| Cash Cost, After By-product Credits |
$ | 15,965 | $ | 104,449 | $ | 120,414 | ||||||
| AISC, After By-product Credits |
$ | 56,725 | $ | 148,947 | $ | 205,672 | ||||||
| Divided by ounces produced |
5,510 | 86 | ||||||||||
| Cash Cost, Before By-product Credits, per Ounce |
$ | 21.00 | $ | 1,236 | ||||||||
| By-product credits per ounce |
(18.10 | ) | (23 | ) | ||||||||
| Cash Cost, After By-product Credits, per Ounce |
$ | 2.90 | $ | 1,213 | ||||||||
| AISC, Before By-product Credits, per Ounce |
$ | 28.39 | $ | 1,752 | ||||||||
| By-product credits per ounce |
(18.10 | ) | (23 | ) | ||||||||
| AISC, After By-product Credits, per Ounce |
$ | 10.29 | $ | 1,729 | ||||||||
| (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 were on strike from March 2017 until January 2020, and production at Lucky Friday has been limited since the start of the strike. Costs related to ramp-up activities totaling $9.3 million in the first half of 2020, and suspension-related costs totaling $3.0 million during the strike in the first half of 2019, along with $4.1 million and $2.1 million, respectively, in non-cash depreciation expense for those periods, 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) |
In early April 2020, the Government of Mexico issued an order to the mining industry to reduce operations to a minimum level until April 30 in response to COVID-19, and the order was subsequently extended until May 30. Our operations at San Sebastian were suspended during that time. Suspension-related costs totaling $1.0 million for the first half of 2020 are reported in a separate line item on our consolidated statements of operations and excluded from the calculations of cost of sales and other direct production costs and depreciation, depletion and amortization, mining and milling cost per ton, and Cash Cost and AISC, After By-product Credits, per Gold Ounce. |
| (4) |
AISC, Before By-product Credits for our consolidated silver properties includes corporate costs for general and administrative expense, exploration and sustaining capital. |
| (5) |
In late March 2020, the Government of Quebec ordered the mining industry to reduce to minimum operations as part of the fight against COVID-19, causing us to suspend our Casa Berardi operations from March 24 until April 15, when mining operations resumed, resulting in reduced mill throughput. Suspension-related costs totaling $1.6 million for the first half of 2020 are reported in a separate line item on our consolidated statements of operations and excluded from the calculations of cost of sales and other direct production costs and depreciation, depletion and amortization and Cash Cost and AISC, After By-product Credits, per Gold Ounce. |
| (6) |
Production was suspended at the Hollister mine in the third quarter of 2019 and at the Midas mine and Aurora mill in late-2019. Suspension-related costs at Hollister, Midas and Aurora totaling $6.7 million for the first half of 2020 are reported in a separate line item on our consolidated statements of operations and excluded from the calculations of cost of sales and other direct production costs and depreciation, depletion and amortization and Cash Cost and AISC, After By-product Credits, per Gold Ounce. |
Financial Liquidity and Capital Resources
Our liquid assets include (in millions):
| June 30, 2020 |
December 31, 2019 |
|||||||
| Cash and cash equivalents held in U.S. dollars |
$ | 52.2 | $ | 50.3 | ||||
| Cash and cash equivalents held in foreign currency |
23.7 | 12.2 | ||||||
| Total cash and cash equivalents |
75.9 | 62.5 | ||||||
| Marketable equity securities - non-current |
12.2 | 6.2 | ||||||
| Total cash, cash equivalents and investments |
$ | 88.1 | $ | 68.7 | ||||
Cash and cash equivalents increased by $13.4 million in the first six months of 2020. Cash held in foreign currencies represents balances in Canadian dollars and Mexican pesos, with the $11.5 million increase in the first half of 2020 resulting from increases in both currencies held. The value of non-current marketable equity securities increased by $6.0 million (see Note 2 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information).
On February 19, 2020, we completed an offering of Senior Notes in the total principal amount of US$475 million. The Senior Notes are due February 15, 2028 and bear interest at a rate of 7.25% per year from the most recent payment date to which interest has been paid or provided for. The net proceeds from the Senior Notes were used, along with cash on hand, to redeem, in March 2020, our previously-outstanding 2021 Notes having a principal balance of $506.5 million. Also, in July 2018 we entered into a new $250 million revolving credit facility. Interest is payable on amounts drawn from the revolving credit facility at a rate of between 2.25% and 4.00% over the London Interbank Offered Rate, or between 1.25% and 3.00% over an alternative base rate, with interest payable on March 31, June 30, September 30, and December 31 of each year. As a precaution due to uncertainties of the duration, severity and scope of the COVID-19 outbreak, we drew $210.0 million on the facility in the first quarter of 2020. In the second quarter of 2020, we repaid $160.0 million of the amount drawn on the facility, with the remaining $50 million outstanding as of the end of the quarter. In addition, in July 2020 we agreed to issue CAD$50 million (approximately USD$36.8 million at the time of the transaction) in aggregate principal amount of our IQ Notes, which mature in July 2025 and bear interest at a rate of 6.515% per year. The IQ Notes will be issued at a premium of 103.65%, implying an effective annual yield of 5.74% and an aggregate principal amount to be repaid of CAD$48.2 million. The IQ Notes will be issued in four equal installments of CAD$12.5 million in July, August, September and October 2020, with the first installment issued net of CAD$0.6 million in fees. The net proceeds from the IQ Notes will be available for general corporate purposes, including for open market purchases of a portion of the Senior Notes and to pay for capital expenditures at our Casa Berardi unit. Under the note purchase agreement for the IQ Notes and subject to a force majeure event, we are required to invest in the aggregate CAD$100 million at the Casa Berardi unit and other exploration and development projects in Quebec over the four-year period commencing on July 9, 2020. See Note 9 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information on our debt arrangements.
We continue to address the COVID-19 outbreak and face uncertainty related to the potential additional impacts it could have on our operations. It is possible that future restrictions at Casa Berardi, San Sebastian or Greens Creek (or at any other operation) could have an adverse impact on operations or 2020 financial results, including materially so, beyond the second quarter of 2020. We have taken precautionary measures to mitigate the impacts of COVID-19, including implementing operational plans and practices and increasing our cash reserves through a draw-down of our revolving credit facility. As long as they are required, the operational practices implemented could continue to have an adverse impact on our operating results due to deferred production and revenues or additional costs. If required, increasing or prolonged restrictions on our operations could require access to additional sources of liquidity, which may not be available to us. See Part II, Item 1A. Risk Factors - Natural disasters, public health crises, political crises, and other catastrophic events or other events outside of our control may materially and adversely affect our business or financial results in our quarterly report on Form 10-Q for the period ended March 31, 2020 for information on how restrictions related to COVID-19 have recently affected some of our operations.
As further discussed in the Lucky Friday Segment section above, the union employees at Lucky Friday were on strike from March 13, 2017 until the strike ended on January 7, 2020, and production at Lucky Friday has been limited since the start of the strike. Re-staffing of the mine has been substantially completed, with a return to full production anticipated by the end of 2020. However, the ramp-up to full production could take longer or be more costly than anticipated.
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 $2.6 million in the first half of 2020 and $2.4 million in the first half of 2019. 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, 2020, 934,100 shares had 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 4, 2020, was $6.05 per share. No shares were purchased under the program during the first half of 2020.
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 availability of our revolving credit facility, we believe we will be able to meet our obligations and other potential cash requirements during the next 12 months from the date of this report. Our obligations and other uses of cash may include, but are not limited to: debt service obligations related to the Senior Notes and IQ Notes; principal and interest payments under our revolving credit facility; deferral of revenues, care-and-maintenance and other costs related to addressing the impacts of COVID-19 on our operations; 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. We currently estimate a total of approximately $90 million will be spent on capital expenditures, primarily for equipment, infrastructure, and development at our mines, in 2020, including $33.8 million incurred in the first half of 2020. We also estimate exploration and pre-development expenditures will total approximately $13.2 million in 2020, including $5.6 million already incurred in the first half of 2020. Our expenditures for these items and our related plans for 2020 may change based upon our financial position, metals prices, and other considerations. Our ability to fund the activities described above will depend on our operating performance, metals prices, our ability to estimate revenues and costs, sources of liquidity available to us, including the revolving credit facility, and other factors. A sustained downturn in metals prices, significant increase in operational or capital costs or other uses of cash, our inability to access the credit facility or the sources of liquidity discussed above, or other factors beyond our control could impact our plans.
| Six Months Ended |
||||||||
| June 30, 2020 |
June 30, 2019 |
|||||||
| Cash provided by operating activities (in millions) |
$ | 42.5 | $ | 8.7 | ||||
Cash provided by operating activities in the first half of 2020 of $42.5 million represented a $33.8 million increase compared to the $8.7 million provided by operating activities in the first half of 2019. The variance was the result of higher net income, as adjusted for non-cash items, reductions to accounts receivable, and increases to accrued payroll and taxes, partially offset by increases to inventory and decreases to accounts payable.
| Six Months Ended |
||||||||
| June 30, 2020 |
June 30, 2019 |
|||||||
| Cash used in investing activities (in millions) |
$ | (31.1 | ) | $ | (71.3 | ) | ||
During the first half of 2020, we invested $30.7 million in capital expenditures, not including $3.1 million in non-cash finance lease additions, a decrease of $40.6 million compared to the same period in 2019. The variance is due to reduced expenditures at all of our operations except Lucky Friday, where we have been preparing for a return to production after the end of the strike in January 2020.
| Six Months Ended |
||||||||
| June 30, 2020 |
June 30, 2019 |
|||||||
| Cash provided by financing activities (in millions) |
$ | 4.0 | $ | 44.2 | ||||
In the first half of 2020, we received $469.5 million in net proceeds from the issuance of our Senior Notes and drew $210.0 million on our revolving credit facility, and had debt repayments of $506.5 million for redemption of our 2021 Notes and $160.0 million for our revolving credit facility. In the first half of 2019, we drew $170.0 million and had repayments of $118.0 million on our revolving credit facility. We made repayments on our finance leases of $2.8 million and $3.4 million in the six-month periods ended June 30, 2020 and 2019, respectively. During the first six months of 2020 and 2019, we paid cash dividends on our common stock totaling $2.6 million and $2.4 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 $2.7 million and $1.6 million in the first half of 2020 and 2019, respectively, as a result of employees' elections to utilize net share settlement to satisfy their tax withholding obligations related to incentive compensation paid in stock and vesting of restricted stock units. See Note 8 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information.
The effect of changes in foreign exchange rates resulted in a $1.8 million decrease in cash and cash equivalents in the first half of 2020 compared to an increase of $0.4 million in the first half of 2019, with the variance due to weakening of the CAD and MXN relative to the USD in the 2020 period.
Contractual Obligations, Contingent Liabilities and Commitments
The table below presents our fixed, non-cancelable contractual obligations and commitments primarily related to our Senior Notes, credit facility, outstanding purchase orders, certain capital expenditures and lease arrangements as of June 30, 2020 (in thousands):
| Payments Due By Period |
||||||||||||||||||||
| Less than 1 year |
1-3 years |
4-5 years |
More than |
Total |
||||||||||||||||
| Purchase obligations (1) |
$ | 10,722 | — | — | $ | — | $ | 10,722 | ||||||||||||
| Credit facility(2) |
— | 50,000 | — | — | 50,000 | |||||||||||||||
| Contractual obligations (3) |
1,302 | — | — | — | 1,302 | |||||||||||||||
| Finance lease commitments (4) |
6,123 | 6,592 | 960 | — | 13,675 | |||||||||||||||
| Operating lease commitments (5) |
3,946 | 6,001 | 2,052 | 2,601 | 14,600 | |||||||||||||||
| Supplemental executive retirement plan (6) |
622 | 1,509 | 2,107 | 6,440 | 10,678 | |||||||||||||||
| Defined benefit pension plans (6) |
4,800 | — | — | — | 4,800 | |||||||||||||||
| Senior notes (7) |
34,438 | 68,875 | 68,875 | 565,398 | 737,586 | |||||||||||||||
| Total contractual cash obligations |
$ | 61,953 | $ | 132,977 | $ | 73,994 | $ | 574,439 | $ | 843,363 | ||||||||||
| (1) |
Consists of open purchase orders of approximately $5.6 million at the Greens Creek unit, $0.3 million at the Casa Berardi unit, $2.1 million at the Lucky Friday unit and $2.8 million at the Nevada Operations unit. |
| (2) |
We have a $250 million revolving credit agreement under which we are required to pay a standby fee of between 0.5625% and 1.00% per annum on undrawn amounts and interest of between 2.25% and 4.00% over the London Interbank Offered Rate or between 1.25% and 3.00% over an alternative base rate on drawn amounts under the revolving credit agreement. We had $50.0 million drawn and $28.2 million in letters of credit outstanding as of June 30, 2020. The amount in the table above only includes the principal balance drawn, and not an estimate of interest to be paid or the standby fee on potentially undrawn amounts, as the timing of repayment of the principal balance and future draws is unknown at this time. For more information on our credit facility, see Note 9 of Notes to Condensed Consolidated Financial Statements (Unaudited). |
| (3) |
As of June 30, 2020, we were committed to approximately $1.3 million for various items at Greens Creek. |
| (4) |
Includes scheduled finance lease payments of $11.3 million, $0.4 million, $1.2 million and $0.8 million (including interest), respectively, for equipment at our Greens Creek, Lucky Friday, Casa Berardi and Nevada Operations units. These leases have fixed payment terms and contain bargain purchase options at the end of the lease periods (see Note 9 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information). |
| (5) |
We enter into operating leases in the normal course of business. Substantially all lease agreements have fixed payment terms based on the passage of time. Some lease agreements provide us with the option to renew the lease or purchase the leased property. Our future operating lease obligations would change if we exercised these renewal options and if we entered into additional operating lease arrangements. |
| (6) |
We sponsor defined benefit pension plans covering substantially all U.S. employees and provide certain post-retirement benefits for qualifying retired employees, along with a supplemental executive retirement plan. These amounts represent our estimate of the future funding requirements for these plans. We believe we will have funding requirements related to our defined benefit plans beyond one year; however, such obligations are not fixed in nature and are difficult to estimate, as they involve significant assumptions. See Note 7 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information. |
| (7) |
On February 19, 2020, we completed an offering of $475 million in aggregate principal amount of our Senior Notes due February 15, 2028. The Senior Notes bear interest at a rate of 7.25% per year from the original date of issuance or the most recent payment date to which interest has been paid or provided for. Interest on the Senior Notes is payable on February 15 and August 15 of each year, commencing August 15, 2020. See Note 9 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information. |
We record liabilities for costs associated with mine closure, reclamation of land and other environmental matters. At June 30, 2020, our liabilities for these matters totaled $104.6 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, 2020, we had no existing off-balance sheet arrangements, as defined under SEC regulations, that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Critical Accounting Estimates
Our significant accounting policies are described in Note 1 of Notes to Consolidated Financial Statements in Part IV of our annual report filed on Form 10-K for the year ended December 31, 2019. As described in such Note 1, 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, equipment and mineral interests, 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 1. - Business in our annual report filed on Form 10-K for the year ended December 31, 2019, 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, U.S. and global trading policies (including tariffs), and a global economic recovery, including recent uncertainty in China and from the current downturn and continued uncertainty resulting from the COVID-19 outbreak, 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, the global economy has been significantly impacted by the COVID-19 outbreak, with the ultimate severity and duration of the downtown unknown, and China has recently experienced economic contraction which could resume in the future. 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 upon completion of the performance obligation and transfer of control of the product 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 Note 6 of Notes to Condensed Consolidated Financial Statements (Unaudited).
We utilize financially-settled forward and put option contracts to manage our exposure to changes in prices for silver, gold, zinc and lead. See Item 3. – 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, 2019. 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, equipment and mineral interests. 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 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 exposure to market risks and risk management activities includes forward-looking statements that involve risks and uncertainties, as well as summarizes the financial instruments held by us at June 30, 2020, which are sensitive to changes in commodity prices, foreign exchange rates and interest 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, 2019, as updated in Part II, Item 1A. – Risk Factors in our quarterly report filed on Form 10-Q for the period ended March 31, 2020).
Metals Prices
Changes in the market prices of silver, gold, lead and zinc can significantly affect our profitability and cash flow. As discussed in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates, metals prices can fluctuate due to numerous factors beyond our control. As discussed below, we utilize financially-settled forward and put option contracts to manage our exposure to changes in prices for silver, gold, zinc and lead.
Provisional Sales
Sales of all metals products sold directly to customers, including by-product metals, are recorded as revenues when all performance obligations have been completed and the transaction price can be determined or reasonably estimated. For concentrate sales, revenues are generally recorded at the time of shipment at forward prices for the estimated month of settlement. Due to the time elapsed between shipment to the customer and the final settlement with the customer, we must estimate the prices at which sales of our metals will be settled. Previously recorded sales are adjusted to estimated settlement metals prices until final settlement by the customer. Changes in metals prices between shipment and final settlement will result in changes to revenues previously recorded upon shipment. Metals prices can and often do fluctuate widely and are affected by numerous factors beyond our control (see 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, 2019). At June 30, 2020, metals contained in concentrate sales and exposed to future price changes totaled approximately 2.6 million ounces of silver, 7,969 ounces of gold, 9,983 tons of zinc, and 7,405 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 $9.0 million. As discussed in Commodity-Price Risk Management below, we utilize a program designed and intended to mitigate the risk of price adjustments with limited mark-to-market financially-settled forward contracts for our silver, gold, zinc and lead sales. Therefore, the impact of changes in prices on the value of concentrates sold would be substantially offset by a gain or loss on forward contracts.
Commodity-Price Risk Management
We may at times use commodity forward sales commitments, commodity swap contracts and commodity put and call option contracts to manage our exposure to fluctuation in the prices of certain metals we produce. Contract positions are designed to ensure that we will receive a defined minimum price for certain quantities of our production, thereby partially offsetting our exposure to fluctuations in market prices. 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 covered under such programs that would establish a ceiling for prices to be realized on future metals sales. These instruments do, however, expose us to (i) credit risk in the form of non-performance by counterparties for contracts in which the contract price exceeds the spot price of a commodity and (ii) price risk to the extent that the spot price exceeds the contract price for quantities of our production covered under contract positions.
We are currently using financially-settled forward contracts to manage the exposure to changes in prices of silver, gold, zinc and lead contained in our concentrate shipments between the time of shipment and final settlement. In addition, we 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. The following tables summarize the quantities of metals committed under forward sales contracts at June 30, 2020 and December 31, 2019:
| June 30, 2020 |
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 |
||||||||||||||||||||||||||||||||
| 2020 settlements |
2,303 | 7 | 17,086 | 11,409 | $ | 16.97 | $ | 1,728 | $ | 0.89 | $ | 0.75 | ||||||||||||||||||||
| Contracts on forecasted sales |
||||||||||||||||||||||||||||||||
| 2020 settlements |
— | — | 26,731 | 8,322 | N/A | N/A | $ | 0.88 | $ | 0.78 | ||||||||||||||||||||||
| 2021 settlements |
— | — | 4,134 | 1,102 | N/A | N/A | $ | 0.91 | $ | 0.77 | ||||||||||||||||||||||
| December 31, 2019 |
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 |
||||||||||||||||||||||||||||||||
| 2020 settlements |
2,556 | 10 | 21,550 | 2,159 | $ | 17.20 | $ | 1,481 | $ | 1.04 | $ | 0.88 | ||||||||||||||||||||
| Contracts on forecasted sales |
||||||||||||||||||||||||||||||||
| 2020 settlements |
— | — | 441 | 11,740 | N/A | N/A | $ | 1.13 | $ | 0.98 | ||||||||||||||||||||||
In June 2019, we began using financially-settled put option contracts to manage the exposure of our forecasted future gold and silver sales to potential declines in market prices for those metals. These put contracts give us the option, but not the obligation, to realize established prices on quantities of silver and gold to be sold in the future. The following tables summarize the quantities of metals for which we have entered into put contracts and the average exercise prices as of June 30, 2020 and December 31, 2019:
| June 30, 2020 |
Ounces under contract (in 000's) |
Average price per ounce |
||||||||||||||
| Silver |
Gold |
Silver |
Gold |
|||||||||||||
| (ounces) |
(ounces) |
(ounces) |
(ounces) |
|||||||||||||
| Contracts on forecasted sales |
||||||||||||||||
| 2020 settlements |
2,718 | 73 | $ | 15.67 | $ | 1,633 | ||||||||||
| December 31, 2019 |
Ounces under contract (in 000's) |
Average price per ounce |
||||||||||||||
| Silver |
Gold |
Silver |
Gold |
|||||||||||||
| (ounces) |
(ounces) |
(ounces) |
(ounces) |
|||||||||||||
| Contracts on forecasted sales |
||||||||||||||||
| 2020 settlements |
5,700 | 130 | $ | 15.73 | $ | 1,435 | ||||||||||
These forward and put option contracts do not qualify for hedge accounting and are marked-to-market through earnings each period.
As of June 30, 2020, we recorded the following balances for the fair value of the forward and put option contracts held at that time:
| • |
a current asset of $0.2 million, which is included in other current assets and is net of $0.2 million for contracts in a fair value liability position; and |
| • |
a current liability of $9.9 million, which is included in current derivatives liabilities and is net of $0.5 million for contracts in a fair value current asset position. |
We recognized a $3.3 million net loss during the first half of 2020 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 $6.1 million net loss during the first half of 2020 on the contracts utilized to manage exposure to prices for forecasted future sales. The net loss on these contracts is included as a separate line item under other income (expense), as they relate to forecasted future sales, 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 2020 is the result of increasing gold and zinc prices, partially offset by decreasing lead prices. These programs, when utilized and the contracts are not settled prior to their maturity dates, are designed to mitigate the impact of potential future declines in silver, gold, lead and zinc prices from the price levels established in the contracts (see average price information above). When those prices increase compared to the contract prices, we incur losses on the contracts.
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 ("USD") and the Canadian dollar ("CAD") and the Mexican peso ("MXN"), respectively. We have determined 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, 2020, we recognized a net foreign exchange gain of $3.4 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, 2020 would have resulted in a change of approximately $8.0 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, 2020 would have resulted in a change of approximately $0.6 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 similar program with respect to MXN, which was not in use as of June 30, 2020. When in use, the programs utilize forward contracts to buy CAD and MXN, and each contract is designated as a cash flow hedge. As of June 30, 2020, we had 140 forward contracts outstanding to buy CAD$315.1 million having a notional amount of US$239.9 million. The CAD contracts are related to cash operating costs at Casa Berardi forecasted to be incurred from 2020 through 2023 and have CAD-to-USD exchange rates ranging between 1.2702 and 1.3785. There were no outstanding MXN contracts as of June 30, 2020. 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, 2020, we recorded the following balances for the fair value of the contracts:
| • |
a current asset of $0.1 million, which is included in other current assets; |
| • |
a non-current asset of $0.2 million, which is included in other non-current assets; and |
| • |
a current liability of $3.9 million, which is included in current derivatives liabilities; and |
| • |
a non-current liability of $5.3 million, which is included in non-current derivatives liabilities. |
Net unrealized losses of approximately $9.3 million related to the effective portion of the hedges were included in accumulated other comprehensive loss as of June 30, 2020. 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 $4.0 million in net unrealized losses included in accumulated other comprehensive loss as of June 30, 2020 would be reclassified to current earnings in the next twelve months. Net realized losses of approximately $1.9 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, 2020. No net unrealized gains or losses 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, 2020.
Interest Rates
We have a $250 million credit facility, and amounts drawn on the facility are subject to variable rates of interest based on a spread over the London Interbank Offered Rate or an alternative base rate. Interest rates fluctuate due to economic factors beyond our control. We had $50.0 million drawn under the facility as of June 30, 2020. See Note 9 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information on our credit facility.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures as required by Securities Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures, including controls and procedures designed to ensure that information required to be disclosed by us is accumulated and communicated to our management (including our CEO and CFO), were effective as of June 30, 2020, 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, 2020, 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.
Hecla Mining Company and Subsidiaries
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.
Part I, Item 1A. – Risk Factors of our annual report filed on Form 10-K for the year ended December 31, 2019, as updated in Part II, Item 1A. – Risk Factors in our quarterly report on Form 10-Q for the period ended March 31, 2020, 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 2. Unregistered Sales of Securities and Use of Proceeds
On April 9, 2020, we issued 119,048 unregistered shares of our common stock in private placements to the Lucky Friday Pension Plan Trust and 47,619 shares to the Hecla Mining Company Retirement Plan Trust in order to satisfy the funding requirements for those defined benefit pension plans. The private placements were exempt from registration under the Securities Act of 1933 pursuant to section 4(a)(2) of that Act. The shares were subsequently registered for resale on a registration statement on Form S-3 filed with the SEC on April 9, 2020. We did not receive any cash proceeds from the issuance of the shares. The shares had a value of approximately $0.4 million at the time of issuance.
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.
Hecla Mining Company and Wholly Owned Subsidiaries
Form 10-Q – June 30, 2020
Index to Exhibits
| 3.1 |
| 3.2 |
| 4.1 |
| 4.2 |
| 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. * |
| 99.1 |
| 99.2 |
| 101.INS |
Inline XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.** |
| 101.SCH |
Inline XBRL Taxonomy Extension Schema.** |
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation.** |
| 101.DEF |
Inline XBRL Taxonomy Extension Definition.** |
| 101.LAB |
Inline XBRL Taxonomy Extension Labels.** |
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation.** |
| 104 |
Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
___________________
* Filed herewith.
** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities 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.
Items 3 and 5 of Part II are not applicable and are omitted from this report.
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.
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HECLA MINING COMPANY |
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(Registrant) |
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| Date: |
August 6, 2020 |
By: |
/s/ Phillips S. Baker, Jr. |
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Phillips S. Baker, Jr., President, |
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Chief Executive Officer and Director |
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| Date: |
August 6, 2020 |
By: |
/s/ Lindsay A. Hall |
| Lindsay A. Hall, Senior Vice President and |
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| Chief Financial Officer |
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