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Note 13 - Guarantor Subsidiaries

9 Months Ended

Sep. 30, 2020

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 100%-owned subsidiaries: Hecla Limited; Silver Hunter Mining Company; Rio Grande Silver, Inc.; Hecla MC Subsidiary, LLC; Hecla Silver Valley, Inc.; Burke Trading, Inc.; Hecla Montana, Inc.; Revett Silver Company; RC Resources, Inc.; Troy Mine Inc.; Revett Exploration, Inc.; Revett Holdings, Inc.; Mines Management, Inc.; Newhi, Inc.; Montanore Minerals Corp.; Hecla Alaska LLC; Hecla Greens Creek Mining Company; Hecla Admiralty Company; Hecla Juneau Mining Company; Klondex Holdings Inc.; Klondex Gold & Silver Mining Co.; Klondex Midas Holdings Limited; Klondex Aurora Mine Inc.; Klondex Hollister Mine Inc.; and Hecla Quebec, Inc. We completed the offering of the Senior Notes on February 19, 2020 under our shelf registration statement previously filed with the SEC. We issued the four equal tranches of IQ Notes on July 9, August 9, September 9 and October 9, 2020.

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 September 30, 2020
	Parent			Guarantors			Non- Guarantors			Eliminations			Consolidated
	(in thousands)
Assets
Cash and cash equivalents	$	54,986		$	27,180		$	16,503		$	—		$	98,669
Other current assets		7,670			121,535			7,356			(74	)		136,487
Properties, plants, equipment and mineral interests - net		1,913			2,331,450			8,675			—			2,342,038
Intercompany receivable (payable)		(46,498	)		(508,931	)		216,536			338,893			—
Investments in subsidiaries		1,665,459			—			—			(1,665,459	)		—
Other non-current assets		286,403			25,194			(117,489	)		(156,152	)		37,956
Total assets	$	1,969,933		$	1,996,428		$	131,581		$	(1,482,792	)	$	2,615,150
Liabilities and Shareholders' Equity
Current liabilities	$	(268,234	)	$	175,677		$	1,206		$	216,742		$	125,391
Long-term debt		495,839			16,000			238			—			512,077
Non-current portion of accrued reclamation		—			93,530			6,542			—			100,072
Non-current deferred tax liability		—			163,581			—			(34,075	)		129,506
Other non-current liabilities		48,680			4,737			1,039			—			54,456
Shareholders' equity		1,693,648			1,542,903			122,556			(1,665,459	)		1,693,648
Total liabilities and shareholders' equity	$	1,969,933		$	1,996,428		$	131,581		$	(1,482,792	)	$	2,615,150

	As of December 31, 2019
	Parent			Guarantors			Non- Guarantors			Eliminations			Consolidated
	(in thousands)
Assets
Cash and cash equivalents	$	33,750		$	15,357		$	13,345		$	—		$	62,452
Other current assets		9,725			89,722			17,299			(74	)		116,672
Properties, plants, equipment and mineral interests - net		1,913			2,410,458			11,327			—			2,423,698
Intercompany receivable (payable)		(28,381	)		(579,830	)		216,632			391,579			—
Investments in subsidiaries		1,636,802			—			—			(1,636,802	)		—
Other non-current assets		289,422			24,325			(121,981	)		(157,280	)		34,486
Total assets	$	1,943,231		$	1,960,032		$	136,622		$	(1,402,577	)	$	2,637,308
Liabilities and Shareholders' Equity
Current liabilities	$	(309,293	)	$	155,441		$	8,334		$	262,492		$	116,974
Long-term debt		504,729			17,271			761			—			522,761
Non-current portion of accrued reclamation		—			96,389			7,404			—			103,793
Non-current deferred tax liability		—			166,549			—			(28,267	)		138,282
Other non-current liabilities		55,372			6,577			1,126			—			63,075
Shareholders' equity		1,692,423			1,517,805			118,997			(1,636,802	)		1,692,423
Total liabilities and shareholders' equity	$	1,943,231		$	1,960,032		$	136,622		$	(1,402,577	)	$	2,637,308

Unaudited Interim Condensed Consolidating Statements of Operations

	Three Months Ended September 30, 2020
	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
	(in thousands)
Revenues	$	(9,558	)	$	200,124		$	9,137		$	—		$	199,703
Cost of sales		(1,268	)		(99,530	)		(5,179	)		—			(105,977	)
Depreciation, depletion, amortization		—			(39,457	)		(781	)		—			(40,238	)
General and administrative		(4,716	)		(6,688	)		(309	)		—			(11,713	)
Exploration and pre-development		(2	)		(2,977	)		(1,187	)		—			(4,166	)
Loss on derivative contracts		(6,666	)		—			—			—			(6,666	)
Acquisition costs		(2	)		—			—			—			(2	)
Equity in earnings of subsidiaries		21,895			—			—			(21,895	)		—
Other (expense) income		14,066			(19,594	)		2,298			(12,450	)		(15,680	)
Income (loss) before income taxes		13,749			31,878			3,979			(34,345	)		15,261
(Provision) benefit from income taxes		(121	)		(13,211	)		(751	)		12,450			(1,633	)
Net income (loss)		13,628			18,667			3,228			(21,895	)		13,628
Preferred stock dividends		(138	)		—			—			—			(138	)
Income (loss) applicable to common shareholders		13,490			18,667			3,228			(21,895	)		13,490
Net income (loss)		13,628			18,667			3,228			(21,895	)		13,628
Changes in comprehensive income (loss)		6,150			—			—			—			6,150
Comprehensive income (loss)	$	19,778		$	18,667		$	3,228		$	(21,895	)	$	19,778

	Nine Months Ended September 30, 2020
	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
	(in thousands)
Revenues	$	(12,877	)	$	491,860		$	24,000		$	—		$	502,983
Cost of sales		(2,596	)		(266,986	)		(15,135	)		—			(284,717	)
Depreciation, depletion, amortization		—			(116,178	)		(3,149	)		—			(119,327	)
General and administrative		(9,520	)		(16,816	)		(1,295	)		—			(27,631	)
Exploration and pre-development		(25	)		(6,777	)		(2,954	)		—			(9,756	)
Loss on derivative contracts		(12,775	)		—			—			—			(12,775	)
Acquisition costs		(13	)		—			—			—			(13	)
Equity in earnings of subsidiaries		28,624			—			—			(28,624	)		—
Other (expense) income		(8,245	)		(40,191	)		3,882			(20,598	)		(65,152	)
Income (loss) before income taxes		(17,427	)		44,912			5,349			(49,222	)		(16,388	)
(Provision) benefit from income taxes		(158	)		(19,812	)		(1,825	)		20,598			(1,197	)
Net income (loss)		(17,585	)		25,100			3,524			(28,624	)		(17,585	)
Preferred stock dividends		(414	)		—			—			—			(414	)
Income (loss) applicable to common shareholders		(17,999	)		25,100			3,524			(28,624	)		(17,999	)
Net income (loss)		(17,585	)		25,100			3,524			(28,624	)		(17,585	)
Changes in comprehensive income (loss)		(2,801	)		—			—			—			(2,801	)
Comprehensive income (loss)	$	(20,386	)	$	25,100		$	3,524		$	(28,624	)	$	(20,386	)

	Three Months Ended September 30, 2019
	Parent			Guarantors			Non- Guarantors			Eliminations			Consolidated
	(in thousands)
Revenues	$	1,049		$	144,999		$	15,484		$	—		$	161,532
Cost of sales		(472	)		(85,829	)		(9,577	)		—			(95,878	)
Depreciation, depletion, amortization		—			(47,448	)		(3,326	)		—			(50,774	)
General and administrative		(2,951	)		(4,722	)		(305	)		—			(7,978	)
Exploration and pre-development		(3	)		(4,315	)		(1,371	)		—			(5,689	)
Research and development		—			37			(90	)		—			(53	)
Gain on derivative contracts		(4,718	)		—			—			—			(4,718	)
Acquisition costs		(100	)		(83	)		—			—			(183	)
Equity in earnings of subsidiaries		(6,761	)		—			—			6,761			—
Other expense		(5,560	)		(8,523	)		451			(3,757	)		(17,389	)
Income (loss) before income taxes		(19,516	)		(5,884	)		1,266			3,004			(21,130	)
(Provision) benefit from income taxes		—			(625	)		(1,518	)		3,757			1,614
Net income (loss)		(19,516	)		(6,509	)		(252	)		6,761			(19,516	)
Preferred stock dividends		(138	)		—			—			—			(138	)
Income (loss) applicable to common shareholders		(19,654	)		(6,509	)		(252	)		6,761			(19,654	)
Net income (loss)		(19,516	)		(6,509	)		(252	)		6,761			(19,516	)
Changes in comprehensive income (loss)		(3,288	)		—			—			—			(3,288	)
Comprehensive income (loss)	$	(22,804	)	$	(6,509	)	$	(252	)	$	6,761		$	(22,804	)

	Nine Months Ended September 30, 2019
	Parent			Guarantors			Non- Guarantors			Eliminations			Consolidated
	(in thousands)
Revenues	$	(136	)	$	409,339		$	39,118		$	—		$	448,321
Cost of sales		(1,190	)		(280,397	)		(29,615	)		—			(311,202	)
Depreciation, depletion, amortization		—			(132,104	)		(6,934	)		—			(139,038	)
General and administrative		(12,110	)		(13,571	)		(1,174	)		—			(26,855	)
Exploration and pre-development		(22	)		(10,645	)		(5,424	)		—			(16,091	)
Research and development		—			(521	)		(93	)		—			(614	)
Gain/(loss) on derivative contracts		(2,719	)		—			—			—			(2,719	)
Acquisition costs		(221	)		(219	)		(153	)		—			(593	)
Equity in earnings of subsidiaries		(77,563	)		—			—			77,563			—
Other (expense) income		2,382			(54,975	)		2,383			(12,589	)		(62,799	)
Income (loss) before income taxes		(91,579	)		(83,093	)		(1,892	)		64,974			(111,590	)
(Provision) benefit from income taxes		(2	)		6,864			558			12,589			20,009
Net income (loss)		(91,581	)		(76,229	)		(1,334	)		77,563			(91,581	)
Preferred stock dividends		(414	)		—			—			—			(414	)
Income (loss) applicable to common shareholders		(91,995	)		(76,229	)		(1,334	)		77,563			(91,995	)
Net income (loss)		(91,581	)		(76,229	)		(1,334	)		77,563			(91,581	)
Changes in comprehensive income (loss)		4,511			—			—			—			4,511
Comprehensive income (loss)	$	(87,070	)	$	(76,229	)	$	(1,334	)	$	77,563		$	(87,070	)

Unaudited Interim Condensed Consolidating Statements of Cash Flows

	Nine Months Ended September 30, 2020
	Parent			Guarantors			Non-Guarantors			Eliminations			Consolidated
	(in thousands)
Cash flows from operating activities	$	47,945		$	144,109		$	23,494		$	(99,656	)	$	115,892
Cash flows from investing activities:
Additions to properties, plants, equipment and mineral interests		—			(53,846	)		(536	)		—			(54,382	)
Other investing activities, net		(28,657	)		262			(1,617	)		28,656			(1,356	)
Cash flows from financing activities:
Dividends paid to shareholders		(4,365	)		—			—			—			(4,365	)
Borrowings on debt		707,107			—			—			—			707,107
Payments on debt		(716,500	)		(4,246	)		—			—			(720,746	)
Other financing activity, net		15,706			(73,632	)		(17,106	)		71,000			(4,032	)
Effect of exchange rates on cash		—			(796	)		(1,077	)		—			(1,873	)
Changes in cash, cash equivalents and restricted cash and cash equivalents		21,236			11,851			3,158			—			36,245
Beginning cash, cash equivalents and restricted cash and cash equivalents		33,750			16,382			13,345			—			63,477
Ending cash, cash equivalents and restricted cash and cash equivalents	$	54,986		$	28,233		$	16,503		$	—		$	99,722

	Nine Months Ended September 30, 2019
	Parent			Guarantors			Non- Guarantors			Eliminations			Consolidated
	(in thousands)
Cash flows from operating activities	$	(140,110	)	$	92,042		$	(15,242	)	$	126,919		$	63,609
Cash flows from investing activities:
Additions to properties, plants, equipment and mineral interests		—			(56,329	)		(41,009	)		—			(97,338	)
Acquisitions of other companies, net of cash acquired		—						—			—			—
Other investing activities, net		72,128			42			1,415			(72,128	)		1,457
Cash flows from financing activities:
Dividends paid to shareholders		(4,070	)		—			—			—			(4,070	)
Borrowings on debt		245,000			—			—			—			245,000
Payments on debt		(195,000	)		(4,965	)		(519	)		—			(200,484	)
Other financing activity, net		34,769			(38,672	)		55,869			(54,791	)		(2,825	)
Effect of exchange rates on cash		—			257			—			—			257
Changes in cash, cash equivalents and restricted cash and cash equivalents		12,717			(7,625	)		514			—			5,606
Beginning cash, cash equivalents and restricted cash and cash equivalents		6,266			18,258			3,890			—			28,414
Ending cash, cash equivalents and restricted cash and cash equivalents	$	18,983		$	10,633		$	4,404		$	—		$	34,020

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

These risks, uncertainties and other factors include, but are not limited to, those set forth under Part I, Item 1A. – 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.