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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 

 

Commission file number 

 

1-8491

 

HECLA MINING COMPANY

(Exact name of registrant as specified in its Charter)

 

 

Delaware

 

77-0664171

 

 

State or Other Jurisdiction of

 

I.R.S. Employer

 

 

Incorporation or Organization

 

Identification No.

 

 

 

 

 

 

 

6500 Mineral Drive, Suite 200

 

 

 

 

Coeur d'Alene, Idaho

 

83815-9408

 

 

Address of Principal Executive Offices

 

Zip Code

 

 

    

208-769-4100

Registrant's Telephone Number, Including Area Code

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

 Name of each exchange
on which registered

Common Stock, par value $0.25 per share

 

HL

 

New York Stock Exchange

Series B Cumulative Convertible Preferred

Stock, par value $0.25 per share

 

HL-PB

 

New York Stock Exchange

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒.    No ☐.

 

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).

Yes ☒.    No ☐.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☒.

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 .    No ☒.

 

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 November 4, 2020

Common stock, par value
$0.25 per share

 

531,022,302

 

 

 

 

 

Hecla Mining Company and Subsidiaries

 

Form 10-Q

 

For the Quarter Ended September 30, 2020

 

INDEX*

 

 

 

 

Page

PART I - Financial Information 

 

       

 

 

Item 1 – Condensed Consolidated Financial Statements (Unaudited)

 

       

 

 

Condensed Consolidated Balance Sheets - September 30, 2020 and December 31, 2019

3

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) - Three Months Ended and Nine Months Ended September 30, 2020 and 2019

4

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2020 and 2019

5

       
   

Condensed Consolidated Statements of Changes in Stockholders' Equity - Three Months Ended and Nine Months Ended September 30, 2020 and 2019

6

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

8

 

 

 

 

   

Forward Looking Statements

 
       

 

 

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

33

 

 

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

68

 

 

 

 

 

 

Item 4. Controls and Procedures

70

 

 

 

 

PART II - Other Information

 

 

 

 

 

 

 

Item 1 – Legal Proceedings

 

 

 

 

71

 

 

Item 1A – Risk Factors

 

 

 

 

71

   

Item 2 Unregistered Sales of Securities and Use of Proceeds

 
      71
   

Item 4 – Mine Safety Disclosures

 
      71
   

Item 6 – Exhibits

 
      72

 

 

Signatures

 

 

 

 

73

 

 

 

 

*Items 3 and 5 of Part II are omitted as they are not applicable.

 

 

2

 

Part I - Financial Information

 

Item 1. Financial Statements

 

 

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except shares)

 

  

September 30,

2020

  

December 31,

2019

 

ASSETS

 

Current assets:

        

Cash and cash equivalents

 $98,669  $62,452 

Accounts receivable:

        

Trade

  28,464   11,952 

Taxes

  6,343   20,048 

Other, net

  6,642   6,421 

Inventories:

        

Concentrates, doré, and stockpiled ore

  50,019   30,364 

Materials and supplies

  37,611   35,849 

Prepaid taxes

  107   107 

Other current assets

  7,301   11,931 

Total current assets

  235,156   179,124 

Non-current investments

  17,362   6,207 

Non-current restricted cash and investments

  1,053   1,025 

Properties, plants, equipment and mineral interests, net

  2,342,038   2,423,698 

Operating lease right-of-use assets

  11,928   16,381 

Non-current deferred income taxes

  3,408   3,537 

Other non-current assets and deferred charges

  4,205   7,336 

Total assets

 $2,615,150  $2,637,308 

LIABILITIES

 

Current liabilities:

        

Accounts payable and accrued liabilities

 $55,315  $57,716 

Accrued payroll and related benefits

  29,201   26,916 

Accrued taxes

  7,890   4,776 

Current portion of finance leases

  6,187   5,429 

Current portion of operating leases

  3,590   5,580 

Current portion of accrued reclamation and closure costs

  5,892   4,581 

Accrued interest

  4,935   5,804 

Current derivatives liabilities

  12,232   6,170 

Other current liabilities

  149   2 

Total current liabilities

  125,391   116,974 

Non-current finance leases

  7,883   7,214 

Non-current operating leases

  8,355   10,818 

Accrued reclamation and closure costs

  100,072   103,793 

Long-term debt - notes

  495,839   504,729 

Non-current deferred tax liability

  129,506   138,282 

Non-current pension liability

  48,303   56,219 

Other non-current liabilities

  6,153   6,856 

Total liabilities

  921,502   944,885 

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

          

SHAREHOLDERS’ EQUITY

 

Preferred stock, 5,000,000 shares authorized:

        

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

  39   39 

Common stock, $0.25 par value, 750,000,000 authorized shares; issued September 30, 2020 — 537,655,291 shares and December 31, 2019 — 529,182,994 shares

  134,421   132,292 

Capital surplus

  1,998,322   1,973,700 

Accumulated deficit

  (375,527)  (353,331)

Accumulated other comprehensive loss

  (40,111)  (37,310)

Less treasury stock, at cost; September 30, 2020 — 6,821,044 and December 31, 2019 — 6,287,271 shares issued and held in treasury

  (23,496)  (22,967)

Total shareholders’ equity

  1,693,648   1,692,423 

Total liabilities and shareholders’ equity

 $2,615,150  $2,637,308 

 

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

 

3

 

 

Hecla Mining Company and Subsidiaries

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

2020

   

September 30,

2019

   

September 30,

2020

   

September 30,

2019

 
                                 

Sales of products

  $ 199,703     $ 161,532     $ 502,983     $ 448,321  

Cost of sales and other direct production costs

    105,977       95,878       284,717       311,202  

Depreciation, depletion and amortization

    40,238       50,774       119,327       139,038  

Total cost of sales

    146,215       146,652       404,044       450,240  

Gross profit (loss)

    53,488       14,880       98,939       (1,919 )

Other operating expenses:

                               

General and administrative

    11,713       7,978       27,631       26,855  

Exploration

    3,407       4,808       7,899       13,556  

Pre-development

    759       881       1,857       2,535  

Research and development

          53             614  

Other operating expense

    3,497       437       5,851       1,681  

(Gain) loss on disposition of properties, plants, equipment and mineral interests

    (14 )     24       559       4,666  

Provision for closed operations and reclamation

    1,254       1,907       2,807       3,529  

Ramp-up and suspension costs

    1,541       3,722       24,109       8,766  

Foundation grant

                1,970        

Acquisition costs

    2       183       13       593  

Total other operating expense

    22,159       19,993       72,696       62,795  

Income (loss) from operations

    31,329       (5,113 )     26,243       (64,714 )

Other income (expense):

                               

Loss on derivative contracts

    (6,666 )     (4,718 )     (12,775 )     (2,719 )

Gain on disposition of investments

          927             927  

Unrealized gain (loss) on investments

    3,979       (126 )     9,410       (1,159 )

Foreign exchange (loss) gain

    (2,196 )     773       1,235       (6,741 )

Other expense

    (406 )     (1,096 )     (1,582 )     (3,407 )

Interest expense

    (10,779 )     (11,777 )     (38,919 )     (33,777 )

Total other expense

    (16,068 )     (16,017 )     (42,631 )     (46,876 )

Income (loss) before income taxes

    15,261       (21,130 )     (16,388 )     (111,590 )

Income tax (provision) benefit

    (1,633 )     1,614       (1,197 )     20,009  

Net income (loss)

    13,628       (19,516 )     (17,585 )     (91,581 )

Preferred stock dividends

    (138 )     (138 )     (414 )     (414 )

Income (loss) applicable to common shareholders

  $ 13,490     $ (19,654 )   $ (17,999 )   $ (91,995 )

Comprehensive income (loss):

                               

Net income (loss)

  $ 13,628     $ (19,516 )   $ (17,585 )   $ (91,581 )

Change in fair value of derivative contracts designated as hedge transactions

    6,150       (3,288 )     (2,801 )     4,511  

Comprehensive income (loss)

  $ 19,778     $ (22,804 )   $ (20,386 )   $ (87,070 )

Basic income (loss) per common share after preferred dividends

  $ 0.03     $ (0.04 )   $ (0.03 )   $ (0.19 )

Diluted income (loss) per common share after preferred dividends

  $ 0.03     $ (0.04 )   $ (0.03 )   $ (0.19 )

Weighted average number of common shares outstanding - basic

    529,838       489,971       526,098       486,298  

Weighted average number of common shares outstanding - diluted

    535,788       489,971       526,098       486,298  

Cash dividends declared per common share

  $ 0.0025     $ 0.0025     $ 0.0075     $ 0.0075  

 

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

 

4

 

Hecla Mining Company and Subsidiaries

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

  

Nine Months Ended

 
  

September 30, 2020

  

September 30, 2019

 
         

Operating activities:

        

Net loss

 $(17,585) $(91,581)

Non-cash elements included in net loss:

        

Depreciation, depletion and amortization

  126,911   143,040 

Gain on disposition of investments

     (927)

Unrealized (gain) loss on investments

  (9,410)  1,159 

Adjustment of inventory to market value

     1,399 

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

  559   4,666 

Provision for reclamation and closure costs

  4,638   5,298 

Stock compensation

  5,229   4,758 

Deferred income taxes

  (6,390)  (26,616)

Amortization of loan origination fees

  3,066   1,919 

Loss on derivative contracts

  4,483   5,824 

Foreign exchange (gain) loss

  (2,810)  6,263 

Foundation grant

  1,970    

Change in assets and liabilities, net of business acquisitions:

        

Accounts receivable

  (3,741)  (10,215)

Inventories

  (13,090)  (6,501)

Other current and non-current assets

  6,748   14,913 

Accounts payable and accrued liabilities

  (1,762)  5,616 

Accrued payroll and related benefits

  11,317   4,506 

Accrued taxes

  3,276   (5,733)

Accrued reclamation and closure costs and other non-current liabilities

  2,483   5,821 

Cash provided by operating activities

  115,892   63,609 

Investing activities:

        

Additions to properties, plants, equipment and mineral interests

  (54,382)  (97,338)

Proceeds from sale of investments

     1,760 

Proceeds from disposition of properties, plants, equipment and mineral interests

  305   86 

Purchases of investments

  (1,661)  (389)

Net cash used in investing activities

  (55,738)  (95,881)

Financing activities:

        

Acquisition of treasury shares

  (2,745)  (2,239)

Dividends paid to common shareholders

  (3,951)  (3,655)

Dividends paid to preferred shareholders

  (414)  (414)

Credit facility and debt issuance fees

  (1,287)  (587)

Borrowings on debt

  707,107   245,000 

Repayments of debt

  (716,500)  (195,000)

Repayments of finance leases

  (4,246)  (5,484)

Net cash (used in) provided by financing activities

  (22,036)  37,621 

Effect of exchange rates on cash

  (1,873)  257 

Net increase in cash, cash equivalents and restricted cash and cash equivalents

  36,245   5,606 

Cash, cash equivalents and restricted cash and cash equivalents at beginning of period

  63,477   28,414 

Cash, cash equivalents and restricted cash and cash equivalents at end of period

 $99,722  $34,020 

Supplemental disclosure of cash flow information:

        

Cash payment for interest

 $33,828  $21,696 

Significant non-cash investing and financing activities:

        

Addition of finance lease obligations

 $5,747  $6,506 

Recognition of operating lease liabilities and right-of-use assets

 $  $22,365 

Payment of accrued compensation in stock

 $5,095  $8,274 

Marketable equity securities received for sale of mineral interest

 $  $2,257 

 

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

 

5

 

 

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 September 30, 2020

 
  

Series B
Preferred
Stock

  

Common
Stock

  

Additional
Paid-In
Capital

  

Accumulated
Deficit

  

Accumulated
Other
Comprehensive
Loss, net

  

Treasury
Stock

  

Total

 

Balances, July 1, 2020

 $39  $133,699  $1,982,400  $(387,688) $(46,261) $(23,496) $1,658,693 

Net income

           13,628         13,628 

Restricted stock units granted

        1,317            1,317 

Common stock dividends declared ($0.0025 per common share)

           (1,329)        (1,329)

Series B Preferred Stock dividends declared ($0.875 per share)

           (138)        (138)

Common stock issued for 401(k) match (439,000 shares)

     110   1,303            1,413 

Common stock issued to pension plans (2,058,000 shares)

     514   11,917            12,431 

Common stock issued to directors (391,000 shares)

     98   1,385            1,483 

Other comprehensive income

              6,150      6,150 

Balances, September 30, 2020

 $39  $134,421  $1,998,322  $(375,527) $(40,111) $(23,496) $1,693,648 

 

 

  

Three Months Ended September 30, 2019

 
  

Series B
Preferred
Stock

  

Common
Stock

  

Additional
Paid-In
Capital

  

Accumulated
Deficit

  

Accumulated
Other
Comprehensive
Loss, net

  

Treasury
Stock

  

Total

 

Balances, July 1, 2019

 $39  $123,701  $1,895,617  $(323,079) $(34,670) $(22,380) $1,639,228 

Net loss

           (19,516)        (19,516)

Restricted stock units granted

        1,206            1,206 

Restricted stock units distributed (1,164,000 shares)

     291   (291)        (595)  (595)

Common stock dividends declared ($0.0025 per common share)

           (1,225)        (1,225)

Series B Preferred Stock dividends declared ($0.875 per share)

           (138)        (138)

Common stock issued for 401(k) match (562,000 shares)

     141   831            972 

Other comprehensive loss

              (3,288)     (3,288)

Balances, September 30, 2019

 $39  $124,133  $1,897,363  $(343,958) $(37,958) $(22,975) $1,616,644 

 

6

 

  

Nine Months Ended September 30, 2020

 
  

Series B
Preferred
Stock

  

Common
Stock

  

Additional
Paid-In
Capital

  

Accumulated
Deficit

  

Accumulated
Other
Comprehensive
Loss, net

  

Treasury
Stock

  

Total

 

Balances, January 1, 2020

 $39  $132,292  $1,973,700  $(353,331) $(37,310) $(22,967) $1,692,423 

Net loss

           (17,585)        (17,585)

Restricted stock units granted

        3,746            3,746 

Restricted stock units distributed (1,702,000 shares)

     426   (426)        (1,479)  (1,479)

Common stock dividends declared ($0.0075 per common share)

           (3,951)        (3,951)

Series B Preferred Stock dividends declared ($2.625 per share)

           (414)        (414)

Common stock issued for 401(k) match (1,396,000 shares)

     350   3,295            3,645 

Treasury shares issued to charitable foundation (650,000 shares)

           (246)     2,216   1,970 

Common stock issued for employee incentive compensation (2,800,000 shares)

     700   4,396         (1,266)  3,830 

Common stock issued to pension plans (2,225,000 shares)

     555   12,226            12,781 

Common stock issued to directors (391,000 shares)

     98   1,385            1,483 

Other comprehensive loss

              (2,801)     (2,801)

Balances, September 30, 2020

 $39  $134,421  $1,998,322  $(375,527) $(40,111) $(23,496) $1,693,648 

 

 

  

Nine Months Ended September 30, 2019

 
  

Series B
Preferred
Stock

  

Common
Stock

  

Additional
Paid-In
Capital

  

Accumulated
Deficit

  

Accumulated
Other
Comprehensive
Loss, net

  

Treasury
Stock

  

Total

 

Balances, January 1, 2019

 $39  $121,956  $1,880,481  $(248,308) $(42,469) $(20,736) $1,690,963 

Net loss

           (91,581)        (91,581)

Restricted stock units granted

        4,303            4,303 

Restricted stock units distributed (1,164,000 shares)

     291   (291)        (636)  (636)

Common stock dividends declared ($0.0075 per common share)

           (3,655)        (3,655)

Series B Preferred Stock dividends declared ($2.625 per share)

           (414)        (414)

Common stock issued for 401(k) match (1,307,000 shares)

     327   2,425            2,752 

Adjustment to fair value of warrants issued for purchase of another company

        (325)           (325)

Common stock issued for employee incentive compensation (3,597,380 shares)

     899   7,375         (1,603)  6,671 

Common stock issued to pension plans (2,384,000 shares)

     597   3,003            3,600 

Common stock issued to directors (253,000 shares)

     63   392            455 

Other comprehensive income

              4,511      4,511 

Balances, September 30, 2019

 $39  $124,133  $1,897,363  $(343,958) $(37,958) $(22,975) $1,616,644 

 

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

 

7

 

 

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 until 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 nine months of 2020 totaled $1.6 million and $1.1 million, respectively. In addition, we have incurred costs of approximately $1.9 million in the first nine months of 2020 related to quarantining employees at Greens Creek, which started in late March 2020. At Lucky Friday and Nevada Operations, COVID-19 procedures have been implemented without a significant impact on production or operating costs. It is possible that future restrictions at any of our operations could have an adverse impact on operations or 2020 financial results, including materially so, beyond the third quarter of 2020.

 

We have taken precautionary measures to mitigate the impact of COVID-19, including implementing operational plans and practices and increasing our cash reserves through a temporary draw-down of our revolving credit facility, which has since been fully repaid (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 September 30, 2020 and December 31, 2019, the fair value of our non-current investments was $17.4 million and $6.2 million, respectively.  Our non-current investments consist of marketable equity securities which are carried at fair value. The cost basis of our non-current investments was approximately $11.3 million and $9.8 million at September 30, 2020 and December 31, 2019, respectively. During the first nine months of 2020 and 2019, we recognized $9.4 million in net unrealized gains and $1.2 million in net unrealized losses, respectively, in current earnings. During the nine months ended September 30, 2020 and 2019, we acquired marketable equity securities having a cost basis of $1.7 million and $0.4 million, respectively. In the first nine months of 2019, we sold marketable equity securities having a cost basis of $0.9 million for proceeds of $1.8 million, resulting in a gain of $0.9 million.

  

 

 

Note 3.   Income Taxes

 

Major components of our income tax benefit (provision) for the three and nine months ended September 30, 2020 and 2019 are as follows (in thousands):

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Current:

                

Domestic

 $(705) $(315) $(1,690) $(317)

Foreign

  (2,286)  (2,467)  (6,005)  (5,260)

Total current income tax (provision) benefit

  (2,991)  (2,782)  (7,695)  (5,577)
                 

Deferred:

                

Domestic

  192   2,652   3,307   10,585 

Foreign

  1,166   1,744   3,191   15,001 

Total deferred income tax benefit (provision)

  1,358   4,396   6,498   25,586 

Total income tax (provision) benefit

 $(1,633) $1,614  $(1,197) $20,009 

 

The current income tax (provisions) benefits for the three and nine months ended September 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 September 30, 2020 continued to support a full valuation allowance in the U.S. for the Hecla U.S. group.

 

As of September 30, 2020, we had a net deferred tax liability in the U.S. of $34.9 million, a net deferred tax liability in Canada of $94.6 million, and a net deferred tax asset in Mexico of $3.4 million, for a consolidated worldwide net deferred tax liability of $126.1 million.

 

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 September 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) $1.1 million to the EPA for its past response costs at the site and (ii) any future response costs at the site under the Consent Order, in exchange for a covenant not to sue by the EPA. Hecla Limited paid the $1.1 million to the EPA for its past response costs and in December 2014 submitted to EPA the Engineering Evaluation and Cost Analysis (“EE/CA”) for the site. The EE/CA evaluates three alternative response actions: 1) no action, 2) off-site disposal, and 3) on-site disposal. The range in estimated costs of these alternatives is $0 to $221 million. In the EE/CA, Hecla Limited recommended that EPA approve on-site disposal, which is currently estimated to cost $6.1 million, on the basis that it is the most appropriate response action under CERCLA. In October 2019, the EPA published the EE/CA for a 30-day public notice comment period, and the agency is expected to make a final decision on the appropriate response action after the comment process is complete. It is anticipated that Hecla Limited will implement the response action selected by the EPA pursuant to an amendment to the Consent Order or a new order. Based on the foregoing, we believe it is probable that Hecla Limited will incur a liability for remediation at the site. In the fourth quarter of 2014, we accrued $5.6 million, and in October 2019 we increased that amount to $6.1 million, with the increase representing estimated costs to begin implementation of the remedy in 2020. It is possible that Hecla Limited’s liability will be more than $6.1 million, and any increase in liability could have a material adverse effect on Hecla Limited’s or our results of operations or financial position.

 

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 $9.6 million in 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 the site, including the relative contributions of contamination by the various PRPs.

 

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 $4.5 million in response costs and estimated that total remediation costs may exceed $100 million. Hecla Limited cannot with reasonable certainty estimate the amount or range of liability, if any, relating to this matter because of, among other reasons, the lack of information concerning the site, including the relative contributions of contamination by various other PRPs.

 

 

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 $5 million in damages, including attorneys’ fees and costs. The lawsuit will be vigorously defended and we believe strong defenses exist against all claims made therein and, as noted above, both CoCa and CRI have limited assets with which to satisfy any claim.

 

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 13%. The lawsuit alleges that Hecla and Havilah are in breach of contract in connection with the issuance to Waterton of warrants to purchase Hecla common stock and Havilah common shares to replace warrants to purchase Klondex common shares that Waterton owned prior to the July 2018 acquisition. The lawsuit claims Hecla and Havilah issued warrants to Waterton valued at $3.7 million but that Waterton was entitled to warrants valued at $8.9 million. We believe the lawsuit is without merit and will vigorously defend it.

 

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 $475 million aggregate principal amount of 7.25% Senior Notes due 2028. The net proceeds from the offering of the Senior Notes were used, together with cash on hand, to redeem all of our previously-outstanding 6.875% Senior Notes that were due in 2021 and had a principal balance of $506.5 million. Interest on the Senior Notes is payable on February 15 and August 15 of each year, commencing August 15, 2020.

 

As discussed in Note 9, on July 9, 2020, we entered into a note purchase agreement pursuant to which we issued CAD$50 million (approximately USD$36.8 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 are 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 were issued in four equal installments of CAD$12.5 million on July 9, August 9, September 9 and October 9, 2020, with the first installment issued net of CAD$0.6 million in fees. The IQ Notes bear interest on amounts outstanding at a rate of 6.515% per year, payable on January 9 and July 9 of each year, commencing January 9, 2021.

 

Other Commitments

 

Our contractual obligations as of September 30, 2020 included approximately $0.7 million for various costs. In addition, our open purchase orders at September 30, 2020 included approximately $3.2 million, $0.4 million, $5.6 million and $3.3 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 $15.0 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 $13.6 million relating to payments on operating leases (see Note 9 for more information). As part of our ongoing business and operations, we are required to provide surety bonds, bank letters of credit, and restricted deposits for various purposes, including financial support for environmental reclamation obligations and workers compensation programs. As of September 30, 2020, we had surety bonds totaling $182.6 million and letters of credit totaling $20.3 million in place as financial support for future reclamation and closure costs, self-insurance, and employee benefit plans. The obligations associated with these instruments are generally related to performance requirements that we address through ongoing operations. As the requirements are met, the beneficiary of the associated instruments cancels or returns the instrument to the issuing entity. Certain of these instruments are associated with operating sites with long-lived assets and will remain outstanding until closure of the sites. We believe we are in compliance with all applicable bonding requirements and will be able to satisfy future bonding requirements as they arise.

 

Other Contingencies

 

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.    Income (Loss) Per Common Share

 

We are authorized to issue 750,000,000 shares of common stock, $0.25 par value per share. At September 30, 2020, there were 537,655,291 shares of our common stock issued with 6,821,044 of those shares held in treasury, for a net of 530,834,247 shares outstanding. Basic and diluted income (loss) per common share, after preferred dividends, was $0.03 and $(0.04) for the three-month periods ended September 30, 2020 and 2019, respectively. Basic and diluted loss per common share, after preferred dividends, was $(0.03) and $(0.19) for the nine-month periods ended September 30, 2020 and 2019, respectively.

 

Diluted income (loss) per share for the three and nine months ended September 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 period ended September 30, 2020, the calculation of diluted income per common share included (i) 2,499,956 restricted stock units that were unvested during the period, (ii) 1,454,246 warrants to purchase one share of common stock and (iii) 1,996,112 deferred shares that were dilutive. For the three-month period ended September 30, 2019 and nine-month periods ended September 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 (i) concentrates containing silver, gold (in the case of Greens Creek), lead and zinc, (ii) carbon material containing silver and gold, and (iii) doré containing silver and gold. We are currently organized and managed in five segments, which represent our operating units: the Greens Creek unit, the Lucky Friday unit, the Casa Berardi unit, the San Sebastian unit and the Nevada Operations unit.

 

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 nine months ended September 30, 2020 and 2019 (in thousands):

 

  

Three Months Ended
September 30,

  

Nine Months Ended
September 30,

 
  

2020

  

2019

  

2020

  

2019

 

Net sales to unaffiliated customers:

                

Greens Creek

 $93,494  $59,015  $232,218  $194,542 

Lucky Friday

  20,812   4,017   35,097   11,150 

Casa Berardi

  53,554   53,453   149,731   139,015 

San Sebastian

  9,138   15,435   23,998   39,028 

Nevada Operations

  22,705   29,612   61,939   64,586 
  $199,703  $161,532  $502,983  $448,321 

Income (loss) from operations:

                

Greens Creek

 $41,527  $17,556  $72,394  $52,130 

Lucky Friday

  957   (3,727)  (12,381)  (8,779)

Casa Berardi

  (828)  (380)  (1,504)  (26,262)

San Sebastian

  1,946   1,077   1,766   (2,358)

Nevada Operations

  5,489   (8,346)  6,112   (43,812)

Other

  (17,762)  (11,293)  (40,144)  (35,633)
  $31,329  $(5,113) $26,243  $(64,714)

 

The following table presents identifiable assets by reportable segment as of September 30, 2020 and December 31, 2019 (in thousands):

 

  

September 30, 2020

  

December 31, 2019

 

Identifiable assets:

        

Greens Creek

 $612,963  $639,047 

Lucky Friday

  508,053   440,615 

Casa Berardi

  695,629   703,511 

San Sebastian

  35,973   48,294 

Nevada Operations

  520,871   528,466 

Other

  241,661   277,375 
  $2,615,150  $2,637,308 

 

 

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 and San Sebastian 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 materials, which we have at our Nevada Operations unit commencing in 2020, with sales of unrefined doré there in previous periods, transfer of control takes place, 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 and the performance obligation has been met for those shipments. We have determined control is transferred and 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 our performance obligations for our concentrate sales are. Most of our concentrate sales involve