|
Annual report pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended December 31, 2011
|
|
77–0664171
|
|
|
83815-9408
|
|
|
(Address of principal executive offices)
|
(Zip Code)
|
|
Common Stock, par value $0.25 per share
|
New York Stock Exchange
|
|
|
New York Stock Exchange
|
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ü No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No ü
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, and (2) has been subject to such filing requirements for the past 90 days. Yes ü No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ü No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
The aggregate market value of the registrant’s voting Common Stock held by non-affiliates was $2,139,690,446 as of June 30, 2011 There were 279,512,363 shares of the registrant’s Common Stock outstanding as of June 30, 2011, and 285,291,773 shares as of February 17, 2012.
To the extent herein specifically referenced in Part III, the information contained in the Proxy Statement for the 2011 Annual Meeting of Shareholders of the registrant, which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of the registrant’s 2011 fiscal year is incorporated herein by reference. See Part III.
TABLE OF CONTENTS
|
1
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
4
|
|
|
5
|
|
|
6
|
|
|
6
|
|
|
19
|
|
|
19
|
|
|
19
|
|
|
22
|
|
|
26
|
|
|
26
|
|
|
26
|
|
|
26
|
|
|
28
|
|
|
30
|
|
|
30
|
|
|
33
|
|
|
35
|
|
|
37
|
|
|
39
|
|
|
41
|
|
|
43
|
|
|
46
|
|
|
47
|
|
|
47
|
|
|
49
|
|
|
49
|
|
|
50
|
|
|
50
|
|
|
51
|
|
|
51
|
|
|
51
|
|
|
51
|
|
|
52
|
|
|
52
|
|
|
53
|
|
|
54
|
|
|
54
|
|
|
54
|
|
|
56
|
|
|
56
|
|
|
56
|
|
|
57
|
|
|
58
|
|
|
58
|
|
|
59
|
|
|
F- 1
|
|
Certain statements contained in this report (including information incorporated by reference) are “forward-looking statements” and 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 production, results, performance, prospects and opportunities, including reserves and other mineralization. We have tried to identify these forward-looking statements by using words such as “may,” “might,” “will,” “expect,” “anticipate,” “believe,” “could,” “intend,” “plan,” “estimate” 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 production, results, performance, prospects or opportunities, including reserves and mineralization, 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 Item 1A. Risk Factors. Given these risks and uncertainties, readers are cautioned not to place undue reliance on our forward-looking statements. Projections and other forward-looking statements included in this Form 10-K have been prepared based on assumptions, which we believe to be reasonable, but not in accordance with United States generally accepted accounting principles (“GAAP”) or any guidelines of the Securities and Exchange Commission (“SEC”). Actual results may vary, perhaps materially. You are strongly cautioned not to place undue reliance on such projections and other 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 disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
For information regarding the organization of our business segments and our significant customers, see Note 11 of Notes to Consolidated Financial Statements.
Hecla Mining Company and its subsidiaries have provided precious and base metals to the U.S. economy and worldwide since incorporation in 1891 (in this report, “we” or “our” or “us” refers to Hecla Mining Company and our affiliates and subsidiaries). We discover, acquire, develop, produce, and market silver, gold, lead and zinc. In doing so, we intend to manage our business activities in a safe, environmentally responsible and cost-effective manner.
We produce lead, zinc and bulk concentrates, which we sell to custom smelters, and unrefined gold and silver bullion bars (doré), which may be sold as doré or further refined before sale to precious metals traders. We are organized and managed into two segments that encompass our operating units: the Greens Creek and Lucky Friday units.
The map below shows the locations of our operating units and our exploration and pre-development projects, as well as our corporate offices located in Coeur d’Alene, Idaho and Vancouver, British Columbia.
1
|
|
•
|
Operating our properties safely, in an environmentally responsible manner, and cost-effectively.
|
|
|
•
|
Resuming production and construction of the #4 Shaft project at our Lucky Friday unit in light of the halt to most operations at the mine in January 2012. The halt of operations occurred because of an order from the Federal Mine Safety and Health Administration ("MSHA") closing the mine until we remove loose material from the Silver Shaft. In response, we submitted a plan to MSHA and received approval to remove loose cementitious material, along with additional work which should improve the shaft's functionality and possibly improve the shaft's hoisting capacity. In addition to the Silver Shaft work, we also have plans to build a new haulage way to bypass an area damaged by a rock burst in December 2011. We anticipate that production will be suspended at Lucky Friday until early 2013 as that work is completed. Construction of the #4 Shaft, an internal shaft that will provide deeper access at Lucky Friday, will also be temporarily suspended as work on the Silver Shaft is completed. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – The Lucky Friday Segment for more information.
|
|
|
•
|
Overcoming the challenges which have arisen at our Lucky Friday unit over the course of 2011 and into 2012. In addition to receiving an order from MSHA closing the Silver Shaft at the Lucky Friday mine (and thus the mine) until the loose material is removed, a number of accidents and other events during the past year have resulted in temporary suspensions of operations at the Lucky Friday. In April 2011, a fall of ground caused the fatality of one employee, resulting in cessation of operations for approximately 10 days. In November 2011, an accident occurring as part of the construction of #4 Shaft resulted in the fatality of one contractor employee. In an unrelated incident, in December 2011, a rock burst occurred in a primary access way at the Lucky Friday and injured seven employees, with no fatalities as a result of that incident. These events and the current halt to most operations at the Lucky Friday are a challenge to us that we will seek to overcome in 2012. See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – The Lucky Friday Segment for more information.
|
2
|
|
•
|
Expanding our proven and probable reserves and production capacity at our operating properties.
|
|
|
•
|
Maintaining and investing in exploration projects in the vicinities of four mining districts we believe to be under-explored and under-developed: 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; and the Creede district of Southwestern Colorado.
|
|
|
•
|
Continuing to seek opportunities to acquire and invest in other mining properties and companies.
|
|
|
•
|
Resolving alleged environmental liabilities on acceptable terms.
|
|
Year Ended December 31,
|
||||||||||||||||||||
|
2011
|
2010
|
2009
|
2008
|
2007
|
||||||||||||||||
|
Net income (loss)
|
$ | 151,164 | $ | 48,983 | $ | 67,826 | $ | (66,563 | ) | $ | 53,197 | |||||||||
|
|
•
|
Fluctuations in prices of the metals we produce. The high and low daily closing market prices for silver, gold, lead and zinc for each of the last five years are as follows:
|
|
2011
|
2010
|
2009
|
2008
|
2007
|
||||||||||||||||
|
Silver (per oz.):
|
||||||||||||||||||||
|
High
|
$ | 48.70 | $ | 30.70 | $ | 19.18 | $ | 20.92 | $ | 15.82 | ||||||||||
|
Low
|
$ | 26.16 | $ | 15.14 | $ | 10.51 | $ | 8.88 | $ | 11.67 | ||||||||||
|
Gold (per oz.):
|
||||||||||||||||||||
|
High
|
$ | 1,895.00 | $ | 1,421.00 | $ | 1,212.50 | $ | 1,011.25 | $ | 841.10 | ||||||||||
|
Low
|
$ | 1,319.00 | $ | 1,058.00 | $ | 810.00 | $ | 712.50 | $ | 608.40 | ||||||||||
|
Lead (per lb.):
|
||||||||||||||||||||
|
High
|
$ | 1.33 | $ | 1.18 | $ | 1.11 | $ | 1.57 | $ | 1.81 | ||||||||||
|
Low
|
$ | 0.81 | $ | 0.71 | $ | 0.45 | $ | 0.40 | $ | 0.71 | ||||||||||
|
Zinc (per lb.):
|
||||||||||||||||||||
|
High
|
$ | 1.15 | $ | 1.20 | $ | 1.17 | $ | 1.28 | $ | 1.93 | ||||||||||
|
Low
|
$ | 0.79 | $ | 0.72 | $ | 0.48 | $ | 0.47 | $ | 1.00 | ||||||||||
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations for a summary of average market and realized prices for each of the three years ended December 31, 2011, 2010 and 2009. Our results of operations are significantly impacted by fluctuations in the prices of silver, gold, lead and zinc, which are affected by numerous factors beyond our control. See Item 1A. Risk Factors – Financial Risks – A substantial or extended decline in metals prices would have a material adverse effect on us for information on the various factors that can impact prices of the metals we produce. Hecla’s average realized prices for all four metals increased in 2011 compared to 2010, and our realized prices for silver and gold in 2011 were higher than average market prices for those metals in 2011, due in part to the timing of concentrate shipments and their final settlement in comparison to fluctuating prices. However, we believe that market metal price trends are a significant factor in our operating and financial performance. Because we are unable to predict fluctuations in prices for metals and have limited control over the timing of our concentrate shipments, there can be no assurance that our realized prices for silver and gold will exceed or even meet average market metals prices for any future period. In April 2010, we began utilizing financially-settled forward contracts for lead and zinc with the objective of managing the exposure to changes in prices of lead and zinc contained in our concentrate shipments between the time of sale and final settlement. See Note 10 of Notes to Consolidated Financial Statements for more information on our base metal forward contract programs.
3
|
|
•
|
Exploration and pre-development expenditures totaling $31.4 million, $21.6 million, $9.2 million, $22.5 million and $17.0 million, respectively, for the years ended December 31, 2011, 2010, 2009, 2008 and 2007. The amount for 2007 includes expenditures of $2.2 million for the now-divested Hollister Development Block, as its development progressed until the sale of our interest in the project in April 2007. In addition to the amounts above, we also incurred exploration expenditures of $1.2 million and $3.9 million, respectively, for the years ended December 31, 2008 and 2007 at our now divested Venezuelan operations. These amounts have been reported in income (loss) from discontinued operations for each period.
|
|
|
•
|
Provision for closed operations and environmental matters of $9.7 million, $201.1 million, $7.7 million, $4.3 million and $49.2 million, respectively, for the years ended December 31, 2011, 2010, 2009, 2008, and 2007. The $201.1 provision in 2010 included a $193.2 million adjustment to increase our accrued liability for environmental obligations in Idaho’s Coeur d’Alene Basin as a result of Hecla, the United States, the Coeur d’Alene Indian Tribe, and the State of Idaho reaching an agreement on proposed financial terms to be incorporated into a comprehensive settlement of the Coeur d’Alene Basin environmental litigation and related claims. The settlement was finalized upon entry of the Consent Decree by the Court in September 2011. See Note 7 of Notes to Consolidated Financial Statements for further discussion.
|
|
|
•
|
Net gain on base metal forward contracts of $38.0 million in 2011 and a net loss of $20.8 million in 2010. These gains and losses are related to financially-settled forward contracts on forecasted zinc and lead production as part of a risk management program initiated in 2010. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Commodity-Price Risk Management for more information on our derivatives contracts.
|
|
|
•
|
Variability in prices for diesel fuel and amounts of fuel used, and variability in prices for other consumables, which have impacted production costs at our operations. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – The Greens Creek Segment for information on the variability in diesel fuel prices and consumption on production costs for the last three years.
|
|
|
•
|
Our acquisition of the remaining 70.3% of the Greens Creek mine for $758.5 million in April 2008, a portion of which was funded by a $140 million term loan and $220 million bridge loan. We recorded interest expense related to these credit facilities, including amortization of loan fees and interest rate swap adjustments, of $10.1 million and $19.1 million, respectively in 2009 and 2008. The amount of interest expense in 2009 is net of $1.9 million in capitalized interest. We also recorded approximately $6.0 million in expense in 2009 for additional debt-related fees. We completed repayment of the bridge loan balance in February 2009 and repayment of the term loan balance in October 2009.
|
|
|
•
|
The global financial crisis and recession beginning in 2008, which impacted metals prices, production costs, and our access to capital markets at that time.
|
|
|
•
|
An increase in the number of shares of our common stock outstanding, which impacts our income per common share.
|
|
|
•
|
Losses from discontinued operations, net of tax, for the years ended December 31, 2008 and 2007 of $17.4 million and $15.0 million, respectively, and a loss on sale of discontinued operations, net of tax, of $12.0 million recognized in 2008.
|
A comprehensive discussion of our financial results for the years ended December 31, 2011, 2010 and 2009, individual operating unit performance, general corporate expenses and other significant items can be found in Item 7. — Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, as well as the Consolidated Financial Statements and Notes thereto.
Our segments are differentiated by geographic region. We produce zinc, lead and bulk concentrates at our Greens Creek unit and lead and zinc concentrates at our Lucky Friday unit, which we sell to custom smelters on contract, and unrefined gold and silver bullion bars (doré) at Greens Creek, which are sold directly to customers or further refined before sale to precious metals traders. The concentrates produced at our Greens Creek and Lucky Friday units contain payable silver, zinc and lead, and the concentrates produced at Greens Creek also contain payable gold. Our segments as of December 31, 2011 included:
4
|
|
•
|
The Greens Creek unit, a joint venture arrangement which is 100%-owned by us through our subsidiaries Hecla Alaska LLC, Hecla Greens Creek Mining Company and Hecla Juneau Mining Company. We acquired 70.3% of our ownership of Greens Creek in April 2008 from indirect subsidiaries of Rio Tinto, plc. Greens Creek is located on Admiralty Island, near Juneau, Alaska, and has been in production since 1989, with a temporary care and maintenance period from April 1993 through July 1996. During 2011, Greens Creek contributed $342.9 million, or 72%, of our consolidated sales.
|
|
|
•
|
The Lucky Friday unit located in northern Idaho. Lucky Friday is, through our subsidiaries Hecla Limited and Silver Hunter Mining Company, 100%-owned and has been a producing mine for us since 1958. During 2011, Lucky Friday contributed $134.7 million, or 28%, of our consolidated sales. Mining at Lucky Friday is currently halted and expected to resume in 2013. In the meantime, it has been placed on temporary care and maintenance.
|
The table below summarizes our production for the years ended December 31, 2011, 2010 and 2009. Zinc and lead production quantities are presented in short tons (“tons”).
|
Year
|
||||||||||||
|
2011
|
2010
|
2009
|
||||||||||
|
Silver (ounces)
|
9,483,676 | 10,566,352 | 10,989,660 | |||||||||
|
Gold (ounces)
|
56,818 | 68,838 | 67,278 | |||||||||
|
Lead (tons)
|
39,150 | 46,955 | 44,263 | |||||||||
|
Zinc (tons)
|
73,355 | 83,782 | 80,995 | |||||||||
We are required to obtain various licenses and permits to operate our mines and conduct exploration and reclamation activities. The current halt in production at the Lucky Friday unit is pursuant to an order from one of these regulatory authorities, the Federal Mine Safety and Health Administration. See Item 1A. Risk Factors - Legal, Market and Regulatory Risks - We are required to obtain governmental and lessor approvals and permits in order to conduct mining operations. In addition, we conduct our exploration activities in Mexico pursuant to concessions granted by the Mexican government, which are subject to certain political risks associated with foreign operations. See Item 1A. Risk Factors - Operation, Development, Exploration and Acquisition Risks - Our foreign activities are subject to additional inherent risks.
Physical Assets
Our business is capital intensive and requires ongoing capital investment for the replacement, modernization or expansion of equipment and facilities. At December 31, 2011, the book value of our property, plant, equipment and mineral interests, net of accumulated depreciation, was approximately $923.2 million . We maintain insurance policies against property loss and business interruption. However, such insurance contains exclusions and limitations on coverage, and there can be no assurance that claims would be paid under such insurance policies in connection with a particular event. See Item 1A. Risk Factors - Operation, Development, Exploration and Acquisition Risks - Our operations may be adversely affected by risks and hazards associated with the mining industry that may not be fully covered by insurance.
Employees
As of December 31, 2011, we employed 735 people, and we believe relations with our employees are generally good.
Many of the employees at our Lucky Friday unit are represented by a union. The current collective bargaining agreement with workers at our Lucky Friday unit, which was signed in 2010, expires on April 30, 2016. As a result of the requirement to remove any loose material from the Silver Shaft, which will limit underground access and temporarily suspend production at the Lucky Friday, Hecla Limited laid off 121 employees in January 2012, with approximately 25 of those employees accepting temporary positions at other Hecla operations. We anticipate that employment at the Lucky Friday will return to its level prior to the suspension of production as the Silver Shaft work is completed. See Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - The Lucky Friday Segment section for more information.
5
Available Information
Hecla Mining Company is a Delaware corporation. Our current holding company structure dates from the incorporation of Hecla Mining Company in 2006 and the renaming of its subsidiary (previously Hecla Mining Company) as Hecla Limited. Our principal executive offices are located at 6500 N. Mineral Drive, Suite 200, Coeur d’Alene, Idaho 83815-9408. Our telephone number is (208) 769-4100. Our web site address is www.hecla-mining.com. We file our annual, quarterly and current reports and any amendments to these reports with the SEC, copies of which are available on our website or from the SEC free of charge (www.sec.gov or 800-SEC-0330 or the SEC’s Public Reference Room, 100 F Street, N.E., Washington, D.C. 20549). Charters of our audit, compensation, corporate governance, and directors’ nominating committees, as well as our Code of Ethics for the Chief Executive Officer and Senior Financial Officers and our Code of Business Conduct and Ethics for Directors, Officers and Employees, are also available on our website. We will provide copies of these materials to shareholders upon request using the above-listed contact information, directed to the attention of Investor Relations, or via e-mail request sent to info@hecla-mining.com.
We have included the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) certifications regarding our public disclosure required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2 to this report. Additionally, we filed with the New York Stock Exchange (“NYSE”) the CEO’s certification regarding our compliance with the NYSE’s Corporate Governance Listing Standards (“Listing Standards”) pursuant to Section 303A.12(a) of the Listing Standards, which certification was dated May 26, 2011, and indicated that the CEO was not aware of any violations of the Listing Standards.
The following risks and uncertainties, together with the other information set forth in this Form 10-K, should be carefully considered by those who invest in our securities. Any of the following risks could materially adversely affect our business, financial condition or operating results and could decrease the value of our common and/or preferred stock.
Global financial events may have an impact on our business and financial condition in ways that we currently cannot predict.
The 2008 credit crisis and related turmoil in the global financial system had an impact on our business and financial position, and a similar financial event in the future may also impact us. The continuation or re-emergence of the financial crisis may limit our ability to raise capital through credit and equity markets. As discussed further below, the prices of the metals that we produce are affected by a number of factors, and it is unknown how these factors may be impacted by a global financial event.
Although we reported net income for the years ended December 31, 2011, 2010, 2009 and 2007 of $151.2 million, $49.0 million, $67.8 million and $53.2 million, respectively, we reported a net loss for the year ended December 31, 2008 of $66.6 million. A comparison of operating results over the past three years can be found in Results of Operations in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Many of the factors affecting our operating results are beyond our control, including, but not limited to, the volatility of metals prices; smelter terms; rock and soil conditions; seismic events; diesel fuel prices; interest rates; global or regional political or economic policies; inflation; availability and cost of labor; economic developments and crises; governmental regulations; continuity of orebodies; ore grades; recoveries; and speculation, purchases and sales by central banks and other holders and producers of gold and silver in response to these factors. We cannot foresee whether our operations will continue to generate sufficient revenue in order for us to generate net cash from operating activities. There can be no assurance that we will not experience net losses in the future.
We periodically enter into risk management activities, such as financially-settled forward sales contracts and commodity put and call option contracts, to manage the prices received on the metals we produce. Such activities are utilized to attempt to insulate our operating results from changes in prices for those metals. However, such activities may prevent us from realizing possible revenues in the event that the market price of a metal exceeds the price stated in a forward sale or call option contract. In addition, we may experience losses if a counterparty fails to purchase under a contract when the contract price exceeds the spot price of a commodity.
6
We utilize financially settled forward contract programs to manage the exposure to changes in lead and zinc prices contained in our concentrate shipments between the time of sale and final settlement, and to manage the exposure of changes in the prices of lead and zinc contained in our forecasted future concentrate shipments. See Note 10 of Notes to Consolidated Financial Statements for more information on these base metals forward contract programs.
The financial terms of settlement of the Coeur d’Alene Basin environmental litigation and other claims may materially impact our cash resources and our access to additional financing.
On September 8, 2011, a Consent Decree (the “Consent Decree”) settling environmental litigation and related claims involving Hecla Limited pertaining to historic releases of mining wastes in the Coeur d'Alene Basin was approved and entered by the U.S. District Court in Idaho. The Consent Decree resolved all existing claims of the United States, the Coeur d'Alene Indian Tribe, and the State of Idaho (“Plaintiffs”) against Hecla Limited and its affiliates under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and certain other statutes for past response costs, future environmental remediation costs, and natural resource damages related to historic releases of mining wastes in the Coeur d'Alene River Basin, as well as all remaining obligations of Hecla Limited with respect to the Bunker Hill Superfund Site. In addition to the approximately $169 million already paid under the Consent Decree in 2011, Hecla Limited remains obligated under the Consent Decree to make the following payments:
|
|
•
|
$25 million of cash by October 8, 2012;
|
|
|
•
|
$15 million of cash by October 8, 2013; and
|
|
|
•
|
approximately $55.4 million by August 2014, as quarterly payments of the proceeds from the exercise of any outstanding Series 1 and Series 3 warrants (which have an exercise price of between $2.44 and $2.49 per share) during the quarter, with the remaining balance, if any, due in August 2014.
|
If additional warrants are not exercised, the requirement to pay up to $95.4 million (excluding interest) in cash over the next approximately three years will cause us to use a significant portion of either our cash currently on hand, or future cash resources. Our cash on hand at December 31, 2011 was $266.5 million; however, there can be no assurance that we will have the cash on hand to meet these obligations.
Financial terms of settlement also require that Hecla Mining Company or Hecla Limited post third party surety in some form to secure the remaining payments. Obtaining surety causes us to incur costs, and also to utilize credit capacity which could otherwise be used to fund other areas of our business, including operations and capital expenditures. Moreover, there is no guarantee that we will be able maintain such surety, in which case we could be in default of the Consent Decree, which could have a material adverse effect on Hecla Limited’s or our results from operations or financial position.
More information about the terms of settlement is set forth in Note 7 of Notes to Consolidated Financial Statements.
Our business activities are highly dependent on the costs of commodities and services such as fuel, steel, cement and electricity. The recent prices for such commodities have been volatile and may increase our costs of production and development. A material increase in costs at any of our operating properties could have a significant effect on our profitability. For additional discussion, see Results of Operations in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts and related disclosure of assets, liabilities, revenue and expenses at the date of the consolidated financial statements and reporting periods. The more significant areas requiring the use of management assumptions and estimates relate to:
|
|
•
|
mineral reserves and other mineralized material that are the basis for future income and cash flow estimates and units-of-production depreciation, depletion and amortization calculations;
|
|
|
•
|
future metals prices;
|
|
|
•
|
environmental, reclamation and closure obligations;
|
7
|
|
•
|
asset impairments;
|
|
|
•
|
reserves for contingencies and litigation; and
|
|
|
•
|
deferred tax asset valuation allowance.
|
Actual results may differ materially from these estimates using different assumptions or conditions. For additional information, see Critical Accounting Estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations, Note 1 of Notes to Consolidated Financial Statements and the risk factors: “Our development of new orebodies and other capital costs may cost more and provide less return than we estimated,” “Our ore reserve estimates may be imprecise,” “Our environmental obligations may exceed the provisions we have made,” and “We are currently involved in ongoing legal disputes that may materially adversely affect us.”
Our revenue is derived from the sale of silver, gold, lead and zinc and, as a result, our earnings are directly related to the prices of these metals. Silver, gold, lead and zinc prices fluctuate widely and are affected by numerous factors, including:
|
|
•
|
speculative activities;
|
|
|
•
|
relative exchange rates of the U.S. dollar;
|
|
|
•
|
global and regional demand and production;
|
|
|
•
|
political instability;
|
|
|
•
|
inflation, recession or increased or reduced economic activity; and
|
|
|
•
|
other political, regulatory and economic conditions.
|
These factors are largely beyond our control and are difficult to predict. If the market prices for these metals fall below our production or development costs for a sustained period of time, we will experience losses and may have to discontinue exploration, development or operations, or incur asset write-downs at one or more of our properties.
The following table sets forth the average daily closing prices of the following metals for the year ended December 31, 2007 and each year thereafter through 2011.
|
2011
|
2010
|
2009
|
2008
|
2007
|
||||||||||||||||
| $ | 35.11 | $ | 20.16 | $ | 14.65 | $ | 15.02 | $ | 13.39 | |||||||||||
| $ | 1,569.00 | $ | 1,224.66 | $ | 972.98 | $ | 871.71 | $ | 696.66 | |||||||||||
| $ | 1.09 | $ | 0.97 | $ | 0.78 | $ | 0.95 | $ | 1.17 | |||||||||||
| $ | 1.00 | $ | 0.98 | $ | 0.75 | $ | 0.85 | $ | 1.47 | |||||||||||
|
|
(1)
|
London Fix
|
|
|
(2)
|
London Final
|
|
|
(3)
|
London Metals Exchange — Cash
|
|
|
(4)
|
London Metals Exchange — Special High Grade — Cash
|
On February 20, 2012, the closing prices for silver, gold, lead and zinc were $33.56 per ounce, $1,733 per ounce, $0.92 per pound and $0.89 per pound, respectively.
An extended decline in metals prices, an increase in operating or capital costs, or our inability to convert exploration potential to reserves may cause us to record write-downs, which could negatively impact our results of operations.
8
When events or changes in circumstances indicate that the carrying value of our long-lived assets may not be recoverable, we review the recoverability of the carrying value by estimating the future undiscounted cash flows expected to result from the use and eventual disposition of the asset. Impairment must be recognized when the carrying value of the asset exceeds these cash flows, and recognizing impairment write-downs could negatively impact our results of operations. Metal price estimates are a key component used in the analysis of the carrying values of our assets, as the evaluation approach involves comparing carrying values to the average estimated undiscounted cash flows resulting from operating plans using various metals price scenarios. Our estimates of undiscounted cash flows for our long-lived assets also include an estimate of the market value of the exploration potential beyond the current operating plans. There were no events or changes in circumstances that caused us to evaluate the carrying values of our long-lived assets as of December 31, 2011. However, if the prices of silver, gold, zinc and lead decline for an extended period of time, if we fail to control production costs, or if we do not realize the mineable ore reserves or exploration potential at our mining properties, we may be required to evaluate the carrying values of out long-lived assets and recognize asset write-downs in the future. In addition, the perceived market value of the exploration potential of our properties is dependent upon prevailing metals prices as well as our ability to discover economic ore. A decline in metals prices for an extended period of time or our inability to convert exploration potential to reserves could significantly reduce our estimations of the value of the exploration potential at our properties and result in asset write-downs.
Our ability to recognize the benefits of deferred tax assets is dependent on future cash flows and taxable income
We recognize the expected future tax benefit from deferred tax assets when the tax benefit is considered to be more likely than not of being realized. Otherwise, a valuation allowance is applied against deferred tax assets reducing the value of such assets. Assessing the recoverability of deferred tax assets requires management to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecasted income from operations and the application of existing tax laws in each jurisdiction. Metal price estimates are a key component used in the determination of our ability to realize the expected future benefit of our deferred tax assets. To the extent that future taxable income differs significantly from estimates as a result of a decline in metals prices or other factors, our ability to realize the deferred tax assets could be impacted. Additionally, significant future issuances of common stock or common stock equivalents could limit our ability to utilize our net operating loss carryforwards pursuant to Section 382 of the Internal Revenue Code. Future changes in tax law or changes in ownership structure could limit our ability to utilize our recorded tax assets. As of December 31, 2010, we removed substantially all deferred tax valuation allowances, with the exception of certain amounts related to foreign net operating loss carryforwards, and our current and non-current deferred tax asset balances were $27.8 million and $88.0 million, respectively. See Note 5 of Notes to Consolidated Financial Statements for further discussion of our deferred tax assets.
We maintain defined benefit pension plans for employees, which provide for specified payments after retirement for most employees. The ability of the pension plans to provide the specified benefits depends on our funding of the plans and returns on investments made by the plans. Returns, if any, on investments are subject to fluctuations based on investment choices and market conditions. A sustained period of low returns or losses on investments could require us to fund the pension plans to a greater extent than anticipated. See Note 8 of Notes to Consolidated Financial Statements for more information on our pension plans.
Production may be reduced below our historical or estimated levels as a result of mining accidents; unfavorable ground conditions; work stoppages or slow-downs; lower than expected ore grades; the metallurgical characteristics of the ore that are less economic than anticipated; or because our equipment or facilities fail to operate properly or as expected. For example, in the second quarter of 2010, mining activities at the Lucky Friday mine stopped for approximately two weeks due to some deterioration of shaft infrastructure at the #2 Shaft, which is the mine's secondary escape way. Upon completion of repairs to #2 Shaft, the mine returned to normal production. In April 2011, a fatal accident occurred at the Lucky Friday mine resulting in a cessation of operations at the mine for approximately 10 days. In November 2011, an accident occurred as part of the construction of the #4 Shaft at the Lucky Friday mine, resulting in the fatality of one contractor employee. In an unrelated incident, in December 2011, a rock burst occurred in a primary access way at the Lucky Friday mine and injured seven employees, with no fatalities as a result of that incident. Each of these events temporarily suspended operations at the Lucky Friday mine and adversely impacted production. Other closures or impacts on operations or production may occur at any of our mines at any time, whether related to accidents, changes in conditions, changes to regulatory policy, or as precautionary measures.
9
At the end of 2011, MSHA began a special impact inspection at the Lucky Friday mine which resulted in an order closing down the Silver Shaft, the primary access way from surface at the Lucky Friday mine, until we remove loose material from the Silver Shaft. This occurred despite the fact that the Silver Shaft was not involved in any of the accidents at the mine in 2011. Underground access will be limited as this work is being performed, and we anticipate that production at the Lucky Friday will be suspended until early 2013 as a result. We anticipate returning to full production levels at the Lucky Friday once the Silver Shaft work and work related to bypassing the December 2011 rock burst is complete; however, no assurance can be made as to when this will occur or as to the cost of the material removal and related work.
For further information, see Management's Discussion and Analysis of Financial Condition and Results of Operations.
Recent accidents and other events at our Lucky Friday mine could have additional adverse consequences to us.
Hecla Limited may face enforcement actions, as well as additional orders from MSHA, as a result of MSHA's inspections and investigations of events at our Lucky Friday mine including the April 2011 fatal ground fall accident, the rock burst incident in December 2011, and the order closing the Silver Shaft for the removal of loose material. Hecla Limited could also face penalties (including monetary penalties) from MSHA or other governmental agencies relating to these incidents and any other orders or citations received by Hecla Limited. In addition, MSHA periodically notifies certain mines that a potential pattern of violations (“PPOV”) may exist based upon an initial statistical screening of violation history and pattern criteria review by MSHA. Receipt of notice of a PPOV typically triggers an undertaking by a mine to implement corrective actions, and if certain criteria are not met, MSHA could subsequently issue a Notice of Pattern of Violations (“NPOV”). Receipt of a NPOV would, among other things, impose certain onerous conditions on the mine, including the requirement to pass an inspection in which no significant and substantial violations of a mandatory health or safety standard are found before termination of the NPOV. In light of the citations/orders received in 2011 and 2012, it is possible that the Lucky Friday mine could receive a PPOV. Finally, it is possible that Hecla Limited could face litigation relating to the 2011 incidents at the Lucky Friday mine. We may not resolve these claims favorably, and each one of the foregoing possibilities could have a material adverse impact on our cash flows, results of operations or financial condition.
Our operations may be adversely affected by risks and hazards associated with the mining industry that may not be fully covered by insurance.
Our business is capital intensive, requiring ongoing capital investment for the replacement, modernization or expansion of equipment and facility. Our mining and milling operations are subject to risks of process upsets and equipment malfunctions. Equipment and supplies may from time to time be unavailable on a timely basis. Our business is subject to a number of other risks and hazards including:
|
•
|
environmental hazards;
|
|
•
|
unusual or unexpected geologic formations;
|
|
•
|
rock bursts and ground falls;
|
|
•
|
seismic activity;
|
|
•
|
underground fires or floods;
|
|
•
|
explosive rock failures;
|
|
•
|
unanticipated hydrologic conditions, including flooding and periodic interruptions due to inclement or hazardous weather conditions;
|
|
•
|
political and country risks;
|
|
•
|
civil unrest or terrorism;
|
|
•
|
industrial accidents;
|
|
•
|
labor disputes or strikes; and
|
|
•
|
our operating mines have tailing ponds which could fail or leak as a result of seismic activity or for other reasons.
|
|
•
|
personal injury or fatalities;
|
10
|
•
|
damage to or destruction of mineral properties or producing facilities;
|
|
•
|
environmental damage;
|
|
•
|
delays in exploration, development or mining;
|
|
•
|
monetary losses;
|
|
•
|
legal liability; and
|
|
•
|
temporary or permanent closure of facilities.
|
We maintain insurance to protect against losses that may result from some of these risks, such as property loss and business interruption, in amounts we believe to be reasonably consistent with our historical experience, industry practice and circumstances surrounding each identified risk. Such insurance, however, contains exclusions and limitations on coverage, particularly with respect to environmental liability and political risk. There can be no assurance that claims would be paid under such insurance policies in connection with a particular event. Insurance against environmental risks is generally either unavailable or, we believe, too expensive for us, and we therefore do not maintain environmental insurance. Occurrence of events for which we are not insured may have an adverse effect on our business.
Our development of new orebodies and other capital costs may be higher and provide less return than we estimated.
Capitalized development projects may cost more and provide less return than we estimate. If we are unable to realize a return on these investments, we may incur a related asset write-down that could adversely affect our financial results or condition.
Our ability to sustain or increase our current level of metals production partly depends on our ability to develop new orebodies and/or expand existing mining operations. Before we can begin a development project, we must first determine whether it is economically feasible to do so. This determination is based on estimates of several factors, including:
|
|
•
|
ore reserves;
|
|
|
•
|
expected recovery rates of metals from the ore;
|
|
|
•
|
future metals prices;
|
|
|
•
|
facility and equipment costs;
|
|
|
•
|
availability of adequate manpower;
|
|
|
•
|
availability of affordable sources of power and adequacy of water supply;
|
|
|
•
|
exploration and drilling success;
|
|
|
•
|
capital and operating costs of a development project;
|
|
|
•
|
environmental considerations and permitting;
|
|
|
•
|
adequate access to the site, including competing land uses (such as agriculture);
|
|
|
•
|
applicable tax rates;
|
|
|
•
|
foreign currency fluctuation and inflation rates; and
|
|
|
•
|
availability of financing.
|
These estimates are based on geological and other interpretive data, which may be imprecise. As a result, actual operating and capital costs and returns from a development project may differ substantially from our estimates, and, as such, it may not be economically feasible to continue with a development project.
11
Our ore reserve figures and costs are primarily estimates and are not guarantees that we will recover the indicated quantities of these metals. You are strongly cautioned not to place undue reliance on estimates of reserves. Reserves are estimates made by our professional technical personnel, and no assurance can be given that the estimated amount of metal or the indicated level of recovery of these metals will be realized. Reserve estimation is an interpretive process based upon available data and various assumptions. Our reserve estimates may change based on actual production experience. Further, reserves are valued based on estimates of costs and metals prices, which may not be consistent among our properties. The economic value of ore reserves may be adversely affected by:
|
|
•
|
declines in the market price of the various metals we mine;
|
|
|
•
|
increased production or capital costs;
|
|
|
•
|
reduction in the grade or tonnage of the deposit;
|
|
|
•
|
increase in the dilution of the ore; and
|
|
|
•
|
reduced recovery rates.
|
Short-term operating factors relating to our ore reserves, such as the need to sequentially develop orebodies and the processing of new or different ore grades, may adversely affect our cash flow. If the prices of metals that we produce decline substantially below the levels used to calculate reserves for an extended period, we could experience:
|
|
•
|
delays in new project development;
|
|
|
•
|
net losses;
|
|
|
•
|
reduced cash flow;
|
|
|
•
|
reductions in reserves;
|
|
|
•
|
write-downs of asset values; and
|
|
|
•
|
mine closure.
|
Efforts to expand the finite lives of our mines may not be successful or could result in significant demands on our liquidity, which could hinder our growth and decrease the value of our stock.
One of the risks we face is that our mines are depleting assets. Thus, we must continually replace depleted ore reserves by locating and developing additional ore. Our ability to expand or replace ore reserves primarily depends on the success of our exploration programs. Mineral exploration, particularly for silver and gold, is highly speculative and expensive. It involves many risks and is often non-productive. Even if we believe we have found a valuable mineral deposit, it may be several years before production from that deposit is possible. During that time, it may become no longer feasible to produce those minerals for economic, regulatory, political or other reasons. As a result of high costs and other uncertainties, we may not be able to expand or replace our existing ore reserves as they are depleted, which would adversely affect our business and financial position in the future.
To increase production and mine life at the Lucky Friday mine, in 2011 we continued progress on the #4 Shaft project. We commenced engineering and construction activities on #4 Shaft in late 2009, and our Board of Directors gave its final approval of the project in August 2011. Work on the project thus far has included: detailed shaft design, excavation of the hoist room and off shaft development access to shaft facilities, hoist installation, placement and receipt of orders for major equipment purchases, 367 feet of vertical shaft excavation, and other construction activities. The #4 Shaft project, as currently designed, is expected to involve development down to the 8800 foot level and capital expenditures of approximately $200 million, which includes approximately $90 million that has been spent on the project as of December 31, 2011. At the end of 2011, MSHA began a special impact inspection at the Lucky Friday mine, and as a result MSHA ordered the Silver Shaft to be closed until we remove loose material from the shaft. The Silver Shaft is the primary access way from the surface at the Lucky Friday, and the order has resulted in a temporary suspension of most operations at the Lucky Friday, including work on #4 Shaft. When access to the #4 Shaft project is restored, we believe that our current capital resources will allow us to proceed. However, there are a number of factors that could affect completion of the project, including: i) a significant decline in metals prices, (ii) a reduction in available cash or credit, whether arising from decreased cash flow or other uses of available cash, or (iii) a significant increase in operating or capital costs. An increase in the capital cost could potentially require us to suspend the project or access additional capital through debt financing, the sale of securities, or other external sources. This additional financing could be costly or unavailable.
12
We have in the past entered into, and may in the future enter into joint venture arrangements in order to share the risks and costs of developing and operating properties. In a typical joint venture arrangement, the partners own a proportionate share of the assets, are entitled to indemnification from each other and are only responsible for any future liabilities in proportion to their interest in the joint venture. If a party fails to perform its obligations under a joint venture agreement, we could incur liabilities and losses in excess of our pro-rata share of the joint venture. We make investments in exploration and development projects that may have to be written off in the event we do not proceed to a commercially viable mining operation.
On February 21, 2008, we announced that our wholly-owned subsidiary, Rio Grande Silver Inc. ("RGS"), acquired the right to earn into a 70% joint venture interest in an approximately 25-square-mile consolidated land package in the Creede Mining District of Colorado. RGS earned into the 70% interest in 2011. In December 2011, RGS completed the acquisition of the remaining 30% interest of the original joint venture, while maintaining a 70% interest in a new joint venture holding additional exploration property within the Creede District, for shares of Hecla common stock valued at approximately $33.8 million on the date that the transaction was completed. For more information on the terms of the agreement, see Note 16 of Notes to Consolidated Financial Statements.
Our ability to market our metals production may be affected by disruptions or closures of custom smelters and/or refining facilities.
We sell substantially all of our metallic concentrates to custom smelters. Our doré bars are sent to refiners for further processing before being sold to metal traders. If our ability to sell concentrates to our contracted smelters becomes unavailable to us, it is possible our operations could be adversely affected. See Note 11of Notes to Consolidated Financial Statements for more information on the distribution of our sales and our significant customers.
We face inherent risks in acquisitions of other mining companies or properties that may adversely impact our growth strategy.
Mines have limited lives, which is an inherent risk in acquiring mining properties. We are actively seeking to expand our mineral reserves by acquiring other mining companies or properties. Although we are pursuing opportunities that we feel are in the best interest of our shareholders, these pursuits are costly and often unproductive. Inherent risks in acquisitions we may undertake in the future could adversely affect our current business and financial condition and our growth.
There is a limited supply of desirable mineral lands available in the United States and foreign countries where we would consider conducting exploration and/or production activities, and any acquisition we may undertake is subject to inherent risks. In addition to the risk associated with limited mine lives, we may not realize the value of the companies or properties that are acquired due to a possible decline in metals prices, failure to obtain permits, labor problems, changes in regulatory environment, failure to achieve anticipated synergies, an inability to obtain financing, and other factors previously described. Acquisitions of other mining companies or properties may also expose us to new geographic, political, operating, and geological risks. In addition, we face strong competition for companies and properties from other mining companies, some of which have greater financial resources than we do, and we may be unable to acquire attractive companies and mining properties on terms that we consider acceptable.
We are dependent upon the ability and experience of our executive officers, managers, employees and other personnel, and there can be no assurance that we will be able to retain all of such employees. We compete with other companies both within and outside the mining industry in connection with the recruiting and retention of qualified employees knowledgeable of the mining business. From time to time, we have encountered, and may in the future encounter, difficulty recruiting skilled mining personnel at acceptable wage and benefit levels in a competitive labor market. Temporary or extended lay-offs due to mine closures may exacerbate such issues and result in vacancies or the need to hire less skilled or efficient employees. The loss of these persons or our inability to attract and retain additional highly skilled employees could have an adverse effect on our business and future operations. The Lucky Friday mine is our only operation subject to a collective bargaining agreement, which expires on April 30, 2016.
13
We were recently ordered by MSHA to remove loose material from the Silver Shaft, the primary access way from surface at the Lucky Friday mine. As this rehabilitation work is performed, underground access at the Lucky Friday mine will be limited, temporarily suspending production and underground work there. As a result, Hecla Limited laid off 121 employees, or approximately 42% of the workforce at the Lucky Friday mine. As the Silver Shaft work is completed, we anticipate that employment levels at the Lucky Friday mine will return to where they were at prior to the suspension of production. Although we believe that we will be able to successfully reassemble the workforce at the Lucky Friday as underground work and production resumes, competition from other companies and other factors may make recruitment difficult.
We compete with other mining companies to attract and retain key executives, skilled labor, contractors and other employees. We compete with other mining companies for the services of skilled personnel and contractors and their specialized equipment, components and supplies, such as drill rigs, necessary for exploration and development. We also compete with other mining companies for rights to mine properties. We may be unable to continue to obtain the services of skilled personnel and contractors or specialized equipment or supplies, or to acquire additional rights to mine properties.
Mining, processing, development and exploration activities depend on adequate infrastructure. Reliable roads, bridges, power sources and water supply are important determinants, which affect capital and operating costs. Unusual or infrequent weather phenomena, sabotage, government or other interference in the maintenance or provision of such infrastructure could adversely affect our mining operations.
We currently conduct exploration and pre-development projects in Mexico and continue to own assets, real estate and mineral interests there. We anticipate that we will continue to conduct operations in Mexico and possibly other international locations in the future. Because we conduct operations internationally, we are subject to political and economic risks such as:
|
|
•
|
the effects of local political, labor and economic developments and unrest;
|
|
|
•
|
significant or abrupt changes in the applicable regulatory or legal climate;
|
|
|
•
|
exchange controls and export restrictions;
|
|
|
•
|
expropriation or nationalization of assets with inadequate compensation;
|
|
|
•
|
currency fluctuations and repatriation restrictions;
|
|
|
•
|
invalidation of governmental orders, permits or agreements;
|
|
|
•
|
renegotiation or nullification of existing concessions, licenses, permits and contracts;
|
|
|
•
|
corruption, demands for improper payments, expropriation, and uncertain legal enforcement and physical security;
|
|
|
•
|
disadvantages of competing against companies from countries that are not subject to U.S. laws and regulations;
|
|
|
•
|
fuel or other commodity shortages;
|
|
|
•
|
illegal mining;
|
14
|
|
•
|
laws or policies of foreign countries and the United States affecting trade, investment and taxation;
|
|
|
•
|
civil disturbances, war and terrorist actions; and
|
|
|
•
|
seizures of assets.
|
Consequently, our exploration, development and production activities outside of the United States may be substantially affected by factors beyond our control, any of which could materially adversely affect our financial condition or results of operations.
There are several ongoing legal disputes in which we are involved, including a putative class action lawsuit recently filed against us, and additional actions may be filed against us. We may be subject to future claims, including relating to environmental damage, safety conditions at our mines, the two fatal accidents that occurred at the Lucky Friday mine and other related matters. The outcomes of these pending and potential claims are uncertain. We may not resolve these claims favorably. Depending on the outcome, these actions could have adverse financial effects or cause reputational harm to us. If any of these disputes result in a substantial monetary judgment against us, are settled on terms in excess of our current accruals, or otherwise impact our operations, our financial results or condition could be materially adversely affected. For a description of the lawsuits in which we are involved, see Note 7 of Notes to Consolidated Financial Statements.
We are required to obtain governmental and lessor approvals and permits in order to conduct mining operations.
In the ordinary course of business, mining companies are required to seek governmental and lessor approvals and permits for expansion of existing operations or for the commencement of new operations. For example, we estimate that our Greens Creek tailings impoundment area has sufficient capacity to meet our needs through 2014. In order to increase the tailings capacity at the mine, a permit is required. Obtaining the necessary governmental permits is a complex, time-consuming and costly process. The duration and success of our efforts to obtain permits are contingent upon many variables not within our control. Obtaining environmental permits, including the approval of reclamation plans, may increase costs and cause delays or halt the continuation of mining operations depending on the nature of the activity to be permitted and the interpretation of applicable requirements implemented by the permitting authority. Interested parties may seek to prevent issuance of permits and intervene in the process or pursue extensive appeal rights. Past or ongoing violations of government mining laws could provide a basis to revoke existing permits or to deny the issuance of additional permits. In addition, evolving reclamation or environmental concerns may threaten our ability to renew existing permits or obtain new permits in connection with future development, expansions and operations. There can be no assurance that all necessary approvals and permits will be obtained and, if obtained, that the costs involved will not exceed those that we previously estimated. It is possible that the costs and delays associated with the compliance with such standards and regulations could become such that we would not proceed with the development or operation. We are required to post surety bonds or cash collateral to secure our reclamation obligations and we may be unable to obtain the required surety bonds or may not have the resources to provide cash collateral. Similarly, we will require the consent of MSHA to reopen the Silver Shaft and resume operations at the Lucky Friday mine upon completion of refurbishing the shaft walls.
Our business is subject to extensive U.S. and foreign, federal, state and local laws and regulations governing development, production, labor standards, occupational health, waste disposal, use of toxic substances, environmental regulations, mine safety and other matters. For example, in 2011 both of our operating mines received several citations, and the Lucky Friday mine also received several orders, under the Mine Safety and Health Act of 1977, as administered by MSHA. Further, we have been and are currently involved in lawsuits or disputes in which we have been accused of causing environmental damage, violating environmental laws, or violating environmental permits, and we may be subject to similar lawsuits or disputes in the future. See risk titled “Our environmental obligations may exceed the provisions we have made.”
15
Exposure to these liabilities arises not only from our existing operations, but from operations that have been closed or sold to third parties. We are required to reclaim properties after mining is completed and specific requirements vary among jurisdictions. In some cases, we may be required to provide financial assurances as security for reclamation costs, which may exceed our estimates for such costs. Our historical operations and the historical operations of entities and properties we have acquired have occasionally been alleged to have generated environmental contamination. We could also be held liable for worker exposure to hazardous substances. There can be no assurances that we will at all times be in compliance with all environmental, health and safety regulations or that steps to achieve compliance would not materially adversely affect our business.
In addition to existing regulatory requirements, legislation and regulations may be adopted or permit limits reduced at any time that result in additional operating expense, capital expenditures or restrictions and delays in the mining, production or development of our properties. Mining accidents and fatalities, whether or not at our mines or related to silver mining, may increase the likelihood of additional regulation or changes in law. In addition, enforcement or regulatory tools and methods available to governmental regulators such as the U.S. Environmental Protection Agency which have not been used or seldomly used against us, could in the future be used against us. Federal or state environmental or mine safety regulatory agencies may order certain of our mines to be temporarily or permanently closed, which may have a material adverse effect on our cash flows, results of operations, or financial condition.
Legislative and regulatory measures to address climate change and green house gas emissions are in various phases of consideration. If adopted, such measures could increase our cost of environmental compliance and also delay or otherwise negatively affect efforts to obtain permits and other regulatory approvals with regard to existing and new facilities. Proposed measures could also result in increased cost of fuel and other consumables used at our operations, including the diesel generation of electricity at our Greens Creek operation if we are unable to regularly access utility power. Climate change legislation may also affect our smelter customers who burn fossil fuels, resulting in increased costs to us, and may affect the market for the metals we produce with effects on prices that are not possible for us to predict.
From time to time, the U.S. Congress considers proposed amendments to the General Mining Law of 1872, as amended, which governs mining claims and related activities on federal lands. The extent of any future changes is not known and the potential impact on us as a result of U.S. Congressional action is difficult to predict. Changes to the General Mining Law, if adopted, could adversely affect our ability to economically develop mineral reserves on federal lands. Although we are not currently mining on federal land, exploration and future mining could occur on federal land.
The Clean Water Act requires permits for operations that discharge into waters of the United States. Such permitting has been a frequent subject of litigation by environmental advocacy groups, which has resulted, and may in the future result, in declines in such permits or extensive delays in receiving them. This may result in delays in, or in some instances preclude, the commencement or continuation of development or production operations. Adverse outcomes in lawsuits challenging permits or failure to comply with applicable regulations could result in the suspension, denial, or revocation of required permits, which could have a material adverse impact on our cash flows, results of operations, or financial condition.
We are subject to significant environmental obligations, particularly in northern Idaho through our subsidiary Hecla Limited. At December 31, 2011, we had accrued $153.8 million as a provision for environmental obligations, including $110.2 million accrued for Hecla Limited’s various liabilities in Idaho. As of the date of this report, these accrual balances included a total of $95.5 million for our remaining obligation for environmental claims with respect to the entire Coeur d’Alene Basin in northern Idaho. A settlement of the Coeur d’Alene Basin environmental litigation and related claims was finalized with entry of the Consent Decree by the Court in September 2011. For an overview of our potential environmental liabilities, see Note 7 of Notes to Consolidated Financial Statements.
Certain of the products we ship to our customers are subject to regulatory requirements regarding packaging, handling and shipping of products that may be considered to be dangerous to human health or the environment. Although we believe we are currently in compliance with all material regulations applicable to packaging, handling and shipping our products, the chemical properties of our products or existing regulations could change and cause us to fall out of compliance, or force us to incur substantial additional expenditures in order to maintain compliance with applicable regulations. Further, we do not ship our own products but instead rely on third party carriers to ship our products to our customers. To the extent that any of our carriers are unable or unwilling to ship our products in accordance with applicable regulations, including because of difficulty in obtaining, or increased cost of, insurance, we could be forced to find alternative shipping arrangements, assuming such alternatives would be available. Any such changes to our current shipping arrangements could have a material adverse impact on our operations and financial results.
16
Unpatented mining claims constitute a significant portion of our undeveloped property holdings, the validity of which could be uncertain and may be contested. Although we have conducted title reviews of our property holdings, title review does not necessarily preclude third parties from challenging our title. In accordance with mining industry practice, we do not generally obtain title opinions until we decide to develop a property. Therefore, while we have attempted to acquire satisfactory title to our undeveloped properties, some titles may be defective.
Our common and outstanding preferred stocks are listed on the New York Stock Exchange. The market price for our stock has been volatile, often based on:
|
|
•
|
changes in metals prices, particularly silver;
|
|
|
•
|
our results of operations and financial condition as reflected in our public news releases or periodic filings with the Securities and Exchange Commission;
|
|
|
•
|
fluctuating proven and probable reserves;
|
|
|
•
|
factors unrelated to our financial performance or future prospects, such as global economic developments, market perceptions of the attractiveness of particular industries, or the reliability of metals markets;
|
|
|
•
|
political and regulatory risk;
|
|
|
•
|
the success of our exploration programs;
|
|
|
•
|
ability to meet production estimates;
|
|
|
•
|
environmental, safety and legal risk;
|
|
|
•
|
the extent of analytical coverage concerning our business; and
|
|
|
•
|
the trading volume and general market interest in our securities.
|
The market price of our stock at any given point in time may not accurately reflect our value, and may prevent shareholders from realizing a profit on their investment.
If we were liquidated, holders of our preferred stock would be entitled to receive approximately $7.9 million (plus any accrued and unpaid dividends) from any liquidation proceeds before holders of our common stock would be entitled to receive any proceeds.
Since July 2005, we paid regular quarterly dividends on our Series B Preferred Stock through the third quarter of 2008. The annual dividend payable on the Series B Preferred Stock is currently $0.6 million. Prior to the fourth quarter of 2004, we had not declared preferred dividends on Series B Preferred Stock since the second quarter of 2000. Series B Preferred Stock dividends due on January 1, 2009, for the fourth quarter of 2008 and dividends due for the three quarters thereafter were deferred. In January 2010 we paid all dividends in arrears and dividends due for the fourth quarter of 2009 for the Series B Preferred Stock, and we paid all regular quarterly dividends for 2010 and 2011. However, there can be no assurance that we will continue to pay preferred stock dividends in the future.
In September 2011, our Board of Directors adopted a common stock dividend policy that links the amount of any declared dividend on our common stock to our average quarterly realized silver price in the preceding quarter. See Note 9 of Notes to Consolidated Financial Statements for more information on potential dividend amounts at various silver prices. On November 8, 2011, our Board of Directors declared the first quarterly silver price-linked dividend of $0.02 per share ($5.6 million total), based on the average realized silver price in the third quarter of 2011 of $37.02 per ounce. On February 17, 2012, our Board of Directors declared a silver price-linked common stock dividend, pursuant to the policy described above, of $0.01 per share based on the average realized silver price of $31.61 per ounce in the fourth quarter of 2011. In addition, in February 2012, our Board of Directors adopted a common stock dividend policy that includes a minimum annual dividend of $0.01 per share of common stock, payable quarterly when declared, and declared a dividend of $0.0025 per share pursuant to that policy. Therefore, the aggregate common stock dividend declared by ouir Board of Directors was $0.0125 per share, for a total of approximately $3.6 million expected to be paid in the first quarter of 2012. The declaration and payment of common stock dividends 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.
17
Additional issuances of equity securities by us would dilute the ownership of our existing stockholders and could reduce our earnings per share.
We may issue equity in the future in connection with acquisitions, strategic transactions or for other purposes, including funding our obligations under any settlement of litigation of other claims. Any such acquisition could be material to us and could significantly increase the size and scope of our business, including our market capitalization. To the extent we issue any additional equity securities, the ownership of our existing stockholders would be diluted and our earnings per share could be reduced. As of December 31, 2011, there were warrants outstanding for purchase of 22,332,623 shares of our common stock. The warrants give the holders the right to purchase our common stock at the following prices: $2.44 (5,200,519 shares), $2.55 (460,976 shares), and $2.49 (16,671,128 shares). The remaining warrants expire in June and August 2014. See Note 9 of Notes to Consolidated Financial Statements.
The issuance of additional shares of our preferred stock or common stock in the future could adversely affect holders of common stock.
The market price of our common stock may be influenced by any preferred stock we may issue. Our board of directors is authorized to issue additional classes or series of preferred stock without any action on the part of our stockholders. This includes the power to set the terms of any such classes or series of preferred stock that may be issued, including voting rights, dividend rights and preferences over common stock with respect to dividends or upon the liquidation, dissolution or winding up of the business and other terms. If we issue preferred stock in the future that has preference over our common stock with respect to the payment of dividends or upon liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of holders of the common stock or the market price of the common stock could be adversely affected.
As noted above, as of December 31, 2011, there were warrants outstanding to purchase a total of 22,332,623 shares of our common stock.
As described in Note 9 of Notes to Consolidated Financial Statements, we issued 18.9 million shares of our common stock in January of 2011 in connection with conversion of our 6.5% Mandatory Convertible Preferred Stock.
If a large number of shares of our common stock are sold in the public market, the sales could reduce the trading price of our common stock and impede our ability to raise future capital.
We cannot predict what effect, if any, future issuances by us of our common stock or other equity will have on the market price of our common stock. In addition, shares of our common stock that we issue in connection with an acquisition may not be subject to resale restrictions. We may issue substantial additional shares of common stock or other securities in connection with material acquisition transactions or for other purposes, including funding of our obligations under any settlement of litigation or other claims. The market price of our common stock could decline if certain large holders of our common stock, or recipients of our common stock, sell all or a significant portion of their shares of common stock or are perceived by the market as intending to sell these shares other than in an orderly manner. In addition, these sales could also impair our ability to raise capital through the sale of additional common stock in the capital markets.
The provisions in our certificate of incorporation, our by-laws and Delaware law could delay or deter tender offers or takeover attempts that may offer a premium for our common stock.
The provisions in our certificate of incorporation, our by-laws and Delaware law could make it more difficult for a third party to acquire control of us, even if that transaction would be beneficial to stockholders. These impediments include:
|
|
•
|
the classification of our board of directors into three classes serving staggered three-year terms, which makes it more difficult to quickly replace board members;
|
|
|
•
|
the ability of our board of directors to issue shares of preferred stock with rights as it deems appropriate without stockholder approval;
|
18
|
|
•
|
a provision that special meetings of our board of directors may be called only by our chief executive officer or a majority of our board of directors;
|
|
|
•
|
a provision that special meetings of stockholders may only be called pursuant to a resolution approved by a majority of our entire board of directors;
|
|
|
•
|
a prohibition against action by written consent of our stockholders;
|
|
|
•
|
a provision that our board members may only be removed for cause and by an affirmative vote of at least 80% of the outstanding voting stock;
|
|
|
•
|
a provision that our stockholders comply with advance-notice provisions to bring director nominations or other matters before meetings of our stockholders;
|
|
|
•
|
a prohibition against certain business combinations with an acquirer of 15% or more of our common stock for three years after such acquisition unless the stock acquisition or the business combination is approved by our board prior to the acquisition of the 15% interest, or after such acquisition our board and the holders of two-thirds of the other common stock approve the business combination; and
|
|
|
•
|
a prohibition against our entering into certain business combinations with interested stockholders without the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of voting stock.
|
The existence of these provisions may deprive stockholders of an opportunity to sell our stock at a premium over prevailing prices. The potential inability of our stockholders to obtain a control premium could adversely affect the market price for our common stock.
If we cannot meet the New York Stock Exchange continued listing requirements, the NYSE may delist our common stock.
Our common stock is currently listed on the NYSE. In the future, if we are not be able to meet the continued listing requirements of the NYSE, which require, among other things, that the average closing price of our common stock be above $1.00 over 30 consecutive trading days, our common stock may be delisted. Our closing stock price on February 20, 2012, was $5.02.
If we are unable to satisfy the NYSE criteria for continued listing, our common stock would be subject to delisting. A delisting of our common stock could negatively impact us by, among other things, reducing the liquidity and market price of our common stock; reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing; decreasing the amount of news and analyst coverage for the Company; and limiting our ability to issue additional securities or obtain additional financing in the future. In addition, delisting from the NYSE might negatively impact our reputation and, as a consequence, our business.
Our various subsidiaries own 100% of the Greens Creek Mine, located in Southeast Alaska, which has been in production since 1989, with a temporary care and maintenance period from April 1993 through July 1996. Since the start of production, Greens Creek has been owned and operated through various joint venture arrangements involving a variety of partners, including us. For approximately 15 years prior to April 16, 2008, our wholly-owned subsidiary, Hecla Alaska LLC, owned an undivided 29.7% joint venture interest in the assets of Greens Creek. On April 16, 2008, we completed the acquisition of all of the equity of two Rio Tinto subsidiaries holding a 70.3% interest in the Greens Creek mine for approximately $758.5 million. The acquisition gives our various subsidiaries control of 100% of the Greens Creek mine.
19
The Greens Creek orebody contains silver, zinc, gold and lead, and lies adjacent to the Admiralty Island National Monument, an environmentally sensitive area. The Greens Creek property includes 17 patented lode claims and one patented mill site claim, in addition to property leased from the U.S. Forest Service. Greens Creek also has title to mineral rights on 7,500 acres of federal land adjacent to the properties. The entire project is accessed by boat and served by 13 miles of road and consists of the mine, an ore concentrating mill, a tailings impoundment area, a ship-loading facility, camp facilities and a ferry dock. The map below illustrates the location and access to Greens Creek:
The Greens Creek deposit is a polymetallic, stratiform, massive sulfide deposit. The host rock consists of predominantly marine sedimentary, and mafic to ultramafic volcanic and plutonic rocks, which have been subjected to multiple periods of deformation. These deformational episodes have imposed intense tectonic fabrics on the rocks. Mineralization occurs discontinuously along the contact between a structural hanging wall of quartz mica carbonate phyllites and a structural footwall of graphitic and calcareous argillite. Major sulfide minerals are pyrite, sphalerite, galena, and tetrahedrite/tennanite.
Pursuant to a 1996 land exchange agreement, the joint venture transferred private property equal to a value of $1.0 million to the U.S. Forest Service and received exploration and mining rights to approximately 7,500 acres of land with mining potential surrounding the existing mine. Production from new ore discoveries on the exchanged lands will be subject to federal royalties included in the land exchange agreement. The royalty is only due on production from reserves that are not part of Greens Creek’s extralateral rights. Thus far, there has been no production triggering payment of the royalty. The royalty is 3% if the average value of the ore during a year is greater than $120 per ton of ore, and 0.75% if the value is $120 per ton or less. The benchmark of $120 per ton is adjusted annually according to the Gross Domestic Product (GDP) Implicit Price Deflator until the year 2016, and at December 31, 2011, was at approximately $164 per ton when applying the latest GDP Implicit Price Deflator observation.
Greens Creek is an underground mine which produces approximately 2,100 to 2,300 tons of ore per day. The primary mining methods are cut and fill and longhole stoping. The ore is processed on site at a mill, which produces lead, zinc and bulk concentrates, as well as gold doré. In 2011, ore was processed at an average rate of approximately 2,115 tons per day. During 2011, mill recovery totaled approximately 73% silver, 79% zinc, 68% lead and 62% gold. The doré is further refined by precious metal refiners and sold to banks, and the three concentrate products are sold to a number of major smelters worldwide. See Note 11 of Notes to Consolidated Financial Statements for information on the significant customers for Greens Creek’s products. Concentrates are shipped from a marine terminal located on Admiralty Island about nine miles from the mine site.
20
Electricity for the Greens Creek unit has historically been provided by diesel generators located on site. However, an agreement was reached during 2005 to purchase excess hydroelectric power from the local power company, Alaska Electric Light and Power Company (“AEL&P”). Installation of the necessary infrastructure was completed in 2006, and use of hydroelectric power commenced during the third quarter of 2006. The infrastructure is also used to provide power to surrounding communities. This project has reduced production costs at Greens Creek to the extent power has been available. Prior to 2009, the low lake levels combined with the increased demand in the Juneau area restricted the amount of power available to Green Creek. In 2009 and 2010 , the mine received an increased proportion of its power needs from AEL&P. Hydroelectric power was also available during 2011, but to a lesser extent compared to the previous two years due to lower precipitation. When weather conditions are not favorable to maintain lake water levels, the mine relies on diesel generated power.
The employees at Greens Creek are employees of Hecla Greens Creek Mining Company, our wholly-owned subsidiary, and are not represented by a bargaining agent. There were 364 employees at the Greens Creek unit at December 31, 2011.
As of December 31, 2011, we have recorded a $36.1 million asset retirement obligation for reclamation and closure costs. We continue to maintain a $30 million reclamation bond for Greens Creek. The net book value of the Greens Creek unit property and its associated plant, equipment and mineral interests was approximately $670 million as of December 31, 2011.
Based on current ore reserve estimates, the currently known remaining mine life at Greens Creek is 10 years. Information with respect to production, average costs per ounce of silver produced and proven and probable ore reserves is set forth in the following table.
|
Years Ended December 31,
|
||||||||||
|
Production
|
2011
|
2010
|
2009
|
|||||||
|
Ore milled (tons)
|
772,069
|
800,397
|
790,871
|
|||||||
|
Silver (ounces)
|
6,498,337
|
7,206,973
|
7,459,170
|
|||||||
|
Gold (ounces)
|
56,818
|
68,838
|
67,278
|
|||||||
|
Zinc (tons)
|
66,050
|
74,496
|
70,379
|
|||||||
|
Lead (tons)
|
21,055
|
25,336
|
22,253
|
|||||||
|
Total cash costs
|
$
|
(1.29
|
)
|
$
|
(3.90
|
)
|
$
|
0.35
|
||
|
Total production costs
|
$
|
5.19
|
$
|
3.36
|
$
|
7.65
|
||||
|
Total tons
|
7,991,000
|
8,243,100
|
8,314,700
|
|||||||
|
Silver (ounces per ton)
|
12.3
|
12.1
|
12.1
|
|||||||
|
Gold (ounces per ton)
|
0.09
|
0.09
|
0.10
|
|||||||
|
Zinc (percent)
|
9.2
|
9.3
|
10.3
|
|||||||
|
Lead (percent)
|
3.5
|
3.5
|
3.6
|
|||||||
|
Contained silver (ounces)
|
98,383,300
|
99,730,000
|
100,973,300
|
|||||||
|
Contained gold (ounces)
|
742,400
|
757,000
|
847,400
|
|||||||
|
Contained zinc (tons)
|
733,140
|
766,500
|
852,900
|
|||||||
|
Contained lead (tons)
|
281,620
|
291,300
|
303,300
|
|||||||
|
(1)
|
Includes by-product credits from gold, lead and zinc production. Cash costs per ounce of silver represent measurements that are not in accordance with GAAP that management uses to monitor and evaluate the performance of our mining operations. We believe cash costs per ounce of silver provides an indicator of economic performance and efficiency at each location and on a consolidated basis, as well as providing a meaningful basis to compare our results to those of other mining companies and other mining operating properties. 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 in Part II, Item 7. — Management's Discussion and Analysis of Financial Condition and Results of Operations, under Reconciliation of Total Cash Costs (non-GAAP) to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP).
|
|
(2)
|
Estimates of proven and probable ore reserves for the Greens Creek unit as of December 2011, 2010 and 2009 are calculated and reviewed in-house and are derived from successive generations of reserve and feasibility analyses for different areas of the mine, using a separate assessment of metals prices for each year. The average prices used for the Greens Creek unit were:
|
21
|
December 31,
|
||||||||||||
|
2011
|
2010
|
2009
|
||||||||||
|
Silver (per ounce)
|
$ | 20.00 | $ | 16.00 | $ | 13.75 | ||||||
|
Gold (per ounce)
|
$ | 1,100 | $ | 950 | $ | 775 | ||||||
|
Lead (per pound)
|
$ | 0.85 | $ | 0.80 | $ | 0.70 | ||||||
|
Zinc (per pound)
|
$ | 0.85 | $ | 0.80 | $ | 0.70 | ||||||
|
(3)
|
Ore reserves represent in-place material, diluted and adjusted for expected mining recovery. Mill recoveries of ore reserve grades differ with ore grades and are expected to average 73% for silver, 62% for gold, 87% for zinc and 77% for lead.
|
|
(4)
|
The changes in reserves in 2011 versus 2010 are due to continued depletion of the deposit through production, partially offset by increases in forecasted precious metals prices. The changes in reserves in 2010 versus 2009 were due to the lower ore grades for gold, zinc, and lead combined with continued depletion of the deposit, partially offset by increases in forecasted metals prices and additional drilling at the East ore zone.
|
|
(5)
|
We only report probable reserves at the Greens Creek unit, which are based on average drill spacing of 50 to 100 feet. Proven reserves typically require that mining samples are partly the basis of the ore grade estimates used, while probable reserve grade estimates can be based entirely on drilling results. Cutoff grade assumptions vary by orebody and are developed based on reserve prices, anticipated mill recoveries and smelter payables and cash operating costs. Due to multiple ore metals, and complex combinations of ore types, metal ratios and metallurgical performances at Greens Creek, the cutoff grade is expressed in terms of net smelter return (“NSR”), rather than metal grade. The cutoff grade was $160 per ton NSR.
|
|
(6)
|
Greens Creek ore reserve estimates were prepared by Ben Gage, Senior Resource Geologist at the Greens Creek unit and reviewed by John Taylor, Senior Resource Geologist at Hecla Limited.
|
|
(7)
|
An independent review by AMEC E&C, Inc. was completed in 2010 for the 2009 reserve models for the 5250 and 9A zones.
|
Since 1958, we have owned and operated the Lucky Friday unit, a deep underground silver, lead and zinc mine located in the Coeur d’Alene Mining District in northern Idaho. Lucky Friday is one-quarter mile east of Mullan, Idaho, and is adjacent to U.S. Interstate 90. Below is a map illustrating the location and access to the Lucky Friday unit:
22
There have been two ore-bearing structures mined at the Lucky Friday unit. The first, mined through 2001, was the Lucky Friday vein, a fissure vein typical of many in the Coeur d’Alene Mining District. The ore body is located in the Revett Formation, which is known to provide excellent host rocks for a number of ore bodies in the Coeur d’Alene Mining District. The Lucky Friday vein strikes northeasterly and dips steeply to the south with an average width of six to seven feet. Its principal ore minerals are galena and tetrahedrite with minor amounts of sphalerite and chalcopyrite. The ore occurs as a single continuous ore body in and along the Lucky Friday vein. The major part of the ore body has extended from 1,200 feet to 6,020 feet below surface.
The second ore-bearing structure, known as the Lucky Friday Expansion Area, has been mined since 1997 pursuant to an operating agreement with Silver Hunter Mining Company (“Silver Hunter”), our wholly owned subsidiary. During 1991, we discovered several mineralized structures containing some high-grade silver ores in an area known as the Gold Hunter property, approximately 5,000 feet northwest of the then existing Lucky Friday workings. This discovery led to the development of the Gold Hunter property on the 4900 level. At approximately 4,900 feet below surface, the Gold Hunter veins are hosted in a 200-foot thick siliceous lens within the Wallace Formation that transitions to the St. Regis Formation below 5,900 feet. The veins are sub-parallel, and are numbered consecutively from the hanging wall of the favorable horizon to the footwall. The strike of the vein system is west-northwest with a dip of 85 degrees to the south. The 30-vein, which has demonstrated to contain higher silver grades, represents approximately 73% of our current proven and probable ore reserve tonnages, while the remaining 27% of our reserves are contained in various intermediate veins having lower silver grades than 30-vein. While the veins share many characteristics with the Lucky Friday vein, the Gold Hunter area possesses some mineralogical and rock mechanics differences that make it more favorable to mine at this time. On November 6, 2008, we, through Silver Hunter, completed the acquisition of substantially all of the assets of Independence Lead Mines Company (“Independence”), including all future interest or royalty obligation to Independence and the mining claims pertaining to the operating agreement with Hecla Limited that was assigned to Silver Hunter.
The principal mining method at the Lucky Friday unit is ramp access, cut and fill. This method utilizes rubber-tired equipment to access the veins through ramps developed outside of the ore body. Once a cut is taken along the strike of the vein, it is backfilled with cemented tailings and the next cut is accessed, either above or below, from the ramp system.
The ore produced from Lucky Friday is processed in a conventional flotation mill, which produces both a lead concentrate and a zinc concentrate. In 2011, ore was processed at an average rate of approximately 905 tons per day. During 2011, mill recovery totaled approximately 93% silver, 93% lead and 87% zinc. All silver-lead and zinc concentrate production during 2011 was shipped to Teck Cominco Limited’s smelter in Trail, British Columbia, Canada.
23
Based on current reserve estimates, the currently known remaining mine life at the Lucky Friday is approximately 25 years. Information with respect to the Lucky Friday unit’s production, average cost per ounce of silver produced and proven and probable ore reserves for the past three years is set forth in the table below.
|
Years Ended December 31,
|
||||||||||||
|
Production
|
2011
|
2010
|
2009
|
|||||||||
|
Ore milled (tons)
|
298,672 | 351,074 | 346,395 | |||||||||
|
Silver (ounces)
|
2,985,339 | 3,359,379 | 3,530,490 | |||||||||
|
Lead (tons)
|
18,095 | 21,619 | 22,010 | |||||||||
|
Zinc (tons)
|
7,305 | 9,286 | 10,616 | |||||||||
|
Total cash costs
|
$ | 6.47 | $ | 3.76 | $ | 5.21 | ||||||
|
Total production costs
|
$ | 8.50 | $ | 6.25 | $ | 8.02 | ||||||
|
Total tons
|
2,345,500 | 1,642,100 | 1,358,200 | |||||||||
|
Silver (ounces per ton)
|
12.6 | 12.4 | 12.3 | |||||||||
|
Lead (percent)
|
7.8 | 7.8 | 8.0 | |||||||||
|
Zinc (percent)
|
3.0 | 2.8 | 2.6 | |||||||||
|
Contained silver (ounces)
|
29,573,900 | 20,387,600 | 16,640,300 | |||||||||
|
Contained lead (tons)
|
183,100 | 128,000 | 109,100 | |||||||||
|
Contained zinc (tons)
|
70,160 | 46,000 | 35,100 | |||||||||
|
Total tons
|
1,345,300 | 1,545,100 | 1,577,000 | |||||||||
|
Silver (ounces per ton)
|
14.7 | 14.2 | 13.9 | |||||||||
|
Lead (percent)
|
9.3 | 8.9 | 8.9 | |||||||||
|
Zinc (percent)
|
3.2 | 3.0 | 2.9 | |||||||||
|
Contained silver (ounces)
|
19,746,200 | 21,955,000 | 21,947,600 | |||||||||
|
Contained lead (tons)
|
124,720 | 136,800 | 140,300 | |||||||||
|
Contained zinc (tons)
|
42,890 | 46,500 | 46,100 | |||||||||
|
Total tons
|
3,690,800 | 3,187,200 | 2,935,200 | |||||||||
|
Silver (ounces per ton)
|
13.4 | 13.3 | 13.1 | |||||||||
|
Lead (percent)
|
8.3 | 8.3 | 8.5 | |||||||||
|
Zinc (percent)
|
3.1 | 2.9 | 2.8 | |||||||||
|
Contained silver (ounces)
|
49,320,100 | 42,342,600 | 38,587,900 | |||||||||
|
Contained lead (tons)
|
307,820 | 264,900 | 249,400 | |||||||||
|
Contained zinc (tons)
|
113,050 | 92,500 | 81,200 | |||||||||
|
(1)
|
Includes by-product credits from lead and zinc production. Cash costs per ounce of silver represent measurements that are not in accordance with GAAP that management uses to monitor and evaluate the performance of our mining operations. We believe cash costs per ounce of silver provides an indicator of economic performance and efficiency at each location and on a consolidated basis, as well as providing a meaningful basis to compare our results to those of other mining companies and other mining operating properties. 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 in Item 7. — Management’s Discussion and Analysis of Financial Condition and Results of Operations, under Reconciliation of Total Cash Costs (non-GAAP) to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP).
|
24
|
(2)
|
Proven and probable ore reserves are calculated and reviewed in-house and are subject to periodic audit by others, although audits are not performed on an annual basis. Cutoff grade assumptions vary by ore body and are developed based on reserve prices, anticipated mill recoveries and smelter payables and cash operating costs. Due to multiple ore metals, and complex combinations of ore types, metal ratios and metallurgical performances at the Lucky Friday, the cutoff grade is expressed in terms of net smelter return (“NSR”), rather than metal grade. The cutoff grade at the Lucky Friday ranges from $74 per ton NSR to $92 per ton NSR. Our estimates of proven and probable reserves are based on the following metals prices:
|
|
December 31,
|
||||||||||||
|
2011
|
2010
|
2009
|
||||||||||
|
Silver (per ounce)
|
$ | 20.00 | $ | 16.00 | $ | 13.75 | ||||||
|
Lead (per pound)
|
$ | 0.85 | $ | 0.80 | $ | 0.70 | ||||||
|
Zinc (per pound)
|
$ | 0.85 | $ | 0.80 | $ | 0.70 | ||||||
|
(3)
|
Reserves are in-place materials that incorporate estimates of the amount of waste that must be mined along with the ore and expected mining recovery. Mill recoveries are expected to be 93% for silver, 93% for lead and 87% for zinc.
|
|
(4)
|
The changes in reserves in 2011 versus 2010 are due to addition of data from new drill holes and development work, an increase in mining widths in areas utilizing mechanized mining, and increases in forecasted metals prices, which has resulted in the addition of new reserves based on updated estimates, partially offset by depletion due to production. The changes in reserves in 2010 versus 2009, and in 2009 versus 2008, are due to addition of data from new drill holes and development work, higher ore grades, and increases in forecasted metals prices, which resulted in the addition of new reserves based on updated estimates, partially offset by depletion due to production.
|
|
(5)
|
Lucky Friday ore reserve estimates were prepared by Terry DeVoe, Chief Geologist at the Lucky Friday unit and reviewed by John Taylor, Senior Resource Geologist at Hecla Limited.
|
|
(6)
|
An independent audit by Scott Wilson Roscoe Postle Associates Inc. was completed in January 2010 for the 2009 reserve model at the Lucky Friday mine.
|
A number of accidents and other events have recently impacted operations at the Lucky Friday. In April 2011, a fall of ground caused the fatality of one employee, resulting in cessation of operations for approximately 10 days. In November 2011, an accident occurred as part of the construction of #4 Shaft and resulted in the fatality of one contractor employee. In an unrelated incident, in December 2011, a rock burst occurring in a primary access way at the Lucky Friday injured seven employees, with no fatalities as a result of that incident. At the end of 2011, the Mine Safety Health Administration began a special impact inspection at the Lucky Friday which resulted in an order to remove loose material from the Silver Shaft, the primary access way from surface at the Lucky Friday mine. In response, we submitted a plan to MSHA and received approval to remove the loose cementitious material. In addition, the plan includes removal of unused utilities, construction of a water ring to prevent ice from forming in the winter, the installation of a metal brattice, repair of shaft steel, and installation of a new power cable, all of which should improve the shaft's functionality and possibly improve the shaft's hoisting capacity. Once the shaft cleanup has been complete down to the 4900 level, work on a haulage way bypassing the area at the 5900 level impacted by the December 2011 rock burst is expected to commence. Underground access will be limited (e.g., to allow maintenance of pumps in the mine) as this work is being performed, and we anticipate that production at the Lucky Friday mine will be suspended until early 2013 as a result. We anticipate returning to full production levels at the Lucky Friday once the Silver Shaft work and work related to the 5900 haulage way bypass is complete.
During 2008, we initiated engineering, procurement and development activities relating to construction of #4 Shaft at the Lucky Friday mine, which, upon completion, would provide access from the 4900 level down to the 8800 level of the mine. The project was temporarily placed on hold in the fourth quarter of 2008 due to then prevailing metals prices. However, detailed engineering, long lead time procurement, and other early-stage activities for the internal shaft project resumed in 2009. Activities in 2010 and 2011 included engineering, erection of a surface concrete batch plant, and work on #4 Shaft, including: detailed shaft design, excavation of the hoist room and off shaft development access to shaft facilities, installation of the hoist and head works, placement and receipt of orders for major equipment purchases, advancement of a geotechnical drill hole, 367 feet of vertical excavation, shaft-sinking set-up, and other construction activities. Upon completion, #4 Shaft would allow us to mine mineralized material below our current workings and provide deeper platforms for exploration. The Board of Directors approved the #4 Shaft project in its entirety in August 2011. Construction of #4 Shaft is expected to take approximately three more years to complete after re-commencement, and capital expenditures for the project are forecast to total approximately $200 million, including approximately $90 million spent on the project through December 31, 2011. As a result of the requirement to remove any loose material from the Silver Shaft (discussed above), work on the #4 Shaft project will be suspended until the Silver Shaft rehabilitation is completed. We believe that our current capital resources will allow us to proceed at that time. However, there are a number of factors that could affect completion of the project, including a significant decline in metals prices or a significant increase in operating or capital costs. An increase in the capital cost could potentially require us to suspend the project or access additional capital though debt financing, the sale of securities, or other external sources. This additional financing could be costly or unavailable.
25
Reclamation activities are anticipated to include stabilization of tailings ponds and waste rock areas. No final reclamation activities were performed at Lucky Friday in 2011, and at December 31, 2011, an asset retirement obligation of approximately $1.5 million had been recorded for reclamation and closure costs. The net book value of the Lucky Friday unit property and its associated plant, equipment and mineral interests was approximately $202 million as of December 31, 2011. The construction of the facilities at Lucky Friday ranges from the 1950s to 2011. The plant is maintained by our employees with assistance from outside contractors as needed.
At December 31, 2011, there were 285 employees at the Lucky Friday unit. United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial, and Service Workers International Union is the bargaining agent for the Lucky Friday’s 217 hourly employees. The current labor agreement expires on April 30, 2016. As a result of the requirement to remove loose material from the Silver Shaft (discussed above), which will limit underground access and temporarily suspend production at the Lucky Friday, Hecla Limited laid off 121 employees in January 2012, with approximately 25 of those employees accepting temporary positions at other Hecla operations. We anticipate that employment levels at the Lucky Friday will return to where they were at prior to the suspension of production as the Silver Shaft work is completed.
For a discussion of our legal proceedings, see Note 7 of Notes to Consolidated Financial Statements.
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 Annual Report.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|
(a)
|
(i) Shares of our common stock are traded on the New York Stock Exchange, Inc.
|
|
(ii)
|
Our common stock quarterly high and low sale prices for the past two years were as follows:
|
|
2011
|
– High
|
$ | 7.00 | $ | 8.65 | $ | 9.95 | $ | 11.56 | ||||||||
|
– Low
|
$ | 4.82 | $ | 5.32 | $ | 6.87 | $ | 7.81 | |||||||||
|
2010
|
– High
|
$ | 11.52 | $ | 6.44 | $ | 6.47 | $ | 6.99 | ||||||||
|
– Low
|
$ | 6.20 | $ | 4.52 | $ | 4.86 | $ | 4.27 | |||||||||
|
(b)
|
As of February 17, 2012, there were6,933 shareholders of record of our common stock.
|
|
(c)
|
Quarterly dividends were paid on our Series B Preferred Stock for 2011, and no dividends are in arrears. The final quarterly dividend on our 6.5% Mandatory Convertible Preferred Stock for the fourth quarter of 2010 was paid in January 2011, and no dividends are in arrears. All outstanding shares of our 6.5% Mandatory Convertible Preferred Stock converted to common stock on January 1, 2011. In September 2011, our Board of Directors adopted a common stock dividend policy that links the anticipated amount of any dividend declared on our common stock to our average quarterly realized silver price in the preceding quarter. In November 2011, we paid the first quarterly common stock dividend totaling $5.6 million in cash under the policy. Prior to 2011, no dividends had been declared on our common stock since 1990. We cannot pay dividends on our common stock if we fail to pay dividends on our Series B Preferred Stock. In January 2010, we paid all cumulative, unpaid dividends on both our Series B and 6.5% Mandatory Convertible Preferred Stock. Prior to January 2010, quarterly dividends were paid on our Series B Preferred Stock through the first three quarters of 2008, with $0.7 million for cumulative, unpaid dividends at December 31, 2009 for the fourth quarter 2008 and year ended December 31, 2009. Prior to January 2010, dividends were paid on our 6.5% Mandatory Convertible Preferred Stock through the first three quarters of 2008, with cumulative, unpaid dividends of $16.5 million at December 31, 2009 for the fourth quarter of 2008 and year ended December 31, 2009. The $0.7 million in dividends paid in January 2010 on our Series B Preferred Stock were paid in cash, while the $16.5 million in dividends paid in January 2010 on our 6.5% Mandatory Convertible Preferred Stock were paid in shares of our common stock.
|
26
|
(d)
|
The following table provides information as of December 31, 2011, regarding our compensation plans under which equity securities are authorized for issuance:
|
|
Equity Compensation Plans Approved by Security Holders:
|
||||||||||||
|
2010 Stock Incentive Plan
|
14,663 | 5.94 | 19,696,320 | |||||||||
|
1995 Stock Incentive Plan
|
1,180,133 | 6.73 | — | |||||||||
|
Stock Plan for Non-employee Directors
|
— | N/A | 671,061 | |||||||||
|
Key Employee Deferred Compensation Plan
|
— | N/A | 2,126,783 | |||||||||
|
Total
|
1,194,796 | 6.72 | 22,494,164 | |||||||||
See Note 8 and Note 9 of Notes to Consolidated Financial Statements for information regarding the above plans.
|
(e)
|
On December 12, 2011, we issued 5,395,683 unregistered shares of common stock to the various parties listed in the Purchase and Sale Agreement filed as exhibit 10.1 to our Current Report on Form 8-K filed on December 13, 2011. The shares were not registered under the Securities Act of 1933 in reliance on Section 4(2) of such Act and Regulation D thereunder, as transactions by an issuer not involving any public offering, and were issued for the acquisition of the remaining 30% interest in the San Juan Silver project (see Note 16 of Notes to Consolidated Financial Statements for information). We did not issue any unregistered securities in 2010. However, we did issue 604,555 and 631,832 shares of common stock on April 1 and July 1, 2010, respectively, as payment of the quarterly dividend on our formerly outstanding 6.5% Mandatory Convertible Preferred Stock. During 2009, we issued unregistered securities as follows:
|
|
|
a.
|
On February 10, 2009, we issued 42,621 unregistered shares of our 12% Convertible Preferred Stock to our various lenders listed in the Fourth Amendment to our Credit Agreement filed as exhibit 10.5 to our Current Report on Form 8-K filed on February 4, 2009. The shares were not registered under the Securities Act of 1933 in reliance on Section 4(2) of such Act and Regulation D thereunder, as transactions by an issuer not involving any public offering, and issued as a fee to the lenders for the deferral of principal payments under the Fourth Amendment.
|
|
|
b.
|
On June 4, 2009, we issued unregistered equity securities in a private placement pursuant to Section 4(2) of the Securities Act of 1933 Act and Regulation D thereunder as transactions by an issuer not involving any public offering. The securities consist of 17,391,302 shares of our common stock and Series 4 Warrants to purchase 12,173,913 shares of our common stock. The Series 4 Warrants had an exercise price of $3.68 per share, subject to certain adjustments. They became exercisable on December 7, 2009 and remained exercisable during the 181 day period following that date. The proceeds from the issuance were used to repay a portion of the prior outstanding balance on our amended and restated credit facility.
|
|
(f)
|
Comparison of Five-Year Cumulative Total Shareholder Return—December 2006 through December 2011(1):
|
27
Hecla Mining Company, S&P 500, S&P 500 Gold Index, and Custom Peer Group(2,3)
|
Hecla Mining
|
S&P 500
|
Group 3
|
||||||||||||||||||
|
December 2006
|
$ | 100.00 | $ | 100.00 | $ | 100.00 | $ | 100.00 | $ | 100.00 | ||||||||||
|
December 2007
|
$ | 122.06 | $ | 105.49 | $ | 109.15 | $ | 104.26 | $ | 101.42 | ||||||||||
|
December 2008
|
$ | 36.55 | $ | 66.46 | $ | 91.88 | $ | 69.89 | $ | 71.03 | ||||||||||
|
December 2009
|
$ | 80.68 | $ | 84.05 | $ | 107.75 | $ | 139.59 | $ | 142.94 | ||||||||||
|
December 2010
|
$ | 147.00 | $ | 96.71 | $ | 141.11 | $ | 213.19 | $ | 220.23 | ||||||||||
|
December 2011
|
$ | 68.49 | $ | 98.75 | $ | 140.15 | $ | 164.62 | $ | 176.50 | ||||||||||
|
(1)
|
Total shareholder return assuming $100 invested on December 31, 2006 and reinvestment of dividends on quarterly basis.
|
|
(2)
|
Centerra Gold, Inc., Coeur d’Alene Mines Corp., Eldorado Gold Corp., Golden Star Resources Ltd., IAMGOLD Corporation, New Gold Incorporation, Pan American Silver Corp., Stillwater Mining Company.
|
|
(3)
|
Alamos Gold Inc., Allied Nevada Gold Corp., Centerra Gold, Inc., Coeur d’Alene Mines Corp., Eldorado Gold Corp., Golden Star Resources Ltd., IAMGOLD Corporation, New Gold Incorporation, Pan American Silver Corp., Stillwater Mining Company. The changes in our 2011 peer group compared to the 2010 peer group were to add Alamos Gold Inc. and Allied Nevada Gold Corp. This change was made to include additional companies that we have determined to be within an acceptable revenue range. Also, one company previously included in our peer group was removed as a result of its stock no longer being registered on an exchange.
|
The following table (in thousands, except per share amounts, common shares issued, shareholders of record, and employees) sets forth selected historical consolidated financial data as of and for each of the years ended December 31, 2007 through 2011, and is derived from our audited financial statements. The data set forth below should be read in conjunction with, and is qualified in its entirety by, our Consolidated Financial Statements and the Notes thereto.
28
|
2011 (4)
|
2010 (4)
|
2009 (4)
|
2008 (4)
|
2007 (4)
|
|||||||||||||||
|
Sales of products
|
$
|
477,634
|
$
|
418,813
|
$
|
312,548
|
$
|
204,665
|
$
|
157,640
|
|||||||||
|
Net income (loss) from continuing operations
|
$
|
151,164
|
$
|
48,983
|
$
|
67,826
|
$
|
(37,173
|
)
|
$
|
68,157
|
||||||||
| $ |
—
|
$ |
—
|
$
|
—
|
$
|
(17,395
|
)
|
$
|
(14,960
|
)
|
||||||||
| Loss on disposal of discontinued operations, net of tax (5) | $ |
—
|
$ |
—
|
$ |
—
|
$ |
(11,995
|
) | $ |
—
|
||||||||
|
Net income (loss)
|
$
|
151,164
|
$
|
48,983
|
$
|
67,826
|
$
|
(66,563
|
)
|
$
|
53,197
|
||||||||
|
$
|
(552
|
)
|
$
|
(13,633
|
)
|
$
|
(13,633
|
)
|
$
|
(13,633
|
)
|
$
|
(1,024
|
)
|
|||||
|
Income (loss) applicable to common shareholders
|
$
|
150,612
|
$
|
35,350
|
$
|
54,193
|
$
|
(80,196
|
)
|
$
|
52,173
|
||||||||
|
Basic income (loss) per common share
|
$
|
0.54
|
$
|
0.14
|
$
|
0.24
|
$
|
(0.57
|
)
|
$
|
0.43
|
||||||||
|
Diluted income (loss) per common share
|
$
|
0.51
|
$
|
0.13
|
$
|
0.23
|
$
|
(0.57
|
)
|
$
|
0.43
|
||||||||
|
Total assets
|
$
|
1,396,090
|
$
|
1,382,493
|
$
|
1,046,784
|
$
|
988,791
|
$
|
650,737
|
|||||||||
|
$
|
153,811
|
$
|
318,797
|
$
|
131,201
|
$
|
121,347
|
$
|
106,139
|
||||||||||
|
Noncurrent portion of debt and capital leases
|
$
|
6,265
|
$
|
3,792
|
$
|
3,281
|
$ |
113,649
|
$ |
—
|
|||||||||
|
$
|
0.02
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||||||
|
$
|
3.50
|
$
|
7.00
|
$
|
—
|
$
|
3.50
|
$
|
3.50
|
||||||||||
|
$
|
1.62
|
$
|
1.69
|
$
|
—
|
$ |
3.48
|
$ |
—
|
||||||||||
|
Common shares issued and outstanding
|
285,289,924
|
258,485,666
|
238,335,526
|
180,461,371
|
121,456,837
|
||||||||||||||
|
6.5% Mandatory Convertible Preferred shares issued and outstanding
|
—
|
2,012,500
|
2,012,500
|
2,012,500
|
2,012,500
|
||||||||||||||
|
Series B Preferred shares issued and outstanding
|
157,816
|
157,816
|
157,816
|
157,816
|
157,816
|
||||||||||||||
|
Shareholders of record
|
6,943
|
7,388
|
7,647
|
7,936
|
6,598
|
||||||||||||||
|
Employees
|
735
|
686
|
656
|
742
|
871
|
||||||||||||||
|
(1)
|
In September 2011, our Board of Directors adopted a common stock dividend policy that links the amount of any declared dividend on our common stock to our average realized silver price in the preceding quarter. See Note 9 of Notes to Consolidated Financial Statements for information on the potential per share dividend amounts at different quarterly average realized price levels according to the policy. On November 8, 2011, our Board of Directors declared the first quarterly silver price-linked dividend of $0.02 per share ($5.6 million total), based on the average realized silver price in the third quarter of 2011 of $37.02 per ounce, which was paid in December 2011. On February 17, 2012, our Board of Directors declared a silver price-linked common stock dividend, pursuant to the policy described above, of $0.01 per share based on the average realized silver price of $31.61 per ounce in the fourth quarter of 2011. In addition, in February 2012, our Board of Directors adopted a common stock dividend policy that includes a minimum annual dividend of $0.01 per share of common stock, payable quarterly when declared, and declared a dividend of $0.0025 per share pursuant to that policy. Therefore, the aggregate common stock dividend declared by our Board of Directors was $0.0125 per share, for a total of approximately $3.6 million expected to be paid in the first quarter of 2012. The declaration and payment of common stock dividends is at the sole discretion of our Board of Directors.
|
|
(2)
|
During 2007, $0.6 million in Series B preferred dividends were declared and paid. During 2008, $0.4 million in Series B preferred dividends were declared and paid, while $0.1 million in dividends for the fourth quarter of 2008 were deferred. Series B preferred dividends for the first three quarters of 2009, which totaled $0.6 million, were also deferred. In December 2009, we declared all dividends in arrears on our Series B preferred stock of $0.6 million and the scheduled $0.1 dividend for the fourth quarter of 2009. These dividends were paid in cash in January 2010. Therefore, dividends declared on our Series B preferred shares of $0.7 million were included in the determination of income applicable to common shareholders for 2009 with no cash paid for Series B preferred dividends during 2009. We declared and paid all quarterly dividends on our Series B preferred shares for 2010 and 2011 totaling $0.6 million for each of those years.
|
29
|
(3)
|
Cumulative undeclared, unpaid 6.5% Mandatory Convertible Preferred Stock dividends for the period from issuance to December 31, 2007 totaled $0.5 million, and are reported in determining income applicable to common shareholders for the year ended December 31, 2007. The $0.5 million in cumulative undeclared dividends were paid in April 2008. During 2008, $9.8 million in 6.5% Mandatory Convertible Preferred dividends were declared and paid. $6.5 million of the dividends declared in 2008 were paid in cash, and are included in the amount reported as cash dividends paid per 6.5% Mandatory Convertible Preferred Share, and $3.3 million of the dividends declared in 2008 were paid in our Common Stock. 6.5% Mandatory Convertible Preferred Stock dividends for the fourth quarter of 2008 totaling $3.3 million were deferred. Dividends on our 6.5% Mandatory Convertible Preferred Stock totaling $9.8 million for the first three quarters of 2009 were deferred. In December 2009, we declared the $13.1 million in dividends in arrears on our 6.5% Mandatory Convertible Preferred Stock and the scheduled $3.3 million dividend for the fourth quarter of 2009. These dividends were paid in shares of our common stock in January 2010. Therefore, dividends declared on our 6.5% Mandatory Convertible Preferred Stock of $13.1 million were included in the determination of income applicable to common shareholders for 2009 with no cash paid for 6.5% Mandatory Convertible Preferred Stock dividends in 2009. We declared and paid all quarterly dividends on our 6.5% Mandatory Convertible Preferred Stock totaling $13.1 million for 2010. Dividends declared for the first and second quarters of 2010 were paid in shares of our common stock and dividends for the third and fourth quarters of 2010 were paid in cash. The cash dividend declared for the fourth quarter of 2010, which was paid in January 2011, represents the last dividend to be paid on the 6.5% Mandatory Convertible Preferred Stock, which automatically converted to shares of our common stock on January 1, 2011.
|
|
(4)
|
On April 16, 2008, we completed the acquisition of all of the equity of two Rio Tinto subsidiaries holding a 70.3% interest in the Greens Creek mine for approximately $758.5 million. The acquisition gives our various subsidiaries control of 100% of the Greens Creek mine. Our operating results reflect our 100% ownership of Greens Creek after April 16, 2008 and our 29.7% ownership of Greens Creek prior to that date.
|
|
(5)
|
On July 8, 2008, we completed the sale of all of the outstanding capital stock of El Callao Gold Mining Company and Drake-Bering Holdings B.V., our wholly owned subsidiaries which together owned our business and operations in Venezuela, the “La Camorra unit.” The results of the Venezuelan operations have been reported in discontinued operations for all periods presented.
|
|
(6)
|
In the fourth quarter of 2010, we recorded an accrual of $193.2 million to increase our liability for environmental obligations in Idaho’s Coeur d’Alene Basin pursuant to negotiations with the Plaintiffs in the Coeur d’Alene Basin environmental litigation and the State of Idaho on the financial terms of settlement of the litigation and related claims. The settlement was finalized in September 2011. For additional discussion, see Coeur d’Alene River Basin Environmental Claims in Note 7 of Notes to the Consolidated Financial Statements.
|
Established in 1891 in northern Idaho’s Silver Valley, we believe we are the oldest precious metals mining company in the United States still operating and the largest silver producer in the U.S. Our corporate offices are in Coeur d’Alene, Idaho and Vancouver, British Columbia. Our production profile includes:
|
|
•
|
silver, gold, lead, and zinc contained in concentrates shipped to various smelters; and
|
|
|
•
|
gold doré.
|
Our operating properties comprise our two business segments for financial reporting purposes: the Greens Creek operating unit on Admiralty Island in Alaska and the Lucky Friday operating unit in Idaho. Since both of our mines are located in the U.S., we believe they have low political risk, and less economic risk than mines located in other parts of the world. Our exploration interests are located in jurisdictions with low and relatively moderate political and economic risk in the United States and Mexico, respectively, and are located in historically successful mining districts.
Our operating and strategic framework is based on expanding our production and locating and developing new resource potential. In 2011, we
30
|
|
•
|
Attained record revenue of $477.6 million and gross profit of $265.0 million, surpassing 2010’s previous record levels as a result of higher metals prices. These results were in spite of challenges faced at the Lucky Friday mine relating to multiple accidents occurring during the year, as discussed further below.
|
|
|
•
|
Finalized settlement of the Coeur d'Alene Basin environmental litigation and related claims. See Note 7 of Notes to Consolidated Financial Statements for further discussion
|
|
|
•
|
Committed a record level of capital investment at our existing operations, with capital expenditures in 2011, including non-cash capital lease additions, totaling approximately $103.2 million, including $60.1 million at Lucky Friday and $41.7 million at Greens Creek. We advanced work on construction of an internal shaft at the Lucky Friday unit.
|
|
|
•
|
Had unrelated incidents at the Lucky Friday mine, resulting in two fatalities, a number of injuries, and the temporary halt of production.
|
|
|
•
|
Increased overall proven and probable silver reserves at December 31, 2011 compared to their levels at the same time last year, with higher silver reserves at Lucky Friday due to results from drilling. The increase in silver reserves at Lucky Friday was partially offset by a slight decrease in silver reserves at Greens Creek in 2011 due to depletion of the deposit through production.
|
|
|
•
|
Acquired the remaining 30% interest in the San Juan Silver exploration a pre-development project at the Creede Mining District in Colorado in December 2011. We completed work to earn-in to a 70% interest in the project earlier in the year. See Note 16 of Notes to Consolidated Financial Statements for more information.
|
|
|
•
|
Increased our exploration and pre-development spending during the year by 45% in comparison to 2010, drilling targets at each of our four land packages in Alaska, Idaho, Colorado, and Mexico and advancing pre-development projects at the historic Equity and Bulldog mines in Creede, Colorado and the Star mine in Idaho's Silver Valley.
|
Silver prices continued on a positive trend over the last three years, with the price climbing from annual averages of $14.65 in 2009 and $20.16 in 2010, to an average of $35.11 for 2011. The price of gold, a significant by-product at our Greens Creek mine, followed a similar trend. The annual average gold price increased from $973 in 2009 to $1,225 in 2010, and to $1,569 in 2011. Average prices of our important base metals by-products, lead and zinc, increased by 24% and 31%, respectively, in 2010 compared 2009, and then remained substantially level during 2011. The positive performance in metals prices allowed us to achieve the milestones discussed above in spite of lower mill throughput at both Greens Creek and Lucky Friday, which resulted in decreased production of all four metals we produce in 2011 compared to 2010.
We reported diluted income per share of $0.51 in 2011 compared to $0.13 in 2010. Gross profit from operations improved to $265.0 million in 2011 from $194.8 million in 2010 primarily as a result of higher realized prices for all four metals we sell. Exploration and pre-development costs were 45% higher in 2011 due to increased drilling and other exploration activities at each of our land packages and pre-development work done to access historical workings and establish underground drill platforms at the Equity mine near Creede, Colorado, and at the Star mine in Idaho's Silver Valley to further evaluate potential mine re-opening. Provision for closed operations and environmental matters decreased by $191.4 million in 2011due primarily to an increase in our estimated liability for environmental obligations in Idaho’s Coeur d’Alene Basin recorded in the fourth quarter of 2010 to reflect the terms of the settlement later finalized. We recognized a $38.0 million gain on base metal derivatives contracts in 2011 compared to a $20.8 million loss in 2010. In 2011, we recorded an $82.0 million income tax provision compared to a $123.5 million benefit recorded in 2010, with $88.1 million of the 2010 benefit resulting from a decreased valuation allowance on deferred tax assets. We removed substantially all of the valuation allowance in the fourth quarter of 2010, with the exception of certain amounts related to foreign net operating loss carryforwards, as high levels of cash flows from operations and metals prices led us to conclude that our deferred tax assets are more likely than not realizable through estimated future profitability. See Note 5 of Notes to Consolidated Financial Statements for further discussion.
The factors driving metals prices are beyond our control and are difficult to predict. As noted above, prices have been highly volatile in the last three years and could be so in the future. Average prices in 2011 compared to those in 2010 and 2009 are illustrated in the Results of Operations section below. Moreover, variations in the metal grades of ore mined are impacted by geology and mine planning efficiencies and operations, potentially creating constraints on metals produced. Ore transportation and smelting schedules also impact the timing of sales and final settlement.
31
We intend to achieve our long-term strategy of increasing production and expanding our proven and probable reserves through development and exploration, as well as by future acquisitions. Our strategic plan requires that we manage several pervasive challenges and risks inherent in conducting mining, development, exploration and metal sales at multiple locations.
One such risk involves metals prices, over which we have no control except through derivative and other contracts. As discussed in the Critical Accounting Estimates section below, metals prices are influenced by a number of factors beyond our control. Average market prices of silver, gold, zinc and lead in 2011 all were higher than their levels in 2010, as illustrated by the table in Results of Operations below. We believe current global economic and industrial trends could result in continued demand growth for the metals we produce. However, prices have been volatile over the last five years and there can be no assurance that higher prices will continue.
We make our strategic plans in the context of significant uncertainty about future revenues, which may impact new opportunities that require many years and substantial cost from discovery to production. We approach this challenge by investing in exploration and capital in districts with an established history of success, and in managing our operations in a manner that seeks to mitigate the effects of lower prices. We significantly increased our exploration and pre-development activity in 2011 compared to 2010, and we anticipate a further increase in the coming year at or near our operating mines at Greens Creek and Lucky Friday, as well as at our exploration projects in the past-producing mining districts in Colorado and Mexico.
As discussed in the Financial Liquidity and Capital Resources section below, we believe our cash, cash equivalents, investments, projected cash from operations, and availability of financing, if needed, will be adequate to meet our obligations during the next twelve months, including obligations relating to growth opportunities. One such opportunity is the construction of an internal shaft at the Lucky Friday mine (“#4 Shaft”), which, we believe, will significantly increase production and extend the life of the mine. The #4 Shaft project will involve significant additional capital costs during the periods leading up to its expected completion date by the end of 2015. As discussed in the Lucky Friday Segment section below, the requirement to remove loose material from the Silver Shaft will temporarily suspend work on the #4 Shaft project. Although we believe that our current capital resources will allow us to continue work on #4 Shaft, when use of the Silver Shaft is restored, and complete the project, there are a number of factors that could affect its completion.
Volatility in global financial markets poses a significant challenge to our ability to access credit and equity markets, should we need to do so, and to predict sales prices for our products. Our stock price, although volatile, has rebounded from its lowest levels in 2008. We eliminated our debt in 2009 partly by increasing our shares of common stock outstanding by 32% during 2009 and issuing warrants at exercise prices ranging from $2.50 to $3.68 per share. Our shares of common stock outstanding increased by an additional 9% in 2010 primarily as a result of exercises of warrants issued in 2008 and 2009, and by an additional 10% in 2011 primarily as a result of the conversion of our 6.5% Mandatory Convertible Preferred Stock in January 2011. We have also entered into a three-year, $100 million revolving credit agreement under which there are no outstanding borrowings as of December 31, 2011, yet our ability to retain the facility depends in part on financial thresholds driven by the prices of products we sell.
Another challenge is the risk associated with environmental litigation and ongoing reclamation activities. As described in Risk Factors and Note 7 of Notes to Consolidated Financial Statements, 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. As discussed in Note 7 of Notes to Consolidated Financial Statements, we finalized the terms of settlement with the Plaintiffs in the Coeur d'Alene Basin environmental litigation, which has assisted our planning efforts by decreasing uncertainty regarding our liability and our liquidity needs relating to our most significant environmental matter. However, we are involved in other environmental legal matters, and there can be no assurance that the estimate of our environmental liabilities, liquidity needs, or strategic plans will not be significantly impacted as a result of these matters or new matters that may arise.
In addition, proposed measures to address climate change and green house gas emissions could have an adverse impact on our operations and financial performance in the future (see Item 1A. Risk Factors – Legal, Market and Regulatory Risks - We face substantial governmental regulation and environmental risk). We intend to continue to strive to ensure that our activities are conducted in compliance with applicable laws and regulations and to attempt to settle the environmental litigation.
Reserve estimation is a major risk inherent in mining. Our reserve estimates, which drive our mining and investment plans and many of our costs, may change based on economic factors and actual production experience. Until ore is actually mined and processed, the volumes and grades of our reserves must be considered as estimates. Our reserves are depleted as we mine. Reserves can also change as a result of changes in metals prices and costs, as well as economic and operating assumptions.
32
We strive to achieve excellent mine safety and health performance. We seek to implement this goal by: training employees in safe work practices; openly communicating with employees; establishing, following and improving safety standards; investigating accidents, incidents and losses to avoid recurrence; and involving employees in the establishment of safety standards. We attempt to implement reasonable best practices with respect to mine safety and emergency preparedness. In spite of these efforts, two fatal accidents and another incident involving injury to seven employees occurred at our Lucky Friday mine during 2011. At the end of 2011, MSHA began a special impact inspection at the Lucky Friday mine which resulted in an order to remove loose material from the Silver Shaft, the primary access way from surface at the Lucky Friday mine, even though such shaft was not involved in the rock burst or any of the other incidents which occurred in 2011. Underground access will be limited as the Silver Shaft work is completed, and we anticipate that production will be suspended at the Lucky Friday mine until early 2013 as a result. See the Lucky Friday Segment section below for more information. We continue to evaluate our safety practices and work with MSHA to address issues outlined in the investigations of these incidents.
As a result of industry-wide fatal accidents in recent years, primarily at underground coal mines, there has been an increase in mining regulation in the United States. This increase has taken the form of vigorous enforcement of existing laws and regulations, and the adoption of new safety and training regulations, primarily by MSHA. In addition, under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission was directed to issue new rules regarding the disclosure of mine safety data. These changes may have a significant effect on our future operating costs, in the form of increased costs for monitoring and administration of and by regulatory agencies.
For the year ended December 31, 2011, we reported income applicable to common shareholders of $150.6 million compared to $35.4 million in 2010 and $54.2 million in 2009. The following factors had a positive impact on results for the year ended December 31, 2011 compared to 2010 and 2009:
|
|
•
|
Increased gross profit at our Greens Creek and Lucky Friday units in 2011 compared to 2010 and 2009. See the Greens Creek Segment and Lucky Friday Segment sections below for further discussion of operating results.
|
|
|
•
|
Provision for closed operations and environmental matters of $9.7 million in 2011 compared to $201.1 million in 2010 and $7.7 million in 2009. In the fourth quarter of 2010, we recorded an accrual of $193.2 million to increase our liability for environmental obligations in Idaho’s Coeur d’Alene Basin pursuant to negotiations with the Plaintiffs in the Coeur d’Alene Basin environmental litigation and the State of Idaho on the financial terms of settlement of the litigation and related claims. The settlement was finalized in September 2011. For additional discussion, see Coeur d’Alene River Basin Environmental Claims in Note 7 of Notes to the Consolidated Financial Statements.
|
|
|
•
|
Net gain on base metal forward contracts of $38.0 million in 2011 compared to a net loss of $20.8 million in 2010. There was no comparable gain or loss reported in 2009, as the forward contract program was initiated in June 2010. These gains and losses are related to financially-settled forward contracts on forecasted zinc and lead production as part of a risk management program. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Commodity-Price Risk Management for more information on our derivatives contracts.
|
|
|
•
|
Interest expense decreased to $2.8 million in 2011 and $2.2 million in 2010 from $11.3 million in 2009 due to repayment in 2009 of debt incurred for the acquisition of the remaining 70.3% ownership interest in Greens Creek. See Note 6 of Notes to the Consolidated Financial Statements for more information on our debt facilities.
|
|
|
•
|
Debt-related fees in 2009 representing $4.3 million in expense recognized in the first quarter of 2009 for preferred stock issued pursuant to our credit agreement and $1.7 million in professional fees incurred in 2009 related to compliance with our amended and restated credit agreement. See Note 6 and Note 9 of Notes to Consolidated Financial Statements for more information.
|
|
|
•
|
In the second quarter of 2009 we recognized a $3.0 million loss on impairment of shares of Rusoro stock received in the 2008 sale of our discontinued Venezuelan operations compared to a $0.7 million impairment loss recognized on the Rusoro stock recognized during the second quarter of 2010 and a $0.1 million impairment recognized in the fourth quarter of 2011 related to stock held in another mining company.
|
33
|
|
•
|
Higher average prices for all four metals produced at our operations in 2011 compared to 2010 and 2009. The following table summarizes average market prices and our realized prices for silver, gold, lead and zinc for the years ended December 31, 2011, 2010 and 2009:
|
|
Average for the year ended December 31,
|
|||||||||||||
|
2011
|
2010
|
2009
|
|||||||||||
|
Silver —
|
London PM Fix ($/ounce)
|
$ | 35.11 | $ | 20.16 | $ | 14.65 | ||||||
|
Realized price per ounce
|
$ | 35.30 | $ | 22.70 | $ | 15.63 | |||||||
|
Gold —
|
London PM Fix ($/ounce)
|
$ | 1,569 | $ | 1,225 | $ | 973 | ||||||
|
Realized price per ounce
|
$ | 1,592 | $ | 1,271 | $ | 1,017 | |||||||
|
Lead —
|
LME Final Cash Buyer ($/pound)
|
$ | 1.09 | $ | 0.97 | $ | 0.78 | ||||||
|
Realized price per pound
|
$ | 1.05 | $ | 0.98 | $ | 0.88 | |||||||
|
Zinc —
|
LME Final Cash Buyer ($/pound)
|
$ | 1.00 | $ | 0.98 | $ | 0.75 | ||||||
|
Realized price per pound
|
$ | 1.00 | $ | 0.96 | $ | 0.90 | |||||||
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 smelters, we must estimate the prices at which sales of our metals will be settled. Previously recorded sales are adjusted to estimated settlement metal prices each period through final settlement. For 2011, we recorded net negative adjustments to provisional settlements of $9.8 million compared to net positive price adjustments to provisional settlements of $14.9 million and $25.6 million in 2010 and 2009, respectively. The price adjustments related to zinc and lead contained in our concentrate shipments were offset by gains and losses on forward contracts for those metals (see Note 10 of Notes to Consolidated Financial Statements for more information). The gains and losses on these contracts are included in revenues and impact the realized prices for lead and zinc. We recognized overall net gains on the contracts of $7.1 million in 2011 and net losses of $3.0 million in 2010. Because the forward contracts program was not initiated until April 2010, there were no comparable gains or losses in 2009. Realized prices are calculated by dividing gross revenues for each metal by the payable quantities of each metal included in concentrate and doré shipped during the period. The differences between our realized metal prices and average market prices are due primarily to the aforementioned gains and losses on forward contracts (for lead and zinc) and price adjustments resulting from the difference between metal prices upon transfer of title of concentrates to the buyer and metal prices at the time of final settlement, which are included in our revenues.
Other significant variances affecting the comparison of our income applicable to common shareholders for 2011 to results for 2010 and 2009 were as follows:
|
|
•
|
Income tax provision in 2011 of $82.0 million compared to income tax benefits in 2010 and 2009 of $123.5 million and $7.7 million, respectively. The 2011 provision is primarily due to the utilization of deferred tax assets as a result of increased profits. The benefits recognized in 2010 and 2009 are the result of valuation allowance adjustments to our deferred tax asset balances. These adjustments are included in the aggregate income tax benefit (provision) for each respective period. Our deferred tax asset balances are recorded net of an offsetting valuation allowance to the extent that we estimate that the assets are not realizable through future taxable income. In the fourth quarter of 2010, we removed substantially all of the valuation allowance on our deferred tax assets. Significant evidence in 2010, including record cash flows from operations and higher metals prices, led us to conclude that our deferred tax assets are more likely than not realizable due to estimated future profitability. See Note 5 of Notes to Consolidated Financial Statements for further discussion.
|
|
|
•
|
Exploration and pre-development expense increased to $31.4 million in 2011 from $21.6 million in 2010 and $9.2 million in 2009 as we continue extensive exploration work at our Greens Creek unit, on our land package near Durango, Mexico, at our San Juan Silver project in the Creede district of Colorado, and in the North Idaho's Coeur d'Alene Mining District near our Lucky Friday unit. "Pre-development expense" is defined as costs incurred in the exploration stage that may ultimately benefit production, such as underground ramp development, which are expensed due to the lack of proven and probable reserves. Establishing proven and probable reserves would indicate future recovery of these expenses. We have advanced pre-development projects during 2011 at the Equity and Bulldog mines in the Creede district and at the Star mine in the Coeur d'Alene district which have given us access to historic workings and underground drill platforms.
|
34
|
|
•
|
The termination of an employee benefit plan resulting in a non-cash gain of $9.0 million recognized in the first quarter of 2009.
|
|
|
•
|
The sale of our Velardeña mill in Mexico in March 2009 generating a pre-tax gain of $6.2 million (see Note 17 of Notes to Consolidated Financial Statements for more information).
|
|
|
•
|
The sale of our investment in Aquiline Resources Inc. stock for proceeds and a pre-tax gain of approximately $4.1 million in the fourth quarter of 2009.
|
Below is a comparison of the operating results and key production statistics of our Greens Creek segment.
|
Years Ended December 31,
|
||||||||||||
|
2011
|
2010
|
2009
|
||||||||||
|
Sales
|
$
|
342,906
|
$
|
313,318
|
$
|
229,318
|
||||||
|
Cost of sales and other direct production costs
|
(113,393
|
)
|
(116,824
|
)
|
(103,670
|
)
|
||||||
|
Depreciation, depletion and amortization
|
(41,013
|
)
|
(51,671
|
)
|
(52,909
|
)
|
||||||
|
Gross Profit
|
$
|
188,500
|
$
|
144,823
|
$
|
72,739
|
||||||
|
Tons of ore milled
|
772,069
|
800,397
|
790,871
|
|||||||||
|
Production:
|
||||||||||||
|
Silver (ounces)
|
6,498,337
|
7,206,973
|
7,459,170
|
|||||||||
|
Gold (ounces)
|
56,818
|
68,838
|
67,278
|
|||||||||
|
Zinc (tons)
|
66,050
|
74,496
|
70,379
|
|||||||||
|
Lead (tons)
|
21,055
|
25,336
|
22,253
|
|||||||||
|
Payable metal quantities sold:
|
||||||||||||
|
Silver (ounces)
|
5,314,232
|
6,223,967
|
6,482,439
|
|||||||||
|
Gold (ounces)
|
43,942
|
57,386
|
54,801
|
|||||||||
|
Zinc (tons)
|
48,436
|
56,001
|
52,928
|
|||||||||
|
Lead (tons)
|
16,067
|
20,221
|
16,749
|
|||||||||
|
Ore grades:
|
||||||||||||
|
Silver ounces per ton
|
11.49
|
12.30
|
13.01
|
|||||||||
|
Gold ounces per ton
|
0.12
|
0.13
|
0.13
|
|||||||||
|
Zinc percent
|
9.81
|
10.66
|
10.13
|
|||||||||
|
Lead percent
|
3.52
|
4.09
|
3.64
|
|||||||||
|
Mining cost per ton
|
$
|
49.31
|
$
|
43.00
|
$
|
42.33
|
||||||
|
Milling cost per ton
|
$
|
30.69
|
$
|
24.23
|
$
|
23.22
|
||||||
|
$
|
(1.29
|
)
|
$
|
(3.90
|
)
|
$
|
0.35
|
|||||
|
(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 in Reconciliation of Total Cash Costs to Costs (non-GAAP) of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP).
|
35
The increase in gross profit for 2011 compared to 2010 and 2009 was primarily the result of the following factors:
|
|
•
|
Higher average market and realized prices in 2011 for all four metals produced at Greens Creek compared to 2010 and 2009, as further discussed in Results of Operations above.
|
|
|
•
|
Lower depreciation, depletion and amortization expense in 2011 of $10.7 million and $11.9, respectively, compared to 2010 and 2009 as a result of lower metals production due to lower ore volume and ore grades for all four metals. The ore volume decreases are primarily due to the lack of availability of higher-volume long-hole stopes, while the ore grade variances are due to differences in the sequencing of production from the various mine areas pursuant to the overall mine plan.
|
|
|
•
|
Mine license taxes decreased in 2011 by $3.4 million compared to 2010 and increased by $0.6 million compared to 2009. The lower taxes in 2011 compared to 2010 is a result of $2.5 million refund from the state of Alaska relating to prior year's returns.
|
|
|
•
|
Negative price adjustments to revenues of $6.7 million, net of base metal forward contract gains, during 2011 compared to positive price adjustments of $12.8 million and $22.2 million in 2010 and 2009, respectively. Price adjustments to revenues result from changes in metals prices between transfer of title of concentrates to buyers and final settlements during the period. The impact of negative price adjustments for lead and zinc in 2011 was substantially offset by net gains of $6.2 million on financially-settled forward contracts. Positive price adjustments for lead and zinc in 2010 were substantially offset by net losses of $2.1 million on financially-settled forward contracts. The base metal forward contract program was initiated in April 2010 and there were no comparable gains or losses impacting 2009.
|
|
|
•
|
Production costs per ton of ore milled for 2011 increased by 19% compared to 2010, whereas, 2010 remained within 3% of their 2009 levels. The higher costs in 2011 are mainly attributable to lower ore volume and higher power costs due to increased reliance in 2011 on more expensive diesel-generated power resulting from lower utility availability.
|
The Greens Creek operation is partially powered by diesel generators, and production costs have historically been significantly affected by fluctuations in fuel prices and utility power availability. Infrastructure has been installed that allows hydroelectric power to be supplied to Greens Creek by AEL&P via a submarine cable from North Douglas Island, near Juneau, to Admiralty Island, where Greens Creek is located. This project has reduced production costs at Greens Creek to the extent power has been available. During 2009, the mine began receiving an increased proportion of its power needs from AEL&P, and we have continued to receive hydroelectric power, with reduced availability in 2011 compared to the previous two years. Fuel costs represented approximately 13% of total production costs at Greens Creek in 2011 compared to 6% in 2010 and 8% in 2009.
Mining and milling costs per ton increased in 2011 by 15% and 27%, respectively, compared to the same period in 2010 and by 16% and 32%, respectively, for the same period in 2009. The increases were driven primarily by lower ore volume and higher power costs. We generated more power on-site in 2011 due to lower availability of less expensive hydroelectric power, the result of lower precipitation levels in Southeastern Alaska. Diesel fuel expense at Greens Creek increased by $7.7 million in 2011 compared to the same period in 2010 and by $6.1 million compared to the same period in 2009. The result is due to an increase in fuel consumption of 97% and 15% compared to 2010 and 2009, respectively, as well as an increase in the cost of diesel.
The $2.61 increase in total cash cost per silver ounce in 2011 compared to 2010 is primarily due to production costs, treatment and freight costs, and production taxes that increased by $2.55, $1.70, and $0.03 per ounce, respectively, partially offset by higher by-product credits of $1.65 per ounce. The increase in by-product credits is due to higher prices, in spite of lower ore grades, for all four metals. The $4.25 decrease in total cash cost per silver ounce in 2010 compared to 2009 is primarily due to by-product credits that increased by $8.10 per ounce, due to higher zinc, gold, and lead prices and production, partially offset by higher treatment and freight costs, production costs, and production taxes of $2.36, $0.91, and $0.57 per ounce, respectively. The higher treatment and freight costs in 2010 are due primarily to increased price participation charges by smelters resulting from higher metals prices.
36
The difference between what we report as "production" and "payable metal quantities sold" is due essentially to the difference between the quantities of metals contained in the concentrate we produce versus the portion of those metals actually payable by our smelter customers according to the terms of the smelter contracts. Differences can also arise from inventory changes incidental to shipping schedules.
While value from zinc, lead and gold by-products is significant, we believe that identification of silver as the primary product 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.
|
We periodically review our proven and probable reserves 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 within our cost per ounce calculations, the values of these metals offset operating costs.
The following is a comparison of the operating results and key production statistics of our Lucky Friday segment (dollars are in thousands, except per ounce and per ton amounts):
| Years Ended December 31, | ||||||||||||
|
2011
|
2010
|
2009
|
||||||||||
|
Sales
|
$
|
134,728
|
$
|
105,495
|
$
|
83,230
|
||||||
|
Cost of sales and other direct production costs
|
(52,180
|
)
|
(47,159
|
)
|
(44,972
|
)
|
||||||
|
Depreciation, depletion and amortization
|
(6,053
|
)
|
(8,340
|
)
|
(9,928
|
)
|
||||||
|
Gross profit
|
$
|
76,495
|
$
|
49,996
|
$
|
28,330
|
||||||
|
Tons of ore milled
|
298,672
|
351,074
|
346,395
|
|||||||||
|
Production:
|
||||||||||||
|
Silver (ounces)
|
2,985,339
|
3,359,379
|
3,530,490
|
|||||||||
|
Lead (tons)
|
18,095
|
21,619
|
22,010
|
|||||||||
|
Zinc (tons)
|
7,305
|
9,286
|
10,616
|
|||||||||
|
Payable metal quantities sold:
|
||||||||||||
|
Silver (ounces)
|
2,805,402
|
3,136,205
|
3,316,034
|
|||||||||
|
Lead (tons)
|
16,983
|
20,213
|
20,461
|
|||||||||
|
Zinc (tons)
|
5,465
|
6,850
|
7,794
|
|||||||||
|
Ore grades:
|
||||||||||||
|
Silver ounces per ton
|
10.69
|
10.25
|
10.86
|
|||||||||
|
Lead percent
|
6.51
|
6.60
|
6.82
|
|||||||||
|
Zinc percent
|
2.82
|
3.04
|
3.46
|
|||||||||
|
Mining cost per ton
|
$
|
60.76
|
$
|
54.27
|
$
|
58.56
|
||||||
|
Milling cost per ton
|
$
|
16.96
|
$
|
14.74
|
$
|
14.98
|
||||||
|
$
|
6.47
|
$
|
3.76
|
$
|
5.21
|
|||||||
|
(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 Total Cash Costs (non-GAAP) to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP).
|
37
The increase in gross profit for 2011 compared to 2010 and 2009 is primarily due to higher average market and realized prices for all metals produced at the Lucky Friday (further discussed in Results of Operations above), partially offset by higher cost of sales and other direct production costs due primarily to increased employee profit sharing and taxes resulting from increased profitability.
Depreciation, depletion, and amortization expense for 2011 was 27% lower than in 2010 and 39% lower than in 2009 due to reduced units-of-production depreciation. The majority of the decrease was incidental to an extension of expected mine life at Lucky Friday, resulting in the book value of units-of-production assets being depreciated over a longer duration. The extension of the expected mine life is primarily due to the positive economics of the #4 Shaft project which, when completed, will provide deeper access beyond the current workings (see below for further discussion of the #4 Shaft project). In addition, production was lower in 2011 compared the previous two years, primarily due to down-time related to the accidents discussed below.
Mining and milling costs per ton increased in 2011 by 12% and 15%, respectively, compared to 2010 and by 4% and 13%, respectively, compared to 2009 primarily due to lower production and higher costs of fuel, consumable underground materials, reagents, and maintenance supplies.
The $2.71 increase in total cash cost per silver ounce in 2011 compared to 2010 is due primarily to higher profit sharing and other costs by $1.76 per ounce, higher treatment and freight costs by $1.24 per ounce, and higher production costs by $0.21 per ounce, partially offset by higher by-product credits by $0.50 per ounce resulting from higher lead and zinc prices. The $1.45 decrease in total cash cost per silver ounce in 2010 compared to 2009 is due primarily to higher by-product credits by $2.95 per ounce resulting from higher lead and zinc prices, partially offset by higher employee profit sharing, production, expensed site infrastructure, and treatment and freight costs by $0.72, $0.34, $0.33, and $0.13 per ounce, respectively.
The difference between what we report as “production” and “payable metal quantities sold” is due to the difference between the quantities of metals contained in the concentrates we produce versus the portion of those metals actually payable by our smelter customers according to the terms of the smelter contracts. The decrease in payable quantities sold in 2011 compared to 2010 and 2009 is attributable to a decrease in production due mainly to various down-time periods related to the accidents discussed below.
While value from lead and zinc is significant at the Lucky Friday, we believe that identification of silver as the primary product, with zinc and lead as by-products, 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;
|
|
|
•
|
the Lucky Friday unit is situated in a mining district long associated with silver production; and
|
|
|
•
|
the Lucky Friday unit generally utilizes selective mining methods to target silver production.
|
We periodically review our proven and probable reserves to ensure that reporting of primary products and by-products is appropriate. Because we consider zinc and lead to be by-products of our silver production within our cost per ounce calculations, the values of these metals offset operating costs.
On April 15, 2011, a fall of ground, which caused a fatality, occurred at the Lucky Friday mine, leading us to immediately halt all operations other than the rescue and recovery efforts at the mine. Operations resumed approximately 10 days after the accident occurred. The accident involved a localized fall of ground at 6150 feet below surface in an area known as the West 15 Stope. MSHA had representatives on-site at the Lucky Friday periodically from April 16, 2011 through June 2011. In addition to our decision to immediately halt mining operations pending rescue and recovery efforts, MSHA issued orders to Hecla Limited under Sections 103(j) and (k) of the Federal Mine Safety & Health Act of 1977 (“Mine Safety Act'), prohibiting all activity in the West 15 Stope except to the extent necessary for rescue and recovery operations or to prevent or eliminate an imminent danger. Subsequent to the recovery efforts and reopening of other portions of the mine, MSHA issued orders under Section 103(k) of the Mine Safety Act prohibiting all activity in Stopes 12 and 15, pending MSHA's determination that it is safe to resume normal mining operations in those areas. Operations resumed in Stope 12 in June 2011, and in Stope 15 in July 2011 with MSHA approval, and MSHA has completed their investigation of the accident.
38
On November 17, 2011, an accident occurred as part of the construction of the #4 Shaft (discussed below), resulting in the fatality of an employee of the #4 Shaft contractor. The accident was caused by the collapse of under-foot material during construction of an underground rock bin. Mining operations at the Lucky Friday mine were immediately suspended on the day of the accident, and MSHA subsequently issued an order under Section 103(j) of the Mine Safety Act, prohibiting activity in the area impacted by the accident except to the extent necessary for investigation purposes. The #4 Shaft construction activity resumed in November 2011 with MSHA's approval.
On December 14, 2011, a rock burst resulting from natural seismic activity approximately 5900 feet below surface resulted in non-life-threatening injuries to seven employees. The employees were working on installation of a steel liner to enhance a primary access way damaged by a previous rock burst occurring on November 16, 2011. That rock burst was caused by mine blasting at the end of a shift, and no employees were impacted at the time of the rock burst. We evacuated the mine and halted operations on December 14, and MSHA subsequently issued an order under Section 103(k) closing the mine, which is currently in effect. In December 2011, we determined that a new haulage way to bypass the area impacted by the rock burst is required. Once construction of the bypass has started, we expect it will take approximately two months to complete.
At the end of 2011, MSHA began a special impact inspection at the Lucky Friday mine which resulted in an order to remove loose material from the Silver Shaft, even though the Silver Shaft was not involved in the rock burst or any of the other incidents which occurred in 2011. The Silver Shaft is an approximately one-mile deep, 18-foot diameter, concrete-lined shaft from surface and the primary access to the Lucky Friday mine's underground workings. In response, we submitted a plan to MSHA and received approval to remove the loose cementitious material. In addition, the plan includes removal of unused utilities, construction of a water ring to prevent ice from forming in the winter, the installation of a metal brattice, repair of shaft steel, and installation of a new power cable, all of which should improve the shaft's functionality and possibly improving the shaft's hoisting capacity. We currently anticipate that the Silver Shaft work will be completed in late 2012, with production at the Lucky Friday temporarily suspended until early 2013. During this period, the smelter contracts related to treatment of Lucky Friday concentrates have been suspended based on force majeure. We anticipate that we will be able to commence construction of the haulage way bypass around the rock burst area (discussed in the preceding paragraph) once the Silver Shaft cleanup has been completed down to the 4900 level and resume work on the #4 Shaft project in early 2013 once the Silver Shaft work is completed.
Work continued during 2011 on the #4 Shaft project, an internal shaft at the Lucky Friday mine which, upon completion, will provide deeper access in order to expand the mine's operational life. We commenced engineering and construction activities on #4 Shaft in late 2009, and our Board of Directors gave its final approval of the project in August 2011. Construction of the #4 Shaft as currently designed is expected to cost a total of approximately $200 million, including approximately $90 million already spent as of December 31, 2011, with completion expected in late 2015. As discussed above, the #4 Shaft construction will be temporarily suspended until cleanup work in the Silver Shaft is completed. Once construction of #4 Shaft resumes, we believe that our current capital resources will allow us to complete the project. However, there are a number of factors that could affect completion of the project, including: (i) a significant decline in metals prices, (ii) a reduction in available cash or credit, whether arising from decreased cash flow or other uses of available cash, or (iii) a significant increase in operating or capital costs.
|
|
•
|
An increase in other operating expense of $2.3 million in 2011 was primarily due to an increase in pension plan actuarial liabilities. See Note 8 of Notes to Condensed Consolidation Financial Statements for more information.
|
|
|
•
|
Decrease in provision for closed operations and environmental matters in 2011 by $191.4 million due primarily to a provision of $193.2 million recorded in the fourth quarter of 2010 to increase our liability for environmental obligations in Idaho’s Coeur d’Alene Basin pursuant to negotiations with the Plaintiffs in the Coeur d’Alene Basin environmental litigation and the State of Idaho on the financial terms of settlement of the litigation and related claims. The settlement was finalized in September 2011.
|
39
|
|
•
|
Mark-to-market gains on financially-settled forward contracts for forecasted lead and zinc sales totaled $38 million in 2011 compared to mark-to-market losses of $20.8 million in 2010.
|
|
|
•
|
Interest expense increased by $0.7 million in 2011 due to the accrual of pre-lodging interest associated with the proposed terms of potential settlement with the Plaintiffs in the Coeur d'Alene Basin environmental litigation that took place in the second quarter of 2011. The pre-lodging interest period ended with lodging of the Consent Decree with the Court in June 2011. See Note 4 of Notes to the Condensed Consolidated Financial Statements for more information.
|
|
|
•
|
Income tax provisions totaled $82 million in 2011 compared to an income tax benefit of $123.5 million in 2010. The higher current-year provisions are the result of increased pre-tax income and release of valuation allowances on our deferred tax assets in 2010. See Note 5 of Notes to the Condensed Consolidated Financial Statements for more information.
|
|
|
•
|
A gain of $6.2 million in 2009 on the sale of our mill in Mexico, with no similar event in 2010.
|
|
|
•
|
Termination of an employee benefit plan in 2009 with a gain of $9.0 million, with no similar event in 2010.
|
|
|
•
|
Other operating expense included cash donations totaling $1.5 million in 2010 to the Hecla Charitable Foundation for its charitable work, including supporting the communities in which Hecla has employees and interests. This was offset by a decrease in pension benefit costs recognized resulting from an increase in the expected returns calculated for plan assets due to higher plan asset values.
|
|
|
•
|
Higher provision for closed operations and environmental matters in 2010 by $193.4 million. The principal cause of the increase was a $193.2 million increase in our accrual for environmental obligations related to the Coeur d’Alene Basin, compared to $4.0 million in 2009. The increase in 2010 was pursuant to negotiations with the Plaintiffs in the Coeur d’Alene Basin environmental litigation and the State of Idaho on the financial terms of potential settlement of the litigation and related claims. For further discussion, see Note 7 to Notes to Consolidated Financial Statements.
|
|
|
•
|
Interest expense and debt-related fees were $15.1 million lower in 2010 as a result of payoff in 2009 of corporate debt, offset partly by increased capital leases in 2010.
|
|
|
•
|
Mark-to-market losses on financially-settled forward contracts for forecasted lead and zinc sales totaling $20.8 million in 2010. The program commenced in April 2010, and hence, no such activity was reported in 2009.
|
|
|
•
|
An income tax benefit of $123.5 million compared to an income tax benefit of $7.7 million in 2009. The 2010 income tax benefit is primarily related to deferred tax asset valuation allowance adjustments of $88.1 million partially offset by current income tax provision and amortization of deferred tax assets. See Note 5 to Notes to Consolidated Financial Statements for further discussion.
|
Our defined benefit pension plans, while affording a significant benefit to our employees, also represent a significant liability. During 2011, the funded status of our plans changed from a liability of $6.5 million at the first of the year to $22.8 million at the end of the year. The increased liability was attributable to decreased returns on plan assets, the effect of decreased interest rates on future benefits, and higher service cost attributable to a higher employee count. Unrecognized losses recorded in accumulated other comprehensive income, which will be amortized over future years, increased by $13 million during the year, and we expect to contribute $1.1 million to the Hecla plan in 2012. While the economic variables which will determine future cash requirements are uncertain, we expect contributions to increase in future years. See Note 8 of Notes to Consolidated Financial Statements for more information.
40
Our net deferred tax asset at December 31, 2011 totaled $115.8 million, or 8% of total assets, a decrease of $71.6 million from the previous year-end balance of $187.4 million. The largest component of the deferred tax asset is deferred reclamation, of which the majority will be realized in the next two years, assuming adequate taxable income. The next largest component derives from the tax effect of past net operating losses carried forward to be applied against current income to determine cash income tax liability. Each reporting period, we assess our deferred tax assets with long-range forecasts to provide reasonable assurance that they will be realized through future earnings. As a result of such modeling, in 2010 we removed a substantial portion of the valuation allowance on our deferred tax assets following analysis of our operational plans and increased prices, resulting in a tax benefit of $88.1 million. At December 31, 2011, with the exception of $0.3 million relating to net operating loss carry forwards for states where we currently have no activity and $2.3 million for foreign tax credits, we retained no valuation allowance on U.S. deferred tax assets. A $20.3 million valuation allowance remains on losses in foreign jurisdictions. As discussed in Note 5 of Notes to Consolidated Financial Statements, our effective tax rate was 35% for 2011, based on our review of statutory rates and permanent book/tax differences. We currently expect the effective tax rate for 2012 to be approximately 40%, with the increase from 2011 attributable to the loss of percentage depletion related to the Lucky Friday mine as a result of the temporary suspension of production there.
Reconciliation of Total Cash Costs (non-GAAP) to Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP)
The tables below present reconciliations between non-GAAP total cash costs to cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP) for our operations at the Greens Creek and Lucky Friday units for the years ended December 31, 2011, 2010 and 2009 (in thousands, except costs per ounce).
Total cash costs 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, net of by-product revenues earned from all metals other than the primary metal produced at each unit. Total cash costs provide management and investors an indication of net cash flow, after consideration of the realized price received for production sold. Management also uses this measurement for the comparative monitoring of performance of our mining operations period-to-period from a cash flow perspective. “Total cash cost per ounce” is a measure developed by precious metals companies in an effort to provide a comparable standard; however, there can be no assurance that our reporting of this non-GAAP measure is similar to that reported by other mining companies.
Cost of sales and other direct production costs and depreciation, depletion and amortization, is the most comparable financial measure calculated in accordance with GAAP to total cash costs. The sum of the cost of sales and other direct production costs and depreciation, depletion and amortization for our operating units in the tables below is presented in our Consolidated Statement of Operations and Comprehensive Income (Loss).
41
|
Total, All Properties
|
||||||||||||
|
Year ended December 31,
|
||||||||||||
|
2011
|
2010
|
2009
|
||||||||||
|
Total cash costs
|
$
|
10,934
|
$
|
(15,435
|
)
|
$
|
20,958
|
|||||
|
Divided by silver ounces produced
|
9,483
|
10,566
|
10,989
|
|||||||||
|
Total cash cost per ounce produced
|
$
|
1.15
|
$
|
(1.46
|
)
|
$
|
1.91
|
|||||
|
Reconciliation to GAAP:
|
||||||||||||
|
Total cash costs
|
$
|
10,934
|
$
|
(15,435
|
)
|
$
|
20,958
|
|||||
|
Depreciation, depletion and amortization
|
47,066
|
60,011
|
62,837
|
|||||||||
|
Treatment costs
|
(99,019
|
)
|
(92,144
|
)
|
(80,830
|
)
|
||||||
|
By-product credits
|
254,372
|
267,272
|
206,608
|
|||||||||
|
Change in product inventory
|
||||||||||||