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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 1-8491
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HECLA MINING COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 82-0126240
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6500 Mineral Drive
Coeur d'Alene, Idaho 83814-8788
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 208-769-4100
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which each class is registered
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Common Stock, par value $0.25 per share )
Preferred Share Purchase Rights )
Series B Cumulative Convertible Preferred ) New York Stock Exchange
Stock, par value $0.25 per share ) ------------------------------
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Securities registered pursuant to Section 12(g) of the Act: None
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 XX . No .
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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. [ X ]
The aggregate market value of the Registrant's voting Common Stock
held by non-affiliates was $378,724,768 as of February 25, 1997. There
were 55,087,239 shares of the Registrant's Common Stock outstanding as of
February 25, 1997.
Documents incorporated by reference herein:
To the extent herein specifically referenced in Part III, the information
contained in the Proxy Statement for the 1996 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 1996 fiscal year
is incorporated herein by reference. See Part III.
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PART I
ITEM 1. BUSINESS.(1)
GENERAL
Hecla Mining Company (the Company or Hecla), originally incorporated in 1891, is
principally engaged in the exploration, development and mining of precious and
nonferrous metals, including gold, silver, lead and zinc, and certain industrial
minerals. The Company owns or has interests in a number of precious and
nonferrous metals properties and industrial minerals businesses. In 1996, the
Company's attributable gold and silver production was approximately 169,000
ounces and 3,025,000 ounces, respectively. The Company also shipped
approximately 1,072,000 tons of industrial minerals products during 1996,
including ball clay, kaolin, feldspar, and specialty aggregates. Additionally,
the Company shipped approximately 996,000 cubic yards of landscape material from
its Mountain West Products subsidiary in 1996.
The principal executive offices of the Company are located at 6500 Mineral
Drive, Coeur d'Alene, Idaho 83814-8788, telephone (208) 769-4100.
The Company's principal producing metals properties include the La Choya gold
mine, located in Sonora, Mexico, which began operations in February 1994; the
Lucky Friday silver mine, located near Mullan, Idaho, which is a significant
primary producer of silver in North America; the Greens Creek silver mine,
located near Juneau, Alaska, a large polymetallic mine in which the Company owns
a 29.7% interest, where operations recommenced in July 1996; the Grouse Creek
mine, located near Challis, Idaho, a gold and silver mine where operations
commenced in December 1994, in which the Company is the operator and owns an
approximate 80% interest and which is expected to be placed on standby in the
second quarter of 1997 (see Metals Segment - Grouse Creek Gold Mine - Idaho);
and the American Girl gold mine, located in Imperial County, California, in
which the Company owns a 47% interest. In 1996, operations were suspended at
the American Girl mine (see Metals Segment - American Girl Mine - California).
Effective January 31, 1997, the Company's interest in the Grouse Creek mine
increased to 100% pursuant to a letter agreement between the Company and Great
Lakes Minerals Inc. (Great Lakes) terminating the Grouse Creek joint venture and
conveying Great Lakes' approximate 20% interest in the Grouse Creek project to
Hecla. Great Lakes retained a 5% defined net proceeds interest in the project.
The Company has assumed 100% of the interests and obligations associated with
the Grouse Creek
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(1) For definitions of certain mining terms used in this description, see
"Glossary of Certain Mining Terms" at the end of Item 1, page 46.
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property. Also in 1996, the Company entered into a 50/50 Joint Venture
Agreement with Santa Fe Pacific Gold Corporation (Santa Fe) to develop the
Rosebud project, an underground gold project located near Winnemucca, Nevada.
The Company currently expects the Rosebud project to commence production in the
second quarter of 1997.
The following table presents certain information regarding the Company's metal
mining and development properties, including the relative percentage each
contributed to the Company's 1996 revenues:
DATE OWNERSHIP PERCENTAGE OF
NAME OF PROPERTY ACQUIRED INTEREST 1996 REVENUE(4)
- ---------------- -------- --------- ------------
Lucky Friday 1958 100.0% 8.8%
Greens Creek(1) 1988 29.7% 1.2%
Grouse Creek(2) 1991 80.0% 16.0%
La Choya 1991 100.0% 20.2%
American Girl(3) 1994 47.0% 5.2%
Rosebud(3) 1994 50.0% 0.0%
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(1) Operations at the Greens Creek mine recommenced in July 1996 with the
first shipment of product in November 1996. Full production levels were
reached in January 1997.
(2) In January 1997, Great Lakes and the Company entered into a letter
agreement terminating the Grouse Creek joint venture and conveying Great
Lakes' approximate 20% interest in the Grouse Creek project to the
Company. Great Lakes retained a 5% defined net proceeds interest in the
project. The Company assumed 100% of the interests and obligations
associated with the property.
(3) The Company's interest in the American Girl mine and Rosebud project were
acquired in the March 11, 1994 acquisition of Equinox Resources Ltd. In
1996, the Company entered into a 50/50 joint venture arrangement with
Santa Fe to develop the Rosebud project.
(4) In addition to the percentage contributions of revenue from the metal
mines, the industrial minerals segment contributed 48.6% of revenue in
1996.
The Company's industrial minerals segment consists of Kentucky-Tennessee Clay
Company (ball clay and kaolin divisions), K-T Feldspar Corporation, K-T Clay de
Mexico, S.A. de C.V., Colorado Aggregate Company of New Mexico, and Mountain
West Products, Inc. The Company's industrial minerals segment is a significant
producer of three of the four basic ingredients required to manufacture ceramic
and porcelain products, including sanitaryware, pottery, dinnerware, electric
insulators, and tile. At current production rates, the Company has over 20
years of Proven and Probable ore reserves of ball clay, kaolin and feldspar.
Following the end of the third quarter of 1996, the Company completed
metallurgical testing and economic analysis at the Company's Grouse Creek mine
in which Hecla had an approximate 80% interest in 1996. Based on the
information gathered during the
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evaluation period, as well as then current metals prices, the Company determined
that the ore contained in the Grouse deposit was not economical at then current
metals prices. Consequently, the Company made the decision to suspend
operations at the Grouse Creek mine. The mine will be placed on a care-and-
maintenance status upon completion of mining at the Sunbeam pit, which is
estimated to occur during the second quarter of 1997. In connection with the
decision to suspend operations at the Grouse Creek mine, the Company determined
that certain third quarter 1996 adjustments were required to properly reflect
the Company's interest in the net realizable value of the property, plant, and
equipment and certain other assets at the mine totaling approximately $5.3
million and the Company's share of future severance, holding, reclamation, and
closure costs totaling approximately $22.5 million.
On January 31, 1997, Great Lakes and the Company entered into a letter agreement
terminating the Grouse Creek joint venture and conveying Great Lakes'
approximate 20% interest in the Grouse Creek project to Hecla. Great Lakes
retained a 5% defined net proceeds interest in the project. The Company has
assumed 100% of the interests and obligations associated with the property (see
Metals Segment - Grouse Creek Gold Mine - Idaho).
In September 1996, the operator of the American Girl gold mine, a mine in which
the Company has a 47% joint-venture interest, determined that operations at the
American Girl mine would be suspended effective November 4, 1996. During the
first six months of 1996 and continuing into the third quarter of 1996, the
American Girl gold mine experienced significantly higher than anticipated
operating costs and lower than expected recovered gold ore grade. Based on its
periodic review of the carrying value of the Company's mining properties, the
Company determined that a third quarter carrying value adjustment totaling
approximately $7.6 million was required to properly reflect the estimated net
realizable value of its interest in the American Girl joint venture. The amount
of the adjustment was based on the Company's carrying value of its interest in
the American Girl mine in excess of estimated discounted future cash flows. In
addition to the carrying value adjustment, the Company also recorded a $0.3
million provision for closed operations to increase the Company's recorded
liability for reclamation and closure costs to its estimate of its interest in
future closure and reclamation costs at the American Girl mine (see Metals
Segment - American Girl Gold Mine - California).
The Company has experienced losses from operations for each of the last six
years. For the year ended December 31, 1996, the Company reported a net loss of
approximately $32.4 million (before preferred dividends of $8.1 million) or
$0.63 per share of Common Stock compared to a net loss of approximately $101.7
million (before preferred stock dividends of $8.1 million) or $2.11 per share of
Common Stock for the year ended December 31, 1995. The 1996 decreased net loss
was due to a variety of factors, the most
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significant of which was the write-down of the Company's interest in the Grouse
Creek mine in the third quarter of 1995 totaling $97.0 million, compared to 1996
adjustments totaling $35.7 million for severance, holding, reclamation, closure
costs, and carrying value adjustments for property, plant and equipment and
certain assets at the Grouse Creek and American Girl mines. If the Company's
estimates of the market prices of gold, silver, lead and zinc are realized in
1997, the Company expects to record income or (loss) in the range of a $(2.0)
million loss, to income of $2.0 million, after the expected dividends to
preferred shareholders totaling approximately $8.1 million for the year ending
December 31, 1997. Due to the volatility of metals prices and the significant
impact metals price changes have on the Company's operations, there can be no
assurance that the actual results of operations for 1997 will be as projected
(see Investment Considerations).
The Company's strategy is to focus its efforts and resources on expanding its
gold and silver reserves and industrial minerals operations via a combination of
acquisition and exploration efforts. During 1997, priorities include the
continued development of the Rosebud mine, in which the Company has a 50%
interest, and the completion of a feasibility study for the Lucky Friday
expansion project, which may lead to the development of the Gold Hunter silver
orebody at the Company's Lucky Friday mine.
The Company's domestic exploration plan consists primarily of exploring for
additional reserves in the vicinity of the Lucky Friday mine, the Greens Creek
mine, and the Rosebud project, in which the Company maintains a 50% interest.
The Company's foreign exploration plan for 1997 will focus on exploration
targets in Mexico, including remaining targets near the Company's La Choya mine,
and South America. At the same time, the Company will continue to evaluate
acquisition and other exploration opportunities, primarily in North America,
that will complement its existing operations.
The Company's revenues and profitability are strongly influenced by the world
prices of silver, gold, lead and zinc. Metals prices fluctuate widely and are
affected by numerous factors beyond the Company's control, including inflation
and worldwide forces of supply and demand. The aggregate effect of these
factors cannot be accurately predicted.
Sales of metal concentrates and metal products are made principally to custom
smelters and metal traders. Industrial minerals are sold principally to
domestic and Mexican manufacturers and wholesalers. The percentage of revenue
contributed by each class of product is reflected in the following table:
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Years
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Product 1996 1995 1994
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Gold 40.7% 42.3% 40.1%
Silver, lead and zinc 10.7 10.4 8.4
Industrial minerals 40.0 37.1 40.8
All others(1) 8.6 10.2 10.7
(1) All others includes specialty metals and sales from Mountain West
Products exclusive of scoria sales.
Reference is made to Note 1 of Notes to Consolidated Financial Statements
forming part of the Company's audited Consolidated Financial Statements for the
year ended December 31, 1996 (the "Notes to Consolidated Financial Statements")
for information with respect to export sales.
The table below summarizes the Company's production and average cash and full
production cost per ounce for gold and silver for each period indicated:
<TABLE>
<CAPTION>
Years
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Products 1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
Gold (Ounces)(1) 169,376 169,777 127,878 95,907 101,392
Silver (ounces)(2) 3,024,911 2,242,309 1,642,913 2,992,499 4,738,625
Lead (tons) 22,660 16,967 13,214 21,093 26,942
Zinc (tons) 7,464 2,999 2,431 7,838 19,890
Average cost per ounce of gold produced:
Cash operating cost $ 273 $ 286 $ 267 $ 228 $ 186
Total cash cost $ 276 $ 288 $ 273 $ 229 $ 191
Total production cost $ 364 $ 398 $ 334 $ 298 $ 261
Average cost per ounce of silver produced:
Cash operating cost $ 4.24 $ 4.57 $ 5.81 $ 5.45 $ 4.51
Total cash cost $ 4.24 $ 4.57 $ 5.81 $ 5.45 $ 4.51
Total production cost $ 5.47 $ 5.76 $ 7.17 $ 6.85 $ 5.89
Industrial minerals
(tons shipped) 1,072,319 991,214 985,639 887,676 879,034
(1) The slight decrease in gold production from 1995 to 1996 is principally due to decreased gold production from the
Grouse Creek mine where gold production decreased 5,487 ounces from 66,887 in 1995 to 61,400 ounces in 1996
principally due to an approximate two-month suspension of operations in 1996; and decreased gold production from the
Republic mine where operations were completed in February 1995 and from the Cactus mine where heap rinsing is being
completed. These decreases in gold production were partially offset by an increase of 8,027 ounces in gold production
from the La Choya mine, and 3,086 ounces of gold production at the Greens Creek mine where operations recommenced in
July 1996. The increase in gold production from 1994 to 1995 is principally due to increased gold production from the
Grouse Creek gold mine where gold production increased 64,794 ounces from 2,093 ounces in 1994 to 66,887 ounces in
1995, and increased gold production from the La Choya gold mine, where gold production increased 24,283 ounces, from
47,861 ounces in 1994 to 72,144 ounces in 1995. The increase in gold production was offset by decreased gold
production at the Republic Unit which completed operations in February 1995, and decreased gold production at the
American Girl mine due to fewer tons being milled. The increase in gold production from 1993 to 1994 is principally
due to the commencement of operations at the La Choya gold mine in February 1994, and the commencement of operations
at the Grouse Creek gold
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mine in December 1994 partially offset by decreased gold production at the Republic mine. The decrease in gold
production from 1992 to 1993 is principally due to decreased production at both the Cactus (which was shut down in
1993) and Republic gold mines.
(2) Increased silver, lead and zinc production from 1995 to 1996 is principally due to increased silver, lead and zinc
production from the Greens Creek mine where operations recommenced in July 1996, as well as increased silver, lead and
zinc production from the Lucky Friday mine. Offsetting the increase in silver production was a decrease in silver
production at the Grouse Creek mine due to an approximate two-month suspension of operations in 1996 and lower silver
ore grades processed. Increased silver, lead and zinc production from 1994 to 1995 is principally due to increased
silver production from the Grouse Creek mine which contributed a full year's production in 1995 after commencing
operations in December 1994, and increased silver, lead and zinc production from the Lucky Friday mine resulting in
part from the effect of the temporary suspension of operations due to an ore conveyance accident on August 30, 1994.
The Lucky Friday resumed operations in December 1994. Decreased silver, lead and zinc production from 1993 to 1994 is
due to two factors: 1) the suspension of operations at the Greens Creek mine in April 1993; and 2) decreased
production at the Lucky Friday mine resulting in part from the temporary suspension of operations due to the ore
conveyance accident on August 30, 1994. The decrease in silver production from 1992 to 1993 is principally due to the
suspension of operations at the Greens Creek mine in April 1993 partially offset by increased silver production at the
Lucky Friday mine.
</TABLE>
METALS SEGMENT
LA CHOYA GOLD MINE - SONORA, MEXICO
The La Choya gold mine is located 30 miles south of the U.S. border in the State
of Sonora, Mexico, and is 100% owned by the Company through a Mexican
subsidiary, Minera Hecla, S.A. de C.V. The La Choya gold mine is the Company's
first operation outside the U.S. and Canada. In May 1992, the Company exercised
its option to purchase the Mexican mineral concessions related to this property,
which includes a land position of over 16,000 acres.
The La Choya gold mine commenced operations in February 1994 and produced
approximately 48,000 ounces of gold in 1994, 72,000 ounces in 1995, and 80,000
ounces in 1996. The Company expects to produce 69,000 to 72,000 ounces of gold
in 1997. Proven and Probable ore reserves at the La Choya gold mine are
expected to be substantially depleted by the end of 1997, although recoveries of
metal through the leaching and rinsing process will continue in 1998 and 1999.
The ore is mined via conventional open pit methods at a stripping ratio of 2.5:1
utilizing a cut-off grade of 0.012 ounce of gold per ton, crushed to two inches
in size, and then cyanide leached on a leach pad. Uncrushed low-grade rock,
grading down to 0.006 ounce of gold per ton, is also dumped on the pad and
leached. The gold in the leach solution is processed in a carbon recovery plant
to produce a gold and silver dore, which is transported to the U.S. for further
refining. The average life of mine recovery of contained gold ounces is
estimated at approximately 88%.
The Company conducted exploration drilling programs during 1994, 1995 and 1996
in an effort to expand the gold reserves and mine life at the La Choya gold
mine. Drilling results in 1994 were successful in adding approximately 55,000
ounces of contained gold to the Proven and Probable ore reserve category. The
1995 program added approximately 18,000 ounces to the existing ore reserve, and
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approximately 50,000 ounces of gold were added during 1996. Exploration
drilling will continue on the remaining targets in 1997.
Information with respect to the La Choya gold mine production, Proven and
Probable ore reserves, and average cost per ounce of gold produced as of the
dates indicated are set forth in the following table:
Years
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Production (100%) 1996 1995 1994(1)
----------------- --------- --------- ---------
Ore processed (tons) 3,571,047 4,031,274 2,026,381
Gold (ounces) 80,171 72,144 47,861
Proven and Probable
Ore Reserves(2)
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Total tons 3,005,231 3,538,042 6,138,000
Gold (oz. per ton) 0.024 0.028 0.032
Contained gold (oz.)(4) 115,418 136,121 196,923
Average Cost per Ounce
of Gold Produced
----------------------
Cash operating costs(3) $ 190 $ 194 $ 243
Total cash costs $ 190 $ 194 $ 243
Total production costs(3) $ 305 $ 297 $ 337
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(1) Production at the La Choya mine commenced in February 1994.
(2) For Proven and Probable ore reserve assumptions, including assumed
metals prices, see Glossary of Certain Mining Terms.
(3) Includes approximately $2.1 million in start-up cost expensed in the
first quarter of 1994.
(4) Contained gold ounces include estimated recoverable gold ounces on
the heap leach pad totaling approximately 44,000 and 36,000 gold
ounces at December 31, 1996 and 1995, respectively. These ounces
were placed on the pad during 1994-1996 and are currently estimated
to be recovered over the mine's remaining life.
Reclamation activities will be completed at the end of the mine's life and will
include rinsing of the heap leach pads, followed by recontouring of the pads,
and regrading and revegetating the site. Reclamation expense recognized in 1996
was approximately $0.5 million.
As of December 31, 1996, there were 190 employees at the La Choya gold mine.
The National Union of Mine, Metallurgical and Related Workers of the Mexican
Republic is the bargaining agent for the La Choya gold mine hourly employees.
The current labor agreement,
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which has a wage reopener in September 1997, expires on September 7, 1998.
As of December 31, 1996, the Company's net book value of the La Choya mine
property, plant and equipment totaled $2.6 million. Electrical power is
provided by on-site diesel generators.
The decline of the Mexican peso has not significantly impacted results at the La
Choya mine as both funding for operations and gold sales are denominated in U.S.
dollars. Further declines in the Mexican peso, or accelerated levels of
inflation in Mexico, could, however, adversely impact the Company's Mexican
operations.
LUCKY FRIDAY MINE - IDAHO
The Lucky Friday, a deep underground silver and lead mine, located in northern
Idaho and 100% owned by the Company, has been a producing mine for the Company
since 1958. The mine operated continuously until low metals prices and
rockburst activity forced the suspension of operations in April 1986. During
the shutdown, the Company's engineers began converting portions of the mine to a
mechanized underhand mining method designed to increase productivity and reduce
rockburst activity. Production was resumed at the Lucky Friday mine in June
1987 and continued uninterrupted until August 30, 1994, when an ore-conveyance
accident forced suspension of operations until repairs could be made.
Operations resumed on December 5, 1994, and steady-state production was achieved
in February 1995. During 1995, the Company recovered its costs and lost
operating cash flow resulting from the accident from its insurance carrier.
The cash operating cost, total cash cost, and total production cost per ounce of
silver decreased from $4.57, $4.57, and $5.76, respectively, in 1995 to $4.24,
$4.24, and $5.47, respectively, in 1996. The decreases were due principally to
increased by-product production and prices, principally lead in the 1996 period.
Lead and zinc are by-products of the ore mined at the Lucky Friday mine, the
revenues from which are deducted from production costs in the calculation of the
cost per ounce amounts (see Glossary of Certain Mining Terms).
The ore-bearing structure at the Lucky Friday mine is the Lucky Friday Vein, a
fissure vein typical of many in the Coeur d'Alene Mining District. The orebody
is located in the Revett Formation which is known to provide excellent host
rocks for a number of orebodies in the Coeur d'Alene District. The Lucky Friday
Vein strikes northeasterly and dips steeply to the south, with an average width
of six to seven feet. The principal ore minerals are galena and tetrahedrite,
with minor amounts of sphalerite and chalcopyrite. The ore occurs as a single
continuous orebody in and along the Lucky Friday Vein. The major part of the
orebody has
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extended from the 1200-foot level to and below the 5840-foot level, which is
currently being developed.
The principal mining method, underhand cut and fill, was piloted in 1985 and
1986, and has since been fully implemented. This method utilizes mechanized
equipment, a ramp system and cemented sand fill. The method has proven
effective in reducing mining costs and limiting rockburst activity.
The ore produced from the mine is processed in a 1,000-ton-per-day conventional
flotation mill at a current rate of approximately 700 tons per day at the Lucky
Friday mine site. The flotation process produces both a silver-lead concentrate
and a zinc concentrate. During 1996 approximately 97% of the silver, 97% of the
lead, and 33% of the zinc were economically recovered.
The Lucky Friday mine mill facility and surface and underground equipment are in
good working condition. The mill was originally constructed approximately 34
years ago. The Company maintains and modernizes the plant and equipment on an
ongoing basis to keep the plant and equipment in good physical and operating
condition. The net book value of the Lucky Friday mine property and its
associated plant and equipment was approximately $28.0 million as of
December 31, 1996.
Ultimate reclamation activities contemplated include stabilization of tailings
ponds and waste rock areas. The current reclamation accrual is adequate to
provide for the estimated reclamation costs, and no reclamation expense was
recognized in 1996.
During 1991, the Company discovered several mineralized structures containing
some high-grade silver ores in an area known as the Gold Hunter property, about
5,000 feet northwest of the existing Lucky Friday workings. In an extensive
exploration program in 1992, the Company undertook an underground evaluation of
the Gold Hunter property mineralization. The program referred to now as the
"Lucky Friday Expansion Project," discovered mineralization containing
significant amounts of silver and lead in an area accessible from the 4050-foot
level of the Lucky Friday mine. The exploration program and a preliminary
feasibility study were completed during 1993. In 1994, the Company approved the
first phase of development of the Lucky Friday expansion project. The first
phase of development consisted primarily of driving an access drift from the
4900-foot level of the Lucky Friday workings which intersected the Gold Hunter
ore zone approximately 850 feet below the presently developed area. The new
access drift includes approximately 7,000 feet of development excavation. The
access drift advanced 3,000 feet in 1995, and exploratory drilling started in
the second quarter of 1996. A final feasibility study will be completed in
1997, at which time a decision will be made on further development of the Lucky
Friday expansion project. If further development is approved by the Company's
Board of Directors, it is presently
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estimated that an additional $12.0 million to $14.0 million in capital
expenditures will be required to bring the Lucky Friday expansion project into
full production. If further development is approved, initial production from
the project is expected in 1997, and production will increase until full
production is achieved upon completion of the entire project in the second
quarter of 1998.
The Gold Hunter property is controlled by the Company under a long-term
operating agreement, which entitles the Company, as operator, to a 79.08%
interest in the net profits from operations from the Gold Hunter properties.
The Company will be obligated to pay a royalty after it has recouped its costs
to explore and develop the properties, which as of December 31, 1996, totaled
approximately $16.5 million.
Even though recent historical total production costs have exceeded revenues
realized from the sale of recovered metals, based upon management's estimates of
metal to be recovered which includes the possible development of the Gold Hunter
property and considering estimated future production costs and metal prices, the
Company's management believes that the carrying value of the Lucky Friday mine
is recoverable from future undiscounted cash flows generated from operations and
considering the estimated salvage value of surface plant, equipment and the
value associated with property rights. In evaluating the carrying value of the
Lucky Friday mine, the Company used fixed metal prices of $5.20 per ounce
silver, $0.38 per pound of lead and $0.52 per pound of zinc through 2007, the
currently estimated end of commercial production. These prices were utilized as
the Company's management believes that they are reasonable estimates of average
prices over the remaining life of the mine. In contrast to longer-term prices
used for estimating life-of-mine revenues and resultant cash flows, the Company
uses near-term estimates of metal prices to estimate ore reserves as they more
closely reflect the current economic conditions at the measurement date.
Estimated future production costs were derived from actual production costs
currently being experienced at the Lucky Friday mine, adjusted for anticipated
changes resulting from the execution of the Company's mine production plan.
Based upon these projected factors, the Company currently estimates that future
cash and total production costs per ounce of silver produced over the remaining
life of mine would be approximately $3.85 and $4.60, respectively. As these
amounts are derived from numerous estimates, the most volatile of which are
metal prices, there can be no assurance that actual results will correspond to
these estimates.
The principal reason that cash costs per ounce are assumed to be lower than
recent historical amounts is the effect of the development of the Lucky Friday
expansion project. If the mineral resource associated with the Gold Hunter
property is not fully developed by the Company, management of the Company
believes that a write-down in the carrying value of the Lucky Friday mine and or
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the capitalized costs associated with the Lucky Friday expansion project may
occur depending on the current economic environment at the time the production
decision is made on the Lucky Friday expansion project. Capitalized
expenditures associated with the Lucky Friday expansion project as of
December 31, 1996 totaled approximately $5.0 million.
The Lucky Friday silver-lead concentrate product is shipped primarily to the
ASARCO smelter at East Helena, Montana. The silver, lead and gold contained in
the concentrates are sold to ASARCO. The Lucky Friday zinc concentrates are
shipped to Cominco's smelter in Trail, British Columbia, Canada, and are sold
under an agreement with Cominco Ltd.
In the event agreements with ASARCO and Cominco are terminated, the Company
believes that new agreements could be negotiated with other smelters. However,
at present metal prices, increased costs associated with transporting the
concentrate product a greater distance to other smelters may render operations
at the Lucky Friday mine uneconomical, thereby resulting in possible mine
closure. If this were to occur, the Company may be required to write down all
or a part of its investment in the Lucky Friday mine.
Based on the Company's experience in operating deep mines in the Coeur d'Alene
Mining District, where the persistence of mineralization to greater depths may
be reliably inferred from operating experience and geological data, the
Company's policy is to develop new levels at a minimum rate consistent with the
requirements for uninterrupted and efficient ore production. A new level is
developed and brought into production only to replace diminishing ore reserves
from levels being mined out. The length and strength of the ore body have not
materially diminished on the lowest developed level of the mine. Based upon
this factor, drilling data and extensive knowledge of the geologic character of
the deposit, and many years of operating experience in the Lucky Friday mine and
Coeur d'Alene Mining District, there are no geologic factors known at present
which appear to prevent the assumed continuation of the Lucky Friday ore body
for a considerable distance below the lowermost working level. Although there
can be no assurance of the extent and quality of the mineralization which may be
developed at greater depths, the existing data and operating experience justify,
in the opinion of the Company's management and based upon industry standards,
the conclusion that the mineralization will extend well below the 6200-foot
level, which is the existing bottom of the mine's Silver Shaft.
Information with respect to the Lucky Friday mine's production, Proven and
Probable ore reserves, and average cost per ounce of silver produced for the
past five years is set forth in the table below:
-11-
<PAGE> 13
<TABLE>
<CAPTION>
Years
---------------------------------------------------------
Production (100%) 1996(1) 1995 1994(2) 1993 1992
- ----------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Ore milled (tons) 188,272 158,874 124,986 179,579 175,170
Silver (ounces) 1,906,333 1,662,706 1,306,884 2,122,738 2,031,779
Gold (ounces) 947 830 605 972 965
Lead (tons) 20,971 16,967 13,214 19,795 21,336
Zinc (tons) 3,653 2,999 2,431 4,385 4,213
Proven and Probable
Ore Reserves(3)
- -------------------
Total tons 1,245,660(5) 468,590 450,685 414,315 446,105
Silver (ozs. per ton)(4) 14.9 11.7 13.9 14.4 14.3
Lead (percent)(4) 11.3 11.6 13.9 14.3 13.4
Zinc (percent)(4) 2.2 1.8 2.9 3.0 2.3
Contained silver (ozs.)18,512,024 5,488,729 6,285,145 5,976,380 6,398,265
Contained lead (tons) 140,608 54,459 62,862 59,195 59,979
Contained zinc (tons) 26,872 8,542 13,082 12,295 10,162
Average Cost per Ounce
of Silver Produced
- ----------------------
Cash operating costs $ 4.24 $ 4.57 $ 5.81 $ 5.54 $ 4.12
Total cash costs $ 4.24 $ 4.57 $ 5.81 $ 5.54 $ 4.12
Total production costs $ 5.47 $ 5.76 $ 7.17 $ 6.77 $ 5.35
- ------------------------------------
(1) Production increases in 1996 as compared to the 1995 period at the Lucky Friday mine
are principally the result of processing development ore tons from the Gold Hunter
ore body totaling 29,921 tons.
(2) Production decreases in 1994 are due primarily to the suspension of operations
resulting from the August 30, 1994 ore-conveyance accident.
(3) At the Lucky Friday mine, reserves lying above or between developed levels are
classified as Proven reserves. Reserves lying below the lowest developed level,
projected to 200 feet below the lowest level or to one-half the exposed strike
length, whichever is less, are classified as Probable reserves. Mineralization
known to exist only from drill-hole intercepts does not meet the Company's current
Proven or Probable reserve criteria and is excluded from these reserve categories.
For additional Proven and Probable ore reserve assumptions, including assumed metals
prices, see Glossary of Certain Mining Terms.
(4) Decreased grades for silver, lead and zinc in 1995 versus 1994 are the result of an
adjustment to mining dilution factors to represent current mining practices, changes
in mining method that require more dilution in some of the planned stopes, decrease
in vein width and grade in current mining areas, and completion of mining in certain
internal ore blocks, around which no additional reserves can be projected.
(5) The increase in the Proven and Probable ore reserves from 1995 to 1996 is
principally due to the addition of 668,760 tons of proven and probable mineral,
grading 16.7 silver ounces per ton, 9.4% lead, and 1.8% zinc from the adjacent Gold
Hunter orebody. Additionally, geologic studies and statistical analysis of a
diamond drill hole exploration program in 1996 permitted increased projection of
probable reserves compared to the previous practice on the Lucky Friday vein.
</TABLE>
-12-
<PAGE> 14
At December 31, 1996, there were 154 employees at the Lucky Friday mine. The
United Steelworkers of America is the bargaining agent for the Lucky Friday
hourly employees. The current labor agreement expires on June 12, 1999.
Washington Water Power Company supplies electrical power to the Lucky Friday
mine.
GREENS CREEK MINE - ADMIRALTY ISLAND, ALASKA
At December 31, 1996, the Company held a 29.7% interest in the Greens Creek
mine, located on Admiralty Island, near Juneau, Alaska, through a joint venture
arrangement with Kennecott Greens Creek Mining Company, the manager of the mine
and a wholly owned subsidiary of Kennecott Corporation. The Greens Creek mine
is a polymetallic deposit containing silver, zinc, gold, and lead.
Greens Creek lies within the Admiralty Island National Monument, an
environmentally sensitive area. The Greens Creek property includes 17 patented
lode claims, and one patented millsite claim in addition to property leased from
the U.S. Forest Service. The entire project is accessed 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.
In February 1993, as a result of depressed metal prices and a glut in world
concentrate markets, the decision was made to place the mine on temporary
shutdown. Commercial production ceased in April 1993, and the mine and mill
were placed on a care and maintenance basis. Exploration and mine development
activities continued at the mine during the shutdown. Follow-up drilling on
previously identified targets was successful in identifying a new ore zone, the
Southwest Extension.
In January 1994, a feasibility study was initiated to determine the advisability
of placing the mine back into production. The feasibility study was completed
in the fourth quarter of 1994 and in 1995 the decision was made to reopen the
Greens Creek Mine, with commercial production estimated to recommence by early
1997. Included in the reopening project were development of the Southwest ore
zone, purchase of new mine mobile equipment, upgrading of ancillary facilities,
improvement of environmental control systems and modification of the process
plant. The reopening project was completed ahead of schedule and production
began in July 1996 and full production levels were achieved in January 1997.
Environmental permitting during the reopening project included obtaining
regulatory agency approval of the updated General Plan of Operations and Large
Mine Permit. The approvals included revisions to appendices regarding fresh
water monitoring, tailings site operation and maintenance, development rock
management and water systems operation. Other actions included Forest Service
approval to house production workers in a man-camp at Hawk Inlet, and State
-13-
<PAGE> 15
of Alaska legislative changes allowing extended working shifts for miners.
State of Alaska permitting action included renewal of the Air Quality Permit by
the Alaska Department of Environmental Control. Permits that were in-progress
at the end of 1996 included the Alaska Department of Environmental Control solid
waste permit for tailings disposal and renewal of the mine waste-water discharge
permit.
Current operating plans anticipate mining 1,320 tons per day underground from
the Southwest ore zone. Ore from the underground trackless mine is milled at
the mine site. The mill produces gold/silver dore; and lead, zinc and bulk
concentrates. The dore is marketed to a precious metal refiner and the three
concentrate products are predominantly sold to a number of major smelters
worldwide. A lesser amount of the concentrates are sold to metal merchants
under short-term agreements. Concentrates are shipped from a marine terminal
located about nine miles from the mine site. The Greens Creek mine uses
electrical power provided by diesel-powered generators located on-site.
Improvements to the mill included modifications designed to allow increased
throughput and to recover higher grades of zinc from the Southwest and West ore
zones. Additionally, the reopening project included recommissioning and deferred
maintenance of all process equipment. Ancillary project work included an
expansion of the tailings disposal facility, upgrade of the power generating
capacity, and purchase of surface equipment which enabled the mine to replace
contractors with mine employees. A camp facility is used to house some of the
production work force at the mine site with the majority of the employees
commuting from Juneau on a daily basis. The capital investment in ancillary
facilities will allow the mine to increase efficiency as well as metal
production. By December 31, 1996, mine and mill performance tests established
that the new capacity exceeds design throughput of 1,320 tons per day.
Environmental projects were focused on improving the performance of water
treatment systems at the mine site. Two new water treatment plants, associated
ponds and pipelines will allow the mine staff more assurance of meeting
stringent environmental standards as well as reducing the possibility of water
contamination. An added benefit of installing the upgraded water treatment
systems is that the EPA is considering a reduction in civil penalties for past
water quality violations.
A land exchange agreement was approved by Congress and signed into law by
President Clinton on April 1, 1996. Subject to the joint venture securing
private property equal to a value of $1.0 million and transferring title to the
USDA Forest Service, Greens Creek will gain access to approximately 7,500 acres
of highly prospective land surrounding the existing mine. Production from new
ore discoveries on the exchange lands will be subject to any future federal
royalties.
-14-
<PAGE> 16
As of December 31, 1996, there were 227 employees at the Greens Creek mine. The
employees at the Greens Creek mine are not represented by a bargaining agent.
In 1996, the Company's portion of capitalized expenditures to redevelop the
Greens Creek mine totaled $19.0 million. The Company's share of 1997
capitalized expenditures is estimated to be $2.0-$2.2 million. At December 31,
1996, the Company's interest in the net book value of the Greens Creek mine
property and its associated plant and equipment was $77.9 million.
Even though historical production costs have exceeded revenues realized from the
sale of recovered metals, based upon management's estimates of metal to be
recovered and considering estimated future production costs and metal prices,
the Company's management believes that the carrying value of the Greens Creek
mine is recoverable from future undiscounted cash flows generated from
operations. In evaluating the carrying value of the Greens Creek mine, the
Company used metal prices of $386 per ounce of gold, $5.20 (for the years 1997-
2001) and $5.50 (for the years 2001-2013) per ounce of silver, $0.38 per pound
of lead and $0.52 (for the years 1997-2000) and $0.55 (for the years 2001-2013)
per pound of zinc through 2013, the currently estimated end of commercial
production. These prices were utilized as the Company's management believes
that they are reasonable estimates of average prices over the remaining life of
the mine. In contrast to longer-term prices used for estimating life-of-mine
revenues and resultant cash flows, the Company uses near-term estimates of metal
prices, process recoveries and smelter terms to estimate ore reserves as they
more closely reflect the current economic conditions at the measurement date.
Estimated future production costs were derived from actual production costs
experienced at the mine, adjusted, as necessary, for anticipated changes
resulting from the execution of the mine manager's mine production plan. Based
upon these projected factors, the Company estimates that future cash and total
production costs per ounce of silver produced over the remaining life of the
mine would be $2.16 and $4.06, respectively. As these amounts are derived from
numerous estimates, the most volatile of which are metal prices, there can be no
assurance that actual results will correspond to these estimates. The principal
reason that cash costs per ounce are assumed to be less than historical amounts
is a forecasted increase in the grade of ore processed.
The Greens Creek deposit consists of zinc, lead, and iron sulfides and copper-
silver sulfides and sulfosalts with substantial contained gold and silver
values, having a vein-like to blanket-like form of variable thickness. The ore
is thought to have been laid down by an "exhalative" process (i.e., volcanic-
related rifts or vents deposited base and precious metals onto an ocean floor).
Subsequently, the mineralization was folded and faulted by multiple generations
of tectonic events.
-15-
<PAGE> 17
The estimated ore reserves for the Greens Creek mine are computed by Kennecott
Greens Creek Mining Company's geology and engineering staff with technical
support from Kennecott Corporation. Geologic interpretations and reserve
methodology are reviewed, but the reserve compilation is not independently
confirmed by the Company in its entirety. Information with respect to the
Company's share of production, Proven and Probable ore reserves, and average
cost per ounce of silver produced is set forth in the table below:
<TABLE>
<CAPTION>
Years (Company's Interest (2))
---------------------------------------------------------------------------------------------
Production 1996(1)(29.7%) 1995(1)(29.7%) 1994(1)(29.7%) 1993(1)(29.7%) 1992(28%)
- ---------- -------------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Ore milled (tons) 42,737 - - - - 33,638 123,526
Silver (ounces) 827,799 - - - - 551,107 1,959,368
Gold (ounces) 3,086 - - - - 2,826 9,094
Zinc (tons) 3,811 - - - - 3,453 11,385
Lead (tons) 1,689 - - - - 1,298 4,650
Proven and Probable
Ore Reserves(3,4)
- -----------------
Total tons 2,642,000 2,585,000 2,585,000 1,911,000 3,422,000
Silver (ozs. per ton) 19.5 19.2 19.2 16.0 12.7
Gold (oz. per ton) 0.15 0.16 0.16 0.14 0.13
Zinc (percent) 12.6 13.1 13.1 14.4 13.2
Lead (percent) 4.6 4.7 4.7 4.7 4.0
Contained gold (ozs.) 398,046 415,696 415,696 273,655 452,091
Contained silver (ozs.) 51,587,608 49,759,167 49,759,167 30,533,705 43,314,807
Contained zinc (tons) 333,849 338,042 338,042 274,894 453,169
Contained lead (tons) 120,096 122,696 122,696 90,467 138,430
Average Cost per
Ounce of Silver Produced
- ------------------------
Cash operating costs(5) - - - - - - $ 5.11 $ 4.82
Total cash costs(5) - - - - - - $ 5.11 $ 4.82
Total production costs(5) - - - - - - $ 7.16 $ 6.54
- -------------------------------
(1) Operations were suspended in April 1993 and restarted in July 1996.
(2) The Company's interest during the period of active production in 1993 was 28.08%, but was increased to 29.7331% by the
time of the reserve determination.
(3) For Proven and Probable ore reserve assumptions and definitions, see Glossary of Certain Mining Terms.
(4) Ore reserves represent in-place material, diluted and adjusted for expected mining recovery. Process plant recoveries of
ore reserve grades are expected to be 75% for silver, 72% for gold, 89% for zinc and 84% for lead. Payable recoveries of
ore reserve grades by smelters and refiners are expected to be 66% for silver, 58% for gold, 69% for zinc and 69% for
lead.
(5) The Greens Creek mine recommenced operations in July 1996, on a start-up basis; as such no cost per ounce amounts are
reported for 1996.
</TABLE>
In 1993, drilling in the southwest area of the mine encountered an additional
mineralized zone containing higher than mine average gold and silver content.
Further drilling in the area in 1994 accounts for most of the increase in
reserves between 1993 and 1994.
-16-
<PAGE> 18
Following definition drilling of the Southwest ore zone in 1995 and 1996, a
revised estimate of reserves was completed. The revised total ore reserve
estimate has increased reserve tons, increased silver grade, reduced gold grade,
and reduced zinc and lead grades.
GROUSE CREEK GOLD MINE - IDAHO
Operations at the Grouse Creek gold mine commenced in December 1994 and full
production levels were achieved by June 1995. The Company's interest in the
Grouse Creek mine production during 1996 amounted to 61,400 ounces of gold and
274,559 ounces of silver, representing the Company's approximate 80% interest.
The mine is located in central Idaho, 27 miles southwest of the town of Challis
in the Yankee Fork Mining District. Mineral rights comprising the Grouse Creek
gold mine cover 9.1 square miles. The Grouse Creek gold mine consists of 18
patented lode mining claims and two patented placer claims, 43 unpatented
millsite claims, and 17 unpatented lode claims for which patent applications are
pending. With respect to the 17 unpatented lode claims, the Company has
received the first half of a Mineral Entry Final Certificate. Upon
certification by a United States Federal Mineral Examiner and issuance of
patents for these claims, all of the current proven and probable reserves at the
Grouse Creek gold mine will be located within patented mining claims. The
remainder of the mineral rights in the Yankee Fork Mining District consist of
337 unpatented claims.
Two distinct ore deposits have been identified at the Grouse Creek mine: the
Sunbeam deposit and the Grouse deposit. Both deposits are mined by open pit
methods.
On February 8, 1994, the Company sold to Great Lakes a 20% undivided interest in
the Company's Grouse Creek gold mine. Proceeds received from the sale, totaled
$13.3 million, which represented the sales price of $6.8 million for 20% of the
amount spent by the Company on acquisition, exploration and development of the
project through June 30, 1993, and a fixed premium of $1.25 million, plus Great
Lakes' pro-rata share of construction costs for Grouse Creek from July 1, 1993
through January 31, 1994. Pursuant to the acquisition and joint venture
agreements, Great Lakes was required to fund its 20% pro-rata portion of all
capital and operating costs.
During the third quarter of 1995 and continuing into the fourth quarter of 1995,
the Grouse Creek mine experienced significantly higher than expected operating
costs per ounce of gold produced and significantly less than expected operating
margins resulting from higher than expected start-up costs and lower than
expected gold ore grade. Mining indicated that mill grade ore occurs in
thinner, less continuous structures than originally interpreted. The Company
thus determined that a 1995 third quarter carrying value
-17-
<PAGE> 19
write-down totaling $97.0 million was required to properly reflect the net
realizable value of its 80% interest in the Grouse Creek joint venture. The
amount of the adjustment was based on the Company's carrying value of its 80%
interest in the Grouse Creek mine in excess of the Company's share of estimated
discounted future cash flows. A revised life-of-mine cash flow analysis was
developed early in the fourth quarter of 1995 for this purpose which recognized
the geologic complexity of the Sunbeam deposit as determined from mining
experience and included a revised interpretation of the geologic data.
During the second quarter of 1996, an approximate two-month shutdown of milling
operations and an approximate one-month shutdown of mining operations was
required to enlarge the tailings impoundment. The impoundment reached capacity
earlier than expected due to precipitation levels reaching 206% of normal during
the late 1995 - early 1996 period, which resulted in significant inflows of
water into the tailings pond and reduced the pond's capacity to hold tailings.
The temporary shutdown of milling operations commenced in late April 1996, and
mining operations ceased in late May 1996. Both mining and milling operations
resumed on July 15, 1996.
Following the end of the third quarter of 1996, the Company completed
metallurgical testing and economic analysis of the Grouse deposit which had been
ongoing throughout 1996. Based on the information gathered during the
evaluation period, as well as then current metals prices, the Company determined
that the ore contained in the Grouse deposit was not economical at the then
current metals prices, and the Company determined to suspend operations at the
Grouse Creek mine. The mine will be placed on a care-and-maintenance status
upon completion of mining at the Sunbeam pit which is estimated to occur during
the second quarter of 1997. In connection with the decision to suspend
operations, the Company determined that certain third quarter 1996 adjustments
were required to properly reflect the Company's interest in the property at net
realizable value totaling approximately $5.3 million and future severance,
holding, reclamation, and closure costs totaling approximately $22.5 million.
The Company estimates that its share of total production at the Grouse Creek
gold mine will be from 18,000 to 20,000 ounces of gold in 1997.
Pursuant to a November 27, 1995 agreement entered into between the Company and
Great Lakes, past due cash calls totaling $2.2 million were forgiven by the
Company in exchange for Great Lakes granting the Company certain warrants, which
expire on December 31, 1997, to purchase Great Lakes' common stock and a royalty
totaling $2.3 million payable out of 25% (75% after December 31, 1997) of the
proceeds (in excess of cash operating requirements) from Great Lakes' share of
Grouse Creek production.
-18-
<PAGE> 20
On January 31, 1997, Great Lakes and the Company entered into a letter agreement
terminating the Grouse Creek joint venture and conveying Great Lakes'
approximate 20% interest in the Grouse Creek project to the Company. Great
Lakes retained a 5% defined net proceeds interest in the project. The Company
has assumed 100% of the interests and obligations associated with the property.
Information with respect to the Company's interest in the Grouse Creek gold
mine's production, Proven and Probable ore reserves, and average cost per ounce
of gold produced as of the dates indicated are set forth in the following table:
<TABLE>
<CAPTION>
Years
--------------------------------------------------------------------------
Production (approximate 80%) 1996(5)(6) 1995(4) 1994(3) 1993 1992
- ---------------------------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Ore milled 1,398,795 1,564,176 70,912 - - - -
Gold (ounces) 61,400 66,887 2,093 - - - -
Silver (ounces) 274,559 541,532 8,763 - - - -
Proven and Probable
Ore Reserves (1)(2)
- --------------------
Total tons 481,840 6,872,400 17,658,000 12,104,000 14,467,000
Gold (oz. per ton) 0.040 0.044 0.041 0.055 0.057
Contained gold (ozs.) 23,843 299,362 721,600 671,200 831,000
Silver (oz. per ton) 0.30 1.25 0.92 1.07 1.21
Contained silver (ozs.) 179,042 8,571,140 16,206,080 12,972,800 17,474,000
Average Cost per Ounce
of Gold Produced:
- ----------------------
Cash operating costs $ 326 $ 344 $ 540 $ - - $ - -
Total cash costs $ 326 $ 344 $ 540 $ - - $ - -
Total production costs $ 383 $ 493 $ 730 $ - - $ - -
- -----------------------
(1) 1996, 1995, 1994, and 1993 Proven and Probable ore reserves reflect only the Company's share (approximately 80%)
pursuant to the February 8, 1994, sale of a 20% interest in its Grouse Creek mine. If the Company had only an 80%
interest in 1992, the Company's share of contained gold and silver would have been 664,800 and 13,979,200 ounces,
respectively.
(2) For Proven and Probable ore reserve assumptions, including assumed metals prices, see Glossary of Certain Mining
Terms.
(3) The increase in the Proven and Probable ore reserves from 1993 to 1994 was principally due to an increase in the
metals price assumptions used in 1994. This increase was partially offset by a decrease in the Grouse underground
reserves totaling 68,000 tons containing 53,000 ounces of gold and 136,000 ounces of silver. The decrease in
underground reserves was necessary when 1994 development encountered erratic mineralization which was previously
estimated to be continuous.
(4) Reserves at the property decreased from 1994 to 1995 for the following reasons:
a) During the year, 1,365,200 tons of ore containing 50,885 ounces of gold and 884,385 ounces of silver
were mined from the Sunbeam pit, and 18,408 tons of ore containing 7,786 ounces of gold and 27,428
ounces of silver were mined from Grouse underground;
b) Recalculation of Sunbeam pit reserves resulting in a decrease of 2,348,880 tons of ore containing
115,207 ounces of gold and 580,702 ounces of silver;
c) Lower-than-expected tonnage and grade in the portion of the pit mined in 1995 leading to a production
shortfall of 766,800 tons containing 33,660 ounces gold and 4,381 ounces of silver; and,
-19-
<PAGE> 21
d) Increases in cutoff grade for the Sunbeam and Grouse deposits, and decreases in mill recovery applied to
the Grouse deposit reserves to match actual operating cost and recovery experience at the property,
resulted in a reduction of 6,285,712 tons containing 214,700 ounces gold and 6,138,044 ounces silver.
(5) The decrease in the ore reserves from 1995 to 1996 is the result of mining activity in 1996, and the determination in 1996,
that mineralized material contained in the Grouse deposit cannot be mined and processed economically at current metals
prices, the result of which will be the suspension of operations at Grouse Creek scheduled for the second quarter of 1997.
(6) On January 31, 1997, Great Lakes and the Company entered into a letter agreement terminating the Grouse Creek joint venture
and conveying Great Lakes' approximate 20% interest in the Grouse Creek project to the Company. Great Lakes retained a 5%
defined net proceeds interest in the project. As such, effective January 31, 1997, the Company's interest in the remaining
reserves is 100%.
</TABLE>
The Sunbeam deposit uses conventional surface mining methods. Blasthole assays
are used to determine ore grade material. The material is segregated and hauled
by off-highway trucks to the mill. Waste material is hauled to a waste dump or
used as construction material in the tailings dam. In the Sunbeam deposit, ore
is mined on 20-foot benches. The milling process involves a 6,000-ton-per-day
gold recovery facility. The recovery process involves crushing and grinding of
the ore and recovering approximately 50% of the gold in a gravity circuit. The
remaining gold and silver is dissolved in a weak sodium cyanide solution and
recovered with carbon adsorption and Merrill-Crowe precipitation. Overall
recoveries are currently estimated at 92% gold and 50% silver for ore from the
Sunbeam deposit. A refinery on the property produces a gold/silver dore that is
further processed by a commercial refiner. The tailings from the cyanide
process are impounded in a 15.5 million ton capacity double-lined tailings pond.
All permits for this facility are in good standing except for the Tailings
Impoundment Storage Certificate, which expired in November 1996. The Company
has submitted an outside consultant's stability analysis to the Idaho Department
of Water Resources - Dam Safety Division; the report indicated that the
embankment is stable. The State of Idaho has elected to perform additional
studies, and if results from such studies are satisfactory, certification is
expected in March 1997. Salmon River Electric Cooperative, Inc. provides
electrical power to the Grouse Creek gold mine.
The Sunbeam deposit is being mined at a rate of 6,000 tons of ore per day at a
current cut-off grade of 0.020 ounce per ton of gold equivalent and a stripping
ratio of 2.8:1.
The approved mining and reclamation plans for the facility will remain in effect
during the suspension period. During the period that the property is on a care-
and-maintenance basis, reclamation activities will be undertaken as necessary to
prevent degradation of the property. The milling facilities will be mothballed
and maintained during the suspension period. Ultimately, at the completion of
mining, the milling facilities will be removed and the foundations buried.
Concurrent reclamation practices will be employed whenever possible. The
original reclamation plan concepts
-20-
<PAGE> 22
have been approved by the appropriate state and federal agencies, and as new
technology and new reclamation practices evolve, they will be evaluated and,
when applicable, proposed to the appropriate agencies for approval.
As of December 31, 1996, there were 187 employees at the Grouse Creek gold mine.
The employees are not represented by a bargaining agent.
AMERICAN GIRL MINE - CALIFORNIA
The Company acquired the American Girl gold mine in March 1994 as part of the
Equinox Resources Ltd. (Equinox) acquisition. The mine property is located in
Imperial County, California. The property includes three mining areas: the
Padre-Madre area, the American Girl area, and the Oro Cruz area where production
commenced in late 1995.
The mine is managed by MK Gold Company, the Company's joint venture partner.
The Company has a 47% interest in the mine with MK Gold having the remaining 53%
interest. MK Gold receives a monthly management fee of 2% of certain specified
costs of the joint venture. Certain matters regarding the joint venture require
the approval of the joint venture management committee which consists of two
representatives of the Company and two representatives of MK Gold.
MK Gold announced plans for suspension of American Girl mine operations on
September 5, 1996. The joint venture completed a thorough evaluation of
shutdown and alternative operating strategies for the operation and determined
no practical mining and processing methods could be developed which would
justify continued operations. The remaining Oro Cruz underground reserves were
not economical due to high development costs and the remaining surface reserves
were not economical at current metals prices due to higher mining costs and
stripping ratio than originally expected. As part of the suspension plan, the
joint venture agreed to a modified program and budget for the remainder of 1996
which called for suspension of surface and underground mining in mid-September
1996. Crushing and milling operations ceased in mid-October 1996.
Reclamation activities began in September and limited exploration will continue
into early 1997. Gold production is expected to continue through late 1997 as
the heaps are leached and rinsed during reclamation. Full mine reclamation is
expected to be completed by early 1999. Reclamation activity includes limited
backfilling of mine pits, recontouring and revegetating pits and heap leach
pads. Final reclamation will include removal of buildings and closure of
underground mine openings. The reclamation and closure cost accruals at
December 31, 1996, totaled $3.0 million.
-21-
<PAGE> 23
The American Girl mine is held through a combination of patented and unpatented
claims either owned outright or through leases. Properties are subject to
underlying net smelter return royalties ranging from 3.5% to 12.5% depending
upon the lessor, gold price and recovery of capital costs.
During production through October 1996, ore was processed by leaching and
conventional milling facilities owned by the joint venture. Electric power is
generated on-site by equipment owned by the joint venture. The full-time
employment at the site as of December 31, 1996 was 30. Employees are not
represented by a bargaining unit.
Information with respect to the Company's share of production, Proven and
Probable ore reserves, and average cost per ounce of gold produced for the
dates indicated are set forth in the table below:
<TABLE>
<CAPTION>
Years
--------------------------------------
Production (47%) 1996 1995 1994
---------------- -------- --------- --------
<S> <C> <C> <C>
Total ore processed (tons) 424,882 783,132 704,489
Gold (ounces) 21,214 21,489 30,624
Proven and Probable
Ore Reserves (47%)(1)
---------------------
Total tons - -(3) 2,171,000(2) 3,428,000
Gold (oz. per ton) - - 0.056 0.049
Contained gold (ounces) - - 121,600 166,505
Average Cost per Ounce
of Gold Produced
----------------------
Cash operating costs $ 480 $ 413 $ 323
Total cash costs $ 503 $ 435 $ 344
Total production costs $ 582 $ 483 $ 367
------------------------------------
(1) For Proven and Probable ore reserve assumptions, including assumed
metals prices, see Glossary of Certain Mining Terms.
(2) The decrease in the ore reserves from 1994 to 1995 is the result of
mining activity in 1995, and the removal of low-grade tons from ore
reserves as Phase I mining of the Tybo pit (low-grade pit) ceased
ahead of schedule due to pit stability concerns.
(3) The decrease in the ore reserves from 1995 to 1996 is the result of
mining activity in 1996, and the determination that remaining
mineralized material cannot be mined and processed economically, the
result of which was the shutdown of the American Girl mine in 1996.
</TABLE>
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<PAGE> 24
ROSEBUD GOLD PROJECT - NEVADA
The Rosebud gold project, in which the Company has a 50% interest, is located in
the Rosebud Mining District, in Pershing County, Nevada, and was acquired by the
Company through the merger with Equinox. The Rosebud gold project consists of a
100% interest in 3 patented lode mining claims and 712 unpatented lode mining
claims (the Hecla Claims), and a 52% interest in 48 lode mining claims held
under a joint venture with N.A. Degerstrom Inc. (the Degerstrom Claims). The
total 772 claims cover approximately 15,950 acres and collectively comprise the
"Rosebud Project." Patent application has been made on the 13 claims that
contain all of the Proven and Probable ore reserves. The Rosebud Project may be
reached from Lovelock, Nevada, by travelling northwest a distance of
approximately 58 miles on an all weather gravel road. At December 31, 1996,
Hecla's interest in the net book value of property, plant, and equipment at the
Rosebud Project totaled $16.4 million.
On September 6, 1996, Hecla and Santa Fe entered into an agreement for a 50/50
joint venture to develop the Rosebud property. Pursuant to the agreement, a
limited liability corporation was established to develop the Rosebud gold
property with each party owning a 50% interest. Under the terms of the
agreement, Hecla will manage the mining activities and ore will be hauled via
truck approximately 100 miles to Santa Fe's Twin Creeks Pinon mill for
processing. Total mine site capital expenditures to bring the mine into
production are expected to be approximately $20-$25 million, of which $11.1 has
been expended through December 31, 1996. Santa Fe funded the first $12.5
million of mine-site development and Santa Fe is also responsible, under the
terms of the agreement, to fund costs of road and mill facility improvements.
Santa Fe also contributed to the joint venture exploration property located near
the Rosebud property, and will fund the first $1.0 million in exploration
expenditures, and two-thirds of future exploration expenditures beyond the
initial $1.0 million.
Construction and development activities to date have included development of a
second portal to the mine, 2,500 feet of underground drifting, a six mile power
line, an eight mile access road, and surface plant facilities necessary to
support the underground operation. At December 31, 1996, surface plant
facilities are approximately 85% complete. Construction and development activi-
ties are expected to be completed and operations started early in the second
quarter of 1997.
In 1993, Equinox sold for $2.5 million a 2.5% net smelter return royalty and an
option to purchase an additional 1.5% net smelter return royalty on the property
to Euro-Nevada Mining Corporation Inc. (Euro-Nevada). The option for the
additional 1.5% royalty was exercised, by Euro-Nevada, in the fourth quarter of
1996. The
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<PAGE> 25
proceeds of $2.5 million were retained by the Company under the terms of the
agreement with Santa Fe.
Until 1991, all significant gold mineralization and most of the 115,000 feet of
drilling in 167 holes had been completed on what was known as the Dozer Hill
Zone, a northeast trending zone extending a distance of about 1,500 feet within
portions of 10 claims within the Hecla Claims. Further delineation drilling
during 1994 resulted in identifying two distinct mineralized zones, the South
Zone and the North Zone, within the original Dozer Hill Zone.
In 1991, 58,691 feet of drilling was carried out to test exploration targets
east of the South Zone and to further evaluate the property. This exploration
drilling encountered a new zone of high-grade gold mineralization (the East
Zone) about 1,000 feet east of the South Zone contained in portions of three
claims within the Hecla Claims. Mineralization appears related to the low angle
South Ridge fault which underlies most of the area of interest. Mineralization
in the South and North Zones occur above this fault while mineralization in the
East Zone occurs within and below this fault.
Results to date indicate that gold mineralization in the South, North and East
Zones, as in many other volcanic-hosted gold deposits, is erratically
distributed with numerous low-grade drill hole intercepts interspersed with
higher grade drill hole intercepts over an area of approximately 1,000 feet
east-west and 1,000 feet north-south. Drilling has also intersected further
mineralization approximately 700 feet east of the East Zone.
In 1992, an additional 35,000 feet of drilling in 56 holes was completed on the
Rosebud Project. This was followed by preliminary metallurgical studies and
permit preparation for an advanced underground exploration program. The
underground exploration program commenced in December 1993. During 1994,
underground work included completion of 3,600 feet of drifting, 25,000 feet of
underground diamond drilling, and 30,000 feet of surface diamond drilling
designed to further delineate the orebody.
Permitting related work which began during 1994 was completed during 1996. All
local permits have been obtained and construction commenced in the third quarter
of 1996.
Following completion of construction and mine development activities, the mine
is expected to commence operations in the second quarter of 1997, with the
Company's share of gold production in 1997 expected to be approximately 38,000
to 43,000 ounces.
The following table presents the Proven and Probable ore reserves for the
Rosebud Project as of the dates indicated:
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<PAGE> 26
<TABLE>
<CAPTION>
Years
-----------------------------------------------------
1996(3) 1995(4) 1994(5) 1993
--------- -------- --------- ---------
Proven and Probable
Ore Reserves (1)(2)
- -------------------
<S> <C> <C> <C> <C>
Total tons 638,317 1,189,000 1,641,000 1,984,000
Gold (oz. per ton) 0.392 0.452 0.356 0.258
Contained gold (ozs.) 249,942 538,000 584,000 512,000
Silver (oz. per ton) 2.70 2.75 2.25 1.81
Contained silver (ozs.) 1,713,945 3,275,000 3,694,000 3,584,000
- -----------------------
(1) 1996 Proven and Probable ore reserves reflect only the Company's share
(50%) pursuant to the September 6, 1996 sale of a 50% interest in its
Rosebud property. If the Company had only a 50% interest in 1993, 1994
and 1995, the Company's share of contained gold and silver would have been
256,000 and 1,792,000 in 1993, 292,000 and 1,847,000 in 1994, and 269,000
and 1,637,500 in 1995, respectively.
(2) For Proven and Probable ore reserve assumptions, including assumed metals
prices, see Glossary of Certain Mining Terms.
(3) The decrease in tons of Proven and Probable ore reserves and decreased
contained gold in 1996 compared to 1995, is principally attributable to
the sale of a 50% interest in the property. Additionally, a decrease in
the specific gravity used for calculating tonnage, revised geologic and
statistical interpretation based on in-fill drilling in the South Zone of
the deposit, increased dilution tonnage, and a decrease in the dilution
grade resulted in an increase in tons of Proven and Probable ore reserves,
and a decrease in gold ore grade and contained gold ounces.
(4) The decrease in the tons of Proven and Probable ore reserves in 1995
compared to 1994 is attributable to refinement of the mine plan, cost
estimates, and cut-off grade in connection with the feasibility study
completed in November 1995.
(5) The decrease in the tons of Proven and Probable ore reserves in 1994
compared to 1993 is attributable to further delineation drilling of the
orebody during 1994 which resulted in fewer reserve tons. However, this
was more than offset by a higher average gold grade per ton.
</TABLE>
As of December 31, 1996, there were 57 employees at the Rosebud Project. The
employees at the Rosebud Project are not represented by a bargaining agent. The
Rosebud Project uses power provided by Sierra Pacific Power.
INDUSTRIAL MINERALS SEGMENT
The Company's principal industrial minerals assets are its ball clay operations
in Kentucky, Tennessee, and Mississippi; its kaolin operations in South Carolina
and Georgia; its feldspar operations in North Carolina; its clay slurry plant in
Monterrey, Mexico; its lawn and garden products operations in Idaho, western
Montana and South Dakota; and its specialty aggregate operations (primarily
scoria) in southern Colorado and northern New Mexico. The Company conducts
these operations through five wholly owned subsidiaries:
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<PAGE> 27
(1) Kentucky-Tennessee Clay Company (K-T Clay), which operates its ball clay and
kaolin divisions; (2) K-T Feldspar Corporation (K-T Feldspar), which operates
the feldspar business; (3) K-T Clay de Mexico, S.A. de C.V. (K-T Mexico), which
operates the clay slurry plant business; (4) Mountain West Products, Inc.
(Mountain West), which operates a lawn and garden products business; and (5)
Colorado Aggregate Company (CAC), which operates the Company's specialty
aggregate business.
K-T CLAY BALL CLAY DIVISION
K-T Clay is one of the nation's major suppliers of premium ball clay. Ball clay
is of sedimentary origin and consists of several basic clay minerals along with
a slight amount of organic content, a combination of materials that gives ball
clay its unique character. The principal use of ball clay is in the ceramic and
porcelain fields, which includes use for such items as pottery, dinnerware,
tile, electrical insulators and sanitaryware. Ball clay is also used in
refractories and abrasives and has applications in other specialty industries as
well.
Mining of ball clay is accomplished through strip mining methods. The mining
activity requires definition drilling and the removal of overburden in order to
expose the clay strata to be mined. Mining activity is selective based on clay
grade and strata control. The clays are mined with loaders and backhoes, loaded
into trucks and hauled to one of K-T Clay's plants for processing. Processing
of ball clay consists of shredding and classification of clay by various grades,
hammer or roller milling to reduce particle size, drying and packaging. The
grades can be shipped in bulk or blended and bagged in order to meet a
particular customer's requirements. A particular clay or blend of several clays
can also be shipped to customers in slurry form in tanker trucks or rail cars.
There are many grades of ball clay which K-T Clay mines, processes and blends to
meet the specifications and requirements of its various customers. Different
uses may require mixtures of ball clay having substantially different physical
properties, and K-T Clay, through many years of experience and ongoing research
performed in its laboratories, possesses the expertise that enables it to
respond to changes in customer requirements with minimal advance notice. The
marketing of ball clays is directed from K-T Clay's headquarters in Mayfield,
Kentucky and Nashville, Tennessee. K-T Clay's marketing personnel are trained
in ceramic engineering or related technical fields, which also has enabled K-T
Clay to respond to changes in its customer requirements.
K-T Clay mines and processes different grades of ball clays in Kentucky,
Tennessee and Mississippi. K-T Clay has identified or delineated deposits of
ball clay on numerous properties. Such properties are either owned in fee
simple or held under long-term lease. The royalties or other holding costs of
leased properties
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<PAGE> 28
are consistent with the industry, and the expiration of any particular lease
would not affect K-T Clay's ability to operate at current levels of operations.
K-T Clay has sufficient mineral reserve positions to maintain current operations
in excess of 20 years. K-T Clay is also continuously exploring for new deposits
of ball clay, either to replace certain grades of clay that may become mined out
or to locate new deposits that can be mined at lower cost.
Minimum standards for strip mining reclamation have been established by various
governmental agencies which affect K-T Clay's ball clay mining operations. The
Tennessee Surface Mining Law and the Mississippi Geological Economics and
Topographical Survey, Division of Mining and Reclamation, require all ball clay
producers, including K-T Clay, to post a performance bond on acreage to be
disturbed. The release of the bond is dependent on the successful grading,
seeding and planting of spoil areas associated with current mining operations.
In addition, the United States Environmental Protection Agency has issued
guidelines and performance standards which K-T Clay must meet. K-T Clay may be
required to obtain other licenses or permits from time to time, but it is not
expected that any such requirements will have a material effect upon the
Company's results of operations or financial condition.
There were 162 people employed by K-T Clay at its ball clay operations as of
December 31, 1996. Some of the hourly employees are represented by the United
Steelworkers of America. The employment of these employees is subject to a
four-year labor agreement which expires on February 8, 2000. The net book value
of the K-T ball clay division properties, plants and equipment was $8.6 million
at December 31, 1996.
K-T CLAY DE MEXICO, S.A. DE C.V.
In 1993, K-T Clay completed construction of its clay slurry plant in Monterrey,
Mexico, which now supplies clay slurry to the Mexican ceramics industry. Prior
to construction, semi-dried clay was shipped to Mexico. The plant was built to
provide our Mexican customers with a high-quality clay product, slurry, at an
economical price and to ensure K-T was the vendor of choice in Mexico. Reducing
freight costs, a bulk air-floated clay weighing substantially less than clay
slurry is now shipped by rail from K-T Clay's domestic operations to the K-T
Mexico slurry plant in Monterrey. The clay is blended to customer
specifications and converted to a slurry form for final shipment to its
customers in the region.
At December 31, 1996, the net book value of K-T Mexico's property and associated
plant and equipment was $3.2 million. K-T Mexico utilizes electrical power from
the local public utility. There were 19 people employed by K-T Mexico as of
December 31, 1996,
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<PAGE> 29
represented by the Industrial Labor Union of Nuevo Leon. The labor agreement is
renegotiated every three years. The present labor agreement expires
November 30, 1998.
Prior to the second quarter of 1995, K-T Mexico's functional currency was the
Mexican peso. During the second quarter of 1995, K-T Mexico commenced invoicing
its customers in U.S. dollars instead of the Mexican peso. This change
indicated a change in the functional currency from the Mexican peso to the U.S.
dollar. The change in the functional currency has been accounted for
prospectively commencing in the second quarter of 1995. Translation adjustments
from prior periods are included in shareholders' equity. The translated amounts
for nonmonetary assets prior to the change have become the accounting basis for
those assets.
The decline of the Mexican peso has not significantly impacted the results at
K-T Mexico as both funding for operations and sales are denominated in dollars.
Further declines in the Mexican peso, or accelerated levels of inflation in
Mexico, could, however, adversely impact the Company's Mexican operations.
K-T CLAY KAOLIN DIVISION
K-T Clay acquired the kaolin operations and assets of Cyprus Minerals Company's
clay division on February 17, 1989, including kaolin mines and plants at
Deepstep and Sandersville, Georgia, and Aiken, South Carolina. On June 1, 1995,
K-T Clay acquired the operation and assets of the Langley plant of JM Huber
Corporation in Langley, South Carolina. Kaolin, or china clay, is a near white
clay of sedimentary origin, and is consumed in a variety of end uses including
ceramic whiteware, textile grade fiberglass, rubber and paper filler, and
miscellaneous plastics, adhesives and pigment applications. Kaolin is a unique
industrial mineral because of its wide range of chemical and physical
properties. The K-T Clay kaolin division mines, processes, and blends numerous
grades of clay to meet the specifications and requirements of its customers.
Markets for K-T Clay's kaolin products are similar to ball clay and adverse
shifts in market demand could occur due to mineral substitution and decreased
demand for end-use products, which could adversely impact the demand for kaolin.
Kaolin currently competes with minerals such as calcium carbonate in many filler
applications, but the substitution of other minerals for kaolin in ceramic and
fiberglass applications is presently limited. The marketing of kaolin to the
ceramics industry is carried out by K-T Clay's sales force. Marketing to other
industries is done through sales and distribution agents.
Mining of kaolin is done by open-pit methods. Ore bodies are identified and
delineated by exploration drilling and overburden is removed by scrapers down to
favorable clay strata. Select mining
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<PAGE> 30
of clay is then accomplished by backhoe with over-the-road truck haulage to the
processing and stockpiling facilities. K-T Clay operates kaolin mines in
Georgia, serving its processing plants located at Sandersville and Deepstep,
Georgia. K-T Clay also operates kaolin mines located in South Carolina, serving
a processing plant located in Langley, South Carolina.
Processing of the clays is completed by the air-floating method where clay is
shredded, dried, ground and separated by particle size at the Sandersville,
Deepstep and Langley locations. In addition, clay is also processed into a
water slurry mixture at the Sandersville location.
K-T Clay's kaolin division holds in excess of 20 years of mineral reserves based
on current sales and product mix. Reserves are held on fee simple and leased
property. K-T Clay is also continuously exploring for new deposits of kaolin,
either to replace certain grades of kaolin that may become mined out or to
locate new deposits that can be mined at lower cost.
The kaolin division operates its mines in Georgia and South Carolina under mine
permits issued by the Environmental Protection Division, Department of Natural
Resources of the State of Georgia, and the Land Resource Conservation
Commission, Division of Mining and Reclamation of the State of South Carolina.
All mines and processing plants have current permit status and are in good
standing.
There were 119 people employed by K-T Clay at its kaolin division as of December
31, 1996, with less than 25% of the labor force being represented by the Cement,
Lime, Gypsum and Allied Workers, Division of International Brotherhood of
Boilermakers. The current labor contract at the Sandersville, Georgia operation
expires on February 28, 1997.
Both the ball clay and kaolin divisions of K-T Clay's plants and equipment have
been operational in excess of 28 years. The Company has upgraded and modernized
these facilities over the years and has a continuing maintenance program to
maintain the plant and equipment in good physical and operating condition. The
net book value of the K-T Clay property and its associated plant and equipment
was $15.1 million as of December 31, 1996. K-T Clay utilizes power from several
public utilities as well as local utility cooperatives located in the vicinity
of K-T Clay's operating plants.
K-T FELDSPAR CORPORATION
The Company acquired the operations and assets of K-T Feldspar on December 13,
1990, including sodium feldspar mines and a processing plant located near Spruce
Pine, North Carolina. Feldspars are a mineral group that are the major
constituents of igneous rocks and
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<PAGE> 31
important constituents of other major rock types. The feldspars are the most
widespread mineral group and make up 60% of the earth's crust. Chemically the
feldspars are aluminosilicates that contain potassium, sodium and calcium.
K-T Feldspar mines, processes and blends sodium feldspar and feldspar-silica
products. It also produces by-product mica concentrate and construction sand.
K-T Feldspar products are primarily used in the ceramic whiteware, glass and
paint industries.
Markets for feldspar have fluctuated slightly over time as a result of mature
market conditions. However, adverse shifts in market demand could occur due to
mineral substitution and decreased demand for end-use products. Feldspar
currently competes with nepheline syenite in some market segments and
substitution between minerals is linked to economics, physical-chemical
characteristics and supplier reliability. The marketing of feldspar to the
ceramics and filler industries is carried out by K-T Clay's sales force and
through sales and distribution agents.
Feldspar ore is mined by open-pit methods using a 40-foot bench mining plan.
Ore is drilled and blasted, loaded by hydraulic shovel or front-end loader into
off-highway dump trucks and transported to the processing plant. K-T Feldspar
operates several mine locations in the Spruce Pine, North Carolina area, all
serving the centrally located processing plant. Processing of the feldspar ores
consists of crushing, grinding, density separation, flotation, drying and high
intensity magnetic separation.
K-T Feldspar holds in excess of 20 years of mineral reserves based on current
sales, product mix and lease terms. Reserves are held on fee simple and leased
properties.
K-T Feldspar operates its mines and plant under permits issued by the North
Carolina Department of Natural Resources and Community Development. All permits
are in good standing.
K-T Feldspar's plant and equipment have been operational in excess of 28 years.
The Company has upgraded and modernized these facilities over the years and has
a continuing maintenance program to maintain the plant and equipment in good
physical and operating condition. The net book value of the K-T Feldspar
property and its associated plant and equipment was $4.9 million as of December
31, 1996. Carolina Power & Light Company, a regulated public utility, provides
the electric power utilized for operations at K-T Feldspar.
There were 48 employees employed by K-T Feldspar as of December 31, 1996; none
of whom are represented by a bargaining agent.
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<PAGE> 32
MOUNTAIN WEST PRODUCTS, INC.
The Company acquired the operations and assets of Mountain West in December
1993, including processing plants in Rexburg, Idaho and Superior, Montana. In
April 1995, Mountain West purchased the assets of Western Bark Company, which
included processing plants at Kamiah, Idaho, Osburn, Idaho, and Piedmont, South
Dakota. Mountain West's primary business is the purchasing, processing and
marketing of certain wood by-products from lumber milling operations in the
western intermountain region. These products are sold as organic soil
amendments, organic landscape mulches and organic decorative landscape ground
cover.
The wood by-products are purchased by Mountain West and transported by truck for
processing at its plants. The processing plants are owned by Mountain West and
the sources of wood by-product supply are held under contracts. The lumber
mills, which supply the wood by-products, are not owned by Mountain West
Products. Mountain West's plants are located near the current sources of the
raw materials to reduce transportation costs. The principal customers are lawn
and garden retail outlets, lawn and garden product distributors and discount
retail chain stores.
Most sales are in the western U.S. and take place in the first six months of the
year due to the seasonality of the market. The plants have operated in excess
of 16 years at Rexburg, eight years at Superior, nine years at Kamiah, six years
at Piedmont, and four years at Osburn. In late 1996, the equipment and
processing capacity of the Osburn plant was consolidated with the Superior plant
due to close proximity of plants and operating efficiencies. All plants are
maintained and upgraded continually and are in good working order. The net book
value of the associated plant and equipment was approximately $5.9 million as of
December 31, 1996.
Utah Power and Light, Montana Power Company, Idaho County Light, and Black Hills
Power, provide electrical power utilized by the operations at Rexburg, Superior,
Kamiah, and Piedmont, respectively.
Mountain West had 120 employees as of December 31, 1996; none of whom are
represented by a bargaining agent.
COLORADO AGGREGATE COMPANY
CAC mines and sells volcanic rock (scoria) for use as briquettes in gas barbecue
grills, as landscaping mulch and decorative ground cover, and paints gravel
bedding which is used in aquariums. Volcanic scoria is a lightweight
clinker-like material produced during gaseous volcanic eruptions that form
cinder cones. These cones occur frequently in the geological environment but
are unique by density, texture and color.
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<PAGE> 33
The Company operates mines at Mesita, Colorado, and in northern New Mexico as
well as processing plants at San Acacio and Antonito, Colorado. All mining is
open pit with minimal requirements for the removal of overburden.
The principal customers for scoria briquettes are manufacturers and retailers of
gas barbecue grills. Landscapers, distributors of landscaping materials, lawn
and garden retailers and discount chain stores are the principal customers for
scoria landscape stone. Pet supply retailers and discount chain stores are the
principal customers for aquarium gravel.
The Mesita mine is owned by CAC. Due to the seasonal nature of CAC's business,
it is usually anticipated that most of its annual sales and profits will be
generated in the first two quarters of each calendar year. The Company has over
nine years of mineral reserves at the Mesita, Colorado, location and has
developed in excess of eight years of mineral reserves at the Red Hill mine, in
northern New Mexico, which is under lease from the Bureau of Land Management.
CAC purchases the rock used for aquarium gravel.
CAC's plants and equipment have been operational in excess of 22 years. The
Company has upgraded and modernized these facilities over the years and has a
continuing maintenance program to maintain the plant and equipment in good
physical and operating condition. The net book value of CAC's property and its
associated plants and equipment was $3.6 million as of December 31, 1996.
Public Service Company of Colorado and San Luis Valley Rural Electric
Cooperative provide the electric power utilized for operations at CAC.
CAC had 67 employees as of December 31, 1996; none of whom are represented by a
bargaining agent.
PROPERTIES ON STANDBY
GENERAL
Various mining operations of the Company have been placed on a standby basis.
Placing a mining property on a standby basis during periods of depressed metals
prices, thereby preserving a depletable asset, is common in the mining industry.
The significant properties on standby at December 31, 1996, are described below.
REPUBLIC MINE - REPUBLIC, WASHINGTON
The Company owns the Republic mine located in the Republic Mining District near
Republic, Washington, which consists of several associated properties, a mill
and ancillary surface facilities. In February 1995, the Company completed
operations at the Republic mine and has commenced reclamation work in connection
with the mine and mill closure. The Company's land position in the Republic
area
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<PAGE> 34
consists of approximately five square miles. In August 1995, the Company
entered into an agreement with Santa Fe to explore and develop the Golden Eagle
deposit on the Republic mine property. Santa Fe conducted extensive exploration
on the property and in the third quarter of 1996 entered into a joint venture
agreement concerning the property. Santa Fe paid Hecla $2.5 million for an
immediate 75% interest in the joint venture. Santa Fe is required to fund all
expenditures required at the Golden Eagle through the feasibility stage.
In 1994, the Company recorded an additional reclamation and closure costs
accrual of $7.3 million. At December 31, 1996, the accrued reclamation and
closure costs balance totaled $6.4 million. Reclamation and closure efforts
commenced in 1995. During 1996, no additional reclamation expense was recorded.
Reclamation and closure costs expenditures totaling approximately $0.5 million
during 1996 were charged against the previously established reclamation and
closure cost accrual.
Also in 1994, based on its periodic reviews of the status of various mining
properties, the Company determined that certain adjustments were appropriate to
properly reflect the estimated net realizable value of the Republic mine's
property, plant and equipment. The adjustments totaled $7.2 million as a write-
down of property, plant, equipment, and supplies inventory of the Republic mine.
The remaining net book value of the Republic mine property and its associated
plant and equipment was approximately $0.6 million as of December 31, 1996.
There were four people employed by the Company at the Republic mine at
December 31, 1996. Employees at Republic are not represented by a bargaining
agent.
CACTUS MINE - CALIFORNIA
The Cactus mine consists of approximately 1,300 acres of leasehold lands, mining
claims and millsites, located approximately 85 miles northeast of Los Angeles,
California, in the Mojave Mining District. The property is readily accessible
year-round by all-weather roads. The Company currently has a 63.75% effective
interest in Cactus Gold Mines Company (Cactus) and manages Cactus' two open-pit
heap leach mines, the Middle Buttes and Shumake. The Company, as manager of
Cactus, receives a management fee equal to 2% of net revenues of Cactus as
defined in the mining venture agreement and is reimbursed for costs incurred on
behalf of Cactus.
The Middle Buttes mine began production in August 1986. During 1991, mining
operations were completed at the Middle Buttes mine, and the remaining ore with
recoverable gold was processed. Rinsing of the heap was completed in 1995,
followed by drain-down and verification sampling in 1996. Reclamation of the
Middle Buttes heap is scheduled for 1997. Development of the Shumake mine was
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<PAGE> 35
completed in November 1988, with commercial production beginning in December
1988. Mining operations at the Shumake mine were completed in February 1992.
Nominal gold production is expected during 1997 as the Shumake heap rinsing
activity is completed. Reclamation of the Shumake heap is presently scheduled
for 1998. No additional reclamation expense was recognized in 1996.
The book value of the Company's interest in the Cactus mine property and its
associated plant and equipment was fully depreciated as of December 31, 1993.
Southern CalEdison supplies electrical power to the Cactus mine. As of
December 31, 1996, there were nine employees at the Cactus mine. Employees at
the Cactus mine are not represented by a bargaining agent.
Cactus is owned 75% by Middle Buttes Partners Limited (MBPL) and 25% by Dakota
Mining Corporation (Dakota). MBPL is a limited partnership in which the Company
is both the sole general partner (52.50%) and a limited partner (11.25%). The
Company, as general partner of MBPL, receives 75% of the production from Cactus
subject to payment of 11.25% of the net cash flows to the other limited partner
of MBPL.
YELLOW PINE - IDAHO
The Yellow Pine gold mine is located in Valley County, Idaho, about 50 miles
east of McCall in central Idaho, and is accessed by secondary roads and air.
The property consists of 26 patented claims which are held by the Company under
lease from the Bradley Mining Company of San Francisco, California, and 57
unpatented claims. The lease provides for production royalties equal to 6% of
net smelter returns plus 10% of cumulative cash flow, and also provides for a
minimum royalty payment of $3,500 per month reduced by current production
royalties. Production from the oxide mineralization ceased in 1992; the
operation has been undergoing reclamation since that time. Mineralized sulfide
material, estimated at between 15 and 20 million tons containing approximately
0.09 ounce of gold per ton, is also located on the property. In 1996, the
Yellow Pine property was combined with adjacent property owned by Dakota
increasing the combined resource to approximately two million ounces of gold.
The Company and Dakota continue to seek other parties interested in the further
exploration and development of this extensive gold-bearing deposit. The net
book value of the Yellow Pine property, plant and equipment as of December 31,
1996, was approximately $0.2 million.
EXPLORATION
The Company conducts exploration activities from its headquarters in
Coeur d'Alene, Idaho. The Company owns or controls patented and unpatented
mining claims, fee land, mineral concessions, and state and private leases in
six states in the United States and two Mexican states. The Company's strategy
regarding reserve
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<PAGE> 36
replacement is to concentrate its efforts on (1) existing operations where an
infrastructure already exists, (2) other properties presently being developed
and advanced-stage exploration properties that have been identified as having
potential for additional discoveries, and (3) advanced-stage exploration
acquisition opportunities. The Company is currently concentrating its
exploration activities at the Lucky Friday and Greens Creek silver mines, the
Rosebud property, in which the Company maintains a 50% interest, the La Choya
mine, and gold properties in Mexico including the Pinos, La Jojoba and Porvenir
properties. The Company remains active in other exploration areas and is
seeking advanced-stage acquisition opportunities principally in the United
States and Mexico.
Mineral exploration, particularly for gold and silver, is highly speculative in
nature, involves many risks and frequently is nonproductive. There can be no
assurance that the Company's mineral exploration efforts will be successful.
Once mineralization is discovered, it may take a number of years from the
initial phases of drilling until production is possible, during which time the
economic feasibility of production may change. Substantial expenditures are
required to establish ore reserves through drilling to determine metallurgical
processes to extract the metals from the ore, and, in the case of new
properties, to construct mining and processing facilities. As a result of these
uncertainties, no assurance can be given that the Company's exploration programs
will result in the expansion or replacement of existing reserves that are being
depleted by current production.
Properties are continually being added to or dropped from this inventory as a
result of exploration and acquisition activities. Exploration expenditures for
the three years ended December 31, 1996, 1995 and 1994 were approximately $4.8
million, $7.1 million and $8.4 million, respectively. Exploration expenditures
for 1997 are estimated to be approximately $4.0 to $5.0 million, although the
Company is currently evaluating a number of opportunities that could potentially
increase this range by an additional $2.0 to $4.0 million.
HEDGING ACTIVITIES
The Company's policy guidelines for hedging gold and silver production permit
management to utilize various hedging mechanisms for up to 50% of the Company's
annual estimated available metal production. Hedging contracts are restricted
to no longer than 24 months without the Board of Directors' approval and will be
spread among a number of available customers. At December 31, 1996, the Company
had 37% of 1997 budgeted gold production hedged utilizing forward sales
contracts and option contracts. There were no hedging contracts for silver
outstanding. The Company's policy with respect to lead and zinc hedging permits
management to hedge 30% of estimated annual production of lead and zinc for
periods not
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to exceed 12 months. None of the aforementioned activities have been entered
into for speculative purposes at December 31, 1996. For further discussion
regarding hedging activities, see Notes 1 and 2 of Notes to Consolidated
Financial Statements and Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations of this Form 10-K.
INDUSTRY SEGMENTS
Financial information with respect to industry segments is set forth in Note 9
of Notes to the Consolidated Financial Statements.
COMPETITION
The Company is engaged in the mining and processing of gold, silver and other
nonferrous metals and industrial minerals in the United States and Mexico. The
Company encounters strong competition from other mining companies in connection
with the acquisition of properties producing, or capable of producing, gold,
silver and industrial minerals. The Company also competes with other companies
both within and outside the mining industry in connection with the recruiting
and retention of qualified employees knowledgeable in mining operations. Silver
and gold are worldwide commodities and, accordingly, the Company sells its
production at world market prices.
The Company cannot compare sales from its ball clay mining operations with sales
of other ball clay producers because the principal competitors are either
family-owned or divisions of larger, diversified companies, but the Company
believes that K-T Clay is one of the more significant producers of ball clay in
the United States. With the acquisition of kaolin assets from Cyprus Minerals
Company in 1989 and JM Huber Corporation in 1995, the Company has also become an
important producer in the United States of ceramic-grade kaolin. The principal
competitors of the Company in the ball clay industry are H. C. Spinks Clay
Company, Watts Blake Bearne & Company, and Old Hickory Clay Company. The
principal competitors of the Company in the kaolin industry, are Albion Kaolin
Company, Evans Clay Company, JM Huber Corporation, English China Clay Company
and Dry Branch Kaolin Company. The Company, with the acquisition of Indusmin
Incorporated's feldspar assets, is also a major producer and supplier of sodium
feldspar products. The principal competitors of the Company in the feldspar
industry are Feldspar Corporation and Unimin Corporation.
The Company competes with other producers of scoria and with manufacturers of
ceramic briquettes in the production and sale of briquettes. The Company has
limited information as to the size of the barbecue briquette industry, but
believes that it supplies a major portion of the scoria briquettes used in gas
barbecue grills. Price and natural product characteristics, such as color,
uniformity of size, lack of contained moisture and density, are
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important competitive considerations. The Company believes that it has a
significant portion of the landscape scoria market east of the Continental
Divide.
Mountain West competes with other producers of lawn and garden and soil
products, decorative bark products and landscape mulches. The principal
competitors are either privately owned companies or divisions of larger
diversified companies that operate in numerous regional markets. The Company
has limited information about the sales of competing products in its overall
markets but believes it supplies a significant portion of the market for its
product in the intermountain region.
REGULATION OF MINING ACTIVITY
The mining operations of the Company are subject to inspection and regulation by
the Mine Safety and Health Administration of the Department of Labor (MSHA)
under provisions of the Federal Mine Safety and Health Act of 1977. It is the
Company's policy to comply with the directives and regulations of MSHA. In
addition, the Company takes such necessary actions as, in its judgment, are
required to provide for the safety and health of its employees. MSHA directives
have had no material adverse impact on the Company's results of operations or
financial condition, and the Company believes that it is substantially in
compliance with the regulations promulgated by MSHA.
All of the Company's exploration, development, and production activities in the
United States, Mexico, and Canada are subject to regulation by governmental
agencies under one or more of the various environmental laws. These laws
address emissions to the air, discharges to water, management of wastes,
management of hazardous substances, protection of natural resources, protection
of antiquities and reclamation of lands which are disturbed. The Company
believes that it is in substantial compliance with applicable environmental
regulations. Many of the regulations also require permits to be obtained for
the Company's activities; these permits normally are subject to public review
processes resulting in public approval of the activity. While these laws and
regulations govern how the Company conducts many aspects of its business,
management of the Company does not believe that they have a material adverse
effect on its results of operations or financial condition at this time. The
Company's projects are evaluated considering the cost and impact of
environmental regulation on the proposed activity. New laws and regulations are
evaluated as they develop to determine the impact on, and changes necessary to,
the Company's operations. It is possible that future changes in these laws or
regulations could have a significant impact on some portion of the Company's
business, causing those activities to be economically reevaluated at that time.
The Company believes that adequate provision has been made for disposal of mine
waste and mill tailings at all of its operating and nonoperating properties
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<PAGE> 39
in a manner which complies with current federal and state environmental
requirements.
Environmental laws and regulation may also have an indirect impact on the
Company, such as increased cost for electricity due to acid rain provisions of
the Clean Air Act Amendments of 1990. Charges by smelters to which the Company
sells its metallic concentrates and products have substantially increased over
the past several years because of requirements that smelters meet revised
environmental quality standards. The Company has no control over the smelters'
operations or their compliance with environmental laws and regulations. If the
smelting capacity available to the Company was significantly reduced because of
environmental requirements, it is possible that the Company's silver operations
could be adversely affected.
The Company is also subject to regulations under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, (CERCLA or
Superfund) which regulates and establishes liability for the release of
hazardous substances, and the Endangered Species Act (ESA), which identifies
endangered species of plants and animals and regulates activities to protect
these species and their habitats. Revisions to CERCLA and ESA are being
considered by Congress; the impact on the Company of these revisions is not
clear at this time.
LEGISLATION
During the past four years, the U.S. Congress considered a number of proposed
amendments to the General Mining Law of 1872, as amended (the General Mining
Law), which governs mining claims and related activities on federal lands. In
1992, a holding fee of $100 per claim was imposed upon unpatented mining claims
located on federal lands. In October 1994, a one year moratorium on processing
of new patent applications was approved. In addition, legislation to further
amend the General Mining Law that was introduced in the U.S. Congress during
1996 is expected to be reintroduced in 1997. The legislation would, among other
things, change the current patenting procedures, impose royalties, and enact new
reclamation, environmental controls and restoration requirements. The royalty
proposals range from a 2% royalty on "net profits" from mining claims to an 8%
royalty on the modified gross income/net smelter returns. The extent of any
such changes is not presently known and the potential impact on the Company as a
result of congressional action is difficult to predict. Although a majority of
the Company's existing mining operations occur on private or patented property,
the proposed changes to the General Mining Law could adversely affect the
Company's ability to economically develop mineral resources on federal lands.
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EMPLOYEES
As of December 31, 1996, the Company and its subsidiaries employed 1,254
people.
INVESTMENT CONSIDERATIONS
The following Investment Considerations, together with other information set
forth in this Form 10-K, should be carefully considered by current and future
investors in the Company's securities.
RECURRING LOSSES
The Company has experienced losses from operations for each of the last six
years. For the year ended December 31, 1996, the Company reported a net loss of
approximately $32.4 million (before preferred dividends of $8.1 million) or
$0.63 per share of Common Stock compared to a net loss of approximately $101.7
million (before preferred stock dividends of $8.1 million) or $2.11 per share of
Common Stock for the year ended December 31, 1995. The 1996 decreased net loss
was due to a variety of factors, the most significant of which was the write-
down of the Company's interest in the Grouse Creek mine in the third quarter of
1995 totaling $97.0 million, compared to 1996 adjustments totaling $35.7 million
for severance, holding, reclamation, closure costs, and carrying value
adjustments for property, plant and equipment and certain assets at the Grouse
Creek and American Girl mines. If the Company's estimates of the market prices
of gold, silver, lead and zinc are realized in 1997, the Company expects to
record income or (loss) in the range of a $(2.0) million loss, to income of $2.0
million, after the expected dividends to preferred shareholders totaling
approximately $8.1 million for the year ending December 31, 1997. Due to the
volatility of metals prices and the significant impact metals price changes have
on the Company's operations, there can be no assurance that the actual results
of operations for 1997 will be as projected.
METAL PRICE VOLATILITY
Because a significant portion of the Company's revenues are derived from the
sale of gold, silver, lead and zinc, the Company's earnings are directly related
to the prices of these metals. Gold, silver, lead and zinc prices fluctuate
widely and are affected by numerous factors beyond the Company's control,
including expectations for inflation, speculative activities, the relative
exchange rate of the U.S. dollar, global and regional demand and production,
political and economic conditions and production costs in major producing re-
gions. The aggregate effect of these factors, all of which are beyond the
Company's control, is impossible for the Company to predict. If the market
price for these metals falls below the Company's full production costs and
remains at such level
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for any sustained period, the Company will experience additional losses and may
determine to discontinue the development of a project or mining at one or more
of its properties. While the Company has periodically used limited hedging
techniques to reduce a portion of the Company's exposure to the volatility of
gold, silver, lead and zinc prices, there can be no assurance that it will be
able to do so as effectively in the future (see Hedging Activities).
The following table sets forth the average daily closing prices of the following
metals for 1980, 1985, 1990, and each year thereafter through 1996.
<TABLE>
<CAPTION>
1980 1985 1990 1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gold(1)
(per oz.) $612.56 $317.26 $383.46 $362.18 $343.73 $359.77 $384.01 $384.16 $387.70
Silver(2)
(per oz.) 20.63 6.14 4.82 4.04 3.94 4.30 5.28 5.19 5.18
Lead(3)
(per lb.) 0.41 0.18 0.37 0.25 0.25 0.18 0.25 0.29 0.35
Zinc(4)
(per lb.) 0.34 0.36 0.69 0.51 0.56 0.44 0.45 0.47 0.46
- ----------------------------
(1) London Final.
(2) Handy & Harman.
(3) London Metals Exchange -- Cash.
(4) London Metals Exchange -- Special High Grade -- Cash.
</TABLE>
VOLATILITY OF METALS PRODUCTION
The Company's future gold production will be dependent upon the Company's
success in developing new reserves, including the development of the Rosebud
gold project, in which the Company maintains a 50% interest, as well as
exploration efforts (see Project Development Risks and Exploration). The
Company's future silver production will be dependent upon the Company's success
in developing new reserves, including the continued development of the Lucky
Friday expansion project. If metals prices decline, the Company could determine
that it is not economically feasible to continue development of a project or
continue commercial production at some of its properties (see Metal Price Vola-
tility).
PROJECT DEVELOPMENT RISKS
The Company from time to time engages in the development of new ore bodies both
at newly acquired properties and presently existing mining operations
(collectively "Development Projects"). The Company's ability to sustain or
increase its present level of metals production is dependent in part on the
successful development of such new ore bodies and/or expansion of existing
mining operations. The economic feasibility of any individual Development
Project and all such projects collectively is based upon, among other things,
estimates of reserves, metallurgical
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recoveries, and capital and operating costs of such Development Projects, and
future metal prices. Development Projects are also subject to the successful
completion of feasibility studies, issuance of necessary permits and receipt of
adequate financing.
Development Projects may have no operating history upon which to base estimates
of future operating costs and capital requirements. Particularly for
Development Projects, estimates of reserves, metal recoveries, and cash
operating costs are to a large extent based upon the interpretation of geologic
data obtained from drill holes and other sampling techniques and feasibility
studies which derive estimates of cash operating costs based upon anticipated
tonnage and grades of ore to be mined and processed, the configuration of the
ore body, expected recovery rates of metals from the ore, comparable facility
and equipment costs, anticipated climate conditions and other factors. As a
result, it is possible that actual cash operating costs and economic returns of
any and all Development Projects may materially differ from the costs and
returns currently estimated.
The Company's current Development Projects include the Rosebud project, in which
the Company maintains a 50% interest, and the Lucky Friday expansion project
(formerly referred to as the Gold Hunter project) located adjacent to the
Company's Lucky Friday mine. The Company's share of remaining development and
construction cost requirements to bring the Rosebud joint venture project into
commercial production are estimated to be in the $10.0-$11.0 million range. The
Company estimates development and construction costs of $12.0-$14.0 million for
the Lucky Friday expansion project. The Company's estimated capital
expenditures are based upon currently available data and could increase or
decrease depending upon a number of factors. Some such factors are that con-
struction activities for certain Development Projects may not commence until the
Company has completed a final feasibility study and detailed engineering,
secured additional financing and/or environmental approvals. If capital
expenditures exceed current estimates, secondary financing may be required.
Moreover, there can be no assurance that such additional or secondary financing
will be available. The commencement of construction activities at such
Development Projects also depends on the receipt of all necessary permits and
regulatory approvals. There can be no assurance, however, that all of the
necessary permits and regulatory approvals required for such Development
Projects will be issued in the time frame contemplated by the Company.
Should the Company incur project development and construction costs as
estimated, the Company anticipates that it will fund its currently estimated
capital requirements for 1997 with operating cash flow, borrowings under its
credit facility, and other potential financing arrangements. As market
circumstances permit, the Company may seek to finance certain of its cash
requirements through the sale of equity or debt securities, as appropriate.
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<PAGE> 43
There can be no assurance that the Company will be able to obtain the necessary
financing, or, if the necessary financing is obtained, that it will be obtained
on favorable terms.
RESERVES
The ore reserve figures presented in this Form 10-K are, in large part,
estimates made by the Company's technical personnel, and no assurance can be
given that the indicated level of recovery of these metals will be realized.
Reserves estimated for properties that have not yet commenced production may
require revision based on actual production experience. Market price
fluctuations of the various metals mined by the Company, as well as increased
production costs or reduced recovery rates, may render ore reserves containing
relatively lower grades of mineralization uneconomic and may ultimately result
in a restatement of reserves. Moreover, short-term operating factors relating
to the ore reserves, such as the need for sequential development of orebodies
and the processing of new or different ore grades, may adversely affect the
Company's profitability in any particular accounting period.
The metal prices used to determine ore reserves at a particular mine are
typically estimated by the company managing the mine. These metal prices may
vary, depending on each company's assessment of metal prices over the near term
and other factors that such company believes relevant. The Company estimates
metals prices for its ore reserve calculations, which approximate current market
prices, but these metal prices may vary from current market prices based on a
number of factors likely to influence metal prices over the near term. For
Proven and Probable ore reserve assumptions, including assumed metal prices, see
Glossary of Certain Mining Terms.
Declines in the market price of gold may also render ore reserves containing
relatively lower grades of gold mineralization uneconomic to exploit unless the
utilization of forward sales contracts or other hedging techniques is sufficient
to offset the effects of a drop in the market price of the gold expected to be
mined from such reserves. If the Company's realized price per ounce of gold,
including hedging benefits, were to decline substantially below the levels set
for calculation of reserves for an extended period, there could be material
delays in the development of new projects, increased net losses, reduced cash
flow, reductions in reserves and asset write-downs.
JOINT DEVELOPMENT AND OPERATING ARRANGEMENTS
The Grouse Creek gold mine, the Greens Creek mine, and the American Girl gold
mine are (or were) operated through joint ventures. The Company owns an un-
divided interest in the assets of the ventures. The Company's Rosebud project
is operated through a Limited Liability Company (LLC) with the Company holding
50% of the
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interest in the LLC. The LLC arrangement operates similar to joint venture
arrangements. Under the joint venture and LLC agreements, the joint
participants, including the Company, are entitled to indemnification from the
other participants and are severally liable only for the liabilities of the
participants in proportion to their interest therein. If a participant defaults
on its obligations under the terms of a joint venture or LLC agreement
(including as a result of insolvency), the Company could incur losses in excess
of its pro rata share of the joint venture. In the event any participant so
defaults, each agreement provides certain rights and remedies to the remaining
participants. These include the right to force a dilution of the percentage
interest of the defaulting participant and the right to utilize the proceeds
from the sale of the defaulting parties' share of products, or its joint venture
interest in the properties to satisfy the obligations of the defaulting partici-
pant. Based on the information available to the Company, the Company has no
reason to believe that its joint venture or LLC participants with respect to the
Greens Creek, American Girl, and Rosebud properties will be unable to meet their
financial obligations under the terms of the respective agreements. On January
31, 1997, Great Lakes Minerals Inc. (Great Lakes) and the Company entered into a
letter agreement terminating the Grouse Creek joint venture and conveying Great
Lakes' 20% interest in the Grouse Creek project to Hecla. Great Lakes retained
a 5% defined net proceeds interest in the project. The Company has assumed 100%
of the interests and obligations associated with the property.
The Company currently estimates its share of its remaining development and
construction costs at the Rosebud project to be $10.0 million to $11.0 million
in 1997. The Company's estimates of its development costs and capital
expenditures assume that its joint venture participants will not default in
their obligations to contribute their respective portions of such costs and
expenditures.
Generally, the manager for a particular project controls day-to-day operating
decisions and most other major decisions for the project. Disagreement with a
joint venture participant as to the major decisions affecting a project's
operations may have an adverse impact on the project. Should the Company incur
joint venture development and construction costs as estimated, the Company
anticipates that it will fund a substantial portion of its currently estimated
capital requirements for 1997 with operating cash flow, borrowings under its
credit facility, and other potential financing arrangements. As market
circumstances permit, the Company may seek to finance certain of its cash
requirements through the sale of equity or debt securities, as appropriate.
There can be no assurance that the Company will be able to obtain the necessary
financing, or, if the necessary financing is obtained, that it will be obtained
on favorable terms.
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COMPETITION FOR PROPERTIES
Because mines have limited lives based on proven ore reserves, the Company is
continually seeking to replace and expand its reserves. The Company encounters
strong competition from other mining companies in connection with the
acquisition of properties producing or capable of producing gold, silver, lead,
zinc and industrial minerals. As a result of this competition, some of which is
with companies with greater financial resources than the Company, the Company
may be unable to acquire attractive mining properties on terms it considers ac-
ceptable. In addition, there are a number of uncertainties inherent in any
program relating to the location of economic ore reserves, the development of
appropriate metallurgical processes, the receipt of necessary governmental
permits and the construction of mining and processing facilities. Accordingly,
there can be no assurance that the Company's programs will yield new reserves to
replace and expand current reserves.
TITLE TO PROPERTIES
The validity of unpatented mining claims, which constitute a significant portion
of the Company's undeveloped property holdings in the United States, is often
uncertain and may be contested. Although the Company has attempted to acquire
satisfactory title to its undeveloped properties, the Company, in accordance
with mining industry practice, does not generally obtain title opinions until a
decision is made to develop a property, with the attendant risk that some
titles, particularly titles to undeveloped properties, may be defective.
MINING RISKS AND INSURANCE
The business of mining is generally subject to a number of risks and hazards,
including environmental hazards, industrial accidents, labor disputes,
encountering unusual or unexpected geologic formations, cave-ins, rockbursts,
flooding and periodic interruptions due to inclement or hazardous weather
conditions. Such risks could result in damage to, or destruction of, mineral
properties or producing facilities, personal injury, environmental damage,
delays in mining, monetary losses and possible legal liability. Although the
Company maintains insurance within ranges of coverage consistent with industry
practice, no assurance can be given that such insurance will be available at
economically feasible premiums. Insurance against environmental risks
(including potential for pollution or other hazards as a result of disposal
waste products occurring from exploration and production) is not generally
available to the Company or to other companies within the industry. To the ex-
tent the Company is subject to environmental liabilities, the payment of such
liabilities would reduce the funds available to the Company. Should the Company
be unable to fund fully the cost of remedying an environmental
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<PAGE> 46
problem, the Company might be required to suspend operations or enter into
interim compliance measures pending completion of the required remedy.
FOREIGN OPERATIONS
The Company's La Choya gold mine is located in Sonora, Mexico and the Company's
K-T Mexico clay slurry plant is located in Monterrey, Mexico. The Company also
has exploration projects and mining investments in Mexico and Canada. Such
projects and investments could be adversely affected by exchange controls,
currency fluctuations, political risks, taxation and laws or policies of either
foreign countries or the United States affecting foreign trade, investment and
taxation, which, in turn, could affect the Company's current or future foreign
operations.
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<PAGE> 47
GLOSSARY OF CERTAIN MINING TERMS
BALL CLAY -- A fine-grained, plastic, white firing clay used principally
for bonding in ceramic ware.
CASH OPERATING COSTS -- Includes all direct and indirect operating cash
costs incurred at each operating mine, excluding royalties and mine
production taxes.
CASH OPERATING COSTS PER OUNCE -- Calculated based upon total cash
operating costs, as defined herein, net of by-product revenues from all
metals other than the primary metal produced at each mine, divided by the
total ounces of the primary metal produced.
DECLINE -- An underground passageway connecting one or more levels in a
mine, providing adequate traction for heavy, self-propelled equipment.
Such underground openings are often driven in an upward or downward spiral,
much the same as a spiral staircase.
DEVELOPMENT -- Work carried out for the purpose of opening up a mineral
deposit and making the actual ore extraction possible.
DILUTION -- The amount of waste which must be mined along with the ore in
order to obtain the ore.
DORE -- Unrefined gold and silver bullion bars consisting of approximately
90% precious metals which will be further refined to almost pure metal.
EXPLORATION -- The searching for ore, usually by geological surveys,
geophysical prospecting, drilling, surface or underground headings, drifts,
or tunnels.
FELDSPAR -- A crystalline mineral consisting of aluminum silicates and
other elements that is an essential ingredient for the ceramics industry,
and also is used in the glass and paint industries.
GRADE -- The average assay of a ton of ore, reflecting metal content.
HEAP LEACHING -- A process involving the percolation of a cyanide solution
through crushed ore heaped on an impervious pad or base to dissolve
minerals or metals out of the ore.
KAOLIN -- Also known as china clay, kaolin is a white alumina-silicate clay
used in porcelain, paper, plastics, rubber, paints, and many other
products.
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MILL -- A processing plant that produces a concentrate of the valuable
minerals or metals contained in an ore. The concentrate must then be
treated in some other type of plant, such as a smelter, to effect recovery
of the pure metal.
MINERAL-BEARING MATERIAL -- Material for which quantitative estimates are
based on inferences from known mineralization, or on drill-hole samples too
few in number to allow for classification as Probable ore reserves.
MINERALIZATION - The process by which a mineral or minerals are introduced
into a rock, resulting in a valuable deposit.
ORE -- A mixture of valuable minerals and gangue (valueless minerals) from
which at least one of the minerals or metals can be extracted at a profit.
OREBODY -- A continuous, well-defined mass of material of sufficient ore
content to make extraction economically feasible.
PATENTED MINING CLAIM -- A parcel of land originally located on federal
lands as an unpatented mining claim under the General Mining Law, the title
of which has been conveyed from the federal government to a private party
pursuant to the patenting requirements of the General Mining Law.
PROVEN AND PROBABLE ORE RESERVES -- Reserves that reflect estimates of the
quantities and grades of mineralized material at the Company's mines which
the Company believes can be recovered and sold at prices in excess of the
total cash cost of production. The estimates are based largely on current
costs and on projected prices and demand for the Company's products.
Mineral reserves are stated separately for each of the Company's mines
based upon factors relevant to each mine. Reserves represent diluted in-
place grades and do not reflect losses in the recovery process. The
Company's estimates of proven and probable reserves for the Lucky Friday
mine, the Grouse Creek mine and the La Choya mine at December 31, 1996 and
1995 are based on gold prices of $386 and $390 per ounce, silver prices of
$5.20 and $5.50 per ounce, lead prices of $0.38 and $0.33 per pound, and
zinc prices of $0.52 and $0.50 per pound, respectively. Proven and
Probable ore reserves for the Rosebud project at December 31, 1996 and 1995
are based on gold prices of $386 and $395 per ounce and silver prices of
$5.20 and $5.60 per ounce, respectively. Proven and Probable ore reserves
for the Greens Creek and American Girl mines are based on calculations of
reserves provided to the Company by the operators of these properties that
have been reviewed but not independently confirmed by the Company.
Kennecott Greens Creek Mining Company's estimates of proven and probable
reserves for the Greens Creek mine as of December 1996 and
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1995 are derived from successive generations of reserve and feasibility
analyses for three different areas of the mine each using a separate
assessment of metal prices. The prices used were:
East Ore Area West Ore Area Southwest Ore Area
------------- -------------- ------------------
Gold $ 340 $ 350 $ 360
Silver 4.50 4.75 5.00
Lead 0.33 0.28 0.28
Zinc 0.60 0.57 0.50
Greens Creek Mining Company's estimates of proven and probable reserves at
December 31, 1993 are based on silver prices of $4.75 per ounce, gold
prices of $350 per ounce, zinc prices of $0.57 per pound, and lead prices
of $0.28 per pound. MK Gold's estimates of proven and probable reserves
for the American Girl mine at December 31, 1995 and 1994 are based on gold
prices of $400 per ounce.
Changes in reserves represent general indicators of the results of efforts
to develop additional reserves as existing reserves are depleted through
production. Grades of ore fed to process may be different from stated
reserve grades because of variation in grades in areas mined from time to
time, mining dilution and other factors. Reserves should not be
interpreted as assurances of mine life or of the profitability of current
or future operations.
PROBABLE RESERVES -- Resources for which tonnage and grade and/or quality
are computed primarily from information similar to that used for proven
reserves, but the sites for inspection, sampling and measurement are
farther apart or are otherwise less adequately spaced. The degree of
assurance, although lower than that for proven reserves, is high enough to
assume continuity between points of observation.
PROVEN RESERVES -- Resources for which tonnage is computed from dimensions
revealed in outcrops, trenches, workings or drill holes and for which the
grade and/or quality is computed from the results of detailed sampling.
The sites for inspection, sampling and measurement are spaced so closely
and the geologic character is so well defined that size, shape, depth and
mineral content of reserves are well established.
RESERVES -- That part of a mineral deposit which could be economically and
legally extracted or produced at the time of the reserve determination.
Reserves are customarily stated in terms of "Ore" when dealing with
metalliferous minerals.
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ROCKBURST -- Explosive rock failures caused by the pressure exerted by rock
adjacent to mine openings far below the surface.
SAND FILL -- The coarser fraction of concentrator tailings, which is
conveyed as a slurry in underground pipes to support cavities left by
extraction of ore.
SHAFT -- A vertical or steeply inclined excavation for the purpose of
opening and servicing a mine. It is usually equipped with a hoist at the
top which lowers and raises a conveyance for handling personnel and
materials.
STOPE -- An underground excavation from which ore has been extracted either
above or below mine level.
TOTAL CASH COSTS -- Includes all direct and indirect operating cash costs
incurred at each operating mine.
TOTAL CASH COSTS PER OUNCE -- Calculated based upon total cash costs, as
defined herein, net of by-product revenues from all metals other than the
primary metal produced at each mine, divided by the total ounces of the
primary metal produced.
TOTAL PRODUCTION COSTS -- Includes total cash costs, as defined, plus
depreciation, depletion and amortization relating to each operating mine.
TOTAL PRODUCTION COSTS PER OUNCE -- Calculated based upon total production
costs, as defined, net of by-product revenues earned from all metals other
than the primary metal produced at each mine, divided by the total ounces
of the primary metal produced.
TROY OUNCE -- Unit of weight measurement used for all precious metals. The
familiar 16-ounce avoirdupois pound equals 14.583 Troy Ounces.
UNDERHAND MINING -- The primary mining method employed in the Lucky Friday
mine utilizing mechanized equipment, a ramp system and cemented sand fill.
The method has proven effective in reducing mining cost and rockburst
activity.
UNPATENTED MINING CLAIM -- A parcel of property located on federal lands
pursuant to the General Mining Law and the requirements of the state in
which the unpatented claim is located, the paramount title of which remains
with the federal government. The holder of a valid, unpatented lode mining
claim is granted certain rights including the right to explore and mine
such claim under the General Mining Law.
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VEIN -- A mineralized zone having a more or less regular development in
length, width and depth which clearly separates it from neighboring rock.
WASTE -- Barren rock in a mine, or mineralized material that is too low in
grade to be mined and milled at a profit.
ITEM 2. PROPERTIES.
The Company's principal mineral properties are described in Item 1 above. The
Company also has interests in a number of other mineral properties in the United
States, Canada and Mexico. Although some of such properties are known to
contain significant quantities of mineralization, they are not considered
material to the Company's operations at the present time. Encouraging results
from further exploration or increases in the market prices of certain metals
could, in the future, make such properties considerably more important to the
business of the Company taken as a whole.
The general corporate office of the Company is located in Coeur d'Alene, Idaho,
on a tract of land containing approximately 13 acres. The Company also owns and
has subdivided approximately 70 adjacent acres presently held for sale.
The administrative offices of the Company's ball clay, kaolin and feldspar
operations are located in Mayfield, Kentucky, and Nashville, Tennessee.
Additionally, there are general offices and laboratory facilities at each
operating location. The Company also owns approximately 1,600 acres of land
principally for use in connection with milling and storage operations for the
industrial minerals operations. The administrative offices of K-T Clay de
Mexico are located with the clay slurry processing facility on a parcel of land
near Monterrey, Mexico.
The general offices of Colorado Aggregate Inc. are located in Rexburg, Idaho.
The Company owns a parcel of land of approximately 20 acres in the vicinity of
Blanca, Colorado, on which are located building, storage and shipping facilities
utilized in its scoria business, and a bagging plant for landscape scoria. An
additional bagging facility, utilized for scoria briquettes, is located at San
Acacio, Colorado.
The general offices of Mountain West Products, Inc. are located in Rexburg,
Idaho. Processing facilities are located in Rexburg, Idaho, Kamiah, Idaho,
Superior, Montana, and Piedmont, South Dakota.
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ITEM 3. LEGAL PROCEEDINGS.
Contingencies
Bunker Hill
In October 1989, and again in February 1990, the Company was notified by the
Environmental Protection Agency (EPA) that the EPA considered the Company a
potentially responsible party (PRP) under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended (CERCLA or
Superfund) at the Bunker Hill Superfund Site located at Kellogg, Idaho (Bunker
Hill Site). In February 1994, the Company and three other mining companies, as
PRPs, entered into a Consent Decree with the EPA and the State of Idaho pursuant
to which the Company and two of the three companies signing the decree agreed to
implement remediation work at a portion of the Bunker Hill Site. The
remediation has primarily involved the removal and replacement of lead-
contaminated soils in residential yards within the site and is estimated to be
completed by the participating mining companies over the period of the next four
to six years. The Consent Decree also provides for the mining companies to
reimburse the EPA for a portion of the government's past costs incurred at the
Bunker Hill Site. The Consent Decree was approved and entered by the Federal
District Court in Idaho on November 17, 1994. The Consent Decree settles the
Company's response-cost liability under Superfund at the Bunker Hill Site.
Based upon the terms of the Consent Decree and an agreement between the
participating mining companies relating to the allocation of the cost for work
under the Consent Decree, the Company has estimated and established a total
allowance for liability for remedial activity costs at the Bunker Hill Site of
$9.4 million as of December 31, 1996. As with any estimate of this nature, it
is reasonably possible that the Company's recorded estimate of this obligation
may change in the near term.
Coeur d'Alene River Basin Natural Resource Damage Claims
- - Coeur d'Alene Tribe Claims
In July 1991, the Coeur d'Alene Indian Tribe (the Tribe) brought a lawsuit,
under CERCLA, in Idaho Federal District Court against the Company and a number
of other mining companies asserting claims for damages to natural resources
located downstream from the Bunker Hill Site over which the Tribe alleges some
ownership or control. The Company has answered the Tribe's complaint denying
liability for natural resource damages. In July 1992, in a separate action
between the Tribe and the State of Idaho, the Idaho Federal District Court
determined that the Tribe does not own the beds, banks and waters of Lake
Coeur d'Alene and the lower portion of its tributaries, the ownership of which
is the primary basis for the natural resource damage claims asserted by the
Tribe against the Company. Based upon the Tribe's appeal of this decision, the
Court
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in the natural resource damage litigation stayed the court proceedings in the
natural resource damage litigation until a final decision is made on the
question of the Tribe's ownership. On December 9, 1994, the 9th Circuit Court
reversed the decision of the Idaho Federal District Court and remanded the case
of the Tribe's ownership for trial before the Idaho Federal District Court. In
April 1996, the U.S. Supreme Court accepted the appeal from the 9th Circuit
Court decision to the U.S. Supreme Court. A decision in the case is expected by
approximately June 1997. In July 1994, the United States, as Trustee for the
Coeur d'Alene Tribe, initiated a separate suit in Idaho Federal District Court
seeking a determination that the Coeur d'Alene Tribe owns approximately the
lower one-third of Lake Coeur d'Alene. The State has denied the Tribe's
ownership of any portion of Lake Coeur d'Alene and its tributaries. In October
1996, the legal proceeding related to the Tribe's natural resource damage claims
was consolidated with the United States Natural Resources Damage litigation
described below.
- - U.S. Government Claims
On March 22, 1996, the United States filed a lawsuit in Idaho Federal District
Court against the Company and other mining companies who conducted historic
mining operations in the Silver Valley of northern Idaho. The lawsuit asserts
claims under CERCLA and the Clean Water Act and seeks recovery for alleged
damages to or loss of natural resources located in the Coeur d'Alene River Basin
(the Basin) in northern Idaho over which the United States asserts to be the
trustee under CERCLA. The lawsuit asserts that the defendants' historic mining
activity resulted in releases of hazardous substances and damaged natural
resources within the Basin. The suit also seeks declaratory relief that the
Company and other defendants are jointly and severally liable for response costs
under CERCLA for historic mining impacts in the Basin outside the Bunker Hill
Site. The Company answered the complaint on May 17, 1996, denying liability to
the United States under CERCLA and the Clean Water Act and asserted a
counterclaim against the United States for the federal government's involvement
in mining activity in the Basin which contributed to the releases and damages
alleged by the United States. The Company believes it also has a number of
defenses to the United States' claims. In October 1996, the Court consolidated
the Coeur d'Alene Tribe Natural Resource Damage litigation with this lawsuit for
discovery and other limited pretrial purposes.
- - State of Idaho Claims
On March 22, 1996, the Company entered into an agreement (the Agreement) with
the State of Idaho pursuant to which the Company agreed to continue certain
financial contributions to environmental cleanup work in the Basin being
undertaken by a State Trustees group. In return, the State agreed not to sue
the Company for
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damage to natural resources for which the State is a trustee for a period of
five years, to pursue settlement with the Company of the State's natural
resource damage claims and to grant the Company credit against any such State
claims for all expenditures made under the Agreement and certain other Company
contributions and expenditures for environmental cleanup in the Basin.
With respect to the Basin litigation, the Company increased its accrual for
closed operations and environmental matters by approximately $2.7 million in
1996. At December 31, 1996, the Company's accrual for remediation activity in
the Basin totals $2.2 million. These expenditures are anticipated to be made
over the next four years. Depending on the results of the aforementioned
lawsuits, it is reasonably possible that the Company's estimate of its
obligation may change in the near term.
Insurance Coverage Litigation
In 1991, the Company initiated litigation in the Idaho State District Court in
Kootenai County, Idaho, against a number of insurance companies which provided
comprehensive general liability insurance coverage to the Company and its
predecessors. The Company believes that the insurance companies have a duty to
defend and indemnify the Company under their policies of insurance for all
liabilities and claims asserted against the Company by the EPA and the Tribe
under CERCLA related to the Bunker Hill Site and the Basin in northern Idaho.
In 1992, the Court ruled that the primary insurance companies had a duty to
defend the Company in the Tribe's lawsuit. During 1995 and 1996, the Company
entered into settlement agreements with a number of the insurance carriers named
in the litigation. The Company has received a total of approximately $7.2
million under the terms of the settlement agreements. Thirty percent of these
settlements were paid to the EPA to reimburse the U.S. Government for past costs
under the Bunker Hill Site Consent Decree. Litigation is still pending against
one insurer with trial continued until the underlying environmental claims
against the Company are resolved or settled. The remaining insurer is providing
the Company with a partial defense in all Basin environmental litigation. As of
December 31, 1996, the Company had not reduced its accrual for reclamation and
closure costs to reflect the receipt of any anticipated insurance proceeds.
Star Phoenix
In June 1994, a judgment was entered against the Company in the Idaho State
District Court in the amount of $10.0 million in compensatory damages and $10.0
million in punitive damages based on a jury verdict rendered in late May 1994
with respect to a lawsuit previously filed against the Company by Star Phoenix
Mining Company (Star Phoenix), a former lessee of the Star Morning mine, over a
dispute between the Company and Star Phoenix concerning the Company's November
1990 termination of the Star Phoenix lease of
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the Star Morning mine property. On May 3, 1995, the District Court issued its
final opinion and order on a number of post-trial issues pending before the
Court. The opinion and order included the Court's denial of the post-trial
motions filed by Star Phoenix and certain of its principals regarding claims
which had been previously dismissed by the Court during trial. The Court also
awarded Star Phoenix approximately $300,000 in attorneys' fees and costs. The
judgement was appealed to the Idaho State Supreme Court which heard arguments in
April 1996 and is expected to render its opinion in the near future. Post-
judgment interest will accrue during the appeal period. In order to stay the
ability of Star Phoenix to collect on the judgment during the pendency of the
appeal, the Company has posted an appeal bond in the amount of $27.2 million
representing 136% of the District Court judgment. The Company pledged U.S.
Treasury securities totaling $10.0 million as collateral for the appeal bond.
This collateral amount is included in restricted investments at December 31,
1996, and December 31, 1995. The Company has vigorously pursued its appeal to
the Idaho Supreme Court and it has been the Company's position, and at the
current time it remains the Company's position, that it will not enter into a
settlement with Star Phoenix for any material amount. Although the ultimate
outcome of the appeal of the Idaho District Court judgment is subject to the
inherent uncertainties of any legal proceeding, based upon the Company's
analysis of the factual and legal issues associated with the proceeding before
the Idaho District Court and based on the opinions of outside counsel, as of the
date hereof, it is management's belief that the Company should ultimately
prevail in this matter, although there can be no assurance in this regard.
Accordingly, the Company has not accrued any liability associated with this
litigation.
The Company is subject to other legal proceedings and claims which have arisen
in the ordinary course of its business and have not been finally adjudicated.
Although there can be no assurance as to the ultimate disposition of these
matters and the proceedings disclosed above, it is the opinion of the Company's
management, based upon the information available at this time, that the expected
outcome of these matters, individually or in the aggregate, will not have a
material adverse effect on the results of operations and financial condition of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(a) (i) Shares of the Common Stock are traded on the New York Stock
Exchange, Inc., New York, New York.
(ii) The price range of the Common Stock on the New York Stock Exchange
for the past two years was as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1996 - High $ 9.50 $ 8.38 $ 7.50 $ 6.75
- Low 7.00 7.00 5.63 5.50
1995 - High $ 11.75 $ 12.25 $ 12.88 $ 12.38
- Low 8.63 10.13 10.13 6.63
(b) As of December 31, 1996, there were 11,299 holders of record of the
Common Stock.
(c) There were no Common Stock cash dividends paid in 1996 or 1995. The
amount and frequency of cash dividends are significantly influenced by
metals prices, operating results and the Company's cash requirements.
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ITEM 6. SELECTED FINANCIAL DATA.
(dollars in thousands except for per-share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total revenue $ 166,882 $ 159,704 $ 130,569 $ 96,060 $ 113,986
========= ========= ========= ========= =========
Loss before cumulative
effect of changes in
accounting principles $ (32,354) $(101,719) $ (24,613) $ (17,782) $ (55,173)
Cumulative effect of changes in
accounting principles - - - - - - - - (103)
--------- --------- --------- --------- ---------
Net loss (32,354) (101,719) (24,613) (17,782) (55,276)
Preferred stock dividends (8,050) (8,050) (8,050) (4,070) - -
--------- --------- --------- --------- ---------
Loss applicable to
common shareholders $ (40,404) $(109,769) $ (32,663) $ (21,852) $ (55,276)
========= ========= ========= ========= =========
Loss per common share
before cumulative effect of
changes in accounting principles
and after preferred stock
dividends $ (0.79) $ (2.28) $ (0.74) $ (0.58) $ (1.59)
========= ========= ========= ========= =========
Loss per common share $ (0.79) $ (2.28) $ (0.74) $ (0.58) $ (1.59)
========= ========= ========= ========= ========
Total assets $ 268,393 $ 258,190 $ 334,582 $ 346,153 $ 236,130
========= ========= ========= ========= =========
Long-term debt - Notes and
contracts payable $ 38,208 $ 36,104 $ 1,960 $ 50,009 $ 71,219
========= ========= ========= ========= =========
Cash dividends per common share $ - - $ - - $ - - $ - - $ - -
========= ========= ========= ========= =========
Cash dividends per preferred
share $ 3.50 $ 3.50 $ 3.50 $ 1.77 $ - -
========= ========= ========= ========= =========
Common shares issued 51,199,324 48,317,324 48,144,274 40,320,761 36,324,517
Shareholders of record 11,299 12,210 13,196 13,549 14,859
Employees 1,254 1,259 1,204 919 826
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.(1)
INTRODUCTION
Hecla Mining Company (Hecla or the Company) is primarily involved in
exploration, development, mining, and processing of gold, silver, lead, zinc,
and industrial minerals. As such, the Company's revenues and profitability are
strongly influenced by world prices of gold, silver, lead, and zinc, which
fluctuate widely and are affected by numerous factors beyond the Company's
control, including inflation and worldwide forces of supply and demand for
precious and base metals. The aggregate effect of these factors is not possible
to accurately predict. In the following descriptions, where there are changes
that are attributable to more than one factor, the Company presents each
attribute in descending order relative to the attribute's importance to the
overall change.
Except for the historical information contained in this Management's Discussion
and Analysis of Financial Condition and Results of Operations, the matters
discussed below are forward-looking statements that involve risks and
uncertainties, including the timely development of existing properties and
reserves (such as the Company's Rosebud joint-venture project) and future
projects, the impact of metals prices and metal production volatility, changing
market conditions and the regulatory environment and the other risks detailed
below and elsewhere in this Form 10-K (see "Investment Considerations" of Part
I, Item 1 of this Form 10-K) and from time to time, as necessary, in the
Company's periodic reports filed with the Securities and Exchange Commission.
As a result, actual results may differ materially from those projected or
implied. These forward-looking statements represent the Company's judgment as
of the date of this filing. The Company disclaims, however, any intent or
obligation to update these forward-looking statements as circumstances change or
develop.
The Company incurred losses applicable to common shareholders for each of the
past three years in the period ended December 31, 1996. If the Company's
estimates of market prices of gold, silver, lead, and zinc are realized in 1997,
the Company expects to record income or (loss) in the range of a $(2.0) million
loss to $2.0 million income after the expected dividends to preferred
shareholders totaling approximately $8.1 million for the year ending
December 31, 1997. Due to the volatility of metals prices and the significant
impact metals price changes have on the Company's operations, there can be no
assurance that the actual results of
- ---------------------
(1) For definitions of certain mining terms used in this description, see
"Glossary of Certain Mining Terms" at the end of Item 1 of this Form 10-K, page
46.
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operations for 1997 will be as projected (see "Investment Considerations" of
Part I, Item 1 of this Form 10-K).
The variability of metals prices requires that the Company, in assessing the
impact of prices on recoverability of its metals segment assets, exercise
judgment as to whether price changes are temporary or are likely to persist.
The Company performs a comprehensive evaluation of the recoverability of its
assets on a periodic basis. This evaluation includes a review of estimated
future net cash flows against the carrying value of the Company's assets.
Moreover, a review is made on a quarterly basis to assess the impact of
significant changes in market conditions and other factors. Asset write-downs
may occur if the Company determines that the carrying values attributed to
individual assets are not recoverable given reasonable expectations for future
production and market conditions.
At the Company's Grouse Creek mine in which Hecla had an 80% interest in 1996,
following the end of the third quarter of 1996, the Company completed
metallurgical testing and economic analysis of the Grouse deposit which had been
ongoing throughout 1996. Based on the information gathered through such period,
as well as then current metals prices, the Company determined that the ore
contained in the Grouse deposit was not economical at the then current metals
prices, and the Company determined to suspend operations at the Grouse Creek
mine. The mine will be placed on a care-and-maintenance status upon completion
of mining at the Sunbeam pit which is estimated to occur during the second
quarter of 1997. In connection with the decision to suspend operations at the
Grouse Creek mine, the Company determined that certain third quarter 1996
adjustments were required to properly reflect the Company's interest in the
property at net realizable value totaling approximately $5.3 million and future
severance, holding, reclamation, and closure costs totaling approximately $22.5
million.
On January 31, 1997, Great Lakes Minerals Inc. (Great Lakes) and the Company
entered into a letter agreement terminating the Grouse Creek joint venture and
conveying Great Lakes' approximate 20% interest in the Grouse Creek project to
Hecla. Great Lakes retained a 5% defined net proceeds interest in the project.
The Company has assumed 100% of the interests and obligations associated with
the property.
In September 1996, the Company announced that the operator of the American Girl
gold mine, in which the Company has a 47% joint-venture interest, had determined
that operations at the American Girl mine would be suspended effective November
4, 1996. During the first six months of 1996 and continuing into the third
quarter of 1996, the American Girl gold mine experienced significantly higher
than anticipated operating costs and lower than expected recovered gold ore
grade. Based on its periodic review of the
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carrying value of the Company's mining properties, the Company determined that a
third quarter carrying value adjustment totaling $7.6 million was required to
properly reflect the estimated net realizable value of its interest in the
American Girl joint venture. The amount of the adjustment was based on the
Company's carrying value of its interest in the American Girl mine in excess of
estimated discounted future cash flows. In addition to the carrying value
adjustment, the Company also recorded a $0.3 million provision for closed
operations to increase the Company's recorded liability for reclamation and
closure costs to its estimate of its interest in future closure and reclamation
costs at the American Girl mine.
In 1996, Hecla and Santa Fe Pacific Gold Corporation (Santa Fe) entered into an
agreement for a 50/50 joint venture to develop the Company's Rosebud property in
Pershing County, Nevada. Pursuant to the agreement, a limited liability
corporation was established, with each party owning a 50% interest, to develop
the Rosebud gold property, which is an underground, oxide gold deposit. Under
the terms of the agreement, Hecla will manage the mining activities and ore will
be trucked approximately 100 miles to Santa Fe's Twin Creeks Pinon mill for
processing. Total mine-site capital expenditures are currently estimated to be
approximately $20.0-$25.0 million. Under the terms of the joint venture, Santa
Fe is responsible for funding the first $12.5 million of mine-site development
costs plus road and mill facility improvements. Santa Fe also contributed to
the joint venture exploration property located near the Rosebud property, and
will fund the first $1.0 million in exploration expenditures, and two-thirds of
future expenditures beyond the initial $1.0 million for further exploration
efforts at the project.
Following the decision to develop the Rosebud project, Euro-Nevada Mining
Corporation Inc. (Euro-Nevada) exercised its option to purchase an additional
1.5% Net Smelter Return (NSR) royalty from the Company for $2.5 million. The
Company received and recorded a gain of $2.5 million in the fourth quarter of
1996 from this transaction, and Euro-Nevada now holds a 4% NSR royalty on
production from the Rosebud property. Production at the Rosebud joint-venture
project is expected to begin in May 1997.
In connection with signing the Rosebud joint-venture agreement, a separate
joint-venture agreement concerning the Golden Eagle property in Ferry County,
Washington, was entered into between Hecla and Santa Fe. Santa Fe paid Hecla
$2.5 million for an immediate 75% interest in the Golden Eagle joint venture.
The Company recorded a gain on the transaction totaling $0.6 million. In
addition, Santa Fe is obligated to fund all expenditures required at the Golden
Eagle through the feasibility stage.
In July 1996, operations recommenced at the Greens Creek silver mine in Alaska.
Grinding and flotation circuit activities in the
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mill commenced ahead of schedule. The Company holds a 29.73% interest in the
mine through a joint venture with Kennecott Greens Creek Mining Company, the
operator of the property. Production levels continued to increase following the
recommencement of operations in July 1996, and full production levels were
achieved in January 1997.
In 1997, the Company expects to produce between 145,000 and 157,000 ounces of
gold compared to actual 1996 gold production of approximately 169,000 ounces of
gold. The 1997 estimated gold production includes 69,000 to 72,000 ounces from
the Company's La Choya mine, 38,000 to 43,000 ounces from the Company's interest
in the Rosebud mine, 18,000 to 20,000 ounces from the Company's Grouse Creek
mine, 20,000 to 22,000 ounces from the Company's interest in the Greens Creek
mine and other sources. The Company's share of silver production for 1997 is
expected to be between 5.7 and 6.2 million ounces compared to 1996 production of
approximately 3.0 million ounces. The 1997 estimated silver production includes
2.1 to 2.3 million ounces from the Lucky Friday mine, 3.4 to 3.7 million ounces
from the Company's interest in the Greens Creek mine and an additional 0.2
million ounces from other sources.
In 1996, the Company shipped approximately 1,072,000 tons of industrial
minerals, including ball clay, kaolin, feldspar, and specialty aggregates. The
Company's shipments of industrial minerals are expected to increase in 1997 to
approximately 1,095,000 tons. Additionally, the Company expects to ship
approximately 930,000 cubic yards of landscape material from its Mountain West
Products subsidiary in 1997 compared to 996,000 cubic yards in 1996.
RESULTS OF OPERATIONS
- ---------------------
1996 vs 1995
The Company incurred a net loss of approximately $32.4 million ($0.63 per common
share) in 1996 compared to a net loss of approximately $101.7 million ($2.11 per
common share) in 1995. After $8.1 million in dividends to holders of the
Company's Series B Cumulative Convertible Preferred Stock, the Company's loss
applicable to common shareholders for 1996 was approximately $40.4 million, or
$0.79 per common share compared to $109.8 million, or $2.28 per common share in
1995. The 1996 decreased loss was due to a variety of factors, the most
significant of which was the write-down of the Company's interest in the Grouse
Creek mine in the third quarter of 1995 totaling $97.0 million, compared to 1996
adjustments totaling $35.7 million for severance, holding, reclamation, closure
costs, and carrying value adjustments for property, plant, and equipment and
certain other assets at the Grouse Creek and American Girl mines.
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Sales of the Company's products increased by approximately $6.6 million, or
4.4%, in 1996 as compared to 1995, principally the result of (1) increased
product sales totaling approximately $16.8 million, most notably from the
industrial minerals operations where shipment volumes increased at all
operations, increased production at the La Choya mine where gold production
increased approximately 8,000 ounces, as well as at the Greens Creek mine where
the first shipment of product occurred in November 1996 following the
recommencement of operations in July 1996; and (2) an increase in the average
price of lead. These two factors were partially offset by decreased sales of
approximately $10.2 million attributable to (1) decreased gold and silver
production in 1996 at the Grouse Creek mine and Republic gold mine, the latter
of which completed operations in February 1995; (2) decreased sales from the
Apex processing facility which was sold in September 1995; and (3) decreased
gold production at the Cactus mine due to the completion of operations in 1995.
Comparing the average metal prices for 1995 with 1996, gold increased by 1.0%
from $384 per ounce to $388 per ounce, silver decreased slightly from $5.19 per
ounce to $5.18 per ounce, lead increased by 20.7% from $0.29 per pound to $0.35
per pound, and zinc decreased slightly from $0.47 to $0.46 per pound.
Cost of sales and other direct production costs increased approximately $5.3
million, or 4.4%, in 1996 compared to 1995, primarily a result of (1) increased
production costs of $6.9 million incurred at the industrial minerals operations
which correlates to the increased sales volume at these operations; (2)
increased production costs at the Lucky Friday mine totaling approximately $2.8
million due to increased mining costs and the nonrecurring 1995 receipt of $1.1
million in insurance proceeds related to an ore conveyance accident in August
1994; (3) increased costs at the La Choya mine of $1.2 million resulting from
increased production at the mine; (4) increased costs at the American Girl mine
of $0.5 million due to difficulties associated with mining in the Oro Cruz
orebody, partially offset by reduced costs following the shutdown of operations
in 1996; and (5) increased costs at Greens Creek where costs associated with the
first shipment were recognized in the amount of $0.5 million. These increases in
cost of sales and other direct production costs were partially offset by
decreases in operating costs at other operations, including (1) decreased costs
associated with the Apex processing facility totaling $4.1 million resulting
from the processing plant being sold in September 1995; (2) decreased costs at
the Cactus mine totaling approximately $1.0 million associated with the
completion of operations in 1995; (3) decreased costs at the Grouse Creek mine
totaling $0.9 million which is associated with the second quarter 1996 temporary
shutdown of operations and the third quarter 1996 decision to suspend
operations, as well as higher costs in 1995 associated with the start-up of
operations; and (4) decreased
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operating costs at the Republic mine totaling approximately $0.6 million due to
the completion of operations in February 1995.
Cost of sales and other direct production costs as a percentage of sales from
products remained constant at 80.2% in 1995 and 1996.
Depreciation, depletion and amortization decreased $3.0 million, or 12.8%, from
1995 to 1996 principally due to decreased depreciation at the Grouse Creek mine
($6.8 million) primarily due to the write-down of the carrying value of
property, plant, and equipment in the third quarter of 1995, partially offset by
increased depreciation at (1) the La Choya mine ($1.9 million) due to increased
gold production; (2) the Greens Creek mine where operations recommenced on a
start-up basis in 1996 ($1.4 million); (3) the American Girl mine ($0.3 million)
due to the increased depreciable base associated with development costs of the
Oro Cruz, partly offset by the write-down of the carrying value of the American
Girl mine property, plant, and equipment, in the third quarter of 1996; and (4)
various industrial minerals operations totaling approximately $0.2 million.
Cash operating cost, total cash cost, and total production cost per gold ounce
decreased from $286, $288, and $398 in 1995 to $273, $276, and $364 in 1996,
respectively. The decreases in the cash operating cost and total cash cost per
ounce were primarily due to decreases in the cost per ounce amounts at the
Grouse Creek and La Choya mines, offset by increased cost per ounce amounts at
the American Girl mine. Total production costs per ounce decreased principally
due to the decreased depreciation, depletion, and amortization expense at the
Grouse Creek mine in 1996 which is the result of the 1995 carrying value
adjustment, partially offset by increased total production cost per ounce at the
American Girl.
Cash operating costs, total cash costs, and total production costs per silver
ounce decreased from $4.57, $4.57, and $5.76 in 1995 to $4.24, $4.24, and $5.47
in 1996, respectively. The decreases in the cost per silver ounce are due
primarily to increased by-product production and prices, principally lead, in
the 1996 period at the Lucky Friday mine. Lead and zinc are by-products at the
Lucky Friday mine, the net revenues of which are deducted from production costs
in the calculation of production cost per silver ounce.
Other operating expenses decreased by approximately $68.6 million, or 57.7%,
from 1995 to 1996, due principally to (1) the decreased reduction in carrying
value of mining properties of $84.5 million, consisting of the Company's 1995
reduction in carrying value of the Company's interest in the Grouse Creek mine
($97.0 million) and the Company's interest in the ConSil Corp.'s Silver Summit
mine ($0.4 million), partly offset by the 1996 reductions in carrying values of
mining properties at the American Girl mine totaling approximately $7.6 million
and the Grouse Creek mine totaling approximately $5.3 million; and (2) decreased
exploration
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expenditures of approximately $2.3 million. These decreases were partially
offset by an $18.2 million increase in provision for closed operations and
environmental matters, consisting of (1) the 1996 provision for the Grouse Creek
mine totaling approximately $22.5 million; (2) the increased 1996 provision over
the 1995 provision for remediation costs associated with the Coeur d'Alene River
Basin of $2.4 million; (3) the American Girl mine closure cost accrual of $0.3
million in 1996; and (4) provision for environmental matters at the Company's
former Yellow Pine mine of $0.2 million, partially offset by (1) the 1995
provision totaling $3.4 million for the Bunker Hill Superfund Site; (2) receipt
of $2.6 million in insurance proceeds in 1996 related to the remediation
liability at Bunker Hill; and (3) decreased expenditures at the closed Star Unit
Area of $1.2 million primarily due to timber sale proceeds of $0.9 million.
Other income was approximately $7.7 million in 1996 compared to $10.8 million in
1995. The $3.1 million decrease was primarily due to (1) decreased gains on
investments of $3.2 million due to the nonrecurring sale of certain common stock
investments in 1995; (2) increased net interest cost of $0.3 million; and (3)
miscellaneous expense in 1996 compared to miscellaneous income in 1995, the
impact of which was $0.3 million. These decreases were partially offset by
increased interest and other income in 1996 over 1995 totaling $0.5 million.
Total interest cost increased $1.1 million in 1996, principally due to higher
borrowings in 1996 under the Company's revolving and term loan facility.
Capitalized interest costs increased $0.8 million principally due to capitalized
interest costs associated with the Greens Creek development, the Rosebud
project, the Lucky Friday expansion project, and development at the American
Girl's Oro Cruz orebody.
Income taxes reflect a provision of $0.7 million in 1996 compared to a provision
of $0.3 million in 1995. The provision in 1996 primarily reflects the
provisions for foreign income taxes as well as a provision for state income
taxes, partially offset by the carryback of certain 1996 expenditures to reduce
U.S. income taxes previously provided. The provision in 1995 primarily reflects
the provisions for U.S. and foreign income taxes as a result of certain asset
and certain common stock investment dispositions made during 1995, as well as a
provision for state income taxes, partially offset by the carryback of certain
1995 expenditures to reduce U.S. income taxes previously provided.
RESULTS OF OPERATIONS
- ---------------------
1995 vs 1994
The Company incurred a net loss of approximately $101.7 million ($2.11 per
common share) in 1995 compared to a net loss of approximately $24.6 million
($0.56 per common share) in 1994. After $8.1 million in dividends to holders of
the Company's Series B
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Cumulative Convertible Preferred Stock, the Company's loss applicable to common
shareholders for 1995 was approximately $109.8 million, or $2.28 per common
share compared to $32.7 million, or $0.74 per common share in 1994. The 1995
loss was due to a variety of factors, the most significant of which was the
third quarter write-down of the Company's interest in the Grouse Creek mine.
Sales of the Company's products increased by approximately $26.3 million, or
21.0%, in 1995 as compared to 1994, principally the result of (1) increased
product sales totaling $49.7 million, most notably from the Grouse Creek mine
where gold and silver production commenced in December 1994, and increased
production at the La Choya and Lucky Friday mines; as well as from several
industrial minerals operations; and (2) an increase in the average price of
lead. These two factors were partially offset by decreased sales of
approximately $23.5 million attributable to (1) decreased gold and silver
production in 1995 at the Republic gold mine which completed operations in
February 1995; and (2) decreased gold production at the American Girl mine due
to the completion of most underground mining operations there in February 1995.
Comparing the average metal prices for 1994 with 1995, gold remained fairly
constant at $384 per ounce, silver decreased by 1.7% from $5.28 per ounce to
$5.19 per ounce, lead increased by 16% from $0.25 per pound to $0.29 per pound,
and zinc increased by 4% from $0.45 to $0.47 per pound.
Cost of sales and other direct production costs increased approximately $20.3
million, or 20.0%, in 1995 compared to 1994, primarily a result of (1) increased
production costs of $24.7 million incurred at the Grouse Creek mine in 1995
where production commenced in December 1994; (2) increased production costs at
Kentucky-Tennessee Clay Company's (K-T Clay's) kaolin and ball clay divisions
totaling approximately $4.0 million, principally due to the Langley kaolin
acquisition in 1995; (3) increased production costs at Mountain West Products
($3.4 million) due principally to increased production as well as increased
freight and raw materials costs; (4) increased production costs at the La Choya
mine ($2.7 million) primarily due to increased production; (5) increased
production costs at Colorado Aggregate Company ($1.2 million) related
principally to a change in product mix requirements; and (6) increased
production costs at Lucky Friday of $1.2 million due to increased production in
1995. These increases in cost of sales and other direct production costs were
partially offset by decreases in operating costs at other operations, the three
most notable of which were (1) decreased production costs of $10.4 million at
the Republic mine due to completion of operations in February 1995; (2)
decreased standby costs at the Greens Creek mine totaling $2.6 million in the
1995 period, a direct result of management's decision to further develop the
mine and recommence production; and (3) decreased cost of sales in 1995 at the
American Girl mine totaling $2.6 million due to decreased gold production.
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Cost of sales and other direct production costs as a percentage of sales from
products decreased slightly from 80.8% in 1994 to 80.2% in 1995.
Depreciation, depletion, and amortization increased $9.2 million, or 64.8%, from
1994 to 1995 principally due to (1) increased depreciation at the Grouse Creek
mine ($8.6 million) which commenced production in December 1994; and (2)
increased depreciation at the La Choya mine ($2.4 million) due to increased
production; both of which were partially offset by decreased depreciation at the
Republic mine ($2.2 million) due to the curtailment of operations in February
1995.
Cash operating costs, total cash costs, and total production costs per gold
ounce increased from $267, $273, and $334 in 1994 to $286, $288, and $398 in
1995, respectively. The increases were mainly attributed to the increased per
ounce production costs at the Grouse Creek and American Girl mines during 1995,
partially offset by decreased per ounce production costs at the La Choya mine.
Cash operating costs, total cash costs, and total production costs per silver
ounce decreased from $5.81, $5.81, and $7.17 in 1994 to $4.57, $4.57, and $5.76
in 1995, respectively. The decreases were due primarily to (1) increased
production in 1995 at the Lucky Friday mine; and (2) increased average prices of
lead and zinc in 1995. Lead and zinc are by-products at the Lucky Friday mine,
the net revenues of which are deducted from production costs in the calculation
of production cost per silver ounce.
Other operating expenses increased by approximately $79.6 million, or 203%, from
1994 to 1995, due principally to (1) the third quarter 1995 reduction in
carrying value of the Company's interest in the Grouse Creek mine ($97.0
million) and the Company's interest in the ConSil Corp.'s Silver Summit mine
($0.4 million); and (2) the third quarter 1995 adjustment to increase the
Company's liability for environmental remediation activity costs at the Bunker
Hill Superfund Site ($3.4 million) and the Coeur d'Alene Mining District ($0.3
million). These increases were partially offset by (1) the 1994 increase in the
provision for closed operations and environmental matters related to the
reclamation accruals for the Republic mine and the Coeur d'Alene Mining District
totaling $7.3 million and $1.1 million, respectively; (2) the 1994 $7.9 million
reduction in carrying value of mining properties adjustment related to the
Republic mine ($7.2 million), the Zenda property ($0.4 million), and exploration
equipment ($0.3 million); (3) decreased general and administrative costs of $1.8
million in 1995, primarily due to the nonrecurring 1994 expenses of
approximately $2.1 million related to the acquisition of Equinox Resources Ltd.;
and (4) a decrease of approximately $1.3 million in exploration expense in 1995.
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Other income was approximately $10.8 million in 1995 compared to $5.2 million in
1994. The increase was primarily due to (1) the 1995 gain of $4.0 million on
the sales of certain common stock investments; and (2) the 1995 gain of $3.2
million on the sale of the Apex processing facility; both of which were
partially offset by (1) the 1995 write-down of $1.1 million for certain common
stock investments; and (2) the 1994 gain on the sale of certain common stock
investments. Total interest cost decreased $0.6 million in 1995, principally
due to the June 1994 retirement of long-term debt, partially offset by interest
expense during 1995 related to new borrowing under the Company's revolving and
term credit facility.
In 1994, the Company recorded an extraordinary loss totaling approximately $0.8
million on the early retirement of long-term debt. The loss related principally
to the write-off of the unamortized balance of deferred issuance costs related
to the debt.
Income taxes reflect a provision of $0.3 million in 1995 compared to a benefit
of $0.5 million in 1994. The provision in 1995 primarily reflects the
provisions for U.S. and foreign taxes due as a result of certain asset and
certain common stock investment dispositions made during 1995, as well as a
provision for state income taxes, partially offset by the carryback of certain
1995 expenditures to reduce income taxes previously provided. The benefit in
1994 primarily reflects the carryback of 1994 and prior year net operating
losses to reduce income taxes previously provided, partially offset by an
Internal Revenue Service settlement and a provision for state income taxes.
FINANCIAL CONDITION AND LIQUIDITY
A substantial portion of the Company's revenue is derived from the sale of
products, the prices of which are affected by numerous factors beyond the
Company's control. Prices may change dramatically in short periods of time and
such changes have a significant effect on revenues, profitability and liquidity
of the Company. The Company is subject to many of the same inflationary
pressures as the U.S. economy in general. The Company continues to implement
cost-cutting measures in an effort to reduce per unit production costs.
Management believes, however, that the Company may not be able to continue to
offset the impact of inflation over the long term through cost reductions alone.
However, the market prices for products produced by the Company have a much
greater impact than inflation on the Company's revenues and profitability.
Moreover, the discovery, development and acquisition of mineral properties are
in many instances unpredictable events. Future metals prices, the success of
exploration programs, changes in legal and regulatory requirements, and other
property transactions can have a significant impact on the need for capital (see
"Investment Considerations" in this Form 10-K).
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At December 31, 1996, assets totaled approximately $268.4 million and
shareholders' equity totaled approximately $145.5 million. Cash and cash
equivalents increased by $4.3 million to $8.3 million at December 31, 1996 from
$4.0 million at the end of 1995. Operating activities provided $22.3 million of
cash during 1996. The primary sources of cash were from the La Choya mine and
the Company's industrial minerals operations. Partially offsetting these
sources were (1) a $4.2 million increase in inventories, primarily at the Greens
Creek mine and the La Choya mine; and (2) payments for reclamation and other
noncurrent liabilities which required cash of $5.2 million. Principal noncash
charges included in operating activities include (1) provisions for reclamation,
holding, severance, and closure costs of approximately $28.3 million; (2)
depreciation, depletion, and amortization costs of approximately $20.8 million;
and (3) adjustments for reduction in the carrying value of mining properties
totaling approximately $12.9 million.
The Company's investing activities used $35.5 million of cash during 1996. The
most significant use of cash was $33.7 million for property, plant, and
equipment additions described below and the transfer of $4.3 million to
restricted investments for additional reclamation funding and surety bonding
collateral requirements related to ongoing and closed operations. These uses
were partially offset by proceeds from the sales of assets ($3.6 million),
primarily for the sale of an interest in the Golden Eagle joint venture and the
sale of the Apex mine, and proceeds from sales of certain common stock
investments ($0.1 million). During 1996, the most significant asset additions
were $19.0 million at the Greens Creek mine, $3.8 million at the Grouse Creek
mine, $2.5 million at the Lucky Friday mine, $2.4 million in capitalized
interest at Greens Creek, Rosebud, Lucky Friday, and American Girl, and capital
expenditures of $1.7 million at K-T Clay's kaolin division and $1.6 million at
the American Girl mine.
During 1996, $17.4 million of cash was provided from financing activities. The
major sources of cash were borrowings on long-term debt of $51.6 million from
the Company's revolving credit facility, proceeds totaling approximately $22.0
million from the issuance of 2.875 million common shares in an underwritten
offering completed in January 1996, and borrowing against cash surrender value
of life insurance of $0.8 million, partially offset by repayments on long-term
debt of $48.9 million and payment of preferred stock dividends of $8.1 million.
The Company currently estimates that capital expenditures to be incurred in 1997
will be in the range of $19.0 million to $32.5 million, including $0.8 million
of capitalized interest. These expenditures, excluding capitalized interest,
consist primarily of (1) the Company's share of development expenditures at the
Rosebud project ($10.0-$11.0 million), the Lucky Friday expansion project ($2.0-
$14.0 million), industrial minerals capitalized expenditures
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($2.6-$2.8 million), Greens Creek mine capitalized expenditures ($2.0-$2.2
million); and (2) expenditures at other operating locations ($1.6-$1.7 million).
The high end of the estimates with respect to the Lucky Friday expansion project
expenditures are subject to preparation of a final feasibility study, final
engineering estimates, as well as Board of Directors approval. These planned
capital expenditures will depend, in large part, on the Company's ability to
obtain the required funds from operating activities, amounts available under its
revolving and term loan credit facility, and other potential financing
arrangements. As market circumstances permit, the Company may also seek to
finance certain of its cash requirements through the sale of equity or debt
securities, as appropriate. There can be no assurance that actual capitalized
expenditures will be as projected based upon the uncertainties associated with
the estimates for development of the Lucky Friday expansion project and the
Company's ability to generate adequate funding for the projected capital
expenditures.
The Company's estimate of its capital expenditure requirements assumes, with
respect to the Greens Creek and Rosebud properties, that the Company's joint-
venture partners will not default with respect to their respective portions of
development costs and capital expenditures.
Pursuant to a Registration Statement filed with the Securities and Exchange
Commission and declared effective in the third quarter of 1995, the Company can,
at its option, offer and sell debt securities, common shares, preferred shares
or warrants in an amount not to exceed $100.0 million in the aggregate. In
January 1996 and February 1997, the Company issued 2.875 million and 3.950
million shares, respectively, of its common stock to facilitate the funding
of the Company's capital expenditure requirements. The net proceeds from
the offerings of approximately $22.0 million and $23.5 million, respectively,
were used principally to reduce the outstanding borrowings under its existing
bank revolving credit facility. As of December 31, 1996 and February 25,
1997, a total of $17.0 million and $33.0 million, respectively, remained
available under the credit facility.
The Company has a revolving and term loan facility (the Bank Agreement) that
allows it to borrow up to $55.0 million. Amounts may be borrowed on a revolving
credit basis through July 31, 1998, and are repayable in eight quarterly
installments beginning on October 31, 1998. During the commitment period, the
Company pays an annual facility fee ranging from $178,750 to $261,250, the
amount of which is based on average quarterly borrowings. The Bank Agreement,
as amended, includes certain collateral provisions, including the pledging of
the common stock of certain of the Company's subsidiaries and providing the
lenders a security interest in accounts receivable. Under the amended terms of
the Bank Agreement, the Company is required to maintain certain financial
ratios, and meet certain net worth and indebtedness tests
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for which the Company was in compliance at December 31, 1996. Amounts available
under the amended Bank Agreement are based on a defined debt to cash flow test.
As of December 31, 1996, the Company had borrowings of $38.0 million and the
ability to borrow the remaining $17.0 million under the facility. The interest
rate for borrowings under the Bank Agreement as of December 31, 1996 was 7.16%.
The Company's planned net environmental and reclamation expenditures for 1997
are expected to be approximately $9.4 million, principally for environmental and
reclamation activities at the Bunker Hill Superfund Site, the Coeur d'Alene
River Basin, and the Republic property.
Exploration expenditures for 1997 are currently estimated to be approximately
$4.0-$5.0 million, although the Company is currently evaluating a number of
opportunities that could potentially increase this range by an additional $2.0-
$4.0 million. The Company's exploration strategy is to focus further
exploration at, or in the vicinity of, its currently owned domestic and foreign
properties. Accordingly, 1997 domestic exploration expenditures will be
incurred principally at the Greens Creek, Rosebud, and Lucky Friday properties.
Foreign exploration efforts in 1997 will center primarily on targets in Mexico.
In the normal course of its business, the Company uses forward sales commitments
and commodity put and call option contracts to manage its exposure to
fluctuations in the prices of certain metals which it produces. Contract
positions are designed to ensure that the Company will receive a defined minimum
price for certain quantities of its production. Gains and losses, and the
related costs paid or premiums received, for option contracts which hedge the
sales prices of commodities are deferred and included in income as part of the
hedged transaction. Revenues from the aforementioned contracts are recognized
at the time contracts are closed out by delivery of the underlying commodity or
settlement of the net position in cash. The Company is exposed to certain
losses, generally the amount by which the contract price exceeds the spot price
of a commodity, in the event of nonperformance by the counterparties to these
agreements.
At December 31, 1996, the Company had forward sales commitments through January
31, 1997, for 1,000 ounces of gold at an average price of $412 per ounce. The
estimated fair value of these forward sales commitments was $43,000 at December
31, 1996. The Company has also purchased options to put 34,440 ounces of gold
to counterparties at an average price of $396 per ounce. Concurrently, the
Company sold options to allow the counterparties to call 34,440 ounces of gold
from the Company at an average price of $461 per ounce. There was no net cost
associated with the purchase and sale of these options which expire on a monthly
basis through December 1997. The London Final gold price at year end was
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$369. At December 31, 1996, the estimated fair value of the Company's purchased
gold put options was approximately $772,000. If the Company had chosen to close
its offsetting short gold call option position, it would have incurred a
liability of approximately $2,000. Additionally, the Company has entered into
spot deferred sales commitments for 25,000 ounces of gold at $381 per ounce for
delivery on January 15, 1997. The nature and purpose of these forward sales
contracts, however, does not presently expose the Company to any significant net
loss. All of the aforementioned contracts are designated as hedges at
December 31, 1996.
In November 1994, the Company entered into a court-approved Consent Decree
requiring the Company and certain other mining companies to undertake specific
remediation work with respect to the Bunker Hill Superfund Site in northern
Idaho. At December 31, 1996, the Company's allowance for Bunker Hill Superfund
Site remedial action costs was approximately $9.4 million, which the Company
believes is adequate based on current estimates of aggregate costs.
In addition, as described in Note 6 of Notes to Consolidated Financial
Statements, the Company is a defendant in an action filed in November 1990 by
Star Phoenix Mining Company (Star Phoenix) and certain principals of Star
Phoenix, asserting that the Company breached the terms of Star Phoenix's lease
agreement for the Company's Star Morning mine and that the Company interfered
with certain contractual relationships of Star Phoenix relating to the Company's
1990 termination of such lease agreement. In June 1994, judgment was entered by
the Idaho State District Court against the Company in the legal proceeding in
the amount of $10.0 million in compensatory damages and $10.0 million in
punitive damages based on a jury verdict rendered in the case in late May 1994.
The verdict was appealed to the Idaho Supreme Court which heard arguments in
April 1996 and is prepared to render its opinion in the near future. Post-
judgment interest will accrue during the appeal period; the current interest
rate is 10.875%. In order to stay the ability of Star Phoenix to collect on the
judgment during the pending of the appeal, the Company posted an appeal bond in
the amount of $27.2 million representing 136% of the District Court judgment.
The Company pledged U.S. Treasury securities totaling $10.0 million as
collateral for the $27.2 million appeal bond. The Company has vigorously
pursued its appeal to the Idaho Supreme Court and it has been the Company's
position, and at the current time it remains the Company's position, that it
will not enter into a settlement with Star Phoenix for any material amount.
Although the ultimate outcome of the appeal of the judgment is subject to the
inherent uncertainties of any legal proceeding, based on the Company's analysis
of the factual and legal issues associated with the proceeding before the
District Court and based upon the opinions of outside counsel, as of the date
hereof, it is management's belief that the Company should ultimately prevail in
this matter, although there can be no assurance in this regard. In
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the event of an unfavorable outcome in this proceeding, the Company expects that
the judgment would be paid from the pledged collateral totaling $10.0 million
with the remaining balance to be paid from bank borrowings, other potential
financing arrangements or proceeds from certain asset sales.
Although there can be no assurance as to the ultimate outcome of the above
matter and the other proceedings disclosed in Note 6 of Notes to Consolidated
Financial Statements, it is the opinion of the Company's management, based upon
the information available at this time, that the expected outcome of these
matters, individually or in the aggregate, will not have a material adverse
effect on the results of operations and financial condition of the Company and
its subsidiaries.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 of this Report for information with respect to the financial
statements filed as a part hereof, including financial statements filed pursuant
to the requirements of this Item 8.
SELECTED QUARTERLY DATA
(dollars in thousands except for per-share amounts)
<TABLE>
<CAPTION>
First Second Third Fourth
1996: Quarter Quarter Quarter Quarter Total
- ---- -------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Sales of products $ 42,947 $ 40,523 $ 37,662 $ 37,120 $ 158,252
Gross profit $ 3,935 $ 3,028 $ 2,360 $ 1,600 $ 10,923
Net income (loss) $ 1,475 $ 2,801 $ (36,765) $ 135 $ (32,354)
Preferred stock dividends $ (2,012) $ (2,013) $ (2,013) $ (2,012) $ (8,050)
Income (loss) applicable to
common shareholders $ (537) $ 788 $ (38,778) $ (1,877) $ (40,404)
Income (loss) per common
share $ (0.01) $ 0.02 $ (0.76) $ (0.04) $ (0.79)
1995:
- ----
Sales of products $ 34,955 $ 40,369 $ 40,088 $ 36,203 $ 151,615
Gross profit (loss) $ (162) $ 1,008 $ 1,775 $ 3,986 $ 6,607
Net income (loss) $ (2,464) $ 2,242 $(102,723) $ 1,226 $(101,719)
Preferred stock dividends $ (2,012) $ (2,013) $ (2,013) $ (2,012) $ (8,050)
Income (loss) applicable to
common shareholders $ (4,476) $ 229 $(104,736) $ (786) $(109,769)
Income (loss) per common
share $ (0.09) $ 0.00 $ (2.17) $ (0.02) $ (2.28)
</TABLE>
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Reference is made to the information with respect to the directors of the
Company set forth under the caption "Election of Directors" in the
Company's proxy statement to be filed pursuant to Regulation 14A for the
annual meeting scheduled to be held on May 9, 1997 (the Proxy Statement),
which information is incorporated herein by reference. Information with
respect to executive officers of the Company is set forth as follows:
Age at
May 9,
Name 1997 Position and Term Served
------------------- ------ --------------------------------
William B. Booth 46 Vice President - Investor and Public Affairs
since May 1994; various administrative
functions with the Company since December
1985.
Arthur Brown 56 Chairman since June 1987; Chief Executive
Officer since May 1987; President since May
1986; Chief Operating Officer from May 1986
to May 1987; Executive Vice President from
May 1985 to May 1986; held various positions
as an officer since 1980; employed by the
Company since 1967.
J. Gary Childress 49 Vice President - Industrial Minerals since
February 1994; President and General Manager
of Kentucky-Tennessee Clay Company from 1987
to 1994; Senior Vice President of Kentucky-
Tennessee Clay Company from 1986 to 1987.
George R. Johnson 48 Vice President - Metal Mining since 1996;
Manager of Operations - Metal Mining from
1990 to 1996; Senior Project Engineer from
1989 to 1990; Lucky Friday Unit Manager from
1986 to 1989; held various positions in
mining operations with the Company since
1983.
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Age at
May 9,
Name 1997 Position and Term Served
------------------- ------ --------------------------------
Roger A. Kauffman 53 Executive Vice President and Chief Operating
Officer since June 1996; President and Chief
Operating Officer of Amax Gold from 1994 to
1996; previously employed with the Company
from 1985 to 1994 serving as Vice President -
Industrial Minerals from 1986 to 1994.
Jon T. Langstaff 60 Vice President - Human Resources since May
1995; Personnel Manager from 1982 to 1995;
held various positions with the Company since
1963.
John P. Stilwell 44 Vice President - Chief Financial Officer and
Treasurer since May 1996; Vice President -
Finance and Treasurer May 1994 to May 1996;
Treasurer since June 1991; held various
administrative positions with the Company
since May 1985.
Michael B. White 46 Vice President - General Counsel and
Secretary since May 1992; Secretary since
November 1991; Assistant Secretary from March
1981 to November 1991; General Counsel since
June 1986; various administrative positions
since 1980.
There are no family relationships between any of the executive officers.
ITEM 11. EXECUTIVE COMPENSATION.
Reference is made to the information set forth under the caption "Compensation
of Executive Officers" in the Proxy Statement (except the Report on the
Compensation Committee on Executive Compensation set forth therein) to be filed
pursuant to Regulation 14A, which information is incorporated herein by
reference.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Reference is made to the information set forth under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement to
be filed pursuant to Regulation 14A, which information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reference is made to the information set forth under the caption "Other
Transactions" in the Proxy Statement to be filed pursuant to Regulation 14A,
which information is incorporated herein by reference.
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<PAGE> 77
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
See Index to Financial Statements on Page F-1
(a)(2) Financial Statement Schedules
See Index to Financial Statements on Page F-1
(a)(3) Exhibits
See Exhibit Index following the financial statements
(b) Reports on Form 8-K
None
-76-
<PAGE> 78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto duly authorized, on
February 28, 1997.
HECLA MINING COMPANY
By /s/ Arthur Brown
----------------------------------
Arthur Brown, Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Arthur Brown 2/28/97 /s/ Theodore Crumley 2/28/97
- -------------------------------- ---------------------------------
Arthur Brown Date Theodore Crumley Date
Chairman and Director Director
(principal executive officer)
/s/ Stanley E. Hilbert 2/28/97 /s/ Leland O. Erdahl 2/28/97
- -------------------------------- ---------------------------------
Stanley E. Hilbert Date Leland O. Erdahl Date
Corporate Controller Director
(principal accounting officer)
/s/ John P. Stilwell 2/28/97 /s/ Charles L. McAlpine 2/28/97
- -------------------------------- ---------------------------------
John P. Stilwell Date Charles L. McAlpine Date
Vice President - Chief Financial Director
Officer and Treasurer (principal
financial officer)
/s/ John E. Clute 2/28/97 /s/ Thomas J. O'Neil 2/28/97
- -------------------------------- ---------------------------------
John E. Clute Date Thomas J. O'Neil Date
Director Director
/s/ Joe Coors, Jr. 2/28/97 /s/ Jorge E. Ordonez 2/28/97
- -------------------------------- ---------------------------------
Joe Coors, Jr. Date Jorge E. Ordonez Date
Director Director
-77-
<PAGE> 79
INDEX TO FINANCIAL STATEMENTS
Page
----
Financial Statements
- --------------------
Report of Independent Accountants F-2
Consolidated Balance Sheets at December 31,
1996 and 1995 F-3
Consolidated Statements of Operations for the
Years Ended December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Changes in
Shareholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994 F-6
Notes to Consolidated Financial Statements F-7 to F-36
Financial Statement Schedules*
- -----------------------------
*Financial statement schedules
have been omitted as not applicable
F-1
<PAGE> 80
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------------------------------
The Board of Directors and Shareholders
Hecla Mining Company
We have audited the accompanying consolidated balance sheets of Hecla
Mining Company and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's man-
agement. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Hecla Mining
Company and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for environmental remediation
liabilities in 1996, the impairment of long-lived assets in 1995, and its method
of accounting for investments in 1994.
/s/ COOPERS & LYBRAND L.L.P.
Spokane, Washington
February 7, 1997
F-2
<PAGE> 81
HECLA MINING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
__________
ASSETS
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
---------- ---------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 8,256 $ 4,024
Accounts and notes receivable 24,168 25,571
Income tax refund receivable 1,262 737
Inventories 22,879 20,915
Other current assets 2,284 2,038
---------- ---------
Total current assets 58,849 53,285
Investments 1,723 2,200
Restricted investments 20,674 16,254
Properties, plants and equipment, net 177,755 177,374
Other noncurrent assets 9,392 9,077
---------- ---------
Total assets $ 268,393 $ 258,190
========== =========
LIABILITIES
Current liabilities
Accounts payable and accrued expenses $ 17,377 $ 14,145
Accrued payroll and related benefits 3,232 3,217
Preferred stock dividends payable 2,012 2,012
Accrued taxes 1,427 1,042
Accrued reclamation and closure costs 8,664 5,549
---------- ---------
Total current liabilities 32,712 25,965
Deferred income taxes 359 359
Long-term debt 38,208 36,104
Accrued reclamation and closure costs 45,953 26,782
Other noncurrent liabilities 5,653 4,864
---------- ---------
Total liabilities 122,885 94,074
---------- ---------
Commitments and contingencies (Notes 1, 2 and 6)
SHAREHOLDERS' EQUITY
Preferred stock, $0.25 par value,
authorized 5,000,000 shares;
issued and outstanding - 2,300,000 shares,
liquidation preference $117,012 575 575
Common stock, $0.25 par value, authorized 100,000,000 shares;
issued 1996 - 51,199,324 shares, issued 1995 - 48,317,324 shares 12,800 12,079
Capital surplus 351,559 330,352
Accumulated deficit (213,610) (173,206)
Net unrealized gain (loss) on investments (32) 100
Foreign currency translation adjustment (4,898) (4,898)
Less treasury stock, at cost;
1996 - 62,085 common shares, 1995 - 62,072 common shares (886) (886)
---------- ---------
Total shareholders' equity 145,508 164,116
---------- ---------
Total liabilities and shareholders' equity $ 268,393 $ 258,190
========== =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-3
<PAGE> 82
HECLA MINING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars and shares in thousands, except per share amounts)
__________
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
Sales of products $ 158,252 $ 151,615 $ 125,342
--------- ---------- ---------
Cost of sales and other direct production costs 126,878 121,546 101,278
Depreciation, depletion and amortization 20,451 23,462 14,233
--------- ---------- ---------
147,329 145,008 115,511
--------- ---------- ---------
Gross profit 10,923 6,607 9,831
--------- ---------- ---------
Other operating expenses
General and administrative 9,365 9,371 11,132
Exploration 4,843 7,109 8,397
Depreciation and amortization 338 367 524
Provision for closed operations and environmental
matters 22,806 4,615 11,353
Reduction in carrying value of mining properties 12,902 97,387 7,864
--------- ---------- ---------
50,254 118,849 39,270
--------- ---------- ---------
Loss from operations (39,331) (112,242) (29,439)
--------- ---------- ---------
Other income (expense)
Interest and other income 8,630 8,089 5,227
Miscellaneous income (expense) (250) 18 (234)
Gain (loss) on investments (28) 3,169 1,053
Interest expense:
Interest costs (3,058) (1,960) (2,606)
Less amount capitalized 2,360 1,516 1,751
--------- ---------- ---------
7,654 10,832 5,191
--------- ---------- ---------
Loss before income taxes and extraordinary item (31,677) (101,410) (24,248)
Income tax (provision) benefit (677) (309) 468
--------- ---------- ---------
Loss before extraordinary item (32,354) (101,719) (23,780)
Extraordinary loss on retirement of long-term debt - - - - (833)
--------- ---------- ---------
Net loss (32,354) (101,719) (24,613)
Preferred stock dividends (8,050) (8,050) (8,050)
--------- ---------- ---------
Loss applicable to common shareholders $ (40,404) $ (109,769) $ (32,663)
========= ========== =========
Loss per common share
Loss before extraordinary item $(0.79) $(2.28) $(0.72)
Extraordinary item - - - - (0.02)
------ ------ ------
$(0.79) $(2.28) $(0.74)
====== ====== ======
Weighted average number of common shares outstanding 51,133 48,192 43,944
====== ====== ======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-4
<PAGE> 83
HECLA MINING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Operating activities
Net loss $ (32,354) $ (101,719) $ (24,613)
Noncash elements included in net loss
Depreciation, depletion and amortization 20,789 23,829 14,757
Gain on disposition of properties, plants
and equipment (706) (3,417) (354)
(Gain) loss on investments 28 (3,169) (1,053)
Accretion of interest on long-term debt - - - - 2,495
Reduction in carrying value of mining properties 12,902 97,387 7,864
Provision for reclamation and closure costs 28,284 8,071 11,353
Loss on retirement of long-term debt - - - - 833
Change in
Accounts and notes receivable 192 (849) (4,675)
Income tax refund receivable (525) (490) (247)
Inventories (4,239) (2,299) (4,086)
Other current assets (479) (441) 406
Accounts payable and accrued expenses 3,232 575 (4,088)
Accrued payroll and related benefits 15 493 668
Accrued taxes 385 117 (3)
Accrued reclamation and closure costs
and other noncurrent liabilities (5,210) (6,326) (4,608)
---------- ---------- ----------
Net cash provided (used) by operating activities 22,314 11,762 (5,351)
---------- ---------- ----------
Investing activities
Additions to properties, plants and equipment (33,731) (45,308) (66,559)
Proceeds from disposition of properties, plants
and equipment 3,641 3,822 13,809
Proceeds from sale of investments 130 5,196 32,067
Purchase of restricted investments (4,308) (2,701) (13,553)
Purchase of investments and change in cash surrender
value of life insurance, net (726) (1,047) 114
Other, net (480) (2,407) (325)
---------- ---------- ----------
Net cash used by investing activities (35,474) (42,445) (34,447)
---------- ---------- ----------
Financing activities
Common stock issued under stock option plans
and warrants - - 1,335 1,765
Common stock issuance, net of issuance costs 21,928 - - 63,499
Preferred stock dividends (8,050) (8,050) (8,050)
Borrowings against cash surrender value of life insurance 801 - - - -
Borrowings on long-term debt 51,631 48,000 - -
Repayment of long-term debt (48,918) (13,856) - -
Retirement of long-term debt including $16,283
of accreted interest - - - - (50,169)
---------- ---------- ----------
Net cash provided by financing activities 17,392 27,429 7,045
---------- ---------- ----------
Change in cash and cash equivalents
Net increase (decrease) in cash and cash equivalents 4,232 (3,254) (32,753)
Cash and cash equivalents at beginning of year 4,024 7,278 40,031
---------- ---------- ----------
Cash and cash equivalents at end of year $ 8,256 $ 4,024 $ 7,278
========== ========== ==========
Supplemental disclosure of cash flow information
Cash paid during year for:
Interest (net of amount capitalized), including
$16,283 of accreted interest in 1994 $ 249 $ (136) $ 16,528
========== ========== ==========
Income tax payments, net $ 148 $ 216 $ 436
========== ========== ==========
See Notes 3 and 5 for noncash investing and financing activities.
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-5
<PAGE> 84
HECLA MINING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1995 and 1994
(dollars and shares in thousands, except per share amounts)
_______________
<TABLE>
<CAPTION>
Unrealized Foreign
Gain Currency
Preferred Stock Common Stock Capital Accumulated (Loss) on Translation Treasury
----------------- -----------------
Shares Amount Shares Amount Surplus Deficit Investments Adjustment Stock
-------- ------ ------- ------- --------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993 2,300 $ 575 40,320 $10,080 $ 265,687 $ (30,774) $ (8) $ - - $ (888)
Effect of change in
accounting for investments 635
Net loss (24,613)
Preferred stock dividends
($3.50 per share) (8,050)
Stock issued under stock
option plans and exercise
of warrants 349 87 1,678
Stock issued for cash,
net of issuance costs 7,475 1,869 61,630
Net change in unrealized
gain (loss) on investments 2,769
Net change in foreign
currency translation
adjustment (3,158)
Treasury stock purchased (1)
----- ------ ------ ------- -------- --------- ------- ------- -----
Balances, December 31, 1994 2,300 575 48,144 12,036 328,995 (63,437) 3,396 (3,158) (889)
Net loss (101,719)
Preferred stock dividends
($3.50 per share) (8,050)
Stock issued under stock
option plans and exercise
of warrants 166 41 1,294
Stock issued to directors 7 2 63
Net change in unrealized
gain (loss) on investments (3,296)
Net change in foreign
currency translation
adjustment (1,740)
Treasury stock issued 3
----- ------ ------ ------- -------- --------- ------- ------- -----
Balances, December 31, 1995 2,300 575 48,317 12,079 330,352 (173,206) 100 (4,898) (886)
Net loss (32,354)
Preferred stock dividends
($3.50 per share) (8,050)
Stock issued for cash,
net of issuance costs 2,875 719 21,154
Stock issued to directors 7 2 53
Net change in unrealized
gain (loss) on investments (132)
----- ------ ------ ------- -------- --------- ------- ------- -----
Balances, December 31, 1996 2,300 $ 575 51,199 $12,800 $ 351,559 $(213,610) $ (32) $(4,898) $ (886)
===== ====== ====== ======= ========= ========= ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
F-6
<PAGE> 85
HECLA MINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BASIS OF PRESENTATION -- The accompanying consolidated financial statements
include the accounts of Hecla Mining Company (Hecla or the Company), its
majority-owned subsidiaries and its proportionate share of the accounts of the
joint ventures in which it participates. All significant intercompany
transactions and accounts are eliminated in consolidation.
The Company's revenues and profitability are strongly influenced by world prices
for gold, silver, lead, and zinc, which fluctuate widely and are affected by
numerous factors beyond the Company's control, including inflation and worldwide
forces of supply and demand. The aggregate effect of these factors is not
possible to accurately predict.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ materially from those estimates.
Certain consolidated financial statement amounts have been reclassified to
conform to the 1996 presentation. These reclassifications had no effect on the
net loss or accumulated deficit as previously reported.
B. COMPANY'S BUSINESS AND CONCENTRATIONS OF CREDIT RISK -- The Company is
engaged in mining and mineral processing activities, including exploration,
extraction, processing, and reclamation. The Company's principal products are
metals (primarily gold, silver, lead, and zinc) and industrial minerals
(primarily clay, aggregate and landscape products). Substantially all of the
Company's operations are conducted in the United States and Mexico. Sales of
metals products are made principally to domestic and foreign custom smelters and
metal traders. The Company sells substantially all of its metallic concentrates
to smelters which are subject to extensive regulations including environmental
protection laws. The Company has no control over the smelters' operations or
their compliance with environmental laws and regulations. If the smelting
capacity available to the Company were significantly reduced because of
environmental requirements or otherwise, it is possible that the Company's
silver operations could be adversely affected. Industrial minerals are sold
principally to domestic and Mexican manufacturers and wholesalers.
F-7
<PAGE> 86
Sales to significant metals customers, as a percentage of total sales of metals,
were as follows:
1996 1995 1994
---- ---- ----
Custom smelters 18.4% 8.9% 9.3%
Custom metal traders
Customer A 31.2% 32.8% 38.3%
Customer B 29.5% 30.6% 19.2%
Customer C 7.7% 11.6% 12.9%
Customer D 7.5% 7.9% 11.9%
During 1996, 1995 and 1994, the Company sold 9.8%, 7.0% and 13.0%, respectively,
of its products to companies in foreign countries.
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company places its cash and temporary cash investments with
institutions of high credit-worthiness. At times such investments may be in
excess of the FDIC insurance limit. The Company routinely assesses the
financial strength of its customers and, as a consequence, believes that its
trade accounts receivable credit risk exposure is limited.
C. INVENTORIES -- Inventories are stated at the lower of average cost or
estimated net realizable value.
D. INVESTMENTS -- The Company uses the equity method to account for
investments in common stock of operating companies 20% to 50% owned.
Investments in nonoperating companies that are not intended for resale or are
not readily marketable are valued at the lower of cost or net realizable value.
Marketable equity securities are categorized as available for sale. Effective
January 1994, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities."
Realized gains and losses on the sale of securities are recognized on a specific
identification basis. Unrealized gains and losses are included as a component
of shareholders' equity net of related deferred income taxes, unless a permanent
impairment in value has occurred, which is then charged to operations.
Restricted investments held at December 31, 1996 and 1995, primarily represent
investments in money market funds and U.S. Treasury securities. These
investments are restricted for reclamation funding, as well as reclamation
surety bond and appeal bond collateral requirements.
E. PROPERTIES, PLANTS AND EQUIPMENT -- Properties, plants and equipment are
stated at the lower of cost or estimated net
F-8
<PAGE> 87
realizable value. Maintenance, repairs and renewals are charged to operations.
Betterments of a major nature are capitalized. When assets are retired or sold,
the costs and related allowances for depreciation and amortization are
eliminated from the accounts and any resulting gain or loss is reflected in
operations. Idle facilities, placed on a standby basis, are carried at the
lower of net book value or estimated net realizable value.
Management of the Company reviews the net carrying value of all facilities,
including idle facilities, on a regular, periodic basis. These reviews
consider, among other factors, (1) the net realizable value of each major type
of asset, on a property-by-property basis, to reach a judgment concerning
possible permanent impairment of value and any need for a write-down in asset
value; (2) the ability of the Company to fund all care, maintenance and standby
costs; (3) the status and usage of the assets, while in a standby mode, to
thereby determine whether some form of amortization is appropriate; and (4)
current estimates of metal prices that affect the decision to reopen or make a
disposition of the assets. The Company estimates the net realizable value of
each property based on the estimated undiscounted future cash flows that will be
generated from operations at each property, the estimated salvage value of the
surface plant and equipment and the value associated with property interests.
These estimates of undiscounted future cash flows are dependent upon estimates
of metal to be recovered from proven and probable ore reserves and, where
appropriate, from the continuity of existing, developed ore bodies, future
production costs and future metals prices over the estimated remaining mine
life. If undiscounted cash flows are less than the carrying value of a
property, an impairment loss is recognized based upon the estimated expected
future net cash flows from the property discounted at an interest rate
commensurate with the risk involved. Effective January 1, 1995, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" (SFAS No. 121). The adoption of the provisions of SFAS No. 121
had no material effect on the results of operations or financial condition of
the Company.
Management's estimates of metals prices, recoverable proven and probable ore
reserves, and operating, capital and reclamation costs are subject to risks and
uncertainties of change affecting the recoverability of the Company's investment
in various projects. Although management has made its best estimate of these
factors based on current conditions, it is reasonably possible that changes
could occur in the near term which could adversely affect management's estimate
of net cash flows expected to be generated from its operating properties and the
need for asset impairment write-downs.
Depreciation is based on the estimated useful lives of the assets and is
computed using straight-line, declining-balance, and
F-9
<PAGE> 88
unit-of-production methods. Depletion is computed using the unit-of-production
method.
Management's calculations of proven and probable ore reserves are based on
engineering and geological estimates including minerals prices and operating
costs. Changes in the geological and engineering interpretation of various ore
bodies, mineral prices and operating costs may change the Company's estimates of
proven and probable reserves. It is reasonably possible that certain of the
Company's estimates of proven and probable reserves will change in the near term
resulting in a change to amortization and reclamation accrual rates in future
reporting periods.
F. MINE EXPLORATION AND DEVELOPMENT -- Exploration costs are charged to
operations as incurred, as are normal development costs at operating mines.
Major mine development expenditures are capitalized at operating properties and
at new mining properties not yet producing.
G. RECLAMATION OF MINING AREAS -- All of the Company's operations are subject
to reclamation and closure requirements. Minimum standards for mine reclamation
have been established by various governmental agencies which affect certain
operations of the Company. A reserve for mine reclamation costs has been
established for restoring certain abandoned and currently disturbed mining areas
based upon estimates of cost to comply with existing reclamation standards.
Mine reclamation costs for operating properties are accrued using the
unit-of-production method and charged to cost of sales and other direct
production costs. The estimated amount of metals or minerals to be recovered
from a mine site is based on internal and external geological data and is
reviewed by management on a periodic basis. Changes in such estimated amounts
which affect reclamation cost accrual rates are reflected on a prospective basis
unless they indicate there is a current impairment of an asset's carrying value
and a decision is made to permanently close the property, in which case they are
recognized currently and charged to provision for closed operations and
environmental matters. It is reasonably possible that the Company's estimate of
its ultimate accrual for reclamation costs will change in the near term due to
possible changes in laws and regulations, and interpretations thereof, and
changes in cost estimates.
H. REMEDIATION OF MINING AREAS -- The Company accrues costs associated with
environmental remediation obligations when it is probable that such costs will
be incurred and they are reasonably estimable. Accruals for estimated losses
from environmental remediation obligations generally are recognized no later
than completion of the remedial feasibility study and are charged to provision
for closed operations and environmental matters. Costs of future expenditures
for environmental remediation are not discounted to their present value; such
costs are based on
F-10
<PAGE> 89
management's current estimate of amounts that are expected to be incurred when
the remediation work is performed within current laws and regulations.
Recoveries of environmental remediation costs from other parties are recorded as
assets when their receipt is deemed probable.
In October 1996, the American Institute of Certified Public Accountants issued
Statement of Position 96-1, "Environmental Remediation Liabilities" (SOP 96-1).
SOP 96-1 provides authoritative guidance with respect to specific accounting
issues that are present in the recognition, measurement, display, and disclosure
of environmental remediation liabilities. The provisions of SOP 96-1 are
effective for fiscal years beginning after December 15, 1996. The Company
adopted the provisions of the SOP 96-1 during 1996. The adoption of the
provisions of SOP 96-1 had no material effect on the results of operations or
financial condition of the Company.
It is reasonably possible that, due to uncertainties associated with defining
the nature and extent of environmental contamination, application of laws and
regulations by regulatory authorities, and changes in remediation technology,
the ultimate cost of remediation could change in the future. The Company
periodically reviews its accrued liabilities for such remediation costs as
evidence becomes available indicating that its remediation liability has
changed.
I. INCOME TAXES -- The Company records deferred tax liabilities and assets for
the expected future income tax consequences of events that have been recognized
in its financial statements. Deferred tax liabilities and assets are determined
based on the temporary differences between the financial statement carrying
amounts and the tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the temporary differences are expected to reverse.
J. LOSS PER COMMON SHARE -- Loss per common share is computed by adding
preferred stock dividends to the net loss and dividing the result by the
weighted average number of shares of common stock and common stock equivalents
(stock options) outstanding during each reporting period unless the common stock
equivalents are antidilutive. Due to the losses in 1996, 1995 and 1994, common
stock equivalents are antidilutive and therefore have been excluded from the
computation.
K. REVENUE RECOGNITION -- Sales of metal products sold directly to smelters
are recorded when title and risk of loss transfer to the smelter, at estimated
metal prices. Recorded values are adjusted periodically and upon final
settlement. Metal in products tolled (rather than sold to smelters) is sold
under contracts for future delivery; such sales are recorded at contractual
amounts when products are available to be processed by the smelter or
F-11
<PAGE> 90
refinery. Sales of industrial minerals are recognized as the minerals are
delivered.
L. INTEREST EXPENSE -- Interest costs incurred during the construction of
qualifying assets are capitalized as part of the asset cost.
M. CASH EQUIVALENTS -- The Company considers cash equivalents to consist of
highly liquid investments with a remaining maturity of three months or less when
purchased.
N. FOREIGN CURRENCY TRANSLATION -- The Company operates in Mexico with its two
wholly owned subsidiaries: Minera Hecla, S.A. de C.V. (Minera Hecla) and K-T
Clay de Mexico S.A. de C.V. (K-T Mexico). The functional currency for Minera
Hecla and K-T Mexico is the U.S. dollar. Accordingly, the Company translates
the monetary assets and liabilities of both subsidiaries at the year-end
exchange rate while nonmonetary assets and liabilities are translated at
historical rates. Income and expense accounts are translated at the average
exchange rate for each period. Translation adjustments and transaction gains
and losses are reflected in the net loss for the period.
Prior to the second quarter of 1995, K-T Mexico's functional currency was the
Mexican peso. During the second quarter of 1995, K-T Mexico commenced invoicing
its customers in U.S. dollars instead of the Mexican peso. This change
indicated a change in the functional currency from the Mexican peso to the U.S.
dollar. The change in the functional currency has been accounted for
prospectively commencing in the second quarter of 1995. Accumulated translation
adjustments from prior periods are included as a separate component of
shareholders' equity. The translated amounts for nonmonetary assets prior to
the change have become the accounting basis for those assets.
O. RISK MANAGEMENT CONTRACTS -- In the normal course of its business, the
Company uses forward sales commitments and commodity put and call option
contracts to manage its exposure to fluctuations in the prices of certain metals
which it produces. Contract positions are designed to ensure that the Company
will receive a defined minimum price for certain quantities of its production.
Gains and losses, and the related costs paid or premium received, for contracts
which hedge the sales prices of commodities are deferred and subsequently
included in income as part of the hedged transaction. Revenues from the
aforementioned contracts are recognized at the time metals are available for
shipment to the refineries. The Company is exposed to certain losses, generally
the amount by which the contract price exceeds the spot price of a commodity, in
the event of nonperformance by the counterparties to these agreements.
F-12
<PAGE> 91
P. ACCOUNTING FOR STOCK OPTIONS -- In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123). SFAS No. 123
establishes financial accounting and reporting standards for stock-based
employee compensation plans. SFAS No. 123 encourages all entities to adopt a
fair value based method of accounting, but allows an entity to continue to
measure compensation cost for those plans using the intrinsic value method of
accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company adopted the disclosure provisions
only of SFAS No. 123 in 1996.
NOTE 2: INVENTORIES
Inventories consist of the following (in thousands):
December 31,
-------------------
1996 1995
-------- --------
Concentrates, bullion, metals in transit
and other products $ 4,839 $ 2,519
Industrial minerals products 8,902 8,671
Materials and supplies 9,138 9,725
------- -------
$22,879 $20,915
======= =======
At December 31, 1996, the Company had forward sales commitments through January
31, 1997, for 1,000 ounces of gold at an average price of $412 per ounce and
spot deferred contracts for 25,000 ounces of gold at an average price of $381
for delivery on January 15, 1997. The Company has also purchased options to put
34,440 ounces of gold to counterparties at an average price of $396 per ounce.
Concurrently, the Company sold options to allow the counterparties to call
34,440 ounces of gold from the Company at an average price of $461 per ounce.
There was no net cost associated with the purchase and sale of these options
which expire, in tandem, on a monthly basis through December 31, 1997. All of
the aforementioned contracts are designated as hedges at December 31, 1996. The
London Final gold price at December 31, 1996 was $369 per ounce.
F-13
<PAGE> 92
NOTE 3: PROPERTIES, PLANTS AND EQUIPMENT
The major components of properties, plants and equipment are (in thousands):
December 31,
--------------------
1996 1995
-------- ---------
Mining properties $ 39,893 $ 45,023
Development costs 99,659 122,842
Plants and equipment 246,091 209,100
Land 6,142 6,501
--------- ---------
391,785 383,466
Less accumulated depreciation,
depletion and amortization 214,030 206,092
--------- ---------
Net carrying value $ 177,755 $ 177,374
========= =========
In the third quarter of 1996, based on its periodic reviews of the status of
various mining properties, the Company determined that certain adjustments were
appropriate to properly reflect estimated net realizable values. These
adjustments, totaling $12.9 million, consisted of write-downs of properties,
plants and equipment, inventories and production notes payable for the Company's
interest in the American Girl mine ($7.6 million), and properties, plants and
equipment and inventories for the Company's interest in the Grouse Creek mine
($5.3 million). The American Girl write-down was due to lower than expected ore
reserves and lower ore grade associated with the Oro Cruz ore body which
resulted in the operator's decision to close the mine effective November 4,
1996. The Grouse Creek write-down was associated with the Company's decision to
suspend operations after determining that the ore contained in the Grouse ore
body was not economical to mine at current metals prices. Mine operations will
be suspended late in the second quarter of 1997 once mining of the Sunbeam
deposit is complete.
In 1995, adjustments to the carrying value of mining properties totaling $97.4
million were recorded to write down the Company's interest in the Grouse Creek
mine ($97.0 million) and for the Company's interest in ConSil Corp.'s Silver
Summit mine ($0.4 million).
In 1994, the major portion of the $7.9 million adjustment was related to the
$7.2 million write-down of property, plant, equipment and supplies inventory at
the Republic mine, which completed operations in February 1995. Also included
was a $0.7 million write-down of exploration equipment and other property.
The net carrying values of the major mining properties of the Company that were
on a standby or idle basis at December 31, 1996
F-14
<PAGE> 93
and 1995, were approximately $4.0 million and $7.6 million, respectively.
On September 6, 1996, Hecla and Santa Fe Pacific Gold Corporation (Santa Fe)
entered into a joint venture agreement with respect to the development and
operation of the Rosebud project. Pursuant to the agreement, a limited
liability corporation was established with each party owning a 50% interest in
the project. No gain or loss was recognized in connection with the agreement.
Under the terms of the agreement, Hecla will manage the mining activities and
Santa Fe will manage mill processing. Total mine-site capital expenditures to
bring the mine into production are expected to be approximately $20.0-$25.0
million, of which $11.1 has been expended through December 31, 1996. Under the
terms of the agreement, Santa Fe funded the first $12.5 million of mine-site
development and is also responsible to fund costs of road and mill facility
improvements. Santa Fe also contributed exploration property adjacent to the
Rosebud property, and will fund the first $1.0 million in exploration
expenditures, and two-thirds of future exploration expenditures beyond the
initial $1.0 million.
In 1996, Euro-Nevada Mining Corporation Inc. (Euro-Nevada) exercised its option
to purchase an additional 1.5% Net Smelter Return (NSR) royalty on the Rosebud
property for $2.5 million, the proceeds of which were retained by Hecla under
the terms of the agreement with Santa Fe. After the exercise of its option,
Euro-Nevada holds a 4% NSR royalty on production from the Rosebud property. The
Company recognized a gain of $2.5 million associated with this transaction.
In 1996, the Company and Santa Fe entered into a joint-venture agreement for the
Golden Eagle property located adjacent to the Company's Republic mine. Santa Fe
purchased an immediate 75% interest in the joint venture for $2.5 million. The
Company recorded a gain on the transaction totaling $0.6 million. Under the
agreement, Santa Fe is to fund all expenditures at the property through the
economic feasibility stage.
On September 27, 1995, the Company sold its Apex Unit processing facility for
$8.0 million, plus certain working capital items totaling an additional $1.4
million, recognizing a gain on the sale totaling approximately $3.2 million.
The Company received $4.4 million in cash at closing and accepted a note
receivable for the remaining $5.0 million. Under the note, $3.0 million, plus
accrued interest, was paid on September 27, 1996, and the balance of $2.0
million, plus accrued interest, is due on September 27, 1997.
On February 8, 1994, the Company sold a 20% interest in its Grouse Creek gold
project to Great Lakes Minerals Inc. of Toronto, Ontario (Great Lakes). The
purchase price of $6.8 million represents 20% of the amount spent by the Company
on acquisition, exploration and development of the project through June 30,
1993, and a fixed
F-15
<PAGE> 94
premium of $1.25 million. On January 31, 1997, Great Lakes and the Company
entered into a letter agreement terminating the Grouse Creek joint venture and
conveying Great Lakes' interest in the Grouse Creek project to Hecla. Great
Lakes retained a 5% defined net proceeds interest in the project. The Company
has assumed 100% of the interests and obligations associated with the property.
NOTE 4: INCOME TAXES
Major components of the Company's income tax provision (benefit) are (in
thousands):
1996 1995 1994
------- ------- --------
Current
Federal $ (749) $ (298) $ (805)
State 341 307 337
Foreign 1,085 300 - -
------- ------- --------
Income tax provision (benefit) $ 677 $ 309 $ (468)
======= ======= ========
Domestic and foreign components of income (loss) before income taxes and
extraordinary item for the years ended December 31, 1996, 1995 and 1994 are as
follows (in thousands):
December 31,
---------------------------------
1996 1995 1994
-------- --------- --------
Domestic $(36,488) $(104,050) $(23,698)
Foreign 4,791 2,640 (550)
-------- --------- --------
Total $(31,677) $(101,410) $(24,248)
======== ========= ========
F-16
<PAGE> 95
The components of the net deferred tax liability were as follows (in thousands):
December 31,
--------------------------
1996 1995
---------- ----------
Deferred tax assets
Accrued reclamation costs $ 17,988 $ 10,832
Investment valuation differences 1,924 1,969
Capital loss carryover 2,826 3,431
Postretirement benefits other
than pensions 967 898
Other liabilities 13 230
Deferred compensation 795 612
Accounts receivable 456 456
Properties, plants and equipment - - 10,969
Foreign net operating losses 3,048 2,314
Federal net operating losses 72,686 57,398
State net operating losses 7,514 4,867
Tax credit carryforwards 2,659 3,435
Miscellaneous 2,518 2,103
---------- ---------
Total deferred tax assets 113,394 99,514
Valuation allowance (107,937) (97,705)
---------- ---------
Net deferred tax assets 5,457 1,809
---------- ---------
Deferred tax liabilities
Properties, plants and equipment (3,903) - -
Deferred income (210) (287)
Pension costs (951) (624)
Inventories (393) (898)
Deferred state income taxes, net (359) (359)
---------- ---------
Total deferred tax liabilities (5,816) (2,168)
---------- ---------
Net deferred tax liability $ (359) $ (359)
========== =========
F-17
<PAGE> 96
The Company has recorded a valuation allowance to reflect the estimated amount
of deferred tax assets which may not be realized principally due to the
expiration of net operating losses and tax credit carryforwards. The changes in
the valuation allowance for the years ended December 31, 1996, 1995 and 1994,
are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ (97,705) $ (67,149) $ (58,529)
Increase related to nonutilization
of net operating loss carry-
forwards and nonrecognition of
deferred tax assets due to
uncertainty of recovery (10,232) (30,556) (8,620)
---------- ---------- -----------
Balance at end of year $ (107,937) $ (97,705) $ (67,149)
========== ========== ===========
</TABLE>
The annual tax provision (benefit) is different from the amount which would be
provided by applying the statutory federal income tax rate to the Company's
pretax loss. The reasons for the difference are (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Computed "statutory"
benefit $ (10,770) (34)% $ (34,479) (34)% $ (8,244) (34)%
Nonutilization of net
operating losses and
effect of foreign tax
provisions, if applicable 11,716 37 34,782 34 8,085 33
State income taxes, net
of federal tax benefit (269) (1) 6 0 (309) (1)
--------- ----- --------- ----- --------- -----
$ 677 2% $ 309 0% $ (468) (2)%
========= ===== ========= ===== ========= =====
</TABLE>
F-18
<PAGE> 97
Substantially all of the Company's net operating loss carryovers are attributed
to preference related items, and therefore are not available to offset
alternative minimum taxable income. However, they are available to offset
future regular taxable income. At December 31, 1996, the Company had tax basis
net operating loss carryovers available to offset future regular and alternative
minimum tax (AMT) and foreign taxable income. These carryovers expire as
follows (in thousands):
Regular Foreign
Tax Net AMT Net Net Investment
Operating Operating Operating Tax Credit
Losses Losses Losses Carryovers
--------- --------- --------- ----------
1997 $ 2,020 $ 695 $ - - $ 117
1998 11,005 308 235 468
1999 6,235 1,199 7,923 310
2000 3,089 789 810 240
2001 4,538 1,683 - - 115
2002 2,717 346 - - - -
2003 1,792 623 - - - -
2004 16,406 532 - - - -
2005 10,744 878 - - - -
2006 23,766 3,105 - - - -
2007 27,134 8,285 - - - -
2008 28,179 21,827 - - - -
2009 11,670 5,274 - - - -
2010 19,087 14,743 - - - -
2011 45,400 44,000 - - - -
--------- --------- --------- -------
$ 213,782 $ 104,287 $ 8,968 $ 1,250
========= ========= ========= =======
At December 31, 1996, for income tax purposes, the Company had approximately
$17.9 million and $8.5 million, respectively, of regular and AMT net operating
loss carryovers from Equinox Resources Ltd. (Equinox) and CoCa Mines Inc. Due
to these mergers, there will be limitations on the amount of these net operating
losses that can be utilized in any given year to reduce certain future taxable
income.
The Company has approximately $0.5 million in AMT credit carryovers eligible to
reduce future regular tax liabilities.
F-19
<PAGE> 98
NOTE 5: LONG-TERM DEBT AND CREDIT AGREEMENT
Long-term debt consists of the following (in thousands):
December 31,
-----------------------
1996 1995
--------- ----------
Revolving credit agreement $ 38,000 $ 35,000
Notes payable - Sunbeam 346 692
Production notes payable - - 609
Other long-term debt 208 149
--------- ----------
38,554 36,450
Less current portion (346) (346)
--------- ----------
$ 38,208 $ 36,104
========= ==========
Revolving Credit Agreement
The Company has a revolving and term loan facility (the Bank Agreement) that
allows it to borrow up to $55.0 million. Amounts may be borrowed on a revolving
credit basis through July 31, 1998, and are repayable in eight quarterly
installments beginning on October 31, 1998. During the commitment period, the
Company pays an annual facility fee ranging from $178,750 to $261,250, the
amount of which is based on average quarterly borrowings. The Bank Agreement,
as amended, includes certain collateral provisions, including the pledging of
the common stock of certain of the Company's subsidiaries and providing the
lenders a security interest in accounts receivable. Under the amended terms of
the Bank Agreement, the Company is required to maintain certain financial
ratios, and meet certain net worth and indebtedness tests for which the Company
was in compliance at December 31, 1996. Amounts available under the amended
Bank Agreement are based on a defined debt to cash flow test. As of December
31, 1996, the Company had borrowings of $38.0 million and the ability to borrow
the remaining $17.0 million under the facility. The interest rate for
borrowings under the Bank Agreement as of December 31, 1996 was 7.16%.
Zero Coupon Convertible Notes
On June 13, 1994, the Company redeemed its Zero Coupon Convertible Notes with a
face value of approximately $50.2 million. The Company recorded an
extraordinary loss on retirement of long-term debt totaling approximately $0.8
million, which related principally to the write-off of the unamortized balance
of deferred issuance costs of the notes.
F-20
<PAGE> 99
Notes Payable - Sunbeam
The notes are non-interest bearing, discounted at 15% and payable in three
annual equal amounts. The first two installments of the notes, totaling
approximately $346,000 each, were paid in January 1995 and January 1996. The
final installment was paid in January 1997.
Production Notes Payable
When the Company acquired Equinox in March 1994, the then outstanding production
participating preferred shares were converted to production notes and recorded
as long-term debt. The attributes of the production notes are identical to their
predecessor production participating preferred shares. The valuation of the
production notes is based on the present value of the estimated cumulative net
cash flow discounted at 10% from the American Girl/Oro Cruz project. Based upon
the repayment terms of the production notes and the shutdown of operations at
the American Girl mine in November 1996, prior to the mine reaching positive
cumulative cash flow, the Company does not expect to pay the notes. Therefore,
the notes were written off in 1996.
NOTE 6: COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases various facilities and equipment under noncancelable
operating lease arrangements. The major facilities and equipment leases are for
terms of three to ten years. Future minimum lease payments under these
noncancelable operating leases as of December 31, 1996, are as follows (in
thousands):
Year ending December 31,
------------------------
1997 $ 4,381
1998 2,123
1999 1,832
2000 1,118
2001 562
Thereafter 312
--------
Total minimum lease payments $ 10,328
========
Approximately $1.6 million of the above minimum lease payments relate to
equipment used at the Company's Grouse Creek mine which was written down in 1996
and 1995 (see Note 4). In 1996, the Company announced plans to suspend
operations at the Grouse Creek mine once the Sunbeam ore reserves are mined and
F-21
<PAGE> 100
processed. The lease obligations for 1997 have been accrued and charged to
operations in 1996. The Company anticipates making arrangements such that there
will be no material additional lease obligations in connection with the Grouse
Creek mine beyond 1997. However, there can be no assurance that the Company
will be successful in making such arrangements.
Rent expense incurred for operating leases during the years ended December 31,
1996, 1995 and 1994 was approximately $4.2 million, $3.8 million and $2.2
million, respectively.
Contingencies
Bunker Hill
In October 1989, and again in February 1990, the Company was notified by the
Environmental Protection Agency (EPA) that the EPA considered the Company a
potentially responsible party (PRP) under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended (CERCLA or
Superfund) at the Bunker Hill Superfund Site located at Kellogg, Idaho (Bunker
Hill Site). In February 1994, the Company and three other mining companies, as
PRPs, entered into a Consent Decree with the EPA and the State of Idaho pursuant
to which the Company and two of the three companies signing the decree agreed to
implement remediation work at a portion of the Bunker Hill Site. The
remediation has primarily involved the removal and replacement of lead-
contaminated soils in residential yards within the site and is estimated to be
completed by the participating mining companies over the period of the next four
to six years. The Consent Decree also provides for the mining companies to
reimburse the EPA for a portion of the government's past costs incurred at the
Bunker Hill Site. The Consent Decree was approved and entered by the Federal
District Court in Idaho on November 17, 1994. The Consent Decree settles the
Company's response-cost liability under Superfund at the Bunker Hill Site.
Based upon the terms of the Consent Decree and an agreement between the
participating mining companies relating to the allocation of the cost for work
under the Consent Decree, the Company has estimated and established a total
allowance for liability for remedial activity costs at the Bunker Hill Site of
$9.4 million as of December 31, 1996. As with any estimate of this nature, it
is reasonably possible that the Company's recorded estimate of this obligation
may change in the near term.
Coeur d'Alene River Basin Natural Resource Damage Claims
- - Coeur d'Alene Tribe Claims
In July 1991, the Coeur d'Alene Indian Tribe (the Tribe) brought a lawsuit,
under CERCLA, in Idaho Federal District Court against
F-22
<PAGE> 101
the Company and a number of other mining companies asserting claims for damages
to natural resources located downstream from the Bunker Hill Site over which the
Tribe alleges some ownership or control. The Company has answered the Tribe's
complaint denying liability for natural resource damages. In July 1992, in a
separate action between the Tribe and the State of Idaho, the Idaho Federal
District Court determined that the Tribe does not own the beds, banks and waters
of Lake Coeur d'Alene and the lower portion of its tributaries, the ownership of
which is the primary basis for the natural resource damage claims asserted by
the Tribe against the Company. Based upon the Tribe's appeal of this decision,
the Court in the natural resource damage litigation stayed the court proceedings
in the natural resource damage litigation until a final decision is made on the
question of the Tribe's ownership. On December 9, 1994, the 9th Circuit Court
reversed the decision of the Idaho Federal District Court and remanded the case
of the Tribe's ownership for trial before the Idaho Federal District Court. In
April 1996, the U.S. Supreme Court accepted the appeal from the 9th Circuit
Court decision to the U.S. Supreme Court. A decision in the case is expected by
approximately June 1997. In July 1994, the United States, as Trustee for the
Coeur d'Alene Tribe, initiated a separate suit in Idaho Federal District Court
seeking a determination that the Coeur d'Alene Tribe owns approximately the
lower one-third of Lake Coeur d'Alene. The State has denied the Tribe's
ownership of any portion of Lake Coeur d'Alene and its tributaries. In October
1996, the legal proceeding related to the Tribe's natural resource damage claims
was consolidated with the United States Natural Resources Damage litigation
described below.
- - U.S. Government Claims
On March 22, 1996, the United States filed a lawsuit in Idaho Federal District
Court against the Company and other mining companies who conducted historic
mining operations in the Silver Valley of northern Idaho. The lawsuit asserts
claims under CERCLA and the Clean Water Act and seeks recovery for alleged
damages to or loss of natural resources located in the Coeur d'Alene River Basin
(the Basin) in northern Idaho over which the United States asserts to be the
trustee under CERCLA. The lawsuit asserts that the defendants' historic mining
activity resulted in releases of hazardous substances and damaged natural
resources within the Basin. The suit also seeks declaratory relief that the
Company and other defendants are jointly and severally liable for response costs
under CERCLA for historic mining impacts in the Basin outside the Bunker Hill
Site. The Company answered the complaint on May 17, 1996, denying liability to
the United States under CERCLA and the Clean Water Act and asserted a
counterclaim against the United States for the federal government's involvement
in mining activity in the Basin which contributed to the releases and
F-23
<PAGE> 102
damages alleged by the United States. The Company believes it also has a number
of defenses to the United States' claims. In October 1996, the Court
consolidated the Coeur d'Alene Tribe Natural Resource Damage litigation with
this lawsuit for discovery and other limited pretrial purposes.
- - State of Idaho Claims
On March 22, 1996, the Company entered into an agreement (the Agreement) with
the State of Idaho pursuant to which the Company agreed to continue certain
financial contributions to environmental cleanup work in the Basin being
undertaken by a State Trustees group. In return, the State agreed not to sue
the Company for damage to natural resources for which the State is a trustee for
a period of five years, to pursue settlement with the Company of the State's
natural resource damage claims and to grant the Company credit against any such
State claims for all expenditures made under the Agreement and certain other
Company contributions and expenditures for environmental cleanup in the Basin.
With respect to the Basin litigation, the Company increased its accrual for
closed operations and environmental matters by approximately $2.7 million in
1996. At December 31, 1996, the Company's accrual for remediation activity in
the Basin totals $2.2 million. These expenditures are anticipated to be made
over the next four years. Depending on the results of the aforementioned
lawsuits, it is reasonably possible that the Company's estimate of its
obligation may change in the near term.
Insurance Coverage Litigation
In 1991, the Company initiated litigation in the Idaho State District Court in
Kootenai County, Idaho, against a number of insurance companies which provided
comprehensive general liability insurance coverage to the Company and its
predecessors. The Company believes that the insurance companies have a duty to
defend and indemnify the Company under their policies of insurance for all
liabilities and claims asserted against the Company by the EPA and the Tribe
under CERCLA related to the Bunker Hill Site and the Basin in northern Idaho.
In 1992, the Court ruled that the primary insurance companies had a duty to
defend the Company in the Tribe's lawsuit. During 1995 and 1996, the Company
entered into settlement agreements with a number of the insurance carriers named
in the litigation. The Company has received a total of approximately $7.2
million under the terms of the settlement agreements. Thirty percent of these
settlements were paid to the EPA to reimburse the U.S. Government for past costs
under the Bunker Hill Site Consent Decree. Litigation is still pending against
one insurer with trial continued until the underlying environmental claims
F-24
<PAGE> 103
against the Company are resolved or settled. The remaining insurer is providing
the Company with a partial defense in all Basin environmental litigation. As of
December 31, 1996, the Company had not reduced its accrual for reclamation and
closure costs to reflect the receipt of any anticipated insurance proceeds.
Star Phoenix
In June 1994, a judgment was entered against the Company in the Idaho State
District Court in the amount of $10.0 million in compensatory damages and $10.0
million in punitive damages based on a jury verdict rendered in late May 1994
with respect to a lawsuit previously filed against the Company by Star Phoenix
Mining Company (Star Phoenix), a former lessee of the Star Morning mine, over a
dispute between the Company and Star Phoenix concerning the Company's November
1990 termination of the Star Phoenix lease of the Star Morning mine property.
On May 3, 1995, the District Court issued its final opinion and order on a
number of post-trial issues pending before the Court. The opinion and order
included the Court's denial of the post-trial motions filed by Star Phoenix and
certain of its principals regarding claims which had been previously dismissed
by the Court during trial. The Court also awarded Star Phoenix approximately
$300,000 in attorneys' fees and costs. The judgement was appealed to the Idaho
State Supreme Court which heard arguments in April 1996 and is expected to
render its opinion in the near future. Post-judgment interest will accrue
during the appeal period. In order to stay the ability of Star Phoenix to
collect on the judgment during the pendency of the appeal, the Company has
posted an appeal bond in the amount of $27.2 million representing 136% of the
District Court judgment. The Company pledged U.S. Treasury securities totaling
$10.0 million as collateral for the appeal bond. This collateral amount is
included in restricted investments at December 31, 1996, and December 31, 1995.
The Company has vigorously pursued its appeal to the Idaho Supreme Court and it
has been the Company's position, and at the current time it remains the
Company's position, that it will not enter into a settlement with Star Phoenix
for any material amount. Although the ultimate outcome of the appeal of the
Idaho District Court judgment is subject to the inherent uncertainties of any
legal proceeding, based upon the Company's analysis of the factual and legal
issues associated with the proceeding before the Idaho District Court and based
on the opinions of outside counsel, as of the date hereof, it is management's
belief that the Company should ultimately prevail in this matter, although there
can be no assurance in this regard. Accordingly, the Company has not accrued
any liability associated with this litigation.
The Company is subject to other legal proceedings and claims which have arisen
in the ordinary course of its business and
F-25
<PAGE> 104
have not been finally adjudicated. Although there can be no assurance as to the
ultimate disposition of these matters and the proceedings disclosed above, it is
the opinion of the Company's management, based upon the information available at
this time, that the expected outcome of these matters, individually or in the
aggregate, will not have a material adverse effect on the results of operations
and financial condition of the Company.
NOTE 7: EMPLOYEE BENEFIT PLANS
The Company and certain subsidiaries have defined benefit pension plans covering
substantially all employees. One plan covering eligible salaried and hourly
employees provides retirement benefits and is based on the employee's
compensation during the highest 36 months of the last 120 months before
retirement. Three other pension plans covering eligible hourly employees
provide benefits of stated amounts for each year of service. It is the
Company's policy to make contributions to these plans sufficient to meet the
minimum funding requirements of applicable laws and regulations, plus such
additional amounts, if any, as the Company and its actuarial consultants
consider appropriate. Contributions are intended to provide not only for
benefits attributed to service to date, but also for those expected to be earned
in the future. Plan assets for these plans consist principally of equity
securities, insurance contracts and corporate and U.S. government obligations.
Net periodic pension cost (income) for the plans consisted of the following in
1996, 1995 and 1994 (in thousands):
1996 1995 1994
-------- -------- --------
Service cost $ 881 $ 778 $ 938
Interest cost 2,196 2,021 1,938
Return on plan assets (3,499) (2,607) (2,737)
Amortization of transition asset (419) (434) (434)
Amortization of unrecognized
prior service cost 91 70 70
Amortization of unrecognized net
gain from earlier periods (60) (12) (4)
-------- -------- --------
Net pension income $ (810) $ (184) $ (229)
======== ======== ========
F-26
<PAGE> 105
The following table sets forth the funded status of the plans and amounts
recognized in the Company's consolidated balance sheets (in thousands):
December 31,
-------------------------
1996 1995
-------- --------
Actuarial present value of
benefit obligations:
Vested benefits $ 29,917 $ 30,203
Nonvested benefits 321 155
-------- --------
Accumulated benefit obligations 30,238 30,358
Effect of projected future salary
and wage increases 1,842 2,014
-------- --------
Projected benefit obligations $ 32,080 $ 32,372
======== ========
Plan assets $ 44,984 $ 39,881
Projected benefit obligations (32,080) (32,372)
-------- --------
Plan assets in excess of projected
benefit obligations 12,904 7,509
Unrecognized net gain (9,260) (3,976)
Unrecognized prior service cost 1,378 932
Unrecognized net asset
at January 1 (2,213) (2,647)
-------- --------
Pension asset recognized in
consolidated balance sheets $ 2,809 $ 1,818
======== ========
The projected benefit obligation was calculated by applying the following rates:
1996 1995
------- -------
Discount rate 7.50% 7.00%
Long-term compensation increase 4.00% 4.00%
Long-term rate of return on
plan assets 9.00% 8.00%
The Company provides certain postretirement benefits, principally health care
and life insurance benefits for qualifying retired employees. The costs of
these benefits are being funded out of general corporate funds and are accrued
over the period in which active employees provide services to the Company. Net
periodic postretirement benefit cost included the following components (in
thousands):
1996 1995 1994
------ ------ ------
Service cost $ 16 $ 13 $ 24
Interest cost 145 154 141
Amortization of gain (24) (18) (13)
------ ------ ------
Net postretirement benefit cost $ 137 $ 149 $ 152
====== ====== ======
F-27
<PAGE> 106
The following table sets forth the status of the postretirement benefits
programs (other than pensions) and amounts recognized in the Company's
consolidated balance sheets (in thousands):
December 31,
--------------------
1996 1995
-------- --------
Accumulated postretirement
benefit obligations:
Retirees $ 1,236 $ 1,353
Fully eligible, active plan
participants 441 400
Other active plan participants 234 310
-------- --------
1,911 2,063
Unrecognized net gain 571 374
-------- --------
Accumulated postretirement
benefit obligations recognized
in consolidated balance sheets $ 2,482 $ 2,437
======== ========
The actuarial assumptions used in determining the Company's accumulated
postretirement benefit obligation are provided in the table below. Due to the
short period which the Company provides medical benefits to its retirees, the
increases in medical costs are assumed to be 6% in each year. A 1% change in
the assumed health care cost trend rate would not have a significant impact on
the accumulated postretirement benefit obligation or the aggregate of service
and interest costs for 1996 or 1995.
1996 1995
----- ------
Discount rate 7.50% 7.00%
Trend rate for medical benefits 6.00% 6.00%
The Company has a nonqualified deferred compensation plan which permits eligible
officers, directors and key employees to defer a portion of their compensation.
The deferred compensation, which together with Company matching amounts and
accumulated interest is accrued and partially funded, is distributable in cash
after retirement or termination of employment, and at December 31, 1996 and
1995, amounted to approximately $2.3 million and $1.8 million, respectively.
The Company amended the Deferred Compensation Plan effective January 1, 1995.
The amended plan allows the participants to defer up to a maximum of 50% of base
salary and up to 100% of annual bonuses. The participant may elect to receive
such deferred amounts, together with interest at the Moody's Corporate Bond
Yield rate, in one payment at retirement, or on any plan anniversary after the
completion of three years, as elected.
The Company has an employees' Capital Accumulation Plan which is available to
all salaried and certain hourly employees after completion of six months of
service. Employees may contribute from
F-28
<PAGE> 107
2% to 15% of their compensation to the plan. The Company makes a matching
contribution of 25% of an employee's contribution up to, but not exceeding, 5%
of the employee's earnings. Commencing in 1997, the Company's matching
contribution will be 25% of an employee's contribution up to, but not exceeding,
6% of the employee's earnings. The Company's contribution was approximately
$190,000 in 1996, $173,000 in 1995, and $170,000 in 1994.
NOTE 8: SHAREHOLDERS' EQUITY
Preferred Stock
The Company has 2.3 million shares of Series B Cumulative Convertible Preferred
Stock (the Preferred Shares) outstanding. Holders of the Preferred Shares are
entitled to receive cumulative cash dividends at the annual rate of $3.50 per
share payable quarterly, when and if declared by the Board of Directors.
The Preferred Shares are convertible, in whole or in part, at the option of the
holders thereof, into shares of common stock at an initial conversion price of
$15.55 per share of common stock. The Preferred Shares were not redeemable by
the Company prior to July 1, 1996. After such date, the shares are redeemable
at the option of the Company at any time, in whole or in part, initially at
$52.45 per share and thereafter at prices declining ratably on each July 1 to
$50 per share on or after July 1, 2003.
Holders of the Preferred Shares have no voting rights except if the Company
fails to pay the equivalent of six quarterly dividends. If these dividends are
not paid, the holders of Preferred Shares, voting as a class, shall be entitled
to elect two additional directors. The holders of Preferred Shares also have
voting rights related to certain amendments to the Company's Articles of
Incorporation.
The Preferred Shares rank senior to the common stock and any outstanding shares
of Series A Preferred Shares. The Preferred Shares have a liquidation
preference of $50 per share plus all declared and unpaid dividends which
aggregate $117,012,000 at December 31, 1996.
Shareholder Rights Plan
In 1996, the Company adopted a new Shareholder Rights Plan replacing the 1986
Shareholder Rights Plan which had expired. Pursuant to this plan, holders of
common stock received one preferred share purchase right for each common share
held. The rights will be triggered once an Acquiring Person, as defined in the
plan, acquires 15% or more of the Company's outstanding common shares. The 15%
triggering threshold may be reduced by the Board of Directors to not less than
10%. When exercisable, the right would, subject to certain adjustments and
alterations, entitle
F-29
<PAGE> 108
rightholders, other than the Acquiring Person or group, to purchase common stock
of the Company or the acquiring company having a market value of twice the $50
exercise price of the right. The rights are nonvoting, may be redeemed at any
time at a price of one cent per right, and expire in May 2006. Additional
details are set forth in the Rights Agreement filed with the Securities and
Exchange Commission on May 10, 1996.
Stock Option Plans
At December 31, 1996, executives, key employees and directors had been granted
options to purchase common shares under stock option plans described below. The
Company has adopted the disclosure-only provisions of SFAS No. 123. No
compensation expense has been recognized in 1996 or 1995 for unexercised options
related to the stock option plans. Had compensation cost for the Company's
stock option plans been determined based on the fair value at the grant date for
awards in 1996 and 1995 consistent with the provisions of SFAS No. 123, the
Company's loss and per share loss applicable to common shareholders would have
been increased to the pro forma amounts indicated below (in thousands, except
per share amounts):
1996 1995
-------- --------
Loss applicable to common
shareholders:
As reported $ 40,404 $109,769
Pro forma $ 41,261 $109,826
Loss applicable to common
shareholders per share:
As reported $ 0.79 $ 2.28
Pro forma $ 0.81 $ 2.28
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
Expected dividend yield 0.00%
Expected stock price volatility 42.65%
Risk-free interest rate: 5.63%
Expected life of options 4.1 years
The weighted average grant-date fair value of options granted in 1996 and 1995
was $3.40 and $4.17, respectively.
The Company adopted a nonstatutory stock option plan in 1987. The plan provides
that options may be granted to certain officers and key employees to purchase
common stock at a price of not less than 50% of the fair market value at the
date of grant. The plan also provides that options may be granted with a
corresponding number of stock appreciation rights and/or tax offset bonuses to
assist the
F-30
<PAGE> 109
optionee in paying the income tax liability that may exist upon exercise of the
options. All of the outstanding stock options under the 1987 plan were granted
at an exercise price equal to the fair market value at the date of grant and
with an associated tax offset bonus. In 1995, 15,000 options under the 1987
plan were granted. Outstanding options under the 1987 plan are immediately
exercisable for periods up to ten years. At December 31, 1996, there were
53,748 shares available for grant in the future under the plan. The plan
expires on February 13, 1997.
In 1995, the Company adopted the new Hecla Mining Company Stock Plan for
Nonemployee Directors (the Directors' Stock Plan), which is subject to
termination by the Board of Directors at any time. Each nonemployee director is
credited with 1,000 shares of the Company's common stock on May 30 of each year.
Nonemployee directors joining the Board of Directors after May 30 of any year
are credited with a pro-rata number of shares based upon the date they join the
Board. All credited shares are held in trust for the benefit of each director
until delivered to the Director. Delivery of the shares from the trust occurs
upon the earliest of (1) death or disability; (2) retirement; (3) a cessation of
the director's service for any other reason; or (4) a change in control of the
Company. Subject to certain restrictions, directors may elect to receive
delivery of shares on such date or in annual installments thereafter over 5, 10
or 15 years. The shares of common stock credited to nonemployee directors
pursuant to the Directors' Stock Plan may not be sold until at least six months
following the date they are delivered. The maximum number of shares of common
stock which may be granted pursuant to the Directors' Stock Plan is 120,000.
During 1996 and 1995, 7,000 and 6,539 shares, respectively, were credited to the
nonemployee directors. At December 31, 1996, there were 106,461 shares
available for grant in the future under the plan.
In 1995, the shareholders of the Company approved the 1995 Stock Incentive Plan
which provides for a variety of stock-based grants to the Company's officers and
key employees. The plan provides for the grant of stock options, stock
appreciation rights, restricted stock and performance units to eligible officers
and key employees of the Company. Stock options under the plan are required to
be granted at 100% of the market value of the stock on the date of the grant.
There were no options to acquire shares granted in 1995 under the 1995 plan.
The terms of such options shall be no longer than ten years from the date of
grant. During 1996, 278,000 options to acquire shares were granted to the
Company's officers and key employees of which 215,000 of these options to
acquire shares have vesting requirements of 20% on the grant date and 20% on
each of the next four anniversary dates from the grant date. During 1996, 1,500
options to acquire shares expired under the 1995 plan. At December 31, 1996,
there were 1,723,500 options to acquire shares available for grant in the future
under the plan.
F-31
<PAGE> 110
Transactions concerning stock options pursuant to all of the above described
plans are summarized as follows:
Weighted Average
Shares Exercise Price
---------- ----------------
Outstanding, December 31, 1993 301,660 $10.39
Year ended December 31, 1994
Granted 120,000 $ 9.63
Exercised (61,037) $ 8.69
Expired (13,123) $11.23
-------
Outstanding, December 31, 1994 347,500 $10.35
Year ended December 31, 1995
Granted 15,000 $ 9.38
Exercised (12,500) $ 9.81
Expired (33,508) $ 8.62
-------
Outstanding, December 31, 1995 316,492 $10.51
-------
Year ended December 31, 1996
Granted 278,000 $ 8.28
Exercised - -
Expired (48,500) $10.57
-------
Outstanding, December 31, 1996 545,992 $ 9.37
=======
The following table presents information about the options outstanding as of
December 31, 1996:
<TABLE>
<CAPTION>
Weighted Average
-----------------------------------
Range of Remaining
Shares Exercise Price Exercise Price Life (Years)
---------- ----------------- ------------------- --------------
<S> <C> <C> <C> <C>
Exercisable options 221,915 $ 6.75 - $ 9.63 $ 8.85 8.2
Exercisable options 152,077 $10.38 - $12.25 $11.26 2.9
---------
Total exercisable options 373,992 $ 6.75 - $12.25 $ 9.84 6.0
Unexercisable options 172,000 $ 6.75 - $ 8.63 $ 8.37 9.2
---------
Total all options 545,992 $ 6.75 - $12.25 $ 9.37 7.1
=========
</TABLE>
The aggregate amounts charged (credited) to operations in connection with the
plans were $0, $(21,000) and $(23,000) in 1996, 1995 and 1994, respectively.
As a result of the acquisition of Equinox in 1994, the outstanding options under
the Equinox stock option plan became exercisable for Hecla common shares.
Transactions concerning the Equinox options, giving effect to the common share
exchange ratio, are as follows:
F-32
<PAGE> 111
Exercise
Shares Price
--------- ---------------
Outstanding, December 31, 1993 252,300 $ 3.78 - $19.56
Year ended December 31, 1994
Exercised (251,400) $ 3.45 - $17.82
--------
Outstanding, December 31, 1994 900 $17.82
Year ended December 31, 1995
Expired (900) $17.82
--------
Outstanding, December 31, 1995 - - - -
========
1996 Common Stock Offering
On January 23, 1996, 2,875,000 shares of the Company's common stock were sold
under the Company's existing Registration Statement which provides for the
issuance of up to $100.0 million of equity and debt securities. The net
proceeds from the offering of approximately $22.0 million were used principally
to reduce the outstanding borrowings under the Company's bank credit agreement.
F-33
<PAGE> 112
NOTE 9: BUSINESS SEGMENTS (IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Net sales to unaffiliated customers
Metals (including $32,034, $27,729
and $18,493 from Mexican operations
in 1996, 1995 and 1994) $ 81,409 $ 79,810 $ 60,828
Industrial minerals (including $4,204,
$2,664 and $2,885 in Mexico in 1996,
1995 and 1994) 76,843 67,391 60,229
Specialty metals - - 4,414 4,285
--------- --------- ---------
$ 158,252 $ 151,615 $ 125,342
========= ========= =========
Income (loss) from operations
Metals (including $7,734, $6,396
and $2,307 from Mexican operations
in 1996, 1995 and 1994) $ (38,711) $(109,449) $ (24,658)
Industrial minerals (including $92,
$(341) and $(810) in Mexico in 1996,
1995 and 1994) 9,083 6,690 6,872
Specialty metals - - 255 3
General corporate (9,703) (9,738) (11,656)
--------- --------- ---------
$ (39,331) $(112,242) $ (29,439)
========= ========= =========
Capital expenditures
Metals (including $411, $2,319 and
$466 in Mexico in 1996, 1995
and 1994) $ 30,388 $ 32,838 $ 62,002
Industrial minerals (including
$93, $183 and $1,352 in Mexico
in 1996, 1995 and 1994) 3,075 11,811 3,615
Specialty metals - - 81 453
General corporate 268 578 489
--------- --------- ---------
$ 33,731 $ 45,308 $ 66,559
========= ========= =========
Depreciation, depletion and amortization
Metals $ 15,728 $ 18,859 $ 9,699
Industrial minerals 4,723 4,580 4,501
Specialty metals - - 23 33
General corporate 338 367 524
--------- --------- ---------
$ 20,789 $ 23,829 $ 14,757
========= ========= =========
Identifiable assets
Metals (including $7,268, $15,702
and $19,241 in Mexico in 1996,
1995 and 1994) $ 155,082 $ 144,246 $ 179,258
Industrial minerals (including
$3,513, $4,888 and $6,192 in
Mexico in 1996, 1995 and 1994) 70,613 71,163 59,502
Specialty metals - - - - 6,288
General corporate 34,520 35,998 36,507
Idle facilities 8,178 6,783 53,027
--------- --------- ---------
$ 268,393 $ 258,190 $ 334,582
========= ========= =========
</TABLE>
F-34
<PAGE> 113
Net sales and identifiable assets of each segment are those that are directly
identified with those operations. General corporate assets consist primarily of
cash, receivables, investments and corporate property, plant and equipment. As
a result of depressed metals prices, operations were suspended at the Greens
Creek mine in April 1993, and the property was placed on a care-and-maintenance
basis pending resumption of operations. At December 31, 1994, the Company's
recorded net book value of identifiable assets at the Greens Creek mine was
approximately $50.3 million. This amount was classified in the idle facilities
category at December 31, 1994. On May 17, 1995, the Company announced plans for
redevelopment of the Greens Creek mine and at December 31, 1996 and 1995, the
recorded net book value of identifiable assets at the Greens Creek mine was
classified in the metals category. The Greens Creek mine recommenced operations
in July 1996 and full production levels were achieved in January 1997.
NOTE 10: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined using available
market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data and to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value. Potential income tax ramifications related to the realization of
unrealized gains and losses that would be incurred in an actual sale or
settlement have not been taken into consideration.
The carrying amounts for cash and cash equivalents, accounts and notes
receivable, restricted investments and current liabilities are a reasonable
estimate of their fair values. Fair value for equity securities investments
available for sale is determined by quoted market prices. The fair value of
long-term debt is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for debt with
similar remaining maturities.
F-35
<PAGE> 114
The estimated fair values of financial instruments are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------
1996 1995
---------------------- -----------------------
Carrying Fair Carrying Fair
Amounts Value Amounts Value
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 8,256 $ 8,256 $ 4,024 $ 4,024
Accounts and notes receivable 24,168 24,168 25,571 25,571
Investments
Equity securities available
for sale 165 165 455 455
Restricted 20,674 20,674 16,254 16,254
Gold spot deferred contracts - - 299 - - - -
Gold forward sales contracts - - 43 - - 228
Gold put options - - 772 - - 436
Financial liabilities
Current liabilities 32,712 32,712 25,965 25,965
Long-term debt - principal 38,208 38,208 36,104 35,563
Gold call options - - 2 - - 134
</TABLE>
F-36
<PAGE> 115
HECLA MINING COMPANY and WHOLLY OWNED SUBSIDIARIES
FORM 10-K - December 31, 1996
INDEX TO EXHIBITS
Number and Description of Exhibits
----------------------------------
3.1(a) Certificate of Incorporation of the
Registrant as amended to date.(2)
3.1(b) Certificate of Amendment of Certificate
of Incorporation of the Registrant,
dated as of May 16, 1991.(2)
3.2 By-Laws of the Registrant as amended
to date.(2)
4.1(a) Certificate of Designations, Preferences
and Rights of Series A Junior
Participating Preferred Stock of the
Registrant.(2)
4.1(b) Certificate of Designations, Preferences
and Rights of Series B Cumulative Convertible
Preferred Stock of the Registrant.(2)
4.2 Rights Agreement dated as of May 10, 1996
between Hecla Mining Company and American
Stock Transfer & Trust Company, which
includes the form of Rights Certificate of
Designation setting forth the terms of the
Series A Junior Participating Preferred
Stock of Hecla Mining Company as Exhibit A
and the summary of Rights to Purchase
Preferred Shares as Exhibit B.(2)
10.1(a) Credit Agreement dated as of August 30, 1994,
among Registrant and Certain Subsidiaries
and NationsBank of Texas, N.A., as Agent,
and Certain Banks as Lenders.(2)
10.1(b) First Amendment to Credit Agreement dated
October 1, 1995.(2)
10.1(c) Second Amendment to Credit Agreement dated
February 7, 1996.(2)
10.1(d) Third Amendment to Credit Agreement dated
October 31, 1996.(2)
<PAGE> 116
INDEX TO EXHIBITS (continued)
Number and Description of Exhibits
----------------------------------
10.2 Employment agreement dated November 10,
1989 between Hecla Mining Company and
Arthur Brown. (Registrant has substantially
identical agreements with each of Messrs.
William B. Booth, J. Gary Childress, George
R. Johnson, Roger A. Kauffman, Jon T. Langstaff,
John P. Stilwell, and Michael B. White. Such
substantially identical agreements are not
included as separate Exhibits.)(1,2)
10.3(a) Form of Executive Deferral Plan Master
Document effective January 1, 1995.(1,2)
10.3(b) Form of Director Deferral Plan Master
Plan Document effective January 1, 1995.(1,2)
10.4(a) 1987 Nonstatutory Stock Option Plan of the
Registrant.(1,2)
10.4(b) Hecla Mining Company 1995 Stock Incentive
Plan.(1,2)
10.4(c) Hecla Mining Company Stock Plan for Non-
employee Directors.(1,2)
10.5(a) Hecla Mining Company Retirement Plan for
Employees and Supplemental Retirement and
Death Benefit Plan.(1,2)
10.5(b) Supplemental Excess Retirement Master
Plan Document.(1,2)
10.5(c) Hecla Mining Company Nonqualified Plans
Master Trust Agreement.(1,2)
10.6 Form of Indemnification Agreement dated
May 27, 1987 between Hecla Mining Company
and each of its Directors and Officers.(1,2)
10.7 Summary of Short-term Performance Payment
Plan.(1,2)
10.8 Acquistion Agreement dated as of
December 29, 1993, by and among Registrant
and B.P.Y.A. 1193 Holdings Ltd., 1057451
Ontario Limited and Equinox Resources Ltd.(2)
<PAGE> 117
INDEX TO EXHIBITS (continued)
Number and Description of Exhibits
----------------------------------
10.9(a) Acquisition Agreement - Grouse Creek
Project, dated January 21, 1994, among
Registrant, Great Lakes Idaho Inc. and
Great Lakes Minerals Inc.(2)
10.9(b) Mining Venture Agreement dated as of
February 8, 1994, between Registrant and
Great Lakes Idaho Inc.(2)
10.9(c) Letter Agreement dated January 31, 1997
between Registrant, Great Lakes Idaho Inc.
and Great Lakes Minerals Inc. Attached
10.10 Purchase and Sale Agreement between Hecla
Mining Company and Mooney Chemicals Inc.,
dated August 2, 1995, related to the sale
of the Apex Unit refining facility located
near St. George, Utah.(2)
10.11(a) Amended and Restated Golden Eagle Earn-In
Agreement between Santa Fe Pacific Gold
Corporation and Hecla Mining Company dated
as of September 6, 1996.(2)
10.11(b) Golden Eagle Operating Agreement between Santa
Fe Pacific Gold Corporation and Hecla Mining
Company dated as of September 6, 1996.(2)
10.12 Limited Liability Company Agreement of the
Rosebud Mining Company, L.L.C. among Santa
Fe Pacific Gold Corporation and Hecla Mining
Company dated as of September 6, 1996.(2)
11. Computation of weighted average number of
common shares outstanding. Attached
12. Statement of Computation of Ratio of Earnings
to Fixed Charges. Attached
13.1 Hecla Mining Company Fourth Quarter and
Year-End Results for the Period Ended
December 31, 1996.(2)
21. List of subsidiaries of the Registrant. Attached
<PAGE> 118
INDEX TO EXHIBITS (continued)
Number and Description of Exhibits
----------------------------------
23.1 Consent of Coopers & Lybrand to incorpora-
tion by reference of their report dated
February 7, 1997, on the Consolidated
Financial Statements of the Registrant in
the Registrant's Registration Statements
on Form S-3, No. 33-72832, and No. 33-59659,
Form S-8, No. 33-7833, No. 33-41833, No.
33-14758, No. 33-40691, No. 33-60095 and
No. 33-60099.(2)
23.2 Consent of Deloitte & Touche to incorpora-
tion by reference of their report dated
February 28, 1994 on the consolidated
financial statements of Equinox Resources
Ltd. in the Registrant's Registration
Statements on Form S-3, No. 33-72832, and
No. 33-59659, Forms S-8, No. 33-7833, No.
33-41833, No. 33-14758, No. 33-40691, No.
33-60095 and No. 33-60099.(2)
27. Financial Data Schedule Attached
________________________
1. Indicates a management contract or compensatory plan or arrangement.
2. These exhibits were filed in SEC File No. 1-8491 as indicated on the
following page and are incorporated herein by this reference thereto.
<PAGE> 119
Corresponding Exhibit in Annual Report on
Form 10-K, Quarterly Report on Form 10-Q,
Current Report on Form 8-K, Proxy Statement
or Registration Statement, as Indicated
Exhibit in Below; All References are to SEC File
this Report No. 1-8491.
- ----------- --------------------------------------------
3.1(a) & (b) 3.1 (10-K for 1987)
3.2 2 (Current Report on Form 8-K dated
November 9, 1990)
4.1(a) & (b) 4.1(d)(e) and 4.5 (10-Q for June 30, 1993)
4.2 4 (Current Report on Form 8-K dated
May 10, 1996)
10.1(a) 10.1(a) (10-Q for September 30, 1994)
10.1(b) 10.1(b) (10-Q for September 30, 1995)
10.1(c) 10.1(c) (10-K for 1995)
10.1(d) 10.1(d) (10-Q for September 30,1996)
10.2 10.2(b) (10-K for 1989)
10.3(a) 3 (10-K for 1994)
10.3(b) 10.3(b) (10-K for 1994)
10.4(a) B (Proxy Statement dated March 20, 1987)
10.4(b) A (Proxy Statement dated March 27, 1995)
10.4(c) B (Proxy Statement dated March 27, 1995)
10.5(a) 10.11(a) (10-K for 1985)
10.5(b) 10.5(b) (10-K for 1994)
10.5(c) 10.5(c) (10-K for 1994)
10.6 10.15 (10-K for 1987)
10.7 10.7 (10-K for 1994)
10.8 2 (Schedule 13D dated January 7, 1993 -
filed by Registrant with respect to
Equinox Resources Ltd.)
10.9(a) (c)1 (Current Report on Form 8-K dated
February 10, 1994)
10.9(b) (c)2 (Current Report on Form 8-K dated
February 10, 1994)
10.10 10.10 (10-K for 1995)
10.11(a) 10.11(a) (10-Q for September 30, 1996)
10.11(b) 10.11(b) (10-Q for September 30, 1996)
10.12 10.12 (10-Q for September 30, 1996)
13.1 99 (Current Report on Form 8-K dated
February 14, 1997)
23.1 23.1 (Current Report on Form 8-K dated
February 19, 1997)
23.2 23.2 (10-K for 1995)
<PAGE> 1
MEMORANDUM Exhibit 10.9(c)
To: Art Brown
From: John McBride
Subsequent to our discussions we have devised a solution which we hope will
satisfy Hecla Mining Company in the event that Newmex Mining Company Ltd. "hits
a double". We have put forward a structure which is based upon our
interpretation of your comments and concerns expressed recently.
In the event that our proposed restructuring is not successful this proposal
would apply to Great Lakes Minerals Inc. In the proposal below, therefore, the
"Company" refers to Newmex Mining if the restructuring is completed and Great
Lakes if the restructuring is not completed.
(i) Commencing on March 1, 1998 and on March 1 of each year thereafter until
2004 (the "Payment Year"), Hecla will have the right to demand payment
from the Company and upon such demand the Company shall pay Hecla an
amount (the "Percentage Amount") equal to 1.5% of the fully diluted
number of shares of the Company as at March 1, 1997 multiplied by the
price per share of the Company's shares on March 1 of the Payment Year.
In the event the Company is merged with another corporation, is re-
organized, consolidates or splits its shares or is acquired by another
corporation or business, the number of shares used for purposes of
calculation of the Percentage Amount shall be adjusted to reflect such
transaction. It is understood that the obligations of the Company under
this agreement shall continue to be an obligation, as adjusted, of any
re-organized, merged, or continuing corporation. The payment can be made
in the Company's stock or cash at the Company's option.
If Hecla's right to demand payment under this section applies to Newmex,
Great Lakes and Newmex shall have the option to have Newmex grant
identical rights to Great Lakes which will then assign those rights to
Hecla.
(ii) The maximum total amount payable by the Company is US$5 million.
(iii) The right cannot be exercised in any Payment Year that the Percentage
Amount is less than US$1.5 Million.
(iv) Hecla will indemnify Great Lakes (and its subsidiaries) and Newmex Mining
against any future liability related to the Grouse Creek Gold/Silver
Project, such that Great Lakes (and its subsidiaries) and Newmex Mining
will never be required to invest any money in Grouse Creek for any reason
whatsoever.
<PAGE> 2
(v) Great Lakes shall convey its interest in the Grouse Creek Gold/Silver
Project to Hecla and the Grouse Creek Joint Venture Agreement shall be
terminated, provided that Great Lakes' subsidiary shall immediately be
granted a 5% net proceeds interest in the Grouse Creek Gold/Silver
Project. Great Lakes (and its subsidiaries) and Newmex Mining shall also
release and indemnify Hecla from any liability or obligation to either
company and their subsidiaries related to the Grouse Creek Joint Venture
Agreement and the Grouse Creek Gold/Silver Project.
The undersigned agree to work together in a timely manner to enter into a
definitive agreement that would supersede this agreement.
We believe a proposal of this nature would not disrupt our restructuring yet
provide Hecla participation if our fortunes turn for the better. Please give
this proposal your serious consideration. We would sincerely like to put this
behind us in a friendly manner so that management of both Great Lakes and Hecla
can return our efforts to building value for our respective shareholders.
HECLA MINING COMPANY GREAT LAKES MINERALS INC.
Per: /s/ Arthur Brown Per: /s/ John McBride
---------------------- ----------------------
Dated: January 31, 1997 Dated: January 31, 1997
-------------------- --------------------
NEWMEX MINING COMPANY LTD.
Per: /s/ Thomas Pladsen
----------------------
Dated: January 31, 1997
--------------------
<PAGE> 1
FORM 10-K DECEMBER 31, 1996
COMMISSION FILE NO. 1-8491
EXHIBIT 11
HECLA MINING COMPANY AND SUBSIDIARIES
CALCULATION OF WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Shares of common stock issued at
beginning of period 48,317,324 48,144,274 40,320,761
The incremental effect of the issuance of
new shares for cash, net of issuance costs 2,875,000 - - 3,450,000
The incremental effect of the issuance
of new shares under Stock Option and
Employee Stock Ownership Plans 3,230 110,263 235,571
---------- ---------- ----------
51,195,554 48,254,537 44,006,332
Less:
Weighted average treasury shares held 62,075 62,291 62,276
---------- ---------- ----------
Weighted average number of common shares
outstanding during the period 51,133,479 48,192,246 43,944,056
========== ========== ==========
</TABLE>
<PAGE> 1
Exhibit 12
HECLA MINING COMPANY
FIXED CHARGE COVERAGE RATIO CALCULATION
For the years ended December 31, 1992, 1993, 1994, 1995 and 1996
and the three months ended December 31, 1995 and 1996
(In thousands, except ratios)
<TABLE>
<CAPTION>
4th Qtr 4th Qtr
1992 1993 1994 1995 1996 1995 1996
--------- --------- -------- ---------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) before income
taxes and cumulative effect of
changes in accounting principles $ (55,518) $ (18,720) $(24,248) $ (101,410) $ (31,667) $ 1,284 $ 888
Add: Fixed Charges 7,036 9,385 10,857 10,551 11,651 2,862 2,985
Less: Capitalized Interest (2,070) (3,533) (1,751) (1,516) (2,360) (666) (646)
--------- --------- -------- ---------- --------- -------- -------
Net income (loss) before
income taxes and cumulative
effect of changes in accounting
principles and fixed charges $ (50,552) $ (12,868) $(15,142) $ (92,375) $ (22,376) $ 3,480 $ 3,227
========= ========= ======== ========== ========= ======== =======
Fixed charges:
Preferred stock dividends - - $ 4,070 $ 8,050 $ 8,050 $ 8,050 $ 2,012 $ 2,012
Interest portion of rentals - - - - 166 541 543 126 139
Interest expense $ 6,905 5,224 2,606 1,960 3,058 724 834
Amortization of LYONs 131 91 35 - - - - - - - -
--------- --------- -------- ---------- --------- -------- -------
Total fixed charges $ 7,036 $ 9,385 $ 10,857 $ 10,551 $ 11,651 $ 2,862 $ 2,985
========= ========= ======== ========== ========= ======== =======
Fixed Charge Ratio (a) (a) (a) (a) (a) 1.22 1.08
Inadequate coverage $ 57,588 $ 22,253 $ 25,999 $ 102,926 $ 34,027 $ - - $ - -
========= ========= ======== ========== ========= ======== =======
Write-downs and other noncash charges:
DD&A(b) (mining activity) $ 13,774 $ 13,526 $ 14,233 $ 23,462 $ 20,451 $ 4,882 $ 5,265
DD&A(b) (corporate) 851 669 524 367 338 102 82
Provision for closed
operations 13,608 2,327 11,353 4,615 22,806 319 115
Reduction in carrying value of
mining properties 30,791 2,561 7,864 97,387 12,902 - - - -
--------- --------- -------- ---------- --------- -------- -------
$ 59,024 $ 19,083 $ 33,974 $ 125,831 $ 56,497 $ 5,303 $ 5,462
========= ========= ======== ========== ========= ======== =======
</TABLE>
(a) Earnings for period inadequate to cover fixed charges.
(b) "DD&A" is an abbreviation for "depreciation, depletion and amoritization."
<PAGE> 1
FORM 10-K DECEMBER 31, 1996
COMMISSION FILE NO. 1-8491
EXHIBIT 21
HECLA MINING COMPANY AND SUBSIDIARIES
SUBSIDIARIES OF REGISTRANT
December 31, 1996
State or Country Percentage of
in Which Voting Securities
Organized Owned
---------------- -----------------
CoCa Mines Inc. Colorado 100 (A)
Colorado Aggregate Company of
New Mexico New Mexico 100 (A)
ConSil Corp. Idaho 78.50 (A)
Eastmaque Gold Mines (U.S.) Inc. Nevada 100 (A)
Equinox Resources, Inc. Nevada 100 (A)
Kentucky-Tennessee Clay Company Delaware 100 (A)
K-T Clay de Mexico, S.A. de C.V. Mexico 100 (A)
K-T Feldspar Corporation North Carolina 100 (A)
Minera Hecla, S.A. de C.V. Mexico 100 (A)
Mountain West Products Inc. Idaho 100 (A)
(A) Included in the consolidated financial statements filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 8,256
<SECURITIES> 0
<RECEIVABLES> 24,168
<ALLOWANCES> 0
<INVENTORY> 22,879
<CURRENT-ASSETS> 58,849
<PP&E> 391,785
<DEPRECIATION> (214,030)
<TOTAL-ASSETS> 268,393
<CURRENT-LIABILITIES> 32,712
<BONDS> 0
0
575
<COMMON> 12,800
<OTHER-SE> 132,133
<TOTAL-LIABILITY-AND-EQUITY> 268,393
<SALES> 158,252
<TOTAL-REVENUES> 166,882
<CGS> 126,878
<TOTAL-COSTS> 147,329
<OTHER-EXPENSES> 50,254
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 698
<INCOME-PRETAX> (31,677)
<INCOME-TAX> (677)
<INCOME-CONTINUING> (32,354)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,354)
<EPS-PRIMARY> (0.79)
<EPS-DILUTED> (0.79)
</TABLE>
