Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Certain statements contained in this Form 10-Q, including in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosure About Market Risk, are intended to be covered by the safe harbor provided for under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Our forward-looking statements include our current expectations and projections about future results, performance, results of litigation, prospects and opportunities, including reserves and other mineralization. We have tried to identify these forward-looking statements by using words such as “may,” “will,” “expect,” “anticipate,” “believe,” “intend,” “feel,” “plan,” “estimate,” “project,” “forecast” and similar expressions. These forward-looking statements are based on information currently available to us and are expressed in good faith and believed to have a reasonable basis. However, our forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements.
These risks, uncertainties and other factors include, but are not limited to, those set forth under Part I, Item 1A – Business – Risk Factors in our annual report filed on Form 10-K for the year ended December 31, 2015. Given these risks and uncertainties, readers are cautioned not to place undue reliance on our forward-looking statements. All subsequent written and oral forward-looking statements attributable to Hecla Mining Company or to persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Except as required by federal securities laws, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
Hecla Mining Company and our subsidiaries have provided precious and base metals to the U.S. and worldwide since 1891. We discover, acquire, develop, and produce silver, gold, lead and zinc.
We produce lead, zinc and bulk concentrates, which we sell to custom smelters and brokers, and unrefined precipitate and bullion bars (doré) containing gold and silver, which are further refined before sale to precious metals traders. We are organized and managed into four segments that encompass our operating and development units: Greens Creek, Lucky Friday, Casa Berardi, and San Sebastian. The map below shows the locations of our operating units and our exploration and pre-development projects, as well as our corporate offices located in Coeur d'Alene, Idaho and Vancouver, British Columbia.
Our current business strategy is to focus our financial and human resources in the following areas:
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•
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operating our properties safely, in an environmentally responsible manner, and cost-effectively;
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•
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continue optimizing and improving operations at our Greens Creek, Lucky Friday, Casa Berardi, and San Sebastian units;
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•
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expanding our proven and probable reserves and production capacity at our operating properties;
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•
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conducting our business with financial stewardship to preserve our financial position in varying metals price environments;
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•
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advance permitting of the Rock Creek project, which we acquired as part of the merger with Revett Mining Company, Inc. ("Revett") in June 2015 as discussed further below;
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•
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maintaining and investing in exploration and pre-development projects in the vicinities of six mining districts and projects we believe to be under-explored and under-invested: North Idaho's Silver Valley in the historic Coeur d'Alene Mining District; our Greens Creek unit on Alaska's Admiralty Island located near Juneau; the silver-producing district near Durango, Mexico; the Abitibi region of northwestern Quebec, Canada; the Rock Creek project in northwestern Montana; and the Creede district of Southwestern Colorado; and
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•
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continuing to seek opportunities to acquire and invest in mining properties and companies.
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A number of key factors may impact the execution of our strategy, including regulatory issues and metals prices. Metals prices can be very volatile. As discussed in the
Critical Accounting Estimates
section below, metals prices are influenced by a number of factors beyond our control. Average market prices of silver, gold, lead, and zinc in the first three months of 2016 were lower than their levels from the comparable period last year, as illustrated by the table in
Results of Operations
below. While we believe current global economic and industrial trends could result in continued demand for the metals we produce, prices have been volatile and there can be no assurance that current prices will continue.
The total principal amount of our Senior Notes due May 1, 2021 is $506.5 million and the Senior Notes bear interest at a rate of 6.875% per year. The net proceeds from the Senior Notes were primarily used for the acquisition of Aurizon in June 2013 (see
Note 9
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
).
As discussed in the
Financial Liquidity and Capital Resources
section below, we believe that we will be able to meet the obligations associated with the acquisition of Aurizon and additional debt; however, a number of factors could impact our ability to meet the debt obligations and fund our other projects.
On June 15, 2015, we completed the acquisition of all of the issued and outstanding common stock of Revett. The acquired entities hold 100% ownership of two properties in northwestern Montana: the Troy Mine, which we are in the process of reclaiming, and the Rock Creek project, a significant undeveloped silver and copper deposit. In the acquisition, we paid cash of $0.9 million and each outstanding common share of Revett was exchanged for 0.1622 of a share of our common stock, for total consideration of approximately $20.1 million based on the closing price of Hecla stock of $3.06 per share on June 15, 2015. Development of Rock Creek has been challenged by conservation groups at various times, and there can be no assurance that we will be able to obtain the permitting required to develop Rock Creek.
As further discussed in the
Lucky Friday Segment
section below, we are in the process of constructing an internal shaft at the Lucky Friday mine (“#4 Shaft”), which, we believe, will significantly increase production and extend the life of the mine. The #4 Shaft project will involve significant additional capital costs leading up to its expected completion date in the fourth quarter of 2016. Although we believe that our current capital resources will allow us to complete the #4 Shaft project, there are a number of factors that could affect its completion.
During the third quarter of 2015, we made a development decision to mine near surface, high grade portions of silver and gold deposits at our San Sebastian project in Mexico, and ore production commenced in the fourth quarter of 2015. See the
San Sebastian Segment
section below for more information. As a result, we believe that we will generate positive cash flows at San Sebastian over the approximate two year period following the start of production. However, our ability to generate positive cash flows at San Sebastian may be impacted by changes in estimated costs, precious metals prices, or other factors, and there can be no assurance that we will be able to develop and operate San Sebastian as anticipated.
We strive to achieve excellent mine safety and health performance. We seek to implement this goal by: training employees in safe work practices; establishing, following and improving safety standards; investigating accidents, incidents and losses to avoid recurrence; involving employees in the establishment of safety standards; and participating in the National Mining Association's
CORESafety
program. We attempt to implement reasonable best practices with respect to mine safety and emergency preparedness. We work with the Mine Safety and Health Administration ("MSHA") to address issues outlined in its investigations and inspections and continue to evaluate our safety practices.
Another challenge for us is the risk associated with environmental litigation and ongoing reclamation activities. As described in
Part I, Item 1A. Risk Factors
of our annual report filed on Form 10-K for the year ended December 31, 2015 and
Note 4
of
Notes to Condensed Consolidated Financial Statements (Unaudited),
it is possible that our estimate of these liabilities (and our ability to estimate liabilities in general) may change in the future, affecting our strategic plans. We are involved in various environmental legal matters with no assurance that the estimate of our environmental liabilities, liquidity needs, or strategic plans will not be significantly impacted as a result of these matters or new matters that may arise. We strive to ensure that our activities are conducted in compliance with applicable laws and regulations and attempt to resolve environmental litigation on as favorable terms as possible.
Results of Operations
Sales of products by metal for the three-month periods ended March 31, 2016 and 2015 were as follows:
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Three Months Ended
March 31,
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(in thousands)
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2016
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2015
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Silver
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$
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56,670
|
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|
$
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50,281
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Gold
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54,892
|
|
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48,620
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Lead
|
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13,724
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|
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14,670
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Zinc
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22,525
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21,037
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Less: Smelter and refining charges
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(16,794
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)
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(15,516
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)
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Sales of products
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$
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131,017
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$
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119,092
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For the first quarter of 2016, we recorded a loss applicable to common stockholders of $0.8 million ($0.00 per basic common share), compared to income of $12.4 million ($0.03 per basic common share) during the first quarter of 2015. The following factors contributed to the results for the first three months of 2016 compared to the same period in 2015:
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•
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A net foreign exchange loss in the first quarter of 2016 of $8.2 million versus a net gain of $12.3 million in the same period of 2015.
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•
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Decreased average silver, gold, lead and zinc prices for the first quarter of 2016 compared to the same period in 2015.
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Three months ended March 31,
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2016
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2015
|
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Silver –
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London PM Fix ($/ounce)
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$
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14.84
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$
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16.72
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Realized price per ounce
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$
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14.93
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$
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17.18
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Gold –
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London PM Fix ($/ounce)
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$
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1,181
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$
|
1,219
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Realized price per ounce
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$
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1,187
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$
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1,222
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Lead –
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LME Final Cash Buyer ($/pound)
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$
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0.79
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$
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0.82
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Realized price per pound
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$
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0.78
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$
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0.85
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Zinc –
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LME Final Cash Buyer ($/pound)
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$
|
0.76
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$
|
0.94
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Realized price per pound
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$
|
0.79
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$
|
0.94
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Average realized prices differ from average market prices primarily because concentrate sales are generally recorded as revenues at the time of shipment at forward prices for the estimated month of settlement, which differ from average market prices. Due to the time elapsed between shipment of concentrates and final settlement with customers, we must estimate the prices at which sales of our metals will be settled. Previously recorded sales are adjusted to estimated settlement metal prices each period through final settlement. For the first quarter of 2016, we recorded net positive price adjustments to provisional settlements of $0.5 million compared to net positive price adjustments to provisional settlements of $2.1 million in the first quarter of 2015. The price adjustments related to silver, gold, zinc and lead contained in our concentrate shipments were largely offset by gains and losses on forward contracts for those metals for each period. See
Note 11
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
for more information. The gains and losses on these contracts are included in revenues and impact the realized prices for silver, gold, lead and zinc. Realized prices are calculated by dividing gross revenues for each metal (which include the price adjustments and gains and losses on the forward contracts discussed above) by the payable quantities of each metal included in concentrate and doré shipped during the period.
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No net activity on base metal derivative contracts in the first quarter of 2016 compared to a gain of $5.8 million in the same period of 2015.
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Higher general and administrative expense by $1.5 million
in the first quarter of 2016 compared to the same period in 2015
due primarily to increased incentive compensation.
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An income tax provision of $1.7 million in the first quarter of 2016 compared to an income tax provision of $1.4 million in the first quarter of 2015. See the
Corporate Matters
section below for more information.
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Exploration and pre-development expense decreased by $1.8 million
in the first quarter of 2016 compared to the first quarter of 2015. In 2016, we have continued exploration work at our Greens Creek unit, on our land package near Durango, Mexico, and at the Casa Berardi mine and other projects on our land package in Quebec, Canada. "Pre-development expense" is defined as costs incurred in the exploration stage that may ultimately benefit production, such as underground ramp development, which are expensed due to the lack of proven and probable reserves.
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Unrealized losses on investments of $0.7 million in the first quarter of 2016 compared to losses of $2.8 million in the first quarter of 2015. The losses were the result of impairments of certain investments being deemed to be other-than-temporary.
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Increased gross profit at our San Sebastian and Casa Berardi units in the first quarter of 2016 of $16.0 million and $2.4 million, respectively, compared to the first quarter of 2015. This was partially offset by decreases in gross profit of $6.6 million and $0.8 million, respectively, in the first quarter of 2016 at our Greens Creek and Lucky Friday units. See
The Greens Creek Segment,
The Lucky Friday Segment, The Casa Berardi Segment, and The San Sebastian Segment
sections below.
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The Greens Creek Segment
Dollars are in thousands (except per ounce and per ton amounts)
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Three months ended March 31,
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2016
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2015
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Sales
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$
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53,882
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$
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67,355
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Cost of sales and other direct production costs
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(31,252
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)
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(37,962
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)
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Depreciation, depletion and amortization
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(13,601
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)
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(13,746
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)
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Gross profit
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$
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9,029
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|
$
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15,647
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Tons of ore milled
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204,968
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195,469
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Production:
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|
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Silver (ounces)
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2,458,276
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2,035,966
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Gold (ounces)
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15,981
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|
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15,239
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Zinc (tons)
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14,611
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13,920
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Lead (tons)
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5,087
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4,930
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Payable metal quantities sold:
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Silver (ounces)
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1,901,143
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2,139,402
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Gold (ounces)
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11,420
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|
13,612
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Zinc (tons)
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12,412
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9,693
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Lead (tons)
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3,244
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4,428
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Ore grades:
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Silver ounces per ton
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15.17
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13.78
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Gold ounces per ton
|
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0.11
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0.12
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Zinc percent
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8.13
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8.34
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Lead percent
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3.05
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|
3.26
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Mining cost per ton
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$
|
66.96
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|
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$
|
73.68
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Milling cost per ton
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$
|
30.99
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|
|
$
|
28.74
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Cash Cost, After By-product Credits, per Silver Ounce
(1)
|
|
$
|
3.96
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|
|
$
|
3.23
|
|
|
(1)
|
A reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found below in
Reconciliation of Cash Cost, Before By-product Credits and Cash Cost, After By-product Credits (non-GAAP) to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP)
.
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The $6.6 million decrease in gross profit during the first quarter of 2016 compared to the same 2015 period was primarily the result of lower average prices for silver, gold, zinc and lead, impacting sales by approximately $10.0 million, as well as lower sales volume due to the timing of shipments, resulting in an approximate $3.5 million reduction in sales. These factors were partially offset by increased ore production, higher silver grades, and improved mill recoveries for all four metals produced. In addition, gross profit at Greens Creek was impacted by positive price adjustments to revenues of $0.4 million for the first quarter of 2016 compared to positive price adjustments of $1.9 million for the first quarter of 2015. Price adjustments to revenues result from changes in metals prices between transfer of title of concentrates to buyers and final settlements during the period. The price adjustments related to silver, gold, zinc and lead contained in concentrate shipments were net of gains and losses on forward contracts for those metals for each period. The price adjustments and gains and losses on forward contracts discussed above are included in sales.
Mining costs per ton decreased by 9% in the first quarter of 2016 compared to the same period in 2015, primarily as a result of lower hourly and salary labor costs, due to lower staffing levels, less expensed development, and higher milled tons, partially offset by higher expensed diamond drilling. Milling costs per ton increased 8% in the first quarter of 2016 compared to the same period in 2015 due to higher maintenance costs and reagent costs, and higher staffing levels.
The chart below illustrates the factors contributing to the variances in Cash Cost, After By-product Credits, per Silver Ounce for the first quarter of 2016 compared to the same period of 2015:
The following table summarizes the components of Cash Cost, After By-product Credits, per Silver Ounce:
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Three Months Ended March 31,
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2016
|
|
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2015
|
|
Cash Cost, Before By-product Credits, per Silver Ounce
|
|
$
|
19.58
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|
|
$
|
23.14
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|
By-product credits
|
|
|
(15.62
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)
|
|
|
(19.91
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)
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Cash Cost, After By-product Credits, per Silver Ounce
|
|
$
|
3.96
|
|
|
$
|
3.23
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|
The increase in Cash Costs, After By-Product Credits, per Silver Ounce for the first quarter of 2016 compared to 2015 was the result of lower by-product credits, partially offset by higher silver production.
Mining and milling costs per ounce decreased in the first quarter of 2016 compared to 2015 on a per-ounce basis, despite milling costs increasing on a per-ton basis as discussed above, due primarily to higher silver production resulting from improved silver grades and recovery.
Other cash costs per ounce for the first quarter of 2016 were lower compared to 2015 due to the effect of higher silver production and decreased labor costs.
Treatment costs were lower in the first quarter of 2016 compared to 2015 as a result of improved payment terms from smelters and lower silver prices, as treatment costs include the value of silver not payable to us through the smelting process. The silver not payable to us is either recovered by the smelters through further processing or ultimately not recovered and included in the smelters’ waste material.
By-product credits per ounce were lower in the first quarter of 2016 compared to 2015 due to lower gold, zinc and lead prices and higher silver production due to increased silver recovery.
The difference between what we report as “production” and “payable metal quantities sold” is attributable to the difference between the quantities of metals contained in the concentrates we produce versus the portion of those metals actually paid for by our customers according to the terms of our sales contracts. Differences can also arise from inventory changes incidental to shipping schedules, or variances in ore grades which impact the amount of metals contained in concentrates produced and sold. The difference in payable quantities sold for 2016 compared to 2015 is due mainly to timing of concentrate shipments.
While revenue from zinc, lead and gold by-products is significant, we believe that identification of silver as the primary product of the Greens Creek unit is appropriate because:
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silver has historically accounted for a higher proportion of revenue than any other metal and is expected to do so in the future;
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•
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we have historically presented Greens Creek as a producer primarily of silver, based on the original analysis that justified putting the project into production, and believe that consistency in disclosure is important to our investors regardless of the relationships of metals prices and production from year to year;
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metallurgical treatment maximizes silver recovery;
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•
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the Greens Creek deposit is a massive sulfide deposit containing an unusually high proportion of silver; and
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in most of its working areas, Greens Creek utilizes selective mining methods in which silver is the metal targeted for highest recovery.
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Likewise, we believe the identification of gold, lead and zinc as by-product credits is appropriate because of their lower economic value compared to silver and due to the fact that silver is the primary product we intend to produce. In addition, we do not receive sufficient revenue from any single by-product metal to warrant classification of such as a co-product.
We periodically review our revenues to ensure that reporting of primary products and by-products is appropriate. Because we consider zinc, lead and gold to be by-products of our silver production, the values of these metals offset operating costs within our calculations of Cash Cost, After By-product Credits, per Silver Ounce.
The Lucky Friday Segment
Dollars are in thousands (except per ounce and per ton amounts)
|
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Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Sales
|
|
$
|
21,252
|
|
|
$
|
19,891
|
|
Cost of sales and other direct production costs
|
|
|
(15,500
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)
|
|
|
(13,474
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)
|
Depreciation, depletion and amortization
|
|
|
(3,004
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)
|
|
|
(2,866
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)
|
Gross profit
|
|
$
|
2,748
|
|
|
$
|
3,551
|
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Tons of ore milled
|
|
|
74,021
|
|
|
|
74,245
|
|
Production:
|
|
|
|
|
|
|
|
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Silver (ounces)
|
|
|
977,084
|
|
|
|
836,719
|
|
Lead (tons)
|
|
|
5,951
|
|
|
|
4,948
|
|
Zinc (tons)
|
|
|
2,753
|
|
|
|
2,167
|
|
Payable metal quantities sold:
|
|
|
|
|
|
|
|
|
Silver (ounces)
|
|
|
928,801
|
|
|
|
781,506
|
|
Lead (tons)
|
|
|
5,507
|
|
|
|
4,196
|
|
Zinc (tons)
|
|
|
1,930
|
|
|
|
1,450
|
|
Ore grades:
|
|
|
|
|
|
|
|
|
Silver ounces per ton
|
|
|
13.67
|
|
|
|
11.75
|
|
Lead percent
|
|
|
8.36
|
|
|
|
7.00
|
|
Zinc percent
|
|
|
3.97
|
|
|
|
3.19
|
|
Mining cost per ton
|
|
$
|
98.02
|
|
|
|
84.68
|
|
Milling cost per ton
|
|
$
|
23.35
|
|
|
|
20.27
|
|
Cash Cost, After By-product Credits, per Silver Ounce (1)
|
|
$
|
9.05
|
|
|
$
|
9.05
|
|
|
(1)
|
A reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found below in
Reconciliation of Cash Cost, Before By-product Credits and Cash Cost, After By-product Credits (non-GAAP) to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP)
.
|
Gross profit decreased by $0.8 million in the first quarter of 2016 compared to 2015 primarily due to lower silver, lead, and zinc prices, partially offset by increased metal production as a result of improved ore grades.
Mining and milling cost per ton increased by 16% and 15%, respectively, in the first quarter of 2016 compared to the same period in 2015 due primarily to higher labor costs.
The chart below illustrates the factors contributing to the variances in Cash Cost, After By-product Credits, per Silver Ounce for the first quarter of 2016 compared to the same period of 2015:
The following table summarizes the components of Cash Cost, After By-product Credits, per Silver Ounce:
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash Cost, Before By-product Credits, per Silver Ounce
|
|
$
|
21.13
|
|
|
$
|
21.68
|
|
By-product credits
|
|
|
(12.08
|
)
|
|
|
(12.63
|
)
|
Cash Cost, After By-product Credits, per Silver Ounce
|
|
$
|
9.05
|
|
|
$
|
9.05
|
|
Cash Cost, After By-product Credits, per Silver Ounce for the first quarter of 2016 was the same as in the first quarter of 2015, as higher labor costs and lower by-product credits were offset by the increased silver production.
Similar to the Greens Creek segment, the difference between what we report as “production” and “payable metal quantities sold” is due essentially to the difference between the quantities of metals contained in the concentrates we produce versus the portion of those metals actually paid for by our customers according to the terms of our sales contracts.
While value from lead and zinc is significant, we believe that identification of silver as the primary product of the Lucky Friday unit is appropriate because:
|
•
|
silver has historically accounted for a higher proportion of revenue than any other metal and is expected to do so in the future;
|
|
•
|
the Lucky Friday unit is situated in a mining district long associated with silver production; and
|
|
•
|
the Lucky Friday unit generally utilizes selective mining methods to target silver production.
|
Likewise, we believe the identification of lead and zinc as by-product credits is appropriate because of their lower economic value compared to silver and due to the fact that silver is the primary product we intend to produce. In addition, we do not receive sufficient revenue from any single by-product metal to warrant classification of such as a co-product.
We periodically review our revenues to ensure that reporting of primary products and by-products is appropriate. Because we consider zinc and lead to be by-products of our silver production, the values of these metals offset operating costs within our calculations of Cash Cost, After By-product Credits, per Silver Ounce.
The #4 Shaft project, an internal shaft at the Lucky Friday mine, is expected to provide deeper access which should in turn extend the mine's operational life and expand silver production. We commenced engineering and construction activities on the #4 Shaft in late 2008, and our Board of Directors gave its final approval of the project in August 2011. As of March 31, 2016, the #4 Shaft has been excavated to the 8575 level, with the final depth of the shaft to be the 8600 level. Construction of the #4 Shaft as currently designed is expected to cost approximately $225 million, including approximately $214.7 million already spent as of March 31, 2016, with completion expected in the fourth quarter of 2016. We believe that our current capital resources will allow us to complete the project. However, there are a number of factors that could affect completion of the project, including: (i) a significant decline in metals prices, (ii) a reduction in available cash or credit, whether arising from decreased cash flow or other uses of available cash, (iii) increased regulatory burden, or (iv) a significant increase in operating or capital costs.
Many of the employees at our Lucky Friday unit are represented by a union. The most recent collective bargaining agreement with the union expired on April 30, 2016, and negotiations on a new agreement are ongoing.
See
Note 4
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
for contingencies related to various accidents and other events occurring at the Lucky Friday mine in prior periods.
The Casa Berardi Segment
Dollars are in thousands (except per ounce and per ton amounts)
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Sales
|
|
$
|
32,198
|
|
|
$
|
31,846
|
|
Cost of sales and other direct production costs
|
|
|
(20,659
|
)
|
|
|
(22,528
|
)
|
Depreciation, depletion and amortization
|
|
|
(8,501
|
)
|
|
|
(8,643
|
)
|
Gross profit
|
|
$
|
3,038
|
|
|
$
|
675
|
|
Tons of ore milled
|
|
|
216,962
|
|
|
|
188,095
|
|
Production:
|
|
|
|
|
|
|
|
|
Gold (ounces)
|
|
|
30,378
|
|
|
|
25,411
|
|
Silver (ounces)
|
|
|
7,005
|
|
|
|
5,912
|
|
Payable metal quantities sold:
|
|
|
|
|
|
|
|
|
Gold (ounces)
|
|
|
27,427
|
|
|
|
26,183
|
|
Silver (ounces)
|
|
|
7,864
|
|
|
|
5,627
|
|
Ore grades:
|
|
|
|
|
|
|
|
|
Gold ounces per ton
|
|
|
0.163
|
|
|
|
0.160
|
|
Silver ounces per ton
|
|
|
0.04
|
|
|
|
0.036
|
|
Mining cost per ton
|
|
$
|
87.54
|
|
|
$
|
105.50
|
|
Milling cost per ton
|
|
$
|
18.91
|
|
|
$
|
21.94
|
|
Cash Cost, After By-product Credits, per Gold Ounce
(1)
|
|
$
|
781
|
|
|
$
|
974
|
|
|
(1)
|
A reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found below in
Reconciliation of Cash Cost, Before By-product Credits and Cash Cost, After By-product Credits (non-GAAP) to Costs of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP)
.
|
Gross profit increased by $2.4 million for the first quarter of 2016 compared to the same period in 2015. The increase is primarily due to increased ore tonnage. Ore grades remained consistent in the first quarter while throughput increased to an average of 2,384 tons per day in the first quarter of 2016 compared to 2,090 tons per day for the same period of 2015.
Mining cost per ton for the first quarter of 2016 was 17% lower than the first quarter of 2015 primarily due to higher ore production. Foreign exchange differences also contributed to the lower costs by approximately $9.00 per ton, as the U.S. dollar was stronger relative to the Canadian dollar in the first quarter of 2016 than it was in the first quarter of 2015.
Milling cost per ton was down 14% in the first quarter of 2016 compared to the same period in 2015 mainly due to higher ore production and foreign exchange differences noted above.
The chart below illustrates the factors contributing to Cash Cost, After By-product Credits, per Gold Ounce for the first quarter of 2016:
The following table summarizes the components of Cash Cost, After By-product Credits, per Gold Ounce:
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash Cost, Before By-product Credits, per Gold Ounce
|
|
$
|
784.66
|
|
|
$
|
977.34
|
|
By-product credits
|
|
|
(3.39
|
)
|
|
|
(3.82
|
)
|
Cash Cost, After By-product Credits, per Gold Ounce
|
|
$
|
781.27
|
|
|
$
|
973.52
|
|
The decrease in Cash Cost, After By-product Credits, per Gold Ounce for the first quarter of 2016 compared to the first quarter of 2015 was primarily the result of higher gold production, which had an approximate $153 per ounce impact, and foreign exchange differences, which had an approximate $83 per ounce impact. These factors were partially offset by higher costs on a Canadian dollar basis.
The difference between what we report as "production" and "payable metal quantities sold" is mainly attributable to inventory changes incidental to the timing of sales of refined metals and shipping schedules.
We believe the identification of silver as a by-product credit is appropriate at Casa Berardi because of its lower economic value compared to gold and due to the fact that gold is the primary product we intend to produce there. In addition, we do not receive sufficient revenue from silver at Casa Berardi to warrant classification of such as a co-product. Because we consider silver to be a by-product of our gold production at Casa Berardi, the value of silver offsets operating costs within our calculations of Cash Cost, After By-product Credits, per Gold Ounce.
The San Sebastian Segment
In the third quarter of 2015, we made the development decision to mine near surface, high grade portions of silver and gold deposits from shallow open pits at our San Sebastian unit in Mexico. We previously produced silver and gold from underground mines at San Sebastian from 2001 to 2005. A Preliminary Economic Assessment was completed, and development of the pits and mine production commenced in the fourth quarter of 2015. Mill production started in December 2015 with the ore processed at a leased mill. The first sales for the property came in early 2016 and included production from both December 2015 and first quarter 2016.
Dollars are in thousands (except per ounce and per ton amounts)
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
Sales
|
|
$
|
23,685
|
|
Cost of sales and other direct production costs
|
|
|
(6,909
|
)
|
Depreciation, depletion and amortization
|
|
|
(769
|
)
|
Gross profit
|
|
$
|
16,007
|
|
Tons of ore milled
|
|
|
31,158
|
|
Production:
|
|
|
|
|
Silver (ounces)
|
|
|
1,200,339
|
|
Gold (ounces)
|
|
|
9,329
|
|
Payable metal quantities sold:
|
|
|
|
|
Silver (ounces)
|
|
|
958,007
|
|
Gold (ounces)
|
|
|
7,413
|
|
Ore grades:
|
|
|
|
|
Silver ounces per ton
|
|
|
41.26
|
|
Gold ounces per ton
|
|
|
0.322
|
|
Mining cost per ton
|
|
$
|
103.72
|
|
Milling cost per ton
|
|
$
|
69.62
|
|
Cash Cost, After By-product Credits, per Silver Ounce (1)
|
|
$
|
(3.26
|
)
|
|
(1)
|
A reconciliation of this non-GAAP measure to cost of sales and other direct production costs and depreciation, depletion and amortization, the most comparable GAAP measure, can be found below in
Reconciliation of Cash Cost, Before By-product Credits and Cash Cost, After By-product Credits (non-GAAP) to Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP)
.
|
The mill operated at 342 tons per day during the quarter, which is lower than the expected throughput rate going forward. The ore processed in the quarter had considerably higher grades than anticipated over the mine life, which is currently expected to be between 18 and 24 months.
The chart below illustrates the factors contributing to Cash Cost, After By-product Credits, Per Silver Ounce for December 2016:
The following table summarizes the components of Cash Cost, After By-product Credits, per Silver Ounce:
|
|
Three Months Ended March 31, 2016
|
|
Cash Cost, Before By-product Credits, per Silver Ounce
|
|
$
|
6.00
|
|
By-product credits
|
|
|
(9.26
|
)
|
Cash Cost, After By-product Credits, per Silver Ounce
|
|
$
|
(3.26
|
)
|
The difference between what we report as "production" and "payable metal quantities sold" is mainly attributable to inventory changes incidental to the timing of sales of refined metals and shipping schedules.
We believe the identification of gold as a by-product credit is appropriate at San Sebastian because of its anticipated lower economic value compared to silver over the life of the mine. In addition, we will not receive sufficient revenue from gold at San Sebastian to warrant classification of such as a co-product. Because we consider gold to be a by-product of our silver production at San Sebastian, the value of gold offsets operating costs within our calculations of Cash Cost, After By-product Credits, per Silver Ounce. In addition to the impact of the by-product credits from gold, Cash Cost, After By-product Credits, per Silver Ounce at San Sebastian is lower compared to our other operations due to the orebody being near surface and having higher precious metal grades, resulting in a lower Cash Cost, Before By-product Credits, per Silver Ounce.
Corporate Matters
Employee Benefit Plans
Our defined benefit pension plans, while affording a significant benefit to our employees, also represent a significant liability to us. The liability recorded for the funded status of our plans was $46.3 million and $46.9 million as of March 31, 2016 and December 31, 2015, respectively. In the first quarter of 2016, we contributed approximately $2.6 million in shares of our common stock and cash to our defined benefit plans, with $2.7 million of additional contributions anticipated in 2016. While the economic variables which will determine future funding requirements are uncertain, we expect contributions to continue to be required in future years under current plan provisions, and we periodically examine the plans for affordability and competitiveness. See
Note 7 of Notes to Condensed Consolidated Financial Statements (Unaudited)
for more information.
Income Taxes
Each reporting period we assess our deferred tax assets utilizing long-range forecasts to provide reasonable assurance that they will be realized through future earnings. We continue to have a net deferred tax asset in the U.S. and Mexico, and a net deferred tax liability in Canada.
Our U.S. net deferred tax asset at March 31, 2016 totaled $42.3 million, or 2% of total assets, a decrease of $0.6 million from the $42.9 million net deferred tax asset at December 31, 2015. The largest component of the deferred tax asset is deferred foreign exchange losses. The next largest component is net operating loss carryforwards. In 2015, we determined that we are indefinite Alternative Minimum taxpayers, resulting in additional valuation allowance primarily related to forecasted utilization of regular net operating loss carryforwards and the effect of re-measuring temporary deferred tax assets using a tax rate of 20% which differed from the previous rate of 35%. At March 31, 2016, we retained a valuation allowance on U.S. deferred tax assets of $102.3 million, primarily for net operating loss carryforwards.
Our net Canadian deferred tax liability at March 31, 2016 was $127.1 million, an increase of $6.8 million from the $120.3 million net deferred tax liability at December 31, 2015. The increase is due to strengthening of the Canadian dollar relative to the U.S. dollar during the period, resulting in a higher U.S. dollar value for the liability. The deferred tax liability is the result of the acquisition of Aurizon completed on June 1, 2013, and is primarily related to the excess of the fair market value of the assets acquired over the tax bases of those assets for Canadian tax reporting, with the majority of that value allocated to mineral resources and reserves.
Our net Mexican deferred tax asset at March 31, 2016, was $7.9 million, a decrease of $3.8 million from the $11.7 million net deferred tax asset at December 31, 2015. The deferred tax asset is the realized portion of net operating loss carryforwards supported by forecasted income from operations at San Sebastian. An $11.0 million valuation allowance remains on deferred tax assets in foreign jurisdictions.
Our effective tax rate for the three months ended March 31, 2016 compared to the three months ended March 31, 2015 was impacted by the effects of the U.S. deduction for percentage depletion and the impact of taxation in foreign jurisdictions, the impacts of which were amplified by relatively low worldwide pre-tax book income.
Reconciliation of Cash Cost, Before By-product Credits and Cash Cost, After By-product Credits, Per Ounce (non-GAAP) to Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP)
The tables below present reconciliations between the non-GAAP measures of Cash Cost, Before By-product Credits, per Ounce and Cash Cost, After By-product Credits, per Ounce to the most comparable GAAP measure of cost of sales and other direct production costs and depreciation, depletion and amortization for our operations at the Greens Creek, Lucky Friday, San Sebastian and Casa Berardi units for the three-month periods ended March 31, 2016 and 2015. Commercial production began at the San Sebastian unit late in 2015, and as a result there is no comparative data for the first quarter of 2015.
Cash Cost, After By-product Credits, per Ounce is an important operating statistic that we utilize to measure each mine's operating performance. It also allows us to benchmark the performance of each of our mines versus those of our competitors. As a primary silver mining company, we also use the statistic on an aggregate basis - aggregating the Greens Creek, Lucky Friday and San Sebastian mines - to compare our performance with that of other primary silver mining companies. With regard to Casa Berardi, we use Cash Cost, After By-product Credits, per Gold Ounce to compare its performance with other gold mines. Similarly, the statistic is useful in identifying acquisition and investment opportunities as it provides a common tool for measuring the financial performance of other mines with varying geologic, metallurgical and operating characteristics.
Cash Cost, Before By-product Credits, per Ounce includes all direct and indirect operating cash costs related directly to the physical activities of producing metals, including mining, processing and other plant costs, third-party refining expense, on-site general and administrative costs, royalties and mining production taxes. By-product credits include revenues earned from all metals other than the primary metal produced at each unit. Cash Cost, After By-product Credits, per Ounce provides management and investors an indication of operating cash flow, after consideration of the average price, received from production. We also use this measurement for the comparative monitoring of performance of our mining operations period-to-period from a cash flow perspective. Cash Cost, After By-product Credits, per Ounce is a measure developed by precious metals companies (including the Silver Institute) in an effort to provide a uniform standard for comparison purposes. There can be no assurance, however, that our reporting of this non-GAAP measure is the same as that reported by other mining companies.
The Casa Berardi section below reports Cash Cost, After By-product Credits, per Gold Ounce for the production of gold, its primary product, and by-product revenues earned from silver, which is a by-product at Casa Berardi. Only costs and ounces produced relating to units with the same primary product are combined to represent Cash Cost, After By-product Credits, per Ounce. Thus, the gold produced at our Casa Berardi unit is not included as a by-product credit when calculating Cash
Cost, After By-product Credits, per Silver Ounce for the total of Greens Creek, Lucky Friday and San Sebastian, our combined silver properties.
As depicted in the Greens Creek Unit, the Lucky Friday Unit and the San Sebastian Unit tables below, by-product credits comprise an essential element of our silver unit cost structure, distinguishing our silver operations due to the polymetallic nature of their orebodies. By-product credits included in our presentation of Cash Cost, After By-product Credits, per Silver Ounce include:
In thousands (except per ounce amounts)
|
|
Total, Greens Creek, Lucky Friday, and San Sebastian Units
|
|
|
|
Three months ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
By-product credits, all silver properties:
|
|
|
|
|
|
|
|
|
Zinc
|
|
$
|
18,817
|
|
|
$
|
21,690
|
|
Gold
|
|
|
27,456
|
|
|
|
15,508
|
|
Lead
|
|
|
15,057
|
|
|
|
13,893
|
|
Total by-product credits
|
|
$
|
61,330
|
|
|
$
|
51,091
|
|
|
|
|
|
|
|
|
|
|
By-product credits per silver ounce, all silver properties
|
|
|
|
|
|
|
|
|
Zinc
|
|
$
|
4.06
|
|
|
$
|
7.54
|
|
Gold
|
|
|
5.92
|
|
|
|
5.40
|
|
Lead
|
|
|
3.25
|
|
|
|
4.84
|
|
By-product credits per silver ounce
|
|
$
|
13.23
|
|
|
$
|
17.78
|
|
By-product credits included in our presentation of Cash Cost, After By-product Credits, per Gold Ounce for our Casa Berardi Unit include:
In thousands (except per ounce amounts)
|
|
Casa Berardi Unit
|
|
|
|
Three months ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Silver by-product credits
|
|
$
|
103
|
|
|
$
|
97
|
|
By-product credits per gold ounce
|
|
$
|
3.39
|
|
|
$
|
3.82
|
|
Cost of sales and other direct production costs and depreciation, depletion and amortization is the most comparable financial measure calculated in accordance with GAAP to Cash Cost, After By-product Credits. The sum of the cost of sales and other direct production costs and depreciation, depletion and amortization for our operating units in the tables below is presented in our
Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) (Unaudited)
.
In thousands (except per ounce amounts)
|
|
Total, Greens Creek, Lucky Friday and San Sebastian Units
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash Cost, Before By-product Credits
(1)
|
|
$
|
75,979
|
|
|
$
|
65,246
|
|
By-product credits
|
|
|
(61,330
|
)
|
|
|
(51,090
|
)
|
Cash Cost, After By-product Credits
|
|
|
14,649
|
|
|
|
14,156
|
|
Divided by ounces produced
|
|
|
4,635
|
|
|
|
2,873
|
|
Cash Cost, Before By-product Credits, per Silver Ounce
|
|
|
16.39
|
|
|
|
22.71
|
|
By-product credits per silver ounce
|
|
|
(13.23
|
)
|
|
|
(17.78
|
)
|
Cash Cost, After By-product Credits, per Silver Ounce
|
|
$
|
3.16
|
|
|
$
|
4.93
|
|
Reconciliation to GAAP:
|
|
|
|
|
|
|
|
|
Cash Cost, After By-product Credits
|
|
$
|
14,649
|
|
|
$
|
14,156
|
|
Depreciation, depletion and amortization
|
|
|
17,374
|
|
|
|
16,612
|
|
Treatment costs
|
|
|
(20,963
|
)
|
|
|
(19,921
|
)
|
By-product credits
|
|
|
61,330
|
|
|
|
51,090
|
|
Change in product inventory
|
|
|
(1,959
|
)
|
|
|
5,718
|
|
Reclamation and other costs
|
|
|
605
|
|
|
|
393
|
|
Cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP)
|
|
$
|
71,036
|
|
|
$
|
68,048
|
|
In thousands (except per ounce amounts)
|
|
Greens Creek Unit
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash Cost, Before By-product Credits
(1)
|
|
$
|
48,133
|
|
|
$
|
47,113
|
|
By-product credits
|
|
|
(38,408
|
)
|
|
|
(40,531
|
)
|
Cash Cost, After By-product Credits
|
|
|
9,725
|
|
|
|
6,582
|
|
Divided by ounces produced
|
|
|
2,458
|
|
|
|
2,036
|
|
Cash Cost, Before By-product Credits, per Silver Ounce
|
|
|
19.58
|
|
|
|
23.14
|
|
By-product credits per silver ounce
|
|
|
(15.62
|
)
|
|
|
(19.91
|
)
|
Cash Cost, After By-product Credits, per Silver Ounce
|
|
$
|
3.96
|
|
|
$
|
3.23
|
|
Reconciliation to GAAP:
|
|
|
|
|
|
|
|
|
Cash Cost, After By-product Credits
|
|
$
|
9,725
|
|
|
$
|
6,582
|
|
Depreciation, depletion and amortization
|
|
|
13,601
|
|
|
|
13,746
|
|
Treatment costs
|
|
|
(15,638
|
)
|
|
|
(15,233
|
)
|
By-product credits
|
|
|
38,408
|
|
|
|
40,531
|
|
Change in product inventory
|
|
|
(1,640
|
)
|
|
|
5,694
|
|
Reclamation and other costs
|
|
|
398
|
|
|
|
388
|
|
Cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP)
|
|
$
|
44,854
|
|
|
$
|
51,708
|
|
In thousands (except per ounce amounts)
|
|
Lucky Friday Unit
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash Cost, Before By-product Credits
(1)
|
|
$
|
20,648
|
|
|
$
|
18,133
|
|
By-product credits
|
|
|
(11,806
|
)
|
|
|
(10,559
|
)
|
Cash Cost, After By-product Credits
|
|
|
8,842
|
|
|
|
7,574
|
|
Divided by ounces produced
|
|
|
977
|
|
|
|
837
|
|
Cash Cost, Before By-product Credits, per Silver Ounce
|
|
|
21.13
|
|
|
|
21.68
|
|
By-product credits per silver ounce
|
|
|
(12.08
|
)
|
|
|
(12.63
|
)
|
Cash Cost, After By-product Credits, per Silver Ounce
|
|
$
|
9.05
|
|
|
$
|
9.05
|
|
Reconciliation to GAAP:
|
|
|
|
|
|
|
|
|
Cash Cost, After By-product Credits
|
|
$
|
8,842
|
|
|
$
|
7,574
|
|
Depreciation, depletion and amortization
|
|
|
3,004
|
|
|
|
2,866
|
|
Treatment costs
|
|
|
(5,334
|
)
|
|
|
(4,688
|
)
|
By-product credits
|
|
|
11,806
|
|
|
|
10,559
|
|
Change in product inventory
|
|
|
21
|
|
|
|
24
|
|
Reclamation and other costs
|
|
|
166
|
|
|
|
5
|
|
Cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP)
|
|
$
|
18,505
|
|
|
$
|
16,340
|
|
In thousands (except per ounce amounts)
|
|
San Sebastian Unit
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash Cost, Before By-product Credits (1)
|
|
$
|
7,198
|
|
|
$
|
—
|
|
By-product credits
|
|
|
(11,116
|
)
|
|
|
—
|
|
Cash Cost, After By-product Credits
|
|
|
(3,918
|
)
|
|
|
—
|
|
Divided by ounces produced
|
|
|
1,200
|
|
|
|
—
|
|
Cash Cost, Before By-product Credits, per Silver Ounce
|
|
|
6.00
|
|
|
|
—
|
|
By-product credits per silver ounce
|
|
|
(9.26
|
)
|
|
|
—
|
|
Cash Cost, After By-product Credits, per Silver Ounce
|
|
$
|
(3.26
|
)
|
|
$
|
—
|
|
Reconciliation to GAAP:
|
|
|
|
|
|
|
|
|
Cash Cost, After By-product Credits
|
|
$
|
(3,918
|
)
|
|
$
|
—
|
|
Depreciation, depletion and amortization
|
|
|
769
|
|
|
|
—
|
|
Treatment costs
|
|
|
9
|
|
|
|
—
|
|
By-product credits
|
|
|
11,116
|
|
|
|
—
|
|
Change in product inventory
|
|
|
(340
|
)
|
|
|
—
|
|
Reclamation and other costs
|
|
|
41
|
|
|
|
—
|
|
Cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP)
|
|
$
|
7,677
|
|
|
$
|
—
|
|
In thousands (except ounce and per ounce amounts)
|
|
Casa Berardi Unit
|
|
|
|
Three months ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cash Cost, Before By-product Credits
(1)
|
|
$
|
23,836
|
|
|
$
|
24,835
|
|
By-product credits
|
|
|
(103
|
)
|
|
|
(97
|
)
|
Cash Cost, After by-product credits
|
|
|
23,733
|
|
|
|
24,738
|
|
Divided by gold ounces produced
|
|
|
30,378
|
|
|
|
25,411
|
|
Cash Cost, Before By-product Credits, per Gold Ounce
|
|
|
784.66
|
|
|
|
977.34
|
|
By-product credits per gold ounce
|
|
|
(3.39
|
)
|
|
|
(3.82
|
)
|
Cash Cost, After By-product Credits, per Gold Ounce
|
|
$
|
781.27
|
|
|
$
|
973.52
|
|
Reconciliation to GAAP:
|
|
|
|
|
|
|
|
|
Cash Cost, After By-product Credits
|
|
$
|
23,733
|
|
|
$
|
24,738
|
|
Depreciation, depletion and amortization
|
|
|
8,501
|
|
|
|
8,643
|
|
Treatment costs
|
|
|
(171
|
)
|
|
|
(153
|
)
|
By-product credits
|
|
|
103
|
|
|
|
97
|
|
Change in product inventory
|
|
|
(3,118
|
)
|
|
|
(2,272
|
)
|
Reclamation and other costs
|
|
|
111
|
|
|
|
118
|
|
Cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP)
|
|
$
|
29,159
|
|
|
$
|
31,171
|
|
|
|
Total, All Locations
|
|
In thousands
|
|
Three months ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Reconciliation to GAAP:
|
|
|
|
|
|
|
|
|
Cash Cost, After By-product Credits
|
|
$
|
38,382
|
|
|
$
|
38,894
|
|
Depreciation, depletion and amortization
|
|
|
25,875
|
|
|
|
25,255
|
|
Treatment costs
|
|
|
(21,134
|
)
|
|
|
(20,074
|
)
|
By-product credits
|
|
|
61,433
|
|
|
|
51,187
|
|
Change in product inventory
|
|
|
(5,077
|
)
|
|
|
3,446
|
|
Reclamation and other costs
|
|
|
716
|
|
|
|
511
|
|
Cost of sales and other direct production costs and depreciation, depletion and amortization (GAAP)
|
|
$
|
100,195
|
|
|
$
|
99,219
|
|
|
(1)
|
Includes all direct and indirect operating costs related directly to the physical activities of producing metals, including mining, processing and other plant costs, third-party refining and marketing expense, on-site general and administrative costs, royalties and mining production taxes, after by-product revenues earned from all metals other than the primary metal produced at each unit.
|
Financial Liquidity and Capital Resources
Our liquid assets include (in millions):
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Cash and cash equivalents held in U.S. dollars
|
|
$
|
118.5
|
|
|
$
|
137.0
|
|
Cash and cash equivalents held in foreign currency
|
|
|
15.5
|
|
|
|
18.2
|
|
Total cash and cash equivalents
|
|
|
134.0
|
|
|
|
155.2
|
|
Marketable equity securities - non-current
|
|
|
2.1
|
|
|
|
1.5
|
|
Total cash, cash equivalents and investments
|
|
$
|
136.1
|
|
|
$
|
156.7
|
|
Cash and cash equivalents decreased by $21.2 million in the first three months of 2016, as discussed below, while the value of non-current marketable equity securities increased by $0.6 million (see
Note 2
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
for more information).
As discussed in
Note 9
of
Notes to Condensed Consolidated Financial Statements (Unaudited),
on April 12, 2013, we completed an offering of Senior Notes in the total principal amount of US$500 million, and our Senior Notes have a total principal balance of $506.5 million as of March 31, 2016
.
The Senior Notes are due May 1, 2021 and bear interest at a rate of 6.875% per year from the date of original issuance or from the most recent payment date to which interest has been paid or provided for. Interest on the Senior Notes is payable on May 1 and November 1 of each year, commencing November 1, 2013.
The #4 Shaft project, which is discussed further in the
Lucky Friday Segment
section above, is expected to involve capital expenditures of approximately $225 million through 2016, including approximately $214.7 million that has been spent on the project as of March 31, 2016.
In the third quarter of 2015, we made a development decision to mine near surface, high grade portions of the silver and gold deposits at our San Sebastian project in Mexico and anticipate commencing ore production there by the end of 2015. As a result, we believe San Sebastian will generate positive cash flows in 2016 and 2017. However, our estimate of costs could change, and our ability to generate cash flow at San Sebastian could be impacted by changes in precious metals prices or other factors, and there can be no assurance that we will be able to develop and operate San Sebastian as anticipated.
In June 2015, we completed the acquisition of all of the outstanding common stock of Revett for total consideration of $20.1 million, consisting of $0.9 million in cash and $19.1 million in our common stock. As a result of the acquisition, we anticipate incurring costs over the next three to four years totaling approximately $18.8 million for reclamation of the Troy mine. We expect to recover approximately $16.8 million of these costs over that time period through submittal of reimbursement claims pursuant to an insurance policy held by the Revett subsidiary owning the Troy mine, and this amount is recorded as an asset as of March 31, 2016. However, there can be no assurance that we will be successful in obtaining reimbursement for such costs as anticipated.
As discussed in
Note 4
of
Notes to Condensed Consolidated Financial Statements (Unaudited),
we believe that it is probable that CoCa, our wholly-owned subsidiary, will incur a settlement liability for response costs at the Gilt Edge and Nelson Tunnel/Commodore sites, which we currently estimate to be $9.9 million after payments from insurance proceeds and another party to the settlement. In the first quarter of 2016, we deposited $3.9 million into an escrow account which would be applied towards the potential settlement. The deposit is reported as current restricted cash on our condensed consolidated balance sheet (unaudited). However, there can be no assurance the settlement will be finalized as outlined above or occur at all.
As discussed in
Note 8
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
, in February 2016 we entered into an equity distribution agreement under which we may issue and sell shares of our common stock from time to time having an aggregate offering price of up to $75 million, with the net proceeds available for general corporate purposes. Whether or not we engage in sales from time to time may depend on a variety of factors, including share price, our cash resources, customary black-out restrictions, and whether we have any material inside information, and the agreement can be terminated by us at any time. As of March 31, 2016, we had sold 737,275 shares under the agreement for total net proceeds of approximately $2.1 million. To date, we have we have sold 2,780,087 shares through the at-the-market program for total net proceeds of $8.1 million.
Pursuant to our common stock dividend policy described in
Note 8
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
, our Board of Directors declared and paid dividends on common stock totaling $1.0 million in the first quarter of 2016 and $0.9 million in the first quarter of 2015. On May 4, 2016, our Board of Directors declared a dividend on common stock totaling $1.0 million payable in June 2016. Our dividend policy has a silver-price-linked component which ties the amount of declared common stock dividends to our realized silver price for the preceding quarter. Another component of our common stock dividend policy anticipates paying an annual minimum dividend. The declaration and payment of dividends on common stock is at the sole discretion of our board of directors, and there can be no assurance that we will continue to declare and pay common stock dividends in the future.
On May 8, 2012, we announced that our board of directors approved a stock repurchase program. Under the program, we are authorized to repurchase up to 20 million shares of our outstanding common stock from time to time in open market or privately negotiated transactions, depending on prevailing market conditions and other factors. The repurchase program may be modified, suspended or discontinued by us at any time. Whether or not we engage in repurchases from time to time may depend on a variety of factors, including not only price and cash resources, but customary black-out restrictions, whether we have any material inside information, limitations on share repurchases or cash usage that may be imposed by our credit agreement or in connection with issuances of securities, alternative uses for cash, applicable law, and other investment opportunities from time to time.
As of March 31, 2016, 934,100 shares have been purchased in prior periods at an average price of $3.99 per share, leaving 19.1 million shares that may yet be purchased under the program. The closing price of our common stock at May 3, 2016, was $4.05 per share.
We may defer some capital investment and/or exploration and pre-development activities, engage in asset sales or secure additional capital if necessary to maintain liquidity. We also may pursue additional acquisition opportunities, which could require additional equity issuances or financing. There can be no assurance that such financing will be available to us.
As a result of our current cash balances, the performance of our current and expected operations, current metals prices, proceeds from potential at-the-market sales of common stock, and full availability of our $100 million revolving credit facility, we believe our cash, cash equivalents, investments, projected cash from operations, and availability of financing (including equity issuances), if needed, will be adequate to meet our obligations and other potential cash requirements during the next 12 months. Our obligations and other uses of cash may include, but are not limited to: debt service obligations related to the Senior Notes, capital outlays for the #4 Shaft project and other capital expenditures, regulatory matters, litigation, potential repurchases of our common stock under the program described above, and payment of dividends on common stock, if declared by our board of directors. We currently estimate that a total of approximately $150 million will be spent on capital expenditures, primarily for equipment, infrastructure, and development at our mines, in 2016. We also estimate that exploration and pre-development expenditures will total approximately $15 million in 2016. However, capital, exploration, and pre-development expenditures may change based upon our financial position, metals prices, and other considerations. Our ability to fund the activities described above will depend on our operating performance, metals prices, our ability to estimate costs, sources of liquidity available to us, and other factors. A sustained downturn in metals prices or significant increase in operational or capital costs, other uses of cash, or other factors beyond our control could impact our plans.
|
|
Three Months Ended
|
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
Cash provided by operating activities (in millions)
|
|
$
|
18.7
|
|
|
$
|
21.4
|
|
Cash provided by operating activities in the first quarter of 2016 decreased by $2.7 million compared to the same period in 2015. The reduction was primarily due to working capital and other operating asset and liability changes which resulted in a net cash flow decrease of $21.5 million in the first three months of 2016 compared to a net decrease in cash flows of $8.0 million in the 2015 period. The $13.5 million variance in working capital changes is attributed to higher accounts receivable and inventory balances due to the timing of sales at Greens Creek and Casa Berardi, partially offset by higher accounts payable due to the timing of capital spending at the operations. In addition, income, as adjusted for non-cash items, was higher by $10.8 million, due primarily to gross profit generated at San Sebastian in the first quarter of 2016 following commencement of production there in December 2015.
|
|
Three Months Ended
|
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
Cash used in investing activities (in millions)
|
|
$
|
(38.3
|
)
|
|
$
|
(27.9
|
)
|
During the first quarter of 2016 we invested $34.7 million in capital expenditures compared to $27.0 million, not including $1.6 million in capital lease additions, in the same period in 2015, with the variance primarily due to increased costs at Casa Berardi for equipment additions and construction of the new East Mine Crown Pillar pit. We incurred increases in restricted cash of $3.9 million in the first quarter of 2016, as discussed above. In the first quarter of 2015, we purchased marketable securities having a cost basis of $0.9 million.
|
|
Three Months Ended
|
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
Cash used in financing activities (in millions)
|
|
$
|
(3.1
|
)
|
|
$
|
(4.4
|
)
|
During the first quarter of 2016, we received $2.1 million in proceeds from sale of shares of our common stock, as discussed above. We paid cash dividends of $1.0 million and $0.9 million on our common stock in the first quarter of 2016 and 2015, respectively, and cash dividends of $0.1 million on our Series B Preferred Stock during the first quarter of each year. We made repayments on our capital leases of $2.1 million and $2.3 million in the three month periods ended March 31, 2016 and 2015, respectively. In the first quarter of 2016, we also made repayments of debt totaling $0.7 million. In addition, during the first quarter of 2016 and 2015, respectively, we acquired treasury shares for $1.3 million and $0.9 million as the result of employees' elections to satisfy their tax withholding obligations related to incentive compensation paid in stock through net share settlement. See
Note 8
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
for more information.
Contractual Obligations, Contingent Liabilities and Commitments
The table below presents our fixed, non-cancelable contractual obligations and commitments primarily related to our Senior Notes, outstanding purchase orders, certain capital expenditures, our credit facility and lease arrangements as of March 31, 2016 (in thousands):
|
|
Payments Due By Period
|
|
|
|
Less than 1 year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
More than
5 years
|
|
|
Total
|
|
Purchase obligations
(1)
|
|
$
|
8,689
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,689
|
|
Commitment fees
(2)
|
|
|
500
|
|
|
|
817
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,317
|
|
Contractual obligations
(3)
|
|
|
11,717
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,717
|
|
Capital lease commitments
(4)
|
|
|
7,955
|
|
|
|
7,767
|
|
|
|
587
|
|
|
|
—
|
|
|
|
16,309
|
|
Operating lease commitments
(5)
|
|
|
3,913
|
|
|
|
2,589
|
|
|
|
2,192
|
|
|
|
299
|
|
|
|
8,993
|
|
Supplemental executive retirement plan
(6)
|
|
|
408
|
|
|
|
895
|
|
|
|
1,152
|
|
|
|
3,764
|
|
|
|
6,219
|
|
Defined benefit pension plans
(6)
|
|
|
2,696
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,696
|
|
Senior Notes
(7)
|
|
|
34,822
|
|
|
|
69,644
|
|
|
|
69,644
|
|
|
|
509,402
|
|
|
|
683,512
|
|
Total contractual cash obligations
|
|
$
|
70,700
|
|
|
$
|
81,712
|
|
|
$
|
73,575
|
|
|
$
|
513,465
|
|
|
$
|
739,452
|
|
|
(1)
|
Consist of open purchase orders of approximately $3.0 million at the Greens Creek unit, $1.5 million at the Lucky Friday unit and $4.2 million at the Casa Berardi unit. Included in these amounts are approximately $0.6 million, $1.0 million, and $0.7 million related to various capital projects at the Greens Creek, Lucky Friday and Casa Berardi units, respectively.
|
|
(2)
|
We have a $100 million revolving credit agreement under which we are required to pay a standby fee of 0.5% per annum on undrawn amounts under the revolving credit agreement. There was no amount drawn under the revolving credit agreement as of March 31, 2016, and the amounts above assume no amounts will be drawn during the agreement's term. For more information on our credit facility, see
Note 9
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
.
|
|
(3)
|
As of March 31, 2016, we were committed to approximately $11.7 million for various non-capital items.
|
|
(4)
|
Includes scheduled capital lease payments of $8.5 million, $4.7 million, and $3.1 million (including interest), respectively, for equipment at our Greens Creek, Lucky Friday and Casa Berardi units. These leases have fixed payment terms and contain bargain purchase options at the end of the lease periods (see
Note 9
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
for more information).
|
|
(5)
|
We enter into operating leases in the normal course of business. Substantially all lease agreements have fixed payment terms based on the passage of time. Some lease agreements provide us with the option to renew the lease or purchase the leased property. Our future operating lease obligations would change if we exercised these renewal options and if we entered into additional operating lease arrangements.
|
|
(6)
|
We sponsor defined benefit pension plans covering substantially all U.S. employees and provide certain post-retirement benefits for qualifying retired employees, along with a supplemental executive retirement plan. These amounts represent our estimate of the future funding requirements for these plans. We believe we will have funding requirements related to our defined benefit plans beyond one year; however, such obligations are not fixed in nature and are difficult to estimate, as they involve significant assumptions. See
Note 7
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
for more information.
|
|
(7)
|
On April 12, 2013, we completed an offering of $500 million in aggregate principal amount of our Senior Notes due May 1, 2021. The Senior Notes bear interest at a rate of 6.875% per year from the date of original issuance or from the most recent payment date to which interest has been paid or provided for. Interest on the Senior Notes is payable on May 1 and November 1 of each year, commencing November 1, 2013. Since the initial offering, we have issued an additional $6.5 million in aggregate principal amount of the Senior Notes to fund obligations under our defined benefit pension plan. See
Note 9
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
for more information.
|
We record liabilities for costs associated with mine closure, reclamation of land and other environmental matters. At March 31, 2016, our liabilities for these matters totaled $96.7 million. Future expenditures related to closure, reclamation and environmental expenditures at our sites are difficult to estimate, although we anticipate we will incur expenditures relating to these obligations over the next 30 years. For additional information relating to our environmental obligations, see
Note 4
of
Notes to Condensed Consolidated Financial Statements (Unaudited)
.
Off-Balance Sheet Arrangements
At March 31, 2016, we had no existing off-balance sheet arrangements, as defined under SEC regulations, that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Critical Accounting Estimates
Our significant accounting policies are described in
Note 1
of
Notes to Consolidated Financial Statements
in our annual report filed on Form 10-K for the year ended December 31, 2015
.
As described in
Note 1
of the annual report, we are required to make estimates and assumptions that affect the reported amounts and related disclosures of assets, liabilities, revenue, and expenses. Our estimates are based on our experience and our interpretation of economic, political, regulatory, and other factors that affect our business prospects. Actual results may differ significantly from our estimates.
We believe that our most critical accounting estimates are related to future metals prices; obligations for environmental, reclamation, and closure matters; mineral reserves; and accounting for business combinations, as they require us to make assumptions that were highly uncertain at the time the accounting estimates were made and changes in them are reasonably likely to occur from period to period. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed the disclosures presented below. In addition, there are other items within our financial statements that require estimation, but are not deemed to be critical. However, changes in estimates used in these and other items could have a material impact on our financial statements.
Future Metals Prices
Metals prices are key components in estimates that determine the valuation of some of our significant assets and liabilities, including properties, plants and equipment, deferred tax assets, and certain accounts receivable. Metals prices are also an important component in the estimation of reserves. As shown under
Item 1A. – Risk Factors
in our annual report filed on Form 10-K for the year ended December 31, 2015, metals prices have historically been volatile. Silver demand arises from investment demand - particularly in exchange-traded funds, industrial demand, and consumer demand. Gold demand arises primarily from investment and consumer demand. Investment demand for silver and gold is influenced by various factors, including: the value of the U.S. Dollar and other currencies, changing U.S. budget deficits, widening availability of exchange-traded funds, interest rate levels, the health of credit markets, and inflationary expectations. Uncertainty concerning a global economic recovery, including recent uncertainty in China, could result in continued investment demand for precious metals. Industrial demand for silver is closely linked to world Gross Domestic Product growth and industrial fabrication levels, as it is difficult to substitute for silver in industrial fabrication. Consumer demand is driven significantly by demand for jewelry and similar retail products. We believe that long-term industrial and economic trends, including urbanization and growth of the middle class in countries such as China and India, will result in continued consumer demand for silver and gold and industrial demand for silver. However, China has recently experienced a lower rate of economic growth which is ongoing and could continue in the near term. There can be no assurance whether these trends will continue or how they will impact prices of the metals we produce. In the past, we have recorded impairments to our asset carrying value because of low prices, and we can offer no assurance that prices will either remain at their current levels or increase.
Processes supporting valuation of our assets and liabilities that are most significantly affected by prices include analysis of asset carrying values, depreciation, reserves, and deferred income taxes. On at least an annual basis - and more frequently if circumstances warrant - we examine our depreciation rates, reserve estimates, and the valuation allowances on our deferred tax assets. We examine the carrying values of our assets as changes in facts and circumstances warrant. In our evaluation of carrying values and deferred taxes, we apply several pricing views to our forecasting model, including current prices, analyst price estimates, forward-curve prices, and historical prices (see
Mineral Reserves
, below, regarding prices used for reserve estimates). Using applicable accounting guidance and our view of metals markets, we use the probability-weighted average of the various methods to determine whether the values of our assets are fairly stated, and to determine the level of valuation allowances, if any, on our deferred tax assets. In addition, estimates of future metals prices are used in the valuation of certain assets in the determination of the purchase price allocations for our acquisitions (see
Business Combinations
below).
Sales of concentrates sold directly to customers are recorded as revenues when title and risk of loss transfer to the customer (generally at the time of shipment) at estimated forward metals prices for the estimated month of settlement. Due to the time elapsed between the time of shipment of concentrates to the customer and final settlement with the customer, we must estimate the prices at which sales of our metals will be settled. Previously recorded sales and trade accounts receivable are adjusted to estimated settlement metals prices until final settlement by the customer. Changes in metals prices between shipment and final settlement result in changes to revenues and accounts receivable previously recorded upon shipment. As a result, our trade accounts receivable balances related to concentrate sales are subject to changes in metals prices until final settlement occurs. For more information, see part
N. Revenue Recognition
of
Note 1
of
Notes to Consolidated Financial Statements
in our annual report filed on Form 10-K for the year ended December 31, 2015.
We utilize financially-settled forward contracts to manage our exposure to changes in prices for silver, gold, zinc and lead. See
Item 3. Quantitative and Qualitative Disclosures About Market Risk - Commodity-Price Risk Management
below for more information on our contract programs. These contracts do not qualify for hedge accounting and are therefore marked-to-market through earnings each period. Changes in silver, gold, zinc and lead prices between the dates that the contracts are entered into and their settlements will result in changes to the fair value asset or liability associated with the contracts, with a corresponding gain or loss recognized in earnings.
Obligations for Environmental, Reclamation and Closure Matters
Accrued reclamation and closure costs can represent a significant and variable liability on our balance sheet. We have estimated our liabilities under appropriate accounting guidance, and on at least an annual basis - and more frequently if warranted - management reviews our liabilities with our Audit Committee. However, the ranges of liability could exceed the liabilities recognized. If substantial damages were awarded, claims were settled, or remediation costs incurred in excess of our accruals, our financial results or condition could be materially adversely affected.
Mineral Reserves
Critical estimates are inherent in the process of determining our reserves. Our reserves are affected largely by our assessment of future metals prices, as well as by engineering and geological estimates of ore grade, accessibility and production cost. Metals prices are estimated at long-term averages, as described in
Item 2. — Property Descriptions
in our annual report filed on Form 10-K for the year ended December 31, 2015. Our assessment of reserves occurs at least annually, and periodically utilizes external audits.
Reserves are a key component in the valuation of our properties, plants and equipment. Reserve estimates are used in determining appropriate rates of units-of-production depreciation, with net book value of many assets depreciated over remaining estimated reserves. Reserves are also a key component in forecasts, with which we compare future cash flows to current asset values in an effort to ensure that carrying values are reported appropriately. Our forecasts are also used in determining the level of valuation allowances on our deferred tax assets. Reserves also play a key role in the valuation of certain assets in the determination of the purchase price allocations for acquisitions (see
Business Combinations
below). Reserves are a culmination of many estimates and are not guarantees that we will recover the indicated quantities of metals or that we will do so at a profitable level.
Business Combinations
We are required to allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The valuation of assets acquired and liabilities assumed requires management to make significant estimates and assumptions, especially with respect to long-lived assets, including estimates of future metals prices and mineral reserves, as discussed above. In some cases, we use third-party appraisers to determine the fair values and lives of property and other identifiable assets. In addition, costs related to business combinations are included in earnings as incurred, and our financial results for periods in which business combinations are pursued could be adversely affected as a result.