PART II — OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
In September 2007, we filed a declaratory judgment action, Mines Management, Inc., Newhi, Inc. and Montanore Minerals Corp. v. Tracie Fus et al., Cause No. DV 07-248 in Montana Nineteenth Judicial District Court, Lincoln County. In this action we sought a Court judgment against certain of the defendants that the unpatented mining claims of such defendants, allegedly located above portions of our Libby adit and overlapping certain of our patented and unpatented mining claims, mill sites and tunnel sites are invalid. The defendants subsequently asserted trespass claims against us relating to our use of certain of our mining claims, mill sites and the adit. The parties participated in a mediation in 2009 which resulted in a settlement with seven of the ten defendants. On March 21, 2013, the Court issued an order (i) enforcing the settlement with seven of the ten defendants, (ii) enjoining us from trespassing on certain mining claims owned by one of the defendants, and (iii) finding that the mining claim of another defendant is valid and superior to certain of our claims. The claims with respect to which we were enjoined from trespass do not overlap the adit. The mining claim that the Court determined was valid and superior to certain of our claims overlaps portions of the adit and portions of certain of our patented claims and unpatented mill sites and tunnel sites. We do not believe that this order affects our ability to use the adit or to conduct exploration and development operations as currently planned once we have obtained the required permits.
The Company appealed to the Montana Supreme Court, Case No. DA 13-0240, certain portions of the order. The Supreme Court ruled in favor of the Company remanding the case to the District Court with instructions to vacate the injunction and to conduct further proceedings. In January 2014, the Supreme Court reversed the District Court on the basis of lack of findings, existence of an issue of fact, lack of evidence regarding trespass and misplaced reliance on evidence that the District Court relied upon with respect to claim validity. In December 2015, the District Court set the case for trial in April 2016. The District Court subsequently vacated and has not reset the trial date.
On June 28, 2013 the Company filed a condemnation action, Montanore Minerals Corp. v. Easements and Rights of Way under through and across those certain unpatented lode mining claims et al., Cause No. CV-00133-DLC, in the United States District Court for the District of Montana, Missoula Division. In this action we sought to acquire easements and rights of way for the Montanore Project including for use of the adit and the construction and use of another underground tunnel and related equipment that are contemplated by the draft environment impact statement for the Montanore Project and other draft permits. The defendants include the defendant in the case referenced in the preceding paragraphs whose claim was determined to be valid and overlaps the existing adit. We filed a motion for a preliminary condemnation order and injunction to obtain immediate access to the easements and rights-of-way and a motion to have the court declare the subject mining claims void for failure to comply with an essential federal filing requirement. The primary defendant filed a motion requesting the court to dismiss without prejudice or stay the condemnation proceeding on abstention grounds and a motion to dismiss one of the two condemnation counts.
On April 29, 2014, the U.S. District Court in Missoula granted the Company’s motion for a preliminary condemnation order, which affirms the Company’s right of access through the Libby adit, and its right to construct another tunnel that is planned in connection with the potential construction of a mine. In addition, the U.S. District Court granted the Company’s motion for a preliminary injunction for immediate right of possession, thereby preserving the Company’s ongoing access through the adit. Our motion to declare the subject mining claims void was denied on abstention grounds. The primary defendant’s motions to dismiss without prejudice or stay the condemnation proceeding on abstention grounds were denied. The primary defendant’s motion to dismiss one of the condemnation counts was denied as moot. The court decisions referenced in this paragraph are subject to appeal. The hearing on the compensation phase of the condemnation case was held in April 2015. In their report issued in May 2015, the Commissioners appointed by the court to determine the just compensation for the taking resulting from the court’s preliminary condemnation order concluded that the amount of just compensation to the defendants is $0. On August 7, 2015, the U.S. District Court issued its final ruling affirming the Commission’s decision. The defendants have appealed this ruling.
In July 2014, Frank R. Wall filed a complaint in the Montana Nineteenth Judicial District Court, Lincoln County, Montana, Frank R. Wall vs. Patent Lode Mining claims HR 133 AND HR 134, et al., , Case No. DV-14-140, arising out of the facts related to the litigation described above and claiming monetary damages, declaratory judgments and other
relief. The complaint names the Company and its subsidiaries Newhi, Inc. and Montanore Minerals Corporation as defendants. The Company believes the allegations of the complaint are without merit.
In January 2016, Frank R. Wall filed a complaint in the United States Federal District Court for the District of Idaho, Frank Reginald Wall v. United States Department of Agriculture, et al., Cause No. CV-16-0043-BLW, claiming a violation of his constitutional rights and requesting an injunction against the USFS record of decision for the issuance of permits to the Company for operations at the Montanore Project. The Company is named as one of the defendants. The Company believes the allegations of the complaint are without merit.
On May 27, 2016, the Company, through its wholly-owned subsidiary Montanore Minerals Corporation, filed motions to
intervene in three cases pending in the United States District Court for the District of Montana, Missoula Division captioned
(i) Save Our Cabinets et al. v. United States Fish and Wildlife Service et al., Cause No. CV-15-69-M-DWM, (ii) Libby Placer Mining Company v. United States Forest Service et al., Cause No. CV-16-53-M-DWM, and (iii) Save Our Cabinets et al. v. United States Department of Agriculture, Cause No. CV-16-56-M-DWM. Each of the actions involve claims challenging the permitting of the Montanore Project. The motions to intervene were granted in early June 2016.
Litigation related to the Merger
Since the announcement of the merger, the Company, members of the Company’s board of directors, Merger Sub and Hecla were named as defendants in three putative stockholder class actions, brought by purported stockholders of the Company, challenging the proposed merger. Two of the lawsuits were filed in the Superior Court in Spokane County, Washington, and are captioned O’Rourke v. Dobbs, et al., No.16202116-1 (Spokane Cnty, Wash. June 6, 2016) and Schubert v. Dobbs, et al., No. 16202667-7 (Spokane Cnty, Wash. July 14, 2016) (together, the “state lawsuits”). The other lawsuit was filed in the United States District Court for the Eastern District of Washington, and is captioned Assad v. Mines Management, Inc., et al., No. 16-cv-00256-SMJ (E.D. Wash. July 12, 2016) (the “federal lawsuit”).
The plaintiffs in the state lawsuits generally claim that (i) the members of the Company’s board of directors breached their fiduciary duties to the Company’s stockholders by authorizing the merger with Hecla for what the plaintiff asserts is inadequate consideration and pursuant to an inadequate process and with inadequate disclosures and (ii) Hecla and Merger Sub aided and abetted the other defendants’ alleged breach of duties. The plaintiffs seek, among other things, to enjoin the merger, rescind the transaction or obtain rescissory damages if the merger is consummated, obtain other unspecified damages and recover attorneys’ fees and costs.
The plaintiff in the federal lawsuit generally claims that (i) the Company and the members of the Company’s board of directors issued a proxy statement containing false and misleading statements and (ii) the members of the Company’s board of directors, Hecla and Merger Sub are liable as controlling persons of the Company. The plaintiff seeks, among other things, to enjoin the merger, rescind the transaction or obtain rescissory damages if the merger is consummated, require the members of the Company’s board of directors to disseminate a proxy statement that does not contain any
untrue statements of material fact and that states all material facts required or necessary to make the statements contained
therein not misleading, obtain other unspecified damages and recover attorneys’ fees and costs. Although it is not possible
to predict the outcome of litigation matters with certainty, each of the Company, its directors, Hecla and Merger Sub believe that each of the lawsuits are without merit, and the parties intend to vigorously defend against all claims asserted.
ITEM 1A.
RISK FACTORS
In addition to the risk factors set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, investors should consider carefully the following risk factors.
Risk Factors Relating to the Merger
The merger may not be completed on the terms or timeline currently contemplated or at all. Failure to complete the merger could negatively impact the stock prices and the future business and financial results of Mines Management.
The completion of the transactions contemplated by the merger agreement is subject to certain conditions, including (1) approval and adoption by Mines Management stockholders, (2) the effectiveness of certain filings with the SEC, (3) the
absence of certain legal impediments and (4) other customary closing conditions. Mines Management cannot assure you that the merger will be consummated on the terms or timeline currently contemplated, or at all. Mines Management has expended and will continue to expend a significant amount of time and resources on the merger, and a failure to consummate the merger as currently contemplated, or at all, could have a material adverse effect on Mines Management’s businesses and results of operations.
If the merger is not completed, the ongoing businesses of Mines Management may be adversely affected and Mines Management will be subject to several risks, including the following:
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Mines Management being required, under certain circumstances, to pay Hecla a termination fee of $1,000,000 plus certain of Hecla’s expenses in an amount not to exceed $200,000;
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having to pay substantial other costs and expenses relating to the proposed transaction, such as legal, accounting, financial advisor, filing, printing and mailing fees and integration costs that have already been incurred and will continue to be incurred until closing;
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under the merger agreement, Mines Management being subject to certain restrictions on the conduct of its business, which may adversely affect its ability to execute certain business strategies in the future if the merger is not completed;
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under the term loan agreement, the amounts loaned to Mines Management are secured by the Montanore Project, and the associated promissory note could mature as early as September 30, 2016. Therefore, if the merger does not close, Mines Management faces the prospects of quickly needing to repay amounts due under the term loan agreement—currently $1.4 million—or remedial actions, which could include bankruptcy or foreclosure;
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the focus of management of each of the companies on the merger instead of on pursuing other opportunities that could be beneficial to the companies;
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the market price of Mines Management common stock could decline to the extent that the current market price reflects a market assumption that the merger will be completed; and
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if the merger agreement is terminated and Mines Management’s board of directors seeks an alternative strategic transaction, stockholders of Mines Management cannot be certain that Mines Management will be able to find a party willing to enter into a strategic transaction on terms equivalent to or more attractive than the terms that Hecla has agreed to in the merger agreement;
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in each case, without realizing any of the anticipated benefits of having the merger completed. In addition, if the merger is not completed, Mines Management may experience negative reactions from the financial markets and from its employees and other stakeholders. Mines Management could also be subject to litigation related to any failure to complete the merger or to perform its obligations under the merger agreement. If the merger is not completed, Mines Management cannot assure its stockholders that these risks will not materialize and will not materially affect the business, financial results and stock prices of Mines Management.
The fairness opinion rendered to Mines Management’s board of directors by Canaccord Genuity Corp. (“CG”) was based on CG’s financial analysis and considered factors such as market and other conditions then in effect, and other information made available to CG, as of the date of the opinion. As a result, the opinion does not reflect changes in events or circumstances after the date of such opinion. Mines Management’s board of directors has not obtained, and does not expect to obtain, an updated fairness opinion from CG reflecting changes in circumstances that may have occurred since the signing of the merger agreement.
The fairness opinion rendered to Mines Management’s board of directors by CG was provided in connection with, and at the time of, the evaluation of the merger and the merger agreement by Mines Management’s board of directors. The opinion was based on the financial analyses performed, which considered market and other conditions then in effect, and other information made available to CG, as of the date of the opinion, which may have changed, or may change, after the date of the opinion. Mines Management’s board of directors has not obtained an updated opinion and does not expect to
obtain an updated opinion prior to completion of the merger. Changes in the operations and prospects of Hecla or Mines Management, general market and economic conditions and other factors that may be beyond the control of Hecla or Mines Management, and on which the fairness opinion was based, may have altered the value of Hecla or Mines Management or the prices of Hecla common stock or Mines Management common stock since the date of such opinion, or may alter such values and prices by the time the merger is completed. The opinion does not speak as of any date other than the date of the opinion.
The exchange ratio is fixed and will not be adjusted in the event of any change in either Hecla’s or Mines Management’s stock price.
Upon the closing of the merger, each share of Mines Management common stock (other than shares owned by Mines Management, Hecla or Merger Sub, which will be cancelled) will be converted into the right to receive 0.2218 of a share of Hecla common stock, with cash paid in lieu of fractional shares. This exchange ratio was fixed in the merger agreement and will not be adjusted for changes in the market price of either Hecla common stock or Mines Management common stock. Changes in the price of Hecla common stock prior to the effective time of the merger will affect the value of Hecla stock that Mines Management stockholders will receive in the merger. Stock price changes may result from a variety of factors (many of which are beyond the control of Hecla or Mines Management), including, without limitation, the following:
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changes in Hecla’s or Mines Management’s businesses, operations, performance and prospects;
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changes in market assessments of the business, operations and prospects of Hecla or Mines Management;
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investor behavior and strategies, including market assessments of the likelihood that the merger will be completed;
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interest rates, metals prices, general market and economic conditions and other factors generally affecting the price of Hecla’s and Mines Management’s common stock; and
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federal, state and local legislation, governmental regulation and legal developments in the businesses in which Hecla and Mines Management operate.
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The price of Hecla common stock at the closing of the merger may vary from its price on the date the merger agreement was executed and on the date of the special meeting of Mines Management. As a result, the market value represented by the exchange ratio will also vary.
Any delay in completing the merger may reduce or eliminate the expected benefits from the merger.
In addition to the required Mines Management stockholder approval and adoption, the merger is subject to a number of other conditions beyond Mines Management’s control that may prevent, delay or otherwise materially adversely affect its completion. Mines Management cannot predict whether and when these other conditions will be satisfied. Furthermore, obtaining the required approval and adoption could delay the completion of the merger for a significant period of time or prevent it from occurring.
The merger agreement contains provisions that could discourage a potential competing acquiror of Mines Management or could result in any competing proposal being at a lower price than it might otherwise be.
The merger agreement contains “no shop” provisions that, subject to limited exceptions, restrict Mines Management’s ability to solicit, initiate or knowingly facilitate or encourage competing third-party proposals to acquire all or a significant part of Mines Management. In addition, Hecla generally has an opportunity to offer to modify the terms of the merger and the merger agreement in response to any competing acquisition proposals that may be made before Mines Management’s board of directors may withhold or withdraw (or modify in a manner adverse to Hecla) its recommendation. In some circumstances, upon termination of the merger agreement, Mines Management may be required to pay a termination fee to Hecla and/or reimburse Hecla for certain expenses.
These provisions could discourage a potential competing acquiror that might have an interest in acquiring all or a significant part of Mines Management from considering or proposing such an acquisition, even if it were prepared to
offer greater value than provided for under the merger agreement, or might result in a potential competing acquiror proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee and/or reimbursement of certain expenses that may become payable in certain circumstances, which would represent an additional cost for a potential third party seeking a business combination with Mines Management.
The merger will involve substantial costs.
Mines Management has incurred and expects to continue to incur substantial costs and expenses relating directly to the transaction, including fees and expenses payable to legal, accounting and financial advisors and other professional fees relating to the transaction, insurance premium costs, fees and costs relating to regulatory filings and notices, SEC filing fees, printing and mailing costs and other transaction-related costs, fees and expenses.
Mines Management’s officers and directors have interests in the transactions that may be different from, or in addition to, the interests of Mines Management’s stockholders generally.
Officers of Mines Management negotiated, with oversight and input provided by its boards of directors, the terms of the merger agreement. Mines Management’s board of directors approved and adopted the merger agreement and determined that the merger agreement and the transactions contemplated thereby are advisable and in the best interests of Mines Management and its stockholders. However, Mines Management’s officers and directors may have interests in the transactions that may be different from, or in addition to, the interests of Mines Management’s stockholders.
Mines Management stockholders will not be entitled to appraisal rights in the merger.
Appraisal rights are statutory rights that, if applicable, enable stockholders, in connection with certain mergers, to demand that the corporation pay the fair value for their shares as determined by a court in a judicial proceeding instead of receiving the consideration offered to stockholders in the merger. Under Idaho law, stockholders do not have appraisal rights if, among other circumstances, the shares of stock they hold at the record date are listed on the NYSE or the NYSE MKT.
Because Mines Management common stock is listed on the NYSE MKT, Mines Management stockholders will not be entitled to appraisal rights under Idaho law in the merger with respect to their shares of Mines Management common stock.
In connection with the announcement of the merger agreement, putative class action lawsuits have been filed and are pending as of the date hereof, seeking, among other things, to enjoin the merger, and an adverse ruling in any of these lawsuits may prevent the merger from being effective or from becoming effective within the expected time frame.
While Mines Management’s directors and management team believes that the allegations in the complaints are without merit and intend to defend vigorously against these allegations, Mines Management cannot assure you as to the outcome of these, or any similar future lawsuits, or the amount of the costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation or settlement of these claims. If any plaintiffs are successful in obtaining an injunction with respect to the merger, such an injunction may prevent the completion of the merger on the agreed upon terms, in the expected time frame or altogether. Whether the plaintiffs’ claims are successful, this type of litigation is often expensive and diverts management’s attention and resources, which could adversely affect the operation of the businesses of Mines Management.
Risk Factors Relating to Mines Management
If the merger is not completed, Mines Management will require additional external financing to fund its continuing business activities in the future, and the terms of any such financing, if obtained, may have negative effects on Mines Management’s flexibility and future transactions.
Mines Management is an exploration stage mining company and currently does not have sufficient capital to continue its business activities as planned through 2016 or to fund the activities needed to establish the economic feasibility of the Montanore Project. Mines Management had approximately $0.8 million in cash and cash equivalents as of June 30, 2016, which is insufficient to fund its business and operations through 2016. Mines Management anticipates that its
expenses in 2016 would total approximately $1.0 million for regulatory and environmental monitoring activities and $1.5 million of general and administrative expenses, assuming that Mines Management were able to obtain sufficient capital to continue operations. Mines Management estimates that, following the completion of environmental mitigation activities, the costs of completing the exploratory drilling program at the Montanore Project will be approximately $20.0 to $25.0 million, plus general and administrative expenses during the period in which the drilling program is being conducted. Uncertainties surrounding the exploratory drilling program and the permitting process could require the drilling program to take longer and cause costs to increase. Mines Management’s cash on hand is not sufficient to continue its business through 2016 or to commence the exploratory drilling program and a bankable feasibility study, and external financing will be required.
If the merger is not completed, Mines Management plans to continue its efforts to secure external financing but it presently does not have agreements from any source under which such financing will be received, and its recent efforts to obtain financing on acceptable terms or at all, other than from Hecla in connection with the merger, have been unsuccessful. There can be no assurance that Mines Management will be successful in obtaining external financing or entering into a sale of Mines Management, a sale or joint venture of the Montanore Project, or other type of transaction that will permit it to repay amounts due to Hecla under the term loan agreement or continue its business, or that the terms of any such financing or transaction would not make future financings or transactions more difficult or otherwise limit Mines Management’s flexibility or opportunities in the future. There can be no assurance that any financing obtained will not be highly dilutive to existing stockholders. In addition, it is uncertain that the amount of any financing that might be obtained would enable Mines Management to repay amounts due to Hecla under the term loan agreement or continue its business and operations for more than a few months. If no additional funding can be secured, Mines Management may not be able to remain in business or to complete a transaction with respect to the Montanore Project or any other transaction. Finally, the amounts owed to Hecla under the term loan agreement —currently $1.4 million—are secured by the Montanore Project, and if Mines Management is unable to repay Hecla, it could face the prospects of losing title to Montanore through foreclosure or other similar remedial measures.
If Mines Management is unable to comply with the NYSE MKT continued listing requirements, its common stock could be delisted from the NYSE MKT equities market. Delisting could negatively affect its stock price and investors’ ability to make transactions in its securities.
On July 1, 2015, Mines Management received a letter from NYSE MKT stating that Mines Management was not in compliance with the continued listing standards as set forth in Section 1003(a)(i-iv) of the NYSE MKT Company Guide (the “Company Guide”). In order to maintain its listing, Mines Management submitted a plan on August 3, 2015, in accordance with the NYSE MKT’s requirement, which addresses how it intends to regain compliance with the financial impairment standards set forth in Section 1003(a)(iv) of the Company Guide by December 31, 2015 and the equity standards set forth in Section 1003(a)(i)-(iii) of the Company Guide by December 31, 2016. During September 2015, the NYSE MKT accepted the Company’s compliance plan and granted Mines Management until September 30, 2015 to regain compliance with the financial impairment standards. On October 21, 2015, the NYSE MKT notified Mines Management that Mines Management had made a reasonable demonstration of its ability to regain compliance with financial impairment standards by the end of the revised plan period of December 31, 2015. In January 2016, the NYSE MKT granted Mines Management a further extension to regain compliance with financial impairment standards to March 31, 2016. In April 2016, the NYSE MKT granted Mines Management an additional extension to June 30, 2016 because Mines Management had made a reasonable demonstration of its ability to regain compliance with Section 1003(a)(iv) of the NYSE MKT Company Guide by the end of the revised plan period and, in July 2016, the NYSE MKT granted an additional extension to August 31, 2016. If the merger is not completed, it is uncertain that Mines Management will be able to obtain sufficient external financing to continue its business and operations for more than a few months, which would be unlikely to satisfy the NYSE MKT financial impairment listing requirements.
There can be no assurance that Mines Management common stock will remain listed on the NYSE MKT. If Mines Management is delisted from the NYSE MKT, Mines Management anticipates that its common stock will trade over the counter. If Mines Management common stock is delisted from the NYSE MKT, its stockholders may face material adverse consequences, including, but not limited to, a decrease in the price of its common stock and reduced liquidity in the trading market for its common stock. Some stockholders may sell their shares, and Mines Management’s ability to issue additional securities or obtain additional financing in the future may be negatively affected. Mines Management would no longer be able to use a short form Form S-3 registration statement (i) for a primary offering, if Mines Management public float is not at least $75.0 million as of a date within 60 days prior to the date of filing the Form S-3,
or a re-evaluation date, whichever is later, and (ii) to register the resale of its securities by persons other than Mines Management. If Mines Management were unable to utilize a Form S-3 registration statement for primary and secondary offerings of Mines Management common stock, Mines Management would be required to file a Form S-1 registration statement, which, due to regulatory review periods, could delay Mines Management’s ability to raise funds in the future, may limit the type of offerings of common stock Mines Management could undertake and could increase the expenses of any offering.
If Mines Management common stock were delisted and determined to be a “penny stock,” a broker-dealer may find it more difficult to trade Mines Management common stock and an investor may find it more difficult to acquire or dispose of Mines Management common stock in the secondary market.
If Mines Management common stock were removed from listing with the NYSE MKT, it may be subject to the so-called “penny stock” rules. The SEC has adopted regulations that define a penny stock to be any equity security that has a market price per share of less than $5.00, subject to certain exceptions, such as any securities listed on a national securities exchange. For any transaction involving a penny stock, unless exempt, the rules impose additional sales practice requirements on broker-dealers, subject to certain exceptions. If Mines Management common stock were delisted and determined to be a penny stock, a broker-dealer may find it more difficult to trade Mines Management common stock, and an investor may find it more difficult to acquire or dispose of Mines Management common stock on the secondary market.
Mines Management has no proven or probable reserves.
Mines Management is currently in the exploration stage and has no proven or probable reserves, as those terms are defined by the SEC, on any of Mines Management’s properties, including the Montanore Project. The mineralized material identified to date in respect of the Montanore Project has not demonstrated economic viability and Mines Management cannot provide any assurance that mineral reserves with economic viability will be identified on that property.
In order to demonstrate the existence of proven or probable reserves under SEC guidelines, it would be necessary for Mines Management to advance the exploration of the Montanore Project by significant additional delineation drilling to demonstrate the existence of sufficient mineralized material with satisfactory continuity. If successful, the results of this drilling program would provide the basis for a feasibility study demonstrating with reasonable certainty that the mineralized material can be economically extracted and produced. Mines Management does not currently have sufficient data to support a feasibility study of the Montanore Project, and in order to perform the drilling to support such a feasibility study, Mines Management must first obtain external financing and complete environmental mitigation activities to continue its exploration efforts. It is possible that, even if Mines Management obtains sufficient geologic data to support a feasibility study on the Montanore Project, the data will lead it to conclude that none of the identified mineral deposits can be economically and legally extracted or produced. If Mines Management cannot adequately confirm or discover any mineral reserves of precious metals at the Montanore Project, it may not be able to generate any revenues.
Even if Mines Management discovers mineral reserves at the Montanore Project in the future that can be economically developed, the initial capital costs associated with development and production of any reserves found is such that Mines Management might not be profitable for a significant time after the initiation of any development or production. The commercial viability of a mineral deposit once discovered is dependent on a number of factors beyond Mines Management’s control, including particular attributes of the deposit such as size, grade and proximity to infrastructure, as well as metal prices. In addition, development of a project as significant as the Montanore Project will likely require significant debt financing, the terms of which could contribute to a delay of profitability.
Even if Mines Management’s exploration efforts at the Montanore Project are successful, Mines Management may not be able to raise the funds necessary to develop the Montanore Project.
If Mines Management’s exploration efforts at the Montanore Project are successful, a Preliminary Economic Assessment completed in November 2010 indicated that it would cost approximately $550.0 million in additional financing to develop and construct the Montanore Project. If and when an updated assessment is completed, this amount could increase significantly. Sources of external financing could include bank debt financing, smelter offtake financings,
equity financing or the sale of all or a portion of the Montanore Project. Even if a bankable feasibility study is completed, commodity prices, the then-current state of financial markets or other factors may render financing for the development of the Montanore Project difficult or impossible. Financing has become significantly more difficult to obtain in the current market environment. There can be no assurance that Mines Management will commence production at the Montanore Project or generate sufficient revenues to meet its obligations as they become due or obtain necessary financing on acceptable terms, if at all, and Mines Management may not be able to secure the financing necessary to begin or sustain production at the Montanore Project. If Mines Management cannot adequately finance its exploration of the Montanore property and its subsequent development, Mines Management will not be able to generate any revenues. In addition, should Mines Management incur significant losses in future periods, it may be unable to continue as a going concern, and realization of assets and settlement of liabilities in other than the normal course of business may be at amounts significantly different than those included in Mines Management’s periodic reports.
Additional permits will be required and may be delayed during advancement of the Montanore Project.
In the ordinary course of business, mining companies are required to seek governmental permits for expansion of existing operations or for the commencement of new operations. Although the final RODs were issued on February 12, 2016, additional permits will be required for advancement of the Montanore Project. Obtaining these permits has been and continues to be a complex and time consuming process involving numerous jurisdictions and often involves additional work and studies, public hearings, litigation and other costly undertakings. Mines Management has been engaged in renewing or pursuing permits since early 2005. Obtaining required permits for the Montanore Project has been and may continue to be more difficult due to its location within the Cabinet Wilderness Area and its proximity to a core habitat of certain protected species, including the grizzly bear and bull trout. In addition, Hecla is seeking to permit its Rock Creek mining project near the Montanore Project, and the impact of that operation on the environment and on wildlife in the area was taken into consideration in Mines Management’s permitting determinations and has lengthened its permitting process and made those determinations more difficult. Private political groups have been active in opposing permitting of projects in and near the Cabinet Wilderness Area and have taken and may in the future take actions to oppose or delay the Montanore Project. For example, Save Our Cabinets, Earthworks and Defenders of Wildlife filed a complaint in the United States District Court for the District of Montana against the U.S. Fish and Wildlife Service (“USFWS”) challenging the issuance of the Montanore biological opinion. Two other lawsuits challenging the permitting of the Montanore Project have since been filed.
Mining projects require the evaluation of environmental impacts for air, water, vegetation, wildlife, cultural, historical, geological, geotechnical, geochemical, soil and socioeconomic conditions. Permits are required for, among other things, storm-water discharge, air quality, wetland disturbance, dam safety (for water storage and/or tailing storage), septic and sewage and water rights appropriation, and compliance must be demonstrated with the Endangered Species Act and the National Historical Preservation Act. Permitting costs through June 30, 2016 have totaled approximately $47.1 million, and it is possible that the costs and delays associated with compliance with such standards and regulations could become such that Mines Management would be unable to raise sufficient funds to proceed with the further exploration, development or operation of a mine at the Montanore Project.
Mines Management has a history of losses and expects losses to continue.
As an exploration stage company that has no production history, Mines Management has incurred losses since its inception, and it expects to continue to incur additional losses for the foreseeable future. For the fiscal years ended December 31, 2015 and 2014, Mines Management incurred losses of $2.8 million and $6.5 million, respectively. As of June 30, 2016, Mines Management had an accumulated deficit of $92 million. There can be no assurance that Mines Management will achieve or sustain profitability in the future.
The title to some of Mines Management’s properties may be uncertain or defective.
Although the Montanore deposit is held by patented mining claims, a significant portion of Mines Management’s United States mineral and surface use rights consist of “unpatented” mining and millsite claims created and maintained in accordance with the General Mining Law. Unpatented mining and millsite claims are unique U.S. property interests and are generally considered to be subject to greater title risk than other real property interests because the validity of unpatented mining and millsite claims is often uncertain. This uncertainty arises, in part, out of the complex federal and state laws and regulations that supplement the General Mining Law. Also, unpatented mining and millsite claims and
related rights, including rights to use the surface, are subject to possible challenges by third parties or contests by the federal government. The validity of an unpatented mining or millsite claim, in terms of both its location and its maintenance, is dependent on strict compliance with a complex body of federal and state statutory and decisional law. In addition, there are few public records that definitively control the issues of validity and ownership of unpatented mining and millsite claims. Mines Management has not filed a patent application for any of its unpatented mining and millsite claims that are located on federal public lands in the United States and, under current law and possible future legislation to change the General Mining Law, patents may not be available. Mines Management has obtained a title opinion on some of the patented mining claims covering the Montanore deposit, but not on all of its patented mining claims. Mines Management has not obtained title opinions on any of its unpatented mining or millsite claims.
Mines Management’s ability to conduct exploration, development, mining and related activities may also be impacted by administrative actions taken by federal agencies. With respect to unpatented millsites, for example, the ability to use millsites and their validity has been subject to greater uncertainty since 1997. In November of 1997, the Secretary of the Interior approved a Solicitor’s Opinion which concluded that the General Mining Law imposed a limitation that only a single five-acre millsite may be claimed or used in connection with each associated and valid unpatented or patented lode mining claim. Subsequently, however, on October 7, 2003, the new Secretary of the Interior approved an Opinion by the Deputy Solicitor which concluded that the mining laws do not impose a limitation that only a single five-acre millsite may be claimed in connection with each associated unpatented or patented lode mining claim. Current federal regulations do not include the millsite limitation. There can be no assurance, however, that the Department of the Interior will not seek to re-impose the millsite limitation at some point in the future.
Other actions have been periodically brought, including one action that is currently ongoing, against the Department of the Interior, the Department of Agriculture, the Bureau of Land Management (BLM), and the U.S. Forest Service (USFS), seeking to impose the five-acre millsite limitation, as well as to require mining claimants to pay fair market value for their use of the surface of federal lands where those claimants have not demonstrated the validity of their unpatented mining claims and millsites. To date, such actions have not been successful, but there can be no assurances they or other actions will not be in the future.
In recent years, the U.S. Congress has considered a number of proposed amendments to the General Mining Law, as well as legislation that would make comprehensive changes to the law. Although no such legislation has been adopted to date, there can be no assurance that such legislation will not be adopted in the future. If adopted, such legislation, if it included concepts that have been part of previous legislative proposals, could, among other things, (i) adopt the millsite limitation discussed above, (ii) impose time limits on the effectiveness of plans of operation that may not coincide with mine life, (iii) impose more stringent environmental compliance and reclamation requirements, (iv) establish a mechanism that would allow states, localities and Native American tribes to petition for the withdrawal of identified tracts of federal land from the operation of the General Mining Law, (v) allow for administrative determinations that mining would not be allowed in situations where undue degradation of the federal lands in question could not be prevented and (vi) impose royalties on silver and copper production or fees on tons of material moved from unpatented mining claims located on federal lands or impose fees on production or tons of material moved from patented mining claims. If adopted, such legislation could have an adverse impact on earnings from Mines Management’s operations, could reduce estimates of any reserves Mines Management may establish and could curtail its future exploration and development activity on federal lands or patented claims.
While Mines Management does not believe that title to any of its properties is defective, title to mining properties is subject to potential claims by third parties claiming an interest in them. For example, in September 2007, Mines Management filed a declaratory judgment action captioned Mines Management, Inc., Newhi, Inc. and Montanore Minerals Corp. v. Tracie Fus et al., Cause No. DV 07-248 in Montana Nineteenth Judicial District Court, Lincoln County. In this action, Mines Management sought a court judgment against certain of the defendants that the unpatented mining claims of such defendants allegedly located above portions of Mines Management’s adit and overlapping certain of its patented and unpatented mining claims, millsites and tunnel sites are invalid. The defendants then asserted trespass claims against Mines Management relating to Mines Management’s use of certain of its mining claims, millsites and the adit. The parties participated in a mediation in 2009, which resulted in a settlement with seven of the ten defendants. In mid-March 2013 the court issued an order (i) enforcing the settlement with seven of the ten defendants, (ii) enjoining Mines Management from trespassing on certain mining claims owned by one of the defendants and (iii) finding that the mining claim of another defendant is valid and superior to certain of Mines Management’s claims. The claims with respect to which Mines Management was enjoined from trespass do not overlap the adit. The mining claim that the court
determined was valid and superior to certain of Mines Management’s claims overlaps portions of the adit and portions of certain of its patented claims and unpatented mill sites and tunnel sites. Mines Management appealed to the Montana Supreme Court with respect to certain portions of the order. The Montana Supreme Court ruled in favor of Mines Management, remanding the case to the district court with instructions to vacate the injunction and to conduct further proceedings. Mines Management does not believe that this order, if re-entered by the district court, would affect its ability to use the adit or to conduct exploration and development operations as currently planned once Mines Management has obtained the required permits.
Mines Management is obligated by a right of first refusal agreement relating to its future silver production that may affect the willingness of third parties to enter into silver purchase agreements with it.
In November 2007, Mines Management entered into a right of first refusal agreement with a significant stockholder that granted to that stockholder a 20-year right of first proposal and a right to match third-party proposals to purchase a silver stream, i.e., all or any portion of silver mined, produced or recovered by Mines Management in the State of Montana. The right does not apply to trade sales and spot sales in the ordinary course of business or forward sales. The existence of this agreement may make other potential buyers less likely to negotiate with Mines Management to purchase silver Mines Management produces since they would be subject to this right of first refusal.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.
MINE SAFETY DISCLOSURES
None.
ITEM 5.
OTHER INFORMATION
None.
ITEM 6.
EXHIBITS
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Exhibit No.
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Title of Exhibit
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2.1
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Agreement and Plan of Merger, dated as of May 23, 2016, between Mines Management, Inc., Hecla Mining Company, and HL Idaho Corp. (1)
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3.1
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Second Amendment to Bylaws of Mines Management, Inc. (1)
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10.1
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Term Loan and Security Agreement, dated as of May 23, 2016, between Mines Management, Inc., Montanore Minerals Corp., Montmin Resources Corp., Montanore Minerals Wisconsin Corp., Newhi, Inc., and Hecla Mining Company (1)
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10.2
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First Amendment to Amended and Restated Employment Agreement, dated as of May 23, 2016, between Mines Management, Inc. and Glenn Dobbs (1)
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10.3
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First Amendment to Amended and Restated Employment Agreement, dated as of May 23, 2016, between Mines Management, Inc. and Douglas Dobbs (1)
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10.4
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First Amendment to Employment Agreement, dated as of May 23, 2016, between Mines Management, Inc. and Nicole Altenburg (1)
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31.1
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
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31.2
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Certification of Controller and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
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32.1
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Certification of Chief Executive Officer pursuant to 18 U.S.C., 1350 (Section 906 of the Sarbanes-Oxley Act) (furnished herewith)
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32.2
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Certification of Controller and Principal Financial Officer pursuant to 18 U.S.C., 1350 (Section 906 of the Sarbanes-Oxley Act) (furnished herewith)
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101.INS
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XBRL Instance Document
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101.SCH
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XBRL Taxonomy Extension Schema Document
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101.CAL
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XBRL Taxonomy Calculation Linkbase Document
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101.DEF
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XBRL Taxonomy Definition Document
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101.LAB
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XBRL Taxonomy Label Linkbase Document
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101.PRE
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XBRL Taxonomy Presentation Linkbase Document
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(1)
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Incorporated by reference to Form 8-K filed on May 27, 2016.
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