HECLA MINING COMPANY Overview
Hecla Mining Company and our subsidiaries have provided precious and base metals to theU.S. and worldwide since 1891. We discover, acquire and develop mines and other mineral interests and produce and market (i) concentrates containing silver, gold (in the case ofGreens Creek ), lead and zinc, (ii) carbon material containing silver and gold, and (iii) unrefined doré containing silver and gold. The lead, zinc and bulk concentrates and carbon material we produce is sold to custom smelters, brokers and third-party processors, and the unrefined doré we produce is sold to refiners or further refined before sale of the metals to traders. We are organized into five segments that encompass our operating and development units:Greens Creek ,Lucky Friday ,Casa Berardi ,San Sebastian and Nevada Operations. The map below shows the locations of our operating units, our exploration and pre-development projects, as well as our corporate offices located inCoeur d'Alene, Idaho andVancouver, British Columbia . [[Image Removed: hl20200930_10qimg001.gif]]
Our current business strategy is to focus our financial and human resources in the following areas:
• rapidly responding to the threats from the COVID-19 pandemic to protect our
workforce, operations and communities while maintaining liquidity;
• operating our properties safely, in an environmentally responsible manner, and
cost-effectively;
• improving operations at our units, which includes incurring costs for new
technologies and equipment that may not result in measurable benefits;
• expanding our proven and probable reserves and production capacity at our
units;
• conducting our business with financial stewardship to preserve our financial
position in varying metals price and operational environments;
• advancing permitting of the Rock Creek and Montanore projects;
• maintaining and investing in exploration and pre-development projects in the
vicinities of seven mining districts and projects we believe to be
under-explored and under-invested:
Coeur d'Alene Mining District; our
Island located near Juneau ; the silver-producing district near Durango,
Mexico ; the Abitibi region of northwestern Quebec, Canada ; our projects in
northern Nevada ; the Rock Creek and Montanore projects in northwestern
Montana ; and the Creede district of southwestern Colorado ; and
• continuing to seek opportunities to acquire or invest in mining properties and
companies.
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The COVID-19 outbreak impacted our operations in the first nine months of 2020, including curtailing our expected production of gold at Casa Berardi. In addition, we have incurred additional costs of approximately$1.9 million in the first nine months of 2020 related to quarantining employees atGreens Creek , which started in lateMarch 2020 . See each segment section below for information on how those operations have been impacted by COVID-19. To mitigate the impact of COVID-19, we have taken precautionary measures, including implementing operational plans and practices and increasing our cash reserves through a temporary draw-down of our revolving credit facility, which has since been fully repaid. As long as they are required, the operational practices implemented could continue to have an adverse impact on our operating results due to additional costs or deferred production and revenues. There is uncertainty related to the potential additional impacts COVID-19 could have on our operations and financial results for the year. See Part II, Item IA. Risk Factors - Natural disasters, public health crises, political crises, and other catastrophic events or other events outside of our control may materially and adversely affect our business or financial results in our Form 10-Q for the quarter endedMarch 31, 2020 for information on how restrictions related to COVID-19 have recently affected some of our operations. 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. The average realized prices of silver and gold were higher, and the average prices for lead and zinc lower, in the first nine months of 2020 compared to the comparable period last year, as illustrated by the table in Results of Operations below. While we believe longer-term 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. We currently have outstanding$475 million of Senior Notes dueFebruary 15, 2028 ("Senior Notes") which bear interest at a rate of 7.25% per year. The$469.5 million in net proceeds from the Senior Notes were used, along with cash on hand, to redeem, inMarch 2020 , our previously-outstanding 6.875% Senior Notes that were due in 2021 and had a principal balance of$506.5 million ("2021 Notes"). As a precaution due to uncertainties of the duration, severity and scope of the COVID-19 outbreak, we drew$210 million under our revolving credit facility during the first quarter of 2020; however, we repaid all of that amount during the second and third quarters of 2020, with no amount outstanding as of the end of the third quarter. When amounts are drawn on the revolving credit facility, they are subject to a variable rate of interest. In addition, inJuly 2020 we agreed to issueCAD$50 million (approximatelyUSD$36.8 million at the time of the transaction) in aggregate principal amount of senior unsecured notes to Investissment Québec, a financing arm of theQuébec government ("IQ Notes"). The IQ Notes mature inJuly 2025 and bear interest at a rate of 6.515% per year. The IQ Notes were issued at a premium of 103.65%, implying an effective annual yield of 5.74% and an aggregate principal amount to be repaid ofCAD$48.2 million . The IQ Notes were issued in four equal installments ofCAD$12.5 million in July, August, September andOctober 2020 , with the first installment issued net ofCAD$0.6 million in fees. The net proceeds from the IQ Notes are available for general corporate purposes, including for open market purchases of a portion of the Senior Notes and to pay capital expenditures at ourCasa Berardi unit. Under the note purchase agreement for the IQ Notes and subject to a force majeure event, we are required to invest in the aggregateCAD$100 million at the Casa Berardi unit and other exploration and development projects inQuebec over the four-year period commencing onJuly 9, 2020 . See Note 9 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information on our debt arrangements. 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 Senior Notes, IQ Notes and amounts drawn on our revolving credit facility; however, a number of factors could impact our ability to meet our debt obligations and fund our business. We generated positive cash flows atSan Sebastian each year from 2016 through the first nine months of 2020. However, that mine is expected to end production in the fourth quarter of 2020, and there can be no assurance that we will be able to develop and operateSan Sebastian beyond that time. As further discussed in The Lucky Friday Segment section below, the union employees at Lucky Friday were on strike fromMarch 13, 2017 until the strike ended onJanuary 7, 2020 . Re-staffing of the mine has been substantially completed with ramp-up activities ahead of schedule, and the mine has returned to full production starting with the fourth quarter of 2020. However, there can be no assurance we will operate as currently 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 theNational Mining Association's CORESafety program. We attempt to implement reasonable best practices with respect to mine safety and emergency preparedness. We work with theMine Safety and Health Administration , theCommission of Labor Standards ,Pay Equity and Occupational Health and Safety inQuebec , and theMexico Ministry of Economy and Mining to address issues outlined in any investigations and inspections and continue to evaluate our safety practices. Achieving and maintaining compliance with regulations will be challenging and may increase our operating costs. See Item 1A. Risk Factors - We face substantial governmental regulation, including the Mine Safety and Health Act, various environmental laws and regulations and the 1872Mining Law in our annual report filed on Form 10-K for the year endedDecember 31, 2019 . Another challenge for us is the risk associated with environmental litigation and ongoing reclamation activities. As described in Item 1A. Risk Factors in our annual report filed on Form 10-K for the year endedDecember 31, 2019 and in 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 and the estimate of our environmental liabilities and liquidity needs, as well as our strategic plans, may 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 terms as favorable to us as possible. 34
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Table of Contents Results of Operations
Sales of products by metal for the three- and nine-month periods ended
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2020 2019 2020 2019
Silver $ 79,684 $ 40,588 $ 179,013 $ 122,392
Gold 98,457 103,889 278,363 261,734
Lead 13,370 7,114 32,244 22,809
Zinc 26,779 15,292 65,540 62,995
Less: Smelter and refining charges (18,587 ) (5,351 ) (52,177 ) (21,609 )
Sales of products $ 199,703 $ 161,532 $ 502,983 $ 448,321
The fluctuations in sales of products in the third quarter and first nine months
of 2020 compared to the same periods of 2019 are primarily due to the following
two factors:
• Higher average realized silver and gold prices in the third quarter and first
nine months of 2020 compared to the same periods in 2019. Average realized
zinc prices were higher in the third quarter of 2020, but lower in the first
nine months of the year compared to 2019, while lead prices were lower for
both periods. These price variances are illustrated in the table below.
Three Months Ended Nine Months Ended
September 30 , September 30,
2020 2019
2020 2019
Silver - London PM Fix ($/ounce)
Realized price per ounce
Realized price per ounce
Realized price per pound
Realized price per pound
Average realized prices typically differ from average market prices primarily because concentrate sales atGreens Creek (our largest segment) are generally recorded as revenues at the time of shipment at forward prices for the estimated month of settlement, which differ from average market prices. Due to the time elapsed between shipment of concentrates and final settlement with the customers, we must estimate the prices at which sales of our metals will be settled. Previously recorded sales are adjusted to estimated settlement metals prices each period through final settlement. For the third quarter and first nine months of 2020, we recorded net positive price adjustments to provisional settlements of$4.3 million and$5.3 million , respectively, compared to net positive price adjustments of$0.6 million and net negative adjustments of$0.1 million , respectively, in the 2019 periods. The price adjustments related to silver, gold, lead and zinc contained in our concentrate shipments were partially offset in the 2020 periods, and largely offset in the 2019 periods, by gains and losses on forward contracts for those metals. 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, doré and carbon material shipped during the period. 35
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• Higher sales quantities for silver, lead and zinc, partially offset by lower
gold quantities, in the third quarter and first nine months of 2020 compared
to the same periods of 2019. See The Greens Creek Segment, The Lucky Friday
Segment, The Casa Berardi Segment, The San Sebastian Segment and The
Operations Segment sections below for more information on metals production
and sales volumes at each of our operating segments. Total metals production
and sales volumes for each period are shown in the following table:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Silver - Ounces produced 3,541,371 3,251,350 10,190,621 9,193,246
Payable ounces sold 3,147,048 2,232,691 9,077,966 7,549,360
Gold - Ounces produced 41,174 77,311 159,948 198,100
Payable ounces sold 51,049 69,760 159,550 189,823
Lead - Tons produced 9,750 6,107 24,620 17,406
Payable tons sold 7,792 3,817 19,948 12,628
Zinc - Tons produced 17,997 15,413 48,699 42,672
Payable tons sold 12,892 7,878 34,717 27,234
The difference between what we report as "ounces/tons produced" and "payable
ounces/tons 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.
We recorded income applicable to common shareholders of $13.5 million ($0.03 per
basic common share) for the third quarter of 2020 and a loss applicable to
common shareholders of $18.0 million ($0.03 per basic common share) for the
first nine months of 2020, compared to losses applicable to common shareholders
of $19.7 million ($0.04 per basic common share) and $92.0 million ($0.19 per
basic common share) for the third quarter and first nine months of 2019,
respectively. The following twelve factors impacted the results for the third
quarter and first nine months of 2020 compared to the same periods in 2019:
• Variances in gross profit (loss) at our operating units as follows (in
millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 Variance 2020 2019 Variance
(0.7 ) - (0.7 ) (0.7 ) - (0.7 )
Casa Berardi (0.3 ) 0.5 (0.8 ) 2.0 (18.2 ) 20.2
San Sebastian 3.2 2.6 0.6 5.7 2.7 3.0
Nevada Operations 8.8 (6.7 ) 15.5 17.6 (40.7 ) 58.3
Total gross profit
See The Greens Creek Segment, The Lucky Friday Segment, The Casa Berardi Segment, The San Sebastian Segment, and The Nevada Operations Segment sections below.
• Higher general and administrative expense by
the third quarter and first nine months of 2020, respectively, compared to the
same periods of 2019 primarily due to increase accruals for incentive
compensation.
• Exploration and pre-development expense decreased by
million in the third quarter and first nine months of 2020, respectively,
compared to the same periods in 2019. In the first nine months of 2020,
exploration was primarily at our San Sebastian and Casa Berardi units.
• Higher other operating expense by
quarter and first nine months of 2020, respectively, compared to the same
periods of 2019 primarily due to costs for an ongoing project to identify and
implement potential operational improvements at Casa Berardi.
• Ramp-up and suspension costs were lower by
of 2020, but higher by
compared to the same periods of 2019. The decrease in the third quarter was
due to increased production at Lucky Friday. The increase in the nine-month
period was due to (i) higher costs at Lucky Friday due to the transition of
production from salary to hourly personnel and the recall, hire and training
of the returning hourly workforce, (ii) placement of the Midas and
mines and Aurora mill in
temporary suspension of operations at Casa Berardi and
response to COVID-19, which lead to lower production at those operations. See
The Lucky Friday Segment, The Nevada Operations Segment, The Casa Berardi
Segment and The San Sebastian Segment sections below.
• In
million at the time of the gift to the
"Foundation"), and recognized expense for that amount in the second quarter of
2020. The Foundation is a 501(c)(3) entity established in 2007 to provide
grants and disburse funds for educational and charitable purposes to
qualifying organizations in order to promote the social, environmental and
economic sustainability and development of the communities where we have
operations and activities.
• A
of equipment at Nevada Operations determined to be held-for-sale compared to a
of exploration interests that were held for sale in Quebec .
• Unrealized gains on investments of $4.0 million and $9.4 million ,respectively, in the third quarter and first nine months of 2020, compared to
losses of
2019 due to changes in the prices of shares in other mining companies held by
us.
• Losses on metal derivatives contracts of
third quarter and first nine months of 2020, respectively, compared to losses
of
2019, respectively. During the third quarter of 2019, we settled, prior to
their maturity date, contracts in a gain position for cash proceeds to us of
approximately
periods. See Note 11 of Notes to Condensed Consolidated Financial Statements
(Unaudited) for more information.
• Foreign exchange net losses of
gain of
first nine months of 2019. The variances are primarily related to the impact
of changes in the CAD-to-USD exchange rate on the remeasurement of our net
monetary liabilities in
applicable CAD-to-USD exchange rate increased from 1.2989 to 1.3333, compared
to a decrease in the rate from 1.3643 to 1.3243 during the first nine months
of 2019.
• Higher interest expense by
compared to the same period of 2019, with the increase resulting from (i)
interest recognized on both the Senior Notes and 2021 Notes for an overlapping
period of almost one month, as the Senior Notes were issued on
2020 and the 2021 Notes were redeemed on
unamortized initial purchaser discount on the 2021 Notes recognized as expense
upon their redemption and (iii) higher interest related to amounts drawn on
our revolving credit facility.
• Income tax provisions of
and first nine months of 2020, respectively, compared to benefits of
million and
provisions in the third quarter and first nine months of 2020 were primarily
the result of income in
third quarter of 2020 and losses in the first nine months of the year. The
benefits for the third quarter and first nine months of 2019 were due to
losses in Nevada and Quebec .
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The Greens Creek Segment
Dollars are in thousands (except per Three Months Ended Nine Months Ended
ounce and per ton amounts) September 30, September 30,
2020 2019 2020 2019
Sales $ 93,494 $ 59,015 $ 232,218 $ 194,542
Cost of sales and other direct
production costs (39,322 ) (31,467 ) (120,758 ) (108,009 )
Depreciation, depletion and amortization (11,735 ) (9,008 ) (37,152 ) (32,228 )
Cost of sales and other direct
production costs and depreciation,
depletion and amortization (51,057 ) (40,475 ) (157,910 ) (140,237 )
Gross profit $ 42,437 $ 18,540 $ 74,308 $ 54,305
Tons of ore milled 215,237 213,557 629,316 629,752
Production:
Silver (ounces) 2,634,436 2,544,018 8,164,062 7,149,035
Gold (ounces) 12,838 13,684 38,215 41,269
Zinc (tons) 16,187 15,073 44,858 41,330
Lead (tons) 5,909 5,258 16,996 14,668
Payable metal quantities sold:
Silver (ounces) 2,311,477 1,565,873 7,158,933 5,545,422
Gold (ounces) 9,924 9,863 32,600 32,466
Zinc (tons) 11,666 7,218 31,968 26,213
Lead (tons) 4,214 3,045 12,907 10,199
Ore grades:
Silver ounces per ton 15.04 15.01 15.79 14.28
Gold ounces per ton 0.08 0.10 0.08 0.10
Zinc percent 8.17 % 7.70 % 7.76 % 7.28 %
Lead percent 3.26 % 3.00 % 3.22 % 2.86 %
Mining cost per ton $ 72.37 $ 81.16 $ 78.97 $ 80.15
Milling cost per ton $ 33.22 $ 36.67 $ 36.77 $ 35.89
Total Cash Cost, After By-product
Credits, Per Silver Ounce (1) $ 4.12 $ 2.05 $ 4.99 $ 1.67
All-In Sustaining Costs ("AISC"), After
By-Product Credits, per Silver Ounce (1) $ 7.70 $ 6.05 $ 7.57 $ 5.28 (1) A reconciliation of these non-GAAP measures 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 Cost
of Sales and Other Direct Production Costs and Depreciation, Depletion and
Amortization (GAAP) to Cash Cost, Before By-product Credits and Cash Cost,
After By-product Credits (non-GAAP) and All-In Sustaining Cost, Before
By-product Credits and All-In Sustaining Cost, After By-product Credits
(non-GAAP). At
by-products of our silver production, and the values of these metals
therefore offset operating costs within our calculations of Cash Cost, After
By-product Credits, per Silver Ounce.
Restrictions imposed by the State of Alaska beginning in late March in response
to the COVID-19 pandemic, including the requirement for employees returning to
Alaska to self-quarantine for 14 days (changed in June to 7 days), has caused us
to revise the normal operating procedures and incur additional costs for
staffing operations at Greens Creek . These or other potential restrictions could
have a material impact if they continue longer than anticipated or become
broader.
The $23.9 million and $20.0 million increases in gross profit in the third
quarter and first nine months of 2020, respectively, compared to the same
periods in 2019, are due to higher realized prices for silver and gold and
higher sales volumes, partially offset by higher treatment costs and lower
average realized lead prices. Average realized zinc prices were higher in the
third quarter of 2020, but lower in the first nine months of 2020, compared to
the 2019 periods. Treatment costs were higher by $10.9 million and $25.8
million , respectively, for the third quarter and first nine months of 2020,
compared to the same periods of 2019, primarily due to unfavorable changes in
smelter terms. Treatment costs for the first quarter of 2020 were also impacted
by failure by a metals trader customer to perform its obligation to purchase a
spot sale of concentrate, for which we are seeking compensation, although there
can be no assurance we will be successful.
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Mining and milling cost per ton were lower by 11% and 9%, respectively, in the
third quarter of 2020. Mining costs were lower by 1% and milling costs were
higher by 2% for the first nine months of 2020 compared to the same periods of
2019. The decrease in mining costs in the third quarter was mainly due to lower
costs for labor, power and consumables, with the decrease in mill costs
attributed to lower power costs.
The chart below illustrates the factors contributing to the variances in Cash
Cost, After By-product Credits, Per Silver Ounce for the third quarter and first
nine months of 2020 versus the same periods in 2019:
[[Image Removed: graph.jpg]]
The following table summarizes the components of Cash Cost, After By-product
Credits, per Silver Ounce:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Cash Cost, Before By-product
Credits, per Silver Ounce $ 24.30 $ 20.77 $ 22.11 $ 20.99
By-product credits (20.18 ) (18.72 ) (17.12 ) (19.32 )
Cash Cost, After By-product
Credits, per Silver Ounce $ 4.12 $ 2.05 $ 4.99 $ 1.67
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The following table summarizes the components of AISC, After By-product Credits,
per Silver Ounce:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
AISC, Before By-product Credits,
per Silver Ounce $ 27.88 $ 24.77 $ 24.69 $ 24.60
By-product credits (20.18 ) (18.72 ) (17.12 ) (19.32 )
AISC, After By-product Credits, per
Silver Ounce $ 7.70 $ 6.05 $ 7.57 $ 5.28
The increases in Cash Cost and AISC, After By-product Credits, per Silver Ounce
for the third quarter and first nine months of 2020 were due to higher treatment
and other costs, partially offset by higher silver production. By-product
credits per silver ounce were higher in the third quarter of 2020, but lower in
the first nine months of the year, compared to the same periods of 2019. The
combined impact of these factors was partially offset by lower capital spending
in the case of AISC, After By-product Credits, per Silver Ounce.
Mining and milling costs decreased in the third quarter and first nine months of 2020 compared to 2019 on a per-ounce basis due primarily to higher silver production resulting from increased silver grades.
Other cash costs per ounce for the third quarter and first nine months of 2020 were higher compared to 2019 on a per-ounce basis primarily due to higher mine license taxes and costs for COVID-19 mitigation, partially offset by higher silver production. Treatment costs per ounce were higher in the third quarter and first nine months of 2020 compared to 2019 as a result of unfavorable changes in smelter terms and higher silver prices, partially offset by higher silver production, with costs in the first quarter of 2020 also impacted by the failure by a metals trader customer to perform its obligation to purchase a spot sale of concentrate, as discussed above. 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 increased in the third quarter of 2020 compared to the third quarter of 2019 due to higher gold prices, partially offset by lower lead prices and the impact of higher silver production, which causes the by-product credits to be less on a per-silver ounce basis. By-product credits increased in the first nine months of 2020 compared to the same period of 2019 due to higher gold prices and higher zinc and lead production, partially offset by lower zinc and lead prices, but were lower on a per-silver ounce basis due to the impact of higher silver production. 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. While revenue from gold, zinc and lead by-products is significant, we believe that identification of silver as the primary product of theGreens Creek 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;
• we have historically presented
based on the original analysis that justified putting the project into
production, and believe that consistency in disclosure is important to our
investors regardless of the relationships of metals prices and production from
year to year;
• metallurgical treatment maximizes silver recovery;
• the
high proportion of silver; and
• in most of its working areas,
in which silver is the metal targeted for highest recovery.
Likewise, we believe the identification of gold, zinc and lead 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 have not consistently received sufficient revenue from any single
by-product metal to warrant classification of such as a co-product.
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We periodically review our revenues to ensure that reporting of primary products
and by-products is appropriate. Because we consider gold, 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 and AISC, After By-product Credits, per Silver Ounce.
The Lucky Friday Segment
Dollars are in thousands (except per Three Months Ended Nine Months Ended
ounce and per ton amounts) September 30, September 30,
2020 2019 2020 2019
Sales $ 20,812 $ 4,017 $ 35,097 $ 11,150
Cost of sales and other direct
production costs (18,544 ) (3,718 ) (30,635 ) (10,258 )
Depreciation, depletion and
amortization (2,956 ) (300 ) (5,152 ) (891 )
Cost of sales and other direct
production costs and depreciation,
depletion and amortization (21,500 ) (4,018 ) (35,787 ) (11,149 )
Gross profit (loss) $ (688 ) $ (1 ) $ (690 ) $ 1
Tons of ore milled 55,050 13,254 109,951 40,754
Production:
Silver (ounces) 636,389 115,682 1,201,674 416,456
Lead (tons) 3,841 849 7,624 2,738
Zinc (tons) 1,810 340 3,841 1,342
Payable metal quantities sold:
Silver (ounces) 585,119 107,992 1,110,568 372,103
Lead (tons) 3,579 771 7,042 2,428
Zinc (tons) 1,226 660 2,749 1,021
Ore grades:
Silver ounces per ton 12.10 9.33 11.43 10.95
Lead percent 7.35 % 7.01 % 7.33 % 7.40 %
Zinc percent 3.76 % 3.13 % 3.89 % 3.91 %
The $0.7 million in gross loss for the third quarter and first nine months of
2020 is related to forward contracts for metals contained in concentrate
shipments in the third quarter. The increases in ore tonnage and metals
production in the third quarter and first nine months of 2020 compared to the
same periods in 2019 are the result of a ramp-up in production following the
strike that ended in January 2020 (discussed further below).
Many of the employees at our Lucky Friday unit are represented by a union, and
the previous collective bargaining agreement with the union expired on April 30,
2016 . The unionized employees were on strike from March 13, 2017 until January
7, 2020 , when the union ratified a new collective bargaining agreement. Salaried
personnel performed limited production and capital improvements from July 2017
until the end of the strike. Re-staffing of the mine commenced in the first
quarter of 2020. We have substantially completed the re-staffing process with
the ramp-up ahead of schedule, and the mine has returned to full production
starting with the fourth quarter of 2020. Costs related to ramp-up activities
totaled $5.4 million in the first nine months of 2020, including a credit of
$3.8 recognized in the third quarter of 2020, and suspension-related costs
during the strike in the third quarter and first nine months of 2019 totaled
$2.7 million and $5.7 million , respectively. The credit in the third quarter of
2020 was the result of revenues exceeding costs, primarily due to an increase in
silver prices, in spite of not yet reaching full production levels in that
period. These costs and credit are combined with non-cash depreciation expense
of $2.2 million and $6.3 million for the third quarter and first nine months of
2020, respectively, and $1.0 million and $3.1 million for the third quarter and
first nine months of 2019, respectively, in a separate line item on our
consolidated statements of operations. These restart and suspension costs are
excluded from the calculation of gross profit, Cash Cost, After By-product
Credits, per Silver Ounce and AISC, After By-product Credits, per Silver Ounce,
when presented.
See Note 4 of Notes to Condensed Consolidated Financial Statements (Unaudited)
for a contingency related to groundwater monitoring at the Lucky Friday mine in
prior periods.
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The Casa Berardi Segment
Dollars are in thousands (except per Three Months Ended Nine Months Ended
ounce and per ton amounts) September 30, September 30,
2020 2019 2020 2019
Sales $ 53,554 $ 53,453 $ 149,731 $ 139,015
Cost of sales and other direct
production costs (36,350 ) (33,916 ) (96,579 ) (103,433 )
Depreciation, depletion and
amortization (17,471 ) (19,090 ) (51,149 ) (53,806 )
Cost of sales and other direct
production costs and depreciation,
depletion and amortization (53,821 ) (53,006 ) (147,728 ) (157,239 )
Gross profit (loss) $ (267 ) $ 447 $ 2,003 $ (18,224 )
Tons of ore milled 288,682 337,351 900,720 1,014,698
Production:
Gold (ounces) 26,405 36,547 83,913 99,616
Silver (ounces) 3,855 6,637 15,284 21,041
Payable metal quantities sold:
Gold (ounces) 28,133 35,811 85,969 101,071
Silver (ounces) 4,769 7,190 17,575 20,552
Ore grades:
Gold ounces per ton 0.114 0.128 0.114 0.120
Silver ounces per ton 0.02 0.02 0.02 0.03
Mining cost per ton $ 92.74 $ 80.67 $ 80.15 $ 80.97
Milling cost per ton $ 28.35 $ 18.39 $ 23.74 $ 17.50
Cash Cost, After By-product Credits,
per Gold Ounce (1) $ 1,398 $ 966 $ 1,181 $ 1,055
AISC, After By-product Credits, per
Gold Ounce (1) $ 1,855 $ 1,348 $ 1,493 $ 1,373 (1) A reconciliation of these non-GAAP measures 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 Cost
of Sales and Other Direct Production Costs and Depreciation, Depletion and
Amortization (GAAP) to Cash Cost, Before By-product Credits and Cash Cost,
After By-product Credits (non-GAAP) and All-In Sustaining Cost, Before
By-product Credits and All-In Sustaining Cost, After By-product Credits
(non-GAAP). At Casa Berardi, silver is considered to be a by-product of our
gold production, and the value of silver therefore offsets operating costs
within our calculations of Cash Cost, After By-product Credits, per Gold
Ounce.
Gross profit decreased by $0.7 million in the third quarter of 2020 compared to
the third quarter of 2019 due to lower gold production and higher milling and
administrative costs, partially offset by higher gold prices. Gross profit
increased by $20.2 million for the first nine months of 2020 compared to the
same period of 2019 due to higher gold prices, partially offset by lower gold
production and higher milling and administrative costs. The decrease in gold
volume was primarily due to lower mill throughput and ore grades. The lower
throughput was due to major mill maintenance activities that resulted in a
longer period of mill down-time than anticipated, with throughput and grades
impacted by a delay in the availability of higher-grade underground stopes as a
result of ground condition challenges. We anticipate ore from these
higher-grade stopes to be mined and processed in the fourth quarter of 2020. The
higher milling and administrative costs resulted from the maintenance activities
and an increase in pre-crushing of open pit ore to aid in recovery, and costs
for COVID-19 mitigation. Gold production for the first nine months of 2020 was
also impacted by a government COVID-19-related order. In late March, the
Government of Quebec ordered the mining industry to reduce to minimum operations
as part of the fight against COVID-19, causing us to suspend our Casa Berardi
operations from March 24 until April 15, 2020 , when mining operations resumed.
As a result of the suspension of operations, gold production was approximately
5,200 ounces lower in March 2020 and approximately 6,500 ounces lower in April
2020 than previously-forecasted full production levels. Production may continue
to be adversely impacted by the COVID-19 mitigation practices in place until
they are no longer required. Suspension-related costs totaling $1.6 million for
the first half of 2020 are reported in a separate line item on our consolidated
statements of operations and excluded from the calculations of cost of sales and
other direct production costs and depreciation, depletion and amortization,
mining and milling cost per ton, and Cash Cost and AISC, After By-product
Credits, per Gold Ounce. We believe gold production should increase in the
fourth quarter due to expected high-grade underground production from the East
Mine .
Mining costs per ton were higher by 15% and lower by 1%, in the third quarter
and first nine months of 2020, respectively, and milling costs were higher by
54% and 36% in the third quarter and first nine months of 2020, respectively.
On a per-ton basis, both mining and milling cost were impacted by the lower mill
throughput discussed above, with milling costs also impacted by higher
maintenance, ore pre-crushing and COVID-19 mitigation costs.
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The chart below illustrates the factors contributing to Cash Cost, After By-product Credits, Per Gold Ounce for the third quarter and first nine months of 2020 and 2019:
[[Image Removed: graph1.jpg]]
The following table summarizes the components of Cash Cost, After By-product
Credits, per Gold Ounce:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Cash Cost, Before By-product Credits,
per Gold Ounce $ 1,402 $ 969 $ 1,184 $ 1,058
By-product credits (4 ) (3 ) (3 ) (3 )
Cash Cost, After By-product Credits,
per Gold Ounce $ 1,398 $ 966 $ 1,181 $ 1,055
The following table summarizes the components of AISC, After By-product Credits,
per Gold Ounce:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
AISC, Before By-product Credits, per
Gold Ounce $ 1,859 $ 1,351 $ 1,496 $ 1,376 By-product credits
(4 ) (3 ) (3 ) (3 )
AISC, After By-product Credits, per
Gold Ounce $ 1,855 $ 1,348 $ 1,493 $ 1,373
The increase in Cash Cost and AISC, After By-product Credits, per Gold Ounce for
the third quarter and first nine months of 2020 compared to the same periods of
2019 was primarily due to lower gold production, as discussed further above, and
higher costs, due to the same factors impacting mining and milling cost per ton
discussed above and COVID-19 mitigation costs. For AISC, After By-product
Credits, per Gold Ounce, the combined impact of these factors was partially
offset by lower capital and exploration spending.
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 and AISC, After By-product Credits, per Gold Ounce.
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Table of Contents
The San Sebastian Segment
Dollars are in thousands (except per Three Months Ended Nine Months Ended
ounce and per ton amounts) September 30, September 30,
2020 2019 2020 2019
Sales $ 9,138 $ 15,435 $ 23,998 $ 39,028
Cost of sales and other direct
production costs (5,179 ) (9,516 ) (15,122 ) (29,404 )
Depreciation, depletion and
amortization (781 ) (3,326 ) (3,149 ) (6,934 )
Cost of sales and other direct
production costs and depreciation,
depletion and amortization (5,960 ) (12,842 ) (18,271 ) (36,338 )
Gross profit $ 3,178 $ 2,593 $ 5,727 $ 2,690
Tons of ore milled 47,093 45,232 104,216 135,576
Production:
Silver (ounces) 266,691 541,636 772,158 1,446,450
Gold (ounces) 1,931 4,699 6,064 11,776
Payable metal quantities sold:
Silver (ounces) 229,250 514,900 745,726 1,453,160
Gold (ounces) 1,713 4,442 5,757 11,582
Ore grades:
Silver ounces per ton 6.27 13.36 8.11 11.78
Gold ounces per ton 0.05 0.12 0.07 0.10
Mining cost per ton $ 31.41 $ 102.94 $ 51.30 $ 112.17
Milling cost per ton $ 58.55 $ 62.85 $ 58.77 $ 62.16
Cash Cost, After By-product Credits,
per Silver Ounce (1) $ 7.53 $ 3.70 $ 5.93 $ 7.77
AISC, After By-product Credits, per
Silver Ounce (1) $ 8.87 $ 7.21 $ 6.76 $ 12.14 (1) A reconciliation of these non-GAAP measures 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 Cost
of Sales and Other Direct Production Costs and Depreciation, Depletion and
Amortization (GAAP) to Cash Cost, Before By-product Credits and Cash Cost,
After By-product Credits (non-GAAP) and All-In Sustaining Cost, Before
By-product Credits and All-In Sustaining Cost, After By-product Credits
(non-GAAP). At
silver production, and the value of gold therefore offsets operating costs
within our calculations of Cash Cost, After By-product Credits, per silver
Ounce.
Mining at
The$0.6 million and$3.0 million increases in gross profit for the third quarter and first nine months of 2020, respectively, compared to the same periods of 2019 were mainly due to higher average silver and gold prices and lower production costs, partially offset by lower silver and gold production as a result of lower ore grades. Metals production for the nine-month period was also impacted by lower mill throughput in the first half of 2020 compared to the same period of 2019. Mining and milling cost per ton were lower by 69% and 7%, respectively, in the third quarter of 2020 and by 54% and 5%, respectively, for the first nine months of 2020 compared to the same periods of 2019. The decreases were mainly due to lower contractor costs, which was partially offset in the nine-month period by lower ore tonnage in the first half of 2020. 43
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The chart below illustrates the factors contributing to Cash Cost, After By-product Credits, Per Silver Ounce for the third quarter and first nine months of 2020 compared to the same periods in 2019:
[[Image Removed: hl20200930_10qimg004.gif]]
The following table summarizes the components of Cash Cost, After By-product
Credits, per Silver Ounce:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Cash Cost, Before By-product Credits,
per Silver Ounce $ 21.34 $ 16.54 $ 19.40 $ 18.97
By-product credits (13.81 ) (12.84 ) (13.47 ) (11.20 )
Cash Cost, After By-product Credits,
per Silver Ounce $ 7.53 $ 3.70 $ 5.93 $ 7.77
The following table summarizes the components of AISC, After By-product Credits,
per Silver Ounce:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
AISC, Before By-product Credits, per
Silver Ounce $ 22.68 $ 20.05 $ 20.23 $ 23.34
By-product credits (13.81 ) (12.84 ) (13.47 ) (11.20 )
AISC, After By-product Credits, per
Silver Ounce $ 8.87 $ 7.21 $ 6.76 $ 12.14
The increase in Cash Cost and AISC, After By-product Credits, per Silver Ounce
in the third quarter compared to the same period in 2019 was primarily the
result of lower silver production, partially offset by higher by-product credits
per-ounce due to higher gold prices. The decrease in Cash Cost and AISC, After
By-product Credits, per Silver Ounce in first nine months of 2020 compared to
the same period of 2019 was primarily due to lower mining costs and higher
by-product credits on a per-ounce basis due to higher gold prices, partially
offset by lower silver production. The same factors, along with lower capital
and exploration spending, resulted in the decrease in AISC, After By-product
Credits, per Silver Ounce for the first nine months of 2020 compared to the same
period of 2019.
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.
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We periodically review our revenues to ensure that reporting of primary products and by-products is appropriate. We believe the identification of gold as a by-product credit is appropriate atSan Sebastian because of its anticipated lower economic value compared to silver over the life of the mine. In addition, we do not receive sufficient revenue from gold atSan Sebastian to warrant classification of such as a co-product. Because we consider gold to be a by-product of our silver production atSan Sebastian , the value of gold offsets operating costs within our calculations of Cash Cost, After By-product Credits, per Silver Ounce and AISC, After By-product Credits, per Silver Ounce. In earlyApril 2020 , the Government ofMexico issued an order to the mining industry to reduce operations to a minimum level untilApril 30 in response to COVID-19, and the order was subsequently extended untilMay 30, 2020 . Our operations atSan Sebastian were suspended during that time. The closure is not expected to have a material impact on full-year production. Suspension-related costs totaling$1.1 million for the first nine months of 2020 are reported in a separate line item on our consolidated statements of operations and excluded from the calculations of cost of sales and other direct production costs and depreciation, depletion and amortization, mining and milling cost per ton, and Cash Cost and AISC, After By-product Credits, per Gold Ounce. The Nevada Operations Segment Dollars are in thousands (except per Three Months Ended Nine Months Ended ounce and per ton amounts) September 30, September 30, 2020 2019 2020 2019 Sales$ 22,705 $ 29,612 $ 61,939 $ 64,586 Cost of sales and other direct production costs (6,582 ) (17,261 ) (21,623 ) (60,098 ) Depreciation, depletion and amortization (7,295 ) (19,050 ) (22,725 ) (45,179 ) Cost of sales and other direct production costs and depreciation, depletion and amortization (13,877 ) (36,311 ) (44,348 ) (105,277 ) Gross profit (loss)$ 8,828 $ (6,699 ) $ 17,591 $ (40,691 ) Tons of ore milled - 63,954 27,984 163,736 Production: Gold (ounces) - 22,381 31,756 45,439 Silver (ounces) - 43,377 37,443 160,264 Payable metal quantities sold: Gold (ounces) 11,280 19,644 35,224 44,704 Silver (ounces) 16,433 36,736 45,164 158,123 Ore grades: Gold ounces per ton - 0.389 1.232 0.320 Silver ounces per ton - 1.54 1.70 1.81 Mining cost per ton $ -$ 149.16 $ 402.94 $ 158.25 Milling cost per ton $ -$ 67.66 $ 176.63 $ 81.73 Cash Cost, After By-product Credits, per Gold Ounce (1) $ -$ 817 $ 716 $ 1,165 AISC, After By-product Credits, per Gold Ounce (1) $ -$ 992 $ 787 $ 1,841
(1) A reconciliation of these non-GAAP measures 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 Cost
of Sales and Other Direct Production Costs and Depreciation, Depletion and
Amortization (GAAP) to Cash Cost, Before By-product Credits and Cash Cost,
After By-product Credits (non-GAAP) and All-In Sustaining Cost, Before
By-product Credits and All-In Sustaining Cost, After By-product Credits
(non-GAAP). At Nevada Operations, silver is considered to be a by-product of
our gold production, and the value of silver therefore offsets operating
costs within our calculations of Cash Cost, After By-product Credits, per
Gold Ounce.
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The increases in gross profit for the third quarter and first nine months of 2020 compared to the same periods of 2019 were due to higher average gold prices. In addition, cost of sales and other direct production costs for the first nine months of 2020 included write-downs totaling approximately$1.5 million of the values of stockpile, in-process and finished goods inventory to their net realizable value, with no portion of that amount recognized in the third quarter, compared to$4.6 million and$32.9 million , respectively, in such write-downs in the third quarter and first nine months of 2019. The write-downs in the 2019 periods were primarily attributed to development costs incurred at theFire Creek mine, which ceased in the second quarter of 2019 when the decision was made to limit near-term production to areas of the mine where development was already completed. During the third quarter of 2020, all ore mined at Nevada Operations was stockpiled, with no ore milled and no production reported during the period. As a result, mining and milling cost per ton and Cash Cost and AISC, After By-product Credits, per Gold Ounce are not presented for Nevada Operations for the third quarter of 2020. Mining of non-refractory ore atFire Creek in areas where development has already been performed is expected to be completed in the fourth quarter of 2020. As discussed below, we have mined and stockpiled a bulk sample of refractory ore for processing at a third-party facility, with transporting of the stockpiled ore to the third-party facility expected to start in the fourth quarter of 2020. If third-party processing of the bulk sample material is successful, we expect to mine refractory ore in 2021.
Mining and milling costs per ton were higher by 155% and 116%, respectively, for the first nine months of 2020, compared to the same periods of 2019, due to lower mill throughput.
The chart below illustrates the factors contributing to Cash Cost, After By-product Credits, Per Gold Ounce for the third quarter and first nine months of 2020 and 2019:
[[Image Removed: hl20200930_10qimg005.gif]]
The following table summarizes the components of Cash Cost, After By-product
Credits, per Gold Ounce:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Cash Cost, Before By-product Credits,
per Gold Ounce $ - $ 851 $ 736 $ 1,221
By-product credits - (34 ) (20 ) (56 )
Cash Cost, After By-product Credits,
per Gold Ounce $ - $ 817 $ 716 $ 1,165
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The following table summarizes the components of AISC, After By-product Credits,
per Gold Ounce:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
AISC, Before By-product Credits, per
Gold Ounce $ - $ 1,026 $ 807 $ 1,897
By-product credits - (34 ) (20 ) (56 )
AISC, After By-product Credits, per
Gold Ounce $ - $ 992 $ 787 $ 1,841
The decrease in Cash Cost and AISC, After By-product Credits, per Gold Ounce in
the first nine months of 2020 compared to the same period of 2019 was a result
of higher gold production in the first half of 2020 due to higher ore grades,
with the decrease in AISC, After By-product Credits, per Gold Ounce also
attributed to lower exploration and capital spending.
We believe the identification of silver as a by-product credit is appropriate at
Nevada Operations 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 Nevada Operations
to warrant classification of such as a co-product. Because we consider silver to
be a by-product of our gold production at Nevada Operations, the value of silver
offsets operating costs within our calculations of Cash Cost, After By-product
Credits, per Gold Ounce and AISC, After By-product Credits, per Gold Ounce.
Because total production and capital costs had exceeded sales since acquisition,
we conducted a review of our Nevada operations, including the relevant carrying
value of our long-term assets there, during the second quarter of 2019. The
review resulted in (i) a plan to limit near-term mining at Fire Creek to areas
where development has already been completed and (ii) suspension of production
and development of the Hatter Graben project at Hollister , resulting in lower
anticipated near-term production and capitalized development costs. Production
at the Midas mine and Aurora mill was suspended in late 2019. Suspension-related
costs totaling $9.6 million for the first nine months of 2020 at Hollister ,
Midas and Aurora, which are currently on care-and-maintenance, are reported in a
separate line item on our consolidated statements of operations and excluded
from the calculations of cost of sales and other direct production costs and
depreciation, depletion and amortization, mining and milling cost per ton, and
Cash Cost and AISC, After By-product Credits, per Gold Ounce.
There were no subsequent events or changes in circumstances during the latter
half of 2019 or the first nine months of 2020 that indicated the carrying value
of our long-term assets in Nevada was not recoverable. We have entered into a
third-party ore processing arrangement for a bulk sample of refractory ore, with
the potential of establishing a long-term arrangement which could reduce
transportation and milling costs. Mining of the bulk sample material commenced
in the second quarter of 2020, with costs for mining the material totaling $9.2
million , along with $7.7 million for costs related to mining non-refractory ore,
included in stockpiled ore inventory as of September 30, 2020 . The carrying
value of our properties, plants, equipment and mineral interests in Nevada as of
September 30, 2020 was $478.9 million , consisting of the following (in
millions):
Value beyond proven and probable reserves
40.6
Buildings and equipment 40.2
Mineral properties 8.6
Asset retirement obligation asset 3.1
Land 3.0
Development 1.2
Total $ 478.9
See Item 1A. Risk Factors - Operation, Development, Exploration and Acquisition
Risks in our annual report filed on Form 10-K for the year ended December 31,
2019 for a discussion of certain risks relating to our recent and ongoing
analysis of the carrying value of the Nevada assets.
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Table of Contents Corporate Matters Employee Benefit Plans Our defined benefit pension plans provide a significant benefit to our employees, but also represent a significant liability to us. The liability recorded for the underfunded status of our plans was$48.9 million and$56.8 million as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. In April andAugust 2020 , we contributed totals of approximately$0.4 million and$12.4 million , respectively, in shares of our common stock, and inOctober 2020 we contributed$6.0 million in cash to the plans. There are no additional contributions to the plans required in 2020. 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 balance based on a review of long-range forecasts and quarterly activity. In 2018, through the acquisition ofKlondex Mines Ltd. , we acquired aU.S. consolidated tax group (the "Nevada U.S. Group ") that did not join the existing consolidatedU.S. tax group ofHecla Mining Company and subsidiaries ("HeclaU.S. "). We recognized a full valuation allowance on our HeclaU.S. net deferred tax assets at the end of 2017 based on results of tax law changes and maintain a full valuation allowance on HeclaU.S. net deferred tax assets atSeptember 30, 2020 . Our netU.S. deferred tax liability for theNevada U.S. Group atSeptember 30, 2020 was$34.9 million compared to the$38.3 million net deferred tax liability atDecember 31, 2019 . The$3.4 million decrease is for current period activity inNevada . The deferred tax liability is primarily related to the excess of the carrying value of the mineral resource assets over the tax bases of those assets forU.S. tax reporting. Our net Canadian deferred tax liability atSeptember 30, 2020 was$94.6 million , a decrease of$5.3 million from the$99.9 million net deferred tax liability atDecember 31, 2019 . The decrease was due to current period activity and the impact of weakening of the CAD relative to the USD on remeasurement of the deferred tax liability balance. The deferred tax liability is primarily related to the excess of the carrying value of the mineral resource assets over the tax bases of those assets for Canadian tax reporting. Our Mexican net deferred tax asset atSeptember 30, 2020 was$3.4 million , a decrease of$0.1 million from the net deferred tax asset of$3.5 million atDecember 31, 2019 . The decrease was primarily due to the impact of weakening of the MXN relative to the USD on remeasurement of the deferred tax asset balance. A$2.3 million partial valuation allowance remains on deferred tax assets inMexico . As a result of the Tax Cuts and Jobs Act enacted inDecember 2017 , our remaining Alternative Minimum Tax ("AMT") credit carryforward of$11.4 million became partially refundable through 2020 and fully refundable in 2021. State and Federal AMT refunds of$6.5 million were received in the first nine months of 2020, leaving a net AMT credit receivable of$4.9 million as ofSeptember 30, 2020 . InMarch 2020 , theU.S. government issued the Coronavirus Aid, Relief and Economic Security Act, which allowed companies to claim immediate refunds of AMT credits. As a result, the remaining$4.9 million AMT credit is classified as a current receivable as ofSeptember 30, 2020 . Reconciliation of Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP) to Cash Cost, Before By-product Credits and Cash Cost, After By-product Credits (non-GAAP) and All-In Sustaining Cost, Before By-product Credits and All-In Sustaining Cost, After By-product Credits (non-GAAP) The tables below present reconciliations between the most comparable GAAP measure of cost of sales and other direct production costs and depreciation, depletion and amortization to the non-GAAP measures of (i) Cash Cost, Before By-product Credits, (ii) Cash Cost, After By-product Credits, (iii) AISC, Before By-product Credits and (iv) AISC, After By-product Credits for our operations at theGreens Creek ,Lucky Friday ,San Sebastian ,Casa Berardi andNevada Operations units and for the Company for the three- and nine-month periods endedSeptember 30, 2020 and 2019. Cash Cost, After By-product Credits, per Ounce and AISC, After By-product Credits, per Ounce are measures developed by precious metals companies (including theSilver Institute and theWorld Gold Council ) in an effort to provide a uniform standard for comparison purposes. There can be no assurance, however, that these non-GAAP measures as we report them are the same as those reported by other mining companies. 48
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Cash Cost, After By-product Credits, per Ounce is an important operating statistic that we utilize to measure each mine's operating performance. We use AISC, After By-product Credits, per Ounce as a measure of our mines' net cash flow after costs for exploration, pre-development, reclamation, and sustaining capital. This is similar to the Cash Cost, After By-product Credits, per Ounce non-GAAP measure we report, but also includes on-site exploration, reclamation, and sustaining capital costs. Current GAAP measures used in the mining industry, such as cost of goods sold, do not capture all the expenditures incurred to discover, develop and sustain silver and gold production. Cash Cost, After By-product Credits, per Ounce and AISC, After By-product Credits, per Ounce also allow us to benchmark the performance of each of our mines versus those of our competitors. As a silver and gold mining company, we also use these statistics on an aggregate basis - aggregating theGreens Creek ,Lucky Friday andSan Sebastian mines to compare our performance with that of other silver mining companies, and aggregatingCasa Berardi and Nevada Operations for comparison with other gold mining companies. Similarly, these statistics are useful in identifying acquisition and investment opportunities as they provide a common tool for measuring the financial performance of other mines with varying geologic, metallurgical and operating characteristics. Cash Cost, Before By-product Credits and AISC, Before By-product Credits include all direct and indirect operating cash costs related directly to the physical activities of producing metals, including mining, processing and other plant costs, third-party refining expense, on-site general and administrative costs, royalties and mining production taxes. AISC, Before By-product Credits for each mine also includes on-site exploration, reclamation, and sustaining capital costs. AISC, Before By-product Credits for our consolidated silver properties also includes corporate costs for general and administrative expense, exploration and sustaining capital projects. By-product credits include revenues earned from all metals other than the primary metal produced at each unit. As depicted in the 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. In addition to the uses described above, Cash Cost, After By-product Credits, per Ounce and AISC, After By-product Credits, per Ounce provide management and investors an indication of operating cash flow, after consideration of the average price received from production. We also use these measurements for the comparative monitoring of performance of our mining operations period-to-period from a cash flow perspective. The Casa Berardi, Nevada Operations and combined gold properties information below reports Cash Cost, After By-product Credits, per Gold Ounce and AISC, After By-product Credits, per Gold Ounce for the production of gold, their primary product, and by-product revenues earned from silver, which is a by-product at Casa Berardi and Nevada Operations. 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 and AISC, After By-product Credits, per Ounce. Thus, the gold produced at ourCasa Berardi and Nevada Operations units is not included as a by-product credit when calculating Cash Cost, After By-product Credits, per Silver Ounce and AISC, After By-product Credits, per Silver Ounce for the total ofGreens Creek ,Lucky Friday andSan Sebastian , our combined silver properties. Similarly, the silver produced at our other three units is not included as a by-product credit when calculating the gold metrics forCasa Berardi and Nevada Operations. 49
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In thousands (except per
ounce amounts) Three Months Ended September 30, 2020
Greens Lucky San
Creek Friday(3) Sebastian(4) Corporate(5) Total Silver
Cost of sales and other
direct production costs
and depreciation,
depletion and
amortization $ 51,057 21,500 $ 5,960 $ 78,517
Depreciation, depletion
and amortization (11,735 ) (2,956 ) (781 ) (15,472 )
Treatment costs 22,675 4,038 81 26,794
Change in product
inventory 2,899 11 826 3,736
Reclamation and other
costs (1) (891 ) - (392 ) (1,283 )
Exclusion of Lucky
Friday costs - (22,593 ) - (22,593 )
Cash Cost, Before
By-product Credits (2) 64,005 - 5,694 69,699
Reclamation and other
costs 788 - 114 902
Exploration 370 - - 429 799
Sustaining capital 8,265 - 244 38 8,547
General and
administrative (1) 10,345 10,345
AISC, Before By-product
Credits (2) 73,428 - 6,052 90,292
By-product credits:
Zinc (23,772 ) - (23,772 )
Gold (21,226 ) - (3,686 ) (24,912 )
Lead (8,149 ) - (8,149 )
Total By-product credits (53,147 ) - (3,686 ) (56,833 )
Cash Cost, After
By-product Credits $ 10,858 $ - $ 2,008 $ 12,866
AISC, After By-product
Credits $ 20,281 $ - $ 2,366 $ 33,459
Divided by silver ounces
produced 2,634 - 267 2,901
Cash Cost, Before
By-product Credits, per
Silver Ounce $ 24.30 $ - $ 21.34 $ 24.02
By-product credits per
ounce (20.18 ) - (13.81 ) (19.59 )
Cash Cost, After
By-product Credits, per
Silver Ounce $ 4.12 $ - $ 7.53 $ 4.43
AISC, Before By-product
Credits, per Silver
Ounce $ 27.88 $ - $ 22.68 $ 31.12
By-product credits per
ounce (20.18 ) - (13.81 ) (19.59 )
AISC, After By-product
Credits, per Silver
Ounce $ 7.70 $ - $ 8.87 $ 11.53
50--------------------------------------------------------------------------------
Table of Contents
In thousands (except per ounce
amounts) Three Months Ended September 30, 2020
Casa Nevada
Berardi(6) Operations(7) Total Gold
Cost of sales and other direct
production costs and depreciation,
depletion and amortization $ 53,821 $ 13,877 $ 67,698
Depreciation, depletion and
amortization (17,471 ) (7,295 ) (24,766 )
Treatment costs 562 - 562
Change in product inventory 543 6,920 7,463
Reclamation and other costs (1) (449 ) (324 ) (773 )
Exclusion of Nevada Operations
costs - (13,178 ) (13,178 )
Cash Cost, Before By-product
Credits (2) 37,006 - 37,006
Reclamation and other costs 97 - 97
Exploration 335 - 335
Sustaining capital 11,629 - 11,629
AISC, Before By-product Credits
(2) 49,067 - 49,067
By-product credits:
Silver (93 ) - (93 )
Total By-product credits (93 ) - (93 )
Cash Cost, After By-product
Credits $ 36,913 $ - $ 36,913
AISC, After By-product Credits $ 48,974 $ - $ 48,974
Divided by gold ounces produced 26 - 26
Cash Cost, Before By-product
Credits, per Gold Ounce $ 1,402 $ - $ 1,402
By-product credits per ounce (4 ) - (4 )
Cash Cost, After By-product
Credits, per Gold Ounce $ 1,398 $ - $ 1,398
AISC, Before By-product Credits,
per Gold Ounce $ 1,859 $ - $ 1,859
By-product credits per ounce (4 ) - (4 )
AISC, After By-product Credits,
per Gold Ounce $ 1,855 $ - $ 1,855
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Table of Contents
In thousands (except per ounce
amounts) Three Months Ended September 30, 2020
Total
Silver Total Gold Total
Cost of sales and other direct
production costs and depreciation,
depletion and amortization $ 78,517 67,698 $ 146,215
Depreciation, depletion and
amortization (15,472 ) (24,766 ) (40,238 )
Treatment costs 26,794 562 27,356
Change in product inventory 3,736 7,463 11,199
Reclamation and other costs (1) (1,283 ) (773 ) (2,056 )
Exclusion of costs (22,593 ) (13,178 ) (35,771 )
Cash Cost, Before By-product
Credits (2) 69,699 37,006 106,705
Reclamation and other costs 902 97 999
Exploration 799 335 1,134
Sustaining capital 8,547 11,629 20,176
General and administrative (1) 10,345 - 10,345
AISC, Before By-product Credits
(2) 90,292 49,067 139,359
By-product credits:
Zinc (23,772 ) - (23,772 )
Gold (24,912 ) - (24,912 )
Lead (8,149 ) - (8,149 )
Silver (93 ) (93 )
Total By-product credits (56,833 ) (93 ) (56,926 )
Cash Cost, After By-product
Credits $ 12,866 $ 36,913 $ 49,779
AISC, After By-product Credits $ 33,459 $ 48,974 $ 82,433
Divided by ounces produced 2,901 26
Cash Cost, Before By-product
Credits, per Ounce $ 24.02 $ 1,402
By-product credits per ounce (19.59 ) (4 )
Cash Cost, After By-product
Credits, per Ounce $ 4.43 $ 1,398
AISC, Before By-product Credits,
per Ounce $ 31.12 $ 1,859
By-product credits per ounce (19.59 ) (4 )
AISC, After By-product Credits,
per Ounce $ 11.53 $ 1,855
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Table of Contents
In thousands (except per
ounce amounts) Three Months Ended September 30, 2019
Greens Lucky San Total
Creek Friday(3) Sebastian Corporate(5) Silver
Cost of sales and other
direct production costs
and depreciation,
depletion and
amortization $ 40,475 $ 4,018 $ 12,842 $ 57,335
Depreciation, depletion
and amortization (9,008 ) (300 ) (3,326 ) (12,634 )
Treatment costs 13,003 500 63 13,566
Change in product
inventory 8,456 (134 ) (335 ) 7,987
Reclamation and other
costs (92 ) - (294 ) (386 )
Exclusion of Lucky
Friday costs - (4,084 ) - (4,084 )
Cash Cost, Before
By-product Credits (2) 52,834 - 8,950 61,784
Reclamation and other
costs 737 - 123 860
Exploration 465 - 1,252 167 1,884
Sustaining capital 8,966 - 528 - 9,494
General and
administrative 7,978 7,978
AISC, Before By-product
Credits (2) 63,002 - 10,853 82,000
By-product credits:
Zinc (22,452 ) - (22,452 )
Gold (17,517 ) - (6,946 ) (24,463 )
Lead (7,649 ) - (7,649 )
Total By-product credits (47,618 ) - (6,946 ) (54,564 )
Cash Cost, After
By-product Credits $ 5,216 $ - $ 2,004 $ 7,220
AISC, After By-product
Credits $ 15,384 $ - $ 3,907 $ 27,436
Divided by ounces
produced 2,544 - 541 3,085
Cash Cost, Before
By-product Credits, per
Ounce $ 20.77 $ - $ 16.54 $ 20.03
By-product credits per
ounce (18.72 ) - (12.84 ) (17.69 )
Cash Cost, After
By-product Credits, per
Ounce $ 2.05 $ - $ 3.70 $ 2.34
AISC, Before By-product
Credits, per Ounce $ 24.77 $ - $ 20.05 $ 26.58
By-product credits per
ounce (18.72 ) - (12.84 ) (17.69 )
AISC, After By-product
Credits, per Ounce $ 6.05 $ - $ 7.21 $ 8.89
53--------------------------------------------------------------------------------
Table of Contents
In thousands (except per ounce
amounts) Three Months Ended September 30, 2019
Nevada
Casa Berardi Operations Total Gold
Cost of sales and other direct
production costs and depreciation,
depletion and amortization $ 53,006 $ 36,311 $ 89,317
Depreciation, depletion and
amortization (19,090 ) (19,050 ) (38,140 )
Treatment costs 561 45 606
Change in product inventory 1,070 2,118 3,188
Reclamation and other costs (129 ) (377 ) (506 )
Cash Cost, Before By-product
Credits (2) 35,418 19,047 54,465
Reclamation and other costs 130 378 508
Exploration 603 1,232 1,835
Sustaining capital 13,237 2,305 15,542
AISC, Before By-product Credits
(2) 49,388 22,962 72,350
By-product credits:
Silver (111 ) (755 ) (866 )
Total By-product credits (111 ) (755 ) (866 )
Cash Cost, After By-product
Credits $ 35,307 $ 18,292 $ 53,599
AISC, After By-product Credits $ 49,277 $ 22,207 $ 71,484
Divided by ounces produced 37 22 59
Cash Cost, Before By-product
Credits, per Ounce $ 969 $ 851 $ 924
By-product credits per ounce (3 ) (34 ) (15 )
Cash Cost, After By-product
Credits, per Ounce $ 966 $ 817 $ 909
AISC, Before By-product Credits,
per Ounce $ 1,351 $ 1,026 $ 1,228
By-product credits per ounce (3 ) (34 ) (15 )
AISC, After By-product Credits,
per Ounce $ 1,348 $ 992 $ 1,213
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Table of Contents
In thousands (except per ounce
amounts) Three Months Ended September 30, 2019
Total
Silver Total Gold Total
Cost of sales and other direct
production costs and depreciation,
depletion and amortization $ 57,335 89,317 $ 146,652
Depreciation, depletion and
amortization (12,634 ) (38,140 ) (50,774 )
Treatment costs 13,566 606 14,172
Change in product inventory 7,987 3,188 11,175
Reclamation and other costs (386 ) (506 ) (892 )
Exclusion of Lucky Friday costs (4,084 ) - (4,084 )
Cash Cost, Before By-product
Credits (2) 61,784 54,465 116,249
Reclamation and other costs 860 508 1,368
Exploration 1,884 1,835 3,719
Sustaining capital 9,494 15,542 25,036
General and administrative 7,978 - 7,978
AISC, Before By-product Credits
(2) 82,000 72,350 154,350
By-product credits:
Zinc (22,452 ) - (22,452 )
Gold (24,463 ) - (24,463 )
Lead (7,649 ) - (7,649 )
Silver (866 ) (866 )
Total By-product credits (54,564 ) (866 ) (55,430 )
Cash Cost, After By-product
Credits $ 7,220 $ 53,599 $ 60,819
AISC, After By-product Credits $ 27,436 $ 71,484 $ 98,920
Divided by ounces produced 3,085 59
Cash Cost, Before By-product
Credits, per Ounce $ 20.03 $ 924
By-product credits per ounce (17.69 ) (15 )
Cash Cost, After By-product
Credits, per Ounce $ 2.34 $ 909
AISC, Before By-product Credits,
per Ounce $ 26.58 $ 1,228
By-product credits per ounce (17.69 ) (15 )
AISC, After By-product Credits,
per Ounce $ 8.89 $ 1,213
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Table of Contents
In thousands (except
per ounce amounts) Nine Months Ended September 30, 2020
Greens Lucky San
Creek Friday(3) Sebastian(4) Corporate(5) Total Silver
Cost of sales and
other direct
production costs and
depreciation,
depletion and
amortization $ 157,910 $ 35,787 $ 18,271 $ 211,968
Depreciation,
depletion and
amortization (37,152 ) (5,152 ) (3,149 ) (45,453 )
Treatment costs 58,517 7,502 232 66,251
Change in product
inventory 1,749 807 681 3,237
Reclamation and other
costs (1) (478 ) - (1,050 ) (1,528 )
Exclusion of Lucky
Friday costs - (38,944 ) (38,944 )
Cash Cost, Before
By-product Credits
(2) 180,546 - 14,985 195,531
Reclamation and other
costs 2,365 - 342 2,707
Exploration 374 - - 1,362 1,736
Sustaining capital 18,276 - 299 38 18,613
General and
administrative (1) 26,263 26,263
AISC, Before
By-product Credits
(2) 201,561 - 15,626 244,850
By-product credits:
Zinc (59,711 ) - (59,711 )
Gold (57,850 ) (10,402 ) (68,252 )
Lead (22,208 ) - (22,208 )
Total By-product
credits (139,769 ) - (10,402 ) (150,171 )
Cash Cost, After
By-product Credits $ 40,777 $ - $ 4,583 $ 45,360
AISC, After
By-product Credits $ 61,792 $ - $ 5,224 $ 94,679
Divided by silver
ounces produced 8,164 - 772 8,936
Cash Cost, Before
By-product Credits,
per Silver Ounce $ 22.11 $ - $ 19.40 $ 21.89
By-product credits
per ounce (17.12 ) - (13.47 ) (16.81 )
Cash Cost, After
By-product Credits,
per Silver Ounce $ 4.99 $ - $ 5.93 $ 5.08
AISC, Before
By-product Credits,
per Silver Ounce $ 24.69 $ - $ 20.23 $ 27.40
By-product credits
per ounce (17.12 ) - (13.47 ) (16.81 )
AISC, After
By-product Credits,
per Silver Ounce $ 7.57 $ - $ 6.76 $ 10.59
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Table of Contents
In thousands (except per ounce
amounts) Nine Months Ended September 30, 2020
Nevada
Casa Berardi(6) Operations(7) Total Gold
Cost of sales and other direct
production costs and depreciation,
depletion and amortization $ 147,728 $ 44,348 $ 192,076
Depreciation, depletion and
amortization (51,149 ) (22,725 ) (73,874 )
Treatment costs 1,693 45 1,738
Change in product inventory 1,751 15,869 17,620
Reclamation and other costs (1) (637 ) (978 ) (1,615 )
Exclusion of Nevada Operations
costs - (13,178 ) (13,178 )
Cash Cost, Before By-product
Credits (2) 99,386 23,381 122,767
Reclamation and other costs 287 654 941
Exploration 1,493 - 1,493
Sustaining capital 24,413 1,600 26,013
AISC, Before By-product Credits
(2) 125,579 25,635 151,214
By-product credits:
Silver (285 ) (635 ) (920 )
Total By-product credits (285 ) (635 ) (920 )
Cash Cost, After By-product
Credits $ 99,101 $ 22,746 $ 121,847
AISC, After By-product Credits $ 125,294 $ 25,000 $ 150,294
Divided by gold ounces produced 84 32 116
Cash Cost, Before By-product
Credits, per Gold Ounce $ 1,184 $ 736 $ 1,061
By-product credits per ounce (3 ) (20 ) (8 )
Cash Cost, After By-product
Credits, per Gold Ounce $ 1,181 $ 716 $ 1,053
AISC, Before By-product Credits,
per Gold Ounce $ 1,496 $ 807 $ 1,307
By-product credits per ounce (3 ) (20 ) (8 )
AISC, After By-product Credits,
per Gold Ounce $ 1,493 $ 787 $ 1,299
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Table of Contents
In thousands (except per ounce
amounts) Nine Months Ended September 30, 2020
Total
Silver Total Gold Total
Cost of sales and other direct
production costs and depreciation,
depletion and amortization $ 211,968 192,076 $ 404,044
Depreciation, depletion and
amortization (45,453 ) (73,874 ) (119,327 )
Treatment costs 66,251 1,738 67,989
Change in product inventory 3,237 17,620 20,857
Reclamation and other costs (1) (1,528 ) (1,615 ) (3,143 )
Exclusion of costs (38,944 ) (13,178 ) (52,122 )
Cash Cost, Before By-product
Credits (2) 195,531 122,767 318,298
Reclamation and other costs 2,707 941 3,648
Exploration 1,736 1,493 3,229
Sustaining capital 18,613 26,013 44,626
General and administrative (1) 26,263 - 26,263
AISC, Before By-product Credits
(2) 244,850 151,214 396,064
By-product credits:
Zinc (59,711 ) - (59,711 )
Gold (68,252 ) - (68,252 )
Lead (22,208 ) - (22,208 )
Silver (920 ) (920 )
Total By-product credits (150,171 ) (920 ) (151,091 )
Cash Cost, After By-product
Credits $ 45,360 $ 121,847 $ 167,207
AISC, After By-product Credits $ 94,679 $ 150,294 $ 244,973
Divided by ounces produced 8,936 116
Cash Cost, Before By-product
Credits, per Ounce $ 21.89 $ 1,061
By-product credits per ounce (16.81 ) (8 )
Cash Cost, After By-product
Credits, per Ounce $ 5.08 $ 1,053
AISC, Before By-product Credits,
per Ounce $ 27.40 $ 1,307
By-product credits per ounce (16.81 ) (8 )
AISC, After By-product Credits,
per Ounce $ 10.59 $ 1,299
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Table of Contents
In thousands (except per
ounce amounts) Nine Months Ended September 30, 2019
Greens Lucky San Total
Creek Friday(3) Sebastian Corporate(5) Silver
Cost of sales and other
direct production costs
and depreciation,
depletion and
amortization $ 140,237 $ 11,149 $ 36,338 $ 187,724
Depreciation, depletion
and amortization (32,228 ) (891 ) (6,934 ) (40,053 )
Treatment costs 34,319 1,834 432 36,585
Change in product
inventory 9,168 708 (1,378 ) 8,498
Reclamation and other
costs (1,439 ) - (1,030 ) (2,469 )
Exclusion of Lucky
Friday costs - (12,800 ) - (12,800 )
Cash Cost, Before
By-product Credits (2) 150,057 - 27,428 177,485
Reclamation and other
costs 2,212 - 369 2,581
Exploration 625 - 4,452 1,105 6,182
Sustaining capital 22,943 - 1,496 73 24,512
General and
administrative 26,855 26,855
AISC, Before By-product
Credits (2) 175,837 - 33,745 237,615
By-product credits:
Zinc (67,957 ) - (67,957 )
Gold (49,385 ) - (16,193 ) (65,578 )
Lead (20,764 ) - (20,764 )
Total By-product credits (138,106 ) - (16,193 ) (154,299 )
Cash Cost, After
By-product Credits $ 11,951 $ - $ 11,235 $ 23,186
AISC, After By-product
Credits $ 37,731 $ - $ 17,552 $ 83,316
Divided by ounces
produced 7,149 - 1,446 8,595
Cash Cost, Before
By-product Credits, per
Ounce $ 20.99 $ - $ 18.97 $ 20.65
By-product credits per
ounce (19.32 ) - (11.20 ) (17.95 )
Cash Cost, After
By-product Credits, per
Ounce $ 1.67 $ - $ 7.77 $ 2.70
AISC, Before By-product
Credits, per Ounce $ 24.60 $ - $ 23.34 $ 27.65
By-product credits per
ounce (19.32 ) - (11.20 ) (17.95 )
AISC, After By-product
Credits, per Ounce $ 5.28 $ - $ 12.14 $ 9.70
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Table of Contents
In thousands (except per ounce
amounts) Nine Months Ended September 30, 2019
Nevada
Casa Berardi Operations Total Gold
Cost of sales and other direct
production costs and depreciation,
depletion and amortization $ 157,239 $ 105,277 $ 262,516
Depreciation, depletion and
amortization (53,806 ) (45,179 ) (98,985 )
Treatment costs 1,429 119 1,548
Change in product inventory 971 (3,097 ) (2,126 )
Reclamation and other costs (385 ) (1,641 ) (2,026 )
Cash Cost, Before By-product
Credits (2) 105,448 55,479 160,927
Reclamation and other costs 386 1,134 1,520
Exploration 2,890 2,048 4,938
Sustaining capital 28,360 27,565 55,925
AISC, Before By-product Credits
(2) 137,084 86,226 223,310
By-product credits:
Silver (328 ) (2,551 ) (2,879 )
Total By-product credits (328 ) (2,551 ) (2,879 )
Cash Cost, After By-product
Credits $ 105,120 $ 52,928 $ 158,048
AISC, After By-product Credits $ 136,756 $ 83,675 $ 220,431
Divided by ounces produced 100 45 145
Cash Cost, Before By-product
Credits, per Ounce $ 1,058 $ 1,221 $ 1,109
By-product credits per ounce (3 ) (56 ) (20 )
Cash Cost, After By-product
Credits, per Ounce $ 1,055 $ 1,165 $ 1,089
AISC, Before By-product Credits,
per Ounce $ 1,376 $ 1,897 $ 1,540
By-product credits per ounce (3 ) (56 ) (20 )
AISC, After By-product Credits,
per Ounce $ 1,373 $ 1,841 $ 1,520
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In thousands (except per ounce
amounts) Nine Months Ended September 30, 2019
Total
Silver Total Gold Total
Cost of sales and other direct
production costs and depreciation,
depletion and amortization $ 187,724 262,516 $ 450,240
Depreciation, depletion and
amortization (40,053 ) (98,985 ) (139,038 )
Treatment costs 36,585 1,548 38,133
Change in product inventory 8,498 (2,126 ) 6,372
Reclamation and other costs (2,469 ) (2,026 ) (4,495 )
Exclusion of Lucky Friday costs (12,800 ) - (12,800 )
Cash Cost, Before By-product
Credits (2) 177,485 160,927 338,412
Reclamation and other costs 2,581 1,520 4,101
Exploration 6,182 4,938 11,120
Sustaining capital 24,512 55,925 80,437
General and administrative 26,855 - 26,855
AISC, Before By-product Credits
(2) 237,615 223,310 460,925
By-product credits:
Zinc (67,957 ) - (67,957 )
Gold (65,578 ) - (65,578 )
Lead (20,764 ) - (20,764 )
Silver (2,879 ) (2,879 )
Total By-product credits (154,299 ) (2,879 ) (157,178 )
Cash Cost, After By-product
Credits $ 23,186 $ 158,048 $ 181,234
AISC, After By-product Credits $ 83,316 $ 220,431 $ 303,747
Divided by ounces produced 8,595 145
Cash Cost, Before By-product
Credits, per Ounce $ 20.65 $ 1,109
By-product credits per ounce (17.95 ) (20 )
Cash Cost, After By-product
Credits, per Ounce $ 2.70 $ 1,089
AISC, Before By-product Credits,
per Ounce $ 27.65 $ 1,540
By-product credits per ounce (17.95 ) (20 )
AISC, After By-product Credits,
per Ounce $ 9.70 $ 1,520
(1) Excludes the discretionary portion of general and administrative costs for
2020.
(2) Includes all direct and indirect operating costs related to the physical
activities of producing metals, including mining, processing and other plant
costs, third-party refining and marketing expense, non-discretionary on-site
general and administrative costs, royalties and mining production taxes,
before by-product revenues earned from all metals other than the primary
metal produced at each unit. AISC, Before By-product Credits also includes
on-site exploration, reclamation, and sustaining capital costs.
(3) The unionized employees at Lucky Friday were on strike from
of the strike. Costs related to ramp-up activities totaling
the first nine months of 2020, and suspension-related costs totaling
million during the strike in the first half of 2019, along with
and
periods, have been excluded from the calculations of cost of sales and other
direct production costs and depreciation, depletion and amortization, Cash
Cost, Before By-product Credits, Cash Cost, After By-product Credits, AISC,
Before By-product Credits, and AISC, After By-product Credits.
(4) In early
industry to reduce operations to a minimum level until
to COVID-19, and the order was subsequently extended until
operations at
Suspension-related costs totaling
2020 are reported in a separate line item on our consolidated statements of
operations and excluded from the calculations of cost of sales and other
direct production costs and depreciation, depletion and amortization, mining
and milling cost per ton, and Cash Cost and AISC, After By-product Credits,
per Gold Ounce.
(5) AISC, Before By-product Credits for our consolidated silver properties
includes non-discretionary corporate costs for general and administrative
expense, exploration and sustaining capital.
(6) In late
reduce to minimum operations as part of the fight against COVID-19, causing
us to suspend our
mining operations resumed, resulting in reduced mill throughput.
Suspension-related costs totaling
2020 are reported in a separate line item on our consolidated statements of
operations and excluded from the calculations of cost of sales and other
direct production costs and depreciation, depletion and amortization and Cash
Cost and AISC, After By-product Credits, per Gold Ounce.
(7) Production was suspended at the
and at the Midas mine and Aurora mill in late-2019. Suspension-related costs
at
months of 2020 are reported in a separate line item on our consolidated
statements of operations and excluded from the calculations of cost of sales
and other direct production costs and depreciation, depletion and
amortization and Cash Cost and AISC, After By-product Credits, per Gold
Ounce. During the third quarter of 2020, all ore mined at Nevada Operations
was stockpiled, with no ore milled and no production reported during the
period. As a result, costs incurred at Nevada Operations during the third
quarter of 2020 were excluded from the calculations of Cash Cost and AISC,
After By-product Credits, per Gold Ounce.
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Financial Liquidity and Capital Resources
Our liquid assets include (in millions):
September 30, December 31,
2020 2019
Cash and cash equivalents held in U.S. dollars $ 68.9 $ 50.3
Cash and cash equivalents held in foreign currency 29.8 12.2
Total cash and cash equivalents 98.7 62.5
Marketable equity securities - non-current 17.4 6.2
Total cash, cash equivalents and investments $ 116.1 $ 68.7
Cash and cash equivalents increased by $36.2 million in the first nine months of
2020. Cash held in foreign currencies represents balances in Canadian dollars
and Mexican pesos, with the $17.6 million increase in the first nine months of
2020 resulting from an increase in Canadian dollars held. The balance for
non-current marketable equity securities increased by $11.2 million (see Note 2
of Notes to Condensed Consolidated Financial Statements (Unaudited) for more
information).
On February 19, 2020 , we completed an offering of Senior Notes in the total
principal amount of US$475 million . The Senior Notes are due February 15, 2028
and bear interest at a rate of 7.25% per year from the most recent payment date
to which interest has been paid or provided for. The net proceeds from the
Senior Notes were used, along with cash on hand, to redeem, in March 2020 , our
previously-outstanding 2021 Notes having a principal balance of $506.5 million .
Also, in July 2018 we entered into a new $250 million revolving credit facility.
Interest is payable on amounts drawn from the revolving credit facility at a
rate of between 2.25% and 4.00% over the London Interbank Offered Rate, or
between 1.25% and 3.00% over an alternative base rate, with interest payable on
March 31 , June 30 , September 30 , and December 31 of each year. As a precaution
due to uncertainties of the duration, severity and scope of the COVID-19
outbreak, we drew $210.0 million on the facility in the first quarter of 2020.
We repaid the $210.0 million during the second and third quarters of 2020, with
no amount outstanding as of the end of the third quarter. In July 2020 we agreed
to issue CAD$50 million (approximately USD$36.8 million at the time of the
transaction) in aggregate principal amount of our IQ Notes, which mature in July
2025 and bear interest at a rate of 6.515% per year. The IQ Notes were issued at
a premium of 103.65%, implying an effective annual yield of 5.74% and an
aggregate principal amount to be repaid of CAD$48.2 million . The IQ Notes were
issued in four equal installments of CAD$12.5 million in July, August, September
and October 2020 , with the first installment issued net of CAD$0.6 million in
fees. The net proceeds from the IQ Notes are available for general corporate
purposes, including for open market purchases of a portion of the Senior Notes
and to pay for capital expenditures at our Casa Berardi unit. Under the note
purchase agreement for the IQ Notes and subject to a force majeure event, we are
required to invest in the aggregate CAD$100 million at the Casa Berardi unit and
other exploration and development projects in Quebec over the four-year period
commencing on July 9, 2020 . See Note 9 of Notes to Condensed Consolidated
Financial Statements (Unaudited) for more information on our debt arrangements.
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We continue to address the COVID-19 outbreak and face uncertainty related to the potential additional impact it could have on our operations. It is possible that future restrictions at Casa Berardi,San Sebastian orGreens Creek (or at any other operation) could have an adverse impact on operations or 2020 financial results, including materially so, beyond the third quarter of 2020. We have taken precautionary measures to mitigate the impact of COVID-19, including implementing operational plans and practices and increasing our cash reserves through a temporary draw-down of our revolving credit facility, which has since been fully repaid. As long as they are required, the operational practices implemented could continue to have an adverse impact on our operating results due to deferred production and revenues or additional costs. If required, increasing or prolonged restrictions on our operations could require access to additional sources of liquidity, which may not be available to us. See Part II, Item 1A. Risk Factors - Natural disasters, public health crises, political crises, and other catastrophic events or other events outside of our control may materially and adversely affect our business or financial results in our quarterly report on Form 10-Q for the period endedMarch 31, 2020 for information on how restrictions related to COVID-19 have affected some of our operations. As further discussed in the Lucky Friday Segment section above, the union employees at Lucky Friday were on strike fromMarch 13, 2017 until the strike ended onJanuary 7, 2020 , and production at Lucky Friday has been limited since the start of the strike. Re-staffing of the mine has been substantially completed with the ramp-up process ahead of schedule, and the mine has returned to full production starting with the fourth quarter of 2020. 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$4.0 million in the first nine months of 2020 and$3.7 million in the first nine months of 2019. 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. InSeptember 2020 , we increased our minimum annual dividend from$0.01 per share to$0.015 per share and reduced the realized silver price threshold for the silver-price-linked component from$30 per ounce to$25 per ounce beginning with the third quarter of 2020, and in the third quarter of 2020 the realized price of$25.32 exceeded the new threshold. As a result, onNovember 6, 2020 , our board of directors declared a quarterly cash dividend of$0.00875 per share of common stock, consisting of$0.005 per share for the silver price-linked component and$0.00375 for the minimum annual dividend component, payable inDecember 2020 . 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. OnMay 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 ofSeptember 30, 2020 , 934,100 shares had 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 atNovember 4, 2020 , was$4.77 per share. No shares were purchased under the program during the first nine months of 2020. 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 other forms of financing. There can be no assurance that such financing will be available to us. 63
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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 availability of our revolving credit facility, we believe we will be able to meet our obligations and other potential cash requirements during the next 12 months from the date of this report. Our obligations and other uses of cash may include, but are not limited to: debt service obligations related to the Senior Notes and IQ Notes; principal and interest payments under our revolving credit facility; deferral of revenues, care-and-maintenance and other costs related to addressing the impact of COVID-19 on our operations; capital expenditures at our operations; potential acquisitions of other mining companies or properties; 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 a total of approximately$90 million will be spent on capital expenditures, primarily for equipment, infrastructure, and development at our mines, in 2020, including$59.7 million incurred in the first nine months of 2020. We also estimate exploration and pre-development expenditures will total approximately$16.2 million in 2020, including$9.8 million already incurred in the first nine months of 2020. Our expenditures for these items and our related plans for 2020 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 revenues and costs, sources of liquidity available to us, including the revolving credit facility, and other factors. A sustained downturn in metals prices, significant increase in operational or capital costs or other uses of cash, our inability to access the credit facility or the sources of liquidity discussed above, or other factors beyond our control could impact our plans. Nine Months EndedSeptember 30 ,September 30, 2020 2019
Cash provided by operating activities (in millions) $ 115.9
$ 63.6
Cash provided by operating activities in the first nine months of 2020 increased
by $52.3 million compared to the same period in 2019 due to higher net income,
as adjusted for non-cash items, partially offset by the impact of working
capital and other operating asset and liability changes. Working capital and
other operating asset and liability changes resulted in a net cash flow increase
of $5.2 million in the first nine months of 2020 compared to a net increase of
$8.4 million in the first nine months of 2019. The $3.2 million variance in
working capital changes is primarily attributable to higher inventories, lower
reductions in prepaid taxes in Mexico , and lower accounts payable balances,
partially offset by increased accruals for incentive compensation and income
taxes.
Nine Months Ended
September 30 , September 30,
2020 2019Cash used in investing activities (in millions) $ (55.7 ) $
(95.9 )
During the first nine months of 2020, we invested $54.4 million in capital
expenditures, not including $5.7 million in non-cash capital lease additions, a
decrease of $43.0 million compared to the same period in 2019. The variance is
due to reduced expenditures at all of our operations except Lucky Friday , where
we have been preparing for a return to production after the end of the strike in
January 2020 . We purchased marketable equity securities having a cost basis of
$1.7 million and $0.4 million during the first nine months of 2020 and 2019,
respectively, and sold marketable equity securities for proceeds of $1.8 million
in the 2019 period.
Nine Months Ended
September 30 , September 30,
2020 2019Cash (used in) provided by financing activities (in millions) $ (22.0 ) $ 37.6
In the first nine months of 2020, we received$469.5 million and$27.6 million in net proceeds from the issuance of our Senior Notes and IQ Notes, respectively, and drew$210.0 million on our revolving credit facility, and had debt repayments of$506.5 million for redemption of our 2021 Notes and$210.0 million for our revolving credit facility. In the first nine months of 2019, we drew$245.0 million and had repayments of$195.0 million on our revolving credit facility. We made repayments on our capital leases of$4.2 million and$5.5 million in the nine-month periods endedSeptember 30, 2020 and 2019, respectively. During the first nine months of 2020 and 2019, we paid cash dividends on our common stock totaling$4.0 million and$3.7 million , respectively, and cash dividends of$0.4 million on our Series B Preferred Stock in each of those periods. We acquired treasury shares for$2.7 million and$2.2 million in the first nine months of 2020 and 2019, respectively, as a result of our employees' elections to utilize net share settlement to satisfy their tax withholding obligations related to incentive compensation paid in stock and vesting of restricted stock units. See Note 8 of Notes to Condensed Consolidated Financial Statements (Unaudited) for more information. 64
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Contractual Obligations, Contingent Liabilities and Commitments
The table below presents our fixed, non-cancelable contractual obligations and commitments primarily related to our Senior Notes, IQ Notes, revolving credit facility, outstanding purchase orders, certain service contract commitments and lease arrangements as ofSeptember 30, 2020 (in thousands): Payments Due By Period Less than More than 1 year 1-3 years 3-5 years 5 years Total Purchase obligations (1)$ 12,531 $ - $ - $ -$ 12,531 Contractual obligations (2) 698 - - - 698 Finance lease commitments (3) 6,549 7,112 1,328 - 14,989
Operating lease commitments (4) 3,883 5,689 1,566
2,464 13,602
Supplemental executive
retirement plan (5) 621 1,573 2,244 6,082 10,520
Revolving credit facility (6) 1,722 3,445 613 - 5,780
Senior Notes (7) 34,438 137,750 556,789 - 728,977
IQ Notes (8) 2,341 4,712 40,342 - 47,395
Total contractual cash
obligations $ 62,783 $ 160,281 $ 602,882 $ 8,546 $ 834,492 (1) Consists of open purchase orders of approximately
Creek unit,
Berardi unit and $3.3 million at the Nevada Operations unit.
(2) As of
for various items at Greens Creek .
(3) Includes scheduled finance lease payments of
equipment at our
Operations 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).
(4) 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.
(5) These amounts represent our estimate of the future funding requirements for
the supplemental executive retirement plan. We believe we will also have
funding requirements related to our defined benefit plans in future years;
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.
(6) We have a $250 million revolving credit agreement under which we arerequired to pay a standby fee of between 0.5625% and 1.00% per annum on
undrawn amounts and interest of between 2.25% and 4.00% over the
Interbank Offered Rate or between 1.25% and 3.00% over an alternative base
rate on drawn amounts under the revolving credit agreement. We had
million in letters of credit outstanding as of September 30, 2020 . The
amounts in the table above assume no additional amounts will be drawn infuture periods, and include only the standby fee on the current undrawn
balance. For more information on our credit facility, see Note 9 of Notes to
Condensed Consolidated Financial Statements (Unaudited).
(7) On
principal amount of our Senior Notes due
bear interest at a rate of 7.25% per year from the original date of issuance
or the most recent payment date to which interest has been paid or provided
for. Interest on the Senior Notes is payable on
each year, commencing
Consolidated Financial Statements (Unaudited) for more information.
(8) On
we issued
transaction) in aggregate principal amount of our IQ Notes. The IQ Notes
were issued at a premium of 103.65%, or CAD$1.8 million , implying an
effective annual yield of 5.74% and an aggregate principal amount to be
repaid of CAD$48.2 million . The IQ Notes were issued in four equal
installments of CAD$12.5 million on July 9 , August 9 , September 9 and
of 6.515% per year, payable on
Statements (Unaudited) for more information.
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We record liabilities for costs associated with mine closure, reclamation of land and other environmental matters. AtSeptember 30, 2020 , our liabilities for these matters totaled$106.0 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
AtSeptember 30, 2020 , we had no existing off-balance sheet arrangements, as defined underSEC 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 Part IV of our annual report filed on Form 10-K for the year endedDecember 31, 2019 . As described in such Note 1, 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 are highly uncertain at the time the accounting estimates are 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, equipment and mineral interests, deferred tax assets, and certain accounts receivable. Metals prices are also an important component in the estimation of reserves. As shown under Part I, Item 1. - Business in our annual report filed on Form 10-K for the year endedDecember 31, 2019 , 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 can be influenced by several factors, including: the value of theU.S. dollar and other currencies, changingU.S. budget deficits, widening availability of exchange-traded funds, interest rate levels, the health of credit markets, and inflationary expectations. Uncertainty related to the political environment in theU.S. ,Britain's exit from theEuropean Union ,U.S. and global trading policies (including tariffs), and a global economic recovery, including recent uncertainty inChina and from the current downturn and continued uncertainty resulting from the COVID-19 outbreak, 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 other retail products. We believe that long-term industrial and economic trends, including urbanization and growth of the middle class in countries such asChina andIndia , will result in continued consumer demand for silver and gold and industrial demand for silver. However, the global economy has been significantly impacted by the COVID-19 outbreak, with the ultimate severity and duration of the downturn unknown, andChina has recently experienced economic contraction which could resume in the future. 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). 66
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Sales of concentrates sold directly to customers are recorded as revenues upon completion of the performance obligation and transfer of control of the product to the customer (generally at the time of shipment) using estimated forward metals prices for the estimated month of settlement. Due to the time elapsed between 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 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 Note 6 of Notes to Condensed Consolidated Financial Statements (Unaudited). We utilize financially-settled forward and put option 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 Part I,
Item 2. - Properties in our annual report filed on Form 10-K for the year ended
Reserves are a key component in the valuation of our properties, plants,
equipment and mineral interests. 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. Annual reserve estimates are also used to
determine conversions of mineral assets beyond the known reserve resulting from
business combinations to depreciable reserves, in periods subsequent to the
business combinations (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 mineral
assets beyond the known reserve). These estimates include future metals prices
and mineral reserves, as discussed above. Management may also be required to
make estimates related to the valuation of deferred tax assets or liabilities as
part of the purchase price allocation for business combinations. In some cases,
we use third-party appraisers to determine the fair values 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.
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