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Hecla Mining Company 2017 Annual Report

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Hecla Mining Company 2017 Annual Report CREATING VALUE THROUGH INNOVATIVE MINING 2017 ANNUAL REPORT Greens Creek Admiralty Island, Alaska Kinskuch Alice Arm, BC Opinaca / Wildcat Rock Creek James Bay, Quebec Silver Valley Noxon, Montana Wallace, Idaho Casa Berardi Vancouver, BC Montanore Val d’Or, Quebec Libby, Montana Val d’Or, Quebec Coeur d’Alene, Idaho Fayolle Val d’Or, Quebec Heva–Hosco Lucky Friday Val d’Or, Quebec Mullan, Idaho Monte Cristo Esmeralda County, Nevada San Juan Silver Creede, Colorado operating mine pre-development project San Sebastian Durango, Mexico exploration project corporate office Innovations such as the tele-remote load-haul-dump at Greens Creek and the automated shaft at Casa Berardi can increase productivity and safety, generating significant returns on investment. FINANCIAL HIGHLIGHTS (Dollars in thousands except in per-share and per-ounce amounts. As of December 31.) FINANCIAL DATA 2017 2016 Sales of products $ 577,775 $ 645,957 Gross profit 156,986 191,506 Cash flow provided by operating activities 115,878 225,328 Net income (loss) (23,519) 69,547 Net income (loss) applicable to common shareholders (24,071) 68,995 Basic income (loss) per common share (0.06) 0.18 Cash, cash equivalents, and short-term investments 219,865 198,894 Capital expenditures 105,393 163,128 YEAR-END DATA Common shares outstanding (in thousands) 399,176 395,287 Weighted average number of shares outstanding for the year – basic (in thousands) 397,394 386,416 Employees 1,431 1,396 OPERATIONAL DATA Silver production (oz) 12,484,844 17,177,317 Gold production (oz) 232,684 233,929 Lead production (tons) 22,733 42,472 Zinc production (tons) 55,107 68,516 Cost of sales and other direct production costs and depreciation, depletion and amortization $ 420,789 $ 454,451 All-in sustaining cost, after by-product credits, per silver ounce (1) $ 7.86 $ 11.68 All-in sustaining cost, after by-product credits, per gold ounce (1) $ 1,174 $ 1,244 Cash cost, after by-product credits, per silver ounce (2) $ (0.01) $ 3.10 Cash cost, after by-product credits, per gold ounce (2) $ 820 $ 764 (1) All-in sustaining cost (AISC), after by-product credits, is a non-GAAP measurement, a reconciliation of which to cost of sales and other direct production costs and depreciation, depletion and amortization, the closest GAAP measurement, can be found in the 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) section in the company’s Form 10-K. AISC, after by-product credits, includes cost of sales and other direct production costs, expenses for reclamation and exploration at the mines sites, corporate exploration related to sustaining operations, and all site sustaining capital costs. AISC, after by-product credits, is calculated net of depreciation, depletion, and amortization and by-product credits. 2016 is the first year this non-GAAP number has been reported. (2) Cash costs, after by-product credits, per ounce of silver and gold represent a non-U.S. generally accepted accounting principles (GAAP) measurement. A reconciliation of cash costs, after by-product credits, to cost of sales and other direct production costs and depreciation, depletion and amortization (the most comparable GAAP measure) can be found in the Reconciliation of Cash Cost, Before By-product Credits, and Cash Cost, After By-product Credits (non-GAAP) to Cost of Sales and Other Direct Production Costs and Depreciation, Depletion and Amortization (GAAP) section in the company’s Form 10-K. HL | 1 “WE’RE CREATING VALUE: IMPROVING PRODUCTIVITY AND SAFETY THROUGH GAME- CHANGING TECHNOLOGICAL INNOVATION.” Phillips S. Baker, Jr. president and chief executive officer The first step to innovation is to Wi-Fi the mines, which opens up a world of information and control – like the ventilation-on-demand system at Greens Creek. HL | 2 DEAR FELLOW SHAREHOLDER, It was a good year for Hecla – both operationally and financially. We achieved the second-highest silver and third-highest gold production in the 127-year history of the company. We produced 12.5 million ounces of silver and 232,684 ounces of gold, at a low cash cost per silver ounce, after by-product credits, ending the year with cash, cash equivalents, and short-term investments of $220 million, a $21 million increase over the prior year. We’ve also had good success with drilling, recording the highest silver, gold, and lead reserves in our history, as well as the fifth highest zinc reserves. And we lowered our All Injury Frequency Rate for the fifth year in a row, exceeding our goal of a 50% reduction in five years. Each of these achievements is a direct result of our strategy: adding value through the ownership of high- quality, long-lived assets in good mining jurisdictions – and investing in those assets to extend their lives even further, making them more productive and safer along the way. And we continue to implement this strategy. We’ve recently reached a definitive arrangement agreement to acquire Klondex Mines Ltd. Klondex is a gold producer with several mines in Nevada, one of the most important gold-producing areas in North America. Among our many strengths is the ability to operate high- grade, narrow-vein underground mines, and Klondex’s three mines – Fire Creek, Midas, and Hollister – share these attributes. This acquisition will bring immediate and significant gold production and cash flow to Hecla, as well as excellent exploration potential to increase the lives of these mines. Assuming an affirmative vote from Klondex shareholders and that all court and regulatory approvals are obtained, the transaction is expected to close in the second quarter of 2018. INNOVATION 2017 marked my fourteenth year leading Hecla Mining Company, and it’s the most interesting and satisfying time of my career. We are in an exciting era of rapid technology advancement, and its adoption allows us to focus on fundamentally improving the value proposition of everything we do. Our business is already changing, and we’re going to see a seismic shift in this industry over the next five to 15 years. But we made a strategic decision to not wait. Technology is being developed right now that can profoundly alter the way we operate, and we want to get as much of that value into our existing operations as soon as we can – in order to take advantage of it for as long as we can. The technological investments we’ve made at our operating mines are incremental and low-risk: small changes with potentially significant returns. I believe there is a strategic advantage to being an early adopter, because it enables us to gain experience with the new technologies in the mine, then use that information across our organization – and build on that knowledge. One example is installing Wi-Fi in our mines – which we’ve completed in-house rather than hiring contractors – to not only allow for the collection and transfer of information, but also to open the door to other innovations. Ultimately, efforts like these put us in a better position when we’re looking to acquire new assets; to apply that knowledge and find value where others don’t see it. It’s not about putting together a purely autonomous operation. That’s possible, of course – and will no doubt be implemented by some companies over the course of the next 15-20 years. But that’s not our focus, because that’s not what’s going to create real value for our shareholders. Our view is that it’s more important to develop areas within working mines where machines can do some of the work faster and, most important, safer than people can on their own. Given the unique conditions and environment in which underground mining takes place, the technologies and innovations I’m talking about are, to a degree, borrowed from other industries and applied in different ways. For example, at the Lucky Friday, where we’re planning to mine at even greater depths thanks to the completion of the #4 Shaft in 2017, mechanical rock cutting is an important step toward significantly increasing safety and making the mine more productive and predictable – and has the potential to replace traditional drilling and blasting with cutting technology. After a joint R&D effort with Epiroc (Atlas Copco), a leader in the field, we’ll take delivery of a Remote Vein Miner, essentially a form of tunnel-boring machine adapted for HL | 3 narrow-vein underground mining, in 2019. We’re also implementing ventilation-on-demand at our Greens Creek mine. By mounting variable frequency drives to our underground fans, we’re able to operate those fans at the right speeds at the right time, which in turn lowers our power consumption. Just one of these drives can save about $23,000 over the course of a single year – and we have 14 of them operating in a test (out of a total of 55) right now. We’re already saving money today, and can roll out this technology throughout Greens Creek and our other mines to potentially save even more in the future. In addition, these technologies are lowering our environmental footprint – reducing green- house gas emissions, potentially reducing the volume of non-ore material brought to the surface, and improving water management at our mines. Other new technologies being introduced include battery-powered LHDs, semi-autonomous LHDs with surface controls, automated shaft and remote rock breakers, laser spectrometry to assist in exploration drilling, and computer-guided drills (for both development and production).
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