<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 20-F
(Mark One)
___ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
OR
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- - --- ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
-----------------
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _________________ to _________________
Commission file number _________________________________________________________
Meridian Gold Inc.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Canada
- - --------------------------------------------------------------------------------
(Jurisdiction of incorporation or organization)
9670 Gateway Drive, Reno, NV 89511
- - --------------------------------------------------------------------------------
(address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
------------------- ------------------------
which registered
----------------
Common Shares, no par value New York Stock Exchange,
Toronto Stock Exchange
- - --------------------------------------- ------------------------------------
Securities registered or to be registered pursuant to Section 12(g) of the Act:
N/A
- - --------------------------------------------------------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
- - --------------------------------------------------------------------------------
(Title of Class)
Indicate the number of outstanding shares of each of the Company's classes of
capital or common stock as of the close of the period covered by the annual
report:
As of December 31, 1997, the Registrant had outstanding 73,601,495 Common
Shares and 10,000 Series 1 Preferred Shares
- - --------------------------------------------------------------------------------
1
<PAGE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 OR 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___
---
Indicate by check mark which financial statement item the registrant has elected
to follow.
ITEM 17 X ITEM 18 ___
---
2
<PAGE>
TABLE OF CONTENTS
-----------------
GLOSSARY..................................................................... 4
CAUTIONARY STATEMENT......................................................... 5
PART I
Item 1. Description of Business............................................. 6
Item 2. Description of Property............................................. 18
Item 3. Legal Proceedings................................................... 27
Item 4. Control of Registrant............................................... 28
Item 5. Nature of Trading Market............................................ 28
Item 6. Exchange Controls and Other Limitations Affecting Security Holders.. 29
Item 7. Taxation............................................................ 30
Item 8. Selected Financial Data............................................. 36
Item 9. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 37
Item 10. Directors and Officers of Registrant................................ 40
Item 11. Compensation of Directors and Officers.............................. 40
Item 12. Options to Purchase Securities From Registrant or Subsidiaries...... 43
Item 13. Interest of Management in Certain Transactions...................... 45
PART II
Item 14. Securities to be Registered......................................... 45
PART III
Item 15. Defaults Upon Senior Securities..................................... 45
Item 16. Changes in Securities and Changes in Security for Registered
Securities.......................................................... 45
PART IV
Item 17. Financial Statements................................................ 45
Item 18. Financial Statements................................................ 45
Item 19. Financial Statements and Exhibits................................... 45
SIGNATURES................................................................... 47
3
<PAGE>
Except as otherwise indicated, all dollar amounts in this Annual Report are
expressed in United States dollars.
The information set forth in this Annual Report is as of December 31, 1997
unless an earlier or later date is indicated.
Except as otherwise indicated, the financial information set forth in this
Annual Report is presented in accordance with Canadian generally accepted
accounting principles ("Canadian GAAP"). Differences between Canadian GAAP and
United States generally accepted accounting principles ("U.S. GAAP"), are
immaterial to the Company. See "Item 17. Financial Statements."
GLOSSARY
The following mining terms have the following meanings in this Annual
Report on Form 20-F (the "Annual Report"):
"carbon adsorption".....A process used to extract dissolved gold and silver from
solvents in leaching. Soluble complexes of gold and
silver physically adhere to activated carbon particles
without chemical reaction.
"cash cost of
production".............Includes site costs for all mining (except deferred
mining and deferred stripping costs), processing,
administration, resource taxes, and royalties but does
not include capital, exploration, depreciation and
financing costs. Total cash costs are reduced by by-
product silver credits, and are then divided by payable
gold ounces to arrive at net cash cost of production per
ounce.
"deposit"...............A mineralized body which has been physically delineated
by sufficient drilling, trenching, and/or underground
work, and found to contain a sufficient average grade of
metal or metals to warrant further exploration and/or
development expenditures; such a deposit does not
qualify as a commercially mineable ore body or as
containing ore reserves, until final technical and
economic factors have been resolved.
"development"...........The preparation of a known commercially mineable deposit
for mining.
"dore"..................Unrefined metal bars consisting mainly of gold, with
small amounts of silver and other metal impurities which
will be further refined by contracted refineries.
"exploration"...........The search for mineral deposits (reserves) which are not
in development or production.
"facies"................Part of a rock body as differentiated from other parts
by appearance or composition.
"heap leaching".........A process of extracting gold by placing broken ore on
sloping, impermeable pads and applying dilute cyanide
solution that dissolves a portion of the contained gold,
which is then recovered in a carbon column or Merrill-
Crowe circuit.
4
<PAGE>
"leach pad".............A large impermeable foundation or pad used as a base for
ore during heap leaching. The pad prevents the leach
solution from escaping out of the circuit.
"mill"..................A plant where ore is ground, usually to fine powder, and
the metals are extracted by physical and/or chemical
processes.
"mineralization"........Mineral-bearing rock; the minerals may have been either
a part of the original rock unit or injected at a later
time.
"ore"...................A metal or mineral bearing rock or a combination of
these of sufficient value as to quality and quantity to
enable it to be mined at a profit.
"ounces"................Troy ounces.
"probable reserves".....Reserves for which quantity and grade and/or quality are
computed from information similar to that used for
proven reserves, but the sites for inspection, sampling
and measurement are further apart or are otherwise less
adequately spaced. The degree of assurance, although
lower than that for proven reserves, is high enough to
assume continuity between points of observation.
"production"............The exploitation of a mineral deposit or reserve.
"proven reserves".......Reserves for which (a) quantity is computed from
dimensions revealed in outcrops, trenches, workings or
drill holes, and (b) the sites for inspection, sampling
and measurement are spaced so closely and the geological
character is so well defined that the size, shape, depth
and mineral content of reserves are well-established.
"reserve"...............That part of a mineral deposit which could be
economically extracted or produced at the time of the
reserve determination.
"stripping ratio".......The ratio of tonnage of waste material removed to allow
the mining of one ton of ore in an open pit.
CAUTIONARY STATEMENT
Certain statements in this Annual Report, including, without limitation,
statements in "Item 1. Description of Business" relating to reserves, refining
and marketing, and hedging policy, in "Item 2. Description of Property" related
to expected operating results at the Company's mines and the preliminary
feasibility study and mine plan at El Penon, and in "Item 9. Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company, or other future
events, to be materially different from any future results, performances or
achievements or other events expressly or impliedly predicted by such forward-
looking statements. Such risks, uncertainties and other factors are set forth
in "Item 1. Description of Business - Risk Factors" and elsewhere in this
Annual Report, and include, but are not limited to, factors associated with
fluctuations
5
<PAGE>
in the market price of precious metals, mining industry risks, recent operating
losses, uncertainty of title to properties, risk associated with foreign
operations, environmental risks and hazards, proposed legislation affecting the
mining industry, litigation, governmental regulation of the mining industry,
properties without known mineable reserves, uncertainty as to calculations of
ore reserves, mineral deposits and ore grades, requirement of additional
financing, uninsured risks, risk of hedging strategies, competition, dependence
on key management personnel, potential volatility of market price of common
shares, dilution and certain anti-takeover effects.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
-----------------------
ORGANIZATION
Meridian Gold Inc. ("Meridian" or the "Company") is a Canadian precious
metals mining and exploration Company that was incorporated in February 1996
under the Canada Business Corporations Act, and whose business is more
specifically described under the heading "- Business of the Company" below. As
used in this Annual Report, "Meridian" or the "Company" includes, unless the
context otherwise requires, the Company's direct and indirect subsidiaries.
Meridian's predecessor, FMC Gold Company ("FMC Gold"), was formed as a
Delaware corporation in 1987 through a combination of FMC Corporation's North
American Precious Metals interests. In June 1987, FMC Gold issued 7.5 million
shares of common stock to the public and FMC Corporation held the remaining
shares. In May 1990, FMC Gold issued 8.0 million shares of common stock to
acquire Meridian Gold Company. FMC Corporation held the remaining 58.8 million
shares of common stock, or 80% of the outstanding shares of FMC Gold, at that
time. Meridian was incorporated in Canada in February 1996, and, upon
completion of a reincorporation in July 1996, Meridian became the successor to
the business of FMC Gold. In connection with this reincorporation, FMC Gold
shareholders received one share of Meridian common stock ("Common Shares") and a
$0.02 per share return of capital, totaling approximately $1.5 million, in
exchange for each share of FMC Gold common stock. Additionally, FMC Corporation
sold its 80% interest in Meridian through a public offering in Canada of
Meridian's Common Shares in July 1996. Concurrent with FMC Corporation selling
its interest in Meridian, FMC Corporation made a capital contribution to
Meridian totaling approximately $3.7 million. The FMC Gold shares were
subsequently canceled.
The Company's registered office is located at Ladner Downs 1200 Waterfront
Centre 200 Burrard St. P.O. Box 48600 Vancouver BC V7X 1T2, and the executive
office is located at 9670 Gateway Drive, Reno, Nevada 89511.
6
<PAGE>
ORGANIZATIONAL CHART
The organizational structure of the Company and its subsidiaries, including
Meridian Gold Company (formerly FMC Gold), is as set forth below:
[GRAPH APPEARS HERE]
BUSINESS OF THE COMPANY
The Company and its predecessor organization, FMC Gold, have been engaged
in the mining and exploration of gold and other precious metals since 1981.
Meridian's principal revenue producing properties are its Beartrack Mine (100%
ownership) located near Salmon, Idaho, and the Jerritt Canyon mine (30%
ownership) located near Elko, Nevada. The Company also has advanced stage
exploration programs underway in Chile (the El Penon property) and in Nevada
(the Rossi property), and several early stage exploration programs located in
Chile, Idaho and Nevada.
The Company and its predecessors have produced over 3.6 million ounces of
gold from five mine sites since 1981. Since 1986, the Company has continuously
produced at least 150,000 ounces of gold annually from mining operations either
directly or through joint ventures. In 1997, the Company produced 203,000
ounces of gold from the Beartrack and Jerritt Canyon mines.
As of December 31, 1997, Meridian had total proven and probable reserves of
approximately 1.9 million ounces of gold, consisting of 894,000 ounces at El
Penon, 545,000 ounces at Beartrack, and 470,000 ounces at Jerritt Canyon.
7
<PAGE>
The Company's strategy is to expand its proven and probable reserves as
well as its mining and processing operations by (i) developing existing
producing properties and pursuing advanced stage exploration properties, (ii)
discovering new properties through its exploration program and (iii) making
selective acquisitions. The Company and its predecessors have spent a total of
approximately $80.4 million on exploration activities in the last five years.
The Company's predecessor established exploration offices in Santiago, Chile in
1993, which resulted in the discovery of gold at El Penon, and the company has
moved its business development group from Vancouver, British Columbia to Reno,
Nevada. As of December 31, 1997, the Company had $54.8 million of working
capital, of which $54.3 million consisted of cash and cash equivalents. The
Company believes these financial resources will enable it to pursue its growth
strategy.
RESERVES, PRODUCTION AND EXPLORATION
Reserves
The Company's internal estimates of proven and probable reserves as of
December 31, 1997 and December 31, 1996 are as follows:
GOLD ORE RESERVES (PROVEN AND PROBABLE) (1)
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------------------------- -------------------------------------------
Ore Tonnes (2) Grade Gold (3) Ore Tonnes (2) Grade Gold (3)
-------------- ----- -------- -------------- ----- --------
(grams per (oz) (grams per (oz)
tonne) tonne)
(in thousands, except grades)
<S> <C> <C> <C> <C> <C> <C>
El Penon 4,657 5.97 894 -- -- --
Beartrack (4) 13,821 1.22 545 23,224 1.13 848
Jerritt Canyon (30%) 1,924 7.61 470 2,540 6.99 571
----- -----
Total 1,909 1,419
</TABLE>
______________________________
(1) Reserves estimates for December 31, 1997 and 1996 were based on assumed
prices of $350 and $400 per ounce of gold respectively. Meridian's ore
reserves are relatively insensitive to a moderate change in gold price.
The 1997 year-end reserves have been audited or reviewed by the following
independent engineers:
. Beartrack Mine Reserve Associates (Audited)
. Jerritt Canyon Mine Reserve Development Inc. (AJ Simons) (Audited)
. El Penon Kvaerner Metals & MICON (Reviewed)
(2) Based on optimized mine plans, which incorporate as necessary the impacts
of dilution and access for Meridian's operations.
(3) Contained ounces exceed recoverable ounces due to metal losses experienced
during the extraction process. Precious metal recoveries are dependent on
the process used, grade of ore and metallurgy. Estimated recoveries are
as follows: Jerritt Canyon mill ore - 90%; Beartrack heap leach ore -
67%, El Penon mill ore 95%. These estimated recoveries have not been
reflected in the table above.
(4) At December 31, 1997, the Beartrack mine had approximately 13.2 million
tons containing 58,000 ounces of gold on the heap leach pad. These ounces
have not been included in Beartrack's ore reserves.
8
<PAGE>
PRODUCTION
Production data for the Company for the years ended December 31, 1997 and
December 31, 1996 are as follows:
PRODUCTION DATA
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1997 1996
------ ------
<S> <C> <C>
(in thousands)
Ore Processed (thousands of tonnes)
Beartrack............................................. 3,764 3,969
Jerritt Canyon (30%).................................. 419 726
Ore Grade (grams per tonne)
Beartrack............................................. .9 .9
Jerritt Canyon (30%).................................. 7.4 4.5
Recoveries
Beartrack............................................. 90% 90%
Jerritt Canyon (30%).................................. 86% 88%
Gold Production (thousands of ounces)
Beartrack............................................. 107 109
Jerritt Canyon (30%).................................. 96 93
Cash Cost of Production ($ per gold equivalent ounce)
Beartrack............................................. $202 $190
Jerritt Canyon (30%).................................. $209 $297
</TABLE>
EXPLORATION
The following table presents the Company's historical exploration
expenditures for the years ended December 31, 1997 and 1996. The amounts stated
for Jerritt Canyon represent the Company's 30% interest in the Jerritt Canyon
Joint Venture.
EXPLORATION EXPENDITURES
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1997 1996
------ ------
<S> <C> <C>
(in thousands)
Beartrack............................................ $ 922 $ 1,305
Jerritt Canyon....................................... 2,638 1,571
Rossi................................................ 2,935 1,969
Acquisitions......................................... 1,250 -
Other U.S. exploration............................... 2,391 1,502
El Penon (1)......................................... 18,929 5,795
Other foreign exploration............................ 2,042 1,215
------- -------
Total.................................................. $31,107 $13,357
</TABLE>
______________________________
(1) Includes $7.2 million dollars for evaluation and feasibility study.
9
<PAGE>
Refining and Marketing
The Company's gold and silver dore production is purchased and refined by
several European and United States refiners. Sales were to three refiners in
1997 and to two refiners in 1996, each representing 10 percent or more of
consolidated sales. Sales to these companies amounted to $68.7 million in 1997,
and $75.7 million in 1996. The Company believes that, because of the
availability of several alternative refiners, each able to supply all of such
services needed by the Company, no adverse effect would result should the
Company lose the services of any of its current refiners.
HEDGING POLICY
The Company has hedged portions of future gold production by entering into
put option contracts. At December 31, 1997, the carrying value of the remaining
options (at cost) was $1.8 million ($2.5 million at December 31, 1996). The
estimated market values of the put options as of December 31, 1997 and 1996,
were approximately $9.2 million and $3.3 million, respectively.
The options are exercisable at a strike price of $400 per ounce. The value of
these options varies with changes in the market price of gold. The options are
exercisable according to the following schedule:
OUNCES OF GOLD SUBJECT TO EXERCISE DATE
OPTIONS
------------------------- -----------------
33,000 December 29, 1998
32,000 December 29, 1999
32,000 December 27, 2000
27,000 December 27, 2001
-------
124,000
=======
The Company does not presently intend to engage in further hedging
transactions with respect to its production of precious minerals, but may decide
to do so in the future.
RISK FACTORS
The following is a brief discussion of those distinctive or special
characteristics of Meridian's operations and industry which may have a material
impact on, or constitute risk factors in respect of, Meridian's future financial
performance:
FLUCTUATIONS IN THE MARKET PRICE OF PRECIOUS METALS
The profitability of the Company's operations will be directly related to
the market price of gold and silver. The prices of gold and silver have
fluctuated widely, particularly in recent years, and are affected by numerous
factors beyond the Company's control, including expectations of inflation, the
relative exchange rate of the U.S. dollar, speculative activities, global and
regional demand and production, political and economic conditions and production
costs in major producing regions. The Company is unable to predict the
aggregate effect of these factors, all of which are beyond the Company's
control. If, as a result of a decline in the price of gold or silver, the
Company's marginal revenues were to fall below and remain below the marginal
costs of production at any particular mine for any
10
<PAGE>
significant period, the Company may experience losses at that mine and may
determine that it is not economically feasible to continue commercial production
at that mine.
MINING INDUSTRY RISKS
The exploration for and development of mineral deposits involves a high
degree of risk which even a combination of careful evaluation, experience and
knowledge may not eliminate. Few properties which are explored are ultimately
developed into producing mines. Major expenses may be required to locate and
establish ore reserves, to develop metallurgical processes and to construct
mining and processing facilities at a particular site. It is impossible to
ensure that the exploration programs planned by the Company will result in a
profitable commercial mining operation. Whether a mineral deposit will be
commercially viable depends on a number of factors, including, the particular
attributes of the deposit, such as size, grade and proximity to infrastructure,
precious metal prices which are highly cyclical, and government regulations,
including regulations relating to prices, taxes, royalties, land tenure, land
use, importing and exporting of minerals and environmental protection. Unusual
or unexpected formations, formation pressures, fires, power outages, labor
disruptions, flooding, explosions, cave-ins, land slides and the inability to
obtain suitable or adequate machinery, equipment or labor are other risks
involved in the operation of mines and the conduct of exploration programs.
RECENT OPERATING LOSSES
The Company has incurred net operating losses of $73.1 million and $20.8
million for the years ended December 31, 1997 and 1996, respectively. There can
be no assurances that the Company will achieve net operating profits in the
future.
UNCERTAINTY OF TITLE TO PROPERTIES
The validity of unpatented mining claims on U.S. public lands, which
constitute a large portion of the property holdings in which the Company has an
interest, is sometimes uncertain and may be contested. Due to the extensive
requirements and associated expense required to obtain and maintain mining
rights on U.S. public lands, the Company's property interests are subject to
various uncertainties which are common to the industry, with the attendant risk
that some titles, particularly on undeveloped properties, may be defective.
However, the Company is not currently aware of any existing title uncertainties
which would be material to the Company's overall operations or financial
condition with respect to the Company's operating properties or any other
property it currently has targeted for development. As a result of the
potential uncertainty of title to mining and exploration properties and the
large number of properties which are ultimately abandoned, expenditures with
respect to any particular property to establish the Company's rights therein are
directly related to the level of current interest in such property and the
extent and results of previous expenditures. The Company's level of interest in
any particular mining claim, and related title expenditures, will in turn vary
depending upon whether and the extent to which exploratory drilling and other
exploration activities have been or will be conducted, the results of such
drilling and other indices of mineralization at such claim as indicated through
other geological, geophysical, geostatistical and related procedures.
Expenditures to establish the Company's rights will generally not be significant
until such time as extensive drilling is planned, and such expenditures often
continue even after proven or probable reserves have been established.
The mining code of Chile provides for transfer of titled mineral rights to
a claimant, domestic or foreign, upon completion of a specified process. In
Chile, the law permits corporations to hold title to their mining concessions in
their names. However, under
11
<PAGE>
Chilean mining law, the beneficiary of a mining exploration concession is
required to take legal measures to transform its mining exploration concession
into a mining exploitation concession, in accordance with the mining code. If
such measures are not taken by the Company, or if the annual fees for mining
concessions are not paid each year, the Company can lose its title over its
mining concessions, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
In Chile, the Company maintains title in its name to its properties and
believes that it has completed the requisite title processes. Although the
Company believes it has taken reasonable measures to ensure proper title to its
mining concessions in Chile, there is no guarantee that title to any of its
mining concessions could not be challenged by a third party, which may have
valid claims underlying portions of the Company's interests.
RISK ASSOCIATED WITH FOREIGN OPERATIONS
The Company currently has exploration projects and investments in Chile.
These projects and investments, as well as any other projects or investments
made or undertaken in the future in other developing nations, are subject to the
risks normally associated with conducting business in such countries, including
labor disputes and uncertain political and economic environments, as well as
risks of war and civil disturbances or other risks which may limit or disrupt
the projects, restrict the movement of funds or result in the deprivation of
contract rights or the taking of property by nationalization or expropriation
without fair compensation laws or policies of particular countries, foreign
taxation, limitations on ownership and on repatriation of earnings, and foreign
exchange controls and currency fluctuations. Although the Company has not
experienced any significant problem in its Chilean operations arising from such
risks, there can be no assurance that such problems will not arise in the
future. Foreign investments may also be adversely affected by changes in
Canadian laws and regulations relating to foreign trade, investment and
taxation.
ENVIRONMENTAL RISKS AND HAZARDS
All phases of the Company's operations are subject to environmental
regulation in the various jurisdictions in which it operates. Environmental
legislation is evolving in a manner which may require stricter standards and
enforcement, increased fines and penalties for non-compliance, more stringent
environmental assessments of proposed projects and a heightened degree of
responsibility for companies and their officers, directors and employees. There
is no assurance that existing or future environmental regulation will not
materially adversely affect the Company's business, financial condition and
results of operations. Environmental hazards may exist on the properties on
which the Company holds interests which are unknown to the Company at present
and which have been caused by previous or existing owners or operators of the
properties.
Government approvals and permits are currently, or may in the future be,
required in connection with the Company's operations. To the extent such
approvals are required and not obtained, the Company may be curtailed or
prohibited from proceeding with planned exploration or development of
properties.
Failure to comply with applicable laws, regulations and permitting
requirements may result in enforcement actions thereunder, including orders
issued by regulatory or judicial authorities causing operations to cease or be
curtailed, and may include corrective measures requiring capital expenditures,
installation of additional equipment, or remedial actions. Parties engaged in
mining operations, including the Company, may be required to compensate those
suffering loss or damage by reason or the mining activities and may have civil
or criminal fines or penalties imposed for violations of applicable laws or
regulations.
12
<PAGE>
Amendments to current laws, regulations and permits governing operations
and activities of mining companies, or more stringent implementation thereof,
could have a material adverse impact on the Company and cause increases in
exploration expenses, capital expenditures or production costs or reduction in
levels of production at producing properties or require abandonment or delays in
development of new mining properties.
PROPOSED LEGISLATION AFFECTING THE MINING INDUSTRY
During the past several years, the United States Congress considered a
number of proposed amendments to the General Mining Law. In 1992, a holding fee
of $100 per claim was imposed upon unpatented mining claims located on federal
lands. Beginning in October 1994, a moratorium on processing of new patent
applications was approved. In addition, a variety of legislation is now pending
before the United States Congress to amend further the General Mining Law. The
proposed legislation would, among other things, change the current patenting
procedures, limit the rights obtained in a patent, impose royalties on
unpatented claims, and enact new reclamation, environmental controls and
restoration requirements. The royalty proposals range from a 2% royalty on "net
profits" from mining claims to an 8% royalty on modified gross income/net
smelter returns. The extent of any such changes that may be enacted is not
presently known, and the potential impact on the Company as a result of future
congressional action is difficult to predict. If enacted, the proposed
legislation could adversely affect the economics of development of operating
mines on the federal unpatented mining claims held by the Company. A majority
of the Company's proven and probable ore reserves in the U.S. are located on
unpatented U.S. federal lands. The Company's financial performance could
therefore be materially and adversely affected by passage of all or pertinent
parts of the proposed legislation.
LITIGATION
The operations of the Company's Beartrack mine may be adversely affected by
the results of litigation initiated by the Pacific Rivers Council and the
Wilderness Society and by the Sierra Club Legal Defense Fund, Inc. The Company
believes that neither of these actions, relating to the Endangered Species Act
and other environmental matters, will ultimately affect mining operations at
Beartrack in any manner that would be materially adverse to the Company.
However, there can be no assurance that the outcome of these actions will not
materially adversely affect the Company's business, financial condition and
results of operations. See "Item 3. Legal Proceedings."
GOVERNMENTAL REGULATION OF THE MINING INDUSTRY
The exploration activities of the Company are subject to various laws
governing prospecting, development, production, taxes, labor standards and
occupational health, mine safety, toxic substances and other matters. Mining
and exploration activities are also subject to various laws and regulations
relating to the protection of the environment. Although the Company believes
that its exploration activities are currently carried out in accordance with all
applicable rules and regulations, no assurance can be given that new rules and
regulations will not be enacted or that existing rules and regulations will not
be applied in a manner which could limit or curtail production or development.
Amendments to current laws and regulations governing the operations and
activities of the Company or more stringent implementation thereof could have a
material adverse effect on the Company's business, financial condition and
results of operations.
13
<PAGE>
PROPERTIES WITHOUT KNOWN MINEABLE RESERVES
Certain of the Company's properties are in the exploration stage and it has
not yet been determined whether these properties contain ore reserves that are
economically recoverable. The activities of the Company will continue to be
directed towards the search for, evaluation and development of mineral deposits.
There is no assurance that the expenditures of the Company will result in
discoveries of commercial ore bodies. Furthermore, there can be no assurance
that the Company's estimates of future exploration expenditures will prove
accurate, and actual expenditures may be significantly higher than currently
anticipated.
UNCERTAINTY AS TO CALCULATIONS OF ORE RESERVES, MINERAL DEPOSITS AND ORE
GRADES
There is a significant degree of uncertainty attributable to the
calculation of ore reserves, mineral deposits and corresponding ore grades. The
Company has calculated its proven and probable reserves internally and these
calculations have been audited or reviewed by independent engineering firms.
Until the ore is actually mined and processed, ore reserves, mineral deposits
and ore grade must be considered as estimates only. Consequently, there can be
no assurance that any ore reserve, mineral deposits or ore grade information
contained in this Annual Report will prove accurate. In addition, the quantity
of ore reserves and mineral deposits may vary depending on mineral prices and
other factors. Any material change in reserves, ore grades or stripping ratios
may affect the economic viability of the Company's projects. Furthermore,
reserve and mineral deposit information should not be interpreted as any
assurance of mine life or of the potential profitability of existing or future
projects.
REQUIREMENT OF ADDITIONAL FINANCING
The development of the Company's properties will require substantial
additional financing. There can be no assurance that additional capital or
other types of financing will be available when needed or that, if available,
the terms of such financing will be favorable to the Company.
UNINSURED RISKS
The Company carries insurance to protect against certain risks in such
amounts as it considers adequate. Risks not insured against in each case
include environmental pollution, earthquake damage, mine floodings or other
hazards against which mining exploration corporations cannot insure or against
which the Company may elect not to insure because of high premium costs or other
reasons. Failure to have insurance coverage for any one or more of such risks
or hazards could have a material adverse effect on the Company's business,
financial condition and results of operations.
RISK OF HEDGING STRATEGIES
In order to mitigate some of the risks associated with fluctuating gold
prices, the Company has in the past, has presently, and may in the future use
various price hedging strategies, such as selling future contracts for gold, or
using put options, to lock in delivery prices for its gold production. The
Company continually evaluates the potential short- and long-term benefits of
engaging in such price hedging strategies based upon the then current market
conditions. No assurance can be given, however, that the use of price hedging
strategies will always benefit the Company. There is a possibility that the
Company could lock in forward deliveries at prices lower than the market price
at the time of delivery. In addition, the Company could fail to produce enough
gold to satisfy its forward delivery
14
<PAGE>
obligations, causing the Company to purchase gold in the spot market at higher
prices to fulfill its delivery obligations. As of December 31, 1997, the Company
had options to sell approximately 124,000 ounces of its gold production from
Beartrack at a fixed gold price of $400 per ounce through the year 2001. See
"Item 1. Description of Business - Hedging Policy."
COMPETITION
Because mines have limited lives based on proven ore reserves, the Company
is continually seeking to replace and expand its reserves. The Company competes
with other mining companies in connection with the search for and acquisition of
properties producing or capable of producing gold and other precious metals.
Existing or future competition in the mining industry could materially adversely
affect the Company's prospects for mineral exploration and success in the
future.
DEPENDENCE UPON KEY MANAGEMENT PERSONNEL
The Company is dependent upon a number of key management personnel. The
loss of the services of one or more of such personnel could have a material
adverse effect on the Company. The Company's ability to manage its exploration
and development activities, and hence its success, will depend in large part on
the efforts of these individuals. The Company faces intense competition for
qualified personnel, and there can be no assurance that the Company will be able
to attract and retain such personnel.
POTENTIAL VOLATILITY OF MARKET PRICE OF COMMON SHARES
Both the Canadian and U.S. stock markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the market price of the Common Shares. In addition, the market
price of the Common Shares may be highly volatile. Factors such as the price of
gold and precious metals, announcements by competitors, changes in stock market
analyst recommendations regarding the Company, and general market conditions
affecting other exploration and mining companies may have a significant effect
on the market price of the Common Shares. Moreover, it is likely that during
future quarterly periods, the Company's results and exploration activities may
fluctuate significantly or may fail to meet the expectations of stock market
analysts and investors and, in such event, the market price of the Common Shares
could be materially adversely affected. In the past, securities class action
litigation has often been initiated following periods of volatility in the
market price of a company's securities. Such litigation, if brought against the
Company, could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
DILUTION
The Company's Certificate and Articles of Amalgamation, as amended, provide
that the Company has an unlimited number of authorized Common Shares and
Preference Shares that may be issued. Under applicable Canadian law,
shareholder approval is not generally required for the Company to issue shares
of either class of capital stock. Moreover, the Company has various commitments
that could require the issuance of a substantial number of additional Common
Shares as follows: exercise of stock options outstanding as of December 31, 1997
under the Meridian Gold Inc. 1996 Stock Option Plan (2,574,075 shares at
December 31, 1997); and issuance of Common Shares pursuant to a Shareholders
Rights
15
<PAGE>
Plan, which is triggered by a "Take-over Bid" meeting certain criteria. See
"Item 12. Options to Purchase Security From Registrant or Subsidiaries."
CERTAIN ANTI-TAKEOVER EFFECTS
The Shareholders Rights Plan established by the Company in 1996 may have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company,
which may otherwise result in holders of the Common Shares receiving a premium
over the existing market price for their shares in a change of control
transaction. See "Item 12. Options to Purchase Securities from Registrant or
Subsidiaries."
PROPERTY INTERESTS IN THE UNITED STATES
Mineral interests in the United States are owned by U.S. federal and state
governments and private parties. In order for the Company to explore or develop
a prospective mineral property that is owned by a private party or by a state,
it must enter into a property or mineral rights acquisition agreement. The
Company may also acquire rights to explore for and produce minerals on U.S.
federally-owned lands. This acquisition is accomplished through the location of
unpatented mining claims upon unappropriated U.S. federal land pursuant to
procedures established principally by the General Mining Law of 1872, as amended
(the "General Mining Law") and the Federal Land Policy and Management Act of
1976 (or the acquisition of previously located mining claims from a private
party as described above). These laws and regulations generally provide that a
citizen of the United States (including a U.S. corporation) may acquire a
possessory right to develop and mine valuable mineral deposits discovered upon
unappropriated U.S. federal lands, provided that such lands have not been
withdrawn from mineral location (which would include, for example, lands
included in national parks and military reservations and lands designated as
part of the National Wilderness Preservation System). This right can be freely
transferred and is protected against appropriation by the government without
just compensation. Also, the claim locator acquires the right to obtain a
patent (or deed) conveying fee title to his claim from the U.S. federal
government upon compliance with certain additional procedures.
The majority of the Beartrack proven and probable ore reserves are located
on patented mining claims owned by the Company. The remaining reserves are
located on unpatented mining claims owned or leased by the Company.
Substantially all of the Jerritt Canyon proven and probable ore reserves are
located on unpatented mining claims owned or leased by the Jerritt Canyon Joint
Venture. The Jerritt Canyon mill is located on land owned by the joint venture.
Substantially all of the Rossi gold exploration operations are being conducted
on unpatented mining claims owned by the Company.
PROPERTY INTEREST IN CHILE
In Chile, mineral rights are granted by ordinary courts of justice in the
form of mining concessions. Any person, whether a Chilean national or a
foreigner, may apply for the granting of mining concessions subject to
compliance with the requirements provided for in Chilean law. The holder of a
mining concession is protected by the ownership right on such concession. The
right over the concession, which is independent from the ownership right on the
surface land, is transferable and may be subject to mortgage. The mining
concession entitles its holder to dispose of all mineral resources contained
within its boundaries.
Mining concessions are of two types:
16
<PAGE>
(i) An Exploration Concession, whereby the holder is legally entitled
to explore for mineral substances in a certain area for a period of two
years, at the expiration of which the concession may be extended for an
additional two year period if the area covered by the concession is reduced
by half and provided the applicable annual tax is paid.
(ii) An Exploitation Concession, whereby the holder is legally
entitled to exploit mineral substances contained therein for an indefinite
period of time subject to payment of the annual tax.
The holder of an Exploration Concession has the exclusive right to initiate
the procedure to obtain an Exploitation Concession within the boundaries and
during the time period of the Exploration Concession. The holder of each type
of mining concession is entitled by law to impose easements on the surface land
in order to facilitate mining exploration or exploitation activities. Any
compensation to be paid to the owner of the surface land for the easement is to
be determined by mutual agreement or, failing such agreement, by the court. The
acquisition of mineral interests in Chile is normally initiated either through
the filing of an application to the courts to obtain the granting of new mining
concessions or by acquiring existing mining concessions.
The legal procedure to obtain the granting of a new mining concession is
regulated in detail in the Chilean Mining Code. A special characteristic of
this judicial procedure is that the applicant is required to be active and to
expedite the proceeding in order to comply with deadlines established in the
Chilean Mining Code for the performance of certain tasks to be fulfilled in
order to obtain the grant of the concession. The judge has an active role, and
the proceeding may transform into a contentious one in certain cases (i.e.,
third party opposition to the survey petition).
The acquisition of mineral interests from parties which already have
registered mining concessions is also considered to be a normal vehicle to
initiate mining activities in Chile. The execution of an option or promise
purchase contract regarding existing mining concessions may enable an interested
party to develop exploration or exploitation mining work in a given area already
legally protected. Chilean law also provides flexibility to the interested
party in acquiring a mining concession to enter into different contractual
arrangements (i.e., deferred installment payments or undertaking to carry out
exploration activities as payment of the purchase price), contemplating the
option to purchase or abandon the mining concession.
EMPLOYEES
As of December 31, 1997, the Company had a total of approximately 221
employees, with approximately 154 employees working on site at the Beartrack
property. At the Jerritt Canyon property located near Elko, Nevada, there are
approximately 527 employees, all of which are employees of the Jerritt Canyon
Joint Venture, not of the Company. There are approximately 33 employees in
Chile, who are employees of Minera Meridian Limitada, a wholly-owned indirect
subsidiary of the Company. None of the employees are covered by a collective
bargaining agreement. The Company believes that its relationship with its
employees is good.
17
<PAGE>
Item 2. Description of Property.
-----------------------
Included herein are certain forward-looking statements that involve various
risks, uncertainties and other factors. See "Cautionary Statement" on Page 5 of
this Annual Report.
Meridian has two principal producing properties, Beartrack (100% ownership)
located near Salmon, Idaho, and Jerritt Canyon (30% ownership) located near
Elko, Nevada. In addition, the Company has advanced stage exploration programs
underway in Chile (at El Penon) and in Nevada (at Rossi), and early stage
exploration programs underway in Chile, Idaho and Nevada.
BEARTRACK
HISTORY, LOCATION, SIZE AND ACCESS
The 100 percent-owned Beartrack mine is an open pit operation with a heap
leach facility located approximately 11 miles west of Salmon, Idaho, near the
historic mining town of Leesburg. The Beartrack property comprises
approximately 27 square miles of patented and unpatented mining claims. The
Company owns the mineral rights to approximately 85 percent of the present
proven and probable reserves at Beartrack by its ownership of patented mining
claims. The remaining reserves are being mined from unpatented mining claims
which the Company owns or leases, a portion of which is subject to a 3 percent
net smelter return on production. Access from Salmon, Idaho to the Beartrack
property is by 34 miles of county and U.S. Forest Service gravel roads.
GEOLOGY
The Beartrack mine is located on the Panther Creek fault. Gold
mineralization is closely associated with the Panther Creek fault. North-
northeast lateral displacement along this fault of up to 2,000 feet created a
shear zone in arkosic sandstone of the Yellowjacket Formation and porphyritic
quartz monzonite, making it ideal for hosting mineralization. Deformation and
shearing along the fault reaches widths up to 600 feet. Gold mineralization
has been found intermittently for a distance of about 16,500 feet along the
Panther Creek fault shear zone. Several stages of silification, brecciation and
gold mineralization have occurred to create the ore deposits at Beartrack. The
gold mineralization occurs in a network of stockwork veins and veinlets created
by the shearing. The primary associated waste minerals are silica, iron
sulfides, pyrite, arsenopyrite and sericite.
MINING
The open pit mining operation at Beartrack commenced in August 1994 and
includes two pits, designated the North and South pits, and one waste rock dump.
Ore and waste rock are removed in horizontal lifts or benches 25 feet in height
with pit slopes ranging from 35 to 50 degrees. Mining operations within the
pits include drilling, blasting, loading and hauling. Drill holes are assayed
to determine whether the material will be treated as waste or ore. Ore and
waste rock are moved by 85-ton diesel haul trucks to the process area and waste
rock disposal areas, respectively. The waste rock dump has been constructed
with a 40 million-ton capacity. Mine production is based on delivering
approximately 4.5 million tons of ore per year to the process facility. The
average stripping ratio over the life of the mine is expected to be 1.2:1. No
underground mining is currently conducted at Beartrack.
18
<PAGE>
HEAP LEACH FACILITY
The ore is processed in a cyanide heap leach facility. The heap leach pad
is constructed in four phases. Phases one and two have been constructed. Each
heap leach phase area is one continuous plastic lined pad surface constructed on
a prepared compacted clay foundation protected by a three foot layer of 3/4
inch crushed ore. Each phase of the pad has a network of solution collection
pipes placed on top of the liner to collect the pregnant gold solution from
individual heap cells. Once the pad has been prepared for loading, ore is
dumped into place. Diluted sodium cyanide solution is applied on the heap
surface. One pond is used for normal operating conditions and a larger overflow
pond has been constructed to provide additional solution storage under unusual
circumstances, such as during periods of unusually large drawdowns. These ponds
are designed to provide sufficient storage capacity for all phases of heap
operations.
Pregnant solution is pumped from the pregnant solution pond through a
series of carbon adsorption tanks where contained values of gold and silver
adsorb on activated carbon. The loaded carbon is stripped and precious metals
recovered, melted and cast as dore. The dore bars are sold to an off-site
refinery for final production of gold and silver.
RECENT OPERATIONS
As of December 31, 1997, Beartrack contained approximately 13.8 million
tonnes of ore containing 545,000 ounces of proven and probable gold reserves,
compared to 23.2 million tonnes of ore containing proven and probable gold
reserves of 848,000 ounces as of December 31, 1996. Gold production in 1997 at
Beartrack was 107,000 ounces, compared with 109,000 ounces produced at Beartrack
in 1996. Cash costs were $202 per ounce in 1997, up $12 per ounce from 1996,
due mainly to lower heap leach tons as a result of the planned heap leach pad
expansion that occurred in 1997.
A total of 3.8 million tonnes of ore were mined and delivered to the leach
pad in 1997, down from 3.9 million tonnes in 1996, due to the planned heap leach
pad expansion that occurred in 1997. The average grade of the ore mined in 1997
was 0.9 grams per tonne, which was unchanged from 1996.
The $0.9 million drilling program in 1997 focused on further delineating
the ore body in the North Pit.
During 1997, the Company constructed a $5.7 million heap leach pad
expansion to process new ore.
JERRITT CANYON
HISTORY, LOCATION, SIZE AND ACCESS
The Jerritt Canyon mine, consisting of a number of underground and open pit
mines, is located 57 miles northwest of Elko, Nevada. The Company's joint-
venture partner, Independence Mining Company, Inc., a wholly-owned subsidiary of
Minorco (U.S.A.) Inc. ("IMC"), operates the mine. Since the discovery of
Jerritt Canyon by Meridian geologists in 1972, the mine has produced over 4.8
million ounces of gold.
Development and mining activities take place at Jerritt Canyon on various
orebodies within the 120-square-mile claim block, which includes both private
and public lands. Property interests at Jerritt Canyon include owned or leased
unpatented claims and surface rights. Approximately 12.8 percent of the Jerritt
Canyon proven and probable reserves are
19
<PAGE>
subject to a net smelter return royalty averaging 2.9 percent. The main access
to the property is by a paved state highway from Elko.
JOINT VENTURE AGREEMENT
Pursuant to the joint venture agreement governing the Jerritt Canyon Joint
Venture, IMC acts as manager of the project and conducts all mining and
processing, exploration, drilling and related operations. However, as a 30%
participant, the Company is actively involved in budgeting, production and
exploration planning, through which it has gained valuable experience. Each
participant has the right to take in kind or dispose of its individual interest
in all ore and minerals extracted from the Jerritt Canyon properties. Joint
venture costs are allocated to each participant in proportion to its interest.
The Company also pays to IMC a management fee of 2.5% of the Company's share of
the joint venture's gross revenues.
Although IMC has the authority to make most decisions with respect to daily
operations of Jerritt Canyon, approval of the Company is required for the annual
operating budget and exploration program, as well as any major capital
expenditures.
Pursuant to the joint venture agreement, a transfer of the interest of
either joint venture participant in the joint venture to any non-affiliate is
subject to a good faith right of first negotiations with the other for the sale
to the other party of such interest. Unless otherwise terminated by mutual
agreement, dissolution or insolvency, the joint venture agreement for Jerritt
Canyon will remain in effect for fifty years and for such longer periods as
exploration, development or production by the joint venture continues.
GEOLOGY
Gold at Jerritt Canyon occurs in typical sediment-hosted type deposits with
many similarities to other Nevada sediment-hosted deposits, such as those on the
Carlin Trend and in the Crescent Valley area. Characteristics at Jerritt Canyon
which conform to the sediment-hosted gold model include:
. Element association Gold, Arsenic, Antimony, Mercury,
Barium
. Gold ore grades 1.7 to more than 34 grams per tonne
. Alteration type Silification, argillization,
carbonization, decalcification,
dolomitization
. Host rocks Paleozoic carbonates and siltstones
. Vertical extent of mineralization Over 3,000 feet as measured from
different locations at Jerritt
Canyon
Major tectonic events have significantly contributed to building a
favorable geologic setting for the formation of major gold deposits. Roberts
Mountains thrusting placed western siliceous rocks over the favorable eastern
facies host rocks, providing an essentially impervious capping which probably
forced the ore solutions to disseminate into favorable beds and structures,
forming the major gold deposits being mined today. North-south compression
created west-northwest, east-northeast, northeast and north striking faults
which became ore channelways during the tertiary gold mineralization event.
Periodic mountain building events after the initial orogenies, continued to
impact the Jerritt Canyon area opening the faults, brecciating and folding the
strata, and in general creating a highly favorable condition for the depositing
of major disseminated gold deposits. The favorable gold host rocks at Jerritt
Canyon are carbonaceous dolomitic siltstones and micritic
20
<PAGE>
limestone of the Roberts Mountains and Hanson Creek Unit III sedimentary
formations. Units I and II of the Hanson Creek Formation locally host
significant gold deposition. Strata in the Pogonip Group appear similar to ore
hosting units in the Hanson Creek Formation. The primary ore controls are high
angle west-northwest, east-northeast, and north-to-northeast faults. The west-
northwest faults are the strongest structures and usually cross the entire
Independence Range. Permeable siltstones, limestones and cherts in the Roberts
Mountains and Hanson Creek Formation provided lateral hosting and dispersion and
dissemination of the Jerritt Canyon gold ore fluids.
MINING
Mining at Jerritt Canyon commenced in 1981 and is conducted from both open
pit and underground sources. The selection of mining method depends upon
numerous factors, such as the depth of the deposit, the grade and quantity of
gold in the deposit, the ore-type of the deposit, and the economics of mining
and processing compared to the expected gold price during the orebody's life.
Current open pit mines include the DASH and Burns Basin mines. Open pit
mining is conducted in ore zones ranging from relatively shallow to
approximately 800 feet in depth. Underground ore production began in 1994 and
is currently conducted at the Murray mine. Some production in 1997 also came
from the West Generator underground mine, which was closed in July 1997. Two
additional deposits, SSX and Papillion, are under exploration and development
for underground mining.
Open pit mining is conducted on orebodies which have relatively shallow ore
deposits. These orebodies provide the quantity and grades of ore which provide
the economic incentive for development and extraction. This ore source tends to
be of relatively low grade gold mineralization with lower total mining costs.
The open pit mining process begins with breaking the in-place rock at the
mine site. Blast holes are approximately 24 feet deep, 5 1/2 or 6 1/2 inches
in diameter, and are drilled on a 12 to 16 foot square pattern. The holes are
filled with explosives, which are detonated. The rock chips from these holes
are analyzed by the assay lab to assign boundaries to various mined rock
classifications. Following blasting, broken material is classified into four
categories (waste rock, sub-ore and two ore types) based on such factors as the
refractory nature of the ore and its grade. Waste rock is transported to waste
dumps, sub-ore grade material (which is mineralized but uneconomic at present
gold prices) is stockpiled, and the two types of ore are separately transported
to stockpiles designated for each of the two mills.
Over the past few years, underground mining has grown to be a major source
of ore. Today, the mill receives ore from the Murray mine. Established ore
reserves for the future of Jerritt Canyon are largely from underground sources
where the costs of development and extraction are greater than in traditional
open pit methods on a per ton of ore basis, which is mitigated somewhat by the
higher ore grades of the underground sources. The Company expects the shift to
underground resources to continue unless new open pittable ore reserves are
discovered and developed.
The Murray mine is accessed by two declines. Ore mining includes cut and
fill methods, either slot and fill or underhand drift and fill. Drifting and
mining are conducted in either 15 by 15 foot or 12 by 12 foot openings. An
engineered cemented backfill material is used for ground support. The basic
mine layouts comprise a main access decline, at 12.5% gradient, suitable for
truck haulage. At various elevations, exploration drifts are cut along the axes
of the deposit to implement delineation drilling. Mining stopes are primarily
transverse to the strike of the deposit and mining begins at the centre of the
ore zone.
21
<PAGE>
Primary stopes are then mined to the ore extremities, followed by the secondary
and the tertiary stopes. The physical ore zone features include varying
thickness, undulating waste-ore contacts, assay walls, irregular continuity, and
variable tonnage per foot of strike length.
MILLING
Ore is hauled from the open pit mines, underground mine and sub grade
stockpiles and stockpiled at the mill for processing. The haul distance ranges
from 3 to 15 miles depending on the mine source.
At the Jerritt Canyon mill, there are two distinct extraction facilities
which process two categories of ore, the wet grinding chlorination circuit and
the dry grinding roasting circuit, each of which is independent of the other.
Each circuit has an annual average capacity of approximately 4,000 tons per day.
With changing ore characteristics, the wet mill was shut down in February 1997,
and only the dry milling circuit is currently in operation.
The less refractory, less carbonaceous ore is sent to the wet grinding
chlorination circuit to oxidize sulfur and carbon contained in the ore prior to
being leached in a conventional sodium cyanide carbon-in-leach ("CIL") circuit.
The ore-water mixture, or slurry, is treated by injecting chlorine gas into the
slurry to oxidize the refractory components. The tanks in which this process
takes place are operated in a vacuum to control any unreacted chlorine gas,
which is converted to bleach in a scrubbing system. The slurry, after
oxidation, is neutralized and treated with cyanide for gold dissolution and
recovery by adsorption on carbon in CIL tanks.
The more refractory ore, which contains higher amounts of sulfur and
carbon, is processed in the dry grinding roasting circuit. This ore is crushed
and dried, and then finely ground and mixed with coal. This mixture is
introduced into the tops of two fluid-bed roasters. The ore is heated and
contacted with oxygen rich gases that oxidize the sulfide and carbon compounds.
The gases produced in the roasting process pass through a scrubbing system to
control emissions. The roasted ore goes to a quench tank to cool and then to a
thickener to increase the density of slurry before entering the CIL tanks.
Sodium cyanide is then used to dissolve the gold from the ore slurry and the
gold is absorbed onto activated carbon.
Gold from both CIL circuits is removed from the carbon using a carbon
stripping process which involves the use of hydrochloric acid, sodium hydroxide
and sodium cyanide. Gold metal is recovered from the stripping solution using
the Merrill-Crowe process, which utilizes zinc powder to precipitate the gold.
The gold precipitate is reacted with nitric acid to remove the excess zinc,
retorted to collect the minor quantity of contained mercury in the precipitate,
melted, and then cast into dore bars which are ultimately sold to outside
refineries for further processing into gold products.
Tailings from the milling process are deposited in a clay-lined impoundment
pond.
RECENT OPERATIONS
In 1997, Meridian's 30 percent share of gold production was 96,000 ounces,
three percent higher than in 1996, due primarily to the increased grade of ore
from the underground mines processed through the dry mill.
22
<PAGE>
The wet mill was shut down in February 1997. Mining activities in 1997
were focused at the Murray and West Generator underground mines (the West
Generator mine was closed in July 1997) and at the DASH and Burns Basin open pit
mines.
Cash costs of production in 1997 decreased 30 percent over the prior year
to $209 per ounce, mainly as a result of the increase in the grade of ore
processed.
As of December 31, 1997, Meridian's share of reserves was approximately 1.9
million tonnes of ore containing 470,000 ounces, versus 2.5 million tonnes of
ore containing 571,000 ounces as of December 31, 1996. Approximately 70 percent
of the current reserve is contained in the Murray (New Deep) and SSX
underground orebodies.
EL PENON
The El Penon property in Chile was the result of a grass-roots discovery
made by Meridian geologists during the initial stages of opening a new
exploration office in Chile in 1993.
The El Penon property is located in an area of low, rolling hills in
northern Chile, approximately 100 miles southeast of Antofagasta. Access is by
a 25 mile long gravel road that connects the property with the Pan-American
Highway. The property is comprised of approximately 230 square miles of
contiguous mineral concessions situated in the Atacama Desert at an elevation of
5,900 feet. The El Penon project is situated on concessions either owned by the
Company outright or leased from a private Chilean company, Sociedad Minera
Soledad and an individual who is its main shareholder. In each case, to protect
its interest, the Company has filed two layers of concessions overlying the base
ownership concession. The Company has entered into option contracts to purchase
the concessions owned by the private Chilean company. In addition, the Company
has granted a net smelter return to the private Chilean company on production
from the leased property. The royalty is on a sliding scale, depending on the
price of gold, ranging from 1% to 3%. No royalty is payable on land claimed by
the Company, where approximately 75% of the mineralization currently known is
located.
Initial exploration, including geochemical and geophysical surveys,
geologic mapping, trenching and drilling, identified 13 target areas exhibiting
gold mineralization or geophysical anomalies. In six areas, known as Quebrada
Orito, Cerro Amatista, Cerro Martillo, Discovery Wash, El Valle and Tres Tontos,
significant intercepts of gold were encountered in drilling. The Company
defines a significant intercept to be one where gold mineralization of 0.20
ounces of gold per tonne over a continuous intercept of at least 13 feet (4
meters) is encountered.
The resource at El Penon is part of a volcanic-hosted epithermal deposit
containing gold and substantial silver with virtually no base metals or
contaminants. The gold and silver occur in quartz vein zones and hydrothermal
breccias in several major deposits that extend along strike for at least 17,000
feet (3.25 miles). In all of the zones, the mineralization varies from
approximately 13 to 100 feet wide and extends to a depth of at least 800 feet.
PRELIMINARY FEASIBILITY RESULTS
Kvaerner Metals is preparing a feasibility study on the El Penon property,
and while the final feasibility study has not been completed, pending
Engineering, Procurement and Construction Management bids on the mill from
several engineering companies, the status of the study to date is positive. The
mine plan calls for mining and milling at 2,000 tonnes per
23
<PAGE>
day, with proven and probable mineable reserves of 894,000 ounces of gold and
14,402,000 ounces of silver. The mine plan also assumes the development of
additional mineralized material containing 249,000 ounces of gold and 3,489,000
ounces of silver contiguous to the proven and probable reserves. The mine plan
contemplates production that would average approximately 130,000 ounces of gold
and 1,900,000 ounces of silver per year, with average cash costs after co-
product silver credits (using a $6/oz silver price) of $160 per ounce of gold
over the life of the mine.
Based on favorable metallurgical testing of the ore, Kvaerner Metals has
recommended a standard processing circuit: a jaw crusher, two-stage grinding
with a SAG mill and a ball mill, a gravity circuit, cyanide leach, Merrill Crowe
zinc precipitation, and a refinery. The preliminary feasibility work indicates
recoveries of 95% of the gold and 87% of the silver. Mill operating costs are
projected to be $12 per tonne of ore.
The mine plan indicates 85% of the reserves being mined by underground
methods from two declines: the first at Quebrada Orito producing at about 600
tonnes per day; and the second at the Orito Sur zone (which comprises the
southern portion of the Quebrada Orito deposit) producing at about 800 tonnes
per day. An overhand cut-and-fill method has been used for the mine plan, with
budgetary contract mining quotes of about $33 per tonne mined.
The open pits at Quebrada Orito and Cerro Martillo would feed the mill at a
projected rate of approximately 600 tonnes per day. The Quebrada Orito pits are
projected to have an average strip ratio of 9.4:1 with an average grade of 4.7
grams/tonne gold and 64.3 grams/tonne silver. Cerro Martillo is projected to
have an average strip ratio of 9.2:1 with an average grade of 2.5 grams/tonne
gold and 81.4 grams/tonne silver. Budgetary quotes for open pit contract mining
are about $1.38 per tonne mined.
Bid packages have been sent to several worldwide engineering firms for the
construction of the plant, and bids will be reviewed during the second quarter
of 1998. If a decision is made to proceed, construction would begin in the
second half of 1998, targeting commercial production before the end of 1999.
Surface Work
Surface drilling started at El Penon in February 1997 and continued until
mid-December 1997. 356 holes were drilled during 1997, including 48 core holes
in the known resource areas. The emphasis was on reserve definition or
development drilling. There were as many as seven drill rigs active on the
property at one time, and more than $12 million was spent on surface drilling.
Early in the year, 51 condemnation holes were drilled to confirm that areas
tentatively planned for future mine dumps and facilities were not located above
potential mineralization. This work was completed in March 1997 and was followed
by extensive development drilling at the known resource areas.
Previous resource estimates included gold and silver resources at Quebrada
Orito, Orito Sur, Orito Norte, Cerro Martillo, and Discovery Wash. The Quebrada
Orito deposit was the focus of the surface and underground exploration work for
most of the year, but 1997 drilling confirmed that the first three resource
areas are connected, and are part of the same deposit localized by the same
mineralized fault zone. This entire deposit is now referred to as Quebrada
Orito.
24
<PAGE>
Surface drilling at Quebrada Orito included 38 core holes and 148 reverse
circulation holes. Most of this work was completed on the southern end of the
deposit where the orebody is covered by gravel and unmineralized rocks. Nearly
all of the drill holes confirmed the previously estimated resource and served to
decrease the drill hole spacing for reserve calculation. Individual assays
ranged up to more than 400 grams/tonne gold, and the structure continues to the
south where the mineralization remains open at depth for much of the strike
length.
Cerro Martillo also received significant surface drilling with ten core and
46 reverse circulation holes. Reserve definition was the primary purpose, as at
Quebrada Orito, and additional samples for metallurgical testing were also
obtained. A significant amount of mineralization at Cerro Martillo remains in a
possible reserve category, so additional drilling will be needed.
Other mineralized material at El Penon totals 3.6 million tonnes grading
8.3 grams per tonne gold and 146 grams per tonne silver, for 964,000 ounces of
gold and 16,903,000 ounces of silver. These figures include the 249,000 ounces
of gold and 3,489,000 ounces of silver contiguous to the proven and probable
reserves, discussed above.
EXPLORATION
Because of the emphasis on reserve definition for the feasibility study,
there were only 63 true exploration holes drilled on the El Penon property.
However, this limited work was successful in defining a new target area called
Doncella, where a new zone of significant mineralization was discovered.
The mineralization occurs along a large geophysical anomaly starting at
depths of 125 meters. Though the drilling is to this point limited, several
holes have confirmed a zone of ore grade mineralization up to 12 meters wide
containing 5.2 grams/tonne gold and 125 grams/tonne silver over a strike length
of at least 60 meters. The core of the zone is higher grade, with up to 6
meters true width of 8 grams/tonne gold and 264 grams/tonne silver. The
Doncella zone remains open in both directions along strike and at depth.
In 1998, the Company intends to test the full potential of Doncella, along
with additional areas north of Discovery Wash and between Doncella and Cerro
Martillo where ore-grade intercepts over mineable widths have been encountered.
Geophysical programs will also continue on the El Penon property, along with
drill testing of new anomalies and targets.
UNDERGROUND WORK
The decline into the Quebrada Orito deposit that was initiated late in 1996
was completed in July 1997. The work consisted of a 750 meter long, 4.25 x 4.75
meter decline, six cross-cuts totaling 341 meters, 55 meters of drifts in ore,
and 44 underground diamond core holes. The underground program confirmed the
continuity and tenor of the mineralization in Quebrada Orito, and additional
samples were obtained for metallurgical and geotechnical data. All of the data
from the underground program was incorporated into the preliminary feasibility
study, and the decline would also provide a production-scale access to a high-
grade portion of the deposit if mining begins.
PERMITTING
All permitting to enable development of a possible mining project has been
initiated with the proper Chilean authorities. This process is proceeding on
schedule.
25
<PAGE>
ROSSI
The Rossi property is geographically situated between the Antelope and
Boulder Creek drainages in the low rolling hills of the Sheep Creek Range, 26
miles northwest of Carlin, Nevada. Access to the property is by all-season
gravel roads either through Boulder Valley or the Newmont Gold Company/Barrick
Gold Corporation owned mining areas. The property is approximately 3.5 and 5
miles northwest of the Meikle (Barrick Gold Corporation) and Post/Betze (Barrick
Gold Corporation/Newmont Gold Company) deposits respectively, and immediately
adjacent to the recently operating Dee gold mine (Rayrock Yellowknife Resources,
Inc.). The land position encompasses 10.7 square miles of unpatented mining
claims as well as patented mining claims on U.S. federally owned ground. The
Company has rights to 100% of the precious metal bearing ores on the Rossi
property.
Gold mineralization on the Rossi property is primarily hosted in the
Devonian Popovich Formation (Lower Rodeo Creek equivalent), which is also the
host at Meikle, Post/Betze, Gold Quarry, Deep Star, Dee and Bootstrap deposits.
The formation consists of limestone and limey mudstone with horizons of fossil
hash with are especially susceptible to mineralization. The Lower Popovich and
Upper Bootstrap commonly displays decalcification, dissolution and collapse
brecciation features in the mineralized areas. Mineralization and alteration
consist of intense silification, quartz veining, argillization and
decalcification. Gold is genetically related to arsenian pyrite which rims
older non-mineralized pyrite and is accompanied by anomalous silver, antimony
and mercury. The spatial distribution of gold is controlled by a complex
relationship between the intersection of northwest oriented Carlin Trend with
other north-south and northeast structures and the presence of permissive
Popovich host rocks. As is commonly the case in most of the deposits in the
northern portion of the Carlin Trend, the presence of intrusive filled
structures are also important keys to mineralization at Rossi. The orientation
of the structures suggests the influence of a wrench fault system; however, the
complete structural picture is undoubtedly much more complex.
The most promising area drilled to date referred to as the "STORM Resource
Area," is located in the southern portion of the Company's claim block.
At the STORM Resource Area, additional deep holes extended the known high-
grade mineralization 600 feet along strike to the northwest. The mineralization
occurs at depths starting at 215 meters. A drilling campaign totaling 20 holes
and 11,174 meters was completed at Rossi in 1997. The drilling was concentrated
in the STORM Resource Area, on Dunphy Road, and at a new target to the southwest
of the STORM Resource Area. In the third quarter of 1997 the company published
our first release of mineralized material for the property totaling 2.8 million
tonnes averaging 12.7 grams per tonne gold for 1.1 million ounces of gold.
The drilling program for 1997 produced disappointing results for the Dunphy
Road target, which covers the northern extensions of the mineralized Bootstrap
and Post-Betze faults onto the Rossi property. However, a new zone of
significant mineralization was encountered southwest of the STORM Resource Area
in three drill holes. The best of the holes encountered 68 meters of 2.5
grams/tonne gold starting at 368 meters depth. This hole did not intersect the
structural intersection targeted, so additional drilling will be necessary to
further evaluate the potential of the zone.
26
<PAGE>
Item 3. Legal Proceedings.
-----------------
In October 1994, the Sierra Club Legal Defense Fund, Inc. ("Sierra"), on
behalf of certain other organizations, filed a lawsuit in Federal District Court
for the Western District of Washington at Seattle against the National Marine
Fisheries Service ("NMFS") and other federal agencies for violation of the
Endangered Species Act (the "Act"), alleging the NMFS' biological opinion failed
to satisfy the requirements of the Act. Sierra, the federal agencies and the
Company, as intervener, each filed a motion for summary judgment. In November
1995, the Court ordered the federal agencies to reinitiate consultation under
Section 7 of the Act on the potential environmental impacts of the Beartrack
mine project on threatened salmon or the designated critical habitat for salmon.
The plaintiffs did not seek, and the Court did not impose, any injunction or
other restriction on the operation of the Beartrack mine pending completion of
such consultation. On November 17, 1995, the court closed the case but retained
jurisdiction to resolve any disputes that may arise concerning the reinitiated
consultation schedule or to resolve issues once the renewed consultation is
completed.
On January 31, 1997 the Forest Service formally reinitiated consultation by
submitting a revised biological assessment to NMFS. Under Section 7(d) of the
Act, the Forest Service may require Meridian to cease an activity associated
with mine operations if that activity could preclude the development of
reasonable and prudent alternatives to the project pending the completion of the
reinitiated consultation. On July 3, 1996, the Forest Service completed its
Section 7(d) determination for the Beartrack mine operations, and determined
that, for the following 12 months, all ongoing and planned significant
activities at the mine could continue pending the reinitiated consultation, with
exception of: (1) proposed reconstruction of the leach pad Run of the Mine
Road, and (2) proposed use of the soil stockpile area associated with
development of Phase III of the heap leach pad. The Forest Service recognized
that these latter two activities may be authorized upon further review by the
Forest Service prior to completion of the reinitiated consultation. The Forest
Service renewed its Section 7(d) determination in July 1997 to run through
February 1998. On March 2, 1998, the Forest Service renewed its Section 7(d)
determination to run through June 1998. On February 18, 1998, NMFS provided a
draft biological opinion to the Forest Service and other federal agencies for
review and comment. On March 2, 1998, the Forest Service requested of NMFS that
the comment period be extended to May 19, 1998. On April 7, 1998, NMFS granted
the requested extension of the comment period, and indicated that the biological
opinion would be finalized by the end of June 1998. The reinitiated
consultation is still ongoing as of the date of this report.
Under the relevant statutory and regulatory authorities, the results of a
consultation can range from no impact on the activities under review on the one
hand to modest to significant impacts on the other. In an extreme situation, a
consultation could result in the cessation of activities altogether, a potential
result the Company believes to be remote in the case of the Beartrack mine,
which has been in operation and production since mid-1995. The Company believes
that the ongoing operation of the Beartrack mine can continue in a manner that
will avoid jeopardizing listed salmon or steelhead or adversely modify or
destroy designated critical habitat for listed salmon, and that upon completion
of consultation, the mine will be permitted to continue operation.
The Company sought and obtained from the U.S. Army Corps of Engineers (the
"Corps") a permit authorizing dredging and filling of wetlands in connection
with construction of the Beartrack mine under Section 404 of the Clean Water
Act. That permit was set to expire on October 11, 1994. On June 16, 1994, the
Company sought an extension of the permit under applicable regulations. Under
those regulations, the filing of a request
27
<PAGE>
for extension operates to extend the permit until the agency acts upon the
request for extension. As of the date of this report, the Corps has not taken
action upon the Company's request.
The Company sought and obtained from the U.S. Environmental Protection
Agency ("EPA") a permit authorizing the discharge of water from the Beartrack
Mine under Section 402 of the Clean Water Act. That permit was set to expire on
October 30, 1996. On April 29, 1996, the Company sought an extension of the
permit on the applicable regulations. Under those regulations, the filing of a
request for extension operates to extend the permit until the agency acts upon
the final request for extension. As of the date of this report, the EPA has not
taken action upon the Company's request.
The Company has certain other contingent liabilities resulting from
litigation, claims and commitments incident to the ordinary course of business.
Management believes that the probable resolution of such contingencies will not
materially affect the financial position or results of operations of the
Company.
Item 4. Control of Registrant.
---------------------
To the knowledge of the Company, Meridian is not directly or indirectly
owned or controlled by another corporation or by any foreign government, and the
Company is not aware of any arrangements which may at a subsequent date result
in a change in control of the Company. To the knowledge of the Company, as of
December 31, 1997, there are two shareholders of record that each hold 10% or
more of the outstanding Common Shares. The following table depicts the
shareholders and percent interest in the outstanding Common Shares:
- - --------------------------------------------------------------------------------
Shareholder of Record Number of Shares Percent of
Held Outstanding
Common Shares
- - --------------------------------------------------------------------------------
Royal Trust Investment Management Holdings Inc. 11,029,900 14.99%
- - --------------------------------------------------------------------------------
FMR Corp (Fidelity Management & Research Corp) 8,349,400 11.34%
- - --------------------------------------------------------------------------------
As of December 31, 1997, the director and executive officers of the
Company, as a group (10 persons) beneficially owned, directly or indirectly,
26,700 Common Shares, representing less than 1% of the total number of
outstanding Common Shares of the Company.
Item 5. Nature of Trading Market.
------------------------
The Common Shares of the Company have been listed and posted for trading on
the Toronto Stock Exchange (the "TSE") since July 31, 1996 (TSE Symbol: MNG)
and on the New York Stock Exchange (the "NYSE") since July 31, 1996 (NYSE
symbol: MDG). The Company's predecessor, FMC Gold, was also traded on the
NYSE. The following tables set forth the high and low closing sales prices as
well as average daily volume for the Common Shares on the TSE (in Canadian
dollars) and on the NYSE (in U.S. dollars) during the periods indicated:
28
<PAGE>
TSE
(In Canadian Dollars)
- - ------------------------------------------------------------------
High Low Average Daily
Volume
- - ------------------------------------------------------------------
1997
- - ------------------------------------------------------------------
First Quarter 7.00 5.00 37,074
- - ------------------------------------------------------------------
Second Quarter 7.70 6.05 10,428
- - ------------------------------------------------------------------
Third Quarter 6.95 5.05 160,265
- - ------------------------------------------------------------------
Fourth Quarter 6.80 2.75 161,324
- - ------------------------------------------------------------------
NYSE
(In U.S. Dollars)
- - ------------------------------------------------------------------
High Low Average Daily
Volume
- - ------------------------------------------------------------------
1997
- - ------------------------------------------------------------------
First Quarter 5 1/4 3 3/4 30,938
- - ------------------------------------------------------------------
Second Quarter 5 1/2 4 3/8 32,739
- - ------------------------------------------------------------------
Third Quarter 5 3 7/8 14,903
- - ------------------------------------------------------------------
Fourth Quarter 4 15/16 1 15/16 49,814
- - ------------------------------------------------------------------
As of March 31, 1998, there were 73,601,495 Common Shares of Meridian
issued and outstanding. Based on the records of Meridian's registrar and
transfer agent, The Trust Company of Bank of Montreal, as of December 31, 1997,
there were 430 registered holders of Meridian's Common Shares resident in the
United States, holding 24,171,772 Common Shares. This number represents
approximately 33% of the total issued and outstanding Common Shares of Meridian
on such date.
Item 6. Exchange Controls and Other Limitations Affecting Security Holders
------------------------------------------------------------------
CAPITAL
There are no governmental laws, decrees or regulations in Canada, other
than withholding taxes, restricting the remittance of interest, dividends or
other payments to non-resident holders of shares of the Company. See
information under "Item 7. Taxation" for a discussion of the Canadian
withholding tax applicable to such payments.
CHANGE OF CONTROL
The acquisition of control of the Company, a Canadian business, by non-
Canadians may be subject to the provisions of the Investment Canada Act
(Canada).
Under the Investment Canada Act (Canada), the acquisition by a non-Canadian
of control of a Canadian business which exceeds certain size thresholds is
reviewable and subject to approval by the Minister of the Industry (the
"Minister"). Such approval is to be granted where the Minister is satisfied
that the acquisition is likely to be of net benefit to Canada. The Investment
Canada Act (Canada) contains certain rules for determining whether a corporation
or other entity or individual is a Canadian or a non-Canadian. In addition, the
applicable transaction size thresholds are significantly higher if the acquiror
is
29
<PAGE>
a "WTO investor," which is defined in the Investment Canada Act (Canada) to
mean an entity controlled by nationals of, or individuals who are nationals of,
World Trade Organization member states.
The Investment Canada Act (Canada) sets out a number of rules and
presumptions relating to when control is or is not acquired:
(a) The acquisition of less than one-third of the outstanding voting
shares of the Company would be deemed not to constitute the
acquisition of control of the Company;
(b) The acquisition of more than one-third, but less than a majority, of
the voting shares of the Company would be presumed (subject to
rebuttal) to constitute the acquisition of control of the Company.
The presumption may be rebutted by showing that control in fact of the
Company is not, or would not be, exercised as a result of such
acquisition of voting shares;
(c) The acquisition of a majority of the voting interests of the Company
would be deemed to constitute an acquisition of control of the
Company; and
(d) The acquisition of all or substantially all of the assets of the
Company would be deemed to constitute an acquisition of control of the
Company.
Where an investment is reviewable, the non-Canadian making the investment
must file an application in the prescribed form with Industry Canada. Except in
limited circumstances, the Investment Canada Act (Canada) prohibits reviewable
direct investments from being implemented prior to approval being obtained
pursuant to the statutorily prescribed review procedure.
The Investment Canada Act (Canada) also provides that if an acquisition is
made in contravention of it, a court may make an order providing for certain
civil penalties, including requiring the non-Canadian acquiror to divest the
shares of the Company. The Investment Canada Act (Canada) also contains certain
criminal penalties in respect of the provision of false information.
Item 7. Taxation.
--------
CERTAIN TAX MATTERS
The following paragraphs summarize certain Canadian and United States
federal income tax considerations in connection with the receipt of dividends
paid on Common Shares of the Company and certain Canadian federal income tax
considerations in connection with a disposition of Common Shares by non-
residents of Canada. These tax considerations are stated in brief and general
terms and are based on Canadian and United States law currently in effect.
There are other potentially significant Canadian and United States federal
income tax considerations, including proposals to amend some of the rules
summarized herein, and state, provincial or local income tax consideration with
respect to ownership and disposition of the Common Shares which are not
discussed herein. The tax considerations relative to ownership and disposition
of the Common Shares may vary from taxpayer to taxpayer depending on the
taxpayer's particular status. Accordingly, prospective purchasers should
consult with their tax advisors regarding tax considerations which may apply to
their particular situation.
30
<PAGE>
CERTAIN CANADIAN FEDERAL INCOME TAX CONSEQUENCES
The Company believes that the following is a summary of the principal
Canadian federal income tax considerations generally applicable to holders of
Common Shares who, for purposes of the Income Tax Act (Canada) (the "Canadian
Tax Act"): (i) will hold Common Shares as capital property; (ii) deal at arm's
length with the Company; (iii) do not and will not have a fixed base or
permanent establishment in Canada; (iv) are not and will not be resident or
deemed to be resident in Canada at any time while they hold Common Shares; (v)
do not use or hold, and are not deemed to use or hold Common Shares in
connection with carrying on a business in Canada; and (vi) in the case of a non-
resident of Canada who carries on an insurance business in Canada and elsewhere,
the Common Shares are not "designated insurance property" pursuant to the
amendments to the Canadian Tax Act and Regulations publicly announced by the
Minister of Finance prior to the date hereof (the "Proposed Amendments") and are
not effectively connected with an insurance business carried on in Canada at any
time (a "non-resident holder"). This summary does not apply to a non-resident
holder with respect to whom the Company is a foreign affiliate within the
meaning of the Canadian Tax Act.
Certain recent amendments to the Canadian Tax Act (the "mark-to-market
rules") relating to financial institutions (including certain financial
institutions, registered securities dealers and corporations controlled by one
or more of the foregoing) will deem such financial institutions not to hold
their Common Shares as capital property for purposes of the Canadian Tax Act.
Shareholders that are financial institutions should consult their own tax
advisors to determine the tax consequences to them of the application of the
mark-to-market rules.
This summary is based on the current provisions of the Canadian Tax Act,
the Regulations thereunder, the current provisions of the Canada-United States
Income Tax Convention, 1980 (the "Tax Treaty"), and the current published
administrative practices of Revenue Canada, Customs, Excise and Taxation
("Revenue Canada"). This summary takes into account the Proposed Amendments and
assumes that all the Proposed Amendments will be enacted in their present form.
However, no assurances can be given that the Proposed Amendments will be enacted
in the form proposed, or at all.
Except for the foregoing, this summary does not take into account or
anticipate any changes in law, whether by legislative, administrative or
judicial decision or action, nor does it take into account provincial,
territorial or foreign income tax legislation or considerations, which may
differ from the Canadian federal income tax considerations described herein.
This summary is of a general nature only and is not intended to be, nor
should it be construed to be, legal, business or tax advice to any particular
holder of Common Shares.
DIVIDENDS
Dividends paid or credited to a non-resident holder on the Common Shares
will be subject to a non-resident withholding tax under the Canadian Tax Act at
the rate of 25%, although such rate may be reduced under the provisions of an
applicable income tax treaty. For example, under the Tax Treaty, the rate is
generally reduced to 15% in respect of dividends paid to a person who is the
beneficial owner and who is resident in the United States for purposes of the
Tax Treaty (and who owns less than 10% of the Company's voting stock). Under
the Tax Treaty, dividends paid to certain religious, scientific, charitable and
other tax exempt organizations and certain pension organizations that are
resident in, and exempt from tax in, the United States are exempt from Canadian
withholding tax. Provided
31
<PAGE>
that certain administrative procedures are observed by the holder, the Company
will not be required to withhold tax on dividend payments to such organizations.
DISPOSITION OF COMPANY COMMON SHARES
A non-resident holder will not be subject to tax under the Canadian Tax Act
on any capital gain realized on a disposition or deemed disposition of Common
Shares provided such shares are not "taxable Canadian property" to such holder
at the time of disposition. Generally, the Common Shares will not be taxable
Canadian property to a non-resident holder described above, provided that such
shares are listed on a prescribed stock exchange (which currently includes the
TSE and the NYSE), and the holder, persons with whom such holder does not deal
at arm's length, or the holder and such persons, has not owned (or had under
option) 25% or more of the issued shares of any class or series of the capital
stock of the Company at any time within five years preceding the date in
question.
Even if the Common Shares are taxable Canadian property to a non-resident
holder, the Tax Treaty will generally exempt such a holder who is resident in
the United States for purposes of the Tax Treaty from tax in respect of the
disposition provided the value of the Common Shares is not derived principally
from real property situated in Canada. The Company is of the view that the
value of the Common Shares is not currently derived principally from real
property situated in Canada.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The Company believes that the following general summary accurately
describes all material United States Federal income tax consequences under
current law which are generally applicable to a U.S. Holder (as defined below)
of Common Shares. This discussion does not address all potentially relevant
United States Federal income tax matters and it does not address consequences
peculiar to persons subject to special provisions of United States Federal
income tax law, such as those described below as excluded from the definition of
a U.S. Holder. In addition, this discussion does not cover any state, local or
foreign tax consequences. (See "Certain Canadian Federal Income Tax
Consequences" above).
The following discussion is based upon the sections of the Internal Revenue
Code of 1986, as amended (the "Code"), Treasury Regulations, published Internal
Revenue Service ("IRS") rulings, published administrative positions of the IRS
and court decisions that are currently applicable, any or all of which could be
materially and adversely changed, possibly on a retroactive basis, at any time.
In addition, this discussion does not consider the potential effects, both
adverse and beneficial, of any proposed legislation. The following discussion
is for general information only and it is not intended to be, nor should it be
construed to be, legal or tax advice to any holder or prospective holder of
Common Shares and no opinion or representation with respect to the United States
Federal income tax consequences to any such holder or prospective holders is
made. Accordingly, holders and prospective holders of Common Shares should
consult their own tax advisors about the Federal, state, local, and foreign tax
consequences of purchasing, owning and disposing of Common Shares, Purchase
Warrants and Common Shares issuable upon exercise of the Purchase Warrants.
U.S. HOLDERS
As used herein, a "U.S. Holder" includes a holder of Common Shares who is a
citizen or resident of the United States, a corporation created or organized in
or under the laws of the United States or of any political subdivision thereof,
any entity which is taxable as a corporation for U.S. tax purposes and which is
organized under the laws of the United
32
<PAGE>
States or any political subdivision thereof, and any other person or entity
whose ownership of Common Shares is effectively connected with the conduct of a
trade or business in the United States. A U.S. Holder does not include persons
subject to special provisions of United States Federal income tax law, such as
tax-exempt organizations, qualified retirement plans, financial institutions,
insurance companies, real estate investment trusts, regulated investment
companies, broker-dealers, nonresident alien individuals or foreign corporations
whose ownership of Common Shares is not effectively connected with the conduct
of a trade or business in the United States and shareholders who acquired their
stock through the exercise of employee stock options or otherwise as
compensation. This discussion is limited to U.S. Holders who hold their Common
Shares as capital assets.
DISTRIBUTIONS ON COMMON SHARES
U.S. Holders receiving dividend distributions (including constructive
dividends) with respect to Common Shares are required to include in their gross
income for United States Federal income tax purposes, the gross amount of such
distributions to the extent that the Company has current or accumulated earnings
and profits, without reduction for any Canadian income tax withheld from such
distributions. Such Canadian tax withheld may be credited, subject to certain
limitations, against the U.S. Holder's United States Federal income tax
liability or, alternatively, may be deducted in computing the U.S. Holder's
United States Federal taxable income by those who itemize deductions. (See more
detailed discussion under the heading "Foreign Tax Credit" below). To the
extent that such distributions exceed current or accumulated earnings and
profits of the Company, they will be treated first as a tax free return of
capital up to the U.S. Holder's adjusted basis in the Common Shares and
thereafter as gain from the sale or exchange of the Common Shares. Preferential
tax rates for net capital gains are applicable to a U.S. Holder which is an
individual, estate or trust. There are currently no preferential tax rates for
long-term capital gains for a U.S. Holder which is a corporation or is an entity
taxable as a corporation.
Dividends paid on the Common Shares will not generally be eligible for the
dividends received deduction provided to corporations receiving dividends from
certain United States corporations or foreign corporations doing business in the
United States.
FOREIGN TAX CREDIT
A U.S. Holder who pays (or has withheld from distributions) Canadian income
tax with respect to the ownership of Common Shares may be entitled, at the
option of the U.S. Holder, to either a deduction or a tax credit for such
foreign tax paid or withheld. Generally, it will be more advantageous to claim
a credit because a credit reduces United States Federal income taxes on a
dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income
subject to tax. This election is made on a year-by-year basis and applies to
all foreign taxes paid by (or withheld from amounts paid to) the U.S. Holder
during that year. There are significant and complex limitations which apply to
the credit, among which is the general limitation that the credit cannot exceed
the proportionate share of the U.S. Holder's United States income tax liability
that the U.S. Holder's foreign source income bears to his or her worldwide
taxable income. In the determination of the application of this limitation, the
various items of income and deduction must be classified into foreign and
domestic sources. Complex rules govern this classification process. There are
further limitations on the foreign tax credit for certain types of income such
as "passive income", "high withholding tax interest", "financial services
income", and certain other classifications of income. The availability of the
foreign tax credit and the application of the limitations on the credit are fact
specific and holders and prospective holders of Common Shares should consult
their own tax advisors regarding their individual circumstances.
33
<PAGE>
DISPOSITION OF COMMON SHARES
A U.S. Holder will recognize a gain or loss upon the sale of Common Shares
equal to the difference, if any, between (i) the amount of cash plus the fair
market value of any property received, and (ii) and shareholder's tax basis in
the Common Shares. This gain or loss will be a capital gain or loss if the
Common Shares are a capital asset in the hands of the U.S. Holder, and will be a
short-term or long-term capital gain or loss depending upon the holding period
of the U.S. Holder. Gains and losses are netted and combined according to
special rules in arriving at the overall capital gain or loss for a particular
tax year. Deductions for net capital losses are subject to significant
limitations. For U.S. Holders who are individuals, any unused portion of such
net capital loss may be carried over to be used in later tax years until such
net capital loss is thereby exhausted. For U.S. Holders that are corporations
(other than corporations subject to Subchapter S of the Code), an unused net
capital loss may be carried back three years from the loss year and carried
forward five years from the loss year to be offset against capital gains until
such net capital loss is thereby exhausted.
CURRENCY EXCHANGE GAINS OR LOSSES
U.S. Holders generally are required to calculate their taxable incomes in
United States dollars. Accordingly, a U.S. Holder who purchases Common Shares
with Canadian dollars will be required to determine the tax basis of such shares
in United States dollars based on the exchange rate prevailing on the settlement
date of the purchase (and may be required to recognize the unrealized gain or
loss, if any, in the Canadian currency surrendered in the purchase transaction).
Similarly, a U.S. Holder receiving dividends or sales proceeds from Common
Shares in Canadian dollars will be required to compute the dividend income or
the amount realized on the sale, as the case may be, in United States dollars
based on the exchange rate prevailing at the time of receipt, in the case of
dividends, and on the settlement date, in the case of sales, on an established
securities exchange. Any gain or loss recognized on a disposition of Canadian
currency in connection with the described transactions generally will be treated
as an ordinary gain or loss.
OTHER CONSIDERATIONS
In the following circumstances, the above sections of this discussion may
not describe the United States Federal income tax consequences resulting from
the holding and disposition of Common Shares:
FOREIGN PERSONAL HOLDING COMPANY
If at any time during a taxable year more than 50% of the total combined
voting power or the total value of the Company's outstanding shares is owned,
directly or indirectly, by five or fewer individuals who are citizens or
residents of the United States and 60% or more of the Company's gross income for
such year was derived from certain passive sources (e.g., from dividends
received from its subsidiaries), the Company would be treated as a "foreign
personal holding company." In that event, U.S. Holders that hold Common Shares
would be required to include in gross income for such year their allocable
portions of such passive income to the extent the Company does not actually
distribute such income.
FOREIGN INVESTMENT COMPANY
If 50% or more of the combined voting power or total value of the Company's
outstanding shares are held, directly or indirectly, by citizens or residents of
the United States, United States domestic partnerships or corporations, or
estates or trusts other than
34
<PAGE>
foreign estates or trusts (as defined by the Code Section 7701(a)(31)) and the
Company is found to be engaged primarily in the business of investing,
reinvesting, or trading in securities, commodities, or any interest therein, it
is possible that the Company might be treated as a "foreign investment company"
as defined in Section 1246 of the Code, causing all or part of any gain realized
by a U.S. Holder selling or exchanging Common Shares to be treated as ordinary
income rather than a capital gain. These rules should not apply because the
Company's activities do not consist primarily of investing, reinvesting or
trading in securities or commodities.
PASSIVE FOREIGN INVESTMENT COMPANY
As a foreign corporation with U.S. Holders, the Company could potentially
be treated as a passive foreign investment company ("PFIC"), as defined in
Section 1296 of the Code, depending upon the percentage of the Company's income
which is passive, or the percentage of the Company's assets which is producing
passive income. U.S. Holders who receive certain dividends on, or who dispose
of, shares of a PFIC are subject to an additional tax and to an interest charge
based on the value of deferral of tax on undistributed earnings of the PFIC for
the period during which the shares of the PFIC are owned, in addition to
treatment of any gain realized on the disposition of shares of the PFIC as
ordinary income rather than a capital gain. However, if the U.S. Holder makes a
timely election to treat a PFIC as a qualified electing fund ("QEF") with
respect to such shareholder's interest therein, the above-described rules
generally will not apply. Instead, the electing U.S. Holder would include
annually in his gross income his pro rata share of the PFIC's ordinary earnings
and net capital gain regardless of whether such income or gain was actually
distributed. A U.S. Holder of a QEF can, however, elect to defer the payment of
United States Federal income tax on such income inclusions. Special rules apply
to U.S. Holders who own their interests in a PFIC through intermediate entities
or persons. Once a foreign corporation is classified as a PFIC, it is generally
always classified as a PFIC, even if subsequent events would otherwise change
the corporation's status as a PFIC.
In determining whether a foreign corporation has the requisite proportion
of passive income or assets, a look-through rule is applied to the foreign
corporation's 25% or more owned subsidiaries (both direct and indirect), under
which a proportionate share of the assets of such subsidiaries are treated as
owned by the foreign parent corporation. Under this look through rule, the
Company would be treated as owning all of the assets of its direct and indirect
subsidiaries. Where the Company is treated as owning all of the assets of its
direct and indirect subsidiaries, it is unlikely that the Company would be
treated as a PFIC.
The Company believes that it has not been a PFIC for its fiscal years ended
December 31, 1997 and 1996. The Company's determination in this respect has
been made after a review of the PFIC regulations and the application of those
rules to its own past and present circumstances. If in a subsequent year the
Company concludes that it is a PFIC, it intends to make information available to
enable a U.S. Holder to make a QEF election in that year. Although it is
considered unlikely, there can be no assurance that the Company's determination
concerning its PFIC status will not be challenged by the IRS, or that it will be
able to satisfy record keeping requirements which will be imposed on QEF's.
However, the PFIC rules are exceedingly complex, and each U.S. Holder is
encouraged and expected to consult his or her own tax advisor regarding the
effect of the Company's potential PFIC status on the U.S. Holder.
35
<PAGE>
CONTROLLED FOREIGN CORPORATION
If more than 50% of the voting power of all classes of stock or the total
value of the stock of the Company is owned, directly or indirectly, by citizens
or residents of the United States, United States domestic partnerships and
corporations, or estates or trusts other than foreign estates or trusts, each of
whom owns 10% or more of the total combined voting power of all classes of stock
of the Company ("United States shareholder"), the Company could be treated as a
"controlled foreign corporation" under Subpart F of the Code. This
classification would effect many complex results including the required
inclusion by such United States shareholders in income of their pro rata shares
of "Subpart F income" (as specially defined by the Code) of the Company. In
addition, under Section 1248 of the Code, any gain from the sale or exchange of
stock by a U.S. Holder of Common Shares who is or was a United States
shareholder at any time during the five year period ending with the sale or
exchange is treated as ordinary dividend income to the extent of earnings and
profits of the Company attributable to the stock sold or exchanged. Because of
the complexity of these rules, and because it is not clear that these rules
would apply to the U.S. Holders of Common Shares (these rules apply only to
owners of 10% of the Company's shares), a more detailed review of these rules is
outside of the scope of this discussion.
The foregoing summary is a general discussion of the United States Federal
income tax considerations to U.S. Holders of Common Shares under current law.
It does not discuss all the tax consequences that may be relevant to particular
holders in light of their circumstances or to holders subject to special rules,
such as tax-exempt organizations, qualified retirement plans, financial
institutions, insurance companies, real estate investment trusts, regulated
investment companies, broker-dealers, nonresident alien individuals or foreign
corporations whose ownership of Common Shares is not effectively connected with
the conduct of a trade or business in the United States, shareholders who
acquired their stock through the exercise of employee stock options or otherwise
as compensation, and any other non-U.S. Holders. In addition, U.S. Holders may
be subject to state, local or foreign tax consequences. This discussion is not
intended to be, nor should it be construed to be, legal or tax advice to any
holder or prospective holder of Common Shares and no opinion or representation
with respect to the United States Federal income tax consequences to any such
holder or prospective holder is made. Holders and prospective holders should
therefore consult their own tax advisors with respect to their particular
circumstances. This discussion is limited to U.S. Holders who hold their Common
Shares as capital assets.
Item 8. Selected Financial Data.
-----------------------
The following selected financial data, for the years 1993 through 1997,
have been derived from the Company's (and its predecessor, FMC Gold's)
consolidated financial statements, including the consolidated balance sheets at
December 31, 1997 and 1996 and the related consolidated statements of
operations, statements of cash flows, and statements of changes in stockholder's
equity for each of the three years ended December 31, 1997, and the notes
thereto, appearing elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(in millions, except per share data)
Summary of Earnings
Sales $ 68.7 $ 76.2 $ 57.4 $ 63.4 $ 118.9
Costs and expenses
Cost of sales 55.0 56.2 30.1 38.8 78.6
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(in millions, except per share data)
Depreciation, depletion, and amortization 23.3 21.0 21.2 15.3 18.5
Exploration costs 31.1 13.4 10.8 10.9 14.2
Selling, general and administrative expenses 6.2 6.4 5.1 6.5 6.9
Provision for impairment of mining properties 26.2 - - - 60.6
- - -------------------------------------------------------------------------------------------------------------------
Total costs and expenses 141.8 97.0 67.2 71.5 178.8
- - -------------------------------------------------------------------------------------------------------------------
Operating income (loss) (73.1) (20.8) (9.8) (8.1) (59.9)
Interest income 3.7 4.9 5.9 8.7 8.3
Gain on sale of assets 0.2 - 1.7 - -
- - -------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (69.2) (15.9) (2.2) 0.6 (51.6)
Provision (benefit) for income taxes - - (4.5) (2.1) 2.2
Net income (loss) $ (69.2) $ (15.9) $ 2.3 $ 2.7 $ (53.8)
- - -------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share $ (0.94) $ (0.22) $ 0.03 $ 0.04 $ (0.73)
- - -------------------------------------------------------------------------------------------------------------------
Number of common shares used in earnings per share computations
(thousands) 73,601 73,563 73,484 73,484 73,484
- - -------------------------------------------------------------------------------------------------------------------
Total Assets at December 31 $ 147.9 $ 214.6 $ 225.2 $ 235.1 $ 238.6
- - -------------------------------------------------------------------------------------------------------------------
Total Dividends $ - $ 1.5 $ 3.7 $ 3.7 $ 3.7
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
See "Item 1. Description of Business" for additional information about the
Company's 1996 reorganization.
Item 9. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations.
- - ---------------------
Reference is made to the Consolidated Financial Statements of the Company
which form part of this Annual Report and on which the following discussion is
based. The Consolidated Financial Statements, furnished pursuant to Item 17,
are presented in accordance with Canadian GAAP which, in the case of the
Company, do not differ materially from U.S. GAAP. Differences between U.S. and
Canadian GAAP do not have a material effect on the financial statements
presented.
The Consolidated Financial Statements include the operations of the
Company, as well as Meridian Gold Canada, Inc., Meridian Gold Company, Meridian
Rossi Corporation, Meridian Jerritt Canyon Corporation, Meridian Beartrack
Company, Meridian Minerals Corporation, Meridian Gold (Delaware), Inc., Meridian
Gold Holdings (Cayman) Limited, Meridian Subco I Limited, Meridian Subco II
Limited, and Minera Meridian Limitada, the Company's direct and indirect
subsidiaries.
Included herein are certain forward-looking statements that involve various
risks, uncertainties and other factors. See "Cautionary Statement" on page 5 of
this Annual Report.
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
As a reflection of lower realized gold prices, sales for 1997 decreased to
$68.7 million, from $76.2 million in 1996. Gold production was 203,000 ounces,
versus 202,000 ounces in 1996, and the average realized price of gold was $334
per ounce, compared to $392 per ounce in 1996. Sales in 1997 include a gain of
$0.9 million on put options covering 33,000 ounces.
37
<PAGE>
Cost of sales in 1997 was lower than in 1996, at $54.9 million versus $56.2
million, due largely to lower costs at Jerritt Canyon resulting from higher ore
grades. Average cash costs declined to $215 per ounce of gold from $239 per
ounce in 1996, as a result of lower operating costs and increased ore grades at
Jerritt Canyon. Beartrack cash costs increased to $202 per ounce from $190 per
ounce due to slightly lower recoveries and the heap leach pad expansion. At
Jerritt Canyon, cash costs per ounce were driven lower by the higher grades,
which more than offset lower throughput, to $209 per ounce, versus $297 per
ounce in 1996.
Exploration spending of $31.1 million in 1997 was significantly higher than
the $13.4 million spent in 1996, owing to the significant amount of preliminary
development work that was completed at El Penon. The Company's policy is to
expense the cost of this work immediately, until the property is deemed capable
of commercial production. Exploration spending was also focused on defining a
resource at Rossi, and on increasing reserves at the Beartrack and Jerritt
Canyon operations. Selling, general and administrative expenses decreased to
$6.2 million in 1997, from $6.4 million in 1996.
In the third quarter of 1997, the Company recorded charges totaling $36.4
million relating to Jerritt Canyon and Beartrack due to the low gold price
environment.
Meridian's net loss for the year was $69.2 million, compared with a net
loss of $15.9 million in 1996. The Company did not recognize a tax benefit in
either 1996 or 1997.
1996 COMPARED WITH 1995
Sales increased to $76.2 million in 1996 from $57.4 million in 1995,
reflecting a full year's production from the Beartrack mine, which started
production in July 1995, partly offset by a slight decrease in production from
the Company's 30 percent interest in the Jerritt Canyon mine. Gold production
of 202,000 ounces increased 34 percent from 1995 levels, reflecting a 60,000
ounce increase at the Beartrack mine during its first full year of production,
offset in part by a 5,000 ounce reduction at Jerritt Canyon. The lower
production at Jerritt Canyon was a result of processing the remaining low grade
stockpiles through the wet mill.
The average realized price of gold increased to $392 per ounce from $389 in
1995, reflecting higher market prices during the first half of 1996 and the
benefit of hedging positions on Beartrack gold production.
Cost of sales increased to $56.2 million in 1996 from $30.1 million in 1995
due to the full year of production at Beartrack, higher mining costs at Jerritt
Canyon, and an additional charge of $5.6 million for a change in engineering
estimates associated with the Royal Mountain King mine which was shut down in
July 1994. Average cash costs of production increased to $239 per gold
equivalent ounce from $221 per gold equivalent ounce in 1995. Beartrack cash
costs increased to $190 per gold equivalent ounce from $166 in 1995 due to
processing the expected lower grade ores from the North Pit. Jerritt Canyon
cash costs per gold equivalent ounce of $297 were $47 per ounce higher than 1995
due to lower production and inclement weather in the first half of the year.
Exploration spending of $13.4 million in 1996 increased from the $10.8
million investment made in 1995, reflecting the Company's commitment to bring
advanced stage opportunities closer to a production decision. Spending
continued to be focused in 1996 on the El Penon project in northern Chile and
the Rossi project on the Carlin Trend in Nevada. Additional exploration
spending was also committed to increasing reserves around the Beartrack and
Jerritt Canyon operations. Selling, general and administrative expenses
38
<PAGE>
increased to $6.4 million in 1996 from $5.1 million in 1995, primarily due to a
reserve of $2.0 million against a note receivable from Arimetco Inc. related to
the November 1995 purchase of Paradise Peak. Arimetco Inc. filed for Chapter 11
bankruptcy in January 1997.
Net loss was $15.9 million in 1996 compared with net income of $2.3 million
in 1995. The Company did not recognize a tax benefit for 1996. The 1995 income
resulted from $4.5 million of tax benefits associated with the utilization of
net operating loss carrybacks which were made available through the previously
existing tax sharing agreement with FMC Corporation.
LIQUIDITY AND CAPITAL RESOURCES
Cash to meet the Company's operating needs, to finance capital expenditures
and to fund exploration activities was provided from operations and from
existing cash reserves. At December 31, 1997, cash and cash equivalents totaled
$54.3 million, and primarily took the form of short-term Euro deposits which
have varying maturities and are payable on demand.
Capital expenditures increased to $19.0 million in 1997, from $13.9 million
in 1996. 1997 expenditures related to Jerritt Canyon were $13.1 million, up
from $9.0 million in 1996, as a result of increased mine development. At
Beartrack, the heap leach pad expansion was completed in 1997, representing the
major portion of Beartrack's $5.7 million capital expenditures in 1997, compared
to expenditures of $4.7 million in 1996.
Expected cash requirements for 1998 include approximately $10.4 million for
planned capital expenditures, primarily directed toward further mine development
at Jerritt Canyon. Exploration spending in 1998 is expected to be approximately
$9.0 million. The Company expects to fund these cash requirements from cash
flow from operations and existing cash reserves.
Should the Company decide to develop any of the Company's exploration and
development properties, significant capital will be required. The Company
believes that these capital requirements could be funded by existing cash
reserves and by borrowings from third parties.
The company has and will continue to address all risk implications with
regard to the Year 2000 issue relating to its business and operations. All
operating systems will be shut down and tested during 1998 running a test Year
2000 environment. All critical customers and suppliers have been requested to
verify, in writing, any implications resulting from Year 2000 before year-end
1998. It is the Company's opinion that there will be no material operating or
financial impact to the Company due to the arrival of the new millennium.
Outlook
Gold production is estimated to be approximately 200,000 ounces in 1998,
based upon the continued operation of the Beartrack and Jerritt Canyon mines.
Cash costs should increase slightly at Beartrack producing due to lower ore
grades and should increase slightly at Jerritt Canyon due to increased use of
higher cost underground ore. Exploration at both operations will continue in
1998, although at somewhat lower levels than before, and grassroots exploration
at El Penon and elsewhere in South America is expected to increase.
39
<PAGE>
Item 10. Directors and Officers of Registrant.
------------------------------------
The following table provides the names of the directors and executive
officers of the Company as of December 31, 1997, the offices held by them, and
their terms of office. Directors are elected for one year terms and until their
successors have been duly elected, and officers serve at the pleasure of the
Board of Directors.
<TABLE>
<CAPTION> DIRECTOR OR
NAME AND RESIDENCE Position with Company OFFICER SINCE
- - ------------------ --------------------- -------------
<S> <C> <C>
John A. Eckersley (1) Director 1996
West Vancouver, BC
Brian J. Kennedy Director, President and 1996
Reno, Nevada Chief Executive Officer
David S. Robertson (2) Director, Chairman of the Board 1996
North York, Ontario
Patrick J. Mars (1) Director 1997
Toronto, Ontario
Malcolm W. MacNaught (2) Director 1997
Duxburg, Massachusetts
John C. White (1) (2) Director 1996
Oakville, Ontario
Christopher D.S. Bates Vice-President, 1996
Vancouver, BC Business Development
Donald L. Beckwith Vice-President, 1996
Denver, Colorado Operations
Edward H. Colt Vice-President, 1996
Reno, Nevada Finance and
Chief Financial Officer
Richard C. Lorson Vice-President, 1996
Reno, Nevada Exploration
Eden M. Oliver Corporate Secretary 1997
Toronto, Ontario
</TABLE>
- - -----------------------------------------------------------
(1) Member of Audit Committee as of January 1, 1998
(2) Member of Compensation Committee as of January 1, 1998
Item 11. Compensation of Directors and Officers.
--------------------------------------
During the fiscal year ended December 31, 1997, the Company and its
subsidiaries paid a total of $1,397,008 in cash compensation to its directors
and executive officers (10
40
<PAGE>
people). That amount does not take into account stock options granted to or
exercised by such individuals and other non-cash compensation, as more fully
described below.
Pursuant to applicable Canadian securities legislation, the Company is
required to disclose to shareholders compensation paid to its executive
officers. The following reflects certain information regarding executive
officer compensation that has been disclosed to shareholders of the Company
under applicable Canadian law.
SUMMARY COMPENSATION TABLE
The Company's Chief Executive Officer and each of the four most highly-
compensated officers who were serving as executive officers on December 31, 1997
(the "Named Executive Officers"), each of whom was employed with the Company's
predecessor prior to beginning service with the Company, were all appointed to
their respective positions with the Company during or after July 1996.
Accordingly, the following table and notes summarize the compensation of the
Named Executive Officers for the fiscal years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1) Long-Term
------------------------- COMPENSATION
NAME AND TITLE Salary Bonus Other(2) OPTION GRANTS All Other (1)
- - -------------- ------- ------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Brian J. Kennedy (3) (4) 1997 283,976 105,000 7,099 235,000 -
President and Chief Executive 1996 170,278 105,000 2,675 250,000 250,000
Officer
Donald L. Beckwith (4) 1997 146,433 79,308 3,661 65,000 -
Vice-President, Operations 1996 128,394 48,769 22,342 113,300 105,000
Edward H. Colt (2) (5) 1997 127,083 81,333 51,510 55,000 -
Vice-President, Finance and Chief 1996 15,376 3,125 - 113,300 65,000
Financial Officer
Christopher D.S. Bates 1997 153,750 57,302 - 50,000 -
Vice-President, Business 1996 75,000 25,875 - 105,000 -
Development
Richard C. Lorson, 1997 134,797 69,286 3,370 55,000 -
Vice President, Exploration 1996 108,215 30,012 500 113,300 -
</TABLE>
- - ------------------------------------
(1) All figures, other than numbers of options granted, are expressed in U.S.
dollars, except for those relating to Mr. Bates, which are expressed in
Canadian dollars. Mr. Bates joined the Company on July 1, 1996 and Mr.
Colt joined the Company on November 18, 1996.
(2) Consists of matching payments to a 401(k) Thrift Plan established by a
subsidiary of the Company. Excludes any perquisites and other benefits not
greater than the lesser of Cdn. $50,000 or 10% of the Named Executive
Officer's total annual salary and bonus. Relocation expenditures for Mr.
Colt of $48,333 are also included in "Other".
(3) On July 31, 1996, Mr. Kennedy was issued 10,000 non-voting Preferred
Shares, Series 1 of the Company, with a face amount of U.S. $100,000, which
amount is included under "All Other" 1996 compensation.
(4) "All Other" 1996 compensation includes, in the case of Messrs. Kennedy and
Beckwith, certain incentive payments made in 1996 by the former parent of
FMC Gold Company, the Company's predecessor.
(5) "All Other" 1996 compensation for Mr. Colt consists of certain payments in
connection with his hiring.
LONG-TERM INCENTIVE PLAN
41
<PAGE>
There were no awards or payouts to the Named Executive Officers during the
fiscal year ended December 31, 1997 under any arrangements of the Company which
would constitute a long-term incentive plan.
GRANTS OF OPTIONS
The following table provides information concerning the grants of options
under the Company's 1996 Stock Option Plan to the Named Executive Officers
during the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
Options % OF EXERCISE VALUE AT EXPIRATION
------- ----- --------- ------------- -------------
Name GRANTED TOTAL PRICE(1) GRANT DATE(2) DATE
- - ---- ------- ----- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Brian J. Kennedy 235,000 25.5 4.25 4.25 July 31, 2007
Donald L. Beckwith 65,000 7.0 4.25 4.25 July 31, 2007
Edward H. Colt 55,000 6.0 4.25 4.25 July 31, 2007
Christopher D.S. Bates 50,000 5.4 6.05 6.05 July 31, 2007
Richard C. Lorson 55,000 6.0 4.25 4.25 July 31, 2007
</TABLE>
- - --------------------------------------------
(1) Exercise prices are expressed in U.S. dollars, except for those relating to
Mr. Bates, which are expressed in Canadian dollars. All exercise prices
are the closing price of the Common Shares of the Company on either the TSE
or NYSE on the trading day prior to the grant date.
(2) This figure is the closing price of the Common Shares of the Company on
either the TSE or NYSE on the grant date.
OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table provides information concerning (i) options exercised
by any Named Executive Officer during the fiscal year ended December 31, 1997;
and (ii) the number and value at December 31, 1997 of unexercised options held
by the Named Executive Officers. In the table, "exercisable" options are those
for which the vesting period or conditions, if any, have been met, and "in-the-
money" options are those where the exercise price was less than the market price
of the Common Shares of the Company at December 31, 1997.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
OPTIONS EXERCISED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS(1)
---------------------- ------------------------ ------------------------
Securities AGGREGATE NOT NOT
---------- ---------- --- ---
NAME ACQUIRED VALUE(1) EXERCISABLE EXERCISABLE EXERCISABLE EXERCISABLE
- - ---- ---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Brian J. Kennedy 4,000 3,000 105,800 485,000 - -
Donald L. Beckwith - - 29,000 178,300 - -
Edward H. Colt - - - 168,300 - -
Christopher D.S. Bates - - - 155,000 - -
Richard C. Lorson - - 600 168,300 - -
</TABLE>
- - --------------------------------------------
(1) All figures relating to "value" are expressed in U.S. dollars.
PENSION PLANS
The Named Executive Officers are covered by a defined benefit pension plan
of Meridian Gold Company, the Company's principal operating subsidiary. The
following table provides information concerning the total annual retirement
benefit payable under these arrangements at retirement (normally at age 65).
42
<PAGE>
<TABLE>
<CAPTION>
YEARS OF SERVICE(1)
--------------------------------------------------------------------------------------
FINAL EARNINGS 10 15 20 25 30
- - -------------- ------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
100,000 13,444 20,165 26,887 33,609 40,331
150,000 20,944 31,415 41,887 52,359 62,831
200,000 28,444 42,665 56,887 71,109 85,331
250,000 35,944 53,915 71,887 89,859 107,831
300,000 43,444 65,165 86,887 108,609 130,331
400,000 58,444 87,665 116,887 146,109 175,331
</TABLE>
- - -----------------------------------------------
(1) All figures are expressed in U.S. dollars.
Compensation covered by this plan includes only the remuneration appearing
in the "Salary" and "Bonus" columns in the Summary Compensation Table. Benefits
are not subject to any deduction for social security or other offset amounts.
The Named Executive Officers have the following number of years of service
credited: Mr. Kennedy - 23, Mr. Bates - 2, Mr. Beckwith - 17, Mr. Colt - 2, and
Mr. Lorson - 15. Credited years of service, in the case of Messrs. Kennedy,
Beckwith and Lorson, include service with FMC Gold, the Company's predecessor.
EMPLOYMENT CONTRACTS
Each of the Named Executive Officers has entered into an employment
contract with the Company or Meridian Gold Company. Each of these contracts has
a term of five years, with an automatic renewal for five years. Compensation is
comprised of base salary, bonus and stock options, generally at the discretion
of the Board of Directors of the Company, together with certain benefits. The
employment contracts also provide for certain payments to the employee upon
certain defined events of termination of employment (including termination or a
change in responsibility after a change of control of the Company). These
payments range from 18 months to 24 months of the employee's regular monthly
compensation.
Item 12. Options to Purchase Securities From Registrant or Subsidiaries.
--------------------------------------------------------------
In 1989, the stockholders of FMC Gold approved the FMC Gold Company 1988
Long-term Incentive Compensation Plan, which authorized the Board of Directors
to grant awards, payable in the form of cash and non-qualified stock options, to
key employees if certain specific performance objectives were met over a four-
year period ended December 31, 1991.
The stock options granted in 1988 bear an exercise price ranging from
$9.625 to $11.25, the fair market value at the date of grant, and expire May 6,
1998. During 1992, additional options for 223,000 shares of common stock were
granted at an exercise price of $4.25 which was fair market value at date of
grant with an expiration date of April 2007.
In the 1996 reincorporation merger, each outstanding option to purchase
shares of FMC Gold common stock was converted by FMC Gold and the Company into
an option to purchase an equal number of Company Common Shares.
On June 7, 1996, the Company's Board of Directors adopted the Meridian Gold
Inc. 1996 Stock Option Plan (the "Plan"), which provides for the granting of
options to purchase Common Shares (the "Option Shares") to certain directors,
officers and employees of the Company (the "Participants"). The aggregate
number of Option Shares which may be reserved for issuance under this Plan shall
not exceed 3,750,000. On July 23, 1996, the Stockholders of FMC Gold approved
the adoption of the Plan. The purpose of the Plan is to
43
<PAGE>
develop the interest and incentive of eligible employees, officers and directors
of the Company in its growth and development by giving such Participants an
opportunity to purchase Common Shares on a favorable basis, thereby advancing
the interests of the Company, enhancing the value of the Common Shares for the
benefit of all shareholders and increasing the ability of the Company to attract
and retain skilled and motivated individuals in the service of the Company. The
Option Shares granted during 1997 were granted at exercise prices ranging from
$2.25 to $5.25 which was fair market value at date of grant, and with expiration
dates in 2007.
At December 31, 1997 options to purchase 2,574,075 Common Shares were
outstanding with terms up to ten years from the date of grant at an exercise
price equal to the market price prevailing at the time of the grants, as
detailed in the following table:
<TABLE>
<CAPTION>
Number of Option Price
COMMON SHARES $ PER SHARE
- - ---------------------------------------- --------------------------- --------------------------
<S> <C> <C>
Outstanding, December 31, 1994 396,300 4.250-10.625
Granted in 1995 -
Surrendered, 1995 (65,500) 4.250-10.625
- - ---------------------------------------- --------------------------- --------------------------
Outstanding, December 31, 1995 330,800 4.250-10.625
Granted in 1996 1,544,150- 3.650-4.500
Exercised in 1996 (113,100) 3.650-4.500
Surrendered, 1996 (81,900) 3.650-10.625
- - ---------------------------------------- --------------------------- --------------------------
Outstanding, December 31, 1996 1,679,950 3.650-10.625
Granted in 1997 932,900 2.250-5.250
Exercised in 1997 (4,000) 4.250
Surrendered in 1997 (34,775) 3.650-4.250
- - ---------------------------------------- --------------------------- --------------------------
Outstanding, December 31, 1997 2,574,075 2.250-10.625
- - ---------------------------------------- --------------------------- --------------------------
Exercisable, December 31, 1997 174,800 4.250-10.625
- - ---------------------------------------- --------------------------- --------------------------
</TABLE>
As of December 31, 1997, the directors and officers of the Company, as a
group (10 persons), held options to purchase an aggregate of 1,350,300 Common
Shares.
In 1996, the Company established a Shareholder Rights Plan. The Plan has a
term of three years and expires on July 31, 1999. In implementing the Plan, one
Right was distributed for each common share outstanding on July 31, 1996, as
well as each common share to be issued prior to the Separation Time. The
"Separation Time" is defined as the eighth trading day after the earlier of (i)
the first date of public announcement that a person or group other than certain
exempt persons (an "Acquiring Person"), together with affiliates or associates,
has acquired, or obtained the right to acquire, 20% or more of any class of
voting shares of the Company; or (ii) the date of commencement or announcement
of a Take-over Bid (as defined in the Shareholder Rights Plan Agreement).
A "Take-over Bid" means an offer to acquire voting shares of the Company
(or securities convertible into such shares) which, if successful, would result
in the person making such an offer ("the Offeror") beneficially owning 20% or
more of any class of the voting shares of the Company (including any such shares
held by the Offeror prior to the offer). A "Permitted Bid" and a "Competing
Permitted Bid" are Take-over Bids that are made by means of an offering circular
and (i) are made to all shareholders; (ii) are open for a period of not less
than 60 days; and (iii) contain certain withdrawal rights and extension terms.
The Shareholder Rights Plan Agreement provides that, until the Separation
Time, the Rights will be transferred with and only with the common shares.
After the Separation
44
<PAGE>
Time, separate Rights Certificates will be mailed to holders of record of the
common shares as of the Separation Time.
After the Separation Time and prior to the Expiration Time, the Rights are
exercisable by the holders. Each Right will entitle the holder to purchase one
common share for the Exercise Price (as defined in the Shareholder Rights Plan
Agreement).
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder.
Item 13. Interest of Management in Certain Transactions.
----------------------------------------------
None of the directors or officers of the Company, nor any associate or
affiliate of any such person, has or had any direct or indirect material
interest, since January 1, 1997, in respect of any matter that has materially
affected or will materially affect the Company or any of its subsidiaries.
None of the directors or officers of the Company, nor any associate or
affiliate of any such person, has been indebted to the Company or any of its
subsidiaries at any time since January 1, 1997, other than amounts owing for
purchases subject to usual trade terms, for ordinary travel and expense advances
and for other transactions in the ordinary course of business.
PART II
Item 14. Securities to be Registered.
---------------------------
None.
PART III
Item 15. Defaults Upon Senior Securities.
-------------------------------
None.
Item 16. Changes in Securities and Changes in Security for Registered
------------------------------------------------------------
Securities.
- - ----------
None.
PART IV
Item 17. Financial Statements.
--------------------
See Consolidated Financial Statements and Exhibits listed in Item 19 hereof
and filed as part of this Annual Report. The financial statements of the
Company have been prepared on the basis of Canadian GAAP.
Item 18. Financial Statements.
--------------------
Not applicable.
Item 19. Financial Statements and Exhibits.
---------------------------------
45
<PAGE>
Financial Statements
Consolidated balance sheets of the Company as at December 31, 1997 and
December 31, 1996, and consolidated statements of operations, cash flows and
changes in shareholders' equity for the years ended December 31, 1997, 1996 and
1995, together with the Auditor's report thereon and notes thereto.
<TABLE>
<CAPTION>
EXHIBITS
<S> <C>
The following exhibits are filed as part of this Annual Report:
2.1* Form of certificate representing Common Shares of the Company (filed with
the Company's Registration Statement on Form 8-B (No. 001-12003))
2.2* Form of certificate representing Installment Receipts of the Company
(filed with the Company's Registration Statement on Form 8-B (No. 001-
12003))
2.3* Articles of Amalgamation, as amended (filed with the Company's
Registration Statement on Form S-4 (No. 333-9171))
2.4* By-laws, as amended (filed with the Company's Annual Report on Form 20-F
filed with the Securities and Exchange Commission on May 24, 1997)
2.5* Executive Employment Agreement dated July 1, 1996 between the Company and
Christopher D.S. Bates (filed with the Company's Annual Report on Form 20-F
filed with the Securities and Exchange Commission on May 24, 1997)
2.6* Executive Employment Agreement dated July 31, 1996 between the Company and
Donald L. Beckwith (filed with the Company's Annual Report on Form 20-F
filed with the Securities and Exchange Commission on May 24, 1997)
2.7* Executive Employment Agreement dated December 1, 1996 between the Company
and Edward H. Colt (filed with the Company's Annual Report on Form 20-F
filed with the Securities and Exchange Commission on May 24, 1997)
2.8* Executive Employment Agreement dated July 31, 1996 between the Company and
Brian J. Kennedy (filed with the Company's Annual Report on Form 20-F filed
with the Securities and Exchange Commission on May 24, 1997)
2.9* Executive Employment Agreement dated July 31, 1996 between the Company and
Richard C. Lorson (filed with the Company's Annual Report on Form 20-F
filed with the Securities and Exchange Commission on May 24, 1997)
2.10* Meridian Gold Inc. 1996 Stock Option Plan (filed with the Company's
Registration Statement on Form S-4 (No. 333-9171))
2.11* Shareholder Rights Plan (filed with the Company's Annual Report on Form
20-F filed with the Securities and Exchange Commission on May 24, 1997)
2.12* Installment Receipt Agreement (filed with the Company's Annual Report on
Form 20-F filed with the Securities and Exchange Commission on May 24,
1997)
2.13* Joint Venture Agreement between Freeport Exploration Company and FMC
Corporation (filed with FMC Gold Company's Registration Statement on Form
S-1 (No. 33-14429))
</TABLE>
- - -----------------------------
* Incorporated by reference pursuant to Rule 12b-32 under the Securities
and Exchange Act of 1934, as amended
46
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS,
MERIDIAN GOLD INC.:
We have audited the accompanying consolidated balance sheets of Meridian Gold
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, cash flows, and changes in stockholders'
equity for each of the years in the three-year period ended December 31, 1997
which, as described in Note 1, have been prepared on the basis of accounting
principles generally accepted in Canada. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in Canada and in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Meridian Gold Inc.
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1997 in conformity with accounting principles generally
accepted in Canada.
/s/ KPMG Peat Marwick LLP
- - -------------------------
KPMG Peat Marwick LLP
Denver, Colorado
February 9, 1998
MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS
The accompanying consolidated financial statements and all of the data included
in this annual report have been prepared by and are the responsibility of the
management of the company. The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in Canada
and reflect management's best estimate and judgements based on currently
available information. The company has developed and maintains systems of
internal accounting controls in order to assure, on a reasonable and cost-
effective basis, the reliability of its financial information, and that its
assets are safeguarded from loss.
The Board of Directors is responsible for ensuring that management fulfills its
responsibilities for financial reporting and internal control. The Board
exercises its responsibilities through the Audit Committee of the Board which
meets with the external auditors to satisfy itself that the management's
responsibilities are properly discharged and to review the financial statements
before they are presented to the Board of Directors for approval.
The consolidated financial statements have been audited by KPMG Peat Marwick
LLP. Their report outlines the scope of their examination and their opinion on
the consolidated financial statements.
/s/ BRIAN J. KENNEDY /s/ EDWARD H. COLT
- - ----------------------------------- --------------------------------
BRIAN J. KENNEDY EDWARD H. COLT
President & Chief Executive Officer Vice President, Finance & Chief
Financial Officer
February 9, 1998
<PAGE>
MERIDIAN GOLD INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
December 31
(in thousands of United States dollars, except per share data)
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------
1997 1996 1995
- - -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 68,740 $ 76,230 $57,438
Costs and expenses
Cost of sales 54,945 56,216 30,065
Depreciation, depletion, and amortization 23,346 21,068 21,253
Exploration costs 31,107 13,357 10,826
Selling, general and administrative expenses 6,242 6,397 5,070
Provision for impairment of mining property 26,233 -- --
- - -------------------------------------------------------------------------------------
Total costs and expenses 141,873 97,038 67,214
- - -------------------------------------------------------------------------------------
Operating loss (73,133) (20,808) (9,776)
Interest Income 3,788 4,953 5,857
Gain on sale of assets 178 -- 1,680
- - -------------------------------------------------------------------------------------
Loss before income taxes (69,167) (15,855) (2,239)
(note 8) Income tax benefit (4,512)
- - -------------------------------------------------------------------------------------
Net income (loss) $(69,167) $(15,855) $ 2,273
- - -------------------------------------------------------------------------------------
(note 1) Earnings (loss) per common share $ (0.94) $ (0.22) $ 0.03
- - -------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MERIDIAN GOLD INC.
CONSOLIDATED BALANCE SHEETS
December 31
<TABLE>
<CAPTION>
(in thousands of United States dollars)
- - ------------------------------------------------------------------------------------------------------
1997 1996
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
(note 1) Cash and cash equivalents $ 54,321 $ 82,570
Trade receivables 1,249 1,768
(note 3) Inventories 9,982 16,763
Other current assets, less allowance of $2,000 in 1997 and 1996 3,359 2,717
- - ------------------------------------------------------------------------------------------------------
Total current assets 68,911 103,818
(note 4) Property, plant and equipment, net 75,687 106,634
(notes 1 and 12) Other assets 3,349 4,115
- - ------------------------------------------------------------------------------------------------------
Total assets $147,947 $214,567
- - ------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade and other $ 5,272 $ 7,549
(note 6) Accrued and other liabilities 8,878 10,709
- - ------------------------------------------------------------------------------------------------------
Total current liabilities 14,150 18,258
- - ------------------------------------------------------------------------------------------------------
(note 7) Other longterm liabilities 21,235 14,597
(note 1) SHAREHOLDERS' EQUITY:
Series 1 preferred shares, no par value, authorized
unlimited shares, 10,000 issued and outstanding in
1997 and 1996 100 100
Common shares, no par value, authorized unlimited shares
73,601,495 and 73,597,495 issued and outstanding in
1997 and 1996 68,449 68,432
Additional paid-in capital 3,658 3,658
Retained earnings 40,355 109,522
- - ------------------------------------------------------------------------------------------------------
Total shareholders' equity 112,562 181,712
- - ------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $147,947 $214,567
- - ------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
Signed on behalf of the Board of Directors:
Dr. David S. Robertson Brian J. Kennedy
Director Director
<PAGE>
MERIDIAN GOLD INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31
(in thousands of United States dollars)
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss) $(69,167) $(15,855) $ 2,273
- - ----------------------------------------------------------------------------------------------------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
Provision for depreciation, depletion and amortization 23,346 21,068 21,253
Gain on sale of asset (178) - (1,680)
Impairment of mining property 26,233 - -
Provision for reclamation, net of costs incurred 5,548 7,331 96
Provision for doubtful note receivable - 1,700 -
Issuance of preferred stock as compensation - 100
(INCREASE) DECREASE IN ASSETS:
Trade receivables 519 3,391 (3,363)
Inventories 6,781 (1,971) (9,171
Other current assets (642) (621) (2,538
Other assets 766 2,497 -
(DECREASE) INCREASE IN LIABILITIES:
Accounts payable, trade and other (2,277) 441 (4,002)
Accrued and other liabilities (1,831) 3,400 (1,716)
Amounts due to FMC Corporation - (2,275) 1,681
Other long-term liabilities 3,590 (3,847) (2,781)
- - ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (7,312) 15,359 52
- - ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital spending (18,959) (13,882) (36,943)
Disposal of property, plant and equipment 505 172 4,645
Increase in other assets - - (1,791)
- - ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (18,454) (13,710) (34,089)
- - ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 17 560
Dividends paid - - (3,674)
Repayments of long-term debt (2,500) (1,000) (1,500)
Capital contribution / return of capital related to the reincorporation 2,186
- - ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (2,483) 1,746 (5,174)
- - ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (28,249) 3,395 (39,211)
Cash and cash equivalents, beginning of year 82,570 79,175 118,386
- - ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 54,321 S 82,570 S 79,175
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Supplemental disclosure of cash flow information:
Cash paid and (refunds received) for income taxes during 1997, 1996, and 1995
were $2,193, ($1,454), and ($2,857), respectively.
See notes to consolidated financial statements
<PAGE>
MERIDIAN GOLD INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
Year ended December 31
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------------
Number of Number of Number of Additional
FMC Gold Meridian Gold Meridian Gold FMC Gold Meridian Gold Meridian Gold Paid-in Retained
(in thousands) Common Shares Preferred Shares Common Shares Common Shares Preferred Shares Common Shares Capital Earnings
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1994 73,484 $ 735 $ $ $ 68,609 $126,778
Net income 2,273
Cash dividend ($0.05 per share) (3,674)
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1995 73,484 735 68,609 125,377
Issuance of shares
upon exercise of
stock options 113 1 559
(note 1)
Reincorporation (73,563) 73,597 (736) 69,904 (69,168)
Net loss (15,855)
(note 1)
Return of capital
in connection
with the reincorporation (1,472)
(note 1)
Capital contribution
related to the
reincorporation 3,658
Preferred shares issued 10 100
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 - 10 73,597 - 100 68,432 3,658 109,522
Net loss - (69,167)
Issuance of shares
upon exercise
of stock - 4 17
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 - 10 73,601 $ - $ 100 $68,449 $ 3,658 $ 40,355
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31
note 1 PRINCIPAL ACCOUNTING POLICIES
- - --------------------------------------------------------------------------------
NATURE OF OPERATIONS AND BACKGROUND
Meridian Gold Inc. ("Meridian") is an exploration oriented gold producer.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Meridian and its predecessor, FMC Gold Company
("FMC Gold"), and all majority-owned subsidiaries (collectively referred to
as "the Company"). The accounts of joint ventures in which the Company holds
an interest are consolidated on a pro rata basis. All significant
intercompany accounts are eliminated in consolidation.
Meridian commenced operations in July, 1996 upon completion of a series of
transactions in which the Company was reincorporated in Canada and became
the successor to the business of FMC Gold (the Reincorporation). In
connection with the Reincorporation, FMC Gold shareholders received one
share of Meridian common stock and a $0.02 per share return of capital,
totaling approximately $1.5 million, in exchange for each common share held
in FMC Gold. The accompanying statement of stockholders' equity for the year
ended December 31, 1996 includes adjustments to give effect to the
Reincorporation. Additionally, FMC Corporation ("FMC") sold its 80 percent
interest in Meridian through a public offering of Meridian's common stock.
Concurrent with FMC's sale of its interest in Meridian, FMC made a capital
contribution to Meridian totaling approximately $3.7 million. FMC Gold
shares were subsequently cancelled.
As a result of the Reincorporation as a Canadian company, in 1996 the
Company began reporting its financial statements in accordance with Canadian
GAAP, which differs in some respects from U. S. GAAP. Differences between
U.S. and Canadian GAAP do not have a material effect on the financial
statements presented. The accompanying consolidated financial statements
are presented in U.S. dollars.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amount of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Meridian considers all highly liquid marketable securities with original
maturities of fewer than 91 days to be cash equivalents. Marketable
securities consist of Euro-time deposits with major commercial banks and
total approximately $54.4 million at December 31, 1997. The book value of
the marketable securities approximates fair value.
INVENTORIES
Inventories are stated at the lower of the average cost or market, and
include labor, materials, other production costs and depreciation. No
inventory value is assigned to stockpiled ore, except for in-process leach-
pad ore where cost includes labor, materials and other production costs.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including development costs and capitalized
interest associated with the construction of certain capital assets, is
recorded at cost. Depreciation and amortization for financial reporting
purposes is provided on a units of production basis or on the straight-line
basis over the shorter of the estimated lives of the assets or the estimated
proven and probable recoverable reserves. Gains and losses are reflected in
income upon sale or retirement of assets.
MINERAL EXPLORATION AND DEVELOPMENT COSTS
Mineral exploration costs are expensed as incurred. Development costs
applicable to mineralized properties deemed capable of commercial production
are capitalized and then amortized using the units of production method.
RECLAMATION
Reclamation and shutdown costs to be incurred following mine closures are
estimated and accrued over the life of each mine using the units of
production method.
REVENUE RECOGNITION
Sales are generally recognized upon shipment of gold and silver dore to
third parties.
<PAGE>
INCOME TAXES
The Company adopted the asset and liability method of accounting for income
taxes in 1997, and elected to apply the new method retroactive to January 1,
1995. The retroactive application of the new method of accounting for
income taxes had no effect on the financial statements for 1996 or 1995.
Under the asset and liability method of accounting for income taxes,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
FORWARD SALES AND HEDGING
In order to reduce its exposure to decreasing prices for future gold
production, the Company has hedged portions of future gold production by
entering into put option contracts. Costs associated with open contracts
were $1.8 million as of December 31, 1997 and $3.3 million as of December
31, 1996 and are included in other assets. The costs of the contracts are
deferred and recognized as a reduction of sales when the hedged production
is sold. Proceeds received upon the exercise of put options are recorded as
sales when the hedged production is sold.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share have been computed based on the weighted
average number of shares of common stock outstanding during the year
(73,600,788 shares in 1997, 73,563,087 shares in 1996 and 73,484,395 shares
in 1995).
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1997 the book value of the Company's financial instruments
approximates their fair value except as disclosed in Note 12.
RECLASSIFICATIONS
Certain amounts in the prior years' financial statements have been
reclassified to conform to the current year's presentation.
note 2 ACQUISITIONS AND DIVESTITURES
- - --------------------------------------------------------------------------------
On November 30, 1995, the Company's 100 percent interest in Paradise Peak
Corporation was sold to Arimetco Inc. for $4 million, including $2.0 million
in cash and a note receivable for $2.0 million, resulting in a $1.7 million
gain on the sale of the assets and the reversal of $4.5 million of accrued
reclamation costs through cost of sales. In January 1997, Arimetco Inc.
declared bankruptcy under Chapter 11. During the year ended December 31,
1996 the Company recorded a provision of $2.0 million for the promissory
note that was due in November 1996.
In June 1994, the Company agreed to purchase the remaining 14 percent
interest in the Beartrack joint venture from Minex for $6.0 million.
Installments of $1.5 million each were paid to Minex in June 1994 and June
1995, and two installments of $1.0 million each were paid in June 1996 and
June 1997. The balance payable to Minex is due in two $0.5 million
installments in 1998 and 1999.
note 3 INVENTORIES
- - --------------------------------------------------------------------------------
Inventories (at cost) consist of the following:
(in thousands) 1997 1996
----------------------------------------------------------------------------
Gold and silver $ 11 $ 1,863
Leach-pad ore 8,964 12,750
Materials and supplies 1,007 2,150
----------------------------------------------------------------------------
Total $9,982 $16,763
----------------------------------------------------------------------------
Gold and silver inventories are in the form of dore, which is delivered to
precious metal treatment facilities for further processing.
Leach pad ore inventory includes the cost of loading ore on the heap leach
pads at the Beartrack mine, and includes labor, materials and other
production costs. At December 31, 1997, there were approximately 13.2
million tons of ore under leach containing approximately 58,000 ounces of
gold.
<PAGE>
note 4 PROPERTY, PLANT AND EQUIPMENT
- - --------------------------------------------------------------------------------
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
<S> <C> <C>
Land and land improvements $ 15,792 $ 26,370
Less accumulated depreciation (5,682) (3,374)
10,110 22,996
Buildings 12,829 12,754
Less accumulated depreciation (6,396) (4,090)
6,433 8,664
Machinery and equipment 118,537 119,900
Less accumulated depreciation (89,265) (75,016)
29,272 44,884
Development costs 93,574 72,270
Less accumulated depletion (75,411) (48,490)
18,163 23,780
Construction in progress 11,709 6,310
Net property, plant and equipment $ 75,687 $106,634
Allocated to the projects as follows:
(in thousands) 1997 1996
Beartrack mine $ 53,149 $ 60,627
Jerritt Canyon mine 15,339 38,889
Rossi project 5,500 5,500
El Penon project 501 355
Royal Mountain King property 449 449
Administrative offices 749 814
- - --------------------------------------------------------------------------------
Net property, plant and equipment $ 75,687 $106,634
- - --------------------------------------------------------------------------------
</TABLE>
<PAGE>
note 5 JOINT VENTURE
- - --------------------------------------------------------------------------------
The Company's 30% interest in the Jerritt Canyon Joint Venture is reflected
in the consolidated financial statements on a pro rata basis. The Company's
share of the joint venture's assets, liabilities, revenues and expenses
included in the accompanying financial statements are as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
<S> <C> <C> <C>
Current assets $ 2,065 $ 2,832 $ 5,126
Property, plant and equipment, net 15,339 38,889 40,384
Investments and other assets 561 649 2,467
Total assets 17,965 42,370 47,977
Current liabilities 2,219 3,171 4,356
Long-term liabilities 9,720 4,565 2,907
Other -- 315 --
Total liabilities 11,939 8,051 7,263
- - -----------------------------------------------------------------------------------
Equity in Joint Venture $ 6,026 $34,319 $ 40,714
- - -----------------------------------------------------------------------------------
Revenue $ 30,559 $35,781 $ 37,622
Expenses
Cost of sales 29,060 27,524 24,605
Depreciation, depletion and amortization 10,053 10,316 16,498
Impairment of assets 26,233 3,225 896
- - -----------------------------------------------------------------------------------
Net loss $(34,787) $(5,284) $ (4,377)
- - -----------------------------------------------------------------------------------
Cash provided by (used in) operating
activities $(11,403) $ 9,932 $ 9,307
Cash used in investing activities (12,737) (8,821) (10,093)
Cash provided by (used in) financing activities -- -- --
- - -----------------------------------------------------------------------------------
</TABLE>
note 6 ACCRUED AND OTHER LIABILITIES
- - --------------------------------------------------------------------------------
Accrued and other liabilities consist of the following:
(in thousands) 1997 1996
Shutdown and reclamation accrual (notes 1 and 7) $3,356 $ 4,615
Notes payable (note 2) 500 2,500
Accrued bonus and payroll 1,354 1,228
Other 3,668 2,366
- - --------------------------------------------------------------------------------
Total $8,878 $10,709
- - --------------------------------------------------------------------------------
Included in notes payable at December 31, 1996 are short-term borrowings of
$1.5 million incurred during the Reincorporation. The note was paid in full
in January 1997.
note 7 OTHER LONG-TERM LIABILITIES
- - --------------------------------------------------------------------------------
Other long-term liabilities consist of the following:
(in thousands) 1997 1996
Shutdown and reclamation accrual (notes 1 and 6) $18,453 $11,707
Notes payable (note 2) 500 1,000
Other 2,282 1,890
- - --------------------------------------------------------------------------------
Total $21,235 $14,597
- - --------------------------------------------------------------------------------
Shutdown and reclamation accruals represent estimated costs of earthwork,
including detoxification and recontouring, revegetation, and stabilization.
The costs of heap-leach encapsulation and facility decommissioning are also
included in these accrued costs.
<PAGE>
In determining the estimated costs, the Company considers such factors as
changes in laws and regulations, the likelihood that additional permits will
be required, and requirements under existing operating permits. Such
analyses are performed on an ongoing basis.
In the fourth quarter of 1996, a new closure estimate to complete
reclamation of the Royal Mountain King mine was developed by an outside
engineering firm. Based on the new estimate, the reclamation liability was
increased by $5.6 million, reflecting increasingly stringent environmental
regulations, changing project conditions, and increased costs. The Royal
Mountain King mine was shut down in July 1994.
Although the ultimate amount of reclamation obligations to be incurred is
uncertain, as of December 31, 1997 Meridian has estimated these costs to be
$33 million, and at December 31, 1997, accrued reclamation costs, including
the current portion, were $21.8 million for all properties. The provision
for reclamation costs charged to operations was $9.7 million, $8.9 million
and $1.9 million in 1997, 1996 and 1995 respectively. Actual reclamation
expenditures were $4.2 million, $1.6 million, and $1.8 million in 1997,
1996 and 1995, respectively.
note 8 INCOME TAXES
- - --------------------------------------------------------------------------------
In 1995 and prior to the Reincorporation in 1996, the Company was included
in FMC's consolidated federal income tax return. Under a tax-sharing
agreement with FMC, the Company paid to FMC amounts generally equal to the
tax the Company would have been required to pay had it filed a separate
return, and FMC paid to the Company amounts generally equal to any tax
benefits the Company would have realized on a separate return basis which
were realized by FMC. Under the terms of the agreement, the Company is
obligated to reimburse FMC for any amounts, including penalties and
interest, that it may be assessed upon an examination of the consolidated
returns by the IRS, to the extent that the additional income taxes are
attributable to the Company's operations prior to the Recapitalization. The
Company believes that it has adequately provided for any amounts that may
ultimately be payable to FMC under the agreement.
On July 31, 1996, the Company received a $1.7 million settlement under the
tax sharing agreement, which amount was reflected as a recovery of taxes in
the financial statements for the year ended December 31, 1995.
In connection with the Reincorporation, Meridian and FMC jointly agreed to
elect to treat the disposition of the shares of Meridian by FMC as an asset
sale. As a result, Meridian's assets were adjusted to their fair market
value for income tax purposes. Accordingly, the Company's net operating
loss and alternative minimum tax credit carryforwards remained with FMC.
The income tax benefit in 1995 represents the intercompany tax allocation
under the tax sharing agreement, including the $1.7 million settlement.
There was no tax provision in 1997 and 1996.
The income tax provision (benefit) differs from that computed by applying
the United States applicable federal statutory rate of approximately 34
percent to income before taxes for the following reasons:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Year ended December 31
----------------------------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax provision (benefit) calculated using statutory tax rates $(23,516) $(5,391) (784)
Increase in valuation allowance for net deferred tax assets 23,441 5,371 765
Other 75 20 19
----------------------------------------------------------------------------------------------------
Actual tax provision (benefit) $ -- $ -- $ --
----------------------------------------------------------------------------------------------------
</TABLE>
The significant components of the Company's deferred tax assets and
liabilities at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
(in thousands) 1997 1996
----------------------------------------------------------------------------
<S> <C> <C>
Inventory $ -- $ 1,068
Reclamation reserves 5,969 2,186
Property, plant and equipment 27,145 5,860
Net operating loss carryforwards 340 923
Other, net 680 --
Total deferred tax assets 34,134 10,037
Valuation allowance (31,634) (8,193)
Deferred tax assets, net of allowance 2,500 1,844
----------------------------------------------------------------------------
Property, plant and equipment (2,500) (1,844)
----------------------------------------------------------------------------
Total deferred tax liabilities (2,500) (1,844)
----------------------------------------------------------------------------
Net deferred tax assets $ -- $ --
----------------------------------------------------------------------------
</TABLE>
<PAGE>
At December 31, 1997, the Company had a Canadian net operating loss
carryforward of approximately $1.0 million, of which $0.6 and $0.4 million
will expire in 2003 and 2004, respectively.
note 9 GEOGRAPHIC SALES AND SALES TO MAJOR CUSTOMERS
- - --------------------------------------------------------------------------------
Sales to unaffiliated customers by destination of sale are as follows:
Year ended December 31
(in thousands) 1997 1996
USA $17,545 $ --
Western Europe 51,195 75,724
----------------------------------------------------------------------------
Total $68,740 $75,724
----------------------------------------------------------------------------
The Company's gold and silver dore production is purchased and refined by
several European and United States refiners. Sales were to three refiners in
1997 and to two refiners in 1996, each representing 10 percent or more of
consolidated sales. Sales to these companies amounted to $68.7 million in
1997, and $75.7 million in 1996. The Company believes that several other
refiners would be willing to purchase the Company's production should any of
the current refiners discontinue buying the Company's production.
note 10 EMPLOYEE PLANS
Prior to July 31, 1996, all Company employees were covered by FMC's
retirement plan, post retirement health care and life insurance benefit
program, the costs of which were included in the amounts paid under the
management services agreement discussed in Note 14.
The Company has a defined benefit pension plan covering substantially all
salaried employees. Pension benefits are generally based on years of service
and final average yearly earnings. The plan was separated from the FMC
Corporation pension plan during 1996, and $1.5 million of FMC's plan assets
were transferred to the Company's plan effective January 1, 1997. The
Company's funding policy is to contribute the minimum amount required by
applicable regulations. The following table represents the plan's funded
status at December 31, 1997 and 1996:
----------------------------------------------------------------------------
(in thousands) 1997 1996
----------------------------------------------------------------------------
Projected benefit obligation $1,897 $1,130
Market value of plan assets 1,875 1,480
----------------------------------------------------------------------------
Projected benefit obligation in excess of or
(less than) plan assets 22 (350)
Unrecognized net gain 288 350
----------------------------------------------------------------------------
Accrued pension cost 310
----------------------------------------------------------------------------
Actuarial assumptions:
Weighted average discount rate 8.25% 8.25%
Weighted average rate of compensation increase 6.90% 6.90%
note 11 SHARE CAPITAL
- - --------------------------------------------------------------------------------
The authorized share capital of the Company consists of an unlimited number
of preferred shares without par value and an unlimited number of common
shares without par value. Preferred shares are issuable in series. The
Board of Directors is authorized to fix the designation, rights, privileges,
restrictions and conditions attaching to the shares of each series. The
preferred shares rank prior to the common shares with respect to dividends
and return of capital on dissolution. Except with respect to matters as to
which the holders of preferred shares as a class are entitled by law to
vote, the holders of preferred shares are not entitled to vote.
The Company has outstanding 10,000 shares of Series 1 preferred stock at
December 31, 1997 and 1996. The shares are redeemable by the Company at any
time and are subject to mandatory redemption by the holder on July 26, 2001
at $10 per share. Dividends at 5% per annum payable on the preferred shares
are recorded as compensation expense.
In 1989, the stockholders of FMC Gold Company approved the FMC Gold Company
1988 Long-term Incentive Compensation Plan (the "1988 Plan"), which
authorized the Board of Directors to grant stock options to key employees of
the Company. Under the terms of the
<PAGE>
1988 Plan, options were granted at the fair market value of the common stock
as of the date of grant. Stock options granted in 1988 have an exercise
price ranging from $9.625 to $10.625 and expire May 6, 1998. During 1992,
additional options were granted to purchase 223,000 shares of common stock
at an exercise price of $4.25, with an expiration date of April 2007. In
connection with the Reincorporation, FMC Gold stock options granted under
the 1988 Plan were converted to options to purchase a like number of common
shares of the Company.
During 1996, the Company's shareholders adopted the Meridian Gold Inc. 1996
Stock Option Plan (the "1996 Plan"), which provides for the granting of
stock options to certain directors, officers and employees of the Company.
A maximum of 3,750,000 shares of common stock are reserved for issuance
under the 1996 Plan. Options are granted at exercise prices equal to the
fair market value of the common stock at date of grant, for a term of ten
years. The options vest over periods of one to five years.
At December 31, 1997 options to purchase 2,564,075 common shares were
outstanding with terms ranging up to ten years as detailed in the following
table:
NUMBER OF OPTION PRICE
COMMON SHARES U.S. $ PER SHARE
----------------------------------------------------------------------------
Outstanding, December 31, 1994 396,300 4.250 - 10.625
Surrendered in 1995 (65,500) 4.250 - 10.625
----------------------------------------------------------------------------
Outstanding, December 31, 1995 330,800 4.250 - 10.625
Granted in 1996 1,544,150 3.650 - 4.500
Exercised in 1996 (113,100) 3.650 - 4.500
Surrendered in 1996 (81,990) 3.650 - 10.625
----------------------------------------------------------------------------
Outstanding, December 31, 1996 1,679,950 3.650 - 10.625
Granted in 1997 932,900 2.250 - 5.250
Exercised in 1997 (4,000) 4.250
Surrendered in 1997 (34,775) 3.650 - 4.250
----------------------------------------------------------------------------
Outstanding, December 31, 1997 2,574,075 2.250 - 10.625
----------------------------------------------------------------------------
Exercisable, December 31, 1997 174,800 4.250 - 10.625
----------------------------------------------------------------------------
In July 1996, the Company established a Shareholder Rights Plan. The Plan
has a term of three years and expires on July 31, 1999. In implementing the
Plan, one Right was distributed for each common share outstanding on July
31, 1996, as well as each common share to be issued prior to the Separation
Time. The "Separation Time" is defined as the eighth trading day after the
earlier of (i) the first date of public announcement that a person or group
other than certain exempt persons (an "Acquiring Person"), together with
affiliates or associates, has acquired, or obtained the right to acquire,
20% or more of any class of voting shares of the Company; or (ii) the date
of commencement or announcement of a Take-over Bid (as defined in the
Shareholder Rights Plan Agreement). A "Take-over Bid" means an offer to
acquire voting shares of the Company (or securities convertible into such
shares) which, if successful, would result in the person making such an
offer ("the Offeror") beneficially owning 20% or more of any class of the
voting shares of the Company.
The Shareholder Rights Plan Agreement provides that, until the Separation
Time, the Rights will be transferred with and only with the common shares.
After the Separation Time, separate Rights Certificates will be mailed to
holders of record of the common shares as of the Separation Time. After the
Separation Time and prior to the Expiration Time, the Rights are exercisable
by the holders. Each Right will entitle the holder to purchase one common
share for the Exercise Price (as defined in the Shareholder Rights Plan
Agreement).
<PAGE>
note 12 HEDGING CONTRACTS
- - --------------------------------------------------------------------------------
The Company has hedged portions of future gold production by entering into
put option contracts. At December 31, 1997, the carrying value of the
remaining options (at cost) was $1.8 million ($2.5 million at December
31,1996). The estimated market values of the put options as of December 31,
1997 and 1996, were approximately $9.2 million and $3.3 million,
respectively.
The options are exercisable at a strike price of $400 per ounce. The value
of these options varies with changes in the market price of gold. The
options are exercisable according to the following schedule:
Options Exercise
(ounces) Date
----------------------------------
33,000 12/29/98
32,000 12/29/99
32,000 12/27/00
27,000 12/27/01
----------------------------------
note 13 COMMITMENTS AND CONTINGENT LIABILITIES
- - --------------------------------------------------------------------------------
The Company leases office and warehouse space in Reno, Vancouver, and
Santiago, as well as various types of equipment (primarily mobile mining
equipment at the Beartrack mine) under operating leases. Total rent expense
under all operating leases amounted to $1.9 million, $2.1 million and $1.1
million for 1997, 1996 and 1995 respectively. Minimum future rentals under
noncancellable leases aggregated approximately $9.1 million as of December
31, 1997, and are estimated to be payable $2.0 million in 1998, $2.0 million
in 1999, $2.0 million in 2000, $2.0 million in 2001, $0.6 million in 2002,
and $0.3 million thereafter.
In October 1994, the Sierra Club Legal Defense Fund, Inc. ("Sierra"), on
behalf of certain other organizations, filed a lawsuit in Federal District
Court for the Western District of Washington at Seattle against the National
Marine Fisheries District ("NMFS") and other federal agencies for violation
of the Endangered Species Act (the "Act"), alleging the NMFS' biological
opinion failed to satisfy the requirements of the Act. Sierra, the federal
agencies and the Company, as intervenor, each filed a motion for summary
judgment. In November 1995, the Court ordered the federal agencies to
reinitiate consultation under Section 7 of the Act on the potential
environmental impacts of the Beartrack Mine Project (the "Project") on
threatened salmon or the designated critical habitat for salmon. The
plaintiffs did not seek, and the court did not impose, any injunction or
other restriction on the operation of the Beartrack Mine pending completion
of such consultation. On November 17, 1995, the court closed the case but
retained jurisdiction to resolve any disputes that may arise concerning the
reinitiated consultation schedule or to resolve issues once the reinitiated
consultation is completed. On January 1, 1997, the Forest Service formally
reinitiated consultation by submitting a revised biological assessment to
NMFS. Under Section 7(d) of the Act, the Forest Service may require
Meridian to cease an activity associated with mining operations if that
activity could preclude the development of reasonable and prudent
alternatives to the project pending the completion of the reinitiated
consultation. On July 3, 1996, the Forest Service completed its Section 7(d)
determination for the Beartrack mine operations and determined that, for the
following 12 months from that date, all ongoing and planned significant
activities at the mine could continue pending the reinitiated consultation,
with exception of: (1) proposed reconstruction of the leach pad run of the
mine road, and (2) proposed use of the soil stockpile area associated with
development of Phase III of the heap leach pad. The Forest Service
recognized that these latter two activities may be authorized upon further
review by the Forest Service prior to completion of the reinitiated
consultation. The Forest Service renewed its Section 7(d) determination in
July 1997 to run through February 1998. Under the Act's regulations,
consultation must be completed within 135 days of the date consultation is
initiated. An extension of 60 days can be imposed by the agencies. In
September 1997, NMFS and the Forest Service extended the consultation until
December 15, 1997 based on the listing of steelhead as a threatened species
under the Act. The reinitiated consultation is still ongoing as of February
9, 1998. Under the relevant statutory and regulatory authorities, the
results of a consultation can range from no impact to modest or significant
impact on the activities under review. In an extreme situation, a
consultation could result in the cessation of activities altogether, a
potential result which the Company believes to be remote in the case of
Beartrack Mine, which has been in operation and production since mid-1995.
The Company believes that the ongoing operation of the Beartrack Mine will
not jeopardize threatened species or adversely modify or destroy designated
critical habitat, and that upon completion of the reinitiated consultation,
the mine will be permitted to continue operation.
The Company is exposed to certain other contingent liabilities resulting
from litigation, claims and commitments incident to the ordinary course of
business. Management believes that the resolution of such matters will not
materially affect the financial position, results of operations or cash
flows of the Company.
<PAGE>
note 14 RELATED PARTY TRANSACTIONS
- - --------------------------------------------------------------------------------
Prior to July 31, 1996, 80 percent of the outstanding common stock of FMC
Gold Company was held by FMC, and the Company had entered into certain
agreements concerning income taxes (Note 8) and management services.
Under the management services agreement, the Company was charged at FMC's
direct and indirect cost, including allocated overhead, for certain general,
administrative and other services provided by FMC. The overhead allocations
of $0.8 million in 1996 and $1.0 million in 1995 were based generally on the
ratio of the Company's sales to consolidated FMC sales. The Company's
management believes that all determinations with respect to direct and
indirect costs, including allocated overhead, were made in a reasonable and
consistent manner.
The agreement also provided for borrowings of up to $50 million between the
parties on a short-term basis. All borrowings were payable on demand with
interest at a floating rate equal to FMC's current weighted average rate on
borrowings under its credit facilities, or its investing rate, for the
relevant period.
On July 31, 1996, FMC repaid its total borrowings and accrued interest,
totaling $79.1 million, to the Company. Total interest received in 1996 on
loans to FMC through July 31, 1996 was $3.1 million.
Also on July 31, 1996, FMC paid $3.658 million to Meridian Gold in
conjunction with the Reincorporation, which was recorded as a capital
contribution.
The following schedule summarizes the activity of indebtedness to and from
FMC in 1996 and 1995.
----------------------------------------------------------------------------
(in thousands) Loan due Amounts due
from FMC from (to) FMC
----------------------------------------------------------------------------
BALANCE DECEMBER 31, 1994 120,326 (594)
Increase in amounts loaned 51,500 --
Interest charges -- 5,737
Payments made by FMC for Meridian Gold -- (18,480)
Charges from FMC for services and materials -- (1,808)
Payments made by Meridian Gold -- 19,040
Payments received by Meridian Gold (91,000) (6,170)
BALANCE DECEMBER 31, 1995 80,826 (2,275)
Increase in amounts loaned 39,500 --
Interest charges -- 3,107
Payments made by FMC for Meridian Gold -- (5,801)
Charges from FMC for services and materials -- (1,176)
Payments made by Meridian Gold -- 9,868
Payments received by Meridian Gold (120,326) (3,723)
----------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 $ 0 $ 0
----------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 $ 0 $ 0
----------------------------------------------------------------------------
FMC continues to be obligated under a $75 million issue of exchangeable
senior subordinated debentures payable by FMC. The debentures bear interest
a 6 3/4% and are exchangeable, at $15 1/8 per share, subject to adjustment,
into Meridian Gold Inc. common stock. In conjunction with the
Reincorporation, FMC was granted a right, exercisable during the period
beginning January 31, 1998 and ending April 30, 1998, to purchase at the
then fair market value, an option from the Company to buy up to an aggregate
of $75 million of the Company's common shares until January 16, 2000 at an
exercise price of $15.125 per share. Such option may only be exercised by
FMC to satisfy its obligation to the holders of the exchangeable debentures
described above, to the extent that those holders elect to exercise their
right of exchange.
In consideration for services rendered by Brian J. Kennedy during the
Reincorporation, the Company issued to Mr. Kennedy 10,000 shares of Series 1
Preferred Stock. The shares were valued at the Canadian dollar equivalent
of $100,000, determined immediately prior to the closing of the
Reincorporation.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused the Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MERIDIAN GOLD INC.
By: /s/Brian J. Kennedy
-------------------------------------
Brian J. Kennedy
President and Chief Executive Officer
Date: April 16, 1998
<PAGE>
INDEX TO EXHIBITS
The following documents are being filed with the Commission as exhibits to,
and are incorporated by reference into, and form a part of, this Annual Report
on Form 20-F.
NUMBER EXHIBIT
- - ------ -------
2.1* Form of certificate representing Common Shares of the Company (filed with
the Company's Registration Statement on Form 8-B (No. 001-12003))
2.2* Form of certificate representing Installment Receipts of the Company
(filed with the Company's Registration Statement on Form 8-B
(No. 001-12003))
2.3* ARTICLES OF AMALGAMATION, AS AMENDED (FILED WITH THE COMPANY'S
REGISTRATION STATEMENT ON FORM S-4 (NO. 333-9171))
2.4* By-laws, as amended (filed with the Company's Annual Report on Form 20-F
filed with the Securities and Exchange Commission on May 24, 1997)
2.5* Executive Employment Agreement dated July 1, 1996 between the Company and
Christopher D.S. Bates (filed with the Company's Annual Report on Form 20-
F filed with the Securities and Exchange Commission on May 24, 1997)
2.6* Executive Employment Agreement dated July 31, 1996 between the Company and
Donald L. Beckwith (filed with the Company's Annual Report on Form 20-F
filed with the Securities and Exchange Commission on May 24, 1997)
2.7* Executive Employment Agreement dated December 1, 1996 between the Company
and Edward H. Colt (filed with the Company's Annual Report on Form 20-F
filed with the Securities and Exchange Commission on May 24, 1997)
2.8* Executive Employment Agreement dated July 31, 1996 between the Company and
Brian J. Kennedy (filed with the Company's Annual Report on Form 20-F
filed with the Securities and Exchange Commission on May 24, 1997)
2.9* Executive Employment Agreement dated July 31, 1996 between the Company and
Richard C. Lorson (filed with the Company's Annual Report on Form 20-F
filed with the Securities and Exchange Commission on May 24, 1997)
2.10* Meridian Gold Inc. 1996 Stock Option Plan (filed with the Company's
Registration Statement on Form S-4 (No. 333-9171))
2.11* Shareholder Rights Plan (filed with the Company's Annual Report on Form
20-F F filed with the Securities and Exchange Commission on May 24, 1997)
2.12* Installment Receipt Agreement (filed with the Company's Annual Report on
Form 20-F filed with the Securities and Exchange Commission on May 24,
1997)
2.13* Joint Venture Agreement between Freeport Exploration Company and FMC
Corporation (filed with FMC Gold Company's Registration Statement on Form
S-1 (No. 33-14429))
- - ------------
* Incorporated by reference pursuant to Rule 12b-32 under the Securities and
Exchange Act of 1934, as amended.
