UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required]
For the fiscal year December 31, 1996 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 0-9370
-------------------
USMX, INC.
(Exact name of registrant as specified in its charter)
-------------------
Delaware 84-1076625
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
141 Union Boulevard, Suite 100
Lakewood, Colorado 80228
(Address of principal executive (Zip Code)
offices)
(303) 985-4665
Registrant's telephone number, including
area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section
12(g) of the Act:
Common Stock, $.001 Par Value
(Title of class)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
USMX, INC.
(Registrant)
Date: April 30, 1997 By: /s/ Greg Pusey
-----------------------
Greg Pusey, President
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12 and 13 are anticipated to
be included in the definitive proxy statement
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
Items 1 and 2. Business and Properties...........................................................2
Introduction.......................................................................2
History of Operations..............................................................3
The Illinois Creek Project.........................................................4
The Thunder Mountain Project.......................................................10
Montana Tunnels....................................................................13
Exploration........................................................................14
Mexico 15
RISK FACTORS 17
General Risks Related to the Mining Industry.......................................18
Specific Risks Related to USMX.....................................................21
Specific Risks Related to Dakota...................................................25
Risks Related to the Merger........................................................26
Employees..........................................................................27
Financial Information about Foreign and Domestic Operations and Export Sales.......27
Glossary of Terms..................................................................28
Item 3. Legal Proceedings........................................................................33
Item 4. Submission of Matters to a Vote of Security Holders......................................33
Item 5. Market For The Registrant's Common Equity And Related Stockholder Matters................34
Item 6. Selected Financial Data..................................................................34
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....35
Going Concern Uncertainty..........................................................35
Liquidity and Capital Resources....................................................35
Results of Operations..............................................................38
Item 8. Financial Statements and Supplementary Data..............................................44
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....70
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........................70
INDEX TO EXHIBITS....................................................................................71
</TABLE>
<PAGE>
PART I
Items 1 and 2. Business and Properties.
Introduction.
Capitalized terms not defined in the text are defined in the Glossary
of Terms on pages 28 through 32.
USMX, Inc. (the "Company" or "USMX") is a Delaware corporation which
was founded in 1979. USMX exclusively engaged in exploration for precious metal
properties until 1988 when it developed the Green Springs Mine in east central
Nevada. During the period 1988 through 1995, while USMX continued its
exploration activity it also produced approximately 273,000 ounces of gold from
Green Springs and three additional mines and successfully closed and reclaimed
the Green Springs Mine. USMX was the recipient of awards for its performance in
the areas of environmental protection, reclamation and safety. Mining was
completed in October 1995 at USMX's remaining production unit, the Goldstrike
Mine, in southwestern Utah. USMX expects to complete reclamation of the
Goldstrike Mine in 1997.
USMX views exploration as an important means of growth, and has
historically explored several projects annually. During 1996, USMX continued its
exploration efforts on a limited basis outside of the United States, principally
in Mexico.
USMX's principal focus in 1996 was the development of its Illinois
Creek Project (the "Project") in west central Alaska. In February 1996 USMX
completed its feasibility study of the Project and received a commitment for
project financing. In May 1996 key permits necessary for mining, heap leaching
and dam construction were received and USMX commenced construction of the mine
and related facilities. The Air Quality Permit was received in June 1996.
Effective July 11, 1996, USMX acquired leasehold and other property interests in
the Project from North Pacific Mining Corporation ("NPMC"), a subsidiary of Cook
Inlet Region ("CIRI"), in exchange for 1,540,663 shares of USMX Common Stock. As
a result of this transaction, NPMC owns approximately 9.5% of USMX's issued and
outstanding Common Stock. In addition, NPMC received a 5% net return royalty on
production from the Illinois Creek Upland Mining Lease. Also effective July 11,
1996, USMX entered into the Rothschild Credit Agreements for a $22,000,000
facility to finance the development and construction costs of the Project.
During 1996 USMX substantially completed construction of a 90-person
man camp, a 6.5 mile road to connect the camp with the deposit area and the site
of the process facility, a double synthetic, modified valley fill heap leach
pad, a rotary kiln to produce calcined lime and a carbon gold recovery plant. In
addition, approximately 115,000 tons of overliner material and run-of-mine ore
were placed on the leach pad. Minor construction and a leak test of the leach
pad will have to be completed before start-up currently scheduled for mid-May of
1997. Leaching is scheduled to commence upon successful completion of the
leakage test of the liner system and completion of loading ore on the first
leach cell. If the initial leak test is successful and normal weather prevails,
the first gold production is anticipated by early summer of 1997.
On January 3, 1997 the Company entered into an agreement in principle
to merge ("Merger") with Dakota Mining Corporation ("Dakota"). The Merger is
subject to, among other things, stockholder approval. A definitive Merger
Agreement was executed on February 5, 1997. On March 17, 1997, Dakota filed a
Registration Statement with the Securities and Exchange Commission ("SEC")
regarding this transaction, including a preliminary draft Joint Proxy Statement
/ Prospectus. The Annual Meeting is scheduled for May 27, 1997.
History of Operations
USMX's first producing mine, the Green Springs Mine, commenced
production in June 1988. USMX completed mining, crushing and stacking operations
at Green Springs in June 1990. Reclamation of pits, haul roads and waste dumps
commenced in 1990 and continued through 1993. Rinsing of the heaps was initiated
during 1992 to meet final closure requirements. During 1993, rinsing of the
heaps and reclamation of the plantsite were completed. During the life of the
Green Springs Mine, USMX received environmental and safety awards for this
operation while producing a total of 69,331 ounces of gold. USMX received the
1992 State of Nevada Governor's Award for Excellence in Mine Reclamation in
connection with several of USMX's Nevada mines which included the Green Springs
Mine. The Governor's award, made jointly by the State of Nevada, U.S. Bureau of
Land Management and U.S. Forest Service was awarded to USMX in recognition of
outstanding achievement in innovative design, superior mine planning and
commitment to reclamation from project commencement to closure.
USMX commenced open pit mining at the Casino Mine in Nevada in June
1990 and completed mining in May 1991. In July 1991, USMX commenced mining at
the Winrock Mine. Mining and crushing were completed at the Winrock Mine in June
1992. The Casino and Winrock Mines shared a common heap leaching facility. USMX
produced a total of 48,953 ounces of gold from the Casino/Winrock project prior
to its sale on August 27, 1993.
In May 1990, USMX completed the purchase of the Alligator Ridge Mine in
Nevada, which included partially leached gold ore on heaps, gold recovery
facilities, a mining fleet, a mill, and approximately 26,000 acres of mineral
interests in the Alligator Ridge trend. During its tenure at the Alligator Ridge
Mine, USMX produced 50,188 ounces of gold. Construction of the crushing and gold
recovery facilities at a satellite facility, designated the Yankee Mine, was
completed during the first quarter of 1992. USMX produced 26,220 ounces of gold
at the Yankee Mine between the time of initial gold production in June 1992 and
its sale on August 27, 1993. USMX's Casino/Winrock, Alligator Ridge and Yankee
Mines, together with surrounding exploration prospects, were sold in two
separate transactions in 1993 for a total of $20 million cash, plus the
assumption by the buyer of related obligations, including reclamation
liabilities.
Effective November 1, 1992, USMX acquired from Tenneco Corporation
("Tenneco"), the stock of Tenneco Minerals Company-Utah ("TMC-Utah"), owner and
operator of the Goldstrike Mine located approximately 35 miles northwest of St.
George, Utah. Soon after the acquisition, the name of this wholly owned
subsidiary was changed to USMX of Utah, Inc. Gold production from the Goldstrike
Mine since November 1, 1992, was 77,182 ounces, including 6,266 ounces of gold
produced in 1995. During 1995, USMX was recognized for its reclamation efforts
at the Goldstrike Mine when it received the 1995 Earth Day Award from the State
of Utah Department of Natural Resources and Division of Oil, Gas and Mining.
Access to the Goldstrike Mine is by State Highway 212 to a point
approximately 21 miles northwest of St. George, then by well-maintained gravel
road over a distance of approximately 14 miles. Mining operations at the
Goldstrike Mine were completed in October 1994. Leaching was completed in
December 1995. Disturbed areas at the Goldstrike Mine were largely reclaimed
during 1995 except for the heaps and the plant site. Reclamation of the heaps
was begun during 1995 with rinsing of the second heap commencing in January
1996, and expected to continue through 1997. A pilot test utilizing a
bio-reactor for the passive treatment of heap effluent was initiated in mid-1996
and is expected to be completed in early 1997. Once rinsing of the second heap
is complete and a closure plan has been approved by the regulatory agencies, the
heap will be recontoured, covered with topsoil and seeded with various native
plant species. In addition, the process plant will be dismantled and the plant
site reclaimed.
USMX has provided approximately $1,700,000 to the State of Utah as
reclamation surety. The primary lease covering the mine permit area has been
terminated; however, a post termination agreement, dated July 16, 1996, provides
for USMX's continued occupancy during ongoing reclamation activities.
The Illinois Creek Project
History
The Illinois Creek Project is a moderate grade, near surface
gold-silver deposit. It consists of two State of Alaska Mining Leases, totaling
62,480 acres. The Illinois Creek Project is part of a large polymetallic
district covering 400 square miles in the southern Kaiyuh Mountains. The area
was first explored by Anaconda Minerals as part of a joint venture with CIRI in
1980. Subsequent to Anaconda Minerals' activities, the area was explored by
Goldmor Group, Ltd., NPMC, and Echo Bay in association with NPMCUSMX commenced
its exploration activities in August 1994. USMX has drilled 61 core holes and 89
reverse circulation holes, totaling approximately 32,000 feet. This drilling
succeeded in increasing the minable reserve to about 442,000 contained
equivalent ounces of gold and provided geotechnical information necessary for
pit design and engineering.
USMX made payments to NPMC totaling $100,000 in 1994 to evaluate the
Illinois Creek property, which consists of the Illinois Creek Upland Mining
Lease and the Round Top Upland Mining Lease. USMX subsequently entered into an
agreement with NPMC effective December 16, 1994, which was amended on February
6, 1996 (the "NPMC Agreement") to acquire these leases. Pursuant to the NPMC
Agreement, USMX agreed to make a $1,000,000 non-refundable payment to NPMC in
cash or shares of USMX Common Stock. USMX elected to make the payment in Common
Stock, and based upon the average market price of the Common Stock on Nasdaq as
provided in the NPMC Agreement, USMX was required to issue to NPMC 449,754
Shares of Common Stock. USMX also agreed that, upon obtaining the necessary
permits and if no material adverse economic change had occurred, USMX would make
a production decision and issue to NPMC an additional $3,000,000 in cash or
Common Stock. USMX received the key permits related to the Project in May 1996,
and determined that no material adverse economic change had occurred with
respect to the Project economics. USMX made a production decision and agreed to
issue to NPMC an additional 1,090,909 shares of Common Stock. The calculation of
the number of shares was based on the average market price of the Common Stock
on Nasdaq as provided in the NPMC Agreement.
Effective July 11, 1996, USMX issued the aggregate of 1,540,663 Common
Stock to NPMC. As a result of this transaction, NPMC owns approximately 9.5% of
USMX's issued and outstanding Common Stock. USMX also granted a security
interest to NPMC in the property, which is subject to a subordination
arrangement with Rothschild on the Project (see below). USMX had also agreed
with NPMC to file a Registration Statement relating to the resale of these
shares, which Registration Statement has been filed and declared effective by
the SEC. USMX has agreed to use its best efforts to keep the Registration
Statement effective until NPMC has sold these shares or until June 1999,
whichever occurs sooner.
In addition to the Common Stock, NPMC has the right to enter into a
mining venture agreement with USMX pursuant to which USMX would transfer to NPMC
an undivided 25% interest in both Illinois Creek Mining leases, or to receive a
5% net return royalty. NPMC chose to receive a 5% net return royalty on
production from the Illinois Creek Upland Mining Lease. No decision has been
made regarding the property covered by the Round Top Upland Mining Lease, as
USMX has not completed significant exploration work there.
If USMX delineates the existence of additional ore reserves on the
lease known as the Illinois Creek Upland Mining Lease, which increases the total
proven ore reserves to at least 1,000,000 ounces of equivalent gold ore reserves
beyond the mineralization stated in USMX's February 1996 feasibility report,
then NPMC will have the right to elect to participate in subsequent mining
operations with respect to those additional reserves for a 25% working interest
by reimbursing USMX 120% of NPMC's 25% share of exploration, development and
capital costs incurred by USMX subsequent to February 1996 which are directly
related to delineation and/or production of the additional reserves.
Pursuant to the NPMC Agreement, USMX has until December 16, 1997 to
achieve ("Commercial Production") which is defined as the delivery to a bona
fide purchaser of minerals produced for a minimum period of 45 consecutive days
at not less than 70% of the pro forma production capacity as set forth in the
Project feasibility report. This period may be extended at the option of USMX
for two additional one-year periods upon payment by USMX of a $300,000 advance
royalty, adjusted for inflation, for each one-year extension. The NPMC Agreement
terminates on December 16, 1999 if USMX has not achieved commercial production
by that date.
Location, Access, Terrain and Climate
The Illinois Creek Project site is located in the southern Kaiyuh
Mountains in the western interior of Alaska. The project is located
approximately 57 miles southwest of Galena and 23 miles east of the Yukon River.
It is equidistant from Fairbanks and Anchorage which lie approximately 320 miles
to the east and southeast of the Project respectively.
Access to the site is by air. Equipment and supplies are transported to
the site by land, sea and air. At the present time the most economical way to
transport freight to the site is from Seattle, Washington to Anchorage, Alaska
by barge. From Anchorage, it travels by truck or rail to Nenana. From Nenana, it
is moved down river on barge to Galena. From Galena, it is transported by air to
the site. The mine site is connected to the airstrip by a 6.5 mile road.
The climate is sub-arctic and characterized by large, seasonal extremes
in temperature and daylight. Average winter temperatures are -7(Degree) F to
20(Degree)F; mean summer temperatures range from 35(Degree)F to 67(Degree)F.
Regional extremes are -63(Degree)F to 93(Degree)F. Precipitation averages 15 to
18 inches annually, including 81 inches of snow. Snow depth at the site ranges
from 24 to 36 inches during a typical winter. Historically, August is the
heaviest rainfall month with an average of 5.3 inches.
Freeze-up of the Yukon River normally occurs in late October to early
November and breakup normally occurs in early to mid May. Accordingly, the
shipping schedule on the Yukon River is typically limited to a period between
approximately May 25 and September 25.
Proven and Probable Mineral Reserves
The following table sets forth the proven and probable mineable gold
ore reserves located on the Illinois Creek Project as of September 24, 1996.
These reserves are based on a cutoff grade of 0.025 ounce of gold equivalent per
ton of ore.
Proven and probable mineable ore reserves are estimates of quantities and
grades of ore which can be economically recovered based on assumptions of a $400
per ounce future gold price. These reserves have been prepared by USMX. The ore
reserves presented in this report are estimates only and may require revisions
based on actual production experience. Fluctuations in the market price of gold,
as well as increased production costs or reduced recovery rates, may render
reserves containing relatively lower grades of mineralization uneconomical to
recover and may ultimately result in a restatement of reserves.
<TABLE>
<CAPTION>
Contained Waste to
Contained Gold Gold Equivalent Gold Ore
Ore Tons Gold Grade Ounces Silver Grade Grade Equivalent Ounces Ratio
----------- ----------- -------------- ------------ ----------------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
6,219,470(1) .064 oz/ton 398,046 1.422 oz/ton 0.069 oz/ton(2) 429,143 2.28:1(3)
<FN>
(1) In addition there are approximately 575,000 tons of material with grades between 0.015 oz/ton and the cut-off grade of 0.025
oz/ton which must be stripped and may be placed on the heap if economics warrant it.
(2) Gold Equivalent grade is calculated using a gross recovery for silver of 25% and a gold to silver price ratio of 80.
(3) Metallurgical recovery from the run-of-mine ore is projected to be
approximately 80% of contained gold and 25% of contained silver. Seasonal
leaching of gold is currently planned, however, year round leaching may be
conducted if operations prove this to be effective.
</FN>
</TABLE>
Geology
The deposit occurs as a large gossan zone striking east-northeast and
dipping 40(Degree) to 70(Degree) to the southeast, hosted within a thick
sequence of quartzites which are carbonate rich. The gossan has been intersected
by drilling over a strike length of 12,000 feet and to a depth of greater than
1,500 feet. Oxidation of the mineralization is complete to a depth of at least
1,100 feet below the present surface. Economic gold-silver mineralization is
present in portions of the gossan, and is associated with elevated levels of
copper and/or lead, hydrothermal or remobilized silica, earthy hematite, and
poorly defined structural features. Supergene enrichment of both gold and silver
in near surface locations is also apparent.
Plan of Operations
USMX has constructed a 90-person camp northwest of an airstrip which is
6.5 miles by road from the mine site. Water for ore processing comes from a
source located near the mid-point of the main access road from the airfield to
the mine site and electrical power is generated using diesel powered generator
sets. Waste heat from the generators will be used to heat the process building.
In addition to the process facility, a rotary kiln, an assay laboratory, a truck
maintenance shop and an administration building have been constructed.
Communications are by satellite phone systems.
The deposit has been developed as a conventional open-pit mine. USMX
currently plans to conduct mining during May through October. Depending on
weather conditions, USMX may attempt to extend this season. Trucks and front-end
loaders will be used to mine, haul and deposit the ore in a valley fill lined
impoundment. Heap leaching followed by carbon
adsorption/desorption/electrowinning will be used to extract the gold. The
process system is designed to recover the annual scheduled amount of gold
production in eight months. Lime is used to condition the ore and is produced
on-site utilizing a local source of limestone. The burnt lime is calcined in a
diesel-fired rotary kiln, which has been erected at the site. This locally
produced lime is less expensive than purchasing and transporting calcined lime
to the site.
The mine operating schedule will be ten hours per shift, two shifts per
day, six days per week. Present plans provide for three crews which will rotate
on a four-week on, two-week off schedule. USMX expects to employ approximately
54 people at Illinois Creek, which excludes personnel to be employed by
the mine contractor.
Construction of mine facilities began in March 1996 and was projected
to be completed in September 1996. The approved capital expenditures for the
development of Illinois Creek was $22 million. However, the project incurred
cost overruns in several areas and experienced delays due to unexpected
inclement weather. As a result, construction is now expected to be completed in
May 1997 and the total pre-production capital costs are currently estimated at
about $43.9 million, including approximately $7.6 million in working capital.
This does not include property acquisition costs of $4 million paid to NPMC as
outlined above. As of December 31, 1996, USMX's investment in Illinois Creek was
approximately $33.7 million including $4.0 million of property acquisition
costs.
Project Financing
Effective July 11, 1996, USMX entered into the Rothschild Credit
Agreements for a $22,000,000 facility to finance the development and
construction costs of the Project. USMX transferred its interest in the Project
to its wholly-owned subsidiary, USMX of Alaska, Inc. ("AK") which is the
borrower of $19.5 million of the $22 million facility. Under certain
circumstances, the loan to AK may be in the form of a gold loan, in which event
the maximum credit amount would be the number of ounces of gold equal to
$19,500,000 divided by the price of gold in London. However, USMX has agreed
with NPMC that it will not convert the loan to a gold loan until such time as
the Project has achieved Commercial Production as defined in the NPMC Agreement.
All Proceeds related to the Project are to be deposited in an account
dedicated to the Project operations (the "Proceeds Account"). In addition, AK is
required to maintain a minimum balance in the Proceeds Account equal to the sum
of (i) the greater of $1,500,000 or a formula amount based on the present value
of future net cash flow from the Project, (ii) the lesser of $250,000 or
interest payable to Rothschild for the following three months, and (iv) any
other payments due to Rothschild for the following three months.
AK is not permitted to make withdrawals from the Proceeds Account for
non-Project purposes or to pay dividends until ("Completion") has occurred. The
requirements for Completion include the construction of the Project facilities,
which facilities and the equipment thereon must be mechanically complete and
electrically operable ("Mechanical Completion"), the achievement of production
in amounts and grades, costs and reserves similar to the development plan, and
the absence of any default in the Credit Agreements. The note evidencing the
$19.5 million obligation bears interest, payable quarterly, at 2.25% above LIBOR
until Completion and 1.879% thereafter for the remainder of the approximate
four-year term of the loan. Principal payments will be made in seven amortized
installments on September 30 and December 31, of each year. AK paid an
establishment fee of $292,500 to Rothschild for the facility.
The balance of the facility is represented by a $2.5 million note made
by USMX which originally provided for conversion into Common Shares at the
conversion price of $3.40 per share at the option of Rothschild at any time
during the approximate four-year term of the note. USMX may also require
conversion if the note is not in default and the daily closing price of the USMX
Common Stock on Nasdaq exceeds $4.75 for 30 consecutive trading days. As a
result of an amendment October 1996, the conversion price has been reduced to
$1.74. USMX has also agreed to register the USMX Common Stock for resale under
certain circumstances. The $2.5 million loan bears interest at 2% above LIBOR,
payable no less frequently than semi-annually.
As of December 31, 1996, substantially all of the $22 million facility
had been drawn down. In accordance with the requirements of the related Credit
Agreements, USMX deposited the entire proceeds of the $2.5 million loan into the
Proceeds Account and such proceeds are not available for general corporate
purposes. Payments may be made to USMX from the Proceeds Account in an amount
sufficient for USMX to make interest payments. AK will not be permitted to repay
the $2.5 million to USMX or other advances by USMX in the approximate amount of
$3.4 million unless certain conditions are satisfied, principally related to
repayment of the notes to Rothschild and satisfactory operation of the Project.
USMX has pledged to Rothschild its shares in AK as well as its notes from AK for
advances made by USMX. Rothschild and Dakota have agreed to terminate the $2.5
million note for payment of $1.5 million and transfer of the balance due to the
$19.5 million note. See "Dakota Line of Credit" and "Intercreditor Agreement."
USMX is also a guarantor of the $19.5 million loan to AK until
Completion. In addition, USMX will be a continuing guarantor of AK's covenant to
comply with environmental laws.
AK must deliver to Rothschild, among other things, financial
information, reserve, hedging and operating reports, and must use all
commercially reasonable efforts to maintain, develop and operate the Project in
accordance with the present development plan and prudent mining industry
practices. AK must comply with applicable laws and maintain its property rights
in the Project, including payment of royalties which may become due to NPMC. In
addition, except for limited circumstances, without Rothschild's consent, AK may
not incur any additional indebtedness, permit any liens on the Project, assume
or guarantee indebtedness of others, invest in others, merge or change its
capital structure, sell the assets of the Project, or permit Project reserves or
future net cash flows to decline materially from the present development plan.
AK must also achieve Mechanical Completion by July 31, 1997, and Completion by
November 30, 1997.
USMX has also agreed with Rothschild that, so long as the $2.5 million
note made by USMX is unpaid, or any other obligation of USMX remains
unsatisfied, including USMX's guarantee of the loan to AK, USMX will, among
other things, comply with all applicable laws, provide Rothschild with financial
reports and continue to engage principally in the mining business. In addition,
except for limited circumstances, without Rothschild's consent, USMX may not
incur indebtedness (other than indebtedness after Completion to develop mining
properties where the sole recourse of the lender is the mining property being
developed), permit any liens on the Project, assume or guarantee indebtedness of
others, invest in others, merge (unless after Completion and USMX is the
survivor of the Merger) or change its capital structure, pay any dividends or
sell the assets of the Project.
USMX has also agreed with Rothschild that it shall not permit its (a)
current ratio to be less than 2.0 to 1.0; (b) consolidated tangible
shareholders' equity to be less than $17,500,000; and (c) total consolidated
liabilities to exceed 175% of its consolidated tangible shareholders' equity,
and that it would deposit $1,500,000 in the Proceeds Account by September 30,
1996, which it was unable to do. In October 1996 Rothschild agreed with USMX to
waive these conditions and to not take any actions until December 31, 1996,
conditioned upon USMX's agreements to, among other things, file a prospectus for
a public offering by November 1, 1996 with appropriate securities regulatory
authorities and complete the offering by December 31, 1996, adjust the price at
which Rothschild may elect to convert the $2.5 million loan into USMX's Common
Stock to the offering price in the public offering (or in a private placement)
are sold or if no sale, at the average trading price of the Common Stock for the
last ten trading days of 1996 and to pay to Rothschild a fee of $100,000 which
fee is payable upon the first to occur of (i) a date upon which such payment can
be made without materially reducing the working capital reasonably required by
USMX for continued operations or (ii) April 15, 1997.
Although USMX did file a prospectus for a public offering by November
1, 1996, it determined to proceed with the Merger instead of a public offering.
USMX has entered into a loan agreement with Dakota, and Rothschild and Dakota
have entered into an agreement which provides for, among other things,
forbearance by Rothschild under certain circumstances of the exercise of
Rothschild's rights under the Rothschild Credit Agreements with USMX. See
"Dakota Line of Credit" and "Intercreditor Agreement."
Dakota Line of Credit
As part of the Merger transactions, Dakota and USMX agreed that Dakota
will provide a $5 million line of credit to USMX to provide interim working
capital to sustain USMX's operations, principally the construction and
development of the Illinois Creek Mine, until the Merger is consummated. The
line of credit bears interest at the rate of one per cent above a quoted
floating prime rate and is due August 31, 1997 or earlier if the Merger
Agreement is terminated before such date. The proceeds will be used to pay
certain ongoing operating expenses of USMX, primarily in connection with
start-up activities associated with the Illinois Creek Mine and to partially pay
trade creditors of USMX and its subsidiaries in accordance with a plan approved
by Rothschild and Dakota. The $5,000,000 Loan Agreement contains
representations, warranties, covenants and negative covenants typical in
short-term financing transactions.
The line of credit is evidenced by two promissory notes with similar
terms but different amounts and different security. The $2 million promissory
note ("Note 1") is secured by a second priority position in all of the capital
stock of AK owned by USMX. AK holds title to the Illinois Creek Mine. The second
promissory note for $3 million ("Note 2") is secured by a first position on all
of the capital stock of MXUS S.A. de C.V., USMX's Mexican Subsidiary, and a
first position on USMX's interest in the Thunder Mountain property in Idaho.
USMX and Dakota agreed to grant Rothschild a second priority security position
in the security for Note 2.
Funding for the $5 million line of credit was provided from a portion
of the proceeds of a Special Warrant offering made by Dakota in February 1997.
See Item 7.
Intercreditor Agreements
In connection with the extension of the $5 million line of credit by
Dakota to USMX and consummation of the Merger, the consent of Rothschild was
required. Further, Dakota, as the potential owner of USMX, desired certain
changes to the Rothschild loan facility in order to avoid immediate defaults
under such facility after closing of the Merger. Accordingly, the parties
negotiated an Intercreditor Agreement which provides, among other things, as
follows:
(a) The consent of Rothschild to the Merger and the extension of the $5
million line of credit from Dakota to USMX on the terms described above.
(b) Rothschild's agreement to share, pari passu with Dakota, in any proceeds
from foreclosure on the capital stock of AK in the ratio of the amount
outstanding under Note 1 to $22 million, but with Rothschild retaining the
right to deal with such security.
(c) Dakota's agreement to fund at least $2 million of its line of credit for
costs and expenses at the Illinois Creek Mine according to a plan prepared by
USMX and approved by Rothschild and Dakota.
(d) The agreement of Dakota to guarantee USMX's obligations under the
Rothschild Credit Agreements until "commercial completion" of the Illinois
Creek Mine.
(e) The agreement of Rothschild to forebear from exercising its rights to
declare and enforce defaults (except payment or bankruptcy defaults) of USMX
or AK under the Rothschild Credit Agreements until the earliest of
consummation of the Merger, termination of the $5 million line of credit or
June 30, 1997.
(f) For amendment of certain terms and covenants in the Rothschild Credit
Agreements, to be effective upon closing of the Merger, which include
revisions to the definition of "commercial completion," and amendments to
certain financial covenants.
(g) Dakota's and Rothschild's rights to share in the collateral terminate if
the Merger is consummated or the $5 million line of credit is extinguished.
(h) At the closing of the Merger, a $2.5 million convertible loan to USMX
under the Rothschild Credit Agreements will be extinguished by payment of
$1.5 million by Dakota and adding the balance to the outstanding amounts
under the project financing portion of the such Agreements. In addition,
certain fees payable by USMX to Rothschild in the amount of $100,000 will
become due and payable at the closing of the merger.
(i) Rothschild, Dakota and Gerald Metals, Inc. ("Gerald") have also entered
into an Intercreditor agreement in connection with the foregoing transactions
and the extension by Gerald of additional working capital credit to Dakota.
This Intercreditor agreement provides that Rothschild shall enjoy a first
priority position on assets owned by the USMX Group and Gerald will hold a
first priority position on all Dakota assets except the USMX Group assets,
following the Merger. Gerald has received a collateral assignment of Dakota's
rights in Note 2 to secure its extension of additional credit under its
working capital facility to Dakota.
Settlement Agreement with Peak Oilfield Service Co. (Peak)
Peak supplied construction services to USMX at its Illinois Creek project
in Alaska. A dispute arose between USMX and Peak concerning payment of, and the
amount owed to, Peak for its services. Peak claimed over $70.0 million was owed
to it under a $3.0 million construction contract and USMX disputed such amount.
Peak filed a mechanic's lien on the Illinois Creek Project in November, 1996.
The parties entered into settlement discussions (in which Dakota also
participated) as part of the effort to deal with USMX's outstanding liabilities
prior to closing of the Merger. The parties entered into a letter agreement on
April 22, 1997 to settle this dispute for $5 million was owed to it under a $3.0
million construction contract and USMX disputed such amount. Peak filed a
mechanic's lien on the Illinois Creek Project in November, 1996.
a) Peak will release its mechanic's lien on the Illinois Creek
Project and USMX will pay Peak an aggregate of $5 million in cash
and securities as follows:
i. $1,772,000 was previously paid by USMX to Peak;
ii. An additional cash payment of $445,598 will be made within
one day of execution of the letter agreement;
iii. A further cash payment of $1,782,396, plus interest at 9 %
per annum, commencing April 11, 1997, upon consummation of
the Merger but not later than June 15, 1997; and
iv. The issuance of 1,000,000 shares of USMX Common Stock
immediately prior to consummation of the Merger. Dakota has
agreed to use its best efforts to file a Registration
Statement covering the resale of the Dakota Common Shares to
be received by Peak in connection with the Merger.
b) USMX agreed that Peak would retain its full lien rights and
the right to claim the full amount of its claims, if the
settlement is not consummated;
c) If the Merger is not consummated by June 15, 1997, then USMX
would have the right for a sixty-day period thereafter to
pay Peak solely in cash the balance of $2,782,396, plus
interest at 15 % annum. If the payment is not made, Peak may
obtain a judgment against USMX for $2,782,396 or may rescind
the settlement agreement in which event could reassert its
original claims, and USMX could reassert it objections to
such claims.
The Thunder Mountain Project
Introduction
USMX is exploring the merits of conducting gold and silver mining
activities at the Dewey Mine in the Thunder Mountain Mining District in eastern
Valley County, Idaho, approximately 100 miles northeast of Boise, Idaho. The
proposed Dewey mining operations are part of the Thunder Mountain Project and
consist of the development of a gold and silver ore deposit located on patented
mining claims administered by the Idaho Department of Lands. In January 1996,
USMX submitted a Notice of Intent to Operate ("NOI") with the Idaho Department
of Lands. Following review by an Idaho Joint Review Process Committee consisting
of state and federal agencies, it was determined by the U.S. Forest Service, the
lead federal agency, that an Environmental Impact Statement would be required
for the project. In June 1996, an Initial Plan of Operations was published to
initiate the process under the National Environmental Protection Act.
Preparation of a feasibility study is expected to be ongoing throughout 1997 to
refine the project design and economics.
History
Gold was discovered in the Thunder Mountain area in 1894 at the site of
what is now known as the Dewey Mine. During the period from the initial
discovery until 1942, various operators reportedly produced approximately 31,000
ounces of gold and 16,000 ounces of silver from both underground lode and
surface placer workings. Renewed interest in the district began in earnest
during the early 1970's due to rising gold prices. After exploration by several
major mining companies, a portion of the property, the Sunnyside Mine area, was
placed into production by Coeur d'Alene Mines Corporation ("Coeur d'Alene") as
an open pit, heap leach operation in 1986. Between 1986 and 1990, Coeur d'Alene
reportedly produced 120,000 ounces of gold and 240,000 ounces of silver from the
combined Sunnyside, Goldbug and Lightning Peak pits. After reclaiming the
property, Coeur d'Alene terminated its leases with Thunder Mountain Gold, Inc.
in December 1990. At the adjacent Dewey Mine, the Dewey Mining Company
constructed a 450 ton per day mill and the property was operated as an open pit
mine ("Golden Reef Joint Venture") during 1981. In the mid 1980's, the Dewey
Mine became the subject of litigation which was resolved in favor of the Dewey
Mining Company late in 1991.
Effective July 9, 1993, USMX entered into an Exploration and Option to
Purchase Agreement ("Thunder Mountain Agreement") with Dewey Mining Company,
Thunder Mountain Gold, Inc. and two individuals (the foregoing companies and
individuals described below collectively as "Owners"). The Owners control
approximately 5,500 acres in the Thunder Mountain Mining District consisting of
both patented and unpatented mining claims. Pursuant to the terms of the Thunder
Mountain Agreement, USMX was granted the sole and exclusive right to explore for
and develop minerals on the property in exchange for advance royalty payments
totaling $100,000. In addition, USMX committed to spend, and did spend, a
minimum of $500,000 evaluating the property prior to April 1, 1995.
The Thunder Mountain Agreement requires that, before USMX can put the
property into commercial production, it must prepare and deliver to the owners a
feasibility study regarding the project. USMX has extended the term of the
agreement through June 15, 1997. However, the Thunder Mountain Agreement
further provides USMX with the option for a final extension until April 30,
1998, in exchange for an additional advance royalty payment of $250,000. The
advance royalty payments made may be recovered by USMX for seven years after
payment should the Owners elect to receive royalties under options (a) or (c)
below. The Thunder Mountain Agreement terminates if USMX fails to deliver a
feasibility study to the Owners by the end of the last year's extension under
the Agreement or if USMX exercises its right to terminate the Thunder Mountain
Agreement at any time.
Within 90 days after USMX provides the Owners with a feasibility study,
the Owners may elect to (a) participate in subsequent efforts to the extent of a
30% working interest, plus receive a 1.5% royalty, or (b) receive a 30% net
profits interest, or (c) receive a 5% net return royalty from production. If the
Owners elect to receive a 5% net return royalty, USMX will be obligated to make
advance royalty payments of: (1) $200,000 within thirty days after commencement
of Commercial Production (as defined in the Thunder Mountain Agreement), and (2)
$250,000 each year thereafter. If the Owners fail to notify USMX of their
election prior to the end of the 90 day election period they will be deemed to
have made an election to receive a 5% net return royalty.
The Thunder Mountain Agreement provides that once the Owners have made
their election, USMX shall have one year within which to achieve Commercial
Production. If USMX fails to achieve Commercial Production within one year, USMX
must either reconvey the property to the Owners or extend by one year the time
period within which Commercial Production must commence by paying an advance
royalty of $200,000 to the Owners. If Commercial Production has not begun by the
end of the extension period, USMX may obtain a final extension of one year
within which to achieve Commercial Production by paying the Owners an additional
advance royalty of $250,000.
In addition to the advance royalty payments and the work commitments
outlined above, USMX is obligated to pay all fees necessary to maintain the
unpatented mining claims through August 31 of the calendar year in which the
extension year expires.
The area of USMX's primary activity lies approximately 4,000 feet west
of the Sunnyside deposit previously mined by Coeur d'Alene. The results of
USMX's drilling in 1993 were favorable, including a number of intersections that
exceed 100 feet in thickness and average in excess of 0.10 ounces of gold per
ton. USMX was also successful in extending the deposit along strike into an area
that was not previously drilled. During 1994, USMX drilled a total of 104
exploration and development holes on the property, helping to define the margins
and high grade core of the Dewey deposit. As of December 31, 1996, USMX has
expended a total of $3.7 million on the property.
Location, Access, Terrain and Climate
The Dewey Mine lies within the Thunder Mountain District in eastern
Valley County, Idaho. Access to the District is obtained via U.S. Highway 95 to
Cascade, Idaho, then east 42 miles to Landmark, Idaho on Forest Highway 22, then
north and east approximately 57 miles on U.S. Forest Service roads to the
property. The Thunder Mountain Mining District is currently accessible by
vehicle about seven months out of the year from late May to late November.
Local elevations range from approximately 7,300 to 9,000 feet. The
District forms an enclave of patented and federal lands within the Frank Church
Wilderness Area administered by the Krassel District of the Payette National
Forest.
Due to the location of the property, and based on the experience of
operations previously conducted at the Dewey Mine and at nearby existing
operations, future mining operations of USMX would be seasonal, except that
processing can be conducted year around.
Plan of Operations
The Dewey Mine contains a bulk tonnage, heap-leachable mineral deposit
located on patented lode mining claims in the central portion of the Thunder
Mountain Mining District. It is presently anticipated that conventional open
pit/heap leach techniques will be used with the fluid management system to be
designed as a zero discharge system. Due to the remote location of the mineral
deposit USMX would be required to generate its own electrical power.
USMX may use a contract miner to develop and operate the open pit mine.
If the Merger is consummated, some aspects of the Thunder Mountain operations
may be combined with Dakota's nearby Stibnite operations for improved
efficiency.
Geology
The Thunder Mountain Mining District is localized in the central
portion of a caldera complex underlain by Challis volcanics as well as
graben-fill, pyroclastic-derived sediments. The Dewey Mine ore deposit is hosted
by pyroclastic sediments, while the Sunnyside, Goldbug and Lightning Peak
deposits previously mined by Coeur d'Alene were hosted by the volcanics. Known
concentrations of economic gold mineralization are controlled by a combination
of structure and stratigraphy.
Permitting
During 1995 and 1996, geotechnical and baseline environmental work was
conducted and USMX re-evaluated the project using the heap leach process for the
recovery of gold. On January 31, 1996, USMX submitted a Notice of Intent to
Operate ("NOI") with the Idaho Department of Lands ("IDL") and U.S. Forest
Service-Payette National Forest ("PNF").
Permits, plans and approvals from federal, state and local agencies are
to be obtained utilizing the Idaho Joint Review Program, details of which are
published in a February 1996 State of Idaho publication titled "Joint Review
Program". This program was initiated on January 31, 1996 with the publication of
the NOI which was forwarded to the IDL. A joint review of the NOI by the IDL and
the PNF determined that a Federal Environmental Impact Statement and Record of
Decision would be required for the Project prior to initiation of development. A
third-party consultant, Science Applications International Corporation, was
selected by the agencies to develop the EIS.
Subsequently, meetings were organized by the IDL and the PNF in which
permit requirements, baseline data requirements and design standards were
discussed on air, climate, soils and subsoils, geology, engineering for the
waste rock facility, roads and heap leach facility. Baseline data requirements
were completed in the summer of 1996. Since permitting has only recently
commenced, it is difficult to predict when necessary permits might be received.
Feasibility Study
Substantially all the field work for the feasibility study has been
completed and it is USMX's intention to complete an internal feasibility study.
Most of USMX's resources are being directed to the Illinois Creek Project
consequently, work on the feasibility study and permitting at Thunder Mountain
may be delayed.
Montana Tunnels
The Montana Tunnels property is located in the Colorado Mining
District, Jefferson County, Montana, 22 miles south of Helena. Montana Tunnels
consists of approximately 9,300 acres of patented ground plus about 1,000 acres
of other mineral rights. This property was developed and is operated by Pegasus
Gold. Mine and mill construction commenced in March 1986, milling operations
began in March 1987, and full operating status was achieved by Pegasus Gold in
October 1987.
The Montana Tunnels Mine involves open pit mining operations and
conventional milling technology. The Montana Tunnels ore is processed through a
circuit which incorporates crushing, grinding, and selective flotation to
produce lead and zinc concentrates, and a gravity circuit for recovery of free
gold. The majority of gold and silver value is associated with the base metal
concentrates. As of December 31, 1996, Pegasus Gold estimated that the Montana
Tunnels Mine has proven and probable ore reserves of approximately 17,095,000
tons.
Pending completion of the sales transaction described below, USMX owns
a net profits interest in the Montana Tunnels Mine. USMX is entitled to the
greater of a five percent net profits royalty interest or minimum advance
royalties of $60,000 per month until certain construction, land acquisition and
associated financing and other costs have been recovered by Pegasus Gold
("Payback"), and a 50 percent net profits royalty interest thereafter. Payback
is defined in the agreement with Pegasus Gold to occur when 90 percent of net
profits equals the sum of $250,000, plus the project costs incurred subsequent
to January 1, 1986, plus interest costs imputed on these costs until September
30, 1987, the date of full operation status. Net profits, as defined, include
deduction from revenues of such costs as direct operating and administration
expenses, allowable new capital expenditures, property payments, management
fees, interest on debt and equity financing, repayment of gold loans, repayment
of certain debt obligations, and taxes other than income taxes. Payback has not
been achieved, and it is unclear whether Payback will ever be achieved. Since
inception of the contract USMX has only received the minimum advance royalties.
In order to obtain additional funding for its operations and to
partially fund the cost overruns experienced at the Illinois Creek Project, USMX
borrowed $2.5 million from Pegasus Gold in May 1996. The obligation is secured
by USMX's royalty interest in the Montana Tunnels Property. In June 1996 USMX
and Pegasus Gold agreed to the sale of USMX's interest in the Montana Tunnels
Property to Pegasus Gold for $4.5 million, subject to the approval by USMX's
stockholders. Pending completion of the transaction, Pegasus Gold provided USMX
an additional $2 million which was deemed an amendment to the terms of the
outstanding $2,500,000 loan (the "Loan"). The $60,000 per month minimum advance
royalty has been applied as payment of the principal and accrued interest on the
Loan.
In March 1997, Pegasus Gold and USMX entered into a formal Purchase and
Sale Agreement (the "Montana Tunnels Royalty Agreement"). A closing is to be
held within five days after USMX stockholder approval. The USMX stockholders are
scheduled to consider this proposal at the annual stockholder meeting. At
closing of the transaction, all rights related to the Montana Tunnels Royalty
Agreement will be conveyed to Pegasus Gold in satisfaction of all unpaid
principal and interest on the Loan, and the security interests granted by USMX
to Pegasus Gold and the net profits royalty interest will be deemed to be
terminated. At the closing, USMX will deliver all of its right, title and
interest in and to the royalty interest and Pegasus Gold will deliver an
acknowledgment of repayment of the Loan.
In determining to sell the net profits royalty interest, the USMX Board
of Directors evaluated the history of payment of the minimum advance royalties,
terms of current and future smelter contracts, estimated variables in metal
prices, site visits conducted by employees of USMX and USMX's outside consultant
and interviews with key staff members of the Montana Tunnels Mine and employees
of Pegasus Gold. Based on the scheduled production termination at the Montana
Tunnels Mine in the year 2000, it was determined that the net present value of
the minimum advance royalties was $2.7 million. The USMX Board concluded that
the purchase price was reasonable in view of its determination that it was
unlikely that USMX would receive royalty payments substantially greater than the
purchase price.
Exploration
Due to continued threat of adverse amendment to or replacement of the
U.S. mining laws as well as to other existing regulations, USMX continued to
direct its exploration activity to the evaluation of private lands in the United
States, and opportunities in Latin America. Exploration for minerals,
particularly for gold, is highly speculative in nature, involves many risks and
frequently is non-productive. There can be no assurance that USMX's mineral
exploration efforts will be successful. Once mineralization is discovered, it
usually takes a number of years from the initial phases of exploration until
production is possible, during which time the economic feasibility of production
may change. Substantial expenditures are required to establish ore reserves
through drilling, to determine metallurgical processes to extract the metal from
the ore and, in the case of new properties, to construct mining and processing
facilities. As a result of these uncertainties, no assurance can be given that
USMX's exploration programs will result in the expansion or replacement of
existing reserves.
Ophir
This property is located in western Alaska, approximately 250 miles
northwest of Anchorage. In July 1996 USMX was granted the right to explore
approximately 13,000 acres in the Ophir Mining District pursuant to an Exclusive
Mineral Exploration Permit with the State of Alaska Mental Health Trust Unit, a
division of the Alaska Department of Natural Resources. Access to the property
is by charter air service from Anchorage to public or private airstrips, then
over state maintained roads to the property. Alternative transport is by barge
up the Kuskokwim River to Sterling Landing, the eastern terminus of the current
road system.
Placer gold production from the District has been significant and is
estimated at greater than 600,000 troy ounces, including over 200,000 troy
ounces from streams proximal to the property. Placer gold production is
continuing from five drainages in the District.
In the District, Cretaceous graywackes and mudstones have been intruded
by late Cretaceous to early Tertiary gold-mineralized granite porphyry sills,
dikes, and small stocks. These intrusive rocks and/or their alteration zones are
the source of gold in the placer deposits. The exploration objective will be to
define ore in bedrock with sufficient size potential and gold grade to justify
development.
During August 1996, USMX conducted preliminary geological mapping,
geochemical sampling and geophysics, with additional exploration activities
planned for 1997. USMX's investment in this property was approximately $99,800
at December 31, 1996.
Cala Abajo, Puerto Rico
During 1992, 1993 and 1994, USMX acquired an equity interest currently
totaling approximately 80% of the outstanding common stock of Southern Gold
Resources (USA), Inc. ("Southern Gold"), a Colorado corporation. On October 5,
1992, Southern Gold was granted an exclusive exploration permit by the Puerto
Rican government covering 2,170 acres that include the Cala Abajo copper/gold
deposit in western-central Puerto Rico. The prospecting permit may be extended
year to year for a maximum 10 year period and gives Southern Gold the exclusive
right to conduct exploration and environmental studies and to negotiate a mining
lease covering the permit area. In September 1996 the permit was extended by the
Puerto Rican government through September 1997. Through 1995, USMX incurred
approximately $1.0 million in drilling, metallurgical test work, engineering and
base line environmental studies.
In 1995, the Commonwealth of Puerto Rico amended its mining law to
prohibit open pit mining of metal deposits on the island. The effect of the
mining law, as currently amended, was to render Southern Gold's plan for
development of the Cala Abajo deposit uneconomic. Accordingly, USMX's investment
was written off in 1995. Southern Gold has notified the Puerto Rican government
of its belief that the government's action was unjustified and harmful to
Southern Gold. Southern Gold is considering whether any other action is
warranted.
Other United States Mineral Properties
USMX has additional mineral properties, located in Utah, Montana,
Wyoming, Alaska and Nevada in the United States. These additional properties are
currently being explored solely by USMX.
<TABLE>
<CAPTION>
Investment as of
Property State Status December 31, 1996
- -------- ----- ------ -----------------
<S> <C> <C> <C>
Goldstrike Area Utah Drilling Proposed $38,000
Baggs Creek/Hidden Hand Montana Has small resource 69,000
Round Top Alaska Part of Illinois Creek 45,000
Jack Springs Nevada Has small resource -0-
</TABLE>
Mexico
USMX is currently investigating several opportunities located primarily
in the northern Mexican states of Sonora, Chihuahua and Coahuila. The more
significant projects USMX is currently evaluating are described below.
Amargosa.
This property is located approximately 95 kilometers southeast of
Juarez in the state of Chihuahua. The property is accessible from Juarez on
Highway 2, southeast for 90 kilometres to El Porvenir, then via poorly
maintained dirt roads to the project. USMX controls by denouncement
approximately 15,100 acres. USMX must meet certain minimum work requirements
arising from Mexican mining law to maintain its rights to the properties. In
addition, if the properties are placed into production, USMX will be obligated
to pay a net smelter return royalty of 2.75% on production from most of the
properties.
A significant amount of exploration was conducted on the Amargosa
polymetallic massive sulfide targets in 1994. Results of this drilling at
Amargosa were geologically interesting; however, continuity of mineralization
between holes was not demonstrated.
A strong magnetic anomaly has been partially defined at the edge of a
ground geophysical survey, caused by a pyrrohite body. Massive sulfide
mineralization is associated with and adjacent to the anomaly. Although this
property continues to hold a great deal of geologic interest, no economic
mineralization has yet been identified. Accordingly, management recorded an
impairment loss of $1.0 million in 1995 and USMX's carrying value in this
property was reduced to zero in 1996.
Boludo Goldfields.
Early in 1994, USMX acquired by lease and purchase option approximately
5,400 acres in the Boludo Goldfields placer district located approximately 121
kilometres southwest of Nogales in northwest Sonora. Access to the property is
via paved highway and well maintained dirt road. During 1994, 328 backhoe pits
were dug at Boludo by USMX to test for placer gold. In addition, several drill
holes were put down in the hard rock targets. This drilling failed to identify
significant mineralization. In 1995, USMX entered into an agreement with
Resource Trend Pty Ltd, an Australian mining company, which firm has informed
USMX that it intends to commence production in 1997. USMX retains a royalty
interest on future production from the property. USMX's investment in this
project was approximately $487,000 as of December 31, 1996.
Noche Buena.
The Noche Buena Project was acquired by USMX in 1992. USMX controls by
denouncement of concessions, approximately 18,800 acres, subject to Mexican
mineral property taxes and work obligations.
The property is located in northwestern Sonora approximately 45
kilometres northwest of the city of Caborca in the state of Sonora. Access from
Caborca is via Highway 2 north for 60 kilometres then west via dirt roads for
approximately 10 kilometres.
USMX conducted exploration on the concessions in 1993 and 1994 outlining an
area if mineralized material which is open in all directions. The project was
joint ventured to Minera Kennecott, the Mexican entity of RTZ-CRA, on July 15,
1995, under terms whereby Kennecott can earn majority interest in the project by
paying USMX $850,000, spending $2,500,000 over a period of five years and
delivering to USMX a feasibility study. Upon delivery of a feasibility study
USMX has the option to participate in the joint venture at 35% or elect a 4 to
4.5% net smelter royalty depending on gold price.
Kennecott has expanded on the drilling conducted by USMX as well as
completed geochemical and geophysical surveys over the property. Based on the
encouraging results of this work, it is expected that Kennecott will conduct
additional drilling on this property in 1997. As of December 31, 1996, USMX's
investment in Noche Buena was approximately $257,000.
Samalayuca.
Samalayuca is located approximately 40 kilometres south of Juarez in
the state of Chihuahua, and is accessed via Highway 45 to the town of Samalayuca
then via dirt roads west a few kilometres to the property. USMX controls by
lease agreement and denouncement approximately 19,000 acres. The lease, executed
on August 12, 1992, provides for a twenty year term. If the exploration work is
successful, the owners will be paid a 3% net smelter return royalty on base
metals and a 4% net smelter return royalty on precious metals produced and sold
from the property. USMX or its joint venture partner must make annual advance
royalties of $25,000 and must meet certain minimum work requirements.
The property is a sediment hosted, stratabound copper/silver property
with primary chalcocite mineralization. In the past (pre 1975), local miners
shipped copper bearing quartzite to the El Paso smelter as flux. These miners
were paid for the copper content of this material which ranged from one to three
percent. Previous mining ceased when copper prices fell in the mid 1970's.
USMX has conducted short hole air track drilling as well as limited
rotary and core drilling since acquisition of the property. Results of this work
have been inconclusive due to structural complexity and associated oxidation and
the depletion of copper values in the near surface environment.
During 1995, the property was joint ventured with a subsidiary of Phelps
Dodge Corporation. Phelps Dodge has conducted geophysical surveys over the
property and has recently completed a first phase drilling program; However, the
joint venture was terminated in March 1997. Following review of the Phelps Dodge
data, USMX will either conduct further exploration, seek a new joint venture
partner or terminate its agreements pertaining to the property. As of December
31, 1996, USMX had invested a total of $508,000 in the property.
Sierra Mojada.
This property is located approximately 200 kilometres north of Torreon
in the state of Coahuila. Access is via improved dirt road north from Torreon or
by railroad from Monclova. USMX controls by denouncement approximately 15,900
acres in the district.
Production from the district in the past has been significant,
consisting of copper, zinc, lead and silver. The district was discovered in 1878
with most of the past production occurring between 1890 and 1945.
On July 26, 1996 USMX entered into a joint venture agreement with
Metalline Mining Company to further explore and develop the property. USMX may
elect to participate for a 35% working interest or receive a net smelter royalty
after earn-in by Metalline.
USMX's investment in this project was approximately $34,000 as of December 31,
1996.
Other Mexican Mineral Properties.
<TABLE>
<CAPTION>
USMX has additional mineral properties in Mexico as follows.
Investment as of
Property State Status December 31, 1996
-------- ----- ------ -----------------
<S> <C> <C> <C>
Altar, Los Apaches Sonora Joint Venture $240,000
El Ocuca, Las Rastras Sonora Joint Venture $146,000
San Miguel Sonora Available for Lease $ 36,000
</TABLE>
Ecuador
In 1995, USMX acquired all of the outstanding capital stock of Mega
Minerals S.A., an Ecuadorian company. The assets of the Ecuadorian company at
the time of acquisition consisted of title to eight exploration concessions
comprising approximately 80,600 acres and the right to acquire title to four
additional exploration concessions comprising approximately 5,900 acres. The
twelve concessions are located in the Nambija-Zamora gold belt of southern
Ecuador. Initial exploration on these concessions has yielded encouraging
results and the land position has been reduced in size to cover the most
promising target areas. Geological mapping and geochemical sampling of stream
sediments anomalous in base and precious metals have identified a two kilometer
by three kilometer zone of skarn type alteration with associated base metals and
gold mineralization. An exploration program is being planned to further evaluate
the discovery and USMX is also seeking interest from other mining companies to
participate in a joint venture. USMX's expenditures in Ecuador through December
31, 1996 totaled $335,000.
RISK FACTORS
In evaluating USMX the following factors among others which relate to both
USMX and Dakota should be considered because of the pending Merger. Dakota is
engaged in the business of investing in and operating precious metals mining
projects, producing gold and silver and exploring for, acquiring and developing
precious metals properties throughout the world. Dakota currently has 100%
interest in Gilt Edge Mine located near Deadwood, South Dakota, a 40% interest
in Golden Reward Mine located near Lead, South Dakota and a 100% interest in
Stibnite Mine located in Valley County Idaho. Information related to Dakota's
risks was provided to USMX by Dakota and was included in a preliminary draft
joint proxy statement filed with the Securities and Exchange Commission by USMX
and Dakota on March 17, 1997.
The following cautionary statements are made pursuant to the United
States Private Securities Litigation Reform Act of 1995 in order for USMX to
avail itself of the "safe harbor" provisions of the Act. The discussions and
information in this report may contain both historical and forward-looking
statements. To the extent that this report contains forward-looking statements
regarding the financial condition, operating results, business prospects or any
other aspect of Dakota or USMX, please be advised that Dakota's and USMX's
actual financial conditions, operating results and business performance may
differ materially from that projected or estimated in forward-looking
statements. USMX has attempted to identify, in context, certain of the factors
that it currently believes may cause actual future results to differ from its
current expectations. The differences may be caused by a variety of factors,
including but not limited to fluctuations in the price of gold, adverse economic
conditions, adverse government regulation, both foreign and domestic, inadequate
capital, unexpected costs, the imposition of new, or the increase of existing,
tariffs, lower revenues and net income than forecasted, higher than anticipated
labor costs, the possible acquisition of new businesses that do not perform as
anticipated, the possible fluctuation and volatility of operating results and
financial condition, inability to carry out exploration and production plans,
loss of key executives, changes in interest rates, inflationary factors, and
other specific risks that may be alluded to in this report or in other reports
issued by Dakota or USMX. USMX cautions the reader that this list of factors may
not be exhaustive.
General Risks Related to the Mining Industry
Nature of Mineral Exploration and Production
Exploration for and, if warranted, production of minerals is highly
speculative and involves greater risks than many other businesses. Many
exploration programs do not result in the discovery of mineralization and any
mineralization discovered may not be of sufficient quantity or quality to be
profitably mined. Uncertainties as to the metallurgical amenability of any
minerals discovered may not warrant the mining of these minerals on the basis of
available technology. Moreover, short-term factors relating to the ore reserves,
such as the need for orderly development of ore bodies or the processing of new
or different grades, may impair the profitability of a mine in any particular
accounting period. Mining operations are also subject to a number of other
hazards and risks such as encountering unusual or unexpected formations,
environmental pollution, industrial accidents, rock movements and flooding, many
of which cannot be insured against.
Project Development Risks
USMX and Dakota from time to time engage in the development of new ore
bodies. The ability of USMX and Dakota to sustain or increase the present level
of gold production is dependent in part on the successful development of such
new ore bodies and/or expansion of existing mining operations. The economic
feasibility of any such development project, and all such projects collectively,
is based on, among other things, estimates of reserves, metallurgical
recoveries, capital and operating costs of such projects and future gold prices.
Development projects are also subject to the successful completion of
feasibility studies, issuance of necessary permits and receipt of adequate
financing.
Development projects have no operating history upon which to base
estimates of future cash operating costs and capital requirements. In
particular, estimates of reserves, metal recoveries and cash operating costs are
to a large extent based on the interpretation of geologic data obtained from
drill holes and other sampling techniques and feasibility studies which derive
estimates of cash operating costs based on anticipated tonnage and grades of ore
to be mined and processed, the configuration of the ore body, expected recovery
rates of metals from the ore, comparable facility and equipment costs,
anticipated climate conditions and other factors. As a result, it is possible
that actual cash operating costs and economic returns of any and all development
projects may materially differ from the costs and returns initially estimated.
Exploration
Mineral exploration, particularly for gold, is highly speculative in
nature, involves many risks and frequently is unsuccessful. While USMX and
Dakota are seeking to expand reserves through exploration of North and South
America, there can be no assurance that exploration efforts will result in the
discovery of gold mineralization. If reserves are developed, it may take a
number of years and substantial expenditures from the initial phases of drilling
until production is possible, during which time the economic feasibility of
production may change. No assurance can be given that the exploration programs
will result in developing or increasing reserves.
Competition and Scarcity of Mineral Lands
Although many companies and individuals are engaged in the mining
business, including large established mining companies, there is a limited
supply of desirable mineral lands available for claim staking, lease or other
acquisition in the United States and other areas where USMX and Dakota
contemplate conducting exploration and/or production activities. USMX and Dakota
may be at a competitive disadvantage in acquiring suitable mining properties as
they must compete with other individuals and companies, many of which have
greater financial resources and larger technical staffs than USMX or Dakota. As
a result there can be no assurance USMX or Dakota will be able to acquire
attractive properties.
Government Regulation
USMX's and Dakota's mining operations are subject to various laws and
regulations concerning prospecting, developing, production, exports, taxes,
labor standards, occupational health, waste disposal, toxic substances,
environmental protection, mine safety and other matters. USMX and Dakota seek to
make good faith efforts to comply with all applicable laws and regulations.
Except as otherwise disclosed herein, Dakota and USMX believe they are each in
compliance with all applicable material governmental regulations. Instances of
non-compliance or new laws or regulations governing operations and activities of
mining companies, however, could have a material adverse impact on the business
of USMX and Dakota.
Environmental Matters
Mining is subject to potential risks and liabilities associated with
pollution of the environment and the disposal of waste products occurring as a
result of mineral exploration and production. Environmental liability may result
from mining activities conducted by others prior to USMX's or Dakota's ownership
of a property. Insurance for environmental risks (including potential liability
for pollution or other hazards as a result of the disposal of waste products
occurring from exploration and production) is not generally available at a
reasonable price to companies within the industry. To the extent USMX and/or
Dakota is subject to environmental liabilities, the payment of such liabilities
would reduce funds otherwise available to the companies and could have a
material adverse effect on the companies.
In the context of environmental compliance and permitting, including the
approval of reclamation plans, USMX and Dakota must comply with standards, laws
and regulations which may entail greater or lesser costs and delays depending on
the nature of the activity to be permitted, constructed and operated and how
stringently the regulations are implemented by the applicable regulatory
authority. It is possible that the costs and delays associated with compliance
with such laws, regulations and permits could become such that a company would
not proceed with the development of a project or the operation or further
development of a mine. Except as otherwise disclosed herein, Dakota and USMX
each believe that their respective operators are in substantial compliance with
all applicable material environmental regulations. However laws, regulations and
regulatory policies involving the protection and remediation of the environment
are constantly changing at all levels of government and are generally becoming
more restrictive and the costs imposed on the development and operation of
mineral properties are increasing as a result of such changes. USMX and Dakota
have made, and expect to make in the future, significant expenditures to comply
with such laws and regulations.
The Environmental Protection Agency ("EPA") continues the development
of a solid waste regulatory program specific to mining operations under the
Resource Conservation and Recovery Act ("RCRA"). Of particular concern to the
mining industry is a proposal by the EPA titled "Recommendation for a Regulatory
Program for Mining Waste and Materials Under Subtitle D of the Resource
Conservation and Recovery Act" ("Strawman II") which, if implemented, would
create a system of comprehensive federal regulation of the entire mine site.
Many of these requirements would be duplicative of existing state regulations.
Strawman II as currently proposed would regulate not only mine and mill wastes
but also numerous production facilities and processes which could limit internal
flexibility in operating a mine. To implement Strawman II as proposed, the EPA
must seek additional statutory authority, which is expected to be requested in
connection with Congress' reauthorization of RCRA.
Mining companies in the United States are also subject to regulations
under (i) the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA") which regulates and establishes liability for the release
of hazardous substances and (ii) the Endangered Species Act ("ESA") which
identifies endangered species of plants and animals and regulates activities to
protect these species and their habitats. Revisions to CERCLA and ESA are being
considered by Congress; the impact on USMX and Dakota of these revisions is not
clear at this time. Environmental laws and regulations enacted and adopted in
the future may have a significant impact upon Dakota's and USMX's future
operations. USMX and Dakota cannot now accurately predict or estimate the impact
of any such future laws or regulations on its operations.
Mining Risks and Insurance
The business of gold mining is generally subject to a number of risks
and hazards, including environmental hazards, industrial accidents, labor
disputes, the encounter of unusual or unexpected geological conditions, slope
failures, changes in the regulatory environment and natural phenomena such as
inclement weather conditions, floods, blizzards and earthquakes. Such
occurrences could result in damage to, or destruction of, mineral properties or
production facilities, personal injury or death, environmental damage, delays in
mining, monetary losses and possible legal liability. USMX and Dakota maintain
insurance against risks that are typical in the gold mining industry and in
amounts that USMX and Dakota believe to be reasonable, but which may not provide
adequate coverage in certain unforeseen circumstances. Insurance against certain
risks (including certain liabilities for environmental pollution or other
hazards as a result of exploration and production) is not generally available to
USMX, Dakota or to other companies within the industry.
Proposed Changes in Mining Laws
Several recent legislative developments have affected or may in the
future affect the cost of and the ability of mining claimants to use the Mining
Law of 1872, as amended, to acquire and use federal lands for mining operations.
Since October 1994, a moratorium has been imposed on processing new patent
applications for mining claims. Also, since 1993, a rental or maintenance annual
fee of $100 per claim has been imposed by the Federal government on unpatented
mining claims in lieu of the prior requirement for annual assessment work.
During the last several Congressional sessions, bills have been repeatedly
introduced in the U.S. Congress which would supplant or radically alter the
General Mining Law. As of the end of 1996, no such bills had been passed. Such
bills have proposed, among other things, to permanently eliminate or greatly
limit the right to a mineral patent, impose royalties, and impose new federal
reclamation, environmental control and other restoration requirements. Recently,
the Secretary of the Interior directed the Bureau of Land Management to form a
task force to prepare and publish for public comment revisions to the hardrock
mining surface management regulations implemented in 1981. The Secretary
suggested that such revised regulations address implementation of a technology
based standard in conduct of hardrock mining, development of performance
standards for hardrock mining and reclamation, increasing regulation of
operations of less than five acres, and increasing coordination with state
regulators. As of March 17, 1997, no such bills have been passed or regulations
proposed or promulgated. If enacted or promulgated, such legislation or
regulations could impair the ability of USMX and Dakota to economically develop
mineral resources on federal lands. The extent of the changes, if any, which may
be made by Congress to the General Mining Law or by the Bureau of Land
Management to the surface mining regulations is not presently known and the
potential impact on USMX and Dakota as a result of future Congressional action
is not presently determinable.
Need for Substantial Capital
The business of precious metals mining requires very large capital
expenditures in advance of anticipated revenues from operations. There is no
assurance that USMX or Dakota will be able to obtain all of the financing that
they require on acceptable terms and conditions.
Fluctuation in the Price of Gold
Because their revenues of USMX and Dakota are or will be derived
primarily from the sale of gold, their earnings for USMX and Dakota are directly
related to gold prices. Gold prices fluctuate widely and are affected by
numerous factors beyond their control, including expectations for inflation, the
relative exchange rate of the dollar, global and regional demand, political and
economic conditions, expectations for inflation and production costs in major
gold producing regions including South Africa and Russia. In addition, gold
prices have on occasion been subject to very rapid short-term changes due to
speculative activities of investors. Gold prices are also affected by world-wide
production levels, which have increased in recent years. Market price
fluctuations of gold may render uneconomic the mining of mineral deposits
containing relatively lower grades of mineralization. If the market price of
gold falls significantly below their production costs of USMX and Dakota and
remains at such a level for any sustained period, their will experience
substantial cash losses, may not be able to recover its investment in its
properties, and may be required to discontinue its operations. Only a portion of
Dakota's expected gold production is hedged in forward sales contracts.
Specific Risks Related to USMX
Going Concern Uncertainty of USMX; Illinois Creek Project Commitments
At December 31, 1996, USMX had a working capital deficiency of $27.1
million. During 1996 USMX devoted or committed substantially all of its liquid
resources to development of the Illinois Creek Project. During 1996, the
estimated development costs for the Illinois Creek Project increased
substantially, partially due to weather-related delays and other problems
arising from the complexities of developing a mine in Alaska using only air
transport. At December 31, 1996, USMX had unpaid commitments to suppliers and
contractors of approximately $5.7 million for work completed in 1996. USMX has
also expended $1.8 million of the $5 million Dakota loaned for additional
construction work at Illinois Creek. USMX estimates that an additional $7
million, including $3.2 million of working capital, will be required to bring
the mine to production. USMX's lending arrangements with Rothschild, its
principal lender, require it to maintain minimum balances in a Proceeds Account
for use only in connection with the Illinois Creek Project and to maintain
certain financial ratios related to such Project and to USMX. USMX was required
to deposit $1.5 million to the Proceeds Account by September 30, 1996, which
requirement was not satisfied. USMX is also not in compliance with other
covenants of the Rothschild Credit Agreements. USMX's auditors have included an
explanatory paragraph in their report that states that these matters, among
others, raise substantial doubt about USMX's ability to continue as a going
concern and that the financial statements of USMX do not include any adjustments
that might result from the outcome of this uncertainty.
In connection with the Merger, USMX obtained a $5 million line of
credit from Dakota. In addition, Rothschild has agreed with Dakota to forbear
from exercising its rights to declare and enforce defaults (except payment or
bankruptcy defaults) of USMX until the latest of consummation of the Merger,
termination of the $5 million line of credit from Dakota or June 30, 1997. See
"Dakota Line of Credit."
If USMX is unable to maintain compliance with its credit obligations to
Rothschild, it risks a possible foreclosure of Rothschild's security interest in
the Illinois Project and legal action for monetary damages against USMX. USMX
does not presently have capital resources available to satisfy its obligations
to Rothschild. Accordingly, if the Merger is not consummated, USMX will need to
obtain other financing or attempt to merge or engage in another form of business
combination with an entity with available cash resources or sell assets. USMX
has made no such arrangements and there can be no assurance that USMX would be
successful in obtaining any such arrangements. See Management's Discussion and
Analysis of Financial Condition and Results of Operations.
USMX commenced mining operations at the Illinois Project in late 1996, but
postponed gold production due to the onset of winter. If the Merger is completed
by the end of May 1997, USMX forecasts achieving gold production in the summer
of 1997. Any revenues from gold sales as well as any other funds deposited to
the Proceeds Account by USMX may not be withdrawn for USMX's general corporate
purposes until Completion has occurred. As defined in the Rothschild Credit
Agreements, the requirements for Completion include the construction of the
Project facilities, which facilities and equipment thereon must be mechanically
complete and electrically operable ("Mechanical Completion"), the achievement of
production amounts and grades, costs and reserves similar to the development
plan, and the absence of any default in the credit agreements. Completion has
not occurred, and there can be no assurance that the conditions for Completion
will be satisfied. Moreover, USMX projects that the earliest date the conditions
could be satisfied would be in the fall of 1997. Accordingly, USMX could be
severely constrained in its ability to conduct operations and to pursue other
mining opportunities pending Completion. There can be no assurance that
Completion will be achieved or that there will not be a significant delay in
achieving Completion. See "Intercreditor Agreements."
Profitability
Although USMX reported net income for each of the six years ended
December 31, 1994, USMX reported a net loss of $3.3 million for the year ended
December 31, 1996 and a net loss of $6.9 million for the year ended December 31,
1995. At December 31, 1996, USMX had an accumulated deficit of $3.1 million.
USMX does not anticipate obtaining operating revenues in 1997 from any mine
other than Illinois Creek. If USMX fails to put the mine in operation or the
operations do not achieve expected levels of production, USMX's ability to
generate revenues will be materially adversely affected. Future profitability is
also dependent upon USMX successfully locating, acquiring, financing,
constructing, and operating additional mines at a cost that is sufficiently less
than the prevailing price of the commodity being mined, of which there can be no
assurance.
Certain Illinois Creek Project Risks
Completion and operation of the Illinois Creek Project involve numerous
risks, including the following:
Pre-Production Work and Testing
The development of the mine and construction of the related facilities were
substantially completed in October 1996. In the fall of 1996, the mining
contractor placed approximately 115,000 tons of overliner material and
run-of-mine ore on the leach pad. USMX is required to successfully complete a
test to demonstrate that the synthetic pad liner meets certain leak test
criteria. After completion of this test to the satisfaction of appropriate
regulatory authorities, which is expected to occur in late May or June of 1997,
USMX would begin placing ore and cyanide solutions to the heap with gold
production anticipated shortly thereafter. However, there are numerous risks
associated with the start-up of a new mine and there can be no assurance that
gold production will be achieved as forecasted.
Reserves
Ore reserves for the Illinois Creek Project are estimates made by USMX
which have been reviewed by MRI and Roscoe Postle Associates Inc. ("RPA"), an
independent mining consulting firm. USMX has not commenced production at the
Illinois Creek Project, and there can be no assurance that the indicated amount
of gold will be recovered. The reserves have been calculated from drill-hole
assay results. Several programs of trenching, diamond drilling and
reverse-circulation drilling have been carried out on the Illinois Creek
Project. Assay results have been analyzed and several checks of the assay data
have been conducted as a quality control procedure. Modeling is used to yield
estimates in reserves determined by optimum economic mining limits. In the
opinion of RPA, the Illinois Creek Project reserves are estimated in accordance
with standard engineering methods and the estimation approach and procedures
used are in keeping with standard industry practice. However, RPA has noted that
there are some issues which can impact on the estimate of the average grade,
including the handling of high-gold assays, which may result in the
overestimation of the average grade of the deposit in the order of 10%. RPA has
noted that differences of this magnitude in gold grades are not unusual. RPA
also has stated its belief that most of the reserves should be classified as
probable. Reserve estimates may require revisions based on actual production
experience. Fluctuations in the market price of gold, as well as increased
production costs or reduced recovery rates, may render reserves containing
relatively lower grades of mineralization uneconomical to recover and may
ultimately result in a restatement of reserves. The reserves for the Illinois
Creek Project have been calculated assuming a realizable price for gold of $400
per ounce. The price of $400 per ounce was selected based on trading on the gold
spot market and the gold forward market. USMX has entered into certain hedging
arrangements. See "Hedging Activities." However, there can be no assurance with
respect to the future price of gold and its effect on USMX's reserves and
operations.
Transportation
The Illinois Creek Project site is located in the southern Kaiyuh
Mountains in the western interior of Alaska. The Illinois Creek Project is
located approximately 57 miles southwest of Galena and 23 miles east of the
Yukon River. It is equidistant from Fairbanks and Anchorage which lie
approximately 320 miles to the east and southeast of such Project, respectively.
The only access to the site is by air. Equipment and supplies are
transported to the site by land, sea and air. The most economical way to
transport freight to the site is from Seattle, Washington to Anchorage, Alaska
by barge; from Anchorage, freight moves by truck or rail to Nenana;and from
Nenana, it is moved down river on barge to Galena. From Galena, it is flown to
an airstrip at the site. If it is not possible to utilize this transportation
route costs increase. For instance, when it is not possible to barge on the
Yukon River, freight must be flown to the site from Anchorage or Fairbanks at a
higher cost.
Weather
The climate is subarctic and characterized by large seasonal extremes
in temperature and daylight. Significant periods of inclement weather could
adversely affect operations at the Illinois Creek Project which would, in turn,
delay production and related cash flow from such Project. Inclement weather can
also cause flights to be delayed or reflown at additional costs. Based on
expected weather conditions, USMX presently intends to conduct mining during May
through October.
Environment
Mining is subject to potential risks and liabilities associated with
pollution of the environment and the disposal of waste products occurring as a
result of mineral exploration and production. The Illinois Creek Project is
permitted as a "zero discharge facility". As such, operation will require strict
control of the water balance to ensure that no discharge occurs. If a discharge
occurs the operation could be temporarily shut down and the cleanup costs could
be substantial. Upon closure, reclamation activities will be closely monitored
and effluent from the decommissioned facility will be required to meet strict
water quality standards.
Community Relations
USMX has established good relations with residents of the local area.
If USMX were unable to continue this rapport, the Illinois Creek Project could
be negatively impacted.
Thunder Mountain Project, Uncertainty of Future Financing
USMX has filed a Notice of Intent to Operate with the Idaho Department
of Lands describing USMX's proposed gold and silver mining activities in the
Thunder Mountain Project. Depending upon USMX's progress in obtaining the
necessary permits, the market price of gold, feasibility study and other
factors, USMX may determine to seek to develop the Thunder Mountain Project.
Management estimates that substantial capital will be required for construction
of facilities and other development activities at Thunder Mountain. USMX has no
commitments for outside financing for the Thunder Mountain Project and there can
be no assurance such financing would be available, or, if available, that the
terms would be beneficial to USMX.
USMX's ability to obtain outside financing for the Thunder Mountain
Project or other future projects will depend, among other things, upon the price
of gold and perceptions of future prices. Therefore, availability of funding is
dependent largely upon factors outside USMX's control, and cannot be predicted.
USMX does not know from what specific sources it will be able to derive any
required funding. Any such financing, if available, could increase the
indebtedness of USMX or dilute current stockholders' positions. If USMX acquires
such funding through debt a substantial portion of USMX's cash flow may need to
be devoted to the payment of principal and interest on such debt which could
render USMX more vulnerable to competitive pressure or economic downturns. If
USMX is not able to raise additional funds (and there can be no assurance that
it can, or that if it can, such funds will be on terms acceptable to USMX) it
will not be able to fund certain exploration and development activities on its
own.
Hedging Activities
Although USMX has historically used, and plans to use in the future,
spot deferred contracts in its hedging program to protect earnings and cash
flows from the impact of gold price fluctuations. USMX was required pursuant to
its lending arrangements with Rothschild to enter into hedging transactions. In
1996 USMX hedged approximately 140,900 ounces of the expected gold production
from the Illinois Creek Project at an average selling price of $409 per ounce.
Spot deferred contracts that are designated as hedges of the price of future
production are accounted for as such. Spot deferred contracts that are not
identified as hedges of specific anticipated future production are marked to
market with unrealized gains or losses recognized in earnings as they occur.
Spot deferred contracts are agreements between a seller and a
counterparty whereby the seller commits to deliver a set quantity of gold, at an
established date in the future and at agreed prices. The established price is
equal to the spot price for gold plus "contango." Contango is equal to the
difference between the prevailing market rate for dollar deposits less the gold
lease rate, for comparable periods, and represents compensation to the seller
for holding gold until a future date. Contango rates ranged from approximately
0% to 5 1/2% during 1996.
At the scheduled future delivery date, the seller may, at the option of
the counterparty, deliver into the contract or defer the delivery to a future
date. This option allows the seller to maximize the price realized by selling at
the spot market price if such price at that time were to be higher than the
forward contract price. Each time the seller defers delivery, the forward sales
price is increased by the then prevailing contango for the next period.
Generally, the counterparty will allow the seller to continue to defer contract
deliveries providing that there is sufficient scheduled production from proven
and probable reserves to fulfill the commitment.
Risk of loss with these spot deferred contracts arises from the
possible inability of a counterparty to honor contracts and from changes in
USMX's anticipated production of gold. However, nonperformance by any party to
such financial instruments is not anticipated.
USMX is typically required by the counterparties to maintain a margin
account. Should the cumulative liquidation cost of USMX's spot deferred
positions exceed the cumulative value of such positions by an amount in excess
of the margin account, USMX could be subject to margin call. The liquidation
cost is what USMX would have to pay on the liquidation date to purchase fixed
forward delivery contracts to meet its spot deferred deliveries. The cost of
fixed forward delivery contracts is based on the spot price on the liquidation
date plus contango through the delivery date. As of December 31, 1996, the
liquidation cost of USMX's existing hedge position was not material. The
aggregate unrealized excess of the net market value of USMX's forward sales
contracts over the spot gold price of $368 per ounce as of December 31, 1996, is
approximately $5,875,000. The aggregate unrealized gain of USMX's forward sales
contracts accounted for as hedges of future production were approximately
$5,033,000 at December 31, 1996.
USMX has also written silver call options expiring at various dates
over the next forty months, which if exercised, would become spot deferred
contracts with delivery deferred as previously described. At December 31, 1996
USMX had sold 825,300 ounces of silver call option contracts all at a strike
price of $5.50 per ounce expiring on dates ranging from September 28, 1997
through December 29, 1999. Call options premiums received amounted to
approximately $424,000. These contracts are marked to market with unrealized
gains or losses recognized in earnings as they occur.
Title to Properties
Certain of USMX's mineral rights consist of unpatented mining claims.
Unpatented mining claims are unique property interests that are generally
considered to be subject to greater title risk than other real property
interests. The greater title risk results from the unpatented mining claims
being dependent on strict compliance with a complex body of federal and state
statutory and decisional law, much of which compliance involves physical
activities on the land, and from the lack of public records which definitively
control the issues of validity and ownership.
No Dividends
USMX anticipates that it will use its earnings, if any, to finance its
operations and growth. USMX does not anticipate paying dividends and, because of
certain debt covenants, is restricted from paying any dividends to its
stockholders.
Volatility of Price for Common Stock
The market prices for shares of the USMX Common Stock have been highly
volatile in recent years. See "Description of USMX Capital Stock-Trading
History." The market price may be highly volatile in the future depending on
news announcements of USMX, gold price volatility and changes in general market
conditions.
Specific Risks Related to Dakota
Uncertainty of Title
Certain of Dakota's mining properties are unpatented mining claims, and
Dakota has only possessory title with respect to such properties. The validity
of unpatented mining claims is often uncertain and may be contested. Although
Dakota has attempted to acquire satisfactory title to its properties, Dakota, in
accordance with mining industry practices, has not obtained title opinions and
title insurance, with the attendant risk that title, particularly on undeveloped
properties, may be defective.
Lack of Profitability
Dakota's operating history has resulted in losses from operations in
each of its last five fiscal years. No assurance can be given that Dakota will
ever operate at a profit. While certain of Dakota's mining properties may be
operated at a profit during a given fiscal year, Dakota's operations as a whole
may be unprofitable due to exploration, development, and operating costs on
other properties. Other items that may adversely effect profitability include
selling expenses, general and administrative costs, allowances for depreciation,
depletion and amortization of assets, and interest expense.
Working Capital and Financing Requirements
Dakota has a limited working capital. If Dakota's continuing
exploration activities indicate economically minable properties now owned or
hereafter acquired by Dakota, Dakota will be required to expend potentially
large sums to put such properties into production. There can be no assurance
that Dakota will be able to obtain such additional funding.
Market Price of Dakota Shares
Assuming that all of the Dakota Common Shares to be issued in respect
to the Merger (including Common Shares issuable upon the exercise of USMX stock
options) are issued, a total of 15.8 million additional Common Shares will be
available for trading in the public market. The increase in the number of Dakota
Common Shares in the market and the possibility of sales of such shares may have
a depressive effect on the price of Dakota's Common Shares.
Dividend Policy
No dividends have been paid by Dakota to date. For the foreseeable
future, it is anticipated that Dakota will use earnings to finance its growth
and that dividends will not be paid to shareholders.
Joint Ventures
Some of the mines in which Dakota owns an interest are operated through
joint ventures with other mining companies. Any failure of such other companies
to meet their obligations to Dakota or to third parties could have a material
adverse effect on the joint ventures.
Royalties
Dakota's mining properties are subject to various royalty and land
payment agreements. Failure by Dakota to meet its payment obligations under
these agreements could result in the loss of Dakota's related property
interests.
Environmental Matters
Reclamation plans which are approved by various environmental
regulatory authorities are subject to on-going review and modification. Although
Dakota believes that the reclamation plans developed and implemented for its
mine sites are reasonable under current conditions, any future re-determination
of reclamation conditions or requirements could significantly increase Dakota's
costs of implementation of such plans.
Permitting Matters
An expansion at the Gilt Edge mine called the Anchor Hill open pit,
contemplates that approximately 37 acres of public lands will be disturbed,
principally for pit wall layback and waste removal. Accordingly, Dakota is
required to complete an Environmental Impact Statement (the "Gilt Edge EIS").
The Gilt Edge EIS, which has been underway since January 1994, was delayed in
1995 pending receipt of the state and county operating permits. Dakota now
expects to finalize the Gilt Edge EIS by the spring of 1997 If, however, the
Gilt Edge EIS is not completed in a timely manner, Gilt Edge Mine operations
scheduled to commence in 1998 will be delayed.
Operations at Stibnite Mine after 1997 are subject to the completion of
an Environmental Impact Statement (the "Stibnite EIS"). Completion of the
Stibnite EIS was delayed during 1996 as a result of prioritizing completion of a
development project at the mine. Dakota now expects the EIS to be completed in
the fall of 1997. If, however, the Stibnite EIS is not completed in a timely
manner, Stibnite Mine operations scheduled to commence in 1998 will be delayed.
Matters Affecting Golden Reward Mine
A significant portion of proven and probable reserves located at Golden
Reward Mine, are encumbered by surface rights and facilities some of which are
owned by third parties. In order to access these reserves and mineral resources,
Golden Reward Mine will be required to relocate its existing crushing facility
and to possibly reduce its existing leach pad capacity by 25% or to require or
otherwise compensate the third parties for their facilities. No assurance can be
given that Golden Reward Mine will be successful in its efforts to remove these
encumbrances.
No operations at Golden Reward Mine are planned for 1997. Before
operations can recommence, Golden Reward Mine will be required to obtain new
operating permits in order to mine certain of these encumbered reserves. Dakota
estimates that it will take between nine to 15 months from commencement of the
application process to obtain said permits. There can be no assurance that such
permits will be obtained within such time periods, if at all. The owners have
disagreed regarding certain operational and financial matters for the Golden
Reward Mine, including planned future operations and related funding
requirements. The resolution of these matters is not presently determinable.
Risks Related to the Merger
Operations of the Combined Company
Although the initial members of the Board of Directors and the senior
management of the combined company resulting from the Merger have been
identified, most operational and strategic decisions with respect to the
combined company have not yet been made and no formal business plan for the
combined company exists at this time. The timing and manner of the
implementation of decisions made with respect to the ongoing business of the
combined company following the Merger will materially affect the operations of
the combined company. Given the range of potential outcomes arising from such
decisions and the interrelationships among decisions to be made, in many cases,
it is not possible to quantify the impact of such decisions on the results of
operations and financial condition of the combined company. Any integration,
consolidation, reconfiguration or other modification of Dakota and USMX would
involve several significant risks, including, but not limited to, the following:
Management
Restructuring or integration of the operations of Dakota and USMX will
require the dedication of management resources, which could distract attention
from the day-to-day operations of the separate businesses of each company. If
the management of the combined company is unable to effectively manage any such
restructuring or integration, the operating results and financial condition of
the combined company could be materially adversely affected. In the event that
the operations of Dakota and USMX are restructured or integrated, there can be
no assurance that the combined company will be able to retain the key personnel
currently employed in the separate operations of each company.
Expenses
The integration, consolidation or restructuring of the business
operations of Dakota and USMX could result in the incurrence of significant
expenses by the combined company following the Merger, which could have a
material adverse effect on the operating results of the combined company.
Employees
The number of persons employed by the Company at March 25, 1997 was 28.
Financial Information about Foreign and Domestic Operations and Export Sales.
The Company had no production from foreign mining operations and did
not make export sales during 1996.
During 1991, the Company incorporated USMX Mining, Inc. under the British
Columbia Company Act in anticipation of a potential acquisition in the Province
of British Columbia that was not consummated. USMX Mining, Inc. had no material
assets or obligations as of December 31, 1996.
During 1992, 1993, 1994 and 1995, MXUS S. A. de C. V., a wholly owned
subsidiary of the Company, acquired the exploration rights to several properties
in Mexico located in the states of Chihuahua, Sonora, Coahuila and Jalisco. The
Company expended approximately $75,000 in Mexico in 1996 on these properties and
on general reconnaissance. As of December 31, 1996, the Company's investment in
Mexican properties amounted to approximately $1.7 million.
In 1992, the Company caused the incorporation of a Costa Rican
subsidiary, USMX de Costa Rica S. A., to facilitate potential acquisitions in
Costa Rica. To date, no material expenditures or obligations have been incurred
by this subsidiary.
In 1994, the Company caused the formation of a Chilean subsidiary,
Compania Minera USMX de Chile Limitada, to facilitate exploration in Chile. To
date, no material expenditures or obligations have been incurred by this
subsidiary.
In 1995, the Company purchased the outstanding capital stock of Mega
Minerals, S.A., an Ecuadorian company. As of December 31, 1996, the Company had
expended approximately $335,000 in mining concessions and exploration thereof.
To date, no significant mineralization has been encountered on the concessions
and the carrying value of the concessions was reduced to $0 in 1996.
<PAGE>
Glossary of General Terms
Dakota
Dakota Mining Corporation, a corporation continued under the laws of Canada, and
where the context so requires means Dakota and its Subsidiaries.
Dakota Common Shares
The common shares, no par value, in the capital of Dakota.
Merger
The merger of USMX and Dakota Merger Corporation whereby USMX becomes the
surviving corporation and a wholly owned subsidiary of Dakota as contemplated in
the Merger Agreement.
Merger Agreement
The agreement dated February 5, 1997 between Dakota, Dakota Merger Corporation
and USMX relating to the Merger annexed to the Joint Proxy Statement/Prospectus
as Appendix A.
Montana Tunnels Royalty Agreement
The agreement dated March 17, 1997 among USMX, USMX of Montana, Inc., and
Pegasus Gold.
Pegasus Gold
Pegasus Gold Corporation, a Nevada corporation, which is a principal stockholder
of USMX.
Rothschild
N M Rothschild & Sons, Limited.
Rothschild Credit Agreements
Those certain Credit Agreements dated July 11, 1996 between USMX, USMX of
Alaska, Inc. and Rothschild and all instruments and documents delivered in
connection therewith, and all modifications, extensions and renewals thereof.
TSE
The Toronto Stock Exchange
USMX
USMX, Inc., a corporation formed under the laws of Delaware, and where the
context so requires means USMX and its Subsidiaries.
USMX Common Stock
The shares of the common stock, par value $.001 per share of USMX.
USMX Group
USMX and its Subsidiaries.
<PAGE>
Glossary of Mining Terms
The following terms are described to aid in understanding this report.
Air Track Drilling
See Drilling.
Anomaly
An anomaly is a geochemical, geophysical or other observed condition, indicated
by differing empirical physical data, that may
indicate the presence of mineralization in underlying bedrock.
Base Metals
A family of metallic elements, including copper, lead and zinc.
Caldera Complex
A large, basin-shaped volcanic depression created by subsidence, representative
of a volcanic vent, which is characterized by a diverse assemblage of volcanic
intrusive and extrusive rocks.
Carbon Adsorption
A process in which soluble
complexes of gold and silver physically adhere without chemical reaction to the
molecular surfaces of activated carbon particles. The process is used to collect
gold and silver from a leach solution. The Company uses activated carbon made
from coconut shells. This carbon contains five to six million square feet of
molecular surface area per pound.
Cash Costs
Include all site costs incurred for
mining, crushing, pad loading, leaching, processing and mine site general and
administrative functions. Such costs exclude royalties and mining taxes which
costs are triggered not by the production of gold but by its sale. Also excluded
are depreciation of equipment, amortization of previously capitalized costs and
accrual of reclamation costs. Revenues from the sale of by-products (principally
silver) are deducted from cash costs.
Contained Ounces
The estimated number of
ounces of precious metals contained in an orebody which is a gross measurement
of ounces in the ground. The ounces ultimately recovered from the ore
(recoverable ounces) will be less than contained ounces due to inherent
inefficiencies in recovery methods.
Cutoff Grade
The lowest grade of mineralized
material that can be mined and processed economically.
Denouncement
A process
under Mexican mining law by which an exploration concession may be obtained from
the Mexican government. The exploration concession is granted for a period of
six years. If a mineable resource is delineated, then an exploitation concession
with a term of fifty years can be obtained.
Dilution
An estimate of the amount
of waste or low grade mineralized rock that is unintentionally mined as part of
normal mining practices in extracting ore.
Dore
Unrefined bullion that is an
alloy of gold and silver and various impurities which will be further refined to
almost pure metals.
Drill-Defined Mineralization
Ore reserves, except that all
legal requirements for extraction of minerals have not yet been satisfied.
Drilling
Air Track Drilling
Small diameter, short hole, percussion drilling
using compressed air.
Core Drilling
Drilling using a hollow diamond-studded bit
that cuts out a rock core. This core is extracted from inside the drill rod for
geological examination and assay.
Infill Drilling
Drilling between existing
holes to better define the geology or to improve the reliability of the ore
reserve calculation.
Rotary Drilling
Drilling with a bit that breaks the rock
into chips. The chips are continually flushed from the hole (outside the drill
pipe) and are collected in sequence for geological examination and assay.
Reverse Circulation Drilling
A type of rotary drilling that uses a double walled
drill pipe. Compressed air, water or other drilling medium is forced down the
space between the two pipes to the drill bit, and the drilled chips are flushed
back up to the surface through the center tube of the drill pipe.
Flotation
A milling process for mineral concentration based on the selective
adhesion of minerals to air bubbles in a water and ground-ore mixture. Air and
specific chemicals are introduced into the mixture. The finely ground minerals
float to the surface forming a metal rich concentrate that is skimmed off the
surface. The resulting concentrates are shipped to a smelter where the final
products are produced.
Graben
A block, generally long compared to its width,
that has been downthrown along faults relative to the rocks on either side.
Grade
The metal or mineral content of rock, ore or drill samples. With respect
to precious metals, grade is generally expressed as troy ounces per ton of rock.
Gravity Concentration
A method of recovering precious metals and other heavy
constituents from ore in which the ore may be physically reduced in size,
combined with water and then processed utilizing gravity to separate the heavier
precious metals from the waste material.
Heap Leaching
A low cost leaching
process in which ore is placed in a heap on an impermeable pad. The solvent,
which in the case of gold is a weak cyanide solution, is sprinkled over the heap
and is later collected after percolating through the ore and dissolving the
metals, allowing subsequent gold recovery.
Hydrothermal Alteration
Changes in
rocks or minerals caused by heated solutions.
Joint Venture
An arrangement
whereunder two or more parties agree to jointly participate in the evaluation of
a mineral property.
Leaching
The extraction of a soluble metallic element from
ore by dissolving the metal in a solvent.
Leach Pad
An impermeable foundation or
pad used as a base for ore during heap leaching. The pad prevents the leach
solution from escaping from the circuit.
Massive Sulfide Mineralization
A sulfide deposit characterized by a
concentration of interconnected sulfides totaling in excess of 30% of the total
rock, as opposed to a disseminated or veinlike deposit.
Mill
A plant where ore
is ground, often to fine powder, and the minerals and metals are concentrated
and extracted by physical or chemical processes.
Mineable
That portion of a
mineral deposit from which it is economically feasible to extract ore.
Mineral
A naturally occurring, usually inorganic and crystalline substance with
characteristic physical and chemical properties that are due to its atomic
arrangement.
Mineralization
Mineral bearing rock. Mineralization generally
refers to the presence of gold, silver, or other minerals and metals which may
not qualify as a commercially mineable orebody without completion of additional
evaluation.
Net Profits Royalty (Net Profits Interest)
A royalty based on the
pretax profit (proceeds) remaining after recapture of certain operating, capital
and other costs. The type and manner of computation of such capital and other
costs may vary considerably.
Net Smelter Return Royalty (Net return royalty)
A royalty based on the actual sale price received for the subject metal less the
cost of smelting and/or refining the material at an off-site refinery or smelter
along with off-site transportation costs.
Orebody A mineral deposit that can be
mined at a profit under existing economic conditions.
Ore Reserves That part of
a mineral deposit which could be economically and legally extracted or produced
at the time of the reserve determination.
Proven Ore Reserves
Reserves for which
(a) quantity is computed from dimensions revealed in outcrops, trenches,
workings or drill holes; grade is computed from the results of detailed sampling
and (b) the sites for inspection, sampling and measurement are spaced so closely
and the geologic character is so well defined that size, shape, depth and
mineral content of reserves are well-established.
Probable Ore Reserves
Reserves
for which quantity and grade are computed from information similar to that used
for proven reserves, but the sites for inspection, sampling, and measurement are
farther 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.
Ounce
Troy ounce which is equivalent
to 31.103 grams. A troy ounce is approximately 9.7% heavier than an avoirdupois
ounce. Accordingly, there are 14.58 troy ounces in an avoirdupois pound as
opposed to 16 avoirdupois ounces.
Oxide Ore
Mineralized rock in which some of
the original minerals have been oxidized. Significant for heap leach operations
since oxidation often changes the original minerals to a more soluble form, and
may also permit a more complete permeation of cyanide solutions throughout the
mineralized rock so that particles of gold in the ore may be more readily
dissolved in the leaching process.
Patented Mining Claim
A mining claim, usually
comprising about 20 acres in area, to which the U.S. Government has conveyed
title to the owner.
Placer Deposit A surficial mineral deposit formed by
mechanical concentration of mineral particles from weathered debris, and which
contains heavy minerals and metals such as gold.
Polymetallic A type of deposit
that contains a suite of minerals or metals that may be valuable. Often copper,
lead, zinc, silver and gold may occur together.
Pyroclastic Rock
A rock
consisting of unreworked solid material explosively or aerially ejected from a
volcanic vent.
Recoverable Ounces
Those ounces contained in ore which can be
ultimately produced and shipped from the mine.
Recovery Rate The percentage of a
metal recovered in a mineral separation process. Recovery rates vary
considerably depending on physical, metallurgical and economic circumstances.
Refining
A process for removing impurities from metals by introducing air and
fluxes into the molten metal. The impurities are removed as gas or slag.
Reserve
See Ore Reserves
Reverse Circulation Drilling
See Drilling.
Run of Mine Ore
Ore that is loaded onto heaps directly from the mine without having been
crushed.
Stratabound
A situation in which mineralization is essentially
contained in or confined to a particular sedimentary or volcanic unit.
Strike
The compass direction that the long axis of a geological feature takes as it
intersects the horizontal.
Stripping Ratio
The tonnage ratio between waste and
ore in an open pit mine.
Sulfide
A mineral compound characterized by the linkage
of sulfur with a metal. Gold mineralization characterized by the presence of
sulfides is often more difficult to leach, and therefor less economic.
Supergene Enriched Deposit
A deposit in which the mineralization has been concentrated due
to oxidation and movement by groundwater with subsequent reprecipitation in a
reducing environment at or near the water table.
Unpatented Mining Claim
That portion of public mineral lands which a party has staked or marked out in
accordance with federal and state mining laws to acquire the exclusive right to
explore for and exploit the minerals which may occur on such lands.
Working Interest
The interest in a mineral property which entitles the owner of such
interest to participate in the exploration, development, and operation of a
mineral property, and to share in the revenues generated and related costs
incurred.
<PAGE>
Item 3. Legal Proceedings.
Thereare currently no legal proceedings to which the Company is a party.
However, litigation has been threatened . See "Items 1. and 2,." and "Items
7. and 8."
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Company's stockholders during
the fourth quarter of the fiscal year covered by this Report.
<PAGE>
PART II
Item 5. Market For The Registrant's Common Equity And Related Stockholder
Matters.
The Company's common stock trades on The Nasdaq National Market tier of
The Nasdaq Stock MarketSM under the symbol "USMX" and the Toronto Stock Exchange
under the symbol "USM". The Nasdaq Stock MarketSM is the principal market on
which the Company's shares are traded. The following table shows the high and
low prices and the volume traded of the Company's shares on The Nasdaq Stock
MarketSM for 1995 and 1996. The closing price of the Company's Common Stock on
January 2, 1997, the day preceding the public announcement of the Merger, was
$1.75 on The Nasdaq Stock MarketSM .
<TABLE>
<CAPTION>
High Low Volume
----------- ---------- ----------------
1995
<S> <C> <C> <C>
First Quarter 2.75 2.06 1,082,500
Second Quarter 2.94 2.13 1,648,700
Third Quarter 2.63 1.97 1,881,700
Fourth Quarter 2.06 1.75 1,347,100
1996
First Quarter 3.25 1.94 2,576,600
Second Quarter 3.13 2.44 837,100
Third Quarter 2.75 2.06 1,057,100
Fourth Quarter 2.44 1.44 1,672,800
</TABLE>
At March 16, 1997, the approximate number of holders of record of the
Company's Common Stock was approximately 4,000. This number does not include
beneficial owners holding shares through nominee or "street" names. No cash
dividends have been paid by the Company. It has been the Company's policy to use
funds derived from its earnings for exploration, development and other business
activities. The Company currently intends to continue this policy and does not
anticipate paying cash dividends in the near future. Any determination to pay
cash dividends in the future will be made by the Company's Board of Directors
after consideration of the Company's financial condition, business prospects and
other relevant factors. At present, the Company is precluded from paying
dividends pursuant to the Rothschild Credit Agreements.
<PAGE>
Item 6. Selected Financial Data
The selected financial data should be read in conjunction with the
Consolidated Financial Statements and the notes thereto which appear elsewhere
in this Report.
<TABLE>
<CAPTION>
Summary Consolidated Financial Information
(dollars in thousands, except per share amounts and operating data)
Years Ended December 31,
1996 1995 1994 1993 1992
----------- ------------ ------------ ------------ --------------
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Revenue (gold sales plus net other
income)............................ $2,323 $3,922 $14,866 $24,252(1) $18,043
Gross profit (loss)................ -- (605) 1,641 880 1,658
Prospecting costs.................. 643 684 739 667 651
Abandonment and impairment of mineral
properties......................... 1,416 4,431 261 938 21
Income (loss from continuing
operations......................... (3,302) (6,906) 204 2,602 37
Net income (loss).................. (3,302) (6,906) 204 2,602 37
Net income (loss per share......... $(0.22) $(0.47) $0.01 $0.17 $0.00(2)
Operating Data:
Ounces of gold sold................ -- 7,000 35,575 50,429 47,356
Average realized price per ounce -- $383 $383 $360 $360
Average market price per ounce $388 $384 $384 $360 $344
Ounces of gold produced:
Alligator Ridge are(3)........... -- -- -- 23,454 41,120
Green Springs -- -- -- -- 2,353
Goldstrike(4).................... -- 6,266 34,486 31,934 4,496
--------------- --------------- -------------- -------------- --------------
Total......................... -- 6,266 34,486 55,388 47,969
============== ======== ========== ======== =======
Cash costs per ounce:
Alligator Ridge area (3)......... -- -- -- $268 $285
Green Springs -- -- -- -- 198
Goldstrike(4).................... -- $233 $229 305 270
--------------- --------------- -------------- -------------- --------------
Combined...................... -- $233 $229 $289 $280
============== ======== ========== ======== =======
Total cost per ounce:
Alligator Ridge area (3)......... -- -- $328 $328 $336
Green Springs -- -- -- -- 162
Goldstrike(4).................... $233 $233 326 326 282
--------------- --------------- -------------- -------------- --------------
Combined...................... $233 $233 $327 $327 $331
============== ======== ========== ======== =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992
----- ----- ----- ----- ----
Financial Condition Data:
<S> <C> <C> <C> <C> <C>
Working capital.................... $(27,132) $5,094 $14,105 $19,362 $12,903
Current assets..................... $2,261 $5,834 $14,923 $21,573 $16,427
Total assets....................... $50,155 $17,469 $24,190 $28,808 $28,741
Current liabilities................ $29,393 $740 $818 $2,211 $3,524
Long term liabilities.............. $4,221 $885 $361 $1,074 $3,290
Stockholders' equity............... $16,541 $15,844 $23,011 $25,523 $21,927
<FN>
(1) Includes gain from the sale of USMX's Alligator Ridge assets totaling $5 million.
(2) Less than $0.01
(3) Sold August 27, 1993
(4) The Goldstrike Mine was acquired effective November 1,1992.
</FN>
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Going Concern Uncertainty
USMX has suffered recurring losses and cash flow deficits from
operations and currently has no mines in operation. At December 31, 1996, USMX
has an accumulated deficit of approximately $3,056,000, a working capital
deficiency of approximately $27,132,000 and is not in compliance with certain
covenants of its long term debt agreements. In addition, significant additional
funds will be required to bring USMX's Illinois Creek Mine into production.
USMX's auditors have included an explanatory paragraph in their opinion that
states that these matters raise substantial doubt about USMX's ability to
continue as a going concern and that the financial statements do not include any
adjustment that might result from the outcome of this uncertainty.
USMX has entered into a Merger Agreement with Dakota. The Merger is subject
to approval by the TSE, stockholder and creditor approval, review by other
regulatory authorities, and other customary conditions. In connection with the
Merger, Dakota has agreed to loan up to $5 million to USMX to be used to pay for
work completed and ongoing work at the Illinois Creek Mine prior to the Merger.
In connection with the Merger, USMX's principal lender, agreed with Dakota not
to accelerate the due date of any loans to USMX or to exercise any rights it may
have to collateral security (except for payment or bankruptcy defaults) until
the earlier of the consummation of the Merger, the termination of the Merger
Agreement in accordance with its terms, or June 30, 1997.
Should USMX be unable to complete the Merger with Dakota, the ability of
USMX to continue as a going concern is dependent on the continued forbearance of
Rothschild, and the commencement and continuation of successful operations at
the mine. Future profitability of the mine is dependent on USMX's ability to
produce gold from the mine in quantities and at costs consistent with those
projected by USMX.
Liquidity and Capital Resources
Working capital at December 31, 1996, was negative $27.1 million. Cash
and cash equivalents amounted to $238,000. Cash and cash equivalents decreased
during 1996 by $5 million primarily as a result of investment in property, plant
and equipment of approximately $25.7 million, including deferred exploration
costs of $0.5 million and development costs of $25.2 million ($23.9 million at
Illinois Creek, Alaska and $1.2 million at Thunder Mountain, Idaho), investment
in reclamation surety and restricted cash accounts of $2.5 million and cash used
in operations of $3.9 million. These costs were partially offset by $1.3 million
in proceeds from the sale of USMX's holdings in Alta Gold Co. common stock.
In addition, USMX obtained $4.5 million in loans from Pegasus Gold
secured by USMX's interest in the Montana Tunnels property and a $22.0 million
financing facility from Rothschild for the construction of the Illinois Creek
Mine and related facilities, including working capital. At December 31, 1996,
USMX had drawn approximately $21.4 million against the facility. See Items 1.
And 2. for a detailed discussion of this financing.
USMX completed its feasibility study of the Illinois Creek Project in
February 1996. After approval of the project by USMX's Board of Directors,
clearing, site preparation, and road building activities began in March 1996.
Upon receipt of a commitment for the $22 million financing facility from
Rothschild, and required permits and regulatory approvals in May, construction
of the mine and related facilities was begun. Construction and mine development
was terminated in November 1996 due to weather, but the leach pads processing
plant, rotary kiln and ancillary facilities were essentially completed at that
time.
The original Illinois Creek development budget was $22.6 million,
including $4.7 million in estimated working capital. In the process of obtaining
bids from construction contractors, USMX determined that the forecast needed to
be increased by approximately $2.8 million to $25.4 million. As a result of
weather induced delays, complexities of developing a mine using only air
transport and other complexities of developing a mine in a remote area, USMX had
incurred costs at December 31, 1996, of approximately $30.7 million related to
the development of the property, including approximately $2.8 million of working
capital. At December 31, 1996, USMX had unpaid obligations to suppliers and
contractors of approximately $5.7 million for work completed in 1996. As noted
below, subsequent to December 31, 1996, USMX obtained a $5 million line of
credit from Dakota, which funds were made available to Dakota as a partial
release of funds from a Dakota private placement. Dakota expects to utilize a
substantial portion of the additional proceeds from that private placement for
repayment of the balance of USMX's unpaid obligations, and for construction and
working capital requirements at Illinois Creek. Of the $5.7 million unpaid at
December 31, 1996, USMX has subsequently paid from the $5 million Dakota line
approximately $1.8 million.
USMX estimates that an additional $7 million, including $3.2 million of
working capital will be required to bring the mine to production. In the event
the Merger is consummated and the additional proceeds from the Dakota financing
are received, gold production is scheduled for the summer of 1997.
In the event the Merger is not consummated, USMX would need to obtain
other financing or attempt to merge or engage in another form of business
combination with an entity with available cash resources, or sell assets. Prior
to entering into the agreement in principle to merge with Dakota, USMX had
contemplated a public offering of securities to raise additional capital. USMX
determined not to proceed with such plans because of the attractiveness of the
Merger with Dakota. Nonetheless, considerable preparation for such offering had
been accomplished, including regulatory filings and preliminary marketing
arrangements. Moreover, Illinois Creek is presently closer to production and the
ability to achieve cash flow from operations is nearer to realization. USMX has
also reduced its general and administrative expenditures in an effort to lower
its ongoing cash requirements. As a result, USMX believes that it has reasonable
prospects for continued forbearance from Rothschild and other creditors pending
receipt of funds from operations at Illinois Creek and proceeds of a securities
offering or as a result of another business combination. USMX also believes that
the prospects for sale of its principal asset, the Illinois Creek Mine, are
enhanced as the plans for production are advanced. Therefore, USMX believes that
it has a viable plan for continuation of operations. As noted elsewhere herein,
USMX's plan is subject to substantial risk and success of its plan is not
assured.
One of the construction contractors on the Illinois Creek Property in
Alaska working under an approximately $3 million contract with the Company has
submitted invoices and claims totaling approximately $7 million for work
completed in 1996. At December 31, 1996, the Company had paid the contractor
$1,772,000 and has recorded an additional liability to the contractor, based on
the Company's estimate of its obligation under the contract of $2,414,000. On
November 8, 1996, the construction contractor also filed a lien on the Illinois
Creek Property. The lien is related to certain invoices and claims submitted
through that date. In April, 1997, USMX and the construction contractor agreed
in principle to settle the claim for $5 million. See "Business & Properties -
Illinois Creek Project - Other Agreements."
In addition to construction and working capital requirements at
Illinois Creek, USMX is required by the terms of the credit agreements with
Rothschild to maintain minimum balances in a Proceeds Account for use only in
connection with the Project and to maintain certain financial ratios related to
the Project and to USMX. Per the terms of the Rothschild Credit Agreements, USMX
agreed to deposit $1.5 million in the Proceeds Account by September 30, 1996.
USMX was unable to comply with this requirement and Rothschild agreed to waive
this and certain financial ratio requirements until December 31, 1996,
conditional upon USMX's agreements to, among other things, (A) file a prospectus
with the appropriate Canadian securities regulatory authorities by November 1,
1996, and complete an offering by December 31, 1996, (B) adjust the price at
which Rothschild may elect to convert the $2.5 million loan into USMX Common
Stock to the price at which the shares are sold in an offering, or if no sale,
at the average trading price for the last ten trading days of 1996 and (C) to
pay the Lender a fee of US$100,000 which fee is payable upon the first to occur
of (i) a date upon which such payment can be made without materially reducing
the working capital reasonably required by USMX for continued operations or (ii)
April 15, 1997. At December 31, 1996, USMX had not completed the offering and
was unable to comply with the requirement that it deposit $1.5 million in the
Proceeds Account. As a result of the covenant violations, at December 31, 1996,
the loans from Rothschild have been classified as a current liability. USMX has
determined to accept the Merger offer from Dakota Mining and not to proceed with
the offering.
On January 3, 1997, USMX entered into an agreement in principle to
merge with Dakota. On February 5, 1997, USMX signed a definitive Merger
Agreement with Dakota whereby USMX Stockholders will receive one Dakota Common
Share for every 1.1 shares of USMX Common Stock and USMX will become a
wholly-owned subsidiary of Dakota. As part of the Merger Agreement, Dakota and
USMX agreed that Dakota would provide a $5 million line of credit to USMX to
provide interim working capital to sustain USMX operations until the Merger is
consummated. The proceeds are to be used to pay certain ongoing operating
expenses primarily in connection with start-up activities associated with the
Illinois Creek Mine and to partially pay trade creditors.
In February 1997, Dakota offered by way of private placement 25,000
Special Warrants at a price of Cdn. $1,000 per Special Warrant resulting in
gross proceeds of Cdn. $25 million. Each Special Warrant entitles the holder to
receive one 7.5% unsecured subordinated convertible debenture in the amount of
Cdn. $1,000. Of the proceeds, U.S. $5 million have been released and the
remaining proceeds have been deposited in escrow pending completion of the
Merger and approval by the Dakota Shareholders of the issuance of the Common
Shares underlying the Debentures. This offering was a condition of USMX's
obligation to proceed with the Merger. A substantial portion of the proceeds
will be used to pay suppliers and contractors for work completed at the Illinois
Creek Mine and to complete construction and provide working capital at the
Illinois Creek Mine.
The line of credit is evidenced by two promissory notes with similar
terms but different amounts and different security. The $2 million promissory
note ("Note 1") is secured by a second priority position in all of the capital
stock of USMX of Alaska, Inc. owned by USMX. USMX of Alaska, Inc. holds title to
the Illinois Creek Mine. The second promissory note for $3 million ("Note 2") is
secured by a first position on all of the capital stock of MXUS S.A. de C.V.,
USMX's Mexican Subsidiary, and a first position on USMX's interest in the
Thunder Mountain property in Idaho. USMX and Dakota agreed to grant Rothschild a
second priority security position in the security for Note 2. (See Items 1. And
2.) Funding for the line of credit was provided from a portion of the proceeds
of a Special Warrant offering by Dakota described above.
USMX has filed a Notice of Intent to Operate with the Idaho Department
of Lands describing USMX's proposed gold and silver mining activities in the
Thunder Mountain Project. Management estimates that the project would require
substantial capital to place it into production, including working capital. If
the project is sufficiently attractive to warrant continued development and the
necessary permits are obtained, construction could begin in 1998. Production
could begin in 1998 or 1999 depending on the construction schedule. Management
believes that USMX will need to obtain additional capital to put Thunder
Mountain into production.
USMX's mining operations are subject to various laws and regulations
concerning prospecting, developing, production, exports, taxes, labor standards,
occupational health, waste disposal, toxic substances, environmental protection,
mine safety and other matters. USMX seeks to make good faith efforts to comply
with all applicable laws and regulations. Except as otherwise disclosed
elsewhere in the Prospectus, USMX believes that it is in substantial compliance
with all applicable material governmental regulations. Instances of
non-compliance or new laws or regulations governing operations and activities of
mining companies however, could have a material adverse impact on the business
of USMX.
Mining is subject to potential risks and liabilities with pollution of the
environment and the disposal of waste products occurring as a result of mineral
exploration and production. Environmental liability may result from mining
activities conducted by others prior to USMX's ownership of a property.
Insurance for environmental risks (including potential liability for pollution
or other hazards a result of the disposal of waste products occurring from
exploration and production) is not generally available at a reasonable price to
companies within the industry. To the extent USMX is subject to environmental
liabilities, the payment of such liabilities would reduce funds otherwise
available to the company and could have a material adverse effect on the
company.
In the context of environmental compliance and permitting, including the
approval of reclamation plans, USMX must comply with standards, laws and
regulations which may entail greater or lesser costs and delays depending on the
nature of the activity to be permitted, constructed and operated and how
stringently the regulations are implemented by the applicable regulatory
authority. It is possible that costs and delays associated with compliance with
such laws, regulations and permits could become such that a company would not
proceed with the development of a project or the operation or further
development of a mine. Except as otherwise disclosed elsewhere in this
Prospectus, USMX believes that it is in substantial compliance with all
applicable material environmental regulations. However, laws regulations and
regulatory policies involving the protection and remediation of the environment
are constantly changing at all levels of government and are generally becoming
more restrictive and the costs imposed on the development and operation of
mineral properties are increasing as a result of such changes. USMX has made,
and expects to make in the future, significant expenditures to comply with such
laws and regulations.
USMX's balance sheet at December 31, 1996 reflects a total of $0.8
million in accrued reclamation liabilities associated with its acquisition and
operation of the Goldstrike Mine. Reclamation activities in 1996 have focused
primarily on recontouring, topsoiling and planting heap number one and
completion of rinsing of heap number two. Commencement of recontouring and
topsoiling of heap number two as well as the dismantling of the process plant
and reclamation of the plant site will begin once USMX has obtained acceptance
by the State of Utah of USMX's final closure. The goal is to achieve closure by
the end of 1997. This reclamation is expected to be financed with internally
available cash balances, cash generated from the sale of gold produced as a by
product of heap rinsing and approximately $1.6 million cash previously provided
to the State of Utah as reclamation surety.
The Illinois Creek Project is permitted as a "zero discharge facility". As
such, operation will require strict control of the water balance to ensure that
no discharge occurs. Upon closure, reclamation activities will be closely
monitored and effluent from the decommisioned facility will be required to meet
strict water quality standards.
Results of Operations
USMX realized a net loss for the year ended December 31, 1996, of
$3,302,000 compared with a $6,906,000 loss for 1995 and net income of $204,000
for 1994. The loss for 1996 includes mineral property abandonments and
impairments of $1,416,000 compared to $4,431,000 for 1995 and $261,000 for 1994.
General and administrative costs increased to $3,621,000 in 1996 from $2,548,000
in 1995 and $2,185,000 in 1994, as the result of added office space and related
expenses arising from increased staffing requirements to develop the Illinois
Creek and Thunder Mountain properties. The 1996 results include a gain of
approximately $936,000 from the sale of common stock held for investment
purposes and an unrealized gain of $884,000 resulting from the roll forward of
four gold forward sales contracts and the sale of various silver call options.
The 1994 results include a $497,000 income tax credit resulting from the
difference between the estimated 1993 federal income tax provision and the
actual liability reflected on the 1993 income tax returns.
Fluctuations in USMX's results of operations from year to year arise
primarily from four factors: (1) changes in the volume of gold sold and the
selling price of gold, (2) changes in the cost of gold sold, (3) the cost of
mineral properties abandoned during any given period, and (4) asset
dispositions.
<PAGE>
Change in the Volume of Gold Sold and Selling Price of Gold
The following table analyzes the variance in gold sales revenue for the
years ended December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
Revenue Variance Analysis
Year Ended December 31, 1996 1995 1994
<S> <C> <C> <C>
Ounces of gold sold................................ -- 6,900 35,575
Average price realized per ounce................... $ - $388 $ 383
Change in revenue attributable to:
Less ounces sold................................... $ (2,678,000) $ (10,972,000) $ 5,342,000)
Higher (lower) price............................... -- $ 35,000 $ 820,000
Decrease in gold sales revenue compared to the
preceding year................................... $ (2,678,000) $ (10,937,000) $ (4,522,000)
</TABLE>
Change in Costs Applicable to Sales
Cost of Gold Sold
No gold was sold in 1996 compared to the cost of gold sold of
$2,890,000 or approximately $419 per ounce in 1995, and $11,203,000 or
approximately $315 per ounce in 1994. The fluctuation in the cost of gold sold
is a result of the change in the cost of production throughout the life of each
mine as illustrated in the table below.
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
-------------- ----------- -------------
<S> <C> <C> <C>
Cash production costs incurred............................ - $ 233 $ 229
Depreciation, depletion, amortization and reclamation
accruals.................................................. 48
-------- -------- ----------
Production cost per ounce produced........................ $ - $ 233 $ 277
==== ===== =====
Gold sales revenue $ - $ 388 $383
Production cost per ounce sold............................ $ - $ 212 $269
Change in inventories and deferred........................ - 207 46
-------- -------- ---------
Cost of gold sold......................................... - 419 315
Mining taxes.............................................. - 2 3
Production royalties...................................... - 55 19
-------- -------- ---------
Costs applicable to sales................................. - 476 337
-------- -------- ---------
Gross profit (loss)....................................... $ - $ (88) $ 46
==== ===== =====
</TABLE>
Cash production costs per ounce of gold produced at USMX's Goldstrike
Mine increased to $233 for 1995 from $229 for 1994 despite the fact that no
mining, crushing or pad loading costs were incurred after October 1994 because a
significant portion of processing costs are fixed and, therefore, do not
decrease as production decreases. As the result of a reduction of the estimated
remaining recoverable ounces of gold at the Goldstrike Mine, change in
inventories and deferred production costs increased to $207 per ounce sold for
1995 from $46 in 1994.
Mining Taxes and Royalties
During 1995, USMX incurred $14,000 in mining taxes compared to $106,000
in 1994. The decrease in mining taxes in 1995 and 1994 is attributable to the
decrease in ounces sold compared to the previous year as a result of declining
production at the Goldstrike Mine. Also, USMX incurred $379,000 in royalty
expense for 1995 compared to $665,000 in 1994. The increase in production
royalties per ounce of gold sold is attributable to the monthly minimum royalty
paid at Goldstrike through January of 1996.
Cost of Mineral Properties Abandoned and Provisions for Impairments of
Investments in Mineral Properties
USMX periodically reviews the carrying values of its properties. In
1996, management determined that properties with an aggregate historical cost of
$674,000 no longer held sufficient promise to justify the cost of maintenance.
The properties abandoned in 1996 were Goldstrike ($345,000), Elk Creek
($93,000), Baggs Creek ($69,000), Putu Chile ($61,000), two other properties in
the United States ($17,000) and six small properties in Mexico ($89,000).
Property abandonments were $758,000 and $261,000 in 1995 and 1994, respectively.
The properties abandoned in 1995 were Tule Canyon ($65,000), Divide ($63,000)
and three other properties in the United States ($202,000) and La Cienega
($111,000), Jalisco Copper ($164,000) and four other properties in Mexico
($153,000). The properties abandoned in 1994 were the Ancho Canyon, New Mexico
($221,000) and the South Pass, Wyoming placer properties ($40,000), both of
which were acquired during that year.
During 1996 USMX wrote down the carrying value of the Nambija property
in Ecuador and the Amargosa and La Reserva properties in Mexico by $335,000,
$326,000 and $81,000 respectively. The carrying value of each of the properties
was reduced to zero. Although the three properties appear to have geological
potential, to date, no significant economic mineralization has been encountered.
The La Reserva property is currently being explored in joint venture with
another mining company. The Nambija and Amargosa properties are being held for
possible future joint venture exploration. In the fourth quarter of 1995, the
carrying value of the Amargosa polymetallic prospect in Chihuahua, Mexico was
reduced by $1.0 million.
In 1995, the Commonwealth of Puerto Rico adopted legislation which
amended the mining law to prohibit future mining of metallic deposits by open
pit methods. Although USMX is considering various strategies and responses, the
effect of the mining law, as currently amended, is to render USMX's plan for
development of the Cala Abajo deposit uneconomic. As a result, in 1995 USMX
reduced the carrying value of this property to zero and recorded an impairment
loss of $1.1 million.
Gold production at USMX's Goldstrike Mine in Utah declined sharply in
August and September of 1995. This decline in gold recovery triggered a
reevaluation of the estimated remaining recoverable gold ounces in the heaps. As
a result, the carrying value of deferred mining and processing costs was reduced
to the fair market value of the remaining gold bullion and dore at the refinery
and USMX recorded an impairment loss of $1.6 million.
Asset Dispositions and Gain on Sale of Common Stock
In April 1994, USMX sold its interest in the Kinsley Mountain Project
in Elko County, Nevada to Alta Gold Co. ("Alta"). In addition to the $20,000
previously received, USMX received $380,000 in cash and Alta restricted common
stock with a then market value of $200,000. In April 1995, USMX received a final
cash payment of $400,000 and additional Alta restricted common stock with a then
market value of $200,000. USMX received, and retained at December 31, 1995, a
total of 352,711 shares of Alta restricted common stock. The cash proceeds and
discounted value of the stock received were recorded as a reduction to the
carrying value of the property on USMX's books. In 1995, USMX recorded a loss on
this transaction of $1,000. During 1996 USMX sold all of the outstanding shares
of Alta common stock for $1,281,000 and recorded a gain on the sale of $936,000.
Other Costs and Expenses
General and administrative costs increased to $3,621,000 in 1996 from
$2,548,000 in 1995, as the result of added office space and related expenses
arising from increased staffing requirements to develop the Illinois Creek and
Thunder Mountain properties. General and administrative expenses were higher in
1995 than 1994 principally due to legal and other professional fees paid
relative to the Cala Abajo project and to salaries and related expenses of
additional corporate staff. Legal and professional consultants were engaged to
evaluate the impact of a change in Puerto Rican mining law and USMX's
alternatives concerning the Cala Abajo Project.
Prospecting costs in 1996 were comparable to Prospecting costs in 1995.
Prospecting costs in 1995 were lower than 1994 as a result of the concentrated
effort by USMX's exploration staff to complete development drilling at the
Illinois Creek, Alaska property.
Interest income decreased to $275,000 in 1996 compared to $525,000 in
1995, as the result of decreasing cash balances during 1996. Interest income for
1995 was comparable to 1994.
Interest expense increased to $511,000 in 1996 compared to $14,000 in
1995, as the result of long term debt incurred during 1996 related to
development of the Illinois Creek property and a $4.5 million loan received from
Pegasus Gold, a stockholder of USMX. Interest expense for 1995 was comparable to
1994.
Income tax expense primarily represents current and deferred federal
income taxes. The entire income tax benefits for 1996 and 1995 are related
primarily to net operating losses carried back to prior years. The 1994 benefit
results primarily from the difference between the estimated 1993 federal income
tax provision and the actual liability reflected on the 1993 income tax returns.
See Note 10 to the Consolidated Financial Statements for a reconciliation of the
provision for income taxes for 1996, 1995 and 1994 to the statutory federal
income tax rate.
Trends Which May Affect Future Results of Operations
As previously stated, fluctuations in USMX's results of operations
arise primarily from four factors: (1) changes in the volume and cost of gold
sold, (2) changes in the selling price of gold, (3) the cost of mineral
properties abandoned during any given period and (4) asset dispositions. The
following is management's view of trends in these factors.
Changes in the Volume and Cost of Gold Sold
USMX's ability to achieve forecasted gold production will be dependent
upon many factors, some of which, such as the price of gold and climate
conditions, are beyond the control of USMX.
Estimates of mineralization, metallurgical recovery, and cash operating
costs are to a large extent based on the interpretation of geologic data
obtained from drill holes and other sampling techniques and feasibility reviews
which derive estimates of cash operating costs based on anticipated tonnage and
grades of ore to be mined and processed, the configuration of the ore body,
expected recovery rates of metals from the ore, comparable facility and
equipment costs, anticipated climate conditions and other factors. Accordingly,
actual volumes of gold produced and actual cash operating costs may differ from
the volumes and costs initially estimated.
USMX's operations will be subject to all of the operating hazards and
risks normally incident to operation of mineral properties, such as unusual or
unexpected geological formations, environmental hazards, industrial accidents,
labor disputes, equipment incapability or failures, and inclement weather
conditions. Such occurrences could result in damage to, or destruction of,
mineral properties or production facilities, personal injury or death,
environmental damage, delays in mining, monetary losses and possible legal
liability. Moreover, USMX's mining operations will be subject to extensive
federal, state and local laws and regulations governing production, taxes, labor
standards, occupational health, waste disposal, protection and remediation of
the environment, reclamation, mine safety, toxic substances and other matters.
Compliance with such laws and regulations has increased the cost of
planning, designing, drilling, developing, constructing, operating and closing
other mines and facilities previously operated by USMX. In addition, USMX has
expended significant resources, both financial and managerial, to comply with
environmental protection regulations and permitting requirements and anticipates
that it will continue to do so in the future. Although USMX believes that it has
made adequate provision to comply with such regulations, there can be no
assurance that additional significant costs and liabilities will not be incurred
to comply with current and future environmental protection regulations.
Moreover, it is possible that future developments, such as increasingly strict
environmental protection laws, regulations and enforcement policies, and claims
for damages to property and persons resulting from USMX's operations, could
result in substantial costs and liabilities in the future.
Changes in the Selling Price of Gold
Another significant uncertainty facing USMX which could potentially
impact its financial position, profitability and liquidity in the short term is
the price of gold. The gold price is a function of a number of factors including
investors' expectations with respect to inflation, the strength of world
currencies, decisions by central banks regarding their gold reserves, and supply
and demand factors, none of which is under the control of USMX's management.
During 1996 gold reached a six year high of $415 per ounce early in the year and
a three year low of $369 per ounce late in the year. The average market price of
gold was $388 an ounce during 1996 compared to $384 per ounce during 1995 and
1994.
In the course of its normal business, USMX uses financial instruments to
manage its exposure to fluctuations in the price of gold which it produces.
Contract positions are designed to ensure USMX will receive a defined minimum
price for a portion of its gold production. Potential gains in gold price
increases are also eliminated under forward sales commitments if such
commitments are not bought back.
USMX is exposed to credit risk to the extent of an inability of a
counterparty to honor contracts, however, management believes the risk of
incurring losses due to credit risk is remote.
Market risk on financial instruments results from fluctuations in the gold
price during the periods in which the contracts are outstanding. USMX manages
its exposure to market risk by attempting to match future physical gold delivery
with contract maturities. The risk of loss arises from the possible inablility
of USMX to deliver gold.
USMX's accounting treatment of financial instruments and hedging is outline
in Notes 2 and 14 to the consolidated financial statements.
As of December 31, 1996, USMX had entered into forward sales contracts for
140,900 ounces of gold deliverable at various dates through December 31, 1999 at
an average selling price of $409 per ounce. Delivery under these spot deferred
contracts can be deferred at USMX's option up to forty months depending on the
individual contract. The aggregate unrealized excess of the net market value of
USMX's forward sales contracts over the spot gold price of $368 per ounce as of
December 31, 1996, is approximately $5,875,000.
USMX has also written silver call options expiring at various dates
over the next forty months, which if exercised, would become spot deferred
contracts with delivery deferred as previously described. At December 31, 1996,
USMX had sold 825,300 ounces of silver call option contracts all at a strike
price of $5.50 per ounce expiring on dates ranging from September 28, 1997
through December 29, 1999. Call options premiums received amounted to
approximately $424,000.
Cost of Mineral Properties Abandoned
The cost of mineral properties abandoned in any period is a function of
the results of USMX's exploration efforts and economic considerations. USMX
makes every effort to maximize the results of its exploration efforts. However,
exploration for economically recoverable metals involves significant risk.
Accordingly, while it is probable there will be abandonment losses in the
future, it is not possible to predict either the timing or amount.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
USMX, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1996 and 1995,
For the years ended December 31, 1996, 1995 and 1994
Page
---------------
Independent Auditors' Reports 46
Consolidated Financial Statements:
Consolidated Statements of Financial Position 47 - 48
Consolidated Statements of Operations 49
Consolidated Statements of Stockholders' Equity 50
Consolidated Statements of Cash Flows 51 - 52
Notes to Consolidated Financial Statements 53 - 70
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
USMX, Inc. and subsidiaries:
We have audited the accompanying consolidated statements of financial position
of USMX, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three year period ended December 31, 1996. 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 generally accepted auditing
standards. 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 USMX, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred cost overruns associated with the
construction of the Illinois Creek Mine, has cash flow deficits from operations
and currently has no mines in operation. At December 31, 1996, the Company has
an accumulated deficit of $3,056,000, a working capital deficiency of
approximately $27,132,000 and is not in compliance with certain covenants of its
long term debt agreements. In addition, significant additional funds will be
required to bring the Company's Illinois Creek Mine into production. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KPMG PEAT MARWICK LLP
Denver, Colorado
March 11, 1997
<PAGE>
USMX, INC. and Subsidiaries
Consolidated Statements of Financial Position
<TABLE>
<CAPTION>
December 31,
1996 1995
- --------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 238 $ 5,226
Restricted cash 108 -
Ore Inventories 200 -
Supplies inventories 488 -
Federal income taxes receivable 424 381
Prepaid financing costs 687 -
Other 116 227
- --------------------------------------------------------------------------------------------------------------
Total current assets 2,261 5,834
- --------------------------------------------------------------------------------------------------------------
Property, plant and equipment, at cost:
Undeveloped mineral properties 1,826 2,913
Mineral properties under development 12,043 6,345
Construction in progress 27,905 -
Developed mineral properties 920 920
Mine buildings and equipment 3,042 2,451
Vehicles, furniture and equipment 703 662
- --------------------------------------------------------------------------------------------------------------
46,439 13,291
Less accumulated depreciation,
depletion and amortization (3,532) (3,475)
- --------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 42,907 9,816
- --------------------------------------------------------------------------------------------------------------
Commodity futures contracts, at market 1,144 -
Reclamation surety and other assets 3,843 1,819
- --------------------------------------------------------------------------------------------------------------
Total assets $ 50,155 $17,469
- --------------------------------------------------------------------------------------------------------------
(Continued)
</TABLE>
<PAGE>
USMX, INC. and Subsidiaries
Consolidated Statements of Financial Position
(Concluded)
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long term debt $ 21,355 $ -
Current portion of note payable to related party 355 -
Accounts payable 6,708 312
Accrued salaries 84 73
Accrued reclamation 843 304
Other accrued liabilities 48 51
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 29,393 740
- -------------------------------------------------------------------------------------------------------------
Note payable to related party, less current portion 3,923 -
Deferred commodity option premiums, at market 298 -
Estimated reclamation liability - 885
Stockholders' equity:
Preferred stock, $.001 par value, 20,000,000
shares authorized, none issued - -
Common stock, $.001 par value, 45,000,000
shares authorized, 16,184,000 shares issued
and outstanding as of December 31, 1996,
14,644,000 shares issued and outstanding
as of December 31, 1995 16 15
Additional paid-in capital 19,581 15,583
Retained earnings (Accumulated deficit) (3,056) 246
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 16,541 15,844
Commitments and contingencies (Note 14)
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 50,155 $ 17,469
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are a part of these consolidated financial statements.
<PAGE>
USMX, INC. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C> <C>
Sales of gold $ - $ 2,678 $ 13,615
Costs applicable to sales:
Cost of gold sold - 2,890 11,203
Mining taxes - 14 106
Production royalties - 379 665
- -------------------------------------------------------------------------- ------------------------------------------
- 3,283 11,974
- -------------------------------------------------------------------------- ------------------------------------------
Gross profit (loss) - (605) 1,641
General and administrative expenses 3,621 2,548 2,185
Prospecting costs 643 684 739
Asset abandonments, write downs and impairments 1,416 4,431 261
- -------------------------------------------------------------------------- ------------------------------------------
Loss from operations (5,680) (8,268) (1,544)
Other income (expense):
Unrealized gains on commodity futures and option contracts 884 - -
Gain on common stock held for investment 936 - -
Royalty income (received from related party) 720 720 720
Interest income 275 525 518
Interest expense (including $184,000 to related parties in 1996) (511) (14) (22)
Other, net 19 13 35
- -------------------------------------------------------------------------- ------------------------------------------
2,323 1,244 1,251
- -------------------------------------------------------------------------- ------------------------------------------
Loss before income taxes (3,357) (7,024) (293)
Income tax benefit (55) (118) (497)
- -------------------------------------------------------------------------- ------------------------------------------
Net income (loss) $(3,302) $ (6,906) $204
- -------------------------------------------------------------------------- ------------------------------------------
Net income (loss) per common share $ (0.22) $ (0.47) $ 0.01
- -------------------------------------------------------------------------- ------------------------------------------
Weighted average common and common equivalent shares outstanding 15,285 14,755 14,860
- -------------------------------------------------------------------------- ------------------------------------------
</TABLE>
The accompanying notes are a part of these consolidated financial statements.
<PAGE>
USMX, INC. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Retained
-------------------------------- Additional Earnings
Number of Paid-in Treasury (Accumulated
Shares Amount Capital Stock Deficit)
- ---------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 15,589 $ 16 $ 18,559 $ - $ 6,948
Shares issued as compensation 2 - 7 - -
Exercise of stock options 198 - 314 - -
Previously issued shares submitted in
partial payment for options - - 14 (14) -
exercised
Repurchase of common stock - - - (3,215) -
Treasury stock retired (1,003) (1) (3,213) 3,213 -
Income tax benefit arising from
the disqualifying disposition of
incentive stock options - - 179 - -
Net income - - - - 204
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 14,786 15 15,860 (16) 7,152
Shares issued as compensation 3 - 11 - -
Exercise of stock options 3 - 6 - -
Repurchase of common stock - - - (278) -
Treasury stock retired (148) - (294) 294 -
Net loss - - - - (6,906)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 14,644 15 15,583 - 246
Shares issued for acquisition of 1,540 1 3,998 - -
assets
Net loss - - - - (3,302)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 16,184 $ 16 $ 19,581 $ - $ (3,056)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are a part of these consolidated financial statements.
<PAGE>
USMX, INC. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Cash from sales of precious metals $ - $ 2,678 $ 13,615
Cash paid to suppliers and employees (4,285) (4,831) (12,279)
Mining taxes paid - (14) (106)
Royalties paid in cash - (379) (665)
Royalties received 720 720 720
Interest received 275 525 518
Interest expense (511) (14) (22)
Other income, net 19 13 35
Income taxes paid, net of refunds received 12 11 1,311
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (3,770) (1,291) 3,127
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property, plant and equipment (25,679) (5,674) (4,221)
Proceeds from sales of property and equipment 24 449 380
Increase in restricted cash accounts, net (108) - -
Increase in reclamation surety and other assets (2,369) - (171)
Proceeds from sale of common stock held for investment 1,281 - -
Other, net - - 80
- ------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (26,851) (5,225) (3,932)
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock - 6 314
Repurchase of common stock - (278) (3,215)
Proceeds of notes payable 25,855 - -
Repayment of notes payable (222) - -
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 25,633 (272) (2,901)
- ------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (4,988) (6,788) (3,706)
Cash and cash equivalents at beginning of year 5,226 12,014 15,720
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 238 $ 5,226 $ 12,014
- ------------------------------------------------------------------------------------------------------------------------
(Continued)
</TABLE>
The accompanying notes are a part of these consolidated financial statements.
<PAGE>
USMX, INC. and Subsidiaries
Consolidated Statements of Cash Flows
(Concluded)
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
Reconciliation of Net Income to Net Cash (Amounts in thousands)
Provided by Operating Activities
<S> <C> <C> <C>
Net income (loss) $ (3,302) $ (6,906) $ 204
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation, depletion and amortization charged to costs and expenses 109 134 1,484
Asset abandonments, write downs and impairments 1,416 2,928 261
Gain on sale of common stock held for investment (936) - -
Unrealized gain on commodity futures and option contracts (884) - -
Other, net - (15) 14
Changes in operating assets and liabilities:
(Increase) decrease in ore inventories (200) 2,344 1,647
(Increase) decrease in supplies inventories (488) 34 27
Depreciation, depletion and amortization
included in ending inventories - - 619
(Increase) decrease in federal income taxes receivable (43) (107) 744
(Increase) in other current assets (576) - -
Increase (decrease) in accounts payable 1,434 116 (1,044)
Increase (decrease) in accrued salaries 11 41 (153)
Increase (decrease) in other accrued liabilities 295 (45) (35)
Increase (decrease) in accrued and estimated reclamation liabilities (346) 335 (874)
Other changes in assets and liabilities, net (260) (150) 233
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $ (3,770) $(1,291) $3,127
- ------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Noncash
Investing and Financing Activities
The Company issued 1,540,663 shares of the Company's common stock to North
Pacific Mining Corporation to acquire leasehold and other property interests in
the Illinois Creek Project in Alaska.
Assets acquired $ 4,000 $ - $ -
Market value of common stock issued 4,000 - -
- ------------------------------------------------------------------------------------------------------------------------
Cash paid $ - $ - $ -
- ------------------------------------------------------------------------------------------------------------------------
The Company received $400,000 and $380,000 cash, plus 184,438 and 168,273
shares of Alta Gold Co. common stock, in 1995 and 1994 respectively, as
payment for the purchase of the Company's interest in the Kinsley Mountain
Property.
Payment received $ - $ 560 $ 540
Discounted market value of common stock received - 160 160
- ------------------------------------------------------------------------------------------------------------------------
Cash received (included in proceeds from sale of property and equipment) $ - $ 400 $ 380
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are a part of these consolidated financial statements.
<PAGE>
USMX, INC. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1. - The Company
USMX, INC. (the "Company") is a Delaware corporation which engages in
the exploration for, and development and operation of precious metal properties.
The Company also evaluates base metal and non-metallic situations. The Company
conducts its operations directly and through various operating subsidiaries. All
references herein to the Company include all subsidiaries of USMX, INC.
Note 2. - Summary of Significant Accounting Policies
Basis of presentation
The financial statements have been prepared assuming the company will
continue as a going concern. Certain factors, discussed below, raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
The Company has incurred cost overruns associated with the construction
of the Illinois Creek Mine, has cash flow deficits from operations and currently
has no mines in operation. At December 31, 1996, the Company has an accumulated
deficit of $3,056,000, a working capital deficiency of approximately $27,132,000
and is not in compliance with certain covenants of its long term debt agreements
(see Note 8). In addition, significant additional funds will be required to
bring the Company's Illinois Creek Mine into production.
The Company has entered into a definitive Merger Agreement with Dakota
Mining Corporation ("Dakota") (see Note 15). The Merger is subject to the
approval of the Toronto Stock Exchange, stockholder and creditor approval,
review by other regulatory authorities, and other customary conditions. In
connection with the Merger, Dakota has agreed to loan the Company up to US $5.0
million to be used to pay for work completed and ongoing work at the Illinois
Creek Mine prior to the Merger. Concurrent with the Merger Agreement, Dakota
entered into an intercreditor agreement with the Company's principal lender, N M
Rothschild & Sons Limited ("Rothschild"), whereby Rothschild agreed not to
accelerate the due date of any loans to USMX or to exercise any rights it may
have to collateral security until the earlier of the consummation of the Merger,
the termination of the Merger agreement in accordance with its terms, or June
30,1997.
Should the Company be unable to complete the Merger with Dakota, the
ability of the Company to continue as a going concern is dependent on the
continued forbearance of Rothschildand the commencement and continuation of
successful operations at the mine. Future success of the mine is dependent the
Company's ability to produce gold from the mine in quantities and at costs
consistent with those projected by the Company.
Principles of consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned and majority owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Use of estimates
Management makes various estimates and assumptions in determining the
reported amounts of assets, liabilities revenues and expenses, and in the
disclosure of commitments and contingencies. These estimates and assumptions
will change with the passage of time and the occurrence of future events, and
actual results will differ from the estimates.
Cash and Cash Equivalents
The Company considers cash in banks and all highly liquid investments,
purchased with a maturity of three months or less, to be cash equivalents.
Ore Inventory
Production costs incurred are charged to Ore inventories as incurred. Cost
of gold sold is based on the currently estimated life of mine average cost. The
amount carried in the Company's balance sheet for Ore inventories is the lower
of the difference between production costs incurred to date and the amount
charged to Cost of gold sold to date or the net realizable value of the
inventoriable ore.
Mineral Properties
The Company's policy is to charge to operations, costs associated with
identifying prospective mineral properties and to capitalize the costs of
acquiring, exploring and developing unproven mineral properties. For properties
subsequently placed into production, the applicable capitalized costs are
amortized using the units-of-production method, based on the ratio of tons of
ore mined or processed during the year to the estimated total proven and
probable ore reserves of the project.
Management periodically reviews the carrying value of its investments in
exploration properties with internal and external mining related professionals.
A decision to abandon, reduce or expand a specific project is based upon many
factors including general and specific assessments of mineral reserves,
anticipated future mineral prices, the anticipated future costs of exploring,
developing, and operating a producing mine, the expiration term and ongoing
expenses of maintaining leased mineral properties and the general likelihood
that the Company will continue exploration. The Company does not set a
pre-determined holding period for properties with unproven reserves, however,
properties which have not demonstrated suitable metal concentrations at the
conclusion of each phase of an exploration program are re-evaluated to determine
if future exploration is warranted and their carrying values are appropriate.
If an area of interest is abandoned or it is determined that its carrying
value cannot be supported by future production or sale, the related costs are
charged against operations in the year of abandonment or determination of value.
The amounts recorded as mineral leases and properties and deferred exploration
expenditures represent costs to date and do not necessarily reflect present or
future values. Proceeds from rentals and option fees relating to undeveloped
mineral properties in which the Company has an economic interest are credited
against capitalized property costs and no gain is recognized until all costs
have been fully recovered.
Construction in Progress
Pre-production, development and asset construction costs related to new
mines and major programs at existing mines are capitalized to Construction in
progress during the construction phase. Upon completion of construction, the
costs are transferred to the appropriate asset accounts.
Interest Capitalized
Interest costs incurred during the construction of qualifying assets
are capitalized as part of the asset cost.
Depreciation and Amortization
Mine buildings and equipment are depreciated using the
units-of-production method based on the ratio of tons of ore mined or ounces of
gold produced during the period to the estimated total proven and probable
reserves of the related property. Vehicles, furniture and office equipment are
depreciated using the straight-line and the declining balance methods over
estimated useful lives of two to five years. The cost of normal repairs and
maintenance is charged to operations as incurred. Significant expenditures which
increase the life of an asset are capitalized and depreciated over the estimated
remaining useful life of the asset. Upon retirement or disposition of property
and equipment, related gains or losses are recorded in operations.
Impairment of Assets
In 1996 the Company adopted Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
("SFAS 121"). Under SFAS 121, the Company periodically reviews the carrying
value of its assets by comparing the net book value of each asset to the
estimated undiscounted future cash flows from the asset. If the net book value
exceeds the undiscounted future cash flow, an impairment is recorded. Changes in
estimates and assumptions that underlie management's estimate of future cash
flow from the Company's assets can materially impact future carrying values and
operating results. The adoption of SFAS 121 had no effect on the Company's
financial statements.
Reclamation Costs
The Company records a liability for the estimated cost to reclaim mined
land by recording charges to production costs for each ton of ore mined. The
amount charged is based on management's estimate of reclamation costs to be
incurred. The estimate is based on the work which is to be performed as set
forth in the reclamation plan approved by the agencies responsible for granting
the related mining permits. The accrued reclamation liability is reduced as
reclamation expenditures are made. Certain reclamation work is performed
concurrently with mining. However, the majority of reclamation expenditures is
made after mining operations cease.
Revenue Recognition
The Company recognizes revenue as precious metals are delivered to the
purchaser.
Commodity Futures Contracts
In order to protect against the impact of falling gold prices, the
Company enters into hedging transactions, the goal of which is to provide a
minimum price for future production, and allow the Company to take advantage of
short term increases in the gold price. Hedging transactions include spot
deferred and forward sales contracts and option contracts. Contracted prices on
spot deferred and forward sales and options are recognized in gold sales as gold
produced is delivered to meet the commitment. The results of hedging activities
are included in revenue when gold is delivered against the contract or, if
delivery under the contract is deferred, the contract is marked to market and
the Company recognizes an unrealized gain or loss in operations. Spot deferred
and forward contracts that are not identified as hedges of specific anticipated
future production are recorded at market, with unrealized gains or losses
recorded in operations.
The Company also has written silver call option contracts. Premiums
received are deferred and recognized in income as the options expire or are
exercised. The open contracts are marked to market and the deferred premiums
adjusted accordingly, with changes in the market value of the contracts
reflected in unrealized gains or losses on commodity future and option contracts
in the consolidated statement of operations.
By-product Revenues
Revenues from sales of by-products (principally silver) are treated as
a reduction of the cost of sales.
Stock Options
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly no compensation costs are
recognized for stock options granted at fair market value.
Income Taxes
The Company follows Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, ("SFAS
109"). Under the asset and liability method of SFAS 109, deferred income taxes
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. 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 taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
Net Income (Loss) per Common Share
Net income (loss) per common share is based on the weighted average
number of shares of common stock and common stock equivalents outstanding during
the year, unless they are anti-dilutive.
Reclassifications
Certain amounts in the accompanying consolidated financial statements
for the years ended December 31, 1994 and 1995, have been reclassified to
conform to the classifications used in 1996.
Note 3. - Ore Inventories
Ore inventories in the accompanying consolidated statements of financial
position represent mining, pad loading and processing costs associated with gold
in various stages of production. Approximately $200,000 of costs were
capitalized as of December 31, 1996 associated with ore stockpiled and ore
placed on the leech pad at the Illinois Creek Mine.
During 1995 the Company recorded an impairment of Ore inventories of
$1,620,000 relating to the Goldstrike Mine (see Note 7).
Note 4. - Undeveloped Mineral Properties
Capitalized costs at December 31, 1996 and 1995 associated with
undeveloped mineral properties were as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- ---------------------
<S> <C> <C>
United States $ 166,000 $ 584,000
Mexico 1,660,000 2,081,000
Chile - 18,000
Ecuador - 230,000
==================== ---------------------
Total $ 1,826,000 $ 2,913,000
==================== ---------------------
</TABLE>
Note 5. - Mineral Properties Under Development
At December 31, 1996 and 1995, the Company had two mineral properties in
various stages of feasibility and development as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- ---------------------
<S> <C> <C>
Illinois Creek, Alaska $ 8,368,000 $ 4,038,000
Thunder Mountain, Idaho 3,675,000 2,307,000
==================== ---------------------
Total $ 12,043,000 $ 6,345,000
==================== ---------------------
</TABLE>
<PAGE>
Illinois Creek, Alaska
The Illinois Creek Project is a moderate grade, near surface
gold-silver deposit. It consists of two State of Alaska Mining Leases, covering
62,480 acres. The project is located in the western interior of Alaska
approximately 57 miles southwest of Galena and 320 miles northwest of Anchorage.
The exploration and feasibility phases were completed in 1995. Site development
and construction commenced in May 1996, with anticipated completion scheduled
for June 1997.
Pursuant to an agreement (the "Agreement") with North Pacific Mining
Corporation ("NPMC"), the owner of the underlying leases, the Company made
initial payments to NPMC of $100,000 in 1994 to evaluate the Illinois Creek
property. The Company was required to make an additional payment to NPMC of $4
million in cash or common stock of the Company in exchange for title to the
underlying leases. The Company chose to make the payment in stock and effective
July 11, 1996, 1,540,663 shares of the Company's common stock were issued to
NPMC. The number of shares of common stock issued to NPMC was equal to $4
million divided by the 30-day average of the price of the Company's stock on the
Nasdaq Stock Market. In addition to these payments, NPMC will receive a 5% net
return royalty.
Pursuant to the Agreement, the Company has until December 16, 1997, to
achieve Commercial Production (as defined) from the property. This period may be
extended at the option of the Company for two additional one year periods upon
payment by the Company of additional advance royalties of approximately $300,000
for each one year extension. The Agreement terminates on December 16, 1999, if
the Company has not achieved Commercial Production from the property by that
date.
The obligations of the Company to NPMC are secured by a subordinated
security interest in all of the Illinois Creek Project assets. The security
interest terminates at Commercial Production.
Thunder Mountain, Idaho
The Company proposes to conduct gold and silver mining activities at
the Dewey Mine in the Thunder Mountain Mining District in eastern Valley County,
Idaho, approximately 100 miles northeast of Boise, Idaho. The proposed Dewey
mining operations are part of the Thunder Mountain Project and consist of the
development of a gold and silver ore deposit located on patented mining claims
administered by the Idaho Department of Lands.
Effective July 9, 1993, the Company entered into an Exploration and
Option to Purchase Agreement ("Agreement") with Dewey Mining Company, Thunder
Mountain Gold, Inc. and two individuals (the foregoing companies and individuals
described below are collectively referred to as the "Owners"). The Owners
control approximately 5,500 acres in the Thunder Mountain Mining District
consisting of both patented and unpatented mining claims. Pursuant to the terms
of the Agreement, the Company was granted the sole and exclusive right to
explore for and develop minerals on the property in exchange for advance royalty
payments totaling $100,000. In addition, the Company committed to spend, and did
spend, a minimum of $500,000 evaluating the property prior to April 1, 1995.
The Agreement requires that, before the Company can put the property
into commercial production, it must prepare and deliver to the Owners a
feasibility study regarding the project. In 1995 and 1996, the Company extended
the term of the agreement through April 30, 1997, by making additional advance
royalty payments in the aggregate amount of $350,000. The Agreement further
provides the Company with the option for a final extension until April 30, 1998,
in exchange for an additional advance royalty payment of $250,000. The advance
royalty payments made may be recovered by the Company for seven years after
payment should the Owners elect to receive royalties under options (a) or (c)
described below. The Agreement terminates if the Company fails to deliver a
feasibility study to the Owners by the end of the last year's extension under
the Agreement or if the Company exercises its right to terminate the Agreement
at any time.
Within 90 days after the Company provides the Owners with a feasibility
study, the Owners may elect to (a) participate in subsequent efforts to the
extent of a 30% working interest, plus receive a 1.5% royalty, or (b) receive a
30% net profits interest, or (c) receive a 5% net return royalty from
production. If the Owners elect to receive a 5% net return royalty, the Company
will be obligated to make advance royalty payments of $200,000 within thirty
days after commencement of Commercial Production (as defined in the Agreement),
and $250,000 each year thereafter.
The Agreement provides that, once the Owners have made their election,
the Company shall have one year within which to achieve Commercial Production.
If the Company fails to achieve Commercial Production within one year, the
Company must either re-convey the property to the Owners or extend by one year
the time period within which Commercial Production must commence by paying an
advance royalty of $200,000 to the Owners. If Commercial Production has not
commenced by the end of the extension period, the Company may obtain one final
extension of one year within which to achieve Commercial Production by paying
the Owners an additional advance royalty of $250,000. In addition to the advance
royalty payments and the work commitments outlined above, the Company is
obligated to pay all fees necessary to maintain the unpatented mining claims
through August 31 of the calendar year in which the extension year expires.
Note 6. - Developed Mineral Properties
The Company's investment in developed mining properties at December 31,
1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- ---------------------
<S> <C> <C>
Goldstrike Mine $ 364,000 $ 364,000
Montana Tunnels 556,000 556,000
-------------------- ---------------------
Total Cost 920,000 920,000
Less: Accumulated depletion and
amortization 914,000 892,000
==================== ---------------------
$ 6,000 $ 28,000
==================== ---------------------
</TABLE>
Goldstrike Mine
Effective November 1, 1992, the Company acquired from Tenneco
Corporation, the stock of Tenneco Minerals Company-Utah, owner and operator of
the Goldstrike Mine located approximately 35 miles northwest of St. George,
Utah. Soon after the acquisition, the name of this wholly owned subsidiary was
changed to USMX of Utah, Inc. Gold production from the Goldstrike Mine since
November 1, 1992, has been 77,182 ounces, including 6,266 ounces of gold
produced in 1995.
Mining operations at the Goldstrike Mine were completed in October
1994. Leaching was completed in December 1995. All disturbed areas at the
Goldstrike Mine were reclaimed during 1995 except for the heaps and the plant
site. Reclamation of these areas will continue into 1997.
Montana Tunnels
The Company owns a net profits royalty interest in this property and,
accordingly, the carrying value has been classified as a producing mineral
property in the Company's consolidated statements of financial position (see
Note 12.). In June 1996, the Company and Pegasus Gold Inc. ("Pegasus"), an
affiliate, agreed to the sale of the Company's net profits royalty interest in
the Montana Tunnels property to Pegasus for $4,500,000. The sale is pending
definitive documentation and approval of the Company's stockholders (see Note
8).
Note 7. - Asset abandonments and Write-downs
Mineral Property Abandonments
Mineral properties that management determined no longer hold sufficient
promise to justify the cost required to maintain them and which had historical
costs of $674,000 were written off in 1996. The write-offs include several
exploration targets near the Goldstrike Mine in Utah with historical costs
totaling $345,000 and various other properties throughout the western United
States with total historical costs of $179,000. Six small properties in Mexico
with historical costs of $89,000 and one property in Chile with historical costs
of $61,000 were also written off in 1996.
Mineral Property Write-downs
During 1996 the Company wrote down the carrying value of the Nambija
property in Ecuador and the Amargosa and La Reserva properties in Mexico by
$335,000, $326,000 and $81,000 respectively. The carrying value of each of the
properties was reduced to zero. To date, no significant economic mineralization
has been encountered on the properties. The La Reserva property is currently
being explored in joint venture with another mining company. The Nambija and
Amargosa properties are being held for possible future joint venture
exploration. During 1995, the Company wrote down the Armagosa property by
$1,000,000.
In June 1995, the Commonwealth of Puerto Rico adopted legislation which
amended the island's mining law to prohibit future mining of metallic deposits
by open pit methods. Although the Company considered various strategies, the
effect of the mining law, as currently amended, is to render the Company's plan
for development of the Cala Abajo deposit uneconomic. As a result the Company
reduce the carrying value of the property to zero and recorded an impairement
loss of $1,039,000 during 1995.
Gold production at the Company's Goldstrike Mine in Utah declined sharply
in August and September, 1995. This decline in gold recovery triggered a
reevaluation of the estimated remaining recoverable gold ounces in the heaps. It
was determined that it was no longer economicaly feasible to add cyanide to the
system and the rinsing of the heaps commenced in October 1995. As a result, the
carrying value of Deferred mining and processing costs were reduced to the fair
market value of the remaining gold bullion and dore' at the refinery and the
Company recorded an impairment loss of $1,620,000.
Note 8. - Long Term Debt and Note Payable to Related Party
Long Term Debt
On July 11, 1996 the Company closed a $22 million financing facility
with Rothschild. The facility consists of a $19.5 million project loan and a
$2.5 million convertible loan. Proceeds of the loans have been used to partially
fund the development of the Company's Illinois Creek Mine in Alaska. At December
31, 1996, the Company has drawn approximately $21,355,000 against the facility.
The $19.5 million project loan bears interest, payable quarterly, at
2.25% above LIBOR until certain tests related to project operations have been
completed to the satisfaction of the lender and 1.875% above LIBOR thereafter.
Principal payments are due in seven installments on September 30 and December 31
of each year, commencing September 30, 1997. The loan is payable by the
Company's operating subsidiary that owns the Illinois Creek property and is
secured by a first priority interest in the Illinois Creek Mine assets. The
Company has agreed to guarantee the $19.5 million project loan until it has been
demonstrated that the Illinois Creek Project is operating in a manner
satisfactory to Rothschild and that no defaults are outstanding. In addition,
the Company is a continuing guarantor of the covenant to comply with
environmental laws.
The Company's obligations under its guarantee and the $2.5 million
convertible loan are secured by subordinated security interests in the Illinois
Creek Mine assets and the outstanding shares of the operating subsidiary formed
to own and develop the mine.
Amounts drawn pursuant to the financing facility are deposited in the
Illinois Creek project proceeds account and may be used only for the benefit of
the project. Such amounts are reflected in the accompanying condensed
consolidated statements of financial position as Restricted cash. At December
31, 1996, approximately $108,000 remained in the account.
The $2.5 million convertible loan bears interest at 2% above LIBOR,
payable semi-annually. The note may be converted into Common Stock at a
conversion price of $1.74 per share at the option of the lender at any time
during the term of the note. The Company may also require conversion of the note
if the note is not in default and the daily closing price of the Common Stock
exceeds $4.75 for 30 consecutive trading days. The convertible loan is due
September 30, 2000.
Assuming the $2.5 million convertible loan is not converted, aggregate
maturites of the notes payable under the Rothschild's financing facility are as
follows:
Year ended
December 31,
---------------- --------------------
1997 $ 6,000,000
1998 6,000,000
1999 6,000,000
2000 3,355,000
====================
$ 21,355,000
====================
The loan agreements include financial, operating and other covenants,
including covenants regarding the maintenance of certain operating and financial
ratios, limitations on or prohibitions of dividends, indebtedness, liens,
investments, Mergers, changes in capital structure and certain other items. At
December 31, 1996 the Company was not in compliance with certain of the loan
covenants.
Under the terms of the $22.0 million Rothschild financing facility, the
Company agreed to deposit $1.5 million in an escrow account by September 30,
1996. The Company was unable to comply with this requirement and Rothschild
agreed to waive this and certain financial ratio covenant requirements until
December 31, 1996, conditional upon the Company's agreements to, among other
things, (A) file a prospectus with the appropriate Canadian securities
regulatory authorities by November 1, 1996, and complete an offering by December
31, 1996, (B) adjust the price at which Rothschild may elect to convert the $2.5
million loan into the Company common shares to the price at which the shares
offered are sold, or if no sale, at the average trading price for the last ten
trading days of 1996 and (C) to pay Rothschild a fee of $100,000 which fee is
payable upon the first to occur of (i) a date upon which such payment can be
made without materially reducing the working capital reasonably required by the
Company for continued operations or (ii) April 15, 1997. At December 31, 1996,
the Company had not completed the offering and was unable to comply with the
requirement to deposit $1.5 million in an escrow account.
As a result of the covenant violations, Rothschild has the ability to
declare an event of default and require that the be paid currently. Accordingly,
the loans have been classified as a current liability. As discussed in notes 2
and 16, subsequent to December 31, 1996, Rothschild has entered into an
intercreditor agreement, whereby Rothschild agreed not to accelerate the due
date of any loans to USMX or to exercise any rights it may have to collateral
security until the earlier of the consummation of the Merger with Dakota, the
termination of the Merger agreement in accordance with its terms, or June 30,
1997.
Note Payable to Related Party
During the second quarter of 1996 the Company arranged for a $4.5
million, 8.75% fixed rate loan from Pegasus, a shareholder of the Company. The
loan is repayable over a 50 month period beginning June 1, 1996. The loan is
collateralized by the Company's net profits royalty interest in the Montana
Tunnels property. In lieu of loan payments by the Company, Pegasus has agreed to
offset the $60,000 per month Montana Tunnels minimum advance royalty payments
that are otherwise payable to the Company (see Note 12) against the payments due
under the loan.
During the second quarter of 1996 the Company also agreed with Pegasus
to sell its net profits royalty interest in the Montana Tunnels property to
Pegasus for $4,500,000. Pegasus is the owner and operator of the Montana Tunnels
Mine. The net profits royalty interest entitles the Company to the greater of a
5% net profits royalty interest or minimum advance royalties of $60,000 per
month until certain construction, land acquisition, associated financing and
other costs have been recovered by Pegasus ("Payback"), and a 50% net profits
royalty interest thereafter. Payback is dependent upon several factors,
including future metal prices, production rates, and the life of the Montana
Tunnels Mine. It is unclear whether Payback will ever be achieved. Since
inception of the contract, the Company has only received the monthly minimum
advance royalties.
Loan proceeds received by the Company from Pegasus will be credited
against the sales price at closing and the loan will be extinguished. Closing of
the transaction is subject to completion of definitive documentation and
approval of the Company's stockholders.
Note 9. - Gain on Sale of Common Stock
In April 1994, the Company sold its interest in the Kinsley Mountain
Project in Elko County Nevada to Alta Gold Co. ("Alta"). In April 1995, the
Company received a final cash payment of $400,000 and Alta restricted common
stock with a market value of $200,000 based on the average closing price of the
stock over the 30 trading days prior to issuance. The payment was in addition to
cash of $400,000 and Alta restricted common stock with a market value of
$200,000 previously received. The cash proceeds and discounted value of the
stock received were recorded as a reduction of the carrying value of the
property. During 1995, the carrying value of the property was reduced to zero
and a $1,000 loss was recorded. During 1996 all of the Alta common stock was
sold for $1,281,000, resulting in a gain of $936,000.
Note 10. - Stock Options
The Company has two stock option plans, the ("1987 Plan") and the
Non-discretionary Plan for Non-Employee Directors ("Directors' Plan"), which
cover a total of 1,700,000 shares of common stock available for grant to
employees and directors of the Company.
Under the 1987 Plan, the Company may grant incentive stock options as
well as non-incentive stock options. Incentive stock options granted under the
1987 Plan are exercisable at prices equal to the market value of the common
stock at the date of grant. The option prices of non-incentive stock options
granted under the 1987 Plan may be less than the market value of the common
shares as of the grant date. Options expire at such time as the Option Committee
of the Board of Directors determines, but no later than ten years from the grant
date.
The Directors' Plan was established in 1992 to afford non-employee
directors an opportunity for investment in the Company and the incentive
advantages inherent in stock ownership of the Company. Options granted under the
Directors' Plan are exercisable at prices equal to the market value of the
common stock at the date of grant and are exercisable in full on the date of
grant.
Shares acquired pursuant to the Directors' Plan may not be sold,
transferred or otherwise disposed of for a period of at least six months
following the date of grant. Under the terms of the Directors' Plan, the
directors who elected to participate were each issued options to purchase 10,000
shares of the Company's common stock upon adoption of the plan. Thereafter, each
non-employee director who elects to participate is automatically granted an
option to purchase 10,000 shares of the Company's common stock upon joining the
Board. In addition, on October 1 of each year each participant is automatically
granted an option to purchase an additional 5,000 shares. Options granted under
the Directors' Plan expire ten years from the date of grant except that an
option will expire, if not exercised, ninety days after the optionee ceases to
be a director of the Company.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its option plans. Accordingly, no compensation cost has been
recognized for options granted at fair market value under the plans. Had
compensation cost for the Company's stock option plans been determined
consistent with SFAS 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
1996 1995
---- ----
Net (loss)
As reported $ (3,302,000) $ (6,906,000)
Pro forma $ (3,493,000) $ (6,954,000)
Net (loss) per common share
As reported $ (0.22) $ (0.47)
Pro forma $ (0.23) $ (0.47)
Changes in stock options for the years ended December 31, 1994, 1995
and 1996, are as follows:
<TABLE>
<CAPTION>
Option Price
Shares Per Share
--------------- --------------
<S> <C> <C>
Outstanding at December 31, 1993 757,550 $1.13-5.50
Exercised (198,300) 1.13-3.06
Expired or canceled (39,000) 3.06-5.50
Granted 275,000 2.69-4.13
---------------
Outstanding at December 31, 1994 795,250 1.16-5.50
Exercised (3,000) 2.06
Expired or canceled (791,750) 1.16-5.50
Granted 1,137,250 1.16-5.50
---------------
Outstanding at December 31, 1995 1,137,750 1.16-5.50
Exercised - -
Expired or canceled 581,000 1.88-5.50
Granted 811,000 2.44-2.94
---------------
Outstanding at December 31, 1996 1,367,750 $1.13-5.50
===============
</TABLE>
During 1995, the terms of options to acquire 724,750 shares were
extended to ten years from the original date of grant. For accounting purposes
the extension was treated as the cancellation of the existing options and the
granting of new options.
At December 31, 1996, 1995 and 1994, the number of options exercisable
was 707,096, 826,250 and 573,250 respectively, the weighted average exercise
price of those options was $3.14, $3.18 and $3.50 respectively, and the weighted
average remaining contractual life was 8.2, 7.8 and 2.2 years respectively. The
remaining 660,664 options at December 31, 1996, are exercisable at various dates
through August 1999.
The weighted average fair value of options granted during the years
ending December 31, 1996 and 1995 were $1.38 and $0.97 respectively, assuming a
risk free rate of 6%, an expected volatility of 50%, and a weighted average
expected life of 9 years.
Note 11. - Employees' Benefit Plans and Incentive Bonus Arrangements
Effective July 1, 1987, the Company adopted an Employee Savings and
Investment Plan under section 401(k) of the Internal Revenue Code, which covers
all full-time employees. The plan is a defined contribution plan and allows
employee contributions of up to ten percent of pre-tax compensation, limited to
the maximum deferral allowed by the Internal Revenue Service.
The Company may contribute at least ten percent and not more than one
hundred percent of the amount contributed by the employees, up to a maximum of
six percent of pre-tax compensation. For 1996, 1995 and 1994, the Board of
Directors has set the Company's contribution at fifty percent of the first six
percent of employee contributions. For 1996, 1995 and 1994, the Company's
contributions were approximately $53,000, $57,000, and $59,000, respectively.
Participants vest in the Company's contributions based upon years of service,
and are fully vested after four years of service.
The Company has an Exploration Discovery Bonus Plan under which bonuses
are paid in cash or in shares of the Company's common stock to certain employees
for discoveries of ore deposits that the Company's Board of Directors determines
can be operated at a profit. The bonus is based on the net present value of the
deposit and is calculated using a sliding scale ranging from 2% for deposits
with a net present value of up to $10 million, to 0.85% of the first $100
million of net present value plus 0.25% of that portion of the net present value
of the deposit that exceeds $100 million. Under the terms of the plan, 70% of
each discovery bonus is divided equally among the Company's explorationists and
the remainder is to be shared among those individuals designated by the
Company's President as playing an especially important role in the discovery. No
bonuses were paid in 1996, 1995 or 1994 under the plan.
Note 12. - Transactions With Affiliates
As of December 31, 1996, Pegasus owned 4,826,000 shares (29.9%) of the
Company's outstanding common stock. In January 1986, the Company entered into a
revised agreement with Centennial Minerals Ltd., a subsidiary of Pegasus for the
development of the Montana Tunnels property. Pursuant to the agreement, Pegasus
developed the property, acquired a 100 percent working interest in the project,
and commenced mine and mill operations in March 1987. The operations at Montana
Tunnels achieved defined operating status on October 1, 1987. Under the
agreement, the Company will receive the greater of a minimum advance royalty of
$60,000 per month or a five percent net profits interest until Pegasus recovers
payout of capital and other defined costs.
During the second quarter of 1996 the Company agreed with Pegasus to
sell its net profits royalty interest in the Montana Tunnels Mine to Pegasus for
$4,500,000. Closing of the transaction is subject to completion of definitive
documentation and approval of the Company's stockholders. Loan proceeds in the
amount of $4,500,000 previously received by the Company from Pegasus will be
credited against the sales price at closing and the loan will be extinguished
(see Note 7).
For each of the years ended December 31, 1996, 1995, and 1994, the Company
received $720,000 in royalty income from the Montana Tunnels property.
In March 1995, the Company acquired all of the outstanding capital
stock of Mega Minerals S.A., an Ecuadorian company. The Company assumed
obligations of approximately $120,000, and agreed to pay the seller a 10% net
proceeds royalty on any production from the concessions after recovery of all
capital expenditures. A director and principal shareholder of the seller is also
a director of the Company. The assets of Mega Minerals S.A. consist of eight
exploration concessions and the rights to acquire four additional exploration
concessions, all located in the Nambija-Zamora gold belt of southern Ecuador.
<PAGE>
Note 13. - Income Taxes
Total income tax benefit for the years ended December 31, 1996, 1995
and 1994, was $55,000, $118,000 and $497,000 respectively. The entire income tax
benefit of $55,000 for the year ended December 31, 1996, is the result of an
adjustment to federal income taxes receivable related to net operating losses
carried back to prior years. Income tax expense (benefit) consists of the
following:
<TABLE>
<CAPTION>
Current Deferred Total
------------------ -------------- -----------------
<S> <C> <C> <C>
Federal tax provision $(55,000) $- $(55,000)
State tax provision - - -
================== ============== =================
Year ended December 31, 1996 $(55,000) $- $(55,000)
================== ============== =================
Federal tax provision $(118,000) $- $(118,000)
State tax provision - - -
================== ============== =================
Year ended December 31, 1995 $(118,000) $- $(118,000)
================== ============== =================
Federal tax provision $(416,000) $- $(416,000)
State tax provision (81,000) - (81,000)
================== ============== =================
Year ended December 31, 1994 $(497,000) $- $(497,000)
================== ============== =================
</TABLE>
The Company's effective tax rate for the years ended December 31, 1996,
1995 and 1994, differs from the federal statutory tax rate for the following
reasons:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- -------------
<S> <C> <C> <C>
Federal statutory rate 34.0% 34.0% 34.0%
Change in valuation allowance (40.9%) (22.4%) -
Revision of prior year's estimated tax 3.8% 1.7% 211.9%
Cost of sales for tax purposes less than financial
statements - 3.0% (184.5%)
Exploration and development deducted for tax
purposes not for financial statements - (13.7%) 77.4%
Royalty payments deducted for tax purposes not for
financial statements - - 22.3%
Mineral property disposal, tax gain greater than
financial statement gain - (2.9%) (44.4%)
Statutory depletion over cost basis - - 16.2%
Use of alternative minimum tax rate - (0.1%) 29.4%
State provision and other 4.4% 2.1% 7.6%
============== ============= =============
Effective tax rate 1.3% 1.7% 169.9%
============== ============= =============
</TABLE>
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are presented below:
<TABLE>
<CAPTION>
Deferred tax assets: 1996 1995
------------------ ------------------
<S> <C> <C>
Reclamation liabilities, accrued for financial
reporting purposes $ 310,000 $ 439,000
Ore inventories, due to additional
costs deferred for tax purposes. 91,000 90,000
Alternative minimum tax credit carryforwards 157,000 157,000
Net operating loss carryforwards 3,826,000 3,343,000
Other - 8,000
------------------ ------------------
Total gross deferred tax assets 4,384,000 4,037,000
Less valuation allowance (3,838,000) (3,612,000)
------------------ ------------------
Total deferred tax assets 546,000 425,000
------------------ ------------------
Deferred tax liabilities:
Mineral properties, principally due to the
capitalization of exploration and development costs
for financial reporting purposes (397,000) (296,000)
Unrealized gain on commodity futures contracts
recognized for tax purposes (62,000) -
Plant and equipment, principally due to accelerated tax
depreciation. (87,000) (129,000)
------------------ ------------------
Total gross deferred tax liabilities (546,000) (425,000)
================== ==================
Net deferred income taxes $ $
- -
================== ==================
</TABLE>
The change in the valuation allowance for the years ending December 31,
1996 and 1995 was $226,000 and $3,247,000, respectively.
As of December 31, 1996, the Company has net operating loss
carryforwards for federal income tax purposes of approximately $9,799,000 which
are available to offset future federal taxable income, if any, through 2011. As
the result of an audit by the Internal Revenue Service ("IRS") during 1996, an
additional $3,151,000 of net operating loss carryforwards were disallowed by the
IRS. The Company is currently protesting the IRS findings. In addition, the
Company has net operating loss carryforwards for alternative minimum tax
purposes of approximately $8,640,000 which are available to offset future
alternative minimum taxable income, if any, through 2011.
<PAGE>
Note 14. - Commitments and Contingencies
Reclamation Surety
Pursuant to the mining reclamation and bonding regulations of the State
of Utah, Department of Natural Resources and the Bureau of Land Management, in
1993 the Company provided reclamation surety for the Goldstrike Mine in the
amount of $2,251,000. In October 1995, the Company was advised that, as a result
of the reclamation work accomplished by the Company at the Goldstrike Mine, the
required surety had been reduced by approximately $514,000 to $1,737,000. The
required surety is in the form of a certificate of deposit in the amount of
$800,000 and letters of credit in the amount of $937,000. The certificate of
deposit and restricted cash account supporting the letter of credit are
reflected in Reclamation surety and other assets in the accompanying
Consolidated Statements of Financial Position.
Pursuant to the mining reclamation and bonding regulations of the State
of Alaska, Department of Natural Resources, the Company provided reclamation
surety for the Illinois Creek Mine in the amount of $1,575,000 in 1996. The
required surety is in the form of certificates of deposit totaling $1,575,000
and is reflected in Reclamation surety and other assets in the accompanying
Consolidated Statements of Financial Position.
Hedging
As part of its gold hedging program the Company has entered into
agreements with a major financial institution to deliver gold. Realization under
these agreements is dependent upon the ability of the counterparties to perform
in accordance with the terms of the agreement. As of December 31, 1996, the
Company had entered into forward sales contracts for 140,900 ounces of gold for
delivery at various dates through December 31, 1999 at an average selling price
of $409 per ounce. Delivery under these spot deferred contracts can be deferred
at the Company's option up to forty months depending on the individual contract.
The aggregate unrealized excess of the net market value of the Company's forward
sales contracts over the spot gold price of $368 per ounce as of December 31,
1996, is approximately $5,875,000. The aggregate unrealized gain on the
Company's forward sales contracts accounted for as hedges of future production
were approximately $5,033,000 at December 31, 1996.
The Company has also written silver call options, which if exercised,
would become spot deferred contracts with delivery deferred as previously
described. At December 31, 1996 the Company had sold 825,300 ounces of silver
call option contracts all at a strike price of $5.50 per ounce expiring on dates
ranging from September 28, 1997 through December 29, 1999. Call options premiums
received amounted to approximately $424,000.
Forward sales contracts and silver call options that are not hedges are
recorded on the Consolidated Statements of Financial Position at market value
and any unrealized gains or losses are recognized on the Consolidated Statements
of Operations.
Operating Leases
The Company leases office space, office equipment and vehicles under
operating leases which expire through 2001.
Effective as of June 15, 1992, the Company entered into a new lease for
its corporate offices in Lakewood, Colorado. The lease was amended effective
June 1, 1996, to provide for additional office space and to extend the initial
term of the lease to May 31, 2001. The lease contains an option to renew for an
additional five year period at the market rate in effect at the time of renewal.
The lease provides for base rent of $12,917 per month with annual increases each
year beginning June 14, 1997. In addition, the Company is obligated to reimburse
the landlord for the Company's proportionate share of increases in real estate
taxes and operating expenses.
Effective as of July 1, 1996, the Company entered into a new lease for
its Alaska district offices in Anchorage, Alaska. The term of the lease is three
years, commencing July 1, 1996, and ending June 30, 1999. The lease provides for
aggregate rent of $121,284 payable in equal monthly installments of $3,369.
<PAGE>
The following table sets forth the future minimum lease payment
obligations as of December 31, 1996:
Minimum
Year Lease Payments
--------------- ---------------------
1997 $298,000
1998 $249,000
1999 $191,000
2000 $173,000
2001 $76,000
--------------- ---------------------
Rent expense was $154,000, $113,000 and $139,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Contractor Claim
One of the construction contractors on the Illinois Creek Property in
Alaska working under an approximately $3 million contract with the Company has
submitted invoices and claims totaling approximately $7 million for work
completed in 1996. At December 31, 1996, the Company had paid the contractor
$1,772,000 and has recorded an additional liability to the contractor, based on
the Company's estimate of its obligation under the contract of $2,414,000. The
unpaid invoices and claims are currently being reviewed, and it is likely that a
significant portion of the invoices and claims will be disputed by the Company.
The contractor has threatened legal proceedings if the dispute is not informally
resolved. The Company and its representatives are currently reviewing the
relevant facts and until that review is complete the Company cannot estimate the
magnitude of any potential liability, possible counterclaims by the Company or
the outcome of arbitration or litigation if the dispute cannot be resolved by
negotiation. On November 8, 1996, the construction contractor also filed a lien
on the Illinois Creek Property for certain unpaid invoices and claims submitted
through that date.
Note 15 - Subsequent Events
Definitive Merger Agreement
On February 5, 1997, the Company signed a definitive Merger agreement
with Dakota Mining Corporation ("Dakota") whereby the shareholders of the
Company will receive one share of Dakota common stock for every 1.1 shares of
the Company's common stock and the Company will become a wholly owned subsidiary
of Dakota (the "Merger"). The Merger is subject to the approval of the Toronto
Stock Exchange, stockholder and creditor approval, review by other regulatory
authorities, and other customary conditions.
As part of the Merger Agreement, Dakota and the Company agreed that
Dakota would provide a $5 million line of credit to the Company to provide
interim working capital to sustain the Company's operations until the Merger is
consummated. The line of credit bears interest at the rate of one per cent above
a quoted prime rate and is due August 31, 1997 or earlier if the Merger
agreement is terminated before such date. The proceeds are to be used to pay
certain ongoing operating expenses of the Company, primarily in connection with
start-up activities associated with the Illinois Creek Mine and to partially pay
trade creditors of the Company and its subsidiaries.
<PAGE>
The line of credit is evidenced by two notes with similar terms but
different amounts and different security. A $2 million note ("the first note")
is secured by a second priority position in the shares of USMX of Alaska and
ranks pari passu with the $22 million loan of Rothschild (which holds the first
priority position in such collateral). USMX of Alaska is the subsidiary holding
title to the Illinois Creek Mine. A second note for $ 3 million ("the second
note") is secured by a first position on all of the shares of USMX's Mexican
subsidiary and a first position on USMX's Thunder Mountain property in Idaho.
Rothschild was granted a second priority security position in the second note
security. Funding for the line of credit is being provided from the proceeds of
a Special Warrant offering by Dakota described below.
In February 1997, Dakota offered by way of private placement 25,000
Special Warrants at a price of Cdn. $1,000 per Special Warrant resulting in
gross proceeds of Cdn. $25 million. Each Special Warrant entitles the holder to
receive one 7.5% unsecured subordinated convertible debenture in the amount of
Cdn. $1,000. Of the proceeds, US $5.0 million have been released immediately and
the remaining proceeds have been deposited in escrow pending completion of the
Merger and approval by the Dakota shareholders of the issuance of the common
shares underlying the debentures. Completion of this offering was a condition of
the Company's obligation to proceed with the Merger.
N. M. Rothschild & Sons Limited financing facility.
Rothschild's consent is required for the extension of the $5 million
line of credit and consummation of the Merger. Further, Dakota, as the potential
owner of the Company, desired certain changes to the Rothschild loan facility in
order to avoid immediate defaults under such facility after closing of the
Merger. Accordingly, the Rothschild and Dakota negotiated an Intercreditor
Agreement which provided, among other things:
i) The consent of Rothschild to the Merger and the extension of the $5 million
line of credit from Dakota to the Company on the terms described above.
ii) Rothschild's agreement to share, pari passu with Dakota, in any proceeds
from foreclosure of the Company's share security in the ratio of the amount
outstanding under the first note to $22 million, but with Rothschild
retaining the right to deal with such security.
iii) Dakota's agreement to fund at least $2 million of its line of credit for
costs and expenses at the Illinois Creek Mine according to a plan prepared
by the Company and approved by Rothschild and Dakota.
iv) The agreement of Dakota to guarantee the Company's obligations under the
Rothschild Credit Agreements until "commercial completion" of the Illinois
Creek Mine.
v) The agreement of Rothschild to forebear from exercising its rights to
declare and enforce defaults (except payment or bankruptcy defaults) of the
Company under the Rothschild Credit Agreements until consummation of the
Merger, termination of the $5 million line of credit or June 30, 1997.
vi) Rothschild and Dakota agreed to amend certain terms and covenants in the
Rothschild Credit Agreements, to be effective upon closing of the Merger.
These include revisions to the definition of "commercial completion", and
amendments to certain financial covenants.
vii) Both parties' rights to share in collateral terminate if the Merger is
consummated or the $5 million line of credit is extinguished.
viii)At the closing of the Merger, a $2.5 million convertible loan under the
Rothschild Credit Agreements will be extinguished by payment of $1.5
million by Dakota and adding the balance to the outstanding amounts under
the project financing portion of the such Agreements.
<PAGE>
Note 16 - Generally Accepted Accounting Principles in the United States and
Canada
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States which differ in certain
respects from those principles that the Company would have followed had its
financial statements been prepared in accordance with accounting principles
generally accepted in Canada. Differences which materially affect these
consolidated financial statements are:
Convertible Debt Securities
The Company has recorded convertible debt due September 2000 using the
accounting principles generally accepted in the United States, whereby the
$$2,500,000 due is presented as long term debt at December 31, 1996. Had the
Company prepared its financial statements using the accounting principles
generally accepted in Canada, as of December 31, 1996 the Company would have
recorded approximately $2,023,000 of additional paid in capital relating to the
conversion rights of the convertible debt, with the remaining $477,000 presented
as long term debt.
Cash Flow Presentation
The Company has presented its financial statements using the accounting
principles generally accepted in the United States, which requires the cash flow
statement exclude all non cash activities. Had the Company presented its
financial statements using the accounting principles generally accepted in
Canada, the Company's additions to property, plant and equipment would have been
increased by $4,000,000 and proceeds from issuance of common stock would have
been increased by $4,000,000 for the year ended December 31, 1996, representing
the estimated fair value of the common stock issued to NPMC to acquire leasehold
and other property interests in the Illinois Creek Project.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no disagreements with the Company's principal independent
accountants on any matter of accounting principles or practices, financial
statement disclosures, or auditing scope or procedure.
PART III
Items 10, 11, 12 and 13 constituting Part III of this Form 10-K have
been omitted from this Annual Report pursuant to the provisions of Instruction
G(3) to Form 10-K, as the Company intends to file a definitive proxy statement
pursuant to Regulation 14A under the Securities Exchange Act of 1934 within 120
days after the close of its last fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) Consolidated Financial Statements.
See Item 8.
(2) Consolidated Financial Statement Schedules.
See Item 8.
(3) Exhibits.
The exhibits listed on the accompanying Index to Exhibits are
filed as part of this Annual Report.
(b) Reports on Form 8-K.
The Company filed a Report on Form 8-K on November 21, 1996,
regarding its Illinois Creek Project and amendments to the
Rothschild Credit Agreements.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
USMX, INC.
(Registrant)
Date: 3/31/97 By: /s/ Donald P. Bellum
----------------------------------
Donald P. Bellum, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Date: 3/31/97 /s/ Donald P. Bellum
-----------------------------------------------------
Donald P. Bellum, President, Chief Executive
Officer, and Chairman of the Board of Directors
Date: 3/25/97 /s/ Dennis L. Lance
-----------------------------------------------------
Dennis L. Lance, Vice President - Exploration
Date: 3/25/97 /s/ Donald E. Nilson
-----------------------------------------------------
Donald E. Nilson, Vice President - Finance,
Secretary, Chief Financial Officer
Date: 3/25/97 /s/ Daniel J. Stewart
-----------------------------------------------------
Daniel J. Stewart, Controller
Date:
-----------------------------------------------------
George J. Allen, Director
Date: 3/27/97 /s/ Phillips S. Baker
-----------------------------------------------------
Phillips S. Baker, Director
Date: 3/27/97 /s/ Terry P. McNulty
-----------------------------------------------------
Terry P. McNulty, Director
Date: 3/27/97 /s/ Werner G. Nennecker
-----------------------------------------------------
Werner G. Nennecker, Director
Date: 3/31/97 /s/ Gregory Pusey
-----------------------------------------------------
Gregory Pusey, Director
Date: 3/27/97 /s/ Robert Scullion
-----------------------------------------------------
Robert Scullion, Director
</TABLE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required] For the fiscal year December 31, Error! Reference source
not found. 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 0-9370
-------------------
USMX, INC.
(Exact name of registrant as specified in its charter)
-------------------
Delaware 84-1076625
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
141 Union Boulevard, Suite 100
Lakewood, Colorado 80228
(Address of principal executive offices) (Zip Code)
(303) 985-4665
Registrant's telephone number, including area code
EXHIBITS
<PAGE>
INDEX TO EXHIBITS
NUMBER DESCRIPTION
Exhibit 2 Agreement and Plan of Merger, dated February 4, 1997, among the
Company, Dakota Mining Corporation and Dakota Merger Corporation,
filed as an Exhibit to the Company's Report on Form 8-K filed on
or about February 5, 1997, is incorporated herein by this
reference.
Exhibit 3.1 Certificate of Incorporation of the Company, previously filed as
an Exhibit to the Company's Report on Form 10-K for the year
ended December 31, 1987, is incorporated herein by this
reference.
Exhibit 3.2 Bylaws of the Company, previously filed as an Exhibit to the
Company's Report on Form 10-K for the year ended December 31,
1987, is incorporated herein by this reference.
Exhibit 4 Specimen Certificate of the $.001 par value common stock,
previously filed as an Exhibit to the Company's registration
statement on Form S-3 (No. 33-19699), is incorporated herein by
this reference.
Exhibit 10.2 The Company's 1987 Stock Option Plan, as amended, previously
filed as an Exhibit to the Company's registration statement on
Form S-8 (No. 33-49392), is incorporated herein by this
reference.
Exhibit 10.3 The Company's Savings and Investment Plan, previously filed as an
Exhibit to the Company's Report on Form 10-K for the year ended
December 31, 1987, is incorporated herein by this reference.
Exhibit 10.7 Agreement, dated January 1, 1986, between the Company and
Centennial Minerals Ltd., previously filed as Exhibit 10.17 to
the Company's Report on Form 10-K for the year ended May 31,
1986, is incorporated herein by this reference.
Exhibit 10.7A Amendment of Agreement and Deed dated July 15, 1991, by and
between Montana Tunnels Mining, Inc., USMX, INC. and USMX of
Montana, Inc., previously filed as an Exhibit to the Company's
Report on Form 10-K for the year ended December 31, 1991, is
incorporated herein by this reference.
Exhibit 10.33 Non-Discretionary Stock Option Plan, previously filed as an
Exhibit to the Company's Report on Form 10-K for the year ended
December 31, 1991, is incorporated herein by this reference.
Exhibit 10.40 Asset Purchase Agreement, dated June 11, 1993, between the
Company and Placer Dome U.S. Inc., as amended, previously filed
as an Exhibit to the Company's Report on Form 10-K for the year
ended December 31, 1993, is incorporated herein by this
reference.
Exhibit 10.42 Employment Agreement, dated July 16, 1993, between the Company
and James A. Knox, previously filed as an Exhibit to the
Company's Report on Form 10-K for the year ended December 31,
1993, is incorporated herein by this reference.
Exhibit 10.44 Exploration and Option to Purchase Agreement, dated effective
July 9, 1993, between the Company and Dewey Mining Company and
Thunder Mountain Gold, Inc., Ronald C. Yanke and Donald J.
Nelson, previously filed as an Exhibit to the Company's Report on
Form 10-K for the year ended December 31, 1994, is incorporated
herein by this reference.
Exhibit 10.45 Purchase and Sale Agreement, dated April 14, 1994, among the
Company, Cominco American Resources Incorporated and Alta Gold
Co., previously filed as an Exhibit to the Company's Report on
Form 10-K for the year ended December 31, 1994, is incorporated
herein by this reference.
Exhibit 10.46 Agreement, dated effective December 16, 1994, between the Company
and North Pacific Mining Corporation, previously filed as an
Exhibit to the Company's Report on Form 10-K for the year ended
December 31, 1994, is incorporated herein by this reference.
Exhibit 10.46a Letter dated February 5, 1996, amending the Agreement, dated
effective December 16, 1994, between the Company and North
Pacific Mining Corporation, previously filed as an Exhibit to the
Company's Report on Form 10-K for the year ended December 31,
1996, is incorporated herein by this reference.
Exhibit 10.47 Post-Termination Agreement, dated February 16, 1996, between the
Company and Bull Valley L.L.C.
Exhibit 10.48 Exploration Discovery Bonus Plan, dated effective September 1,
1989.
Exhibit 10.49 Mine Services and Earthworks Contract, dated January 19, 1996,
between the Company and D.H. Blattner & Sons, Inc.
Exhibit 10.50 Purchase and Sale Agreement, dated March 20, 1995, among the
Company, Mega Metals, Inc.; Mega Minerals S.A.; Greg Pusey; John
Dreier and Gary McAdam.
Exhibit 10.51 Option agreement, dated February 4, 1997, between the Company and
Dakota Mining Corporation, previously filed as an Exhibit to the
Company's Report on Form 8-K filed on or about February 5, 1997,
is incorporated herein by this reference.
Exhibit 10.52 Support Agreement, dated February 4, 1997, among the Company,
Pegasus Gold Inc. and Dakota Mining Corporation, previously filed
as an Exhibit to the Company's Report on Form 8-K filed on or
about February 5, 1997, is incorporated herein by this reference.
Exhibit 10.53 Loan Agreement dated March 11, 1997, among the Company, USMX of
Alaska, inc. and Dakota Mining Corporation, filed as an Exhibit
to the Registration Statement on Form S-4 of Dakota mining
Corporation (File No. 333-23453), is incorporated herein by this
reference.
Exhibit 10.54 Credit Agreement between USMX of Alaska, inc. and N M Rothschild
& Sons Limited, dated July 11, 1996, filed as an Exhibit to the
Company's Report on Form 8-K, filed on or about July 24, 1996,
and First Amendment to Credit Agreement, dated as of November 15,
1996, filed as an Exhibit to the Company's Report on Form 8-K,
filed on or about November 21, 1996, are incorporated herein by
this reference.
Exhibit 10.55 Credit Agreement between the Company and N M Rothschild & Sons
Limited, dated July 11, 1996, previously filed as an Exhibit to
the Company's Report on Form 8-K on or about July 24, 1996, and
the First Amendment to the USMX, Inc. Credit Agreement, dated as
of November 15, 1996, previously filed as an Exhibit to the
Company's Report on Form 8-K, filed on or about November 21,
1996, are incorporated herein by this reference.
Exhibit 10.56 Guaranty of the Company to N M Rothschild & Sons Limited, dated
July 11, 1996, previously filed as an Exhibit to the Company's
Report on Form 8-K filed on or about July 24, 1996, and the
Guarantor's Acknowledgment of First Amendment to USMX of Alaska,
Inc. Credit Agreement dated November 15, 1996, previously filed
as an Exhibit to the Company's Report on Form 8-K, filed on or
about November 21, 1996, are incorporated herein by this
reference.
Exhibit 10.57 Hedging Agreement between USMX of Alaska, Inc. and N M Rothschild
& Sons Limited, dated July 11, 1996, previously filed as an
Exhibit to the Company's Report on Form 8-K filed on or about
July 24, 1996, is incorporated herein by this reference.
Exhibit 10.58 Registration Rights Agreement between the Company and N M
Rothschild & Sons Limited, dated July 11, 1996, previously filed
as an Exhibit to the Company's Report on Form 8-K filed on or
about July 24, 1996, is incorporated herein by this reference.
Exhibit 22 Subsidiaries of the Company
Exhibit 24.1 Consent of KPMG Peat Marwick LLP
<TABLE>
<CAPTION>
SUBSIDIARIES OF USMX, INC.
FORM 10-K - December 31, 1996
EXHIBIT 22
Percent
Subsidiary Place of Incorporation Owned
- ---------------------------------- ---------------------- ---------------
<S> <C> <C>
USMX of Alaska, Inc. Alaska 100%
USMX of Montana, Inc. Montana 100%
USMX of Nevada, Inc. Nevada 100%
USMX of Utah, Inc. Delaware 100%
USMX Mining, Inc. British Columbia 100%
MXUS S.A. de C. V. Mexico 100%
USMX de Costa Rica C. V. Costa Rica 100%
CompaOia Minera USMX de
Chile Limitada Chile 100%
Southern Gold Resources (USA), Inc. Colorado 80%
Mega Minerals S. A. Ecuador 100%
</TABLE>
Consent to Independent Auditors
To the Stockholders and Board of Directors
USMX, INC.:
We consent to incorporation by reference in the registration statements
(No. 33-16194, 33-16195, 33-38855, 33-49392, 33-68882 and 33-63599) on Form S-8
and registration statement (No. 333-03561) on Form S-3 of USMX, INC. of our
report dated March 11, 1997 relating to the consolidated statements of financial
position of USMX, INC. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996, which report appears in the December 31, 1996 annual report on Form 10-KA
of USMX, INC.
Our report contains an explanatory paragraph that states that the Company
has incurred cost overruns associated with the construction of the Illinois
Creek Mine, has cash flow deficits from operations and currently has no mines in
operation. At December 31, 1996, the Company has an accumulated deficit of
$3,065,000, a working capital deficit of approximately $27,132,000 and is not in
compliance with certain covenants of its long term debt agreements. In addition,
significant additional funds will be required to bring the Company's Illinois
Creek Mine into production. These matters raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do no
include any adjustments that might result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Denver, Colorado
May 5, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000315523
<NAME> USMX, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 346
<SECURITIES> 0
<RECEIVABLES> 424
<ALLOWANCES> 0
<INVENTORY> 488
<CURRENT-ASSETS> 2,261
<PP&E> 46,439
<DEPRECIATION> 3,532
<TOTAL-ASSETS> 50,155
<CURRENT-LIABILITIES> 29,393
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 50,155
<SALES> 0
<TOTAL-REVENUES> 2,834
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<INCOME-PRETAX> (3,357)
<INCOME-TAX> (55)
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</TABLE>
