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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission File Number 1-4350
ROYAL OAK MINES INC.
(Exact name of Registrant as specified in its charter)
ONTARIO, CANADA 98-0160821
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
c/o Royal Oak Mines (U.S.A.) Inc.
5501 Lakeview Drive
Kirkland, Washington
U.S.A. 98033
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (206) 822-8992
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days. Yes X No _
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common shares outstanding as of November 8, 1996 was 140,672,579. This includes
1,924,816 shares which are owned by a wholly owned subsidiary of the Company and
may not be voted, and are not considered outstanding for accounting matters,
including earnings per share calculations.
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INDEX
Page
PART I - FINANCIAL INFORMATION........................................ *
Item 1. Consolidated Financial Statements of Royal Oak Mines Inc.
and Subsidiaries (All statements are unaudited except for
the December 31, 1995 Consolidated Balance Sheet, which
has been audited.)
Consolidated Balance Sheets - September 30, 1996 and
December 31, 1995........................................ *
Consolidated Statements of Income - Three and Nine Months Ended
September 30, 1996 and 1995.............................. *
Consolidated Statements of Cash Flow - Three and Nine Months
Ended September 30, 1996 and 1995........................ *
Notes to Consolidated Financial Statements (unaudited)...... *
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. *
PART II - OTHER INFORMATION........................................... *
Item 6. Exhibits and Reports on Form 8-K............................ *
Signatures............................................................ *
In this Report, unless otherwise indicated, all dollar amounts are expressed in
Canadian dollars.
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
All tabular amounts are in thousands of Canadian dollars, except as indicated.
(see Notes 1 and 7).
<TABLE>
Consolidated Balance Sheets
(unaudited - Cdn$ 000's)
September 30 December 31
1996 1995
======== ===========
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $233,042 $139,410
Short-term investments 20,779 2,971
Receivables 16,577 7,138
Inventories (note 4) 69,413 46,136
Prepaid expenses 9,460 5,620
-------- --------
Total Current Assets 349,271 201,275
Property, Plant and Equipment, net 469,790 191,381
Long-Term Investments 16,559 36,307
Deferred Charges and Other 9,330 --
-------- --------
TOTAL ASSETS $844,950 $428,963
======== ========
LIABILITIES
Current Liabilities
Accounts payable $ 30,521 $13,640
Accrued payroll 2,813 5,267
Current portion of deferred revenue 20,801 4,523
Income taxes payable 4,118 3,350
Interest payable 4,049 --
Other current liabilities 17,294 15,654
-------- -------
Total Current Liabilities 79,596 42,434
Deferred Revenue 25,646 25,188
Other Liabilities 15,191 15,612
Deferred Income Taxes 13,884 5,064
Senior Subordinated Notes (note 12) 238,385 --
Minority Interest in Subsidiary Companies 134 170
-------- --------
TOTAL LIABILITIES 372,836 88,468
-------- --------
SHAREHOLDERS' EQUITY
Capital Stock (note 11)
Common stock
Authorized - unlimited
Outstanding - 138,680,263 (Dec. 31, 1995 - 119,118,714) 378,255 261,957
Retained Earnings 93,859 78,538
-------- --------
TOTAL SHAREHOLDERS' EQUITY 472,114 340,495
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $844,950 $428,963
======== ========
The accompanying notes are an integral part of the Consolidated Financial Statements.
</TABLE>
<TABLE>
Consolidated Statements of Income
(unaudited - Cdn$ 000's except per share amounts)
Three months ended Nine months ended
September 30 September 30
------------------ ------------------
1996 1995 1996 1995
======== ======== ======== ========
<S> <C> <C> <C> <C>
REVENUE $ 77,323 $ 52,258 $183,169 $153,097
-------- -------- -------- --------
EXPENSES
Operating 49,544 45,648 130,926 135,300
Royalties and marketing 807 610 2,215 1,718
Administrative and corporate 2,500 2,100 7,360 7,045
Depreciation and amortization 7,587 3,694 18,953 9,964
Exploration 1,424 237 3,833 491
Recovery of loss on foreign currency contracts (622) (3,271) (1,597) (7,043)
-------- -------- -------- --------
Total operating expenses 61,240 49,018 161,690 147,475
-------- -------- -------- --------
OPERATING INCOME 16,083 3,240 21,479 5,622
OTHER INCOME (EXPENSE)
Interest and other income, net (note 3) 3,214 3,416 5,762 15,583
Interest expense (126) (43) (213) (137)
Long-term debt interest (3,590) -- (3,590) --
Long-term debt interest capitalized 1,926 -- 1,926 --
-------- -------- -------- --------
NET INCOME BEFORE UNDERNOTED 17,507 6,613 25,364 21,068
Income and mining taxes - current (361) (279) (1,084) (1,248)
Income and mining taxes - deferred (6,814) -- (8,820) --
Minority interest 6 85 36 94
Equity in income (loss) of associated companies (122) (191) (175) (435)
-------- -------- -------- --------
NET INCOME 10,216 6,228 15,321 19,479
RETAINED EARNINGS - BEGINNING OF PERIOD 83,643 68,619 78,538 55,368
-------- -------- -------- --------
RETAINED EARNINGS - END OF PERIOD $ 93,859 $ 74,847 $ 93,859 $ 74,847
======== ======== ======== ========
EARNINGS PER SHARE $0.07 $0.05 $0.11 $0.17
======== ======== ======== ========
Weighted average number of
common shares outstanding (000's) 138,286 119,021 136,099 117,510
======== ======== ======== ========
The accompanying notes are an integral part of the Consolidated Financial Statements.
</TABLE>
<TABLE>
Consolidated Statements of Cash Flow
(unaudited - Cdn$ 000's)
Three months ended Nine months ended
September 30 September 30
------------------ ------------------
1996 1995 1996 1995
======== ======== ======== ========
<S> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Consolidated net income for the period $ 10,216 $ 6,228 $ 15,321 $ 19,479
Items not affecting cash:
Depreciation and amortization 7,587 3,694 18,953 9,964
Deferred income tax 6,814 -- 8,820 --
Recovery of loss on foreign currency contracts (622) (3,271) (1,597) (7,043)
Other 116 156 284 391
-------- -------- -------- --------
CASH FLOW 24,111 6,807 41,781 22,791
Net changes in other operating items (note 5) 3,098 (883) 1,063 (3,042)
-------- -------- -------- --------
Net cash provided by operating activities 27,209 5,924 42,844 19,749
-------- -------- -------- --------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Issue of common shares (note 11) 1,940 268 116,298 14,843
Issuance of senior subordinated notes 238,385 -- 238,385 --
Cost of senior subordinated notes (8,616) -- (8,616) --
Reclamation -- 3,000 -- 3,000
Other (1,801) (76) 624 (223)
-------- ------- -------- --------
Net cash provided by financing activities 229,908 3,192 346,691 17,620
-------- ------- -------- --------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Investment in Kemess capital assets through purchase
of companies (note 8) -- -- (201,976) --
Decrease in long-term investments (note 8) -- -- 26,882 --
Investment in capital assets through purchase of
Consolidated Professor Mines Limited (note 9) (15) -- (15,858) --
Investment in other capital assets, net (41,972) (8,440) (74,188) (25,726)
Investment in exploration and
non-producing properties, net 657 (8,309) (5,035) (13,965)
Change in other assets (1,648) (13,814) (7,919) (14,950)
-------- -------- -------- --------
Net cash used in investing activities (42,978) (30,563) (278,094) (54,641)
-------- -------- -------- --------
INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS DURING PERIOD 214,139 (21,447) 111,441 (17,272)
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD 39,683 183,113 142,381 178,938
-------- -------- -------- --------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $253,822 $161,666 $253,822 $161,666
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 126 $ 43 $ 213 $ 137
Income taxes $ 65 $ 822 $ 595 $ 1,248
Cash consists of cash and short-term investments.
The accompanying notes are an integral part of the Consolidated Financial Statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(tabular amounts in thousands of Canadian dollars unless otherwise stated)
1. Interim Financial Statements Accounting Policies
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting principles
("Canadian GAAP") which, in the case of Royal Oak Mines Inc. (the "Company"),
differ in certain material respects from United States generally accepted
accounting principles ("U.S. GAAP"), as described in Note 7. Also, such
statements do not include all of the disclosures required by generally accepted
accounting principles for annual statements. In the opinion of management all
adjustments considered necessary for fair presentation have been included in
these statements. Operating results for the three and nine months ended
September 30, 1996, are not necessarily indicative of the results that may be
expected for the full year ending December 31, 1996. For further information,
see the Company's Consolidated Financial Statements, including the accounting
policies and notes thereto, included in the Annual Report to Shareholders and
Annual Report on Form 10-K for the year ended December 31, 1995.
The calculations of net earnings per share are based upon the weighted average
number of common shares of the Company outstanding during each period (except as
set forth in Note 11(b)). When outstanding convertible instruments materially
dilute earnings per share, fully diluted earnings per share are disclosed.
2. Presentation
Certain amounts for 1995 have been reclassified to conform with the current
year's presentation.
3. Interest and Other Income, Net
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
1996 1995 1996 1995
------ ------ ------ -------
Interest income $1,918 $2,229 $3,278 $ 7,217
Gain on sale of securities and
other 1,296 1,187 2,484 8,366
------ ------ ------ -------
Interest and other income, net $3,214 $3,416 $5,762 $15,583
====== ====== ====== =======
4. Inventories
September 30 December 31
1996 1995
------- -----------
Bullion in process $27,307 $18,574
Stores and operating supplies 42,106 27,562
------- -------
Inventories $69,413 $46,136
======= =======
The increase in stores and operating supplies resulted from the need to bring in
up to one year's supply of operating and maintenance materials over a winter
road to the Colomac mine site during the first quarter. Due to the remote
nature of the Colomac Mine, the most effective way to manage the stores and
operating supplies inventory is to transport them over a winter ice road from
January to March. The freight costs associated with this inventory have been
included in the cost of the inventory and will be charged to operations
throughout the year as the inventory is utilized.
5. Net Changes in Other Operating Items
Three months ended Nine months ended
September 30 September 30
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
Cash provided by (used in):
Receivables $ (9,073) $ 1,181 $ (9,439) $ 2,360
Inventories 3,416 (126) (23,277) (14,796)
Prepaid expenses (935) (2,089) (3,840) (3,909)
Accounts payable, accrued payroll
and other current liabilities 17,685 (2,575) 20,116 2,835
Deferred revenue (8,362) 2,407 16,735 9,099
Income taxes payable 367 319 768 1,369
-------- -------- -------- --------
Net change in
non-cash working capital $ 3,098 $ (883) $ 1,063 $ (3,042)
======== ======== ======== ========
6. Reclamation and Environmental Remediation
The Company's current and proposed mining and exploration activities are subject
to various laws and regulations governing the protection of the environment.
These laws and regulations are continually changing and are generally becoming
more restrictive. The Company conducts its operations so as to protect its
employees, the general public and the environment and believes its operations
are in compliance with all applicable laws and regulations, in all material
respects. The Company has, and expects to in the future, comply with such laws
and regulations, including making all required expenditures.
Where estimated reclamation and closure costs are reasonably determinable, the
Company has recorded a provision for environmental liabilities, using the unit-
of-production method, based on management's estimate of these costs. Such
estimates are subject to adjustment based on changes in laws and regulations and
as new information becomes available.
7. Reconciliation to United States Generally Accepted Accounting Principles
Reconciliation of net income in accordance with Canadian GAAP to net income in
accordance with U.S. GAAP is as follows:
Three months ended Nine months ended
September 30 September 30
------------------ ----------------
1996 1995 1996 1995
------- ------- ------- -------
Net income in accordance
with Canadian GAAP $10,216 $ 6,228 $15,321 $19,479
Adjustments:
Depreciation and amortization (1,309) (1,214) (3,542) (4,703)
Income taxes 458 -- 1,240 --
------- ------- ------- -------
Net income in accordance with U.S. GAAP $ 9,365 $ 5,014 $13,019 $14,776
======= ======= ======= =======
Earnings per share
in accordance with U.S. GAAP $0.07 $0.04 $0.10 $0.13
===== ===== ===== =====
The effects on the balance sheets of the Company at September 30, prepared in
accordance with U.S. GAAP, are:
September 30
--------------------
1996 1995
-------- --------
Increase (decrease):
Property, plant and equipment $ 74,959 $(10,864)
Prepaid expenses (pension asset) $ (359) --
Deferred income taxes $ 89,055 --
Retained earnings $(14,455) $(10,864)
Statement of Financial Accounting Standards No. 109 requires that a deferred tax
liability be recognized for differences between the assigned values and the tax
bases of the assets and liabilities recognized in a business combination
involving a purchase of stock. Canadian GAAP does not require similar
recognition. Accordingly, during the nine months ended September 30, 1996, a
difference between U.S. GAAP and Canadian GAAP arose for the deferred tax
liabilities associated with the excess of the assigned values and the tax bases
of assets acquired in the acquisition of Geddes Resources Limited, El Condor
Resources Ltd., St. Philips Resources Inc. and Consolidated Professor Mines
Limited. The effect of these differences is to increase property, plant and
equipment and deferred income taxes by $90.3 million as of September 30, 1996.
8. Acquisition of Geddes Resources Limited, El Condor Resources Ltd. and St.
Philips Resources Inc.
On January 11, 1996, the Company acquired all of the outstanding shares of
Geddes Resources Limited ("Geddes"), El Condor Resources Ltd. ("El Condor") and
St. Philips Resources Inc. ("St. Philips") not already owned by the Company
pursuant to an arrangement agreement (the "Plan of Arrangement") on the
following terms:
Geddes: 0.30 shares of the Company for each share of Geddes.
El Condor: 0.95 shares of the Company plus $2.00 cash for each share of
El Condor.
St. Philips: $3.40 cash for each share of St. Philips.
As a result of these transactions, the Company issued 19,011,883 common shares
of the Company and paid approximately $56 million in cash pursuant to the Plan
of Arrangement. The January 11, 1996 closing price on The Toronto Stock
Exchange for the Company's common shares was $6.00. This price was used to
value the common shares of the Company issued under the Plan of Arrangement. At
the time of acquisition, St. Philips, with its wholly owned subsidiary, and El
Condor jointly owned the Kemess South property. El Condor owned 100% of the
Kemess North property.
As at December 31, 1995, the Company's investment in Geddes, El Condor and St.
Philips amounted to approximately $26.9 million and was included in long-term
investments.
The following outlines the details of the purchase price and its allocation to
the assets and liabilities acquired:
El St.
Geddes Condor Philips Total
-------- -------- -------- --------
Purchase price:
Cash paid, including
open market purchases $ 3,220 $ 34,222 $ 38,562 $ 76,004
Issue of common shares 37,650 76,421 -- 114,071
-------- -------- -------- --------
40,870 110,643 38,562 190,075
Initial carrying value
of Geddes 9,192 -- -- 9,192
Transaction and other costs 2,290 680 679 3,649
-------- -------- -------- --------
52,352 111,323 39,241 202,916
Cash and cash equivalents
acquired from companies (561) (1) (378) (940)
-------- -------- -------- --------
Total $ 51,791 $111,322 $ 38,863 $201,976
======== ======== ======== ========
Allocated to:
Property, plant and
equipment $ 52,101 $112,087 $ 39,015 $203,203
Other assets 31 151 9 191
Total liabilities (341) (916) (161) (1,418)
-------- -------- -------- --------
Total $ 51,791 $111,322 $ 38,863 $201,976
======== ======== ======== ========
These transactions were linked to the resolution of the claim by Geddes for
compensation from the Government of British Columbia (the "B.C. Government")
which, in 1993, declared the area, including the Windy Craggy property, a
provincial park. Under the terms of an agreement among the B.C. Government, the
Company and Geddes, the B.C. Government has agreed to an economic assistance and
investment package and to compensation valued, in the aggregate, at up to $166
million. The majority of these funds are payable to the Company over the next
three years.
The following shows pro forma what the results of operations would have been if
the acquisition had occurred at the beginning of the period:
Nine months ended
September 30
------------------
1996 1995
-------- --------
Revenue $183,169 $153,097
Net income $ 15,321 $ 15,331
Earnings per share - basic $0.11 $0.11
Earnings per share - fully diluted $0.11 $0.11
On April 29, 1996, the Project Approval Certificate (formerly known as the Mine
Development Certificate) for the Kemess South Project was received from the B.C.
Government following resolution of provincial environmental assessment matters.
Federal approval under the Environmental Assessment Act (Canada) and the
Fisheries Act (Canada) was received November 4, 1996, and will facilitate
completion of all infrastructure impacting on viable lakes and streams in the
project area. The Kemess South gold-copper project in north central British
Columbia is scheduled to commence production in the second quarter of 1998. The
mineable ore reserves at year-end 1995 at Kemess contained approximately 4.1
million ounces of gold and one billion pounds of copper.
The Company is proceeding with the development and construction of the Kemess
South project. Engineering on the project is approximately 85% complete.
Certain of the construction contracts for the plant and infrastructure
facilities have been awarded and the remainder are expected to be awarded in the
next few months. Construction on the project commenced in early July. As of
October 31, 1996, approximately $161 million has been committed on the project.
The capital cost of the Kemess South project has been estimated at $390 million,
including contingency and start-up costs, but excluding the cost of acquisition
of the property. Financing for the Kemess South project will include up to $166
million by way of an economic assistance and investment package and compensation
from the B.C. Government. The Company's wholly owned subsidiary, Kemess Mines
Inc. (formerly Geddes Resources Limited) has already received the first of two
equal payments of compensation from the B.C. Government in the sum of $14.5
million in April 1996, the final compensation payment being due in April 1997.
The Company will fund the balance of the capital cost from cash in treasury,
future operating cash flow and debt. At this time, the Company has no plans to
issue any new equity in connection with this project.
The Company will apply for and seek to obtain all necessary permits, licences,
approvals and other authorizations for the Kemess South project as project
development continues.
9. Acquisition of Consolidated Professor Mines Limited
On February 5, 1996, the Company made a public offer to purchase all of the
outstanding common shares of Consolidated Professor Mines Limited ("Consolidated
Professor"), consisting of approximately 20 million common shares, at a cash
price of $0.80 per share. By June 30, 1996, the Company had purchased all
shares tendered and acquired all remaining shares in accordance with compulsory
acquisition procedures, for a total purchase price of $16.2 million. The
purchase price, net of cash acquired on the acquisition of $0.3 million, has
been assigned as follows:
Capital assets $15.8 million
Miscellaneous net assets 0.1 million
-----
Purchase price, net of cash acquired $15.9 million
=====
The acquisition is part of the Company's strategic plan to increase ore reserves
and production at its Ontario Division. Consolidated Professor has a 100%
interest in the Duport Gold Project in the Kenora mining district in
northwestern Ontario. The Company intends to review production plans and
continue the mine permitting process initiated by the former owners of
Consolidated Professor.
10. Credit Line
The Company entered into a $28 million unsecured, revolving line of credit with
a major Canadian bank in the first quarter of 1996. This line will be used as
necessary to finance working capital for current operations. At September 30,
1996, the Company had drawn $1.9 million as letters of credit.
11. Capital Stock
(a) Changes in capital
Number of
shares Amount
----------- --------
Balance, December 31, 1994 114,494,747 $247,362
Exercise of warrants - Series 2 4,475,300 14,545
Issued for share purchase options 148,667 190
Issued to acquire Witteck Development Inc. 1,924,816 8,854
Share issue and other related costs -- (140)
----------- --------
Balance, December 31, 1995 issued and
outstanding 121,043,530 270,811
Company shares held by Witteck Development
Inc. (see note 11(b)) (1,924,816) (8,854)
----------- --------
Balance, December 31, 1995 for financial
reporting purposes 119,118,714 $261,957
=========== ========
Balance, December 31, 1995 121,043,530 $270,811
Issued to acquire Geddes and El
Condor (See note 8) 19,011,883 114,071
Issued for share purchase options 549,666 2,227
----------- --------
Balance, September 30, 1996 issued and
outstanding 140,605,079 387,109
Company shares held by Witteck Development
Inc. (see note 11(b)) (1,924,816) (8,854)
----------- --------
Balance, September 30, 1996 for financial
reporting purposes 138,680,263 $378,255
=========== ========
(b) Company shares held by Witteck Development Inc.
During 1995, the Board of Directors and the shareholders approved the
acquisition of all of the shares of Witteck Development Inc. ("Witteck") whose
sole asset is an investment in the Company of 1,924,816 common shares of the
Company. This investment has been recorded as a reduction of capital stock on
the balance sheet. Consequently, the common shares of the Company that are held
by Witteck may not be voted and have been excluded from the determination of
earnings per share information.
12. Long-Term Debt
On August 12, 1996, the Company completed the sale of US$175 million principal
amount of 11% Senior Subordinated Notes due 2006 (the "Notes"). The Notes were
sold in a private placement to qualified institutional buyers pursuant to Rule
144A under the Securities Act of 1933 and to certain other accredited
institutional buyers. On October 9, 1996, an exchange offer was made to
exchange the Notes for Series B 11% Senior Subordinated Notes due 2006 (the
"Series B Notes"), pursuant to a Registration Statement on Form S-4 filed under
the Securities Act of 1933, as amended. This exchange offer expired on November
5, 1996, and all US$175 million principal amount of Notes were exchanged for
Series B Notes.
The Series B Notes are unsecured senior subordinated obligations of the Company
and, as such, will be subordinated in right of payment to all existing and
future senior indebtedness of the Company. The Series B Notes are guaranteed by
Kemess Mines Inc., a wholly owned subsidiary of the Company. The Series B Notes
and interest payments are denominated in U.S. dollars.
13. Hedge Gains
Hedge gains of $31.8 million realized in the nine months ended September 1996
included a gain of $18.0 million from the one-time buy-back of call options.
14. Subsequent Events
Subsequent to the end of the period, the Company announced it would close the
Hope Brook Mine in the third quarter of 1997 so that the mill and mine equipment
can be relocated to its Matachewan project. In addition, as a result of a
reclassification of mineable reserves at the Colomac Mine in the Northwest
Territories, a provision will be made to decrease the carrying value of the
Colomac property. The Company will provide for the revaluation of the carrying
values of the Hope Brook and Colomac assets, and for a provision for reclamation
costs at Hope Brook, in the fourth quarter of 1996. Subject to final analysis,
these charges will be approximately $37.4 million in total. This comprises $10
million for reclamation costs at Hope Brook, the revaluation of Hope Brook
assets by a reduction of $9.0 million, and the revaluation of Colomac assets by
a reduction of $18.4 million.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
- ---------------------
Revenue
Revenue from the sale of gold for the three months ended September 30, 1996
increased 48% to $77.3 million from $52.3 million in the same period of 1995.
This increase was accounted for by a 13% increase in production from 92,159
ounces in the third quarter of 1995 to 104,012 ounces in the third quarter of
1996 as well as $18.0 million from the one-time buy-back of call options. The
Company's regular hedging program (excluding the impact of the $18.0 million
gain) resulted in a realized gold price of US$416 per ounce in the third quarter
this year. The increase in gold production in the third quarter this year was
attributed to increased production at the Ontario Division which resulted from
the positive impact of higher grade ore from the Nighthawk Mine which is
processed at the Pamour mill (the Nighthawk Mine commenced limited production
from development ore towards the end of the third quarter last year). In
addition, there was an increase in mill throughput at the Hope Brook Mine
compared to the third quarter of 1995 when there was a shortfall in ore mined.
Revenue from the sale of gold for the nine months ended September 30, 1996
increased 19.7% to $183.2 million from $153.1 million in the same period in
1995. This increase is attributable to the $18.0 million one-time buy-back of
call options discussed earlier, a 3% increase in gold production from 276,365
ounces in 1995 to 283,655 ounces in 1996, and an improvement in the realized
price of gold to $425 per ounce (excluding the impact of the $18.0 million one-
time buy-back) from $402 per ounce in 1995. In the nine month period ended
September 30, 1996 the positive impact of production at the Nighthawk Mine on
the Pamour operations was sufficient to offset slightly lower production at the
Giant, Colomac and Hope Brook mines compared to the same period in 1995.
Expenses
Operating expenses increased 8.5% to $49.5 million in the third quarter from
$45.6 million in the same quarter in 1995. Operating expenses increased in the
third quarter as a result of increased production. At the Hope Brook Mine,
costs which had been deferred earlier in the year during the planned mill
shutdown were expensed as ore stockpiled during the shutdown was processed
through the mill in the third quarter. Operating costs decreased 3.3% for the
nine months ended September 30, 1996 to $130.9 million from $135.3 million in
the same period a year earlier.
Average cash operating costs per ounce in the three and nine month periods ended
September 30, 1996 decreased by 5% in each period from the comparable periods
last year and were US$348 and US$337 per ounce, respectively, for the three and
nine month periods in 1996. These decreases reflect the cost controls
implemented during 1996 and steps taken to reduce the average cash operating
costs per ounce.
Royalties and marketing expenses were higher during the third quarter of 1996
reflecting higher production during the quarter compared to the same period in
1995. In addition, royalties on production from the Nighthawk Mine, where
substantial mining began in 1996, contributed to the increase for both the
quarter and the nine months ended September 30, 1996.
Administrative and corporate expenses increased $0.4 million during the third
quarter of 1996 compared to the same period in 1995. Increased corporate
activity and an increase in capital taxes pursuant to the exercise of warrants
as a result of the acquisitions of Geddes Resources Limited ("Geddes") and El
Condor Resources Ltd. ("El Condor") contributed to the increases for both the
three and nine month periods in 1996 compared to 1995.
Depreciation and amortization increased from $3.7 million in the third quarter
of 1995 to $7.6 million in the same period in 1996 and from $10.0 million in the
first nine months of 1995 to $19.0 million in the same period in 1996.
Increases in capital assets and deferred mining costs over the past several
years combined with adjustments to mineral inventory on specific properties have
led to these increases. Depreciation and amortization of the Nighthawk Mine
asset and deferred development costs commenced in early 1996.
Exploration expenses increased from $0.2 million in the third quarter of 1995 to
$1.4 million in the same period in 1996 and from $0.5 million in the nine months
ended September 30, 1995 to $3.8 million in the same period in 1996. The
Company has been evaluating its exploration projects as part of its overall
strategic plan and to the extent that certain exploration costs are determined
not to be recoverable due to insufficient or lack of expected mineralized
material or otherwise, exploration costs have been charged to operations.
Recovery of loss on foreign currency contracts resulted in the recovery of $0.6
million with respect to these contracts for the three months ended September 30,
1996, as a result of the continuing strengthening of the Canadian dollar during
the third quarter. For the third quarter of 1995, a recovery of $3.3 million
was recognized. For the nine months ended September 30, 1996 and 1995, the
recovery balances were $1.6 million and $7.0 million, respectively. These
recoveries reflect the strengthening of the Canadian dollar since early 1995 and
the Company's policy of marking to market its foreign currency hedge position.
Net Income
Increased revenues from higher gold prices, the one-time buy-back of call
options, increased production, a 5% decrease in cash costs, offset by increased
charges for depreciation and exploration costs, resulted in improved operating
income of $16.1 million in the third quarter and $21.5 million in the nine month
period ended September 30, 1996 compared to $3.2 million and $5.6 million,
respectively, in the comparable 1995 periods.
Interest and Other Income/Interest Expense
Interest and other income of $3.2 million for the third quarter of 1996 was
comparable to $3.4 million in the same period in 1995. For the nine months
ended September 30, 1996 interest and other income decreased from $15.6 million
in 1995 to $5.8 million in the same period in 1996. The decrease reflects the
lower average cash balances for 1996 compared to 1995 due to the acquisitions of
Geddes, El Condor, St. Philips Resources Inc. ("St. Philips") and Consolidated
Professor Mines Limited ("Consolidated Professor") in early 1996.
On August 12, 1996, the Company issued US$175 million of 11% Senior Subordinated
Notes due 2006 (the "Notes"). Proceeds from this issue, which will be used to
finance construction of the Company's development projects, have been
temporarily invested in highly liquid financial instruments and contributed to
increased interest income in the third quarter of 1996 compared to the first and
second quarters of this year.
Interest expense on the Notes is payable semi-annually on February 15th and
August 15th of each year. Interest expense of $3.6 million has been accrued for
the period from the date of issue of the Notes on August 12, 1996 to September
30, 1996. The Company adopted the policy of capitalizing long-term debt
interest to the extent that proceeds from the issue have been used to finance
the purchase and construction of the Company's development projects.
Income Taxes
Income taxes increased by $6.9 million from $0.3 million in the third quarter of
1995 to $7.2 million in the third quarter of 1996. For the ninth months ended
September 30, 1996, income taxes were $9.9 million compared to $1.2 million in
the same period in 1995. The 1996 balance includes a provision for deferred
taxes of $6.8 million and $8.8 million for the three and nine month periods
ended September 30, 1996, respectively. No such provision for deferred taxes
was required for 1995 because the Company had unrecognized deferred tax assets.
However, the balance of the Company's unrecognized deferred tax assets has been
virtually utilized such that an accrual for deferred income taxes is necessary
for 1996.
Net Income
Net income for the three months ended September 30, 1996 was $10.2 million or
$0.07 per share compared to $6.2 million or $0.05 per share for the same period
in 1995. Net income for the nine months ended September 30, 1996 was $15.3
million or $0.11 per share compared to $19.5 million or $0.17 per share for the
same period in 1995.
Liquidity and Capital Resources
- -------------------------------
At September 30, 1996, the Company had cash, cash equivalents and short-term
investments of $253.8 million compared to $39.7 million at June 30, 1996 and
$142.4 million at December 31, 1995.
Operating Activities
Net cash provided by operating activities for the third quarter of 1996 was
$27.2 million compared to $5.9 million in the same period in 1995. For the nine
month period ended September 30, 1996, net cash provided by operating activities
was $42.8 million compared to $19.7 million in the same period in 1995. As part
of its risk management program, the Company employs hedging strategies to
provide price protection on its gold sales. In the third quarter of 1996, the
Company took advantage of favorable conditions in the gold market and generated
approximately $18.0 million from the one-time buy-back of call options. The
Company has reviewed the presentation in the financial statements of the results
of its hedging activities and has determined that the deferred revenue resulting
from hedging activities, as recorded on the Consolidated Balance Sheets, is an
integral part of the Company's routine operating activities. Accordingly, the
Company has reclassified the change in deferred revenue as recorded in the
Consolidated Statements of Cash Flow by including this item in "Operating
Activities". Previously, the change in deferred revenue was included in
"Financing Activities". This change in presentation conforms with industry
practice.
Earlier this year the Company closed-out its hedge position on 420,000 ounces of
gold which would have required the delivery of this gold at prices ranging from
C$614 to C$654 during the period 1997 to 1999. In closing out these positions,
the Company locked in pre-tax gains totaling $20.1 million which will be
included in revenues during the period 1997 to 1999.
Other items which contributed to operating activities consist of the non-cash
changes in working capital as outlined in Note 2 to the Unaudited Consolidated
Financial Statements. The increase in accounts receivable and accounts payable
are principally related to the Kemess project.
Financing Activities
Net cash provided by financing activities for the third quarter of 1996 was
$229.9 million compared to $3.2 million in the same period of 1995. During the
quarter, the Company issued US$175 million of 11% Senior Subordinated Notes due
2006 (see Note 12 to the Unaudited Consolidated Financial Statements). The
Notes were recorded in the Company's accounting records at the rate of exchange
in effect on the date the Notes were issued. A gain or loss, however, may be
recognized due to changes in the carrying value of the Notes resulting from
fluctuations in the exchange rate between the United States and Canadian dollar.
(The Notes are denominated in United States dollars and the value thereof is
recorded on the Company's books in Canadian dollars.) Expenses associated with
the note offering were approximately $8.6 million and will be amortized over the
term of the Notes.
For the nine months ended September 30, 1996, the net cash provided by financing
activities was $346.7 million compared to $17.6 million in the comparable period
of 1995. The higher cash provided in 1996 results mainly from the issuance of
the Notes and the issuance of share capital as part of the acquisition of the
Kemess property (see Note 8 to the Unaudited Consolidated Financial Statements).
Investing Activities
Net cash used in investing activities for the third quarter of 1996 was $43.0
million compared to $30.6 million in the same period in 1995. During the
quarter, the Company commenced construction on the Kemess project and continued
advanced exploration and development of the Red Mountain property. Net cash
used in investing activities for the nine months ended September 30, 1996, was
$278.1 million compared to $54.6 million in the corresponding period in 1995.
The Company completed the acquisition of the Kemess property in January, 1996,
for an aggregate consideration of approximately $202 million. This included
cash consideration of $87.8 million of which $26.9 million was incurred in prior
periods in respect of open market purchases of shares of Geddes, El Condor and
St. Philips (see Note 8 to the Unaudited Consolidated Financial Statements). In
addition, the Company acquired all of the shares of Consolidated Professor for
the total consideration of approximately $16.2 million (see Note 9 to the
Unaudited Consolidated Financial Statements). For the nine months ended
September 30, 1996, the Company had also invested $74.2 million on property,
plant and equipment at its various mines and development projects including $5.8
million related to the Pamour Mine open pit expansion, $7.2 million for advanced
exploration and development of the Red Mountain property, $45.0 million for the
Kemess property and $34.0 million on minesite maintenance capital and deferred
development. Expenditures on the Red Mountain and Kemess properties were offset
by approximately $22.0 million of economic assistance and direct compensation
from the government of the Province of British Columbia. Also during 1996, the
Company made $7.1 million of additional investment in Mountain Minerals Co. Ltd.
("Mountain Minerals") and Asia Minerals Corp. ("Asia Minerals"), two strategic
long-term investments. Asia Minerals recently completed a $7.0 million private
placement offering, proceeds of which will provide funds to allow the company to
pursue its ventures in China.
During the third quarter, Mountain Minerals announced it had filed Articles of
Arrangement to give effect to the Plan of Arrangement whereby Highwood Resources
Limited ("Highwood Resources") acquired all of the outstanding shares of
Mountain Minerals. In accordance with the Plan of Arrangement, the Company
converted all of its shares of Mountain Minerals into shares of Highwood
Resources on the basis of 1 Highwood Resources share for every 3.521 Mountain
Minerals shares. At September 30, 1996, the Company owned 32% of Highwood
Resources. Highwood Resources will continue the industrial minerals business
under the name of Mountain Minerals Co. Ltd. and plans to enter the specialty
metals and rare earth business.
Revaluation Of Assets
On November 6, 1996, the Company announced two important steps to refocus its
strategy of reducing costs and increasing production. First, the Hope Brook
Mine in Newfoundland will be closed in the third quarter of 1997 so that the
mill and mine equipment can be relocated to the Matachewan Mine located 56 miles
southeast of Timmins, Ontario. Capital savings to the Matachewan Project as a
result of the re-allocation of assets and the salvage of the remaining equipment
at Hope Brook is expected to be approximately $23.0 million. The Matachewan
Mine is expected to produce an average of approximately 100,000 ounces of gold
annually over the life of the mine at an estimated cash cost of US$227 per ounce
and is scheduled to commence production in the second half of 1998. Many of the
approximately 280 employees at Hope Brook will be considered for employment at
other Royal Oak facilities currently under development.
Secondly, as a result of the reclassification of mineral resources at the
Colomac Mine in the Northwest Territories, a provision will be made to reduce
the carrying value of the Colomac property. At the Colomac Mine for the last
nine months, mill output has not reconciled with blasthole ore grades. A
complete ore reserve audit at the mine has recently been undertaken to reconcile
reserves mined through the upper eleven benches. Despite reserve audits by
independent consultants in 1986 and 1987, an audit on a 200,000 ton bulk sample
take in 1988 and a further independent reserve audit in 1992, the Company now
believes the ore reserve grade in the zones 2.0, 2.5 and 3.0 where mining is
currently underway is 0.046 opt compared to the year-end 1995 estimate by the
Company of 0.053 opt. Based on this analysis, a 253,000 ounce decrease in the
mineable ore reserves at Colomac results. The Company has been successful in
increasing the mining rate to over 50,000 tpd and milled tonnage to over 9,500
tpd. These production rates exceed the rates in the feasibility study upon
which the operation was predicated. The result of mining lower grade ore is
that the cash cost at Colomac for the nine month period ended September 30, 1996
was US$369 per ounce. It is anticipated that cash costs will continue at this
level.
Furthermore, the Company's Kim and Cass projects, which are expected to supply
additional higher grade ore to the Colomac mill, are subject to both Federal and
Territorial permitting and it is unknown at this time how long the permitting
process will take. After deducting 1996 production at Colomac through the third
quarter and reclassifying mineable reserves, the readjusted proven and probable
reserves at Colomac and Kim-Cass are approximately 358,000 ounces at the end of
September 1996. The Company believes, however, that the Indin Lake land
position still hosts excellent exploration potential and Royal Oak will be
increasing its exploration focus in the area. Mine life at Colomac beyond the
year 1999 cannot be estimated at this time but still appears promising.
As a result of the above-mentioned strategic initiatives, the Company will
provide for the revaluation of the carrying values of the Hope Brook and Colomac
assets, and for the provision for reclamation costs at Hope Brook, in the fourth
quarter of 1996.
Subject to final analysis, these charges will be approximately $37.4 million in
total. These charges consist of $10.0 million for reclamation costs at Hope
Brook, the revaluation of Hope Brook assets by a reduction of $9.0 million, and
the revaluation of Colomac assets by a reduction of $18.4 million. The after-
tax impact of these revaluations will be a decrease in net income of
approximately $27 million or $0.19 per share, in the fourth quarter. The
revaluations will not significantly affect cash flow from the operations and/or
EBITDA in 1996.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule.
(b) Reports on Form 8-K.
A report on Form 8-K was filed on August 14, 1996, regarding
a press release from Royal Oak Mines Inc., announcing the
completion of the sale of US$175,000,000 principal amount of
its 11% Senior Subordinated Notes due 2006.
SIGNATURES
Pursuant to the requirements 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.
ROYAL OAK MINES INC.
Date: November 14, 1996 By /s/ Margaret K. Witte
------------------------
Margaret K. Witte
President and Chief
Executive Officer
Date: November 14, 1996 By /s/ James H. Wood
------------------------
James H. Wood
Chief Financial Officer
EXHIBIT INDEX
Exhibit Method of Filing
- ------- ----------------
27. Financial Data Schedule Filed herewith
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND
IN THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> CANADIAN
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1.3622
<CASH> 233,042
<SECURITIES> 20,779
<RECEIVABLES> 16,577
<ALLOWANCES> 0
<INVENTORY> 69,413
<CURRENT-ASSETS> 349,271
<PP&E> 522,417
<DEPRECIATION> 52,627
<TOTAL-ASSETS> 844,950
<CURRENT-LIABILITIES> 79,596
<BONDS> 238,385
0
0
<COMMON> 378,255
<OTHER-SE> 93,859
<TOTAL-LIABILITY-AND-EQUITY> 844,950
<SALES> 183,169
<TOTAL-REVENUES> 183,169
<CGS> 161,690
<TOTAL-COSTS> 161,690
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,877
<INCOME-PRETAX> 25,225
<INCOME-TAX> 9,904
<INCOME-CONTINUING> 15,321
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 15,321
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