<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 1996
REGISTRATION NO. 333-4108
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
ECHO BAY MINES LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CANADA 1041 NONE
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
6400 SOUTH FIDDLERS GREEN CIRCLE
SUITE 1000
ENGLEWOOD, COLORADO 80111
(303) 714-8600
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
RICHARD C. KRAUS, CHIEF EXECUTIVE OFFICER
6400 SOUTH FIDDLERS GREEN CIRCLE
SUITE 1000
ENGLEWOOD, COLORADO 80111
(303) 714-8600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
It is requested that copies of communications be sent to:
RONALD R. LEVINE, II, ESQ.
DAVIS, GRAHAM & STUBBS LLP
370 SEVENTEENTH STREET, SUITE 4700
DENVER, COLORADO 80202
(303) 892-9400
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
From time to time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
<PAGE>
ECHO BAY MINES LTD.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM AND HEADING PROSPECTUS CAPTION OR LOCATION
--------------------------------------- ------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus.............................. Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus..................... Inside Front Cover Page of Prospectus;
Available Information; Incorporation of
Certain Documents by Reference; Enforcement
of Certain Obligations; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information........... Outside Front Cover Page of Prospectus;
Summary; Risk Factors
4. Terms of the Transaction................ Outside Front Cover Page of Prospectus;
Summary; The Merger; Comparative Rights of
Shareholders
5. Pro Forma Financial Information......... Summary; Capitalization; Pro Forma
Financial Information; Schedule VI--Pro
Forma Financial Statements
6. Material Contacts with the Company Being
Acquired................................ The Merger
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters...................... *
8. Interests of Named Experts and Counsel.. The Merger; Legal Matters; Experts
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................. *
10. Information with Respect to S-3
Registrants............................. *
11. Incorporation of Certain Information by
Reference............................... *
12. Information with Respect to S-2 or S-3
Registrants............................. *
13. Incorporation of Certain Information by
Reference............................... *
14. Information with Respect to Registrants
Other than S-3 or S-2 Registrants....... Summary, Risk Factors, Pro Forma Financial
Information; Echo Bay Mines; Description of
Echo Bay Share Capital; Schedule VI--Pro
Forma Financial Statements; Schedule VII--
Form 10-K of Echo Bay Mines Ltd.; Schedule
VIII--Management Proxy Circular of Echo Bay
Mines Ltd.; Schedule IX--Form 10-Q of Echo
Bay Mines Ltd.
15. Information with Respect to S-3
Companies............................... *
16. Information with Respect to S-2 or S-3
Companies............................... *
17. Information with Respect to Companies
Other than S-3 or S-2 Companies......... Summary; Pro Forma Financial Information;
Santa Elina Gold Corporation; Schedule V--
Santa Elina Gold Corporation Financial
Statements
18. Information if Proxies, Consents or
Authorizations are to be Solicited...... Outside Front Cover Page of Prospectus;
Incorporation of Certain Documents by
Reference; Summary; Management Information
Circular; The Merger; Santa Elina Gold
Corporation
19. Information if Proxies, Consents or
Authorizations are not to be Solicited
or in an Exchange Offer................. *
</TABLE>
- --------
* Inapplicable or answer negative upon the date of filing of this Registration
Statement.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOME +
+EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE +
+SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 20, 1996
LOGO OF SANTA ELINA GOLD CORPORATION APPEARS HERE]
NOTICE AND
MANAGEMENT INFORMATION CIRCULAR
AND PROXY STATEMENT
RELATING TO THE SPECIAL MEETING OF SHAREHOLDERS OF
SANTA ELINA GOLD CORPORATION
TO BE HELD ON JULY 9, 1996
TO CONSIDER A PROPOSED
MERGER OF
SANTA ELINA GOLD CORPORATION
AND
KENDALL GOLD CORPORATION
(a jointly owned holding company of Sercor Ltd. and Echo Bay Mines Ltd.)
In the proposed Merger, shareholders of Santa Elina other than Echo Bay Mines
Ltd., Sercor Ltd. and Kendall will receive one redeemable preference share of
Kendall for each 6.67 common shares of Santa Elina held by them, which
preference shares will be immediately redeemed without shareholder action on a
one-for-one basis for common shares of Echo Bay.
This Management Information Circular and Proxy Statement also constitutes the
Prospectus of Echo Bay Mines Ltd. required under United States securities laws.
This Circular supersedes the Management Information Circular and Prospectus
dated April 24, 1996.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Management Information Circular and Prospectus is June 21,
1996.
<PAGE>
To the Shareholders of
June 21, 1996
SANTA ELINA GOLD CORPORATION
The accompanying management information circular and proxy statement
contains information for holders of common shares of Santa Elina Gold
Corporation ("Santa Elina") relating to the proposed merger (the "Merger") of
Santa Elina and Kendall Gold Corporation ("Kendall"), a company equally owned
by Echo Bay Mines Ltd. ("Echo Bay") and Sercor Limited ("Sercor"). Under the
terms of the Merger, shareholders of Santa Elina other than Echo Bay, Sercor
and Kendall will receive one redeemable preference share of Kendall for each
6.67 common shares of Santa Elina held by them, which will immediately be
redeemed without shareholder action on a one-for-one basis for common shares
of Echo Bay.
The management information circular and proxy statement also serves as the
prospectus of Echo Bay as required by the securities laws of the United
States. Echo Bay is required to file such document with the United States
Securities and Exchange Commission since shareholders of Santa Elina will
ultimately receive Echo Bay common shares. It is a condition to the Merger
that there will generally be no restriction on the resale of such shares in
the United States by persons other than affiliates of Santa Elina and Echo
Bay.
The board of directors of Santa Elina, based on the recommendation of an
independent committee of directors formed to consider the terms of the
proposed Merger and a valuation and fairness opinion provided by its financial
advisor that the proposed Merger is fair to the minority shareholders of Santa
Elina, has determined that the proposed Merger is in the best interests of
Santa Elina and its shareholders and has recommended that shareholders vote in
favour of the Merger.
The special meeting of shareholders of Santa Elina that was originally
scheduled for May 24, 1996 has been rescheduled and will be held at 10 o'clock
a.m. (Toronto time) on July 9, 1996, in the Kensington Room of The King Edward
Hotel, 37 King Street East, Toronto, Ontario, to vote on the proposed Merger.
For details of all matters to be considered at the special meeting please
review the accompanying materials carefully. Please also note that the
accompanying materials supersede the management information circular and
prospectus dated April 24, 1996 which was previously mailed to you. Please
also note that the substance of the accompanying materials does not differ
materially from the substance of the management information circular and
prospectus dated April 24, 1996, but that such materials have been revised to
address comments made by the United States Securities and Exchange Commission
in its review of the materials.
These documents require shareholders to make important decisions and
require immediate attention. If a shareholder is in doubt as to how to deal
with these documents or the matters referred to therein, he should immediately
consult his professional advisors.
Paulo C. de Brito
President
SANTA ELINA GOLD CORPORATION
<PAGE>
SANTA ELINA GOLD CORPORATION
NOTICE OF POSTPONED SPECIAL MEETING OF SHAREHOLDERS
TAKE NOTICE THAT the Special Meeting (the "Meeting") of Shareholders of
Santa Elina Gold Corporation ("Santa Elina") originally scheduled for May 24,
1996 has been rescheduled and will be held in the Kensington Room of The King
Edward Hotel, 37 King Street East, Toronto, Ontario, on JULY 9, 1996 AT THE
HOUR OF 10 O'CLOCK A.M. IN THE FORENOON (TORONTO TIME), for the following
purposes:
(a) to receive the financial statements of Santa Elina for the year ended
December 31, 1995, together with the report of the auditors;
(b) to consider and if thought advisable, to pass with or without
variation, a special resolution approving and adopting a merger
agreement, as amended (the "Merger Agreement"), to be entered into
between Santa Elina and Kendall Gold Corporation ("Kendall"), a company
equally owned by Echo Bay Mines Ltd. ("Echo Bay") and Sercor Limited
("Sercor"), providing for the merger (the "Merger") of Santa Elina with
Kendall, pursuant to which, among other things, each 6.67 common shares
of Santa Elina (other than those held by Echo Bay, Sercor and Kendall)
will be converted into one redeemable preference share of Kendall,
which will immediately be redeemed without shareholder action on a one-
for-one basis for common shares of Echo Bay; and
(c) to transact such other business as may properly come before the Meeting
or any adjournment or adjournments thereof.
Copies of the Merger Agreement and the special resolution are annexed as
Schedules I and II, respectively, to the Management Information Circular which
accompanies this Notice. In addition, the Management Information Circular
contains important information regarding the forwarding of share certificates
and certain other matters.
The International Business Companies Act (British Virgin Islands) provides
that dissenting shareholders (as described therein) with respect to the Merger
are entitled to be paid the fair value of their common shares of Santa Elina.
This right is described in detail in the accompanying Management Information
Circular under the heading "Dissenting Shareholders' Rights".
SHAREHOLDERS ARE ENTITLED TO VOTE AT THE MEETING EITHER IN PERSON OR BY
PROXY. AS THE MEETING IS CALLED TO CONSIDER A PROPOSAL THAT, IF ADOPTED, WILL
HAVE A MATERIAL IMPACT ON YOUR INVESTMENT, IF YOU ARE NOT ABLE TO BE PRESENT
PERSONALLY, KINDLY DATE, SIGN AND RETURN THE FORM OF PROXY ACCOMPANYING THIS
NOTICE IN THE ENVELOPE PROVIDED FOR THAT PURPOSE.
DATED at Toronto, this 21st day of June, 1996.
BY ORDER OF THE BOARD OF DIRECTORS
Paulo C. de Brito
President
Notes:
(1) The directors have fixed the close of business on April 23, 1996 as the
record date for determining the shareholders of Santa Elina entitled to
receive notice of and to vote at the Meeting. Accordingly, only persons
who are registered as holders of record of common shares of Santa Elina at
the close of business on April 23, 1996 or persons who are transferees of
common shares acquired after April 23, 1996 and who produce properly
endorsed certificates for such common shares or otherwise establish
ownership thereof and demand, not later than the close of business on July
7, 1996, that the Secretary of Santa Elina include their names in the list
of shareholders, are entitled to vote at the Meeting.
(2) The directors have fixed the hour of 4:30 in the afternoon on the last
business day preceding the day of the Meeting or any adjournment thereof,
before which time the instrument of proxy to be used at the Meeting must
be deposited with the Secretary of Santa Elina, c/o Montreal Trust Company
of Canada, 151 Front Street West, 8th Floor, Toronto, Ontario, provided
that a proxy may be delivered to the Chairman of the Meeting on the day of
the Meeting or any adjournment thereof prior to the time for voting.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOME +
+EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE +
+SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 20, 1996
ECHO BAY MINES LTD. SANTA ELINA GOLD CORPORATION
MANAGEMENT INFORMATION CIRCULAR/PROXY STATEMENT/PROSPECTUS
This Management Information Circular/Proxy Statement/Prospectus (the
"Circular") relates to the proposed merger (the "Merger") of Kendall Gold
Corporation ("Kendall"), a British Virgin Islands corporation, equally owned by
Echo Bay Mines Ltd. ("Echo Bay") and Sercor Limited ("Sercor"), with Santa
Elina Gold Corporation ("Santa Elina"), a British Virgin Islands corporation,
pursuant to the Merger Agreement, effective as of April 9, 1996, between
Kendall and Santa Elina, as amended (the "Merger Agreement").
As a result of the Merger, (i) each 6.67 common shares of Santa Elina issued
and outstanding immediately prior to the effective time of the Merger (other
than those held by Kendall) will be converted into one redeemable preference
share of Kendall, which will be immediately redeemed without shareholder action
on a one-for-one basis for common shares of Echo Bay, (ii) Santa Elina will be
merged with Kendall with Kendall surviving, all on the terms and subject to the
conditions set forth in the Merger Agreement, a copy of which is attached
hereto as Schedule I and incorporated by reference herein, and (iii) the Santa
Elina common shares held by Kendall will be cancelled. In connection with the
Merger, Echo Bay will acquire 23,479,185 Santa Elina common shares from Sercor
in exchange for 3,520,118 Echo Bay common shares.
This Circular is being furnished to holders of Santa Elina common shares in
connection with the solicitation of proxies by Santa Elina's board of directors
for use at the Special Meeting of holders of Santa Elina common shares to be
held at 10 o'clock a.m., Eastern Daylight Time, on July 9, 1996 (including any
adjournment or postponement thereof, the "Special Meeting") in the Kensington
Room of The King Edward Hotel, 37 King Street East, Toronto, Ontario. This
Circular and the accompanying form of proxy are first being delivered to
holders of Santa Elina common shares on or about June 24, 1996. This Circular
supersedes the earlier version of the Circular dated April 24, 1996. At the
Special Meeting, holders of Santa Elina common shares will be asked to consider
approval and adoption of the Merger Agreement.
This Circular also constitutes a prospectus of Echo Bay with respect to the
approximately 5,310,816 Echo Bay common shares to be issued upon redemption of
the preference shares of Kendall issued pursuant to the Merger Agreement in
exchange for currently issued and outstanding Santa Elina common shares and as
consideration for the cancellation of options, and the 3,520,118 Echo Bay
common shares to be issued to Sercor as set forth above. The Kendall preference
shares will be immediately redeemed without shareholder action in exchange for
the Echo Bay common shares, and no market will exist for the Kendall preference
shares. As such, shareholders will, as a practical matter, have no direct
investment in Kendall.
On June 17, 1996, the per share last sales prices of Echo Bay common shares
and Santa Elina common shares, as reported on the American Stock Exchange and
The Toronto Stock Exchange, respectively, were $11.125 and Cdn$1.50. On April
9, 1996, the last trading day prior to announcement of the Merger, the per
share last sales price of Echo Bay common shares and Santa Elina common shares
on such exchanges were $13.875 and Cdn$2.19, respectively.
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN CONSIDERATIONS IN
EVALUATING THE MERGER AND AN INVESTMENT IN ECHO BAY COMMON SHARES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Management Information Circular, Proxy Statement and
Prospectus is June 21, 1996.
1
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Circular in connection with
the solicitation of proxies or the offering of securities made hereby and, if
given or made, such information or representations must not be relied upon as
having been authorized by Echo Bay or Santa Elina. This Circular does not
constitute an offer to sell, or a solicitation of an offer to purchase, any
securities, or the solicitation of a proxy, in any jurisdiction in which, or
to any person to whom, it is unlawful to make such offer or solicitation of an
offer or proxy solicitation. Neither the delivery of this Circular nor any
distribution of the securities offered hereby shall under any circumstances
create an implication that there has been no change in the affairs of Echo Bay
or Santa Elina since the date hereof or that the information set forth herein
is correct as of any time subsequent to its date.
AVAILABLE INFORMATION
Echo Bay is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports and other information with the Securities and
Exchange Commission (the "Commission"). Reports, proxy statements and other
information filed by Echo Bay can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices at Seven
World Trade Center, 13th Floor, New York, New York 10048 and CitiCorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, reports, proxy statements and other information concerning
Echo Bay may be inspected at the offices of the American Stock Exchange, 86
Trinity Place, New York, New York 10006.
Echo Bay has filed with the Commission a Registration Statement on Form S-4
(together with all amendments, supplements and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to Echo Bay common shares to be issued in
connection with the Merger. The information contained herein with respect to
Echo Bay and its affiliates has been provided by Echo Bay, and the information
contained herein with respect to Santa Elina and its affiliates has been
provided by Santa Elina. This Circular does not contain all of the information
set forth in the Registration Statement, certain parts of which were omitted
in accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement. Any
statements contained herein concerning the provisions of any document filed as
an exhibit to the Registration Statement or otherwise filed with the
Commission are not necessarily complete, and in each instance reference is
made to the copy of such document so filed, each such statement being
qualified in its entirety by such reference.
ENFORCEMENT OF CERTAIN OBLIGATIONS
Echo Bay is a Canadian corporation and certain of its directors and
officers, as well as certain of the experts named herein, are neither citizens
nor residents of the United States. A substantial part of the assets of
several of such persons and of Echo Bay are located outside the United States.
As a result, it may be difficult for investors to effect service of process
within the United States upon such persons or to enforce against them or Echo
Bay within the United States judgments of courts of the United States
predicated upon the civil liability provisions of the federal securities laws
of the United States. Milner Fenerty, Canadian counsel to Echo Bay, has
advised Echo Bay that there is doubt as to the enforceability against such
persons and Echo Bay in Canada, in original actions or in actions to enforce
judgments of United States courts, of liabilities predicated solely upon the
federal securities laws of the United States.
2
<PAGE>
CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Statements which are not historical facts contained in this Circular
(including the Schedules hereto) are forward looking statements that involve
risks and uncertainties that could cause actual results to differ from
projected results. Such forward-looking statements include statements
regarding expected commencement dates of mining or mineral production
operations, projected quantities of future mining or mineral production, and
anticipated production rates, costs and expenditures, as well as projected
demand or supply for the products Echo Bay produces, which will affect both
sales levels and prices realized by Echo Bay. Factors that could cause actual
results to differ materially include, among others, risks and uncertainties
relating to: general domestic and international economic and political
conditions, the cyclical and volatile prices of gold, silver, copper and other
minerals, political and economic risks associated with foreign operations,
unanticipated ground and water conditions, unanticipated grade and geological
problems, metallurgical and other processing problems, availability of
materials and equipment, the timing of receipt of necessary governmental
permits, the occurrence of unusual weather or operating conditions, force
majeure events, lower than expected ore grades and higher than expected
stripping ratios, the failure of equipment or processes to operate in
accordance with specifications and expectations, labor relations, accidents,
delays in anticipated start-up dates, environmental costs and risks, the
results of financing efforts and financial market conditions, and other
factors described herein and in Echo Bay's annual reports on Form 10-K,
quarterly reports on Form 10-Q and event reports on Form 8-K filed with the
Securities and Exchange Commission. Many of such factors are beyond Echo Bay's
ability to control or predict.
Actual results may differ materially from those projected. Readers are
cautioned not to put undue reliance on forward-looking statements. For a
discussion of certain of such risks and uncertainties, see "Risk Factors"
contained herein, and the discussions contained in Echo Bay's annual reports
on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K
filed with the Securities and Exchange Commission. Echo Bay disclaims any
intent or obligation to update publicly these forward-looking statements,
whether as a result of new information, future events or otherwise.
3
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TABLE OF CONTENTS
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SUMMARY.................................................................... 5
Date, Place, Time of Meeting.............................................. 5
Purpose of Meeting........................................................ 5
Terms of the Merger....................................................... 5
Reasons for the Merger.................................................... 5
Background to the Merger.................................................. 6
Independent Committee..................................................... 6
Recommendation of the Directors........................................... 6
Valuations and Fairness Opinion........................................... 6
Shareholders' Approvals................................................... 7
Canadian Federal Income Tax Considerations................................ 7
U.S. Federal Income Tax Considerations.................................... 7
Procedure for Exchange or Conversion of Shares............................ 8
Rights of Dissenting Shareholders......................................... 8
Santa Elina............................................................... 8
Kendall................................................................... 8
Echo Bay.................................................................. 8
Market Prices............................................................. 9
Selected Financial Information for Santa Elina............................ 10
Selected Financial Information for Echo Bay............................... 10
Selected Pro Forma Financial Information.................................. 11
Risk Factors.............................................................. 13
Management and Operations Following the Merger............................ 13
Stock Exchange Listings................................................... 13
Governmental and Regulatory Approvals..................................... 13
Conditions to the Merger.................................................. 13
Accounting Treatment...................................................... 13
Interests of Certain Persons in the Merger................................ 13
No Solicitation........................................................... 14
Termination............................................................... 14
Alternative Transaction................................................... 14
Comparative Rights of Santa Elina and Echo Bay Shareholders............... 14
GLOSSARY OF TERMS.......................................................... 15
AUSTRALASIAN RESOURCE AND RESERVE CLASSIFICATION SYSTEM.................... 18
METRIC CONVERSION TABLE.................................................... 18
MANAGEMENT INFORMATION CIRCULAR............................................ 19
Solicitation of Proxies................................................... 19
Appointment and Revocation of Proxies..................................... 19
Voting of Proxies......................................................... 19
Voting Securities......................................................... 20
THE MERGER................................................................. 20
Meeting of Shareholders................................................... 20
Votes Required for the Merger............................................. 20
Terms of the Merger....................................................... 20
Reasons for the Merger.................................................... 23
Background to and Purpose of the Merger................................... 23
Conditions to the Merger Becoming Effective............................... 26
Other Principal Provisions................................................ 27
Timing.................................................................... 27
Exchange of Share Certificates............................................ 27
Stock Option Plan......................................................... 28
The Independent Committee................................................. 28
Report and Recommendation of the Independent Committee.................... 30
Recommendation of the Board of Directors of Santa Elina................... 30
Valuations and Fairness Opinion........................................... 30
Canadian Federal Income Tax Considerations................................ 33
United States Federal Income Tax Considerations........................... 34
Dissenting Shareholders' Rights........................................... 35
U.S. Securities Registration.............................................. 36
Accounting Treatment...................................................... 36
Fees and Expenses......................................................... 36
Comparative Rights of Santa Elina and Echo Bay Shareholders............... 37
</TABLE>
<TABLE>
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PAGE
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Management and Operations Following the Merger........................... 38
Amendment and Termination of the Merger Agreement........................ 38
Interests of Certain Persons in the Merger............................... 38
No Solicitation.......................................................... 39
PRO FORMA FINANCIAL INFORMATION........................................... 39
RISK FACTORS.............................................................. 39
SANTA ELINA GOLD CORPORATION.............................................. 42
Santa Elina and its Subsidiaries......................................... 42
Description of Properties................................................ 44
Brazilian Corporate Matters.............................................. 61
Financial Statements..................................................... 61
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 62
Voting Securities And Principal Holders Thereof.......................... 64
Shareholder Agreements................................................... 65
Directors and Officers................................................... 66
Executive Compensation................................................... 68
Santa Elina Stock Option Plan............................................ 68
Interest Of Management And Others In Material Transactions............... 69
Price Range and Trading Volumes of Santa Elina Common Shares............. 69
Prior Sales.............................................................. 70
Dividend Policy.......................................................... 70
Legal Proceedings........................................................ 70
Material Contracts....................................................... 70
Joint Venture Arrangements............................................... 71
Auditors, Registrar and Transfer Agent................................... 72
ECHO BAY MINES LTD........................................................ 72
Recent Developments...................................................... 73
Capitalization........................................................... 73
Selected Financial Information........................................... 74
Selected Financial Data.................................................. 74
DESCRIPTION OF ECHO BAY SHARE CAPITAL..................................... 74
General.................................................................. 74
Common Shares............................................................ 74
Preferred Shares......................................................... 75
RESALE OF ECHO BAY COMMON SHARES BY SANTA ELINA AFFILIATES................ 75
LEGAL MATTERS............................................................. 75
EXPERTS................................................................... 75
DIRECTORS' APPROVAL....................................................... 76
INDEX TO SCHEDULES
SCHEDULE I
MERGER AGREEMENT
SCHEDULE II
SANTA ELINA MERGER RESOLUTION
SCHEDULE III
VALUATIONS AND FAIRNESS OPINION
SCHEDULE IV
EXCERPT FROM INTERNATIONAL BUSINESS COMPANIES ACT RESPECTING DISSENT
RIGHTS
SCHEDULE V
FINANCIAL STATEMENTS OF SANTA ELINA GOLD CORPORATION
SCHEDULE VI
PRO FORMA FINANCIAL STATEMENTS
SCHEDULE VII
FORM 10-K OF ECHO BAY MINES LTD.
SCHEDULE VIII
MANAGEMENT PROXY CIRCULAR OF ECHO BAY MINES LTD.
SCHEDULE IX
FORM 10-Q OF ECHO BAY MINES LTD.
</TABLE>
4
<PAGE>
SUMMARY
The following is a summary of certain information contained in this
Circular. This summary is not intended to be a complete statement of all
material features of the Merger and the matters to be voted on at the Meeting,
and is qualified in its entirety by the detailed information appearing
elsewhere in the Circular and the Schedules hereto. Certain capitalized terms
used in this summary are defined in the Glossary of Terms. Unless otherwise
noted, all dollar amounts quoted herein are in United States dollars.
Shareholders are urged to carefully read this Circular and the Schedules hereto
in their entirety. Shareholders should carefully consider the information set
forth under the heading "Risk Factors".
DATE, TIME, PLACE
OF MEETING: The Meeting will be held in the Kensington Room of The King
Edward Hotel, 37 King Street East, Toronto, Ontario, at 10
o'clock a.m. (Toronto time) on July 9, 1996. Only persons
who are registered as holders of record of common shares of
Santa Elina at the close of business on April 23, 1996 or
persons who are transferees of common shares acquired after
April 23, 1996 and who produce properly endorsed
certificates for such common shares or otherwise establish
ownership thereof and demand, not later than the close of
business on July 7, 1996, that the Secretary of Santa Elina
include their names in the list of shareholders, are
entitled to vote at the Meeting.
PURPOSE OF
MEETING: The purpose of the Meeting is to consider, and if thought
advisable, to pass the Santa Elina Merger Resolution
approving and adopting the Merger Agreement between Santa
Elina and Kendall. The effective date of the Merger is
anticipated to be on or before July 16, 1996.
TERMS OF THE
MERGER: On the Effective Date, Santa Elina and Kendall will merge
and continue as one corporation under the name Kendall Gold
Corporation. On the Effective Date, each 6.67 Santa Elina
Common Shares (other than those held by Kendall) will be
converted into one Redeemable Preference Share of Kendall
which will immediately be redeemed without shareholder
action for one Echo Bay Common Share. The Santa Elina
Common Shares held by Kendall will be cancelled in the
Merger.
REASONS FOR THE
MERGER: Management of Santa Elina considers the Merger to be
advantageous to Shareholders for a number of reasons. The
Merger results in the Shareholders continuing to
participate in Santa Elina through their ownership of Echo
Bay Common Shares, and results in Kendall being
sufficiently capitalized to continue with Santa Elina's
exploration and development programs. The Shareholders will
also benefit from the additional assets and resources owned
by Echo Bay and Echo Bay's expertise in the development and
operation of mineral properties. As a result of becoming
Echo Bay shareholders, the Shareholders are not expected to
be subject to as high a risk as that associated with a
junior mining company with property interests primarily in
one country, as is currently the case.
Beginning in 1994, Echo Bay determined that it would be
advisable to pursue a growth strategy which focused on
exploration and development internationally. The
transaction exemplifies Echo Bay's strategic plan of
significantly increasing gold reserves and gold production
through strategic alliances with exploration companies such
as Santa Elina holding land positions on some of the
world's major gold belts. It is anticipated that the
combined skills and resources of Echo Bay and Santa Elina
will enable a number of Santa Elina's gold properties to
realize their full potential sooner than would have been
possible without the combination. Echo Bay anticipates a
sufficiently large increase in other gold mineralization
from Santa Elina's properties by year end 1996 to offset
any dilution in other gold mineralization per share caused
by the issuance of Echo Bay Common Shares in the
transaction. In the longer term, the transaction allows the
shareholders of both Echo Bay and Santa Elina to benefit
from any increases in reserves of the Santa Elina
properties through the ownership of Echo Bay Common Shares.
Based on the foregoing, Echo Bay's board of directors
believes that the Merger is in the best interests of Echo
Bay and its shareholders.
5
<PAGE>
BACKGROUND TO
THE MERGER: Since mid-1994 when Echo Bay and Santa Elina first entered
into agreements as described in "Santa Elina Gold
Corporation - Joint Venture Arrangements," Santa Elina and
Echo Bay have been in discussions with respect to the
possibility of a merger of the two companies and Echo Bay's
interest in increasing its stake in Santa Elina to a 50%
ownership interest. In early 1996, Echo Bay expressed
to Santa Elina its desire to increase its position by
acquiring outstanding shares in Santa Elina from Sercor and
the public. Echo Bay, being interested in acquiring 50% of
Santa Elina, commenced negotiations with Santa Elina and
Sercor in connection with the value of Santa Elina, the
proposed share exchange ratio and the manner of effecting
such a transaction. These negotiations took place
throughout the first three months of 1996. On April 9,
1996, Santa Elina and Echo Bay announced that they had
entered into an agreement with Sercor and Paulo C. de Brito
("de Brito"), the controlling shareholder of Sercor,
pursuant to which Echo Bay would increase its direct and
indirect ownership interest in Santa Elina from 7% to 50%
through a series of transactions, including the Merger. A
definitive Merger Agreement contemplating the Merger as
described herein has been entered into between Santa Elina
and Kendall. Echo Bay, Sercor, de Brito and Kendall have
entered into a share subscription and purchase agreement
(the "Share Subscription and Purchase Agreement") pursuant
to which Echo Bay will acquire 23,479,185 Santa Elina
Common Shares from Sercor in exchange for 3,520,118 Echo
Bay Common Shares and Echo Bay and Sercor will capitalize
Kendall with their Santa Elina Common Shares and in the
aggregate cash amount of $25,000,000 to facilitate the
Merger. Each of Echo Bay and Sercor have advanced to Santa
Elina $2,500,000 of this amount, which is intended to be
converted to a capital contribution to Kendall following
the Merger. The Share Subscription and Purchase Agreement
also contemplates the entering into of a unanimous
shareholder agreement among Echo Bay, Sercor, Kendall, de
Brito and his spouse to govern the affairs of Kendall
following the Merger. It also provides that if for any
reason it is not possible to effect the Merger, whether due
to the failure of the Minority Shareholders to approve the
Merger or otherwise, certain alternate transactions will be
implemented to allow Echo Bay and Sercor to provide
financing for the ongoing capital requirements of Santa
Elina and which will result in Echo Bay indirectly owning a
50% interest in Santa Elina. See "The Merger - Background
to and Purpose of the Merger."
INDEPENDENT
COMMITTEE: The board of directors of Santa Elina appointed the
Independent Committee of independent directors of Santa
Elina to review and consider the terms of the proposed
Merger. The Independent Committee retained RBC DS as its
financial advisor. Based on the opinion of RBC DS described
below under "The Merger -Valuations and Fairness Opinion",
among other things, the Independent Committee advised the
board of directors on April 9, 1996 that the proposed
Merger was fair to the Minority Shareholders and in the
best interests of Santa Elina, and recommended that Santa
Elina enter into the Merger Agreement and that the board
recommend that Santa Elina Shareholders vote in favour of
the Merger.
RECOMMENDATION OF The board of directors of Santa Elina, based on the
THE DIRECTORS: unanimous recommendation of the Independent Committee of
directors formed to consider the terms of the proposed
Merger and the Valuations and Fairness Opinion provided by
its financial advisor, among other things, has determined
that the proposed Merger is in the best interests of Santa
Elina and its shareholders and has recommended that Santa
Elina Shareholders vote in favour of the Merger.
VALUATIONS AND The Independent Committee requested RBC DS to prepare an
FAIRNESS OPINION: opinion as to whether the proposed Merger would be fair to
the Minority Shareholders of Santa Elina, from a financial
point of view, and also to prepare a valuation of the Santa
Elina Common Shares and the consideration received therefor
in the Merger by the Minority Shareholders. In the opinion
of RBC DS, subject to the assumptions and
6
<PAGE>
qualifications set out in the Valuations and Fairness
Opinion, the fair market value of the Santa Elina Common
Shares is in the range of $1.75 to $2.15 per Santa Elina
Common Share. Based on the closing price of Echo Bay Common
Shares on April 22, 1996 (the last trading day prior to the
date of RBC DS's valuation), the value per Santa Elina
Common Share based on the 6.67 to 1 exchange ratio under
the Merger is $1.95. Based on the closing price of Echo Bay
Common Shares on April 9, 1996 (the last trading day prior
to the announcement of the Merger), the value per Santa
Elina Common Share based on the 6.67 to 1 exchange ratio
under the Merger is $2.09. Based on the average closing
price of Echo Bay Common Shares for the 20 trading day
period ending April 22, 1996, the value per Santa Elina
Common Share is $2.03. RBC DS concluded that, in its
opinion, as of the date of its fairness opinion, the
proposed Merger is fair from a financial point of view to
the Minority Shareholders. A copy of the Valuations and
Fairness Opinion of RBC DS is attached to this Circular as
Schedule III.
SHAREHOLDERS' In order for the Merger to be effective, the Merger must be
APPROVALS: approved by a resolution of the Santa Elina Shareholders
passed by the affirmative votes of at least a majority of
the Santa Elina Common Shares represented in person or by
proxy at the Meeting. As Sercor and Echo Bay have agreed to
vote in favour of the Merger, this approval is assured. The
Merger is a "related party transaction" within the meaning
of OSC Policy 9.1 and QSC Policy Q-27. As the consideration
for the Merger is shares, the Santa Elina Merger Resolution
must also be confirmed by not less than two-thirds of the
votes cast by Minority Shareholders at the Meeting. The
Santa Elina Common Shares held by each of Kendall, Echo Bay
and Sercor will not be counted for the purpose of the
approval by Minority Shareholders. As of the record date,
Sercor and Echo Bay held 91,044,445 and 9,000,000 Santa
Elina Common Shares, respectively, representing 67% and 7%,
respectively, of the total shares outstanding. These Santa
Elina Common Shares will be transferred to Kendall prior to
the Merger pursuant to the Share Subscription and Purchase
Agreement. See "Santa Elina Gold Corporation - Voting
Securities and Principal Holders Thereof".
Approval of the transactions by Echo Bay shareholders is
not required in order to complete the Merger.
CANADIAN FEDERAL A Shareholder who exercises dissenter's rights in the
INCOME TAX Merger may realize a capital gain or loss on receipt of
CONSIDERATIONS: payment for his or her Santa Elina Common Shares. A
Shareholder will not realize a capital gain or loss on the
Merger, unless he or she elects otherwise. Absent such
election, the Shareholder will acquire his or her
Redeemable Preference Shares at the same adjusted cost base
as the Santa Elina Common Shares before the Merger. Upon
the subsequent immediate redemption of such shares, a
Shareholder may realize a capital gain or loss as measured
by the difference in value between the fair market value of
the Echo Bay Common Shares received and the adjusted cost
base of the shares so redeemed.
U.S. FEDERAL
INCOME TAX In order to facilitate the economics of the business
CONSIDERATIONS: arrangement, notably that the Minority Shareholders receive
freely tradeable Echo Bay Common Shares and Echo Bay's
desire to acquire only 50% of Santa Elina, the Merger has
been structured in a manner that results in a taxable
exchange for U.S. Federal income tax purposes. Therefore, a
U.S. Shareholder of Santa Elina who participates in the
Merger should be treated as exchanging his or her Santa
Elina Common Shares for the Echo Bay Common Shares
received, and generally should recognize capital gain (or
loss) equal to the difference between the fair market value
of the Echo Bay Common Shares received and his or her
adjusted basis in the Santa Elina Common Shares surrendered
in the Merger.
A U.S. Shareholder of Santa Elina who exercises dissenter's
rights in the Merger generally should recognize capital
gain (or loss) equal to the difference between the net cash
payment received for his or her Santa Elina Common Shares
and the
7
<PAGE>
U.S. Shareholder's adjusted basis in the Shares for which
dissenter's rights are exercised.
PROCEDURE FOR
EXCHANGE OR The transmittal form enclosed with this Circular sets forth
CONVERSION OF the details for the procedure for each Santa Elina
SHARES: Shareholder to surrender the certificates representing all
such Santa Elina Common Shares to the Depositary. Santa
Elina Shareholders must deliver a duly completed
transmittal form and their share certificates according to
the instructions provided in the transmittal form in order
to receive the consideration to which they are entitled
upon completion of the Merger, including the redemption of
the Redeemable Preference Shares. The transmittal form
includes instructions for persons who may have already
transmitted their share certificates to the Depositary and
wish to revoke their prior transmittal.
RIGHTS OF
DISSENTING Santa Elina Shareholders are entitled to dissent in respect
SHAREHOLDERS: of the Santa Elina Merger Resolution. Reference is made to
the heading "The Merger - Dissenting Shareholders' Rights"
and Schedule IV (Excerpt from International Business
Companies Act) attached to this Circular. The Merger
Agreement provides that it is a condition to the Merger
that holders of more than 7.5% of the outstanding Santa
Elina Common Shares do not dissent.
SANTA ELINA: Santa Elina is a company incorporated under the laws of the
British Virgin Islands. Santa Elina is engaged in the
business of exploration for, development and mining of
precious metals. Santa Elina has interests in more than
11,000,000 hectares of mineral claims at various stages of
gold exploration and development in South America.
The only person who currently owns beneficially, directly
or indirectly, or exercises control or direction over more
than 10% of the votes attached to the issued Santa Elina
Common Shares is Sercor, which owns 91,044,445 Santa Elina
Common Shares representing 67% of the outstanding Santa
Elina Common Shares. The registered office address of Santa
Elina is located at Arawak Chambers, Road Town, Tortola,
British Virgin Islands. The head office and principal
office of Santa Elina is located at Av. Juscelino
Kubitschek, 1830, Torre 3, Sao Paulo, SP, Brazil.
KENDALL: Kendall is a company incorporated under the laws of the
British Virgin Islands for the purposes of the Merger.
Kendall is, and at the time of the Merger will be, owned by
Sercor and by Echo Bay, each holding a 50% ownership
interest. Immediately following the Meeting but prior to
the completion of the Merger, all of the Santa Elina Common
Shares held by each of Echo Bay and Sercor will be
transferred to Kendall in exchange for Kendall Common
Shares.
The Kendall Redeemable Preference Shares to be received in
the Merger by Santa Elina Shareholders will be immediately
redeemed in exchange for Echo Bay Common Shares without any
action by such shareholders. As such, Kendall Redeemable
Preference Share certificates will not be issued to Santa
Elina Shareholders, no separate market will develop for
such shares, and the Santa Elina Shareholders will not have
any direct investment in Kendall other than during the
transitory period during which the Redeemable Preference
Shares are deemed to be outstanding.
At the time of the Merger, Kendall will own 100,044,445
Santa Elina Common Shares, representing 74% of the
outstanding Santa Elina Common Shares, and 5,260,281 Echo
Bay Common Shares.
ECHO BAY: Echo Bay mines, processes and explores for gold and silver.
Its interest in operating properties is set out below (all
are operated by Echo Bay):
<TABLE>
<CAPTION>
PERCENTAGE
MINE LOCATION OWNERSHIP INTEREST
---- -------- ------------------
<S> <C> <C>
McCoy/Cove....... Nevada, U.S.A. 100%
Round Mountain... Nevada, U.S.A. 50%
Lupin............ Northwest Territories, Canada 100%
Kettle River..... Washington, U.S.A. 100%
</TABLE>
8
<PAGE>
In 1995, Echo Bay produced a total of 754,762 ounces of
gold at an average cash operating cost of $229 per ounce.
1995 silver production was 11,905,806 ounces. First quarter
1996 gold production was 161,246 ounces at an average cash
operating cost of $261 per ounce. First quarter 1996 silver
production was 1,175,057 ounces.
Over the past several years, Echo Bay has significantly
expanded its search for new gold reserves and production,
particularly outside Canada and the United States. Echo
Bay's international growth strategy emphasizes strategic
alliances with exploration companies holding land positions
on some of the world's major gold belts. Echo Bay added
five development properties during 1995: Paredones
Amarillos, Mexico (60% interest), Chapada, Brazil (holds an
option to acquire a 50% interest), Kingking, Philippines
(holds an option to acquire a 75% interest), and Aquarius
(100% interest) and Ulu (100% interest) in Canada. Echo Bay
also continued work at the Alaska-Juneau development
project, Alaska (100% interest). At December 31, 1995, Echo
Bay's proven and probable ore reserves totaled 10,983,000
ounces of gold and 62,913,000 ounces of silver. In
addition, Echo Bay reported other mineralization of 343.1
million tons at a grade of 0.027 ounces of gold per ton,
6.8 million tons at a grade of 0.65 ounces of silver per
ton and 225.5 million tons at a grade of 0.46% copper.
Echo Bay is incorporated under the laws of Canada. No
shareholder is known to own more than 5% of the Echo Bay
Common Shares. The principal executive offices of Echo Bay
are located at Suite 1000, 6400 South Fiddlers Green
Circle, Englewood, Colorado, 80111-4957. See "Echo Bay
Mines Ltd."
MARKET PRICES:
Closing prices of the Santa Elina Common Shares and the
Echo Bay Common Shares on The Toronto Stock Exchange
("TSE") and the American Stock Exchange ("AMEX"), as
applicable, on April 9, 1996, the last trading day before
the announcement of the proposed Merger, and on June 17,
1996, were as follows:
<TABLE>
<CAPTION>
APRIL 9, 1996 JUNE 17, 1996
------------- -------------
<S> <C> <C>
Santa Elina Common Shares
TSE................................. Cdn$ 2.19 Cdn$ 1.50
Echo Bay Common Shares
TSE................................. Cdn$18.875 Cdn$15.00
AMEX................................ $13.875 $11.125
</TABLE>
Based on the closing price of Echo Bay Common Shares on the
TSE on June 17, 1996, the market value of 0.1499 Echo Bay
Common Shares (one Santa Elina Common Share being equal to
0.1499 Echo Bay Common Shares at a share exchange ratio of
6.67 to 1) was Cdn$1.67 per share. On June 17, 1996, there
were 16,870 holders of record of Echo Bay Common Shares.
Following the Merger, Echo Bay Common Shares will continue
to be traded on the AMEX and the TSE as well as the other
Canadian and international exchanges on which they
currently trade. Following the Merger, Santa Elina Common
Shares will cease to be traded on the TSE, and there will
be no further market for Santa Elina Common Shares.
Because the exchange ratio is fixed and because the market
price of Echo Bay Common Shares is subject to fluctuation,
the market value of the Echo Bay Common Shares that holders
of Santa Elina Common Shares will receive in the Merger may
increase or decrease prior to and following the Merger.
Shareholders are urged to obtain current market quotations
for Echo Bay Common Shares and Santa Elina Common Shares.
9
<PAGE>
SELECTED
FINANCIAL
INFORMATION FOR
SANTA ELINA(/1/):
<TABLE>
<CAPTION>
THREE MONTHS PERIOD ENDED
ENDED MARCH 31 DECEMBER 31,
---------------------- ---------------------------
1996 1995 1995 1994(/2/)
---------- ---------- ----------- --------------
(thousands of U.S. dollars, except for per
share data)
<S> <C> <C> <C> <C>
EARNINGS STATEMENT DATA
Revenue................. $ 2,494 $ 789 $ 7,180 $ 6,401
Net loss................ $ (3,469) $ (2,861) $ (15,419) $ (7,090)
Loss per share.......... $ (0.03) $ (0.02) $ (0.12) $ (0.07)
BALANCE SHEET DATA
Total assets............ $ 52,038 $ 49,648 $ 52,370 $ 59,152
Other liabilities and
obligations under
capital leases......... $ 5,900 $ 1,042 $ 4,242 $ 1,930
</TABLE>
-------
(1) This information should be read in conjunction with
Santa Elina's consolidated financial statements and
accompanying notes.
Santa Elina's consolidated financial statements are
prepared in accordance with Canadian generally accepted
accounting principles. Had the consolidated financial
statements been prepared in accordance with accounting
principles generally accepted in the United States,
total assets at December 31, 1994 would be reduced by
$957,000. See also note 13 to Santa Elina's annual
consolidated financial statements for the year ended
December 31, 1995 and note 5 to its quarterly
consolidated financial statements for the period ended
March 31, 1996.
(2) The selected financial information is for the period
from April 1, 1994 to December 31, 1994 after the
reorganization of Santa Elina on March 31, 1994 (the
"Reorganization"). Prior to the Reorganization, Santa
Elina was comprised of several mining and non-mining
subsidiaries and therefore comparative consolidated
statements of operations and deficit have not been
prepared.
(3) The selected financial information does not include
information on the predecessor companies. See note 15
to Santa Elina's consolidated financial statements for
the year ended December 31, 1995.
SELECTED
FINANCIAL
INFORMATION FOR
ECHO BAY(/1/):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31 YEAR ENDED DECEMBER 31
---------------- ------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- ------ ------ ------ ------ ------
(millions of U.S. dollars, except for gold price
and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA
Revenue................. $ 67.8 $ 84.2 $360.7 $377.6 $366.5 $312.4 $315.6
Average gold price
realized per ounce..... $ 397 $ 385 $ 388 $ 387 $ 360 $ 357 $ 392
Net earnings
(loss)(/2/)............ $ (16.2) $ (11.7) $(50.1) $ 8.0 $ 3.6 $(31.7) $ 6.8
Earnings (loss) per
common share(/2/)...... $ (0.12) $ (0.10) $(0.43) $ 0.07 $ 0.03 $(0.30) $ 0.07
BALANCE SHEET DATA
Total assets............ $ 848.9 $ 863.6 $871.2 $881.7 $990.5 $936.6 $875.0
Gold, silver and
currency financings.... $ 150.2 $ 133.4 $152.8 $132.7 $217.4 $220.1 $233.7
OTHER DATA
Cash dividends paid per
common share............ $ -- $ -- $0.075 $0.075 $0.075 $0.075 $0.075
</TABLE>
-------
(1) This information should be read in conjunction with
Echo Bay's consolidated financial statements and
accompanying notes which are part of its Form 10-K and
Form 10-Q that are attached hereto as Schedule VII and
Schedule IX, respectively. Contingencies are described
in note 16d to Echo Bay's annual consolidated
financial statements included in its Form 10-K and note
10 to its quarterly consolidated financial statements
included in its Form 10-Q.
Echo Bay's consolidated financial statements are
prepared in accordance with Canadian generally accepted
accounting principles. Had the consolidated financial
statements been prepared in accordance with accounting
principles generally accepted in the United States,
certain selected financial data would be disclosed as
follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------- ------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- ------ ------ ------ ------ ------
(millions of U.S. dollars, except for per share
data)
<S> <C> <C> <C> <C> <C> <C> <C>
Net earnings (loss)..... $(15.5) $(11.7) $(46.5) $ 7.3 $ 8.5 $(31.7) $ 6.8
Earnings (loss) per
common share........... $(0.12) $(0.10) $(0.40) $ 0.07 $ 0.08 $(0.30) $ 0.07
Total assets............ $877.0 $867.8 $892.8 $885.9 $990.5 $936.6 $875.0
</TABLE>
See also note 12 to Echo Bay's annual consolidated
financial statements included in its Form 10-K and note
8 to its quarterly consolidated financial statements
included in its Form 10-Q.
(2) At December 31, 1992, Echo Bay wrote down its
investment in Kettle River by $14.9 million ($0.14 per
share) and wrote off $3.2 million ($0.03 per share) in
two exploration properties.
10
<PAGE>
SELECTED PRO
FORMA FINANCIAL The pro forma condensed consolidated balance sheet and
INFORMATION: statement of earnings are based upon the audited financial
statements of Echo Bay and Santa Elina as of and for the
year ended December 31, 1995 and the unaudited financial
statements of Echo Bay and Santa Elina as of and for the
three months ended March 31, 1996, adjusted to reflect Echo
Bay increasing its ownership from 7% to 50% of the
outstanding Santa Elina Common Shares. As the transaction
will result in the current shareholders of Echo Bay
retaining a majority of Echo Bay Common Shares, the pro
forma transaction has been accounted for as a purchase of
43% of Santa Elina by Echo Bay. Echo Bay's total interest
in Santa Elina will be 50% when added to its existing 7%
interest. Santa Elina has been consolidated into Echo Bay
using the proportionate consolidation method, as Echo Bay
and Sercor will jointly control Santa Elina. Under the
proportionate consolidation method, 50% of Santa Elina's
assets, liabilities, revenues and expenses will be included
in the consolidated financial statements of Echo Bay. Pro
forma adjustments were made based on the purchase method of
accounting under Canadian GAAP. In all material respects,
pro forma financial information conforms with principles
generally accepted in the United States (except as
described in footnote 1 to this table, note 12 to Echo
Bay's annual consolidated financial statements included in
its Form 10-K, note 8 to Echo Bay's quarterly consolidated
financial statements included in its Form 10-Q and note 5
to Santa Elina's quarterly consolidated financial
statements for the period ended March 31, 1996). For
additional information see the historical financial
statements of Echo Bay and Santa Elina and notes thereto
and the Pro Forma Condensed Consolidated Financial
Information included elsewhere in this Circular.
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED DECEMBER 31,
SELECTED PRO FORMA FINANCIAL MARCH 31, 1996 1995
DATA(/1/): -------------- ------------
(millions of U.S. dollars,
except for
per share data)
<S> <C> <C>
EARNINGS STATEMENT DATA
Revenue............................. $ 69.0 $ 364.3
Net earnings (loss)................. $ (18.9) $ (60.6)
Earnings (loss) per common share.... $ (0.14) $ (0.48)
BALANCE SHEET DATA
Total assets........................ $ 987.2 $1,007.9
Gold and other financings........... $ 157.3 $ 157.8
OTHER DATA
Cash dividends paid per common
share.............................. -- $ 0.075
</TABLE>
--------
(1) This information should be read in conjunction with
Echo Bay's and Santa Elina's audited consolidated
financial statements and accompanying notes.
Contingencies are described in note 16d to Echo Bay's
annual consolidated financial statements included in
its Form 10-K, note 10 to Echo Bay's quarterly
consolidated financial statements included in its Form
10-Q and note 14 to Santa Elina's consolidated
financial statements.
The pro forma condensed consolidated financial
statements are prepared in accordance with Canadian
generally accepted accounting principles. Had the pro
forma condensed consolidated financial statements been
prepared in accordance with accounting principles
generally accepted in the United States, certain
selected financial data would be disclosed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
--------------------------- --------------------------
(millions of U.S. dollars, except for per share data)
<S> <C> <C>
Net earnings (loss)..... $ (18.2) $ (57.0)
Earnings (loss) per
common share........... $ (0.13) $ (0.46)
Total assets............ $ 1,014.2 $ 1,032.6
</TABLE>
See also note 12 to Echo Bay's annual consolidated
financial statements included in its Form 10-K and note
8 to Echo Bay's quarterly consolidated financial
statements included in its Form 10-Q.
SELECTED HISTORICAL AND PRO FORMA PER SHARE DATA
Based upon the exchange rate of 6.67 Santa Elina Common
Shares for one Echo Bay Common Share, the following table
sets forth the comparative per common share net earnings,
book value and cash dividends of Echo Bay, Echo Bay
11
<PAGE>
pro forma adjusted, Santa Elina and Santa Elina equivalent
pro forma adjusted. The following information should be
read in conjunction with the audited consolidated financial
statements and notes of Echo Bay and Santa Elina included
elsewhere in this Circular and the unaudited pro forma
condensed consolidated financial information included
elsewhere in this Circular. Contingencies are described in
note 16d to Echo Bay's annual consolidated financial
statements included in its Form 10-K, note 10 to Echo Bay's
quarterly consolidated financial statements included in its
Form 10-Q and note 14 to Santa Elina's annual consolidated
financial statements. The following data are not
necessarily indicative of the results that actually would
have occurred if the transaction had been in effect during
the period presented or which may be attained in the
future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
------------------ -----------------
<S> <C> <C>
HISTORICAL - ECHO BAY(/1/)
Net earnings (loss) per
share(/2/)................ $(0.12) $(0.43)
Net book value per
share(/3/)................ 4.43 4.53
Cash dividends per
share(/2/)................ -- 0.075
PRO FORMA - ECHO BAY(/4/)
Net earnings (loss) per
share(/2/)................ $(0.14) $(0.48)
Net book value per
share(/3/)................ 5.02 5.13
Cash dividends per
share(/2/)................ -- 0.075
HISTORICAL - SANTA ELINA
Net earnings (loss) per
share(/2/)................ $(0.03) $(0.12)
Net book value per
share(/3/)................ 0.15 0.18
Cash dividends per
share(/2/)................ -- 0.000
EQUIVALENT PRO FORMA - SANTA
ELINA(/5/)(/6/)
Net earnings (loss) per
share(/2/)................ $(0.02) $(0.07)
Net book value per
share(/3/)................ 0.75 0.77
Cash dividends per
share(/2/)................ -- 0.011
</TABLE>
--------
(1) Echo Bay's consolidated financial statements are
prepared in accordance with Canadian generally accepted
accounting principles. Had the consolidated financial
statements been prepared in accordance with accounting
principles generally accepted in the United States,
certain per share data would be disclosed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
------------------ -----------------
<S> <C> <C>
Net earnings (loss) per
share..................... $(0.12) $(0.40)
Net book value per share... 4.64 4.70
See also note 12 to Echo Bay's annual consolidated
financial statements included in its Form 10-K and note
8 to Echo Bay's quarterly consolidated financial
statements included in its Form 10-Q
</TABLE>
(2) For the three months ended March 31, 1996 and the year
ended December 31, 1995
(3) As of March 31, 1996 and December 31, 1995
(4) The pro forma condensed consolidated financial
statements are prepared in accordance with Canadian
generally accepted accounting principles. Had the pro
forma consolidated financial statements been prepared
in accordance with accounting principles generally
accepted in the United States, certain per share data
would be disclosed as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
------------------ -----------------
<S> <C> <C>
Net earnings (loss) per
share..................... $(0.13) $(0.46)
Net book value per share... 5.22 5.31
(5) The pro forma condensed consolidated financial
statements are prepared in accordance with Canadian
generally accepted accounting principles. Had the pro
forma consolidated financial statements been prepared
in accordance with accounting principles generally
accepted in the United States, certain per share data
would be disclosed as follows:
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
------------------ -----------------
<S> <C> <C>
Net earnings (loss) per
share..................... $(0.02) $(0.07)
Net book value per share... 0.78 0.80
</TABLE>
(6) Represents pro forma Echo Bay on a Santa Elina
equivalent basis, calculated by dividing combined pro
forma amounts by the exchange rate of 6.67 common
shares of Santa Elina for one common share of Echo Bay.
12
<PAGE>
RISK FACTORS: There are risks associated with the transaction and
investments in Santa Elina, Kendall and Echo Bay that
should be carefully considered by Shareholders of Santa
Elina. See "Risk Factors."
MANAGEMENT AND Kendall plans to continue the operations of Santa Elina
OPERATIONS after the Merger essentially in the same manner as they
FOLLOWING THE have been conducted by Santa Elina. Kendall expects that
MERGER: Santa Elina's Brazilian management will remain with Kendall
following the Merger. Kendall will continue to operate the
Santa Elina operations out of Brazil and Bolivia. The board
of directors of Kendall will be comprised of eight
directors initially with four nominees from each of Echo
Bay and Sercor.
STOCK EXCHANGE The Echo Bay Common Shares are listed on, among others, The
LISTINGS: Toronto Stock Exchange and the American Stock Exchange. It
is a condition to closing that Echo Bay obtain, prior to
the Effective Date, approval for listing on The Toronto
Stock Exchange and the American Stock Exchange of the Echo
Bay Common Shares to be issued in connection with the
Merger, including those that will be issuable in exchange
for the termination of the Santa Elina stock options.
GOVERNMENTAL AND None of Santa Elina, Echo Bay or Kendall is aware of any
REGULATORY governmental or regulatory approval required in order to
APPROVALS: complete the Merger, other than compliance with applicable
securities laws and stock exchange rules and certain
discretionary orders and approvals in Canada relating to
the distribution of the Echo Bay Common Shares in respect
of which applications have been submitted. This Circular
also serves as a prospectus of Echo Bay filed with the
United States Securities and Exchange Commission relating
to the distribution of the Echo Bay Common Shares to the
Shareholders of Santa Elina including, without limitation,
to Sercor in connection with the formation of Kendall.
CONDITIONS TO THE The obligations of Santa Elina and Kendall to complete the
MERGER: Merger are subject to the satisfaction of certain
conditions, which are also set out in the Merger Agreement.
Among other conditions, the Merger must be approved by the
Shareholders holding a majority of the outstanding Santa
Elina Common Shares represented at the Meeting and by
Minority Shareholders holding two-thirds of the outstanding
Santa Elina Common Shares represented at the Meeting. Santa
Elina and Kendall anticipate that all of the conditions
will be satisfied prior to completion of the Merger. Either
Santa Elina or Kendall may waive in whole or in part any of
the conditions required of the other party. See "The
Merger - Conditions to the Merger Becoming Effective."
ACCOUNTING The Merger will be accounted for as a purchase of 43% of
TREATMENT: Santa Elina by Echo Bay, increasing its total interest from
7% to 50%, and Santa Elina will be consolidated into Echo
Bay using the proportionate consolidation method for
financial accounting purposes. See "The Merger - Accounting
Treatment."
INTERESTS OF Shareholders should be aware that certain officers,
CERTAIN PERSONS directors and employees of Santa Elina have certain
IN THE MERGER: interests in the Merger that are different from the
interests of Shareholders generally. Sercor will
immediately prior to the Merger sell to Echo Bay 23,479,185
Santa Elina Common Shares, or 17% of its 67% interest in
Santa Elina, in exchange for Echo Bay Common Shares, in the
same ratio offered to the Shareholders. Upon the completion
of the Merger, Sercor and Echo Bay will hold Kendall Common
Shares whereas the Minority Shareholders will hold
Redeemable Preference Shares (which will be redeemed for
Echo Bay Common Shares). As discussed below under "Santa
Elina Gold Corporation", Paulo C. de Brito and his family,
who control Sercor, will continue to hold a direct 17%
interest in the subsidiaries of Santa Elina upon completion
of the Merger. Upon completion of the
13
<PAGE>
Merger, all outstanding options or warrants to acquire
Santa Elina securities will be cancelled except for certain
warrants held by Sercor. Echo Bay will issue up to 50,535
Echo Bay Common Shares in exchange for cancellation of the
outstanding stock options in Santa Elina. Employment
arrangements will be entered into between Kendall and
certain officers, directors and employees of Santa Elina
upon completion of the Merger. See "The Merger - Interests
of Certain Persons in the Merger."
NO SOLICITATION:
Sercor has agreed that during the period ending no later
than July 31, 1996, it will not enter into any agreement,
or take part directly or indirectly, through
representatives, advisors or agents or otherwise, in any
discussions or negotiations or provide any information to
any third party relating to any acquisition or disposition
of any assets of Santa Elina, its subsidiaries or Sercor
(except for transactions in the ordinary course of
business), or the issue or transfer of any securities of
Santa Elina, its subsidiaries or Sercor, or any proposal to
offer to purchase outstanding shares, amalgamate, merge or
effect a merger or other business combination of Santa
Elina, its subsidiaries or Sercor with one or more
corporations or entities.
TERMINATION:
The Merger Agreement may be terminated at any time prior to
the Effective Date if, notwithstanding the best efforts of
Santa Elina, the Shareholders do not approve the Merger in
accordance with the requirements of applicable laws,
policies and regulations, or if, notwithstanding the best
efforts of Santa Elina and Kendall, the Merger has not
become effective on or before July 31, 1996. If the Merger
Agreement is terminated prior to the Effective Date by
Kendall or by Santa Elina, then Santa Elina or Kendall, as
the case may be, shall pay $2,000,000 or $500,000,
respectively, to the other in respect of its third party
costs.
ALTERNATIVE Sercor has agreed to sell that number of its Santa Elina
TRANSACTION: Common Shares to Echo Bay, on the same terms as the share
exchange ratio applicable to the Merger, to cause Echo Bay
to hold a 50% interest in Santa Elina if the Merger is not
successful. Certain other transactions would also follow in
order to capitalize Santa Elina. See "The Merger -
Background to and Purpose of the Merger".
COMPARATIVE The rights of the Shareholders are currently governed by
RIGHTS OF SANTA the laws of the British Virgin Islands and the constating
ELINA AND ECHO documents of Santa Elina. Upon completion of the Merger,
BAY the Shareholders will become shareholders of Echo Bay, and
SHAREHOLDERS: their rights as shareholders of Echo Bay will be governed
by the federal laws of Canada and the constating documents
of Echo Bay. There are various differences between the
rights of the Shareholders of Santa Elina and the
shareholders of Echo Bay. See "The Merger - Comparative
Rights of Santa Elina and Echo Bay Shareholders".
14
<PAGE>
GLOSSARY OF TERMS
The following is a glossary of certain defined terms used frequently
throughout this Circular. The following words and phrases shall have the
meanings set forth below, unless the context otherwise requires. The
definitions used in the WGM Report and in this Circular which relate to Santa
Elina's mineral resources and reserves are as outlined in the Australasian
Code for Reporting of Identified Mineral Resources and Ore Reserves adopted by
the Australian Stock Exchange for companies listed thereon.
The definitions of proven ore reserves and probable ore reserves in the
Australasian Code are very similar to the definitions of proven ore and
probable ore outlined in National Policy No. 2-A of the Canadian Securities
Administrators and those of proven and probable reserves outlined in Guide 7
of the United States Securities and Exchange Commission. Echo Bay uses the
Canadian definitions and is subject to the United States system. All of these
definitions of "ore" or "reserve" require that, among other things, the
mineralized material be economically recoverable in order to be within the
defined term. "Mineralization" in National Policy No. 2-A is identified as
"resources" in the Australasian Code, and neither is required to be
economically recoverable. Under Guide 7, mineralization not meeting the
definition of reserves is referred to as "mineralized material" or "Other
Mineralization." WGM has used, and Santa Elina has adopted, the Australasian
Code definitions in the WGM Report as it believes that the Code provides a
more useful classification of material that does not meet the economic
criteria implicit in the definition of ore reserves. These definitions are
used herein solely in order to maintain the consistency of the disclosure
regarding Santa Elina's Properties to its Shareholders in connection with
their consideration of the Merger. The regulations of the United States
Securities and Exchange Commission do not permit disclosure of estimates not
meeting the definition of "reserves" except when required by foreign
regulatory requirements or when such information was provided to the
registrant in connection with an acquisition, merger or consolidation. Please
note that if the Merger is consummated, Echo Bay will in the future describe
its interests in these properties in accordance with National Policy No. 2-A
and Guide 7. A description of the Australasian Code is set forth below at
"Australasian Resource and Reserve Classification System."
"ACT" means the International Business Companies Act (British Virgin
Islands);
"ARAUCO" means Arauco Resources Corporation, a corporation incorporated
under the laws of British Columbia;
"ARTICLES OF MERGER" means the articles to be issued to give effect to the
Merger;
"AU" means gold;
"BUSINESS DAY" means, with respect to any action to be taken, any day,
other than a Saturday, Sunday or statutory holiday in the place where such
action is to be taken;
"CDN$" means Canadian dollars;
"CIRCULAR" means this management information circular, proxy statement and
prospectus dated June 21, 1996;
"COMPANIA MINERA" means Compania Minera San Vicente Ltda., a corporation
incorporated under the laws of Bolivia;
"CU" means copper;
"DEPOSIT" means a mineralized body which has been physically delineated by
sufficient drilling, trenching, and/or underground work, and found to contain
a sufficient average grade of metal or metals to warrant further exploration
and/or development expenditures. Such a deposit does not qualify as a
commercially mineable ore body or as containing ore reserves, until final
legal, technical, and economic factors have been resolved;
"DEPOSITARY" means Montreal Trust Company of Canada;
"DISSENTING SHAREHOLDER" means a Shareholder who exercises his dissent
rights under the Act;
"DNPM" or "Departamento Nacional da Producao Mineral" means the government
agency existing under the Ministry of Mines and Energy of Brazil responsible
for controlling and applying the Brazilian Mining Code;
"$" means United States dollars;
"ECHO BAY" means Echo Bay Mines Ltd., a corporation existing under the laws
of Canada;
"ECHO BAY COMMON SHARES" means the common shares in the capital of Echo
Bay;
"EFFECTIVE DATE" means the date shown on the certificate of merger issued
by the Registrar under the Act;
"G AU/T" means grams of gold per metric tonne;
15
<PAGE>
"GRAMS PER CUBIC METER" means alluvial mineralization measured by grams of
gold contained per cubic meter of material, a measure of weight of gold per
volume of material;
"HECTARE" or "HA" means measurement of an area of land equivalent to 10,000
square metres or 2.47 acres;
"INDEPENDENT COMMITTEE" means the committee of independent directors of
Santa Elina appointed to review and consider the terms of the proposed Merger;
"INDICATED MINERAL RESOURCE" means a mineral resource sampled by
drillholes, underground openings or other sampling procedures at locations too
widely spaced to ensure continuity but close enough to give a reasonable
indication of continuity and where geoscientific data are known with a
reasonable level of reliability. An indicated mineral resource estimate will
be based on more data, and therefore will be more reliable, than an inferred
mineral resource estimate;
"INFERRED MINERAL RESOURCE" means a mineral resource inferred from
geoscientific evidence, drillholes, underground openings or other sampling
procedures where the lack of data is such that continuity cannot be predicted
with confidence and where geoscientific data may not be known with a
reasonable level of confidence;
"KENDALL" means Kendall Gold Corporation, a corporation existing under the
laws of the British Virgin Islands, whether prior to the Merger or after
completion of the Merger, as the context may require;
"KENDALL COMMON SHARES" means the common shares in the capital of Kendall;
"KENDALL COMMON SHAREHOLDERS" means Echo Bay and Sercor;
"KENDALL SHARES" means the Kendall Common Shares and the Redeemable
Preference Shares;
"LATERITE" means highly weathered residual superficial soils and decomposed
rocks, rich in iron and aluminum oxides that are characteristically developed
in tropical climates;
"MEASURED MINERAL RESOURCE" means a mineral resource intersected and tested
by drillholes, underground openings or other sampling procedures at locations
which are spaced closely enough to confirm continuity and where geoscientific
data are reliably known. A measured mineral resource estimate will be based on
a substantial amount of reliable data, interpretation and evaluation of which
allows a clear determination to be made of shapes, sizes, densities and
grades;
"MEETING" means the special meeting of Santa Elina Shareholders and
includes references to any adjournment or adjournments thereof;
"MERGER" means the proposed merger of Santa Elina and Kendall;
"MERGER AGREEMENT" means the agreement made effective as of April 9, 1996
between Santa Elina and Kendall providing for the Merger as set out in
Schedule I, as amended by agreements extending the dates provided for therein
to July 22 and July 31, 1996 in respect of the Shareholders' Meeting date and
the termination date, respectively;
"MERGING CORPORATIONS" means Santa Elina and Kendall;
"MINERACAO MARACA" means Mineracao Maraca Industria e Comercio S.A.
(formerly Mineracao Maraca Industria e Comercio Ltda.), a corporation existing
under the laws of Brazil;
"MINERACAO SANTA ELINA" means Mineracao Santa Elina Industria e Comercio
S.A. (formerly Mineracao Santa Elina Industria e Comercio Ltda.), a
corporation existing under the laws of Brazil;
"MINERALIZATION" means a natural aggregate of one or more metallic
minerals. Under the regulations of the United States Securities and Exchange
Commission, mineralization is the term used to describe all estimates of
material not meeting the definition of reserves;
"MINORITY SHAREHOLDERS" means all Santa Elina Shareholders other than (i)
Echo Bay; (ii) Sercor; (iii) any person or company which alone or in
combination with others holds a sufficient number of securities or has
contractual rights sufficient to affect materially the control of Echo Bay or
Sercor; (iv) any person or company in respect of which a person or company
referred to in item (iii) above, alone or in combination with others, holds a
sufficient number of securities or has contractual rights sufficient to affect
materially its control; (v) any person or company in respect of which Echo Bay
or Sercor alone or in combination with others holds a sufficient number of
securities or has contractual rights sufficient to affect materially its
control; (vi) any person or company who beneficially owns, directly or
indirectly, voting securities of Echo Bay or Sercor or who exercises control
or direction over voting securities of Echo Bay or Sercor or a combination of
both carrying more than 10% of the voting rights carried by any class of
voting
16
<PAGE>
securities of Echo Bay or Sercor for the time being outstanding; (vii) any
director or senior officer of Echo Bay or Sercor or any other companies
referred to in items (iii) and (vi) above (other than a director or senior
officer of Santa Elina who is independent from Echo Bay and Sercor for
purposes of qualifying to serve as a member of the Independent Committee);
(viii) any person or company acting jointly or in concert with any of the
foregoing in connection with the subject matter of the vote, or (ix) any
affiliate (as such term is defined in the Securities Act (Quebec) or the
Securities Act (Ontario)) of any of the foregoing;
"ORE" means a natural aggregate of one or more minerals which, at a
specified time and place, may be mined and sold at a profit or from which some
part may be profitably separated;
"OSC" means the Ontario Securities Commission;
"OUNCES" means troy ounces;
"PROBABLE ORE RESERVE" means an ore reserve stated in terms of mineable
tonnes/volumes and grades where the corresponding identified mineral resource
has been defined by drilling, sampling or excavation (including extensions
beyond actual openings and drillholes), and where the geological factors that
control the ore body are known with sufficient confidence that the mineral
resource is categorized as "Indicated";
"PROPERTIES" means the gold properties held directly or indirectly by
Mineracao Santa Elina in Brazil and Compania Minera in Bolivia, the copper and
gold property held indirectly by Mineracao Maraca in Brazil and the properties
held by Arauco in Chile;
"PROVED ORE RESERVE" means an ore reserve stated in terms of mineable
tonnes/volumes and grades in which the corresponding identified mineral
resource has been defined in three dimensions by excavation or drilling
(including minor extensions beyond actual openings and drillholes), and where
the geological factors that limit the ore body are known with sufficient
confidence that the mineral resource is categorized as "Measured";
"QSC" means the Quebec Securities Commission;
"RBC DS" means RBC Dominion Securities Inc., the financial advisor to the
Independent Committee;
"REDEEMABLE PREFERENCE SHARES" means the non-voting redeemable preferred
shares to be issued by Kendall;
"RESERVES" means ore;
"SANTA ELINA" means Santa Elina Gold Corporation, a company incorporated
under the laws of the British Virgin Islands;
"SANTA ELINA COMMON SHARES" means the common shares in the capital of Santa
Elina;
"SANTA ELINA MERGER RESOLUTION" means the resolution, the full text of
which is attached as Schedule II to the Circular, to be considered and if
deemed advisable, passed with or without variation, by the Santa Elina
Shareholders at the Meeting;
"SANTA ELINA STOCK OPTION PLAN" means the incentive share option plan
adopted by Santa Elina in September 1994;
"SERCOR" means Sercor Ltd., a corporation existing under the laws of the
Cayman Islands;
"SHAREHOLDERS" means the registered holders of Santa Elina Common Shares;
"TAX ACT" means the Income Tax Act (Canada);
"U.S. SHAREHOLDERS" means those Shareholders of Santa Elina who, for
purposes of income taxation under the Internal Revenue Code of 1986, as
amended, are citizens or residents of the United States, deal at arm's length
with Santa Elina, and hold their shares as a capital asset;
"TON" means a short ton (2,000 pounds);
"TONNE" means a metric tonne (2,204.6 pounds);
"WGM" means Watts, Griffis and McOuat Limited, an independent geological
consulting firm; and
"WGM REPORT" means the report dated December 19, 1995 prepared by WGM on
the Properties.
Unless otherwise noted, all dollar amounts quoted herein are in United
States dollars.
17
<PAGE>
AUSTRALASIAN RESOURCE AND RESERVE CLASSIFICATION SYSTEM
National Policy No. 2-A, the policy adopted by Canadian securities
regulators in connection with reporting of mineral resources, restricts its
definitions to Ore Reserves, which it subdivides into Proven (Measured),
Probable (Indicated) and Possible (Inferred). Guide 7, "Description of
Property by Issuers Engaged or to be Engaged in Significant Mining
Operations," adopted by the United States Securities and Exchange Commission,
restricts its definitions to Proven (Measured) and Probable (Indicated)
Reserves, and generally does not permit disclosure of estimates other than
Proven (Measured) or Probable (Indicated) Reserves. The Proven (Measured)
category would correspond to Proven Ore Reserves pursuant to the Australasian
Code, the Probable (Indicated) category would correspond to the Probable Ore
Reserves pursuant to the Australasian Code and the Possible (Inferred)
category of National Policy No. 2-A does not correspond to any category used
in the Australasian Code or in Guide 7. All of these definitions of "ore" or
"reserves" require that the mineralized material be economically recoverable.
"Resources" under the Australasian Code would be classified as
"Mineralization" under the definitions of National Policy No. 2-A, and are
used to describe mineralized material that cannot at that time be said to be
economically recoverable. Under Guide 7, mineralization not meeting the
definition of reserves is referred to as "mineralized material" or "Other
Mineralization." The resource definitions used herein are used solely in order
to maintain the consistency of the disclosure regarding Santa Elina's
Properties to its Shareholders in connection with their consideration of the
Merger. Assuming the Merger is consummated, Echo Bay will in the future
describe its interests in these properties in accordance with National Policy
No. 2-A and Guide 7.
The following demonstrates pictorially the relationships between the
various categories of mineral resource reporting used in the Australasian
Code:
[GRAPH APPEARS HERE]
The information contained herein for Santa Elina is reported according to
the Australasian Code.
METRIC CONVERSION TABLE
<TABLE>
<CAPTION>
MULTIPLY
TO CONVERT TO METRIC MEASUREMENT UNIT BY
---------- -------------------------- --------
<S> <C> <C>
Acre................................ Hectares............................ 0.404686
Miles............................... Kilometres.......................... 1.609344
Ounces (troy)....................... Kilograms........................... 0.0311035
Ounces (troy)....................... Grams............................... 31.1035
Pounds.............................. Kilograms........................... 0.453592
Tons................................ Tonnes.............................. 0.907185
Troy ounces/ton..................... Grams/tonne......................... 34.2857
Yards............................... Metres.............................. 0.9144
</TABLE>
18
<PAGE>
MANAGEMENT INFORMATION CIRCULAR
SOLICITATION OF PROXIES
THIS CIRCULAR IS FURNISHED IN CONNECTION WITH THE SOLICITATION OF PROXIES
BY THE MANAGEMENT OF SANTA ELINA FOR USE AT THE MEETING TO BE HELD AT THE TIME
AND PLACE AND FOR THE PURPOSES SET FORTH IN THE ATTACHED NOTICE OF MEETING. It
is expected that the solicitation will be by courier primarily, but proxies
may also be solicited personally by regular employees of Santa Elina. Santa
Elina is considering hiring a dealer to act as a soliciting dealer in respect
of the solicitation of proxies. The amount payable would be included in the
estimate of Santa Elina's expenses described herein.
Santa Elina may also pay brokers or other persons holding Santa Elina
Common Shares, or in their own names or in the names of nominees, for their
reasonable expenses of sending proxies and proxy material to beneficial owners
and obtaining their proxies.
No person is authorized to give any information or to make any
representations other than those contained in this Circular and, if given or
made, such information or representation should not be relied upon as having
been authorized.
APPOINTMENT AND REVOCATION OF PROXIES
Shareholders have received with this Circular a form of proxy for the
Meeting. The persons named in the enclosed instrument appointing proxy are
directors, officers or nominees of Santa Elina.
A SHAREHOLDER HAS THE RIGHT TO APPOINT A PERSON (WHO NEED NOT BE A
SHAREHOLDER) TO ATTEND AND ACT FOR HIM AND ON HIS BEHALF AT THE MEETING OTHER
THAN THE PERSONS DESIGNATED IN THE ENCLOSED FORM OF PROXY. Such right may be
exercised by striking out the names of the persons designated in the enclosed
form of proxy and by inserting in the blank space provided for that purpose
the name of the desired person or by completing another proper form of proxy
and, in either case, delivering the completed and executed proxy to the
Secretary of Santa Elina, c/o Montreal Trust Company of Canada, 151 Front
Street West, 8th Floor, Toronto, Ontario, for receipt on or before 4:30 p.m.
on the last business day preceding the day of the Meeting or any adjournment
thereof at which the proxy is to be used, or delivering it to the Chairman of
the Meeting on the day of the Meeting or any adjournment thereof prior to the
time of voting. A proxy should be executed by the Shareholder or his attorney
duly authorized in writing or, if the Shareholder is a corporation, by an
officer thereof or an attorney thereof duly authorized.
The board of directors of Santa Elina has fixed April 23, 1996, as the
record date, being the date for the determination of the registered holders of
securities entitled to receive notice of the Meeting.
A Shareholder forwarding the enclosed proxy may indicate the manner in
which the appointee is to vote with respect to any specific item by checking
the appropriate space. If the Shareholder giving the proxy wishes to confer a
discretionary authority with respect to any item of business then the space
opposite the item is to be left blank. The shares represented by the proxy
submitted by a Shareholder will be voted in accordance with the directions, if
any, given in the proxy.
A Shareholder who has given a proxy may revoke it at any time insofar as it
has not been exercised. This includes any proxy given in response to the
Management Information Circular dated April 24, 1996. A proxy may be revoked,
as to any matter on which a vote shall not already have been cast pursuant to
the authority conferred by such proxy, by instrument in writing (including a
later dated proxy) executed by the Shareholder or by his attorney authorized
in writing or, if the Shareholder is a body corporate by an officer or
attorney thereof duly authorized and deposited either with Santa Elina, as the
case may be, at any time up to and including the last business day preceding
the day of the Meeting at which the proxy is to be used or with the Chairman
of such Meeting on the date of the Meeting and upon either of such deposits
the proxy is revoked. A proxy may also be revoked in any other manner
permitted by applicable law.
Any proxy given in response to the Management Information Circular dated
April 24, 1996, unless revoked as set forth above, will be voted in the manner
described below.
VOTING OF PROXIES
The persons named in the enclosed form of proxy will vote the shares in
respect of which they are appointed in accordance with the direction of the
Shareholders appointing them. IN THE ABSENCE OF SUCH DIRECTION, SUCH SHARES
19
<PAGE>
WILL BE VOTED FOR THE PASSING OF THE SANTA ELINA MERGER RESOLUTION. The
enclosed form of proxy confers discretionary authority upon the persons named
therein with respect to amendments or variations to matters identified in the
Notice of Meeting and with respect to other matters which may properly come
before the Meeting. At the time of the printing of this Circular, management
of Santa Elina knows of no such amendments, variations or other matters to
come before the Meeting other than the matters referred to in the Notice of
Meeting. HOWEVER, IF ANY OTHER MATTERS WHICH ARE NOT KNOWN TO MANAGEMENT OF
SANTA ELINA SHOULD PROPERLY COME BEFORE THE MEETING THE PROXY WILL BE VOTED ON
SUCH MATTERS IN ACCORDANCE WITH THE BEST JUDGMENT OF THE NAMED PROXIES.
VOTING SECURITIES
As at the date hereof 135,130,521 Santa Elina Common Shares are issued and
outstanding. Each Santa Elina Common Share entitles the holder thereof to one
vote on all matters to be acted upon at a meeting of Shareholders.
All holders of record of Santa Elina Common Shares as of the time of the
Meeting are entitled either to attend and vote in person the shares held by
them or, provided a completed and executed proxy shall have been delivered to
Santa Elina within the time specified in the attached Notice of Meeting, to
attend and vote thereat by proxy the shares held by them.
The Merger is a "related party transaction" within the meaning of
OSC Policy 9.1 and QSC Policy Q-27. As the consideration for the Merger is
shares, the Santa Elina Merger Resolution must also be confirmed by the
holders of not less than two-thirds of the votes cast by Minority Shareholders
at the Meeting. The Santa Elina Common Shares held by each of Kendall, Echo
Bay and Sercor will not be counted for this purpose.
Reference is made to the heading "Voting Securities and Principal Holders
Thereof" for disclosure pertaining to principal Shareholders.
THE MERGER
MEETING OF SHAREHOLDERS
The Meeting has been called to consider and, if thought advisable, to pass,
with or without variation, the Santa Elina Merger Resolution approving and
adopting the Merger Agreement. Subject to the approval of the Meeting, as a
result of the Merger, Santa Elina and Kendall will merge and continue as one
corporation. After the redemption of the Redeemable Preference Shares, Kendall
will be equally owned by Echo Bay and Sercor.
VOTES REQUIRED FOR THE MERGER
In order for the Merger to be effective, the Merger must be approved by a
resolution of the Shareholders passed by the affirmative votes of at least a
majority of the Santa Elina Common Shares, represented in person or by proxy
at the Meeting. As Sercor and Echo Bay have agreed to vote in favour of the
Merger, this approval is assured. The Merger is a "related party transaction"
within the meaning of OSC Policy 9.1 and QSC Policy Q-27. As the consideration
for the Merger is shares, the Santa Elina Merger Resolution must also be
confirmed by not less than two-thirds of the votes cast by Minority
Shareholders at the Meeting. For this purpose, the Santa Elina Common Shares
held by each of Kendall, Echo Bay and Sercor will not be counted. See "Voting
Securities and Principal Holders Thereof".
UNLESS OTHERWISE INDICATED, PROXIES IN THE ENCLOSED FORM WILL BE VOTED FOR
THE APPROVAL OF THE SANTA ELINA MERGER RESOLUTION ON ANY BALLOT REQUESTED OR
REQUIRED BY LAW.
TERMS OF THE MERGER
The Merger is to be carried out pursuant to the Act and, subject to
obtaining the requisite shareholder and regulatory approval and the filing of
Articles of Merger, will become effective on the Effective Date.
Prior to the completion of the Merger, Sercor, the controlling shareholder
of Santa Elina, shall have sold to Echo Bay 23,479,185 Santa Elina Common
Shares, constituting 17% of the outstanding shares of Santa Elina, and as
consideration for such sale, Echo Bay shall have issued to Sercor 3,520,118
Echo Bay Common Shares pursuant to this Circular. The share exchange ratio is
the same as that made available to the Minority Shareholders in the Merger.
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In order to facilitate Echo Bay's acquisition of a 50% ownership interest
in Santa Elina, Echo Bay and Sercor established Kendall and, immediately prior
to the Merger becoming effective, each of Echo Bay and Sercor will transfer
all of their respective Santa Elina Common Shares to Kendall in consideration
for Kendall Common Shares.
The Effective Date of the Merger is anticipated to be on or before July 16,
1996. On the Effective Date, Santa Elina and Kendall will merge and continue
as one corporation under the name Kendall Gold Corporation. On the Effective
Date:
(a) each 6.67 Santa Elina Common Shares (other than those held by Kendall)
will be converted into one Redeemable Preference Share of Kendall,
which will immediately be redeemed without shareholder action on a one-
for-one basis for Echo Bay Common Shares;
(b) each Kendall Common Shareholder will receive one Redeemable Preference
Share of Kendall for each 2.167 Kendall Common Shares held (although
the Kendall Common Shareholders have agreed to waive any right they may
have to receive Redeemable Preference Shares);
(c) the Santa Elina Common Shares held by Kendall will be cancelled; and
(d) the Kendall Common Shares shall otherwise be unaffected by the Merger
and shall remain outstanding in the hands of the Kendall Common
Shareholders.
Upon the Merger becoming effective and after the redemption of the
Redeemable Preference Shares, Kendall will be equally owned by Echo Bay and
Sercor.
IN THE EVENT THAT A SHAREHOLDER, OTHER THAN A DISSENTING SHAREHOLDER, FAILS
TO DELIVER AND SURRENDER TO THE DEPOSITARY AT THE LOCATION SET FORTH IN THE
TRANSMITTAL FORM ENCLOSED WITH THIS CIRCULAR SHARE CERTIFICATES REPRESENTING
SUCH SHAREHOLDER'S SANTA ELINA COMMON SHARES BEFORE THE CLOSE OF BUSINESS ON
JULY 16, 1996 (OR SUCH LATER DATE UPON WHICH THE MERGER OCCURS), SUCH
SHAREHOLDER WILL BE DEEMED TO HAVE RECEIVED ONE REDEEMABLE PREFERENCE SHARE
FOR EACH 6.67 SANTA ELINA COMMON SHARES HELD.
The share provisions attaching to each of the Redeemable Preference Shares
require Kendall to redeem all of such shares held by persons other than
persons who are also Kendall Common Shareholders (being Echo Bay and Sercor)
on a one-for-one basis for Echo Bay Common Shares immediately upon the
Effective Date. This redemption will take place without any shareholder
action. As such, Santa Elina Shareholders will not receive share certificates
representing the Kendall Redeemable Preference Shares, no market will develop
for such shares, and the Santa Elina Shareholders will not have any direct
investment in Kendall other than during the transitory period during which the
Redeemable Preference Shares are deemed to be outstanding.
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The share ownership structures applicable to Santa Elina and Kendall
currently, immediately prior to the Merger and immediately following the
Merger are as follows:
CURRENT STRUCTURE
[GRAPH APPEARS HERE]
IMMEDIATELY PRIOR TO MERGER
[GRAPH APPEARS HERE]
IMMEDIATELY FOLLOWING MERGER
[GRAPH APPEARS HERE]
The acquisition transaction has been structured in this fashion in order
to: (i) avoid the complexities and uncertainty which would be associated with
Echo Bay making a partial bid for 50% of the Santa Elina Common Shares with
Sercor being required to tender only a portion of its shares to such a bid;
(ii) facilitate and organize the ongoing business relationship between Echo
Bay and Sercor upon completion of the acquisition, including in the event the
acquisition does not proceed by way of the Merger; (iii) comply with
applicable laws of the British Virgin Islands, and in particular to ensure the
procedural fairness of the acquisition transaction to all Santa Elina
Shareholders, and (iv) facilitate tax planning for the parties involved in the
transaction.
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REASONS FOR THE MERGER
Management of Santa Elina considers the Merger to be advantageous to
Shareholders for a number of reasons. Echo Bay and Santa Elina have been in
discussions for some time regarding the possibility of a merger, and Echo Bay
has previously discussed with Santa Elina the possibility of increasing its
stake in Santa Elina to a 50% ownership interest. Santa Elina agreed to such a
proposal on the condition that the Shareholders would participate on the same
basis as Sercor in the transaction. The Merger will result in the Shareholders
continuing to participate in Santa Elina through their ownership of Echo Bay
Common Shares, and will also result in Kendall being sufficiently capitalized
to continue with Santa Elina's exploration and development programs as a
result of the aggregate cash $25,000,000 investment being made by Echo Bay and
Sercor through subscriptions for Kendall Common Shares in connection with the
transaction. The Merger is advantageous in that the Shareholders, through Echo
Bay, will have the Santa Elina assets managed by a larger mining company with
greater resources and with expertise in the development and operation of
mineral properties. Santa Elina investigated obtaining new capital but such an
approach would have been prohibitively dilutive to the Shareholders at the
prevailing Santa Elina Common Share price at the time in question. Moreover,
the Shareholders will also benefit from the additional assets held by Echo
Bay, and are expected to be less subject to the risks associated with a junior
mining company holding a properties portfolio primarily in one country, as is
currently the case.
Beginning in 1994, Echo Bay determined that it would be advisable to pursue
a growth strategy which focused on exploration and development
internationally. The transaction exemplifies Echo Bay's strategic plan of
significantly increasing gold reserves and gold production through strategic
alliances with exploration companies such as Santa Elina holding land
positions on some of the world's major gold belts. It is anticipated that the
combined skills and resources of Echo Bay and Santa Elina will enable a number
of Santa Elina's gold properties to realize their full potential sooner than
would have been possible without the combination. Echo Bay anticipates a
sufficiently large increase in other gold mineralization from Santa Elina's
properties by year end 1996 to offset any dilution in other gold
mineralization per share caused by the issuance of Echo Bay Common Shares in
the transaction. In the longer term, the transaction allows the shareholders
of both Echo Bay and Santa Elina to benefit from any increases in reserves of
the Santa Elina properties through the ownership of Echo Bay Common Shares.
Based on the foregoing, Echo Bay's board of directors believes that the Merger
is in the best interests of Echo Bay and its shareholders.
BACKGROUND TO AND PURPOSE OF THE MERGER
Santa Elina and Echo Bay have been in discussions for some time with
respect to the possibility of a merger of the two companies and Echo Bay's
interest in increasing its stake in Santa Elina to a 50% ownership interest.
In early 1996, Echo Bay expressed to Santa Elina its desire to increase its
position by acquiring outstanding shares in Santa Elina. Echo Bay, being
interested in acquiring 50% of Santa Elina, commenced negotiations with Santa
Elina and Sercor in connection with the value of Santa Elina, the proposed
share exchange ratio and the manner of effecting such a transaction. On April
9, 1996, Santa Elina and Echo Bay announced that they had entered into an
agreement with Sercor and Paulo C. de Brito ("de Brito"), the controlling
shareholder of Sercor, pursuant to which Echo Bay would increase its direct
and indirect ownership interest in Santa Elina from 7% to 50% through a series
of transactions, including the Merger. A definitive Merger Agreement
contemplating the Merger as described herein has been entered into between
Santa Elina and Kendall. Echo Bay, Sercor, de Brito and Kendall have entered
into a share subscription and purchase agreement (the "Share Subscription and
Purchase Agreement") pursuant to which Echo Bay will acquire 23,479,185 Santa
Elina Common Shares from Sercor in exchange for 3,520,118 Echo Bay Common
Shares and Echo Bay and Sercor will capitalize Kendall with their Santa Elina
Common Shares and in the aggregate cash amount of $25,000,000 to facilitate
the Merger. Each of Echo Bay and Sercor have advanced to Santa Elina
$2,500,000 of this amount, which is intended to be converted to a capital
contribution to Kendall following the Merger. The Share Subscription and
Purchase Agreement also contemplates the entering into of a unanimous
shareholder agreement among Echo Bay, Sercor, Kendall, de Brito and his spouse
to govern the affairs of Kendall following the Merger. It also provides that
if for any reason it is not possible to effect the Merger, whether due to the
failure of the Minority Shareholders to approve the Merger or otherwise,
certain alternate transactions will be implemented to allow Echo Bay and
Sercor to provide financing for the ongoing capital requirements of Santa
Elina and which will result in Echo Bay indirectly owning a 50% interest in
Santa Elina. These alternate transactions could include Echo Bay and Sercor
causing Kendall to make a securities exchange take-over bid for all of the
issued and outstanding Santa Elina Common Shares not owned at that time by
Kendall for consideration equivalent to that proposed under the Merger. If,
pursuant to the bid, Kendall does not acquire sufficient Santa Elina Common
Shares to result in Kendall holding at least 90% of all issued and outstanding
Santa Elina Common Shares and in order to ensure that Santa Elina has
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sufficient working capital to fund its business, Echo Bay, Sercor and Kendall
shall use their best efforts to cause Santa Elina to make a rights offering to
all shareholders of Santa Elina for rights to subscribe for $25,000,000
aggregate dollar amount of additional Santa Elina Common Shares. In connection
with such rights offering, Kendall would provide a standby commitment pursuant
to which Kendall would purchase all Santa Elina Common Shares not otherwise
purchased pursuant to the rights offering. If, upon completion of any one of
the alternate transactions described above, Kendall holds at least 90% but less
than 100% of all of the issued and outstanding Santa Elina Common Shares,
Kendall shall propose to compulsorily acquire the remaining Santa Elina Common
Shares not then owned by Kendall pursuant to the provisions of the Act. The
following details the background resulting in the proposals contemplated in the
Merger Agreement and the Share Subscription and Purchase Agreement.
Representatives of Santa Elina first contacted Echo Bay in December 1993 to
discuss a potential joint venture with Echo Bay involving Santa Elina's mining
properties and the possibility of Echo Bay becoming a minority shareholder in
Santa Elina. During February 1994, representatives of Santa Elina and Echo Bay
met several times to discuss and review Santa Elina's business and prospects,
and Echo Bay conducted a due diligence examination of Santa Elina. In May 1994,
representatives of Santa Elina and Echo Bay met again to discuss the terms of
the proposed joint venture and Echo Bay's purchase of Santa Elina Common
Shares. In July 1994, Sercor completed the sale (following certain adjustments)
of 5,000,000 Santa Elina Common Shares, representing approximately 5% of the
then outstanding shares, to Echo Bay at a price of $2.00 per share.
After Santa Elina completed its initial public offering in December 1994,
Echo Bay continued its due diligence review of the proposed joint venture,
which review included a visit by Echo Bay to Santa Elina's Brazilian properties
and an investigation of Santa Elina's business and its prospects by Echo Bay
and its advisors.
On August 30, 1995, representatives of Santa Elina met with Echo Bay's
representatives at Echo Bay's offices in Denver, Colorado to discuss the
results of Echo Bay's due diligence and the terms of the Chapada property joint
venture. At that meeting, Santa Elina's management inquired about the
possibility of an additional investment by Echo Bay in Santa Elina Common
Shares. Echo Bay indicated that it would be interested in making such an
investment within certain parameters. Negotiations with respect to the Chapada
property joint venture and Echo Bay's purchase of additional Santa Elina Common
Shares then ensued. At the conclusion of the August 30 meeting Santa Elina and
Echo Bay agreed, subject to the approval of their respective boards of
directors, on the terms of the Chapada property joint venture and Echo Bay's
additional investment in Santa Elina Common Shares. Following the approval of
the two transactions by their respective boards of directors in September of
1995, Santa Elina sold 4,000,000 Santa Elina Common Shares, representing
approximately 3% of the then outstanding shares, to Echo Bay at a price of
$2.50 per share on September 22, 1995 for which Echo Bay also received an
option to acquire a 50% interest in the Chapada property (the amount of $1.25
per share of the purchase price has been accounted for by Santa Elina to
acquire the option). See "Santa Elina Gold Corporation - Joint Venture
Arrangements."
In November 1995, Echo Bay and Santa Elina personnel engaged in further
discussions with respect to a definitive joint venture agreement for the
Chapada property. In December 1995, Echo Bay technical services personnel
visited the Chapada and Fazenda Nova properties to conduct further due
diligence with respect to Santa Elina's development plans for those properties,
and on December 7 and 8, 1995 Echo Bay and Santa Elina personnel met in Sao
Paulo for a Chapada joint venture meeting and an update on Santa Elina's other
properties.
On January 16, 1996, Echo Bay's management met in New York with Santa
Elina's management to discuss Santa Elina's long-term objectives and the
funding requirements of its mining projects other than the Chapada mine. The
discussions were for information purposes only and no specific decisions were
made.
On January 27, 1996, Paulo C. de Brito, the controlling shareholder of
Sercor, met with Richard C. Kraus, the President and Chief Executive Officer of
Echo Bay, at Echo Bay's offices in Denver. At that meeting, the participants
discussed various financing alternatives for Santa Elina, including the
possibility of Echo Bay's purchase of a portion of Sercor's Santa Elina Common
Shares and an offer to purchase the Santa Elina Common Shares held by the other
Shareholders on similar terms.
On January 29, 1996, Echo Bay began its due diligence review of Santa Elina.
Also on January 29, 1996, Echo Bay sent a written proposal to Sercor, which
proposal contemplated the purchase by Echo Bay of 50% of Sercor's interest in
Santa Elina and an option to purchase Sercor's remaining interests in Santa
Elina. Representatives of Sercor and Echo Bay then met on February 1, 1996 to
discuss Echo Bay's proposal as well as alternative acquisition structures, each
with the objective of creating a privately held, jointly controlled, Santa
Elina. At the February 1 meeting, the parties also discussed post-acquisition
corporate governance and management of Santa Elina.
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On February 2, 1996, John L. Azlant, Echo Bay's Senior Vice President,
Business Development sent a letter to Sercor outlining Echo Bay's
understanding of the proposed transaction. This letter was followed by several
telephone conversations between Mr. de Brito and Mr. Kraus to discuss various
aspects of the acquisition, and by a letter dated February 5, 1996 from Mr.
Kraus to Mr. de Brito. Among the issues discussed was the offering price to
Santa Elina's public shareholders, post-acquisition management and an option
to purchase Sercor's remaining interests in Santa Elina.
At a regularly scheduled meeting held on February 14, 1996, Echo Bay's
board of directors was informed of Echo Bay's discussions with Sercor about a
possible acquisition of a portion of Sercor's interest in Santa Elina and the
proposed offer to purchase the Santa Elina Common Shares held by the public.
At the February 14 meeting, Echo Bay's management described Santa Elina's
assets and a range of possible values for those assets, as well as the timing
and stages of a possible acquisition. Echo Bay's board of directors authorized
Echo Bay's management to proceed with negotiations with Sercor and Santa
Elina.
On February 15, 1996, representatives of Santa Elina, Sercor and Echo Bay,
together with their respective financial and legal advisors, met in Toronto to
discuss the possible acquisition by Echo Bay of a portion of Sercor's interest
in Santa Elina and an offer to purchase the Santa Elina Common Shares held by
the public. Also, on February 16, 1996, there was another Chapada joint
venture meeting, which was conducted by telephone. On February 22, 1996, Mr.
Azlant advised Mr. de Brito on the status of Echo Bay's review of the proposed
transactions.
On February 16, 1996, Echo Bay engaged the investment banking firm of
Nesbitt Burns Inc. to assist Echo Bay in evaluating Santa Elina and in
structuring an acquisition proposal. Nesbitt Burns' engagement did not
contemplate the preparation of a fairness or other valuation opinion. On March
7, 1996, Echo Bay completed its due diligence review of Santa Elina and
reported the results of its review to Nesbitt Burns. Between March 12 and
March 15, 1996, representatives of Sercor and Echo Bay engaged in several
discussions about various aspects of the proposed acquisition, including
pricing, corporate governance and post-acquisition management. On March 25,
1996, Echo Bay's management advised the Echo Bay board of directors about the
status and proposed terms of the Santa Elina transactions.
On March 1, 1996, Santa Elina's board of directors met to discuss the Echo
Bay proposals in general, and determined that it would be prudent to form a
special committee to consider the proposals as there would likely be some
related party aspect with the involvement of Sercor. The Independent Committee
so formed first met on March 4, 1996 and then met again on March 19, 1996 to
interview a number of investment dealers.
On March 25 and 26, 1996, representatives of Sercor and Echo Bay met in the
offices of Cassels Brock & Blackwell to negotiate the terms of the acquisition
of a portion of Sercor's interest in Santa Elina and the terms of an offer to
purchase the Santa Elina Common Shares held by the public. These negotiations
continued on April 4 and April 5, 1996 in Denver, Colorado.
On April 9, 1996, Echo Bay's board of directors met to consider the
proposed Share Subscription and Purchase Agreement, the Merger Agreement and
the transactions contemplated thereby. Echo Bay's management presented
the terms of the Share Subscriptions and Purchase Agreement and the Merger
Agreement and the financial aspects of the acquisition transactions. After
extensive consideration of the acquisition of a portion of Sercor's interest
in Santa Elina and the Merger, Echo Bay's board of directors unanimously
approved the execution and delivery of the Share Subscription and Purchase
Agreement and the Merger Agreement and the consummation of the transactions
contemplated thereby.
On April 9, 1996, the Independent Committee and the board of directors of
Santa Elina also met to consider the Merger Agreement and the Merger
contemplated therein. The Independent Committee met with RBC DS and, based on
the latter's advice, recommended the Merger to the board of Santa Elina. The
board considered the recommendation of the Independent Committee and
authorized Santa Elina to enter into the Merger.
After Santa Elina's board of directors approved the transactions at the
April 9, 1996 meeting, a joint press release was issued by Santa Elina and
Echo Bay announcing Echo Bay's agreement to increase its ownership interest in
Santa Elina from 7% to 50% pursuant to the terms of the Share Subscription and
Purchase Agreement and the Merger Agreement.
On April 17, 1996, representatives of Sercor and Echo Bay met in Denver,
Colorado to discuss the final terms of an unanimous shareholder agreement
among Sercor, Echo Bay, Kendall, Mr. de Brito and his spouse.
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On April 19, 1996, following a conference call in which the final terms of
the agreements were negotiated, Sercor, Echo Bay, Kendall, de Brito and Santa
Elina executed the Share Subscription and Purchase Agreement, to which was
attached the final version of the unaminous shareholders agreement, and Kendall
and Santa Elina executed the Merger Agreement.
On April 23, 1996, Santa Elina's board of directors received the final
report of the Independent Committee and considered and approved the original
Management Information Circular and the Merger Agreement.
On June 17, 1996, Santa Elina's board of directors approved this Circular.
See also "The Merger - The Independent Committee".
CONDITIONS TO THE MERGER BECOMING EFFECTIVE
The conditions to the Merger are contained as conditions in the Merger
Agreement. The Merger is conditional upon, among other things:
(i) the Merger being approved by the Shareholders as discussed under the
heading "Votes Required for the Merger";
(ii) there shall be no action taken under any existing applicable law or
regulation, nor any statute, rule, regulation or order which is
enacted, enforced, promulgated or issued by any court, department,
commission, board, regulatory body, government or governmental
authority or similar agency, domestic or foreign, that:
(A) makes it illegal or otherwise directly or indirectly restrains,
enjoins or prohibits the Merger or any other transactions
contemplated in the Merger Agreement;
(B) results in a judgment or assessment of material damages, directly
or indirectly, relating to the transactions contemplated in the
Merger Agreement; or
(C) prohibits Santa Elina's or Kendall's ownership or operation of all
or any material portion of the business or assets of Santa Elina or
compels Santa Elina or Kendall to dispose of or hold separately all
or any portion of the business or assets of Kendall or Santa Elina;
(iii) all consents, approvals and authorizations, regulatory or otherwise
(including third party approvals and consents and the effectiveness
of the Registration Statement filed with the Securities and Exchange
Commission) required or necessary in connection with the Merger shall
have been obtained on terms and conditions satisfactory to Santa
Elina and Kendall, acting reasonably;
(iv) holders of not more than 7.5% of the issued and outstanding Santa
Elina Common Shares shall have exercised rights of dissent in relation
to the Merger;
(v) the representations and warranties contained in the Merger Agreement
being true as of the Effective Date as if made on and of such date and
the performance of the covenants required to be performed under the
Merger Agreement;
(vi) the delivery of legal opinions by counsel to each of Santa Elina and
Kendall in the form required under the Merger Agreement;
(vii) all outstanding options or warrants to acquire any securities of
Santa Elina shall have been cancelled to the satisfaction of Kendall,
except for the warrants held by Sercor; and
(viii) the Echo Bay Common Shares shall have been validly issued and all
necessary documents and proceedings shall have been filed and taken
and all other legal requirements shall have been fulfilled under the
laws of each of the provinces of Canada and of the United States,
and no filing of any other document or taking of any other
proceedings in such jurisdictions shall be required in respect of
the delivery of the Echo Bay Common Shares upon the redemption of
the Redeemable Preference Shares or, except in respect of control
persons or insiders, or affiliates of Santa Elina, Sercor or Echo
Bay, in respect of the first trade of the Echo Bay Common Shares by
the holders thereof in compliance with applicable securities laws.
Santa Elina and Kendall will obtain an opinion of British Virgin Islands
counsel that the Merger has been effected pursuant to section 76 of the Act.
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OTHER PRINCIPAL PROVISIONS
Certain other principal provisions of the Merger Agreement and certain
ancillary agreements may be summarized as follows:
(i) Santa Elina and Kendall will merge and continue as one corporation
under the name "Kendall Gold Corporation" effective as of the
Effective Date;
(ii) upon completion of the Merger, the memorandum and articles of the
merged corporation will be the memorandum and articles of association
of Kendall until repealed or amended;
(iii) there shall be a minimum of three and a maximum of ten directors of
Kendall and the size of the initial board of directors of Kendall
shall be eight, four of whom shall be representatives of Echo Bay and
four of whom shall be representatives of Sercor;
(iv) there will be no restrictions on the business which Kendall will be
authorized to carry on;
(v) Echo Bay, Sercor, Kendall, de Brito and his spouse have agreed that
Kendall will be the exclusive legal entity through which any of the
aforementioned parties hold any mining properties or ancillary
interests, other than the direct 17% interest held by de Brito and
his spouse in the Santa Elina subsidiaries, in Brazil and Bolivia. If
the board of directors of Kendall rejects or cannot agree on the
acquisition of a new property or related interest, such property or
interest shall not be acquired by Kendall and none of the
aforementioned parties shall acquire any interest, directly or
indirectly, in such property;
(vi) the options to acquire Santa Elina Common Shares pursuant to the
Santa Elina Stock Option Plan will be cancelled in exchange for the
issuance of up to 50,535 Echo Bay Common Shares;
(vii) Santa Elina must be satisfied that on the Effective Date of the
Merger, the Echo Bay Common Shares to be received by former
Shareholders of Santa Elina will be listed and posted for trading on
the Toronto and American stock exchanges and generally not subject to
resale restrictions;
(viii) if, prior to the Effective Date, the Merger Agreement is terminated:
(a) by Kendall, then Santa Elina shall pay $2,000,000 to Kendall in
respect of its third party costs;
(b) by Santa Elina, then Kendall shall pay $500,000 to Santa Elina in
respect of its third party costs; and
(ix) the Merger must be completed on or before July 31, 1996.
TIMING
It is anticipated that the Effective Date of the Merger will be on or
before July 16, 1996.
EXCHANGE OF SHARE CERTIFICATES
Upon the Merger becoming effective, former Shareholders of Santa Elina are
requested to exchange their share certificates by delivering or mailing their
share certificates, together with a letter of transmittal as included with
this Circular, to the Depositary, Montreal Trust Company of Canada.
Shareholders may forward the letter of transmittal and the share certificates
to the Depositary at the time that they return the proxy included with this
Circular, on the basis that if the Merger is not approved, the share
certificates and the letter of transmittal will be returned to Shareholders
who have forwarded such certificates to the Depositary. No share certificates
will be issued for the Redeemable Preference Shares of Kendall. Certificates
representing the Santa Elina Common Shares will be deemed to represent the
Redeemable Preference Shares received on the Merger and, immediately
thereafter, the Echo Bay Common Shares to be received upon the redemption of
the Redeemable Preference Shares, provided that a Shareholder has, prior to
the close of business on July 16, 1996 (or such later date upon which the
Merger occurs), delivered and surrendered to the Depositary all share
certificates representing such Shareholder's Santa Elina Common Shares
together with a transmittal form duly completed and executed in accordance
with the instructions on such form. Within two Business Days following the
Effective Date, Kendall shall cause the Depositary to send certificates to
such Shareholder representing the number of Echo Bay Common Shares such
Shareholder is entitled to receive upon redemption of the Kendall Redeemable
Preference Shares.
If a Shareholder (other than a Dissenting Shareholder) fails to deliver and
surrender to the Depositary all share certificates representing such
Shareholder's Santa Elina Common Shares together with a transmittal form duly
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completed and executed in accordance with the instructions on such form prior
to the close of business on July 16, 1996 (or such later date upon which the
Merger occurs), such Shareholder will only be entitled to receive the
certificates representing the Echo Bay Common Shares issuable upon conversion
of the Santa Elina Common Shares and redemption of the Redeemable Preference
Shares following the delivery and surrender by such Shareholder to the
Depositary of all of such share certificates.
In the event that a Shareholder wishes to have a new certificate issued by
Echo Bay in a name other than that appearing on the face of any existing
certificate, the certificate delivered or mailed to the Depositary must be
endorsed by such Shareholder and the signature must correspond in every
respect with the name of the holder appearing on the face of such certificate
and must be guaranteed by a Canadian chartered bank, a Canadian trust company
or a firm having membership in a recognized stock exchange or in some other
manner satisfactory to the Depositary.
STOCK OPTION PLAN
The Santa Elina Stock Option Plan will terminate upon the Merger becoming
effective and all outstanding options will be cancelled. Holders of the
options will receive up to a total of 50,535 Echo Bay Common Shares as
consideration for the cancellation of the options. Reference is made to the
heading "Santa Elina Stock Option Plan" for disclosure pertaining to the Santa
Elina Stock Option Plan.
THE INDEPENDENT COMMITTEE
On March 1, 1996, the board of directors of Santa Elina appointed the
Independent Committee consisting of Messrs. Paulo R. De Castro, Christopher M.
T. Thompson (Chairman) and The Honourable Michael H. Wilson, none of whom is
an officer, employee or insider of Santa Elina, except by virtue of being a
director thereof, or of Sercor or Echo Bay. None of the members of the
Independent Committee will benefit from the outcome of the Merger in any
manner different than all of the Shareholders of Santa Elina other than Echo
Bay or Sercor or their respective associates and affiliates (the "Minority").
The responsibilities of the Independent Committee were: (i) to receive
details of the proposed transaction; (ii) to supervise the preparation of any
valuation required under applicable securities laws or regulatory policies;
(iii) to negotiate any revisions to the structure, terms or conditions of the
proposed transaction if thought appropriate by the Independent Committee; (iv)
to consider and advise the board of directors as to what recommendation should
be made to Shareholders concerning the proposed transaction; and (v) to review
and monitor the implementation of any such transaction approved by the board
of directors. The Independent Committee was authorized by the board of
directors to engage, at the expense of Santa Elina, such professional advisors
as the Independent Committee considered appropriate to assist it in carrying
out its responsibilities.
The Independent Committee appointed Borden & Elliot as independent legal
counsel to the Independent Committee and, following the interview of a number
of investment advisors, engaged RBC Dominion Securities Inc. as independent
financial advisor to the Independent Committee. The Independent Committee
engaged RBC DS to prepare a valuation of the Santa Elina Common Shares and of
the consideration to be received therefor in the Merger by the Shareholders in
accordance with applicable securities regulatory requirements and to provide
an opinion as to the fairness, from a financial point of view, of the proposed
Merger to the Minority. The terms of RBC DS's engagement are contained in an
engagement letter dated as of March 22, 1996. In engaging RBC DS, the
Independent Committee, based in part on representations made to it by RBC DS,
concluded that RBC DS was independent of Santa Elina, Sercor and Echo Bay and
was qualified to provide the required valuation and fairness opinion.
Before formally engaging RBC DS, the Independent Committee considered, with
the assistance of its legal counsel and Cassels Brock & Blackwell, counsel for
Santa Elina and Sercor, Mr. Wilson's affiliation and business relationship
with RBC DS to determine whether such relationship would impact upon his or
RBC DS's independence for the purpose of carrying out their respective
responsibilities. Mr. Wilson is currently a Vice-Chairman, director and
shareholder of RBC Dominion Securities Limited, an affiliate of RBC DS, and
provides advisory services to RBC DS from time to time through an
international advisory business. The Independent Committee concluded that,
despite Mr. Wilson's affiliation and business relationship with RBC DS, the
retention of RBC DS as its financial advisor would not compromise the
independence of Mr. Wilson or RBC DS in the circumstances and that his
membership on the Independent Committee is desirable based on the following
considerations: (i) the process by which the Independent Committee selected
its financial advisor, which involved interviewing three investment banking
firms; (ii) the
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Independent Committee's assessment of RBC DS's qualifications and independence
from Santa Elina, Sercor and Echo Bay; (iii) Mr. Wilson's financial knowledge
and expertise and his knowledge of Santa Elina's business and affairs; (iv)
the fact that Mr. Wilson's shareholding in RBC DS's affiliate is de minimis
and that he will receive no direct financial benefit from RBC DS's engagement;
and (v) Mr. Wilson's independence from Sercor and Echo Bay.
In the course of its deliberations, the Independent Committee had four
formal meetings. These meetings are summarized below. In addition, certain
members of the Independent Committee participated in discussions, at various
times, with representatives of Santa Elina and Echo Bay regarding the proposed
terms, structure and timing of the Merger and the provisions of the proposed
Merger Agreement.
At a meeting held on March 19, 1996, the Independent Committee discussed
the role of an independent financial advisor and met with and received
presentations from three investment banking firms, including RBC DS. At this
meeting the Independent Committee decided to retain RBC DS as its financial
advisor. RBC DS was verbally engaged by the Independent Committee on March 21,
1996 and instructed to commence its valuation review.
The Independent Committee met again on April 4, 1996 to confirm the
appointment of its legal counsel and its financial advisor and to discuss the
mandate of the Independent Committee, guidelines prepared by counsel to assist
the Independent Committee in carrying out its mandate and initial drafts of
the Merger Agreement and related documentation. At this meeting the
Independent Committee received a progress report from RBC DS on the valuation
work performed by it to date and the remaining work required to be completed
by it. RBC DS also discussed the scope of its valuation review and
investigations, its valuation approach and the valuation methodologies that
were being used by it to value Santa Elina's different assets and liabilities,
as well as the methodology being used to value the Echo Bay Common Shares
proposed to be offered as consideration in the Merger.
On April 6, 1996, the Chairman of the Independent Committee met with a
representative of Echo Bay to discuss the Independent Committee's comments on
the provisions of the draft Merger Agreement and the terms of the Merger.
At a meeting of the Independent Committee held on April 9, 1996, RBC DS
presented its interim report of its valuation of Santa Elina, including its
views as to the fair market value of the Santa Elina Common Shares, and market
trading and liquidity analysis of the Echo Bay Common Shares. This
presentation included a detailed discussion of RBC DS's valuation analysis of
each of Santa Elina's assets and liabilities, including valuation
methodologies, key assumptions and sensitivities and alternative valuation
approaches considered by RBC DS. The Independent Committee also reviewed with
RBC DS issues affecting the fairness of the proposed Merger and received
RBC DS's advice on the fairness of the proposed Merger terms. RBC DS also
advised the Independent Committee as to what was needed to be done in order
for RBC DS to be able to finalize its formal valuation report and fairness
opinion. The Independent Committee also reviewed with its legal and financial
advisors a revised draft of the Merger Agreement and considered further
possible revisions thereto.
At its April 9, 1996 meeting, the Independent Committee also discussed and
formulated its conclusions and recommendations for presentation to the board
of directors of Santa Elina at a meeting of the board of directors to be held
later that day. The Independent Committee unanimously concluded that the
proposed Merger would be fair to the Minority and in the best interests of
Santa Elina and unanimously recommended that Santa Elina enter into the Merger
Agreement in the form ultimately settled between Santa Elina and Echo Bay.
This recommendation was expressed to be conditional upon: (i) the provisions
of the final form of the Merger Agreement being no less advantageous, in any
material respect, to Santa Elina and the Minority than those contained in the
most recent draft version of this agreement reviewed by the Independent
Committee; and (ii) RBC DS delivering its formal valuation report and fairness
opinion to Santa Elina confirming the interim conclusions and advice of RBC DS
as discussed with the Independent Committee. The Independent Committee further
unanimously recommended that the board of directors recommend that
Shareholders vote in favour of the proposed Merger.
The Independent Committee received the formal valuation report and fairness
opinion and the final form of the Merger Agreement on April 23, 1996 and
delivered its final report to the board of directors of Santa Elina
recommending that Shareholders vote in favour of the proposed Merger. See
"Report and Recommendation of the Independent Committee".
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REPORT AND RECOMMENDATION OF THE INDEPENDENT COMMITTEE
On April 9, 1996, the Independent Committee delivered its interim report to
the board of directors and on April 23, 1996 the Independent Committee
delivered its final report to the board of directors. In its final report, the
Independent Committee unanimously concluded that the Merger is fair to the
Minority and in the best interests of Santa Elina and unanimously recommended
that the board of directors recommend that Shareholders vote in favour of the
Merger.
In reaching its conclusion and recommendation to the board of directors,
the Independent Committee considered and relied upon, among other things, the
following:
1. the results of the formal valuation of the Santa Elina Common Shares and
Echo Bay Common Shares prepared by RBC DS;
2. the opinion of RBC DS as to the fairness, from a financial point of
view, of the Merger and the reasons specified therefor in RBC DS's
fairness opinion;
3. that the Merger must be approved by not less than two-thirds of the
votes cast by Minority Shareholders at the Meeting;
4. the Committee's understanding that Minority Shareholders who oppose the
Merger may, upon compliance with certain conditions, dissent in respect
of the Santa Elina Merger Resolution in accordance with the applicable
provisions of the Act and be entitled to be paid the fair value of their
Santa Elina Common Shares under such statutory provisions; and
5. the Committee's knowledge of the financial condition, results of
operations, business, properties, plans and prospects of Santa Elina and
in particular the substantial capital investment that will be required
by Santa Elina to develop its mining properties and Santa Elina's
prospects for raising such funds on acceptable terms in the absence of
the Merger.
In view of the wide variety of factors which it considered in its
assessment of the proposed Merger, the Independent Committee found it
impractical to, and therefore did not, quantify or otherwise assign relative
weight to the specific factors considered in reaching its conclusion. However,
the Independent Committee was most influenced by the factors referred to in
items 1, 2 and 5 above.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF SANTA ELINA
The board of directors of Santa Elina, based upon the unanimous
recommendation of the Independent Committee and the reasons specified
therefor, including the formal valuation and fairness opinion provided by RBC
DS, and based upon the reasons enumerated under "Reasons for the Merger", has
determined that the proposed Merger is in the best interests of Santa Elina
and its Shareholders and recommends that Shareholders vote in favour of
the Merger.
This recommendation was made by resolution of the board of directors of
Santa Elina with Mr. Paulo C. de Brito (who together with his spouse, owns all
of the outstanding shares of Sercor) and Mr. John L. Azlant (who is a senior
officer of Echo Bay) declaring their interest in the proposed Merger and
refraining from voting on the resolution.
The Santa Elina properties are at an early stage of development and its
board believes that the properties may have a potential eventual value that
exceeds the price offered by Echo Bay pursuant to the Merger. Notwithstanding
the foregoing, given the current stage of development and the information
available on the properties, the terms of the Merger are considered fair at
this time. Santa Elina's ability to realize on any potential future value
would depend on the significant capital required to develop the properties, on
Santa Elina's ability to access such capital, and on the terms at which such
capital is available. Given Santa Elina's current financial position, the
Santa Elina board believes that it may be difficult for Santa Elina to
independently access the capital required to develop the properties.
VALUATIONS AND FAIRNESS OPINION
The Valuations and Fairness Opinion is dated April 23, 1996 and is attached
as Schedule III to the Circular.
RBC DS was formally contacted by the Independent Committee regarding a
potential advisory assignment on or about March 4, 1996 and was verbally
engaged by the Independent Committee on March 21, 1996. Under the terms of an
engagement agreement effective as of March 22, 1996 between Santa Elina and
RBC DS, RBC DS agreed to prepare a valuation of the Santa Elina Common Shares,
a valuation of the Echo Bay Common Shares to be received as consideration and
to provide its opinion as to the fairness of the Merger, from a financial
point of view, to the Minority.
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RBC DS is one of the largest investment banking firms in Canada with
operations in all facets of corporate and government finance, mergers and
acquisitions, equity and fixed income sales and trading and investment
research. RBC DS has experience in transactions involving valuation and
fairness opinions of private and publicly traded Canadian companies, including
recent transactions to which OSC Policy 9.1 and QSC Policy Q-27 were
applicable. The form and content of the Valuations and Fairness Opinion have
been approved by a committee of the directors of RBC DS, each of whom is
experienced in merger, acquisition, divestiture and valuation matters.
None of RBC DS, its associates or affiliates is an insider, associate or
affiliate (as such terms are defined in the Securities Act (Ontario)) of Echo
Bay, Sercor or Santa Elina or any of their respective associates or affiliates
(collectively the "Interested Parties"). Except as advisor to the Independent
Committee, neither RBC DS nor any of its affiliates is an advisor to any of
the Interested Parties in respect of the Merger. RBC DS has not, in the 24
months preceding the commencement of its engagement by the Independent
Committee, acted as lead or co-lead underwriter of securities of any
Interested Party or any of its principal security holders or its affiliates,
associates or related persons. RBC DS does not have any understanding,
agreement, arrangement or commitment with respect to any future business
involving any of the Interested Parties. However, RBC DS may, in the future,
seek or be provided with assignments from one or more of the Interested
Parties. Fees payable to RBC DS in connection with its engagement by the
Independent Committee are not dependent, in whole or in part, on the
conclusions reached in the Valuations and Fairness Opinion or the successful
completion of the Merger.
RBC DS is receiving a fee of Cdn$300,000 for the performance of its
services under the engagement letter. In addition, RBC DS will also be
reimbursed for its reasonable out-of-pocket expenses and will be indemnified
by Santa Elina under certain circumstances.
In preparing the Valuations and Fairness Opinion, RBC DS, among other
things, reviewed public and non-public information concerning Santa Elina and
Echo Bay; conducted site visits of Santa Elina's major properties; held
discussions with senior management of Santa Elina, Echo Bay and Sercor,
auditors and legal counsel of Santa Elina and accounting advisors and legal
counsel to Echo Bay, and received certificates from officers of Santa Elina
and Echo Bay as to the accuracy and completeness of certain information
provided to RBC DS. RBC DS also reviewed such other financial market,
corporate and industry information and conducted such other investigations and
analysis as RBC DS considered necessary or appropriate in the circumstances.
RBC DS was not, to the best of its knowledge, denied access by Santa Elina,
Echo Bay or Sercor to any information required by RBC DS.
For purposes of RBC DS's valuation of the Santa Elina Common Shares, "fair
market value" is defined as the highest price expressed in terms of money or
money's worth, available in an open and unrestricted market between informed
and prudent parties, each acting at arm's length, where neither party is under
any compulsion to act and without any downward adjustment to reflect the lack
of liquidity of the Santa Elina Common Shares or to reflect the fact that the
Santa Elina Common Shares owned by persons other than Echo Bay or Sercor, do
not form part of a controlling interest.
RBC DS reviewed whether any distinctive material value might accrue to Echo
Bay or Sercor through the acquisition of all the outstanding Santa Elina
Common Shares as contemplated by the Merger. In RBC DS's view, special
benefits which would accrue to Echo Bay and Sercor, assuming the completion of
the Merger, relate principally to the avoidance of "public company" costs of
Santa Elina. The estimated public company cash costs to Santa Elina are
approximately $1,000,000 per year. These costs were not included in the
estimated cash costs associated with the operations of Santa Elina and
therefore the savings of these costs after the completion of the Merger were
reflected by RBC DS in the determination of the fair market value of the Santa
Elina Common Shares.
As the vast majority of Santa Elina's assets consist of exploration and
mining assets, RBC DS concluded that the net asset value approach was the most
appropriate methodology for determining the value of the Santa Elina Common
Shares. This approach allows for the separate assessment of all assets and
liabilities in a manner most appropriate to the nature of the particular asset
or liability. The approach was derived by applying appropriate valuation
methods to each of Santa Elina's assets and liabilities. As a test of the net
asset value range obtained, RBC DS reviewed comparable prior property
transactions.
For the Sao Vicente operating mine, the Sao Francisco and Chapada
properties and the Guapore hydroelectric project, RBC DS utilized the
discounted cash flow ("DCF") approach to determine the appropriate range of
the present value of the assets. The DCF approach takes into account the
amount, timing and relative certainty of projected costs
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related to the project's capital expenditures and the future revenue generated
by, and the operating costs required by, the completed facility. In completing
their DCF analysis on the mining interests of Santa Elina and the Guapore
hydroelectric project, RBC DS did not rely on any single series of expected
cash flows but performed a variety of sensitivity analyses based on ranges of
copper and gold prices and recoveries, capital and operating costs, discount
rates and income tax assumptions.
For the Fazenda Nova property, where there was insufficient information to
carry out a DCF calculation, RBC DS determined the value of the property by
applying a range of multiples per ounce of gold to Santa Elina's resource
estimates for the property. Santa Elina's portfolio of land was valued by RBC
DS based on a review of the market capitalization of certain publicly traded
junior exploration companies and a comparison of their relative permitted land
positions, geological structures, previous mining activity and geographic
location. Santa Elina's 64% interest in Arauco Resources Corporation was valued
at its current market price and the current assets and all liabilities of Santa
Elina were valued at book value as at December 31, 1995.
Based on the assumptions, limitations and analysis in its Valuations and
Fairness Opinion, RBC DS is of the opinion that the fair market value of the
Santa Elina Common Shares, as of April 23, 1996, is in the range of $1.75 to
$2.15 per Santa Elina Common Share.
For purpose of RBC DS's valuation of the Echo Bay Common Shares, "fair
market value" is defined as the highest price expressed in terms of money or
money's worth, available in an open and unrestricted market between informed
and prudent parties, each acting at arm's length, where neither party is under
any compulsion to act. The market trading analysis approach adopted by RBC DS
to determine the fair market value of the Echo Bay Common Shares to be received
by the Minority necessarily reflects the liquidity of such shares as well as
the fact that such shares trade as a minority interest.
In determining the fair market value of the Echo Bay Common Shares, RBC DS
relied on the market trading analysis approach. RBC DS considered this approach
to be the most appropriate indicator of the fair market value of the Echo Bay
Common Shares due to the following factors: (i) the Minority will exert no
control over Echo Bay and hence would have no ability to, on their own, achieve
a premium to the market price of the Echo Bay Common Shares; (ii) given the
substantial market capitalization of Echo Bay, RBC DS does not anticipate that
the issuance by Echo Bay of the approximately 5.3 million new Echo Bay Common
Shares to the Minority and the additional approximately 3.5 million new Echo
Bay Common Shares to Sercor will have a material effect on the price of Echo
Bay Common Shares; (iii) the Echo Bay Common Shares are well followed by
analysts and trade on a comparable basis and in a manner consistent with other
major mining resource companies; and (iv) Echo Bay Common Shares are highly
liquid.
Based on the closing price of Echo Bay Common Shares on April 22, 1996 (the
last trading day prior to the date of RBC DS's valuation) RBC DS determined
that the value per Santa Elina Common Share based on the 6.67 to 1 exchange
ratio under the Merger is $1.95. Based on the closing price of Echo Bay Common
Shares on April 9, 1996 (the last trading day prior to the announcement of the
Merger), the value per Santa Elina Common Share based on the 6.67 to 1 exchange
ratio under the offer is $2.09. Based on the average closing price of Echo Bay
Common Shares for the 20 trading day period ending April 22, 1996, the value
per Santa Elina Common Share is $2.03. All such dollar amounts in this
paragraph are stated in U.S. dollars.
In considering the financial fairness of the proposed Merger to the
Minority, RBC DS considered the following:
(a) the fair market value of the Echo Bay Common Shares to be received by
the Minority is within the range of fair market values of the Santa
Elina Common Shares as determined by RBC DS;
(b) the implied offer price under the Merger represents a 20% to 29%
premium over the closing price of Cdn$2.19 per Santa Elina Common Share
on The Toronto Stock Exchange on April 9, 1996 (being the last day on
which the shares traded prior to the announcement of the proposed
Merger), which is within the range of premiums paid in similar
transactions reviewed by RBC DS;
(c) the relative liquidity of the Santa Elina Common Shares and the Echo
Bay Common Shares; and
(d) RBC DS's view of the future business prospects of Santa Elina as a
standalone entity, which it that it is possible that Santa Elina would
be unable to fully realize the net asset value of its underlying
properties.
Based upon the assumptions, limitations and analysis in its Valuations and
Fairness Opinion, RBC DS is of the opinion that, as at the date of RBC DS's
valuation, the Merger is fair, from a financial point of view, to the Minority.
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The foregoing is only a summary of the Valuations and Fairness Opinion, the
assumptions and analysis underlying the Valuations and Fairness Opinion should
be considered as a whole. SHAREHOLDERS ARE URGED TO READ THE VALUATIONS AND
FAIRNESS OPINION IN ITS ENTIRETY. There are no other valuations or appraisals
in respect of Santa Elina, its material assets or the Santa Elina Common
Shares made in the 24 months preceding the date of this Circular that are
known to Santa Elina, its directors or senior officers.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of the principal Canadian federal income
tax consequences under the Income Tax Act (Canada) (the "Tax Act") of the
Merger as described herein to Shareholders of Santa Elina.
This summary is based upon and takes into account the current provisions of
the Tax Act and the current regulations thereunder (the "Regulations"), all
specific proposals to amend the Tax Act and the Regulations publicly announced
by the Minister of Finance prior to the date hereof (the "Amendments"), and
Santa Elina's understanding of the current administrative practices published
by Revenue Canada, Customs, Excise and Taxation ("RCT"). This summary does not
otherwise take into account or anticipate any changes in law, whether by
judicial, governmental or legislative decision or action, nor, except as
specifically noted herein, does it not take into account tax laws or
considerations of any province or territory of Canada or any jurisdiction
outside Canada. Moreover, there can be no assurance that the Amendments will
be enacted as proposed or that the Tax Act, the Regulations or administrative
practices of RCT, respectively, will not change, in a manner which will affect
the tax consequences of the transactions to Santa Elina or the Shareholders.
This summary is restricted to those Shareholders of Santa Elina who, for
purposes of the Tax Act, are resident in Canada, deal at arm's length with
Santa Elina, and hold their shares as capital property. A share will generally
be capital property to a shareholder unless it is held in the course of
carrying on a business of trading or dealing in securities, has been acquired
in a transaction or transactions considered to be an adventure in the nature
of trade, or is a mark-to-market property of certain financial institutions.
This summary does not apply to a Shareholder who, either alone, or together
with related persons, owns at least 10% of the Santa Elina Common Shares.
THIS SUMMARY IS OF A GENERAL NATURE ONLY, IS NOT EXHAUSTIVE OF ALL
POTENTIALLY RELEVANT CANADIAN FEDERAL INCOME TAX CONSIDERATIONS AND IS NOT
INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY
PARTICULAR SHAREHOLDER. THEREFORE, SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX
ADVISERS WITH RESPECT TO THEIR PARTICULAR CIRCUMSTANCES.
DISSENTING SHAREHOLDERS
The consequences under the Tax Act to a Shareholder who dissents from the
Merger and who receives a payment for his or her shares are discussed below.
The receipt by a Dissenting Shareholder of a cash payment from Santa Elina
or Kendall, respectively, equal to the fair value of his or her common shares
will generally be treated as proceeds of disposition of the subject shares for
capital gains purposes. Consequently, such a Dissenting Shareholder would
realize a capital gain (capital loss) to the extent that the proceeds of
disposition the Shareholder receives for the share exceed (are exceeded by)
the Shareholder's adjusted cost base thereof.
Any capital loss arising on exercise of dissent rights by a corporate
Shareholder of Santa Elina will be reduced by dividends received on the
subject shares where the period of ownership of such shares was less than 365
days or where the corporate holder (together with persons with whom it did not
deal at arm's length) held more than 5% of the issued shares of any class of
Santa Elina at the time the dividends were received.
MERGER
Upon the Merger, Santa Elina will be merged into Kendall with Kendall being
the surviving corporation. All of the assets and liabilities of Santa Elina
will become assets and liabilities of the surviving corporation. In addition,
all of the shares of Santa Elina will become shares of the surviving
corporation. For purposes of the comments in the next paragraph, it is assumed
that Santa Elina and Kendall (both before and after the Merger) are resident
in the same jurisdiction.
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Unless a Shareholder elects otherwise, the Shareholder will not realize a
capital gain or a capital loss on the Merger. The aggregate cost base of the
Redeemable Preference Shares received by a Shareholder of Santa Elina as a
result of the Merger will be equal to the aggregate adjusted cost base of the
shares of Santa Elina that are exchanged by virtue of the Merger.
Upon the redemption by Kendall of the Redeemable Preference Shares (which
will occur immediately after the effective time of the Merger without any
shareholder action) and the payment of the Echo Bay Common Shares, a
Shareholder will be considered to have disposed of the Redeemable Preference
Shares for proceeds equal to the value of the Echo Bay Common Shares so
received. Consequently, the Shareholder would realize a capital gain (capital
loss) to the extent that the proceeds of disposition the Shareholder receives
for the share exceed (are exceeded by) the Shareholder's adjusted cost base
thereof.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of the principal United States federal
income tax consequences of the Merger to Shareholders of Santa Elina. This
summary is based on (i) the Internal Revenue Code of 1986, as amended
(the "Code"), judicial decisions, existing and proposed Treasury regulations,
Revenue Rulings, and other administrative pronouncements, changes to any of
which after the date of this Circular could apply on a retroactive basis and
affect the tax consequences described herein, and (ii) in part, on the facts
and agreements as described in this Circular and certain representations made
to counsel by Santa Elina.
This summary is restricted to those Shareholders of Santa Elina who, for
purposes of income taxation under the Code, are citizens or residents of the
United States or U.S. corporations, deal at arm's length with Santa Elina, and
hold their shares as a capital asset (collectively, "U.S. Shareholders"). This
summary does not apply to non-U.S. Shareholders who own their interests in
Santa Elina in connection with the conduct of a trade or business in the
United States. Shares of stock are generally a capital asset unless they are
held by the taxpayer as stock in trade, inventory, or property held primarily
for sale to customers in the ordinary course of trade or business (generally
applicable to a dealer in securities).
THIS SUMMARY IS OF A GENERAL NATURE ONLY, IS NOT EXHAUSTIVE OF ALL
POTENTIALLY RELEVANT UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS, DOES NOT
ADDRESS STATE TAX ASPECTS AND IS NOT INTENDED TO BE, NOR SHOULD IT BE
CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR SHAREHOLDER. THEREFORE,
SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS IN LIGHT OF THEIR
PARTICULAR CIRCUMSTANCES, INCLUDING IN PARTICULAR, THE EFFECT OF ANY FOREIGN,
U.S. STATE OR LOCAL TAX LAWS.
NON-DISSENTING SHAREHOLDERS
The Merger
A U.S. Shareholder who participates in the Merger should be treated for
U.S. federal income tax purposes as exchanging his or her Santa Elina Common
Shares for Echo Bay Common Shares received in redemption of the Redeemable
Preference Shares of Kendall. Because the Merger will not qualify as a tax-
free reorganization under the Code, the exchange of Santa Elina Common Shares
for Echo Bay Common Shares will be a taxable exchange for U.S. Federal income
tax purposes. Accordingly, a U.S. Shareholder who participates in the Merger
generally should recognize capital gain (or loss) equal to the difference
between the fair market value of the Echo Bay Common Shares received and his
or her adjusted basis, as determined under U.S. federal income tax law, in the
Santa Elina Common Shares surrendered in the Merger. Any such gain or loss
recognized should be long-term capital gain if at the time of the Merger the
U.S. Shareholder has held the Santa Elina Common Shares for more than one
year. At present, long-term capital gains of individuals are subject to a 28%
maximum tax rate (as compared with 39.6% for ordinary income), but the
deduction of capital losses is subject to limitation.
A U.S. Shareholder who participates in the Merger will take a basis in the
Echo Bay Common Shares received equal to their fair market value on the date
of the Merger.
The Merger will not satisfy the requirements of any of the various types of
tax-deferred reorganizations permitted under the Code. First, the Merger will
not qualify as a reorganization described in Section 368(a) (1) (A) of the
Code because such reorganizations are limited to U.S. state-law mergers and
Santa Elina is a British Virgin Islands corporation. Second, the Merger will
not qualify as a reorganization described in Sections 368(a)(1)(B) and
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368(a)(1)(C) of the Code because Echo Bay will not own 80% of the Kendall
stock immediately before or after the Merger. Third, the Merger will not
qualify as a reorganization described in Section 368(a)(1)(D) of the Code
because stock of Echo Bay, rather than Kendall, will be received by Santa
Elina Shareholders participating in the Merger. In order to facilitate the
economics of the business arrangement as described above at "The Merger-Terms
of the Merger," notably that the Minority Shareholders receive freely
tradeable Echo Bay Common Shares and that Echo Bay desires to acquire only 50%
of Santa Elina, the Merger has been structured in a manner that results in a
taxable exchange for U.S. Federal income tax purposes.
Ownership of Echo Bay Common Shares
Dividends on Echo Bay Common Shares paid to citizens or residents of the
U.S. or to U.S. corporations (including any Canadian federal income tax
withheld) generally will be subject to U.S. federal income tax as ordinary
income. Such dividends will not be eligible for the deduction for dividends
received by corporations (unless such corporation owns by vote and value at
least 10% of the stock of the company, in which case a portion of such
dividend may be eligible for such deduction).
U.S. corporations, U.S. citizens and U.S. residents will generally be
entitled, subject to certain limitations, to a credit against their U.S.
federal income tax for Canadian federal income taxes withheld from such
dividends. Taxpayers may claim a deduction for such taxes if they do not elect
to claim such tax credit. However, no deduction for foreign taxes may be
claimed by an individual taxpayer who does not itemize deductions. Under
certain limited circumstances, non-resident aliens and foreign corporations
will be subject to U.S. federal income taxation at graduated rates upon
dividends or gain with respect to their Echo Bay Common Shares (and may be
entitled to such tax credit or such deduction), if such income or gain is
treated as effectively connected with the conduct of the recipient's trade or
business within the United States.
Echo Bay believes that it is not a "passive foreign investment company" (a
"PFIC") for United States federal income tax purposes. However, if Echo Bay
were, or were to become, a PFIC, some or all United States shareholders would
be required to include in their taxable income certain undistributed amounts
of Echo Bay's income, or, in certain circumstances, to pay an interest charge
together with tax calculated at maximum rates on certain "excess
distributions," defined as including gain on the sale of stock of a PFIC.
Any United States person who owns 5% or more in value of the stock of Echo
Bay may be required to file IRS Form 5471 with respect to Echo Bay and its
non-United States subsidiaries to report certain acquisitions or dispositions
of stock of Echo Bay.
DISSENTING SHAREHOLDERS
A U.S. Shareholder who dissents from the Merger generally will recognize
capital gain (or loss) equal to the difference between the cash payment
received for his or her Santa Elina Common Shares and his or her adjusted
basis, as determined under U.S. federal income tax law, in the Santa Elina
Common Shares for which the Shareholder exercised dissenter rights. Any gain
or loss recognized should be treated as long-term capital gain (or loss) if at
the time of the Merger the U.S. Shareholder has held the Santa Elina Common
Shares for more than one year. As discussed above, long-term capital gains of
individuals may be subject to more favorable rates than ordinary income, but
the deduction of capital losses is subject to limitation.
DISSENTING SHAREHOLDERS' RIGHTS
A dissenting shareholder of Santa Elina is entitled to payment of the fair
value of his Santa Elina Common Shares upon dissenting from the Merger
pursuant to section 83 of the Act. The following summary is qualified in its
entirety by the provisions of section 83 of the Act, the text of which is set
forth as Schedule IV to this Circular.
A shareholder who desires to exercise his dissent right must give to Santa
Elina, before the Meeting, or at the Meeting but before the vote, written
objection ("Objection") to the Merger. The Objection must include a statement
that the Shareholder proposes to demand payment for his shares if the Merger
is completed. Within 20 days immediately following the Meeting, if the Merger
is approved, Santa Elina must give written notice (the "Notice") of such
approval to each Shareholder who submitted an Objection, except those
Shareholders who voted for the Merger. A Shareholder to whom Santa Elina was
required to give Notice who elects to dissent must, within 20 days immediately
following the date on which the Notice is given, give to Santa Elina a written
notice (the "Dissenter's Notice") of his decision to elect to dissent. The
Dissenter's Notice must include (a) his name and address; (b) the
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number of shares in respect of which he dissents; and (c) a demand for payment
of the fair value of his shares. A Shareholder who dissents must do so in
respect of all shares that he holds in Santa Elina. Upon giving the
Dissenter's Notice, the Shareholder ceases to have any of the rights of a
shareholder except the right to be paid the fair value of his shares.
Within seven days immediately following the date of the expiration period
within which Shareholders may give a Dissenter's Notice or within seven days
immediately following the Effective Date, whichever is later, Santa Elina or,
Kendall if the Merger has been completed, must make a written offer to each
dissenting Shareholder to purchase his shares at a specified price which such
company determines to be their fair value; and if, within 30 days immediately
following the date on which the offer is made, Santa Elina making the offer
and the dissenting Shareholder agree upon the price to be paid for his shares,
Santa Elina shall pay to the Shareholder the amount in money upon the
surrender of the certificates representing the shares. If Santa Elina and a
dissenting Shareholder fail, within the period of 30 days referred to above,
to agree on the price to be paid for the shares owned by the Shareholder,
within 20 days immediately following the date on which the period of 30 days
expires, the following shall apply: (a) Santa Elina and the dissenting
Shareholder shall each designate an appraiser; (b) the two designated
appraisers shall designate a third appraiser; (c) the three appraisers shall
fix the fair value of the shares owned by the dissenting Shareholder as of the
close of business on the day prior to the date of the Meeting, excluding any
appreciation or depreciation directly or indirectly incurred by the action or
proposal from which the Shareholder dissents, and that value is binding on
Santa Elina and the dissenting shareholder for all purposes; and (d) Santa
Elina shall pay to the Shareholder the amount in money upon the surrender by
him of the certificates representing his shares.
The enforcement by a Shareholder of his entitlement under section 83 of the
Act excludes the enforcement by the Shareholder of a right to which he might
otherwise be entitled by virtue of his holding Santa Elina Common Shares,
except that section 83 does not exclude the right of the shareholder to
institute proceedings to obtain relief on the ground that the Merger is
illegal.
THE ABOVE IS ONLY A SUMMARY OF THE DISSENTING SHAREHOLDER PROVISIONS OF THE
ACT, WHICH ARE TECHNICAL AND COMPLEX. IT IS SUGGESTED THAT ANY SHAREHOLDERS
WISHING TO AVAIL THEMSELVES OF SUCH SHAREHOLDER'S RIGHTS UNDER THOSE
PROVISIONS SEEK SUCH SHAREHOLDER'S OWN LEGAL ADVICE, AS FAILURE TO COMPLY
STRICTLY WITH THE PROVISIONS OF THE ACT MAY PREJUDICE SUCH SHAREHOLDER'S RIGHT
OF DISSENT.
U.S. SECURITIES REGISTRATION
Echo Bay has agreed to register the Echo Bay Common Shares to be received
by Shareholders of Santa Elina in the Merger and related transactions under
the Securities Act. This Circular constitutes the prospectus of Echo Bay
included within its Registration Statement filed with the Securities and
Exchange Commission. See "Available Information." It is a condition to the
obligations of the parties to consummate the Merger that the Registration
Statement be declared effective by the Securities and Exchange Commission, the
effect of which will be that the Minority Shareholders will receive Echo Bay
Common Shares without restriction on resale. See "Resale of Echo Bay Common
Shares by Santa Elina Affiliates".
ACCOUNTING TREATMENT
As the transaction will result in the current shareholders of Echo Bay
retaining a majority of Echo Bay Common Shares, the transaction will be
accounted for as a purchase of an additional 43% interest in Santa Elina by
Echo Bay. Echo Bay's total interest in Santa Elina will be 50% when added to
its existing 7% interest. Santa Elina will be consolidated into Echo Bay using
the proportionate consolidation method, as Echo Bay and Sercor will jointly
control Santa Elina. Under the proportionate consolidation method, 50% of
Santa Elina's assets, liabilities, revenues and expenses will be included in
the consolidated financial statements of Echo Bay.
FEES AND EXPENSES
Each of Santa Elina, Kendall, Echo Bay and Sercor is responsible for its
own expenses incurred in connection with the completion of the Merger.
Assuming that the Effective Date is on or about July 16, 1996, the estimated
costs and fees of Santa Elina in connection with the Merger, including,
without limitation, financial advisors' fees, filing fees, legal and
accounting fees (including legal advisors to the Independent Committee) and
soliciting dealer fees are estimated to be approximately $1,100,000 and the
estimated costs and fees of Echo Bay in connection with the Merger, including,
without limitation, financial advisors' fees, filing fees and legal and
accounting fees are estimated to be approximately $1,000,000.
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COMPARATIVE RIGHTS OF SANTA ELINA AND ECHO BAY SHAREHOLDERS
As a result of the Merger, the Shareholders of Santa Elina will become
shareholders of Echo Bay and the rights of all such former Santa Elina
Shareholders will thereafter be governed by the constating documents of Echo
Bay and the Canada Business Corporations Act. The rights of the Santa Elina
Shareholders are presently governed by the constating documents of Santa Elina
and the Act. The following summary, which does not purport to be a complete
statement of the general differences between the rights of the shareholders of
Santa Elina and Echo Bay, sets forth certain differences between the
constating documents of Santa Elina and Echo Bay. This summary is qualified in
its entirety by reference to the full text of each such document. Shareholders
wishing to obtain copies of such documents should contact Santa Elina in order
to request copies of the constating documents of either or both of Santa Elina
and Echo Bay.
Both Santa Elina and Kendall are incorporated under the corporate laws of
the British Virgin Islands, and the Merger will take place in accordance with
the laws of that jurisdiction. Echo Bay is incorporated under the laws of
Canada. The discussion below is intended only as a guide to some of the
material differences between the British Virgin Islands International Business
Companies Act (the "Act") and the Canada Business Corporations Act
(the "CBCA"). Shareholders should seek their own legal counsel in the
respective jurisdictions to address any specific legal questions arising from
the Merger.
Shareholder Approvals
Under the Act, shareholders of common shares of Santa Elina or Kendall are
entitled to vote as one class and each whole share carries one vote.
Shareholders may also vote by proxy or by appointment of a voting trustee to
vote the affected shares at any meeting of shareholders. Shareholders of Echo
Bay are also entitled under the CBCA to one vote for each common share, and
may vote in person, or by proxy.
Notice of Shareholder Business
A notice of a shareholder meeting is required to be sent by Santa Elina or
Kendall no less than seven days prior to that meeting, to all voting
shareholders appearing on the register of the corporation on the date of that
notice. The Articles of Santa Elina and Kendall provide that notice of a
meeting may be waived by the vote of an absolute majority of the shareholders.
A quorum is achieved for Santa Elina or Kendall when one-third or more of the
holders of each class or series of shares is present or otherwise accounted
for. Under the CBCA and the By-laws of Echo Bay, a notice of any meeting of
voting shareholders must be sent no more than 50 days and no less than 21 days
prior to the meeting, to all shareholders appearing on the register as at a
record date as set by the directors, which may be no less than 21 days prior
to the meeting. Quorum is reached by attendance of a majority of the voting
shares. A shareholder may waive notice, but neither the notice nor the quorum
requirements may be waived in respect of a shareholder by the directors or
other shareholders.
Power to Call Special Meetings
Under the Act and the Articles of Santa Elina and Kendall, shareholders
holding 50% or more of the voting shares of the corporation may require the
directors to call a meeting of shareholders. Under the CBCA, a holder of more
than 5% of the common shares of Echo Bay may requisition a meeting of
shareholders. If that meeting is not called within 21 days, the shareholder
may call the meeting on his own authority. No equivalent provision exists
under the Act.
Voting Requirements
Under the Act, amendment of the By-laws of Santa Elina or Kendall and
approval of a plan of merger or consolidation may be authorized by a simple
majority of shareholders of outstanding shares voting as a class or series. A
fundamental change such as a merger under the CBCA requires authorization by a
special resolution of the shareholders of Echo Bay, also voting as a separate
class or series, of not less than two-thirds of the votes cast.
Election of Directors
Under the Act, directors may be elected either by the shareholders or, if
the company's Articles or Memorandum permits, by other directors, for such
terms as the directors may determine. A director may be removed by a
resolution of the shareholders or of the directors, as the Articles or
Memorandum permits. The Articles of Santa Elina and Kendall provide that a
director may hold office until his death, resignation or removal, or the
election of his successor. Under
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the CBCA, directors of Echo Bay may only be elected by the voting
shareholders, and for a term of no more than three years. The By-laws of Echo
Bay provide that directors are elected for one-year terms, or until their
replacements are elected. A director may be removed by an ordinary resolution
of the voting shareholders.
Shareholder Rights Plan
Echo Bay has adopted a shareholder rights plan. Under this plan, if any
person or group were to announce an intention to acquire, or were to acquire,
20% or more of Echo Bay's Common Shares without complying with the conditions
of a "permitted bid," then the owners of each common share (other than the
acquiring person or group) would become entitled to exercise a right to buy
one additional common share at 50% of the lowest share price on The Toronto
Stock Exchange during the prior 90 days. The plan expires in 2004, subject to
reconfirmation by shareholders in 1999.
A "permitted bid," which does not trigger the entitlement to acquire shares
under the plan, is one that complies with applicable securities law in all
jurisdictions where at least 5% of Echo Bay's Common Shares are owned; is made
to all shareholders for all outstanding shares; is open for a minimum of 60
days; takes up no shares until at least 66 2/3% of the outstanding shares have
been tendered to the bid, including those owned by the acquiring person or
group; and meets certain other conditions.
Santa Elina does not have a shareholder rights plan in place.
MANAGEMENT AND OPERATIONS FOLLOWING THE MERGER
Kendall plans to continue the operations of Santa Elina after the Merger
essentially in the same manner as they have been conducted by Santa Elina.
Kendall expects that Santa Elina's Brazilian management will remain with
Kendall following the Merger. Kendall will continue to operate the Santa Elina
operations out of Sao Paulo, Brazil and Bolivia. Certain functions relating to
Santa Elina's financial reporting will be centralized in Echo Bay's Colorado
offices. The board of directors of Kendall will be comprised of eight
directors. Initially, each of Echo Bay and Sercor will be entitled to nominate
four representatives to the board.
AMENDMENT AND TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be amended by the written agreement of Santa Elina
and Kendall (or in the case of a waiver, by written instrument of the party
giving the waiver) without further notice to or authorization on the part of
their respective shareholders, provided that the number of Redeemable
Preference Shares that the Shareholders shall have the right to receive on the
Merger, and the provisions attaching to the Redeemable Preference Shares
(including, without limitation, the number of Echo Bay Common Shares issuable
upon redemption of each Redeemable Preference Share), may not be reduced
without the approval of the Shareholders given in the same manner as required
for the approval of the Merger. The Merger Agreement has twice been amended to
extend the dates provided for therein.
The Merger Agreement may be terminated at any time prior to the Effective
Date if, notwithstanding the best efforts of Santa Elina, the Shareholders do
not approve the Merger in accordance with the requirements of applicable laws,
policies and regulations, or if, notwithstanding the best efforts of Santa
Elina and Kendall, the Merger has not become effective on or before July 31,
1996. If the Merger Agreement is terminated prior to the Effective Date by
Kendall, then Santa Elina shall pay $2,000,000 to Kendall in respect of its
third party costs, and if the Merger Agreement is terminated during such
period by Santa Elina, then Kendall shall pay $500,000 to Santa Elina in
respect of its third party costs.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Shareholders should be aware that certain officers, directors and employees
of Santa Elina have certain interests in the Merger that are different from
the interests of Shareholders generally. Sercor will immediately prior to the
Merger sell to Echo Bay 23,479,185 Santa Elina Common Shares (or 17% of its
67% interest) in exchange for 3,520,118 Echo Bay Common Shares (which is the
same ratio offered to the Shareholders). On the incorporation of Kendall, each
of Sercor and Echo Bay will hold a 50% interest in Kendall, comprised of
Kendall Common Shares. Upon the completion of the Merger, Sercor and Echo Bay
will hold Kendall Common Shares whereas the Minority Shareholders will hold
Redeemable Preference Shares (which will be redeemed for Echo Bay Common
Shares). As discussed below under "Santa Elina Gold Corporation", Paulo C. de
Brito and his family, who control Sercor, will
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continue to hold a direct 17% interest in the subsidiaries of Santa Elina upon
completion of the Merger, such that the Santa Elina subsidiaries will be owned
83% by Kendall and 17% by the de Brito family. Upon completion of the Merger,
all outstanding options or warrants to acquire any securities of Santa Elina
will be cancelled except for certain warrants held by Sercor. In addition,
Echo Bay will issue up to 50,535 Echo Bay Common Shares in exchange for
cancellation of the 1,193,333 outstanding options on Santa Elina Common
Shares. Lastly, employment arrangements will be entered into between Kendall
and certain officers, directors and employees of Santa Elina, including
Mr. de Brito, following completion of the Merger. The terms of these
arrangements have not been finalized.
NO SOLICITATION
Sercor has agreed that during the period ending no later than July 31,
1996, it will not enter into any agreement, or take part directly or
indirectly, through representatives, advisors or agents or otherwise, in any
discussions or negotiations or provide any information to any third party
relating to any acquisition or disposition of any assets of Santa Elina, its
subsidiaries or Sercor (except for transactions in the ordinary course of
business), or the issue or transfer of any securities of Santa Elina, its
subsidiaries or Sercor, or any proposal to offer to purchase outstanding
shares, amalgamate, merge or effect a merger or other business combination of
Santa Elina, its subsidiaries or Sercor with one or more corporations or
entities.
PRO FORMA FINANCIAL INFORMATION
Shareholders are referred to Schedule VI attached to this Circular for the
pro forma financial statements of Echo Bay, assuming completion of the
transactions culminating in the Merger as of and for the three months ended
March 31, 1996 and for the year ended December 31, 1995.
The pro forma condensed consolidated balance sheet and statement of
earnings are based upon the audited financial statements of Echo Bay and Santa
Elina as of and for the year ended December 31, 1995, and the unaudited
financial statements of Echo Bay and Santa Elina as of and for the three
months ended March 31, 1996, adjusted to reflect Echo Bay increasing its
ownership from 7% to 50% of the outstanding Santa Elina Common Shares. Each
Shareholder of Santa Elina other than Echo Bay and Sercor will receive one
Echo Bay Common Share for each 6.67 Santa Elina Common Shares held. Echo Bay
will purchase 23,479,185 Santa Elina Common Shares from Sercor in exchange for
3,520,118 Echo Bay Common Shares, which is the same ratio offered to the
public shareholders. In addition, Echo Bay will issue up to 50,535 Echo Bay
Common Shares in exchange for cancellation of the 1,193,333 outstanding
options on Santa Elina Common Shares. Upon consummation of the transactions,
Echo Bay will have issued 8,830,934 Echo Bay Common Shares and Echo Bay and
Sercor will each own 50% of Santa Elina. As the transaction will result in the
current shareholders of Echo Bay retaining a majority of Echo Bay Common
Shares, the pro forma transaction has been accounted for as a purchase of 43%
of Santa Elina by Echo Bay. Echo Bay's total interest in Santa Elina will be
50% when added to its existing 7% interest. Santa Elina has been consolidated
into Echo Bay using the proportionate consolidation method, as Echo Bay and
Sercor will jointly control Santa Elina. Under the proportionate consolidation
method, 50% of Santa Elina's assets, liabilities, revenues and expenses will
be included in the consolidated financial statements of Echo Bay.
The Pro Forma Condensed Consolidated Financial Statements should be read in
conjunction with the historical consolidated financial statements, including
the notes thereto, of Echo Bay and Santa Elina which are included elsewhere in
this Circular.
RISK FACTORS
Shareholders of Santa Elina should carefully consider the information set
forth below, as well as that set forth under, and cross-referred to in, the
section of Echo Bay's Form 10-K for the year ended December 31, 1995 (which is
attached hereto as Schedule VII and incorporated by reference herein) entitled
"Risk Factors" and appearing on page 5 thereof.
Speculative Investments
The Santa Elina Common Shares should be considered speculative due to the
nature of its early stage of involvement in the business of exploration,
development and production of mining properties. Investors must rely upon the
ability, expertise, judgment, discretion, integrity and good faith of
management of Santa Elina, Kendall and Echo
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Bay. The success of Santa Elina, Kendall and Echo Bay depends upon a number of
factors, such as the marketability of, and prices for, gold, silver and
copper, competition with companies having greater resources, the operational,
project development and production risks involved in mineral exploration and
development and the regulation of the mining industry by various levels of
government.
Environmental and Other Regulatory Requirements
Existing and possible future environmental legislation, regulations and
actions could cause additional expense, capital expenditures, restrictions and
delays in the activities of Santa Elina, Kendall and Echo Bay, the extent of
which cannot be predicted. Regulatory requirements and environmental standards
are subject to constant evaluation and may be significantly increased, which
could significantly adversely affect the business of those companies. The cost
of compliance with changes in governmental regulations has the potential to
reduce the profitability of operations and to affect development decisions
with respect to exploration and development properties.
Exploration and Mining Risks
The business of exploration for minerals and mining involves a high degree
of risk. Few properties that are explored are ultimately developed into
producing mines. Unusual or unexpected formations, formation pressures, fires,
power outages, labour disruptions, flooding, explosions, cave-ins, land slides
and the inability to obtain suitable or adequate machinery, equipment or
labour are other risks involved in the operation of mines and the conduct of
exploration programs. Santa Elina, Kendall and Echo Bay have relied and may
continue to rely upon consultants and others for construction and operating
expertise. The economics of developing gold and other mineral properties is
affected by many factors including the cost of operations, variations of the
grade of ore mined, fluctuant mineral markets, costs of mining and processing
equipment and such other factors as government regulations, including
regulations relating to royalties, allowable production, importing and
exporting of minerals and environmental protection. In order to commence
exploitation of certain properties held by Santa Elina under exploration
permits it is often necessary for the companies to apply for mining
concessions. Further, a certain minimum amount of work must be done in order
to maintain an exploration permit on a Brazilian property.
Mineral Prices
Factors beyond the control of mining companies may affect the marketability
of gold or any other minerals discovered. Mineral prices have fluctuated
widely in international markets, particularly in recent years. The effect of
these factors cannot accurately be predicted.
Uninsured Risks
The companies in which Santa Elina, Kendall or Echo Bay have interests may
become subject to liability for pollution or other hazards against which they
cannot insure or against which they may elect not to insure because of high
premium costs or other reasons. The payment of such liabilities would reduce
the funds available for exploration and mining activities.
Political and Other Risks
Santa Elina's and Echo Bay's mining interests outside Canada and the United
States host economic reserves of silver, gold and other minerals, but factors
such as political instability, expropriation of property, opposition and
harassment from local miners, or governmental regulation may prevent or
restrict mining of any such deposits or repatriation of profits. Santa Elina
currently has mining interests in Brazil and, to a lesser extent, Bolivia.
Echo Bay's current mining activities outside Canada and the United States are
in Mexico, the Philippines and, through its agreements with Santa Elina,
Brazil and Bolivia. It is also conducting exploration in various countries in
South America and West Africa, either directly or through strategic
relationships.
Reserve and Resource Estimation and Gold and Other Mineral Recoveries
There is a degree of uncertainty attributable to the estimation of ore
reserves and corresponding ore grades to be mined or dedicated to future
production. This uncertainty is substantially magnified with respect to
mineralization classified as "resources" or "other mineralization". Until the
ore is actually mined and processed, ore reserves,
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estimates of resources or other mineralization and ore grades must be
considered as estimates only. In addition, the quantity of ore reserves may
vary depending on mineral prices and changes in costs. Any material change in
reserves, resources, ore grades or stripping ratios may affect the economic
viability of the projects. In addition, there can be no assurance that gold
and other mineral recoveries in small scale laboratory tests will be
duplicated in larger scale tests under on-site conditions or in production
scale processing. Shareholders should also be aware that Santa Elina has
historically classified non-reserve mineralization as resources. Under
Securities and Exchange Commission regulations, Echo Bay reports its non-
reserve mineralization as "other mineralization." Further, Echo Bay prepares
its reserve reports in accordance with the Canadian Securities Administrators'
National Policy Statement No. 2-A, as opposed to the Australasian Code for
Reporting of Identified Mineral Resources and Ore Reserves which has been
utilized by Santa Elina, and future reporting of Santa Elina's mineral
resources and reserves will be required to meet the standards set forth in
National Policy Statement No. 2-A.
Operating History
Santa Elina has limited operating history in the mining business. The
Shareholders must rely upon the ability, expertise, judgment, discretion,
integrity and good faith of Santa Elina's management. Echo Bay has a longer
history of mining activity, having been incorporated and operating mines
profitably since 1964, although its experience has been focused on North
America. Both companies have undertaken aggressive exploration and acquisition
programs internationally in the last two years, with the result that both
companies reported net losses in 1995. There is no assurance that these losses
will not continue, nor that these exploration activities and acquisitions will
be profitable. Both companies anticipate that the completion of existing
exploration and development projects will require additional funding. There
can be no assurance that such funds will be available at terms acceptable to
Santa Elina or to Echo Bay or at all. Reference is made to the financial
statements of Santa Elina and Echo Bay and the pro forma financial statements
of Echo Bay which are attached as Schedules to this Circular.
Conflicts of Interest
The directors of Santa Elina and Echo Bay may, from time to time, be
directors, officers and shareholders of other natural resource and precious
metals exploration and mining companies. For example, John Azlant, a senior
vice president of Echo Bay, is a director of Santa Elina. As a result,
conflicts may arise between the obligations of these directors to Santa Elina
and Echo Bay and to such other companies. See "Interests of Certain Persons in
the Transaction." See, also, "Experts" for a description of the relationship
of John J. McOuat, President of WGM, to Echo Bay.
Enforcement of Civil Liabilities and Governing Law
Santa Elina and Kendall are British Virgin Islands companies. All or a
substantial portion of their assets, or those of any of their subsidiaries,
are or may be located outside Canada. In addition, certain of the directors
and officers of Santa Elina and Kendall and certain of the experts named in
this Circular are residents of Brazil, the British Virgin Islands or the
United States and all or a substantial portion of the assets of such persons
are or may be located outside Canada. As a result, it may be difficult or not
possible for investors to effect service of process within Canada upon such
persons or to enforce against them judgments obtained in Canadian courts,
including judgments predicated upon the civil liability provisions of the
securities laws of Canada. In addition, the laws of the British Virgin Islands
governing corporations are similar to but differ in some respects from
Canadian laws governing Canadian corporations. See also, "Enforcement of
Certain Obligations."
Inflation and Currency Risks
Santa Elina and Echo Bay hold mining interests in several countries,
including Brazil, Bolivia, Chile, Peru, Guyana, Mexico, Niger, Burkina Faso
and the Philippines, which historically have had unstable currencies as a
result of inflation, currency controls or other reasons. Although the
production resulting from such mining interests is generally sold in US
dollars, both companies are vulnerable to the effects of inflation in their
operations in certain countries, and profitability levels may be eroded by
unfavourable exchange rates. None of the countries in which the companies hold
mineral interests restrict the repatriation of profits, other than through the
requirement to register such distributions. While recent years have seen a
generally positive trend toward lowering inflation and stabilizing exchange
rates in these countries, there is no assurance that governments will continue
with current economic policies or that inflation will be lower than it has
been historically.
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SANTA ELINA GOLD CORPORATION
SANTA ELINA AND ITS SUBSIDIARIES
Santa Elina was incorporated under the laws of the British Virgin Islands
on April 17, 1990 under the name Woodbine Limited by registration of its
Memorandum and Articles of Association with the Registrar of International
Business Companies of the British Virgin Islands and changed its name to its
present name on March 31, 1994. The registered office address of Santa Elina
is located at Arawak Chambers, Road Town, Tortola, British Virgin Islands. The
head and principal office of Santa Elina is located at Av. Juscelino
Kubitschek, 1830, Torre 3, Sao Paulo, SP, Brazil.
Santa Elina's principal subsidiary, Mineracao Santa Elina was formed in
1976 and since then has operated as a private company in the business of
exploring and developing gold mining properties in Brazil. Mineracao Santa
Elina also provides management and technical expertise to other Santa Elina
subsidiaries and affiliates, including Mineracao Maraca, which owns properties
in Brazil, Compania Minera, which has a number of mineral properties in
Bolivia, and Arauco, with a portfolio of properties in Chile.
The following chart indicates the corporate structure of Santa Elina and
its equity and voting position in various companies, as well as the respective
jurisdictions under the laws of which each such company was organized.
Santa Elina Gold Corporation (British Virgin Islands)
-------------------------------------------------------------
[GRAPH APPEARS HERE]
Santa Elina is controlled by Sercor, which owns 91,044,445 Santa Elina
Common Shares resulting in a 67% interest. Mr. Paulo de Brito, the Chairman,
President and Chief Executive Officer of Santa Elina, is a director and the
controlling shareholder of Sercor.
Santa Elina holds 86,535,262 voting common shares and 351,416,675 non-
voting preference shares of Mineracao Santa Elina representing 49% of the
voting common shares and 100% of the non-voting preference shares, or 83% of
the total outstanding shares of Mineracao Santa Elina. One-third of all of the
issued and outstanding shares of Mineracao Santa Elina are common shares and
the balance are preference shares. Mr. de Brito and his spouse hold 89,700,638
voting common shares of Mineracao Santa Elina representing 51% of the voting
common shares and 17% of the total outstanding shares of Mineracao Santa
Elina. Preference shares of Mineracao Santa Elina are entitled to a priority
on dividends and other distributions, including on dissolution.
Santa Elina carries on its business in Bolivia through its wholly-owned
subsidiary Compania Minera.
Santa Elina also holds 16,400 voting common shares and 66,600 non-voting
preference shares of Mineracao Maraca representing 49% of the voting common
shares and 100% of the non-voting preference shares, or 83% of the total
outstanding shares, of Mineracao Maraca. Mr. Paulo de Brito and his spouse
hold the remaining 17,000 voting common shares of Mineracao Maraca
representing 51% of the voting common shares and 17% of the total outstanding
shares of Mineracao Maraca.
Santa Elina holds 5,395,279 Class A common shares of Arauco, representing
38% of the outstanding voting Class A common shares of Arauco. Arauco is a
reporting issuer in British Columbia, is listed on the Vancouver Stock
Exchange and has property interests in Chile.
42
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The Brazilian subsidiaries of Mineracao Santa Elina and Mineracao Maraca
are wholly-owned except for one subsidiary which is 51% owned by Mineracao
Santa Elina. See "Description of Properties - Other Mato Grosso Properties".
The Properties are held by Mineracao Santa Elina and Compania Minera and
their subsidiaries. Mineracao Maraca holds the Chapada property through a
wholly-owned subsidiary. See "Description of Properties".
BUSINESS AND PROPERTIES
Santa Elina invests in and holds interests in mining properties in Brazil,
Bolivia and Chile through a number of subsidiaries and other companies in
which it maintains a significant share position.
The Properties are comprised of the Santa Elina Gold Belt, the Chapada
property, the Fazenda Nova project, the Inaja project, the Jaragua project,
the Sao Paulo project and certain other areas in Brazil and in Bolivia and
Chile. In total, the Properties represent more than 11,000,000 hectares of
mineral claims at various stages of gold exploration and development in the
states of Mato Grosso, Para, Amazonas, Sao Paulo, Rondonia, Mato Grosso do Sul
and Goias, Brazil and in Bolivia and Chile. The Santa Elina Gold Belt is the
largest of the Properties, extending into four States in Brazil and into
Bolivia, and includes the Sao Vicente mine and the Sao Francisco deposit, the
most developed area of the belt, and certain alluvial deposits.
The map below shows Santa Elina's principal mining properties.
43
<PAGE>
As at March 26, 1996, the following permits and concessions have been
obtained or applied for in respect of the Properties:
<TABLE>
<CAPTION>
NATURE OF CLAIMS NO. OF HECTARES
---------------- ---------------
<S> <C>
Mining Concessions(/1/)...................................... 51,799
Exploration Permits.......................................... 339,599
Applications for Prospecting(/2/)............................ 11,500,000
</TABLE>
- --------
(1) Mining concessions have been granted for the Sao Vicente mine and the
Chapada property. Exploration of the Sao Francisco deposit is at an
advanced stage and a mining concession is expected to be issued within a
few months.
(2) Of the 11,500,000 hectares, applications for prospecting relating to
5,400,000 hectares have recently been submitted. Santa Elina normally has
access to the records of DNPM and ascertains that there are no prior claims
before applications for prospecting are submitted, thereby assuring the
accuracy of the applications and the likelihood that exploration permits
will be granted. Santa Elina does not believe that there are prior claims
in respect of these applications. However, Santa Elina did not ascertain
whether or not prior claims existed in respect of these recent applications
before submitting them.
The larger Brazilian portion of the Santa Elina Gold Belt is held by
Mineracao Santa Elina and its wholly-owned or controlled subsidiaries and the
smaller Bolivian portion is held by Compania Minera. The number of hectares of
mineral claims on the Santa Elina Gold Belt, including applications for
prospecting, now exceeds 5,000,000 hectares. The Santa Elina Gold Belt is
located about 1,750 kilometres northwest of Sao Paulo and 80 kilometres east of
the Bolivian border and extends in the south into Bolivia. The Santa Elina Gold
Belt includes the Sao Vicente mine located approximately 50 kilometres
northwest of Pontes e Lacerda and approximately 400 kilometres northwest of
Cuiaba, the Sao Francisco property located approximately 40 kilometres
southeast of Sao Vicente and certain other properties along the approximately
900 kilometre length of the belt. Mining concessions have been granted for the
Sao Vicente property and are in the process of being granted for the Sao
Francisco property.
The Chapada property is a 75,000 hectare pre-feasibility stage property held
by Mineracao Maraca directly and indirectly. A mining concession in respect of
3,000 hectares of the Chapada property has been granted. Mineracao Maraca also
owns the land that comprises part of the mining concession which is located
northwest of Brazilia. In consideration of Mr. de Brito's and his spouse's
contribution of the entire working interest in the Chapada property to
Mineracao Maraca, Mr. de Brito and his spouse have a carried interest in
Mineracao Maraca and are not required to contribute to the development of the
Chapada property by Mineracao Maraca.
The company that owns the Fazenda Nova property was purchased by Santa Elina
in January 1995. Six gold prospects have been identified at the property, which
is located 200 kilometres from the state capital of Goiania.
Santa Elina also holds interests in mining properties in Chile through its
interest in Arauco.
Santa Elina actively pursues business opportunities relating to the
acquisition, exploration and development of mineral properties in Brazil and
elsewhere in South America.
Santa Elina considers its most important projects to be the Sao Vicente
mine, the Chapada property, the Sao Francisco deposit and the Fazenda Nova
project.
DESCRIPTION OF PROPERTIES
WGM has prepared a number of reports on the Santa Elina Properties. Much of
the following information has been abstracted from the WGM Report.
THE SANTA ELINA GOLD BELT
Description of Belt
The Santa Elina Gold Belt is the largest component of the Properties. The
Santa Elina Gold Belt is located in four states of Brazil beginning about 1,750
kilometres northwest of Sao Paulo and extending in the south into Bolivia and
re-entering Brazil.
The Santa Elina Gold Belt includes the Sao Vicente mine located
approximately 90 kilometres north-northwest of Pontes e Lacerda and 500
kilometres northwest of Cuiaba and the Sao Francisco property located
approximately
44
<PAGE>
40 kilometres southeast of Sao Vicente and certain other properties along the
approximately 900 kilometre length of the belt. Mining concessions have been
granted for the Sao Vicente property and are in the process of being obtained
for the Sao Francisco property.
History of the Area
Mining expeditions in the Mato Grosso area by Portuguese explorers date
back to the 1700s. Gold was discovered in the Sao Vicente area in 1720. Over
the next century until 1830, the Sao Vicente area became one of the most
important gold producers in the Portuguese settlements, second only to Minas
Gerais State. At its height, the population of the Sao Vicente area was 20,000
inhabitants who were involved predominantly in gold mining activity. The area
has many mining and town site ruins discovered by Mineracao Santa Elina.
During this period, gold production was routinely forwarded to Portugal.
Official recorded gold production from the area during the period 1720 to 1830
is estimated at 60 to 70 tonnes. Historically, official recorded production
would have represented a small amount of actual production and Santa Elina
believes that actual production from the Sao Vicente area for that period
significantly exceeded official recorded production.
Mineracao Santa Elina became interested in the placer gold potential of the
Sao Vicente area in 1976 after researching historical records which showed
earlier gold production and conducting airphoto reconnaissance interpretation
which identified alluvial targets. By January 1977, Mineracao Santa Elina had
staked what was eventually to become the Sao Vicente mine and thereafter
gradually increased its holdings in the district over the following two years.
In 1983, Mineracao Santa Elina brought its first portable gravity separation
plant contained on a dredge into the area. By 1990, three dredges were in
operation. Placer gold production totalled approximately 75,000 ounces during
the period 1985 to 1992. During evaluation of the source of the placer gold,
the Sao Vicente and Sao Francisco deposits were discovered.
Location and Access
Access to the Santa Elina Gold Belt in Mato Grosso State is via Cuiaba, the
capital of Mato Grosso State, having a population of more than 400,000. There
are daily commercial jet flights to Cuiaba from Sao Paulo and Rio de Janeiro
and other major Brazilian cities. Access from Cuiaba is by fixed-wing aircraft
to a paved strip at Sao Vicente mine. This is a 1,250 metre long asphalt
runway which facilitates small jet aircraft. The nearby Sao Francisco property
is also accessible by air using an all-weather gravel strip at the site.
There is also good road access from Cuiaba to Sao Vicente and Sao
Francisco. Pontes e Lacerda, with a population of approximately 40,000, is
accessible by paved highway from Cuiaba. A paved road runs alongside the gold
belt to within about 40 kilometres of Sao Vicente from Pontes e Lacerda.
Access is year-round, and freight and other materials can be brought in
relatively inexpensively.
Regional Geology
The regional geological setting for the Sao Vicente mine, the Sao Francisco
property, and numerous other gold occurrences that comprise the Santa Elina
Gold Belt is the Aguapei Mobile and Mafic Arc Belt. This belt separates the
Archean Amazon Craton to the east from the Proterozoic Paragua Craton to the
west. The belt extends for more than 600 kilometres in a north-northwest
direction, and is characterized by a prominent ridge composed of a 1,200 metre
thick sequence of Proterozoic clastic sediments known as the Aguapei Group.
The Aguapei Group is the host rock for the gold mineralization, and is
predominantly metamorphosed conglomerates, sandstones and shales. Southward
along the belt, the lower part of the Aguapei Group contains interbedded
volcanic rock.
The Aguapei Group overlies the central part of the Brazilian Precambrian
Shield. This part of the shield contains volcanic and sedimentary formations
surrounded by older igneous rocks. Prolonged erosion of these older rocks was
accompanied by the development of basins in which were deposited the Aguapei
sediments. These sediments were later subjected to northwest-southwest
compressional forces that folded the eastern edge resulting in the ridge
paralleling the axis of the belt. Faulting, fracturing and shearing have also
developed parallel to and across the fold axis.
45
<PAGE>
Mineralization
The known bedrock gold deposits and occurrences in Mato Grosso are
separated into two districts - the Sao Vicente/Borda district and the Pontes e
Lacerda district. In the Sao Vicente/Borda district, gold mineralization in
the folded Aguapei Group metasediments occurs in shear zones that are filled
with sericite and subordinate quartz along the bedding planes and in quartz
veins filling fractures that cut the bedding planes. Free gold occurs in a
size range from microscopic to nuggets measuring several millimetres in
diameter. Gold also occurs as laminations along the shear planes and within
limonite boxworks after pyrite and arsenopyrite. In the Lavrinha area of the
Pontes e Lacerda district, gold mineralization is often associated with low
angle shear zones and also occurs in millimetric to centrimetric quartz veins
within sulphide horizons within the meta-arenites.
SAO VICENTE MINE
Geology
The host rocks of the Sao Vicente mine are metamorphosed sandstones within
the lower formation of the Aguapei Group. Interbedded metamorphosed
conglomerates are present and their surface exposure serves as a guide for
geologic mapping of the host rock.
The formation is tightly folded and steeply dipping on either side of an
axis which plunges to the northwest. Gold bearing quartz is associated with
shearing and fracturing. This occurrence includes small veins within and
across the bedding planes, and larger silicified breccias within the fracture
zones.
Mineralization
At Sao Vicente gold mineralization occurs for more than 1,000 metres in two
parallel northwest trending zones along the flanks of a fold. Free gold is
common and is visible as grains, some up to 10 millimetres in diameter. Gold
is principally associated with quartz and pyrite.
A mineral estimate was prepared by Mineracao Santa Elina in September 1995,
using a specific gravity of 2.65 and cutoff grades of 0.3 and 0.35 g Au/t.
This estimate totals 10.44 million tonnes at a grade of 0.88 g Au/t. Re-
evaluation of the deposit with study of variograms suggests vertical
continuity rather than the stacked lenses of mineralization in earlier models.
Vertically dipping structural domains are now recognized, which, though not
fully tested, seem appropriate for the control of gold mineralization at the
mine. Management has since re-evaluated the deposit and has concluded that the
deposit contains a resource of 9.99 million tonnes at a grade of 0.805 g Au/t.
Sections and drillholes are 25 metres apart over most of the
mineralization; a spacing of 50 metre sections is used on the fringes. There
is no need for closer spaced drilling in WGM's opinion.
At costs, mining grade and metallurgical recovery experienced in 1995, the
Sao Vicente operation was not profitable, resulting in WGM reclassifying such
reserves as mineralization. This mineralization is appropriately classified as
reserves if Mineracao Santa Elina continues to achieve the throughput, lower
operating costs and improved recovery as it has in 1996 at current gold
prices.
Mining
The Sao Vicente mine commenced production in November 1992 at a rate of
1,500 tonnes of gold-bearing material per day from material grading
approximately 1.0 g Au/t from a small open pit. Production increased to
3,000 tonnes per day in early 1993 and is presently about 125,000 to 150,000
tonnes of gold-bearing material per month from an open pit and newly built
treatment plant.
Since start-up in November 1992, the Sao Vicente mine has produced
approximately 87,000 ounces of gold as at February 1996. During such period,
4.8 million tonnes of gold-bearing material were processed at a recovered
grade of 0.56 g Au/t.
The Sao Vicente operation is a truck and shovel/loader operation with the
gold-bearing material trucked to the primary crusher and the waste dumped into
a valley to the west of the deposit. The material is drilled and blasted
before loading. An additional shovel has recently been added to the mine
equipment fleet which will allow production to achieve a rate of 5,000 tonnes
per day as well as catching up on waste removal.
46
<PAGE>
Mineracao Santa Elina performs all mining operations except for blasting
which is done by a third party. Mineracao Santa Elina mine geologists utilize
assays of blast-hole samples for grade control and to upgrade mine planning.
The information on the Sao Vicente deposit is based on 23,557 metres of
mostly diamond drilling (from a total of 197 drillholes) and information
resulting from exposures in the open pit mine.
Processing Plant
The first process plant installed at Sao Vicente consisted of the jig
section of a dredge previously used for gold recovery from placers. The
circuit included four stages of jigging with the tailings of the first stage
pumped to the tailings pond.
The efficiency of that plant was impossible to establish since only
blasthole assays and gold production data was available. Using the blasthole
assays of the material mined over an 18 month period indicated that
approximately 81% of the gravimetric gold in the feed was recovered, and the
overall recovery, was approximately 58%.
Data collected by WGM during a site visit at the end of 1993 indicated that
an effort must be made to improve the gold recovery. A number of approaches
were discussed with the Mineracao Santa Elina staff aimed at increasing the
gold recovery at minimum cost, including crushing to minus 1/4", screening the
crushed material at 10 mesh, grinding the plus 10 mesh in a rod mill to minus
10 mesh and combining the ground product with the minus 10 mesh screen
undersize. This minus 10 mesh material is pumped to a cyclone to produce a
separation at 65 mesh. The plus 65 mesh material sent to the jig plant and the
minus 65 mesh material sent to flotation to recover a gold concentrate. The
flotation concentrate is sent to a Knelson concentrator to recover free gold
with the Knelson tailings sent to cyanidation to recover the remainder of the
gold.
Based on preliminary test results, Mineracao Santa Elina adopted this
approach, as it appeared, based on Brazilian economics, to give the best gold
recovery at the lowest cost. WGM recommended at that time that this flowsheet
be tested in a pilot plant to confirm the assumptions.
A plant was designed and built and put into operation early in 1995 using
this proposed circuit with some minor modification. The operating results
indicated that the majority of the gold losses are in the jig tailings and an
additional 7% in the flotation tailings. It has been suggested by WGM to the
Mineracao Santa Elina personnel that further testing should be carried out to
improve recovery.
The process plant gold recoveries in 1995 were in the range of 65% to 70%
but recent modifications to the grinding and flotation circuits have increased
recoveries to about 75%.
Ancillary Facilities and Infrastructure
A modern town site at the Sao Vicente operation houses approximately 600
people of whom approximately 150 to 200 are employees. Facilities include
permanent offices, housing for the staff and workers, mess halls, repair
shops, a primary school, laboratories, a polyclinic and a diesel electric
power generating facility. Since approval has been received by Mineracao Santa
Elina to develop its hydroelectric site, plans have been formulated for power
from the National grid to be brought to the mine and town sites. Modern
communications are available by telephone, facsimile and radio.
A 1,250 metre paved runway is at the site to accommodate small executive
jets. Charter aircraft are used for travel to Cuiaba, where frequent jet
service to Sao Paulo and Rio de Janeiro may be obtained. A 4.5 megawatt diesel
power plant is currently installed at the property.
Included in the ancillary facilities is a refinery to handle the jig
concentrate from the gravity recovery plant and gold from electrowinning and a
laboratory to analyze drill cores, blast hole samples and process plant feed
samples. A laboratory using acid dissolution and atomic absorption has been
built near the process plant to handle metallurgical samples. A fully-equipped
pilot plant is available at the site so that testing for gravity recovery of
gold from the ores can be carried out.
47
<PAGE>
SAO FRANCISCO PROPERTY
Geology
The Sao Francisco deposit occurs in the same formation as the Sao Vicente
mine. Similar folding, faulting, shearing and fracturing of the host rocks
occurred. The principal difference is that the Sao Francisco deposit occurs
over a larger area with broad folds that can be traced over several
kilometres.
Mineralization
The gold mineralization at Sao Francisco is similar to that at Sao Vicente
with occurrences as disseminations and laminations, and with pyrite in quartz
veins. Four sets of vein systems have been identified. Higher grade
mineralization is present in a structural trap in the centre of the deposit,
referred to in the WGM Report as Body 2. The main body of mineralization is
referred to in the WGM Report as Body 1, which is lower grade. Surficial gold
mineralization is more extensive than the bedrock mineralization.
Surficial mineralization is estimated to be 1.9 million tonnes of measured
resources at a grade of 0.76 g Au/t. With respect to bedrock mineralization,
WGM's review of the Sao Francisco data indicates that Body 1 contains
approximately 20 million tonnes of indicated resources grading 0.8 g Au/t and
Body 2 contains approximately 2 million tonnes of mineralization grading
approximately 4.2 g Au/t (undiluted).
The foregoing information has been obtained from the WGM Report. Management
is continually evaluating the properties, and more current information may
therefore be available since the date of the WGM Report. Management has
provided this updated information to RBC DS, and such updated information has
been included in the Valuations and Fairness Opinion prepared by RBC DS and
attached as Schedule III to this Circular. See Schedule III for further
particulars.
Proposed Mining
The Sao Francisco deposit is currently at an advanced stage of exploration
and no mining has been carried out to date. Exploration has included
trenching, diamond drilling and a 62 metre long decline for bulk sampling. It
is assumed that the high grade lenses of Body 2 would be extracted by
underground mining, and that the mineralization of Body 1 would be extracted
by open pit mining.
To date only limited test work has been carried out on the Sao Francisco
material, all from drill core samples, but a bulk sample is being obtained for
further testing.
Results from testing to date indicate that a combination of gravity
separation, flotation and cyanidation will be required to recover the gold.
Santa Elina has developed a preliminary flowsheet consisting of primary
grinding in a semi-autogenous (SAG) grinding mill, followed by gravity
separation on Reichart cones, with the cone concentrate upgraded to a final
concentrate using jigs and tables. The cone tailings would be treated by
flotation and the gold would be recovered from the flotation concentrate by
cyanidation.
A final report has been submitted and approved by the DNPM, which has
facilitated application for a mining concession which is expected to be
granted with respect to four exploration permits covering about 40,000
hectares when a production decision is made.
Ancillary Facilities and Infrastructure
Only an exploration camp exists at the Sao Francisco site. The site is 40
kilometres southeast of Sao Vicente and most of the travel between Sao Vicente
and Sao Francisco is by air. A dirt airstrip has been built to accommodate
travel between the sites.
It is anticipated that if and when Sao Francisco is put into production,
the personnel will be bused from Pontes e Lacerda, approximately 60 kilometres
to the southeast of Sao Francisco. The infrastructure at Sao Francisco would
be limited and would consist of administration and maintenance facilities in
addition to the process plant and support services for the mining operation.
Process water will probably have to be pumped to the facilities from the
adjoining valley as sufficient water is not available at the Sao Francisco
location. Water from the valley is in ample supply.
48
<PAGE>
HYDROELECTRIC POWER PROJECT
Mineracao Santa Elina has completed an in-house prefeasibility study which
establishes the viability of developing a 60 megawatt hydroelectric power
plant which will generate power for the Sao Vicente mine and future operations
at Sao Francisco.
Mineracao Santa Elina has received approval from the Government of Brazil
and the environment agency of Mato Grosso State to proceed with a 43 megawatt
hydroelectric power project and has received tenders for the engineering and
construction of this project. The completion and operation of the project will
reduce operating costs at all the mining operations of Mineracao Santa Elina
in Brazil. It is expected that the power generated from the project will be
sold to a local power utility in exchange for power for use by Mineracao Santa
Elina. There may be excess power sold to the local utility to generate
additional revenue for Mineracao Santa Elina.
A site has been located on the Guapore River, approximately 60 kilometres
east of Pontes e Lacerda. The site is on the Guape farm which is owned by Mr.
Paulo de Brito's family. The hydroelectric project has been fully engineered
by an independent Brazilian engineering company specializing in the
development of hydroelectric power projects.
Mineracao Santa Elina intends to start construction on the plant in late
1996 and start up the plant in December 1998. Additional financing may be
needed to pay for construction of the plant which Mineracao Santa Elina
intends to raise as needed. The land for the project will either be purchased
from the de Brito family or leased on a long-term basis in either case for a
nominal amount.
Total costs to construct the plant are presently estimated to be
approximately $42,000,000.
Mineracao Santa Elina has also received indications from CEMAT, the local
power utility, that it would be prepared to purchase the power and to build
the necessary power lines to connect the CEMAT grid to both properties prior
to completion of the power project.
ADDITIONAL GOLD OCCURRENCES IN THE SANTA ELINA GOLD BELT
In addition to the Sao Vicente mine and Sao Francisco deposit, there are an
estimated 50 other known bedrock and placer gold occurrences within the Santa
Elina Gold Belt that Mineracao Santa Elina holds either through mining
concessions, exploration permits or applications for prospecting or pursuant
to agreements with third parties.
Several of these areas have been in limited production by garimpeiros who
are unlicensed miners in Brazil. Santa Elina estimates that garimpeiro
production in these areas is 2 to 3 tonnes of gold per annum. During the past
year, garimpeiro activity has decreased considerably (due to exhaustion of the
easily mined mineralization) so that the total annual production is now
probably less than one tonne.
The following is a brief description of several of these gold occurrences.
Esperanca
The Esperanca property is located approximately 8 kilometres from the Sao
Vicente mine. Early Portuguese workings evidence an area of mineralization
estimated at 500 metres in length and 300 metres in width. Mineracao Santa
Elina has conducted initial mapping, soil sampling, trenching and drilling.
Gold values obtained from additional sampling and drilling of quartz veins in
Aguapei Group rocks suggest that gold enrichment in the upper 10 to 20 metres
is apparent. Additional work is planned.
6(degrees) Braco
The 6(degrees) Braco property is located approximately 13 kilometres from
the Sao Vicente mine.
Early Portuguese workings evidence an area of mineralization estimated at
300 metres in length and 100 metres in width. Initial exploration by Mineracao
Santa Elina by panning, trenching and drilling suggests that the area
dimensions are 600 metres in length by 300 metres in width. Additional
exploration including ground geological and geochemical surveys of 10,000
hectares has been conducted by Echo Bay as contemplated in the Echo Bay
Agreement in Principle. See "Joint Venture Agreements."
49
<PAGE>
Carneiro
The Carneiro property is situated 44 kilometres north of Pontes e Lacerda
and 3 kilometres from the Sao Francisco property. It has been worked by
garimpeiros and gold mineralization is seen in a shear zone in basement
graphitic schists.
Tuneis
The Tuneis property is located 2 kilometres from the Sao Francisco property
on the western edge of the Serra Sao Vicente. A total of 11 old Portuguese
mining adits have been located over a distance of 250 to 300 metres extending
60 to 70 metres into the hillside. Waste dumps left by the Portuguese miners
exhibit abundant quartz vein material. Santa Elina geologists believe the old
adits may have been developed to access a vertical gold-bearing quartz vein in
a shear zone.
Torre
The Torre property is situated 2 kilometres from Pontes e Lacerda on a low
ridge which rises 150 metres. The mineralization is hosted by silicified meta-
arenites of the Aguapei Group which have been locally intensely folded.
Gold-bearing veins cut the sediments. An estimated 15 garimpeiros are
presently mining this property at 12 excavations where gold is processed by
crushing and sluicing. No detailed exploration has been conducted on the
property.
Ernesto/Minopar
Located about 12 kilometres southwest of Pontes e Lacerda, this is another
gold occurrence in Aguapei Group metasediments. Former garimpeiro workings
cover an area measuring approximately one square kilometre. No detailed
information is available.
Serra do Caldeirao
The Serra do Caldeirao properties are located 28 kilometres from Pontes e
Lacerda in the Caldeirao Range. Four areas of past and present garimpeiro
activity have been noted by Mineracao Santa Elina for exploration. Two of
these areas of previous workings are a square kilometre each. Mineracao Santa
Elina has placed a high priority on exploration of this area as the extent of
the previous workings suggests the possibility of a significant gold
occurrence.
Serra Salto Do Aguapei
Gold occurrences are also evident further south of Pontes e Lacerda along
the Serra Salto Do Aguapei. These occurrences include the Pau-a-Pique whose
operations are situated 53 kilometres south of Pontes e Lacerda and can be
accessed by a 33 kilometre good secondary dirt road. The southern continuation
of the Serra Do Caldeirao, Serra Pau-a-Pique consist of Aguapei Group-Fortuna
Formation meta-sediments.
Mineralization is found along a fault zone that extends for 450 metres in a
northwesterly direction. Portuguese mining activity dating from the 18th
Century is reported to occur at the top of the ridge to the northwest. Open
pit workings on the property extend for 600 metres and follow a 10 metre wide,
high grade pyritic core. The gold occurs in vertical, 1 to 10 centimetre wide
quartz veins with pyrite. Material is presently mined and processed by
garimpeiros at the site and gold is recovered by amalgamation with mercury.
Other Mato Grosso Properties
The GP 1 to GP 7 properties are located 40 to 70 kilometres south by
southeast of Pontes e Lacerda. They were initially discovered by a major
multinational mining company in the 1980's during an exploration program in
the Archean greenstone belts for volcanic-hosted copper and gold deposits and
were acquired by Mineracao Santa Elina from Mineracao Manati S.A. (an indirect
subsidiary of The RTZ Corporation PLC.). Exploration work including some
drilling has been carried out. Additional drilling and soil sampling will be
necessary to determine the extent of the mineralization. Mineracao Santa Elina
owns 51% of the shares of the subsidiary that holds the GP 1 to GP 7
properties. The remaining 49%, which is owned by Mineracao Manati S.A., may be
repurchased pursuant to an option held by Mineracao Santa Elina.
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<PAGE>
Sao Vicente Ridge
The initial exploration targets for Mineracao Santa Elina in the Santa
Elina Gold Belt were the placer deposits in the rivers draining the Sao
Vicente Ridge. Prospecting started in 1978 on the Guapore River, a headwater
tributary of the Amazon River system and progressed upstream on the Galera
River. The exploration program initially involved prospecting by test pits and
all the tributaries of the Galera River were sampled at 500 metre intervals.
The placer gold is concentrated in a gravel horizon directly overlying the
bedrock surface, with the thicker alluvial cover above the gravel horizon
generally barren, or containing sub-economic amounts of gold. Both the gravel
horizon and the overlying alluvial material were panned for their gold
content.
All gold bearing streams draining into the Galera River were drilled at 25
metre intervals along parallel cross-lines spaced at 500 metres to 600 metres
along the stream course. Holes were drilled 0.5 metres into the bedrock.
Alluvial mining began in 1983 and the operations were progressively
increased until three large dredges, two with a capacity of 100,000 cubic
metres per month were operated variously from July 1988 to March 1991.
Recoveries based on this operating experience ranged from 114% to 118% of the
measured resources. Using a cutoff value of 0.08 g Au/cubic metre, and
$1.00/cubic metre operating cost for the entire alluvial column, the following
table outlines the Mineracao Santa Elina remaining reserve alluvial estimates:
SAO VICENTE RIDGE ALLUVIAL DEPOSITS
RESERVE ESTIMATE BY MINERACAO SANTA ELINA
(CUTOFF GRADE 0.08 AU/CUBIC METRE)
<TABLE>
<CAPTION>
WITH STRIPPING
WITHOUT STRIPPING WASTE: ORE RATIO 2:1
----------------------------- --------------------------------
VOLUME
(000 GRADE CONTAINED VOLUME GRADE CONTAINED
RESERVE CATEGORY M/3/) (G AU/M/3/) AU (KG) (000 M/3/) (G AU/M/3/) AU (KG)
- ---------------- ------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Proved ......... 65,000 0.139 9,000 21,700 0.397 8,600
Probable ....... 37,700 0.120 4,500 12,600 0.339 4,300
------- ----- ------ ------ ----- ------
TOTAL........... 102,700 0.132 13,500 34,300 0.376 12,900
======= ===== ====== ====== ===== ======
</TABLE>
Additional mineralization, without stripping, of 132,700,000 cubic metres
at a grade of 0.098 g Au/cubic metre or at a waste to ore stripping ratio of
2.2 to 1 equal to 41,500,000 cubic metres at a grade of 0.293 g Au/cubic metre
has also been estimated. WGM reviewed the methodology of the estimates and is
in agreement with the estimates.
The above analysis assumes a gold price of $400 per ounce.
CHAPADA PROPERTY
The Chapada Project is one of Santa Elina's major mineral assets. The
property consists of mining claims covering 75,000 hectares, of which the
company has obtained a mining concession in respect of 3,000 hectares. Chapada
is a copper-gold project located in west-central Goias State, approximately
320 kilometres north of Goiania, the state capital. Access to the project is
via 8 kilometres of graded unpaved road from the state highway GO-08. A
railroad is also under construction about 30 kilometres from the property.
Several small towns, Alto Horizonte, Campinorte, S. Teresina de Goias and
Compos Verdes are located within 50 kilometres of the project. Water is
readily available from the Rio dos Bois River south of the project, and
electricity is available from the national grid. The Chapada prospect was
discovered in 1974 by a subsidiary of a major mining company, through follow
up of a stream sediment geochemical anomaly.
Geology and Mineralization
The Chapada deposit is hosted by upper Proterozoic volcano-sedimentary
rocks known as the Mara Rosa Sequence. The Mara Rosa Sequence occurs as a
north-east trending belt between the Archean rocks of the Sao Francisco and
Guapore Cratons. The schistose rocks are intruded by massive amphibolite of
uncertain age and by Upper Proterozoic tonalite stocks. All of the rocks have
been deformed by at least three metamorphic-tectonic events,
51
<PAGE>
which produced the strong foliation and folding. Mineralization consists of
disseminated chalcopyrite and pyrite, typically at a ratio of 1:4. Magnetite
is abundant locally. Native gold occurs as very fine grains, on the surface of
pyrite grains and as inclusions in chalcopyrite.
Mineral Resources and Ore Reserves
The Chapada deposit has been defined over a length of 2,000 metres, a width
of 400 metres and a thickness of 12 to 60 metres. The depth of mineralization
ranges up to 150 metres. The data available for estimation of grade and
tonnage of the Chapada deposit include 24,693 metres of drilling from 221
vertical drillholes, 201 vertical soil drillholes totalling 2,836 metres, and
samples from 92 metres of vertical shaft and 110 metres of crosscuts. The
deposit database contains a total of 35,917 samples. Added to this are 7,300
samples from 416 recently completed overburden drillholes. Drillholes are on
100 x 100, and 50 x 100 metre spacing. Overburden holes are on 50 x 100 metre
spacing.
Between 1979 and 1981, several estimates of the mineable reserves of the
deposit were completed. Most of the estimates were made by block kriging of
the grade based on 50 x 50 x 10 metre blocks followed by floating cone open
pit planning using the Surface Mine Planning System.
In 1994, WGM completed an independent estimate of the mineable reserves of
the Chapada deposit. The results were very close to the estimate previously
made by a major mining company, being 103 million tonnes with an average grade
of 0.429% copper and 0.398 g Au/t and a waste to ore ratio of 1.26. A final
feasibility study relating to the Chapada deposit has not been completed.
Management believes that the Chapada deposit contains a mineable reserve as
noted above; however, until completion of the final feasibility study, the
Chapada deposit may appropriately be classified as a measured and indicated
resource.
The objective of the recent overburden drilling program was to evaluate the
potential for gold in the overburden (soil and saprolite) at Chapada. Based on
the data available in August 1995, Mineracao Maraca exploration estimated that
within the proposed open pit area there is an indicated resource of 7.7
million tonnes with an average grade of 0.33% copper and 0.53 g Au/t.
Metallurgical testwork is required before it can be determined whether this
material can be mined and processed at a profit.
Previous work at Chapada by others has focused largely on delineation and
evaluation of the Chapada deposit itself. Since acquisition of the property,
Mineracao Maraca has also focused effort on the evaluation of the exploration
potential of the deposit, the immediate surrounding area and the region.
Based on a review of the existing drilling data, Mineracao Maraca
geologists have identified three areas of mineralization or potential
mineralization which could potentially increase the reserves of the Chapada
deposit by 90 to 100 million tonnes, although there can be no assurance that
this will occur.
The above analysis assumes a gold price of $400 per ounce and a copper
price of $1.00 per pound.
Metallurgy
Metallurgical test work was carried out at Chapada in 1979 to 1981 during a
prefeasibility study conducted by others. The testwork consisted of laboratory
scale tests on drill core composites in 1979 to 1980 and pilot plant
scale tests on bulk samples collected from underground in 1980 to 1981. These
were followed by additional bench scale tests on drill core composites with a
higher gold content.
Test results indicate that the copper is readily recoverable by flotation
with expected recoveries of 90% of the contained copper. The gold reports to
the copper concentrate with gold content of the concentrate directly related
to the gold/copper ratio of the feed.
Comparison of the pilot plant and later bench scale tests showed that metal
recoveries are sensitive to the degree of oxidation of the ore. The Chapada
ore zone is generally divided into two ore types; oxidized (saprolite) and
sulphide (bedrock).
In the 1995 prefeasibility study on the Chapada project, Mineracao Maraca
used copper recoveries of 90.0 to 91.4% and gold recoveries of 70.0 to 79.3%.
Mineracao Maraca is in the process of conducting tests on the gold bearing
saprolite. Initial results of cyanide leach tests indicated low gold
recoveries but high cyanide consumption due to the high copper content of the
feed. Additional tests are in progress to evaluate the applicability of
flotation.
52
<PAGE>
Mining
A major mining company developed a preliminary open pit mine plan for the
Chapada deposit in 1981 based on a production rate of 8.4 million tonnes of
ore per year.
In June 1995 Mineracao Maraca issued a new mining plan based on a
production rate of 10 million tonnes per year. The pit plan was based on a
bench height of 10 metres with 25 metre wide ramps at a maximum grade of 10%.
The final pit would have 20 metre benches with 15 metre berms and a pit slope
of 45(degrees).
WGM reviewed the previous mine plan and the suggested changes recently
proposed by Mineracao Maraca and believes that the plan and proposed equipment
are appropriate for the development scenario planned for the deposit.
Mineracao Maraca is now projecting a production rate of 15 million tonnes a
year (42,750 tonnes per day). In WGM's economic analysis, adjustments were
made to the capital and operating costs to reflect the increased equipment
requirements.
Capital and Operating Costs
Economic evaluation of the Chapada project was first carried out in 1982 by
others using the project design created in 1981. In 1995, Mineracao Maraca
prepared an economic evaluation using current costs for capital items and
operating cost estimates based on experience at the Sao Vicente mine.
Based on WGM's review of the Mineracao Maraca estimates WGM adjusted the
capital and operating costs for the Chapada project assuming that only the
sulphide ore will be mined and processed, producing a copper concentrate. The
oxide capping will be stockpiled separately from the mine waste for possible
later reclamation and processing. Capital and operating cost estimates are
based on a production rate of 10 million tonnes per year at an average waste
to ore ratio of approximately 1.6:1. Mineracao Maraca is now projecting a
production rate of 15 million tonnes a year (42,750 tonnes per day). WGM
agrees that the increased production rate is warranted given the exploration
potential of the area and the high probability that additional reserves will
be defined.
CHAPADA COPPER-GOLD PROJECT
CAPITAL COST ESTIMATE
(PRODUCTION RATE 10 MILLION TONNES PER YEAR)
<TABLE>
<CAPTION>
COST
DESCRIPTION ($000S)
- ----------- --------
<S> <C>
Mine Pre-production................................................... $ 8,477
Mine Equipment........................................................ 32,040
Process Facilities.................................................... 38,905
Utilities............................................................. 19,630
Plant Construction.................................................... 17,970
Engineering and Construction Management............................... 19,450
--------
TOTAL................................................................. 136,472
Contingency (15%)..................................................... 20,528
--------
TOTAL................................................................. $167,000
========
</TABLE>
53
<PAGE>
CHAPADA COPPER-GOLD PROJECT
OPERATING COST ESTIMATE
(PRODUCTION RATE 10 MILLION TONNES PER YEAR)
<TABLE>
<CAPTION>
ANNUAL COST PER
COST TONNE
$ X PROCESSED
DESCRIPTION 1,000 $
- ----------- ------- ---------
<S> <C> <C>
Mining........................................................ $ 9,174 $0.92
Sulphide Processing........................................... 19,382 1.93
Utilities..................................................... 853 0.09
General and Administration.................................... 3,800 0.38
Reclamation................................................... 300 0.03
------- -----
TOTAL......................................................... $33,509 $3.35
Contingency (10%)............................................. 3,351 0.34
------- -----
TOTAL......................................................... $36,860 $3.69
======= =====
</TABLE>
The results of WGM's preliminary economic analysis shows that the Chapada
project is a viable, profitable project at the copper prices analyzed. WGM has
recommended that a bankable feasibility study be prepared as soon as possible
to confirm these results.
The foregoing information has been obtained from the WGM Report. Management
is continually evaluating the properties, and more current information may
therefore be available since the date of the WGM Report. Management has
provided this updated information to RBC DS, and such updated information has
been included in the Valuations and Fairness Opinion prepared by RBC DS and
attached as Schedule III to this Circular. See Schedule III for further
particulars.
Echo Bay has been granted an option to acquire a 50% interest in the
Chapada property. See "Joint Venture Agreements".
FAZENDA NOVA PROJECT
Property, Location And Description
The Fazenda Nova project included exploration of an area covering some
45,000 square kilometres in southwestern Goias State, Brazil. Mineracao Santa
Elina chose to conduct exploration in Goias State because of favourable
geology, known mineral occurrences, well developed infrastructure and the
general lack of previous systematic exploration in the area.
The project area is located 200 kilometres by road from the state capital
of Goiania. Access to the area is by paved highway, and locally by graded
unpaved roads. An airstrip capable of handling light planes is located at the
town of Fazenda Nova, which has a population of 7,000 people. The area is
crossed by the Rio Clara and Rio dos Piloes rivers. Electric power is readily
available from the national grid.
The property consists of 23 mining claims in three separate blocks covering
23,000 hectares. The property is owned by Mineracao Bacilandia, a Brazilian
company. Mineracao Santa Elina purchased 100% of the company in January 1995.
The final purchase agreement was signed on March 20, 1995. Total consideration
to be paid to the former owners of the company is $9,000,000. The purchase
price is based on one of the claims containing minimum "proven reserves" of
2.7 tonnes of gold. In the event that "proven reserves" for such claim are
less than 2.7 tonnes, at Mineracao Santa Elina's option, the purchase price is
to be reduced proportionately or such particular claim is to be returned to
the seller. Mineracao Santa Elina made an initial payment of $500,000 upon
signing the purchase agreement. A second payment of $500,000 was made in
December 1995, and four subsequent payments of $2,000,000 are due on
December 14, 1996 through 1999 if Mineracao Santa Elina chooses to retain its
interest in the claim.
Two of the claims were acquired from Metago, the Goias State mining
company. Metago retains a 2% net smelter royalty interest in mineral
production from the claims. The remaining 21 claims were acquired from Western
Mining Corporation ("WMC"), which retains a 2% net smelter royalty on
production from those claims.
54
<PAGE>
The surface rights to two farms covering the Lavrinha and Vital prospects
have been leased from local land owners. These leases have rentals equivalent
to $500 per month. Mineracao Santa Elina has also applied for mining claims
covering the areas between and surrounding the existing claims. Under
Brazilian law the land owners will also receive a 1% net smelter royalty on
mineral production from their properties.
Since the acquisition of the property by Mineracao Santa Elina, work has
focused on recompilation and evaluation of the extensive data set acquired
with the WMC claims and an aggressive delineation drilling program at the
Lavrinha prospect.
Regional Geology And Mineralization
The Fazenda Nova project area is underlain mainly by Precambrian rocks with
minor Paleozoic rocks, in four lithologic-tectonic domains. Bedrock exposures
in the area are few. Weathering commonly extends to depths of up to 50 metres
with extensive saprolite formation. At surface, a lateritic soil profile with
a pisolitic or stone line horizon is developed to a depth of five to six
metres.
The most prominent geological feature in the area is the northwest trending
Fazenda Nova-Israelandia-Maipora lineament. This is a major regional
structural feature consisting of a five to 10 kilometre wide zone of
cataclastic rocks, mainly strongly foliated mylonite. The lineament forms the
boundary between a domain of gneissic rocks to the east and a volcano-
sedimentary sequence to the west.
The eastern part of the project area is underlain mainly by gneissic rocks.
These rocks consist of undifferentiated gneiss, granite gneiss and migmatite
of uncertain age. They are intruded by upper Precambrian, post tectonic
granite plutons and overlain to the east by metasedimentary rocks of the
Proterozoic Araxa Group.
The western part of the project area, including most of the known gold
prospects, is underlain by northwest trending, interlayered acid and mafic
metavolcanic and metasedimentary rocks of the Proterozoic Amorinopolis Group.
The layered rocks are known locally as the Jaupaci sequence and are intruded
by small to large plutons of upper Precambrian granite. Bodies of mafic to
ultramafic rock of uncertain age and origin occur within the metavolcanic
sequence.
The fourth structural lithologic group in the area comprises Devonian
detrital sedimentary rocks of the Parana Basin Group which overlie the
Precambrian rocks to the south and east.
The project area has received comparatively little mineral exploration
attention. A low grade (0.92% Cu and 0.3 g Au/t) copper-gold prospect was
discovered about 180 kilometres west of Fazenda Nova in 1974. The Ipora
alluvial gold-diamond deposit to the south was developed in the late 1980's.
In 1989, WMC discovered the Jenipapo gold deposit to the north, and mined some
400,000 tonnes of oxide ore at a grade of 10 g Au/t from 1990 to 1991.
Based on its experience with Jenipapo, WMC conducted regional and follow up
exploration in the Fazenda Nova area in 1991. This program focussed on gold in
the Jaupaci sequence and delineated the prospects later acquired indirectly by
Mineracao Santa Elina.
Within the prospect area, exploration by WMC and later by the current owner
has delineated six gold prospects, Lavrinha, Vital, Veadhinho-Hamilton,
Bastos, Guarda-Mor and Salto. All of the prospects were defined through a
regional heavy mineral concentrate ("HMC") survey, followed up by detailed HMC
sampling, soil sampling, ground geophysics and scout drilling. The exploration
efforts are currently focussed on the Lavrinha project which, in the opinion
of WGM, has the potential to be a mineable gold deposit. The current program
focuses not only on delineation of the deposit but also on the development of
an exploration model which can be used in the evaluation of other prospects in
the area.
LAVRINHA GOLD PROSPECT
General
The Lavrinha Prospect, located 8 kilometres west of Fazenda Nova is the
most advanced prospect in the project area. The prospect was discovered
through WMC's 1991-92 regional exploration program. HMC samples from streams
at Lavrinha contained 65 to 180 gold grains per 10 litres of sample. Follow up
soil sampling on a 100 by 50 metres
55
<PAGE>
grid defined two gold anomalies, known as Valfrido and Vital, with values of
up to 380 parts per billion ("ppb") Au. Both anomalies, defined by soil
samples containing greater than 100 ppb Au, measured 200 by 300 metres.
WMC followed up with the soil anomalies with 157 auger drillholes totalling
1,153 metres; and 20 reverse circulation drillholes totalling 1,157 metres.
The holes at Valfrido intercepted significant gold mineralization, with
intercepts of up to 19 metres at 6.44 g Au/t. WMC estimated that the Lavrinha
mineralized zone, contained 235,000 tonnes of mineralization at a grade of
3.93 g Au/t. The drillholes at Vital intercepted several subparallel gold
bearing veins with widths of one to two metres.
WMC discontinued exploration in the area due to a land tenure conflict,
since resolved. Mineracao Bacilandia continued work at Lavrinha and was
awarded a temporary mining permit by Metago in 1993. It then developed a
small, open-pit heap-leach gold operation which mined gold-bearing saprolite
for thirteen months in 1993 and 1994. A total of 100,000 tonnes of material
was mined at a cutoff grade of 1.5 g Au/t and a head grade of 2.2 g Au/t. Gold
recovery in the heap leach was reportedly only 40 to 50% breakdown of the
material mined.
After the acquisition, Mineracao Santa Elina decided to suspend the mining
operation and focus efforts on delineation of additional gold mineralization.
An auger drilling program comprising 460 holes totalling 2,800 metres was
completed. Core drilling started in February 1995, and by the end of August,
20 holes totalling 2,600 metres had been completed. An additional 5,000 metres
of core drilling is planned. All drillholes are sampled over their entire
length and analyzed for gold by fire assay at Nomos laboratory in Rio de
Janeiro. Mineracao Santa Elina is currently conducting an in-house feasibility
study in order to reach a production decision on Lavrinha in late 1996.
Geology And Mineralization
The Lavrinha prospect is underlain by northwest trending metavolcanic rocks
of Proterozoic Jaupaci sequence. The bedrock lithologies comprise weakly
metamorphosed dacitic and mafic volcanic rocks. Small stocks of tonalite
intrude the layered rocks to the north and south of the mineralized zone.
Primary mineralization at Lavrinha consists of fine grained free gold in
the 2 to 10 micron size range. The gold is commonly associated with fine
grained arsenopyrite but only occasionally occurs as inclusions in
arsenopyrite. Geochemically there is a good correlation between arsenic and
gold, with arsenic values typically 1,000 times gold values. Locally the
arsenopyrite is altered to escordite. Where this has occurred gold values are
generally lower. Arsenopyrite and gold most commonly occur in and are
associated with carbonate-quartz veinlets.
The specific gravity of primary (bedrock) mineralization, based on
measurements of core samples, is 2.7. The density of the saprolite is 1.8 with
a moisture content of 6.6%. Shallow weathered laterite and saprolite mined
from the pit, to a depth of six to ten metres had a density of 1.68.
Mineral Resources
The Lavrinha zone is at the advanced prospect stage of exploration. WMC
estimated that the mineralized zone contained 235,000 tonnes of material with
an average grade of 3.93 g Au/t. However this estimate addressed only a small
part of the weathered portion of the mineralized zone as defined by shallow
Reverse Circulation ("RC") drilling.
Drilling has delineated low grade gold mineralization (greater than 0.3 g
Au/t) over an area of 150 by 400 metres, to a depth of 130 metres. Within the
mineralized zone there are two northeast trending zones of higher grade
(greater than 1.0 g Au/t) mineralization. Mineracao Santa Elina plans to
complete a grade tonnage estimate for the deposit as a part of the feasibility
study.
56
<PAGE>
WGM prepared a resource estimate for the Lavrinha deposit as follows:
FAZENDA NOVA PROJECT
LAVRINHA PRELIMINARY RESOURCE ESTIMATE BY WGM
(CUTOFF GRADE 0.3 G AU/T)
<TABLE>
<CAPTION>
GRADE
TONNES (G AU/T)
--------- --------
<S> <C> <C>
INDICATED RESOURCES
Saprolite High Grade......................................... 800,000 2.6
Bedrock High Grade........................................... 1,500,000 2.2
Saprolite Low Grade.......................................... 800,000 0.7
Bedrock Low Grade............................................ 1,100,000 0.8
--------- ---
TOTAL INDICATED RESOURCES.................................... 4,200,000 1.6
</TABLE>
WGM estimates that the Lavrinha deposit contains indicated resources
totalling 4.2 million tonnes at an average grade of 1.6 g Au/t, and additional
mineralization of 1.2 million tonnes at an average grade of 1.0 g Au/t.
The foregoing information has been obtained from the WGM Report. Management
is continually evaluating the properties, and more current information may
therefore be available since the date of the WGM Report. Management has
provided this updated information to RBC DS, and such updated information has
been included in the Valuations and Fairness Opinion prepared by RBC DS and
attached as Schedule III to this Circular. See Schedule III for further
particulars.
Exploration Potential
The Lavrinha mineralized zone has been defined over a length of 350 to 400
metres. The northern and southern limits and the depth extent of the
mineralization have not been determined.
Potential exists for the discovery of additional mineralization to the
north and south and below the presently known deposit. Over most of the length
of the mineralized zone, the deposit is open at depth. Additional deeper
drilling below the known mineralization has the potential to add to the
resource base of the deposit.
Metallurgy
Mineracao Santa Elina is in the process of conducting metallurgical tests
on one saprolite and two bedrock drill core composite samples. Testwork
indicates that the best gold recoveries are obtained when the saprolite ore is
agglomerated in a trommel.
VITAL
The Vital gold prospect is located 750 metres southeast of Lavrinha
deposit. It is considered to be a part of the overall Lavrinha prospect area
but is discussed separately here as it may represent a distinct mineralized
zone.
Vital was discovered by WMC through regional HMC sampling. HMC samples from
the Vital area contain from 50 to greater than 450 gold grains per 10 litres
of sample. Follow up soil sampling defined an anomaly, with gold values
greater than 100 ppb, measuring 250 by 300 metres directly on strike (north
20(degrees) west) with the Lavrinha soil anomaly. The shape of the greater
than 100 ppb anomaly suggests the possibility of northwest and east north east
trending sources. The sampling program shows gold values of greater than 1.0 g
Au/t gold in both the stone line horizon and the underlying saprolite forming
three parallel northwest trending zones.
WMC drilled 11 reverse circulation drillholes at Vital. The holes ranged
from 40 to 80 metres in depth and were drilled at 40 metres spacing on three
east-west lines. Ten of the holes intercepted showed mineralization grading
greater than 1 g Au/t. The better intercepts occur in the upper part of the
holes. Deeper intercepts are general only one metre in width.
57
<PAGE>
Mineracao Santa Elina has drilled four core holes totalling 297 metres at
Vital. The core hole results were similar to the RC results. The holes
intercepted a number of narrow gold-bearing shear zones, one to two metres
wide with grades of 2 to 8 g Au/t gold.
Ground geophysical data for Vital has been reinterpreted in order to guide
further exploration. The ground magnetic data shows both northwest and
northeast trending structures with a third possible east-west structure.
Radiometric data is dominated by northwest trends. Vital is located at the
intersection of three structures as is Lavrinha. Mineracao Santa Elina plans
to further evaluate the geochemical, geophysical and drilling data prior to
drilling additional holes. WGM has reviewed the exploration data on Vital and
feels that the prospect definitely warrants further drilling. This work should
be deferred until a better understanding of the controls on mineralization is
developed from the work at Lavrinha.
Veadinho-Hamilton
Veadinho and Hamilton are two gold prospects located 12 kilometres west
northwest of Fazenda Nova town and about 4 kilometres north of the Lavrinha
prospect. The prospects are covered by five mining claims which were acquired
from WMC. The prospects were identified by WMC through regional and detailed
HMC sampling. Follow up work at each prospect comprised detailed HMC sampling,
grid soil sampling and ground magnetic and radiometric surveys.
(a) Veadinho. The Veadinho prospect consists of a 7 kilometres long HMC
anomaly in three separate streams. Gold colors in HMC samples range
from 50 to greater than 400 grains per 10 litres. The distribution of
the gold grains suggests a north northwest-striking source for the
anomaly with a possible second north-east-trending source just north of
the village of Bacilandia.
Gold values in soils are generally low with a background of greater than
2 ppb gold and anomalous values in the 2 to 10 ppb range. Only a few
samples contain greater than 10 ppb gold. This contrasts with Lavrinha-
Vital and other prospects in the Fazenda Nova area were gold in soil
values of greater than 100 parts per million are often found. This
relatively low gold expression may be due to geomorphology. The Veadinho
area is low lying and swampy and may have a less well developed soil
profile than other areas. The weakly anomalous soil gold values do occur
in a north north west-trending zone which is along strike from the
Lavrinha-Vital soil anomaly.
(b) Hamilton. The Hamilton prospect consists of a 7 kilometres long east
northeast-trenching gold in HMC anomaly located south and east of
Veadinho. Gold in HMC samples range from 50 to 595 grains per
10 litres. The distribution of the gold values suggests an east
northeast-trending source for the anomaly. Gold values in soil are low
as at Veadinho.
Mineracao Santa Elina's work at Veadinho-Hamilton to date has consisted of
review and compilation of geological and geochemical data and a
reinterpretation of the ground geophysical data. Further work on the prospects
is planned as the resources become available.
WGM has reviewed the exploration data on Veadinho and Hamilton and feels
that both are good gold prospects which warrant further work. Given the poor
representivity of soil sampling it may be advisable to test the use of auger
drilling as a tool for identification of drill targets.
BASTOS
The Bastos gold prospect is located 8 kilometres southeast of the Lavrinha
prospect and 6 kilometres southwest of Fazenda Nova town. The prospect is
covered by two mining claims which were acquired from WMC.
The prospect was discovered in 1991 by HMC sampling. Reconnaissance HMC
samples contain 20 to 300 gold grains per 10 litres of sample and defined a
north north west-trending anomaly some 8 kilometres long. WMC carried out
detailed HMC sampling, soil sampling, and ground magnetic and radiometric
surveys to follow up the HMC anomaly.
The soil sampling defined three anomalous zones on strike along north 10-
20(degrees) west. Anomalous values were defined as greater than 40 ppb gold,
although significant parts of the anomalies exceed 100 ppb gold. The anomaly
is open to the south.
58
<PAGE>
WMC completed nine shallow scout RC holes on the southern two soil
anomalies, two on the central anomaly and seven on the southernmost anomaly.
The holes ranged from 29 to 35 metres in depth and were drilled to the east
at -50(degrees) along east-west lines.
The two holes drilled on the central anomaly were barren. Four of the holes
drilled on the southern anomaly intercepted mineralization grading greater
than 1 g Au/t. The majority of the intercepts are one metre in width with
grades of 1.3 to 5.4 g Au/t gold. The best intercept is in hole BCC-63 at the
south end of the prospect which intercepted two zones, 2 metres at 2.5 g Au/t
and 6 metres at 3.07 g Au/t. WGM feels that the Bastos prospect warrants
further exploration.
GUARDA-MOR
The Guarda-Mor gold prospect is located 16 kilometres south southwest of
the Lavrinha prospect, 23 kilometres southwest of Fazenda Nova town and 5
kilometres west of the village of Israelandia. The prospect is covered by
7 mining claims which were acquired from WMC, who retain a 2% NSR royalty
interest.
The prospect was discovered by WMC in 1991 through regional HMC sampling.
HMC samples in the area contain 46 to 215 grains of gold per 10 litres in a 9
kilometre long anomaly. Follow up work consisting of grid soil sampling,
magnetometer and radiometric surveys followed by RC drilling was completed in
1991 to 92.
The prospect is underclaim by north to northwest trending metavolcanic
rocks of the Jaupaci Group.
The distribution of gold in the HMC samples suggests a north to north-
northeast trending source with a second possible source trending east-west to
east-northeast. The soil sampling delineated two anomalies. The eastern
anomaly measures 2 kilometres long and trends north-south to north-northeast,
with values in the 10 to 30 ppb gold range. The second anomaly, located to the
southwest consists of two clusters of anomalies samples over a length of
1.5 kilometres. The general trend of the southwest anomaly is northeast, with
values of 100 to greater than 200 ppb gold.
WMC drilled 38 RC holes on the two parts of the southwest soil anomaly.
At the northern part of the anomaly, five of the nine holes intercepted
gold mineralization. Most of the intercepts were one metre of 1 to 3 g Au/t.
The best intercept was 8 metres at 5.45 g Au/t in hole BCC-42. The drilling
data suggest that the mineralization occurs erratically in a zone 4 to 8
metres thick which dips to the east at 45(degrees).
At the southern part of the anomaly, 12 to 29 holes intercepted
mineralization. The intercepts were typically one metre in width with grades
ranging from 1 to 11 g Au/t. The best intercepts were in holes BCC-49 with 3
metres at 4.7 g Au/t; BCC-27 with 4 metres at 1.41 g Au/t; BC-47 with one
metre at 11.58 g Au/t. The data in BCC-22 and BCC-49 indicate a mineralized
zone 4 to 6 metres in width which dips to the east at 80(degrees).
WMC concluded that the gold mineralization at Guarda-Mor occurs in north-
south silicified shear zones and quartz veins with associated carbonate and
sericite alteration and oxidized sulphides. WMC estimates that Guarda-Mor
contains mineralization of 200,000 tonnes at a grade of 2.0 g Au/t.
Mineracao Santa Elina's work at Guarda-Mor has consisted of review of the
WMC data and reinterpretation of the geophysical data. Additional exploration
is planned but has been deferred while efforts are concentrated at Lavrinha.
SALTO
The Salto gold prospect is the southernmost prospect in the Fazenda Nova
project area. The prospect is located 23 kilometres south south-west of the
Lavrinha prospect, 26 kilometres southwest of the town of Fazenda Nova and
8 kilometres south of the village of Israelandia.
The Salto prospect was identified by WMC through regional HMC sampling in
1991. HMC samples in the Salto area contain 90 to 220 gold grains per 10
litres of sample. The anomalous HMC samples define a 5 kilometres long
northeast trending zone which extends to the south beyond the limits of
Mineracao Santa Elina's claims. The area is underlain by Jaupaci Group
metavolcanic rocks and granitic intrusives.
59
<PAGE>
WMC carried out only limited follow up exploration at Salto. Soil sampling,
ground magnetometer and gamma ray spectrographic surveys were completed over a
1.8 by 2.0 kilometres area. The soil sampling identified three anomalies with
values greater than 50 ppb gold. All three anomalies are located at the
intersection of northeast and west to northwest trending structures identified
from the geophysical data.
Mineracao Santa Elina's work at Salto has consisted of recompilation of the
WMC geologic and geochemical data and reprocessing and interpretation of the
WMC ground geophysical data. Mineracao Santa Elina has applied for additional
mining claims around the Salto anomaly. Additional exploration work is planned
for the Salto prospect but has been deferred pending completion of the
detailed work at Lavrinha. WGM reviewed the data on the Salto prospect and
feels that the results are sufficiently positive to support further
exploration.
OTHER MINERACAO SANTA ELINA PROJECTS
While Mineracao Santa Elina has concentrated most of its efforts on the
Santa Elina Gold Belt, it has also been active in several other areas of
Brazil, including Archean greenstone belts. A brief summary of some of these
projects is outlined below. Such projects will be funded as cash flows from
operations or arrangements with third parties permit.
INAJA PROJECT
The Inaja Project is located in southeast Para State, an important farming
and agricultural area in north central Brazil. Access is by paved highway and
secondary gravel road approximately 100 kilometres east of the city of Santana
do Araguaia.
The area is underlain by an Archean greenstone belt comprising a volcanic-
sedimentary sequence of the Xingu Complex. Locally, geological units include
ultramafics and mafic intrusives, acid volcanics and sedimentary sequences.
Placer gold is common in the area and 5 placer mines operated during
the 1980's.
Mineracao Santa Elina has completed and WGM has reviewed an exploration
program relating to the placer potential of the property. The program outlined
indicated resources totalling 8,850,000 cubic metres grading 152 grams of gold
per cubic metre.
Bedrock gold mineralization at Inaja comprises vertical quartz vein systems
in schists and banded iron formation. Veins occasionally reach 1 metre in
width but are highly variable. Grades of up to of 10 g Au/t are reported and
gold is associated with base metal sulphides.
Mineracao Santa Elina presently controls more than 68,000 hectares of
mineral rights in the Inaja project area.
SAO PAULO PROJECT
The Sao Paulo Project is an early stage exploration project located in the
Nazare Paulista area north of the city of Sao Paulo.
The Portuguese commenced mining in the area in the 1600's from a
metamorphosed volcanic-sedimentary sequence. Modern exploration has been
limited to a relatively small program in 1984 including drillholes. The best
intercept was 0.5 metres of 7.1 g Au/t.
Mineracao Santa Elina obtained the property in 1986 and will conduct
further exploration once its claims have been approved. Mining claim
applications covering an additional 20,500 hectares are being reviewed for
approval.
JARAGUA PROJECT
Mineracao Santa Elina has applied for 135 mining claims covering 135,000
hectares near the town of Jaragua in Goias State in central west Brazil. Gold
production by the Portuguese is recorded to have occurred in the Pirineus
greenstone belt. Mineracao Santa Elina plans to complete reconnaissance stream
sediment and HMC sampling in the area in 1996.
60
<PAGE>
AMAZONAS PROPERTY
Mineracao Santa Elina has 375,615 hectares of properties under application
in Amazonas State, however follow up work on the properties has been deferred
in favour of work elsewhere.
BOLIVIA
The Aguapei Mobile Belt and Mafic Arc continues south of Pontes e Lacerda
and eventually enters Bolivia. Compania Minera holds 14 claim blocks along
this extension, totalling 114,396 hectares.
BRAZILIAN CORPORATE MATTERS
Santa Elina holds voting common shares and non-voting preference shares of
Mineracao Santa Elina and Mineracao Maraca, which exist as corporations under
the laws of Brazil.
RIGHT OF FIRST REFUSAL
Shareholders of Brazilian corporations have an inherent right of first
refusal to subscribe for shares in proportion to the number of shares that
they own. A shareholder is also entitled to renounce or assign his right of
first refusal. If a subscription right should be renounced, the other
shareholders of the company may subscribe for and purchase more shares than
their proportionate shareholding in the company would entitle them to
subscribe for and purchase.
PREFERENCE SHARES
Classes of shares and the number of shares which are issuable are
established pursuant to the by-laws of a Brazilian corporation. Common shares
are entitled to vote on any matters brought before the shareholders.
Preference shares are non-voting but have a priority in the distribution of
dividends, the repayment of capital and any other distribution that is made to
shareholders. The number of preference shares issuable may not at any time
exceed two times the number of common shares issued and outstanding.
A minimum dividend, which may be established by the company, must be paid
on the preference shares. Holders may elect to receive the right to vote if no
dividend is paid on the preference shares for a three year period. The
entitlement to vote expires after the payment of the dividend is made. If any
dividend is declared on the common shares, a dividend of at least the same
amount must be declared on the preference shares.
The preference shares of Mineracao Santa Elina and Mineracao Maraca are
non-voting, non-convertible, fully participating shares.
FINANCIAL STATEMENTS
CAPITALIZATION
The following table sets forth the capitalization of Santa Elina as at
March 31, 1996 and December 31, 1995, before giving effect to the Merger:
<TABLE>
<CAPTION>
OUTSTANDING AT
OUTSTANDING AT DECEMBER 31,
AUTHORIZED MARCH 31, 1996 1995
---------- -------------- --------------
<S> <C> <C> <C>
Debt(/1/)........................... -- $14,087,000 $ 7,343,000
Obligations under Capital Leases.... -- 1,844,000 2,124,000
Other Liabilities................... -- 3,022,000 3,333,000
Minority Interest(/2/).............. -- 662,000 691,000
Common Shares(/3/).................. Unlimited 46,545,000 46,545,000
Deficit............................. (25,978,000) (22,509,000)
----------- -----------
Total Capitalization:............... $40,182,000 $37,527,000
=========== ===========
</TABLE>
- -------
(1) Does not include "Bank Indebtedness" of $2,538,000 which is represented by
a 30 day line of credit at December 31, 1995, and was refinanced with an
unsecured 91 day term loan on March 4, 1996.
(2) Santa Elina's consolidated financial statements are prepared in accordance
with Canadian generally accepted accounting principles. Had the
consolidated financial statements been prepared in accordance with
accounting principles generally accepted in the United States, minority
interest would have been reduced by $2,050,000 at December 31, 1995 and
March 31, 1996. See also note 13 to Santa Elina's annual consolidated
financial statements for the year ended December 31, 1995 and note 5 to
its quarterly consolidated financial statements for the period ended March
31, 1996.
(3) Excludes outstanding Common Share Purchase Warrants, stock options and a
share purchase warrant entitling the holders thereof to acquire 1,063,854,
1,193,333 and 6,556,526 Common Shares, respectively (see notes to annual
consolidated financial statements for the year ended December 31, 1995).
61
<PAGE>
SELECTED FINANCIAL INFORMATION
The following information is drawn from the financial statements of Santa
Elina contained in Schedule V attached to this Circular.
Readers should review the financial statements in their entirety for
complete financial information relating to Santa Elina. This information is
presented in accordance with accounting principles generally accepted in
Canada unless otherwise indicated.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------------- -------------------
1996 1995 1995 1994(/2/)
------- -------- -------- ---------
(thousands of U.S. dollars, except
for per share data)
<S> <C> <C> <C> <C>
EARNINGS STATEMENT DATA(1)
Revenue................................. $ 2,494 $ 789 $ 7,180 $ 6,401
Net loss................................ $(3,469) $ (2,861) $(15,419) $(7,090)
Loss per share.......................... $ (0.03) $ (0.02) $ (0.12) $ (0.07)
BALANCE SHEET DATA(1)
Total assets............................ $52,038 $ 49,648 $ 52,370 $59,152
</TABLE>
- -------
(1) This information should be read in conjunction with Santa Elina's audited
annual consolidated financial statements and unaudited interim
consolidated financial statements and accompanying notes.
Santa Elina's consolidated financial statements are prepared in accordance
with Canadian generally accepted accounting principles. Had the
consolidated financial statements been prepared in accordance with
accounting principles generally accepted in the United States, total assets
at December 31, 1994 would be reduced by $957,000. See also note 13 to
Santa Elina's annual consolidated financial statements for the year ended
December 31, 1995 and its quarterly consolidated financial statements for
the period ended March 31, 1996.
(2) The selected financial information presented above is for the period from
April 1, 1994 to December 31, 1994 after the reorganization of Santa Elina
on March 31, 1994 (the "Reorganization"). Prior to the Reorganization,
Santa Elina was comprised of several mining and non-mining subsidiaries
and therefore comparative consolidated statements of operations and
deficit have not been prepared.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
During 1995 Santa Elina completed the construction of the new Sao Vicente
mill, finished a drilling program and reserve study at Sao Vicente, concluded
the exploration drilling program at Sao Francisco, and added significantly to
Santa Elina's land position.
In addition, Santa Elina continued the exploration of the gold potential in
the overburden at the Chapada copper-gold reserve and entered into an option
agreement with Echo Bay on the property which included the financing of the
final feasibility study for Chapada.
The new mill at Sao Vicente commenced operations in February 1995, and
metallurgical recovery of gold at the plant remained below 65% through much of
the year. Budgeted gold recovery was 75%. Based on internal test work and on
the advice of a metallurgical consultant, a number of process modifications
have been made and in the first quarter recovery averaged just below 75%. Some
further improvement was experienced beginning in May 1996 when screening of
the primary jig tailings of the plant was implemented. The new plant produced
20,401 ounces of gold during 1995. Costs at Sao Vicente were high because of
the low recovery, and averaged $474 per ounce during 1995. Based on the
drilling results at Sao Vicente, a new, phased mining plan is being
implemented. This, together with proposed changes in the mining equipment and
further modifications to the mill, is expected to result in increased annual
throughput and gold production, and reduced operating costs. Implementation of
these changes will require additional capital expenditure at Sao Vicente of
approximately $4,500,000.
The initial drilling program at Sao Francisco has been concluded and Santa
Elina has prepared a preliminary feasibility study for this project. Mining
and geological consultants have confirmed much of Santa Elina's work. Santa
Elina and its consultants concur that exploration work elsewhere on the Santa
Elina Gold Belt has led to the development of a geologic model which points to
the likely occurrence of gold mineralization at depth at Sao Francisco, and
Santa Elina plans to explore this concept. Santa Elina has focused primarily
on its existing exploration projects during 1995. In addition, however, Santa
Elina has continued to prepare for the increased level of exploration activity
expected in Brazil. Preliminary exploration has led to the dropping of several
small land holdings;
62
<PAGE>
however, the overall increase in Santa Elina's applications for prospecting
has increased Santa Elina's land position to in excess of 12,000,000 hectares.
The most prospective of Santa Elina's land additions during 1995 is the
Fazenda Nova project. Early drilling results at this property are very
encouraging.
During 1995, Santa Elina entered into an agreement with Echo Bay wherein
Santa Elina received $10,000,000 from a private placement of 4,000,000 Santa
Elina Common Shares and Echo Bay received an option to acquire a 50% interest
in the Chapada project. $5,000,000 of the proceeds of the placement were
committed to be spent on a final feasibility study on the development of
Chapada. Santa Elina's drilling program indicates that the overburden at
Chapada contains gold, and metallurgical studies are being undertaken to
determine if this can be recovered economically. Additional drilling at
Chapada is expected to increase the copper-gold reserve.
Arauco, which is owned 38% by Santa Elina, did not report significant
successful results from its Chilean exploration program. Arauco has closed its
office in Santiago but is continuing its own exploration program. Arauco
recently entered into an earn in agreement on its Guindo property with Cheni
Resources Inc. and may pursue additional agreements on its properties.
The Brazilian currency, the Real, continues to be strong against the U.S.
dollar and this has resulted in some cost increases after taking local
inflation into account. The long run prospects for the Brazilian economy and
for improved financing terms in Brazil should offset these cost increases. All
of Santa Elina's revenues are derived from the sale of gold, and significant
fluctuations in the price of gold will affect Santa Elina's profitability. See
"Risk Factors".
RESULTS
For the quarter ended March 31, 1996, Santa Elina recorded a loss of
$3,500,000 or $0.03 per share.
Corporate administration costs were $1,300,000 for the quarter compared
with $1,000,000 for the quarter ended March 31, 1995.
Revenues from the sale of gold for the quarter were $2,500,000 compared
with $800,000 for the quarter ended March 31, 1995. During the quarter, Santa
Elina sold 6,540 ounces of gold at an average realized price of $395. Santa
Elina does not, and at this point does not intend to make use of forward sales
or other hedging programs.
For the year ended December 31, 1995, Santa Elina recorded a loss of
$15,400,000 or $0.12 per share.
Major factors contributing to the 1995 loss were the delay of the start-up
of the new plant and attaining full production at the Sao Vicente mine, as
well as the high cost of Brazilian debt during the first and second quarters
of the year, which was replaced by lower cost financing only during the second
half of the year.
Corporate administration costs were $4,800,000 for the year ended December
31, 1995 compared with $2,300,000 for the nine month period ended December 31,
1994 (1994 corporate administration costs reflected reclassification of
$1,200,000 of mine level administration costs to mining operating costs). The
difference reflects not only the full year 1995 but also increased costs
relating to investor relations following Santa Elina's initial public offering
and increased costs for site visits by potential joint venture partners,
potential lenders and outside consultants.
Revenues from the sale of gold for the year ended December 31, 1995 were
$7,200,000 compared with $6,400,000 for the nine month period ended December
31, 1994. Santa Elina sold 19,663 ounces of gold in 1995 (compared to 18,190
ounces for the nine months ended December 31, 1994) at an average realized net
price of $380. Santa Elina does not, and at this point has no intention to,
make use of forward sales or other hedging programs.
LIQUIDITY AND FINANCING
Cash used in operating activities by Santa Elina for the quarter ended
March 31, 1996 was $2,500,000. Cash, net of bank indebtedness, of Santa Elina
as of March 31, 1996 was $5,500,000.
Consolidated bank indebtedness at March 31, 1996 was $14,100,000, comprised
of $11,200,000 of short term loans incurred at Mineracao Santa Elina level in
Brazil and $2,900,000 at the corporate level. At the end of the quarter there
was also outstanding a $1,400,000 loan from a minority shareholder.
63
<PAGE>
Cash used in operating activities by Santa Elina for the year ended
December 31, 1995 was $12,600,000. Cash, net of bank indebtedness, in Santa
Elina as of December 31, 1995 was $3,500,000.
Consolidated bank indebtedness at December 31, 1995 was $9,900,000,
comprised of $7,400,000 of short term loans incurred by Mineracao Santa Elina
in Brazil and a short term revolving line of credit of $2,500,000 incurred by
Santa Elina. At year end there was also outstanding a $2,000,000 loan from a
related party who is a minority shareholder of Santa Elina.
Included in other liabilities on Santa Elina's balance sheet are $3,300,000
of negotiated long term Brazilian Government social contribution charges, to
be paid over the next six years. During 1995, bank indebtedness was reduced by
$1,500,000. During the second half of 1995, most of the borrowings at the
Mineracao Santa Elina level were renegotiated for lower interest bearing
credit facilities.
In July 1995, a related party (a minority shareholder) extended a
$3,000,000 loan to Santa Elina, of which $2,000,000 was still outstanding at
year end.
Realizing that additional financing would be required by Santa Elina to
meet its obligations and maintain its level of exploration activity, during
1995 Santa Elina started negotiations with financial institutions to obtain
credit facilities to provide longer term liquidity.
At the same time Santa Elina engaged itself in discussions on selling a
partial or whole interest in one or more of its exploration properties.
In October 1995, Santa Elina received $10,000,000 from a private placement
with Echo Bay of 4,000,000 Santa Elina Common Shares and an option to Echo Bay
to acquire 50% of the Chapada copper-gold project. Of the $10,000,000 raised,
$5,000,000 was used for general working capital and $5,000,000 is committed to
produce and complete a third party bankable feasibility study on Chapada.
The recoverability of the amounts shown as mining interests and the ability
of Santa Elina to meet its obligations when they become due is dependent on
its success in obtaining further financing and on the success of its
operations.
The proposed Merger of Santa Elina with Kendall will result in the addition
of the necessary equity and financing needed for its continued operation.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
DESCRIPTION OF SHARE CAPITAL
The authorized share capital of Santa Elina is fixed at $20,000,000, does
not vary with the number of shares issued or outstanding, and consists of an
unlimited number of Santa Elina Common Shares without par value. A total of
135,130,521 Santa Elina Common Shares are presently issued and outstanding.
The holders of Santa Elina Common Shares are entitled to one vote per share
at all meetings of Santa Elina. The Santa Elina Common Shares are entitled to
dividends, when and if declared by the directors of Santa Elina, and to the
distribution of the residual assets of Santa Elina in the event of the
liquidation, dissolution or winding-up of Santa Elina.
64
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth the name of every person or company who, to
the knowledge of Santa Elina, owned of record or beneficially, directly or
indirectly, more than 10% of the voting securities of Santa Elina as at May
31, 1996. Each person's ownership is of record and beneficial.
<TABLE>
<CAPTION>
PERCENTAGE OF
SANTA ELINA
NUMBER OF PERCENTAGE OF COMMON SHARES
SANTA ELINA SANTA ELINA AFTER GIVING
COMMON SHARES COMMON SHARES EFFECT TO THE
NAME AND ADDRESS OWNED OWNED MERGER
- ---------------- ------------- ------------- -------------
<S> <C> <C> <C>
Sercor Limited
Bank of Nova Scotia Building
Georgetown, Grand Cayman
Cayman Islands.................... 91,044,445(/1/) 67% 50%
</TABLE>
- -------
(1) Sercor also holds a share purchase warrant entitling it to acquire at any
time prior to September 25, 2000 up to 6,556,526 Santa Elina Common Shares
at $1.50 per share.
The present directors and senior officers of Santa Elina, other than Mr. de
Brito, as a group, beneficially own, directly or indirectly 1,488,472 Santa
Elina Common Shares or 1.1% of the issued and outstanding Santa Elina Common
Shares. Mr. de Brito is the controlling shareholder of Sercor, holding 96.7%
of the outstanding common shares of that company.
ESCROWED SHARES
Pursuant to an agreement (the "Escrow Agreement") dated as of December 12,
1994 between Montreal Trust Company of Canada (the "Escrow Agent"), Sercor and
Santa Elina, 56,731,000 Santa Elina Common Shares (the "Escrowed Shares")
owned directly or indirectly by Sercor were placed on deposit with the Escrow
Agent. The Escrow Agent has released 8,104,000 Escrowed Shares to date, and
the balance of the Escrowed Shares will be released as follows: (a) 8,104,000
Santa Elina Common Shares and 16,208,000 Santa Elina Common Shares will be
released on each of the second and third anniversary dates of the initial
escrow contribution, respectively; and (b) 24,315,000 Santa Elina Common
Shares will be released immediately upon Santa Elina attaining cumulative cash
flow per Santa Elina Common Share exceeding $0.75 in any five year period or
in equal annual instalments over a three year period upon Santa Elina
attaining a 2% return on equity in any one year. The Escrowed Shares may
otherwise be released from escrow with the consent of The Toronto Stock
Exchange. The Escrowed Shares cannot be given as security or disposed of
without the prior consent of the applicable securities commissions and other
regulatory authorities. If the Merger is successful, Sercor intends to make an
application to The Toronto Stock Exchange to release the Escrowed Shares from
escrow. The Toronto Stock Exchange has agreed to consent to the release of the
shares upon consummation of the Merger.
SHAREHOLDER AGREEMENTS
MINERACAO SANTA ELINA
Mineracao Santa Elina has entered into a shareholder agreement with Mr.
Paulo de Brito, his spouse and Santa Elina providing, among other matters,
that Mr. de Brito and his spouse may not sell or otherwise transfer their
shares to a person who or company which is not resident in Brazil and that the
by-laws of Mineracao Santa Elina may not be amended to remove or add any
provision that would have the effect of threatening the ownership, exercise or
existence of any mining claim held by Mineracao Santa Elina. Santa Elina
believes that these prohibitions protect both it and Mineracao Santa Elina
from risks arising from the transfer of effective control of Mineracao Santa
Elina to a non-Brazilian resident should such transfer ever occur.
The shareholder agreement also provides that Santa Elina has the authority
to transact ordinary course business on behalf of Mineracao Santa Elina
provided that Mr. de Brito continues to control a majority of the Santa Elina
Common Shares. Mr. de Brito and his spouse have agreed to vote their shares in
favour of any proposal or matter, other than a fundamental change relating to
Mineracao Santa Elina, that is made by Santa Elina. These provisions will
terminate if Mr. de Brito and his spouse directly or indirectly hold less than
a majority of the Santa Elina Common
65
<PAGE>
Shares. Mr. de Brito and his spouse have agreed that they will cause Sercor
not to sell Santa Elina Common Shares if the effect of doing so would be that
Sercor will hold less than a majority of the Santa Elina Common Shares
outstanding unless alternative comparable arrangements acceptable to Santa
Elina are entered into.
The shareholder agreement further provides for certain anti-dilution
protections. If any shareholder does not contribute additional capital as
needed, and it would not otherwise be possible to issue shares to the other
shareholders who are prepared to contribute, the non-contributing shareholder
will be deemed to have subscribed for his shares (so as to not be diluted) and
the subscription amount will be a receivable due to the company. However, the
non-contributing shareholder's shares may, at the option of the contributing
shareholder, also be sold if the contribution to additional capital is not
made.
The shareholder agreement further provides that no shareholder shall act in
a manner that is adverse in interest to the other shareholders including
effecting a transfer of shares that could result in the loss of mining claims.
MINERACAO MARACA
Santa Elina and Mr. de Brito and his spouse have also entered into a
shareholder agreement relating to Mineracao Maraca on substantially the same
terms and conditions as those contained in the Mineracao Santa Elina
shareholder agreement. However, the Mineracao Maraca shareholder agreement
also provides that in consideration of Mr. de Brito and his spouse renouncing
their subscription rights for the shares subscribed for by Santa Elina,
thereby allowing Santa Elina to acquire 83% of the total outstanding shares of
Mineracao Maraca, Mr. de Brito and his spouse will hold a carried interest
toward Mineracao Maraca's future capital requirements. The effect of doing so
is that Mr. de Brito and his spouse need not contribute further capital in
Mineracao Maraca as and when capital is contributed to Mineracao Maraca by
Santa Elina and shares are issued in the future. Mr. de Brito and his spouse
will be deemed to have paid for future share purchases in Mineracao Maraca so
as to prevent their shareholding in Mineracao Maraca from being diluted.
DIRECTORS AND OFFICERS
The names, municipalities of residence, positions with Santa Elina and
principal occupations of the present directors and officers during the past
five years are as follows:
<TABLE>
<CAPTION>
NAME AND MUNICIPALITY OF
RESIDENCE POSITION HELD PRINCIPAL OCCUPATION
- ------------------------ ------------- --------------------
<S> <C> <C>
Paulo C. de Brito(/1/).. Chairman of the Board, President of Santa Elina since
Sao Paulo, Brazil Director, President and March 1994, prior thereto,
Chief Executive Officer President of Mineracao Santa
Elina since 1988
John K. Director and Chief Senior officer of Santa Elina
Hammes(/2/)(/3/)....... Operating Officer since June 1994; prior thereto,
Madison, New Jersey senior banker and Vice-President
of a United States bank
Juvenal Mesquita Filho.. Director and Vice- President, Mineracao Santa Elina
Sao Paulo, Brazil President since 1994; Managing Director of
Mineracao Santa Elina since 1988
Luiz A.P. Barreto....... Director and Vice- Director, Legal Affairs,
Sao Paulo, Brazil President, Corporate and Mineracao Santa Elina since 1988
Legal Affairs
Robert R. Beebe(/3/).... Director Consultant since 1991; Vice-
Tucson, Arizona President and Senior Vice-
President, Homestake Mining
Company from 1986 to 1991; Vice-
President, Newmont from 1981 to
1986
William Meyer........... Director President, Teck Exploration Ltd.
Vancouver, British and Vice-President, Exploration,
Columbia Teck Corporation
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
NAME AND MUNICIPALITY OF
RESIDENCE POSITION HELD PRINCIPAL OCCUPATION
- ------------------------ ------------- --------------------
<S> <C> <C>
Paulo R. Castro(/3/).... Director Managing Partner, R.C.
Rio de Janeiro, Brazil Consultores Associados (economics
consulting firm); Chairman of the
Board, SR Rating (credit rating
agency)
John L. Azlant.......... Director Senior Vice-President - Corporate
Denver, Colorado Development, Echo Bay since 1993;
prior thereto, Chief Financial
Officer of Pegasus Gold
The Honourable Michael Director Businessman and consultant since
Wilson................. 1993; prior thereto, Minister of
Toronto, Ontario Finance and other ministries for
the Canadian Government
Christopher Thompson.... Director Managing director of Emerging
Denver, Colorado Markets Gold Fund and Castle
Group
Laercio B. Vice-President Chief Senior officer of Santa Elina
Teixeira(/4/).......... Financial Officer since September 1994, prior
New York, New York thereto, senior officer of
certain Brazilian banks since
prior to 1988
Marcos A. Paro.......... Vice-President, Director of Geology, Mineracao
Sao Paulo, Brazil Exploration Santa Elina since prior to 1988
Antenor F. Silva Jr..... Vice-President, Operations Senior officer of Santa Elina
Sao Paulo, Brazil since September 1994; prior
thereto, President, Paulo Abib
Engenharia S.A. (engineering
firm) since prior to 1988
Peter Marrone........... Secretary Partner, Cassels Brock &
Toronto, Ontario Blackwell (law firm) since
January 1996; prior thereto,
consulting partner, Cassels Brock
& Blackwell since August 1994;
prior thereto, partner, Holden
Day Wilson (law firm) since
February 1992; prior thereto,
associate, Holden Day Wilson
Robert Muffly........... Assistant Secretary Partner, Becker, Glynn, Melamed &
New York, New York Muffly (law firm)
</TABLE>
- -------
Notes:
(1) Mr. de Brito is a Brazilian businessman who has built up and run a number
of Brazilian companies. For example, Mr. de Brito founded Cotia Comercio
Exportacao e Importacao S.A., operating as Cotia Trading, which he built
up to be Brazil's largest trading company.
(2) Prior to joining Santa Elina, Mr. Hammes was with a major United States
bank in New York where he was the Chief Mining Engineer and a Senior
Credit Officer. He holds a PhD in Mineral Engineering from the University
of Minnesota School of Mines.
(3) Member of the audit committee.
(4) Mr. Teixeira was a director of a Brazilian bank in New York prior to
joining Santa Elina. Mr. Teixeira holds an MBA from Harvard and has over
20 years of corporate finance experience.
There may be a minimum of 1 and a maximum of 10 directors. The size of the
board is presently fixed at 10 directors.
No director, officer or promoter of Santa Elina has been the subject of any
penalties or sanctions by a court or securities regulatory authority relating
to trading in securities, the promotion, formation or management of a publicly
traded company or involving theft or fraud.
Santa Elina provides a limited indemnity to its directors and officers for
any loss they might incur in the proper conduct of the business of Santa
Elina.
67
<PAGE>
EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Santa Elina's policy provides that each director who is not an officer of
Santa Elina is entitled to receive an annual fee of $20,000, a fee of $500 for
each meeting attended, and reimbursement of expenses incurred to attend
meetings. Since December 30, 1994 $146,328 (including reimbursement of
expenses) has been paid to the directors for services rendered by them.
EXECUTIVE COMPENSATION
No remuneration was paid to officers or employees of Santa Elina from its
date of incorporation to June 1994. Santa Elina then commenced the payment of
remuneration. Santa Elina currently has 7 executive officers. The aggregate
cash compensation paid to these officers during the 12-month period ending
December 31, 1995 was $1,185,250. Each executive officer has executed an
employment agreement with Santa Elina. Such employment agreements are for a
term of four years commencing on various dates in June and August 1994 and do
not provide for any payment or compensation in the event of a change of
control of Santa Elina.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the annual
compensation payable to those persons (the "Named Executive Officers") who are
the chief executive officer of Santa Elina (or the individual who will act in
a similar capacity) and the other four most highly compensated executive
officers of Santa Elina during Santa Elina's two most recently completed
fiscal years, for services to be rendered in all capacities to Santa Elina and
its subsidiaries for such fiscal year:
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION(/1/) COMPENSATION
------------------------------------- -------------
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDER OPTIONS ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) GRANTED (#) COMPENSATION ($)
- ------------------ ---- ---------- --------- ---------------- ------------- ----------------
(common shares)
<S> <C> <C> <C> <C> <C> <C>
Paulo C. de Brito 1995 240,000 Nil Nil Nil Nil
Chairman of the Board, 1994 240,000 Nil Nil Nil Nil
President and Chief
Executive Officer
John K. Hammes 1995 216,000 Nil Nil Nil Nil
Chief Operating Officer 1994 216,000 Nil Nil 200,002 Nil
Juvenal Mesquita Filho 1995 158,000 Nil Nil Nil Nil
Vice-President 1994 120,000 Nil Nil 133,333 Nil
Luiz A.P. Barreto 1995 145,000 Nil Nil Nil Nil
Vice-President
Corporate 1994 110,000 Nil Nil 133,333 Nil
and Legal Affairs
Laercio B. Teixeira 1995 210,000 Nil Nil Nil Nil
Vice-President and 1994 210,000 Nil Nil 133,333 Nil
Chief Financial Officer
</TABLE>
- -------
(1) Compensation for certain executive officers for the 1994 fiscal year began
to accrue on July 1, 1994.
PENSION PLANS
No pension or retirement benefit plans have been instituted by Santa Elina
and none are proposed at this time.
SANTA ELINA STOCK OPTION PLAN
Santa Elina may grant incentive stock options to its directors, officers
and employees for the purchase of unissued Santa Elina Common Shares in
accordance with the Santa Elina Stock Option Plan adopted in 1994 and the
policies of applicable securities regulatory authorities and stock exchanges.
The Santa Elina Stock Option Plan provides that
68
<PAGE>
2,000,000 Santa Elina Common Shares may be granted thereunder and options may
be granted with terms of up to 10 years. No insider may hold any options to
acquire more than 5% of the outstanding Santa Elina Common Shares and the
maximum number of Santa Elina Common Shares that may be acquired by all
insiders may not exceed 10% of the outstanding Santa Elina Common Shares. No
stock options were granted by Santa Elina prior to September 23, 1994.
The following 1,193,333 stock options are presently outstanding to various
directors and officers of Santa Elina pursuant to the Santa Elina Stock Option
Plan:
<TABLE>
<CAPTION>
NUMBER OF SANTA ELINA EXERCISE PRICE
NAME OF INDIVIDUAL COMMON SHARE(/1/) ($) GRANT DATE(/2/)
- ------------------ --------------------- -------------- -------------------
<S> <C> <C> <C>
Luiz A.P. Barreto....... 133,333 1.50 September 26, 1994
Laercio B. Teixeira..... 133,333 1.50 September 26, 1994
John K. Hammes.......... 200,002 1.50 September 26, 1994
Juvenal Mesquita Filho.. 133,333 1.50 September 26, 1994
Marcos A. Paro.......... 133,333 1.50 September 26, 1994
Antenor F. Silva Jr. ... 133,333 1.50 September 26, 1994
Jose L. Beraldo......... 133,333 1.50 September 26, 1994
Patrick J. Burns........ 133,333 1.50 September 26, 1994
Christian F. Baiz III... 60,000 1.35 March 27, 1995
</TABLE>
- -------
(1) 40% vested immediately and the balance vest in 15% increments on the
first, second, third and fourth anniversaries of the date of their grant.
(2) Stock options expire five years from the date of their grant.
If the Merger is successful, the Santa Elina Stock Option Plan will be
terminated and all of the outstanding options granted pursuant thereto will be
terminated. Up to 50,535 Echo Bay Common Shares will be issued to holders of
the Santa Elina stock options upon such termination.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
None of the present directors, senior officers or principal shareholders of
Santa Elina and no associate or affiliate of any of them has any material
interest in any transaction within the past three years or in any proposed
transaction which has materially affected or will materially affect Santa
Elina, other than as referred to in this Circular.
PRICE RANGE AND TRADING VOLUMES OF SANTA ELINA COMMON SHARES
The following table sets forth the high and low sale prices and volume of
sales of the Santa Elina Common Shares, as reported by The Toronto Stock
Exchange, for the periods indicated:
<TABLE>
<CAPTION>
HIGH (CDN$) LOW (CDN$) VOLUME
----------- ---------- ---------
<S> <C> <C> <C>
1995
April.......................................... 2.00 1.50 398,600
May............................................ 2.20 1.80 1,922,220
June........................................... 2.35 1.90 206,055
July........................................... 2.10 1.90 207,800
August......................................... 1.95 1.55 428,600
September...................................... 1.90 1.80 132,189
October........................................ 1.82 1.50 48,367
November....................................... 1.60 1.00 13,600
December....................................... 1.50 .75 138,200
1996
January........................................ 2.00 1.85 298,000
February....................................... 2.00 1.85 284,700
March.......................................... 2.50 1.90 683,900
April ......................................... 3.00 2.00 3,256,330
May............................................ 2.75 2.50 325,385
June (to June 17).............................. 2.55 1.50 7,000
</TABLE>
69
<PAGE>
The closing price per Santa Elina Common Share on The Toronto Stock
Exchange on April 9, 1996, the date prior to the date that the proposed Merger
was announced to the public, was Cdn$2.19. The closing price per Santa Elina
Common Share on The Toronto Stock Exchange on June 17, 1996 was Cdn$1.50.
PRIOR SALES
The following Santa Elina Common Shares have been issued since the
incorporation of Santa Elina:
<TABLE>
<CAPTION>
ISSUE PRICE
(PER SHARE) DATE
NUMBER ----------- ------------------
<S> <C> <C>
2 -- April 17, 1990(/1/)
99,999,998 -- June 3, 1994(/2/)
66,667 $0.001 September 23, 1994(/3/)
3,600,000 $ 1.50 October 5, 1994(/4/)
11,400,000 $ 1.50 December 30, 1994(/5/)
15,000,000 $ 1.50 December 30, 1994(/6/)
1,063,854 $ 1.50 January 3, 1995(/7/)
4,000,000 $ 2.50 September 22, 1995(/8/)
135,130,521
</TABLE>
- -------
(1) Issued to Sercor on incorporation.
(2) Issued to Sercor pursuant to a stock split.
(3) Issued to a director for nominal consideration upon exercise of a stock
option on the day of its grant.
(4) Issued to Sercor. Sercor had borrowed money from a major United States
bank and used a portion of the borrowings to purchase 3,600,000 Santa
Elina Common Shares. The proceeds received by Santa Elina were then used
to repay a loan to that bank owed by Mineracao Santa Elina.
(5) Issued pursuant to the initial public offering of Santa Elina.
(6) Issued in connection with the exercise of 15,000,000 special warrants of
Santa Elina issued pursuant to a private placement.
(7) Issued in connection with the exercise of 159,578 special warrants of
Santa Elina issued in connection with its purchase of common shares of
Arauco.
(8) Issued in connection with a $10,000,000 private placement for 4,000,000
Santa Elina Common Shares and an option to acquire a 50% interest in Santa
Elina's Chapada property.
(9) A share purchase warrant to acquire 6,556,526 Santa Elina Common Shares at
$1.50 per share until September 25, 2000 has been issued by Santa Elina to
Sercor.
(10) 159,578 common share purchase warrants to acquire 1,063,854 Santa Elina
Common Shares at an exercise price of $1.50 per share expired on January
30, 1996.
DIVIDEND POLICY
Santa Elina has not paid any dividends on its outstanding Santa Elina
Common Shares and has no current intention to declare dividends on the Santa
Elina Common Shares in the foreseeable future. Any decision to pay dividends
on its Santa Elina Common Shares in the future will be dependent upon the
financial requirements of Santa Elina to finance future growth, the financial
condition of Santa Elina and other factors which the board of directors of
Santa Elina may consider appropriate in the circumstances. There is no
withholding tax on dividends or capital gains in the British Virgin Islands.
LEGAL PROCEEDINGS
Santa Elina and its subsidiaries are engaged in routine litigation
incidental to their business. This litigation is not believed by Santa Elina's
management to be material to Santa Elina.
MATERIAL CONTRACTS
Except for contracts entered into in the ordinary course of business, the
only contracts entered into by Santa Elina within the two years prior to the
date hereof or which will be entered into in connection with the Merger and
which can reasonably be considered as being presently material are the
following:
(a) the letter agreement dated April 9, 1996 among Santa Elina, Sercor,
Paulo C. de Brito and Echo Bay wherein it was agreed that Echo Bay
would acquire a 50% interest in Santa Elina in a share exchange
transaction, subject to regulatory approvals and approval by two-thirds
of the Minority Shareholders of Santa Elina;
70
<PAGE>
(b) the Merger Agreement between Santa Elina and Kendall effective as of
April 9, 1996, as amended, referred to under "The Merger";
(c) the shareholder agreements referred to under "Shareholder Agreements";
(d) the Escrow Agreement referred to under "Escrowed Shares";
(e) the Echo Bay Agreement in Principle and the Echo Bay Purchase Agreement
referred to under "Echo Bay Agreements";
(f) the share purchase agreement whereby Mineracao Santa Elina acquired all
of the shares of Mineracao Bacilandia in January 1995 referred to under
"Fazenda Nova Project"; and
(g) the Echo Bay Subscription/Option Agreement referred to under "Echo Bay
Agreements".
The above contracts and the WGM Report will be available for inspection
from the date hereof to the date of the Meeting at the offices of Cassels
Brock & Blackwell, Scotia Plaza, Suite 2100, 40 King Street West, Toronto,
Ontario, M5H 3C2.
JOINT VENTURE ARRANGEMENTS
Echo Bay Agreements
As at June 6, 1994, Santa Elina, Echo Bay and Sercor entered into an
agreement in principle (the "Echo Bay Agreement in Principle") and a purchase
agreement (the "Echo Bay Purchase Agreement"). Pursuant to the Echo Bay
Purchase Agreement, Echo Bay purchased from Sercor 6,666,667 Santa Elina
Common Shares at the issue price of the special warrants offered by Santa
Elina pursuant to its private placement for gross proceeds of $10,000,000.
Sercor waived its right to repurchase the Santa Elina Common Shares sold to
Echo Bay at the original issue price in consideration of Echo Bay returning to
Sercor 1,666,667 Santa Elina Common Shares; therefore, the purchase price for
each Santa Elina Common Share purchased by Echo Bay from Sercor was $2.00 per
share.
Pursuant to the Echo Bay Agreement in Principle, Echo Bay and Santa Elina
also agreed that Echo Bay would conduct an exploration programme on the Sao
Vicente/6(degrees) Braco property in the Santa Elina Gold Belt for a period of
up to three years. Echo Bay has the option to acquire a 50% joint venture
interest in the property upon completion of a feasibility study relating to
the property, at a purchase consideration determined pursuant to a formula
dependent upon the proven and probable reserves of the ore body on the
property less its exploration expenditures.
On September 22, 1995, Santa Elina and Echo Bay entered into a subscription
agreement (the "Echo Bay Subscription/Option Agreement") whereby Echo Bay
subscribed for 4,000,000 Santa Elina Common Shares for an aggregate purchase
price of $10,000,000 and Santa Elina granted to Echo Bay the option to acquire
a 50% joint venture interest in the Chapada property. The parties agreed to
enter into a definitive option agreement, and further agreed that in the event
that the terms of the definitive option agreement could not be settled (other
than the option exercise price which has been agreed upon), such matters would
be settled by arbitration under the UNCITRAL Arbitration Rules. Of the
proceeds received in connection with the private placement, the parties agreed
that $5,000,000 would be applied toward the preparation of a feasibility study
relating to the Chapada property and the balance would be used for general
working capital of Santa Elina. Pursuant to the agreement between the parties,
Echo Bay will have the right to acquire 50% of Chapada within 18 months from
the date of closing of the private placement, so long as a feasibility study
has been completed, at which point Echo Bay would have 60 days to accept. If
the study is not completed within 18 months, Echo Bay's right to acquire the
50% interest in Chapada would be extended an additional six months, for a
total period of 24 months. Echo Bay would be required to pay to Santa Elina
(or its successors and assigns) as the consideration to exercise the option
and thereby acquire a 50% interest in the Chapada property $25 per ounce of
gold and $0.02 per pound of copper on proven and probable reserves on the
property as determined in the future feasibility study, and if additional
reserves are discovered later, Echo Bay will pay Santa Elina a net smelter
return royalty of 3.5% on Echo Bay's portion of the revenue from Chapada after
the initial reserves in the feasibility study are depleted.
Rio Algom Agreement
Santa Elina and Rio Algom Limited ("Rio") entered into an agreement dated
December 16, 1994 (the "Rio Agreement") pursuant to which Rio held a right of
first opportunity entitling Rio to elect to participate in the exploration and
development of a land parcel on the Santa Elina Gold Belt, not exceeding
10,000 hectares, held by
71
<PAGE>
Santa Elina on terms presented by Santa Elina from time to time. The right of
first opportunity would expire on the earlier of Rio's election to participate
in respect of the proposed parcel of land, or a transaction being completed
with a third party in respect of such parcel of land, and 450 days from the
date of the Rio Agreement. Further, Rio had a one-time right for the same
period to select any 10,000 hectare land parcel on the Santa Elina Gold Belt
for further exploration and development and was entitled to substitute
alternative selected land parcels for a period of three years from the date of
the Rio Agreement. In addition, Rio has a right of first opportunity to
participate in the exploration and development of targets primarily prospected
for base metals on a joint venture basis with Santa Elina.
AUDITORS, REGISTRAR AND TRANSFER AGENT
The auditors of Santa Elina are KPMG Peat Marwick Thorne, Chartered
Accountants, Suite 3300, Commerce Court West, Toronto, Ontario, M5L 1B2.
The registrar and transfer agent for the Santa Elina Common Shares is
Montreal Trust Company of Canada at its principal office in the City of
Toronto.
ECHO BAY MINES LTD.
Echo Bay mines, processes and explores for gold and silver. Its interest in
operating properties is set out below (all are operated by Echo Bay):
<TABLE>
<CAPTION>
PERCENTAGE
OWNERSHIP
MINE LOCATION INTEREST
- ---- -------- ----------
<S> <C> <C>
McCoy/Cove............................. Nevada, U.S.A. 100%
Round Mountain......................... Nevada, U.S.A. 50%
Lupin.................................. Northwest Territories, Canada 100%
Kettle River........................... Washington, U.S.A. 100%
</TABLE>
In 1995, Echo Bay produced a total of 754,762 ounces of gold at an average
cash operating cost of $229 per ounce. Effective January 1, 1996, Echo Bay
adopted the "Gold Institute Production Cost Standard" for reporting production
costs on a per ounce basis. This standard defines cash operating costs as
those costs directly associated with the mining and milling of gold and
silver, adjusted for such items as inventories and mining costs relating to
future production. 1995 costs have been restated to conform with the new
standard. 1995 silver production was 11,905,806 ounces.
In 1995, Echo Bay reported a net loss of $50.1 million. Operating earnings
in 1995 were $33.5 million on revenues of $360.7 million. 1995 results reflect
increased operating costs per ounce (principally due to mining lower grade
ores), significantly increased exploration and development property expenses,
and increased environmental expenses related to reclamation at the former
Sunnyside mine in Colorado. Exploration and development properties expenses
increased to $69.8 million in 1995 reflecting Echo Bay's expanded
international search for new gold reserves and production.
For the three months ended March 31, 1996, Echo Bay produced a total of
161,246 ounces of gold at an average cash operating cost of $261 per ounce.
Silver production was 1,175,057 ounces.
For the three months ended March 31, 1996, Echo Bay reported a net loss of
$16.2 million and an operating loss of $2.6 million on revenues of $67.8
million. The results reflect lower precious metals sales and increased
operating costs per ounce (principally due to mining lower grade ores),
partially offset by the elimination of preferred stock dividends and higher
prices realized.
Over the past several years, Echo Bay has significantly expanded its search
for new gold reserves and production, particularly outside Canada and the
United States. Echo Bay's international growth strategy emphasizes strategic
alliances with exploration companies holding land positions on some of the
world's major gold belts. Echo Bay added five development properties during
1995: Paredones Amarillos, Mexico (60% interest), Chapada, Brazil (holds an
option to acquire a 50% interest), Kingking, Philippines (holds an option to
acquire a 75% interest), and Aquarius (100% interest) and Ulu (100% interest)
in Canada. Echo Bay also continued work at the Alaska-Juneau development
project, Alaska (100% interest). At December 31, 1995, Echo Bay's proven and
probable ore reserves totaled 10,983,000 ounces of gold and 62,913,000 ounces
of silver. In addition, Echo Bay reported other mineralization of 343.1
million tons at a grade of 0.027 ounces of gold per ton, 6.8 million tons at a
grade of 0.65 ounces of silver per ton, and 225.5 million tons at a grade of
0.46% copper. Considerable further information respecting Echo Bay's ore
reserves and other mineralization is found in Echo Bay's report on Form 10-K
which is attached hereto as Schedule VII.
72
<PAGE>
Echo Bay is incorporated under the laws of Canada. No shareholder is known
to own more than 5% of the Echo Bay Common Shares. The principal executive
offices of Echo Bay are located at Suite 1000, 6400 South Fiddlers Green
Circle, Englewood, Colorado, 80111 - 4957.
The annual report on Form 10-K of Echo Bay for the year ended December 31,
1995 and its quarterly report on Form 10-Q for the three months ended March
31, 1996 are attached hereto as Schedule VII and IX, respectively and form an
integral part of this Circular. The Proxy Statement, or Management Proxy
Circular, of Echo Bay referred to in such Form 10-K and attached hereto as
Schedule VIII is also an integral part hereof.
RECENT DEVELOPMENTS
Other than the transaction described in this Circular, there are no
material recent developments since Echo Bay's report on Form 10-Q was filed on
May 15, 1996.
CAPITALIZATION
The following table sets forth the cash and short-term investments and
capitalization of Echo Bay as of March 31, 1996 and December 31, 1995, and as
adjusted to give effect to the Merger. This information is derived from the
March 31, 1996 financial statements of Echo Bay included in Schedule IX
attached to this Circular, the December 31, 1995 financial statements of Echo
Bay included in Schedule VII attached to this Circular and the pro forma
statements included in Schedule VI attached to this Circular, and should be
read in conjunction with such financial statements and the notes thereto.
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
--------------------- -----------------
ACTUAL AS ADJUSTED ACTUAL
-------- ----------- -----------------
(in thousands of U.S. dollars)
<S> <C> <C> <C>
Cash and cash equivalents.............. $149,981 $151,190 $185,843
======== ======== ========
Current portion of gold and other
financings(/1/)....................... $ 35,833 $ 42,877 $ 41,135(/2/)
======== ======== ========
Gold and other financings(/1/)......... $114,373 $114,373 $111,679
Common shareholders' equity
Common shares(/3/).................... 623,577 746,106 618,965
Deficit............................... (31,265) (31,265) (15,109)
Foreign currency translation.......... (14,832) (14,832) (15,004)
-------- -------- --------
577,480 700,009 588,852
-------- -------- --------
$691,853 $814,382 $700,531
======== ======== ========
</TABLE>
- -------
(1) Includes gold and silver loans and currency loans with swaps to create the
effect of gold and silver loans. These obligations are expected to be
repaid from Echo Bay's future production. Gold loans consist of bullion
borrowed from financial institutions and immediately sold in the open
market for cash. The borrowed bullion is repaid over time from mine
production. The interest rate on bullion loans is and historically has
been low (under 2%). At December 31, 1995, total unused credit facilities
were $81.6 million.
(2) The capitalization data has been prepared on the basis of Canadian
generally accepted accounting principles which require the remeasurement
of gold loans to reflect gold prices at the balance sheet date. If the
data had been prepared on the basis of United States generally accepted
accounting principles, gold loans would not have been remeasured and the
current portion of gold and other financings would have been $33.3
million, $40.4 million and $38.9 million at March 31, 1996, as adjusted at
March 31, 1996 and at December 31, 1995, respectively.
(3) Common shares outstanding are 130,497,801, 139,328,735 and 129,880,804 at
March 31, 1996, as adjusted at March 31, 1996 and at December 31, 1995,
respectively.
73
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table is derived in part from Echo Bay's annual audited
consolidated financial statements included in its Form 10-K and Echo Bay's
quarterly unaudited consolidated financial statements included in its Form 10-
Q. The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada. In all material respects,
they conform with principles generally accepted in the United States (except
as described in footnote 1 to this table and note 12 to Echo Bay's annual
consolidated financial statements included in its Form 10-K and note 8 to Echo
Bay's quarterly consolidated financial statements included in its Form 10-Q).
This information should be read in conjunction with the audited consolidated
financial statements and the notes thereto.
SELECTED FINANCIAL DATA(/1/)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31
-------------- ------------------------------------
1996 1995 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------ ------
(millions of U.S. dollars, except for gold price
and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA
Revenue................... $ 67.8 $ 84.2 $360.7 $377.6 $366.5 $312.4 $315.6
Average gold price
realized per ounce....... $ 397 $ 385 $ 388 $ 387 $ 360 $ 357 $ 392
Net earnings (loss)(/2/).. $(16.2) $(11.7) $(50.1) $ 8.0 $ 3.6 $(31.7) $ 6.8
Earnings (loss) per common
share(/2/)............... $(0.12) $(0.10) $(0.43) $ 0.07 $ 0.03 $(0.30) $ 0.07
BALANCE SHEET DATA
Total assets.............. $848.9 $863.6 $871.2 $881.7 $990.5 $936.6 $875.0
Gold, silver and currency
financings............... $150.2 $133.4 $152.8 $132.7 $217.4 $220.1 $233.7
OTHER DATA
Cash dividends paid per
common share.............. -- -- $0.075 $0.075 $0.075 $0.075 $0.075
</TABLE>
- -------
(1) This information should be read in conjunction with Echo Bay's audited
consolidated financial statements and accompanying notes which are part of
its Form 10-K that is attached hereto as Schedule VII and its Form 10-Q
that is attached hereto as Schedule IX. Contingencies are described in
note 16d to Echo Bay's annual consolidated financial statements included
in its Form 10-K and note 10 to Echo Bay's quarterly consolidated
financial statements included in its Form 10-Q.
Echo Bay's consolidated financial statements are prepared in accordance
with Canadian generally accepted accounting principles. Had the
consolidated financial statements been prepared in accordance with
accounting principles generally accepted in the United States, certain
selected financial data would be disclosed as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------- -----------------------------------------
(millions of U.S. dollars, except for per share data)
1996 1995 1995 1994 1993 1992 1991
--------- --------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net earnings (loss)..... $ (15.5) $ (11.7) $ (46.5) $ 7.3 $ 8.5 $ (31.7) $ 6.8
Earnings (loss) per
common share........... $ (0.12) $ (0.10) $ (0.40) $ 0.07 $ 0.08 $ (0.30) $ 0.07
Total assets............ $ 877.0 $ 867.8 $ 892.8 $ 885.9 $ 990.5 $ 936.6 $ 875.0
</TABLE>
See also note 12 to Echo Bay's annual consolidated financial statements
included in its Form 10-K and note 8 to Echo Bay's quarterly consolidated
financial statements included in its Form 10-Q.
(2) At December 31, 1992, Echo Bay wrote down its investment in Kettle River
by $14.9 million ($0.14 per share) and wrote off $3.2 million ($0.03 per
share) in two exploration properties.
DESCRIPTION OF ECHO BAY SHARE CAPITAL
GENERAL
The authorized share capital of Echo Bay consists of an unlimited number of
Echo Bay Common Shares, without par value, of which 130,497,801 were
outstanding on March 31, 1996, and an unlimited number of preferred shares,
issuable in series, none of which is currently outstanding.
COMMON SHARES
The holders of Echo Bay Common Shares have one vote for each share held of
record and are not entitled to cumulative votes for the election of directors.
Each Echo Bay Common Share is entitled to participate equally in such
dividends as may be declared by the Board of Directors of Echo Bay out of
funds legally available therefor and is
74
<PAGE>
entitled to share equally in any distribution to holders of Echo Bay Common
Shares on liquidation. The holders of Echo Bay Common Shares have no
preemptive, conversion or redemption rights. Each outstanding Echo Bay Common
Share is fully paid and nonassessable. See "The Merger--Comparative Rights of
Santa Elina and Echo Bay Shareholders" for a further description of the Echo
Bay Common Shares.
PREFERRED SHARES
The Board of Directors of Echo Bay may issue preferred shares from time to
time in one or more series, subject to the provisions of the Articles of
Incorporation of Echo Bay. When any Echo Bay preferred shares are outstanding,
the preferred shares shall, with respect to priority in payment of dividends
or in the distribution of assets in the event of the liquidation, dissolution
or winding up of Echo Bay, be entitled to preference over the outstanding Echo
Bay Common Shares.
RESALE OF ECHO BAY COMMON SHARES BY SANTA ELINA AFFILIATES
The Echo Bay Common Shares to be issued to the Shareholders will be freely
transferable, except that under United States law Echo Bay Common Shares
received by persons who may be deemed to be "affiliates" of Santa Elina, as
that term is defined in SEC Rule 405, may only be sold by such persons (i)
outside of the United States in accordance with SEC Rule 904 and (ii) in the
United States in accordance with the provisions of Rule 145, pursuant to an
effective registration statement under the Securities Act of 1933, or in
transactions exempt from registration thereunder. SEC Rule 405 defines an
affiliate as any person that directly or indirectly controls, is controlled
by, or is under common control with the person specified.
LEGAL MATTERS
Certain Canadian legal matters relating to Santa Elina and Sercor have been
passed upon by Cassels Brock & Blackwell, Toronto, Ontario. Cassels Brock &
Blackwell prepared and passed upon the discussion concerning Canadian tax
matters.
The validity of the Echo Bay Common Shares being offered hereby will be
passed upon for Echo Bay by Milner Fenerty, Edmonton, Alberta. Milner Fenerty
has, in addition, reviewed the statements made herein as to the enforceability
in Canada of liabilities under the Federal securities laws of the United
States and has reviewed the statements made herein as to Canadian tax matters.
Davis, Graham & Stubbs LLP, Denver, Colorado, reviewed the statements made
herein as to United States tax matters.
As of June 17, 1996, Mr. Robert L. Leclerc, Q.C., the Chairman of the Board
of Directors of Echo Bay and a partner of Milner Fenerty, owned 10,000 Echo
Bay Common Shares and held options to acquire 181,400 Echo Bay Common Shares.
At June 17, 1996, partners and associates of Milner Fenerty, as a group,
beneficially owned, directly or indirectly, less than 1% of the Echo Bay
Common Shares.
Mr. Peter Marrone, the Secretary of Santa Elina, is a partner of Cassels
Brock & Blackwell. At June 17, 1996, partners and associates of Cassels Brock
& Blackwell did not beneficially own, directly or indirectly, any Santa Elina
Common Shares and or Echo Bay Common Shares.
EXPERTS
The consolidated financial statements of Echo Bay included in the annual
Report on Form 10-K for the year ended December 31, 1995 are attached hereto
and are incorporated herein by reference and have been so included and
incorporated in reliance on the report of Ernst & Young, Chartered
Accountants, which report is given on their authority as experts in auditing
and accounting.
Santa Elina's ore reserves as of December 31, 1995, have been calculated by
Santa Elina and verified by Santa Elina's external geological consultant, WGM.
WGM has also prepared the WGM Report, which forms the source of
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much of the disclosure included herein with respect to Santa Elina's
Properties. Such information is presented upon the authority of such firm as
experts in geology. Mr. John F. McOuat is President of WGM and has served as a
member of the board of directors of Echo Bay since 1989. As of June 17, 1996,
Mr. McOuat owns 2,791 Echo Bay Common Shares, and holds options to acquire
9,600 Echo Bay Common Shares.
The consolidated financial statements of Santa Elina as of December 31,
1995 are included herein in reliance on the report of KPMG Peat Marwick
Thorne, independent auditors, which report is given on their authority as
experts in auditing and accounting.
DIRECTORS' APPROVAL
The contents of this Circular and the sending thereof has been approved by
the board of directors of Santa Elina. The information relating to Kendall and
Echo Bay contained in this Circular is based upon information supplied by the
management of Kendall and Echo Bay and has not been verified by Santa Elina or
any of its officers and directors. Santa Elina assumes no responsibility for
the accuracy or completeness of such information, nor any omission on the part
of either Kendall or Echo Bay to disclose facts or events which may affect the
accuracy of any such information.
Dated this day of June, 1996.
By Order of the
Board of Directors of
SANTA ELINA GOLD CORPORATION
(signed)
Secretary
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INDEX TO SCHEDULES
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SCHEDULE I - MERGER AGREEMENT............................................. 1
SCHEDULE II - SANTA ELINA MERGER RESOLUTION............................... 1
SCHEDULE III - VALUATIONS AND FAIRNESS OPINION............................ 1
SCHEDULE IV - EXCERPT FROM INTERNATIONAL BUSINESS COMPANIES ACT RESPECTING
DISSENTERS RIGHTS........................................................ 1
SCHEDULE V - CONSOLIDATED FINANCIAL STATEMENTS OF SANTA ELINA GOLD
CORPORATION
Auditors' Report.......................................................... 1
Consolidated Balance Sheets at December 31, 1995 and 1994................. 2
Consolidated Statement of Operations and Deficit for the Year Ended
December 31, 1995
and the nine month period from April 1, 1994 to December 31, 1994........ 3
Consolidated Statements of Changes in Financial Position for the Year
Ended December 31, 1995
and the nine month period from April 1, 1994 to December 31, 1994........ 4
Notes to Consolidated Financial Statements................................ 5
Notice to Reader.......................................................... 10
Consolidated Balance Sheets (unaudited) at March 31, 1996 and December 31,
1995..................................................................... 11
Consolidated Statement of Operations (unaudited) for the Three Months
Ended March 31, 1996 and 1995............................................ 12
Consolidated Statements of Changes in Financial Position (unaudited) for
the Three Months Ended March 31, 1996 and 1995........................... 13
Notes to Consolidated Financial Statements (unaudited).................... 14
SCHEDULE VI - PRO FORMA FINANCIAL STATEMENTS OF ECHO BAY MINES LTD.
Compilation Report of Independent Chartered Accountants................... 2
Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1996....... 3
Pro Forma Condensed Consolidated Statement of Earnings for the Three
Months Ended March 31, 1996.............................................. 4
Pro Forma Condensed Consolidated Statement of Earnings for the Year Ended
December 31, 1995........................................................ 5
Notes to the Pro Forma Condensed Consolidated Balance Sheet and Statements
of Earnings.............................................................. 6
SCHEDULE VII - ANNUAL REPORT ON FORM 10-K OF ECHO BAY MINES LTD.,
INCLUDING
CONSOLIDATED FINANCIAL STATEMENTS
Management's Responsibility for Financial Reporting....................... 63
Report of Independent Chartered Accountants............................... 64
Consolidated Statement of Earnings for the Three Years Ended December 31,
1995..................................................................... 65
Consolidated Balance Sheet at December 31, 1995 and 1994.................. 66
Consolidated Statement of Retained Earnings for the Three Years Ended
December 31, 1995........................................................ 67
Consolidated Statement of Cash Flow for the Three Years Ended December 31,
1995..................................................................... 68
Summary of Significant Accounting Policies................................ 69
Notes to Consolidated Financial Statements................................ 73
SCHEDULE VIII - ECHO BAY MINES LTD. MANAGEMENT PROXY CIRCULAR IN
CONNECTION WITH ITS 1996 ANNUAL SHAREHOLDER MEETING...................... 1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SCHEDULE IX - QUARTERLY REPORT ON FORM 10-Q OF ECHO BAY MINES LTD.,
INCLUDING UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS................... 1
Consolidated Statement of Earnings for the Three Months Ended March 31,
1996 and 1995........................................................... 3
Consolidated Balance Sheet at March 31, 1996 and December 31, 1995....... 4
Consolidated Statement of Cash Flow for the Three Months Ended March 31,
1996 and 1995........................................................... 5
Consolidated Statement of Retained Earnings (Deficit) for the Three
Months Ended March 31,
1996 and 1995........................................................... 5
Notes to Interim Consolidated Financial Statements....................... 6
</TABLE>
<PAGE>
SCHEDULE I
MERGER AGREEMENT
<PAGE>
MERGER AGREEMENT
SANTA ELINA GOLD CORPORATION
AND
KENDALL GOLD CORPORATION
1
<PAGE>
TABLE OF CONTENTS
ARTICLE 1
INTERPRETATION
<TABLE>
<C> <S> <C>
1.1 Definitions........................................................... 5
1.2 Articles and Headings................................................. 6
1.3 Meaning of Expressions................................................ 7
1.4 Extended Meaning...................................................... 7
1.5 Date for Any Action................................................... 7
1.6 Currency.............................................................. 7
1.7 Statutes.............................................................. 7
1.8 Exhibits.............................................................. 7
ARTICLE 2
THE MERGER
2.1 Meeting............................................................... 7
2.2 Merger................................................................ 7
2.3 Effective Date........................................................ 7
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 Mutual Representations and Warranties................................. 8
3.2 Representations and Warranties of Kendall............................. 10
3.3 Representations and Warranties of Santa Elina......................... 10
ARTICLE 4
COVENANTS
4.1 Mutual Covenants...................................................... 12
4.2 Covenants of Santa Elina.............................................. 13
4.3 Covenants of Kendall.................................................. 14
4.4 Other Covenants....................................................... 15
ARTICLE 5
CONDITIONS
5.1 Mutual Conditions..................................................... 15
5.2 Kendall Conditions.................................................... 16
5.3 Santa Elina Conditions................................................ 17
ARTICLE 6
TERMINATION
6.1 Termination by Either Party........................................... 19
6.2 Effect of Termination................................................. 19
6.3 Break Fees............................................................ 19
</TABLE>
2
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ARTICLE 7
AMENDMENT
<TABLE>
<C> <S> <C>
7.1 Amendment............................................................ 19
ARTICLE 8
GENERAL
8.1 Expenses............................................................. 20
8.2 Notices.............................................................. 20
8.3 Disclosure........................................................... 21
8.4 Time of Essence...................................................... 21
8.5 Entire Agreement..................................................... 21
8.6 Further Assurances................................................... 21
8.7 Governing Law........................................................ 21
8.8 Execution in Counterparts............................................ 21
8.9 Waiver............................................................... 21
8.10 Enurement and Assignment............................................. 21
8.11 Subsidiary Covenants................................................. 22
EXHIBIT 1 - Plan of Merger................................................. 23
EXHIBIT 2 - Mineral Interests and de Brito Interests.......................
EXHIBIT 3 - Echo Bay Representations and Warranties........................ 27
</TABLE>
3
<PAGE>
MERGER AGREEMENT
THIS AGREEMENT made as of the 9th day of April,
1996
Between:
SANTA ELINA GOLD CORPORATION, a company
incorporated under the International Business
Companies Ordinance of the British Virgin
Islands ("Santa Elina")
and
KENDALL GOLD CORPORATION, a company incorporated
under the International Business Companies
Ordinance of the British Virgin Islands
("Kendall").
WHEREAS:
A. Kendall and Santa Elina wish to merge and therefore wish to carry out
certain transactions on the basis hereinafter set forth;
B. the Parties hereto intend to carry out the transactions contemplated
herein by way of a merger under the provisions of the International
Business Companies Ordinance of the British Virgin Islands; and
C. the Parties hereto have entered into this Agreement to provide for the
matters referred to in the foregoing recitals and for other matters
relating to such merger.
NOW THEREFORE in consideration of the mutual covenants and agreements
herein contained and other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the Parties agree as set forth
below.
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<PAGE>
ARTICLE 1
INTERPRETATION
1.1Definitions
In this Agreement, including the recitals hereto but excluding the Exhibits
hereto, unless there is something in the subject matter or context
inconsistent therewith, the following terms shall have the meanings set out
below.
"AGREEMENT" means this merger agreement together with any amendments hereto
made from time to time.
"ARTICLES OF MERGER" means the articles of merger in respect of the Merger
required by the IBCO to be executed and submitted to the Registrar after
approval of the Plan of Merger by the directors and members of each Party.
"BUSINESS DAY" means, with respect to any action to be taken, any day,
other than Saturday, Sunday or a statutory holiday in the place where such
action is to be taken.
"DE BRITO INTERESTS" means the following interests owned by Paulo C. de
Brito and Angela M. G. de Brito in precious and base metal mining companies
and related projects, all as more particularly described in Exhibit 2 to this
Agreement:
51% of the voting common shares, or 17% of the total outstanding
shares of Mineracao Santa Elina, and
51% of the voting common shares, or 17% of the total outstanding
shares of Mineracao Maraca.
"ECHO BAY" means Echo Bay Mines Ltd., a corporation incorporated under the
Canada Business Corporations Act.
"ECHO BAY SHARES" means 5,260,281 common shares of Echo Bay held or to be
held by Kendall.
"EFFECTIVE DATE" means the date set out in the Certificate of Merger issued
by the Registrar.
"ENCUMBRANCE" includes, without limitation, any mortgage, pledge,
assignment, charge, lien, security interest or trust, royalty, carried,
working, participation or net profits interest, or any other third party
interest, and any agreement, option, right or privilege (whether by law,
contract or otherwise) capable of becoming any of the foregoing.
"IBCO" means the International Business Companies Ordinance, Cap. 291, of
the British Virgin Islands, as amended from time to time.
"INFORMATION CIRCULAR" means the information circular and proxy materials
to be sent to the Santa Elina Common Shareholders in connection with the Santa
Elina Meeting.
"KENDALL COMMON SHAREHOLDERS" means the holders of Kendall Common Shares
being Echo Bay and Sercor.
"KENDALL COMMON SHARES" means the common shares of Kendall.
"KENDALL COUNSEL" means Milner Fenerty, barristers and solicitors.
"KENDALL PREFERRED SHARES" means the non-voting redeemable preferred shares
of Kendall.
"MERGER" means the merger under the provisions of section 76 of the IBCO,
on the terms and conditions set forth in the Plan of Merger.
"MINERAL INTERESTS" means all of the interests owned by Santa Elina in
precious and base metal mining companies and related projects, including those
set out below, and as more particularly described in Exhibit 2 to this
Agreement:
49% of the voting common shares and 100% of the non-voting preference
shares, or 83% of the total outstanding shares of Mineracao Santa
Elina, which in turn owns:
100% of the Sao Vicente property,
100% of the Sao Francisco property,
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<PAGE>
100% of the hydroelectric power project on the Guapore River,
99.9% of Mineracao Bacilandia, which in turn owns 100% of the
Fazenda Nova property,
99.9% of the following companies: Mineracao Aguapei, Mineracao
Arapua, Mineracao Marajoara, Mineracao Marina and Mineracao
Silvana, and
51% of Mineracao Paloma,
49% of the voting common shares and 100% of the non-voting preference
shares, or 83% of the total outstanding shares of Mineracao Maraca,
which in turn owns:
99.9% of Mineracao Alonte, which in turn owns 100% of the Chapada
property (subject to a 50% option in favour of Echo Bay), and
100% of the Fazenda Genipapo surface,
100% of Santa Elina Gold Ltd.,
100% of Compania Minera, which in turn owns interests in properties in
Bolivia, and
62% of the voting common shares of Arauco Resources Corporation, a
company under the laws of British Columbia and listed on the Vancouver
Stock Exchange.
"PARTIES" means Santa Elina and Kendall, and "Party" means one of the
Parties.
"PLAN OF MERGER" means the plan of merger which is annexed as Exhibit 1 and
any amendment or variation thereto made in accordance with section 7.1.
"REGISTRAR" means the Registrar of Companies under the IBCO.
"SANTA ELINA COMMON SHAREHOLDERS" means the holders of Santa Elina Common
Shares.
"SANTA ELINA COMMON SHARES" means the common shares of Santa Elina.
"SANTA ELINA COUNSEL" means Cassels Brock & Blackwell, barristers and
solicitors.
"SANTA ELINA FINANCIAL STATEMENTS" means the audited financial statements
and related notes thereto of Santa Elina for its fiscal year ended December
31, 1995.
"SANTA ELINA MEETING" means the meeting of the Santa Elina Common
Shareholders contemplated by section 2.1.
"SANTA ELINA SHAREHOLDER AGREEMENTS" means the shareholder agreements dated
as of August 3, 1994 among Paulo C. de Brito, Angela Maria Guaspari de Brito
and Santa Elina and each of Mineracao Maraca Industria e Comercio S.A. and
Mineracao Santa Elina Industria e Comercio S.A. in respect of the de Brito
Interests.
"SERCOR" means Sercor Limited, a corporation incorporated under the laws of
the Cayman Islands.
"SHARE SUBSCRIPTION AND PURCHASE AGREEMENT" means the share subscription
and purchase agreement dated as of the date hereof among Echo Bay, Sercor
Limited and Kendall.
"SUBSIDIARY" means a company more than 50% of whose total outstanding
shares of all classes are owned by another company.
1.2 Articles and Headings
The division of this Agreement into articles, sections, subsections and
paragraphs and the insertion of headings are for convenience of reference only
and shall not affect in any way the meaning or interpretation of this
Agreement. A reference to an article or a section number shall, unless
otherwise stated, be a reference to an article or section of this Agreement.
6
<PAGE>
1.3 Meaning of Expressions
"Herein", "hereof" or "hereunder" and similar expressions when used in a
section shall be construed as referring to the whole Agreement and not that
section only.
1.4 Extended Meaning
In this Agreement, unless the contrary intention appears, words importing
the singular include the plural and vice versa, words importing gender shall
include all genders and words importing a person shall include a natural
person, firm, trust, partnership, association, corporation, joint venture or
government (including any governmental board, agency or instrumentality
thereof).
1.5 Date for Any Action
In the event that the date on which any action is required to be taken
hereunder by any of the Parties is not a Business Day, such action shall be
required to be taken on the next succeeding day which is a Business Day.
1.6 Currency
Unless otherwise stated, all references in this Agreement to sums of money
are expressed in lawful money of the United States of America.
1.7 Statutes
References in this Agreement to any statute or sections thereof shall
include such statute as amended or substituted and any regulations promulgated
thereunder.
1.8 Exhibits
The following exhibits which are attached to this Agreement are
incorporated into this Agreement by reference and are deemed to be part
hereof:
Exhibit 1 - Plan of Merger
Exhibit 2 - Mineral Interests and de Brito Interests
Exhibit 3 - Echo Bay Representations and Warranties
ARTICLE 2
THE MERGER
2.1 Meeting
As soon as reasonably practicable, but in any event not later than May 31,
1996, Santa Elina shall call and hold a meeting of the Santa Elina Common
Shareholders for the purpose of considering and, if deemed advisable,
approving the Merger.
2.2 Merger
Subject to the fulfilment of the conditions set forth in Article 5, Kendall
and Santa Elina shall deliver to the Registrar Articles of Merger and such
other documents as may be required to give effect to the Merger.
2.3 Effective Date
The Merger shall become effective on the Effective Date, which shall be not
more than five Business Days after the date of the Santa Elina Meeting unless
otherwise agreed to in writing by the Parties.
7
<PAGE>
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 Mutual Representations and Warranties
Each Party to this Agreement represents and warrants to the other Party,
and acknowledges that such other Party is relying upon such representations
and warranties in connection with the matters contemplated by this Agreement,
that:
(a) it (and each of its Subsidiaries, if any) is duly incorporated and
organized and validly existing under the laws of the jurisdiction of
its incorporation and has the corporate power and authority to own or
lease its property and assets and to carry on any business now
conducted by it and is duly qualified in all material respects to carry
on business in each jurisdiction in which the nature of its business or
the property or assets owned or leased by it makes such qualification
necessary;
(b) it has the corporate power and authority to enter into this Agreement
and, subject to obtaining the requisite approvals contemplated hereby,
to perform its obligations hereunder;
(c) the execution and delivery of this Agreement by it and the completion
of the transactions contemplated hereby and provisions hereof and
thereof do not and will not:
(i) result in the breach of, or violate any term or provision of its
memorandum, articles or other governing documents,
(ii) conflict with, result in the breach of, constitute a default
under, or accelerate or permit the acceleration of the performance
required by, any agreement, instrument, license, permit or
authority to which it is a party or by which it or its property is
bound and which is material to it, or result in the creation of
any material Encumbrance upon any of its assets under any such
agreement, instrument, license, permit, authority or otherwise, or
give to others any material interest or right, including rights of
purchase, termination, cancellation or acceleration, under any
such agreement, instrument, license, permit or authority, or
(iii) subject to receipt of necessary regulatory approvals, violate or
contravene any provision of any law or regulation or any judicial
or administrative award, judgment or decree applicable and known
to it (after due inquiry), where such violation or contravention
would have a material adverse affect on it or could reasonably be
expected to prevent or hinder the consummation of the transactions
contemplated by this Agreement or the Plan of Merger;
(d) there are no actions, suits, proceedings or investigations commenced,
contemplated or threatened against or affecting it (or any of its
Subsidiaries, if any), at law or in equity, before or by any
governmental department, commission, board, bureau, court, agency,
arbitrator or instrumentality, domestic or foreign, of any kind, nor are
there any existing facts or conditions which may reasonably be expected
to be a proper basis for any such action, suit, proceeding or
investigation, which in any case would prevent or hinder the
consummation of the transactions contemplated by this Agreement or the
Plan of Merger or which could reasonably be expected to materially
adversely affect its business, financial condition, operations,
prospects, properties, assets or affairs;
(e) it has no agreements of any nature to acquire any Subsidiary, or to
acquire or lease any other business operations out of the ordinary
course;
(f) its minute books and the minute books of its Subsidiaries, if any, are
true and correct in all material respects and contain the minutes of all
meetings and all resolutions of the directors and shareholders thereof
and to its knowledge there are no shareholder agreements among its
shareholders, except in respect of Kendall, the shareholder agreement to
be entered into pursuant to the Share Subscription and Purchase
Agreement, and except in respect of Santa Elina, the existing
shareholder agreements among Santa Elina, Paulo C. de Brito and Angela
M. G. de Brito governing the affairs of Mineracao Santa Elina Industria
e Comercio S.A. and Mineracao Maraca Industria e Comercio S.A.;
(g) since December 31, 1995 in the case of Santa Elina and since its date
of incorporation in the case of Kendall, it (and each of its
Subsidiaries, if any) has:
8
<PAGE>
(i) not amended its memorandum, articles or other governing documents
and there are no resolutions or proceedings pending for any
amendment thereto except as may be desirable in respect of the
transactions contemplated by this Agreement,
(ii) conducted its business in all material respects in the ordinary
course of business consistent with normal industry practice except
for the retaining of any financial and other advisors relating to
the business combination of Kendall with Santa Elina and the fees
and expenses resulting therefrom and this Agreement,
(iii) not suffered any material adverse change, financial or otherwise, in
its business, financial condition, operations, prospects,
properties, assets, liabilities or affairs nor have there been any
occurrences or circumstances which have resulted or might reasonably
be expected to result in a material adverse change thereto (other
than changes attributable to general economic conditions, including
changes in interest rates and fluctuations in the prices of precious
and base metals),
(iv) not made any change in its accounting policies and practices as
theretofore applied including, without limitation, the basis upon
which its assets and liabilities are recorded on its books and its
earnings and profits and losses are ascertained,
(v) maintained in effect salary and other compensation levels in
accordance with its then existing salary administration program and
has not authorized or paid or agreed to pay any bonus or similar
payment to any officer or director or person providing to it
services similar in nature to employment services, or made any
material change in respect of employment or contract terms, as the
case may be and is not presently indebted to any of its present or
former shareholders, directors or officers in any material respect,
(vi) not declared, paid or set aside for payment any dividend or
distribution of any kind in respect of any of its outstanding
securities nor made any repayments of capital, and
(vii) not entered into or committed to enter into any agreement with a
non-arm's length person;
(h) in all material respects, it has duly and timely filed, in proper form,
returns in respect of taxes under the tax legislation of any country,
province, state or other jurisdiction having jurisdiction over its
affairs or any of its Subsidiaries (if any), for all prior periods in
respect of which such filings have heretofore been required, and all
taxes shown thereon and all taxes now owing have been paid or accrued
on its books and there are no outstanding agreements or waivers
extending the statutory period of limitations applicable to any tax
return for any period, it is not aware of any contingent tax
liabilities or any grounds for reassessment, there are no material
assessments or reassessments pursuant to which there are amounts owing
or discussions in respect thereof with any taxing authority and it has
withheld from each payment made to any of its directors, officers and
employees and former directors, officers and employees the amount of
all taxes (including, without limitation, income tax) and other
deductions required to be withheld therefrom and has paid the same to
the proper tax or other authority within the time required under any
applicable tax legislation;
(i) it and each of its Subsidiaries, if any, is not:
(i) in breach or violation of any term or provision of its memorandum,
articles or other governing documents,
(ii) in breach or violation of any material term or provision of, or in
default under any agreement, instrument, license, permit or
authority to which it is a party or by which it or any of its
property is bound and which is material to it, or
(iii) in violation or contravention of any provision of any law or
regulation or any judicial or administrative award, judgment or
decree applicable to it, where such violation or contravention could
reasonably be expected to prevent or hinder the consummation of the
transactions contemplated by this Agreement or the Plan of Merger or
which could reasonably be expected to materially adversely affect
its business, financial condition, operations, prospects,
properties, assets or affairs;
(j) the execution of this Agreement or the consummation of the transactions
contemplated by this Agreement or the Plan of Merger will not result in
its having to pay any fee to any person other than, in the case of
Santa Elina, RBC Dominion Securities Inc., in the case of Kendall,
Nesbitt Burns Inc., and in both Parties case, lawyers, accountants and
other professional advisors; and
9
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(k) it has filed all reports and other documents required to be filed
pursuant to applicable securities legislation and, as of their
respective dates, such reports and documents disclose all material
facts (as defined in the Securities Act (Ontario)) relating to its
business and financial affairs required to be disclosed in such reports
and documents.
3.2 Representations and Warranties of Kendall
Kendall represents and warrants to and in favour of Santa Elina as follows,
and acknowledges that Santa Elina is relying upon such representations and
warranties in connection with the matters contemplated by this Agreement:
(a) the authorized capital of Kendall consists of 100,000,000 Kendall
Common Shares and 37,500,000 Kendall Preferred Shares;
(b) the aggregate number of Kendall Common Shares presently issued and
outstanding is 20 and, pursuant to the Share Subscription and Purchase
Agreement, as at the Effective Date, will be 32,500,000 and there are
no Kendall Preferred Shares presently issued or outstanding and, except
as provided under the Share Subscription and Purchase Agreement or
under or as a consequence of the Merger, no person has any agreement or
option or any right or privilege (whether by law, preemptive right,
contract or otherwise) capable of becoming an agreement, option or
right for the purchase, subscription, allotment or issuance of any
unissued securities of Kendall;
(c) the Echo Bay Shares issuable upon redemption by Kendall of the Kendall
Preferred Shares shall on the Effective Date be duly authorized and
validly issued as fully paid and non-assessable and shall on such date
be tradeable by the recipients of such shares (other than control
persons, insiders and affiliates of Santa Elina, Sercor and Echo Bay)
without restriction by Canadian and United States securities laws
pursuant to an available exemption or an order or pursuant to a
prospectus, registration statement or other filing in compliance with
applicable securities laws;
(d) it is not a resident of Canada for tax purposes;
(e) the execution and delivery of this Agreement and the completion of the
transactions contemplated herein and in the Plan of Merger have been
duly approved by its board of directors and this Agreement constitutes
a valid and binding obligation enforceable against it in accordance
with its terms; and
(f) as of the dates as of which the information is given, the information
respecting Kendall and Echo Bay to be set out in the Information
Circular for the Santa Elina Meeting shall be true and complete in all
material respects and shall not contain any misrepresentation (as
defined in the Securities Act (Ontario)).
3.3 Representations and Warranties of Santa Elina
Santa Elina represents and warrants to and in favour of Kendall as follows
and acknowledges that Kendall is relying upon such representations and
warranties in connection with the matters contemplated by this Agreement:
(a) the authorized capital of Santa Elina consists of an unlimited number
of Santa Elina Common Shares;
(b) the aggregate number of Santa Elina Common Shares presently issued and
outstanding (other than an aggregate of 1,193,333 Santa Elina Common
Shares which may be issued after the date hereof upon the exercise of
options granted under Santa Elina's employee stock option plan and an
aggregate of 6,556,526 Santa Elina Common Shares which may be issued
after the date hereof upon the exercise of warrants granted by Santa
Elina to Sercor) is 135,130,521 and except in respect of the
aforementioned employee stock option plan and warrants, no person has
any agreement or option or any right or privilege (whether by law,
preemptive right, contract or otherwise) capable of becoming an
agreement, option or right for the purchase, subscription, allotment or
issuance of any unissued securities of Santa Elina;
(c) the Santa Elina Financial Statements have been prepared in accordance
with generally accepted accounting principles applicable in Canada on a
consistent basis with prior periods (except as stated therein) and
present fairly the financial position of Santa Elina as of the dates
provided therein and the results of its operations and the changes in
financial position for the periods then ended;
(d) all filings made by it or its Subsidiaries under which they have
received or are entitled to government incentives have been made in
accordance, in all material respects, with all applicable legislation
and contain
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no misrepresentations of material fact or omit to state any material
fact which could cause any amount previously paid or previously accrued
on its accounts to be recovered or disallowed;
(e) there has been no material adverse change in its mining assets from
those described in its current independent engineering reports provided
by it to Kendall or its shareholders, except as may have occurred
through normal production or otherwise as a result of transactions in
the ordinary course of business;
(f) it and its Subsidiaries hold and are legally entitled to hold such
right and title to the assets used in connection with its business,
including but not limited to the Mineral Interests, as may be required
for the carrying on of its business in accordance with normal industry
practice and its interests in such assets in the aggregate are not
subject to any material reduction by a right of conversion or other
alteration or election in favour of a third party;
(g) under any and all applicable laws and regulations it or its
Subsidiaries:
(i) are legally entitled to hold its interests directly or indirectly in
the Mineral Interests and it or its Subsidiaries are the recorded
holders and beneficial owners of all of its interests, as identified
herein, in the mineral rights comprising or contained in the Mineral
Interests free and clear of all material Encumbrances,
(ii) to the extent possible under applicable laws, holds all necessary
surface and subsurface rights in respect of or related to the
Mineral Interests, and
(iii) have secured all required permits or other governmental or
regulatory approvals in respect of mining, milling and related
operations currently being conducted for the Mineral Interests and
all such permits or approvals are in good standing and will continue
to be in good standing at the Effective Date and there are no
notices of material violations that have been received in respect
thereof;
(h) to the best of its knowledge (after due inquiry), except to the extent
that such violation does not have a material adverse effect on its
business, financial condition, operations, prospects, properties,
assets or affairs (on a consolidated basis):
(i) it (and each of its Subsidiaries) is in compliance in all material
respects with all applicable environmental laws,
(ii) it (and each of its Subsidiaries) has operated its business at all
times and has received, handled, used, stored, treated, shipped and
disposed of all contaminants in compliance in all material respects
with all applicable environmental laws,
(iii) there have been no unrectified spills, releases, deposits or
discharges of hazardous or toxic substances, contaminants or
wastes on any of the real property owned or leased by it (or any
of its Subsidiaries) or under their respective control,
(iv) there have been no unrectified releases, deposits or discharges, in
violation of applicable environmental laws, of any hazardous or
toxic substances, contaminants or wastes to the earth, air or into
any body of water or any municipal or other sewer or drain water
system by it (or its Subsidiaries),
(v) no orders, directions, or notices have been issued and remain
outstanding pursuant to applicable environmental laws relating to
its (and its Subsidiaries') business or assets,
(vi) neither it nor its Subsidiaries has failed to report to the proper
governmental authority the occurrence of any event which is required
to be so reported by any applicable environmental laws, and
(vii) it (and each of its Subsidiaries) holds all licenses, permits and
approvals required under applicable environmental laws in connection
with the operation of its business and the ownership and use of its
assets, all such licenses, permits and approvals are in full force
and effect, and except for notifications and conditions of general
application to assets of the type owned by it, neither it nor its
Subsidiaries has received any notification pursuant to any
applicable environmental laws that any work, repairs, construction
or capital expenditures are required to be made by it as a condition
of continued compliance with any applicable environmental laws, or
any license, permit or approval issued pursuant thereto, or that any
license, permit or approval referred to above is about to be
reviewed, made subject to limitations or conditions, revoked,
withdrawn or terminated;
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(i) except for employment agreements with Chris Baiz, Luiz A. P. Barreto,
Jose Beraldo, Paulo de Brito, Patrick Burns, Juvenal Mesquita Filho,
John Hammes, Marcos Paro, Antenor Silva and Laercio Teixeira, it is not
a party to any written employment, service or pension agreement;
(j) the execution and delivery of this Agreement and the completion of the
transactions contemplated herein and in the Plan of Merger have been
duly approved by its board of directors and this Agreement constitutes
a valid and binding obligation enforceable against it in accordance
with its terms;
(k) it is a reporting issuer under the securities laws of each of the
provinces of Canada, and to the best of its knowledge is not in default
of any requirement of such securities laws and it is in compliance in
all material respects with the by-laws, rules and regulations of The
Toronto Stock Exchange, being the only exchange upon which the Santa
Elina Common Shares are listed;
(l) it is not a resident of Canada for tax purposes;
(m) as of the dates as of which the information is given, the information
respecting Santa Elina to be set out in the Information Circular for
the Santa Elina Meeting shall be true and complete in all material
respects and shall not contain any misrepresentation (as defined in the
Securities Act (Ontario)); and
(n) it is not required to file reports pursuant to sections 13 or 15(a) of
the U.S. Securities Exchange Act of 1934, as amended.
ARTICLE 4
COVENANTS
4.1 Mutual Covenants
Each of the Parties to this Agreement covenants and agrees that, until the
Effective Date or the day upon which this Agreement is terminated, whichever
is earlier, it (and its Subsidiaries, if any):
(a) will use its best efforts to satisfy (or cause the satisfaction of) the
conditions precedent to its obligations hereunder set forth in article
5 to the extent the same is within its control and to take, or cause to
be taken, all other action and to do, or cause to be done, all other
things necessary, proper or advisable under applicable laws and
regulations to complete the Merger, including using its best efforts:
(i) to obtain all necessary waivers, consents and approvals required to
be obtained by it from other parties to loan agreements, leases and
other contracts,
(ii) to obtain all necessary consents, approvals and authorizations as
are required to be obtained by it under any applicable laws or
regulations, and
(iii) to effect all necessary registrations and filings and submissions
of information requested by governmental authorities required to
be effected by it in connection with the Merger,
and it will use its best efforts to cooperate with the other Party to
this Agreement in connection with the performance by it of its
obligations hereunder;
(b) will continue to make available and cause to be made available to the
other Party to this Agreement, its agents and advisors, as soon as
possible, all documents and agreements in any way relating to or
affecting its business, financial condition, operations, prospects,
properties, assets and affairs, and such other documents or agreements
as may be necessary to enable such other Party to effect a thorough
investigation of its business, properties and financial status, except
where it is contractually precluded from making such document or
agreement available, in which case it shall cooperate with the other
Party in securing access to any such documentation not in its
possession or under its control;
(c) will continue to make available and cause to be made available to
Nesbitt Burns Inc. and RBC Dominion Securities Inc., as soon as
possible, all documents and agreements in any way relating to or
affecting its business, financial condition, operations, prospects,
properties, assets and affairs, and such other documents or agreements
as may be necessary to enable Nesbitt Burns Inc. and RBC Dominion
Securities Inc. to effect a thorough investigation of its business,
properties and financial status and so as to permit RBC Dominion
Securities Inc. to deliver its valuation and fairness opinion regarding
the transaction contemplated hereby;
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(d) will not, except for transactions in the ordinary course of business
and as required in the course of prudent mining operations, sell,
dispose of, transfer, convey, surrender, release or abandon, or create
or assume any material Encumbrance on or in respect of, the whole or
any material part of its assets other than chattels that are replaced
by equivalent property or consumed in operations and other than any
liens arising as a result of operations under agreements affecting the
assets;
(e) will maintain insurance on and in respect of its assets in like kind
to, and in an amount not less than the amount of, insurance in respect
of the assets in effect on the date hereof;
(f) will, in all material respects, conduct itself so as to keep the other
Party to this Agreement fully informed as to the decisions required
with respect to the most advantageous methods of exploring, operating
and producing from its assets;
(g) other than the entering into of the unanimous shareholder agreement
contemplated by the Share Subscription and Purchase Agreement or as
contemplated in the specific circumstances described in section 4.1(i)
hereof, will not enter into any transaction not in the ordinary course
of its business as hereinbefore conducted and will use all reasonable
efforts to preserve intact its present business organization, licenses
and permits;
(h) will not declare or pay any dividends or make any other distribution or
repay, other than in the ordinary course of business, any material
outstanding indebtedness;
(i) will not enter into any agreement, or take part directly or indirectly,
through representatives, advisors or agents or otherwise, in any
discussions or negotiations or provide any information to any third
party relating to any acquisition or disposition of any assets (except
for transactions in the ordinary course of business) or the issue or
transfer of any of its securities or any proposal to offer to purchase
its outstanding shares, amalgamate, merge or effect a merger of itself
(or its Subsidiaries, if any) with one or more corporations or
entities, except as provided for in this Agreement and the Plan of
Merger; provided that the foregoing shall not prevent its board of
directors from responding as required by law (including pursuant to the
rules or policies of any applicable securities regulatory authority) to
any unsolicited submission or proposal regarding any acquisition or
disposition of assets or any unsolicited proposal to amalgamate, merge
or effect a merger or other business combination or any unsolicited
acquisition proposal generally or making any disclosure to its
shareholders with respect thereto which in the judgment of its board of
directors or upon the written opinion of its counsel is required under
such applicable law;
(j) will not take any action, refrain from taking any action, or permit any
action to be taken or not taken, inconsistent with this Agreement or,
except as contemplated in the specific circumstances described in
section 4.1(i) hereof, which might, directly or indirectly, interfere
with or adversely affect the consummation of the Merger;
(k) will not issue, authorize or propose the issuance of, or purchase or
propose the purchase of any shares or any class or securities
convertible into, or rights, warrants or options to acquire, any such
shares or other convertible securities, except pursuant to the Merger
or pursuant to rights, options or agreements outstanding on the date
hereof and in accordance therewith; and
(l) will not disclose to any person, other than to their officers,
directors, key employees and professional advisors, any confidential
information relating to each other, except information disclosed in the
Information Circular, required to be disclosed by law or otherwise
known to the public.
4.2 Covenants of Santa Elina
Santa Elina covenants and agrees that, until the Effective Date or the day
upon which this Agreement is terminated, whichever is earlier:
(a) it will, in a timely and expeditious manner, and in any event not later
than April 30, 1996, prepare (in consultation with Kendall and its
counsel) and file an Information Circular in all jurisdictions where
the same is required to be filed and mail the same to the Santa Elina
Common Shareholders and its directors and auditors in accordance with
laws applicable to Santa Elina, Kendall, Echo Bay and the transaction,
in all jurisdictions where the same is required, complying in all
material respects with all applicable legal requirements on the date of
mailing thereof;
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(b) it will, in a timely and expeditious manner:
(i) convene the Santa Elina Meeting and distribute copies of this
Agreement (or a written summary thereof prepared by Santa Elina in
form and substance reasonably satisfactory to Kendall), in each case
subject to and in compliance in all material respects with all
applicable legal requirements,
(ii) provide notice to Kendall of the Santa Elina Meeting and allow
Kendall's representatives to attend the Santa Elina Meeting, and
(iii) conduct the Santa Elina Meeting in accordance with the articles of
Santa Elina and any instrument governing such meeting, as
applicable, and as otherwise required by law;
(c) in a timely and expeditious manner, it will prepare (in consultation
with Kendall) and file any amendments or supplements to the Information
Circular and mail the same to the Santa Elina Common Shareholders and
its directors and auditors in accordance with applicable law, in all
jurisdictions where the same is required, complying in all material
respects with all applicable legal requirements on the date of mailing
thereof;
(d) it will, prior to the Merger, take all necessary actions to have any
outstanding options or warrants (other than the warrants of Santa Elina
held by Sercor) to acquire any of its securities cancelled and, in this
regard, shall use its best efforts to enter into an agreement, on a
basis acceptable to Kendall, with each holder of outstanding options
whereby the holders of such options will surrender their options to
Kendall for cancellation (it being acknowledged that it will be
acceptable to Kendall if such option holders agree to accept a total of
a maximum of 50,535 common shares of Echo Bay as consideration for the
surrender of all such options);
(e) it will, together with Kendall, and subject to the approval of the
Merger at the Santa Elina Meeting and satisfaction or waiver of the
conditions precedent to its obligations set forth in article 5,
forthwith, but in any event not later than June 3, 1996, file Articles
of Merger with the Registrar in order for the Merger to become
effective on or before June 3, 1996, provided that nothing shall
require Santa Elina to consent to any modification of this Agreement,
the Merger or Santa Elina's obligations hereunder which is materially
adverse to it;
(f) it will, except for non-substantive communications with security
holders, forthwith furnish to Kendall a copy of each notice, letter,
report, schedule or other document or communication delivered, filed or
received by Santa Elina in connection with the Merger, the Santa Elina
Meeting and any other meeting of Santa Elina security holders or class
of security holders which all such holders, as the case may be, are
entitled to attend, including, without limitation, any filings under
applicable laws and any dealings with regulatory agencies in connection
with the transactions contemplated herein;
(g) it will make other necessary filings and applications under applicable
laws and regulations required on the part of Santa Elina in connection
with the transactions contemplated herein and take all action necessary
to be in compliance with such laws and regulations; and
(h) it will use its best efforts to conduct its affairs so that all of its
representations and warranties contained herein shall be true and
correct in all material respects on and as of the Effective Date as if
made thereon.
4.3 Covenants of Kendall
Kendall covenants and agrees that, until the Effective Date or the day upon
which this Agreement is terminated, whichever is earlier, it:
(a) will not make any changes in its share capital that would adversely
affect the value of the Kendall Preferred Shares to be issued to the
Santa Elina Common Shareholders in connection with the Merger;
(b) will provide to Santa Elina in a timely and expeditious manner all
information as may be reasonably requested by Santa Elina or is
required by applicable law with respect to Kendall and its business and
properties for inclusion in the Information Circular or in any
amendments or supplements to the Information Circular complying in all
material respects with all applicable legal requirements on the date of
mailing thereof;
(c) will, together with Santa Elina, and subject to the approval of the
Merger at the Santa Elina Meeting and satisfaction or waiver of the
conditions precedent to its obligations set forth in article 5,
forthwith, but in any event not later than June 3, 1996, file Articles
of Merger with the Registrar in order for the Merger to become
effective on or before June 3, 1996, provided that nothing shall
require Kendall to consent to any
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modification of this Agreement, the Merger or Kendall's obligations
hereunder which is materially adverse to it;
(d) will, on the Effective Date, issue Kendall Preferred Shares to those
persons entitled thereto pursuant to the Merger and redeem, in
accordance with their terms, the Kendall Preferred Shares held by all
of the holders thereof other than Echo Bay and Sercor;
(e) will, on the Effective Date, transfer common shares of Echo Bay to the
holders of the outstanding options for Santa Elina Common Shares,
provided that acceptable agreements providing for the surrender and
cancellation of such options have been entered into on or prior to the
Effective Date, all as contemplated by section 4.2(d);
(f) will make all other necessary filings and applications under applicable
laws and regulations required in connection with the transactions
contemplated herein and take all action necessary to be in compliance
with such laws and regulations; and
(g) will use its best efforts to conduct its affairs so that all of its
representations and warranties contained herein shall be true and
correct in all material respects on and as of the Effective Date as if
made thereon.
4.4 Other Covenants
The Parties agree that, subject to any limitations imposed by the IBCO, all
rights of indemnification in favour of present or former directors and
officers of Santa Elina with respect to actions taken in their capacities as
directors or officers of Santa Elina prior to the Effective Date in effect on
the date hereof and in any indemnification agreement between any of such
directors or officers and Santa Elina in effect as of the date hereof shall
survive the Merger and continue in full force and effect. Santa Elina and its
successors, including, without limitation, upon completion of the Merger,
Kendall, shall maintain, or cause to be maintained, Santa Elina's current
director and officer liability insurance policy or an equivalent policy, in
either case on terms and conditions no less advantageous to the present or
former directors and officers of Santa Elina than those contained in the
policy in force on the date hereof, for all present and former directors and
officers of Santa Elina covering claims made prior to or within three years
after the Effective Date. The provisions of this section 4.4 are intended to
be for the benefit of, and shall be enforceable by, each present or former
director and officer of Santa Elina and their respective estates, heirs and
legal representatives.
ARTICLE 5
CONDITIONS
5.1 Mutual Conditions
The obligations of Kendall and Santa Elina to complete the transactions
contemplated hereby are subject to fulfilment of the following conditions on
or before the Effective Date or such other time as is specified below:
(a) resolutions shall have been passed at the Santa Elina Meeting, duly
approving the Merger, with or without amendment, by the requisite
majorities of persons entitled or required to vote thereon pursuant to
the IBCO, Ontario Securities Commission Policy Statement No. 9.1 and
any other applicable legal or regulatory requirements;
(b) the Articles of Merger relating to the Merger shall be in form and
substance satisfactory to Kendall and Santa Elina, acting reasonably;
(c) there shall be no action taken under any existing applicable law or
regulation, nor any statute, rule, regulation or order which is
enacted, enforced, promulgated or issued by any court, department,
commission, board, regulatory body, government or governmental
authority or similar agency, domestic or foreign, that:
(i) makes it illegal or otherwise directly or indirectly restrains,
enjoins or prohibits the Merger or any other transactions
contemplated herein,
(ii) results in a judgment or assessment of material damages, directly
or indirectly, relating to the transactions contemplated herein, or
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(iii) prohibits Santa Elina's or Kendall's ownership or operation of all
or any material portion of the business or assets of Santa Elina
or compels Santa Elina or Kendall to dispose of or hold separately
all or any portion of the business or assets of Kendall or Santa
Elina;
(d) Kendall and Santa Elina shall have obtained all consents, approvals and
authorizations, regulatory or otherwise (including third party
approvals and consents and a declaration of effectiveness of the
U.S. registration statement), required or necessary in connection with
the transactions contemplated herein on terms and conditions
satisfactory to Kendall and Santa Elina, acting reasonably; and
(e) holders of not more than 7.5% of the issued and outstanding Santa Elina
Common Shares shall have exercised rights of dissent in relation to the
Merger approved at the Santa Elina Meeting.
The foregoing conditions are for the mutual benefit of Kendall and Santa
Elina and may be waived, in whole or in part, by Kendall and Santa Elina at any
time. If any of the said conditions precedent shall not be complied with or
waived on or before the date required for the performance thereof, either
Kendall or Santa Elina may, rescind and terminate this Agreement by written
notice to the other Party and receive the amount payable to it, if any, pursuant
to section 6.3.
5.2 Kendall Conditions
The obligation of Kendall to complete the transactions contemplated herein
is subject to the fulfilment of the following conditions on or before the
Effective Date or such other time as specified below:
(a) the representations and warranties made by Santa Elina in this Agreement
shall be true as of the Effective Date as if made on and as of such date
and Santa Elina shall have provided to Kendall a certificate of two
senior officers of Santa Elina certifying such accuracy on the Effective
Date and Kendall shall have no knowledge to the contrary;
(b) Santa Elina shall have provided Kendall with opinions of Santa Elina
Counsel reasonably satisfactory to Kendall dated the Effective Date (or
such other date as Kendall and Santa Elina may agree) and addressed
to Kendall and Kendall Counsel to the effect that:
(i) Santa Elina and each of its Subsidiaries is duly incorporated and
validly existing under the laws of the jurisdiction of its
incorporation and has the corporate power and authority to own or
lease its property and assets and to carry on any business now
conducted by it and is registered in each jurisdiction in which
the nature of its business or the property or assets owned or
leased by it makes such registration necessary,
(ii) Santa Elina has full corporate power and authority to enter into
this Agreement and to perform its obligations hereunder,
(iii) all necessary proceedings, corporate, regulatory or otherwise, of
Santa Elina have been taken to fully, validly and effectively
authorize this Agreement and the transactions contemplated herein,
including the Merger, the performance by Santa Elina of its
obligations hereunder and the execution and delivery by Santa
Elina of this Agreement and all documents delivered pursuant
hereto,
(iv) the execution and delivery by Santa Elina of this Agreement and
all documents delivered pursuant hereto, the performance by Santa
Elina of its obligations hereunder and thereunder and the
consummation of the transactions contemplated herein and therein
will not result in the breach of or violate any term or provision
of the memorandum, articles or other governing documents of Santa
Elina,
(v) this Agreement has been duly executed and delivered by Santa Elina
and this Agreement and all documents delivered pursuant to the
terms hereof are valid and binding obligations of Santa Elina
enforceable against it in accordance with their respective terms,
subject to enforceability being limited by applicable bankruptcy,
insolvency, reorganization and other laws affecting creditors'
rights generally and the discretionary nature of certain remedies
(including specific performance and injunctive relief) and subject
to the effectiveness of provisions providing rights of indemnity
or exculpating a party or persons from a liability or a duty
otherwise owed which may be limited by law, and
(vi) Santa Elina is a reporting issuer under the securities laws of
each of the provinces of Canada and is not on the list of
defaulting issuers maintained by any such jurisdictions.
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In giving such opinion, Santa Elina Counsel may rely, in respect of
matters governed by the laws of any jurisdiction other than the Province
of Ontario or the laws of Canada applicable therein upon the opinion of
local counsel in such other jurisdiction provided that Santa Elina
Counsel has no reason to believe that the opinion of such local counsel
is one upon which Santa Elina Counsel cannot properly rely, and, in
respect of matters of fact, upon certificates of senior officers of
Santa Elina or any other appropriate persons;
(c) Santa Elina shall have complied with its covenants herein and shall have
provided to Kendall a certificate of two senior officers of Santa Elina
certifying that Santa Elina has complied with its covenants herein and
Kendall shall have no knowledge to the contrary;
(d) before giving effect to the transactions contemplated by this Agreement,
there shall have been no material adverse change, financial or
otherwise, in the business, financial condition, operations, prospects,
properties, assets or affairs, of Santa Elina or any occurrences or
circumstances which have resulted or might reasonably be expected to
result in a material adverse change thereto (other than changes
attributable to general economic conditions, including changes in
interest rates and fluctuations in the prices of precious or base
metals), and which shall include the commencement of one or more actions
by a shareholder or shareholders of Santa Elina against Santa Elina
and/or its directors, which in Kendall's sole judgment, acting
reasonably, is material, or any decision by a securities regulatory
authority to commence action against Santa Elina and/or its directors,
provided that, without limitation, any change or changes (other than
changes attributable to general economic conditions, including changes
in interest rates and fluctuations in the prices of precious or base) in
or in respect of the Santa Elina assets reducing the aggregate value
thereof by more than $5 million shall be deemed to be a material adverse
change;
(e) Kendall shall be reasonably satisfied that immediately prior to the
Effective Date (i) the aggregate number of Santa Elina Common Shares
issued and outstanding is 135,130,521 and (ii) no person has any
agreement or option or any right or privilege (whether by law,
preemptive right, contract or otherwise) capable of becoming an
agreement, option or right for the purchase, subscription, allotment or
issuance of any unissued securities of Kendall (including any agreements
relating to employee options and warrants, which shall have been
cancelled prior to the Effective Date) other than the warrants for the
acquisition of Santa Elina Common Shares held by Sercor; and
(f) all outstanding options or warrants other than the warrants for the
acquisition of Santa Elina Common Shares held by Sercor to acquire any
securities of Santa Elina shall have been cancelled to the satisfaction
of Kendall.
The foregoing conditions precedent are for the benefit of Kendall and may
be waived, in whole or in part, by Kendall in writing at any time. If any of
the said conditions shall not be complied with or waived by Kendall on or
before the date required for their performance then Kendall may rescind and
terminate this Agreement by written notice to Santa Elina and receive the
amount payable to it, if any, pursuant to section 6.3.
5.3 Santa Elina Conditions
The obligation of Santa Elina to complete the transactions contemplated
herein is subject to fulfilment of the following conditions on or before the
Effective Date or such other time as specified below:
(a) the representations and warranties made by Kendall in this Agreement
shall be true as of the Effective Date as if made on and as of such date
and Kendall shall have provided to Santa Elina a certificate of two
senior officers of Kendall certifying such accuracy on the Effective
Date and Santa Elina shall have no knowledge to the contrary;
(b) on the date hereof and again on the Effective Date (or such other date
as Kendall and Santa Elina may agree) Echo Bay shall have provided to
Santa Elina a certificate of two senior officers of Echo Bay making
certain representations and warranties in the form attached hereto as
Exhibit 3 and Santa Elina shall have no knowledge to the contrary;
(c) Kendall shall have provided Santa Elina with opinions of Kendall Counsel
reasonably satisfactory to Santa Elina dated the Effective Date (or such
other date as Kendall and Santa Elina may agree) and addressed to Santa
Elina and Santa Elina Counsel to the effect that:
(i) each of Kendall and Echo Bay is duly incorporated and validly
existing under the laws of the jurisdiction of its incorporation and
has the corporate power and authority to own or lease its property
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and assets and to carry on any business now conducted by it and is
registered in such jurisdictions in which the nature of its business
or the property or assets owned or leased by it makes such
registration necessary,
(ii) Kendall has full corporate power and authority to enter into this
Agreement and to perform its obligations hereunder,
(iii) all necessary proceedings, corporate, regulatory and otherwise, of
Kendall have been taken to fully, validly and effectively
authorize this Agreement and the transactions contemplated, herein
including the Merger, the performance by Kendall of its
obligations hereunder and the execution and delivery by Kendall of
this Agreement and all documents delivered pursuant hereto,
(iv) the execution and delivery by Kendall of this Agreement and all
documents delivered pursuant hereto, the performance by Kendall of
its obligations hereunder and thereunder and the consummation of
the transactions contemplated herein and therein will not result in
the breach of or violate any term or provision of the memorandum,
articles or other governing documents of Kendall,
(v) this Agreement has been duly executed and delivered by Kendall and
this Agreement and all documents delivered pursuant to the terms
hereof are valid and binding obligations of Kendall enforceable
against it in accordance with their respective terms, subject to
enforceability being limited by applicable bankruptcy, insolvency,
reorganization and other laws affecting creditors' rights generally
and the discretionary nature of certain remedies (including specific
performance and injunctive relief) and subject to the effectiveness
of provisions providing rights of indemnity or exculpating a party
or persons from a liability or a duty otherwise owed which may be
limited by law,
(vi) all necessary corporate action has been taken by Kendall to validly
issue the Kendall Preferred Shares and to redeem the Kendall
Preferred Shares in exchange for the Echo Bay Shares; and
(vii) the Echo Bay Shares have been validly issued and all necessary
documents and proceedings have been filed and taken and all other
legal requirements have been fulfilled under the laws of each of
the provinces of Canada and of the United States, and no filing of
any other document or taking of any other proceedings in such
jurisdictions is required in respect of the delivery of the Echo
Bay Shares upon the redemption of the Kendall Preferred Shares or,
except in respect of control persons or insiders, or affiliates of
Santa Elina, Sercor or Echo Bay, in respect of the first trade of
the Echo Bay Shares by the holders thereof in compliance with
applicable securities laws.
In giving such opinion, Kendall Counsel may rely, in respect of matters
governed by the laws of any jurisdiction other than the Province of Alberta
or the laws of Canada applicable therein upon the opinion of local counsel
in such other jurisdiction provided that Kendall Counsel has no reason to
believe that the opinion of such counsel is one upon which Kendall Counsel
cannot properly rely, and, in respect of matters of fact, upon certificates
of senior officers of Kendall or any other appropriate persons;
(d) Kendall shall have complied with its covenants herein, shall have provided
to Santa Elina a certificate of two senior officers of Kendall certifying
that Kendall has complied with its covenants herein and Santa Elina shall
have no knowledge to the contrary; and
(e) before giving effect to the transactions contemplated by this Agreement,
there shall have been no material adverse change, financial or otherwise, in
the business, financial condition, operations, prospects, properties, assets
or affairs of Kendall or Echo Bay or any occurrences or circumstances which
have resulted or might reasonably be expected to result in a material
adverse change thereto (other than changes attributable to general economic
conditions, including changes in interest rates and fluctuations in the
prices of precious and base metals).
The foregoing conditions precedent are for the benefit of Santa Elina and
may be waived in whole or in part by Santa Elina in writing at any time. If
any of the said conditions shall not be complied with or waived by Santa Elina
on or before the date required for the performance thereof, Santa Elina may
rescind and terminate this Agreement by written notice to Kendall and receive
the amount payable to it, if any, pursuant to section 6.3.
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ARTICLE 6
TERMINATION
6.1 Termination by Either Party
Notwithstanding any other rights contained herein, either Party to this
Agreement may terminate this Agreement at any time prior to the Effective
Date, upon notice to the other Party but without further notice to, or action
on the part of, its security holders:
(a) if, notwithstanding the best efforts of Santa Elina, the Santa Elina
Common Shareholders do not approve the Merger in accordance with the
requirements of applicable laws, policies and regulations; or
(b) if, notwithstanding the best efforts of each Party giving notice and
provided that such Party is not in breach or default of any of the
provisions hereof, the Merger has not become effective on or before
June 30, 1996.
6.2 Effect of Termination
Upon the termination of this Agreement pursuant to this article 6, no Party
shall have any liability or further obligation to the other Party hereunder,
except as specifically provided in section 6.3.
6.3 Break Fees
(a) If this Agreement is properly terminated by Kendall for any reason,
including, without limitation, pursuant to section 6.1 or as a result
of a material breach or default of Santa Elina under this Agreement,
Santa Elina shall pay to Kendall the sum of $2,000,000, which amount,
it is acknowledged by the Parties, is approximately equal to the third
party costs incurred by Kendall in connection with the transactions
contemplated herein.
(b) If this Agreement is properly terminated by Santa Elina as a result of
a material breach or default of an obligation of Kendall under this
Agreement, or as a result of a material breach or default of Echo Bay
in respect of the representations and warranties of Echo Bay contained
in its certificates provided pursuant to subsection 5.3(b), Kendall
shall pay to Santa Elina the sum of $500,000, which amount, it is
acknowledged by the Parties, is approximately equal to the third party
costs incurred by Santa Elina in connection with the transactions
contemplated herein.
(c) For greater certainty, the Parties acknowledge that if the Agreement is
terminated under the circumstances contemplated by both sections 6.3(a)
and 6.3(b), each of the sums payable under such sections shall be paid
(resulting in a net payment to Kendall of the sum of $1,500,000).
(d) Notwithstanding any other provisions of this Agreement, the provisions
of this section 6.3 shall survive any termination of this Agreement.
ARTICLE 7
AMENDMENT
7.1 Amendment
This Agreement may, at any time and from time to time before or after the
holding of the Santa Elina Meeting, be amended by written agreement of the
Parties hereto (or in the case of a waiver, by written instrument of the Party
giving the waiver) without further notice to or authorization on the part of
their respective shareholders, and any such amendment may, without limitation:
(a) change the time for performance of any of the obligations or acts of
the Parties hereto;
(b) waive any inaccuracies or modify any representation contained herein or
in any document delivered pursuant hereto;
(c) waive compliance with or modify any of the covenants herein contained
and waive or modify performance of any of the obligations of the
Parties hereto; or
(d) waive compliance with or modify any conditions precedent herein
contained,
provided that, notwithstanding the foregoing, the number of Kendall Preferred
shares which the Santa Elina Common Shareholders shall have the right to
receive on the Merger and the provisions attaching to the Kendall Preferred
Shares (including, without limitation, the number of Echo Bay Shares issuable
upon redemption of each Kendall Preferred Share), may not be reduced without
the approval of the Santa Elina Common Shareholders given in the same manner
as required for the approval of the Merger.
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ARTICLE 8
GENERAL
8.1 Expenses
Except as otherwise provided for herein, each Party hereto covenants and
agrees to bear its own costs and expenses in connection with the transactions
contemplated hereby.
8.2 Notices
Any notice, consent, waiver, direction or other communication required or
permitted to be given under this Agreement by a Party to any other Party shall
be in writing and may be given by sending same by facsimile transmission or by
hand delivery to a responsible person addressed to the Party to whom the
notice is to be given at its address for service herein. Any notice, consent,
waiver, direction or other communication aforesaid shall, if delivered, be
deemed to have been given and received on the date on which it was delivered
to the address provided herein (if a Business Day and, if not, on the next
succeeding Business Day) and if sent by facsimile transmission be deemed to
have been given and received at the time of receipt unless actually received
after 4:00 p.m. at the point of delivery, in which case it shall be deemed to
have been given and received on the next Business Day.
The address for service of each of the Parties hereto shall be as follows:
if to Kendall:
645 - 5th Avenue
Suite 500
New York, New York 10022
Attention: President
Facsimile: (212) 207-3607
with a copy to:
Milner Fenerty
30th Floor, Fifth Avenue Place
237 - 4th Avenue S.W.
Calgary, Alberta
T2P 4X7
Attention: David Robottom
Facsimile: (403) 268-3100
if to Santa Elina:
645 - 5th Avenue
Suite 500
New York, New York 10022
Attention: President
Facsimile: (212) 207-3607
with a copy to:
Cassels Brock & Blackwell
Scotia Plaza
Suite 2100, 40 King Street West
Toronto, Ontario
M5H 3C2
Attention: Peter Marrone
Facsimile: (416) 360-8877
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8.3 Disclosure
It is acknowledged that Santa Elina and Echo Bay, given its interest in
this Agreement, have obligations as public issuers to make an immediate
announcement of the execution and delivery of this Agreement and the
transactions contemplated by it. Both Santa Elina and Echo Bay shall consult
with each other and give each other the opportunity to comment on the text of
any announcement proposed to be made by it in this regard. Other than as
specified herein, neither of the Parties hereto shall make any public
announcement or disclosure concerning the execution of this Agreement or the
transactions contemplated hereby to any Party without the prior written consent
of the other Party hereto unless, in the written opinion of counsel, such Party
is compelled by law to do so, and then only with prior written notice to the
other Parties.
8.4 Time of Essence
Time shall be of the essence in this Agreement.
8.5 Entire Agreement
This Agreement constitutes the entire agreement between the Parties hereto
and cancels and supersedes all prior agreements and understandings between the
Parties with respect to the subject matter hereof.
8.6 Further Assurances
Each Party hereto shall, from time to time, and at all times hereafter, at
the request of the other Party hereto, but without further consideration, do
all such further acts and execute and deliver all such further documents and
instruments as shall be reasonably required in order to fully perform and
carry out the terms and intent hereof.
8.7 Governing Law
This Agreement shall be governed by and construed in accordance with the
laws of the Province of Ontario but the reference to such laws shall not, by
conflict of laws rules or otherwise, require the application of the law of any
jurisdiction other than the Province of Ontario. Each Party hereto hereby
irrevocably attorns to the jurisdiction of the courts of the Province of
Ontario in respect of all matters arising under or in relation to this
Agreement.
8.8 Execution in Counterparts
This Agreement may be executed in identical counterparts, each of which is
and is hereby conclusively deemed to be an original and the counterparts
collectively are to be conclusively deemed to be one instrument.
8.9 Waiver
No waiver by any Party hereto shall be effective unless in writing and any
waiver shall affect only the matter, and the occurrence thereof, specifically
identified and shall not extend to any other matter or occurrence.
8.10 Enurement and Assignment
This Agreement shall enure to the benefit of and be binding upon the
Parties hereto and respective successors and assigns. This Agreement may not
be assigned by either Party hereto without the express prior written consent
of the other Party hereto.
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8.11 Subsidiary Covenants
To the extent any representations, warranties, covenants or agreements
contained herein relate, directly or indirectly, to a Subsidiary of any Party,
each such provision shall be construed as a covenant by such Party to cause
(to the fullest extent to which it is legally capable) such Subsidiary to
perform the required action.
IN WITNESS WHEREOF the Parties hereto have executed this Agreement as of the
date first written above.
KENDALL GOLD CORPORATION
John L. Azlant
Per: __________________________________
Per: __________________________________
SANTA ELINA GOLD CORPORATION
Paulo C. de Brito
Per: __________________________________
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EXHIBIT 1
PLAN OF MERGER INVOLVING
KENDALL GOLD CORPORATION
AND
SANTA ELINA GOLD CORPORATION
DATED APRIL . , 1996
AND MADE PURSUANT TO SECTION 76 OF THE
THE INTERNATIONAL BUSINESS COMPANIES ORDINANCE
(CAP. 291 BRITISH VIRGIN ISLANDS)
ARTICLE 1
INTERPRETATION
1.1 Definitions
In this Plan, unless the context otherwise requires, defined terms shall
have the following meanings:
"ARTICLES OF MERGER" means the articles of merger in respect of the Merger
required by the IBCO to be sent to the Registrar.
"BUSINESS DAY" means, with respect to any action taken, any day, other than
a Saturday, Sunday or statutory holiday in the place where such action is to
be taken;
"COMMON SHAREHOLDERS" means the holders of Kendall Common Shares;
"DEPOSITARY" means The Montreal Trust Company of Canada, at its principal
office in Toronto, Ontario, as the registrar and transfer agent of the Santa
Elina Common Shares;
"EFFECTIVE DATE" means the date set out in the Certificate of Merger issued
by the Registrar;
"IBCO" means The International Business Companies Ordinance (British Virgin
Islands, Cap. 291);
"KENDALL" means Kendall Gold Corporation, a company incorporated under and
subject to the provisions of the IBCO;
"KENDALL COMMON SHARES" means the common shares of Kendall as constituted
on the date hereof;
"KENDALL PREFERRED SHARES" means the non-voting redeemable preferred shares
of Kendall as constituted on the date hereof;
"MERGER" means the merger contemplated by this Plan, or any amendment or
variation hereto, pursuant to section 76 of the IBCO;
"MINORITY SHAREHOLDERS" means the holders of Santa Elina Common Shares
other than Kendall;
"MINORITY SHARES" means the Santa Elina Common Shares beneficially owned by
Minority Shareholders immediately preceding the Effective Date;
"PLAN" means this plan, as amended or supplemented from time to time, and
"hereby", "hereof", "herein", "hereunder", "herewith" and similar terms refer
to this Plan and not to any particular provision of this Plan;
"REGISTRAR" means the Registrar of Companies under the IBCO;
"SANTA ELINA" means Santa Elina Gold Corporation, a company incorporated
under and subject to the provisions of the IBCO; and
"SANTA ELINA COMMON SHARES" means the common shares of Santa Elina as
constituted on the date hereof.
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1.2 Interpretation Not Affected by Headings
The division of this Plan into articles, sections, subsections and
paragraphs and the insertion of headings are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Plan.
1.3 Article References
Unless the contrary intention appears, references in this Plan to an
article, section, subsection, paragraph, exhibit or schedule by number or
letter or both refer to the article, section, subsection, paragraph, exhibit
or schedule, respectively, bearing that designation in this Plan.
1.4 Number
In this Plan, unless the contrary intention appears, words importing the
singular include the plural and vice versa; words importing gender shall
include all genders; and words importing persons shall include any individual,
partnership, firm, trust, body corporate, joint venture, government,
governmental body, agency or instrumentality, unincorporated body of persons
or association.
1.5 Date for Any Action
In the event that the date on which any action is required to be taken
hereunder is not a Business Day, such action shall be required to be taken on
the next succeeding day which is a Business Day.
1.6 Legislation
References in this Plan to any statute or sections thereof shall include
such statute as amended or substituted and any regulations promulgated
thereunder from time to time in effect.
1.7 Currency
Reference in this Plan to sums of money are expressed in lawful money of
the United States of America.
ARTICLE 2
EFFECT OF THE PLAN
2.1 Constituent Companies
The constituent companies to this Plan are Kendall and Santa Elina. Kendall
shall be the surviving company upon the Merger becoming effective.
2.2 Binding Effect
The Plan shall be binding upon all Santa Elina Common Shareholders, Kendall
Common Shareholders, Santa Elina and Kendall upon the filing of the Articles
of Merger with the Registrar.
2.3 Participating Classes of Shares
(a) The authorized capital of Santa Elina consists of an unlimited number
of Santa Elina Common Shares and the aggregate number of Santa Elina
Common Shares presently issued and outstanding is 135,130,521.
The holders of the Santa Elina Common Shares shall be entitled to vote
such shares in respect of the Merger as a class.
(b) The authorized capital of Kendall consists of 100,000,000 Kendall
Common Shares and 37,500,000 Kendall Preferred Shares, the aggregate
number of Kendall Common Shares presently issued and outstanding is
32,500,000 and there are no Kendall Preferred Shares presently issued
and outstanding. The holders of the Kendall Common Shares shall be
entitled to vote such shares in respect of the Merger as a class.
2.4 Effect of Merger
Upon the Merger becoming effective, the separate corporate existence of
Santa Elina shall cease and Kendall shall become the owner, without other
transfer, of all the rights and property of the constituent companies and
Kendall shall become subject to all liabilities, obligations and penalties of
the constituent companies.
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2.5 Entire Plan to be Effective
Subject to section 2.1, Articles of Merger shall be filed with the
Registrar with the purpose and intent that none of the provisions of this Plan
shall become effective unless all of the provisions of this Plan shall have
become effective.
2.6 Effect on Memorandum and Articles
The Memorandum and Articles of Association of Kendall as in effect at the
time the Merger becomes effective shall be the Memorandum and Articles of
Association of Kendall until the same shall be altered or amended or until a
new Memorandum and Articles of Association are adopted as provided therein.
ARTICLE 3
MERGER
3.1 Events of Merger
On the Effective Date, each of the events set out below shall occur and be
deemed to occur without further act or formality:
(a) each 6.67 Santa Elina Common Shares held by a Minority Shareholder
shall be converted into one Kendall Preferred Share;
(b) each Kendall Common Shareholder will receive one Kendall Preferred
Share for each 2.167 Kendall Common Shares held;
(c) the Kendall Common Shares shall otherwise be unaffected by the Merger
and shall remain outstanding in the hands of the Kendall Common
Shareholders; and
(d) the Santa Elina Common Shares held by Kendall shall be cancelled by
Santa Elina without any repayment of capital in respect thereof.
ARTICLE 4
OUTSTANDING CERTIFICATES AND PAYMENTS
4.1 Outstanding Certificates
After the Effective Date, certificates formerly representing Santa Elina
Common Shares shall represent only the right to receive one Kendall Preferred
Share from Kendall for each 6.67 Santa Elina Common Shares which a former
Santa Elina Common Shareholder is entitled to receive after giving effect to
article 3, subject to compliance with the requirements set forth in this
article 4.
4.2 Replacement Certificates
As soon as practicable after the Effective Date, Kendall shall forward or
cause to be forwarded to each holder of Santa Elina Common Shares (other than
those Santa Elina Common Shareholders who have exercised their dissent rights)
at the address of such holder as it appears in the relevant share register of
Santa Elina, a letter of transmittal containing, among other things,
instructions for obtaining delivery of the Kendall Preferred Shares pursuant
to this Plan. Such holder of Santa Elina Common Shares shall be entitled to
receive certificates representing the Kendall Preferred Shares upon delivering
the certificate formerly representing such holder's Santa Elina Common Shares
to the Depositary or as the Depositary may otherwise direct and in accordance
with the instructions contained in the letter of transmittal. Such certificate
shall be accompanied by the letter of transmittal, duly completed, and such
other documents as the Depositary may reasonably require.
4.3 Registration
The Depositary shall register the Kendall Preferred Shares in the name of
such shareholder or as otherwise instructed in the letters of transmittal, and
shall deliver such Kendall Preferred Shares as each such holder may direct in
such letter of transmittal, as soon as practicable after receipt by the
Depositary of such documents.
4.4 Prior Redemption
If, prior to the Kendall Preferred Shares being delivered and registered
pursuant to sections 4.2 and 4.3 above, all or any of the Kendall Preferred
Shares are redeemed by Kendall in accordance with their terms, Kendall and the
Depositary shall be relieved of their respective obligations under sections
4.2 and 4.3 in respect of the Kendall
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Preferred Shares so redeemed, and Kendall and the Depositary shall treat the
certificates formerly representing the Santa Elina Common Shares as
representing the Kendall Preferred Shares and the former register of the Santa
Elina Common Shares as being the register for the Kendall Preferred Shares for
all purposes of such redemption.
4.5 Rights Extinguished
After the Effective Date, the Santa Elina Common Shareholders shall not be
entitled to any interest, dividend, premium or other payment on or with
respect to the Santa Elina Common Shares other than Kendall Preferred Shares
which they are entitled to receive pursuant to this Plan.
4.6 Fractional Shares
No fractional Kendall Preferred Shares will be issued. In the event that
the exchange ratios referred to herein would in any case otherwise result in a
shareholder being entitled to a fractional Kendall Preferred Share, Kendall
shall, in lieu of delivering any certificate in respect of such fractional
interest, satisfy such fractional interest by paying to such shareholder an
amount equal (computed to the nearest cent) to the fraction of the Kendall
Preferred Share that would otherwise be required to be issued multiplied by
U.S. $13.34. In calculating such fractional interests, all Santa Elina Common
Shares registered in the name of or beneficially held by each Santa Elina
Common Shareholder or the nominee of such Santa Elina Common Shareholder shall
be aggregated.
ARTICLE 5
SHAREHOLDER DISSENT RIGHTS
5.1 Dissenting Shareholders
Santa Elina Common Shareholders who have given a demand for payment which
remains outstanding on the Effective Date in accordance with the rights of
dissent in respect of the Plan granted under the IBCO and who:
(a) are ultimately entitled to be paid for the Santa Elina Common Shares in
respect of which they dissent in accordance with the provisions of the
IBCO, whether by acceptance of an offer or by an appraisal pursuant to
the IBCO, shall be deemed to have transferred such Santa Elina Common
Shares to Santa Elina for cancellation on the Effective Date; or
(b) are ultimately not so entitled to be paid for the Santa Elina Common
Shares in respect of which they dissent for any reason, shall not be,
or be reinstated as, shareholders of Santa Elina but for purposes of
receipt of consideration shall be treated as if they had participated
in this Plan on the same basis as a non-dissenting Santa Elina Common
Shareholder and such holders shall accordingly be entitled to receive
Kendall Preferred Shares as such non-dissenting holders are entitled to
receive on the basis determined in accordance with article 3 and shall
be deemed to have transferred such Santa Elina Common Shares to Santa
Elina for cancellation;
but in no case shall Kendall or Santa Elina be required to recognize such
persons as shareholders of Santa Elina after the Effective Date.
ARTICLE 6
AMENDMENTS
6.1 Amendment
Santa Elina and Kendall may at any time and from time to time before the
Effective Date, vary, amend, modify or supplement this Plan if each of Santa
Elina and Kendall determine that such variation, amendment, modification or
supplement would not be prejudicial to the interests of Santa Elina Common
Shareholders under this Plan, provided that, notwithstanding the foregoing,
the exchange ratio of Kendall Preferred Shares for Santa Elina Common Shares
may not be amended without the approval of the Santa Elina Common Shareholders
given in the same manner as required for the approval of the Merger.
EXHIBIT 2
MINERAL INTERESTS
AND
DE BRITO INTERESTS
(COMPLETE EXHIBIT AVAILABLE AT THE OFFICES OF SANTA ELINA GOLD CORPORATION)
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EXHIBIT 3
TO THE MERGER AGREEMENT DATED AS OF APRIL . , 1996 BETWEENSANTA ELINA GOLD
CORPORATION AND KENDALL GOLD CORPORATION.
ECHO BAY MINES LTD.
REPRESENTATIONS AND WARRANTIES
Echo Bay represents and warrants to Santa Elina Gold Corporation ("Santa
Elina"), and acknowledges that Santa Elina is relying upon such
representations and warranties in connection with the matters contemplated by
the merger agreement (the "Agreement") between Kendall Gold Corporation
("Kendall") and Santa Elina, that:
1. it (and each of its subsidiaries) is duly incorporated and organized and
validly existing under the laws of the jurisdiction of its incorporation
and has the corporate power and authority to own or lease its property
and assets and to carry on any business now conducted by it and is duly
qualified in all material respects to carry on business in each
jurisdiction in which the nature of its business or the property or
assets owned or leased by it makes such qualification necessary;
2. it has the corporate power and authority to perform its obligations
relating to the Agreement;
3. the execution and delivery of the Agreement by Kendall and the
completion of the transactions contemplated thereby and provisions
thereof do not and will not:
(a) result in the breach of, or violate any term or provision of its
memorandum, articles or other governing documents,
(b) conflict with, result in the breach of, constitute a default under,
or accelerate or permit the acceleration of the performance required
by, any agreement, instrument, license, permit or authority to which
it is a party or by which it or its property is bound and which is
material to it, or result in the creation of any Encumbrance upon
any of its assets under any such agreement, instrument, license,
permit, authority or otherwise, or give to others any material
interest or right, including rights of purchase, termination,
cancellation or acceleration, under any such agreement, instrument,
license, permit or authority, or
(c) subject to receipt of necessary regulatory approvals, violate or
contravene any provision of any law or regulation or any judicial or
administrative award, judgment or decree applicable and known to it
(after due inquiry), where such violation or contravention would
have a material adverse affect on it or could reasonably be expected
to prevent or hinder the consummation of the transactions
contemplated by the Agreement or the Plan of Merger;
4. there are no actions, suits, proceedings or investigations commenced,
contemplated or threatened against or affecting it (or any of its
Subsidiaries), at law or in equity, before or by any governmental
department, commission, board, bureau, court, agency, arbitrator or
instrumentality, domestic or foreign, of any kind, nor are there any
existing facts or conditions which may reasonably be expected to be a
proper basis for any such action, suit, proceeding or investigation,
which in any case would prevent or hinder the consummation of the
transactions contemplated by the Agreement or the Plan of Merger or
which could reasonably be expected to materially adversely affect its
business, financial condition, operations, prospects, properties, assets
or affairs;
5. since December 31, 1995, it (and each of its Subsidiaries) has:
(a) except in the case of Echo Bay Ontario Ltd., not amended its
memorandum, articles or other governing documents and there are no
resolutions or proceedings pending for any amendment thereto except
as may be desirable in respect of the transactions contemplated by
the Agreement;
(b) conducted its business in all material respects in the ordinary
course of business consistent with normal industry practice except
for the retaining of any financial and other advisors relating to
the business combination of Kendall with Santa Elina and the fees
and expenses resulting therefrom and the entering into of a share
purchase and subscription agreement and unanimous shareholder
agreement relating thereto;
(c) not suffered any material adverse change, financial or otherwise, in
its business, financial condition, operations, prospects,
properties, assets, liabilities or affairs nor have there been any
occurrences or
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circumstances which have resulted or might reasonably be expected to
result in a material adverse change thereto (other than changes
attributable to general economic conditions, including changes in
interest rates and fluctuations in the prices of precious and base
metals), provided that, for greater certainty, Echo Bay has advised
Santa Elina of the preliminary results of its production being 165,000
ounces of gold and 1,100,000 ounces of silver for the first quarter
ended March 31, 1996 (compared to 182,826 ounces of gold and 2,700,000
ounces of silver for the first quarter ended March 31, 1995);
(d) not made any change in its accounting policies and practices as
theretofore applied including, without limitation, the basis upon
which its assets and liabilities are recorded on its books and its
earnings and profits and losses are ascertained; and
(e) not declared, paid or set aside for payment any dividend or
distribution of any kind in respect of any of its outstanding
securities nor made any repayments of capital, other than dividends
declared and paid in the normal course in accordance with Echo Bay's
current dividend payment practices;
6. except as set out in Schedule A hereto, it has duly and timely filed, in
all material respects, in proper form, returns in respect of taxes under
the tax legislation of any country, province, state or other jurisdiction
having jurisdiction over its affairs or any of its Subsidiaries, for all
prior periods in respect of which such filings have heretofore been
required, and all taxes shown thereon and all taxes now owing have been
paid or accrued on its books and there are no outstanding agreements or
waivers extending the statutory period of limitations applicable to any
tax return for any period, it is not aware of any contingent tax
liabilities or any grounds for reassessment, there are no material
assessments or reassessments pursuant to which there are amounts owing or
discussions in respect thereof with any taxing authority and it has
withheld from each payment made to any of its directors, officers and
employees and former directors, officers and employees the amount of all
taxes (including, without limitation, income tax) and other deductions
required to be withheld therefrom and has paid the same to the proper tax
or other authority within the time required under any applicable tax
legislation;
7. it and each of its Subsidiaries is not:
(a) in breach or violation of any term or provision of its memorandum,
articles or other governing documents,
(b) in breach or violation of any material term or provision of, or in
default under any agreement, instrument, license, permit or
authority to which it is a party or by which it or any of its
property is bound and which is material to it, or
(c) in violation or contravention of any provision of any law or
regulation or any judicial or administrative award, judgment or
decree applicable, where such violation or contravention could
reasonably be expected to prevent or hinder the consummation of the
transactions contemplated by the Agreement or the Plan of Merger or
which could reasonably be expected to materially adversely affect
its business, financial condition, operations, prospects,
properties, assets or affairs;
8. the consummation of the transactions contemplated by the Agreement or
the Plan of Merger will not result in its having to pay any fee to any
person other than Nesbitt Burns Inc., lawyers, accountants and other
professional advisors;
9. the authorized capital of Echo Bay consists of an unlimited number of
common shares;
10. the aggregate number of Echo Bay common shares presently issued and
outstanding (other than an aggregate of 3,774,761 Echo Bay common
shares which may be issued after the date hereof upon the exercise of
options granted under Echo Bay's employee stock option plan and an
aggregate of 120,200 Echo Bay common shares which may be issued after
the date hereof upon the exercise of options granted under Echo Bay's
director equity plan) is 130,499,226 and, except in respect of the
aforementioned employee stock option plan and director equity plan and
except as provided under the Share Subscription and Purchase Agreement
or under or as a consequence of the Merger, no person has any agreement
or option or any right or privilege (whether by law, preemptive right,
contract or otherwise) capable of becoming an agreement, option or
right for the purchase, subscription, allotment or issuance of any
unissued securities of Echo Bay;
11. the Echo Bay Shares issuable upon redemption by Kendall of the Kendall
Preferred Shares shall, on the Effective Date, be duly authorized and
validly issued as fully paid and non-assessable and shall, pursuant to
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applicable securities laws in Canada and the United States and subject
to receipt of necessary regulatory approvals or orders, on such date be
tradeable by the recipients of such shares (other than control persons,
insiders and other affiliates of Santa Elina, Sercor and Echo Bay)
pursuant to an available exemption or an order or pursuant to a
prospectus, registration statement or other filing in compliance with
applicable securities laws;
12. as of the dates as of which the information is given, the information
respecting Echo Bay to be set out in the Information Circular for the
Santa Elina Meeting shall be true and complete in all material respects
and shall not contain any misrepresentation (as defined in the
Securities Act (Ontario));
13. the audited financial statements of Echo Bay for the fiscal year ended
December 31, 1995 have been prepared in accordance with generally
accepted accounting principles applicable in Canada on a consistent
basis with prior periods (except as stated therein) and present fairly
in all material respects the financial position of Echo Bay as of the
dates provided therein and the results of its operations and the
changes in financial position for the periods then ended;
14. the completion of the transactions contemplated in the Agreement and in
the Plan of Merger have been duly approved by Echo Bay's board of
directors;
15. it is a reporting issuer under the securities laws of each of the
provinces of Canada and its common shares have been duly and properly
registered under the U.S. Securities Act of 1933, and to the best of
its knowledge it is not in default of any requirement of Canadian or
United States securities laws and it is in compliance in all material
respects with the by-laws, rules and regulations of The Toronto Stock
Exchange and the American Stock Exchange, being the primary exchanges
upon which its common shares are listed; and
16. it has complied with its covenants contained in the certificate of Echo
Bay dated April 9, 1996.
Defined terms used in this certificate shall have the meanings given to such
terms in the Agreement.
The representations and warranties set forth in this certificate are given
for the sole benefit of Santa Elina as contemplated by subsections 5.3(b) and
6.3(b) of the Agreement, any liability of Echo Bay to Santa Elina in connection
with this certificate and any other certificate provided by Echo Bay to Santa
Elina shall be strictly limited to the amount of $500,000 less any amount paid
by Kendall to Santa Elina pursuant to subsection 6.3(b) of the Agreement, it
being understood that Santa Elina shall be limited to recovering $500,000 in
the aggregate for breaches of representations, warranties or covenants by
Kendall or Echo Bay under the Agreement, this certificate and any other
certificate provided by Echo Bay to Santa Elina, and the representations and
warranties set forth herein shall terminate and be of no further force or
effect upon the earlier of the termination of the Agreement or completion of
the Merger.
IN WITNESS WHEREOF Echo Bay has executed this certificate as of the . day
of . , 1996.
ECHO BAY MINES LTD.
Per: ____________________________________
29
<PAGE>
SCHEDULE A
Echo Bay and its subsidiaries have granted the following statute waivers:
(a) Echo Bay indefinitely extended the statute applicable to its 1987
Canadian corporate income tax return, but is taking steps to revoke the
waiver;
(b) the State of Colorado has asked Echo Bay Exploration Inc. and Echo Bay
Management Inc. for extensions until September 20, 1996 of the statutes
applicable to state use tax returns and wage withholding tax returns
for all periods from 3/93 to 2/96. Echo Bay will grant these requests.
The State of Colorado has also asked for an extension until September 20,
1996 of the statutes applicable to the state income tax returns of Echo Bay
Finance Corp. for tax years 1992 through 1996. Echo Bay is not prepared to
grant this request at this time because it is premature. A Canadian GST
auditor has also requested a waiver for all of Echo Bay's 1992 GST returns,
but Echo Bay will not likely agree to provide one.
Revenue Canada has proposed a reassessment with respect to Echo Bay's 1991
corporate income tax return which, if successful, would add Cdn. $33 million
of taxable income. Echo Bay plans to appeal the reassessment.
30
<PAGE>
SCHEDULE II
SANTA ELINA MERGER RESOLUTION
<PAGE>
SPECIAL RESOLUTION OF THE SHAREHOLDERS OF
SANTA ELINA GOLD CORPORATION
WHEREAS the Corporation has entered into a merger agreement made as of
April 9, 1996 (the "Merger Agreement") with Kendall Gold Corporation
("Kendall"), a company equally owned by Echo Bay Mines Ltd. and Sercor
Limited, pursuant to which the Corporation has agreed to merge with Kendall
(the "Merger") and to continue under the name of Kendall Gold Corporation
("KGC");
AND WHEREAS the terms of the Merger are described in the Merger Agreement,
a copy of which is attached to the Management Information Circular of the
Corporation dated April 24, 1996 provided to all shareholders of the
Corporation, and whereas the Merger Agreement provides that, among other
things, each 6.67 common shares of the Corporation will be converted into one
redeemable preference share of KGC upon completion of the Merger, and that
such shares shall then be redeemed in exchange for common shares of Echo Bay
Mines Ltd. on a one-for-one basis;
AND WHEREAS the board of directors has reviewed the recommendations of the
independent committee of the board, which has reviewed the terms of the Merger
and the valuations and fairness opinion provided by the appointed financial
advisor, among other documents, and concluded that the Merger is in the best
interests of the Corporation and its shareholders, such that the board of
directors has recommended that the shareholders of the Corporation vote in
favour of the Merger;
AND WHEREAS the shareholders of the Corporation wish to authorize the
Corporation to enter into the Merger with Kendall and, further, wish to
provide additional authorities to the Corporation;
NOW THEREFORE BE IT RESOLVED THAT:
1. The entering into of the Merger Agreement by the Corporation is hereby
approved, ratified and confirmed and the terms of the Merger as described
therein are hereby approved, ratified, confirmed and adopted;
2. The Corporation be and it is hereby authorized and directed to complete
the Merger as described in the Merger Agreement with such amendments or
variations as may be considered necessary or desirable pursuant to the
authorities given herein;
3. The board of directors of the Corporation be and they are hereby
authorized and directed to amend or vary the terms of the Merger with Kendall,
to terminate or suspend the Merger with Kendall or the other transactions
involving Kendall described in the Merger Agreement, as may be required;
4. The board of directors be and they are hereby authorized, directed and
empowered to carry out all of the foregoing without any further action on the
part of the shareholders of the Corporation;
5. Any one director or officer of the Corporation be and he is hereby
authorized and directed to do any and all acts and things as may be considered
necessary or desirable in order to give effect to the foregoing; and
6. Any one director or officer of the Corporation be and he is hereby
authorized and directed to execute, whether under the corporate seal of the
Corporation or otherwise, and deliver any and all agreements and documents as
may be considered necessary or desirable in order to give effect to the
foregoing.
1
<PAGE>
SCHEDULE III
VALUATIONS AND FAIRNESS OPINION
<PAGE>
RBC Dominion Securities Inc.
P.O. Box 21
Commerce Court South
Toronto, Ontario M5L 1A7
Telephone (416) 864-4000
[RBC DOMINION SECURITIES LOGO APPEARS HERE]
- -------------------------------------------------------------------------------
STRICTLY PRIVATE AND CONFIDENTIAL
April 23, 1996
The Special Committee of the Board of Directors
Santa Elina Gold Corporation
645 Fifth Avenue
Fifth Floor
New York, New York 10022
Dear Sirs:
RBC Dominion Securities Inc. ("RBC DS") understands that Echo Bay Mines
Ltd. ("Echo Bay") and Sercor Ltd. ("Sercor"), through Kendall Gold Corporation
("Kendall"), a special purpose investment company owned equally by each of
Echo Bay and Sercor, has proposed to merge Santa Elina Gold Corporation
("Santa Elina") into Kendall. Under the merger, all shareholders of Santa
Elina other than Echo Bay or Sercor and their respective associates and
affiliates (the "Minority Shareholders") will receive one redeemable
preference share of Kendall for each 6.67 common shares of Santa Elina (the
"Common Shares"). Each redeemable preference share of Kendall will be redeemed
for one common share of Echo Bay immediately following completion of the
merger. The merger and subsequent preference share redemption are referred to
herein as the "Offer". Prior to completion of the Offer, Sercor will sell
23,479,185 of its 91,044,445 Common Shares to Echo Bay in exchange for Echo
Bay common shares on the basis of one Echo Bay common share for each 6.67
Common Shares. The terms of the Offer are more fully described in the
Management Information Circular (the "Circular") to be dated on or about April
24, 1996 to be mailed to all holders of Common Shares in connection with the
Offer.
The Board of Directors of Santa Elina (the "Board") has appointed a special
committee of independent directors (the "Special Committee") to review the
Offer and to make a recommendation to the Board in respect of the Offer. The
Special Committee has retained RBC DS to prepare a valuation of the Common
Shares (the "Santa Elina Valuation"), a valuation of the Echo Bay common
shares received as consideration (the "Echo Bay Valuation" and collectively
with the Santa Elina Valuation, the "Valuations") and to provide its opinion
as to the fairness of the Offer, from a financial point of view, to the
Minority Shareholders (the "Fairness Opinion").
RBC DS understands that the Offer will constitute a "related party
transaction" and a "going private transaction" within the meaning of Ontario
Securities Commission Policy Statement No. 9.1 and Quebec Securities Policy
No. Q27 (the "Policies").
ENGAGEMENT
The Special Committee initially contacted RBC DS regarding a potential
advisory assignment in March, 1996 and RBC DS was verbally engaged by the
Special Committee on March 21, 1996. The terms of the engagement are set out
in an agreement between Santa Elina and RBC DS (the "Engagement Agreement")
which was executed effective as of March 22, 1996.
The terms of the Engagement Agreement provide that RBC DS is to be paid a
fee of Can$300,000 for providing the Valuations and the Fairness Opinion and
for general financial advice in connection with the Offer. RBC DS will also be
reimbursed for its reasonable out-of-pocket expenses and will be indemnified
by Santa Elina in certain circumstances.
Member of Royal Bank Group
1
<PAGE>
RELATIONSHIP WITH INTERESTED PARTIES
None of RBC DS, its associates or affiliates is an insider, associate or
affiliate (as those terms are defined in the Securities Act (Ontario) (the
"Act")) of Echo Bay, Sercor or Santa Elina or any of their respective
associates or affiliates. RBC DS has not provided any financial advisory
services or participated in financings involving Santa Elina, Echo Bay or
Sercor or any of their respective associates or affiliates, within the past
two years. There are no understandings, agreements or commitments between RBC
DS and Echo Bay, Sercor or Santa Elina or any of their respective associates
or affiliates, with respect to any future business dealings. RBC DS may in the
future, in the ordinary course of our business, perform financial advisory or
investment banking services for Santa Elina, Echo Bay, Sercor or any of their
respective associates or affiliates. The compensation of RBC DS in connection
with the Offer does not depend in whole or in part on the conclusions reached
in the Valuations or Fairness Opinion or the successful completion of the
Offer.
RBC DS acts as a trader and dealer, both as principal and agent, in all
major North American financial markets and as such may have had and may in the
future have positions in the securities of Santa Elina or Echo Bay and, from
time to time, may have executed or may execute transactions on behalf of such
companies or clients for which it receives compensation. As an investment
dealer, RBC DS conducts research on securities and may, in the ordinary course
of its business, be expected to provide research reports and investment advice
to its clients on investment matters.
CREDENTIALS OF RBC DOMINION SECURITIES
RBC DS is one of Canada's largest investment banking firms, with operations
in all facets of corporate and government finance, mergers and acquisitions,
equity and fixed income sales and trading and investment research. The
Valuations and Fairness Opinion expressed herein represent the opinions of RBC
DS and the form and content herein have been approved for release by a
committee of its directors, each of whom is experienced in merger,
acquisition, divestiture and valuation matters.
SCOPE OF REVIEW
In connection with our Valuations and Fairness Opinion, we have reviewed
and relied upon, or carried out, among other things, the following:
(i) the most recent draft of the Management Information Circular (the
"Circular") dated April 20, 1996;
(ii) audited financial statements of Santa Elina for the five years ended
December 31, 1995;
(iii) Annual Information Form of Santa Elina for the year ended December
31, 1994 and Notice of Annual Meeting of Shareholders and Management
Proxy Circular for Santa Elina dated May 12, 1995;
(iv) the initial public offering prospectus for Santa Elina dated December
19, 1994;
(v) the letter agreement dated April 9, 1996 between Sercor, Paulo de
Brito (Chairman, Chief Executive and majority shareholder of Sercor),
Santa Elina and Echo Bay;
(vi) the most recent draft dated April 19, 1996 of the Unanimous
Shareholder Agreement between Echo Bay, Sercor, Paulo de Brito,
Angela Maria Guaspari de Brito and Kendall;
(vii) the most recent draft dated April 21, 1996 of the Merger Agreement
between Santa Elina and Kendall and the most recent draft dated April
9, 1996 of the Share Subscription and Purchase Agreement between
Sercor, Paulo de Brito, Echo Bay and Kendall;
(viii) unaudited operating statements for Santa Elina's main operating
subsidiaries (Mineracao Santa Elina and Mineracao Maraca) for the
two years ended December 31, 1995;
(ix) life of mine forecasts, prepared by Santa Elina management, for Santa
Elina's major properties;
(x) technical data on all of Santa Elina's properties including in-house
feasibility studies on Chapada and Sao Francisco and operating
information on Sao Vicente;
(xi) site visits to Santa Elina's major properties (Sao Vicente, Sao
Francisco and Chapada) and discussions with Santa Elina geologists
and mine site engineers;
[LOGO OF RBC DOMINION SECURITIES APPEARS HERE]
2
<PAGE>
(xii) Watts, Griffis, McQuat Limited report on each of Santa Elina's major
properties except Fazenda Nova dated November 1994 and updated in
December 1995;
(xiii) discussions with Santa Elina independent engineers Watts, Griffis,
McQuat Ltd.;
(xiv) income tax returns of Santa Elina for 1994;
(xv) audited financial statements of Echo Bay for the five years ended
December 31, 1995;
(xvi) Annual Information Forms, Notices of Annual Meetings of Shareholders
and Management Proxy Circulars for Echo Bay for the four years ended
December 31, 1994;
(xvii) 1996 - 1998 budgets and forecasts for Echo Bay;
(xviii) discussions with senior management of Santa Elina, Echo Bay and
Sercor;
(xix) discussions with Santa Elina's auditors and accounting advisors to
Echo Bay concerning their review of Santa Elina's financial
statements and tax position;
(xx) discussions with Santa Elina's and Echo Bay's legal counsel;
(xxi) public information relating to the business, operations, financial
performance and stock trading history of Echo Bay;
(xxii) public information relating to the business, operations, financial
performance and stock trading history of Santa Elina, Arauco
Resources Corporation ("Arauco") and other selected public
companies;
(xxiii) public data with respect to other transactions of a comparable
nature considered by us to be relevant;
(xxiv) representations contained in certificates addressed to us dated as
of the date hereof from the senior officers of Santa Elina and Echo
Bay respectively; and
(xxv) such other information, investigations and analyses as we considered
necessary or appropriate in the circumstances.
RBC DS has not, to the best of its knowledge, been denied access by Santa
Elina, Echo Bay or Sercor to any information required by RBC DS.
ASSUMPTIONS AND LIMITATIONS
We have relied upon, and have assumed the completeness, accuracy and fair
presentation of all financial and other information, data, advice, opinions
and representations obtained by us from public sources, from a draft of the
Circular dated April 20, 1996 or provided to us by Santa Elina, Echo Bay and
Sercor and their respective subsidiaries, affiliates, and advisors, or
otherwise pursuant to the Engagement Agreement. The Valuations and Fairness
Opinion are conditional upon such completeness, accuracy and fair presentation
and upon the draft of the Circular dated April 20, 1996 being the same in all
material respects as the Circular that is mailed to the holders of Common
Shares. Subject to the exercise of professional judgment and except as
required by the Policies or expressly described herein, we have not attempted
to verify independently the accuracy or completeness of any of such
information, data, advice, opinions and representations. Certain senior
officers of Santa Elina have represented to us, in a certificate delivered as
of the date hereof, among other things, that (i) the material information,
data and other material (financial or otherwise) (the "Information") provided
orally by, or in the presence of, a senior officer of Santa Elina or in
writing by Santa Elina or any of its subsidiaries or their respective agents
to RBC DS relating to Santa Elina or any of its subsidiaries or the Offer for
the purpose of preparing the Valuations and Fairness Opinion was, at the date
the Information was provided to RBC DS, and is, except as has been disclosed
to RBC DS, complete, true and correct in all material respects, and did not
and, except as has been disclosed to RBC DS, does not contain any untrue
statement of a material fact in respect of Santa Elina, its subsidiaries or
the Offer and did not and does not omit to state a material fact in respect of
Santa Elina, its subsidiaries or the Offer necessary to make the Information
not misleading in light of the circumstances under which the Information was
made or provided; and that, (ii) since the dates on which the Information was
provided to us, except as disclosed in writing to us, there has been no
material change, financial or otherwise, in the financial condition, assets,
liabilities (contingent or otherwise), business, operations or prospects of
Santa Elina or any of its subsidiaries and no material change has occurred in
the Information or any part thereof which would have or which would reasonably
be expected to have a material effect on the Valuations and Fairness Opinion.
Certain senior officers of Echo Bay have made substantially identical
representations to us regarding Echo Bay and its subsidiaries and affiliates
in a certificate delivered as of the date hereof.
[LOGO OF RBC DOMINION SECURITIES APPEARS HERE]
3
<PAGE>
In preparing the Valuations and Fairness Opinion, RBC DS has made several
other assumptions, including that all of the conditions required to implement
the Offer will be met, that the Offer will proceed as described, and
substantially within the time frames specified in the Circular, and that the
disclosure provided or incorporated by reference in the Circular with respect
to Santa Elina or Echo Bay, their respective subsidiaries and affiliates and
the Offer is accurate in all material respects. Further, we have assumed that
there are no material contingent liabilities of Santa Elina or Echo Bay or any
of their respective subsidiaries or affiliates except as disclosed to us.
The Valuations and Fairness Opinion are rendered on the basis of securities
markets, economic and general business and financial conditions prevailing as
at the date hereof and the condition and prospects, financial and otherwise,
of Santa Elina and Echo Bay, and their respective subsidiaries or affiliates,
as they were reflected in the information and documents reviewed by RBC DS and
as they were represented to RBC DS in discussions with management of Santa
Elina, Echo Bay or Sercor. In our analyses and in connection with the
preparation of the Valuations and Fairness Opinion, we have made numerous
assumptions with respect to industry performance, general business, market and
economic conditions and other matters, many of which are beyond the control of
any party involved with the Offer. The Valuations and Fairness Opinion are not
intended to be and do not constitute a recommendation to any shareholder of
Santa Elina as to whether or not such shareholder should vote in favour of the
Offer.
The Valuations and Fairness Opinion have been provided for the use of the
Special Committee and may not be used or relied upon by any other person
without the express prior written consent of RBC DS. We hereby consent to the
appending of the Valuations and Fairness Opinion, in their entirety, to the
Circular and to any references to the Valuations and Fairness Opinion in the
Circular made in compliance with the Policies and applicable law. RBC DS is
providing the Valuations and Fairness Opinion as of the date hereof and
subject to the Policies, RBC DS disclaims any undertaking or obligation to
advise any person of any change in any fact or matter affecting the Valuations
and Fairness Opinion which may come or be brought to RBC DS' attention after
the date hereof. Without limiting the foregoing, in the event that there is
any material change in any fact or matter affecting the Valuations and
Fairness Opinion after the date hereof, RBC DS reserves the right to change,
modify or withdraw either of the Valuations or the Fairness Opinion.
RBC DS believes that our analyses must be considered as a whole and that
selecting portions of our analyses or the factors considered by us, without
considering all factors and analyses together, could create a misleading view
of the process underlying the Valuations and Fairness Opinion. The preparation
of a valuation and fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Any
attempt to do so could lead to undue emphasis on any particular factor or
analysis.
UNLESS OTHERWISE NOTED ALL DOLLAR VALUES EXPRESSED HEREIN ARE IN US DOLLARS.
OVERVIEW OF SANTA ELINA
Santa Elina is a Brazilian based gold exploration and mining company
incorporated under the laws of the British Virgin Islands, with approximately
11.8 million hectares of mineral claims at various stages of exploration and
development through its subsidiaries in Brazil, Bolivia and Chile. The head
and principal office of Santa Elina is located in New York. Santa Elina's
principal subsidiary, Mineracao Santa Elina, was formed in 1976 and since then
has operated as a private company in the business of exploring and developing
gold mining properties in Brazil.
Santa Elina's main properties are listed below by subsidiary:
<TABLE>
<CAPTION>
SUBSIDIARY PERCENTAGE OWNERSHIP PROPERTIES
- ---------- -------------------- ----------
<S> <C> <C>
Mineracao Santa Elina..... 83%(/1/) Sao Vicente (operating mine)
Sao Francisco (exploration)
Guapore (hydroelectric project)
Fazenda Nova (exploration)
Santa Elina gold belt (licences)
Mineracao Maraca.......... 83%(/2/) Chapada (exploration)
Arauco (listed on VSE).... 64% Exploration properties in Chile
CIA Minera S. Vicente..... 100% Bolivian extension of gold belt
</TABLE>
- -------
(1) Paulo de Brito, the majority shareholder of Sercor, has a 17% equity
holding in Mineracao Santa Elina.
(2) Paulo de Brito, the majority shareholder of Sercor, has a 17% equity
holding in Mineracao Maraca. Under the agreement with Mr de Brito, Santa
Elina has agreed to fund all the development costs of Mineracao Maraca,
until the start up of production of the Chapada Property. Echo Bay has an
option on 50% of the Chapada property (at an agreed price per ounce of
gold and per pound of copper).
[LOGO OF RBC DOMINION SECURITIES APPEARS HERE]
4
<PAGE>
Sao Vicente Mine
Santa Elina commenced hard rock mining at the Sao Vicente Mine in November,
1992 following placer mining using dredges on the river beds below the current
open pit operations. Host rocks are steeply dipping, isoclinally folded meta-
arenites with interbedded meta-conglomerates. Gold mineralization occurs in
two parallel, northwest trending zones for more than 1,000 metres. The gold is
in quartz filled shear zones associated with pyrite and arsenopyrite,
sericiate and minor chlorite.
The Sao Vicente Mine is a truck and shovel operation with a four stage
crusher and a plant consisting of a jig circuit and a flotation circuit. The
company is currently mining at a rate of 4,500 t/d with 75% of the ore going
to the jig circuit and 25% to the flotation circuit. Low recoveries combined
with high infrastructure costs have limited the mine to operating at close to
a break-even.
The mine's resource as calculated by Santa Elina is as follows:
<TABLE>
<CAPTION>
TONNES GRADE CONTAINED
(000'S) (G AU/T) GOLD OUNCES
------- -------- -----------
<S> <C> <C>
9,990.................. 0.805 258,555
</TABLE>
Chapada Property
The Chapada Property consists of 3,000 hectares of mining claims. The
property is underlain by upper Proterozoic volcano-sedimentary rocks that have
been metamorphosed to the amphibolite facries and consist of biotitle-kyanite
schists and amphibolites. The schistose rocks have been intruded by
amphibolites and tonaelites. Mineralization consists of disseminated
chalcopyrite and pyrite with native gold occurring as fine grains on the
surface of pyrite grains and as inclusions in chalcopyrite.
Previous work was carried out on the Chapada Property by Eluma Ltd., Inco
Ltd., Noranda Inc., and Parsons Engineering Ltd and included: 221 diamond
drillholes totaling 24,693 metres; 201 auger holes totaling 2,836 metres; a 92
metre vertical shaft and 110 metres of crosscuts. In 1995, Santa Elina drilled
416 overburden holes for a total of 6,600 metres. The company analysed 7,300
samples for gold.
Between 1979 and 1981 eight reserve studies were conducted by various
parties. The tonnages ranged between 92 million tonnes and 137 million tonnes,
the copper grade between 0.400% and 0.467% and the gold grade between 0.383 g
Au/t and 0.450 g Au/t (only six studies analysed for gold). In 1981, Noranda
developed a mining plan based on 8.4 million tonnes per year. Santa Elina's
"in-house" feasibility study used a mining rate of 15 million tonnes per year
based on a reserve of 200 million tonnes and a capital cost of US$200 million.
Santa Elina is conducting a $5 million feasibility study on the Chapada
Property which is to be completed in the second half of 1997.
Sao Francisco Property
The Sao Francisco Property is similar in geology to the Sao Vicente Mine.
The host rocks are meta-arenites with intercalated meta-pelites. Folding
consists of open anticlines and synclines with limbs dipping at 45(degrees) to
60(degrees). The host rock contains fractures that have been quartz filled in
proximity to shear zones. Three main sets of quartz veins have been
identified - 1) dipping SW and parallel to bedding and foliation; 2) dipping
NE and crosscutting the first set; 3) horizontal and crosscutting the other
two sets. Pyrite equals less than one percent but there is a good correlation
between pyrite and gold.
Santa Elina carried out trenching between 1985 and 1988 at 200 metre
intervals over 1.5 km of the mineralized zone. Twenty one vertical rotary
holes were drilled in 1990 along the trenches. Diamond drilling commenced in
April 1995 and 166 holes totaling 36,000 metres were completed. The drillholes
are spaced 25 metres apart on sections 100 metres apart. Santa Elina also
completed a 62 metre decline for bulk sampling.
[LOGO OF RBC DOMINION SECURITIES APPEARS HERE]
5
<PAGE>
Based on the work to date Santa Elina has calculated the following resource:
<TABLE>
<CAPTION>
TONNES GRADE CONTAINED
(G AU/T) OUNCES
---------- -------- ---------
<S> <C> <C> <C>
Upper zone..................................... 20,761,000 0.9 600,745
Lower zone..................................... 8,314,800 3.8 1,015,844
</TABLE>
Santa Elina's "in-house" feasibility study uses gravimetric and dump
leaching to recover the gold.
Fazenda Nova Property
The Fazenda Nova Property consists of 1.4 million hectares including two
mining permits. Previous work on the property was done by a Brazilian company,
Matega, and Western Mining of Australia. Matega mined 100,000 tonnes of
saprolitic material and deposited 50,000 tonnes of this material on a heap to
recover 50 kg of gold. The recovery was low at 50%. Western Mining carried out
stream sediment sampling and geophysics and identified six targets displaying
anomalous soil geochemical results. Western Mining drilled three targets and
encountered primary ore.
The regional geologic setting is Proterozoic volcano-sedimentary rocks in a
gneissic basement and three volcano sedimentary remnants have been identified
on the 1.4 million hectares. The Fazenda Nova occurrence is in the eastern
most remnant. Santa Elina has identified three other targets in addition to
the Fazenda Nova occurrence. Local geology consists of relatively unaltered
dacitic volcanics intruded by altered diorite sills. Gold occurs in the
diorites in association with arsenopyrite and carbonate alteration.
Santa Elina commenced drilling the Fazenda Nova occurrence in February,
1995 and has completed 65 diamond drill holes totaling 8,000 metres and 997
auger holes totaling 5,600 metres. Recent estimates by Santa Elina geologists
are as follows:
Oxide ore 330,000 ounces (to a depth of 60 metres)
Sulphide ore 250,000 ounces (60-155 metres)
Undeveloped Acreage
Santa Elina had land which was claimed or under application totaling
approximately 11.8 million hectares. The land is in seven states of Brazil
with the bulk being in the states of Rondonia, Mato Grosso and Goias. Of the
11.8 million hectares, approximately 181,000 hectares are covered by
exploration permits and approximately 52,000 hectares are covered by mining
permits (including those properties detailed above). Santa Elina's land
position is not static as it adds or drops claims reflecting the prospective
nature of the individual claims.
Guapore Hydro Electric Project
Santa Elina has received licences to build, own and operate a hydro-
electric power project on the Guapore River. The facility is scheduled to be
constructed in 1996, and will provide power both for Santa Elina's mining
operations and for sale to Electrobras, the state electricity distribution
company. Santa Elina has received turn-key lump sum bids for the engineering
procurement and construction of the proposed facility from several
international consortia.
OVERVIEW OF ECHO BAY
Echo Bay is a large gold producer with three mines in the United States and
one in Canada. Echo Bay's share of production for 1995 was 750,000 ounces of
gold, an 8% decrease from 1994, and 11,900,000 ounces of silver. The 100%
owned McCoy/Cove mine in Nevada produced 310,000 ounces of gold and 11,900,000
ounces of silver at a cash cost of $222 per ounce of gold in 1995. Echo Bay's
other Nevada mine is the 50% owned Round Mountain mine where Echo Bay's share
of gold production in 1995 was 172,000 ounces of gold at a cash cost of $200
per ounce. In Washington State, Echo Bay's 100% owned Kettle River mine
produced 100,000 ounces of gold in 1995 at a cash cost of $237 per ounce. Echo
Bay's mine in Canada is the 100% owned Lupin mine in the Northwest
Territories.
[LOGO OF RBC DOMINION SECURITIES APPEARS HERE]
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<PAGE>
Production in 1995 was 172,000 ounces of gold at a cash cost of $303 per
ounce. As at December 31, 1995 Echo Bay's share of proven and probable gold
reserves at producing mines was 7,500,000 ounces. McCoy/Cove had reserves of
1,500,000 ounces of gold and 63,000,000 ounces of silver. Echo Bay's share of
reserves at Round Mountain was 5,000,000 ounces and at Kettle River and Lupin
the gold reserves were 330,000 ounces and 685,000 ounces respectively. Echo
Bay added 6,400,000 ounces to the category of other mineralization in 1995
bringing the total to 9,400,000 ounces.
Echo Bay's strategic focus is on gold and on proving up large reserves. To
this end Echo Bay has embarked on a number of strategic alliances with
explorationists and entrepreneurial companies with land positions on some of
the major gold belts of the world.
Echo Bay's 130 million outstanding common shares are widely held and
actively traded on both The Toronto Stock Exchange and The American Stock
Exchange. No shareholder holds more than 5% of Echo Bay's common shares. The
average daily volume traded on the TSE and Amex of Echo Bay's common shares
for 1995 and 1996 was 1,003,551.
HISTORICAL FINANCIAL DATA
Historical financial data of Santa Elina and Echo Bay are set forth in the
Circular.
TRADING VOLUMES AND PRICING RANGES
Trading volumes and pricing ranges of the Common Shares and Echo Bay common
shares are set forth in the Circular.
DEFINITION OF FAIR MARKET VALUE
For purposes of the Santa Elina Valuation, fair market value is defined as
the highest price expressed in terms of money or money's worth, available in
an open and unrestricted market between informed and prudent parties, each
acting at arm's length, where neither party is under any compulsion to act,
and without any downward adjustment to reflect the lack of liquidity of the
Common Shares or to reflect the fact that the Common Shares owned by persons
other than Echo Bay or Sercor, do not form part of a controlling interest.
For purposes of the Echo Bay Valuation, fair market value is defined as the
highest price expressed in terms of money or money's worth, available in an
open and unrestricted market between informed and prudent parties, each acting
at arm's length, where neither party is under any compulsion to act. Since the
market trading analysis approach was adopted to determine the fair market
value of the Echo Bay common shares to be received by the Minority
Shareholders, fair market value of the Echo Bay common shares necessarily
reflects their liquidity as well as the fact that such shares trade as a
minority interest.
SANTA ELINA VALUATION
Valuation Methodology
The vast majority of Santa Elina's assets consist of exploration and mining
assets. As a result, we concluded that the net asset value approach was the
most appropriate methodology for determining the value of the Common Shares.
This approach allows for the separate assessment of all assets and liabilities
in a manner most appropriate to the nature of the particular asset or
liability. As a test of the net asset value range obtained we reviewed
comparable prior transactions and the gold and copper acquisition price
implied.
For the Sao Vicente operating mine and the Sao Francisco and Chapada
properties and for the Guapore hydroelectric project, RBC DS has utilized the
discounted cash flow ("DCF") approach to determine the appropriate range of
the present value of the assets. The DCF approach takes into account the
amount, timing and relative certainty of projected cash costs related to the
project's capital expenditures and the future revenue generated by, and the
operating costs required by, the completed facility. The DCF approach requires
that certain assumptions be made regarding, among other things, future cash
costs, commodity prices and discount rates. The possibility that some of the
assumptions will prove to be inaccurate is one factor involved in the
determination of the discount rates to be used in establishing a range of
values.
[LOGO OF RBC DOMINION SECURITIES APPEARS HERE]
7
<PAGE>
In completing our DCF analyses on the mining interests of Santa Elina, we
did not rely on any single series of expected cash flows but performed a
variety of sensitivity analyses based on ranges of copper and gold prices and
recoveries, capital and operating costs, discount rates and income tax
assumptions. The results of these sensitivity analyses are reflected in our
value ranges.
Sao Vicente Mine
RBC DS has reviewed the production and capital and operating costs
estimates developed by Santa Elina management for the Sao Vicente Mine. RBC DS
discussed the basis on which the estimates were prepared with management to
assess the reasonableness of the estimates, and made adjustments to the
estimates as RBC DS deemed appropriate. The only adjustment of a material
nature was the reduction in the operating costs over the life of the mine by
10% to reflect discussions with Santa Elina management on their current cost
reduction plans. RBC DS did not develop independent production or operating
cost estimates. As the Sao Vicente Mine is currently operating at close to a
break-even level, the reserves are classified as a measured resource due to
the quality of ore encountered and the economic cost of extraction.
In order to project the revenues generated by the resource, RBC DS utilized
a realised gold price of $400/ounce. The appropriate real after tax discount
rate to apply to the projected cash flows was derived with reference to the
stage of development of the Sao Vicente Mine and the operating performance to
date. Based on the foregoing, we determined the real after-tax discount rate
to be 5% - 7%. A summary of the base case cashflow forecasts used by RBC DS
with respect to the Sao Vicente Mine is included in Appendix A.
Based upon and subject to the foregoing, we have concluded that the fair
market value of Santa Elina's interest in the Sao Vicente Mine using the DCF
approach, as of the date hereof, is in the range of $5 million to $6 million.
Chapada Property
RBC DS has relied on production and capital and operating costs estimates
developed by Santa Elina management for the Chapada Property. RBC DS has
discussed the basis on which the estimates have been prepared with management
to assess the reasonableness of the estimates, and found such estimates to be
reasonable. RBC DS did not develop independent production or capital and
operating cost estimates for the Chapada Property. Echo Bay has an option to
buy 50% of Santa Elina's interest in the Chapada Property at a copper price of
$0.02/lb and a gold price of $25/ounce. Our valuation assumes that this option
is exercised by Echo Bay in accordance with its terms. The Chapada deposit has
been classified as a measured resource.
In order to project the revenues generated by the resource, RBC DS utilized
a realised copper price of $1.05/pound and a realised gold price of
$400/ounce. The appropriate real after tax discount rate to apply to the
projected cash flows was derived with reference to the revenue split between
gold and copper, the stage of development and the certainty of future cash
flows from the Chapada Property. Based on the foregoing, we determined the
real after-tax discount rate to be 9% - 11%. A summary of the base case
cashflow forecasts used by RBC DS with respect to the Chapada Property is
included in Appendix B.
Based upon and subject to the foregoing, we have concluded that the fair
market value of Santa Elina's interest in the Chapada Property using the DCF
approach, as of the date hereof, is in the range of $102 million to $111
million.
Sao Francisco Property
RBC DS has relied on production, capital and operating costs estimates
developed by Santa Elina management for the Sao Francisco Property. RBC DS has
discussed the basis on which the estimates, have been prepared with management
to assess the reasonableness of the estimates, and found such estimates to be
reasonable. RBC DS did not develop independent production or capital and
operating cost estimates. The Sao Francisco Property is classified as a
measured resource.
In order to project the revenues generated by the resource, RBC DS utilized
a realised gold price of $400/ounce. The appropriate real after tax discount
rate to apply to the projected cash flows was derived with reference to the
uncertainty regarding the economic recovery of the ore and the stage of
development of the Sao Vicente Property.
[LOGO OF RBC DOMINION SECURITIES APPEARS HERE]
8
<PAGE>
Based on the foregoing, we determined the real after-tax discount rate to be
5% - 7%. A summary of the base case cashflow forecasts used by RBC DS with
respect to the Sao Francisco Property is included in Appendix C.
Based upon and subject to the foregoing, we have concluded that the fair
market value of Santa Elina's interest in the Sao Francisco Property using the
DCF approach, as of the date hereof, is in the range of $79 million to $91
million.
Fazenda Nova Property
The Fazenda Nova Property is at an early exploration stage and as such has
been classified as an inferred resource. Due to the limited information
available on the property, RBC DS decided that it was not appropriate to carry
out a DCF calculation. RBC DS relied on resource estimates prepared by Santa
Elina management and discussions on the basis upon which the estimates were
prepared to assess the reasonableness of the estimates. In determining a value
for the property RBC DS applied a multiple of between $20/ounce of gold and
$30/ounce of gold to reflect the quality of the ore body and the level of
development currently achieved.
Based upon and subject to the foregoing, we have concluded that the fair
market value of Santa Elina's interest in the Fazenda Nova Property using a
multiple approach on the indicated resource, as of the date hereof, is in the
range of $19 million to $29 million.
Undeveloped Acreage
Santa Elina has an extensive portfolio of land. In establishing the value
of the land, RBC DS considered the fact that all but approximately 230,000
hectares of Santa Elina's land was under application and reviewed recent
publicly traded junior exploration companies with land positions in Brazil. RBC
DS determined that there are no reliable multiples that can be utilized to
determine a value of undeveloped acreage. Instead RBC DS conducted a review of
publicly traded junior exploration companies with land positions in Brazil (such
as Ambrex Mining Corporation, Brazilian Resources Inc. and Madison Energy
Corporation). RBC DS reviewed the market capitalization of these companies
relative to their permitted land positions, the geological structures, previous
mining activity and geographic location and determined a relative valuation of
Santa Elina's undeveloped acreage. RBC DS particularly considered the
prospective nature of Santa Elina's portfolio and the relative amount of
exploration completed to arrive at a value range. Third party transactions
involving undeveloped acreage commonly do not involve cash buyouts but instead
are structured as joint ventures or option agreements whereby money is to be
spent on exploration over a number of years. Based upon and subject to the
foregoing, we have concluded that the fair market value of Santa Elina's
undeveloped acreage, as of the date hereof, is in the range of $25 million to
$45 million.
Guapore Hydro Electric Project
RBC DS has relied on forecasts of electricity production, the electricity
price obtainable and capital and operating costs estimates developed by Santa
Elina management for the Guapore Project. RBC DS has discussed the basis on
which the estimates have been prepared with management to assess the
reasonableness of the estimates, and found such estimates to be reasonable.
RBC DS did not develop independent production, price or cost estimates for the
Guapore Project.
The appropriate real after tax discount rate to apply to the equity cash
flows of the Guapore Project was derived with reference to an appropriate
capital structure, the stage of development of the project, the uncertainty
associated with the capital and operating costs and electricity revenue
obtained. Based on the foregoing, we determined the real after-tax equity
discount rate to be 13.5% - 15%. A summary of the base case cashflow forecasts
used by RBC DS with respect to the Guapore Project is included in Appendix D.
Based upon and subject to the foregoing, we have concluded that the fair
market value of Santa Elina's interest in the Guapore project using the DCF
approach, as of the date hereof, is in the range of $22 million to $26
million.
Arauco Resources Corporation
Santa Elina directly owns 64% of the shares of Arauco, a mining exploration
company active in Chile and listed on the Vancouver Stock Exchange. Due to the
liquidity of this investment and having reviewed the publicly available
information, we have valued the investment in Arauco at its current market
value of $2.4 million.
[LOGO OF RBC DOMINION SECURITIES APPEARS HERE]
9
<PAGE>
Other Assets and Liabilities
Santa Elina's other assets and liabilities were valued at their stated
amounts as of December 31, 1995, as outlined in the table below. More recent
consolidated financial statements are not available as at the date hereof,
however, discussions with Santa Elina management confirmed that no material
changes have occurred between December 31, 1995 and the date hereof.
<TABLE>
<CAPTION>
ASSETS LIABILITIES
------------ ------------
($ millions) ($ millions)
<S> <C> <C> <C>
Cash.................... 6.0 Bank Debt.................... 9.9
Accounts Receivable..... 0.2 Accounts Payable & Accruals.. 5.7
Inventory............... 1.6 Shareholder Loan............. 2.0
--- Capital Leases............... 2.1
7.9 Other S/T Liabs.............. 4.7
Other L/T Liabs.............. 3.3
----
27.7
</TABLE>
Benefits to Sercor or Echo Bay of Acquiring Santa Elina
In arriving at our opinion of the fair market value of the Common Shares,
we reviewed and considered whether any distinctive material value might accrue
to Echo Bay or Sercor through the acquisition of all of the outstanding Common
Shares as contemplated by the Offer as a result of, among other things, the
earlier use of available tax losses, lower income taxes, reduced costs,
increased revenues and higher utilization of the subject matter.
We understand that Santa Elina, Echo Bay or Sercor's tax position will not
change materially as a result of completion of the Offer. Special benefits
which would accrue to Echo Bay and Sercor assuming the completion of the Offer
relate principally to the avoidance of "public company" costs of Santa Elina.
The estimated public company cash costs are approximately $1,000,000 per year.
These costs were not included in the estimated cash costs associated with the
operations of Santa Elina and therefore the savings of these costs after
completion of the Offer have been reflected in the determination of the fair
market value of the Common Shares.
Net Asset Value Summary
SANTA ELINA
NET ASSET VALUE
<TABLE>
<CAPTION>
LOW HIGH
------ ------
($ millions)
<S> <C> <C>
ASSETS
Current assets................................................... $ 7.9 $ 7.9
Proceeds from exercise of options................................ 2.1 2.1
Mining Interests
Chapada (resource)............................................. 102 111
Sao Vicente (resource)......................................... 5 6
Sao Franciso (resource)........................................ 79 91
Fazenda Nova (resource)........................................ 19 29
Undeveloped acreage............................................ 25 45
------ ------
Total Mining Interests........................................... $230.0 $282.0
Hydro-electric project........................................... 22 26
------ ------
Total Assets..................................................... $264.5 $320.6
====== ======
LIABILITIES
Current liabilities.............................................. $ 23.5 $ 23.5
Long Term Obligations............................................ 4.2 4.2
------ ------
Total Liabilities................................................ 27.7 27.7
NET ASSET VALUE.................................................. $236.8 $292.9
====== ======
Common shares outstanding (fully diluted) 136.5 136.5
Per fully diluted common share (rounded)......................... $ 1.75 $ 2.15
</TABLE>
[LOGO OF RBC DOMINION SECURITIES APPEARS HERE]
10
<PAGE>
Prior Transactions
In addition to the above net asset value analysis, RBC DS conducted a
review of prior property transactions in Latin America completed during the
period of 1992 to 1996. Approximately two thirds of these transactions
involved the acquisition of at least 50% of a property, and one half involved
100% acquisitions. A list of these prior transactions is included in
Appendix E.
A gold equivalent multiple for Santa Elina was determined by taking the
above range of net asset values and subtracting Santa Elina's net non-gold
assets and dividing by Santa Elina's share of gold-equivalent ounces which
were used in deriving the asset values above. The value range obtained through
our net asset value analysis above equates to a gold equivalent multiple of
$27/ounce to $35/ounce. Although this is below the average of the transactions
reviewed, RBC DS considers this range to be appropriate based on the quality
of ore acquired and the level of development of Santa Elina's properties in
comparison to the comparable transactions. Based upon and subject to the
foregoing, RBC DS concluded that the implied gold multiples based on our net
asset value range confirms the reasonableness of the net asset value range.
Prior Valuations
Certain senior officers of Santa Elina have represented to RBC DS, in a
certificate delivered as of the date hereof, among other things, that to the
best of their knowledge, information and belief after due inquiry, there are
no independent appraisals or valuations or material non-independent appraisals
or valuations (as those terms are used in the Policy or subsection 182(1) of
the Regulation to the Act) relating to Santa Elina or any of its subsidiaries
or any of their respective material assets or liabilities which have been
prepared as of a date within the two years preceding the date hereof.
Conclusions
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the fair market value of the Common Shares is in the range of
$1.75 to $2.15 per Common Share.
ECHO BAY VALUATION
Under the Offer, Santa Elina shareholders will receive one Echo Bay common
share for each 6.67 Common Shares held, as consideration. In determining the
fair market value of the Echo Bay common shares being offered, RBC DS relied
on the market trading analysis approach. RBC DS considers the market trading
price of Echo Bay common shares to be the most appropriate indicator of the
fair market value of the Echo Bay common shares offered under the Offer in
view of the following:
(i) the Minority Shareholders will exert no control over Echo Bay and hence
would have no ability to, on their own, achieve a premium to the market
price of Echo Bay common shares;
(ii) Echo Bay will issue approximately 5.3 million new common shares to the
Minority Shareholders and an additional 3.5 million new common shares
to Sercor, representing in the aggregate approximately 7% of Echo
Bay's current common shares outstanding. Given the substantial market
capitalization of Echo Bay, RBC DS does not anticipate that the
issuance will have a material effect on the share price of Echo Bay;
(iii) Echo Bay common shares are well followed by analysts and trade on a
comparable basis and in a manner consistent with other major mining
and resource companies;
(iv) Echo Bay common shares are highly liquid. Over the three month period
from January 9, 1996 to April 9, 1996 (the last trading day prior to
the announcement of the Offer) the average daily trading volume of
Echo Bay common shares was 1.025 million; and
(v) In our review of Echo Bay, RBC DS was not made aware of any material
information which has not been publicly disclosed which would
reasonably be expected to materially affect the market price of the
Echo Bay common shares.
[LOGO OF RBC DOMINION SECURITIES APPEARS HERE]
11
<PAGE>
Based on the closing price of Echo Bay common shares on April 22, 1996 (the
last trading day prior to the date hereof), the value per Common Share based
on the 6.67 to 1 exchange ratio under the offer is $1.95. Based on the closing
price of Echo Bay common shares on April 9, 1996 (the last trading day prior
to the announcement of the Offer), the value per Common Share based on the
6.67 to 1 exchange ratio under the offer is $2.09. Based on the average
closing price of Echo Bay common shares for the 20 trading day period ending
April 22, 1996, the value per Common Share is $2.03.
FAIRNESS OF THE OFFER
Factors Considered
In considering the fairness of the Offer, from a financial point of view,
to the Minority Shareholders, we considered the fair market value of the Echo
Bay common shares to be received by the Minority Shareholders under the Offer
compared to the range of fair market value of the Common Shares arrived at in
the Santa Elina Valuation. In addition, we considered the premium over recent
trading levels represented by the value of the Echo Bay common shares to be
received per Common Share under the Offer compared to premiums paid in other
transactions in the Canadian market where controlling shareholders
successfully acquired publicly traded minority interests, the relative
liquidity of the common shares of Santa Elina and Echo Bay, and an analysis of
the expected future business prospects of Santa Elina as a standalone entity.
Fair Market Value of the Common Shares as Compared to the Fair Market Value of
Echo Bay Common Shares Received as Consideration
The fair market value of the Common Shares was determined to be in the
range of $1.75 to $2.15 per Common Share as described under "Santa Elina
Valuation". The fair market value of the Echo Bay common shares to be received
as consideration in the Offer is within the range, based on the closing
trading price of Echo Bay common shares as of April 22, 1996, as of April 9,
1996 (the last trading day prior to the announcement of the Offer) and for the
20 trading day period ending April 22, 1996.
Comparable Transaction Premiums
Our review of other transactions in the Canadian equity market where
controlling shareholders successfully acquired publicly traded minority
interests identified 38 such transactions with a value over $10 million over
the past five years. Success was defined as acquiring at least one-half of the
minority shares outstanding at the time of the offer. Defining the premium for
this purpose as the amount by which the price per share offered under the
relevant offer exceeded the closing price of the shares on their principal
trading exchange on the day immediately prior to announcement of the offer
resulted in premiums as follows:
<TABLE>
<CAPTION>
NUMBER OF
HIGHEST LOWEST MEAN MEDIAN TRANSACTIONS
------- ------ ---- ------ ------------
<S> <C> <C> <C> <C> <C>
Last two years........................ 77% 11% 34% 28% 20
Last five years....................... 77% 6% 33% 30% 38
</TABLE>
A list of these prior transactions included in the above table is attached
as Appendix F.
The range of premiums paid in similar transactions is very wide. Although
each transaction has its own particular circumstances and direct comparison of
any single transaction to the Offer is difficult, we believe that the
38 transactions listed, in the aggregate, provide a useful comparison
benchmark. The implied Offer price represents a 20% to 29% premium over the
closing price of Can$2.19 (US$1.62) per Common Share on The Toronto Stock
Exchange on April 9, 1996, being the last day on which the Common Shares
traded prior to the public announcement of Echo Bay's intention to make the
Offer (depending on whether the April 9, April 22 or 20 trading day average
price for Echo Bay common shares is used). The premium of 20% to 29% is within
the range of premiums paid in the transactions reviewed above.
[LOGO OF RBC DOMINION SECURIITES APPEARS HERE]
12
<PAGE>
Liquidity of Santa Elina Common Shares
Liquidity in the Common Shares is limited. Over the 320 trading days from
the initial public offering of Santa Elina to April 9, 1996 (the last trading
day prior to the announcement of Echo Bay's intention to make the Offer), the
Common Shares traded an average of 28,400 shares per day. Over this time
frame, only 30 blocks of Common Shares in excess of 50,000 traded on The
Toronto Stock Exchange. The Offer provides an opportunity to liquidate large
positions in Common Shares that is not otherwise available.
Santa Elina as a Standalone Entity
Santa Elina has been suffering losses at its only producing mine and has
been unable to secure long term financing to fund the development of its
exploration properties. As a standalone entity, it is possible that Santa
Elina would be unable to fully realize the net asset value of its underlying
properties.
Conclusion
Based upon and subject to the foregoing, RBC DS is of the opinion that, as
at the date hereof, the Offer is fair, from a financial point of view, to the
Minority Shareholders.
Yours very truly,
RBC DOMINION SECURITIES INC.
[LOGO OF RBC DOMINION SECURITIES APPEARS HERE]
13
<PAGE>
LOGO
APPENDIX A
SAO VICENTE MINE - CASHFLOW ANALYSIS
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001
--------- --------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Tonnes Mined(/1/).... 1,800,000 1,800,000 1,800,000 1,800,000 1,800,000 990,000
Grade (g/tonne)...... 0.75 0.79 0.79 0.79 0.85 0.85
Ounces Produced...... 30,383 32,003 32,003 32,003 34,434 18,938
Gross Revenue(/2/)... $ 12,153 $ 12,801 $ 12,801 $ 12,801 $ 13,773 $ 7,575
Cash Operating Costs. $ 10,507 $ 11,137 $ 11,641 $ 11,803 $ 11,803 $ 5,908
Operating Cashflow... $ 1,646 $ 1,664 $ 1,160 $ 998 $ 1,970 $ 1,668
Capital Expenditures. $ 100 $ 100 $ 100 $ 100 $ 100 $ 100
Pre-tax Cashflow..... $ 1,546 $ 1,564 $ 1,060 $ 898 $ 1,850 $ 1,568
Free Cashflow........ $ 1,546 $ 1,564 $ 1,060 $ 898 $ 1,870 $ 1,568
</TABLE>
- --------
(1) Recovery equals 70%.
(2) All dollar amounts expressed in ('000s).
APPENDIX B
CHAPADA PROPERTY - CASHFLOW ANALYSIS
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
------- --------- --------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tonnes Mined..... 11,250 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000
Grade
Copper(/1/)... 0.00429 0.00434 0.00395 0.00430 0.00462 0.00494 0.00467 0.00405 0.00339
Gold(/2/)... 0.57000 0.49500 0.39600 0.33700 0.29200 0.33200 0.43300 0.43700 0.31500
Copper Concentrate
Tonnes (000's)... 146.51 197.63 179.87 195.80 210.38 224.95 212.65 184.42 154.37
Grade Copper %. 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28 0.28
Gold g/t.... 30.64 26.30 23.12 18.07 14.57 15.50 21.38 24.88 21.43
Metal Production
Copper (000's
lbs)............ 90,456 122,014 111,049 120,889 129,886 138,882 131,291 113,861 95,306
Gold (ozs).... 144,317 167,104 133,683 113,766 98,574 112,078 146,174 147,524 106,339
Gross Revenue.... $152,706 $194,945 $170,075 $172,440 $175,810 $190,657 $196,325 $178,563 $142,606
Smelting,
Refining,
Freight Charges. $ 39,690 $ 52,637 $ 47,306 $ 50,461 $ 53,443 $ 57,363 $ 55,541 $ 48,845 $ 40,325
Net Smelter
Revenue......... $113,016 $142,319 $122,769 $121,979 $122,366 $133,294 $140,784 $129,718 $102,281
Marketing and
Royalty Costs .. $ 5,029 $ 6,333 $ 5,463 $ 5,428 $ 5,445 $ 5,932 $ 6,265 $ 5,772 $ 4,552
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net Revenue $107,986 $135,986 $117,306 $116,551 $116,921 $127,362 $134,519 $123,946 $ 97,730
Cash Operating
Costs........... $ 41,456 $ 55,275 $ 55,275 $ 55,275 $ 55,275 $ 55,275 $ 55,275 $ 55,275 $ 55,275
Operating
Cashflow (100%). $ 66,530 $ 80,711 $ 62,031 $ 61,276 $ 61,646 $ 72,087 $ 79,244 $ 68,671 $ 42,455
83% of Cashflow
to reflect 17%
carried
interest........ $555,220 $ 66,990 $ 51,486 $ 50,859 $ 51,166 $ 59,833 $ 65,773 $ 56,997 $ 35,237
Capital
Expenditures.... $ 5,000 $ 100,000 $ 100,000 $ 9,000 $ 600 $ 600 $ 600 $ 600 $ 600 $ 600 $ 600 $ 600
Pre-tax Cashflow. $(5,000) $(100,000) $(100,000) $ 46,220 $ 66,390 $ 50,886 $ 50,259 $ 50,566 $ 59,233 $ 65,173 $ 56,397 $ 34,637
Social
Contribution
Taxes........... $ 2,042 $ 3,177 $ 1,682 $ 1,622 $ 1,652 $ 5,767 $ 6,340 $ 5,494 $ 3,396
Corporate Taxes.. $ 5,872 $ 9,133 $ 4,837 $ 4,664 $ 4,749 $ 16,580 $ 18,226 $ 15,794 $ 9,765
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Taxes...... $ 7,914 $ 12,310 $ 6,520 $ 6,286 $ 6,400 $ 22,347 $ 24,566 $ 21,288 $ 13,161
Free Cashflow.... $(5,000) $(100,000) $(100,000) $ 38,306 $ 54,080 $ 44,366 $ 43,974 $ 44,166 $ 36,885 $ 40,607 $ 35,109 $ 21,476
<CAPTION>
2008-
2013(/3/) 2014
--------- --------
<S> <C> <C>
Tonnes Mined..... 15,000 3,750
Grade
Copper(/1/)... 0.00332 0.00332
Gold(/2/)... 0.28500 0.28500
Copper Concentrate
Tonnes (000's)... 151.18 37.79
Grade Copper %. 0.28 0.28
Gold g/t.... 19.79 19.79
Metal Production
Copper (000's
lbs)............ 93,338 23,334
Gold (ozs).... 96,211 24,053
Gross Revenue.... $136,489 $34,122
Smelting,
Refining,
Freight Charges. $ 39,234 $ 9,808
Net Smelter
Revenue......... $ 97,255 $24,314
Marketing and
Royalty Costs .. $ 4,328 $ 1,082
--------- --------
Net Revenue $ 92,928 23,232
Cash Operating
Costs........... $ 55,275 $13,819
Operating
Cashflow (100%). $ 37,653 $ 9,413
83% of Cashflow
to reflect 17%
carried
interest........ $ 31,252 $ 7,813
Capital
Expenditures.... $ 600 $(9,000)
Pre-tax Cashflow. $ 30,652 $16,813
Social
Contribution
Taxes........... $ 3,012 $ 752
Corporate Taxes.. $ 8,660 $ 2,165
--------- --------
Total Taxes...... $ 11,672 $ 2,918
Free Cashflow.... $ 18,979 $13,895
</TABLE>
- --------
(1) Recovery equals 85%.
(2) Recovery equals 70%.
(3) Plateau production from year 13-18; declines in year 19.
14
<PAGE>
LOGO
APPENDIX C
SAO FRANCISCO PROPERTY - CASHFLOW ANALYSIS
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
-------- -------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Production -
Gravimetric
Tonnes Mined(/1/)... 3,690,000 3,690,000 3,690,000 3,690,000 3,690,000 3,690,000 3,690,000 3,690,000
Grade (g/tonne)..... 0.792 0.792 0.923 0.923 1.726 1.726 0.985 0.985
Ounces Produced..... 75,168 75,168 87,601 87,601 163,813 163,813 93,486 93,486
Production - Dump
leach
Tonnes Mined(/2/)... 3,690,000 3,690,000 3,690,000 3,690,000 3,690,000 3,690,000 3,690,000 3,690,000
Grade (g/tonne)..... 0.294 0.294 0.291 0.291 0.291 0.285 0.285 0.285
Ounces Produced..... 17,440 17,440 17,262 17,262 17,262 16,906 16,906 16,906
Total Ounces
Produced........... 92,608 92,608 104,863 104,863 181,075 180,719 110,391 110,391
Gross Revenue(/3/).. $37,043 $37,043 $41,945 $41,945 $72,430 $72,288 $44,156 $44,156
Provincial Royalty +
Smelting/Refining
Charge............. $ 1,111 $ 1,111 $ 1,258 $ 1,257 $ 2,173 $ 2,169 $ 1,325 $ 1,325
--------- --------- --------- --------- --------- --------- --------- ---------
Net Smelter Revenue. $35,932 $35,932 $40,687 $40,687 $70,257 $70,119 $42,832 $42,832
Cash Operating
Costs.............. $16,375 $17,193 $18,059 $18,059 $20,179 $20,179 $20,179 $20,179
Operating cashflow.. $19,557 $18,739 $22,628 $22,628 $50,078 $49,940 $22,653 $22,653
Capital
Expenditures....... $ 7,600 $22,000 $ 3,000 $ 500 $ 500 $ 500 $ 500 $ 500 $ 500 -$ 3,000
Pre-tax Cashflow.... -$ 7,600 -$22,000 $16,557 $18,239 $22,128 $22,128 $49,578 $49,440 $22,153 $25,653
Social Contribution
Taxes.............. $ 1,269 $ 1,203 $ 1,514 $ 1,514 $ 3,710 $ 3,699 $ 1,516 $ 1,516
Corporate Taxes..... $ 1,824 $ 1,730 $ 2,177 $ 2,177 $ 5,333 $ 5,318 $ 2,180 $ 2,180
--------- --------- --------- --------- --------- --------- --------- ---------
Total Taxes......... $ 3,092 $ 2,933 $ 3,691 $ 3,691 $ 9,044 $ 9,017 $ 3,696 $ 3,696
Free Cashflow....... -$ 7,600 -$22,000 $13,465 $15,307 $18,437 $18,437 $40,534 $40,423 $18,457 $21,957
</TABLE>
- --------
(1) Recovery equals 80%.
(2) Recovery equals 50%.
(3) All dollar amounts expressed in ('000s).
APPENDIX D
GUAPORE HYDROELECTRIC PROJECT - CASHFLOW ANALYSIS
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008(/1/)
-------- -------- ------- ------- ------- ------- -------- ------- ------- -------- ------- ------- ---------
($ 000'S)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross Revenues.. $13,756 $13,756 $13,756 $13,756 $ 13,756 $13,756 $13,756 $ 13,756 $13,756 $13,756 $13,756
Cash Operating
Costs.......... $ 597 $ 597 $ 597 $ 597 $ 597 $ 597 $ 597 $ 597 $ 597 $ 597 $ 597
Operating
Cashflow....... $13,159 $13,159 $13,159 $13,159 $ 13,159 $13,159 $13,159 $ 13,159 $13,159 $13,159 $13,159
Capital
Expenditure.... $ 16,816 $ 25,224
Pre-tax
Cashflow....... -$16,816 -$25,224 $13,159 $13,159 $13,159 $13,159 $ 13,159 $13,159 $13,159 $143,159 $13,159 $13,159 $13,159
Social
Contribution... $ 1,459 $ 1,471 $ 1,484 $ 1,496 $ 1,508 $ 1,521 $ 1,533 $ 1,545 $ 1,558 $ 1,570 $ 1,576
Corporation Tax. $ 1,104 $ 1,122 $ 1,139 $ 1,157 4 1,175 $ 1,193 $ 1,210 $ 1,228 $ 1,246 $ 1,264 $ 1,273
------- ------- ------- ------- -------- ------- ------- -------- ------- ------- -------
Total Tax....... $ 2,563 $ 2,593 $ 2,623 $ 2,653 $ 2,683 $ 2,714 $ 2,743 $ 2,773 $ 2,804 $ 2,834 $ 2,849
Free Cashflow to
Project
(levered)...... $10,596 $10,566 $10,536 $10,506 $ 10,476 $10,445 $10,416 $ 10,386 $10,355 $10,325 $10,310
Less: Debt
repayment...... $ 3,093 $ 3,093 $ 3,093 $ 3,093 $ 3,093 $ 3,093 $ 3,093 $ 3,093 $ 3,093 $ 3,093 $ 0
Less: Interest
payment........ $ 1,469 $ 1,314 $ 1,160 $ 1,005 $ 851 $ 696 $ 541 $ 387 $ 232 $ 77 $ 0
Free Cashflow to
Equity......... -$16,816 -$25,224 $ 6,034 $ 6,159 $ 6,283 $ 408 $ 6,532 $ 6,656 $ 6,782 $ 6,906 $ 7,030 $ 7,155 $10,310
</TABLE>
- --------
(1)2008 Cashflow continue for 30 year project life (until 2027)
15
<PAGE>
LOGO
APPENDIX E
PRIMARY GOLD PROJECT TRANSACTIONS
LATIN AMERICA FROM 1992-1996
<TABLE>
<CAPTION>
PRICE GOLD GOLD
% PAID EQUIVALENT EQUIVALENT
PROPERTY COUNTRY SELLER BUYER ACQUIRED (MILLIONS) ACQUIRED (OZ.) GRADE (OZ/ST)
-------- ------------- -------------------- ------------------------- -------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Yaou-Dorlin French Guiana BRGM/BHP Golden Star Resources 100% $ 6.8 1,708,000 0.100
Aldebaran Chile Anglo American Chile Bema Gold 49% 4.0 794,780 0.020
El Oro Mexico Industrias Luismin All-North Resources 45% 4.5 887,436 0.120
San Antonio de
Poto Peru Minero Peru Andrade Guiterrez 100% 5.0 949,608 0.006
San Antonio de
Poto Peru Minero Peru Vegas-Andes 100% 8.4 1,316,000 0.0007
Lobo Chile Cominco Resources Teck 50% 15.8 1,650,000 0.060
Diablillos Argentina Abra de Minas Pacific Rim Mining 100% 5.9 603,509 0.110
Bajo de la
Alumbrera Argentina International Musto MIM 50% 130.0 12,359,680 0.045
Mercedes Chile Aurifera Jeraldo Minera Aurex 100% 5.5 440,000 0.200
Yaou-Dorlin French Guiana Golden Star Cambior 50% 11.0 854,000 0.0100
La Reyna Mexico Aurizon Mines Cambior 50% 15.0 1,110,928 0.061
Paredones
Amarillos Mexico Tellis/CIM Baja Gold 46% 2.2 149,481 0.055
Bajo de la
Alumbrera Argentina International Musto Rio Algom/North 50% 364.0 19,148,274 0.046
Diablillos Argentina Pacific Rim Mining Barrick Gold 10% 1.5 78,134 0.138
Refugio Chile Minera Refugio Amax Gold 50% 32.7 1,680,000 0.030
Avino Mexico Avino/Ysita Royal Bay 33% 5.0 229,804 0.125
Las Palmas Chile Cominor North Lily/Int'l Mahogany 100% 10.1 441,080 0.221
Gross Rosebel Suriname Grassalco Golden Star Resources 100% 8.0 319,000 0.058
Kori Kollo Bolivia Zeland Mines Battle Mountain 3% 3.5 137,567 0.064
San Gregorio Uruguay Mineracao do Amapa American Resource 100% 12.0 431,340 0.091
Oro Uno Venezuela Minex Venezuelan Goldfields 100% 53.6 1,820,000 0.140
Gross Rosebel Suriname Golden Star Cambior 50% 6.0 159,500 0.058
Brasilia Brazil APSA TVX 10% 14.0 354,621 0.014
Santa Gertrudis Mexico Phelps Dodge Campbell 100% 10.0 201,600 0.048
Amelia Mexico Walhall Mining Nord Pacific 60% 3.9 78,242 0.091
La Colorada Mexico Campbell Eldorado 30% 5.0 87,750 0.039
Rio Chiquito Costa Rica Mallon Resources Polymet Resources 10% 1.5 21,500 0.108
Andacollo Chile Dayton Mining Malaysia Mining 25% 18.8 258,400 0.034
Faride Chile Cerro Dominador Coeur d'Alene 51% 15.5 119,340 N/A
Santa Rosa Panama Greenstone Repadre Capital 5% 4.3 30,071 0.044
Rio Chiquito Costa Rica Mallon Resources Newmont Mining 51% 16.0 97,698 0.128
El Bronce de
Petorca Chile El Bronce de Petorca Coeur d'Alene 51% 25.4 94,860 0.155
<CAPTION>
$ PAID/OZ
OF GOLD
PROPERTY EQUIVALENT
-------- ----------
<S> <C>
Yaou-Dorlin $ 3.98
Aldebaran 5.03
El Oro 5.07
San Antonio de
Poto 5.27
San Antonio de
Poto 6.38
Lobo 9.58
Diablillos 9.78
Bajo de la
Alumbrera 10.52
Mercedes 12.50
Yaou-Dorlin 12.88
La Reyna 13.50
Paredones
Amarillos 14.72
Bajo de la
Alumbrera 19.01
Diablillos 19.20
Refugio 19.46
Avino 21.76
Las Palmas 22.90
Gross Rosebel 25.08
Kori Kollo 25.44
San Gregorio 27.82
Oro Uno 29.45
Gross Rosebel 37.62
Brasilia 39.48
Santa Gertrudis 49.60
Amelia 49.85
La Colorada 56.98
Rio Chiquito 69.77
Andacollo 72.76
Faride 129.88
Santa Rosa 142.99
Rio Chiquito 163.77
El Bronce de
Petorca 267.76
</TABLE>
- --------
Source: Metals Economic Group
16
<PAGE>
APPENDIX F
LAST TWO YEARS
Target companies consist of: Audrey Resources Inc., Bonar Inc., Brunswick
Mining & Smelting Corporation Ltd., LSI Logic Corp. of Canada Inc., SCI Canada
Ltd., Ford Motor Co. of Canada Ltd., Prairie Oil Royalties Co. Ltd., Cominco
Resources Int. Ltd., Hayes-Dana Inc., DA Stuart Ltd., ISM Information Systems
Corp., Cogas Energy Ltd., North Canadian Oils Ltd., TransMountain Pipeline
Co., Texaco Canada Inc., and Versa Services Ltd., Alberta Natural Gas, BICC
Phillips, Kerr Addison Mines Ltd. and Brenda Mines Ltd..
LAST FIVE YEARS
Target companies include those in (1) plus Canadian Roxy Petroleum Ltd.,
Motor Coach Industries Ltd., Goldex Mines Ltd., Simcoe Erie Investors Ltd.,
Laurentian Group Corp., Scurry Rainbow Oil Ltd., Teledyne Canada Ltd., Minnova
Inc., Goodyear Canada Inc., Dundee Capital Inc., GW Utilities Ltd.,
Precambrian Shield Resources Ltd., Asamera Minerals Inc., Tripet Resources
Ltd., Strathfield Oil & Gas Ltd., Campbell Soup Company Ltd., Union Carbide
Canada Ltd., and Kelsey-Hayes Canada Ltd.
[LOGO OF RBC DOMINION SECURITIES APPEARS HERE]
17
<PAGE>
SCHEDULE IV
EXCERPT FROM INTERNATIONAL BUSINESS COMPANIES ACT
RESPECTING DISSENT RIGHTS
<PAGE>
83.(1) A member of a company incorporated under this Ordinance is entitled to
payment of the fair value of his shares upon dissenting from
(a) a merger, if the company is a constituent company, unless the
company is the surviving company and the member continues to hold
the same or similar shares;
(b) a consolidation, if the company is a constituent company;
(c) any sale, transfer, lease, exchange or other disposition of more
than 50% of the assets or business of the company, if not made in
the usual or regular course of the business carried on by the
company, but not including
(i) a disposition pursuant to an order of the court having
jurisdiction in the matter;
(ii) a disposition for money on terms requiring all or substantially
all net proceeds to be distributed to the members in accordance
with their respective interests within one year after the date
of disposition; or
(iii) a transfer payment to the power described in subsection (2) of
section 9;
(d) a redemption of his shares by the company pursuant to section 81; and
(e) an arrangement, if permitted by the court.
(2) A member who desires to exercise his entitlement under subsection (1)
must give to the company, before the meeting of members at which the
action is submitted to a vote, or at the meeting but before the vote,
written objection to the action; but an objection is one required from
a member to whom the company did not give notice of the meeting in
accordance with this Ordinance or where the proposed action is authorized
by written consent of member without a meeting.
(3) An objection under subsection (2) must include a statement that the
member proposes to demand payment for his shares if the action is taken.
(4) Within 20 days immediately following the date on which the vote of
members authorizing the action is taken, or the date on which written
consent of members without a meeting is obtained, the company must
given written notice of the authorization or consent to each member who
gave written objection or from whom written objection was not required,
except those members who voted for, or consented to in writing, the
proposed action.
(5) A member to whom the company was required to give notice who elects to
dissent must, within 20 days immediately following the date on which
the notice referred to in subsection (4) is given, give to the company
a written notice or his decision to elect to dissent, stating
(a) his name and address;
(b) the number and classes or series of shares in respect of which he
dissents; and
(c) a demand for payment of the fair value of his shares;
and a member who elects to dissent from a merger under section 77 must
give to the company a written notice of his decision to elect to dissent
within 20 days immediately following the date on which the company of
the plan of merger or an outline thereof is given to him in accordance
with section 77.
(6) A member who dissents must do so in respect of all shares that he holds
in the company.
(7) Upon the giving of a notice of election to dissent, the member to whom
the notice relates ceases to have any of the rights of a member except
the right to be paid the fair value of his shares.
(8) Within 7 days immediately following the date of the expiration of the
period within which members may give their notices of election to
dissent; or within 7 days immediately following the date on which the
1
<PAGE>
proposed action is put into effect, whichever is later, the company or,
in the case of a merger or consolidation, the surviving company or the
consolidated company, must make a written offer to each dissenting
member to purchase his shares at a specified price that the company
determines to be their fair value; and if, within 30 days immediately
following the date on which the offer is made, the company making the
offer and the dissenting member agreed upon the price to be paid for his
shares, the company shall pay to the member the amount in money upon the
surrender of the certificates representing his shares.
(9) If the company and a dissenting member fail, within the period of 30
days referred to in subsection (8), to agree on the price to be paid
for the shares owned by the member, within 20 days immediately following
the date on which the period of 30 days expires, the following shall
apply:
(a) the company and the dissenting member shall each designate an
appraiser;
(b) the two designated appraisers together shall designate a third
appraiser;
(c) the three appraisers shall fix the fair value of the shares owned by
the dissenting member as of the close of business on the day prior
to the date on which the vote of members authorizing the action was
taken or the date on which written consent of members without a
meeting was obtained, excluding any appreciation or depreciation
directly or indirectly induced by the action or its proposal, and
that value is binding on the company and the dissenting member for
all purposes; and
(d) the company shall pay to the member the amount in money upon the
surrender by him of the certificates representing his shares.
(10) Shares acquired by the company pursuant to subsection (8) or (9) shall
be cancelled but if the shares are shares of a surviving company, they
shall be available for reissue.
(11) The enforcement by a member of his entitlement under this section
excludes the enforcement by a member of a right to which he might
otherwise be entitled by virtue of his holding shares, except that
this section does not exclude the right of the member to institute
proceedings to obtain relief on the ground that the action is illegal.
(12) Only subsection (1) and (8) to (11) shall apply in the case of a
redemption of shares by a company pursuant to the provisions of
section 81 and in such case the written offer to be made to the
dissenting member pursuant to subsection (8) shall be made within
seven days immediately following the direction given to a company
pursuant to section 81 to redeem its shares.
2
<PAGE>
SCHEDULE V
FINANCIAL STATEMENTS OF SANTA ELINA GOLD CORPORATION
<PAGE>
AUDITORS' REPORT
The Board of Directors
Santa Elina Gold Corporation
Sao Paulo - SP
We have audited the consolidated balance sheets of Santa Elina Gold
Corporation as at December 31, 1995 and 1994 and the consolidated statements
of operations and deficit and changes in financial position for the year ended
December 31, 1995 and the nine-month period from April 1, 1994 to December 31,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December
31, 1995 and 1994 and the results of its operations and the changes in its
financial position for the year ended December 31, 1995 and the nine-month
period from April 1, 1994 to December 31, 1994 in accordance with generally
accepted accounting principles.
Toronto, Canada (Signed) KPMG Peat Marwick Thorne
April 9, 1996 Chartered Accountants
1
<PAGE>
SANTA ELINA GOLD CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and short-term investments (note 8)..................... $ 6,035 $18,184
Accounts receivable and other................................ 234 364
Inventories (note 3)......................................... 1,598 1,175
Due from related parties (note 4)............................ -- 2,050
------- -------
7,867 21,773
Mining interests, net (note 5)................................ 44,503 37,379
------- -------
$52,370 $59,152
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness............................................ $ 2,538 $ --
Accounts payable and accrued liabilities..................... 5,656 9,336
Due to related parties (note 4).............................. 2,001 --
Debt (note 6)................................................ 7,343 11,394
Obligations under capital leases (note 7).................... 1,215 1,180
Other liabilities (note 8)................................... 4,699 --
------- -------
23,452 21,910
Other liabilities............................................. 3,333 --
Obligations under capital leases (note 7)..................... 909 1,930
Minority interest............................................. 691 957
Shareholders' equity (note 8):
Capital stock................................................ 46,545 41,558
Deficit...................................................... (22,509) (7,090)
Cumulative translation adjustment............................ (51) (113)
------- -------
23,985 34,355
Commitments and contingencies (notes 12 and 14)
$52,370 $59,152
======= =======
</TABLE>
On behalf of the Board:
(Signed) Paulo C. de Brito (Signed) John K. Hammes
Director Director
See accompanying notes to consolidated financial statements.
2
<PAGE>
SANTA ELINA GOLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
Year ended December 31, 1995 and the nine-month period
from April 1, 1994 to December 31, 1994
(In thousands of U.S. dollars except loss per share amounts)
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Revenues:
Net sales.................................................. $ 7,180 $ 6,401
Expenses:
Mining operating costs..................................... 10,525 6,877
Depreciation and depletion................................. 3,609 1,699
Exploration costs.......................................... 285 --
Corporate administration................................... 4,791 2,332
Interest................................................... 4,090 3,851
Other income and expense, net.............................. (492) 569
Write-off of mining interests.............................. 292 371
-------- -------
23,100 15,699
-------- -------
Loss for the period before minority interest................ (15,920) (9,298)
Minority interest........................................... 501 2,208
-------- -------
Loss for the period......................................... (15,419) (7,090)
Deficit, beginning of period................................ (7,090) (1,963)
Deficit eliminated (note 8)................................. -- 1,963
-------- -------
Deficit, end of period...................................... $(22,509) $(7,090)
======== =======
Loss per share (note 9)..................................... $ (0.12) $ (0.07)
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
SANTA ELINA GOLD CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
Year ended December 31, 1995 and the nine-month period
from April 1, 1994 to December 31, 1994
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Cash provided by (used in):
Operating activities:
Loss for the period......................................... $(15,419) $(7,090)
Items not affecting cash:
Depreciation and depletion................................. 3,609 1,699
Loss on sale of assets..................................... 79 --
Write-off of mining interests.............................. 292 371
Gain on dilution of investment in subsidiary............... (37) --
Minority interest.......................................... (501) (2,208)
Net changes in non-cash operating working capital balances:
Accounts receivable........................................ 132 (20)
Inventories................................................ (423) (357)
Accounts payable and accrued liabilities................... (348) 4,261
-------- -------
(12,616) (3,344)
Investing activities:
Mining interests............................................ (11,070) (23,747)
Acquisitions net of $1,834,000 cash acquired (note 11)...... -- (2,323)
-------- -------
(11,070) (26,070)
Financing activities:
Issue of capital stock (note 8)............................. 9,987 43,521
Minority interest investment in subsidiary.................. 272 2,050
Debt incurred............................................... 8,733 11,394
Repayment of debt........................................... (13,085) (18,836)
Due from related party...................................... 4,051 9,044
Obligations under capital leases............................ (986) 439
-------- -------
8,972 47,612
-------- -------
Increase (decrease) in cash position during the period....... (14,714) 18,198
Effect of exchange rate changes on cash...................... 27 (113)
Cash position, beginning of period........................... 18,184 99
-------- -------
Cash position, end of period................................. $ 3,497 $18,184
======== =======
</TABLE>
Cash position is comprised of cash and short-term investments and bank
indebtedness.
See accompanying notes to consolidated financial statements.
4
<PAGE>
SANTA ELINA GOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended December 31, 1995
(U.S. dollars, tabular dollar amounts in thousands)
GENERAL:
Santa Elina Gold Corporation is engaged principally, through its
subsidiaries, in the exploration, mining and processing of gold in South
America. Santa Elina Gold Corporation was incorporated under the laws of
the British Virgin Islands.
The accompanying consolidated financial statements present the financial
position, results of operations and changes in financial position of Santa
Elina Gold Corporation and its subsidiaries (collectively, the "Company")
after the reorganization of the Company on March 31, 1994 (the
"Reorganization").
1.BASIS OF PRESENTATION:
The recoverability of the amounts shown for mining interests and the
ability of the Company to meet its obligations as they become due is
dependent upon the ability of the Company to obtain financing and the
success of future operations.
2.SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements of Santa Elina have been prepared by
management in accordance with accounting principles generally accepted in
Canada, which, except as described in note 13, conform in all material
respects with accounting principles generally accepted in the United States
and practices prescribed by the United States Securities and Exchange
Commission, in so far as such accounting principles and practices affect
the measurement of financial statement amounts and balances.
(a) Principles of consolidation:
The consolidated financial statements include the financial statements
of Santa Elina Gold Corporation, 83% owned Mineracao Santa Elina
Industria e Comercio S.A. ("MSE"), 83% owned Mineracao Maraca Industria
e Comercio S.A., 65% owned Arauco Resources Corporation ("Arauco") and
various inactive, wholly owned or controlled subsidiaries which hold
mineral rights in certain areas containing potential mineral reserves.
(b) Foreign currency translation:
The Company's financial statements are presented in U.S. dollars, which
is the functional currency of the Company's corporate office and South
American operations.
The Canadian dollar is the functional currency of the Company's Canadian
operations, which are translated into U.S. dollars using the current
rate method. Under this method, all assets and liabilities are
translated at period-end exchange rates, and all revenue and expense
items are translated at the average rate of exchange for the period.
Exchange differences arising on translation are deferred as a separate
component of shareholders' equity.
(c) Revenue recognition:
Revenue is recognized when title passes to the customer. Settlement
adjustments arising from final determination of metal weights and assays
are reflected in sales when received.
(d) Mining interests:
Machinery, buildings and equipment are recorded at cost less
depreciation which is generally provided on a straight-line basis over
the lesser of their useful service lives or the estimated economic life
of the mine to which they relate, as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
------------
<S> <C>
Buildings .................................................... 25 years
Machinery and equipment....................................... 5 - 10 years
</TABLE>
Mineral property acquisition costs and expenditures on mineral
exploration programs are recorded at cost and deferred on a property-by-
property basis until the commercial viability of the property is
determined. Mine development costs are capitalized. When commercial
production is achieved, the capitalized costs are depleted using the
units-of-production method based on the estimated useful life of the
mine. If a property is abandoned, sold, or the net costs to date are
determined to be unrecoverable, the accumulated property and exploration
costs are removed from the accounts and any gains or losses thereon are
included in operations.
Interest is capitalized on expenditures relating to the construction of
major capital assets until the asset is ready for use.
(e) Inventories:
Finished goods and concentrates are valued at the lower of average cost
and estimated net realizable value. Materials and supplies are valued at
the lower of average cost and replacement cost.
5
<PAGE>
3.INVENTORIES:
Inventories are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
------ -------
<S> <C> <C>
Finished products and concentrates.......................... $ 422 $ --
Materials and supplies...................................... 1,176 1,175
------ -------
$1,598 $ 1,175
====== =======
4.DUE TO (FROM) RELATED PARTIES:
<CAPTION>
1995 1994
------ -------
<S> <C> <C>
Due to (from) minority shareholders......................... $2,001 $(2,050)
====== =======
</TABLE>
5.MINING INTERESTS:
<TABLE>
<CAPTION>
1995 1994
-------------------------------- ----------
ACCUMULATED
DEPRECIATION NET NET
COST AND DEPLETION BOOK VALUE BOOK VALUE
------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Buildings, machinery and
equipment...................... $34,236 $ 8,105 $26,131 $25,261
Mining properties and deferred
mining expenditures............ 17,552 1,292 16,260 9,299
Machinery and equipment under
capital leases................. 3,308 1,196 2,112 2,819
------- ------- ------- -------
$55,096 $10,593 $44,503 $37,379
======= ======= ======= =======
</TABLE>
Interest of $228,000 (1994 - $1,600,000) was capitalized to mining
interests on debt to finance the construction of the mill at the Sao
Vicente mine.
Mining properties and deferred mining expenditures relate to the following
properties:
<TABLE>
<CAPTION>
1995 1994
------- ------
<S> <C> <C>
Sao Vicente................................................... $ 2,459 $2,846
Sao Francisco................................................. 4,382 1,739
Fazenda Nova.................................................. 2,495 574
Chapada....................................................... 1,263 701
Other Brazil.................................................. 2,771 920
Other Chile................................................... 2,890 2,519
------- ------
$16,260 $9,299
======= ======
</TABLE>
6.DEBT:
<TABLE>
<CAPTION>
1995 1994
------ -------
<S> <C> <C>
Citibank N.A.:
Advances from Export Notes, bearing interest at 11.5% per
annum, denominated in U.S. dollars, maturing on November
22, 1996................................................... $3,039 $ --
Due on February 14, 1995, bearing interest from 8.9% to 9%
per annum, effectively denominated in
U.S. dollars, repaid in full at the maturity date.......... -- 1,100
Unibanco:
Advances from Export Notes, bearing interest at 14% and 15%
per annum, denominated in U.S. dollars, maturing on
February 24, May 20, May 29 and June 18, 1996.............. 3,323 --
30-day revolving loan, bearing interest at 2.5% per month
plus the Interbank Deposit Certificate rate, denominated in
local currency, repaid in full on January 23, 1995......... -- 6,194
Boavista:
30-day revolving loan, bearing interest at 2.5% per month
plus the Interbank Deposit Certificate rate, denominated in
local currency, payable on January 29, 1996................ 388 --
Advances from Export Notes, bearing interest at 15% per
annum, maturing on January 29, 1996........................ 532 --
Other....................................................... 61 4,100
------ -------
$7,343 $11,394
====== =======
</TABLE>
6
<PAGE>
7. OBLIGATIONS UNDER CAPITAL LEASES:
Future minimum capital lease payments by year, and in aggregate, are as
follows:
<TABLE>
<S> <C>
1996................................................................. $1,537
1997................................................................. 976
------
Total minimum lease payments......................................... 2,513
Less:
Amount representing interest........................................ 389
------
2,124
Less current portion................................................. 1,215
------
$ 909
======
</TABLE>
Interest expense incurred under capital leases for the period amounted to
$539,000 (1994 - $610,000).
8. CAPITAL STOCK:
The authorized capital consists of an unlimited number of common shares,
having no par value.
Legal stated capital is fixed at $20 million, and does not vary with the
number of shares issued or outstanding.
The deficit of $1,963,000 at March 31, 1994 was eliminated by a directors'
resolution effective September 26, 1994 on completion of the private
placement of Special Warrants, by a charge to capital stock. Other
previously accumulated deficit was eliminated by a directors' resolution
concurrent with the Reorganization, against contributed surplus.
<TABLE>
<CAPTION>
NUMBER OF
------------------------------------
SPECIAL ACQUISITION COMMON
WARRANTS WARRANTS SHARES AMOUNT
----------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Balance, March 31, 1994....... -- -- 100,000,000 $ --
Private placement of Special
Warrants..................... 15,000,000 -- -- 21,090
Share options exercised....... -- -- 66,667 --
Acquisition Warrants issued on
Arauco acquisition........... -- 159,578 -- 1,596
Common shares purchased by
controlling shareholder...... -- -- 3,600,000 5,400
Initial public offering....... -- -- 11,400,000 15,435
Exercise of Special Warrants.. (15,000,000) -- 15,000,000 --
Exercise of Acquisition
Warrants..................... -- (159,578) 1,063,854 --
----------- -------- ----------- -------
-- -- 131,130,521 43,521
Elimination of deficit........ -- -- -- (1,963)
----------- -------- ----------- -------
Balance, December 31, 1994.... -- -- 131,130,521 41,558
Common shares issued.......... -- -- 4,000,000 4,987
----------- -------- ----------- -------
Balance, December 31, 1995.... -- -- 135,130,521 $46,545
=========== ======== =========== =======
</TABLE>
The Company has received $10,000,000 (less costs of $13,000) in a private
placement for 4,000,000 common shares and an option to acquire a 50%
interest in the Company's Chapada property. $5,000,000 of the proceeds was
used for general working capital purposes, and the Company is committed to
spending $5,000,000 of the proceeds on a bankable feasibility study on the
property, of which $4,699,000 remains to be spent at December 31, 1995, and
is included in cash and short-term investments.
On September 26, 1994, the Company completed a private placement of
15,000,000 Special Warrants for net proceeds of $21,089,750 after related
costs of $1,410,250.
On December 30, 1994, the Company completed an initial public offering of
11,400,000 common shares for net proceeds of $15,435,475 after related
costs of $1,664,525. The initial public offering prospectus also qualified
for distribution 15,000,000 common shares issued on the exercise of the
15,000,000 Special Warrants, and 1,063,854 common shares issued on the
exercise of the 159,578 Arauco Acquisition Warrants (note 11).
The Company has issued share purchase warrants to the controlling
shareholder, for no consideration, to purchase 6,556,526 common shares at
$1.50 per share, exercisable until September 25, 2000.
Pursuant to the terms of the acquisition of Arauco (note 11), the Company
issued Common Share Purchase Warrants to purchase 1,063,854 common shares
at $1.50 per share for a period of 13 months from December 30, 1994.
At December 31, 1995, there were 2,000,000 common shares set aside for
issue under the employee share option plan. During 1995, 60,000 share
options were granted for a total of 1,193,333 share options outstanding at
December 31, 1995 as follows:
<TABLE>
<CAPTION>
EXERCISE NUMBER OF
EXPIRY DATE PRICE SHARES
----------- -------- ---------
<S> <C> <C>
March 27, 1999........................................... $1.35 60,000
September 25, 1999....................................... $1.50 1,133,333
----- ---------
Total number of shares and weighted average exercise
price................................................... $1.50 1,193,333
===== =========
</TABLE>
7
<PAGE>
9.LOSS PER SHARE:
Loss per share is based on the weighted average of 132,226,411 (1994 -
101,262,778) shares outstanding during the year ended December 31, 1995.
10.INCOME TAXES:
Up to December 31, 1993, the Company's Brazilian operations were exempt
from income taxes, as they are located in an incentive area of SUDAM (the
Amazon Development Agency). The Company is requesting a further exemption
for ten fiscal years beginning in 1994, which, in accordance with the
current legislation, will permit it to reduce its future income tax rate
from the statutory combined rate of 48% to 29%, and from 30% to 19% after
1995.
The Company has $15,882,797 of tax losses available for carry forward,
which have not been recognized for accounting purposes.
11.ACQUISITIONS:
On June 30, 1994, the Company subscribed for an 83% interest, comprised of
49% of the voting common shares and 100% of the outstanding non-voting
preference shares, in Mineracao Maraca Industria e Comercio S.A. for
$500,000. On September 27, 1994, the amount of $580,000 was used to pay the
United States dollar equivalent of the subscription amount owed to
Mineracao Maraca. The remaining 17% equity interest, represented by 51% of
the voting common stock, is a carried interest owned by the controlling
shareholders of the Company. The purchase price has been allocated to the
mining concessions in Brazil owned by Mineracao Maraca.
On October 4, 1994, the Company completed the acquisition of 3,394,779
common shares of Arauco from certain of its shareholders for $1,595,781,
paid by the issue of 159,578 Acquisition Warrants and 159,578 Common Share
Purchase Warrants. The Acquisition Warrants have been exercised for no
additional consideration for 1,063,854 common shares. The Common Share
Purchase Warrants may be exercised for 1,063,854 common shares, at an
exercise price of $1.50 per share for a period of 13 months from December
30, 1994. Concurrently, the Company acquired 2,000,000 Arauco shares from
treasury and 2,000,000 Arauco warrants for $1,789,576 (Cdn. $2,400,000).
The Arauco warrants are exercisable for one Arauco common share each at
Cdn. $1.50 until October 4, 1996. The Company has a 65% interest in Arauco,
which would increase to 72% if the Arauco Warrants are exercised, on a
fully diluted basis. The acquisition of Arauco has been accounted for by
the purchase method and consolidated from the acquisition date.
The net assets acquired of Arauco are as follows:
<TABLE>
<S> <C>
Current assets....................................................... $1,236
Mining interests..................................................... 2,463
Current liabilities.................................................. (42)
------
Consideration for interest acquired.................................. 3,657
Less cash acquired................................................... 1,834
------
Net consideration, net of cash acquired.............................. $1,823
======
</TABLE>
12.COMMITMENTS:
Operating lease:
The Company is party to an operating lease. Future minimum lease payments
under this lease at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996.................................................................... $180
1997.................................................................... 180
1998.................................................................... 180
1999.................................................................... 180
2000.................................................................... 105
----
$825
====
</TABLE>
13.RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
At December 31, 1994, the company's subsidiary had unpaid subscriptions of
$2,050,000 which was recorded as a credit to shareholders' equity in the
subsidiary's financial statements under Canadian accounting principles,
thus resulting in a credit to minority interest in the consolidated
financial statements. Under United States accounting principles, unpaid
subscriptions are reflected as a debit to shareholders' equity, and thus
accounting for this transaction under United States accounting principles,
in the consolidated financial statements, would result in a credit of
$2,050,000 in due from related parties and a debit to minority interest of
$2,050,000, resulting in a debit balance in minority interest of
$1,093,000.
14.CONTINGENCIES:
The Company has entered into various commitments in the ordinary course of
business, including commitments to perform assessment work and other
obligations necessary to maintain or protect its interests in mining
properties. It also has obligations pursuant to commitments under federal
and state environmental, health and safety permits.
8
<PAGE>
The Company's mining and exploration activities are subject to various
federal and state laws and regulations governing the protection of the
environment. The Company conducts its operations so as to protect the public
health and environment and believes its operations are materially in
compliance with all applicable laws and regulations. The Company has
incurred, and expects to incur in the future, expenditures to comply with
such laws and regulations. The Company has recorded a provision for
environmental and reclamation obligations based on management's estimate of
these costs. Such estimates are, however, subject to change based on
negotiations with regulatory authorities, changes in laws and regulations
and as new information becomes available.
15. INVESTMENT IN MINERACAO SANTA ELINA:
The Company's currrent mining operations are substantially carried out by
its 83% owned subsidiary Mineracao Santa Elina ("MSE"). Summarized below are
the operating revenues and expenses of the mining operations of MSE. Prior
to the Reorganization completed on March 31, 1994, MSE was comprised of
several mining and non-mining subsidiaries and therefore the mining
operations did not constitute a legal or reporting entity for which complete
financial statements were prepared.
The operating revenues and expenses of the mining operations of MSE do not
include the allocation of certain revenues, costs and expenses indirectly
relating to the business, such as certain corporate administrative expenses,
interest income and expenses and income taxes.
<TABLE>
<CAPTION>
12 MONTHS ENDED
-------------------------
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
Revenue............................................ $ 8,913 $ 9,505
Expenses:
Mining operating costs........................... 8,371 9,081
Depreciation and depletion....................... 2,166 1,505
General and administrative....................... 3,115 1,507
Interest......................................... 610 229
Foreign exchange loss (gain)..................... 187 (1,581)
Loss on disposal of fixed assets................. 101 --
------- -------
(14,550) (10,741)
------- -------
Excess of operating expenses over revenues......... $(5,637) $(1,236)
======= =======
</TABLE>
16. SUBSEQUENT EVENT:
On April 10, 1996, Echo Bay Mines Ltd. ("Echo Bay"), Sercor Ltd. (a private
company that owns 66% of the Company) and the Company, announced that they
have signed an agreement enabling Echo Bay to increase its ownership of the
Company from 7% to 50% in a share exchange transaction. The agreement is
subject to regulatory approvals and approval by two-thirds of the minority
shareholders of the Company. On completion, Echo Bay and Sercor would each
own 50% of the Company.
9
<PAGE>
NOTICE TO READER
We have compiled the consolidated balance sheet of Santa Elina Gold
Corporation as at March 31, 1996 and the consolidated statements of operations
and deficit and changes in financial position for the three month period then
ended from information provided by management. We have not audited, reviewed
or otherwise attempted to verify the accuracy or completeness of such
information. Readers are cautioned that these statements may not be
appropriate for their purposes.
Toronto, Canada KPMG Peat Marwick Thorne
May 16, 1996 Chartered Accountants
10
<PAGE>
SANTA ELINA GOLD CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and short-term investments (note 3).............. $ 5,518 $ 6,035
Accounts receivable and other......................... 221 234
Inventories........................................... 1,625 1,598
-------- --------
7,364 7,867
Mining interests, net (note 1)......................... 44,674 44,503
-------- --------
$ 52,038 $ 52,370
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness..................................... $ -- $ 2,538
Accounts payable and accrued liabilities.............. 5,905 5,656
Due to related party.................................. 1,374 2,001
Debt.................................................. 14,087 7,343
Obligations under capital leases...................... 1,278 1,215
Other liabilities (note 3)............................ 4,622 4,699
-------- --------
27,266 23,452
Other liabilities...................................... 3,022 3,333
Obligations under capital leases....................... 566 909
Minority interest...................................... 662 691
Shareholders' equity:
Capital stock......................................... 46,545 46,545
Deficit............................................... (25,978) (22,509)
Cumulative translation adjustment..................... (45) (51)
-------- --------
20,522 23,985
-------- --------
$ 52,038 $ 52,370
======== ========
</TABLE>
Contingency and commitment (notes 1 and 3)
On behalf of the Board:
(Signed) Paulo C. de Brito (Signed) John K. Hammes
Director Director
See accompanying notes to the consolidated financial statements.
11
<PAGE>
SANTA ELINA GOLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
QUARTER ENDED MARCH 31,
(In thousands of U.S. dollars except loss per share amounts)
<TABLE>
<CAPTION>
1996 1995
----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues:
Net sales.............................................. $ 2,494 $ 789
Expenses:
Mining operating costs................................. 2,974 1,653
Depreciation and depletion............................. 1,049 434
Corporate administration............................... 1,280 1,049
Interest............................................... 572 496
Other income and expense, net.......................... 117 39
------- -------
5,992 3,671
------- -------
Loss for the period before minority interest............ (3,498) (2,882)
Minority interest....................................... 29 21
------- -------
Loss for the period..................................... (3,469) (2,861)
======= =======
Loss per share.......................................... $ 0.03 $ 0.02
======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
12
<PAGE>
SANTA ELINA GOLD CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
QUARTER ENDED MARCH 31,
(In Thousands of U.S. Dollars)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash provided by (used in):
Operating activities:
Loss for the period................................... $(3,469) (2,861)
Items not affecting cash:
Depreciation and depletion........................... 1,049 434
Loss on sale of assets............................... -- 59
Gain on dilution of investment in subsidiary......... -- (23)
Minority interest.................................... (29) (21)
Net changes in non-cash operating working capital
balances:
Accounts receivable.................................. 13 (196)
Inventories.......................................... (27) (509)
Accounts payable and accrued liabilities............. (62) (894)
------- --------
(2,525) (4,011)
Investing activities:
Mining interests...................................... (1,214) (4,901)
Financing activities:
Minority interest investment in subsidiary............ -- 57
Debt incurred......................................... 6,951 --
Repayment of debt..................................... (284) (5,520)
Due to related party.................................. (627) --
Obligations under capital leases...................... (280) (232)
------- --------
5,760 (5,695)
------- --------
Increase (decrease) in cash position during the period. 2,021 (14,607)
Effect of exchange rate changes on cash................ -- (10)
Cash position, beginning of period..................... 3,497 18,184
------- --------
Cash position, end of period........................... $ 5,518 $ 3,567
======= ========
</TABLE>
Cash position is comprised of cash and short-term investments and bank
indebtedness.
See accompanying notes to the consolidated financial statements.
13
<PAGE>
SANTA ELINA GOLD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quarter ended March 31, 1996
(Unaudited)
1.BASIS OF PRESENTATION:
These financial statements have been presented on the going concern basis
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business.
At March 31, 1996, the Company has a working capital deficiency of
$19,902,000. Its ability to pay its obligations as they become due, its
continued operations and the recoverability of the amounts shown for mining
interests is dependent upon the ability of the Company to obtain financing
and the success of future operations.
Should the Company be unable to restructure its financial arrangements, the
going concern assumption would no longer be appropriate and adjustments
would be necessary in the carrying values of assets and liabilities, the
reported net earnings and the balance sheet classifications used.
2.ECHO BAY TRANSACTION:
On April 10, 1996, Echo Bay Mines, Ltd. ("Echo Bay"), Sercor Ltd.
("Sercor") (a private company that owns 66% of the Company) and the
Company, announced that they had signed an agreement enabling Echo Bay to
increase its ownership of the Company from 7% to 50% in a share exchange
transaction. The agreement is subject to regulatory approvals and approval
by two-thirds of the minority shareholders of the Company. On completion,
Echo Bay and Sercor would each own 50% of the Company.
In connection with the agreement, Echo Bay and Sercor have announced that
they will capitalize the Company in the aggregate cash amount of
$25,000,000.
3.COMMITMENT:
The Company is committed to spending $5,000,000 on a bankable feasibility
study on the Chapada property, of which $4,622,000 remains to be spent at
March 31, 1996, and is included in cash and short-term investments.
4.INVESTMENT IN ARAUCO RESOURCES CORPORATION:
On May 10, 1996, the Company's 65% owned investee, Arauco Resources
Corporation ("Arauco"), completed a private placement of 8 million units
for $0.28 per unit, each unit comprising one common share and one share
purchase warrant. Concurrently, the Company agreed to exchange 4.8 million
shares which it held in Arauco, which shares were freely tradeable, in
exchange for 4.8 million restricted shares issued in the private placement,
and 2.45 million share purchase warrants. As a result of these
transactions, the Company's interest in Arauco has been diluted from 65% to
38% effective May 10, 1996, resulting in a dilution loss of approximately
$740,000, which will be recorded in the Company's second quarter financial
statements.
5.RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES:
The consolidated financial statements of the Company have been prepared by
management in accordance with accounting principles generally accepted in
Canada, which, except as described below, conform in all material respects
with accounting principles generally accepted in the United States and
practices prescribed by the United States Securities and Exchange
Commission, in so far as such accounting principles and practices affect
the measurement of financial statement amounts and balances.
At March 31, 1995 and December 31, 1994, the Company's subsidiary had
unpaid subscriptions of $2,050,000 which was recorded as a credit to
shareholders' equity in the subsidiary's financial statements under
Canadian accounting principles, thus resulting in a credit to minority
interest in the consolidated financial statements. Under United States
accounting principles, unpaid subscriptions are reflected as a debit to
shareholders' equity, and thus accounting for this transaction under United
States accounting principles, in the consolidated financial statements,
would result in a credit of $2,050,000 in due from related parties and a
debit to minority interest of $2,050,000, resulting in a debit balance in
minority interest of $1,095,000 (December 31, 1994--$1,093,000).
14
<PAGE>
SCHEDULE VI
PRO FORMA FINANCIAL STATEMENTS
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
The pro forma condensed consolidated balance sheet and statement of
earnings are based upon the audited financial statements of Echo Bay and Santa
Elina as of and for the year ended December 31, 1995 and the unaudited
financial statements of Echo Bay and Santa Elina as of and for the three
months ended March 31, 1996 adjusted to reflect Echo Bay increasing its
ownership from 7% to 50% of the outstanding Santa Elina Common Shares. Each
Shareholder of Santa Elina other than Echo Bay and Sercor will receive one
Echo Bay Common Share for each 6.67 Santa Elina Common Shares held. Echo Bay
will purchase 23,479,185 Santa Elina Common Shares from Sercor in exchange for
3,520,118 Echo Bay Common Shares, which is the same ratio offered to the
public shareholders. In addition, Echo Bay will issue up to 50,535 Echo Bay
Common Shares in exchange for cancellation of the 1,193,333 outstanding
options on Santa Elina Common Shares. Upon consummation of the transactions,
Echo Bay will have issued 8,830,934 Echo Bay Common Shares and Echo Bay and
Sercor will each own 50% of Santa Elina. As the transaction will result in the
current shareholders of Echo Bay retaining a majority of Echo Bay Common
Shares, the pro forma transaction has been accounted for as a purchase of 43%
of Santa Elina by Echo Bay. Echo Bay's total interest in Santa Elina will be
50% when added to its existing 7% interest. Santa Elina has been consolidated
into Echo Bay using the proportionate consolidation method, as Echo Bay and
Sercor will jointly control Santa Elina. Under the proportionate consolidation
method, 50% of Santa Elina's assets, liabilities, revenues and expenses will
be included in the consolidated financial statements of Echo Bay.
The Pro Forma Condensed Consolidated Financial Statements should be read in
conjunction with the historical consolidated financial statements, including
the notes thereto, of Echo Bay and Santa Elina which are included elsewhere in
this Circular.
1
<PAGE>
COMPILATION REPORT
To the Directors of
Echo Bay Mines Ltd.
We have reviewed, as to compilation only, the accompanying pro forma
condensed consolidated balance sheet of Echo Bay Mines Ltd. as at March 31,
1996 and the pro forma condensed consolidated statements of earnings for the
three months then ended and for the year ended December 31, 1995 which have
been prepared for inclusion in the notice and management information circular,
proxy statement and prospectus of Santa Elina Gold Corporation related to the
offer made by Echo Bay Mines Ltd. to acquire 43% of the outstanding common
shares of Santa Elina Gold Corporation. In our opinion, the pro forma
condensed consolidated balance sheet and statements of earnings have been
properly compiled to give effect to the proposed transaction and the
assumptions described in the notes thereto.
Edmonton, Canada Ernst & Young
Chartered Accountants
June 19, 1996
COMMENT FOR UNITED STATES READERS ON DIFFERENCES BETWEEN
CANADIAN AND UNITED STATES REPORTING STANDARDS
The above opinion, provided solely pursuant to Canadian requirements, is
expressed in accordance with standards of reporting generally accepted in
Canada. Such standards contemplate the expression of an opinion with respect
to the compilation of pro forma financial statements. United States standards
do not provide for the expression of an opinion on the compilation of pro
forma financial statements. To report in conformity with United States
standards on the reasonableness of the pro forma assumptions and adjustments
and their application to the historical financial statement amounts would
require an examination or review which would be substantially greater in scope
than the procedures that we have conducted. Consequently, under United States
standards, we would be unable to express any opinion with respect to the
compilation of the accompanying pro forma balance sheet and statements of
earnings.
Edmonton, Canada Ernst & Young
Chartered Accountants
June 19, 1996
2
<PAGE>
ECHO BAY MINES LTD.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(thousands of U.S. dollars)
<TABLE>
<CAPTION>
HISTORICAL
SANTA ELINA
HISTORICAL (50% - NOTE PRO FORMA
ECHO BAY 1) ADJUSTMENTS NOTES CONSOLIDATED
---------- ------------- ----------- ----- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $149,981 $ 2,759 $ (1,550) 2(a) $151,190
Interest and accounts
receivable............ 14,209 110 14,319
Inventories............ 43,204 813 44,017
Prepaid expenses and
other assets.......... 6,053 -- 6,053
-------- ------- -------- --------
213,447 3,682 (1,550) 215,579
Plant and equipment
(net).................. 251,398 13,796 265,194
Mining properties (net). 328,554 8,541 1,550 2(a)
(7,999) 2(b)
120,267 2(c)
13,073 2(d) 463,986
Long-term investments
and other.............. 55,469 -- (13,073) 2(d) 42,396
-------- ------- -------- --------
$848,868 $26,019 $112,268 $987,155
======== ======= ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued liabilities... $ 53,186 $ 6,589 $ $ 59,775
Income and mining taxes
payable............... 2,249 -- 2,249
Gold and other
financings............ 35,833 7,044 42,877
Deferred income........ 12,192 -- 12,192
-------- ------- --------
103,460 13,633 117,093
Gold and other
financings............. 114,373 -- 114,373
Deferred income......... 12,920 -- 12,920
Other long-term
obligations............ 32,337 2,125 34,462
Deferred income taxes... 8,298 -- 8,298
-------- ------- --------
271,388 15,758 287,146
-------- ------- --------
Common shareholders'
equity:
Common shares.......... 623,577 23,272 120,267 2(c)
(21,010) 2(e) 746,106
Deficit................ (31,265) (12,989) (7,999) 2(b)
20,988 2(e) (31,265)
Foreign currency
translation........... (14,832) (22) 22 2(c) (14,832)
-------- ------- -------- --------
577,480 10,261 112,268 700,009
-------- ------- -------- --------
$848,868 $26,019 $112,268 $987,155
======== ======= ======== ========
</TABLE>
These pro forma condensed consolidated financial statements are prepared on the
basis set forth in the Notes hereto and are not necessarily indicative of the
future financial performance of the combined companies.
3
<PAGE>
ECHO BAY MINES LTD.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(thousands of U.S. dollars)
<TABLE>
<CAPTION>
HISTORICAL
SANTA ELINA
HISTORICAL (50% - NOTE PRO FORMA
ECHO BAY 1) ADJUSTMENTS NOTES CONSOLIDATED
---------- ------------- ----------- ----- ------------
<S> <C> <C> <C> <C> <C>
Revenue................. $ 67,750 $ 1,247 $ $ 68,997
-------- ------- --------
Expenses:
Operating costs........ 44,565 1,487 46,052
Royalties.............. 2,103 -- 2,103
Production taxes....... 709 -- 709
Depreciation........... 12,885 461 13,346
Amortization........... 5,612 64 5,676
Reclamation............ 1,144 -- 1,144
General and
administrative........ 3,332 640 (320) 3(a) 3,652
Exploration expense.... 9,303 -- 160 3(a)
1,129 3(b) 10,592
Development properties
expense............... 4,705 -- 4,705
Other (income) expense. (997) 44 (953)
Interest (income)
expense............... 151 286 437
-------- ------- ----- --------
83,512 2,982 969 87,463
-------- ------- ----- --------
Loss before taxes ...... (15,762) (1,735) (969) (18,466)
Income taxes............ (394) -- -- (394)
-------- ------- ----- --------
Net earnings (loss)..... $(16,156) $(1,735) $(969) $(18,860)
======== ======= ===== ========
Earnings (loss) per
share,
basic and fully
diluted................ $ (0.12) $ (0.14)
======== ========
Weighted average number
of shares outstanding
(thousands)............ 130,046 138,877
======== ========
</TABLE>
These pro forma condensed consolidated financial statements are prepared on the
basis set forth in the Notes hereto and are not necessarily indicative of the
future financial performance of the combined companies.
4
<PAGE>
ECHO BAY MINES LTD.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995
(thousands of U.S. dollars)
<TABLE>
<CAPTION>
HISTORICAL
SANTA ELINA
HISTORICAL (50% - NOTE PRO FORMA
ECHO BAY 1) ADJUSTMENTS NOTES CONSOLIDATED
---------- ------------- ----------- ----- ------------
<S> <C> <C> <C> <C> <C>
Revenue................. $360,730 $ 3,590 $ $364,320
-------- ------- --------
Expenses:
Operating costs........ 212,182 5,263 217,445
Royalties.............. 8,434 -- 8,434
Production taxes....... 4,324 -- 4,324
Depreciation........... 56,182 1,576 57,758
Amortization........... 33,221 228 33,449
Reclamation............ 5,005 -- 5,005
General and
administrative........ 12,169 2,396 (1,198) 3(a) 13,367
Exploration expense.... 46,527 142 599 3(a)
3,428 3(b) 50,696
Development properties
expense............... 23,269 -- 23,269
Other (income) expense. 9,004 (350) 8,654
Interest (income)
expense............... (4,843) 2,045 (2,798)
-------- ------- ------- --------
405,474 11,300 2,829 419,603
-------- ------- ------- --------
Loss before taxes ...... (44,744) (7,710) (2,829) (55,283)
Income tax benefit...... 3,208 -- -- 3,208
-------- ------- ------- --------
Loss before preferred
stock dividends........ (41,536) (7,710) (2,829) (52,075)
Dividends on preferred
stock of subsidiary.... (8,524) -- -- (8,524)
-------- ------- ------- --------
Net earnings (loss)..... $(50,060) $(7,710) $(2,829) $(60,599)
======== ======= ======= ========
Earnings (loss) per
share,
basic and fully
diluted................ $ (0.43) $ (0.48)
======== ========
Weighted average number
of shares outstanding
(thousands)............ 116,233 125,064
======== ========
</TABLE>
These pro forma condensed consolidated financial statements are prepared on the
basis set forth in the Notes hereto and are not necessarily indicative of the
future financial performance of the combined companies.
5
<PAGE>
ECHO BAY MINES LTD.
NOTES TO THE PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AND STATEMENTS OF
EARNINGS
(in U.S. dollars unless otherwise stated)
1.BASIS OF PRESENTATION
The pro forma condensed consolidated balance sheet and statement of
earnings are based upon the audited financial statements of Echo Bay and
Santa Elina as of and for the year ended December 31, 1995 and the
unaudited financial statements of Echo Bay and Santa Elina as of and for
the three months ended March 31, 1996 adjusted to reflect Echo Bay
increasing its ownership from 7% to 50% of the outstanding common shares of
Santa Elina. Each shareholder of Santa Elina other than Echo Bay and Sercor
will receive one common share of Echo Bay for each 6.67 common shares of
Santa Elina held. Echo Bay will purchase 23,479,185 common shares of Santa
Elina from Sercor in exchange for 3,520,118 common shares of Echo Bay,
which is the same ratio offered to the public shareholders. In addition,
Echo Bay will issue up to 50,535 common shares in exchange for cancellation
of the 1,193,333 outstanding options on Santa Elina common shares. Upon
consummation of the transactions, Echo Bay will have issued 8,830,934
common shares and Echo Bay and Sercor will each own 50% of Santa Elina. As
the transaction will result in the current shareholders of Echo Bay
retaining a majority of Echo Bay shares, the pro forma transaction has been
accounted for as a purchase of 43% of Santa Elina by Echo Bay. Echo Bay's
total interest in Santa Elina will be 50% when added to its existing 7%
interest. Santa Elina has been consolidated into Echo Bay using the
proportionate consolidation method, as Echo Bay and Sercor will jointly
control Santa Elina. Under the proportionate consolidation method, 50% of
Santa Elina's assets, liabilities, revenues and expenses will be included
in the consolidated financial statements of Echo Bay.
Historical Santa Elina information is shown at Echo Bay's 50% interest.
Certain figures in the historical Santa Elina financial statements have
been reclassified to conform with Echo Bay's classifications.
Effective January 1, 1996, Echo Bay adopted the Gold Production Cost
Standard developed by the Gold Institute as a means of facilitating
meaningful comparisons among companies through uniform presentation of cost
data industry wide. Certain expenses in the December 31, 1995 pro forma
statement of earnings have been reclassified to conform with this standard.
The primary differences between the December 31, 1995 basis of presentation
as shown in the pro forma statement of earnings and the December 31, 1995
basis of presentation as shown in Echo Bay's Form 10-K are to show
reclamation expenses as a separate component of expenses instead of
combining reclamation expenses with operating costs and to show production
taxes as a separate component of expenses instead of combining production
taxes with income taxes.
2.PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The pro forma condensed consolidated balance sheet reflects the acquisition
as though it had occurred on March 31, 1996 and gives effect to the
following:
(A) TRANSACTION COSTS
Transaction costs are estimated to total $1.6 million, including those
of Echo Bay and 50% of those of Santa Elina.
(B) MINING PROPERTIES
Santa Elina's accounting policy is to capitalize mineral property
acquisition costs and expenditures on mineral exploration programs on a
property-by-property basis until the commercial viability of the
property is determined. Echo Bay's accounting policy is to expense the
costs of exploration programs until such time as the properties are
identified as having development potential. Mining properties have been
reduced by $8.0 million to conform to Echo Bay's accounting policies.
(C) PURCHASE OF SANTA ELINA SHARES
Each shareholder of Santa Elina other than Echo Bay and Sercor Ltd. will
receive one common share of Echo Bay for each 6.67 common shares of
Santa Elina held. Echo Bay will purchase 23,479,185 common shares of
Santa Elina from Sercor in exchange for 3,520,118 common shares of Echo
Bay, which is the same ratio offered to the public shareholders. In
addition, Echo Bay will issue up to 50,535 common shares in
6
<PAGE>
exchange for cancellation of the 1,193,333 outstanding options on Santa
Elina common shares. Upon consummation of the transactions, Echo Bay will
have issued approximately 8,830,934 common shares in exchange for
58,565,260 common shares of Santa Elina. Echo Bay will achieve a 50%
ownership of Santa Elina, when added to the 9,000,000 common shares of
Santa Elina already owned by Echo Bay.
The $120.3 million excess of the purchase price over the adjusted book
value of the net assets of Santa Elina has been allocated to mining
properties based on the relative fair values of the assets acquired.
<TABLE>
<S> <C>
Shares issued (8,830,934 shares at the April 9, 1996 share
price of $13.875)............................................. $122,529
Adjusted book value of net assets acquired..................... (2,262)
--------
Excess purchase price allocated to mining properties........... $120,267
========
</TABLE>
(D) CURRENT 7% INTEREST IN SANTA ELINA
Echo Bay's current 7% interest in Santa Elina has been reclassified to
mining properties.
(E) ELIMINATION OF SANTA ELINA SHAREHOLDERS' EQUITY
Santa Elina's shareholders' equity accounts have been eliminated as
required by the purchase method of accounting for this transaction.
3. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
The pro forma condensed consolidated statements of earnings for the three
months ended March 31, 1996 and for the year ended December 31, 1995 assume
that the acquisition occurred on January 1 of each year and give effect to
the following:
(A) PROJECT SUPPORT COSTS
Santa Elina's general and administrative expenses include exploration,
geological, metallurgical and engineering support for Santa Elina's
exploration and development properties. As these expenses directly relate
to the properties, these expenses would have been classified as
exploration expense or capitalized to development properties under Echo
Bay's accounting policies. Accordingly, $0.2 million for the three months
ended March 31, 1996 and $0.6 million for the year ended December 31,
1995 has been charged to exploration expense and $0.2 million for the
three months ended March 31, 1996 and $0.6 million for the year ended
December 31, 1995 would have been capitalized to mining properties.
(B) EXPLORATION EXPENSES
Santa Elina's accounting policy is to capitalize mineral property
acquisition costs and expenditures on mineral exploration programs on a
property-by-property basis until the commercial viability of the property
is determined. Echo Bay's accounting policy is to expense the costs of
exploration programs until such time as the properties are identified as
having development potential. The adjustment represents exploration and
development expenses that were capitalized by Santa Elina during the
period but would have been expensed under Echo Bay's accounting policies.
(C) RATIONALIZATION BENEFITS OR COSTS
No attempt has been made to estimate rationalization benefits or costs.
4. DIFFERENCES BETWEEN CANADIAN AND U.S. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
The companies prepare their consolidated financial statements in accordance
with accounting principles generally accepted in Canada. These differ in
some respects from those in the United States, as described below.
In accordance with Canadian GAAP, certain long-term foreign exchange
contracts are considered to be hedges of the cost of goods to be purchased
in foreign currencies in future periods. Gains and losses related to
changes in market values of such contracts are deferred, then recognized as
a component of the cost of goods when the related
7
<PAGE>
hedged purchases occur. Under U.S. GAAP, changes in market value would be
included in current earnings. The change in market value of Echo Bay's
foreign exchange contracts was an unrealized gain of $0.7 million for the
three months ended March 31, 1996 and an unrealized gain of $3.6 million
for the year ended December 31, 1995. The unrealized gain on these
contracts from inception to March 31, 1996 was $8.5 million.
In accordance with Canadian GAAP, some of Echo Bay's share investments are
carried at cost as long-term investments. These investments would be
written down and a loss recognized in earnings only when a loss in value is
other than a temporary decline. Under U.S. GAAP, these investments would be
marked to market, with unrealized gains or losses excluded from earnings
and reported as a separate component of common shareholders' equity, net of
tax. The unrealized gain on share investments is $18.5 million after a nil
income tax effect as of March 31, 1996.
Under U.S. GAAP, the pro forma consolidated net loss would have been $18.2
million for the three months ended March 31, 1996 and the pro forma loss
per share would have been $0.13.
Under U.S. GAAP, the pro forma consolidated net loss would have been $57.0
million for year ended December 31, 1995 and the pro forma loss per share
would have been $0.46.
Under U.S. GAAP, the pro forma consolidated long-term investments and other
assets, deficit, and common shareholders' equity would have been $69.4
million, $22.8 million and $727.0 million respectively at March 31, 1996.
In October 1995, the U.S. Financial Accounting Standards Board ("FASB")
issued Statement No. 123, "Accounting and Disclosure of Stock-Based
Compensation". Statement No. 123 is applicable for fiscal years beginning
after December 15, 1995 and gives the option to either follow fair value
accounting or to follow Accounting Principles Board Option No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and related
Interpretations. Echo Bay has determined that it will elect to continue to
follow APB No. 25 and related Interpretations in accounting for its
employee and director stock options.
Effective January 1, 1996, Echo Bay adopted FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", which requires impairment losses to be recorded
on long-lived assets used in operations when indicators of impairment are
present. Implementation of Statement No. 121 had no effect on the financial
statements of Echo Bay.
8
<PAGE>
SCHEDULE VII
FORM 10-K OF ECHO BAY MINES LTD.
(SEPARATELY ATTACHED)
<PAGE>
ECHO BAY MINES LTD.
FORM 10-K
FILED ON MARCH 21, 1996
AND
MANAGEMENT PROXY CIRCULAR
FILED ON MARCH 29, 1996
AND
FORM 10-Q
FILED ON MAY 15, 1996
(CONSTITUTING, SCHEDULES VII, VIII AND IX,
RESPECTIVELY, TO THE MANAGEMENT
INFORMATION CIRCULAR
AND PROXY STATEMENT
OF SANTA ELINA GOLD CORPORATION
DATED JUNE 21, 1996
IN RESPECT OF A SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD ON
JULY 9, 1996)
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995..................................
[_] 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: 1-8542
----------------
ECHO BAY MINES LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
INCORPORATED UNDER THE LAWS OF CANADA NONE
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
SUITE 1000, 6400 S. FIDDLER'S GREEN 80111-4957
CIRCLE ENGLEWOOD, COLORADO (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (303) 714-8600
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
----------------------- -----------------------------------------
Common shares, no par value American Stock Exchange
----------------
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
<TABLE>
<S> <C>
Aggregate market value of the voting securities held
by non-affiliates of the registrant at March 15, 1996..... U.S.$1,692,533,492
Number of common shares outstanding as of March 15, 1996... 130,476,039
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Accounting Principles...................................................... 3
Reporting Currency........................................................ 3
Gold Prices............................................................... 3
Silver Prices............................................................. 3
Exchange Rates............................................................ 3
Conversion Table.......................................................... 4
Forward-Looking Information............................................... 4
PART I
ITEMS 1 AND 2--BUSINESS AND PROPERTIES..................................... 5
Introduction.............................................................. 5
Risk Factors............................................................. 5
Property and Office Locations............................................ 6
Mine Processing........................................................... 7
General Description of Mining and Mill Recovery Process.................. 8
General Description of Mining and Heap-Leach Recovery Process............ 9
Operations Summary........................................................ 10
Gold Production.......................................................... 10
Silver Production........................................................ 10
Cash Production Cost per Ounce of Gold................................... 10
Breakeven Cost per Ounce................................................. 10
Reserves.................................................................. 11
Change in Proven and Probable Reserves................................... 13
Other Mineralization...................................................... 14
History of the Company.................................................... 15
Executive Officers of the Registrant...................................... 16
McCoy/Cove................................................................ 17
Geology and Ore Reserves................................................. 19
Mining and Processing.................................................... 21
Round Mountain............................................................ 22
Geology and Ore Reserves................................................. 23
Mining and Processing.................................................... 25
Lupin..................................................................... 26
Geology and Ore Reserves................................................. 27
Mining and Processing.................................................... 28
Supplies, Utilities and Transportation................................... 29
Water Supply and Waste Disposal.......................................... 30
Kettle River.............................................................. 30
Geology and Ore Reserves................................................. 31
Mining and Processing.................................................... 32
Overlook................................................................. 32
Lamefoot................................................................. 32
K-2 Project--Exploration and Development................................. 32
Development Programs...................................................... 33
Alaska-Juneau............................................................ 33
Kingking................................................................. 34
Aquarius................................................................. 35
Paredones Amarillos...................................................... 35
Chapada.................................................................. 36
Exploration............................................................... 36
Sunnyside................................................................. 36
Kensington................................................................ 37
Other..................................................................... 37
Precious Metal Sales and Hedging Activities.............................. 37
Government Regulation--Canada............................................ 38
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Government Regulation--United States.................................... 39
Employees............................................................... 41
Insurance and Mining Risks.............................................. 41
Competition............................................................. 41
Supplies, Utilities and Transportation.................................. 42
Waste Disposal.......................................................... 42
Royalties............................................................... 42
Title Matters........................................................... 42
Glossary................................................................. 43
ITEM 3--LEGAL PROCEEDINGS................................................. 50
Sunnyside................................................................ 50
Alaska-Juneau............................................................ 50
McCoy/Cove............................................................... 50
Other.................................................................... 50
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 50
PART II
ITEM 5--MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER
MATTERS.................................................................. 51
Market Information....................................................... 51
Dividends................................................................ 51
Certain Tax Matters...................................................... 52
United States Federal Income Tax Considerations......................... 52
Canadian Federal Income Tax Considerations.............................. 52
ITEM 6--SELECTED FINANCIAL DATA........................................... 53
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 55
Summary.................................................................. 56
Results of Operations.................................................... 56
Capital, Exploration and Development Spending............................ 59
Financial Condition, Liquidity and Capital Resources..................... 60
Commitments and Contingencies............................................ 61
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 62
Quarterly Financial Highlights........................................... 91
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE..................................................... 91
PART III
ITEM 10--DIRECTORS OF THE REGISTRANT...................................... 91
ITEM 11--EXECUTIVE COMPENSATION........................................... 91
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 91
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 91
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.. 92
SIGNATURES................................................................ 94
</TABLE>
2
<PAGE>
ACCOUNTING PRINCIPLES
The company's accounts are stated in accordance with Canadian Generally
Accepted Accounting Principles.
REPORTING CURRENCY
In this report, unless otherwise specified, all dollar amounts are expressed
in U.S. dollars.
GOLD PRICES
The following table sets forth annual high, low, average and end of period
afternoon fixing gold prices in U.S. dollars per troy ounce on the London
Bullion Market:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996* 1995 1994 1993 1992 1991
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
High............................................. $415 $396 $396 $406 $360 $403
Low.............................................. 389 372 370 326 330 344
Average.......................................... 402 384 384 360 344 362
End of Period.................................... 401 387 383 392 333 353
</TABLE>
- --------
* Through February 29, 1996.
On March 15, 1996, the afternoon fixing price of gold on the London Bullion
Market was $396.
SILVER PRICES
The following table sets forth annual high, low, average and end of period
noon prices in U.S. dollars per troy ounce as quoted by Handy & Harman:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996* 1995 1994 1993 1992 1991
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
High........................................ $5.79 $6.01 $5.76 $5.37 $4.32 $4.53
Low......................................... 5.24 4.36 4.63 3.55 3.63 3.58
Average..................................... 5.55 5.20 5.29 4.30 3.94 4.04
End of Period............................... 5.52 5.11 4.87 5.08 3.67 3.85
</TABLE>
- --------
* Through February 29, 1996.
On March 15, 1996, the noon price of silver quoted by Handy & Harman was
$5.56.
EXCHANGE RATES
The exchange rates of the Canadian dollar to the U.S. dollar at the end of
each period and the high, the low and the average exchange rates for each
period, were as follows (such rates, which are expressed in Canadian dollars,
being the noon buying rates in New York City for cable transfers in U.S.
dollars as certified for customs purposes by the Federal Reserve Bank of New
York).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996* 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
High...................... C$1.3530 C$1.3285 C$1.3103 C$1.2428 C$1.1420 C$1.1203
Low....................... 1.3822 1.4238 1.4078 1.3443 1.2885 1.1645
Average................... 1.3727 1.3689 1.3699 1.2939 1.2143 1.1460
End of Period............. 1.3728 1.3655 1.4030 1.3255 1.2714 1.1558
</TABLE>
- --------
* Through February 29, 1996.
3
<PAGE>
On March 15, 1996, the noon buying rate in New York City for cable transfers
in U.S. dollars as certified for customs purposes by the Federal Reserve Bank
of New York was U.S.$1.00 = C$1.3640 (equivalent to U.S.$0.7331 = C$1.00).
CONVERSION TABLE
For ease of reference, the following conversion factors are provided.
<TABLE>
<S> <C> <C>
1 mile = 1.6093 kilometers
1 foot = 0.305 meter
1 acre = 0.4047 hectare
1 U.S. gallon = 3.785 liters
1 short ton = 2,000 pounds
= 907.2 kilograms
1 troy ounce = 1.097 avoirdupois ounces
= 31.103 grams
</TABLE>
The term "ounce" as used in this report means "troy ounce."
FORWARD-LOOKING INFORMATION
This Form 10-K contains statements regarding matters such as reserves and
other mineralization, production, and costs that are forward-looking and
uncertain in nature. See the disclosures in "Business and Properties--Risk
Factors", "--Reserves", "--Other Mineralization", and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for a
discussion of selected factors which affect these forward-looking disclosures.
In this report, the "company" refers to Echo Bay Mines Ltd. together with
its subsidiaries unless the context otherwise specifies.
4
<PAGE>
PART I
ITEMS 1 AND 2--BUSINESS AND PROPERTIES
INTRODUCTION
The company mines, processes and explores for gold and silver. Revenues are
derived principally from the sale of gold and silver. The company's interest
in operating properties is set out below (all are operated by the company):
<TABLE>
<CAPTION>
PERCENTAGE
OWNERSHIP
MINE LOCATION INTEREST
---- -------- ----------
<S> <C> <C>
McCoy/Cove Nevada, U.S.A. 100%
Round Mountain Nevada, U.S.A. 50%
Lupin Northwest Territories, Canada 100%
Kettle River Washington, U.S.A. 100%
</TABLE>
In 1995, the company reported a net loss of $50.1 million. Operating
earnings in 1995 were $33.5 million on revenues of $360.7 million. 1995
results reflect increased operating costs per ounce, significantly increased
exploration and development property expenses, lower silver prices realized,
operating earnings on reduced precious metals sales and increased
environmental expenses related to reclamation at the Sunnyside mine in
Colorado. See "Sunnyside." In 1995, the company produced a total of 754,762
ounces of gold at an average cash production cost of $235 per ounce. Silver
production was 11,905,806 ounces.
Exploration and development properties expenses increased to $69.8 million
in 1995 from $46.6 million in 1994 and $24.6 million in 1993, reflecting the
company's expanded international search for new gold reserves and production.
The company added five development properties during 1995: Paredones Amarillos
in Mexico, Chapada in Brazil, Kingking in the Philippines, and Aquarius and
Ulu in Canada. The company continued development at the Alaska-Juneau project
in Alaska, and sold its Kensington project to its joint venture partner in
1995.
RISK FACTORS
Profitability of the company's operations, which are reported in U.S.
dollars, is directly affected by the market price of gold in relation to the
company's production costs. Silver price fluctuations also affect the
company's profitability, though to a lesser extent. Gold and silver prices can
fluctuate widely and are affected by numerous factors beyond the company's
control. Profitability of the company's Canadian operations is also affected
by fluctuations in the Canadian dollar exchange rate for U.S. dollars. See
"Gold Prices", "Silver Prices" and "Exchange Rates." See also note 15 to the
company's consolidated financial statements for information with respect to
the company's gold and silver commitments, currency position and other hedging
activity information.
Gold price declines may also render projects with higher production costs
per ounce temporarily or permanently uneconomic, unless forward sales or other
hedging techniques make realized prices sufficiently higher than the then
achievable spot market prices. Spot market prices for gold are currently
higher than the company's cash production cost ($235 per ounce for the year
ended December 31, 1995) and the company's total production cost which
includes cash production costs, royalties, general and administrative costs,
depreciation and amortization ($354 per ounce for the year ended December 31,
1995). Total production cost does not include exploration expense, development
properties expense, other expense, net interest income, income and mining tax
expense and preferred stock dividends. See "Operations Summary--Breakeven Cost
per Ounce" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Comparative production, production costs, breakeven costs and ore reserve
data for 1995, 1994, and 1993 are shown in the tables beginning on page 10.
These should be read in conjunction with the more detailed
5
<PAGE>
information provided elsewhere in this report. The textual language following
the ore reserve table includes important information with respect to the
interpretation of the reserve data.
The company's operations are subject to laws and regulations concerning the
protection of the environment. These laws and regulations change periodically
and are generally becoming more restrictive, which may have the effect of
increasing future costs. See "Other--Government Regulation--Canada" and "--
United States."
For financial information with respect to geographic segments, see note 14
to the company's consolidated financial statements.
A map indicating the location of the company's offices and operating and
development properties is provided below.
ECHO BAY MINES
PROPERTY AND OFFICE LOCATIONS
<TABLE>
<CAPTION>
OFFICES MINES DEVELOPMENT PROPERTIES
- ------- ----- ----------------------
<S> <C> <C>
1-Denver (Colorado) A-McCoy/Cove (Nevada) a-Alaska-Juneau (Alaska)
2-Edmonton (Alberta) B-Round Mountain (Nevada) b-Aquarius (Ontario)
3-Reno (Nevada) C-Lupin (Northwest Territories) c-Chapada (Brazil)
4-Santiago (Chile) D-Kettle River (Washington) d-Kingking (Philippines)
5-Spokane (Washington) e-Paredones Amarillos (Mexico)
6-Vancouver (British Co- f-Ulu (Northwest Territories)
lumbia)
</TABLE>
6
<PAGE>
MINE PROCESSING
Milling is the traditional method of recovering gold from ore. McCoy/Cove,
Lupin and Kettle River use milling. Details of the process vary from mine to
mine, but the principles remain the same. The mill recovery process at the
McCoy/Cove operation, where both oxide ores and sulfide ores are processed, is
illustrated on page 8.
Heap leaching is a low-cost gold recovery process that can only be
successfully applied to certain oxidized, permeable ores. It has a lower
recovery rate than milling but is a less expensive process. Heap leaching is
particularly suited to large, low-grade oxide ore deposits. Both Round
Mountain and McCoy/Cove use heap leaching. The details, but not the
principles, vary among individual mines. To describe how the heap leach
process works, the Round Mountain mine's current reusable leach pad process is
illustrated on page 9.
7
<PAGE>
GENERAL DESCRIPTION OF MINING AND MILL RECOVERY PROCESS
(Text below appears as ART for printed piece)
MILLING
Milling is the traditional method of recovering gold from ore. Details of
the process vary from mine to mine, but the principles remain the same. (Heap
leaching is another method of recovering gold from certain types of low-grade
ore, described on the next page.) Here is how the mill recovery process works
at our McCoy/Cove operation, where we have both oxide ores and sulfide ores.
MINING
Ore is blasted and trucked from underground or an open pit to the mill. Ore
is gold-bearing rock. After it's blasted, it ranges from powder to boulders as
large as five feet across.
CRUSHING
A giant jaw crusher reduces all of the ore to eight inches or smaller.
GRINDING
Crushed ore is ground to the consistency of fine sand in a series of three
grinding mills. Steel balls tumble with the ore and water inside huge rotating
drums, pulverizing the ore and liberating most of the gold and silver.
After grinding, sulfide ores need two extra steps that oxide ores don't:
flotation and regrinding.
FLOTATION
Flotation is a method of concentrating sulfide ores. The mineral particles
are floated to the surface by a froth of induced air, where they concentrate
and are skimmed off. The remaining underflow, which still contains some gold
and silver, skips the next step.
REGRINDING
The sand-size concentrated sulfide particles are reground even finer, to the
size of talcum powder. This frees the precious metals from the sulfides
trapping them.
LEACHING
Oxide ores, sulfide ore underflows, and reground sulfide concentrates all go
to large leaching tanks, where a cyanide solution dissolves the gold and
silver from the solids like hot water leaches tea from tea leaves.
PRECIPITATION AND REFINING
After 36 to 96 hours, zinc powder is added to the "pregnant" leach solution.
This precipitates the gold and silver from the solution in the form of
metallic powder. The powder is collected on filters and smelted into bullion
bars. The bars are shipped to refineries for further processing into the pure
metals.
TAILINGS NEUTRALIZATION
The leftover solids from the leach tanks, called tailings, are pumped to a
treatment plant, where the contaminants are neutralized using sulfur dioxide
(SO/2/) and air. The tailings are then pumped to a lined tailings pond. The
solids settle to the bottom, and the water that doesn't evaporate is
recirculated back to the mill.
8
<PAGE>
GENERAL DESCRIPTION OF MINING AND HEAP-LEACH RECOVERY PROCESS
(Text below appears as ART for printed piece)
HEAP LEACHING
Heap leaching is a gold recovery process that can only be applied to
permeable ores. It has a lower recovery rate than milling, but lower-grade
ores can be economically heap leached rather than milled because heap leaching
costs are much lower.
Here is how Round Mountain's reusable leach pad process works. The details,
but not the principles, vary among individual mines.
MINING
Ore is mined and hauled by truck from the open pit. Ore is gold-bearing
rock.
CRUSHING
Crushing reduces the ore to less than three-quarters of an inch in size.
Lime is added to assist in leaching.
LEACHING
After being loaded onto the impermeable leach pad, the ore is sprinkled for
up to 140 days with a weak sodium cyanide solution. This penetrates the ore,
dissolving the almost-microscopic bits of gold and silver. The "pregnant"
solution drains to the collection area at the lower side of the pad and flows
to a pump. During the final 10 days of the cycle, the leached ore is washed
with water and drained.
CARBON ABSORPTION
The pregnant solution is pumped through a series of tanks containing
activated carbon, which removes the gold and silver from the cyanide solution.
The "barren" solution is recycled back to the leach pads.
DESCRIPTION
The gold and silver are stripped from the carbon, forming a more highly
concentrated solution. The carbon is regenerated and returned to the
absorption circuit.
ELECTROWINNING
The precious metals in the concentrated solution are electrolytically
deposited on steel wool cathodes in the electrowinning cells.
REFINING
The gold precipitated on the cathodes is then placed into an electrorefining
cell, where the gold is plated out in the form of foil. The foil is fire-
refined into dore bars containing about half gold and half silver, together
with minor amounts of impurities.
BULLION
The dore bars are shipped to a precious metals refinery for final processing
into pure gold and silver.
9
<PAGE>
OPERATIONS SUMMARY
Summary gold and silver production, cash production costs per ounce and
breakeven costs per ounce for the last three years are provided below:
<TABLE>
<CAPTION>
GOLD PRODUCTION (OUNCES) 1995 1994 1993
- ------------------------ ---------- ---------- ----------
<S> <C> <C> <C>
McCoy/Cove.............................. 310,016 359,360 395,608
Round Mountain (50%).................... 172,217 211,752 187,347
Lupin................................... 172,110 180,052 217,504
Kettle River............................ 100,419 66,782 73,431
---------- ---------- ----------
Total Gold.............................. 754,762 817,946 873,890
========== ========== ==========
Percentage increase (decrease) from
prior year............................. (7.7%) (6.4%) 14.4%
========== ========== ==========
<CAPTION>
SILVER PRODUCTION (OUNCES) 1995 1994 1993
- -------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Total Silver--all from McCoy/Cove....... 11,905,806 10,443,151 12,454,338
========== ========== ==========
Percentage increase (decrease) from
prior year............................. 14.0% (16.1%) 57.2%
========== ========== ==========
<CAPTION>
CASH PRODUCTION COST PER OUNCE OF
GOLD(1) 1995 1994 1993
- --------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
McCoy/Cove.............................. $ 222 $ 199 $ 195
Round Mountain.......................... 200 180 205
Lupin................................... 303 280 247
Kettle River............................ 237 259 277
---------- ---------- ----------
Company consolidated weighted average... $ 235 $ 214 $ 214
========== ========== ==========
Percentage increase (decrease) from
prior year............................. 9.8% -- % (9.7%)
========== ========== ==========
</TABLE>
- --------
(1) Cash production costs include mining, processing and direct administration
costs. Mining costs relating to gold which will be produced in future
years are deferred and are charged to operating costs in the period in
which the production occurs.
Royalties, corporate general and administrative expense, depreciation and
amortization are not included in cash production cost, nor are development
properties expense, finance costs and exploration expense. Nevada net proceeds
tax, Northwest Territories royalty tax and similar production taxes are not
included. These taxes are included as mining taxes in "income and mining tax
expense."
BREAKEVEN COST PER OUNCE
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- -----
<S> <C> <C> <C>
Cash production costs....................................... $235 $214 $ 214
Royalties................................................... 9 10 8
General and administrative.................................. 13 11 9
---- ---- -----
Total cash costs............................................ 257 235 231
Depreciation and amortization............................... 97 89 88
---- ---- -----
Total production costs...................................... 354 324 319
Exploration expense......................................... 51 28 13
Development properties expense.............................. 25 20 11
Interest income............................................. (5) (4) --
Other expense............................................... 10 4 2
Income and mining taxes..................................... 1 2 4
---- ---- -----
Breakeven(1)................................................ $436 $374 $ 349
==== ==== =====
Percentage increase (decrease) from prior year.............. 16.6% 7.2% (10.7%)
==== ==== =====
</TABLE>
- --------
(1) Before preferred stock dividends of subsidiary (which dividends are net of
interest income/expense from related interest rate swaps).
10
<PAGE>
The breakeven cost of $436 per ounce for 1995 reflects significantly
increased exploration and development property expenses totaling $76 per
ounce, most of which represent discretionary investments in the company's
expanded international search for new gold reserves and production. Total
production cost per ounce has increased by $30 in 1995 to $354 as a result of
the fewer ounces produced and as a result of higher cash production costs at
McCoy/Cove. See "McCoy/Cove."
RESERVES
The following table presents ore reserves by property. See also below for a
description of each mine. Ore reserves set forth below are estimated by the
company.
<TABLE>
<CAPTION>
ORE RESERVES(1)
----------------------------------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
CONTAINED CONTAINED CONTAINED
AVERAGE CONTAINED OUNCES OUNCES OUNCES
GRADE (OUNCES OUNCES (THE COMPANY'S (THE COMPANY'S (THE COMPANY'S
TONS PER TON) (100%) SHARE) SHARE) SHARE)
------- ------------- --------- -------------- -------------- --------------
(THOUSANDS, EXCEPT AVERAGE GRADES)
(PROVEN AND PROBABLE AT DECEMBER 31)
<S> <C> <C> <C> <C> <C> <C>
GOLD
Producing mines:
McCoy/Cove............ 47,221 0.032 1,526 1,526 1,870 2,369
Round Mountain........ 508,820 0.020 10,000 5,000 3,900 3,562
Lupin................. 2,445 0.280 685 685 727 916
Kettle River.......... 1,602 0.206 330 330 388 415
------ ------ ------ -------
Total producing mines... 12,541 7,541 6,885 7,262
------ ------ ------ -------
Development properties:
Alaska-Juneau(2)...... 67,063 0.051 3,442 3,442 3,442 3,442
Kensington(3)......... -- -- -- -- 973 973
------ ------ ------ -------
Total development prop-
erties................. 3,442 3,442 4,415 4,415
------ ------ ------ -------
Total Gold.............. 15,983 10,983 11,300 11,677
====== ====== ====== =======
SILVER
McCoy/Cove.............. 47,221 1.33 62,913 62,913 82,724 105,051
------ ------ ------ -------
Total Silver............ 62,913 62,913 82,724 105,051
====== ====== ====== =======
</TABLE>
- --------
(1) The definitions of proven and probable ore set forth below are those used
in Canada by certain provincial securities regulatory authorities and are
set forth in National Policy No. 2-A.
"Proven ore" or "measured ore" means that material for which tonnage is
computed from dimensions revealed in outcrops or trenches or underground
workings or drill holes and for which the grade is computed from the
results of adequate sampling, and for which sites for inspection, sampling
and measurement are so spaced and the geological character so well defined
that the size, shape and mineral content are established, and for which the
computed tonnage and grade are judged to be accurate within limits which
shall be stated and for which it shall be stated whether the tonnage and
grade of proven ore or measured ore are "in-situ" or extractable, with
dilution factors shown, and reasons for the use of these dilution factors
clearly explained.
"Probable ore" or "indicated ore" means that material for which tonnage and
grade are computed partly from specific measurements, samples or production
data, and partly from projection for a reasonable distance on geological
evidence, and for which the sites available for inspection, measurement and
sampling are too widely or otherwise inappropriately spaced to outline the
material completely or to establish its grade throughout.
These definitions are substantially the same as those applied in the United
States by the Securities and Exchange Commission which are based on
definitions used by the United States Bureau of Mines and the United States
Geological Survey.
(2) The company's construction and production decision at its Alaska-Juneau
development property is dependent on the issuance of appropriate permits,
the resolution of legal challenges and the ability of the company to
obtain required financing. See "Development Programs--Alaska-Juneau."
(3) The company sold its interest in the Kensington development property
during 1995. See "Kensington."
11
<PAGE>
The company reports extractable (minable) ore reserves. Reserves do not
reflect losses in the milling or heap leaching processes, but do include
allowance for dilution of ore in the mining process.
Recovery rates for 1995 were as follows:
<TABLE>
<CAPTION>
OPERATING MINES GOLD SILVER
- --------------- ---- ------
<S> <C> <C>
McCoy/Cove:
Heap leach--crushed(a)............................................ 68% 30%
--run-of-mine(a)........................................ 48% 10%
Mill oxides....................................................... 93% 76%
Mill sulfides..................................................... 79% 80%
Round Mountain:
Reusable pad...................................................... 71% -- %
Dedicated pad(a).................................................. 50% -- %
Lupin............................................................... 93% -- %
Kettle River........................................................ 87% -- %
</TABLE>
- --------
(a) Recovery rates on dedicated pads can only be estimated, as actual
recoveries will not be known until leaching is complete.
Based on completed feasibility studies and the processes contemplated
therein, the estimated gold recovery rate at the company's Alaska-Juneau
development property is 86%. The company expects to complete an updated
feasibility study in 1996 based on additional information developed in a
three-year underground work program completed in 1995.
There are numerous uncertainties inherent in estimating proven and probable
reserves including many factors beyond the control of the company. The
estimation of reserves is a subjective process and the accuracy of any reserve
estimate is a function of the quality of available data and of engineering and
geological interpretation and judgment. Results of drilling, testing and
production subsequent to the date of an estimate may justify revision of such
estimates. Assumptions about prices are subject to great uncertainty and
prices of gold and silver have fluctuated widely in recent years.
Ore reserves at December 31, 1995 and 1994 were estimated based on a gold
price of $375 per ounce and a silver price of $5.00 per ounce. In 1993, ore
reserves were estimated based on a gold price of $375 per ounce and a silver
price of $4.50 per ounce.
The market prices for gold and silver are currently above the prices used in
estimating the company's ore reserves at December 31, 1995. Market prices for
gold and silver can be volatile. If the company were to determine that its
reserves and future cash flows should be calculated at significantly lower
gold and silver prices than those used at December 31, 1995, there would
likely be a material reduction in the amount of both gold and silver reserves.
Should such reductions occur, material write-downs of the company's investment
in mining properties may be required.
In addition to ore reserve estimation, the company periodically reviews
mining schedules, production levels and asset lives in its life-of-mine
planning for all of its operating and development properties. Significant
changes in the life-of-mine plans can occur as a result of mining experience,
new ore discoveries, changes in mining methods and rates, process changes,
investments in new equipment and technology, and other factors. Based on year-
end ore reserves and each current life-of-mine plan, the company reviews its
accounting estimates and makes needed adjustments. This complex process
continues for the life of every mine.
12
<PAGE>
The company reviews the carrying value of each producing mine and
development property by comparing the net book value with the estimated
undiscounted future cash flow from the property. If the net book value exceeds
the undiscounted future cash flow, then the excess is expensed. There has been
no excess carrying value to be expensed in the three years ended December 31,
1995. Changes in the significant assumptions underlying future cash flow
estimates may have a material effect on future carrying values and operating
results.
Once major permits have been approved for a development property but a final
construction decision has not yet been made, the company considers the
uncertainty that the economics of the project may materially change if permits
expire before a final construction decision is made, and records reductions in
the property's book value when appropriate. Permits may not be renewable under
the same terms and conditions. See "Development Programs--Alaska-Juneau."
In December 1994, the U.S. Environmental Protection Agency (EPA) issued a
Technical Assistance Report concluding that the Alaska-Juneau development
project, as configured in the May 1992 Final Environmental Impact Statement,
would be likely to violate water quality and other environmental standards. In
1996, the company's reapplication of permits included a new project
description with an alternative of Submarine Tailings Disposal (STD), which
would require a change in EPA regulations. For that purpose, the EPA has
instituted rulemaking procedures to enable it to consider the STD proposal. To
review that proposal and other options that could enable the Alaska-Juneau
project to proceed, the EPA will prepare a Supplemental Environmental Impact
Statement expected to be completed in 1997. See "Development Programs--Alaska-
Juneau."
CHANGE IN PROVEN AND PROBABLE RESERVES
The reconciliation of the change in proven and probable reserves from
December 31, 1994 to December 31, 1995 is as follows:
<TABLE>
<CAPTION>
GOLD SILVER
--------- ----------
(MILLION OF OUNCES)
<S> <C> <C>
Proven and probable reserves at December 31, 1994....... 11.3 82.7
Extensions, discoveries and adjustments--McCoy/Cove... -- (3.6)
--Round Mountain 1.5 --
--Other......... 0.1 --
Production(1)......................................... (0.9) (16.2)
Sale of Kensington.................................... (1.0) --
--------- ----------
Proven and probable reserves at December 31, 1995....... 11.0 62.9
========= ==========
</TABLE>
- --------
(1) Production represents previously modeled, in-situ ounces mined during
1995; this amount does not reflect recovery losses from heap leaching and
milling.
For further information on ore reserves for specific mines, see the mines'
descriptions in "Business and Properties."
13
<PAGE>
OTHER MINERALIZATION
The following table presents other mineralization by property. Other
mineralization for producing mines and development properties is estimated by
the company. Chapada's other mineralization was based on estimates prepared by
Santa Elina Gold Corporation. Kingking's other mineralization was based on
estimates prepared by Benguet Corporation.
OTHER MINERALIZATION(1)
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------ ----------------- -----------------
AVERAGE AVERAGE AVERAGE
GRADE GRADE GRADE
TONS TONS (OUNCES TONS (THE (OUNCES TONS (THE (OUNCES
(100% (THE COMPANY'S PER COMPANY'S PER COMPANY'S PER
BASIS) SHARE) TON) SHARE) TON) SHARE) TON)
------- -------------- ------- --------- ------- --------- -------
(THOUSANDS, EXCEPT AVERAGE GRADES) (AT DECEMBER 31)
<S> <C> <C> <C> <C> <C> <C> <C>
GOLD
PRODUCING MINES:
McCoy/Cove.............. 6,767 6,767 0.036 4,786 0.015 3,686 0.015
Round Mountain.......... 72,680 36,340 0.021 19,219 0.022 13,969 0.022
Lupin (including Ulu)... 3,640 3,640 0.300 1,703 0.265 2,944 0.250
Kettle River............ 1,097 1,097 0.186 1,361 0.193 2,004 0.185
------- ------- ----- ------ ----- ------ -----
84,184 47,844 0.048 27,069 0.045 22,603 0.065
------- ------- ----- ------ ----- ------ -----
DEVELOPMENT
PROPERTIES(2):
Alaska-Juneau........... 30,086 30,086 0.052 33,865 0.046 33,865 0.046
Kensington(3)........... -- -- -- 1,594 0.147 1,594 0.147
Aquarius................ 23,465 23,465 0.055 -- -- -- --
Paredones Amarillos..... 27,125 16,275 0.040 -- -- -- --
------- ------- ----- ------ ----- ------ -----
80,676 69,826 0.050 35,459 0.051 35,459 0.051
------- ------- ----- ------ ----- ------ -----
DEVELOPMENT PROPERTIES
UNDER OPTION(2)(4):
Chapada................. 113,400 56,700 0.012 -- -- -- --
Kingking................ 225,000 168,750 0.017 -- -- -- --
------- ------- ----- ------ ----- ------ -----
338,400 225,450 0.016 -- -- -- --
------- ------- ----- ------ ----- ------ -----
Total Gold.............. 503,260 343,120 0.027 62,528 0.048 58,062 0.056
======= ======= ===== ====== ===== ====== =====
SILVER
PRODUCING MINES:
McCoy/Cove.............. 6,767 6,767 0.65 4,786 0.50 3,686 0.48
------- ------- ----- ------ ----- ------ -----
Total Silver............ 6,767 6,767 0.65 4,786 0.50 3,686 0.48
======= ======= ===== ====== ===== ====== =====
<CAPTION>
TONS TONS (THE AVERAGE TONS (THE AVERAGE TONS (THE AVERAGE
(100% COMPANY'S GRADE COMPANY'S GRADE COMPANY'S GRADE
BASIS) SHARE) (%) SHARE) (%) SHARE) (%)
------- -------------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
COPPER
DEVELOPMENT PROPERTIES
UNDER OPTION(2)(4):
Chapada................. 113,400 56,700 0.43% -- -- -- --
Kingking................ 225,000 168,750 0.47% -- -- -- --
------- ------- ----- ------ ----- ------ -----
Total Copper............ 338,400 225,450 0.46% -- -- -- --
======= ======= ===== ====== ===== ====== =====
</TABLE>
- --------
(1) Other mineralization has not been included in the proven and probable ore
reserve estimates because even though enough drilling, trenching, and/or
underground work indicate a sufficient amount and grade to warrant further
exploration or development expenditures, these resources do not qualify
under the U.S. Securities and Exchange Commission standards as
commercially minable ore bodies until further drilling, metallurgical
work, and other economic and technical feasibility factors based upon such
work are resolved.
14
<PAGE>
(2) The company's construction and production decision at its development
properties is dependent on the issuance of appropriate permits, the
ability of the company to obtain required financing, and in the case of
Alaska-Juneau, the resolution of legal challenges. See "Development
Programs."
(3) The company sold its interest in the Kensington development property
during 1995. See "Kensington."
(4) Assumes the company exercises its right to acquire interests in the
properties. Chapada's other mineralization was based on estimates prepared
by Santa Elina Gold Corporation and Kingking's other mineralization was
based on estimates prepared by Benguet Corporation. The company only
recently acquired options on the properties and is conducting further work
leading to updated feasibility studies. As a matter of policy, during this
work, and until the company has completed its own feasibility studies, it
will only include the material in other mineralization.
HISTORY OF THE COMPANY
The company was incorporated in Canada in 1964. Between 1964 and 1982, the
company developed and operated several silver mines near Port Radium in the
Northwest Territories of Canada and produced 35.5 million ounces of silver.
These silver reserves were mined out in 1982.
In 1979, the company optioned the Lupin gold property, located 190 miles
east of Port Radium. Construction of the Lupin mine began in August 1980, and
commercial production commenced in October 1982. During 1982 through 1984, the
company concentrated efforts on developing the Lupin mine.
With earnings generated from Lupin, the company initiated an aggressive
acquisition, exploration and development program.
During 1985 and 1986 the company acquired a 50% interest in the Round
Mountain mine and also acquired the Sunnyside, McCoy, Borealis, Manhattan and
Illipah mines. The Cove deposit was discovered adjacent to the McCoy mine in
early 1987 and major expansions at McCoy/Cove and Round Mountain were started
in 1988. The mine expansions were substantially funded by borrowing gold and
silver. Gold and silver financing allowed the company to hedge future
production and obtain the low interest rates associated with these
instruments.
Commercial production began at the Kettle River mine in Washington in 1990.
The Lamefoot deposit became part of the Kettle River joint venture in December
1991. In December 1992, the company's 30% partner withdrew from the Kettle
River joint venture and the company increased its ownership interest to 100%
from 70%.
In order to expedite the internationalization of the company since 1994, it
has formed strategic alliances with exploration-oriented companies that give
the company access to exploration and development prospects along some of the
major gold belts of the world. The company has purchased common shares of some
of these exploration-oriented companies and has options to purchase direct
interests on certain properties.
The company added five development properties during 1995: Paredones
Amarillos in Mexico, Chapada in Brazil, Kingking in the Philippines, and
Aquarius and Ulu in Canada. The company continued development at the Alaska-
Juneau project in Alaska. The company sold its interest in the Kensington
project to its joint venture partner in 1995.
The company increased exploration activities over the period from 1993 to
1995. Major exploration programs are being funded at all operating properties
and elsewhere in North America; however, 70% of 1995 exploration expenditures
were made outside of the United States and Canada. A similar percentage is
expected in 1996. The company is exploring and seeking new opportunities in
Mexico, South America, the Philippines, and West Africa.
15
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the company and certain executive officers of
subsidiaries of the company (collectively referred to herein as "executive
officers") are listed below. Mr. Calman, currently the Chairman of the
company, has decided to retire as Chairman and as a director of the company at
the annual general meeting of shareholders on May 10, 1996. The Board has
selected Mr. Leclerc to succeed Mr. Calman as Chairman as of that date.
<TABLE>
<CAPTION>
NAME AND MUNICIPALITY OF POSITION WITH THE COMPANY AND BUSINESS
RESIDENCE AGE EXPERIENCE WITHIN THE LAST FIVE YEARS
- ------------------------ --- --------------------------------------
<S> <C> <C>
ROBERT CLARK ARMSTRONG... 52 Executive Vice President of the company since
Englewood, Colorado June 1995; Executive Vice President, Operations
and Chief Operating Officer of the company from
June 1994 to June 1995; Executive Vice
President, Operations of the company from
December 1992 to June 1994; Senior Vice
President, Operations of the company from
January 1992 to December 1992; prior thereto
Vice President of the company
JOHN LAWRENCE AZLANT..... 49 Senior Vice President, Business Development of
Greenwood Village, Colo- the company since November 1993; prior thereto
rado Senior Vice President and Chief Financial
Officer of Pegasus Gold Inc.
JONATHAN RAMSDEN BAKER... 39 Vice President, Technical Services of the
Salt Lake City, Utah company since June 1995; Director, Coal Business
Development of Kennecott Corporation from July
1994 to June 1995; Director, Technical Services
of a subsidiary of Kennecott Corporation from
March 1993 to July 1994; Director, Operations
Planning of a subsidiary of Kennecott from
February 1992 to March 1993; Director, Uranium
Sales of Kennecott Corporation from July 1991 to
February 1992; Manager, Operations Planning of a
subsidiary of Kennecott Corporation from
February 1991 to July 1991; prior thereto Chief
Mine Planning Engineer of Phelps Dodge
Corporation
ALAN BROUGHTON........... 53 Vice President, Corporate Affairs of the company
Littleton, Colorado
ROBERT FREDERICK CALMAN.. 63 Chairman of the company; Chief Executive Officer
Palm Beach, Florida of the company from January 1992 to June 1994
PETER HILTON CHEESBROUGH. 44 Senior Vice President, Finance and Chief
Englewood, Colorado Financial Officer of the company since June
1993, prior thereto Vice President, Controller
and Principal Accounting Officer of the company
CHARLES BRIAN CRAMM...... 43 Vice President, Business Development of the
Highlands Ranch, Colo- company since June 1995; Director, Business
rado Development from June 1992 to June 1995; prior
thereto Director, Planning and Development
DONALD CARLTON EWIGLEBEN. 42 Vice President, Environmental and Public Affairs
Aurora, Colorado of the company since August 1994; Vice
President, Environmental and Governmental
Affairs of Amax Gold Inc. from June 1992 to
February 1994; prior thereto various
Environmental and Governmental Affairs positions
at Amax Gold Inc. and Amax Coal Industries
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
NAME AND MUNICIPALITY OF POSITION WITH THE COMPANY AND BUSINESS
RESIDENCE AGE EXPERIENCE WITHIN THE LAST FIVE YEARS
- ------------------------ --- --------------------------------------
<S> <C> <C>
TERRY NOBLE FISKE....... 62 Vice President of a subsidiary of the company
Castle Rock, Colorado
RAYMOND WAYNE JENNER.... 44 Vice President and Treasurer of the company
Englewood, Colorado
RICHARD CARL KRAUS...... 49 President and Chief Executive Officer of the
Englewood, Colorado company since June 1994; President and Chief
Operating Officer of the company from January
1992 to June 1994; prior thereto Executive Vice
President and Chief Financial Officer of the
company
BRIAN MICHAEL LABADIE... 43 Vice President, Operations of the company
Aurora, Colorado
MICHAEL KEITH MCMILLAN.. 41 Vice President, Human Resources, of the company
Aurora, Colorado since June 1995; prior thereto Vice President,
Human Resources of Merisel, Inc.
ROBERT LEIGH LECLERC, 51 Secretary of the company; Chairman and Chief
Q.C.................... Executive Officer, Milner Fenerty, barristers
Edmonton, Alberta and solicitors, since December 1993; now and
prior thereto partner of Milner Fenerty
DONALD ELI RANTA........ 53 Vice President, Exploration, of the company
Evergreen, Colorado since June 1995; Vice President, Exploration, of
a subsidiary of the company from October 1993 to
June 1995; prior thereto Manager of North
American Exploration of Phelps Dodge Mining
Company
GERALD ALLEN TYWONIUK... 34 Vice President, Controller and Principal
Englewood, Colorado Accounting Officer of the company since June
1995; Controller and Principal Accounting
Officer of the company from June 1993 to June
1995; prior thereto various mine site and
corporate financial positions with the company
ROBERT DUNHAM WUNDER.... 46 Senior Vice President, Project Development of
Englewood, Colorado the company since March 1996; Manager, Strategic
Development of BHP Minerals from July 1995 to
March 1996; Vice President, Operations of a
subsidiary of BHP Minerals (Chile) from May 1993
to July 1995; Executive Vice President, Minerals
Marketing of BHP Minerals (Japan) from March
1992 to May 1993; prior thereto General Manager,
Groote Eylandt Mining Company (Australia)
</TABLE>
In addition to the executive officers listed above, there are two other
officers of the company, namely Lois-Ann L. Brodrick and Patrick T. Sugiura,
who have been assistant secretaries of the company during the past five years.
The Board has selected Ms. Brodrick to succeed Mr. Leclerc as secretary of the
company as of May 10, 1996.
Officers of the company are appointed by the Board of Directors.
MCCOY/COVE
The McCoy/Cove property commenced production in April 1986 as an open pit
heap leaching operation. The McCoy mine and surrounding property, which was
purchased by the company in September 1986, is located in Lander County,
Nevada, about 30 miles southwest of the town of Battle Mountain. The Cove
deposit, located one mile northeast of the McCoy deposit, was discovered in
early 1987. Open pit mining of the Cove deposit
17
<PAGE>
began in early 1988. A 7,500 ton per day mill, completed in July 1989,
utilizes flotation and agitation leach circuits to recover gold and silver
from sulfide ores not amenable to heap leaching and high-grade oxide ore.
Production from underground sources beneath the McCoy and Cove pits commenced
in late 1989 and was completed at Cove in 1993 and McCoy in 1994.
The McCoy/Cove property consists of approximately 2,560 unpatented claims
covering approximately 44,989 acres of United States federal land administered
by the Bureau of Land Management of the Department of the Interior. The
company has completed all steps currently required under U.S. law to convert
the land to patented status and has filed applications for patents. The
patents have not been issued to date and are currently under audit. See
"Other--Government Regulation--United States."
The following table sets forth annual production data for the McCoy/Cove
operation for 1991 through 1995.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total gold produced..... 310,016 359,360 395,608 301,512 284,327
Total silver produced... 11,905,806 10,443,151 12,454,338 7,921,496 5,619,007
Production costs per
ton:
Mining................ $ 0.67 $ 0.68 $0.74 $ 0.72 $ 0.84
Heap leaching......... $ 2.32 $ 1.09 $1.29 $ 1.31 $ 2.08
Milling............... $10.67 $10.09 $9.28 $10.74 $10.17
Production cost per
ounce of gold:
Cash production cost.. $ 222 $ 199 $ 195 $ 234 $ 253
Royalties paid........ $ 5 $ 6 $ 5 $ 4 $ 4
Depreciation.......... $ 53 $ 48 $ 41 $ 53 $ 54
Amortization.......... $ 46 $ 43 $ 45 $ 47 $ 46
Total production cost. $ 326 $ 296 $ 286 $ 338 $ 357
Average gold-to-silver
price ratio............ 74:1 73:1 85:1 87:1 89:1
Production cost per
ounce of silver(1):
Cash production cost.. $ 3.01 $ 2.73 $2.29 $ 2.70 $ 2.86
Royalties paid........ $ 0.07 $ 0.08 $0.06 $ 0.05 $ 0.05
Depreciation.......... $ 0.72 $ 0.66 $0.48 $ 0.61 $ 0.61
Amortization.......... $ 0.62 $ 0.59 $0.53 $ 0.54 $ 0.52
Total production cost. $ 4.42 $ 4.06 $3.36 $ 3.90 $ 4.04
Capital expenditures
(millions)............. $ 8.6 $ 5.2 $ 6.7 $ 24.4 $ 8.7
Deferred (applied)
mining expenditures
(millions)............. $ (7.3) $ (3.0) $ (1.5) $ 9.5 $ 12.7
Heap leached:
Ore processed
(tons/day)............ 11,966 21,682 24,090 24,806 14,214
Days of operation..... 364 364 371 364 364
Total ore processed
(000 tons)............ 4,355 7,892 8,938 9,029 5,174
Gold grade
(ounce/ton)........... 0.018 0.013 0.017 0.014 0.020
Silver grade
(ounce/ton)........... 0.49 0.48 0.88 0.60 0.69
Gold recovery rate.... (2) (2) (2) (2) (2)
Silver recovery rate.. (2) (2) (2) (2) (2)
Gold recovered (ounc-
es)................... 59,910 66,617 100,136 77,550 85,309
Silver recovered
(ounces).............. 877,463 940,652 2,406,939 1,130,857 949,135
Oxide ore milled:
Total ore processed
(000 tons)............ 497 556 2,308 1,483 2,094
Gold grade
(ounce/ton)........... 0.150 0.126 0.107 0.075 0.077
Silver grade
(ounce/ton)........... 5.42 6.71 4.61 2.54 1.70
Gold recovery rate
(%)................... 92.5 90.4 92.1 85.6 88.0
Silver recovery rate
(%)................... 75.7 77.1 70.3 59.2 71.3
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Sulfide ore milled:
Total ore processed
(000 tons)............ 2,151 2,104 552 990 364
Gold grade
(ounce/ton)........... 0.104 0.143 0.136 0.163 0.194
Silver grade
(ounce/ton)........... 5.23 4.91 4.65 7.57 8.42
Gold recovery rate
(%)................... 79.0 78.0 83.2 82.1 81.3
Silver recovery rate
(%)................... 79.6 67.6 74.0 68.0 72.2
Total ore milled:
Ore processed
(tons/day)............ 7,275 7,307 7,708 6,794 6,753
Days of operation..... 364 364 371 364 364
Total ore processed
(000 tons)............ 2,648 2,660 2,860 2,473 2,458
Gold grade
(ounce/ton)........... 0.113 0.140 0.113 0.110 0.094
Silver grade
(ounce/ton)........... 5.27 5.29 4.62 4.55 2.69
Gold recovery rate
(%)................... 82.4 80.3 90.0 83.6 86.1
Silver recovery rate
(%)................... 78.8 70.1 71.0 65.0 71.8
Gold recovered (ounc-
es)................... 250,106 292,743 295,472 223,962 199,018
Silver recovered
(ounces).............. 11,028,343 9,502,499 10,047,399 6,790,639 4,669,872
</TABLE>
- --------
(1) The cost per ounce of silver is calculated by dividing cost per ounce of
gold by average market price ratio of gold to silver.
(2) As dedicated leach pads are used at McCoy/Cove, a gold recovery rate
cannot be calculated until leaching is complete. The ultimate recovery
rate for crushed ore is estimated to be about 68% for gold and 35% for
silver and for run-of-mine ore, 48% for gold and 10% for silver.
GEOLOGY AND ORE RESERVES
McCoy/Cove ore reserves are estimated by the company.
Gold deposition in the McCoy pit was associated with the intrusion of a
Tertiary-age quartz diorite stock into Mesozoic sedimentary formations
including quartzites, conglomerates, and limestones. Gold occurs in the skarn
formation proximal to the intrusion and as a stockwork-type deposit in the
highly fractured sediments.
The Cove deposit is a sediment hosted gold-silver deposit that is spatially
associated with a sequence of argillically altered felsite dikes. Gold and
silver mineralization occurs both as a rind around the altered intrusion and
away from the intrusions along favorable horizons such as permeable beds and
fractured zones.
Cove ore is hosted by two members of the Triassic-age Augusta Mountain
Formation in two major ore zones. The upper oxide ore is hosted by limestone
and shale of the Triassic-age Augusta Mountain Formation, Smelser Pass member.
Gold and silver are associated with clay which developed along fractures and
permeable horizons during hydrothermal alteration of the host rock. Gold
content appears to be higher in the core area, and grades uniformly toward the
lower-grade fringes. Silver is more erratically distributed in the upper zone.
The upper ore zone is almost entirely oxidized, containing less than 1%
sulfides.
The upper oxide ore zone is separated from the lower ore zone by up to
several hundred feet of barren rock. The lower zone is entirely hosted by
conglomerate and sandstone of the Panther Canyon member. During hydrothermal
alteration, base metal sulfides and pyrite were introduced into the host rock,
filling fractures and partially replacing the host. Sulfide content of the ore
zone averages between two and 10% by volume. The upper portion of the Panther
Canyon member has been oxidized and is a source of oxide ore.
19
<PAGE>
MCCOY/COVE MINE
ORE RESERVES(1)(2)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
AVERAGE
GRADE
(OUNCES PER
TONNAGE TON) CONTENT OUNCES(3)
(SHORT TONS) ------------ ---------------------------
(000'S) GOLD SILVER (000'S) GOLD (000'S) SILVER
------------ ----- ------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Cove Pit
Mill
High-grade Sulfide.. 3,157 0.141 6.11 445 19,286
Sulfide............. 10,539 0.038 2.19 400 23,091
Low-grade Sulfide... 7,653 0.024 1.35 184 10,331
Oxide............... 15 0.115 4.18 2 63
Leach
Crush............... 5,898 0.022 0.75 130 4,418
Run-of-Mine......... 5,464 0.008 0.14 44 781
------ ----- ----- ----- ------
Total Cove............... 32,726 0.037 1.77 1,205 57,970
------ ----- ----- ----- ------
West Contact
Mill
Oxide............... 201 0.118 -- 24 --
Leach
Crush............... 6,554 0.024 -- 157 --
Run-of-Mine......... 5,261 0.009 -- 48 --
------ ----- ----- ----- ------
Total West Contact....... 12,016 0.019 -- 229 --
------ ----- ----- ----- ------
Stockpiles
Mill
High Grade Sulfide.. 2 0.101 10.00 -- 20
Sulfide............. 703 0.057 3.14 40 2,204
Low-grade Sulfide... 1,477 0.030 1.62 45 2,391
Oxide............... 30 0.104 4.75 3 143
Leach
Crush............... 267 0.016 0.69 4 185
------ ----- ----- ----- ------
Total Stockpiles......... 2,479 0.037 1.99 92 4,943
------ ----- ----- ----- ------
Total Proven and Proba-
ble--1995............... 47,221 0.032 1.33 1,526 62,913
====== ===== ===== ===== ======
Proven................... 25,182 0.036 1.54 913 38,731
Probable................. 22,039 0.028 1.10 613 24,182
------ ----- ----- ----- ------
Total Proven and Proba-
ble--1995............... 47,221 0.032 1.33 1,526 62,913
====== ===== ===== ===== ======
Total Proven and Proba-
ble--1994............... 56,347 0.033 1.47 1,870 82,724
====== ===== ===== ===== ======
</TABLE>
- --------
(1) See "Reserves" as to the estimation of proven and probable ore reserves.
(2) Based on a gold price of $375 per ounce and a silver price of $5.00 per
ounce in 1995 and 1994.
20
<PAGE>
(3) Reserves include allowances for dilution in mining but do not reflect
losses in the recovery process. Recovery rates for the life-of-mine are
estimated to be:
<TABLE>
<CAPTION>
GOLD SILVER
---- ------
<S> <C> <C>
(i)High-grade Sulfide............................................ 80% 64%
(ii)Sulfide...................................................... 73% 60%
(iii)Low-grade Sulfide........................................... 73% 60%
(iv)Oxide........................................................ 84% 70%
(v)Crushed Leach................................................. 68% 35%
(vi)Run-of-Mine Leach............................................ 48% 10%
</TABLE>
The cut-off grades (stated in ounces of gold-equivalent per ton) are:
<TABLE>
<S> <C>
(i)High-grade Sulfide.................................................. 0.100
(ii)Sulfide............................................................ 0.045
(iii)Low-grade Sulfide................................................. 0.034
(iv)Oxide.............................................................. 0.090
(v)Crushed Leach....................................................... 0.013
(vi)Run-of-Mine Leach.................................................. 0.006
</TABLE>
Ore under leach is not included in McCoy/Cove's ore reserves.
The prospective waste-to-ore ratio is 3.1:1.
The change in proven and probable reserves since December 31, 1994 is
attributable to:
<TABLE>
<CAPTION>
PERCENT OF
OUNCES 1994 RESERVES
--------------------------- ----------------
(000'S) GOLD (000'S) SILVER GOLD SILVER
------------ -------------- ------ -------
<S> <C> <C> <C> <C>
Reserves subtracted due to
modeling changes............ (15) (3,559) (0.8%) (4.3%)
1995 Production(1)........... (329) (16,252) (17.6%) (19.6%)
---- ------- ------ ------
Net Change in Reserves....... (344) (19,811) (18.4%) (23.9%)
==== ======= ====== ======
</TABLE>
- --------
(1) Production represents previously modeled, in situ ounces mined during
1995; this amount does not reflect recovery losses from heap leaching and
milling, nor changes in ore under leach.
MINING AND PROCESSING
Open pit mining was at a rate of 173,000 tons per day in 1995, similar to
the preceding year. The company mines at this rate to minimize the time and
expense required to keep the Cove pit dewatered. Water pumped out of the Cove
pit averaged 15,000 gallons per minute at the end of 1995. Water flows are
projected to increase in future years. The company uses infiltration ponds for
water pumped from the mine. The company has purchased four additional 190-ton
haul trucks in 1996 for $4 million which will increase the mining rate to
186,000 tons per day. The increased mining rate will reduce future dewatering
costs in the Cove pit and will allow for the mining of the West Contact of the
McCoy pit in 1996.
A 7,500 ton per day mill utilizes flotation and agitation leach circuits to
recover gold and silver from sulfide ores not amenable to heap leaching and
high grade oxide ore. The mill is being expanded in 1996 to 10,000 tons per
day. The expansion is expected to cost $3.9 million and will improve
recoveries of sulfide ore by increasing processing time. For a general
description of McCoy/Cove's mining and mill recovery process, see page 8.
The ore mined from the Cove pit was all oxide in the early years of
production. Oxide ore is replaced by sulfide ore at depth. Almost all of the
remaining ore at Cove is sulfide. Overall recovery rates and production levels
decline as more sulfides are processed.
The mill processed oxide and sulfide ores at the same rate as the preceding
year. Mill throughput averaged 7,275 tons per day in 1995 compared to 7,307 in
1994. Gold production decreased from 1994 due to lower gold sulfide grades
milled. Silver production increased from 1994 due to higher silver recovery on
sulfide ore.
21
<PAGE>
Heap leach production was down from 1994 due to fewer tons being processed.
The heap leach crusher averaged 9,893 tons per day compared to 12,097 tons per
day in 1994 with the balance of lower grade heap leach ore being processed
uncrushed, for a total of 11,966 tons per day in 1995 versus 21,682 tons per
day in 1994. The reduction is due to the lower quantity of oxide ore being
mined. The West Contact of the McCoy pit is scheduled to be mined in 1996 and
will provide oxide ore for heap leaching.
In 1996, cash production costs are expected to increase by approximately $50
per ounce of gold produced to $270-$275 due to the costs of mining at deeper
levels at Cove, and the processing of lower grades of gold and silver. Gold
production is expected to be 235,000 to 245,000 ounces and silver production
is expected to be 7.5 million to 8.5 million ounces in 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
At Cove, a high grade sulfide ore zone was located nearer the surface than
most of the lower-grade sulfide ore. The company finished mining the high-
grade sulfide zone in 1995. The lower grade of the remaining sulfides, coupled
with lower recovery rates, will mean lower production levels in 1996 and
beyond.
ROUND MOUNTAIN
The company owns an undivided 50% interest in and operates the Round
Mountain gold mine, acquired in 1985. Subsidiaries of Homestake Mining Company
and Case, Pomeroy & Company, Inc., each own an undivided 25% interest in the
mine. Mining equipment, crushing facilities, heap-leaching facilities, gold
extraction and recovery facilities, administration and maintenance buildings
and other equipment are included in the joint venture.
The mine, located 60 miles north of Tonopah in Nye County, Nevada, consists
of open-pit mining operations on patented and unpatented mining claims
covering approximately 28,362 acres. The company has completed all steps
currently required under U.S. law to convert the minable land to patented
status and has filed application for patents. The patents have not been issued
to date and are currently under audit. See "Other--Government Regulations--
United States."
In 1994, the joint venture decided to invest about $60 million (the
company's share, $30 million) to build an 8,000 ton per day mill to treat
higher-grade unoxidized ore. This facility is expected to recover up to 85% of
the gold contained in unoxidized ores by employing gravity concentration and
cyanide leaching. Construction is expected to commence in 1996 with start up
in 1997 assuming approval of the Environmental Impact Statement by the Bureau
of Land Management. The participants in the joint venture have sufficient
capital resources to fund construction costs.
The following table sets forth annual production data for the Round Mountain
operation for 1991 through 1995. The company's share of production is 50% of
the ounces shown.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Gold produced (ounces)..... 344,434 423,504 374,694 370,585 339,024
Production costs per ton:
Mining................... $ 0.61 $ 0.53 $ 0.60 $ 0.62 $ 0.68
Heap leaching............ $ 0.65 $ 0.66 $ 0.91 $ 1.54 $ 1.66
Production cost per
ounce of gold:
Cash production cost..... $ 200 $ 180 $ 205 $ 216 $ 231
Royalties paid........... $ 31 $ 32 $ 26 $ 24 $ 26
Depreciation............. $ 62 $ 51 $ 67 $ 49 $ 54
Amortization............. $ 20 $ 20 $ 20 $ 19 $ 19
Total production cost.... $ 313 $ 283 $ 318 $ 308 $ 330
Capital expenditures (mil-
lions)(1)................. $ 11.7 $ 8.7 $ 6.6 $ 12.4 $ 3.9
Deferred (applied) mining
expenditures
(millions)(1)............. $ 4.0 $ (1.7) $ 1.3 $ (0.9) $ (0.2)
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Round Mountain Leach-
ing--Reusable Pad:
Ore processed
(tons/day)............ 22,490 18,980 28,329 46,562 44,339
Days of operation..... 354 355 361 355 355
Total ore processed
(000 tons)............ 7,961 6,738 10,227 16,530 15,740
Grade (ounce/ton)..... 0.034 0.040 0.033 0.036 0.031
Recovery rate (%)..... 70.9 78.7 69.4 58.1 65.9
Gold recovered (ounc-
es)................... 192,052 216,710 256,784 311,701 321,396
Round Mountain Leach-
ing--Dedicated Pad:
Ore processed
(tons/day)............ 66,197 54,161 39,379 -- --
Days of operation..... 354 355 361 -- --
Total ore processed
(000 tons)............ 23,434 19,227 14,216 -- --
Grade (ounce/ton)..... 0.012 0.014 0.014 -- --
Recovery rate (%)..... (2) (2) (2) -- --
Gold recovered (ounc-
es)................... 138,700 173,544 62,368 -- --
High Grade Ore processed
at Round Mountain:(3)
Gold recovered (ounc-
es)................... 12,244 33,052 53,376 52,020 --
Manhattan Leaching--Ded-
icated Pad:(4)
Recovery rate (%)..... (4) (4) (4) (4) (4)
Gold recovered (ounc-
es)................... 1,438 198 2,166 6,864 17,628
</TABLE>
- --------
(1) The company's 50% share.
(2) For dedicated leach pads, a gold recovery rate cannot be calculated until
leaching is complete. The eventual recovery rate is estimated to be
approximately 50%.
(3) A high-grade occurrence was discovered April 1992. A small gravity plant
was constructed to recover these ounces.
(4) All known bulk minable ore deposits at the Manhattan property were
depleted in 1990. Leaching at Manhattan was completed in 1994. The final
recovery rate was 74.6%. Final reclamation is underway.
GEOLOGY AND ORE RESERVES
Round Mountain ore reserves are estimated by the company.
Gold mineralization in the Round Mountain deposit and other areas in the
Toquima Range is associated with Tertiary volcanism and caldera formation. The
deposit is hosted by a thick sequence of rhyolitic ash-flow tuffs deposited on
a Paleozoic and Cretaceous basement.
The rhyolitic ash-flow tuffs consist of three main units known as Rock Type
I, a densely welded tuff, Rock Type II, a poorly welded tuff, and Rock Type
III, older lithic tuffs. The Paleozoic and Cretaceous rocks beneath the ash-
flow tuffs are known as Rock Types IV and VIII, respectively.
Mineralization occurs within a four square mile hydrothermally altered zone.
A dominant northwest trending fracture system appears to have served as a
channel way for hydrothermal solutions and the introduction of electrum and
pyrite. Oxidation extends irregularly to a depth of about 1,000 feet below
surface.
Mineralization in Rock Type I occurs in steeply dipping, predominantly
northwest trending oxidized quartz-pyrite gold veins and stockworks.
Mineralization in Rock Type II occurs as gold and pyrite in veins and as
disseminations within porous host rocks. Most of the mineralization in Rock
Type II is oxidized. Mineralization in Rock Type III occurs in quartz-
carbonate-pyrite gold veins and minor disseminations. Only a portion of Rock
Type III is oxidized.
Subsequent to deposition, the gold mineralization in Rock Type I has been
partially eroded, producing a placer deposit within a complex alluvial fan.
23
<PAGE>
ROUND MOUNTAIN MINE
ORE RESERVES(1)(2)(3)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
TONNAGE AVERAGE GRADE GOLD CONTENT
(SHORT TONS) OF GOLD (OUNCES (OUNCES)(4)
(000'S) PER TON) (000'S)
------------ --------------- ------------
<S> <C> <C> <C>
Oxide
Placer.............................. 12,368 0.017 212
Type I.............................. 58,317 0.017 985
Transition.......................... 22,579 0.018 404
Type II............................. 137,413 0.025 3,439
Type III............................ 13,098 0.022 290
Type IV............................. 9,641 0.018 170
Offloads and stockpiles(5).......... 148,506 0.011 1,658
------- ----- ------
Total Oxide........................... 401,922 0.018 7,158
------- ----- ------
Non-Oxide
Placer.............................. 309 0.025 8
Type I.............................. 180 0.023 4
Transition.......................... 632 0.017 11
Type II............................. 76,333 0.026 1,998
Type III............................ 24,270 0.027 649
Type IV............................. 3,764 0.031 117
Mill Stockpile...................... 1,410 0.039 55
------- ----- ------
Total Non-Oxide....................... 106,898 0.027 2,842
------- ----- ------
Total Proven and Probable--1995(6).... 508,820 0.020 10,000
======= ===== ======
Proven................................ 350,222 0.019 6,550
Probable.............................. 158,598 0.022 3,450
------- ----- ------
Total Proven and Probable--1995(6).... 508,820 0.020 10,000
======= ===== ======
Total Proven and Probable--1994....... 348,910 0.022 7,799
======= ===== ======
</TABLE>
- --------
(1) The company's share is 50% of the reserves presented.
(2) See "Reserves" as to the estimation of proven and probable ore reserves.
(3) Based on a gold price of $375 per ounce in 1995 and 1994.
(4) Reserves include allowances for dilution in mining but do not reflect
losses in the leaching process. The average leach recovery rate for the
reusable pad in 1995 was 70.9%. The eventual recovery rate for the
dedicated pad is estimated to be approximately 50%. The cut-off grade for
Round Mountain ore is 0.006 ounces of gold per ton for oxide and 0.010
ounces of gold per ton for non-oxide.
(5) The offloads consist of approximately 105 million tons of previously
crushed, leached and rinsed ore. The stockpiles consist of approximately
44 million tons of previously unprocessed ore. Sampling and metallurgical
testing conducted in 1994 and 1995 confirmed that this material can be
profitably processed on the dedicated leach pads.
(6) Total proven and probable reserves include 1,838,000 ounces of gold of
which 85% is anticipated to be recovered through a milling process. The
mill was approved by the joint venture partners in 1994, but has not yet
been built. Permitting is nearing completion. Construction will begin in
1996 assuming a positive record of decision is received in connection with
permitting.
The prospective waste to ore ratio of pit ore is 1.76:1. This ratio has
increased significantly from the 1.1:1 waste to ore ratio in 1994 due to the
significant expansion of the size of the ultimate pit. There is potential to
reduce this ratio through optimization of the pit design and by additional
drilling, which could convert some of the material currently classified as
waste into ore. Efforts to reduce the waste to ore ratio will begin in 1996.
24
<PAGE>
The change in proven and probable reserves since December 31, 1994 is
attributable to:
<TABLE>
<CAPTION>
GOLD CONTENT PERCENT OF
OUNCES(1) 1994
(000'S) RESERVES
------------ ----------
<S> <C> <C>
Additions to reserves due to pit expansion and new
drilling information.............................. 2,878 36.9%
1995 Production(2)................................. (577) (7.4%)
Adjustments due to improved estimation techniques
including costs, recovery processes and pit con-
figuration, and changes in stockpiles............. (100) (1.3%)
----- ----
Net Change in Reserves............................. 2,201 28.2%
===== ====
</TABLE>
- --------
(1) The company's share is 50% of the reserves presented.
(2) Production represents previously modeled, in situ ounces mined during
1995; this amount does not reflect recovery losses from heap leaching, nor
changes in ore under leach.
MINING AND PROCESSING
For a general description of Round Mountain's mining and heap-leach recovery
process see page 9.
Ore and waste rock are mined at a rate of approximately 170,000 tons per
day. Nearly all mined material requires drilling and blasting prior to
excavation. The open pit mining operation employs three 28-yard electric
mining shovels, and seventeen 150-ton and seven 190-ton mechanical haul
trucks.
Gold recovery from ore occurs from three independent recovery operations.
These include crushed ore (reusable pad) leaching, run-of-mine ore (dedicated
pad) leaching and gravity concentration. Beginning in 1993 the company began
processing the lower-grade ore on the run-of-mine leach pads. Recovery rates
for crushed ore has increased and lower-grade ore and some material previously
hauled to the waste dumps is being leached on the run-of-mine leach pads.
Gravity concentration is applied only to very high grade ore containing
coarse gold. A 500 ton per day gravity recovery plant was constructed in 1992
to process ore from a small but very high grade vein excavated within the main
Round Mountain ore body. Feed for the gravity plant has been exhausted and
future operation of that facility will be intermittent.
Currently, gold recovery occurs almost entirely from heap leaching. Higher-
grade ore is crushed to 3/4 inches at a rate of 22,000 tons per day and
conveyed to two parallel 1.5 million square foot asphalt reusable leach pads.
This ore is leached for approximately 128 days, rinsed and removed. Fine
crushing capacity exceeds 22,000 tons per day, but crushing throughput is
operationally constrained to prolong the leaching cycle for maximum recovery.
Geothermal heat is employed to raise the temperature of leach solutions during
the winter months. In 1996, heap leaching rates on the reusable leach pads is
expected to increase to 28,000 tons per day, decreasing the leach cycle to
approximately 110 days.
Lower-grade ore (down to a cut-off grade of 0.006 ounce per ton for oxidized
ores and 0.010 ounce per ton for unoxidized ores) is transported directly to a
dedicated run-of-mine leach pad at a rate which averaged 66,000 tons per day
in 1995. Ore is placed in 50 foot thick layers for leaching. After completion
of an initial leaching cycle of approximately 100 days, additional layers of
ore are placed until the heap reaches an ultimate height of 300 feet. The
dedicated leach pad is constructed in phases as capacity is needed. The
existing dedicated leach pad covers approximately 16.4 million square feet and
has a capacity of approximately 131 million tons.
During 1995, Round Mountain concluded after extensive testing that crushed
ore which has already been leached on the reusable pad can profitably be
loaded onto the dedicated pad and releached there. Most of the contained gold
is released on the reusable pad within the first 90 days, but sufficient gold
values remain to justify additional leaching on the low-cost dedicated pad
over a period of years.
25
<PAGE>
Accordingly, Round Mountain plans to releach on its dedicated pad most of
the crushed ore previously leached on its reusable pad. The amount of ore
loaded on the reusable pad is expected to increase to 28,000 tons/day in 1996
from 22,490 tons/day in 1995, reducing the reusable pad's leach cycle from 140
to 110 days. The additional tonnage should increase production from the
reusable pad.
In 1994, the joint venture decided to invest about $60 million (the
company's share, $30 million) to build an 8,000 ton per day mill to treat
higher-grade unoxidized ore. This facility is expected to recover up to 85% of
the gold contained in unoxidized ores by employing gravity concentration and
cyanide leaching. Construction is expected to commence in 1996 with startup in
1997 assuming approval of the Environmental Impact Statement by the Bureau of
Land Management. The participants in the joint venture have sufficient capital
resources to fund construction costs.
Round Mountain is expected to produce approximately 370,000 to 380,000
ounces of gold (the company's share, 185,000 to 190,000 ounces) in 1996 from
344,434 ounces (the company's share, 172,217) in 1995. Cash production costs
are expected to be $210--$215 per ounce of gold versus $200 per ounce in 1995.
LUPIN
The Lupin mine is an underground operation located 250 miles northeast of
Yellowknife in the Northwest Territories of Canada, 56 miles south of the
Arctic Circle. Production began in October 1982.
The Lupin mining leases cover 16,699 acres. The principal lease was renewed
for 21 years in 1992, and, provided the company has complied with its terms,
is renewable for further 21 year periods subject to any applicable regulations
then in effect. The lease was granted by the Department of Indian Affairs and
Northern Development on behalf of the Crown and is subject to the provisions
of the Territorial Lands Act and the Canada Mining Regulations. The lease is
in good standing.
In 1995, Echo Bay purchased the Ulu Project, located approximately 100 miles
north of Lupin, from BHP Minerals for $10 million. A 5% net smelter royalty is
payable to BHP after the recovery of 675,000 ounces of gold.
The Ulu property has about 1.9 million minable tons of mineralized material
at average grades of 0.320 ounces of gold per ton. The deposit is open on
strike and down dip. Beginning in 1996, a two year, $19 million, exploration
program will be undertaken by the company to further explore and develop the
deposit.
Ulu ore is expected to be hauled to Lupin for processing beginning in 1998,
allowing the Lupin mill to run near full capacity (2,300 tons per day) for at
least four years, and lowering unit costs.
The table below sets forth annual production data for the Lupin mine for
1991 through 1995.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Gold produced (ounces)........ 172,110 180,052 217,504 214,482 216,877
Production costs per ton:
Mining...................... C$44.23 C$40.45 C$35.54 C$34.79 C$34.77
Milling..................... C$12.26 C$12.03 C$12.27 C$13.49 C$18.47
Production cost per ounce of
gold:
Cash production cost:
Canadian dollars.......... C$ 415 C$ 382 C$ 318 C$ 294 C$ 277
U.S. dollars.............. US$ 303 US$ 280 US$ 247 US$ 244 US$ 242
Royalties paid.............. $ -- $ -- $ -- $ -- $ --
Depreciation................ $ 68 $ 64 $ 59 $ 57 $ 52
Amortization................ $ 19 $ 16 $ 17 $ 16 $ 18
Total production cost....... $ 390 $ 360 $ 323 $ 317 $ 312
Capital expenditures (millions
US$)......................... $ 14.5 $ 8.5 $ 4.5 $ 12.8 $ 9.0
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Deferred (applied) mining expenditures
(millions US$)....................... $ 2.8 $ 0.5 $(0.9) $(0.3) $ 0.6
Milled:
Ore processed (tons/day)............ 1,986 2,241 2,297 2,043 1,998
Days of operation................... 364 364 371 364 364
Total ore processed (000 tons)...... 723 816 852 744 727
Grade (ounce/ton)................... 0.258 0.238 0.272 0.308 0.317
Recovery rate (%)................... 92.5 92.9 93.7 93.5 94.2
</TABLE>
GEOLOGY AND ORE RESERVES
Lupin ore reserves are estimated by the company.
Gold mineralization in the Lupin deposit and numerous other occurrences in
the Contwoyto Lake area is contained in lenses and beds of sulfide-bearing
iron formation within the greywacke-slate dominated Archean age Contwoyto
Formation. The Contwoyto Formation is intruded by granite plutons and gabbro
dikes and is generally isoclinally folded. Iron formation is characterized by
a high amphibole and quartz content.
At Lupin, gold occurs in thin beds of pyrrhotite-rich iron formation, in
arsenopyrite-rich zones adjacent to quartz veins and in quartz veins.
The Lupin gold deposit exists at surface in a Z-shaped isoclinally folded
iron formation horizon which consists of a north-plunging syncline with an
adjoining anticline to the west and to the east. The Lupin deposit is overlain
by phyllite and slate and is underlain by greywacke. Most gold in reserves is
contained in the west limb of the syncline (Center Zone) and in the west limb
of the western anticline (West Zone). A lesser amount of gold mineralization
occurs in the east limb of the syncline (East Zone) and the east limb of the
eastern anticline (L19 Zone).
Ore reserves and other mineralization exist to a depth below surface of
5,020 feet for the Center Zone and 4,590 feet for the West Zone, 2,706 feet
for the East Zone and 1,020 feet for the L19 Zone. Ore reserves include broken
ore in stopes and in ore passes and stockpiled ore on surface. Ore reserves
also include an allowance for mining dilution and therefore represent an
estimate of the mill head grade. Ore reserves do not include any allowance for
losses from milling. In estimating the reserves and other mineralization,
waste rock amounted to an average dilution of 15% to 25% in the Center Zone,
25% in the East Zone and 35% to 60% in the West and L19 Zones. Ore reserves
include ore in recoverable pillars but do not include ore left in non-
recoverable pillars required for long term ground support.
The Center and West Zones are open at depth. Additional proven and probable
reserves are expected in the Center Zone, with development between the 4,070
and 4,350 foot levels, and in the West Zone with development between the 2,820
and 3,215 foot levels and between the 3,740 and 4,150 foot levels. Additional
other mineralization may be expected from systematic drilling of the West
Zone, although the prospects for adding significant reserves in the future are
diminishing.
27
<PAGE>
LUPIN MINE
ORE RESERVES (1) (2)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
TONNAGE AVERAGE GOLD CONTENT
(SHORT TONS) GRADE OF GOLD (OUNCES)(3)
(000'S) (OUNCES PER TON) (000'S)
------------ --------------- ------------
<S> <C> <C> <C>
Proven and Probable
Center Zone........................ 1,197 0.298 356
North Nose......................... 251 0.259 65
East Zone.......................... 228 0.317 73
West Zone.......................... 734 0.247 181
Broken Ore......................... 35 0.280 10
----- ----- ---
Total Proven and Probable--1995...... 2,445 0.280 685
===== ===== ===
Proven............................... 2,174 0.284 617
Probable............................. 271 0.250 68
----- ----- ---
Total Proven and Probable--1995...... 2,445 0.280 685
===== ===== ===
Total Proven and Probable--1994...... 2,517 0.289 727
===== ===== ===
</TABLE>
- --------
(1) See "Reserves" as to the estimation of proven and probable ore reserves.
(2) Based on a gold price of $375 per ounce in 1995 and 1994.
(3) Reserves do not reflect losses in the milling process but do include
allowance for dilution of ore in the mining process. The mining recovery
factor was estimated at 85%. The average mill recovery rate of gold in
1995 was 92.5%. The cut-off grade is 0.146 ounces of gold per ton.
The change in proven and probable reserves since December 31, 1994 is
attributable to:
<TABLE>
<CAPTION>
GOLD CONTENT PERCENT OF
(OUNCES) 1994
(000'S) RESERVES
------------ ----------
<S> <C> <C>
New reserves added by additional drilling and inclusion
of sill pillars previously
considered non-recoverable............................ 132 18.1%
1995 Production(1)..................................... (174) (23.9%)
---- -----
Net Change in Reserves................................. (42) (5.8%)
==== =====
</TABLE>
- --------
(1) Production represents previously modeled, in situ ounces mined during
1995; this amount does not reflect recovery losses from milling.
The ore grade at Lupin declines with depth, and it becomes more erratic. The
Center Zone of the three-zoned ore body also tends to be narrower. All of this
causes slower and more costly mining in the deeper levels of the mine.
MINING AND PROCESSING
Access to the Lupin underground mine, removal of ore and waste, and movement
of personnel within the mine, is by a shaft developed to a depth of 3,970 feet
and by a ramp driven to a depth of 4,130 feet.
The ore in the Center and East Zones has been mined by the sub-level, long-
hole open stoping method. Mining of the narrower West Zone has been also by
the long-hole open stoping method, although it has been a more costly zone to
mine than the Center Zone. A change to integrated backfilling methods in the
Center Zone below 2,460 feet and West Zone below 2,400 feet was completed in
1995.
28
<PAGE>
After the ore is mined, it is hoisted to the surface for processing and
recovery of gold. The ore is crushed and ground and is then agitated in a lime
solution in the presence of air to oxidize some of the ore constituents which
may otherwise inhibit the solubility of the gold and increase the consumption
of reagents. The ore is then leached in a solution of sodium cyanide for
approximately 40 hours to dissolve the gold. The gold-bearing solution is
separated from the solids using thickening and vacuum filtration, and the gold
is precipitated from the solution by means of zinc dust. The precipitate is
dewatered, smelted and cast into bars of unrefined gold.
During 1990, stopes were backfilled with waste rock and glacial gravel and
sand for the first time. This process provides additional underground
structural stability which allowed for mining of sills which had been unmined
earlier. A new mining method, started in 1993, incorporates waste filling of
stopes primarily from development waste headings. In 1995, this method also
incorporated "pastefill" which is composed of mine tailings and cement.
Shaft deepening commenced in 1988, with the objective of further delineating
the Lupin ore body at depth and providing access for mining at these lower
depths. This phase involved shaft sinking from 2,550 feet to about 3,970 feet
and had reached the completed depth by December 1990. In mid-1994, the ramp
was stopped at the 4,070 foot depth and ore drifting was completed on the
Center Zone at the 3,940 foot depth. By year end 1995, ore development in the
Center Zone was complete between the 3,710 and 3,940 foot levels as well as
between the 2,970 and 3,180 foot levels. In the West Zone, development was
completed between the 2,460 and 2,760 foot levels and the 3,315 and 3,445 foot
levels.
Stope production in the Center Zone between the 2,460 and 2,660 foot
horizons was completed in 1995. The Center Zone production horizons currently
advance in an upwards fashion, with mined out stopes being backfilled with
paste backfill.
The ore grade at Lupin declines with depth, and the deposit becomes more
erratic. Additional ground support is also required as the depth increases.
The company has changed its mining techniques and backfill process to overcome
the challenges of mining at depth.
The company expects to operate the mill at 2,145 tons per day during 1996,
compared to 1,986 tons per day in 1995. Gold production is expected to be
approximately 185,000 to 190,000 ounces in 1996 versus 172,110 ounces in 1995.
Cash production costs are expected to be $272-$275 per ounce of gold versus
$303 per ounce in 1995.
SUPPLIES, UTILITIES AND TRANSPORTATION
The Lupin mine and mill facilities are in a remote location in the sub-
Arctic region of Canada which requires the company to respond to certain
unusual conditions. At the mine, the company maintains supplies of spare parts
and other materials, including fuel, and standby systems of piping and pumping
in excess of what would be required at less remote locations.
The principal supplies needed for the operation of the Lupin mine are diesel
fuel, chemical reagents (including lime, cyanide and zinc), cement, grinding
media, drill steel, equipment parts, lubricants, food and explosives. The
largest single item is diesel fuel, which is used principally to generate
power. A diesel-powered generating plant provides power for all the Lupin
facilities. The powerhouse has a primary installed capacity of approximately
18,000 kilowatts which is supplemented by additional standby generators having
a combined capacity of 1,500 kilowatts. Heating for the Lupin facilities is
obtained by utilizing waste heat from these generators augmented by diesel
oil-fired boilers.
All equipment, materials and supplies must be transported to the mine from
Edmonton or Yellowknife. Personnel are transported from these locations and
from Kugluktuk (formerly Coppermine) and Cambridge Bay, Northwest Territories.
Each year since 1983, the company has completed a 360-mile ice road commencing
40 miles northeast of Yellowknife and ending at the Lupin mine as the most
economical way of transporting bulk items, including fuel, to the mine.
29
<PAGE>
In order to operate the winter road, the company is required to obtain
certain permits from the government of the Northwest Territories. To date, the
company has experienced no significant difficulties in obtaining these
permits. The winter road is usable for approximately 12 weeks each year
beginning in mid-January during which time tractor-trailers can transport all
of the company's annual requirements for diesel fuel, chemical reagents and
certain other supplies. There are on-site facilities for the storage of
approximately 5.4 million U.S. gallons of diesel fuel, which is in excess of
the mine's annual requirements.
Supplies and personnel that must be brought in by air are transported
principally on a leased Boeing 727, which carries up to 117 passengers, or up
to 35,000 pounds of freight, or a combination of both passengers and freight.
Surface facilities at the Lupin mine include a 6,300-foot compacted gravel
airstrip with an instrument landing and navigation system and runway lighting.
Voice and data communications with the Lupin mine are maintained via
satellite, which provides for uninterrupted communications regardless of
adverse weather conditions.
Severe winter conditions, including snow, wind and fog, may at times delay
the operation of aircraft and of vehicles using the winter road. Despite the
remote location and adverse weather conditions, since beginning Arctic
operations in 1964, the company has experienced no material operational
disruptions or cessation of its operations, although such disruptions could
occur.
WATER SUPPLY AND WASTE DISPOSAL
Water for mining, milling and domestic use is obtained on site by pumping
from Contwoyto Lake. Tailings from the mill are pumped into a tailings pond or
pumped underground as part of the paste-backfill. In 1995, approximately 35%
of tailings were placed underground as paste-fill. This percentage is expected
to increase in 1996. Water from the tailings pond is processed through a water
treatment plant and monitored for compliance with Northwest Territories'
standards prior to discharge. The company's water license, which is renewable
on application, expires May 31, 2000.
KETTLE RIVER
The Kettle River properties are located in Ferry County in the State of
Washington and covers approximately 13,409 acres through patented and
unpatented mining claims and fee lands.
The following table sets forth annual production data for the Kettle River
operation for 1991 through 1995.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Gold produced (ounces) (100%).... 100,419 66,782 73,431 89,849 90,273
Gold produced (ounces) (the
company's share)(1)............. 100,419 66,782 73,431 62,894 63,191
Production costs per ton:
Mining......................... $ 22.60 $11.06 $16.12 $21.77 $23.64
Milling........................ $ 12.76 $13.54 $12.80 $12.66 $12.73
Production cost per ounce of
gold:
Cash production cost........... $ 237 $ 259 $ 277 $ 294 $ 303
Royalties paid................. $ 8 $ 5 $ 10 $ 1 $ --
Depreciation................... $ 74 $ 95 $ 76 $ 79 $ 78
Amortization................... $ 45 $ 45 $ 53 $ 156 $ 72
Total production cost.......... $ 364 $ 404 $ 416 $ 530 $ 453
Capital expenditures (millions)
(the company's share)........... $ 9.5 $ 10.0 $ 7.9 $ 7.4 $ 4.3
Deferred (applied) mining expen-
ditures (millions)
(the company's share)........... $ -- $ -- $ -- $ -- $ (0.4)
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Milled:
Ore processed
(tons/day)............. 1,504 1,438 1,551 1,805 1,772
Days of operation...... 364 364 371 364 364
Total ore processed
(000 tons)............. 548 523 575 657 645
Grade (ounces per ton). 0.212 0.149 0.146 0.155 0.164
Recovery rate (%)...... 86.6 85.6 87.7 87.9 85.5
</TABLE>
- --------
(1) The Kettle River Joint Venture was terminated on December 24, 1992 upon
the withdrawal of Crown Resources Corporation (the company's 30% joint
venture partner). The company has owned 100% of the Kettle River
operations since that date.
GEOLOGY AND ORE RESERVES
Kettle River ore reserves are estimated by the company.
At Kettle River, a series of deposits is mined to feed a central mill. All
of the deposits are located within the Republic Graben. Structure in the area
is characterized by north and northeast trending faults which parallel the
Graben boundaries.
The Lamefoot deposit is hosted by Permian age siliciclastic and carbonate
rocks intruded by rhyodacite of Eocene age. Mineralization occurs at or near
the contact between the siliciclastic and carbonate rocks. The contact is near
vertical.
Gold mineralization in the carbonate rocks is principally related to
silicification, massive magnetite, hematite alteration, and lesser amounts of
pyrrhotite and pyrite. Gold mineralization in the siliciclastic rocks is
characterized by sheeted veins containing quartz, pyrrhotite and pyrite.
Reserves at Lamefoot decreased during 1995 due to production. Production was
partially offset, however as a result of continuing underground evaluation,
detailed diamond drilling and development. Mining at Overlook was completed
during October 1995. Remaining Overlook reserves are stockpiled at the Kettle
River Mill.
KETTLE RIVER
ORE RESERVES(1)(2)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
AVERAGE GRADE GOLD CONTENT
TONS OF GOLD (OUNCES)(3)
(000'S) (OUNCES PER TON) (000'S)
------- --------------- ------------
<S> <C> <C> <C>
Lamefoot.................................. 1,585 0.207 328
Overlook stockpile........................ 17 0.139 2
----- ----- ---
Total Proven and Probable--1995........... 1,602 0.206 330
===== ===== ===
Proven.................................... 1,334 0.204 272
Probable.................................. 268 0.214 58
----- ----- ---
Total Proven and Probable--1995........... 1,602 0.206 330
===== ===== ===
Total Proven and Probable--1994........... 1,778 0.218 388
===== ===== ===
</TABLE>
- --------
(1) See "Reserves" as to the estimation of proven and probable ore reserves.
(2) Based on a gold price of $375 per ounce in 1995 and 1994.
(3) Reserves do not reflect losses in the milling process but do include
allowance for dilution in the mining process. The average mill recovery
rate of gold in 1995 was 86.6%. Cut-off grades range from 0.105 to 0.124
ounces of gold per ton.
31
<PAGE>
The change in proven and probable reserves since December 31, 1994 is
attributable to:
<TABLE>
<CAPTION>
PERCENT OF
GOLD CONTENT 1994
OUNCES (000'S) RESERVES
-------------- ----------
<S> <C> <C>
New reserves added by additional drilling............. 37 9.6%
1995 Production(1).................................... (95) (24.5%)
--- -----
Net Change in Reserves................................ (58) (14.9%)
=== =====
</TABLE>
- --------
(1) Production represents previously modeled, in situ ounces mined during
1995; this amount does not reflect recovery losses from milling.
MINING AND PROCESSING
Ore milled in 1995 came principally from Lamefoot and Overlook. Lamefoot
commenced production in December 1994, and Overlook operated until October
1995 when it closed as planned due to depletion of the minable reserve.
Ore from all sources is hauled to the Kettle River mill. In the mill, the
ore is reduced through two stages of crushing and two stages of grinding to a
fine pulp which is then agitated in the presence of oxygen to promote the
oxidation of sulfides. Partial oxidation improves recovery and reduces reagent
consumption. The fine ore is then leached with sodium cyanide in the presence
of carbon. This "carbon-in-leach" process dissolves the gold from the ore and
allows the gold in solution to be adsorbed onto the carbon. Loaded carbon is
removed from the circuit and re-leached in a concentrated cyanide solution at
elevated temperature and pressure. Gold in the concentrated "strip solution"
is then precipitated using the Merrill-Crowe process. Precipitate is then
filtered, dried, smelted and cast into dore bars prior to shipping off site.
Kettle River is expected to produce 120,000 to 125,000 ounces of gold in
1996 from 100,419 ounce in 1995. Cash production costs are expected to be
$225-$230 per ounce of gold versus $237 per ounce in 1995.
OVERLOOK
Mining at Overlook started in 1990 and operated until the mine was closed at
the end of 1992 due to low gold prices. The mine was reopened in May 1994.
Completion of mining occurred in October 1995 with the mining of Zone 5 by a
contractor. Some Overlook ore remains in stockpile and will be milled during
1996.
LAMEFOOT
Development on the Lamefoot project began during 1992 when the portal was
collared and 4,800 feet of drifting was completed. During 1993 and 1994 an
additional 12,700 feet of drifting was completed for a total of 17,500 feet of
drift.
Lamefoot achieved full production in June 1995, at a rate of 1,500 tons per
day. A favorable decision from regulatory authorities in September 1995
enabled mining and development below the 2,750 level.
K-2 PROJECT--EXPLORATION AND DEVELOPMENT
During December 1994, surface excavation for building construction and
portal clearing commenced at K-2. The portal was completed in March 1995 and
the adit to access the ore deposit started. A total of 5,684 feet of drifting
was completed during 1995. Underground diamond drilling to better define the
resource started in August 1995 with a total of 10,466 feet drilled.
Completion of a 530 foot borehole in November provided necessary ventilation
to continue the ramp for additional diamond drilling. Ore production from K-2
is expected to start in late 1996. Capitalized exploration and development
costs related to K-2 are expected to be $7 million in 1996.
32
<PAGE>
DEVELOPMENT PROGRAMS
Alaska-Juneau
The Alaska-Juneau (A-J) project is located near Juneau, Alaska. The property
operated as a large tonnage, low-grade underground gold mine from 1901 to 1944
and covers 8,482 acres located on patented mining claims and state lands. The
company commenced work on the project in 1985.
Ore reserves are set out in "Reserves." The expected process recovery rate
is 86%. The cut-off grade is 0.023 ounces of gold per ton. Ore reserves have
been estimated by the company.
The ore reserve for Alaska-Juneau is based upon exploration, feasibility and
ore reserve work completed in 1992. The 1992 feasibility study calls for a
large-volume underground mine and mill, able to process 22,500 tons per day.
This would produce an average of about 335,000 ounces of gold per year.
The capital cost was projected to be $270 million, stated in third quarter
1992 dollars.
Underground program
From mid-1993 until the second quarter of 1995, the company conducted an
additional $17 million underground drilling program. The program was directed
primarily at in-fill drilling, and not at reserve additions, although some
exploration was conducted. Currently a new mining plan is being prepared based
on the significant additional information from the underground program. While
still in the process of assembling the information, early indications are that
mining zones will be narrower than previously estimated but perhaps at a
better grade. An updated Level 2 feasibility study (see "Feasibility Studies"
in "Glossary") and new ore reserve estimate are expected to be completed by
the end of 1996.
Major mine permit
The major mine permit for the Alaska-Juneau development property in
southeastern Alaska was approved in 1993 by the City and Borough of Juneau. In
October 1994, the Superior Court for the State of Alaska upheld the decision
of the City and Borough of Juneau Assembly to grant the large mine development
permit to the company. That decision was appealed to the Alaska Supreme Court
which heard oral arguments in late 1995 and a decision is expected by mid-
1996.
Permitting Issues
In December 1994, the U.S. Environmental Protection Agency (EPA) issued a
Technical Assistance Report concluding that this development project, as
configured in the May 1992 Final Environmental Impact Statement, would be
likely to violate water quality and other environmental standards. In February
1996, the company's reapplication of permits included a new project
description with an alternative of Submarine Tailings Disposal (STD), which
would require a change in the EPA's regulations. For that purpose, the EPA has
instituted rulemaking procedures to enable it to consider the STD proposal.
The EPA will prepare a Supplemental Environmental Impact Statement (SEIS)
expected to be completed in 1997 that will review the STD proposal and other
options that could enable the Alaska-Juneau project to proceed. There can be
no assurance as to the outcome of the EPA's rulemaking process, the effect of
SEIS, or of the possible legal actions taken by groups opposed to the
development of the Alaska-Juneau property.
Other suits
In December 1993, the Sierra Club Legal Defense Fund and others filed suit
in federal court in Alaska challenging the potential issuance of permits by
the EPA and Army Corps of Engineers for tailings disposal facilities at the
Alaska-Juneau project. In June 1994, the federal court dismissed that lawsuit.
33
<PAGE>
Other matters
The company expects additional legal challenges over the permitting process.
Further legal challenges, if any, could delay development of Alaska-Juneau.
The company has a 100% working interest in the property, subject to a 1 1/2%
net smelter return royalty held by affiliates of Watts, Griffis and McOuat. A
director of the company and members of his immediate family indirectly own or
exercise control over approximately 30% of shares in the affiliates. The
company has an option to purchase the royalty until the earlier of December
31, 2003 or three years after commercial production begins. Upon exercise of
the option, the company must pay C$15.0 million either in cash or a
combination of the company's common shares and cash. In addition, production
is subject to a 2% net smelter return royalty during the first three and one-
half years of commercial production and a 3 1/2% net smelter return royalty
thereafter; this royalty is held by the City and Borough of Juneau and Alaska
Electric Light and Power Company.
The company's construction and production decision is dependent on the
issuance of appropriate permits, the resolution of legal challenges and the
ability of the company to obtain required financing.
See also "Other--Government Regulation--United States."
Kingking
In October 1995, the company and TVI Pacific Inc. signed a definitive
agreement with Benguet Corporation enabling them to acquire the Kingking
porphyry copper-gold project in the Philippines from Benguet. The company has
a 75% interest in the project and is the operator of this joint venture.
The Kingking deposit is located in southeastern Mindanao Island, about eight
miles from the town of Pantukan on the Gulf of Davao. Based on a
prefeasibility report prepared by Benguet in March 1994, Kingking has about
225 million minable tons of mineralized material (the company's 75% share, 169
million tons) at average grades of 0.017 troy ounces of gold per ton and 0.47%
copper based on a cutoff grade of 0.20% copper. The cutoff grade was based on
prices of $340 per ounce of gold and $1.00 per pound of copper.
The Benguet initial feasibility report contemplates open pit mining at
Kingking followed by processing through a concentrator and solvent
extraction/electrowining copper treatment plant. Alternative processing
methods will be considered by the joint venture.
An extensive two-year program of advanced exploration and confirmation
drilling has begun. An updated Level 1 feasibility study is expected to be
completed by the joint venture in 1996. The deposit is open at depth, and also
to the west where drilling to date indicates there is material richer in gold
and leaner in copper. If the work program is successful, the company and TVI
have the right to acquire Kingking on completion of a final feasibility study
in 1997 for $67.0 million (the company's share, $50.3 million). The company
and TVI would also share an additional payment of up to $18.0 million (the
company's share, $13.5 million) for any increase in proven and probable gold
reserves over the mineralization initially outlined by Benguet.
Benguet could elect to reacquire a 20% interest in the project by paying the
company and TVI $20.0 million. This would reduce the company's share to 60% in
exchange for $15.0 million and TVI's share to 20% in exchange for $5.0
million. An additional agreement with TVI allows the company to purchase an
additional 5% interest from TVI for a purchase price determined by applying a
discount rate of 10% to the net present value of the interest as shown in the
final feasibility study.
On October 25, 1995, the company purchased a 1 1/2% net smelter return
royalty on the Kingking property from Nationwide Development Corporation for
$15.0 million payable as follows: $3.0 million in 1995; $3.3 million in 1996;
$2.7 million in 1997; and $6.0 million in 1998. Including the company's
royalty, the Kingking property is subject to a 6 1/2% net smelter return
royalty for the first seven years of production, 4 1/2% for the following
eight years, and 5 1/2% thereafter.
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As part of its strategic alliance with TVI, the company has purchased 11.7
million common shares of TVI, representing 15.7% of TVI's common shares
outstanding for $8.7 million, including a $1.0 million premium for property
options.
The company capitalized approximately $2.9 million related to the two-year
work program in 1995 and expects to capitalize $15 million in 1996. The
company also incurred acquisition costs of $28.8 million in 1995.
The company's construction and production decision is dependent on the
successful completion of additional drilling and metallurgical testing, the
completion of a final feasibility study, the exercise of the company's
purchase option, the issuance of appropriate permits and the ability of the
company to obtain required financing.
Aquarius
In December 1995, the company acquired the remaining 49% interest in the
Aquarius property in the Timmins gold district of northern Ontario in Canada
for $7.75 million from ASARCO Incorporated, increasing the company's interest
to 100%. In February 1995, the company had agreed to earn a 51% interest in
Aquarius from ASARCO by spending Cdn$8.8 million on exploration by September
30, 1998. ASARCO was to have retained a 49% working interest plus a 1% net
smelter royalty. The new agreement replaces the original agreement, increases
the company's interest to 100% of Aquarius, and eliminates the royalty.
Aquarius has about 23 million minable tons of mineralized material at an
average grade of 0.055 troy ounces of gold per ton based on a cutoff grade of
0.020 ounces per ton. The cutoff grade was based on a price of $375 per ounce
of gold.
A level 1 feasibility study was completed in 1995. Extensive additional
drilling is planned for 1996 to better define the mineralization. A level 2
feasibility study is expected to be completed in 1996. The deposit remains
open to the northeast and also to the west.
The company capitalized approximately $1.0 million related to the drilling
program and feasibility study in 1995 and expects to capitalize $4 million in
1996. The company also incurred acquisition costs of $7.8 million in 1995.
The company's construction and production decision is dependent on
successful completion of the current drilling program, completion of a final
feasibility study, the issuance of appropriate permits and the ability of the
company to obtain required financing.
Paredones Amarillos
In 1995, the company completed the work necessary to earn a 51% interest and
an option to acquire an additional 9% interest on the property from its joint
venture partner, Baja Gold. The company is required to make a $1.0 million
payment to exercise its 9% option on the property located near La Paz, Mexico.
The company's work to date has outlined 27 million minable tons of
mineralized material (the company's 60% share, 16 million tons) at average
grades of 0.040 troy ounces of gold per ton based on a cutoff grade of 0.022
ounces per ton. The cutoff grade was based on a price of $375 per ounce of
gold.
A level 1 feasibility study was completed in 1995. The company has begun a
step-out drilling program to outline an extension of the mineralization at
depth to the south and east, where the deposit remains open. Preliminary
metallurgical work indicates that milling at a relatively coarse grind will
probably be a more cost-effective processing method than heap leaching, but
the company is also studying a combination of milling the higher-grade ore and
heap leaching the lower-grade material. A level 2 feasibility study is
expected to be completed by the end of 1996.
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The company expensed approximately $3.4 million and capitalized
approximately $1.2 million related to the 1995 drilling program and
metallurgical testing and expects to capitalize $5 million in 1996.
The company's construction and production decision is dependent on
completion of a final feasibility study, the issuance of appropriate permits
and the ability of the company to obtain required financing.
Chapada
In 1995, the company entered into an agreement enabling it to acquire a 50%
interest in the Chapada property from Santa Elina Gold Corporation. Chapada is
a large-tonnage copper and gold deposit in Brazil. To exercise the option, the
company has agreed to pay Santa Elina $25.00 per ounce of contained gold and
$0.02 per pound of contained copper for the company's share of proven and
probable reserves, as reported in the final feasibility study. If additional
reserves are found later, the company would pay Santa Elina a net smelter
return royalty of 3.5% on the company's share of revenue after the initial
reserves identified in the feasibility study are depleted.
Santa Elina has outlined 113 million minable tons of mineralized material
(the company's 50% share, 57 million tons) at average grades of 0.012 troy
ounces of gold per ton and 0.43% copper based on a cutoff grade of 0.30%
copper. The cutoff grade was based on prices of $400 per ounce of gold and
$1.00 per pound of copper.
The company has begun a work program to further expand the currently
outlined mineralization. A level 2 feasibility study is expected to be
completed in 1997.
The company purchased 4,000,000 common shares of Santa Elina Gold
Corporation for $10.0 million in 1995 in addition to the 5,000,000 common
shares which were purchased in 1994 for $10.0 million. $5.0 million of the
proceeds of the 1995 purchase is being used by Santa Elina to perform
exploration work on the Chapada property.
The company's construction and production decision is dependent on positive
results from the work program, completion of a final feasibility study, the
issuance of appropriate permits and the ability of the company to obtain
required financing.
EXPLORATION
The company explores for extensions of known reserves at its mines and
development properties as well as conducting exploration for new gold
deposits. In response to available opportunities, as well as increased
difficulty in obtaining mining permits and proposed U.S. federal royalties on
production from U.S. public lands, the company has expanded its exploration
focus outside North America. The company conducted exploration in Mexico,
South America, the Philippines and West Africa in 1995.
Exploration offices have been established in Mexico, Chile, Niger, the
Philippines and Ghana, in addition to the existing offices in the U.S. and
Canada, to conduct regional activities effectively.
Exploration expense totaled $46.5 million in 1995 compared to $27.1 million
in 1994 and $13.5 million in 1993. The budget for exploration expense for 1996
is currently $43.1 million, dependent on opportunities, of which 70% is
expected to be spent outside the U.S. and Canada. A similar percentage was
spent outside the U.S. and Canada during 1995. The company conducts its own
active exploration and participates in farm in/farm out exploration
arrangements.
SUNNYSIDE
In December 1991, Sunnyside Gold Corporation (SGC) , an indirect wholly
owned subsidiary of the company, transferred its interest in the Alta Bay
joint venture properties located in Nevada to Alta Gold Co. Alta Gold assumed
all future environmental liabilities at the properties transferred. SGC
maintained its interest in the Sunnyside mine, located in Colorado, and
assumed Alta Gold's share of future environmental liabilities at Sunnyside.
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In February 1996, SGC and the State of Colorado agreed in principle to a
plan for obtaining release from Colorado Discharge Permit System requirements
following sealing of the Sunnyside mine. Under this plan, SGC would perform
environmental mitigation on up to nine mining claims which are unrelated to
production at the Sunnyside mine; divert and treat Cement Creek while the
mitigation work is being performed; monitor water quality at several points in
the Animas River basin and provide financial assurance in the form of a letter
of credit of $5.0 million. In return, the State of Colorado will release SGC's
mine discharge permits after the mitigation projects are completed and the
post-project monitoring period has elapsed; refrain from enforcement action on
groundwater seeps and springs that may occur subsequent to the sealing of the
Sunnyside mine; release SGC from future obligations after the permits are
released; and will support the settlement before the Environmental Protection
Agency and the public. SGC estimates that it will take a minimum of seven
years for all of the conditions of the agreement to be fulfilled by both
parties. This settlement is subject to a public comment period and is expected
to be finalized in the second quarter of 1996.
In May 1994, SGC commenced proceedings in Colorado state court to obtain a
declaratory judgment clarifying the extent of SGC's responsibility, if any,
for ground water seeps and springs that may occur subsequent to the planned
sealing of the Sunnyside mine. These proceedings will be concluded upon
finalization of the consent decree by the State of Colorado and approval by
the court. See "Legal Proceedings--Sunnyside."
In 1995, SGC increased the provision for future reclamation costs at the
Sunnyside mine by $11.7 million. SGC's provision for future reclamation costs
is reviewed periodically and adjusted as additional information becomes
available.
KENSINGTON
In 1995, the company sold its 50% interest in the Kensington development
project to its partner, Coeur d'Alene Mines Corp. for $32.5 million and a
scaled royalty on future production, resulting in a $3.2 million gain.
OTHER
Precious Metal Sales and Hedging Activities
The company's dore bars are further refined by third parties before they are
sold as gold or silver bullion. The refined gold and silver is sold to banks
or precious metal dealers.
The company's profitability is subject to changes in gold and silver prices,
exchange rates, interest rates and certain commodity prices. To reduce the
impact of such changes, the company attempts to lock in the future value of
certain of these items through hedging transactions. These transactions are
accomplished through the use of derivative financial instruments, the value of
which is derived from movements in the underlying prices or rates.
The gold- and silver-related instruments used in these transactions include
commodity loans, fixed-forward and spot-deferred contracts, swaps and options.
Sensitivity to changing metal prices is reduced, and future revenues are
hedged, as the company's future production will satisfy these loans and other
delivery commitments.
In 1995, approximately 22% of gold production was delivered against forward
sales and gold loans at an average price of $395 per ounce. This compares with
19% of gold production in 1994 and 11% of gold production in 1993, at an
average price of $370 and $352, respectively. Approximately 47% of silver
production was delivered against forward sales at an average price of $5.48
per ounce in 1995, compared to 50% at an average price of $4.56 in 1994 and
33% at an average price of $4.40 in 1993.
The company engages in forward currency-exchange contracts to reduce the
impact on the Lupin mine's operating costs caused by fluctuations in the
exchange rate of U.S. dollars to Canadian dollars. Forward currency
transactions more closely link profitability of Canadian operations to the
price of gold in U.S. dollars.
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The company also engages in crude oil hedging activities, including forward
purchase agreements and swaps, to reduce the impact of fluctuations in crude
oil prices on its operating costs.
The company used interest rate swap agreements to effectively convert its
fixed-rate preferred stock dividends into floating-rate dividends. The
interest rate swap agreements expired on December 31, 1995.
All purchases and sales of derivatives are connected to production of gold
or silver, or to existing financial commitments and are not entered into for
speculative gain.
The company's forward sales positions, gold and silver loan and swap
repayment schedules, option position, currency position and crude oil position
at December 31, 1995 are set out in note 15 to the company's consolidated
financial statements.
Government Regulation--Canada
The mining industry in the Northwest Territories operates under Canadian
federal and territorial legislation governing prospecting, development,
production, environmental protection, exports, income taxes, labor standards,
mine safety and other matters. The company believes its Canadian operations
are operating in substantial compliance with such legislation. The operation
of the Lupin mine is subject to substantial regulation by government
authorities, which is in many instances discretionary.
The company's Lupin operation is presently subject to environmental
regulation primarily by the Federal Department of Indian Affairs and Northern
Development ("DIAND") and the Northwest Territories Water Board, which are
responsible for administering the Northwest Territories Water Act (Canada)
("NWTWA"), legislation that on June 15, 1993, replaced the Northern Inland
Waters Act (Canada) ("NIWA") pursuant to which DIAND previously exercised
jurisdiction over the operation. The company's existing licences under NIWA
were deemed to continue under the NWTWA.
Pursuant to the Nunavut Final Agreement between the Government of Canada and
the Inuit of Canada's eastern arctic, the jurisdiction previously exercised by
the Northwest Territories Water Board under the NWTWA will effectively be
exercised by the Nunavut Water Board. Once the Nunavut Water Board is
established, the company will be subject to its jurisdiction and any further
approvals or licences will have to be obtained from that Board. In the
meantime, any changes or additions to existing operations that may require
additional, or amendments to existing, licences would be obtained from the
Northwest Territories Water Board under the NWTWA. All federal licences,
permits or authorizations required for the operation of the Lupin mine are in
good standing.
On January 19, 1995, the Canadian Environmental Assessment Act ("CEAA") came
into force. Any changes or additions to existing operations at Lupin may be
subject to environmental assessment by the federal government under the CEAA
before any permits or licenses are issued under the NWTWA in respect of those
changes or additions to existing operations.
The federal Departments of Fisheries & Oceans and Environment have an
enforcement role in the event of environmental mishaps, but presently have no
direct, regulatory role in relation to Lupin.
Lupin is also subject to enforcement by the Northwest Territories Department
of Natural Resources pursuant to the Northwest Territories Environmental
Protection Act ("NWTEPA"). NWTEPA contains requirements to obtain licenses and
permits which may, in the future, affect the Lupin operation, but those
requirements are not presently in force. The company believes it is in
substantial compliance with all relevant territorial environmental
legislation.
On January 1, 1994, the North American Free Trade Agreement ("NAFTA")
between Canada, the United States and Mexico came into force. The NAFTA amends
the Investment Canada Act and its regulations and guidelines in that the
investors of the United States and Mexico are treated more favorably from all
other "non-Canadian" investors with respect to reviews by Investment Canada.
Direct acquisitions of Canadian businesses
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<PAGE>
by investors from the United States or Mexico are only subject to review if
the acquisitions exceed a certain threshold which is adjusted annually
according to the formula set out in Annex I to the NAFTA. However, indirect
acquisitions of Canadian businesses by investors of the United States or
Mexico are not subject to review.
The Competition Act (Canada) requires parties to certain transactions, if
the parties to and the circumstances of the transaction meet certain size
thresholds as designated in the Act, to provide the Director of Investigation
and Research (the "Director") with detailed information about the transaction
and the parties, and to observe a waiting period prior to closing. Without the
Director's pre-clearance of the transaction by the expiration of the waiting
period, the transaction will not be permitted to be completed. In order to be
notifiable, transactions must meet the basic size threshold, namely, the
parties to the transaction together with their affiliates (defined to include
parent, subsidiary and sister corporations) must have assets in Canada or
gross revenues from sales in, from or into Canada that exceed C$400 million.
Assuming the size threshold is met, additional thresholds based on the type of
transaction must be met before notification is required.
Government Regulation--United States
The company's U.S. operations are subject to comprehensive regulation with
respect to operational, environmental, safety and similar matters by federal
agencies including the U.S. Department of the Interior, the U.S. Department of
Agriculture (U.S. Forest Service), the U.S. Environmental Protection Agency
("EPA"), the U.S. Mine Safety and Health Administration ("MSHA") and similar
state and local agencies. Failure to comply with applicable laws, regulations
and permits can result in injunctive actions, damages and civil and criminal
penalties. If the company expands or changes its existing operations or
proposes any new operations, it may be required to obtain additional or
amended permits or authorizations. The company spends substantial time, effort
and funds in planning, constructing and operating its facilities to ensure
compliance with U.S. environmental and other regulatory requirements. Such
efforts and expenditures are common throughout the U.S. mining industry and
generally should not have a material adverse effect on the company's
competitive position.
The company believes its U.S. operations are in substantial compliance with
applicable air and water quality laws and regulations and that it has acquired
or applied for all permits required under such laws or requested by the states
in which it is operating.
The City and Borough of Juneau in Alaska has adopted an ordinance which will
require the company to compensate the city for the costs of any direct socio-
economic impacts from the Alaska-Juneau project on the city and its services.
The city in turn is obligated to pay for any indirect impacts. The nature and
extent of any direct impacts and related costs for which the company might be
responsible under such ordinance cannot be conclusively determined at this
time.
Certain wastes from mining and mineral processing operations are currently
exempt from regulation under the Bevill amendment to the federal Resource
Conservation and Recovery Act ("RCRA"). However, Congress will be considering
revision and reauthorization of RCRA, as well as the federal Clean Water Act
and Endangered Species Act, each of which substantially affects mine
development and operations. The effect of any revised or additional regulation
on the company's U.S. operations cannot be determined until the legislative
process is completed and new administrative rules are issued, but they can
have a significant impact upon operations of all mining companies and increase
the costs of those operations.
Proposed legislation is being introduced in both houses of the current
Congress to modernize the general mining laws applicable to operations on
federal lands, including a comprehensive bi-partisan bill actively supported
by the mining industry. These proposals include royalty provisions,
environmental controls and requirements for reclamation.
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The most material direct economic impact of mining law revision could be
from royalties for production at the McCoy/Cove mine in Nevada, which is on
federal land, and (to a lesser degree) at the 50%-owned Round Mountain mine in
Nevada, 24% of whose reserves are on federal land. However, the company has
completed all of the steps currently required under U.S. law to convert the
McCoy/Cove and Round Mountain land to patented status (and thus to be exempt
from any proposed royalty), and it filed applications for patents. During
1994, the company filed lawsuits against the U.S. Department of the Interior
to require the government to cease its delay and to issue certificates and
patents to which the mines are currently entitled. The government has formally
notified the court that the key certificates, which were the objective of the
suits, were issued to the company March 1, 1995. The Department is expected to
complete its administrative review and issue the patents in accordance with
the regulations.
The federal Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA"), commonly called the "Superfund Act," contains
stringent reporting requirements for the release or disposal of hazardous
substances, with substantial fines for noncompliance. In addition, under
CERCLA, any party responsible for the release or threatened release of a
hazardous substance into the environment is liable for all clean-up costs.
Responsible parties under CERCLA include the owner or operator of the site
where the release occurs or anyone who owned or operated the site when a
disposal was made, regardless of culpability. Mining wastes are subject to
CERCLA regulation if they contain hazardous substances, and EPA has included
several mining sites on its list of high-priority sites for clean-up under
CERCLA.
The Stibnite property near Yellow Pine, Idaho, is the subject of a
preliminary investigation/site assessment ("PI/SA") by the Environmental
Protection Agency that indicates that the site may be eligible for inclusion
on the National Priorities List ("NPL") under CERCLA. During 1985, Copper
Range Company, then an acquired subsidiary of the company, and from November
1985 to December 1989, Round Mountain Gold Corporation, a subsidiary of the
company, owned a 20% interest in a joint venture that controlled several
claims in the Stibnite area. Copper Range Company, a subsidiary of the company
from January 1985 until November 1985, is on the list of present and former
owners or operators of properties at the Stibnite site. Round Mountain Gold
Corporation, because it owned 20% of the joint venture between November 1985
and December 1989, also may have liability for a share of the cleanup costs at
the site, if cleanup is undertaken pursuant to CERCLA. At this time, it is not
possible to estimate the size of the potential cost of cleanup, or to state
how much of that liability, if any, might be the responsibility of Round
Mountain Gold Corporation. However, the current operator is conducting
permitted mining operations which include remediation of the site, and no
CERCLA action is presently anticipated.
Various types of dust control, revegetation and similar reclamation-related
measures are generally required for the company's Nevada operations under
specific state air or water quality and mine reclamation rules and permits.
The Bureau of Land Management ("BLM") and Forest Service permits and Plans of
Operations for the company's Nevada operations also contain some reclamation-
related requirements, including an obligation to perform recontouring of pre-
existing pits at the Borealis mine. The Kettle River project is similarly
subject to requirements for reclamation of disturbed surface areas by
agreement with the State of Washington. The company believes its operations
are in substantial compliance with these reclamation requirements.
The company believes that all of its U.S. operations are currently being
conducted in substantial compliance with applicable MSHA and similar state
labor, health and safety rules.
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Employees
At December 31, 1995, the company employed 1,987 persons excluding temporary
employees directly involved in short-term programs, broken down as follows:
<TABLE>
<S> <C>
McCoy/Cove................................................................ 475
Round Mountain, including ancillary services.............................. 555
Lupin, including aviation and winter road................................. 522
Kettle River.............................................................. 195
Exploration............................................................... 52
Technical and Corporate Staff............................................. 137
Other, including Alaska and Sunnyside..................................... 51
-----
1,987
=====
</TABLE>
A sufficient supply of qualified workers is available for both Canadian and
U.S. operations, although the continuation of such supply depends upon a
number of factors, including, principally, the demand occasioned by other
projects. None of the company's employees are represented by labor unions. The
company believes it generally has good relations with its employees. The
company provides its employees with a competitive compensation package and
comprehensive benefits program.
Insurance and Mining Risks
The company carries insurance against property damage, including boiler and
machinery insurance, and also comprehensive general liability insurance of a
total of $51 million per occurrence, which is available to all operations. The
company carries special liability policies applicable to aircraft and motor
vehicles. It is also insured against dishonesty and gold and silver bullion
thefts, as well as losses of goods in transit. The property damage and boiler
and machinery insurance policies include coverage for business interruption,
resulting from an insured loss, subject to a five day waiting period and a
maximum indemnification period of one year.
Risks not insured against include mine cave-ins, mine floodings or other
hazards and most types of environmental pollution against which the company
cannot insure or against which it has elected not to insure.
The company believes that it has taken adequate precautions to minimize the
risk of environmental pollution. However, with respect to certain mines, there
is some risk that cyanide may escape from the leach pads or tailings dams in
sufficient quantities to cause water or surface pollution. In addition, there
is some risk of environmental pollution and liability under U.S. or Canadian
environmental laws. See "Government Regulation."
Underground mining is generally subject to certain types of risks and
hazards, including unusual or unexpected formations, pressures, cave-ins,
flooding and other conditions. The company has not experienced any significant
cave-ins at its underground mines. See "Lupin--Mining and Processing." In
addition, because mining can be conducted on a number of different levels at
the same time, a cave-in in one area would not necessarily affect mining in
other areas.
Open-pit mining, such as that conducted at certain of the company's mines,
is generally subject to certain types of risks and hazards, primarily pit wall
failure. The company has not experienced any pit wall failures that have
significantly affected its open-pit mines. In addition, for large open-pits,
because mining is done in phases, whereby pit walls are pushed back to final
pit boundaries, a pit wall failure in one area would not necessarily affect
mining in another area or overall pit design.
Competition
The company competes with other mining companies for the acquisition of
mining claims and leases. The company also competes with other mining
companies in connection with the recruitment and retention of qualified
employees. See "Employees."
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Supplies, Utilities and Transportation
The principal supplies needed for the operation of the company's mines are
explosives, diesel fuel, chemical reagents (including cyanide, lime, sulfur
dioxide, sodium hydroxide and zinc dust), cement, equipment parts and
lubricants.
Power is supplied to the company's mines by power companies or by diesel
generators. Each mine has access to adequate water.
Each of the U.S. mines has good road access by either paved or gravel roads
from state highways.
See also "Lupin--Supplies, Utilities and Transportation."
Waste Disposal
Heap leaching is done with a weak cyanide solution held within a closed
circuit, which includes the leach pads and surface holding ponds. Leached ore
from the reusable pad at Round Mountain is washed and deposited adjacent to
the mine site. Where dedicated pads are used, the leached ore remains on the
pads. Mill processing may use a cyanide leaching solution, which is contained
within the mills' processing circuits. See "Government Regulation--United
States."
See also "Lupin--Water Supply and Waste Disposal."
Royalties
Production from the company's mines is subject to certain royalties. These
are described in note 16a to the company's consolidated financial statements.
Title Matters
Title to mining properties in the western United States involves certain
inherent risks due to the impossibility of determining the validity of
unpatented claims from real estate records, as well as the potential for
problems arising from the frequently ambiguous conveyancing history
characteristic of many mining properties. Although the company believes it
conducted reasonable investigations (in accordance with standard mining
industry practice) of the validity of ownership of and the ability of its
sellers to transfer mining claims and other interests to it, there can be no
assurance that it holds good and marketable title to all of its
U.S. properties. The company has conducted limited reviews of title and
obtained representations regarding ownership from the sellers.
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GLOSSARY
The following terms are described to aid in understanding the company's Form
10-K. Geological terms are not generally included.
ADIT
A tunnel driven horizontally into the side of the mountain or hill to gain
access to mineralization for exploration or mining.
ANOMALY
A changed ground condition, often indicated by differing survey data, and
may indicate the presence of mineralization in the underlying bedrock. See
Survey.
ASSAY
A chemical test performed on a sample of ore, mineral or rock to determine
the mineralized content.
CALL OPTION
An option contract that gives the holder the right, but not the obligation,
to buy a specific commodity for a limited time period at a fixed price.
CARBON ADSORPTION
A process used to extract dissolved gold and silver from solvents in
leaching. Soluble complexes of gold and silver physically adhere to activated
carbon particles without chemical reaction. The company uses activated carbon
made from coconut shells. This carbon contains five to six million square feet
of molecular surface area per pound of carbon.
CONCENTRATE
A metal-rich product from a mineral separation process such as flotation.
The metals are "concentrated" from ore and the remainder is discarded as
neutralized tailings. The contained metals are recovered from the concentrates
either by leaching or by smelting.
CONTANGO
The premium paid over spot prices on a forward contract. The contango is
based on the difference between the cost of leasing gold and current money
interest rates.
DEDICATED PAD
See Leach Pad.
DILUTION
The unwanted but unavoidable inclusion of some barren or low-grade rock
along with the ore being mined. This lowers the grade of the mined material.
DORE
An unrefined bar of bullion containing an alloy of gold, silver and
impurities. The company ships dore bars to refiners for further processing,
then sells them to precious metal dealers, mainly banks and their affiliates.
DRIFT
An underground horizontal passage providing access to a mineralized area.
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DRILLING
(i) Blasthole Drilling
The drilling of holes in rock to insert with an explosive charge. The
drill holes are usually about 10-25 feet apart. The ensuing
synchronized blast will break up the rock so it can be dug out.
(ii) Diamond (or Core) Drilling
Drilling with a hollow diamond-studded bit to cut out a solid rock
core. A column of rock is extracted from inside the drill rod for
geological examination and assay.
(iii) In-Fill Drilling
Drilling between widely spaced holes (typically up to 200 feet apart)
to establish or upgrade the ore reserve classification.
(iv) 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.
(v) 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.
(vi) Step-Out Drilling
Drilling at widely spaced intervals (typically in increments of 300
feet) outward from known deposits to test for extensions of
mineralization.
ELECTROWINNING
The recovery of metal by electrolysis. An electric current is passed through
a solution containing dissolved metals, which causes the metals to be
deposited on a cathode.
EXERCISE (OR STRIKE) PRICE
The price at which the underlying commodity or security can be bought, sold,
or settled on exercise of the option contract. In the case of a call option,
the exercise price is the price at which the buyer of the option has the right
to purchase the underlying commodity or security. In the case of a put option,
the exercise price is the price at which the buyer of the option has the right
to sell the underlying commodity or security.
EXPLORATION
Exploration can be divided into three basic categories:
(i) Grassroots Exploration
Exploration for ore in an area that has the correct geologic setting,
although no ore may have been found yet in that precise location.
(ii) Headframe Exploration
Exploration for a separate ore body "within sight of the headframe" of
an existing mine.
(iii) Definition Exploration
Exploration that defines an ore body, or searches for extensions to it,
once it has been discovered.
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FEASIBILITY STUDIES
Determinations of the economic feasibility of mining a deposit, based on
progressively greater levels of information.
(i) Initial Feasibility (Level 1)
A preliminary estimate of what the economic parameters of mining a
deposit are likely to be, based on a particular mining plan, process
flow sheet, facility design, infrastructure, and estimated capital and
operating costs. A Level 1 estimate usually describes an installation
that might be built. The deposit is classified as other mineralization.
(ii) Detailed/Optimized Feasibility (Level 2)
A refinement and reassessment of the initial study, based on extensive
additional information, detailed engineering, and optimization work.
This provides a level of confidence such that a decision to build the
project can be made. A Level 2 estimate generally describes an
installation that probably will be built, rather than an installation
which is conceptual only. The deposit is now classified as ore
reserves.
(iii) Definitive Feasibility (Level 3)
Yet a further increase in the level of engineering and other detailed
work. The designs and estimates provided in the Level 3 estimate are
for the installation that will be built with minimal modifications. The
company would not normally proceed to this level of detail before
making a construction decision unless it were to be required for stand-
alone project financing.
FLOTATION
A process for concentrating minerals based on the selective adhesion of
certain minerals to air bubbles in a mixture of water and ground-up ore. When
the right chemicals are added to a frothy water bath of ore that has been
ground to the consistency of talcum powder, the minerals will float to the
surface. The metal-rich flotation concentrate is then skimmed off the surface.
FLUX
Chemical compounds added during a refining or smelting process to separate
impurities.
FORWARD CONTRACT
A legal agreement to buy or sell a commodity at a specific price on a future
date.
GOLD LOAN
A low interest cost method of debt financing that also acts to hedge future
selling prices. A gold producer borrows gold bullion from a bank or dealer and
sells it on the spot market, thereby establishing the sales price for the
quantity of gold borrowed. The producer replaces the borrowed gold from its
future production according to an agreed upon schedule. A gold loan allows the
producer to receive the proceeds from the sale of the borrowed gold
immediately, rather than as the metal is produced.
GRADE
The metal content of ore. With precious metals, grade is expressed as troy
ounces per ton of ore.
(i) Cut-off Grade
The minimum grade of ore that can be mined and processed economically.
45
<PAGE>
GRADE THICKNESS
The average grade of a drill hole intersection(s) multiplied by the
thickness of the intersection(s). The resulting figure indicates the
concentration of mineralization in that hole. When the value for each hole is
plotted, the mineral intensity of a deposit can be identified.
GRAVITY SEPARATION
Recovery of gold from crushed rock or gravel using gold's high specific
gravity to separate it from the lighter material.
HEAP LEACHING
A low-cost leaching process in which ore is placed in a large heap on an
impermeable pad. The solvent, a weak cyanide solution, is dripped or sprinkled
over the heap and collected at the bottom after percolating through the ore
and dissolving the metals. See the illustration in "Mine Processing."
LEACHING
The extraction of a soluble metallic compound from ore by dissolving the
metals in a solvent. See also Heap Leaching.
LEACH CYCLE
The average amount of time that ore is leached.
LEACH PAD
A large, impermeable foundation or pad used as a base for ore during heap
leaching. The pad prevents the leach solution from escaping out of the
circuit.
(i) Dedicated Pad
A Leach Pad which is constructed to permanently accommodate one ore
heap. The pad forms the tailings pile when economic recovery has been
reached and the pad neutralized.
(ii) Reusable Pad
A pad where ore is loaded and then unloaded at the end of each Leach
Cycle. The pad, made of durable materials, can be reused continually.
MILL
A plant where ore is ground, usually to fine powder, and the metals are
extracted by physical and/or chemical processes. See the illustration in "Mine
Processing."
MILLIOUNCE
One milliounce equals 0.001 ounce. See Ounce.
MINERALIZATION
Mineral-bearing rock. In this report, mineralization generally refers to the
presence of gold and silver established by widely spaced drilling. It is
referred to as "other mineralization" to distinguish it from "proven and
probable reserves." See Ore Reserves.
46
<PAGE>
OPTION PREMIUM
The total price paid or received for the option contract. This is the price
that the buyer of an option pays and the writer of an option receives for the
rights conveyed by the option.
ORE BODY
A mineral deposit that can be mined at a profit under existing economic
conditions.
ORE PASS
A vertical or steeply inclined raise used to move ore by gravity to the mine
level where it will be crushed and hoisted to surface.
ORE RESERVES
The tonnage and grade of an economically and legally extractable ore body.
The company's reserves are minable reserves and do not reflect losses in the
recovery process. They include allowance for dilution of ore in the mining
process. Securities regulations in both Canada and the U.S. set strict
requirements for proven and probable ore reserves.
(i) Proven Ore Reserves
Reserves that can be accurately estimated by establishing the size,
shape and mineral content of an ore body by inspection and closely
spaced samples.
(ii) Probable Ore Reserves
Reserves that have reasonable geologic continuity but cannot be
considered proven because inspection and measurement locations are not
detailed enough to estimate as accurately the size, shape and mineral
content of the ore body.
The Canadian and U.S. regulations are presented in "Operations Summary."
OTHER MINERALIZATION
See Mineralization.
OUNCE
Throughout this report, the terms "ounce" and "Milliounce" are used as
abbreviations for the troy ounce measure of weight. The troy ounce has been
used exclusively as a previous metals measurement, probably since the 16th
century.
One troy ounce = 1.097 avoirdupois ounces
= 31.103 grams
One milliounce = 0.001 ounce
PAD
See Leach Pad.
PLACER DEPOSIT
A gravel-type deposit formed by the erosion of rocks and veins that contain
particles of gold or other metals or minerals.
47
<PAGE>
PROSPECTING
The initial search for a mineral deposit, often through the visual
examination of the surface for indications of mineralization.
PUT OPTION
An option contract that gives the holder the right, but not the obligation,
to sell a specific commodity for a limited time period at a fixed price.
RAISE
A vertical or inclined passage between underground mine levels, used for
ventilation or access for mining.
RAMP
An underground tunnel providing access for exploration or the movement of
materials and equipment between mine levels.
RECOVERY RATE
The percentage of metals recovered in a mineral separation process. Recovery
rates vary considerably depending on physical, metallurgical and economic
circumstances.
REFINING
A process of removing impurities from metals by introducing air and fluxes
into the molten metal. The impurities are removed as gases or slag.
RESERVES
See Ore Reserves.
REVERSE-CIRCULATION DRILLING
See Drilling.
RUN-OF-MINE ORE
Uncrushed ore in its natural state just as it is when blasted.
SHAFT
A vertical accessway to a mine. Shafts are used for the movement of
personnel and materials, including ore and nonmineralized rock.
SLAG
Impurities that have combined with fluxes during a smelting or refining
process.
SMELTING
A process using heat and fluxes in which metals are separated from
impurities with which they are physically or chemically associated.
SPOT DEFERRED SALE
Similar to a forward sale except the date of sale may be deferred many times
before the gold is ultimately delivered. The contango will increase at each
deferral or roll forward.
48
<PAGE>
STOPE
An underground working area where ore is mined.
STRIPPING RATIO
In an open pit mine, large quantities of nonmineralized rock often cover up
the ore and must be removed. The stripping ratio is the number of tons of
nonmineralized material removed per ton of ore mined.
SULFIDE
A mineral compound characterized by the linkage of sulfur with a metal or
semimetal.
SURVEY
Some of the survey techniques used in exploration include:
(i) Airborne Survey
A survey made from an aircraft to identify anomalies in the ground that
may reflect the presence of mineralization. Airborne surveys include
photographic, geophysical and geological surveys.
(ii) Geophysical Survey
The use of geophysical techniques in the search for mineral deposits.
Geophysical techniques include earth currents, electrical, gravity,
heat flow, magnetic, seismic or thermal measurements.
(iii) Induced-Polarization Survey
A geophysical survey that induces an electric charge into the ground.
The strength of the return signal indicates the sulfide content of the
rock.
SWAP
Transactions that generally involve the contractual exchange of interest
payment obligations, currency positions, or commodities (or any combination
thereof), on a specified amount of notional principal for a specified period
of time.
TAILINGS
The neutralized material discarded after the economically recoverable metals
have been extracted from the ore by Milling or Heap Leaching.
TON
The short ton is used throughout this report. It is a unit of weight equal
to 2,000 pounds or 907.2 kilograms.
TRENCHING
The digging of shallow trenches on the surface to expose a vein for
inspection and sampling.
VENT RAISE
See Raise.
WASTE PASS
See Ore Pass.
49
<PAGE>
ITEM 3--LEGAL PROCEEDINGS
SUNNYSIDE
On May 18, 1994, the company commenced proceedings in Colorado state court
to obtain a declaratory judgment clarifying the extent of the company's
responsibility, if any, for ground water seeps and springs that may occur
following the company's planned sealing of the Sunnyside Mine in Colorado. The
Colorado Department of Public Health and Environment had asserted that any
changes in quantity or quality of water flowing from seeps or springs that
occur subsequent to sealing the mine might potentially require the company to
acquire discharge permits, whether or not the water flows through the sealed
mine. The company sought the declaratory judgment before it completes the
sealing, which has been approved by the Division of Minerals and Geology of
the Colorado Department of Natural Resources. The company has negotiated a
consent decree with state authorities which, pending a public comment period,
and approval by the court, will resolve the litigation. See "Business and
Properties--Sunnyside."
ALASKA-JUNEAU
During 1994, the U.S. Attorney began a grand jury investigation of potential
Clean Water Act violations. The investigation is to determine whether the
company unlawfully discharged pollutants from the drainage tunnel without a
National Pollution Discharge Elimination System (NPDES) permit. The outcome of
this investigation is uncertain.
See "Business and Properties--Development Programs--Alaska-Juneau" and "--
Other--Government Regulations--United States."
MCCOY/COVE
There is pending, in Nevada state court, a suit commenced by Summa
Corporation against the company and the predecessor owner of the McCoy/Cove
and Manhattan mines, claiming improper deductions in calculation of royalties
payable over several years from production at McCoy/Cove and the former
Manhattan mine. The claim is for unquanitified amounts of allegedly unpaid
royalties, plus interest, which claim would be substantial. Although trial has
been scheduled for 1996, discovery by counsel is not complete and the outcome
is uncertain.
OTHER
The company is also engaged in routine litigation incidental to its
business.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1995.
50
<PAGE>
PART II
ITEM 5--MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER
MATTERS
MARKET INFORMATION
The company's common shares were first sold to the public at $2.36 per share
in April 1983 after giving effect to the six-for-five share split in 1983 and
the two-for-one share split in 1987. The company's stock exchange listings,
together with the date of listing, are set out below:
Canada--Toronto and Montreal (April 1983)
United States--American (October 1983)
France--Paris (March 1985)
Belgium--Brussels (October 1985)
Switzerland--Zurich, Geneva and Basel (April 1987)
Germany--Frankfurt, Berlin and Dusseldorf (November 1988)
The following table sets forth for the period from January 1, 1994 through
February 29, 1996 the high and low reported prices and trading volume of the
common shares on The Toronto Stock Exchange and the American Stock Exchange.
<TABLE>
<CAPTION>
AMERICAN STOCK
THE TORONTO STOCK EXCHANGE EXCHANGE
-------------------------------------------------------
HIGH LOW VOLUME HIGH LOW VOLUME
--------- --------- ------------------ ----- ----------
(CANADIAN DOLLARS) (SHARES IN (U.S. (SHARES IN
THOUSANDS) DOLLARS) THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1994
First Quarter........ 20.13 15.38 4,806 15.13 11.38 45,303
Second Quarter....... 18.13 13.63 3,958 13.25 9.75 28,753
Third Quarter........ 18.88 14.25 4,369 14.00 10.25 30,177
Fourth Quarter....... 18.63 13.38 4,680 13.88 9.75 25,276
1995
First Quarter........ 15.00 12.00 4,410 10.63 8.63 33,740
Second Quarter....... 15.00 12.00 5,142 10.75 8.75 27,712
Third Quarter........ 15.63 12.50 9,500 11.50 9.06 34,604
October.............. 14.50 12.00 2,917 10.88 9.00 10,858
November............. 14.75 12.00 6,562 10.88 8.88 12,516
December............. 15.25 13.88 4,827 11.25 10.13 8,921
1996
January.............. 18.00 14.38 18,670 13.00 10.50 19,786
February............. 20.25 18.00 26,882 14.75 13.25 23,469
</TABLE>
On March 15, 1996, the closing price of the common shares on The Toronto
Stock Exchange and on the American Stock Exchange was C$17.88 and U.S.$13.00,
respectively.
On March 15, 1996, the company had 130,476,039 common shares outstanding
held by approximately 66,200 registered and nominee shareholders.
DIVIDENDS
The company's policy is to declare dividends to shareholders in U.S. funds.
The company paid dividends totaling $0.0750 per share in 1995, 1994 and 1993.
Dividends payable to Canadian residents are converted to and paid in Canadian
dollars.
51
<PAGE>
The declaration and payment of future dividends is dependent upon the
company's capital requirements, earnings and economic outlook. Payment of
dividends could be reduced or discontinued at any time. See "Certain Tax
Matters--Canadian Federal Income Tax Considerations" for information with
respect to Canadian withholding tax applicable to non-Canadian shareholders.
CERTAIN TAX MATTERS
The following paragraphs summarize certain United States and Canadian
federal income tax considerations in connection with the receipt of dividends
paid on common shares of the company and certain Canadian federal income tax
considerations in connection with a disposition of common shares by non-
residents of Canada. These tax considerations are stated in brief and general
terms and are based on United States and Canadian law currently in effect.
There are other potentially significant United States and Canadian federal
income tax considerations and state, provincial or local income tax
considerations with respect to ownership and disposition of the common shares
which are not discussed herein. The tax considerations relative to ownership
and disposition of the common shares may vary from taxpayer to taxpayer
depending on the taxpayer's particular status. Accordingly, prospective
purchasers should consult with their tax advisors regarding tax considerations
which may apply to their particular situation.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
Dividends on common shares paid to citizens or residents of the U.S. or to
U.S. corporations (including any Canadian federal income tax withheld) will be
generally subject to U.S. federal ordinary income taxation. Such dividends
will not be eligible for the deduction for dividends received by corporations
(unless such corporation owns by vote and value at least 10% of the stock of
the company, in which case a portion of such dividend may be eligible for such
deduction).
U.S. corporations, U.S. citizens and U.S. residents will generally be
entitled, subject to certain limitations, to a credit against their U.S.
federal income tax for Canadian federal income taxes withheld from such
dividends. Taxpayers may claim a deduction for such taxes if they do not elect
to claim such tax credit. No deduction for foreign taxes may be claimed by an
individual taxpayer who does not itemize deductions. Because the application
of the foreign tax credit depends upon the particular circumstances of each
shareholder, shareholders are urged to consult their own tax advisors in this
regard. Non-resident alien and foreign corporations will be subject to U.S.
federal income taxation at graduated rates upon dividends or gain with respect
to their common shares (and may be entitled to such tax credit or such
deduction), if such income or gain is treated as effectively connected with
the conduct of the recipient's trade or business within the United States.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
Dividends paid on common shares held by non-residents of Canada will
generally be subject to Canadian withholding tax. This withholding tax is
levied at the basic rate of 25%, although this rate may be reduced by the
terms of any applicable tax treaty. The Canada-U.S. tax treaty provides that
the withholding rate on dividends paid to U.S. residents on common shares is
generally 15%.
Generally, a non-resident of Canada who holds common shares as capital
property will not be subject to Canadian federal income tax on capital gains
realized on the disposition of his common shares.
52
<PAGE>
ITEM 6--SELECTED FINANCIAL DATA
The following table is derived in part from the audited consolidated
financial statements of the company. The consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in Canada. In all material respects, they conform with principles generally
accepted in the United States (except as described in footnote 1 to this table
and note 12 to the company's consolidated financial statements). This
information should be read in conjunction with the audited consolidated
financial statements and the notes thereto.
SELECTED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
MILLIONS OF U.S. DOLLARS EXCEPT
FOR GOLD PRICE, PER SHARE,
PRODUCTION AND RESERVE DATA
<S> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA
Revenue................................ $360.7 $377.6 $366.5 $312.4 $315.6
Average gold price realized per ounce.. $388 $387 $360 $357 $392
Operating earnings..................... $ 33.5 $ 65.8 $ 41.6 $ 4.8 $ 23.1
Earnings (loss) before taxes(2)........ $(40.5) $ 19.5 $ 14.7 $(27.2) $ 11.2
Earnings (loss) before preferred share
dividends(2).......................... $(41.6) $ 17.3 $ 10.2 $(27.4) $ 6.8
Net earnings (loss)(2)................. $(50.1) $ 8.0 $ 3.6 $(31.7) $ 6.8
Earnings (loss) per common share(2).... $(0.43) $ 0.07 $ 0.03 $(0.30) $ 0.07
Effective tax rate..................... (2.8%) 11.3% 30.4% (0.5%) 39.2%
Return on assets....................... (5.7%) 0.9% 0.4% (3.5%) 0.8%
Return on invested capital............. (4.8%) 2.8% 2.1% (2.9%) 1.8%
Return on average common shareholders'
equity................................ (9.1%) 1.6% 0.7% (6.8%) 1.5%
Weighted average common shares out-
standing, in millions................. 116.2 112.5 108.2 105.2 101.2
BALANCE SHEET DATA
Working capital (deficiency)........... $109.6 $186.2 $148.9 $ 31.1 $(14.1)
Current ratio.......................... 1.84 4.24 2.01 1.42 0.80
Total assets........................... $871.2 $881.7 $990.5 $936.6 $875.0
Gold, silver and currency financings... $152.8 $132.7 $217.4 $220.1 $233.7
Deferred income taxes.................. $ 8.1 $ 8.4 $ 14.6 $ 20.0 $ 26.0
Common shareholders' equity............ $588.9 $509.7 $513.7 $440.3 $491.5
Common shares outstanding, in millions. 129.9 112.7 112.2 105.2 105.1
Book value per common share............ $ 4.53 $ 4.52 $ 4.58 $ 4.19 $ 4.67
</TABLE>
53
<PAGE>
SELECTED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- -------
MILLIONS OF U.S. DOLLARS EXCEPT FOR GOLD
PRICE, PER SHARE, PRODUCTION AND RESERVE
DATA
<S> <C> <C> <C> <C> <C>
OTHER DATA
Cash dividends paid:
Common shares
--total.................. $ 9.0 $ 8.5 $ 8.1 $ 7.9 $ 7.7
--per common share....... $ 0.0750 $ 0.0750 $ 0.0750 $ 0.0750 $0.0750
Convertible preferred shares
of subsidiary(3)
--total................... $ 8.5 $ 10.1 $ 10.1 $ 4.3 $ --
--per share............... $ 1.75 $ 1.75 $ 1.75 $0.75347 $ --
Working capital from opera-
tions........................ $ 66.3 $ 108.1 $ 107.5 $ 76.5 $ 87.8
Capital and exploration spend-
ing.......................... $ 138.3 $ 66.8 $ 44.4 $ 81.4 $ 65.6
PRODUCTION AND RESERVE DATA
Production (thousands of ounc-
es)
Gold........................ 754.8 817.9 873.9 764.2 733.9
Silver...................... 11,905.8 10,443.2 12,454.3 7,921.5 5,619.0
Average gold to silver price
ratio........................ 74:1 73:1 85:1 87:1 89:1
Year-end gold to silver price
ratio........................ 76:1 79:1 77:1 90:1 92:1
Production cost per ounce of
gold
Cash production costs(4).... $ 235 $ 214 $ 214 $ 237 $ 249
Royalties................... 9 10 8 7 7
General and administrative.. 13 11 9 12 13
-------- -------- -------- -------- -------
Total cash costs............ 257 235 231 256 269
Depreciation and amortiza-
tion....................... 97 89 88 98 93
-------- -------- -------- -------- -------
Production costs............ 354 324 319 354 362
Exploration expense......... 51 28 13 7 7
Development properties ex-
pense...................... 25 20 11 -- --
Interest expense (income)... (5) (4) -- 4 7
Write-downs................. -- -- -- 21 --
Other expense............... 10 4 2 5 1
Income and mining tax ex-
pense...................... 1 2 4 -- 6
-------- -------- -------- -------- -------
Breakeven(3)(5)............... $ 436 $ 374 $ 349 $ 391 $ 383
======== ======== ======== ======== =======
Profit margin(6).............. 8.7% 16.3% 11.4% 0.8% 7.7%
======== ======== ======== ======== =======
PROVEN AND PROBABLE RESERVES
(millions of ounces at year
end)
Gold--producing mines......... 7.5 6.9 7.3 7.2 8.0
--development properties.. 3.5 4.4 4.4 4.4 4.5
-------- -------- -------- -------- -------
Total gold.................. 11.0 11.3 11.7 11.6 12.5
======== ======== ======== ======== =======
Silver--producing mines....... 62.9 82.7 105.1 112.3 116.9
======== ======== ======== ======== =======
</TABLE>
- --------
(1) This information should be read in conjunction with the company's audited
consolidated financial statements and accompanying notes. Contingencies
are described in note 16d to the company's consolidated financial
statements.
54
<PAGE>
The company's consolidated financial statements are prepared in accordance
with Canadian generally accepted accounting principles. Had the
consolidated financial statements been prepared in accordance with
accounting principles generally accepted in the United States, certain
selected financial data would be disclosed as follows:
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Earnings (loss) before taxes............ $(36.9) $ 23.7 $ 14.7 $(27.2) $ 11.2
Net earnings (loss)..................... $(46.5) $ 7.3 $ 8.5 $(31.7) $ 6.8
Earnings (loss) per common share........ $(0.40) $ 0.07 $ 0.08 $(0.30) $ 0.07
Total assets............................ $892.8 $885.9 $990.5 $936.6 $875.0
Deferred income taxes................... $ 8.1 $ 8.4 $ 9.7 $ 20.0 $ 26.0
Common shareholders' equity............. $610.6 $513.9 $518.6 $440.3 $491.5
</TABLE>
See also note 12 to the company's consolidated financial statements.
(2) At December 31, 1992, the company wrote down its investment in Kettle
River by $14.9 million ($0.14 per share) and wrote off $3.2 ($0.03 per
share) million in two exploration properties.
(3) All of the outstanding shares of preferred stock of subsidiary were
redeemed or converted into common shares of the company during 1995.
(4) Cash production costs include mining, processing and direct administration
costs. Mining costs relating to gold which will be produced in future
years are deferred and are charged to operating costs in the period in
which the production occurs.
Royalties, corporate general and administrative expense, depreciation and
amortization are not included in cash production cost, nor are development
properties expense, finance costs and exploration expense. Nevada net
proceeds tax, Northwest Territories royalty tax and similar taxes are not
included. These taxes are included as mining taxes in "income and mining
tax" expense.
(5) Before preferred stock dividends of subsidiary (which dividends are net of
interest income/expense from related interest rate swaps).
(6) The difference between the average gold price realized and the production
cost per ounce of gold before exploration expense, development properties
expense, interest income, write-downs, other expense, income and mining
tax expense and preferred stock dividends divided by the average gold
price realized.
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial results of the company's
operations for the years 1993 through 1995 should be read in conjunction with
the financial data and the company's consolidated financial statements,
included elsewhere in this report. The company's consolidated financial
statements are prepared in accordance with accounting principles generally
accepted in Canada. In all material respects, they conform with those
principles generally accepted in the United States, except as described in
note 12 to the company's consolidated financial statements, and also with
International Accounting Standards.
Material changes in the company's reserves may significantly impact results
of operations and asset carrying values. See the discussion of reserves in
"Business and Properties--Reserves".
The following contains statements that are, by their nature, forward looking
and uncertain. See "Business and Properties--Introduction--Risk Factors" and
"Commitments and Contingencies" for a discussion of factors which should be
considered in evaluating these statements.
55
<PAGE>
SUMMARY
The company's net loss in 1995 was $50.1 million. Production costs in 1995
were $354 per ounce of gold, which includes $235 per ounce cash production
cost, $97 per ounce depreciation and amortization, $13 per ounce general and
administrative and $9 per ounce royalties. Production costs do not include
exploration expense, development properties expense, write-downs, other
expense, net interest, income and mining tax expense and preferred stock
dividends. The average price realized in 1995 was $388 per ounce of gold,
including forward sales and loan repayments, which exceeded the average market
price of $384 per ounce of gold in 1995. Total working capital provided from
operations was $66.3 million in 1995 after cash exploration and development
expenses of $60.4 million.
RESULTS OF OPERATIONS
The company had a net loss of $50.1 million ($0.43 per share) in 1995,
compared to net earnings of $8.0 million ($0.07 per share) in 1994 and $3.6
million ($0.03 per share) in 1993 . The 1995 results compared to 1994 reflect
increased operating costs per ounce ($19.4 million), significantly increased
exploration ($19.4 million) and development property ($3.8 million) expenses
due to the company's expanded search for new gold reserves and production,
lower silver prices realized ($4.5 million), lower precious metal sales
($3.8 million decreased earnings margin), and increased environmental expenses
at Sunnyside ($11.7 million). The increase in 1994 from 1993 was primarily a
result of higher gold and silver prices partially offset by higher exploration
and development properties expenses.
Revenue is derived from the sale of gold and silver bullion and varies with
the volume of production and the price received. The significant majority of
revenues continue to be derived from gold sales. The company expects gold
production to be slightly below 1995 production of 754,762 ounces. The price
of gold and silver is affected by many factors which are beyond the company's
control. See "Business and Properties--Introduction--Risk Factors."
The gold and silver ounces sold and other revenue data for the last three
years is set out below:
REVENUE DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
GOLD
Ounces sold................................. 758,635 823,841 865,420
Average price realized per ounce............ $ 388 $ 387 $ 360
Average market price per ounce.............. $ 384 $ 384 $ 360
Revenue (millions of U.S. dollars).......... $ 294.6 $ 318.8 $ 311.2
Percentage of total revenue................. 82% 84% 85%
SILVER
Ounces sold................................. 12,234,835 10,196,356 12,350,519
Average price realized per ounce............ $ 5.40 $ 5.77 $ 4.48
Average market price per ounce.............. $ 5.19 $ 5.29 $ 4.29
Revenue (millions of U.S. dollars).......... $ 66.1 $ 58.8 $ 55.3
Percentage of total revenue................. 18% 16% 15%
---------- ---------- ----------
Total Revenue (millions of U.S. dollars).... $ 360.7 $ 377.6 $ 366.5
========== ========== ==========
</TABLE>
56
<PAGE>
The effects of changes in sales volume and prices were:
<TABLE>
<CAPTION>
VARIANCES
YEAR ENDED DECEMBER 31
---------------------------
1995 1994 1993
-------- -------- -------
THOUSANDS OF U.S. DOLLARS
<S> <C> <C> <C>
Change in volume.................................. $(13,478) $(24,600) $56,120
Higher (lower) prices:
Gold............................................ 1,135 22,512 2,073
Silver.......................................... (4,527) 13,153 (4,076)
-------- -------- -------
Increase (decrease) in gold and silver revenue
from the previous year........................... $(16,870) $ 11,065 $54,117
======== ======== =======
</TABLE>
The decrease in gold and silver revenue from 1994 to 1995 was primarily due
to lower production at three of the company's four mines. The increase in gold
and silver revenue from 1993 to 1994 was primarily due to an increase in
average realized prices, the effect of which was partially offset by lower
production at three of the company's four mines. Production by mine is set out
in "Business and Properties -Operations Summary."
The company's profitability is subject to changes in gold and silver prices,
exchange rates, interest rates and certain commodity prices. To reduce the
impact of such changes, the company attempts to lock in the future value of
certain of these items through hedging transactions. These transactions are
accomplished through the use of derivative financial instruments, the value of
which is derived from movements in the underlying prices or rates.
The gold- and silver-related instruments used in these transactions include
commodity loans, fixed-forward and spot-deferred contracts, swaps and options.
Sensitivity to changing metal prices is reduced, and future revenues are
hedged, as the company's future production will satisfy these loans and other
delivery commitments. The company engages in forward currency-exchange
contracts to reduce the impact on the Lupin mine's operating costs caused by
fluctuations in the exchange rate of U.S. dollars to Canadian dollars. The
company also engages in crude oil hedging activities, including forward
purchase agreements and swaps, to reduce the impact of fluctuations in crude
oil prices on its operating costs. The company used interest rate swap
agreements to effectively convert its fixed-rate preferred stock dividends
into floating-rate dividends. The interest rate swap agreements expired on
December 31, 1995.
Gains and losses resulting from hedging activities are recognized in
earnings on a basis consistent with the hedged item. When hedged production is
sold, revenue is recognized in amounts implicit in the commodity loan,
delivery commitment or option agreement. Gains or losses on foreign currency
and crude oil hedging activities are recorded in operating costs, or
capitalized for capital assets, when the hedged Canadian dollars are purchased
and when crude oil supplies are used in operations. Gains and losses on early
termination of hedging contracts are deferred until the hedged items are
recognized in earnings.
In 1995, approximately 22% of gold production was delivered against forward
sales and gold loans at an average price of $395 per ounce. This compares with
19% of gold production in 1994 at an average price of $370 and 11% of gold
production in 1993 at an average price of $352. Approximately 47% of silver
production was delivered against forward sales at an average price of $5.48
per ounce in 1995, compared to 50% at an average price of $4.56 in 1994 and
33% at an average price of $4.40 in 1993.
At December 31, 1995, the company had forward sales and loan obligations
covering about 30% of its expected 1996 gold production and about 40% of its
expected 1996 silver production. The company's hedging activities and
commitments at December 31, 1995 are described in note 15 of the company's
consolidated financial statements.
57
<PAGE>
Operating costs include mining and processing costs for gold and silver sold
during the year. The most significant of these costs are labor, consumable
materials, repairs of machinery and equipment, fuel and utilities. The cost of
transporting personnel and freight to the Lupin mine is also a significant
cost for that operation. Operating costs vary with the quantity of gold and
silver sold and with the cash production cost per ounce.
In 1995, the average cash production cost per ounce was $235. In both 1994
and 1993, the average cash production cost was $214. Production costs per
ounce were higher in 1995 due to lower production levels and increased mining
costs per ounce at McCoy/Cove. Cash production costs by mine are set out in
"Business and Properties--Operations Summary." The company's consolidated cash
production target is $245-255 per ounce of gold produced in 1996, primarily
the result of declining production and resulting higher costs at McCoy/Cove.
Production costs are subject to normal inflationary pressures (see also the
discussion of profitability in "Business and Properties--Introduction").
Depreciation expense increased in 1995 compared to 1994 and 1993 due to a
full year of production at the Lamefoot mine and the depreciation of new
dewatering equipment at McCoy/Cove. On a per ounce basis, depreciation was $61
in 1995 compared with $56 in 1994 and $53 in 1993.
Amortization expense varies with the quantity of gold and silver sold and
the mix of production at the four mines. The quantity of the company's proven
and probable reserves and other mineralization also affects amortization
expense as the company's investment is amortized over these ounces. The
increase in total amortization expense in 1995 reflects an increased
percentage of total production derived from Kettle River and a decreased
percentage of total production derived from Round Mountain. On a per ounce
basis, amortization was $36 in 1995, compared to $33 in 1994 and $35 in 1993.
Royalties are described in note 16a to the company's consolidated financial
statements. Royalty expense decreased in 1995 primarily due to lower
production at Round Mountain.
General and administrative costs have increased in 1995 compared to 1994 and
1993, reflecting increased support for permitting, exploration and business
development activities. On a per ounce basis, these costs were $13 in 1995,
$11 in 1994 and $9 in 1993.
Exploration expense was $46.5 million in 1995, $27.1 million in 1994 and
$13.5 million in 1993. To increase gold reserves and production, the company
has entered into strategic alliances and joint ventures with exploration
companies that give the company access to exploration and development
prospects along some of the major gold belts around the world, especially in
North America, South America, West Africa and the Philippines. The company is
conducting exploration drilling programs at prospects in Mexico, the
Philippines, West Africa, Canada and the United States. 1996 exploration
expense is budgeted at $43 million, but is dependent on opportunities.
Development properties expense increased to $23.3 million in 1995, primarily
due to the increased intensity of exploration, permitting and environmental
compliance activities at the A-J development property (see "Business and
Properties--Development Programs--Alaska-Juneau" and "Legal Proceedings--
Alaska-Juneau"). In addition, the company began expensing all current costs at
A-J in 1995 including $4.4 million to complete a 3-year work program. The
company is continuing to reduce the net book value of A-J over the life of its
permit, as initial major permits have been approved but a final construction
decision has not yet been made. The increase in development properties expense
was partially offset by reduced expenditures at the Kensington development
property, which was sold in the second quarter of 1995. 1996 development
properties expense is expected to be approximately $15 million.
Other expense increased in 1995 primarily the result of environmental
expenses at non-producing properties ($12.9 million), partially offset by the
gain on sale of Kensington ($3.2 million) and the gain on sale of Muscocho
shares ($2.1 million). Further details are provided in note 7 to the company's
consolidated financial statements.
58
<PAGE>
Net interest income has remained at the same level in 1995 compared to 1994.
Net interest income increased in 1994 from 1993, the result of higher interest
rates on increase cash balances and short-term investments, and reductions in
debt in 1994.
Income and mining tax recovery (expense) is described in note 9 to the
company's consolidated financial statements.
The 1995 net earnings also reflect $8.0 million for dividends paid on
preferred stock of Echo Bay Finance Corp., compared to dividends of $10.1
million in 1994 and 1993. The reduction in 1995 reflects partial dividends
paid in the fourth quarter of 1995 due to the fourth quarter conversion or
redemption of all the outstanding preferred shares.
In December 1992, the company entered into interest rate swap agreements
that expired December 31, 1995. The agreements effectively converted the 7%
annual dividends on preferred shares of a subsidiary from a fixed to floating
rate obligation. The differential between the amounts of 5 2/3% fixed interest
the company received and LIBOR-based interest the company paid was shown as an
adjustment to dividends on preferred stock of subsidiary. Preferred stock
dividends have been increased by interest expense from related interest rate
swaps of $0.5 million in 1995 and reduced by interest income of $0.8 million
in 1994 and interest income of $3.4 million in 1993. The interest rate swap
agreement expired on December 31, 1995.
For 1996, the company expects gold production to be in the range of 725,000
to 750,000 ounces and silver production to be in the range of 7.5 million to
8.5 million ounces. The decline in production is due to lower expected grades
and recoveries at McCoy/Cove. The company's consolidated cash production cost
target is $245-255 per ounce of gold produced in 1996, primarily the result of
declining production and resulting higher costs at McCoy/Cove. See "Business
and Properties--McCoy/Cove."
CAPITAL, EXPLORATION AND DEVELOPMENT SPENDING
In 1995, the company incurred cash development property expense of $16.6
million and cash exploration expense of $43.8 million. Approximately 70% of
the exploration expense was incurred outside of the U.S. and Canada. For 1996,
the company expects to incur $10 million in permitting and holding costs at
its Alaska-Juneau development project. The company expects to incur $43
million of cash exploration expense in 1996, dependent on opportunities, with
70% of the expenditure outside of the U.S. and Canada.
In 1995, the company capitalized $32.0 million in acquisition and
development property costs including $20.9 million at Kingking, $8.8 million
at Aquarius, and $1.2 million at Paredones Amarillos. For 1996, the company
expects to capitalize $32 million at its development properties including $23
million at Kingking, $4 million at Aquarius and $5 million at Paredones
Amarillos.
Capital expenditures at the company's operating mines were $42.0 million
including $8.6 million at McCoy/Cove which was primarily related to sustaining
capital and dewatering equipment; $9.4 million at Round Mountain which was
primarily related to the purchase of additional haul trucks; $14.5 million at
Lupin, of which $10.0 million was Ulu acquisition costs; and $9.5 million at
Kettle River which was primarily related to Lamefoot exploration and
development. For 1996, the company expects a similar level of capital spending
including $19 million related to mill construction at Round Mountain.
The company's capital, exploration and development spending has largely been
funded by working capital provided by operations. Working capital provided by
operations before exploration and development properties expenses was $126.7
million in 1995.
To increase gold reserves and production, the company has entered into
strategic alliances and joint ventures with exploration companies that give
the company access to exploration and development prospects along some of the
major gold belts around the world.
59
<PAGE>
The company purchased common shares of exploration-oriented companies that
give the company access to exploration and development prospects along some of
the major gold belts of the world, including properties in South America, West
Africa and the Philippines. The company has invested $45.4 million in these
exploration-oriented companies during 1995 in addition to the $10.0 million
invested during 1994.
During 1995, the company entered into agreements entitling it to acquire a
75% interest in the Kingking development property, located in the Philippines,
after completion of a bankable feasibility study and payment of an additional
$50.3 million, plus a contingent payment of up to $13.5 million based on any
increase in reserves from the mineralization shown in the Benguet initial
feasibility study. The interest may, in certain circumstances, be reduced to
65%. See "Business and Properties--Development Programs--Kingking."
Also during 1995, the company obtained an option to acquire a 50% interest
in the Chapada development property, located in Brazil. In order to exercise
the option, the company has agreed to pay Santa Elina Gold Corporation $25 per
ounce of gold and $0.02 per pound of copper in the company's share of the
proven and probable reserves as determined by the feasibility study.
In 1995, the company completed work required to earn a 60% interest in the
Paredones Amarillos project in Mexico. The company currently owns 51% and
following the payment of an additional $1.0 million its ownership will
increase its interest to 60%.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Working capital provided from operations amounted to $66.3 million for 1995
compared to $108.1 million in 1994. The 1995 results reflect increased
operating costs per ounce ($19.4 million); significantly increased cash
exploration ($16.7 million) and cash development property ($6.0 million)
expenses in the company's expanded international search for new gold reserves
and production; and lower production levels during the year ($5.0 million
reduced cash margin). Most of the exploration and development property
spending represents discretionary investments for the future.
The decrease in cash invested in working capital related to operations was
$1.0 million in 1995.
The company's financing activities netted to zero in 1995. Outflows were
$28.0 million, primarily related to gold loan repayments of $9.9 million,
preferred share dividends of $8.5 million, and common share dividends of $9.0
million. The company issued a debenture in the amount of $28.0 million
repayable in 1997. All preferred shares outstanding were converted or redeemed
in 1995.
The company used $83.0 million in cash for investing activities during 1995,
for mining properties, plant and equipment ($81.5 million) and to purchase
long-term investments and other assets of $47.6 million, partially offset by
the receipt of $44.7 million in cash on the sale of mining properties and
other assets including Kensington ($32.5 million), Robinson royalty interests
($10.0 million), and the common shares of Muscocho Explorations Ltd. ($2.1
million). The long-term investments and other assets includes $42.7 million of
share investments and property options purchased during 1995. To increase gold
reserves and production, the company has formed a number of strategic alliance
and joint ventures with exploration companies that give the company access to
exploration and development projects along some of the major gold belts around
the world.
Most of the company's hedging transactions have no margin requirements. In
some instances however, mainly for longer term forward sales and options,
margin deposits are required when the market value exceeds the contract value
by a pre-determined amount. See note 15 to the company's consolidated
financial statements.
The company has adequate resources and liquidity to pursue additional
acquisition, investment, exploration and development programs. Working capital
provided by operations before exploration and development properties expenses
was $126.7 million in 1995. In addition, the company has $185.8 million in
cash and
60
<PAGE>
$81.6 million in unutilized credit facilities at December 31, 1995. The
company has an effective shelf registration statement with the Securities and
Exchange Commission. The aggregate initial offering price of debt and/or
equity securities sold pursuant to the shelf registration may not exceed $200
million.
COMMITMENTS AND CONTINGENCIES
The company's profitability is subject to changes in gold and silver prices,
exchange rates, interest rates and certain commodity prices. To reduce the
impact of such changes, the company attempts to lock in the future value of
certain of these items through hedging transactions. These transactions are
accomplished through the use of derivative financial instruments, the value of
which is derived from movements in the underlying prices or rates.
The gold- and silver-related instruments used in these transactions include
commodity loans, fixed-forward and spot-deferred contracts, swaps and options.
Sensitivity to changing metal prices is reduced, and future revenues are
hedged, as the company's future production will satisfy these loans and other
delivery commitments. The company engages in forward currency-exchange
contracts to reduce the impact on the Lupin mine's operating costs caused by
fluctuations in the exchange rate of U.S. dollars to Canadian dollars. The
company also engages in crude oil hedging activities, including forward
purchase agreements and swaps, to reduce the impact of fluctuations in crude
oil prices on its operating costs. The company used interest rate swap
agreements to effectively convert its fixed-rate preferred stock dividends
into floating-rate dividends. The interest rate swap agreements expired on
December 31, 1995.
Gains and losses resulting from hedging activities are recognized in
earnings on a basis consistent with the hedged item. When hedged production is
sold, revenue is recognized in amounts implicit in the commodity loan,
delivery commitment or option agreement. Gains or losses on foreign currency
and crude oil hedging activities are recorded in operating costs, or
capitalized for capital assets, when the hedged Canadian dollars are purchased
and when crude oil supplies are used in operations. Gains and losses on early
termination of hedging contracts are deferred until the hedged items are
recognized in earnings.
The company's forward sales commitments, gold loan and swap commitments and
option positions are described in notes 4 and 15a to the company's
consolidated financial statements.
The company's obligation to purchase Canadian dollars are described in note
15b to the company's consolidated financial statements.
The company's crude oil commitments are described in note 15c to the
company's consolidated statements.
The company's operations are subject to laws and regulations concerning
protection of the environment. These laws and regulations change periodically
and are generally becoming more restrictive, which may have the effect of
increasing future costs. See "Business and Properties--Other--Government
Regulation--Canada" and "--United States."
The company's operations are subject to certain royalty obligations as
described in note 16a to the company's consolidated financial statements.
Lease commitments are described in note 16b to the company's consolidated
financial statements.
The company's commitment related to the purchase of the remaining 15%
working interest in the Alaska-Juneau mine is described in note 16c to the
company's consolidated financial statements.
The uncertainty regarding the recoverability of the company's $61.2 million
investment in Alaska-Juneau is described in note 16d to the company's
consolidated financial statements.
The company's provision for future reclamation costs at the Sunnyside mine
in Colorado is reviewed periodically and may be adjusted as additional
information becomes available, and is further described in note 16d to the
company's consolidated financial statements. See also "Legal Proceedings--
Sunnyside."
61
<PAGE>
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management's Responsibility for Financial Reporting....................... 63
Report of Independent Chartered Accountants............................... 64
Consolidated Statement of Earnings for the Three Years Ended December 31,
1995..................................................................... 65
Consolidated Balance Sheet at December 31, 1995 and 1994.................. 66
Consolidated Statement of Retained Earnings for the Three Years Ended De-
cember 31, 1995.......................................................... 67
Consolidated Statement of Cash Flow for the Three Years Ended December 31,
1995..................................................................... 68
Summary of Significant Accounting Policies................................ 69
Notes to Consolidated Financial Statements................................ 73
</TABLE>
62
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying financial statements and related data are the
responsibility of management. Management has prepared the statements in
accordance with accounting principles generally accepted in Canada.
The integrity of the financial reporting process is also the responsibility
of management. Management maintains systems of internal controls designed to
provide reasonable assurance that transactions are authorized, assets are
safeguarded, and reliable financial information is produced. Management
selects accounting principles and methods that are appropriate to the
company's circumstances, and makes decisions affecting the measurement of
transactions in which estimates or judgments are required to determine the
amounts reported.
The Board of Directors is responsible for ensuring that management fulfills
its responsibilities for financial reporting. The Board carries out this
responsibility principally through its Audit Committee.
The Audit Committee consists of five outside directors and the Corporate
Secretary. The Committee meets periodically with management, the internal
auditors, and the external auditors to discuss internal financial controls,
auditing matters and financial reporting issues. The Committee satisfies
itself that each party is properly discharging its responsibilities; reviews
the quarterly and annual financial statements and the external auditors'
report; and recommends the appointment of the external auditors for review by
the Board and approval by the shareholders.
The external auditors audit the financial statements annually on behalf of
the shareholders. They also perform certain procedures related to the
company's unaudited interim financial statements and report their findings to
the Audit Committee. The external auditors have free access to the internal
auditors, management, and the Audit Committee.
/s/ Richard C. Kraus
----------------------------------------
Richard C. Kraus
President and Chief Executive Officer
/s/ Peter H. Cheesbrough
----------------------------------------
Peter H. Cheesbrough
Senior Vice President--Finance and
Chief Financial Officer
January 29, 1996
63
<PAGE>
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
The Board of Directors
Echo Bay Mines Ltd.
We have audited the consolidated balance sheet of Echo Bay Mines Ltd. as at
December 31, 1995 and 1994 and the consolidated statements of earnings,
retained earnings and cash flow for each of the years in the three-year period
ended December 31, 1995. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
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 an audit to obtain
reasonable assurance 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.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
company as at December 31, 1995 and 1994 and the results of its operations and
changes in its financial position for each of the years in the three-year
period ended December 31, 1995 in accordance with accounting principles
generally accepted in Canada.
Edmonton, Canada (signed) Ernst & Young
January 29, 1996 Chartered Accountants
64
<PAGE>
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1995 1994 1993
-------- -------- --------
THOUSANDS OF U.S. DOLLARS,
EXCEPT FOR PER SHARE DATA
<S> <C> <C> <C>
Revenue.......................................... $360,730 $377,600 $366,535
-------- -------- --------
Operating expenses:
Operating costs................................ 217,187 205,782 217,468
Depreciation................................... 56,182 53,682 53,737
Amortization................................... 33,221 31,856 35,849
Royalties (note 16a)........................... 8,434 10,039 8,624
General and administrative..................... 12,169 10,447 9,297
-------- -------- --------
327,193 311,806 324,975
-------- -------- --------
Operating earnings............................... 33,537 65,794 41,560
-------- -------- --------
Exploration expense.............................. (46,527) (27,076) (13,494)
Development properties expense................... (23,269) (19,463) (11,112)
Other expense (note 7)........................... (9,004) (3,864) (2,172)
Interest income (expense) (note 8)............... 4,843 4,135 (57)
-------- -------- --------
(73,957) (46,268) (26,835)
-------- -------- --------
Earnings (loss) before taxes..................... (40,420) 19,526 14,725
Income and mining taxes (note 9)................. (1,116) (2,205) (4,481)
-------- -------- --------
Earnings (loss) before preferred stock dividends. (41,536) 17,321 10,244
Dividends on preferred stock of subsidiary (note
6).............................................. (8,524) (9,298) (6,693)
-------- -------- --------
Net earnings (loss).............................. $(50,060) $ 8,023 $ 3,551
======== ======== ========
Earnings (loss) per share........................ $ (0.43) $ 0.07 $ 0.03
======== ======== ========
Weighted average number of shares outstanding
(thousands)..................................... 116,233 112,514 108,225
======== ======== ========
</TABLE>
See accompanying notes.
65
<PAGE>
ECHO BAY MINES LTD.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1995 1994
-------- --------
THOUSANDS OF U.S.
DOLLARS
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $185,843 $201,527
Interest and accounts receivable......................... 14,749 5,842
Inventories (note 1)..................................... 34,173 31,215
Prepaid expenses and other assets........................ 5,353 5,140
-------- --------
240,118 243,724
Plant and equipment (note 2)............................... 255,868 281,073
Mining properties (note 2)................................. 318,219 327,437
Long-term investments and other (note 3)................... 56,956 29,429
-------- --------
$871,161 $881,663
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities................. $ 61,781 $ 44,884
Income and mining taxes payable.......................... 2,547 1,842
Gold and other financings (note 4)....................... 41,135 10,787
Deferred income (note 4)................................. 25,053 --
-------- --------
130,516 57,513
Gold and other financings (note 4)......................... 111,679 121,896
Deferred income (note 4)................................... -- 26,581
Other long-term obligations (note 5)....................... 32,018 21,329
Deferred income taxes...................................... 8,096 8,397
Series A cumulative convertible preferred stock of subsidi-
ary (note 6).............................................. -- 136,294
Common shareholders' equity:
Common shares (note 11), no par value, unlimited number
authorized; issued and outstanding 129,880,804 shares
(112,681,803 shares in 1994)............................ 618,965 483,061
Retained earnings (deficit).............................. (15,109) 44,140
Foreign currency translation............................. (15,004) (17,548)
-------- --------
588,852 509,653
-------- --------
Commitments and contingencies (notes 15 and 16)
$871,161 $881,663
======== ========
</TABLE>
See accompanying notes.
66
<PAGE>
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1995 1994 1993
-------- ------- -------
THOUSANDS OF U.S.
DOLLARS
<S> <C> <C> <C>
Balance, beginning of year......................... $ 44,140 $44,560 $51,922
Net earnings (loss)................................ (50,060) 8,023 3,551
-------- ------- -------
(5,920) 52,583 55,473
-------- ------- -------
Dividends on common shares (note 11)............... (8,978) (8,443) (8,152)
Excess of redemption price of preferred shares re-
deemed over original proceeds (note 6)............ (211) -- --
Common share issue costs (net of income tax bene-
fits of $0, $0, and $1,841)....................... -- -- (2,761)
-------- ------- -------
(9,189) (8,443) (10,913)
-------- ------- -------
Balance, end of year............................... $(15,109) $44,140 $44,560
======== ======= =======
</TABLE>
See accompanying notes.
67
<PAGE>
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1995 1994 1993
-------- -------- --------
THOUSANDS OF U.S. DOLLARS
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss)............................. $(50,060) $ 8,023 $ 3,551
Add (deduct):
Depreciation and amortization................. 89,403 85,538 89,586
Dividends on preferred stock of subsidiary
(note 6)..................................... 8,524 9,298 6,693
Development properties expense................ 6,691 8,902 7,059
Deferred income taxes......................... (448) (5,702) (2,654)
Environmental expenses at non-producing prop-
erties....................................... 12,899 -- --
Gain on sale of assets........................ (5,506) (1,282) (200)
Other......................................... 4,794 3,366 3,433
-------- -------- --------
Working capital provided by operations.......... 66,297 108,143 107,468
Change in cash invested in working capital re-
lated to operations:
Interest and accounts receivable.............. (2,667) 1,822 (768)
Inventories................................... (3,563) 468 2,060
Prepaid expenses and other assets............. (134) (1,817) (518)
Accounts payable and other liabilities........ 6,695 (12,182) (7,892)
Income and mining taxes payable............... 701 (4,207) 1,328
-------- -------- --------
67,329 92,227 101,678
-------- -------- --------
FINANCING ACTIVITIES
Financings:
Borrowings.................................... 28,015 -- --
Repayments.................................... (9,853) (84,853) (10,126)
Dividends on preferred stock of subsidiary (note
6)............................................. (8,524) (9,298) (6,693)
Common share dividends (note 11)................ (8,978) (8,443) (8,152)
Preferred share conversions and redemptions
(note 6)....................................... (136,505) (2) (4)
Common share issues, net of issuance costs (note
11)............................................ 135,904 3,055 82,712
-------- -------- --------
59 (99,541) 57,737
-------- -------- --------
INVESTING ACTIVITIES
Mining properties, plant and equipment.......... (81,538) (35,727) (28,310)
Short-term investments.......................... -- 234,441 (173,479)
Long-term investments and other assets.......... (47,557) (10,719) (1,010)
Proceeds on sale of mining properties and other
assets......................................... 44,655 -- --
Other........................................... 1,368 1,649 2,288
-------- -------- --------
(83,072) 189,644 (200,511)
-------- -------- --------
Net increase (decrease) in cash and cash equiva-
lents.......................................... (15,684) 182,330 (41,096)
Cash and cash equivalents, beginning of year.... 201,527 19,197 60,293
-------- -------- --------
Cash and cash equivalents, end of year.......... $185,843 $201,527 $ 19,197
======== ======== ========
</TABLE>
See accompanying notes.
68
<PAGE>
ECHO BAY MINES LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 1995
GENERAL
Echo Bay Mines Ltd. mines, processes and explores for gold and silver. The
company's revenues are derived principally from the sale of gold, which
accounted for 82% of 1995 revenue, and silver, which accounted for 18% of 1995
revenue. The company has four operating mines: McCoy/Cove (100% owned) in
Nevada, U.S.A.; Round Mountain (50% owned) in Nevada, U.S.A.; Lupin (100%
owned) in Northwest Territories, Canada; and Kettle River (100% owned) in
Washington, U.S.A.
The company's financial position and operating results are directly affected
by the market price of gold in relation to the company's production costs.
Silver price fluctuations also affect the company's financial position and
operating results, though to a lesser extent. Gold and silver prices fluctuate
widely and are affected by numerous factors beyond the company's control.
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in Canada. In all material respects,
they conform with accounting principles generally accepted in the United
States (except as described in note 12) and with International Accounting
Standards. The statements are expressed in U.S. dollars.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain of the comparative figures have been reclassified to conform with
the current year's presentation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the company
and its subsidiaries. Interests in joint ventures are accounted for using the
proportionate consolidation method to consolidate the company's share of the
joint ventures' assets, liabilities, revenues and expenses.
SHARE INVESTMENTS
Investments in the common shares of affiliates are recorded using the cost
method unless the company owns more than a 20% interest and can exercise
significant influence, in which case the equity method is used. The cost
method reports the investment at cost and the equity method reports the
investment at cost adjusted for the company's pro rata share of the
affiliate's undistributed earnings (losses) since acquisition. A provision for
loss would be recorded in income if there were a decline in market value of a
share investment that is other than temporary.
FOREIGN CURRENCY TRANSLATION
The company's self-sustaining Canadian operations are translated into U.S.
dollars using the current-rate method, which translates assets and liabilities
at the year-end exchange rate and translates revenue and expenses at average
exchange rates. Exchange differences arising on translation are recorded as a
separate component of shareholders' equity. The change in the balance is
attributable to fluctuations in the exchange rate of U.S. dollars to Canadian
dollars.
REVENUE RECOGNITION
Revenue is recognized when title to delivered gold or silver passes to the
buyer.
69
<PAGE>
ECHO BAY MINES LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
DECEMBER 31, 1995
EARNINGS PER SHARE
Earnings per share is calculated based on the weighted average number of
common shares outstanding during the year. Fully diluted earnings per share
are the same as basic earnings per share because the company's outstanding
options and preferred stock of subsidiary are not dilutive.
CASH AND CASH EQUIVALENTS
The company considers to be cash equivalents all highly liquid debt
instruments purchased with a maturity of three months or less.
INVENTORIES
Precious metals inventories are valued at the lower of cost, using the
"first-in, first-out" method, or net realizable value. Materials and supplies
are valued at the lower of average cost or replacement cost.
PLANT AND EQUIPMENT
Plant and equipment are recorded at cost. Depreciation is provided using the
straight-line method over each asset's estimated economic life to a maximum of
20 years.
MINING PROPERTIES
Producing mines' acquisition, exploration and development costs
Mining properties are recorded at cost of acquisition. Mine exploration and
development costs include expenditures incurred to develop new ore bodies, to
define further mineralization in existing ore bodies and to expand the
capacity of operating mines. These expenditures are amortized against earnings
on the unit-of-production method over the expected economic life of each mine.
Mining costs
Mining costs are the costs incurred to remove ore and waste from an open pit
or underground mine. These costs are deferred when they relate to gold that
will be produced in future years. They are charged to operating costs in the
period in which the production occurs.
For open pit mining operations, mining costs are deferred when the ratio of
tons mined per ounce of gold recovered exceeds the average ratio estimated for
the life of the mine. These deferred costs are charged to operating costs when
the actual ratio is below the average ratio.
For underground mining operations, these costs include the cost of accessing
and developing new production areas.
Development properties
At properties identified as having development potential, the costs of
acquisition, exploration and development are capitalized as they are incurred.
If production commences, these costs are transferred to "producing mines'
acquisition, exploration and development costs" and are amortized against
earnings as described above.
70
<PAGE>
ECHO BAY MINES LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
DECEMBER 31, 1995
If a project is determined not to be commercially feasible, unrecoverable
costs are expensed in the year in which the determination is made.
The costs of exploration programs not anticipated to result in additions to
the company's reserves and other mineralization in the current year are
expensed as incurred.
Reclamation costs
Estimated site restoration and closure costs for each producing mine are
charged against operating earnings on the unit-of-production method over the
expected economic life of each mine.
REVIEW OF LIFE-OF-MINE PLANS AND CARRYING VALUES
Plant and equipment are depreciated, and mining properties are amortized,
over their anticipated economic lives. Each year, the company estimates ore
reserves and prepares a comprehensive mining plan for the then-anticipated
remaining life of each property. The prices used in estimating the company's
ore reserves at December 31, 1995 were $375 per ounce of gold and $5.00 per
ounce of silver. The market prices were $387 per ounce of gold and $5.11 per
ounce of silver at December 31, 1995. If the company were to determine that
its reserves should be calculated at significantly lower prices, then ore
reserves would likely be materially reduced.
Significant changes in the life-of-mine plans can occur as a result of
mining experience, new ore discoveries, changes in mining methods and rates,
process changes, investments in new equipment and technology, and other
factors. Based on year-end ore reserves and each current life-of-mine plan,
the company reviews its accounting estimates and makes needed adjustments.
This complex process continues for the life of every mine.
The company reviews the carrying value of each producing mine and
development property by comparing the net book value with the estimated
undiscounted future cash flow from the property. If the net book value exceeds
the undiscounted future cash flow, then the excess is expensed. There has been
no excess carrying value to be expensed in the three years ended December 31,
1995. Changes in the significant assumptions underlying future cash flow
estimates may have a material effect on future carrying values and operating
results.
Once major permits have been approved for a development property but a final
construction decision has not yet been made, the company considers the
uncertainty that the economics of the project may materially change if permits
expire before a final construction decision is made, and records reductions in
the property's book value when appropriate. Permits may not be renewable under
the same terms and conditions.
CAPITALIZATION OF INTEREST
Interest cost is capitalized on development projects until major permits are
obtained, and on construction programs until the facilities are ready for
their intended use.
HEDGING ACTIVITIES
The company's profitability is subject to changes in gold and silver prices,
exchange rates, interest rates and certain commodity prices. To reduce the
impact of such changes, the company attempts to lock in the future value of
certain of these items through hedging transactions. These transactions are
accomplished through the
71
<PAGE>
ECHO BAY MINES LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
DECEMBER 31, 1995
use of derivative financial instruments, the value of which is derived from
movements in the underlying prices or rates.
The gold- and silver-related instruments used in these transactions include
commodity loans, fixed-forward and spot-deferred contracts, swaps and options.
Sensitivity to changing metal prices is reduced, and future revenues are
hedged, as the company's future production will satisfy these loans and other
delivery commitments. The company engages in forward currency-exchange
contracts to reduce the impact on the Lupin mine's operating costs caused by
fluctuations in the exchange rate of U.S. dollars to Canadian dollars. The
company also engages in crude oil hedging activities, including forward
purchase agreements and swaps, to reduce the impact of fluctuations in crude
oil prices on its operating costs. The company used interest rate swap
agreements to effectively convert its fixed-rate preferred stock dividends
into floating-rate dividends.
Gains and losses resulting from hedging activities are recognized in
earnings on a basis consistent with the hedged item. When hedged production is
sold, revenue is recognized in amounts implicit in the commodity loan,
delivery commitment or option agreement. Gains or losses on foreign currency
and crude oil hedging activities are recorded in operating costs, or
capitalized for capital assets, when the hedged Canadian dollars are purchased
and when crude oil supplies are used in operations. Gains and losses on early
termination of hedging contracts are deferred until the hedged items are
recognized in earnings.
The carrying values of gold loans are remeasured using the market value of
gold at the reporting date. Differences between these values and the loan
proceeds that were originally received are recorded as deferred income and
will be included in revenue when the production related to the loans is sold.
Under the interest rate swap agreements, the company received fixed-rate
interest and paid interest based on the London Inter-Bank Offered Rate
(LIBOR). The interest rate differential was recognized as an adjustment to
dividends on preferred stock of subsidiary as the differential accrued.
72
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED
1. INVENTORIES
<TABLE>
<CAPTION>
1995 1994
------- -------
THOUSANDS OF
U.S. DOLLARS
<S> <C> <C>
Precious metals-- bullion................................... $ 5,944 $ 9,051
-- in-process................................ 10,312 7,276
Materials and supplies...................................... 17,917 14,888
------- -------
$34,173 $31,215
======= =======
</TABLE>
2. PLANT AND EQUIPMENT, AND MINING PROPERTIES
a)Net book value
Given below are the percentage ownership and net book value of plant and
equipment and mining properties by property at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
-------- --------
NET NET
PLANT AND MINING BOOK BOOK
EQUIPMENT PROPERTIES VALUE VALUE
--------- ---------- -------- --------
THOUSANDS OF U.S. DOLLARS
<S> <C> <C> <C> <C>
McCoy/Cove (100%).................... $103,574 $101,856 $205,430 $251,395
Lupin (including Ulu)(100%).......... 67,583 47,253 114,836 109,719
Round Mountain (50%)................. 50,437 53,917 104,354 103,011
Kettle River (100%).................. 30,593 12,989 43,582 46,166
Alaska-Juneau (100%)................. -- 61,247 61,247 66,363
Kingking (75%)....................... 340 31,002 31,342 --
Aquarius (100%)...................... 100 8,805 8,905 --
Paredones Amarillos (51%)............ 119 1,150 1,269 --
Kensington (50%)..................... -- -- -- 30,787
Other................................ 3,122 -- 3,122 1,069
-------- -------- -------- --------
$255,868 $318,219 $574,087 $608,510
======== ======== ======== ========
</TABLE>
Kingking
During 1995, the company entered into agreements entitling it to acquire a
75% interest in the Kingking property after completion of a bankable
feasibility study and payment of an additional $50.3 million, plus a
contingent payment of up to $13.5 million based on any increase in
mineralization. The seller has an option to re-acquire a 10% interest in
Kingking for $10.0 million, potentially reducing the company's interest to
65%.
b)Plant and equipment
<TABLE>
<CAPTION>
1995 1994
----------------- -----------------
NET BOOK NET BOOK
COST VALUE COST VALUE
-------- -------- -------- --------
THOUSANDS OF U.S. DOLLARS
<S> <C> <C> <C> <C>
Land improvements and utility systems... $ 63,076 $ 26,331 $ 58,860 $ 29,556
Buildings............................... 160,106 68,083 159,350 80,620
Equipment............................... 363,537 142,731 348,135 162,147
Construction in progress................ 18,723 18,723 8,750 8,750
-------- -------- -------- --------
$605,442 $255,868 $575,095 $281,073
======== ======== ======== ========
</TABLE>
73
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED
c)Mining properties
<TABLE>
<CAPTION>
1995 1994
-------- --------
THOUSANDS OF
U.S. DOLLARS
<S> <C> <C>
Producing mines' acquisition, exploration and development
costs.................................................... $364,611 $344,881
Less accumulated amortization............................. 221,125 187,318
-------- --------
143,486 157,563
Development properties' acquisition, exploration and de-
velopment costs.......................................... 102,204 97,150
Deferred mining costs..................................... 72,529 72,724
-------- --------
$318,219 $327,437
======== ========
</TABLE>
3.LONG-TERM INVESTMENTS AND OTHER
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------- -----------------
MARKET VALUE COST COST
------------ ------- -----------------
THOUSANDS OF U.S. DOLLARS
<S> <C> <C> <C>
Equity investment in Etruscan En-
terprises, Ltd.
4,175,275 common shares
27.0% interest................... $12,815 $ 8,877 $ --
Share investments in:
TVI Pacific Inc.
11,666,667 common shares
15.7% interest.................. 18,715 7,579 --
Santa Elina Gold Corporation
9,000,000 common shares
6.7% interest (5,000,000 common
shares and
3.8% interest in 1994).......... 9,889 13,073 7,500
Canarc Resources Corp.
3,000,000 common shares
10.5% interest.................. 3,055 4,153 --
Cluff Resources plc
3,630,800 common shares
4.8% interest................... 6,033 2,899 --
Other common share investments... 8,157 8,315 --
------- ------- -------
58,664 44,896 7,500
Property options................... 7,764 2,500
Robinson royalty interests......... -- 11,400
Other assets....................... 4,296 8,029
------- -------
$56,956 $29,429
======= =======
</TABLE>
Equity investment
During 1995, the company purchased 4,175,275 common shares of Etruscan
Enterprises, Ltd. ("Etruscan") for $9.0 million, which resulted in a 27%
ownership of Etruscan. Etruscan is the company's joint venture partner in the
Koma Bangou project, an advanced-stage exploration project in Niger, West
Africa.
74
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED
Share investments
The company purchased common shares of exploration-oriented companies that
give the company access to exploration and development prospects along some of
the major gold belts of the world, including properties in South America, West
Africa and the Philippines.
Property options
In several cases the company paid a premium over the then-market value of
the common shares of exploration-oriented companies to fund exploration
programs on certain properties and for the right to acquire direct interests
in these properties. These amounts are being expensed as the exploration work
is conducted, until development potential is established. The company holds
options to purchase direct interests in these properties at purchase
considerations dependent on the properties' reserves and other mineralization.
Robinson royalty interests
In September 1995, the company sold its royalty interests in gold produced
by the Robinson mine, a large-scale copper project in Nevada, for $10.0
million in cash. No gain or loss was recognized on the transaction because the
selling price was equal to the net book value.
4.GOLD AND OTHER FINANCINGS AND DEFERRED INCOME
<TABLE>
<CAPTION>
FINANCINGS DEFERRED INCOME
----------------- ----------------
1995 1994 1995 1994
-------- -------- ------- -------
THOUSANDS OF U.S. DOLLARS
<S> <C> <C> <C> <C>
Gold swaps............................... $101,480 $ 98,870 $26,925 $28,891
Gold loan................................ 23,279 33,813 291 657
Debenture payable........................ 28,055 -- -- --
Other.................................... -- -- (2,163) (2,967)
-------- -------- ------- -------
152,814 132,683 25,053 26,581
Less current portion..................... 41,135 10,787 25,053 --
-------- -------- ------- -------
$111,679 $121,896 $ -- $26,581
======== ======== ======= =======
</TABLE>
a)Gold swaps
Gold swaps refer to currency loans and related, independently arranged,
future gold delivery commitments. Taken together, the loans and commitments
create obligations effectively denominated in gold and represent hedges of
future gold production. At December 31, 1995 and 1994, 336,990 ounces of gold
were deliverable under gold swap agreements as described below.
(i)U.S. dollar notes and bonds
In 1990, bonds totaling $84.0 million were swapped for an obligation to
deliver 218,000 ounces of gold in 1997, equivalent to a selling price of $385
per ounce. The effective interest rate on the bond and swap arrangement was
3.78% at December 31, 1995.
(ii)Swiss franc bonds
In 1989, the company swapped Swiss franc bonds with a principal amount of
SFr110 million, originally issued in 1986, for an obligation to deliver
175,311 ounces of gold in 1996. In 1991, bonds with a principal
75
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED
amount of SFr88.7 million were converted into common shares, and the 1989 swap
arrangement was renegotiated. All gains relating to changes in the price of
gold and changes in the exchange rate of the Swiss franc to the U.S. dollar
have been deferred and will be recorded as revenue on a basis that matches the
gain with the production originally designated for delivery in 1996. The
company's remaining 1996 net gold delivery commitment relating to the Swiss
franc bond and swap arrangement is 118,990 ounces at approximately $374 per
ounce, including deferred amounts. The effective rate of interest on the Swiss
franc bond and swap arrangement was 2.22% at December 31, 1995.
b)Gold loan
At December 31, 1995, 60,200 ounces of gold were outstanding under a gold
loan agreement (88,400 ounces at December 31, 1994). The outstanding gold loan
was remeasured to $387 per ounce, the gold price at December 31, 1995 ($383
per ounce in 1994). Unrealized remeasurement gains or losses are included in
deferred income. This loan has been outstanding since 1992, when the company
borrowed 173,000 ounces of gold under a gold bullion agreement with six banks.
The agreement contains term and revolving loan provisions. The term loan,
which was used to refinance existing debt, is being repaid at the rate of
2,350 ounces per month, with the balance of 32,000 ounces due on December 31,
1996. At December 31, 1995, the company had $75.0 million or gold equivalent
available until 1999 under the revolving commitment.
The facility is convertible between gold and dollar borrowings. Interest on
gold borrowings is calculated at the banks' gold rate plus 0.55%, and interest
on dollar borrowings at LIBOR plus 0.55%. The effective interest rate on the
gold loan was 4.99% at December 31, 1995.
c)Debenture payable
A subsidiary of the company has issued a debenture in the amount of $28.0
million, which bears interest at the one-month discount rate for bankers'
acceptances plus 0.325%. This debenture is payable in 1997 and is secured by a
letter of credit.
d)Other information
Certain of the company's financing arrangements require it to maintain
specified ratios of assets to liabilities and cash flow to debt. The company
is in compliance with these ratios and other requirements.
The company had outstanding letters of credit of $55.9 million at December
31, 1995, primarily relating to the bonding of future reclamation obligations
and to the debenture issued by a subsidiary of the company. Annual fees on the
letters of credit range from 0.5% to 0.55%.
At December 31, 1995, the company had unutilized credit facilities of $81.6
million including the $75.0 million revolving commitment (note 4b). Annual
commitment fees on the unutilized credit facilities are 0.225%.
Interest payments were $4.3 million in 1995, $7.2 million in 1994 and $3.0
million in 1993.
Future gold and silver delivery commitments are summarized by year in note
15a.
76
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED
5.OTHER LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
1995 1994
------- -------
THOUSANDS OF
U.S. DOLLARS
<S> <C> <C>
Accrued reclamation......................................... $30,868 $21,461
Property acquisition costs (note 16c)....................... 1,831 2,138
Other....................................................... 2,069 1,466
------- -------
34,768 25,065
Less current portion........................................ 2,750 3,736
------- -------
$32,018 $21,329
======= =======
</TABLE>
The current portion is included in accounts payable and accrued liabilities.
Reclamation
At December 31, 1995, the company's share of future estimated reclamation
costs was $59.7 million. The aggregate obligation accrued to December 31,
1995, was $30.9 million, including accruals of $5.1 million at operating mines
and $12.9 million at non-producing properties (note 7) in 1995, $5.2 million
at operating mines in 1994 and $5.7 million at operating mines in 1993.
6.PREFERRED STOCK OF A SUBSIDIARY
The company owns 100% of the common stock of a financing subsidiary, Echo
Bay Finance Corp. In July 1992, the company received net proceeds of $136.3
million from the sale of 5.75 million shares of Series A cumulative
convertible preferred stock of this subsidiary. On July 31, 1995, the
preferred stock became redeemable, in whole or in part, at the option of the
subsidiary.
In three separate calls for redemption occurring between September and
December 1995, the entire issue of preferred shares was converted into common
shares of the company or redeemed for cash. Each preferred share was
redeemable for $26.225 per share plus accrued dividends based on the
redemption date. Alternatively, each of the preferred shares was convertible
at the option of the holder into common shares based on a conversion price of
$8.375 per share (equivalent to 2.985 common shares for each preferred share).
In response to the redemption notices, shareholders converted a total of
4,385,541 preferred shares into 13,090,299 common shares, while the remaining
82,313 preferred shares were redeemed for cash of $2.2 million.
In addition to the shares called for redemption, 1,281,896 preferred shares
were voluntarily converted into 3,826,396 shares of the company's common
shares during 1995.
Quarterly dividends were paid on the preferred shares totaling $1.75 per
share annually, a yield of 7% based on the shares' $25.00 initial offering
price.
In December 1992, the company entered into interest rate swap agreements
that effectively converted its 7% fixed-rate dividend obligation into a
floating-rate obligation. The agreements expired on December 31, 1995. Under
the agreements, the company received 5 2/3% fixed-rate interest and paid
LIBOR-based interest on a principal amount of $143.8 million, a principal
amount equal to its subsidiary's preferred stock.
77
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED
Shown below are the total dividends paid to the holders of the preferred
stock of subsidiary, and the net interest income (expense) from related
interest-rate swap agreements.
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- --------
THOUSANDS OF U.S. DOLLARS
<S> <C> <C> <C>
Total dividends paid to holders of preferred
stock of subsidiary.......................... $(8,031) $(10,062) $(10,062)
Interest income (expense) from related
interest-rate swap agreements, after a nil
income tax effect in 1995, 1994 and 1993..... (493) 764 3,369
------- -------- --------
Dividends on preferred stock of subsidiary.... $(8,524) $ (9,298) $ (6,693)
======= ======== ========
</TABLE>
7.OTHER INCOME (EXPENSE)
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- -------
THOUSANDS OF U.S.
DOLLARS
<S> <C> <C> <C>
Gain on sale of Kensington...................... $ 3,189 $ -- $ --
Gain on disposition of Muscocho shares.......... 2,104 -- --
Environmental expenses at non-producing proper-
ties........................................... (12,899) -- --
Amortization of a royalty interest, net of roy-
alties received................................ (1,425) (1,784) (1,592)
Gain on disposition of mining property.......... -- -- 610
Other........................................... 27 (2,080) (1,190)
-------- ------- -------
$(9,004) $(3,864) $(2,172)
======== ======= =======
</TABLE>
Gain on sale of Kensington
In June 1995, the company completed the sale of its 50% interest in the
Kensington development project to its partner, Coeur d'Alene Mines Corp., for
$32.5 million and a scaled royalty on future production. A gain of $3.2
million was recorded on the sale.
Gain on disposition of Muscocho shares
In June 1995, the company sold its 11,585,110 common shares of Muscocho
Explorations Ltd., representing 24.8% of Muscocho's issued and outstanding
capital, in a private transaction for $2.1 million. A gain of $2.1 million was
recorded on the sale, as the company had written off its investment in
Muscocho in 1990.
Environmental expenses
During 1995, the company increased its provision for future reclamation
costs at non-producing properties by $12.9 million, including $11.7 million
related to the Sunnyside mine in Colorado (note 16d).
8.INTEREST INCOME (EXPENSE)
<TABLE>
<CAPTION>
1995 1994 1993
------ ------- ------
THOUSANDS OF U.S.
DOLLARS
<S> <C> <C> <C>
Interest income.................................... $9,871 $10,237 $6,724
Interest expense................................... (5,028) (6,102) (6,781)
------ ------- ------
Interest income (expense).......................... $4,843 $ 4,135 $ (57)
====== ======= ======
</TABLE>
78
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED
9.INCOME AND MINING TAX RECOVERY (EXPENSE)
a)Geographic components
The geographic components of earnings before tax recovery (expense), and of
income and mining tax expense, were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- -------
THOUSANDS OF U.S. DOLLARS
<S> <C> <C> <C>
Earnings (loss) before tax recovery (expense):
Canada...................................... $(41,407) $(15,183) $(9,102)
United States and other..................... 987 34,709 23,827
-------- -------- -------
$(40,420) $ 19,526 $14,725
======== ======== =======
Current income and mining tax recovery (ex-
pense):
Canada...................................... $ 3,891 $ (297) $ (407)
United States and other..................... (5,455) (7,610) (6,728)
-------- -------- -------
(1,564) (7,907) (7,135)
======== ======== =======
Deferred income tax recovery (expense):
Canada...................................... 950 5,702 2,654
United States and other..................... (502) -- --
-------- -------- -------
448 5,702 2,654
-------- -------- -------
Income and mining tax expense................. $ (1,116) $ (2,205) $(4,481)
======== ======== =======
</TABLE>
b)Deferred income taxes
The payment of certain income taxes is deferred due to the recognition of
amounts for tax purposes in different periods than for accounting purposes.
The principal timing differences and related tax effects were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ------ ------
THOUSANDS OF U.S.
DOLLARS
<S> <C> <C> <C>
Depreciation and amortization......................... $(502) $3,602 $3,647
Deferred mining costs................................. -- 1,532 (905)
Exploration costs..................................... -- 1,437 (46)
Non-deductible reserves............................... -- 355 418
Non-capital losses.................................... -- (169) 497
Other................................................. 950 (1,055) (957)
----- ------ ------
$ 448 $5,702 $2,654
===== ====== ======
</TABLE>
79
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED
c)Effective tax rate
The effective tax rate on the company's earnings differed from the combined
Canadian federal and provincial corporate income tax rate of 43.2% in 1995,
42.9% in 1994 and 41.0% in 1993 for the following reasons:
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- -------
THOUSANDS OF U.S.
DOLLARS
<S> <C> <C> <C>
Earnings (loss) before taxes................... $(40,420) $19,526 $14,725
======== ======= =======
Income tax effect of:
Expected Canadian federal and provincial
corporate income taxes...................... $ 17,461 $(8,376) $(6,037)
Operating loss from which no tax benefit is
derived..................................... (12,139) -- --
Canadian resource allowance and earned deple-
tion........................................ -- 245 898
Foreign earnings subject to different income
tax rates................................... (1,206) 13,817 8,038
Mining taxes................................. (4,571) (6,648) (4,995)
Other items.................................. (661) (1,243) (2,385)
-------- ------- -------
Income and mining tax recovery (expense)....... $ (1,116) $(2,205) $(4,481)
======== ======= =======
Effective tax rate (current and deferred)...... (2.8%) 11.3% 30.4%
======== ======= =======
</TABLE>
d)Loss carryforwards
At December 31, 1995, the company had U.S. net operating loss carryforwards
of approximately $244 million to apply against future taxable income and $34
million to apply against future alternative minimum taxable income. Deferred
tax benefits have been recorded, reflecting utilization of $47 million of net
operating loss carryforwards. The remaining carryforwards expire during 2001-
2009. Additionally, the company has Canadian non-capital loss carryforwards of
approximately $12 million and capital losses (unrecognized for tax return
purposes) of approximately $24 million. The non-capital losses expire in
various amounts from 1996 through 2002. The capital losses have not yet been
realized for income tax purposes and, once realized, have no expiration date.
In 1995, the company realized $4.8 million from the conveyance of Canadian
Development Expenses of $32.8 million to a third party. Since the expenses
represented unrecorded loss carryforwards for accounting purposes, the
proceeds have been recorded as a recovery of income taxes in 1995. The
arrangement involved a series of transactions including the issuance of
debentures to the third party (note 4c).
e)Tax payments
Income and mining tax payments were $0.9 million in 1995, $12.1 million in
1994 and $5.8 million in 1993.
10.PREFERRED SHARES
The company is authorized to issue an unlimited number of preferred shares,
issuable in series, each series to consist of such number of shares and to
have such designation, rights, privileges, restrictions and conditions as may
be determined by the directors. No preferred shares are currently issued.
80
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED
11.COMMON SHARES
Changes in the number of common shares outstanding during the three years
ended December 31, 1995, were as follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
----------- --------
THOUSANDS OF U.S.
DOLLARS, EXCEPT
NUMBER OF SHARES
<S> <C> <C>
Balance, December 31, 1992............................. 105,168,655 $392,692
1993:Common share offering............................. 6,371,300 83,702
Exercise of share options............................. 673,094 3,608
Conversion of preferred shares of subsidiary.......... 447 4
----------- --------
Balance, December 31, 1993............................. 112,213,496 480,006
1994:Exercise of share options......................... 468,009 3,053
Conversion of preferred shares of subsidiary.......... 298 2
----------- --------
Balance, December 31, 1994............................. 112,681,803 483,061
1995:Exercise of share options......................... 282,306 1,517
Conversion of preferred shares of subsidiary (note 6). 16,916,695 134,387
----------- --------
Balance, December 31, 1995............................. 129,880,804 $618,965
=========== ========
</TABLE>
The company's policy is to declare dividends to shareholders in U.S. funds.
The company paid dividends totaling $0.075 per share in each of 1995, 1994 and
1993. Dividends payable to Canadian residents are converted to and paid in
Canadian dollars.
a)Shelf registration
Pursuant to a shelf registration statement filed with the Securities and
Exchange Commission on April 14, 1994, the company may offer from time to time
(1) debt securities, (2) common shares, and/or (3) guarantees of debt
securities issued by Echo Bay Resources, Inc., a wholly owned subsidiary of
the company. The aggregate initial offering price of securities sold pursuant
to the shelf registration would not exceed $200 million.
b)Shareholder rights plan
Under the company's shareholder rights plan, if any person or group were to
announce an intention to acquire, or were to acquire, 20% or more of the
company's common shares without complying with the conditions of a "permitted
bid," then the owners of each share of common stock (other than the acquiring
person or group) would become entitled to exercise a right to buy one
additional common share at 50% of the lowest share price on The Toronto Stock
Exchange during the prior 90 days. The plan expires in 2004, subject to
reconfirmation by shareholders in 1999.
A "permitted bid," which does not trigger the entitlement to acquire shares
under the plan, is one that complies with applicable securities law in all
jurisdictions where at least 5% of the company's common shares
81
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED
are owned; is made to all shareholders for all outstanding shares; is open for
a minimum of 60 days; takes up no shares until at least 66 2/3% of the
outstanding shares have been tendered to the bid, including those owned by the
acquiring person or group; and meets certain other conditions.
c)Employee share incentive plan and director equity plan
The company has an employee share incentive plan that provides for the
granting of options to officers and key employees to purchase common shares.
The company also has a director equity plan that provides for the granting of
options to permit eligible directors to purchase common shares. Eligible
directors are neither officers nor employees of the company. Outstanding share
options under the plans are exercisable at prices equal to the market value on
the date of grant. The option holder may exercise each share option over a
period of 10 years from the date of grant. Option prices are denominated in
Canadian dollars.
The status of the plans is as follows:
<TABLE>
<CAPTION>
EMPLOYEE SHARE DIRECTOR EQUITY
INCENTIVE PLAN PLAN
------------------ ----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER PRICE NUMBER PRICE
OF PER OF PER
OPTIONS SHARE OPTIONS SHARE
--------- -------- ------- --------
<S> <C> <C> <C> <C>
Options outstanding, December 31, 1993.. 3,613,414 C$11.24 -- --
Options outstanding, December 31, 1994.. 3,723,737 C$12.30 55,200 C$14.63
Options granted in 1995................. 989,400 C$13.33 65,000 C$12.50
Options outstanding, December 31, 1995.. 4,302,692 C$12.81 120,200 C$13.48
Weighted average price of outstanding
options in equivalent U.S. funds....... US$9.38 US$9.87
Options exercisable at December 31,
1995................................... 2,502,927 13,800
Further options exercisable in 1996..... 599,211 30,050
Shares reserved for future grants, De-
cember 31, 1995........................ 1,018,818 304,800
</TABLE>
12. DIFFERENCES BETWEEN CANADIAN AND U.S. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
a)U.S. GAAP financial statements
The company prepares its consolidated financial statements in accordance
with accounting principles generally accepted in Canada. These differ in some
respects from those in the United States, as described below.
In accordance with Canadian GAAP, certain long-term foreign exchange
contracts are considered to be hedges of the cost of goods to be purchased in
foreign currencies in future periods. Gains and losses related to changes in
market values of such contracts are deferred, then recognized as a component
of the cost of goods when the related hedged purchases occur. Under U.S. GAAP,
changes in market value would be included in current earnings. The company had
no long-term foreign exchange contracts prior to 1994.
In accordance with Canadian GAAP, the company's share investments are
carried at cost as long-term investments (note 3). These investments would be
written down and a loss recognized in earnings only when a
82
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED
loss in value is other than a temporary decline. Under U.S. GAAP, these
investments would be marked to market, with unrealized gains or losses
excluded from earnings and reported as a separate component of common
shareholders' equity, net of tax. The unrealized gain on share investments is
$13.8 million after a nil income tax effect as of December 31, 1995.
If the company had changed from the deferred method of accounting for
deferred income taxes under Canadian GAAP to the liability method under U.S.
GAAP at January 1, 1993, in accordance with Financial Accounting Standards
Board Statement No. 109, then the financial statements would have reflected
the cumulative effect of such a change in accounting methodology in 1993 and
adjustments for the application of Statement No. 109 during 1995 and 1994.
The effects on the consolidated statement of earnings of the above
differences would have been as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- -------- --------
THOUSANDS OF U.S. DOLLARS,
EXCEPT PER SHARE DATA
<S> <C> <C> <C>
Net earnings (loss) under Canadian GAAP...... $ (50,060) $ 8,023 $ 3,551
Change in market value of foreign exchange
contracts................................. 3,605 4,198 --
Application of liability method for ac-
counting for income taxes................. -- (4,900) 4,900
---------- -------- --------
Net earnings (loss) under U.S. GAAP.......... $ (46,455) $ 7,321 $ 8,451
========== ======== ========
Earnings (loss) per share under U.S. GAAP.... $ (0.40) $ 0.07 $ 0.08
========== ======== ========
</TABLE>
Long-term investments and other assets, retained earnings (deficit), and
common shareholders' equity would have been $78.6 million, $(7.3) million and
$610.5 million respectively at December 31, 1995 and $33.6 million, $48.3
million and $513.9 million respectively at December 31, 1994.
Under U.S. GAAP, the preferred stock conversions to common shares would not
have been shown in the consolidated statement of cash flow as they are non-
cash transactions. Accordingly, preferred stock conversions would have been
reduced by $134.3 million for 1995. Common share issues would have been
reduced by $134.3 million for 1995.
b)U.S. GAAP tax disclosure
Significant components of the company's deferred tax liabilities and assets
under U.S. GAAP disclosure requirements would have been:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------- ---------------------
U.S. AND U.S. AND
OTHER CANADA TOTAL OTHER CANADA TOTAL
-------- ------ ----- -------- ------ -----
MILLIONS OF U.S. DOLLARS
<S> <C> <C> <C> <C> <C> <C>
Deferred tax liabili-
ties:
Tax over book depreci-
ation and depletion.. $35.2 $17.0 $52.2 $38.0 $5.1 $43.1
Other tax liabilities. -- 8.0 8.0 -- 8.8 8.8
----- ----- ----- ----- ---- -----
Total deferred tax lia-
bilities............... 35.2 25.0 60.2 38.0 13.9 51.9
----- ----- ----- ----- ---- -----
</TABLE>
83
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------- -----------------------
U.S. AND U.S. AND
OTHER CANADA TOTAL OTHER CANADA TOTAL
-------- ------ ------ -------- ------ ------
MILLIONS OF U.S. DOLLARS
<S> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss and
other carryforwards.. 87.7 5.3 93.0 93.3 3.2 96.5
Book over tax depreci-
ation and depletion.. -- 22.6 22.6 -- 4.4 4.4
Accrued liabilities... 11.3 2.5 13.8 7.7 3.4 11.1
Other tax assets...... 6.9 1.3 8.2 5.5 1.5 7.0
------ ------ ------ ------ ----- ------
Total deferred tax as-
sets before allowance.. 105.9 31.7 137.6 106.5 12.5 119.0
Valuation allowance for
deferred tax assets.... (71.2) (14.3) (85.5) (68.5) (7.0) (75.5)
------ ------ ------ ------ ----- ------
Total deferred tax as-
sets................... 34.7 17.4 52.1 38.0 5.5 43.5
------ ------ ------ ------ ----- ------
Net deferred tax liabil-
ities.................. $ 0.5 $ 7.6 $ 8.1 $ -- $ 8.4 $ 8.4
====== ====== ====== ====== ===== ======
</TABLE>
The net increase in the valuation allowance for deferred tax assets was
$10.0 million for 1995.
c)Other
In accordance with U.S. GAAP disclosure requirements, the estimated fair
values of financial instruments are set out below and in note 15d. The fair
values were determined from quoted market prices.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------- -------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
MILLIONS OF U.S. DOLLARS
<S> <C> <C> <C> <C>
Cash and cash equivalents............ $185.8 $185.8 $201.5 $201.5
Long-term investments................ 52.6 66.4 21.4 21.9
</TABLE>
13.JOINT VENTURES
Summarized below is the company's 50% interest in the Round Mountain mine,
accounted for by the proportionate consolidation method.
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
THOUSANDS OF U.S. DOLLARS
<S> <C> <C> <C>
Revenues................................. $ 67,843 $ 79,806 $ 67,216
Operating costs.......................... (35,028) (37,547) (38,822)
Depreciation and amortization............ (14,488) (15,050) (16,541)
Royalties................................ (5,266) (6,833) (4,889)
Exploration.............................. (24) (37) (186)
Other income (expense)................... (143) 87 389
-------- -------- --------
Earnings before taxes.................... $ 12,894 $ 20,426 $ 7,167
======== ======== ========
</TABLE>
84
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
THOUSANDS OF U.S. DOLLARS
<S> <C> <C> <C>
Current assets........................... $ 6,575 $ 7,911 $ 8,428
Non-current assets....................... 102,847 101,914 113,666
Current liabilities...................... (7,870) (13,789) (11,243)
Non-current liabilities.................. (29,537) (17,332) (18,655)
-------- -------- --------
Equity................................... $ 72,015 $ 78,704 $ 92,196
======== ======== ========
Net cash provided (used) by:
Operating activities................... $ 42,853 $ 46,207 $ 21,660
Investing activities................... (15,415) (2,661) (3,332)
-------- -------- --------
Net increase in cash..................... $ 27,438 $ 43,546 $ 18,328
======== ======== ========
</TABLE>
14.GEOGRAPHIC SEGMENT INFORMATION
Financial information regarding geographic segments is set out below:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
THOUSANDS OF U.S. DOLLARS
<S> <C> <C> <C>
Revenue:
Canada...................................... $ 67,026 $ 69,468 $ 76,508
United States............................... 293,704 308,132 290,027
-------- -------- --------
$360,730 $377,600 $366,535
======== ======== ========
Operating earnings:
Canada...................................... $ (370) $ 3,805 $ 4,995
United States............................... 33,907 61,989 36,565
-------- -------- --------
33,537 65,794 41,560
Other expenses................................ (73,957) (46,268) (26,835)
-------- -------- --------
Earnings (loss) before taxes.................. (40,420) 19,526 14,725
Income and mining tax expense................. (1,116) (2,205) (4,481)
-------- -------- --------
Earnings (loss) before preferred stock divi-
dends........................................ (41,536) 17,321 10,244
Dividends on preferred stock of subsidiary.... (8,524) (9,298) (6,693)
-------- -------- --------
Net earnings (loss)........................... $(50,060) $ 8,023 $ 3,551
======== ======== ========
Assets:
Canada...................................... $350,329 $140,035 $148,523
United States............................... 488,250 741,628 841,928
Other....................................... 32,582 -- --
-------- -------- --------
Total assets.................................. $871,161 $881,663 $990,451
======== ======== ========
</TABLE>
85
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED
15.HEDGING ACTIVITIES AND COMMITMENTS
a)Gold and silver commitments
As of December 31, 1995, the company's gold and silver commitments were as
follows:
<TABLE>
<CAPTION>
PRICE OF AVERAGE PRICE
FORWARD FORWARD GOLD LOANS OF LOANS
SALES SALES AND SWAPS AND SWAPS
(OUNCES) (PER OUNCE) (OUNCES) (PER OUNCE)
---------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
GOLD
1996(1)...................... 41,000 $ 408 179,190 $366
1997......................... 49,333 418 218,000 385
1998......................... 154,000 456 -- --
1999......................... 290,667 498 -- --
2000 and beyond.............. 140,000 526 -- --
---------- ----- ------- ----
675,000 $ 483 397,190 $376
========== ===== ======= ====
SILVER
1996......................... 3,200,000 $5.78
1997......................... 2,600,000 5.96
1998......................... 3,100,000 6.46
1999......................... 2,800,000 6.47
---------- -----
11,700,000 $6.16
========== =====
</TABLE>
- --------
(1) The gold commitments for 1996 include spot-deferred contracts for which
the price per ounce is estimated based on expected delivery dates and
estimated interest rates.
The remeasurement of a gold loan resulted in deferred losses of $2.2 million
at December 31, 1995. These losses are netted against deferred income and will
be included in revenue when the production related to the loan is sold.
The company's option position as of December 31, 1995 was as follows:
<TABLE>
<CAPTION>
PUT OPTIONS PURCHASED CALL OPTIONS SOLD
---------------------- ----------------------
STRIKE PRICE STRIKE PRICE
OUNCES PER OUNCE OUNCES PER OUNCE
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
GOLD
1996........................... 50,000 $ 389 30,000 $ 412
--------- ----- --------- -----
50,000 $ 389 30,000 $ 412
========= ===== ========= =====
SILVER
1996........................... 1,440,000 $5.40 1,440,000 $6.43
1997........................... 1,440,000 5.40 1,440,000 6.43
--------- ----- --------- -----
2,880,000 $5.40 2,880,000 $6.43
========= ===== ========= =====
</TABLE>
86
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED
b)Currency position
The company's obligations to purchase Canadian dollars as of December 31,
1995 were as follows:
<TABLE>
<CAPTION>
CANADIAN EXCHANGE RATE
DOLLARS (C$TO U.S.$1.00)
------------ ----------------
<S> <C> <C>
1996........................................... $ 50,200,000 1.42
1997........................................... 25,200,000 1.49
1998........................................... 25,200,000 1.52
1999........................................... 25,200,000 1.56
2000........................................... 25,200,000 1.59
------------ ----
$151,000,000 1.50
============ ====
</TABLE>
c)Crude oil position
The company's swap contracts and forward purchase commitment as of December
31, 1995 were as follows:
<TABLE>
<CAPTION>
BARRELS
OF CRUDE PRICE
OIL PER
PURCHASED BARREL
--------- ------
<S> <C> <C>
1996........................................................ 397,000 $18.16
1997........................................................ 397,000 17.95
1998........................................................ 20,000 17.50
------- ------
814,000 $18.04
======= ======
</TABLE>
d)Other hedging activity information
The company assesses the exposure that may result from a hedging transaction
prior to entering into the commitment, and only enters into transactions
which, it believes, accurately hedge the underlying risk and could be safely
held to maturity. The company does not actively engage in the practice of
trading derivative securities for profit. The company regularly reviews its
unrealized gains and losses on hedging transactions.
Shown below are the carrying amounts, estimated fair values, and unrealized
gains or losses on the company's hedging positions at December 31.
<TABLE>
<CAPTION>
CARRYING ESTIMATED UNREALIZED
AMOUNT FAIR VALUE GAIN(LOSS)
-------- ---------- ----------
THOUSANDS OF U.S. DOLLARS
<S> <C> <C> <C>
1995
Gold swaps (note 4a)..................... $101,480 $97,880 $ 3,600
Gold loan (note 4b)...................... 23,279 23,279 --
Off balance sheet instruments:
Gold forward sales..................... -- 34,900
Silver forward sales................... -- 6,400
Gold and silver options................ 378 1,100
Foreign currency contracts............. -- 7,800
Crude oil contracts.................... -- (300)
-------
$53,500
=======
</TABLE>
87
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED
<TABLE>
<CAPTION>
CARRYING ESTIMATED UNREALIZED
AMOUNT FAIR VALUE GAIN(LOSS)
-------- ---------- ----------
THOUSANDS OF U.S. DOLLARS
<S> <C> <C> <C>
1994
Gold swaps (note 4a)..................... $98,870 $99,670 $ (800)
Gold loan (note 4b)...................... 33,813 33,813 --
Off balance sheet instruments:
Gold forward sales..................... -- (7,500)
Silver forward sales................... -- 2,400
Gold and silver options................ 500 (1,800)
Foreign currency contracts............. -- 4,200
Crude oil contracts.................... -- --
Interest rate swap (note 6)............ -- (3,400)
-------
$(6,900)
=======
</TABLE>
Fair values are estimated for the contract settlement dates based upon
market quotations of various input variables. These variables are used in
valuation models that estimate the fair market value.
The credit risk exposure related to all hedging activities is limited to the
unrealized gains on outstanding contracts based on current market prices. To
reduce counterparty credit exposure, the company deals only with large credit-
worthy financial institutions, and limits credit exposure to each. In
addition, to allow for situations where positions may need to be reversed, the
company deals only in markets it considers highly liquid.
Most of the company's hedging transactions have no margin requirements. In
some instances, however, mainly for the longer-term forward sales and options,
margin deposits are required when the market value exceeds the contract value
by a predetermined amount.
The fair value of the company's hedged position can be affected by market
conditions beyond the company's control. The effect of changes in various
market factors on the company's outstanding hedged position at December 31,
1995 would be as follows:
<TABLE>
<CAPTION>
EFFECT ON MARKET
AMOUNT VALUE OF
OF HEDGED POSITION
CHANGE (THOUSANDS OF U.S.$)
------------ --------------------
<S> <C> <C>
Change in:
Gold prices............................ $10.00/ounce $12,000
Silver prices.......................... $ 0.25/ounce 2,900
Canadian dollar........................ U.S.$0.01 1,500
Crude oil prices....................... $1.00/barrel 800
Interest rates (effect on gold and sil-
ver forward sales and swaps).......... 1% 12,000
</TABLE>
Hedging gains and losses represent the difference between spot or market
prices and realized amounts. Shown below are the hedging gains and losses
recognized in earnings.
88
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
GAINS (LOSSES) IN THOUSANDS
OF U.S. DOLLARS
<S> <C> <C> <C>
Revenue:
Gold loans................................. $ (612) $ 3,278 $ 6,977
Gold forward sales......................... 2,849 (1,278) (500)
Silver loans and swaps..................... -- 7,539 4,561
Silver forward sales....................... 1,909 (3,703) 917
Gold and silver options.................... 394 1,113 (1,742)
Operating expenses:
Foreign currency contracts................. 839 (705) 66
Crude oil contracts........................ 326 (631) (125)
Dividends on preferred stock of subsidiary:
Interest rate swap (note 6)................ (493) 764 3,369
-------- -------- ---------
$ 5,212 $ 6,377 $ 13,523
======== ======== =========
</TABLE>
16.OTHER COMMITMENTS AND CONTINGENCIES
a)Royalties
Round Mountain mine production is subject to a net smelter return royalty
ranging from 3.53% at gold prices of $320 per ounce or less to 6.35% at gold
prices of $440 per ounce or more. Its production is also subject to a gross
revenue royalty of 3%, reduced to 1 1/2% after $75.0 million has been paid.
For the period from inception through December 31, 1995, cumulative royalties
of $14.4 million have been paid on the gross revenue royalty.
McCoy/Cove production is subject to a 2% net smelter return royalty. This
royalty is based on sales less certain deductions.
A portion of production from the Lamefoot area of the Kettle River mine is
subject to a 5% net smelter return royalty.
b)Operating lease commitments
The company's principal lease commitments are for office premises, aircraft
and equipment. The company's commitments under the remaining terms of the
leases are approximately $16.4 million, payable as follows: $3.2 million in
1996, $3.6 million in 1997, $1.4 million in 1998, $1.4 million in 1999, $1.1
million in 2000 and $5.7 million thereafter.
c)Alaska-Juneau
In December 1991, the company purchased the remaining 15% working interest
in the Alaska-Juneau development properties from affiliates of Watts, Griffis
and McOuat in exchange for a 1 1/2% net smelter return royalty on all future
production. A director of the company and members of his immediate family
indirectly own or exercise control over approximately 30% of the shares in the
affiliates. The purchase price was C$4.0 million paid in January 1992 plus
C$0.5 million to be paid in each of the next eight years, subject to
acceleration upon commencement of commercial production, and 100,000 common
shares upon commencement of commercial production.
89
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
STATED IN U.S. DOLLARS UNLESS OTHERWISE NOTED
d)Contingencies
(i)Alaska-Juneau
In December 1994, the U.S. Environmental Protection Agency (EPA) issued a
Technical Assistance Report concluding that this development project, as
configured in the May 1992 Final Environmental Impact Statement, would be
likely to violate water quality and other environmental standards. In 1996,
the company's reapplication of permits included a new project description with
an alternative of Submarine Tailings Disposal (STD), which would require a
change in EPA regulations. For that purpose, the EPA has instituted rulemaking
procedures to enable it to consider the STD proposal. To review that proposal
and other options that could enable the Alaska-Juneau project to proceed, the
EPA will prepare a Supplemental Environmental Impact Statement expected to be
completed in 1997. The recoverability of the company's $61.2 million
investment in Alaska-Juneau (note 2) is dependent on receipt of all necessary
permits and the company's ability to attain profitable production from the
property or from alternative courses of action that the company may pursue.
(ii)Sunnyside
Sunnyside Gold Corporation (SGC), an indirect wholly owned subsidiary of the
company, has negotiated a consent decree with the State of Colorado that sets
standards for the release of all reclamation and water treatment permits and
the resolution of future enforcement issues regarding groundwater seeps and
springs. This settlement is subject to a public comment period and final
approval by the state's attorney general. It is expected to be finalized in
the second quarter of 1996. The consent decree, after approval by the court,
will settle proceedings commenced by SGC in Colorado state court in May 1994
to clarify the extent of SGC's responsibility, if any, for groundwater seeps
and springs that may occur subsequent to the planned sealing of the Sunnyside
mine. In 1995, SGC increased the provision for future reclamation costs at the
Sunnyside mine by $11.7 million (note 7). SGC's provision for future
reclamation costs is reviewed periodically and adjusted as additional
information becomes available.
90
<PAGE>
QUARTERLY FINANCIAL HIGHLIGHTS
(UNAUDITED)
(MILLIONS OF U.S. DOLLARS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NET EARNINGS
OPERATING EARNINGS (LOSS)
REVENUE EARNINGS (LOSS) PER SHARE
------- --------- -------- ---------
<S> <C> <C> <C> <C>
1995
First quarter.............................. $ 84.2 $ 5.6 $(11.7) $(0.10)
Second quarter............................. 90.6 6.9 (13.0) (0.12)
Third quarter.............................. 93.5 13.2 (8.7) (0.08)
Fourth quarter............................. 92.4 7.8 (16.7) (0.13)
------ ----- ------ ------
Total...................................... $360.7 $33.5 $(50.1) $(0.43)
====== ===== ====== ======
1994
First quarter.............................. $103.1 $22.4 $ 11.5 $ 0.10
Second quarter............................. 95.8 18.7 1.7 0.02
Third quarter.............................. 89.1 13.4 -- --
Fourth quarter............................. 89.6 11.3 (5.2) (0.05)
------ ----- ------ ------
Total...................................... $377.6 $65.8 $ 8.0 $ 0.07
====== ===== ====== ======
</TABLE>
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10--DIRECTORS OF THE REGISTRANT
The information about the directors of the company required by this item is
located in the Echo Bay Mines Ltd. proxy statement to be filed within 120 days
after the end of the fiscal year. Information about the executive officers of
the company required by this item appears in Part I of this Annual Report on
Form 10-K.
ITEM 11--EXECUTIVE COMPENSATION
The information required by this item appears in the Echo Bay Mines Ltd.
proxy statement to be filed within 120 days after the end of the fiscal year.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appears in the Echo Bay Mines Ltd.
proxy statement to be filed within 120 days after the end of the fiscal year.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears in the Echo Bay Mines Ltd.
proxy statement to be filed within 120 days after the end of the fiscal year.
91
<PAGE>
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements included in Part II, Item 8
Echo Bay Mines Ltd.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management's Responsibility for Financial Reporting.................... 63
Report of Independent Chartered Accountants............................ 64
Consolidated Statement of Earnings for the three years ended December
31, 1995.............................................................. 65
Consolidated Balance Sheet as at December 31, 1995 and 1994............ 66
Consolidated Statement of Retained Earnings for the three years ended
December 31, 1995..................................................... 67
Consolidated Statement of Cash Flow for the three years ended December
31, 1995.............................................................. 68
Summary of Significant Accounting Policies............................. 69
Notes to Consolidated Financial Statements............................. 73
</TABLE>
2. Financial Statement Schedules included in Part IV
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
3. Exhibits required to be filed by Item 601 of Regulation S-K
Exhibits 21, 23.1 and 24 are filed herewith. All other exhibits are
incorporated by reference as indicated below.
<TABLE>
<CAPTION>
EHIBITX
NO. EXHIBIT DESCRIPTION
- ------- -------------------
<S> <C>
3.1 Restated Articles of Incorporation of the Registrant (incorporated
herein by reference to Exhibit 3(a) of Registration Statement No. 2-
84687).
3.2 By-Laws of the Registrant (incorporated herein by reference to
Exhibit 3(b) of Registration Statement No. 2-84687).
4.1 Bond Purchase, Paying and Warrant Agency Agreement made as of
10/7/86 among the Registrant, Credit Suisse, Union Bank of
Switzerland and Swiss Bank Corporation (incorporated herein by
reference to Exhibit 10(b) of Registration Statement No. 33-9720).
4.2 Form of Guaranty and Exchange Agreement of Echo Bay Mines Ltd.
(incorporated herein by reference to Exhibit 4.3 to Registration
Statement Nos. 33-48119 and 33-48120).
4.3 Form of Certificate of Designations of Echo Bay Mines Convertible
Preferred Shares (incorporated herein by reference to Exhibit 4.4 to
Registration Statement Nos. 33-48119 and 33-48120).
4.4 Form of Echo Bay Mines Preferred Share Certificate (incorporated
herein by reference to Exhibit 4.5 to Registration Statement Nos.
33-48119 and 33-48120).
4.5 Shelf registration statement, dated April 14, 1994 (incorporated
herein by reference to Registration Statement No. 33-77738 and
amendments thereto).
</TABLE>
92
<PAGE>
4.6 Shareholder rights plan, dated September 2, 1994 (incorporated
herein by reference to the report on Form 8-A of file No. 1-8542
which was made effective on October 14, 1994).
10.1 Employee Share Incentive Plan (incorporated herein by reference to
Exhibit 10(n) of Registration Statement No. 2-84687).
10.2 Amendment dated 2/18/86, to the Employee Share Incentive Plan
described in 10.1 above (incorporated herein by reference to Exhibit
10.29 of the Report on Form 10-K for the year ended December 31,
1986).
10.3 Prospectus dated 10/7/86 relating to the offering in Switzerland of
3 7/8% Bonds with Gold Purchase Warrants (incorporated herein by
reference to Exhibit 28(a) of Registration Statement No. 33-9720 and
amendments thereto).
10.4 Amendment dated April 1, 1992 to Employment Agreement with Robert F.
Calman (incorporated herein by reference to Exhibit 10.15 of the
report on Form 10-K for the year ended December 31, 1992).
10.5 Amendment dated April 1, 1992 to Employment Agreement with Richard
C. Kraus (incorporated herein by reference to Exhibit 10.16 of the
report on Form 10-K for the year ended December 31, 1992).
10.6 Employment agreement dated April 1, 1992 between the company and
Robert C. Armstrong (incorporated herein by reference to Exhibit
10.17 of the report on Form 10-K for the year ended December 31,
1992).
10.7 Consulting agreement dated November 30, 1992 between the company and
John Zigarlick (Pilot Shipping Ltd.) (incorporated herein by
reference to Exhibit 10.18 of the report on Form 10-K for the year
ended December 31, 1992).
10.8 Form of Deferred Compensation Agreement between the company and
certain senior executives (incorporated herein by reference to
Exhibit 10.11 of the report on Form 10-K for the year ended December
31, 1993).
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young.
24 Power of Attorney.
(b) Reports on Form 8-K
No report on Form 8-K was filed during the last quarter of the period
covered by this report.
93
<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.
Echo Bay Mines Ltd.
By: /s/ Richard C. Kraus
------------------------------------
Richard C. Kraus
President and Chief Executive Officer
Date: March 20, 1996
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 IN THE CAPACITY AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Richard C. Kraus President and Chief Executive March 20, 1996
- ------------------------------------ Officer
Richard C. Kraus
/s/ Peter H. Cheesbrough Senior Vice President, Finance
- ------------------------------------ and Chief Financial Officer
Peter H. Cheesbrough
/s/ Gerald A. Tywoniuk Vice President, Controller and
- ------------------------------------ Principal Accounting Officer
Gerald A. Tywoniuk
* John N. Abell
* Latham C. Burns
* Robert F. Calman
* John Gilray Christy
* Peter Clarke
* Carlos A. Ferrer
*A majority of the Board of
* Richard C. Kraus Directors
* Robert L. Leclerc
* John F. McOuat
* Monica E. Sloan
* R. Geoffrey P. Styles
By: /s/ Paul Hilton March 20, 1996
--------------------------------
Paul Hilton, Attorney-In-Fact
</TABLE>
94
<PAGE>
SCHEDULE VIII
MANAGEMENT PROXY CIRCULAR OF ECHO BAY MINES LTD.
(SEPARATELY ATTACHED)
<PAGE>
MANAGEMENT PROXY CIRCULAR
SOLICITATION OF PROXIES
THIS MANAGEMENT PROXY CIRCULAR IS FURNISHED IN CONNECTION WITH THE
SOLICITATION BY THE MANAGEMENT OF ECHO BAY MINES LTD. (THE "CORPORATION") OF
PROXIES TO BE USED AT THE ANNUAL GENERAL MEETING OF THE SHAREHOLDERS OF THE
CORPORATION, TO BE HELD AT THE TIME AND PLACE AND FOR THE PURPOSES SET FORTH
IN THE FOREGOING NOTICE. This material was first sent to shareholders on or
about March 28, 1996. The Corporation will bear all costs in connection with
the printing and mailing of the enclosed materials as well as the cost of
solicitation of proxies. D.F. King & Company, Inc. will solicit proxies from
nominee accounts for a fee of U.S. $20,000 plus expenses. To the extent
necessary to assure adequate representation at the meeting, solicitation of
proxies may be made by directors, officers and regular employees of the
Corporation directly as well as by mail and by telephone.
APPOINTMENT AND REVOCATION OF PROXIES
The persons designated in the enclosed form of proxy are directors of the
Corporation. A SHAREHOLDER HAS THE RIGHT TO APPOINT A PERSON, WHO NEED NOT BE
A SHAREHOLDER, TO REPRESENT HIM AT THE MEETING OTHER THAN THE PERSONS
DESIGNATED IN THE ACCOMPANYING FORM OF PROXY. This right may be exercised
either by inserting in the space provided the name of the other person a
shareholder wishes to appoint or by completing another proper form of proxy.
Shareholders who wish to be represented at the meeting by proxy must deposit
their form of proxy prior to 11:30 o'clock in the morning local time on May 9,
1996 either at the principal office of the Corporation, 1210 Manulife Place,
10180 - 101 Street, Edmonton, Alberta, Canada T5J 3S4 or at the office of
Montreal Trust Company of Canada, 151 Front Street West, Toronto, Ontario,
Canada M5J 2N1, or bring the proxy to the meeting and deliver it to the
Chairman or Secretary of the Corporation prior to the commencement of the
meeting.
A shareholder who has given a proxy has the right to revoke it at any time
by an instrument in writing executed by the shareholder or his attorney
authorized in writing or, if the shareholder is a corporation, under its
corporate seal or by an officer or attorney thereof duly authorized, and
deposited either at the principal office of the Corporation, 1210 Manulife
Place, 10180 - 101 Street, Edmonton, Alberta, Canada T5J 3S4 or at the office
of Montreal Trust Company of Canada, 151 Front Street West, Toronto, Ontario,
Canada M5J 2N1 addressed to the Secretary of the Corporation, c/o Montreal
Trust Company of Canada, at any time up to and including the last business day
preceding the day of the meeting, or any adjournment thereof, at which the
proxy is to be used, or with the Chairman or Secretary of the Corporation on
the day of the meeting, or any adjournment thereof.
VOTING SHARES AND PRINCIPAL HOLDERS THEREOF
On March 13, 1996, there were outstanding 130,476,039 common shares of the
Corporation, each of which carries with it the right to one vote. A quorum of
shareholders will be established at the meeting if the holders of a majority
of the shares entitled to vote at the meeting are present in person or
represented by proxy. Abstentions will be counted for quorum but for no other
purpose. A majority of the votes cast at the meeting in person or by proxy is
required for the approval of each matter being submitted to a vote of the
shareholders at the meeting.
Shareholders of record at the close of business on March 21, 1996 will be
entitled to vote at the meeting except to the extent that they have
transferred the ownership of any of their shares after the record date and the
transferee of those shares has produced properly endorsed share certificates
or has otherwise established that he owns the shares and, in either case, has
demanded not later than April 30, 1996 that his name be included in the list
of shareholders entitled to vote at the meeting.
As of March 13, 1996, based upon information available to the Corporation,
no one shareholder was the beneficial owner of more than five percent of the
common shares.
VOTING OF PROXIES
Common shares of the Corporation, represented by a valid proxy in favour of
the person or persons designated in the enclosed form of proxy, will be voted
on any ballot which may be called for in respect of matters referred to in the
accompanying notice of meeting and, where a choice with respect to any matter
to be acted upon has been specified in the proxy, the shares will be voted in
accordance with the specification so made. THE COMMON SHARES WILL BE VOTED IN
FAVOUR OF ANY MATTER FOR WHICH NO SPECIFICATION HAS BEEN MADE.
1
<PAGE>
The enclosed form of proxy confers discretionary authority upon the persons
named therein with respect to amendments to the matters identified in the
notice of meeting and other matters that may properly come before the meeting.
Management is not aware of any amendments to matters identified in the notice
of meeting or of any other matters that are to be presented for action to the
meeting.
ELECTION OF DIRECTORS
Under the articles of the Corporation, the Board of Directors may consist
of a minimum of three and a maximum of 15 directors. At present, the Board
consists of 11 directors and the Board of Directors has fixed the number of
directors at 11 for the term of office commencing with this election.
Management proposes to nominate and the persons named in the enclosed form of
proxy intend to vote for the election of the 11 persons named below, 10 of
whom are already directors. Management does not contemplate that any of the
nominees will be unable to serve as a director. Each director elected will
hold office until the next annual general meeting or until a successor is duly
elected.
Mr. Calman, currently the Chairman of the Corporation, has decided to
retire as Chairman and as a director of the Corporation at this meeting. The
Board has selected Mr. Leclerc to succeed Mr. Calman as Chairman effective at
the conclusion of the meeting.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND BUSINESS
NAME AND MUNICIPALITY OF DIRECTOR EXPERIENCE WITHIN THE LAST FIVE DIRECTORSHIPS OF OTHER
RESIDENCE AGE SINCE YEARS PUBLIC CORPORATIONS
- ------------------------ --- -------- ------------------------------------ --------------------------
<S> <C> <C> <C> <C>
JOHN NORMAN 64 1980 Corporate director since 1991; Stelco, Inc;
ABELL(/1/)(/3/)(/4/)........ Vice Chairman, Wood Gundy, AT Plastics Inc.
Ramsbury, Wilts., England Inc. (investment dealers)
1986 to 1991
LATHAM CAWTHRA 65 1980 Corporate director since 1995;
BURNS(/1/)(/2/)(/3/)(/4/)... Prior thereto Honorary
Toronto, Ontario Chairman, Nesbitt Burns Inc.
(investment dealers)
PIERRE CHOQUETTE............. 53 -- President and Chief Executive Methanex Corporation;
Vancouver, British Columbia Officer, Methanex Corporation Gennum Corporation
since October 1994; President,
Novacorp International Inc. from
August 1993 to October 1994;
prior thereto Senior Vice President,
NOVA Corporation Ltd.
JOHN GILRAY 63 1980 Chairman, Chestnut Capital First Union Bank
CHRISTY(/1/)(/2/)(/4/)(/5/). Corporation (holding company) Advisory Board -
Wyndmoor, Pennsylvania and corporate director New Jersey; First Union
Bank Advisory Board -
Philadelphia;
The Philadelphia
Contributionship; The 1838
Bond Debenture Trading
Fund Limited
PETER CLARKE(/5/)(/6/)....... 65 1993 Consultant - metals and mining
Nanoose Bay, British industries since December 1992;
Columbia prior thereto Senior Vice
President of the Corporation
CARLOS ANTONIO 42 1994 Partner, Ferrer & Company, LLC
FERRER(/2/)(/3/)............ (private equity fund) since July,
Rye, New York 1995; prior thereto Managing
Director, CS First Boston
Corporation (investment
bankers)
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND
BUSINESS
NAME AND MUNICIPALITY OF DIRECTOR EXPERIENCE WITHIN THE LAST DIRECTORSHIPS OF OTHER
RESIDENCE AGE SINCE FIVE YEARS PUBLIC CORPORATIONS
- ------------------------ --- -------- ----------------------------- -----------------------------
<S> <C> <C> <C> <C>
RICHARD CARL KRAUS......... 49 1992 President and Chief Executive St. Mary Land and
Denver, Colorado Officer of the Corporation Exploration Company
since June 1994; President
and Chief Operating Officer
from January 1992 to June
1994; prior thereto Executive
Vice President and Chief
Financial Officer of the
Corporation
ROBERT LEIGH LECLERC, 51 1992 Chairman and Chief Executive
Q.C.(/1/)(/3/)(/5/)....... Officer, Milner Fenerty
Edmonton, Alberta (barristers and solicitors)
since December 1993; now
and prior thereto, partner in
Milner Fenerty
JOHN FREDERICK 62 1989 President, Watts, Griffis and Cominco Ltd.; Euro Nevada
McOUAT(/5/)(/6/).......... McOuat Limited (consulting Mining Corporation Ltd.;
Toronto, Ontario geologists and engineers) Diamond Fields Resources
Inc.
MONICA ELIZABETH 42 1994 President, AGT Advanced
SLOAN(/1/)(/2/)(/4/)(/6/). Communications (a
Calgary, Alberta telecommunications company)
since August 1995;
Assistant Vice-President
Strategy Development, Telus
Corporation from December
1991 to August 1995; prior
thereto employed in general
management capacities by
Novacorp International
Consulting Incorporated
RICHARD GEOFFREY PENTLAND 65 1987 Corporate director Onex Corp.; Working
STYLES(/1/)(/2/)(/3/)(/4/). Ventures Canadian
Toronto, Ontario Fund Inc.; Scotts Hospitality
Inc.; The Geon Company
</TABLE>
- -------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Finance Committee
(4) Member of the Nominating and Corporate Governance Committee
(5) Member of the Operations Committee
(6) Member of the Safety and Environment Committee
MEETINGS AND COMPENSATION OF THE BOARD OF DIRECTORS
In 1995, the Board of Directors held 13 meetings. All directors received an
annual retainer fee of U.S.$10,000 and U.S.$500 for attendance at each meeting
of the Board of Directors and of each committee on which they served, except
Messrs. Calman and Kraus who do not receive annual retainer fees. The Chairman
of the Operations Committee received an additional annual fee of U.S.$15,000
and all other committee chairmen an additional annual fee of U.S.$10,000.
These fees were approved effective as of January 1, 1995. The committee
chairmen were: Audit - Mr. Burns; Compensation - Mr. Christy; Finance - Mr.
Abell; Nominating and Corporate Governance - Mr. Styles; Operations - Mr.
Clarke; and Safety and Environment - Mr. McOuat.
In 1994 the Corporation established a director equity plan which provides
for the grant of options to permit eligible directors to acquire common shares
of the Corporation. Eligible directors are neither officers nor employees of
3
<PAGE>
the Corporation and options may be granted according to a formula which calls
for grants annually on the date of the Corporation's annual meeting of
shareholders. In no case may the number of shares covered by the grant be less
than 2,500 or more than 6,500. The first grants were made June 9, 1994 and
each eligible director received an option to acquire 4,600 common shares of
the Corporation at a price of Can.$14.625. The next grants were made June 8,
1995 and each eligible director received an option to acquire 6,500 common
shares of the Corporation at a price of Can.$12.50, the closing price reported
by The Toronto Stock Exchange on that date.
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee reviews the annual financial statements and the annual
audit with the Corporation's independent auditors and also reviews quarterly
financial information which is published and disseminated to shareholders. The
Compensation Committee reviews the performance and recommends the compensation
of corporate officers and makes grants under the employee share incentive
plan. The Finance Committee reviews the financial structure of the
Corporation, assesses its financial position and requirements and makes
recommendations in areas such as hedging policies and the use of financial
derivatives. The Nominating and Corporate Governance Committee reviews Board
responsibilities, structure and composition, and recommends candidates to
serve as directors of the Corporation. Committee policy on nominations permits
consideration of candidates put forward by shareholders. Any shareholder
interested in submitting such a recommendation is required to communicate full
details to the Secretary of the Corporation by the end of the calendar year
prior to the year in which the nomination will be considered. The Operations
Committee reviews and makes recommendations to the Board regarding operations
of the Corporation, reserves, life-of-mine plans, the annual operating plan
and budget, and the annual exploration program. The Safety and Environment
Committee reviews the Corporation's safety and environmental policies,
procedures and practices.
During 1995, the Audit Committee met five times, the Compensation Committee
five times, the Finance Committee three times, the Nominating and Corporate
Governance Committee three times, the Operations Committee twice and the
Safety and Environment Committee four times. Mr. Ferrer attended fewer than 75
percent of the aggregate of the total number of meetings of the Board of
Directors and the total number of meetings held by all committees of the Board
on which he served.
REPORT ON CORPORATE GOVERNANCE
The Toronto Stock Exchange recently introduced a new listing requirement
mandating disclosure of the corporate governance practices followed by
companies listed on that Exchange. Listed companies are now required to
disclose their approach to corporate governance in their annual reports or
information circulars and make the disclosure with reference to guidelines
published by The Toronto Stock Exchange (the "Guidelines"). The following
discusses the Corporation's adherence to the Guidelines.
Mandate of the Board of Directors
The Board of Directors is responsible for managing the business and affairs
of the Corporation. This responsibility manifests itself in many ways such as
considering strategic alternatives, selecting and approving a strategic plan
and establishing operating plans consistent with approved strategies. The
Board must identify the principal risks of the business and monitor to see
that they are controlled. The Board is responsible for corporate governance
generally and for specific tasks such as the selection of a Chief Executive
Officer, the assessment of performance and for replacing that individual if
appropriate. It is also responsible for all key executive appointments and for
setting equitable compensation for these and other executives.
The Board must ensure that there is a sound basis for making key business
decisions, to facilitate realization of corporate goals and to ensure
compliance, to the greatest extent possible, with sound safety and
environmental standards. It must also make certain that the Corporation has
sufficient financial resources to meet its commitments.
In all instances the Board must ensure that the interests of shareholders,
creditors, employees and the communities in which the Corporation operates are
properly served. The Board must be able and willing to take action, separate
from management, on issues which by law or practice require independent
thought and action. In all of this the Board has a duty to be certain that the
Corporation acts in a lawful, ethical and responsible manner.
4
<PAGE>
Composition of the Board
The Guidelines require the Corporation to address the extent to which the
Board has a majority of unrelated directors and the basis for reaching this
conclusion. An "unrelated director" is defined as someone who is independent
of management and is free from any interest and any business or other
relationship which could, or could reasonably be perceived to, interfere
materially with the director's ability to act with a view to the best
interests of the Corporation. Of the 11 directors, six are unrelated. Each of
them has business and other interests entirely unrelated to those of the
Corporation except to the extent that a director has an interest arising
because he or she is a shareholder of the Corporation. The shareholding issue
is immaterial as no single shareholder or shareholder group, to the knowledge
of management, has more than a five percent beneficial interest in the shares
of the Corporation. Of the five directors who do not meet the "unrelated"
test, only two (Messrs Calman and Kraus) are employed by the Corporation. Mr.
Clarke was a senior officer of the Corporation while Messrs. Leclerc and
McOuat are principals in firms which from time to time provide consulting
services to the Corporation. The amount of business done by their firms for
the Corporation does not represent a material percentage of the gross annual
revenue of either firm.
Independent Functioning of the Board
In June 1994 the Corporation separated the functions of Chairman and Chief
Executive Officer by appointing Mr. Kraus, its President, as Chief Executive
Officer in place of Mr. Calman who had been Chairman and Chief Executive
Officer. Mr. Calman has remained as Chairman. The purpose of that decision was
in part to facilitate an orderly succession in management and also to attempt
to divide senior officer functions to permit the Board to operate with more
independence from management than when the Chairman and Chief Executive
Officer designation had been vested in one person. In addition, the Board
recently expanded the duties of the Nominating Committee, now known as the
Nominating and Corporate Governance Committee. This committee now makes
recommendations to the Board as to which directors are "unrelated", reviews
compliance with the Guidelines and other relevant corporate governance
requirements, and develops once every three years a long term Board succession
plan. It also reviews the effectiveness of the Board, its committees and
individual members and recommends to the Board position descriptions for the
Chairman, the President and Chief Executive Officer and the Board itself. All
of this is in addition to the committee's duty to search for and recruit new
directors.
The Board allows each director to seek the advice of independent experts,
if deemed appropriate. The relevant procedure in this case calls for a
director obtaining the approval of an appropriate Board committee not chaired
by that director.
Board Committees
The Board committees and their mandates are described at page 4 of this
management proxy circular. All members of the Compensation and Nominating and
Corporate Governance Committees are unrelated, outside directors. All but one
member of the Audit and Finance Committees are unrelated, outside directors.
Neither the Operations nor Safety and Environment Committees comprise a
majority of unrelated, outside directors and the Board believes the interests
of the Corporation are better served by having it this way.
Decisions Requiring Prior Approval By The Board
Prior Board approval is required for capital expenditures in excess of
U.S.$5,000,000 (approval of such items beyond U.S.$2,500,000 is delegated to
the Operations Committee of the Board), all acquisitions of other companies,
sale of securities of the Corporation, incurring debt except under approved
credit arrangements with banks and financial institutions, and employment and
compensation arrangements for officers of the Corporation.
Shareholder Feedback
Shareholders are encouraged to convey their concerns to management or the
board. They may do so by writing to the Corporation's Investor Relations
Department.
The Board's Expectations of Management
The Board expects management to conduct the business of the Corporation in
keeping with the strategic and operating plans adopted by the Board. The
Corporation is presently in a period of transition from its "first generation"
5
<PAGE>
of gold mines, all in Canada and the United States, to a new period when its
production will likely come increasingly from mines outside of these two
countries. The Board expects management to explore and assess the potential of
several properties to become profitable commercial producers of gold and other
metals, to develop plans to bring these properties into production, to arrange
financing, to hire and train staff capable of getting the mines up and running
and, at the same time, manage effectively the major mines that today provide
essentially all of the Corporation's cash flow.
The Board expects that the capable management of today's producing mines,
the development of new properties and the successful execution of the plans
that management has been developing on exploration and development properties
can increase shareholder value. The Board believes that the elements necessary
for success are in place, except for the hiring and training of on site
management teams that will be required at each new mine site when a
construction decision is reached.
SECURITY OWNERSHIP
The following table shows equity securities of the Corporation beneficially
owned as of March 13, 1996 by all directors of the Corporation, the Chief
Executive Officer and next four most highly compensated executive officers of
the Corporation, and directors and executive officers of the Corporation as a
group.
<TABLE>
<CAPTION>
OPTIONS TO ACQUIRE
COMMON
SHARES OF THE
CORPORATION
AMOUNT AND NATURE OF EXERCISABLE WITHIN 60
BENEFICIAL OWNERSHIP AS DAYS
BENEFICIAL OWNER OF MARCH 13, 1996 OF MARCH 13, 1996
- ---------------- ----------------------- --------------------- ---
<S> <C> <C> <C>
John N. Abell........... 8,000 1,150
Robert C. Armstrong..... 27,944 150,495
John L. Azlant.......... 11,000 32,734
Latham C. Burns......... 2,000 1,150
Robert F. Calman........ 24,378 458,560
Peter H. Cheesbrough.... 21,368 83,190
John G. Christy......... 42,553 1,150
Peter Clarke............ 30,000 180,517
Carlos A. Ferrer........ 1,000 1,150
Richard C. Kraus........ 65,194 280,403
Robert L. Leclerc, Q.C.. 10,000 37,650
John F. McOuat.......... 1,791 1,150
Monica E. Sloan......... 1,000 1,150
R. Geoffrey P. Styles... 2,000 1,150
Directors and executive
officers as a group.... 1,877,035(/1/)(/2/)(/3/)
</TABLE>
- -------
(1) Represents 1.4 percent of the outstanding common shares of the
Corporation.
(2) Includes 1,595,880 common shares which directors and officers have the
right to acquire within 60 days of March 13, 1996.
(3) No individual director or officer owns common shares of the Corporation
representing 1.0 percent or more of the number of outstanding shares.
LIABILITY INSURANCE
The Corporation has purchased insurance and has, in addition, agreed to
indemnify directors and officers of the Corporation against all costs, charges
and expenses reasonably incurred by them in respect of certain proceedings to
which they may be made party by reason of their status as director or officer
of the Corporation. The indemnification is extended to directors and officers
provided that they have acted honestly and in good faith with a view to the
best interests of the Corporation and, in the case of a criminal or
administrative action or proceeding that is enforced by a monetary penalty, on
the condition that the director or officer had reasonable grounds for
believing his conduct was lawful. The amount of the premium paid in respect of
directors and officers as a group was U.S.$110,000; the policy coverage is
U.S.$20,000,000 per claim and in aggregate in any policy year. The first
U.S.$500,000 of expense for the Corporation per claim is not covered by the
policy.
6
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
During 1995 there were 17 executive officers of the Corporation. Cash
remuneration paid to all executive officers for the portion of 1995 during
which an office was held aggregated U.S.$3,353,042.
SUMMARY COMPENSATION TABLE
The table below shows the compensation of the Chief Executive Officer and
the next four most highly compensated executive officers for each of the
Corporation's last three completed fiscal years.
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
----------------- ------------
SHARE ALL OTHER
SALARY BONUS OPTION COMPENSATION
NAME/PRINCIPAL POSITION YEAR (U.S.$) (U.S.$) AWARDS (#) (U.S.$)
- ----------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Richard C. Kraus.......... 1995 $372,274 $186,137 143,328 $219,958(/1/)
Director, President and
Chief Executive 1994 346,519 118,042 93,172 39,224(/2/)
Officer 1993 328,574 164,287 98,800 188,838(/3/)
Robert F. Calman.......... 1995 $334,324 $167,162 101,776 $164,318(/1/)
Director and Chairman 1994 341,079 115,896 86,184 40,009(/2/)
1993 349,207 174,604 103,748 207,449(/3/)
Robert C. Armstrong....... 1995 $260,592 $130,296 79,332 $158,945(/1/)
Executive Vice-President 1994 240,293 77,339 65,220 26,816(/2/)
1993 224,179 112,500 73,960 119,863(/3/)
Peter H. Cheesbrough...... 1995 $172,000 $ 68,800 64,272 $ 73,614(/1/)
Senior Vice President,
Finance 1994 160,000 43,528 30,936 9,000(/2/)
and Chief Financial
Officer 1993 138,200 55,667 43,980 41,607(/3/)
John L. Azlant............ 1995 $164,800 $ 65,920 94,608 $ 75,797(/1/)
Senior Vice President, 1994 160,000 43,528 30,936 8,123(/2/)
Corporate Development 1993 32,846 13,025 50,000 6,385(/2/)
---- -------- -------- ------- --------
</TABLE>
- -------
(1) Represents the annual employer contributions to the Corporation's
retirement savings and defined contribution plans and compensation to
which the named persons are contingently entitled payable over a three-
year period commencing February 1997 in the amounts of: R. C. Kraus -
$179,031; R. F. Calman - $127,542; R. C. Armstrong - $130,296; P. H.
Cheesbrough - $63,322; J. L. Azlant - $65,920.
(2) Represents the annual employer contributions to the Corporation's
retirement savings and defined contribution plans.
(3) Represents the annual employer contributions to the Corporation's
retirement savings and defined contribution plans and, in the cases of
Messrs. Calman, Kraus, Armstrong and Cheesbrough, compensation to which
they are contingently entitled payable over a three-year period which
commenced February 1995 in the amounts of: R. C. Kraus - $151,528, R. F.
Calman - $160,544, R. C. Armstrong - $95,276, P. H. Cheesbrough - $33,649.
EXECUTIVE CASH INCENTIVE PLAN
The Corporation has an executive cash incentive plan (the "ECIP") under
which certain executive officers and key employees are eligible to receive, in
addition to their base salary, incentive compensation if performance
objectives related to the Corporation's annual operating plan have been met. A
participant in the ECIP received for 1995 a percentage of base salary if the
Corporation met certain performance standards considered applicable to the
participant. Awards earned and paid to executive officers under the ECIP for
1995 aggregated U.S.$2,014,018. The amounts paid to the Chief Executive
Officer and the next four most highly compensated executive officers are shown
in the Summary Compensation Table at page 7 under "Bonus".
SHARE OPTIONS
The Corporation has adopted a share incentive plan which provides for the
grant of options to purchase common shares to directors, officers and
employees. The number of common shares currently authorized under the plan is
8,000,000. The exercise price of all options granted to date has been 100
percent of the market value of the common shares on the date of each grant.
Options may be granted for a term of not more than 10 years and must be
granted at no less than 100 percent of fair market value on the date of grant.
The exercise price must be paid in full at the time of exercise of an option
and may be paid either in cash or by the surrender or delivery to the
Corporation of common shares.
7
<PAGE>
The Compensation Committee of the Board of Directors exercises its judgment
as to eligibility for participation in the plan and the amount of any
particular grant. It also determines the date on which each option shall
become exercisable and may provide that options shall be exercisable in
installments. The Committee may in its sole discretion accelerate the time at
which any option may be exercised in whole or in part. Such discretion may be
exercised in any circumstances deemed appropriate by the Committee including,
but without limitation, the threat (actual or perceived) of a take-over bid
for voting control of the Corporation
At March 13, 1996 options to purchase a total of 3,774,761 common shares
were outstanding with an average exercise price per common share of
Can.$13.33.
Options to purchase 716,680 common shares of the Corporation were granted
to 16 executive officers in 1995. The following table shows option grants in
the last fiscal year to the Chief Executive Officer and the next four most
highly compensated executive officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL
RATES
OF SHARE PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(/2/)
- ------------------------------------------------------------------------------- ----------------------
PERCENT OF
TOTAL OPTIONS
GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR (CAN.$/SH)(/1/) DATE 5% (U.S.$) 10% (U.S.$)
- ---- ---------- ------------- --------------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Richard C. Kraus........ 143,328 14.5 $13.375 Nov. 8, 2005 $883,093 $2,237,931
Robert F. Calman........ 101,776 10.3 13.375 Nov. 8, 2005 627,077 1,589,136
Robert C. Armstrong..... 79,332 8.0 13.375 Nov. 8, 2005 488,792 1,238,694
Peter H. Cheesbrough.... 64,272 6.5 13.375 Nov. 8, 2005 396,002 1,003,546
John L. Azlant.......... 94,608 9.6 13.375 Nov. 8, 2005 582,912 1,477,214
</TABLE>
- -------
(1) All grants under the share incentive plan were made for a ten year period
at the closing price for the shares as published by The Toronto Stock
Exchange on the date of grant. The Compensation Committee of the Board of
Directors determines the date on which each option shall become
exercisable and has decided that the options shall become exercisable as
to 25 percent on each of the first, second, third and fourth anniversaries
of the date of grant.
(2) Potential realizable values (pre-tax gain) in this table have been
calculated in the manner prescribed by applicable securities regulatory
requirements and are not intended to reflect actual values nor are they a
forecast of future prices for the common shares of the Corporation during
the ten year option term. Values were calculated in Can.$ and converted to
U.S.$ using the year-end exchange rate of Can.$1.3652 = U.S.$1.00.
Options to acquire 93,500 common shares of the Corporation were exercised
by executive officers during 1995. The aggregate value realized was
U.S.$382,539(/1/). The following table shows aggregated option exercises in
the last fiscal year and year-end option values for the Chief Executive
Officer and the next four most highly compensated executive officers of the
Corporation.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-
NUMBER OF UNEXERCISED THE-MONEY OPTIONS AT
SHARES OPTIONS AT FISCAL YEAR- FISCAL YEAR-END
ACQUIRED VALUE END (#) (U.S.$)(/2/)
ON EXERCISE REALIZED ------------------------- -------------------------
NAME (#) (U.S.$)(/1/) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard C. Kraus........ -- -- 280,403 262,607 $ 435,791 $ 91,863
Robert F. Calman........ 45,000 184,274 558,560 218,288 1,338,558 65,231
Robert C. Armstrong..... -- -- 161,495 165,227 535,573 105,783
Peter H. Cheesbrough.... 17,000 71,127 81,440 109,464 176,474 60,422
John L. Azlant.......... -- -- 32,734 142,810 -- 60,637
</TABLE>
- -------
(1) Represents the difference between the market value of the Corporation's
common shares on The Toronto Stock Exchange on the date of exercise of the
option and the exercise price calculated in Can.$ and converted into U.S.$
using the exchange rate on the date of exercise.
(2) Represents the difference between the market value of the securities
underlying the options calculated in Can.$ using the closing price of the
Corporation's common shares on The Toronto Stock Exchange on December 29,
1995 and the exercise price of the options converted to U.S.$ using the
year-end exchange rate of Can.$1.3652 = U.S.$1.00.
8
<PAGE>
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
AGREEMENTS
Mr. Kraus, the President and Chief Executive Officer of the Corporation,
and the Corporation entered into a contract dated November 17, 1987 which
provides for an annual base salary currently set at U.S.$420,000. The
contract, which is for an indefinite term, provides for certain lump sum
payments if the Corporation terminates Mr. Kraus's employment on fewer than
two years' written notice or demotes him and he voluntarily resigns within
60 days thereof. In the event that a change of control of the Corporation is
followed by a termination of Mr. Kraus's employment under specified
circumstances, Mr. Kraus shall be paid a cash payment equal to three times the
total of his annual base salary plus bonus at guideline under the executive
cash incentive plan. The specified circumstances include (i) the Corporation's
termination of Mr. Kraus' employment within two years of a change of control
or (ii) a voluntary resignation by Mr. Kraus within one year of a change of
control as a result of his good faith determination that he is unable to
effectively discharge his duties.
Mr. Calman, Chairman of the Corporation, entered into an employment
agreement with the Corporation effective April 1, 1991 for an indefinite term
replacing the 1987 agreements which provided for his retainer as Chairman and
for the engagement of Calman & Co., Inc., a consulting company controlled by
Mr. Calman, by a subsidiary of the Corporation. There is no material economic
change in the arrangement with Mr. Calman, and his contractual relationship is
now structured on a basis similar to Mr. Kraus's. Under the new agreement, Mr.
Calman's base salary and retainer from the Corporation, including any
subsidiaries, is currently set at U.S.$334,324.
Mr. Armstrong, Executive Vice President of the Corporation, has entered
into an employment contract with the Corporation for an indefinite term. It is
structured on a basis similar to Mr. Kraus's. Mr. Armstrong's annual base
salary is currently set at U.S. $260,592.
The employment contracts for Messrs. Kraus, Calman and Armstrong also
provide that, if a payment is to be made in the context of a change of control
followed by termination of employment, and the payment when made would
constitute a "parachute payment" as defined in the U.S. Internal Revenue Code,
the payment will be reduced to the largest amount that would result in no
portion being subject to the excise tax imposed by (or the disallowance of a
deduction under) certain provisions of the Code.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Until June 1995 the members of the Compensation Committee were John Gilray
Christy, Chairman, Carlos A. Ferrer, Monica E. Sloan, David W. Strangway and
R. Geoffrey P. Styles. In June 1995 the membership of the Compensation
Committee changed. Mr. Christy remains Chairman and the other members are
Latham C. Burns, Carlos A. Ferrer, Monica E. Sloan and R. Geoffrey P. Styles.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors was established in
1983 and has always been comprised of outside directors. Among other
activities, the Committee sets guidelines for executive compensation and
recommends compensation for executive officers of the Corporation. In the case
of share options, the Committee makes the final determination of recipients
and the amount of the awards. For other significant components of executive
compensation, the Committee recommends action to the full Board of Directors.
In all cases the directors have acted upon Compensation Committee
recommendations without modification in any material way.
The following report is submitted by the undersigned directors in their
capacity as the Compensation Committee of the Board. This report shall not be
deemed incorporated by reference by any general statement incorporating this
proxy circular into any filing under the Securities Act of 1933 or under the
Securities Exchange Act of 1934, except to the extent that the Corporation
specifically incorporates this information by reference, and shall not
otherwise be deemed filed under such Acts.
Compensation Philosophy
The Corporation's policy on compensation attempts to show consistent
application for all executive officers, with variations given to differences
in the level of responsibility for certain areas of corporate management, or
in the nature of the functions performed by particular individuals or groups.
The goals of the compensation program include creating a relationship between
business objectives and performance, which will encourage the creation of
value for shareholders. Pursuit of such goals requires the establishment of
compensation policies which will enable the
9
<PAGE>
Corporation to attract, retain and reward executive officers who can
effectively contribute to the long-term success of the Corporation. No
particular attempt is made to select and segregate the Chief Executive Officer
for compensation purposes. The Committee views the Chief Executive Officer as
one member of the senior management team and applies compensation criteria
evenly among the top five officers.
The Committee recognizes that management of a precious metal producer must
take the initiative in identifying and developing properties which will be of
long-term benefit and create value for shareholders. At the same time,
properties which are in production must be judiciously managed, with metal
production carefully planned and delivered for sale at an efficient cost for
each ounce produced. Management has limited control over the prices at which
gold and silver are sold but does attempt to secure prices for a limited part
of future production using prudent hedging techniques.
Regardless of the stage of property activity, management must also be
mindful of the need to maintain a safe work environment. The failure to do
better than standard in this area should result in a deduction from
compensation otherwise payable. In addition, management must take steps to
ensure the development of ore reserves and to plan for mining these reserves
efficiently and with due regard for cost, safety and environmental concerns.
The compensation techniques are designed to give effect to this philosophy.
Compensation Components and Performance Measures
In evaluating executive compensation for 1995, the Committee adopted a plan
comprising a mix of base compensation (salary), cash bonus and share options
to give effect to the general philosophy outlined above. In considering base
compensation and the principle of paying according to "quartile", the
Committee chose 10 North American precious metal producers as a competitor
group. Management and an independent consultant obtained data for the
prospective 1995 salary policies of this group. The cash bonus and share
option plan components were selected in preference to and exclusion of other
alternatives. The Committee considered competitor practices and judged what
would best further the interests of the Corporation both short and long term,
and also facilitate the objective of attracting, retaining and rewarding
quality executives.
For the salary component, the Committee decided to compensate the five most
senior executives on a level that would be average (second quartile level) by
reference to competitor practices in the North American gold mining industry.
The same determination was made for Vice Presidents and General Managers
having responsibility in the development or mine management areas. For
executive officers in staff functions, the Committee recommended payment in
the third quartile level, that is, they would be paid on a basis whereby 25
percent of their industry counterparts would be more highly compensated.
Regarding the cash bonus, the most senior executives in 1995 were to have
the opportunity to earn a bonus of 50 to 200 percent of a guideline ranging
between 40 and 50 percent of their base compensation, whereas for executives
in a development or mine management function the guideline was 35 percent and
for staff executives 25 percent. All guidelines were set in February 1995
after the establishment (in November 1994) of the 1995 Operating Plan for the
Corporation, and involved ore reserve, production volume, production cost,
support service cost and return on equity criteria. Guidelines could be met in
whole or in part or surpassed, and bonuses would reflect this. The weighting
of the criteria would vary in the executive ranks, depending on the nature of
an individual's job responsibility. Under the bonus plan, all executives are
penalized should the Corporation fail to meet safety standards.
The share option component of the executive compensation plan was set as a
function of base salary and the price for the Corporation's common shares,
measured at 100 percent of market on the date of grant. For the three most
senior executive's the formula called for a grant equal to 300 percent of the
executives base compensation divided by the prevailing market price per share.
For the two Senior Vice Presidents the percentage was 225 percent, for staff
executives 150 percent and for executives in a development or mine management
function 75 percent. Grants were made on this basis in November 1994 for 1995.
Fiscal 1995 Executive Compensation
For the financial year ended December 31, 1995 the following summarizes
executive compensation recommended by the Committee and approved by the Board
of Directors. Share option grants were generally made in accordance with the
formula and for the reasons described above. The numbers of shares covered by
option grants to the named executive officers are set out in the Summary
Compensation Table and the Table of Option Grants shown at pages 7 and 8.
10
<PAGE>
SALARY - The Committee decided in general to increase executive salaries by
three percent. In the case of 15 of the 19 most senior executives increases
were set on this basis. Mr. Calman received no increase as his scope of
responsibility was viewed by the Committee as having been capped by the
appointment in mid-1994 of Mr. Kraus as Chief Executive Officer. The other
three exceptions involved increases from 6.7 to 8.2 percent, in all cases
attributable to expanded job responsibility and an assessment of what industry
would pay on average for the particular job.
CASH BONUS - The Committee set guidelines for the ore reserve, production
volume, production cost, support service cost and return on equity components
of the 1995 bonus plan. The weighting of bonus components varied, as described
earlier in this report, according to the nature of the function or
responsibility assigned to an executive officer or other participant in the
bonus plan. Within each classification the target percentage was allocated
among the five criteria. Except for five executives and the general managers,
for all executives the guideline bonus was allocated 35 percent to ore reserve
performance, 20 percent to production, 25 percent to cash costs and 10 percent
each to support service performance and return on equity. For general
managers, the weighting was biased in favour of cash cost performance (35
percent), with the balance allocated to production volume (25 percent),
operations spending (20 percent) and, new for 1995, ore reserve strategy (20
percent), to encourage the involvement of general managers in the search for
additional reserves.
For all but one participant in the cash bonus plan the actual payout of
cash bonus exceeded guideline. On average, executive bonuses were paid at 178
percent of guideline, with success in ore reserve and resource development
being the single largest factor contributing to this result.
As to safety, the Committee continued its policy that lost time accidents
at each minesite must not exceed a predetermined target. At three of the four
minesites lost time accident performance did not meet target and bonuses for
the mine managers were reduced. Corporation-wide there were 29 lost time
accidents. The accident incident rate was 1.4 for each 200,000 employee-hours
worked compared with a rate of 3.04, the average reported by organizations
subject to the United States Mine Safety and Health Act.
Additionally, if a fatality were to occur at an operation, safety
deductions would be applied as follows: (i) the general manager 20 percent,
(ii) the Executive Vice President, Operations 15 percent, (iii) the Vice
President with responsibility for operations 15 percent, (iv) the Vice
President in charge of safety 15 percent, (v) other senior executives 10
percent, and (vi) other officers 5 percent. In 1995 there were no fatalities
and no safety deductions were applied against bonuses.
PERFORMANCE COMPARED TO 1995 OPERATING PLAN - The Committee believes that
planned operating results are critical to the establishment of bonus levels.
Accordingly, the 1995 bonus plan was established to reward executives whose
performance helped the Corporation meet targets contemplated by the 1995
Operating Plan. As to gold ore reserves at the producing minesites, 174
percent of 1995 production was replaced with new reserves. There was a decline
in reserves at development sites, wholly attributable to the sale of the
Corporation's Kensington property in Alaska. The Corporation, however,
experienced growth in other mineralization at producing minesites and at
development properties, which increased from 3.0 million ounces of gold at
year end 1994 to 9.4 million ounces at year end 1995. Production and cost
performance fell slightly short of target, while support services overran
target by approximately 10 percent due to the increased emphasis placed on ore
reserve strategy. Return on equity was negative and no bonus was therefore
payable in respect of this plan component.
For the 20 executives who participated in the bonus plan a total of
U.S.$2,014,018 in bonus was paid in early 1996 for 1995 performance. The
Committee recognizes the dedication and hard work by all of these executives
and believes that performance and shareholder value mandate bonus payments at
the formula level measured by the criteria established in November 1994. The
Committee has discretion to adjust bonus payments for individual executives
but declined to exercise that discretion for 1995.
Other Remarks
In summary, the Committee believes it is important to compensate officers
on a basis which reflects industry practice but which also considers corporate
objectives and performance. Base salaries are established by reference to
competitor practice, and the Corporation tends to pay its executives at an
average or, in the case of staff executives, slightly above average rate,
compared with other North American precious metal producers. The cash bonus
plan is aligned to short-term objectives and performance, with reserve
strategy, production and cost performance, and return on equity being the
criteria selected for the 1995 financial year. The Corporation's share
incentive plan is used as a
11
<PAGE>
long-term compensation technique and aligns managements objectives with those
of the shareholders. While monitoring reserves is an ongoing discipline, the
Corporation relies on executives to build reserves over time and facilitate
future production and other long term goals designed to create value for the
shareholders.
The Committee is of the view that the compensation practices followed for
1995 have achieved an equitable balance between rewarding executives and
managing the business of the Corporation for all shareholders.
John Gilray Christy, Chairman
Latham C. Burns, Carlos A. Ferrer, Monica E. Sloan, R. Geoffrey P. Styles
PERFORMANCE GRAPH
The graph below, expressed in U.S. dollars, compares over five years the
percentage change in the cumulative return to a holder of common shares in the
Corporation with the cumulative performance of the S & P 500 Index, The
Toronto Stock Exchange Gold Index and the price of gold. The graph assumes an
investment of U.S.$100 on December 31, 1990 and the reinvestment of dividends
paid during the five year period.
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
ECHO BAY LONDON PM TSE S&P
YEAR COMMON FIX AU/AG 500
- ---- -------- --------- ----- -----
<S> <C> <C> <C> <C>
1990........................................... 100.0 100.0 100.0 100.0
1991........................................... 82.9 91.5 87.0 130.5
1992........................................... 55.4 86.3 86.1 140.4
1993........................................... 145.2 101.6 168.5 154.6
1994........................................... 120.7 99.2 143.5 156.6
1995........................................... 117.3 100.2 161.4 215.5
</TABLE>
12
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GENERAL
Robert L. Leclerc, Q.C., a director and the Secretary of the Corporation,
is Chairman and Chief Executive Officer of and a partner in Milner Fenerty,
which provides legal services to the Corporation.
John F. McOuat is a director, officer and shareholder of Watts, Griffis and
McOuat Limited ("WGM"). Mr. McOuat, indirectly, and WGM, directly, own shares
of Gastineau Gold Limited ("Gastineau"). Echo Bay Exploration Inc., an
indirect wholly-owned subsidiary of the Corporation, and Gastineau were
parties to a mining venture agreement dated as of December 31, 1988 and
respectively then owned 85 percent and 15 percent undivided interests in the
Alaska-Juneau property currently being developed by Echo Bay Alaska Inc. as
operator. From time to time WGM also performs professional consulting services
for the Corporation and affiliates.
Effective December 31, 1991, the Corporation acquired from affiliates of
WGM the 15 percent working interest in the above-mentioned Alaska properties
not already owned by the Corporation. The WGM affiliates exchanged their 15
percent working interest in the properties for a 1.5 percent net smelter
return royalty on all future production. The Corporation paid WGM affiliates
Can.$4 million in cash and agreed to pay an additional Can.$500,000 annually
for the next eight years. Remaining annual payments are to be prepaid once
commercial gold production begins or if the Corporation exercises a royalty
purchase option which is part of the agreements. The option gives the
Corporation the right to purchase the WGM affiliates' 1.5 percent net smelter
return royalty for Can.$15 million until the earlier of December 31, 2003 or
three years after commercial production begins. On commercial production, the
Corporation will also issue 100,000 common shares to the WGM affiliates.
The interest of Mr. McOuat and members of his immediate family in the
transaction described above, whether direct or indirect, is approximately 30
percent.
Effective December 12, 1992 the Corporation entered into an agreement with
Peter Clarke, a director of the Corporation. Under this agreement Mr. Clarke
was paid an annual retainer of U.S.$132,000 for a three year period which
concluded in 1995 in consideration for performing certain consulting services
for the Corporation. The retainer arrangement was separate and apart from any
fees that were paid to Mr. Clarke in his capacity as a director of the
Corporation.
INDEBTEDNESS OF MANAGEMENT
The Corporation has made loans available to certain persons employed by the
Corporation or an affiliate to assist with employee relocation. The loans are
for five years with an interest rate of nine percent per annum but for the
first three years the interest is rebated to the employee. At the end of three
years, interest at the lower of nine percent or the applicable federal rate
for short-term loans determined pursuant to the U.S. Internal Revenue Code
will be payable monthly until maturity. At maturity the loans may be
renegotiated for a further five-year period.
The following table shows, in United States dollars, the particulars of
indebtedness by officers in excess of U.S.$60,000 for the period January 1,
1995 to March 13, 1996:
<TABLE>
<CAPTION>
MAXIMUM BALANCE
BALANCE OUTSTANDING
NATURE IN AT MARCH 13, INTEREST
NAME CAPACITY OF LOAN PERIOD 1996 RATE
- ---- ---------------------------- ------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
D. C. Ewigleben......... Vice President Housing $450,000 $450,000 9.00%
R.W. Jenner............. Vice President and Treasurer Housing 85,000 85,000 5.63%
B.M. Labadie............ Vice President Housing 75,000 75,000 9.00%
</TABLE>
13
<PAGE>
APPOINTMENT OF AUDITORS
The persons named in the enclosed form of proxy intend to vote for the
appointment of Ernst & Young as the auditors of the Corporation to hold office
until the next annual meeting of shareholders. Ernst & Young have been the
auditors of the Corporation since 1985. One or more members of the auditors
will attend the meeting, have an opportunity to make a statement, and be
available to respond to appropriate questions.
1995 ANNUAL REPORT
The annual report for the year 1995, including financial statements and
other information with respect to the Corporation, has been mailed to each
shareholder. Additional copies of the annual report may be obtained by writing
to the Corporation.
1997 ANNUAL MEETING
Proposals of shareholders intended to be presented at the next annual
meeting must be received by the Corporation for inclusion in its Management
Proxy Circular on or before February 7, 1997.
The contents and the sending of this Management Proxy Circular have been
approved by the directors of the Corporation.
Dated at Edmonton, Alberta, Canada this 28th day of March 1996.
Robert L. Leclerc, Q. C.
Secretary
1210 Manulife Place
10180 - 101 Street
Edmonton, Alberta, Canada
T5J 3S4
14
<PAGE>
SCHEDULE IX
FORM 10-Q OF ECHO BAY MINES LTD.
(SEPARATELY ATTACHED)
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER
SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996...............................
[_] 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: 1-8542
----------------
ECHO BAY MINES LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NONE
INCORPORATED UNDER THE LAWS OF CANADA (I.R.S. Employer
(State or other jurisdiction of Identification No.)
incorporation or organization)
SUITE 1000, 6400 S. FIDDLERS GREEN CIRCLE
(Address of principal executive offices) 80111-4957
(Zip Code)
Registrant's telephone number, including area code (303) 714-8600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
TITLE OF CLASS SHARES OUTSTANDING AS OF APRIL 30, 1996
------------------- -------------------------------------------
Common Shares 130,511,166
without nominal or par value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ECHO BAY MINES LTD.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS......................................... 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 16
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................ 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................. 30
SIGNATURES................................................................ 31
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1996 1995
------------ ------------
THOUSANDS OF U.S. DOLLARS
EXCEPT FOR PER SHARE DATA
<S> <C> <C>
Revenue............................................ $ 67,750 $ 84,209
------------ ------------
Operating expenses:
Operating costs.................................. 44,565 50,591
Royalties........................................ 2,103 2,079
Production taxes................................. 709 1,363
Depreciation..................................... 12,885 14,180
Amortization..................................... 5,612 7,905
Reclamation...................................... 1,144 1,187
General and administrative....................... 3,332 2,707
------------ ------------
70,350 80,012
------------ ------------
Operating earnings (loss).......................... (2,600) 4,197
Exploration expense................................ (9,303) (6,491)
Development properties expense..................... (4,705) (7,895)
Other income (expense)............................. 997 (559)
Interest income (expense).......................... (151) 1,640
------------ ------------
Loss before taxes.................................. (15,762) (9,108)
------------ ------------
Income tax recovery (expense):
Current.......................................... (206) (264)
Deferred......................................... (188) 475
------------ ------------
(394) 211
------------ ------------
Loss before preferred stock dividends.............. (16,156) (8,897)
Preferred stock dividends of subsidiary............ -- (2,762)
------------ ------------
Net loss........................................... $(16,156) $(11,659)
============ ============
Loss per share..................................... $ (0.12) $ (0.10)
============ ============
Weighted average number of shares outstanding
(thousands)....................................... 130,046 112,699
============ ============
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE>
ECHO BAY MINES LTD.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
THOUSANDS OF U.S.
DOLLARS
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $149,981 $185,843
Interest and accounts receivable...................... 14,209 14,749
Inventories (note 2).................................. 43,204 34,173
Prepaid expenses and other assets..................... 6,053 5,353
-------- --------
213,447 240,118
Plant and equipment (note 3)............................ 251,398 255,868
Mining properties (note 4).............................. 328,554 318,219
Long-term investments and other assets (note 5)......... 55,469 56,956
-------- --------
$848,868 $871,161
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.............. $ 53,186 $ 61,781
Income and mining taxes payable....................... 2,249 2,547
Gold and other financings (note 6).................... 35,833 41,135
Deferred income (note 6).............................. 12,192 25,053
-------- --------
103,460 130,516
Gold and other financings (note 6)...................... 114,373 111,679
Deferred income (note 6)................................ 12,920 --
Other long-term obligations (note 7).................... 32,337 32,018
Deferred income taxes................................... 8,298 8,096
Common shareholders' equity:
Common shares, no par value, unlimited number
authorized; issued and outstanding--130,497,801
shares (129,880,804 shares at December 31, 1995)..... 623,577 618,965
Deficit............................................... (31,265) (15,109)
Foreign currency translation.......................... (14,832) (15,004)
-------- --------
577,480 588,852
-------- --------
Commitments and contingencies (notes 9 and 10)
$848,868 $871,161
======== ========
</TABLE>
See accompanying notes to interim financial statements.
4
<PAGE>
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------
1996 1995
-------- --------
THOUSANDS OF U.S.
DOLLARS
<S> <C> <C>
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Working capital provided from operations................. $ 2,345 $ 16,166
Increase in cash invested in working capital related to
operations.............................................. (18,241) (13,391)
-------- --------
(15,896) 2,775
-------- --------
FINANCING ACTIVITIES
Gold loan repayments..................................... (2,463) (2,463)
Dividends on preferred stock of subsidiary............... -- (2,762)
Common share issues...................................... 4,611 764
-------- --------
2,148 (4,461)
-------- --------
INVESTING ACTIVITIES
Mining properties, plant and equipment................... (26,692) (10,173)
Long-term investments and other assets................... (1,051) (315)
Proceeds on sale of mining properties and other assets... 5,550 --
Other.................................................... 79 245
-------- --------
(22,114) (10,243)
-------- --------
Net decrease in cash and cash equivalents.................. (35,862) (11,929)
Cash and cash equivalents, beginning of period............. 185,843 201,527
-------- --------
Cash and cash equivalents, end of period................... $149,981 $189,598
======== ========
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (DEFICIT)
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------
1996 1995
-------- --------
THOUSANDS OF U.S.
DOLLARS
<S> <C> <C>
Balance, beginning of period............................... $(15,109) $ 44,140
Net loss................................................... (16,156) (11,659)
-------- --------
Balance, end of period..................................... $(31,265) $ 32,481
======== ========
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(U.S. DOLLARS)
1.GENERAL
In the opinion of management, the accompanying unaudited consolidated
statement of earnings, consolidated statement of retained earnings,
consolidated balance sheet and consolidated statement of cash flow contain all
adjustments, consisting only of normal recurring accruals, necessary to
present fairly in all material respects the consolidated financial position of
Echo Bay Mines Ltd. (the company) as of March 31, 1996 and December 31, 1995
and the consolidated results of operations and cash flow for the three months
ended March 31, 1996 and 1995.
The unaudited financial statements presented herein have been prepared in
accordance with the instructions to Form 10-Q and do not include all the
information and note disclosures required by generally accepted accounting
principles for complete financial statements. For further information, refer
to the financial statements and related footnotes included in the company's
annual report on Form 10-K for the year ended December 31, 1995.
The effective corporate tax rate for interim periods is based on the
estimated annual effective corporate tax rate, excluding certain nonrecurring
or unusual events. The effective tax rate varies from statutory rates due
primarily to resource and depletion allowances and operating losses for which
no tax benefit has been recorded.
The financial statements are prepared on the historical cost basis in
accordance with accounting principles generally accepted in Canada and, in all
material respects, conform with those principles generally accepted in the
United States except as described in note 8 to the company's interim
consolidated financial statements and with International Accounting Standards.
The statements are expressed in U.S. dollars.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain of the comparative figures have been reclassified to conform with
the current period's presentation.
2.INVENTORIES
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
-------- ------------
THOUSANDS OF U.S. DOLLARS
<S> <C> <C>
Precious metals--bullion.......................... $ 8,531 $ 5,944
--in-process....................... 10,992 10,312
Materials and supplies............................ 23,681 17,917
-------- --------
$ 43,204 $ 34,173
======== ========
3.PLANT AND EQUIPMENT
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
-------- ------------
THOUSANDS OF U.S. DOLLARS
<S> <C> <C>
Cost.............................................. $614,725 $605,442
Less accumulated depreciation..................... 363,327 349,574
-------- --------
$251,398 $255,868
======== ========
</TABLE>
6
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1996
(U.S. DOLLARS)
4.MINING PROPERTIES
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
THOUSANDS OF U.S. DOLLARS
<S> <C> <C>
Producing mines' acquisition, exploration and
development costs..................................... $357,389 $364,611
Less accumulated amortization......................... 227,063 221,125
-------- --------
130,326 143,486
Development properties' acquisition, exploration and
development costs..................................... 119,987 102,204
Deferred mining costs................................. 78,241 72,529
-------- --------
$328,554 $318,219
======== ========
</TABLE>
5.LONG-TERM INVESTMENTS AND OTHER ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, 1996 1995
---------------- ----------------
MARKET CARRYING MARKET CARRYING
VALUE VALUE VALUE VALUE
------- -------- ------- --------
THOUSANDS OF U.S. DOLLARS
<S> <C> <C> <C> <C>
Share investments carried at cost:
TVI Pacific Inc.
11,666,667 common shares (15.6% inter-
est)(2).............................. $23,365 $ 7,579 $18,715 $ 7,579
Santa Elina Gold Corporation
9,000,000 common shares (6.7% inter-
est)(3).............................. 14,129 13,073 9,889 13,073
Canarc Resources Corp.
3,000,000 common shares (10.1% inter-
est)(4).............................. 5,194 4,153 3,055 4,153
Cluff Resources plc(5).................. -- -- 6,033 2,899
Other common share investments.......... 11,225 9,518 8,157 8,315
------- ------- ------- -------
53,913 34,323 45,849 36,019
Equity investment in:
Etruscan Enterprises Ltd.
4,175,275 common shares (25.5% inter-
est)(1).............................. 12,528 8,254 12,815 8,877
------- ------- ------- -------
$66,441 42,577 $58,664 44,896
======= =======
Property options.......................... 6,778 7,764
Other assets.............................. 6,114 4,296
------- -------
$55,469 $56,956
======= =======
</TABLE>
- --------
(1) At December 31, 1995, 4,175,275 common shares (27.0% interest).
(2) At December 31, 1995, 11,666,667 common shares (15.7% interest).
(3) At December 31, 1995, 9,000,000 common shares (6.7% interest).
(4) At December 31, 1995, 3,000,000 common shares (10.5% interest).
(5) At December 31, 1995, 3,630,800 common shares (4.8% interest).
These shares were sold in the first quarter of 1996.
7
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1996
(U.S. DOLLARS)
Equity Investment
During 1995, the company purchased 4,175,275 common shares of Etruscan
Enterprises, Ltd. ("Etruscan") for $9.0 million, which resulted in an
ownership interest sufficient to account for this investment using the equity
method. Etruscan is the company's joint venture partner in the Koma Bangou
project, an advanced stage exploration project in Niger, West Africa.
Share investments
The company has purchased common shares of exploration-oriented companies
that give the company access to exploration and development prospects along
some of the major gold belts of the world, including properties in South
America, West Africa and the Philippines.
Property options
In several cases the company paid a premium over the then-market value of
the common shares of exploration-oriented companies to fund exploration
programs on certain properties, and for the right to acquire direct interests
in these properties. These amounts are being expensed as the exploration work
is being conducted, until development potential is established. The company
holds options to purchase direct interests in these properties at purchase
considerations dependent on the properties' reserves and other mineralization.
6.GOLD AND OTHER FINANCINGS AND DEFERRED INCOME
<TABLE>
<CAPTION>
FINANCINGS DEFERRED INCOME
---------------------- ----------------------
MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31,
1996 1995 1996 1995
--------- ------------ --------- ------------
THOUSANDS OF U.S. DOLLARS
<S> <C> <C> <C> <C>
Gold swaps...................... $ 101,044 $101,480 $27,233 $26,925
Gold loan....................... 21,066 23,279 291 291
Debenture payable............... 28,096 28,055 -- --
Other........................... -- -- (2,412) (2,163)
--------- -------- ------- -------
150,206 152,814 25,112 25,053
Less current portion............ 35,833 41,135 12,192 25,053
--------- -------- ------- -------
$ 114,373 $111,679 $12,920 $ --
========= ======== ======= =======
</TABLE>
a) Gold swaps
Gold swaps refer to currency loans and related, independently arranged,
future gold delivery commitments. Taken together, the loans and commitments
create obligations effectively denominated in gold and represent hedges of
future gold production. At March 31, 1996 and December 31, 1995, 336,990
ounces of gold were deliverable under gold swap agreements as described below.
(i) U.S. dollar notes and bonds
In 1990, bonds totaling $84.0 million were swapped for an obligation to
deliver 218,000 ounces of gold in 1997, equivalent to a selling price of $385
per ounce. The effective interest rate on the bond and swap arrangement was
2.96% at March 31, 1996.
8
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1996
(U.S. DOLLARS)
(ii) Swiss franc bonds
In 1989, the company swapped Swiss franc bonds with a principal amount of
SFr110 million, originally issued in 1986, for an obligation to deliver
175,311 ounces of gold in 1996. In 1991, bonds with a principal amount of
SFr88.7 million were converted into common shares, and the 1989 swap
arrangement was renegotiated. All gains relating to changes in the price of
gold and changes in the exchange rate of the Swiss franc to the U.S. dollar
have been deferred and will be recorded as revenue on a basis that matches the
gain with the production originally designated for delivery in 1996. The
company's remaining net gold delivery commitment relating to the Swiss Franc
bond and swap arrangement is 118,990 ounces at $374 per ounce, including
deferred amounts. In the first quarter of 1996, the net gold delivery
commitment was rescheduled. The company will now deliver 69,267 ounces in the
fourth quarter of 1996 with the remaining 49,723 ounces spread equally over
the following nine quarters. The effective rate of interest on the Swiss Franc
bond and swap arrangement was 1.37% at March 31, 1996.
b)Gold loan
At March 31, 1996, 53,150 ounces of gold were outstanding under a gold loan
agreement (60,200 ounces at December 31, 1995). The outstanding gold loan was
remeasured to $396 per ounce, the gold price at March 31, 1996 ($387 per ounce
in 1995). Unrealized remeasurement gains or losses are included in deferred
income. This loan has been outstanding since 1992, when the company borrowed
173,000 ounces of gold under a gold bullion agreement with six banks. The
agreement contains both term and revolving loan provisions. The term loan,
which was used to refinance existing debt, is being repaid at the rate of
2,350 ounces per month with the balance of 32,000 ounces due on December 31,
1996. At March 31, 1996, the company had no amounts outstanding under the
revolving commitment. The company had $75.0 million or gold equivalent
available until 1999 under the revolving commitment.
The facility is convertible between gold and dollar borrowings. Interest on
gold borrowings is calculated at the banks' gold rate plus 0.55%, and interest
on dollar borrowings at LIBOR plus 0.55%. The effective interest rate on the
gold loan was 2.01% at March 31, 1996.
c)Debenture payable
A subsidiary of the company has issued a debenture in the amount of $28.0
million, which bears interest at the one-month discount rate for bankers'
acceptances plus 0.325%. This debenture is payable in 1997 and is secured by a
letter of credit.
d) Other information
Certain of the company's financing arrangements require it to maintain
specified ratios of assets to liabilities and cash flow to debt. The company
is in compliance with these ratios and other covenant requirements.
The company had outstanding letters of credit of $52.3 million at March 31,
1996, primarily relating to the bonding of future reclamation obligations and
to the debenture issued by a subsidiary of the company. Annual fees on the
letters of credit range from 0.50% to 0.55%.
At March 31, 1996, the company had unutilized credit facilities of $86.3
million including the $75.0 million revolving commitment (note 6b). Annual
commitment fees on the unutilized credit facilities are 0.225%.
Future gold and silver delivery commitments are summarized in note 9.
9
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1996
(U.S. DOLLARS)
7.OTHER LONG-TERM OBLIGATIONS
Other long-term obligations consist primarily of accrued reclamation costs
of $30.6 million at March 31, 1996 and $30.9 million at December 31, 1995.
8. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP)
The company prepares its consolidated financial statements in accordance
with accounting principles generally accepted in Canada. These differ in some
respects from those in the United States, as described below.
In accordance with Canadian GAAP, certain long-term foreign exchange
contracts are considered to be hedges of the cost of goods to be purchased in
foreign currencies in future periods. Gains and losses related to changes in
market values of such contracts are deferred, then recognized as a component
of the cost of goods when the related hedged purchases occur. Under U.S. GAAP,
changes in market value would be included in current earnings.
In accordance with Canadian GAAP, some of the company's share investments
are carried at cost as long-term investments (note 5). These non-equity method
investments are written down and the loss recognized in earnings only when the
loss in value is other than a temporary decline. Under U.S. GAAP, these
investments would be marked to market, with unrealized gains or losses
excluded from earnings and reported in a separate component of common
shareholders' equity, net of tax. The unrealized gain on share investments
carried at cost is $19.6 million after a nil tax effect as of March 31, 1996.
The effects on the consolidated statement of earnings of the above
differences would have been as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1996 1995
------------- -------------
THOUSANDS OF U.S. DOLLARS,
EXCEPT PER SHARE DATA
<S> <C> <C>
Net loss under Canadian GAAP.................. $ (16,156) $ (11,659)
Change in market value of foreign exchange
contracts.................................... 661 (34)
------------- -------------
Net loss under U.S. GAAP...................... $ (15,495) $ (11,693)
------------- -------------
Loss per share under U.S. GAAP................ $ (0.12) $ (0.10)
============= =============
</TABLE>
Long-term investments and other assets, deficit, and common shareholders'
equity would have been $83.6 million, $22.8 million, and $605.6 million
respectively at March 31, 1996 and $78.6 million, $7.3 million and $610.5
million respectively at December 31, 1995.
9.HEDGING ACTIVITIES AND COMMITMENTS
The company's profitability is subject to changes in gold and silver prices,
exchange rates, interest rates and certain commodity prices. To reduce the
impact of such changes the company attempts to lock in the future value of
certain of these items through hedging transactions. These transactions are
accomplished through the use of derivative financial instruments, the value of
which is derived from movements in the underlying prices or rates.
10
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1996
(U.S. DOLLARS)
The gold- and silver-related instruments used in these transactions include
commodity loans, fixed-forward and spot-deferred contracts, swaps and options.
Sensitivity to changing metal prices is reduced, and future revenues are
hedged, as the company's future production will satisfy these loans and other
delivery commitments. The company engages in forward currency-exchange
contracts to reduce the impact on the Lupin mine's operating costs caused by
fluctuations in the exchange rate of U.S. dollars to Canadian dollars. The
company also engages in crude oil hedging activities, including forward
purchase agreements and swaps, to reduce the impact of fluctuations in crude
oil prices on its operating costs.
a)Gold and silver commitments
As of March 31, 1996, the company's gold and silver commitments were as
follows:
<TABLE>
<CAPTION>
PRICE OF AVERAGE PRICE
FORWARD FORWARD GOLD LOANS OF LOANS
SALES SALES AND SWAPS AND SWAPS
(OUNCES) (PER OUNCE) (OUNCES) (PER OUNCE)
---------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
GOLD
Balance of 1996.............. 91,000 $ 406 122,417 $375
1997......................... 69,333 419 240,100 386
1998......................... 154,000 456 22,100 395
1999......................... 290,667 497 5,523 395
2000......................... 70,000 503 -- --
2001 and beyond.............. 70,000 548 -- --
---------- ----- ------- ----
745,000 $ 476 390,140 $383
========== ===== ======= ====
SILVER
Balance of 1996.............. 2,600,000 $5.81
1997......................... 2,600,000 5.96
1998......................... 3,100,000 6.46
1999......................... 2,800,000 6.47
---------- -----
11,100,000 $6.19
========== =====
</TABLE>
The company's option position as of March 31, 1996 was as follows:
<TABLE>
<CAPTION>
PUT OPTIONS PURCHASED CALL OPTIONS SOLD
---------------------- ----------------------
STRIKE PRICE STRIKE PRICE
OUNCES PER OUNCE OUNCES PER OUNCE
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
GOLD
Balance of 1996................. 45,000 $ 398 10,000 $ 421
--------- ----- --------- -----
SILVER
Balance of 1996................. 1,080,000 $5.40 1,080,000 $6.43
1997............................ 1,440,000 5.40 1,440,000 6.43
--------- ----- --------- -----
2,520,000 $5.40 2,520,000 $6.43
========= ===== ========= =====
</TABLE>
11
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1996
(U.S. DOLLARS)
b)Currency position
The company's obligations to purchase Canadian dollars as of March 31, 1996
were as follows:
<TABLE>
<CAPTION>
CANADIAN EXCHANGE RATE
DOLLARS (C$ TO US$1.00)
------------ ---------------
<S> <C> <C>
Balance of 1996................................. $ 67,500,000 1.42
1997............................................ 99,900,000 1.49
1998............................................ 110,000,000 1.52
1999............................................ 111,000,000 1.56
2000............................................ 109,000,000 1.59
------------ ----
$497,400,000 1.51
============ ====
</TABLE>
c)Crude oil position
The company's swap contracts and forward purchase commitments as of March 31,
1996 were as follows:
<TABLE>
<CAPTION>
BARRELS
OF PRICE
CRUDE OIL PER
PURCHASED BARREL
--------- ------
<S> <C> <C>
Balance of 1996.............................................. 180,000 $18.40
1997......................................................... 397,000 17.96
1998......................................................... 20,000 17.50
------- ------
597,000 $18.08
======= ======
</TABLE>
d) Other hedging activity information
The company assesses the exposure that may result from a hedging transaction
prior to entering into the commitment, and only enters into transactions which
it believes accurately hedge the underlying risk and could be safely held to
maturity. The company does not actively engage in the practice of trading
derivative securities for profit. The company regularly reviews its unrealized
gains and losses on hedging transactions.
Shown below are the carrying amounts, estimated fair values, and unrealized
gains or losses on the company's hedging positions at March 31, 1996 and
December 31, 1995.
<TABLE>
<CAPTION>
CARRYING ESTIMATED UNREALIZED
AMOUNT FAIR VALUE GAIN(LOSS)
-------- ---------- ----------
THOUSANDS OF U.S. DOLLARS
<S> <C> <C> <C>
MARCH 31, 1996
Gold swaps...................................... $101,044 $99,244 $ 1,800
Gold loans...................................... 21,066 21,066 --
Off balance sheet instruments:
Gold forward sales............................ -- 25,100
Silver forward sales.......................... -- 1,100
Gold and silver options--puts................. 2,597 (1,600)
--calls................ (2,069) 1,600
Foreign currency contracts.................... -- 8,500
Crude oil contracts........................... -- (300)
-------
$36,200
=======
</TABLE>
12
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1996
(U.S. DOLLARS)
<TABLE>
<CAPTION>
CARRYING ESTIMATED UNREALIZED
AMOUNT FAIR VALUE GAIN(LOSS)
-------- ---------- ----------
THOUSANDS OF U.S. DOLLARS
<S> <C> <C> <C>
DECEMBER 31, 1995
Gold swaps....................................... $101,480 $97,880 $ 3,600
Gold loans....................................... 23,279 23,279 --
Off balance sheet instruments:
Gold forward sales............................. -- 34,900
Silver forward sales........................... -- 6,400
Gold and silver options........................ 378 1,100
Foreign currency contracts..................... -- 7,800
Crude oil contracts............................ -- (300)
-------
$53,500
=======
</TABLE>
Fair values are estimated for the contract settlement dates based upon
market quotations of various input variables. These variables were used in
valuation models which estimate the fair market value.
Hedging gains and losses represent the differences between spot or market
prices and realized amounts. Shown below are the hedging gains and losses
recognized in earnings.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
31,
-------------
1996 1995
----- ------
GAINS
(LOSSES) IN
THOUSANDS OF
U.S.
DOLLARS)
<S> <C> <C>
Revenue:
Gold loans................................................... $(358) $ 68
Gold forward sales........................................... 225 789
Silver forward sales......................................... 125 1,310
Gold and silver options...................................... (211) (94)
Operating expenses:
Foreign currency contracts................................... 277 (77)
Crude oil contracts.......................................... 143 88
Dividends on preferred stock of subsidiary:
Interest rate swap........................................... -- (247)
----- ------
$ 201 $1,837
===== ======
</TABLE>
10.CONTINGENCIES
a)Alaska-Juneau
In December 1994, the U.S. Environmental Protection Agency (EPA) issued a
Technical Assistance Report, concluding that this development project as
configured in the May 1992 Final Environmental Impact Statement would be
likely to violate water quality and other environmental standards. In 1996,
the company's reapplication of permits included a new project description with
an alternative of Submarine Tailings Disposal (STD), which would require a
change in EPA regulations. For that purpose, the EPA has instituted rulemaking
procedures to
13
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1996
(U.S. DOLLARS)
enable it to consider the STD proposal. To review that proposal and other
options that could enable the Alaska-Juneau project to proceed, the EPA will
prepare a Supplemental Environmental Impact Statement expected to be completed
in 1997. The recoverability of the company's $59.7 million investment in
Alaska-Juneau is dependent on receipt of all necessary permits and the
company's ability to attain profitable production from the property or from
alternative courses of action that the company may pursue.
b)Sunnyside
Sunnyside Gold Corporation (SGC), an indirect wholly owned subsidiary of the
company, negotiated a consent decree with the State of Colorado that set
standards for the release of all reclamation and water treatment permits and
resolved future enforcement issues regarding groundwater seeps and springs.
The consent decree, approved by the court in May 1996, settles proceedings
commenced by SGC in Colorado state court in May 1994 to clarify the extent of
SGC's responsibility, if any, for groundwater seeps and springs that may occur
subsequent to the planned sealing of the Sunnyside mine. In 1995, SGC
increased the provision for future reclamation costs at the Sunnyside mine by
$11.7 million. SCG's provision for future reclamation costs is reviewed
periodically and adjusted as additional information becomes available.
c)Summa
There is pending, in Nevada state court, a suit commenced by Summa
Corporation against the company and the predecessor owner of the McCoy/Cove
and Manhattan mines, claiming improper deductions in calculation of royalties
payable over several years from production at McCoy/Cove and the former
Manhattan mine. Summa Corporation filed a motion for summary judgment which
sought $10.3 million for allegedly underpaid royalties plus interest. The
court denied Summa's motion. The company does not agree with the amount sought
by Summa and will vigorously defend its position. The company proposed a
settlement of $1.2 million that Summa rejected. The company made an offer of
judgment to the court of $1.5 million and Summa made an offer of judgment to
the court of $7.5 million. Both of these offers of judgment have expired and
are now null and void. The May 1996 court date has been continued to February
3, 1997. The company has accrued $1.2 million related to the Summa litigation,
including $1.0 million during the first quarter of 1996.
11.SUBSEQUENT EVENT
On April 9, 1996, the company, Santa Elina Gold Corporation and Sercor Ltd.
(a private company that owns 67% of Santa Elina) signed an agreement enabling
the company to increase its ownership from 7% to 50% of the outstanding common
shares of Santa Elina. Each shareholder of Santa Elina other than the company
and Sercor Ltd. will receive one common share of the company for each 6.67
common shares of Santa Elina held. The company will purchase 23,479,185 common
shares of Santa Elina from Sercor in exchange for 3,520,118 common shares of
the company, which is the same ratio offered to the public shareholders. In
addition, the company will issue up to 50,535 common shares in exchange for
cancellation of the 1,193,333 outstanding options on Santa Elina common
shares. Upon consummation of the transactions, the company will have issued
8,830,934 common shares and the company and Sercor will each own 50% of Santa
Elina.
The agreement is subject to regulatory approvals and approval by two-thirds
of the minority shareholders of Santa Elina. It is anticipated that the
meeting, originally scheduled to take place on May 24, 1996, will occur in
June.
14
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1996
(U.S. DOLLARS)
The rescheduling accommodates the review process of the United States
Securities and Exchange Commission relating to the prospectus and registration
statement filed in connection with the transaction. The company and Santa
Elina have agreed that the company will deliver freely-tradeable shares to
Santa Elina's shareholders (other than affiliates of Santa Elina or the
company) in connection with the acquisition. Clearance of the registration
statement will enable the company to issue freely-tradeable shares to such
shareholders upon completion of the transaction.
Acquisition of the Santa Elina minority holders' shares is subject to
approval by two-thirds of the minority shareholders of Santa Elina voting at a
special meeting. The transaction has been approved by the boards of directors
of the companies, including an independent committee of Santa Elina's board.
As the transaction will result in the current shareholders of the company
retaining a majority of the company's shares, the transaction has been
accounted for as a purchase of 43% of Santa Elina by the company. The
company's total interest in Santa Elina will be 50% when added to its existing
7% interest. Santa Elina will be consolidated into the company using the
proportionate consolidation method, as the company and Sercor will jointly
control Santa Elina. Under the proportionate consolidation method, 50% of
Santa Elina's assets, liabilities, revenues and expenses will be included in
the company's consolidated financial statements.
The total cost is estimated at $137.2 million including $121.8 million to
purchase the additional 43% interest in Santa Elina, $13.1 million cost of the
company's current 7% interest in Santa Elina, $1.6 million of transaction
costs and $0.7 million to cancel all outstanding options on the Santa Elina
shares. The purchase price will be allocated to the net assets of Santa Elina
based on the relative fair values. Santa Elina holds interests in mining
properties in Brazil, Bolivia and Chile.
15
<PAGE>
ITEM 2.--MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
MARCH 31, 1996
(U.S. DOLLARS)
FINANCIAL CONDITION
Working capital provided from operations amounted to $2.3 million for the
first quarter of 1996 compared to $16.2 million in the first quarter of 1995.
The 1996 results reflect lower production levels in the first quarter of 1996
($7.3 million reduced cash margin) and increased operating costs per ounce
($5.0 million). Working capital from operations has been reduced by cash
exploration and development property expenses of $12.6 million in 1996 and
$11.5 million in 1995, most of which represent discretionary investments for
the future.
The company expects production levels to be higher and cash operating costs
to be lower in the remaining three quarters of 1996. For the full year 1996,
the company's targeted gold production remains at 725,000 to 750,000 ounces.
The company expects silver production to be no better than the lower end of
the target range of 7.5 to 8.5 million ounces for the full year 1996.
Consolidated cash operating costs are targeted at $245 to $255 per ounce of
gold produced for the full year 1996.
The increase in cash invested in working capital related to operations was
$18.2 million in the first quarter of 1996. The primary use of the cash
invested in working capital was the annual resupply of diesel fuel, bulk
materials and other inventory items at the Lupin mine in the Northwest
Territories of Canada ($5.7 million); the payment of common and preferred
share dividends accrued at the end of 1995 ($5.2 million); and the increase in
precious metals inventories ($3.3 million) during the first quarter of 1996.
The company had gold loan repayments of $2.5 million in the first quarter of
1996, and issued 0.6 million shares of common stock on the exercise of stock
options ($4.6 million).
The company used $22.1 million of cash in investing activities in the first
quarter of 1996, for mining properties, plant and equipment ($26.7 million),
and long-term investments ($1.1 million), partially offset by the receipt of
$5.6 million of cash on the sale of an investment in Cluff Resources plc.
For the year 1996, the company expects to incur $53 million in cash
exploration and development properties expenses; $70 million of capitalized
acquisition, exploration and development costs at development properties
including Kingking; and $43 million of capital expenditures.
The company expects to fund these expenditures from working capital provided
by operations and existing working capital. The company has adequate resources
and liquidity to pursue additional acquisition, investment, exploration and
development programs. Working capital from operations was $2.3 million in the
first quarter of 1996 after incurring cash exploration and development costs
of $12.6 million. In addition, the company has $150.0 million in cash and cash
equivalents, and $86.3 million in established unutilized credit facilities at
March 31, 1996. The company also has an effective shelf registration statement
with the Securities and Exchange Commission pursuant to which it may sell up
to $200.0 million of debt and/or equity securities.
Most of the company's hedging transactions have no margin requirements. In
some instances however, mainly for longer term forward sales and options,
margin deposits are required when the market value exceeds the contract value
by a predetermined amount.
16
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(U.S. DOLLARS)
FINANCIAL REVIEW
The company reported a net loss of $16.2 million ($0.12 per share) in the
first quarter of 1996, compared to a net loss of $11.7 million ($0.10 per
share) in the first quarter of 1995. The results reflect lower precious metals
sales ($5.6 million decreased earnings margin), higher cash operating costs
per ounce ($5.0 million), partially offset by the elimination of preferred
stock dividends ($2.8 million), a $2.5 million gain on the sale of a share
investment and higher prices realized ($2.3 million).
Gold production decreased 12% to 161,246 ounces in the first quarter of 1996
compared to 182,826 ounces in the first quarter of 1995. Increased production
at the Lupin and Kettle River mines was offset by decreases at McCoy/Cove and
Round Mountain, reflecting lower-grade ores mined. Silver production decreased
57% to 1.2 million ounces in 1996 from 2.7 million ounces in 1995, a result of
lower grade and recovery at McCoy/Cove. Quarterly revenues were $67.7 million
in 1996 and $84.2 million in 1995.
Cash operating costs were higher, $261 per ounce of gold in the first
quarter of 1996 versus $234 per ounce of gold in the first quarter of 1995,
due to lower grades mined and fewer ounces recovered.
See "Operations Review" for further comments as to production and cash
production cost changes.
The term "ounce" as used in this Form 10-Q means "troy ounce".
17
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(U.S. DOLLARS)
Revenue
The gold and silver ounces sold and other revenue data is set out below:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------
1996 1995
------- -------
<S> <C> <C>
REVENUE DATA
GOLD
Ounces sold............................................... 155,189 179,498
Average price realized/ounce.............................. $ 397 $ 385
Average market price/ounce................................ $ 400 $ 379
Revenue (millions of U.S. dollars)........................ $ 61.6 $ 69.1
Percentage of total revenue............................... 91% 82%
SILVER
Ounces sold (millions).................................... 1.1 2.9
Average price realized/ounce.............................. $ 5.57 $ 5.13
Average market price/ounce................................ $ 5.46 $ 4.63
Revenue (millions of U.S. dollars)........................ $ 6.1 $ 15.1
Percentage of total revenue............................... 9% 18%
------- -------
Total revenue (millions of U.S. dollars).................... $ 67.7 $ 84.2
======= =======
</TABLE>
The effects of changes in sales volume and prices were:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-------------
(MILLIONS OF
U.S. DOLLARS)
<S> <C>
REVENUE VARIANCE ANALYSIS 1996 VS. 1995
Higher prices:
Gold.......................................................... $ 1.8
Silver........................................................ 0.5
Change in volume................................................ (18.8)
------
Decrease in revenue............................................. $(16.5)
======
</TABLE>
18
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(U.S. DOLLARS)
Production costs
Production cost data per ounce of gold is set out below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
PRODUCTION COSTS PER OUNCE OF GOLD PRODUCED
Direct mining expense.................................. $ 298 $ 244
Deferred stripping and mine development costs......... (33) 2
Inventory movements and other......................... (4) (12)
--------- ---------
Cash operating costs................................... 261 234
Royalties............................................. 11 10
Production taxes...................................... 4 6
--------- ---------
Total cash costs....................................... 276 250
Depreciation.......................................... 76 66
Amortization.......................................... 33 37
Reclamation........................................... 6 5
--------- ---------
Total production costs................................. $ 391 $ 358
========= =========
</TABLE>
Effective January 1, 1996, the company adopted the "Gold Institute
Production Cost Standard" for reporting production costs on a per ounce basis.
This standard defines cash operating costs as those costs directly associated
with the mining and milling of gold and silver, adjusted for such items as
inventories and mining costs relating to future production. Other cash costs,
specifically royalties and production taxes, are defined as those costs
resulting from, but not directly related to, the production of gold and
silver. Non-cash costs are defined as costs accounted for ratably over the
life of an operation, including depreciation, amortization, and reclamation
costs.
Prior period costs have been restated to conform with the new standard.
Expenses
Operating costs vary with the quantity of gold and silver sold and with the
cost of operating. The cash operating costs were higher, $261 per ounce of
gold in the first quarter of 1996 versus $234 per ounce of gold in the first
quarter of 1995. The increase in operating costs per ounce in the first
quarter of 1996 was a result of lower grades mined and fewer ounces produced.
See "Operations Review".
RECONCILIATION OF CASH OPERATING COSTS PER OUNCE TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1996 1995
------------- -------------
THOUSANDS OF U.S. DOLLARS,
EXCEPT PER OUNCE AMOUNTS
<S> <C> <C>
Operating costs per financial statements....... $ 44,565 $ 50,591
Change in finished goods inventory and other... 2,572 (189)
Co-product cost of silver produced............. (5,111) (7,652)
------------- -------------
Cash operating costs........................... $ 42,026 $ 42,750
============= =============
Gold ounces produced........................... 161,246 182,826
Cash operating costs per ounce................. $ 261 $ 234
============= =============
</TABLE>
19
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(U.S. DOLLARS)
Depreciation is a fixed cost, a portion of which is charged to depreciation
expense based on the number of ounces sold and a portion of which is charged
to inventory based on the number of ounces in inventory at quarter end. The
decrease in depreciation expense is due to the increase in precious metals
inventory during the first quarter of 1996.
Amortization varies with the quantity of gold and silver sold and the mix of
production at the four mines. The decrease in amortization in the first
quarter of 1996 reflects fewer ounces sold in the first quarter of 1996.
General and administrative expenses increased in the first quarter of 1996
compared to the first quarter of 1995, reflecting increased support for
exploration, business development and project development activities.
Exploration expense rose 54% in the first quarter of 1996, to $9.3 million,
compared to $6.5 million in the first quarter of 1995, reflecting the
company's expanded search for reserves and production. Much of the expanded
1995 exploration activity took place in quarters subsequent to the first
quarter of 1995. 1996 exploration expense is expected to be $43 million, but
is dependent upon opportunities. 1995 exploration expense totaled $46.5
million. To increase gold reserves and production, the company has entered
into strategic alliances and joint ventures with exploration-oriented
companies that give the company access to exploration and development
prospects along some of the major gold belts around the world, especially in
North America, South America, West Africa and the Philippines. The company is
conducting exploration drilling programs at prospects in Mexico, South
America, the Philippines, West Africa, Canada and the United States.
Development properties expense was $4.7 million for the first quarter of
1996 compared to $7.9 million in the first quarter of 1995. The decrease in
1996 is primarily due to reduced expenditures resulting from the 1995 sale of
the Kensington development property and to the completion of the underground
drilling program at the Alaska-Juneau development property in the second
quarter of 1995.
Other income of $1.0 million for the first quarter of 1996 compared to other
expense of $0.5 million for the first quarter of 1995 is primarily due to the
gain on the sale of the investment in Cluff Resources plc during the first
quarter of 1996 ($2.5 million), offset by a $1.0 million accrual for Summa
litigation (note 10c).
Net interest expense of $0.2 million for the first quarter of 1996 compared
to net interest income of $1.6 million for the first quarter of 1995 is
primarily due to a decrease in cash on hand and increased gold lease rates
affecting interest paid related to gold denominated financings.
Preferred stock dividends are nil in the first quarter of 1996 compared to
$2.8 million in the first quarter of 1995 due to the fourth quarter 1995
conversion or redemption of all the outstanding preferred shares.
Reserve estimates
The price used in estimating the company's ore reserves at December 31, 1995
was $375 per ounce of gold and $5.00 per ounce of silver. The market price for
gold and silver is currently above these levels. If the company determines
that its reserves should be calculated at a significantly lower price than
used at December 31, 1995, there would likely be a material reduction in the
amount of gold reserves. Should such reductions occur, material write-downs of
the company's investment in mining properties and/or increased amortization
charges may be required.
20
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(U.S. DOLLARS)
OPERATIONS REVIEW
Operating data by mine is set out in the table below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1996 1995
OPERATING DATA BY MINE --------- ---------
<S> <C> <C>
Gold production (ounces)
(a)McCoy/Cove............................................ 48,890 78,871
(b)Round Mountain (50%).................................. 39,716 45,884
(c)Lupin................................................. 40,310 35,515
(d)Kettle River.......................................... 32,330 22,556
--------- ---------
Total gold............................................... 161,246 182,826
========= =========
Silver production (ounces)
(a)McCoy/Cove............................................ 1,175,057 2,732,770
--------- ---------
Total silver............................................. 1,175,057 2,732,770
========= =========
</TABLE>
Gold production decreased 12% to 161,246 ounces in the first quarter of 1996
from 182,826 ounces in the first quarter of 1995, reflecting lower mill grade
and recovery rates at McCoy/Cove and time lags between placement of ore on the
Round Mountain dedicated heap leach pad and the recovery of gold; offset
partially by an increase in tons milled at Lupin and a first full quarter of
production exclusively from Kettle River's Lamefoot deposit. Silver production
decreased 57% to 1.2 million ounces in the first quarter of 1996 from 2.7
million ounces in the first quarter of 1995, reflecting lower grades and
recovery rates at McCoy/Cove. The company expects higher production levels in
the remaining three quarters of 1996. For the full year 1996, the gold
production target remains at 725,000 to 750,000 ounces and the silver
production target is expected to be no better than the lower end of the target
range of 7.5 to 8.5 million ounces.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1996 1995
OPERATING DATA BY MINE --------- ---------
<S> <C> <C>
Cash operating costs (per ounce of gold)
(a)McCoy/Cove........................................... $ 314 $ 225
(b)Round Mountain (50%)................................. 216 177
(c)Lupin................................................ 291 322
(d)Kettle River......................................... 170 253
--------- ---------
Company Average......................................... $ 261 $ 234
========= =========
</TABLE>
Cash production costs were higher, at $261 per ounce of gold in the first
quarter of 1996 versus $234 per ounce of gold in the first quarter of 1995,
reflecting the lower grades mined and fewer ounces produced.
21
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(U.S. DOLLARS)
(a) McCoy/Cove, Nevada (100% owned)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
OPERATING DATA
Gold produced (ounces):
Milled............................................ 34,300 63,946
Heap leached...................................... 14,590 14,925
Total gold........................................ 48,890 78,871
Silver produced (ounces):
Milled............................................ 1,033,577 2,500,791
Heap leached...................................... 141,480 231,979
Total silver...................................... 1,175,057 2,732,770
Ore and waste mined (million tons).................. 15.5 16.6
Mining cost/ton of ore and waste.................... $ 0.70 $ 0.64
Milling cost/ton of ore............................. $ 9.92 $ 10.70
Heap leaching cost/ton of ore....................... $ 2.09 $ 2.19
Production cost per ounce of gold produced:(1)
Direct mining expense............................. $ 369 $ 224
Deferred stripping cost.......................... (58) 16
Inventory movements and other.................... 3 (15)
---------- ----------
Cash operating cost............................... 314 225
Royalties........................................ 4 5
Production taxes................................. 7 10
---------- ----------
Total cash cost................................... 325 240
Depreciation..................................... 95 60
Amortization..................................... 45 47
Reclamation...................................... 6 5
---------- ----------
Total production cost............................. $ 471 $ 352
---------- ----------
Average gold-to-silver price ratio(2)............... 72.2:1 80.5:1
Milled:
Ore processed (tons/day).......................... 7,579 7,282
Gold grade (ounce/ton)............................ 0.070 0.120
Silver grade (ounce/ton).......................... 2.70 4.79
Gold recovery rate (%)............................ 75.7 84.2
Silver recovery rate (%).......................... 72.5 78.6
Heap leached:
Ore processed (tons/day).......................... 11,658 14,294
Gold grade (ounce/ton)............................ 0.023 0.018
Silver grade (ounce/ton)
Recovery rates(3)................................ 0.38 0.59
</TABLE>
- --------
(1) Effective January 1, 1996, the company adopted the "Gold Institute
Production Cost Standard" for reporting production costs on a per ounce
basis. This standard defines cash operating costs as those costs directly
associated with the mining and milling of gold and silver, adjusted for
such items as inventories and mining costs relating to future production.
Other cash costs, specifically royalties and production taxes, are defined
as those costs resulting from, but not directly related to, the production
of gold and silver. Non-cash costs are defined as costs accounted for
ratably over the life of an operation, including depreciation,
amortization, and reclamation costs. Prior period costs have been restated
to conform to the standard.
(2) To convert costs per ounce of gold into comparable costs per ounce of co-
product silver, divide the production cost per ounce of gold by the
period's average gold-to-silver price ratio.
(3) Recovery rates on dedicated pads can only be estimated, as actual
recoveries will not be known until leaching is complete. At the McCoy/Cove
mine, the gold recovery rate is estimated at 68% for crushed ore and 48%
for uncrushed, run-of-mine ore, while the silver recovery rate is
estimated at 30% for crushed ore and 10% for uncrushed, run-of-mine.
22
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(U.S. DOLLARS)
At McCoy/Cove, the company's largest producer, 48,890 ounces of gold were
produced during the first quarter of 1996, compared with 78,871 ounces in the
first quarter of 1995. Silver production was 1,175,057 ounces in the first
quarter of 1996, compared with 2,732,770 ounces in the first quarter of 1995.
The lower production was due mainly to the milling of lower-grade sulfide ores
from the deeper levels of the Cove deposit. The last of the high-grade
sulfides at Cove were depleted in late 1995.
Beginning in the second quarter, increased mill capacity and improving
grades and recoveries are expected to result in higher production levels for
the remainder of the year, although full year silver production is expected to
be no better than the lower end of the target range of 7.5 to 8.5 million
ounces, compared to 11.9 million ounces produced in 1995. Full-year gold
production is still anticipated to be on target with the company's earlier
projection of 235,000 to 245,000 ounces in 1996 compared to 310,016 ounces
produced in 1995.
Cash operating costs rose to $314 per ounce of gold produced in the first
quarter of 1996 from $225 in the first quarter of 1995, reflecting the lower
grades processed and fewer ounces produced. With increased production and
improving grades in the remaining quarters in 1996, unit costs are anticipated
to be $270 to $275 per ounce for the full year 1996.
The expansion of the mill's flotation circuit was completed in mid-April
1996, three months ahead of schedule. The $4.0 million expansion provides
increased retention time for sulfide ore in the flotation circuit, improving
recoveries and reducing unit costs. Mill capacity has been increased to a
nominal 10,000 tons/day from 7,500 tons/day.
In April 1996, mining recommenced on the original McCoy pit. The material
being mined on the pit's western perimeter is predominantly oxide and will
provide additional heap leaching and milling ore.
23
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(U.S. DOLLARS)
(b) Round Mountain, Nevada (50% owned)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
OPERATING DATA
Gold produced (ounces):
Reusable heap leach pad (50%)....................... 25,972 26,661
Dedicated heap leach pad (50%)...................... 13,744 19,223
Total (50%)......................................... 39,716 45,884
Ore and waste mined (million tons)(100%).............. 14.5 13.7
Mining cost/ton of ore and waste...................... $ 0.64 $ 0.57
Heap leaching cost/ton of ore......................... $ 0.80 $ 1.01
Production cost per ounce of gold produced:(1)
Direct mining expense............................... $ 268 $ 186
Deferred stripping costs.......................... (29) (4)
Inventory movements and other..................... (23) (5)
--------- ---------
Cash operating cost................................. 216 177
Royalties......................................... 34 28
Production taxes.................................. 4 5
--------- ---------
Total cash cost..................................... 254 210
Depreciation...................................... 62 57
Amortization...................................... 18 20
Reclamation....................................... 5 5
--------- ---------
Total production cost............................... $ 339 $ 292
--------- ---------
Reusable heap leach pad:
Ore processed (tons/day)(100%)...................... 25,902 19,895
Grade (ounce/ton)................................... 0.038 0.029
Recovery rate (%)................................... 65.6 83.9
Dedicated heap leach pad:
Ore processed (tons/day)(100%)...................... 74,713 34,027
Grade (ounce/ton)................................... 0.012 0.013
Recovery rate(2)....................................
</TABLE>
- --------
(1) Effective January 1, 1996, the company adopted the "Gold Institute
Production Cost Standard" for reporting production costs on a per ounce
basis. This standard defines cash operating costs as those costs directly
associated with the mining and milling of gold, adjusted for such items as
inventories and mining costs relating to future production. Other cash
costs, specifically royalties and production taxes, are defined as those
costs resulting from, but not directly related to, the production of gold.
Non-cash costs are defined as costs accounted for ratably over the life of
an operation, including depreciation, amortization, and reclamation costs.
Prior period costs have been restated to conform to the standard.
(2) Recovery rates on dedicated pads can only be estimated, as actual
recoveries will not be known until leaching is complete. At the Round
Mountain mine, the gold recovery rate on the dedicated heap leach pad is
estimated at 50%.
24
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(U.S. DOLLARS)
At 50%-owned Round Mountain in Nevada, Echo Bay's portion of gold production
totaled 39,716 ounces in the first quarter of 1996, compared with 45,884
ounces in the first quarter of 1995. Cash operating costs were $216 per ounce
in the first quarter of 1996 and $177 a year ago.
The lower production and higher costs were functions of the time lag between
initial loading of ore on Round Mountain's dedicated heap leach pad and the
release of large quantities of contained gold over time. Round Mountain's
dedicated pad is nearly a mile long, and several months are required to fully
load a large enough area of one "lift" (one of six 50-foot-high layers of ore)
for leaching to commence. A total of 74,713 tons/day of ore were loaded on the
dedicated pad in the first quarter of 1996, up from 34,027 tons/day in the
first quarter of 1995, but this ore was not placed under leach until late in
this year's quarter. As a result, Echo Bay's share of dedicated pad production
was 13,744 ounces in the first quarter of 1996, down from 19,223 ounces in the
first quarter of 1995. The benefit of the increased ore under leach will come
in the second quarter of this year and successive quarters.
The company's share of production from Round Mountain's reusable heap leach
pad was 25,972 ounces in the first quarter of 1996 and 26,661 ounces in the
first quarter of 1995. During the first quarter of 1996, the mine implemented
its decision to treat larger quantities of ore for shorter periods of time on
the reusable pad and then to recover more of the contained gold over a period
of years by releaching the material on the dedicated pad. Accordingly, about
30% more ore was loaded on the reusable pad during the first quarter of 1996
than a year earlier in 1995, and leaching time was reduced to 90 days from 140
days.
For the full year 1996, Round Mountain continues to expect total gold
production of 370,000 to 380,000 ounces (the company's share, 185,000 to
190,000 ounces), compared to 344,434 ounces (the company's share 172,217)
produced in 1995. The processing changes implemented in the first quarter were
designed to benefit production and costs beginning in the second quarter.
Construction of the mill facilities began shortly after receipt of the
necessary permits at the end of March 1996. The 8,000-ton/day mill will
process the large quantities of nonoxidized ore with anticipated production of
up to 100,000 ounces per year (the company's share, up to 50,000 ounces)
beginning in late 1997. In preparation for startup, Round Mountain has
stockpiled 2.1 million tons of nonoxidized ore averaging 0.042 ounce/ton of
gold. More ore is being added to the stockpile every quarter.
Round Mountain has expanded its ore reserves significantly in recent years.
In 1995, 2.2 million ounces were added on a 100% basis. Work continues to
further define mineralization within the recently expanded ultimate pit and to
determine the viability of pockets of mineralization identified outside the
new pit perimeter. Reserves are expected to increase further as this work is
completed.
25
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(U.S. DOLLARS)
(c) Lupin, Northwest Territories (100% owned)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------
1996 1995
------- -------
<S> <C> <C>
OPERATING DATA
Gold produced (ounces)................................... 40,310 35,515
Tons of ore mined and milled............................. 185,505 154,063
Mining cost/ton of ore................................... C$41.81 C$46.26
Milling cost/ton of ore.................................. C$12.80 C$13.10
Production cost per ounce of gold produced:(1)
Canadian dollars:
Direct mining expense................................ C$ 428 C$ 495
Deferred mine development cost..................... (29) (42)
------- -------
Cash operating cost.................................. C$ 399 C$ 453
U.S. dollars:
Cash operating cost US$ 291 US$ 322
Royalties.......................................... -- --
Production taxes................................... -- --
------- -------
Total cash cost...................................... 291 322
Depreciation....................................... 72 80
Amortization....................................... 18 19
Reclamation........................................ 8 7
------- -------
Total production cost................................ US$ 389 US$ 428
======= =======
Milled:
Ore processed (tons/day)............................... 2,039 1,693
Grade (ounce/ton)...................................... 0.235 0.248
Recovery rate (%)...................................... 92.3 92.8
</TABLE>
- --------
(1) Effective January 1, 1996, the company adopted the "Gold Institute
Production Cost Standard" for reporting production costs on a per ounce
basis. This standard defines cash operating costs as those costs directly
associated with the mining and milling of gold, adjusted for such items as
inventories and mining costs relating to future production. Other cash
costs, specifically royalties and production taxes, are defined as those
costs resulting from, but not directly related to, the production of gold.
Non-cash costs are defined as costs accounted for ratably over the life of
an operation, including depreciation, amortization, and reclamation costs.
Prior period costs have been restated to conform to the standard.
Production at Lupin, located in the Northwest Territories, was 40,310
ounces in the first quarter of 1996, up from 35,515 ounces in the first
quarter of 1995.
During the fourth quarter of 1995, mining began from the surface at Lupin
to access high-grade, near-surface ore from the East Zone. Mining was
interrupted in January 1996 by extreme weather conditions, deferring
production of the anticipated ounces. Mining resumed in late February 1996
with the higher-grade East Zone ores being used to supplement mill feed from
the Centre Zone, increasing mill throughput to 2,400 tons/day. Full year 1996
production is expected to be approximately 185,000 to 190,000 ounces, versus
172,110 ounces produced in 1995.
26
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(U.S. DOLLARS)
Development of Ulu as a satellite mine is moving forward. Current
activities are centered on mobilizing camps and equipment to the staging and
Ulu sites. The first construction camp was operational in early April 1996
with the fuel tanks in place. Underground development is anticipated to start
in early June 1996.
(d) Kettle River, Washington (100% owned)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------
1996 1995
------- -------
<S> <C> <C>
OPERATING DATA
Gold produced (ounces).................................... 32,330 22,556
Tons of ore mined and milled.............................. 132,973 128,718
Mining cost/ton of ore.................................... $ 22.24 $ 22.83
Milling cost/ton of ore................................... $ 11.99 $ 13.59
Production cost per ounce of gold produced:(1)
Direct mining expense................................... $ 172 $ 266
Inventory movements and other.......................... (2) (13)
------- -------
Cash operating cost..................................... 170 253
Royalties paid......................................... 10 10
Production taxes....................................... 2 2
------- -------
Total cash cost......................................... 182 265
Depreciation........................................... 56 83
Amortization........................................... 45 45
Reclamation............................................ 8 7
------- -------
Total production cost................................... $ 291 $ 400
------- -------
Milled:
Ore processed (tons/day)................................ 1,461 1,414
Grade (ounce/ton)....................................... 0.274 0.204
Recovery rate (%)....................................... 88.6 85.9
</TABLE>
- --------
(1) Effective January 1, 1996, the company adopted the "Gold Institute
Production Cost Standard" for reporting production costs on a per ounce
basis. This standard defines cash operating costs as those costs directly
associated with the mining and milling of gold, adjusted for such items as
inventories and mining costs relating to future production. Other cash
costs, specifically royalties and production taxes, are defined as those
costs resulting from, but not directly related to, the production of gold.
Non-cash costs are defined as costs accounted for ratably over the life of
an operation, including depreciation, amortization, and reclamation costs.
Prior period costs have been restated to conform to the standard.
Gold production increased to 32,330 ounces at a cash operating cost of $170
per ounce in the first quarter of 1996 versus 22,556 ounces at $253 per ounce
in the first quarter of 1995. The improvement reflects the first full quarter
of production exclusively from Lamefoot ore. Lamefoot is the fifth deposit to
be developed at the site. Its ore is higher-grade than the prior four ore
bodies mined. Permits are being sought and preparation work is being done for
exploration of a northern extension of the Lamefoot deposit.
Kettle River continues to target its full year 1996 production levels of
120,000 to 125,000 ounces of gold, compared to 100,419 ounces in 1995.
27
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(U.S. DOLLARS)
Advanced exploration is underway at the sixth deposit, K-2. Drifting along
the mineralization underground continues to prove up ore with grades equal to
or higher than the grades predicted by earlier exploration drilling from the
surface. A second diamond drill has been added to the underground exploration
program. Underground work on K-2 will produce sufficient quantities of ore to
facilitate bulk mill tests. Drilling has defined two new targets to the east
of the K-2 zone and has also identified continued ore-grade mineralization to
the south.
RECENT DEVELOPMENTS
Santa Elina
On April 9, 1996, the company, Santa Elina Gold Corporation and Sercor Ltd.
(a private company that owns 67% of Santa Elina) signed an agreement enabling
the company to increase its ownership from 7% to 50% of the outstanding common
shares of Santa Elina. Each shareholder of Santa Elina other than the company
and Sercor Ltd. will receive one common share of the company for each 6.67
common shares of Santa Elina held. The company will purchase 23,479,185 common
shares of Santa Elina from Sercor in exchange for 3,520,118 common shares of
the company, which is the same ratio offered to the public shareholders. In
addition, the company will issue up to 50,535 common shares in exchange for
cancellation of the 1,193,333 outstanding options on Santa Elina common
shares. Upon consummation of the transactions, the company will have issued
8,830,934 common shares and the company and Sercor will each own 50% of Santa
Elina.
The agreement is subject to regulatory approvals and approval by two-thirds
of the minority shareholders of Santa Elina. It is anticipated that the
meeting, originally scheduled to take place on May 24, 1996, will occur in
June.
The rescheduling accommodates the review process of the United States
Securities and Exchange Commission relating to the prospectus and registration
statement filed in connection with the transaction. The company and Santa
Elina have agreed that the company will deliver freely-tradeable shares to
Santa Elina's shareholders (other than affiliates of Santa Elina or the
company) in connection with the acquisition. Clearance of the registration
statement will enable the company to issue freely-tradeable shares to such
shareholders upon completion of the transaction.
Acquisition of the Santa Elina minority holders' shares is subject to
approval by two-thirds of the minority shareholders of Santa Elina voting at a
special meeting. The transaction has been approved by the boards of directors
of the companies, including an independent committee of Santa Elina's board.
As the transaction will result in the current shareholders of the company
retaining a majority of the company's shares, the transaction has been
accounted for as a purchase of 43% of Santa Elina by the company. The
company's total interest in Santa Elina will be 50% when added to its existing
7% interest. Santa Elina will be consolidated into the company using the
proportionate consolidation method, as the company and Sercor will jointly
control Santa Elina. Under the proportionate consolidation method, 50% of
Santa Elina's assets, liabilities, revenues and expenses will be included in
the company's consolidated financial statements.
The total cost is estimated at $137.2 million including $121.8 million to
purchase the additional 43% interest in Santa Elina, $13.1 million cost of the
company's current 7% interest in Santa Elina, $1.6 million of transaction
costs and $0.7 million to cancel all outstanding options on the Santa Elina
shares. The purchase price will be allocated to the net assets of Santa Elina
based on the relative fair values. Santa Elina holds interests in mining
properties in Brazil, Bolivia and Chile.
28
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS--(CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(U.S. DOLLARS)
U.S. Mining Law Revision
Proposed legislation has been introduced in both houses of the current
Congress to modernize the general mining laws applicable to operations on
federal lands, including a comprehensive bi-partisan bill actively supported
by the mining industry. These proposals include royalty provisions,
environmental controls and requirements for reclamation.
The most material direct economic impact of mining law revision could be
from royalties for production at the McCoy/Cove mine in Nevada, which is on
federal land, and (to a lesser degree) at the 50%-owned Round Mountain mine in
Nevada, 24% of whose reserves are on federal land. However, the company has
completed all of the steps currently required under U.S. law to convert the
McCoy/Cove and Round Mountain land to patented status (and thus to be exempt
from any proposed royalty), and it filed applications for patents. During
1994, the company filed lawsuits against the U.S. Department of the Interior
to require the government to cease its delay and to issue certificates and
patents to which the mines are currently entitled. The government has formally
notified the court that the key certificates, which were the objective of the
suits, were issued to the company March 1, 1995. The Department is expected to
complete its administrative review and issue the patents in accordance with
the regulations.
"SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
Statements which are not historical facts contained in this Form 10-Q are
forward looking statements that involve risks and uncertainties that could
cause actual results to differ from projected results. Factors that could
cause actual results to differ materially include, among others: general
economic conditions, the market price of gold and silver, political events in
foreign countries, the risks associated with foreign operations generally, the
timing of receipt of necessary governmental permits, climatic conditions,
labor relations, availability and cost of material and equipment, the actual
configuration of ore bodies, delays in anticipated start-up dates,
environmental risks, the results of financing efforts and other risk factors
detailed in Echo Bay's Form 10-K and 8-K filed with the Securities and
Exchange Commission.
29
<PAGE>
ECHO BAY MINES LTD.
PART II--OTHER INFORMATION
ITEM 1.--LEGAL PROCEEDINGS
SUNNYSIDE
On May 18, 1994, the company commenced proceedings in Colorado state court
to obtain a declaratory judgment clarifying the extent of the company's
responsibility, if any, for ground water seeps and springs that may occur
following the company's planned sealing of the Sunnyside Mine in Colorado. The
Colorado department of Public Health and Environment had asserted that any
changes in quantity or quality of water flowing from seeps or springs that
occur subsequent to sealing the mine might potentially require the company to
acquire discharge permits whether or not the water flows through the sealed
mine. The company sought the declaratory judgment before it completes the
sealing, which has been approved by the Division of Minerals and Geology of
the Colorado Department of Natural Resources. The company negotiated a consent
decree with state authorities which was approved by the court in May 1996 and
which resolves the litigation.
ALASKA-JUNEAU
During 1994, the U.S. Attorney began a grand jury investigation of potential
Clean Water Act violations. The investigation is to determine whether the
company unlawfully discharged pollutants from the drainage tunnel without a
National Pollution Discharge Elimination System (NPDES) permit. The outcome of
this investigation is uncertain.
SUMMA
There is pending, in Nevada state court, a suit commenced by Summa
Corporation against the company and the predecessor owner of the McCoy/Cove
and Manhattan mines, claiming improper deductions in calculation of royalties
payable over several years from production at McCoy/Cove and the former
Manhattan mine. Summa Corporation filed a motion for summary judgment which
seeks $10.3 million for allegedly underpaid royalties plus interest. The court
denied Summa's motion. The company does not agree with the amount sought by
Summa and will vigorously defend its position. The company proposed a
settlement of $1.2 million that Summa rejected. The company made an offer of
judgment to the court of $1.5 million and Summa made an offer of judgment to
the court of $7.5 million. Both of these offers of judgment have expired and
are now null and void. The May 1996 court date has been continued to February
3, 1997. The company has accrued $1.2 million related to the Summa litigation,
including $1.0 million during the first quarter of 1996.
OTHER
The company is also engaged in routine litigation incidental to its
business.
ITEM 6.--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits 27--Financial Data Schedule.
(b) Reports on Form 8-K--Form 8-K, filed on April 11, 1996, reporting the
company's April 9, 1996 agreement to increase its ownership from 7% to 50%
of the outstanding shares of Santa Elina Gold Corporation. See "Recent
Developments".
Additionally, Form 8-K, filed on April 23, 1996, related to the entry into
definitive agreements with respect to the aforementioned Santa Elina
transaction.
30
<PAGE>
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.
Echo Bay Mines Ltd.
(Registrant)
Date: May 10,1996
/s/ G. Tywoniuk
---------------------------------------
G. Tywoniuk
Vice President, Controller and
Principal Accounting Officer
31
<PAGE>
PART II
ITEM 21. EXHIBITS AND FINANCIAL SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
10.2 Employee Share Incentive Plan (incorporated herein by reference to Exhibit
10(n) of Registration Statement No. 2-84687).
10.3 Amendment dated 2/18/86, to the Employee Share Incentive Plan described in 10.1
above (incorporated herein by reference to Exhibit 10.29 of Echo Bay's Report
on Form 10-K for the year ended December 31, 1986).
10.4 Amendment dated April 1, 1992 to Employment Agreement with Robert F. Calman
(incorporated herein by reference to Exhibit 10.15 of Echo Bay's Report on Form
10-K for the year ended December 31, 1992).
10.5 Amendment dated April 1, 1992 to Employment Agreement with Richard C. Kraus
(incorporated herein by reference to Exhibit 10.16 of Echo Bay's Report on Form
10-K for the year ended December 31, 1992).
10.6 Employment Agreement dated April 1, 1992 between the company and Robert C.
Armstrong (incorporated herein by reference to Exhibit 10.17 of Echo Bay's
Report on Form 10-K for the year ended December 31, 1992).
10.7 Consulting Agreement dated November 30, 1992 between the company and John
Zigarlick (Pilot Shipping Ltd.) (incorporated herein by reference to Exhibit
10.18 of Echo Bay's Report on Form 10-K for the year ended December 31, 1992).
10.8 Form of Deferred Compensation Agreement between the company and certain senior
executives (incorporated herein by reference to Exhibit 10.11 of Echo Bay's
Report on Form 10-K for the year ended December 31, 1993).
23.2* Consent of Ernst & Young.
23.4* Consent of KPMG Peat Marwick Thorne.
</TABLE>
- --------
* Filed herewith.
II-1
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF DENVER,
STATE OF COLORADO, ON JUNE 19, 1996.
Echo Bay Mines Ltd.
a Canadian corporation
By: /s/ Richard C. Kraus*
------------------------------------
Richard C. Kraus
Chief Executive Officer, President and
U.S. Authorized Representative
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Chief Executive Officer and June 19, 1996
/s/ Richard C. Kraus* President
- --------------------------
Richard C. Kraus (Principal Executive Officer)
/s/ Peter H. Cheesbrough Senior Vice President, Finance June 19, 1996
- -------------------------- and
Peter H. Cheesbrough Chief Financial Officer
(Principal Financial Officer)
/s/ Gerry Tywoniuk Vice President, Controller June 19, 1996
- -------------------------- (Principal Accounting Officer)
Gerry Tywoniuk
John N. Abell
Latham C. Burns
John Gilray Christy
Peter Clarke
Carlos A. Ferrer
Richard C. Kraus *A majority of the Board of Directors
Robert L. Leclerc
John F. McOuat
Monica E. Sloan
R. Geoffrey P. Styles
*By: Peter H. Cheesbrough June 19, 1996
Attorney-In-Fact
</TABLE>
II-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------- ---------------------- ----
<S> <C> <C>
23.2 Consent of Ernst & Young
23.4 Consent of KPMG Peat Marwick Thorne
</TABLE>
<PAGE>
EX23.2
Consent of Independent Chartered Accountants
We consent to the reference to our firm under the caption "Experts" in the
Amendment No. 1 to Registration Statement (Form S-4) and related prospectus of
Echo Bay Mines Ltd., for the registration of 8,830,934 shares of its common
stock and to the incorporation by reference therein of our report dated January
29, 1996, with respect to the consolidated financial statements of Echo Bay
Mines Ltd., included in its Annual Report (Form 10-K) for the year ended
December 31, 1995, filed with the Securities and Exchange Commission.
ERNST & YOUNG
Chartered Accountants
Edmonton, Canada
June 19, 1996
<PAGE>
Exhibit 23.4
The Board of Directors
Santa Elina Gold Corporation
We consent to the inclusion of our report dated April 9, 1996, with respect to
the consolidated balance sheets of Santa Elina Gold Corporation ("Santa Elina")
as of December 31, 1995 and 1994, and the related consolidated statements
of operations and deficit and changes in financial position for the year ended
December 31, 1995 and for the period from April 1, 1994 to December 31, 1994,
which report appears in the Management Information Circular and Proxy Statement
of Santa Elina, which document also constitutes the Prospectus of Echo Bay Mines
Ltd. ("Echo Bay") included in the Registration Statement of Form S-4 of Echo Bay
dated June 20, 1996 (the "Registration Statement").
We also consent to the reference to our firm under the heading "Experts" in the
Registration Statement.
KPMG Peat Marwick Thorne
Toronto, Canada
June 19, 1996
