<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 September 30, 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)
Incorporated under the laws
of Canada None
--------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 1000, 6400 S. Fiddlers Green Circle
Englewood, CO 80111-4957
---------------------------------------- ----------
(Address of principal (Zip Code)
executive offices)
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
- - -------------------------------------- October 31, 1996
Common Shares ------------------------
without nominal or par value 139,350,281
================================================================================
<PAGE>
ECHO BAY MINES LTD.
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited).............................1
ITEM 2. Managements Discussion And Analysis Of Financial Condition
And Results Of Operations..................................17
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings...........................................34
ITEM 6. Exhibits And Reports On Form 8-K............................34
SIGNATURE..............................................................35
i
<PAGE>
ECHO BAY MINES LTD.
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
- - ------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF EARNINGS Three months ended Nine months ended
thousands of U.S. dollars, September 30 September 30
except for per share data 1996 1995 1996 1995
- - ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 94,936 $ 93,497 $ 257,772 $268,300
- - ------------------------------------------------------------------------------------------
Expenses:
Operating costs 57,940 51,840 160,464 157,649
Royalties 3,021 2,384 7,253 6,620
Production taxes 253 1,359 1,749 4,230
Depreciation 13,837 13,031 42,232 41,056
Amortization 8,127 8,720 21,748 24,909
Reclamation 1,985 1,377 4,568 3,797
General and administrative 2,850 2,950 9,732 8,567
Exploration expense 13,076 13,796 35,668 31,040
Development properties expense 4,031 4,964 13,460 17,494
Other (income) expense 868 (382) 1,688 1,733
Interest (income) expense 1,237 (1,252) 1,561 (4,171)
Provision for McCoy/Cove pit wall
stabilization (note 10) 30,000 -- 30,000 --
- - ------------------------------------------------------------------------------------------
137,225 98,787 330,123 292,924
- - ------------------------------------------------------------------------------------------
Loss before taxes (42,289) (5,290) (72,351) (24,624)
- - ------------------------------------------------------------------------------------------
Income tax expense (recovery):
Current 126 800 767 1,641
Deferred -- -- 56 (950)
- - ------------------------------------------------------------------------------------------
126 800 823 691
- - ------------------------------------------------------------------------------------------
Loss before preferred stock dividends (42,415) (6,090) (73,174) (25,315)
Preferred stock dividends of subsidiary 2,599 8,010
- - ------------------------------------------------------------------------------------------
Net loss $ (42,415) $ (8,689) $ (73,174) $(33,325)
==========================================================================================
Loss per share $ (0.31) $ (0.08) $ (0.55) $ (0.29)
==========================================================================================
Weighted average number of shares 137,604 113,870 132,795 113,132
outstanding (thousands)
==========================================================================================
</TABLE>
See acompanying notes to interim consolidated financial statements.
<PAGE>
ECHO BAY MINES LTD.
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET September 30 December 31
thousands of U.S. dollars 1996 1995
- - ---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 145,039 $ 185,843
Interest and accounts receivable 13,213 14,749
Inventories (note 2) 41,007 34,173
Prepaid expenses and other assets 7,079 5,353
- - ------------------------------------------------------------------------------------------
206,338 240,118
Plant and equipment (note 3) 250,620 255,868
Mining properties (note 4) 441,385 318,219
Long-term investments and other assets (note 6) 41,741 56,956
- - ------------------------------------------------------------------------------------------
$ 940,084 $ 871,161
==========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 54,867 $ 61,781
Income and mining taxes payable 4,228 2,547
Gold and other financings (note 7) 136,985 41,135
Deferred income (note 7) 15,576 25,053
- - ------------------------------------------------------------------------------------------
211,656 130,516
Gold and other financings (note 7) 46,580 111,679
Deferred income (note 7) 11,561 --
Other long-term obligations (note 8) 60,382 32,018
Deferred income taxes 8,166 8,096
Commitments and contingencies (notes 12 and 13)
Common shareholders' equity:
Common shares, no par value, unlimited number authorized;
issued and outstanding - 139,350,281 shares
(129,880,804 shares at December 31, 1995) 709,510 618,965
Deficit (93,178) (15,109)
Foreign currency translation (14,593) (15,004)
- - ------------------------------------------------------------------------------------------
601,739 588,852
- - ------------------------------------------------------------------------------------------
$940,084 $ 871,161
==========================================================================================
</TABLE>
See accompanying notes to interim consolidated financial statements.
2
<PAGE>
ECHO BAY MINES LTD.
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT Three months ended Nine months ended
OF CASH FLOW September 30 September 30
thousands of U.S. dollars 1996 1995 1996 1995
- - ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash provided by (used in):
OPERATING ACTIVITIES
Working capital provided from
operations $ 12,637 $ 18,422 $ 26,826 $ 48,687
Increase in cash invested in working
capital related
to operations (247) (622) (11,590) (12,228)
- - ------------------------------------------------------------------------------------------
12,390 17,800 15,236 36,459
- - ------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Currency borrowings 34,714 34,714
Gold loan repayments (3,958) (2,463) (8,885) (7,390)
Dividends on preferred stock of
subsidiary -- (2,599) -- (8,010)
Common share dividends (note 9) -- -- (4,895) (4,231)
Preferred share conversions and
redemptions -- (74,187) -- (74,248)
Common shares issued on acquisition
of Santa Elina,
net of issuance costs (note 5) 85,801 -- 85,801 --
Common share issues, net of issuance
costs -- 73,071 4,745 73,898
- - ------------------------------------------------------------------------------------------
116,557 (6,178) 111,480 (19,981)
- - ------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Mining properties, plant and equipment (26,724) (8,990) (75,483) (28,144)
Cost of Santa Elina acquisition (note 5) (91,069) -- (91,069) --
Short-term investments -- (8,178) -- (8,178)
Long-term investments and other assets (599) (17,329) (7,317) (38,347)
Proceeds on sale of mining properties
and long-term investments -- 42,500 5,550 44,655
Other 210 458 799 595
- - ------------------------------------------------------------------------------------------
(118,182) 8,461 (167,520) (29,419)
- - ------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 10,765 20,083 (40,804) (12,941)
Cash and cash equivalents, beginning of
period 134,274 168,503 185,843 201,527
- - ------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 145,039 $188,586 $ 145,039 $188,586
==========================================================================================
CONSOLIDATED STATEMENT Three months ended Nine months ended
OF RETAINED EARNINGS (DEFICIT) September 30 September 30
thousands of U.S. dollars 1996 1995 1996 1995
- - ------------------------------------------------------------------------------------------
Balance, beginning of period $ (50,763) $ 15,273 $ (15,109) $ 44,140
Net loss (42,415) (8,689) (73,174) (33,325)
- - ------------------------------------------------------------------------------------------
(93,178) 6,584 (88,283) 10,815
Dividends on common shares (note 9) -- -- (4,895) (4,231)
Excess of redemption price of preferred
shares redeemed over
original proceeds -- (115) -- (115)
- - ------------------------------------------------------------------------------------------
Balance, end of period $ (93,178) $ 6,469 $ (93,178) $ 6,469
==========================================================================================
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(U.S. dollars)
1. GENERAL
In the opinion of management, the accompanying unaudited consolidated statement
of earnings, consolidated statement of retained earnings (deficit), 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 September 30, 1996 and December 31, 1995 and the
consolidated results of operations and cash flow for the three and nine months
ended September 30, 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 11 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.
4
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(U.S. dollars)
2. INVENTORIES
- - --------------------------------------------------------------------------
September 30 December 31
thousands of U.S. dollars 1996 1995
- - --------------------------------------------------------------------------
Precious metals -- bullion $ 6,032 $ 5,944
-- in-process 14,051 10,312
Materials and supplies 20,924 17,917
- - --------------------------------------------------------------------------
$ 41,007 $ 34,173
==========================================================================
3. PLANT AND EQUIPMENT
September 30 December 31
thousands of U.S. dollars 1996 1995
- - --------------------------------------------------------------------------
Cost $ 640,523 $ 605,442
Less accumulated depreciation 389,903 349,574
- - --------------------------------------------------------------------------
$ 250,620 $ 255,868
==========================================================================
4. MINING PROPERTIES
- - --------------------------------------------------------------------------
September 30 December 31
thousands of U.S. dollars 1996 1995
- - --------------------------------------------------------------------------
Producing mines' acquisition,
exploration & development costs $ 384,360 $ 364,611
Less accumulated amortization 243,028 221,125
- - --------------------------------------------------------------------------
141,332 143,486
Development properties acquisition,
exploration & development costs 221,849 102,204
Deferred mining costs 78,204 72,529
- - --------------------------------------------------------------------------
$ 441,385 $ 318,219
==========================================================================
5. SANTA ELINA ACQUISITION
On July 16, 1996, the company, Santa Elina Gold Corporation ("Santa Elina") and
Sercor Ltd. ("Sercor", a private company that owned 67% of Santa Elina)
completed a series of transactions which enabled the company to increase its
ownership from 7% to 50% of the outstanding common shares of Santa Elina by
issuing 8,830,915 common shares. As a result of the transaction, the company and
Sercor each own 50% of Santa Elina. Santa Elina holds interests in mining
properties, principally in Brazil, and also in Bolivia.
The company has accounted for the transactions as a purchase of an additional
43% of Santa Elina. Santa Elina has been consolidated into the company using
the proportionate consolidation method, as the company and Sercor jointly
control Santa Elina. Under the proportionate consolidation method, 50% of Santa
Elina's assets, liabilities, revenues and expenses are included in the company's
consolidated financial statements. The companys share of operating results of
Santa Elina are included in the company's consolidated results of operations
from the date of acquisition.
5
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(U.S. dollars)
The total cost of the transactions was $106.0 million, including $86.1 million
to purchase the additional 43% interest in Santa Elina (including $0.5 million
to cancel all outstanding options on the Santa Elina shares), the $13.1 million
cost of the companys prior 7% interest in Santa Elina, the $5.3 million carrying
value of the companys option to acquire a direct 50% interest in the Chapada
property and $1.5 million of transaction costs. The purchase price has been
allocated to the net assets of Santa Elina based on the relative fair values.
The value of the assets and liabilities acquired, based on the consideration
given, is as follows:
<TABLE>
<CAPTION>
thousands of U.S. dollars
- - ---------------------------------------------------
ASSETS
<S> <C>
Cash $ 2,025
Accounts receivable 555
Inventories 895
Plant and equipment 14,147
Mining properties 105,023
Long-term investments 478
- - ---------------------------------------------------
123,123
- - ---------------------------------------------------
LIABILITIES
Accounts payable and accrued
liabilities 3,097
Current portion of financings 6,888
Other long-term obligations 7,138
- - ---------------------------------------------------
17,123
- - ---------------------------------------------------
Net assets at values assigned $106,000
===================================================
</TABLE>
Unaudited pro forma summarized operating results of the company, assuming the
Santa Elina purchase had been consummated on January 1, 1995, are as follows:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------
Nine months ended
thousands of U.S. dollars, September 30
except per share amounts 1996 1995
- - -----------------------------------------------------------
<S> <C> <C>
Revenue $257,772 $268,300
Net loss $(76,517) $(40,301)
Net loss per common share $(0.55 ) $ (0.33)
- - -----------------------------------------------------------
</TABLE>
The unaudited pro forma information is based upon historical results of
operations and is not necessarily indicative of results that would have occurred
had the Santa Elina purchase been consummated on January 1, 1995.
6
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(U.S. dollars)
<TABLE>
<CAPTION>
6. LONG-TERM INVESTMENTS AND OTHER ASSETS
- - --------------------------------------------------------------------------------------------------------------------------
September 30, 1996 December 31, 1995
----------------------------------------- -----------------------------------------
thousands of U.S. dollars, except
number of shares and percent Number of Percent Market Carrying Number of Percent Market Carrying
interest Shares Interest Value Value Shares Interest Value Value
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Share investments carried at cost:
TVI Pacific Inc. 14,016,845 15.5% $18,609 $11,810 11,666,667 15.7% $18,715 $ 7,579
Santa Elina Gold Corporation -- -- -- -- 9,000,000 6.7 9,889 13,073
Canarc Resources Corp. 3,000,000 10.3 4,533 4,153 3,000,000 10.5 3,055 4,153
Rift Resources Ltd. 1,000,000 12.2 873 1,465 -- -- -- --
Cluff Resources plc -- -- -- -- 3,630,800 4.8 6,033 2,899
Other common share investments -- -- 10,884 10,276 -- -- 8,157 8,315
- - --------------------------------------------------------------------------------------------------------------------------
34,899 27,704 45,849 36,019
Equity investment in:
Etruscan Enterprises Ltd. 4,175,275 24.3 11,760 6,243 4,175,275 27.0 12,815 8,877
- - --------------------------------------------------------------------------------------------------------------------------
$46,659 $33,947 $58,664 $44,896
Property options 1,627 7,764
Other assets 6,167 4,296
- - --------------------------------------------------------------------------------------------------------------------------
$41,741 $56,956
==========================================================================================================================
</TABLE>
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,
Africa, and the Philippines.
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 in
Niger, West Africa.
7
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 31, 1996
(U.S. dollars)
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. The premium is 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.
<TABLE>
<CAPTION>
7. GOLD AND OTHER FINANCINGS AND DEFERRED INCOME
- - ------------------------------------------------------------------------------------------------
Financings Deferred Income
------------------------- ---------------------------
September 30 December 31 September 30 December 31
thousands of U.S. dollars 1996 1995 1996 1995
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold swaps $100,351 $101,480 $27,981 $26,925
Gold loan 16,656 23,279 1,197 291
Term loan 34,714 -- -- --
Debenture payable 28,093 28,055 -- --
Other 3,751 -- (2,041) (2,163)
- - ------------------------------------------------------------------------------------------------
183,565 152,814 27,137 25,053
Less current portion 136,985 41,135 15,576 25,053
- - ------------------------------------------------------------------------------------------------
$ 46,580 $111,679 $11,561 $ --
================================================================================================
</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 September 30, 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 2.60% at
September 30, 1996.
(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. 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
1996, the net gold delivery commitment was rescheduled. The company will now
deliver 69,267 ounces in the fourth quarter of 1996. The remaining 49,723
ounces will be delivered in 5,525 ounce repayments in each of the following nine
quarters ended
8
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(U.S. dollars)
March 1999. All deferred gains related to the Swiss franc transactions will be
recognized in earnings on a basis that matches the production originally
designated for delivery in 1996. The rescheduled commitment is priced at $403
per ounce. The effective rate of interest on the Swiss Franc bond and swap
arrangements was 0.97% at September 30, 1996.
b) Gold loan and currency loan
The company's loan agreement contains both term and revolving loan provisions.
At September 30, 1996, 43,750 ounces of gold were outstanding under the term
provisions of this agreement (60,200 ounces at December 31, 1995). For financial
statement presentation, the outstanding gold loan was remeasured to $381 per
ounce, the gold price at September 30, 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. This term loan, which was used to
refinance existing debt, was scheduled to be repaid in the fourth quarter of
1996. In August 1996, the loan was amended and will now be repaid over five
years. As part of the amendment, the company borrowed an additional $34.7
million in U.S. dollars under the amended term loan provisions, which will also
be repaid over five years.
At September 30, 1996, the company had no amounts outstanding under the
revolving commitment. The company had a $50.0 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 1.58% at September 30, 1996, and 6.1% on the dollar borrowings.
c) Debenture payable
A subsidiary of the company has issued a debenture in the amount of $28.1
million, which bears interest at the one-month discount rate for bankers'
acceptances plus 0.325%. The interest rate was 4.32% at September 30, 1996. 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 $58.6 million at September 30,
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%.
9
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(U.S. dollars)
At September 30, 1996, the company had unutilized credit facilities of $111.3
million including the $50.0 million revolving commitment (note 7b). Annual
commitment fees on the unutilized credit facilities are 0.225%.
Future gold and silver delivery commitments are summarized in note 12.
8. OTHER LONG-TERM OBLIGATIONS
Other long-term obligations consists primarily of the provision for McCoy/Cove
pit wall stabilization of $26.1 million, net of the current portion of $3.8
million at September 30, 1996 (note 10) and accrued reclamation costs of $29.8
million, net of the current portion of $2.3 million at September 30, 1996 and
$29.0 million, net of the current portion of $1.9 million at December 31, 1995.
9. DIVIDENDS ON COMMON SHARES
The company's policy is to declare dividends to shareholders in U.S. funds.
Dividends payable to Canadian residents are converted to and paid in Canadian
dollars. The company paid a semi-annual dividend of U.S. $0.0375 per common
share on June 30, 1996 and 1995.
10. PROVISION FOR McCOY/COVE PIT WALL STABILIZATION
In the third quarter of 1996, the company recorded a $30.0 million provision
related to the estimated costs to remove up to 30 million tons of waste rock
from an unstable portion of the Cove pit wall at the McCoy/Cove mine in Nevada.
The estimate of the provision is based on a preliminary evaluation of the total
tons to be removed and the associated costs, both of which will be further
refined as McCoy/Cove completes its stabilization plan.
11. 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 6). 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
10
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(U.S. dollars)
earnings and reported in a separate component of common shareholders' equity,
net of tax. The unrealized gain on share investments carried at cost is $7.2
million after a nil tax effect as of September 30, 1996.
In accordance with Canadian GAAP, the cost of the Santa Elina acquisition was
determined, in part, by the market value of the company's common shares ($9.75
per share of $86.1 million) on the date of the 8.8 million share issuance (July
16, 1996) (note 5). U.S. GAAP requires that the cost be determined based on the
market value of the company's common shares ($13.875 per share or $122.5
million) on the date of the commitment agreement (April 9, 1996.). The
difference between the methods would increase mining properties and common
shares under U.S. GAAP by $36.4 million. In accordance with Canadian GAAP, the
allocation of the purchase price of the Santa Elina acquisition does not include
any adjustment for the effect of deferred income taxes. U.S. GAAP requires the
recognition of deferred tax assets and liabilities for the tax effects of the
differences between the allocated values and the tax bases of the assets
acquired and the liabilities assumed. Under U.S. GAAP the recognition of
deferred taxes would increase mining properties and deferred income taxes by
$42.0 million.
In accordance with Canadian GAAP, the company's mining properties are amortized
over proven and probable reserves and other mineralization. U.S. GAAP allows
only proven and probable reserves as a basis for amortization. The difference
between the two accounting principles is not material to the results of
operations for any of the periods presented. On a cumulative basis under U.S.
GAAP, mining properties and common shareholders' equity would be $12.0 million
lower and deficit would be $12.0 million higher at September 30, 1996.
11
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(U.S. dollars)
The effects on the consolidated statement of earnings of the above differences
would have been as follows:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------
Three months ended Nine months ended
thousands of U.S. dollars, September 30 September 30
except per share data 1996 1995 1996 1995
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss under Canadian GAAP $(42,415) $ (8,689) $(73,174) $(33,325)
Change in market value of
foreign exchange contracts 1,323 2,457 2,130 4,286
- - -----------------------------------------------------------------------------------------------
Net loss under U.S. GAAP $(41,092) $ (6,232) $(71,044) $(29,039)
===============================================================================================
Loss per share under
U.S. GAAP $ (0.30) $ (0.05) $ (0.53) $ (0.26)
===============================================================================================
</TABLE>
The effects on the consolidated balance sheet of the above differences would
have been as follows:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------
September 30, 1996 December 31, 1996
thousands of U.S. dollars Canadian GAAP U.S. GAAP Canadian GAAP U.S. GAAP
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term investments and other assets $ 41,741 $ 58,869 $ 56,956 $ 78,527
Mining properties 441,385 507,864 318,219 306,819
Deferred income taxes 8,166 50,197 8,096 8,096
Common shares 709,510 745,938 618,965 618,965
Deficit 93,178 95,225 15,109 18,706
Common shareholders' equity 601,739 643,315 588,852 599,023
===============================================================================================
</TABLE>
Under U.S. GAAP, the common share issuance for the acquisition of Santa Elina
would not have been shown in the consolidated statement of cash flow as it was a
non-cash transaction. Accordingly, common shares issued and the cost of the
Santa Elina acquisition for the three and nine months ended September 30, 1996
would have been reduced by $86.1 million.
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 were non-cash
transactions. Accordingly, preferred share conversions and common share issues
for the three and nine months ended September 30, 1995 would have been reduced
by $73.1 million.
The U.S. Financial Accounting Standards Board ("FASB") Statement No. 123,
"Accounting and Disclosure of Stock-Based Compensation" 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 Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and related
Interpretations. The company 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 in financial information prepared in conformity with U.S.
GAAP.
Effective January 1, 1996, for the purpose of preparing U.S. GAAP financial
information, the company adopted FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-
12
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(U.S. dollars)
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 U.S. GAAP financial information of the company.
12. 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.
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 also 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 September 30, 1996, the company's gold and silver commitments were as
follows:
- - -------------------------------------------------------------------
Average
Price of Gold Price of
Forward Forward Loans Loans
Sales Sales and Swaps and Swaps
(ounces) (per ounce) (ounces) (per ounce)
- - -------------------------------------------------------------------
Gold
- - ----
Balance of 1996 -- $ -- 71,455 $ 391
1997 /(1)/ 69,333 422 245,568 382
1998 154,000 456 29,756 360
1999 290,667 498 15,367 374
2000 70,000 503 12,031 388
2001 and beyond 70,000 548 6,563 388
- - -------------------------------------------------------------------
654,000 $ 486 380,740 $382
===================================================================
Silver
- - ------
Balance of 1996 550,000 $6.13
1997 2,600,000 5.96
1998 3,100,000 6.46
1999 2,800,000 6.47
- - -------------------------------------------
9,050,000 $6.30
===========================================
/(1)/ The gold commitment for 1997 include spot-deferred contracts for which
the price per ounce is estimated based on expected delivery dates and
estimated interest rates.
13
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(U.S. dollars)
The company's option position as of September 30, 1996 was as follows:
- - --------------------------------------------------------------------------------
Put Options Purchased Call Options Sold
--------------------- ----------------------
Strike Price Strike Price
Ounces per Ounce Ounces per Ounce
- - --------------------------------------------------------------------------------
Silver
- - ------
Balance of 1996 -- $ -- 360,000 $ 6.43
1997 1,440,000 5.40 1,440,000 6.43
- - --------------------------------------------------------------------------------
1,440,000 $ 5.40 1,800,000 $ 6.43
================================================================================
b) Currency position
The company's obligations to purchase Canadian dollars as of September 30, 1996
were as follows:
- - --------------------------------------------------------------------------------
Canadian Exchange Rate
Dollars (C$ to US$1.00)
- - --------------------------------------------------------------------------------
Balance of 1996 $ 9,300,000 1.44
1997 25,200,000 1.49
1998 25,200,000 1.52
1999 25,200,000 1.56
2000 25,200,000 1.59
- - --------------------------------------------------------------------------------
$110,100,000 1.53
================================================================================
c) Crude oil position
The company's swap contracts and forward purchase commitments as of September
30, 1996 were as follows:
- - --------------------------------------------------------------------------------
Barrels of
Crude Oil Price per
Purchased Barrel
- - --------------------------------------------------------------------------------
Balance of 1996 60,000 $18.40
1997 397,000 17.96
1998 390,000 17.57
1999 20,000 17.63
- - --------------------------------------------------------------------------------
867,000 $17.81
================================================================================
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.
14
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(U.S. dollars)
Shown below are the carrying amounts, estimated fair values, and unrealized
gains or losses on the company's hedging positions at September 30, 1996 and
December 31, 1995.
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------
Carrying Estimated Unrealized
thousands of U.S. dollars Amount Fair Value Gain (Loss)
- - ----------------------------------------------------------------------
<S> <C> <C> <C>
September 30, 1996
- - ------------------
Gold swaps $100,351 $97,351 $ 3,000
Gold loan 16,656 16,656 --
Off balance sheet instruments:
Gold forward sales -- 42,100
Silver forward sales -- 8,900
Silver options-puts 1,386 (100)
-calls (1,008) 900
Foreign currency contracts -- 9,900
Crude oil contracts -- 2,100
- - ----------------------------------------------------------------------
$66,800
======================================================================
- - ----------------------------------------------------------------------
Carrying Estimated Unrealized
thousands of U.S. dollars Amount Fair Value Gain (Loss)
- - ----------------------------------------------------------------------
December 31, 1995
- - -----------------
Gold swaps $101,408 $97,880 $ 3,600
Gold loan 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.
15
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(U.S. dollars)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Three months ended Nine months ended
Gains (losses) in thousands September 30 September 30
of U.S. dollars 1996 1995 1996 1995
- - -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Gold loans $ (83) $ (246) $ (764) $ (448)
Gold forward sales 1,064 650 1,541 2,042
Silver forward sales 436 274 1,206 1,502
Gold and silver options 644 359 534 325
Operating expenses:
Foreign currency contracts 330 331 1,007 519
Crude oil contracts 295 11 690 265
Dividends on preferred stock of
subsidiary:
Interest rate swap -- (90) -- (471)
- - -----------------------------------------------------------------------------------
$2,686 $1,289 $4,214 $3,734
===================================================================================
</TABLE>
13. 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, which would require a change in EPA
regulations. For that purpose, the EPA has instituted rulemaking procedures to
enable it to consider submarine tailings disposal. 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 (SEIS) expected to be
completed in 1997. The company's revised feasibility study, currently underway,
is addressing the submarine tailings disposal method under consideration by the
EPA. The recoverability of the company's $57.1 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) Summa
In 1995, Summa Corporation commenced in Nevada state court a lawsuit 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 case is scheduled for trial in February 1997. The company has accrued $1.5
million related to the Summa litigation, including $1.3 million in 1996.
16
<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
September 30, 1996
(U.S. dollars)
FINANCIAL CONDITION
Working capital provided from operations was $26.8 million for the first nine
months of 1996 compared to $48.7 million in the first nine months of 1995. The
1996 results reflect increased operating costs per ounce ($10.6 million), lower
precious metal sales ($5.8 million reduced cash margin), increased net interest
expense ($5.8 million) and increased cash exploration expense ($3.1 million),
partially offset by the elimination of preferred share dividends ($8.0 million)
and higher gold and silver prices realized ($3.3 million). Working capital from
operations has been reduced by cash exploration and development property
expenses of $42.4 million in 1996 and $41.7 million in 1995, most of which
represent discretionary investments for the future.
The increase in cash invested in working capital related to operations was $11.6
million in the first nine months of 1996. The primary use of the cash invested
in working capital was the payment of December 1995 common share dividends in
January 1996 ($4.9 million), an increase in in-process inventories ($3.8
million) primarily at the McCoy/Cove mine and an increase in material and
supplies inventory ($2.9 million) primarily related to the annual resupply of
diesel fuel, bulk materials and other inventory items at the Lupin mine in the
Northwest Territories of Canada.
In the first nine months of 1996, the company borrowed $34.7 million in a
currency loan, had gold loan repayments of $8.9 million, paid common share
dividends of $4.9 million and issued 0.6 million shares of common stock on the
exercise of stock options, for proceeds of $4.7 million.
In connection with the Santa Elina acquisition, the company issued common shares
of $85.8 million net of issuance costs of $0.3 million and acquired net assets
valued at $91.1 million
In addition to the Santa Elina acquisition, the company invested $75.5 million
in mining properties, plant and equipment and $7.3 million in long-term
investments in the first nine months of 1996. The company received $5.6 million
on the sale of a common share investment.
For the remainder of 1996, the company expects to incur $16 million in cash
exploration and development properties expenses; $17 million of capitalized
acquisition, exploration and development costs at development properties
including Kingking, Chapada, Ulu, Paredones Amarillos and Aquarius; and $13
million of capital and deferred mining expenditures at operating properties,
including construction of a mill at Round Mountain.
17
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
September 30, 1996
(U.S. dollars)
The company expects to fund these expenditures from working capital provided by
operations and existing working capital. The company has adequate financial
resources and liquidity to pursue additional acquisition, investment,
exploration and development programs. Working capital from operations was $26.8
million in the first nine months of 1996 after incurring cash exploration and
development costs of $42.4 million. In addition, the company has $145.0 million
in cash and cash equivalents, and $111.3 million in established unutilized
credit facilities at September 30, 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.
18
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 1996
(U.S. dollars)
FINANCIAL REVIEW
Three month results
The company reported a net loss of $42.4 million ($0.31 per share) in the third
quarter of 1996, compared to a net loss of $8.7 million ($0.08 per share) in the
third quarter of 1995. The increase in 1996 from 1995 reflects the provision
for McCoy/Cove pit wall stabilization ($30.0 million) (see note 10 to the
interim consolidated financial statements), higher cash operating costs per
ounce ($5.2 million) and increased interest expense ($2.6 million), partially
offset by the elimination of preferred share dividends ($2.6 million).
Gold production increased 6% to 218,043 ounces in the third quarter of 1996
compared to 205,119 ounces in the third quarter of 1995. Increased production
was due to increased tons leached at the Round Mountain mine and was due to
higher grade and recoveries at the Kettle River mine. These increases were
partially offset by decreased production due to lower grades at McCoy/Cove and
reduced tons milled at the Lupin mine. Silver production decreased 39% to 2.1
million ounces in 1996 from 3.4 million ounces in 1995, a result of lower grade
at McCoy/Cove. Quarterly revenues were $94.9 million in 1996 and $93.5 million
in 1995.
Cash operating costs were $243 per ounce of gold in the third quarter of 1996,
versus $215 in 1995, reflecting the lower grades processed.
Nine month results
The company reported a net loss of $73.2 million ($0.55 per share) in the first
nine months of 1996, compared to a net loss of $33.3 million ($0.29 per share)
in the first nine months of 1995. The increase in 1996 from 1995 reflects the
provision for McCoy/Cove pit wall stabilization ($30.0 million), higher cash
operating costs per ounce ($10.6 million), increased exploration expense ($4.7
million) and lower precious metals sales ($4.6 million decreased earnings
margin) partially offset by the elimination of preferred stock dividends ($8.0
million).
Gold production increased 2% to 584,890 ounces in the first nine months of 1996
compared to 571,052 ounces in the first nine months of 1995. Increased
production at Round Mountain (increased tons leached), Lupin (increased tons
milled) and Kettle River (higher grades) was partially offset by lower
production due to decreasing grade at McCoy/Cove. Silver production decreased
48% to 4.9 million ounces in 1996 from 9.5 million ounces in 1995, a result of
lower grade and recovery at McCoy/Cove. Revenues were $257.8 million in the
first nine months of 1996 compared to $268.3 million in the first nine months of
1995.
Cash operating costs were higher, $247 per ounce of gold in the first nine
months of 1996 versus $229 per ounce of gold in the first nine months of 1995,
primarily due to lower grades mined at three of the company's four mines
resulting in lower recoveries, and fewer gold and silver ounces produced at
McCoy/Cove.
See "Operations Review" for further comments as to production and cash operating
cost changes.
The term "ounce" as used in this Form 10-Q means "troy ounce".
19
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Revenue
Statistics for gold and silver ounces sold and other revenue data are set out
below:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
REVENUE DATA 1996 1995 1996 1995
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold
- - ----
Ounces sold 217,686 188,874 589,759 557,144
Average price realized/ounce $ 390 $ 387 $ 393 $ 388
Average market price/ounce $ 385 $ 384 $ 392 $ 384
Revenue (millions of U.S. $) $ 84.9 $ 73.2 $ 231.5 $ 216.2
Percentage of total revenue 89% 78% 90% 81%
Silver
- - -----
Ounces sold (millions) 1.8 3.7 4.7 9.7
Average price realized/ounce $ 5.29 $ 5.62 $ 5.53 $ 5.40
Average market price/ounce $ 5.06 $ 5.34 $ 5.33 $ 5.17
Revenue (millions of U.S. $) $ 10.0 $ 20.3 $ 26.3 $ 52.1
Percentage of total revenue 11% 22% 10% 19%
- - ---------------------------------------------------------------------------------------------
Total revenue (millions of
U.S. dollars) $ 94.9 $ 93.5 $ 257.8 $ 268.3
=============================================================================================
</TABLE>
The effects of changes in sales volume and prices were:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------
REVENUE VARIANCE ANALYSIS Three months ended Nine months ended
1996 VS. 1995 September 30 September 30
- - --------------------------------------------------------------------------------------------
<S> <C> <C>
Higher (lower) prices:
Gold $ 0.6 $ 2.7
Silver (0.6) 0.6
Change in volume 1.4 (13.8)
- - --------------------------------------------------------------------------------------------
Increase (decrease) in revenue $ 1.4 $ (10.5)
============================================================================================
</TABLE>
20
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 1996
(U.S. dollars)
Production Costs
Production cost data per ounce of gold is set out below:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------
Three months ended Nine months ended
PRODUCTION COSTS PER September 30 September 30
OUNCE OF GOLD PRODUCED 1996 1995 1996 1995
- - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Direct mining expense $ 235 $ 214 $ 261 $ 226
Deferred stripping and mine
development costs 8 6 (9) 4
Inventory movements and other -- (5) (5) (1)
- - --------------------------------------------------------------------------------------------
Cash operating costs 243 215 247 229
Royalties 12 9 11 9
Production taxes 1 5 3 6
- - --------------------------------------------------------------------------------------------
Total cash costs 256 229 261 244
Depreciation 58 54 65 59
Amortization 34 37 33 37
Reclamation 8 6 7 5
- - --------------------------------------------------------------------------------------------
Total production costs $ 356 $ 326 $ 366 $ 345
============================================================================================
</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 changes in
in-process inventories. 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 per ounce costs have been restated to conform with the new
standard.
Expenses
Operating costs per ounce vary with the quantity of gold and silver sold and
with the cost of operations. The cash operating costs were $243 per ounce of
gold in the third quarter of 1996, and $215 in 1995. See "Operations Review".
21
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 1996
(U.S. dollars)
<TABLE>
<CAPTION>
RECONCILIATION OF CASH OPERATING
COSTS PER OUNCE TO FINANCIAL STATEMENTS
- - -------------------------------------------------------------------------------------
Three months ended Nine months ended
thousands of U.S. dollars, September 30 September 30
except per ounce amounts 1996 1995 1996 1995
- - -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating costs per
financial statements $ 57,940 $ 51,840 $160,464 $157,649
Change in finished goods
inventory and other 1,616 1,771 1,411 580
Co-product cost of silver
produced (6,572) (9,466) (17,407) (27,544)
- - -------------------------------------------------------------------------------------
Cash operating costs $ 52,984 $ 44,146 $144,468 $130,685
=====================================================================================
Gold ounces produced 218,043 205,119 584,890 571,052
Cash operating costs per ounce $ 243 $ 215 $ 247 $ 229
</TABLE>
Royalties vary with the quantity of gold and silver produced, the mix of
production from the company's four mines and market prices. The increase in the
third quarter of 1996 compared to the third quarter of 1995 is due to an
increased percentage of total production coming from the Round Mountain and
Kettle River mines which have higher royalties, and a decreased percentage of
total production coming from the Lupin mine which has no royalty.
Production taxes decreased in the third quarter of 1996 compared to the third
quarter of 1995 due to reduced net profits at the McCoy/Cove mine on which
production taxes are calculated.
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 third quarter
of 1996 versus 1995 is primarily due to the lower gold and silver production at
the McCoy/Cove mine in the third quarter of 1996.
Development properties expense decreased in the third quarter of 1996 compared
to the third quarter of 1995 due to a reduction in activity and personnel at the
Alaska-Juneau development project while awaiting completion of the Supplemental
Environmental Impact Statement by the Environmental Protection Agency.
Net interest expense was $1.2 million for the third quarter of 1996 compared to
net interest income of $1.3 million for the third quarter of 1995, primarily due
to a decrease in cash on hand and an increase in gold and other financings.
Preferred stock dividends are nil in the third quarter of 1996 compared to $2.6
million in the third quarter of 1995 due to the conversion or redemption of all
the outstanding preferred shares in the third and fourth quarters of 1995.
The provision for McCoy/Cove pit wall stabilization in the third quarter of 1996
represents the estimated costs to remove up to 30 million tons of waste rock
from an unstable portion of the Cove pit wall at the McCoy/Cove mine in Nevada.
The estimate of the provision is based on a preliminary evaluation of the
22
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 1996
(U.S. dollars)
total tons to be removed and the associated costs, both of which will be further
refined as McCoy/Cove completes its stabilization plan.
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.
23
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 1996
(U.S. dollars)
OPERATIONS REVIEW
Operating data by mine is set out in the table below:
- - -------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
OPERATING DATA BY MINE 1996 1995 1996 1995
- - -------------------------------------------------------------------------
Gold production (ounces)
- - ------------------------
(a) McCoy/Cove 85,754 92,002 204,218 251,743
(b) Round Mountain (50%) 59,415 41,236 156,748 127,453
(c) Lupin 41,295 45,133 129,853 118,017
(d) Kettle River 31,579 26,748 94,071 73,839
- - -------------------------------------------------------------------------
Total gold 218,043 205,119 584,890 571,052
=========================================================================
Silver production (ounces)
- - --------------------------
(a) McCoy/Cove 2,092,987 3,404,998 4,917,206 9,465,141
- - -------------------------------------------------------------------------
Total silver 2,092,987 3,404,998 4,917,206 9,465,141
=========================================================================
Gold production increased 6% to 218,043 ounces in the third quarter of 1996 from
205,119 ounces in the third quarter of 1995, reflecting an accelerated loading
of ore and a shortened leach cycle on the reusable pad and an increase in tons
loaded on the dedicated pad at Round Mountain, increased production from Kettle
River's higher grade Lamefoot deposit, offset partially by a decrease in grade
at Lupin, and a decrease in grade and recovery rates at McCoy/Cove. Silver
production decreased 39% to 2.1 million ounces in the third quarter of 1996 from
3.4 million ounces in the third quarter of 1995, reflecting lower grades and
recovery rates at McCoy/Cove. For the full year 1996, the gold production target
remains at 725,000 to 750,000 ounces and the silver production target is
approximately 7.0 million ounces.
- - -------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
OPERATING DATA BY MINE 1996 1995 1996 1995
- - -------------------------------------------------------------------------
Cash operating costs
- - --------------------
(per ounce of gold)
------------------
(a) McCoy/Cove $ 239 $ 200 $ 263 $ 215
(b) Round Mountain (50%) 228 194 215 191
(c) Lupin 310 280 287 305
(d) Kettle River 201 217 196 243
- - -------------------------------------------------------------------------
Company Average $ 243 $ 215 $ 247 $ 229
=========================================================================
Cash operating costs were $243 per ounce of gold in the third quarter of 1996,
compared to $215 in the third quarter of 1995. Consolidated cash operating
costs are targeted at $245 to $255 per ounce of gold produced for the full year
1996.
24
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 1996
(U.S. dollars)
(a) McCoy/Cove, Nevada (100% owned)
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
OPERATING DATA 1996 1995 1996 1995
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold produced (ounces):
Milled 66,256 77,724 155,397 205,258
Heap leached 19,498 14,278 48,821 46,485
---------- ---------- ---------- ----------
Total gold 85,754 92,002 204,218 251,743
Silver produced (ounces):
Milled 1,965,862 3,195,711 4,533,767 8,763,326
Heap leached 127,125 209,287 383,439 701,815
---------- ---------- ---------- ----------
Total silver 2,092,987 3,404,998 4,917,206 9,465,141
Ore and waste mined
(million tons) 16.1 15.3 48.8 48.2
Mining cost/ton of ore and
waste $ 0.70 $ 0.67 $ 0.70 $ 0.66
Milling cost/ton of ore $ 9.60 $ 11.57 $ 9.76 $ 11.24
Heap leaching cost/ton of
ore $ 1.35 $ 2.38 $ 1.64 $ 2.37
Production cost per ounce
of gold produced:
Direct mining expense $ 238 $ 176 $ 291 $ 196
Deferred stripping cost 6 28 (20) 21
Inventory movements and other (5) (4) (8) (2)
---------- ---------- ---------- ----------
Cash operating cost 239 200 263 215
Royalties 5 6 5 6
Production taxes -- 8 3 9
---------- ---------- ---------- ----------
Total cash cost 244 214 271 230
Depreciation 58 42 72 49
Amortization 46 45 46 46
Reclamation 10 5 8 (5)
---------- ---------- ---------- ----------
Total production costs $ 358 $ 306 $ 397 $ 330
---------- ---------- ---------- ----------
Average gold-to-silver price ratio 76.0:1 71.9:1 74.2:1 74.0:1
Milled:
Ore processed (tons/day) 10,008 7,117 8,756 7,183
Gold grade (ounce/ton) 0.080 0.137 0.097 0.123
Silver grade (ounce/ton) 3.30 6.28 3.41 5.61
Gold recovery rate (%) 80.4 86.1 80.9 84.2
Silver recovery rate (%) 73.7 75.9 73.5 78.5
Heap leached:
Ore processed (tons/day) 22,393 11,070 16,570 12,019
Gold grade (ounce/ton) 0.015 0.016 0.019 0.021
Silver grade (ounce/ton) 0.23 0.52 0.30 0.65
Recovery rates /(2)/
===============================================================================================================
</TABLE>
/(1)/ 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.
/(2)/ 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.
25
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 1996
(U.S. dollars)
At McCoy/Cove, the company's largest producer, 85,754 ounces of gold were
produced during the third quarter of 1996, down 7% from 92,002 ounces in the
third quarter of 1995. In compensation for lower ore grades at deeper levels of
the mine, significantly more tons of ore are being processed both in the mill
and on the heap leach pads. The average grade milled during the third quarter
of 1996 was 42% lower than in the third quarter of 1995 (0.080 versus 0.137
ounces per ton), and the average grade heap leached was 6% lower (0.015 versus
0.016 ounces per ton).
During the third quarter of 1996, 41% more tons were milled compared to the
third quarter of 1995 (10,008 versus 7,117 tons per day). The increase in the
tons milled resulted from the first full quarter utilizing the increased
capacity afforded by the mill expansion, which was completed in April. The mill
expansion not only provides additional capacity but also improves recoveries
through additional retention time.
The amount of ore placed under heap leach doubled, to 22,393 tons per day in the
third quarter of 1996 from 11,070 tons per day in the third quarter of 1995,
with the additional volume coming from run of mine (uncrushed) ores placed under
leach. Heap leaching accounted for 23% of the gold and 6% of the silver
produced during the third quarter of 1996.
Silver production was 2,092,987 ounces in the third quarter of 1996, compared
with 3,404,998 ounces in the third quarter of 1995. Silver grades were also
down 47% in the third quarter of 1996 compared to the third quarter of 1995
(3.30 versus 6.28 ounces per ton).
Cash operating costs were $239 per ounce of gold produced in the third quarter
of 1996, compared with $200 per ounce in the third quarter of 1995, reflecting
the lower gold and silver grades.
Due to increased capacity, the 1996 full-year gold production at McCoy/Cove is
currently expected to be only 15-20% less than in 1995.
26
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 1996
(U.S. dollars)
(b) Round Mountain, Nevada (50% owned)
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
OPERATING DATA 1996 1995 1996 1995
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold produced (ounces):
Reusable heap leach pad (50%) 32,251 22,132 90,643 71,193
Dedicated heap leach pad (50%) 24,681 15,938 61,365 50,700
Other 2,483 3,166 4,740 5,560
-------- ------- -------- --------
Total (50%) 59,415 41,236 156,748 127,453
Ore and waste mined
(million tons) (100%) 12.1 15.3 40.9 44.7
Mining cost/ton of ore and waste $ 0.79 $ 0.67 $ 0.71 $ 0.60
Heap leaching cost/ton of ore $ 0.81 $ 0.61 $ 0.79 $ 0.65
Production cost per ounce of
gold produced:
Direct mining expense $ 208 $ 246 $ 224 $ 216
Deferred stripping costs 15 (42) - (23)
Inventory movements and other 5 (10) (9) (2)
-------- ------- -------- --------
Cash operating cost 228 194 215 191
Royalties 37 33 32 30
Production taxes 3 5 4 5
-------- ------- -------- --------
Total cash cost 268 232 251 226
Depreciation 47 67 50 63
Amortization 18 20 18 20
Reclamation 5 5 5 5
-------- ------- -------- --------
Total production cost $ 338 $ 324 $ 324 $ 314
-------- ------- -------- --------
Reusable heap leach pad:
Ore processed (tons/day) (100%) 27,224 23,187 27,823 21,539
Grade (ounce/ton) 0.032 0.034 0.036 0.033
Recovery rate (%) 72.5 66.9 68.1 72.9
Dedicated heap leach pad:
Ore processed (tons/day (100%) 107,544 74,148 92,987 62,380
Grade (ounce/ton) 0.010 0.013 0.011 0.013
Recovery rate /(1)/
============================================================================================================
</TABLE>
/(1)/ 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%.
At the 50% owned Round Mountain mine in Nevada, the company's portion of gold
production increased 44% to 59,415 ounces in the third quarter of 1996 from
41,236 ounces in the third quarter of 1995. This increase came as a result of
the accelerated loading of ore on both the dedicated and reusable pads. In the
third quarter of 1996, loading continued to be high with a 17% increase on the
reusable pad and a 45% increase on the dedicated pad compared to the third
quarter of 1995.
During the third quarter of 1996, there was only a slight drop in the grade of
the tons placed on the reusable pad compared to the third quarter of 1995 (0.032
versus 0.034 ounces per ton), with a 25% drop in the grade of the tons placed on
the dedicated pad (0.010 versus 0.013 ounces per ton). Ore placed on the
dedicated pad included ore that was previously leached on the reusable pad as
well as low grade stockpiles.
27
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 1996
(U.S. dollars)
Cash operating costs were $228 per ounce in the third quarter of 1996, compared
with $194 per ounce in the third quarter of 1995. Costs rose because of the
lower grade of ore placed under leach and the higher cost of mining deeper in
the pit, which was only partially offset by higher volume.
Round Mountain has increased its 1996 full-year production target to 10 - 15%
more gold than produced in 1995.
Construction of a mill at Round Mountain continues on track. The 8,000 ton/day
mill is slated to begin operations in late 1997 and will process large
quantities of nonoxidized ore. More nonoxidized ore is being added to the
stockpile each quarter in preparation for mill start up.
28
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 1996
(U.S. dollars)
(c) Lupin, Northwest Territories (100% owned)
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
OPERATING DATA 1996 1995 1996 1995
- - ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold produced (ounces) 41,295 45,133 129,853 118,017
Tons of ore mined and milled 192,449 182,940 592,836 502,517
Mining cost/ton of ore C$ 47.76 C$ 46.26 C$ 42.90 C$ 47.08
Milling cost/ton of ore C$ 13.28 C$ 12.61 C$ 12.35 C$ 12.77
Production cost per ounce of
gold produced:
Canadian dollars:
Direct mining expense C$ 408 C$ 392 C$ 396 C$ 441
Deferred mine development cost C$ 13 C$ (16) C$ (5) C$ (26)
Inventory movements and other C$ 3 C$ 3 C$ 1 C$ 5
-------- -------- ------- --------
Cash operating cost C$ 424 C$ 379 C$ 392 C$ 420
U.S. dollars:
Cash operating cost US$ 310 US$ 280 US$ 287 US$ 305
Royalties -- -- -- --
Production taxes -- -- -- --
-------- -------- ------- --------
Total cash cost 310 280 287 305
Depreciation 71 65 68 74
Amortization 18 20 18 20
Reclamation 8 7 8 7
-------- -------- ------- --------
Total production cost US$ 407 US$ 372 US$ 381 US$ 406
-------- -------- ------- --------
Milled:
Ore processed (tons/day) 2,115 2,010 2,172 1,841
Grade (ounce/ton) 0.231 0.267 0.237 0.254
Recovery rate (%) 92.9 92.5 92.5 92.5
=================================================================================
</TABLE>
Production at Lupin, located in the Northwest Territories, was 41,295 ounces in
the third quarter of 1996, down 9% from 45,133 ounces in the third quarter of
1995. Mining at depth in the Centre Zone and East Zone of the ore body was
slowed by the necessity of more ground support, resulting in reduced tonnage
sent to the mill from levels in 1995. The slower mining rate has resulted in a
reduction of Lupin's 1996 full-year production target to the same level as in
1995.
Ore grades are also lower at depth. The average grade milled in the third
quarter of 1996 was 0.231 ounces per ton versus 0.267 in the third quarter of
1995.
Cash operating costs increased to $310 per ounce in the third quarter of 1996
from $280 in the third quarter of 1995, reflecting the reduced mining rate and
fewer ounces produced.
To facilitate the mining of the Ulu deposit as satellite feed for Lupin, the
company signed an agreement with the Kitikmeot Inuit Association to provide
education, employment, job training and business opportunities for the area
Inuit communities. The portal has been collared at Ulu, and a ramp is being
driven into the mineralization. Ore grade material is expected to be reached
early in 1997 and trucked to Lupin beginning in 1998.
29
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 1996
(U.S. dollars)
(d) Kettle River, Washington (100% owned)
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------
Three months ended Nine months ended
September 30 September 30
OPERATING DATA 1996 1995 1996 1995
- - --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold produced (ounces) 31,579 26,748 94,071 73,839
Tons of ore mined and milled 148,406 149,171 430,256 414,432
Mining cost/ton of ore $ 19.24 $ 21.20 $ 21.25 $ 23.41
Milling cost/ton of ore $ 12.93 $ 12.34 $ 12.48 $ 12.74
Production cost per ounce
of gold produced:
Direct mining expense $ 194 $ 235 $ 192 $ 250
Inventory movements and other 7 (18) 4 (7)
-------- -------- -------- --------
Cash operating cost 201 217 196 243
Royalties 8 9 9 9
Production taxes 2 2 2 2
-------- -------- -------- --------
Total cash cost 211 228 207 254
Depreciation 58 70 59 76
Amortization 45 45 45 45
Reclamation 8 7 8 7
-------- -------- -------- --------
Total production cost $ 322 $ 350 $ 319 $ 382
-------- -------- -------- --------
Milled:
Ore processed (tons/day 1,631 1,639 1,576 1,518
Grade (ounce/ton) 0.244 0.205 0.253 0.204
Recovery rate (%) 87.1 87.7 86.3 87.5
==========================================================================
</TABLE>
At the Kettle River mine in Washington State, gold production increased 18% to
31,579 ounces in the third quarter of 1996 from 26,748 ounces in the third
quarter of 1995. Cash operating costs were $201 per ounce in the third quarter
of 1996, down from $217 per ounce in the third quarter of 1995. This
improvement resulted from treating ores with 19% higher grades, 0.244 ounces per
ton in the third quarter of 1996 compared with 0.205 ounces per ton in the third
quarter of 1995.
At the end of the third quarter of 1996, the mill increased operations from five
to seven days a week, maximizing mill capacity at 2,000 tons per day. The
increased production capacity will offset the lower ore grades planned for
processing later in 1996 and into 1997.
Underground development of the K-2 deposit is being completed. The underground
work indicates that ore grades and widths are similar to those indicated by
earlier exploration drilling from the surface. Possible extensions of the
deposit still need to be investigated.
The full-year 1996 production target for Kettle River remains approximately 20%
more gold than in 1995.
30
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 1996
(U.S. dollars)
RECENT DEVELOPMENTS
Development Properties
The company is advancing a number of projects from exploration through
feasibility and development to construction. Detailed feasibility studies, on
which construction decisions will be based, are well underway at Aquarius in
Canada, Paredone Amarillos in Mexico, A-J in Alaska and Chapada in Brazil.
Three initial feasibility studies, those studies that determine whether or not
to advance the project for further development, are also moving forward at
Kingking in the Philippines and Fazenda Nova and Sao Francisco in Brazil.
For the first nine months of 1996, in connection with activities to advance its
exploration and development prospects, the company charged $49.1 million
(including $17.1 million in the third quarter) against current earnings and
capitalized another $38.0 million (including $19.0 million in the third
quarter).
The company's exploration and development properties represent opportunities for
future growth. These opportunities come to the company through acquisition and
as the result of the company's program of strategic alliances with smaller,
entrepreneurial exploration companies. These alliances have allowed the company
to expand its search for gold from North America throughout the world.
Highlights of these programs are outlined below:
. At the 100% owned Aquarius gold property in the Timmins mining district of
Ontario, Canada, the 1996 drill program of 43,500 meters (138,000 feet) was
completed in August. Extensive hydrological studies and other process
optimizations are nearing completion. The detailed feasibility study is
scheduled to be completed by year end 1996. A construction decision could
be made in early 1997 and production could begin as early as 1999.
. At the 60% owned Paredones Amarillos gold project in Baja California Sur,
Mexico, the 1996 in-fill drilling program was completed early in the third
quarter of 1996 with a total of 18,000 meters (59,000 feet) drilled. These
drill results are being incorporated into the global resource evaluation.
An increase is anticipated in the number of minable ounces of gold due to
an increase in the tons of ore outlined by the drilling program. Other work
is being completed, including water source studies, in support of a
detailed feasibility study anticipated for completion by year end 1996. If
a positive construction decision is made in early 1997, production could
start as early as the fourth quarter of 1998.
. Seven drill rigs are at work at the 41.5% owned Chapada copper-gold deposit
in Brazil. The drill program was hampered early in the year by the
unavailability of skilled crews and problems getting equipment into the
country. Issues such as these continue to slow the program. Among the
concerns being addressed in a detailed feasibility study, now scheduled for
completion in the second quarter of 1997, is the high cost of transporting
concentrates across most of Brazil to a deepwater port.
31
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 1996
(U.S. dollars)
. Echo Bay's initial feasibility study on the optioned Kingking copper-gold
development property in the Philippines is currently expected to be
completed in the second quarter of 1997. The slow start to the exploration
drilling program has now been corrected and two more drills have been
added, bringing the total to 10. These rigs are working towards completing
45,000 meters (150,000 feet) of drilling. Drilling to date, much of it
focused on the eastern portion of the mineralized area outlined by Benguet
Corporation, the property's current owner, indicates significantly more
tons are being found at similar or slightly lower grades than those
outlined by Benguet's earlier work. Additional drilling is continuing to
the west in areas where there were preliminary indications of higher gold
grades and lower cooper grades. Mapping and sampling is under way at two
other targets, Binutaan and Diat.
. At the 100% owned Alaska-Juneau gold project in Alaska, a revised
feasibility study is being prepared based on the significant additional
information from a two-year underground, in-fill drilling program completed
in 1995. Geological assessment of the drilling data was completed in the
third quarter of 1996. Indications are that mining zones will be narrower
than previously estimated leading to a reduced scale of operations and more
costly mining methods.
The revised feasibility study will incorporate a new mine plan and address
the submarine tailings disposal method currently under consideration by the
U.S. Environmental Protection Agency. The extent to which narrower mining
widths, a smaller operation and required environmental changes would
adversely affect the economics of the project is not yet clear. The revised
feasibility study is expected to be completed at year's end.
In September 1996, the Alaska Supreme Court ruled that the company's large
mine permit was improperly issued by the City and Borough of Juneau (CBJ)
for the procedural reason that by deferring approval of the tailings
disposal system, the CBJ failed to consider the total impact of the project
as required by the city's code. In as much as the originally proposed
method of tailings disposal has been superseded by consideration of
submarine tailings disposal, the company planned for a major amendment of
the permit with attendant hearings and administrative consideration after
completion of the Supplemental Environmental Impact Statement. Thus, the
court decision, which did not involve a substantive review of the project,
provides guidance on the correct procedure for the next consideration by
the CBJ. The decision is not expected to delay the permitting schedule of
the company.
See also note 13a to the company's interim consolidated financial
statements.
U.S. Mining Law Revision
The U.S. Congress recessed in October 1996 without any revision of federal
mining law. What proposals may be introduced in the next Congress, which
convenes in January 1997, and what, if
32
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 1996
(U.S. dollars)
anything is enacted, are speculative and will be largely determined by the
outcome of the congressional and presidential elections in November 1996. If
proposals are introduced in the new Congress, its consideration probably will
include issues of royalty, patenting, land use and environmental protection.
CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
With the exception of historical matters, the matters discussed in this report
are forward looking statements that involve risks and uncertainties that could
cause actual results to differ materially from targeted or projected results.
Such forward looking statements include statements regarding targets for gold
and silver production, cash operating costs and certain significant expenses,
percentage increases and decreases in production from the company's principal
mines, schedules for completion of detailed feasibility studies and initial
feasibility studies, potential increases in reserves and production, the timing
and scope of future drilling and other exploration activities, expectations
regarding receipt of permits and commencement of mining or production,
anticipated recovery rates and potential acquisitions or increases in property
interests. Factors that could cause actual results to differ materially
include, among others, changes in gold, silver and copper prices, unanticipated
grade, geological, metallurgical, processing or other problems, from those
expected, results of current exploration activities, results of pending and
future feasibility studies, changes in project parameters as plans continue to
be refined, political, economic and operational risks of foreign operations,
availability of materials and equipment, the timing of receipt of governmental
permits, force majeure events, the failure of plant, equipment or processes to
operate in accordance with specifications or expectations, accidents, labor
relations, delays in start-up dates, environmental costs and risks, the outcome
of acquisition negotiations and general domestic and international economic and
political conditions, as well as other factors described herein or in the
company's filings with the U.S. Securities and Exchange Commission. Many of
these factors are beyond the company's ability to predict or control. Readers
are cautioned not to put undue reliance on forward-looking statements.
33
<PAGE>
ECHO BAY MINES LTD.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Alaska-Juneau
During 1994, the U.S. Attorney began an 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 also "Management's Discussion and Analysis - Recent Developments -
Development Properties" for additional comments regarding Alaska-Juneau.
Summa
See note 13(b) to the interim consolidated financial statements.
Other
The company is also engaged in routine litigation incidental to its business.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K Filed on July 31, 1996, related to the completion
of the aforementioned Santa Elina transaction.
Filed on August 5, 1996 amending the Form 8-K
filed on July 31, 1996.
Filed on August 19, 1996 related to the provision
for McCoy/Cove pit wall stabilization.
34
<PAGE>
ECHO BAY MINES LTD.
SIGNATURE
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)
October 30, 1996
- - ---------------------------
Date
/s/ G. Tywoniuk
----------------------------------------------
G. TYWONIUK
Vice President, Controller and
Principal Accounting Officer
35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements included in Echo Bay Mines Ltd. Form 10-Q for the nine
months ended September 30, 1996 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000722080
<NAME> ECHO BAY MINES LTD.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 145,039
<SECURITIES> 0
<RECEIVABLES> 13,213
<ALLOWANCES> 0
<INVENTORY> 41,007
<CURRENT-ASSETS> 206,338
<PP&E> 640,523
<DEPRECIATION> 389,903
<TOTAL-ASSETS> 940,084
<CURRENT-LIABILITIES> 211,656
<BONDS> 46,580
0
0
<COMMON> 709,510
<OTHER-SE> (107,771)
<TOTAL-LIABILITY-AND-EQUITY> 940,084
<SALES> 257,772
<TOTAL-REVENUES> 257,772
<CGS> 160,464
<TOTAL-COSTS> 247,746
<OTHER-EXPENSES> 80,816
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,561
<INCOME-PRETAX> (72,351)
<INCOME-TAX> 823
<INCOME-CONTINUING> (73,174)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (73,174)
<EPS-PRIMARY> (.55)
<EPS-DILUTED> (.55)
</TABLE>
