<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 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)
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 executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 714-8600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class 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]
Aggregate market value of the voting securities held by non-affiliates
of the registrant at January 31, 1997 . . . . . . . . . . . . U.S.$897,111,531
----------------
Number of common shares outstanding as of January 31, 1997 . . . 139,357,131
-----------
================================================================================
<PAGE> 2
TABLE OF CONTENTS
PAGE
PART I
<TABLE>
<S> <C>
ITEMS 1 AND 2--BUSINESS AND PROPERTIES . . . . . . . . . . . . . . . . . . 1
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
OPERATIONS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Gold and Silver Production . . . . . . . . . . . . . . . . . . . . . 2
Production Costs . . . . . . . . . . . . . . . . . . . . . . . . . . 2
RESERVES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Change in Proven and Probable Reserves . . . . . . . . . . . . . . . 4
OTHER MINERALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . 4
CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 . . . . . . . . . . . . . . . 6
MCCOY/COVE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Geology and Ore Reserves . . . . . . . . . . . . . . . . . . . . . . 8
Mining and Processing . . . . . . . . . . . . . . . . . . . . . . . . 8
ROUND MOUNTAIN . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Geology and Ore Reserves . . . . . . . . . . . . . . . . . . . . . .11
Mining and Processing . . . . . . . . . . . . . . . . . . . . . . . .11
LUPIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Geology and Ore Reserves . . . . . . . . . . . . . . . . . . . . . .14
Mining and Processing . . . . . . . . . . . . . . . . . . . . . . . .14
Supplies, Utilities and Transportation . . . . . . . . . . . . . . .15
Water Supply and Waste Disposal . . . . . . . . . . . . . . . . . . .15
KETTLE RIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Geology and Ore Reserves . . . . . . . . . . . . . . . . . . . . . .16
Mining and Processing . . . . . . . . . . . . . . . . . . . . . . . .17
Lamefoot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
K-2 Project--Exploration and Development . . . . . . . . . . . . . .17
CONSTRUCTION PROGRAMS . . . . . . . . . . . . . . . . . . . . . . . . .18
Aquarius . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Paredones Amarillos . . . . . . . . . . . . . . . . . . . . . . . . .19
DEVELOPMENT PROGRAMS . . . . . . . . . . . . . . . . . . . . . . . . .21
Kingking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Santa Elina . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
EXPLORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
ALASKA-JUNEAU . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
SUNNYSIDE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
OTHER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Precious Metal Sales and Hedging Activities . . . . . . . . . . . . .24
Government Regulation . . . . . . . . . . . . . . . . . . . . . . . .25
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30
Executive Officers of the Registrant . . . . . . . . . . . . . . . .31
Insurance and Mining Risks . . . . . . . . . . . . . . . . . . . . .32
Supplies, Utilities and Transportation . . . . . . . . . . . . . . .32
Waste Disposal . . . . . . . . . . . . . . . . . . . . . . . . . . .32
Royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
History of the Company . . . . . . . . . . . . . . . . . . . . . . .33
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Mining and Processing . . . . . . . . . . . . . . . . . . . . . . . .33
Uncertainty of Reserve and Other Mineralization Estimates. . . . . . .34
Gold and Silver Price Volatility . . . . . . . . . . . . . . . . . .35
Exploration and Development . . . . . . . . . . . . . . . . . . . . .35
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
Insurance and Mining Risks . . . . . . . . . . . . . . . . . . . . .35
Governmental Regulation . . . . . . . . . . . . . . . . . . . . . . .36
Risk of International Operations . . . . . . . . . . . . . . . . . .36
Title to Properties . . . . . . . . . . . . . . . . . . . . . . . . .37
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . . .37
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
GOLD PRICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
SILVER PRICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
EXCHANGE RATES . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
CONVERSION TABLE . . . . . . . . . . . . . . . . . . . . . . . . . . .42
MINE PROCESSING . . . . . . . . . . . . . . . . . . . . . . . . . . . .42
ITEM 3--LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . .45
ALASKA-JUNEAU . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
SUMMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
OTHER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . .45
PART II
ITEM 5--MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED
SHAREHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . .46
MARKET INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . .46
DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46
CERTAIN TAX MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . .47
United States Federal Income Tax Considerations . . . . . . . . . . .47
Canadian Federal Income Tax Considerations . . . . . . . . . . . . .47
ITEM 6--SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . .47
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . .49
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . .49
CAPITAL, EXPLORATION AND DEVELOPMENT SPENDING . . . . . . . . . . . . .53
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES . . . . . . . . .53
COMMITMENTS AND CONTINGENCIES . . . . . . . . . . . . . . . . . . . . .54
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . .56
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . .56
QUARTERLY FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . .86
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . .86
PART III
ITEM 10--DIRECTORS OF THE REGISTRANT . . . . . . . . . . . . . . . . . . .86
ITEM 11--EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . .86
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . .86
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . .86
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . .87
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .89
</TABLE>
iii
<PAGE> 5
PART I
ITEMS 1 AND 2--BUSINESS AND PROPERTIES
INTRODUCTION
In this report, the "company" refers to Echo Bay Mines Ltd. and its
subsidiaries unless the context specifies otherwise. The company's financial
statements are presented in accordance with generally accepted accounting
principles in Canada. In this report, all dollar amounts are expressed in U.S.
dollars unless specified otherwise.
The company is a major North American mining company which in recent years has
broadened its interests to development properties located in Mexico, Brazil and
the Philippines and exploration properties in North America, Central America,
South America, West Africa and the Philippines. The company mines, processes
and explores for gold. The company also produces a significant amount of silver
at its McCoy/Cove mine in Nevada, and certain of its development properties
include copper mineralization. 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 Nunavut Settlement Area of the Northwest Territories, Canada 100%
Kettle River Washington, U.S.A. 100%
- ---------------------------------------------------------------------------------------------------
</TABLE>
In January 1997, the company decided to bring two new gold mines into
production, Aquarius in Canada and Paredones Amarillos in Mexico. The company
expects to begin construction on both of these mines in 1997. See "Construction
Programs--Aquarius" and "--Paredones Amarillos."
In 1996, the company produced a total of 768,919 ounces of gold at an average
cash operating cost of $254 per ounce. 1996 silver production was 7,102,348
ounces. In 1996, the company reported a net loss of $176.7 million on revenues
of $337.3 million, after expensing $63.6 million on exploration and
development, a provision of $77.1 million on the company's Alaska-Juneau
development property and a $30.0 million provision for pit wall stabilization
at the company's McCoy/Cove mine. At December 31, 1996, the company had 8.6
million ounces of gold reserves and 53.9 million ounces of silver reserves.
For 1997, the company expects to produce from 700,000 to 725,000 ounces of gold
and about 7.0 million ounces of silver at an average cash operating cost of
$265 to $275 per ounce of gold. For a general identification of risk
considerations involved in the company's business, see "Cautionary 'Safe
Harbor' Statement under the United States Private Litigation Reform Act of
1995" and "Risk Factors."
1
<PAGE> 6
OPERATIONS SUMMARY
Gold and Silver Production
Gold and silver production for the last three years is provided below.
<TABLE>
<CAPTION>
GOLD PRODUCTION (OUNCES) 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
McCoy/Cove 271,731 310,016 359,360
Round Mountain (50%) 205,487 172,217 211,752
Lupin 166,791 172,110 180,052
Kettle River 124,910 100,419 66,782
- ----------------------------------------------------------------------------------------------
Total Gold 768,919 754,762 817,946
==============================================================================================
Percentage increase (decrease) from prior year 1.9% (7.7%) (6.4%)
==============================================================================================
<CAPTION>
SILVER PRODUCTION (OUNCES) 1996 1995 1994
--------- ----------- ----------
<S> <C> <C> <C>
Total Silver--all from McCoy/Cove 7,102,348 11,905,806 10,443,151
==============================================================================================
Percentage increase (decrease) from prior year (40.3%) 14.0% (16.1%)
==============================================================================================
</TABLE>
Production Costs
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.
<TABLE>
<CAPTION>
PRODUCTION COSTS PER OUNCE OF GOLD PRODUCED 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Direct mining expense $ 262 $ 231 $ 202
Deferred stripping and mine development costs (9) 1 4
Inventory movements and other 1 (3 ) 3
- ------------------------------------------------------------------------------------------------------------
Cash operating costs 254 229 209
Royalties 11 9 10
Production taxes 3 5 7
- ------------------------------------------------------------------------------------------------------------
Total cash costs 268 243 226
Depreciation 64 61 56
Amortization 34 36 33
Reclamation and closure 7 6 5
- ------------------------------------------------------------------------------------------------------------
Total production costs $ 373 $ 346 $ 320
============================================================================================================
Percent increase from prior year 7.8% 8.1% 1.6%
============================================================================================================
CASH OPERATING COSTS PER OUNCE OF GOLD 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
McCoy/Cove $ 271 $ 217 $ 194
Round Mountain 221 195 176
Lupin 299 296 274
Kettle River 201 230 253
- ------------------------------------------------------------------------------------------------------------
Company consolidated weighted average $ 254 $ 229 $ 209
============================================================================================================
Percentage increase from prior year 10.9% 9.6% --%
============================================================================================================
</TABLE>
2
<PAGE> 7
RESERVES
The following table presents ore reserves by property. These reserves were
estimated by the company. A description of each mine follows the "Reserves" and
"Other Mineralization" sections. See "Risk Factors" for a discussion of items
which could affect the company's reserve estimates.
Ore Reserves(1)
(thousands, except average grades)
(proven and probable at December 31)
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------------------------------
Average Contained Contained Contained
grade Contained ounces (the ounces (the ounces (the
(ounces ounces company's company's company's
Tons per ton) (100%) share) share) share)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GOLD
- ----
PRODUCING MINES:
McCoy/Cove 35,379 0.033 1,183 1,183 1,526 1,870
Round Mountain 476,509 0.019 9,050 4,525 5,000 3,900
Lupin 1,576 0.281 443 443 685 727
Kettle River 1,987 0.186 370 370 330 388
------------------------------------------------
Total producing mines 11,046 6,521 7,541 6,885
------------------------------------------------
DEVELOPMENT PROPERTIES:
Aquarius 21,730 0.059 1,277 1,277 -- --
Paredones Amarillos 39,954 0.032 1,292 775 -- --
Alaska-Juneau(2) -- -- -- -- 3,442 3,442
Kensington(3) -- -- -- -- -- 973
------------------------------------------------
Total development properties 2,569 2,052 3,442 4,415
------------------------------------------------
Total Gold 13,615 8,573 10,983 11,300
================================================
SILVER
- ------
McCoy/Cove 35,379 1.52 53,858 53,858 62,913 82,724
------------------------------------------------
Total Silver 53,858 53,858 62,913 82,724
================================================
</TABLE>
(1) The definitions of proven and probable ore are those used in Canada by
certain provincial securities regulatory authorities and are set forth in
National Policy No. 2-A. The 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. See "Glossary--Ore
Reserves".
(2) In 1996, the company decided not to proceed with development of its
Alaska-Juneau project, wrote off its entire remaining investment in the
project of $57.1 million and established a reserve of $20.0 million to
cover estimated reclamation and closure responsibilities. Alaska-Juneau's
proven and probable reserves of 3.4 million ounces of gold were removed
from the company's ore reserves as of December 31, 1996. See
"Alaska-Juneau."
(3) The company sold its interest in the Kensington development property during
1995.
The company reports extractable (minable) ore reserves. Reserves do not reflect
recovery losses in the milling or heap leaching processes, but do include
allowance for dilution of ore in the mining process.
Ore reserves at December 31, 1996, 1995 and 1994 were estimated based on a gold
price of $375 per ounce and a silver price of $5.00 per ounce.
3
<PAGE> 8
Change in Proven and Probable Reserves
The reconciliation of the change in proven and probable reserves from December
31, 1995 to December 31, 1996 is as follows.
<TABLE>
<CAPTION>
(millions of ounces)
Gold Silver
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Proven and probable reserves at December 31, 1995 11.0 62.9
-------------------------
Extensions, discoveries and adjustments
-- McCoy/Cove 0.1 3.9
-- Round Mountain (0.1) --
-- Lupin (0.1) --
-- Kettle River 0.1 --
Development property additions
-- Aquarius 1.3 --
-- Paredones Amarillos 0.8 --
Production(1) (1.1) (12.9)
-------------------------
Change in proven and probable reserves before write
off of Alaska-Juneau 1.0 (9.0)
-------------------------
Write off of Alaska-Juneau (3.4) --
-------------------------
Proven and probable reserves at December 31, 1996 8.6 53.9
=========================
</TABLE>
(1) Production represents previously modeled, in-situ ounces mined during 1996;
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."
OTHER MINERALIZATION
The following table presents other mineralization by property. Other
mineralization for producing mines and development properties is generally
estimated by the company. Chapada's other mineralization was based on estimates
prepared by Santa Elina Gold Corporation in December 1994. Kingking's other
mineralization was based on estimates prepared by Benguet Corporation
("Benguet") and included in its March 1994 pre-definitive feasibility study.
See "Development Programs--Santa Elina" and "--Kingking." The company acquired
options on these properties in 1995 and is conducting its own advanced
exploration and updated feasibility studies. The company expects to prepare its
own estimates of ore reserves and other mineralization on completion of this
work. The company's policy is to classify such estimates of mineralized
material as other mineralization until its own estimates have been completed.
4
<PAGE> 9
Other Mineralization(1)
(thousands, except average grades) (at December 31)
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------------------------------------
Tons Average Tons Average Tons Average
Tons (the grade (the grade (the grade
(100% company's (ounces company's (ounces company's (ounces
basis) share) per ton) share) per ton) share) per ton)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
GOLD
- ----
PRODUCING MINES:
McCoy/Cove 1,473 1,473 0.029 6,767 0.036 4,786 0.015
Round Mountain 105,915 52,958 0.015 36,340 0.021 19,219 0.022
Lupin (including Ulu) 3,365 3,365 0.310 3,640 0.300 1,703 0.265
Kettle River 282 282 0.181 1,097 0.186 1,361 0.193
------------------------------------------------------------------------------------
111,035 58,078 0.033 47,844 0.048 27,069 0.045
------------------------------------------------------------------------------------
DEVELOPMENT PROPERTIES(2):
Aquarius -- -- -- 23,465 0.055 -- --
Paredones Amarillos -- -- -- 16,275 0.040 -- --
Alaska-Juneau(3) -- -- -- 30,086 0.052 33,865 0.046
Kensington(4) -- -- -- -- -- 1,594 0.147
------------------------------------------------------------------------------------
-- -- -- 69,826 0.050 35,459 0.051
------------------------------------------------------------------------------------
DEVELOPMENT PROPERTIES UNDER OPTION (2):
Chapada (5) 113,400 56,700 0.012 56,700 0.012 -- --
Kingking(6) 225,000 168,750 0.017 168,750 0.017 -- --
------------------------------------------------------------------------------------
338,400 225,450 0.016 225,450 0.016
------------------------------------------------------------------------------------
Total Gold 449,435 283,528 0.019 343,120 0.027 62,528 0.048
====================================================================================
SILVER
- ------
PRODUCING MINES:
McCoy/Cove 1,473 1,473 1.36 6,767 0.65 4,786 0.50
------------------------------------------------------------------------------------
Total Silver 1,473 1,473 1.36 6,767 0.65 4,786 0.50
=====================================================================================
Tons Tons Tons
Tons (the Average (the Average (the Average
(100% company's grade company's grade company's grade
basis) share) (%) share) (%) share) (%)
------------------------------------------------------------------------------------
COPPER
- ------
DEVELOPMENT PROPERTIES UNDER OPTION (2):
Chapada(5) 113,400 56,700 0.43% 56,700 0.43% -- --
Kingking(6) 225,000 168,750 0.47% 168,750 0.47% -- --
------------------------------------------------------------------------------------
Total Copper 338,400 225,450 0.46% 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.
(2) The company's construction and production decision at its development
properties is dependent on the issuance of appropriate permits and the
ability of the company to obtain required financing. See "Development
Programs."
(3) In 1996, the company decided not to proceed with development of its
Alaska-Juneau project, wrote off its entire remaining investment in the
project of $57.1 million and established a reserve of $20.0 million to
cover estimated reclamation and closure responsibilities. Alaska-Juneau's
other mineralization of 30.1 million tons at an average grade of 0.052
ounces of gold per ton was removed from the company's ore reserves as of
December 31, 1996. See "Alaska-Juneau."
(4) The company sold its interest in the Kensington development property during
1995.
5
<PAGE> 10
(5) The company owns an option entitling it to acquire a 50% direct interest in
Chapada from Santa Elina Gold Corporation. In addition, the company owned
7% of the common shares of Santa Elina at year end 1995 and 51% of the
common shares at year end 1996, giving the company indirect Chapada
interests of 6% and 42% respectively. Until a decision is made on
exercising the option, the company will continue to show its Chapada
interest at 50%. The other mineralization was based on a gold price of $400
per ounce and a copper price of $1.00 per pound.
(6) The company owns an option to acquire up to a 75% interest in Kingking
through various foreign subsidiaries and alliances with Filipino
associates. The other mineralization was based on a gold price of $340 per
ounce and a copper price of $1.00 per pound.
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, access, transportation of
supplies or other problems, 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. See "Risk Factors" for items
which could affect forward-looking statements.
6
<PAGE> 11
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 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 from high-grade oxide ore. The mill was expanded to 10,000
tons per day during 1996.
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".
The following table sets forth operating data for the McCoy/Cove operation from
1992 through 1996.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gold produced (ounces) 271,731 310,016 359,360 $ 395,608 301,512
Silver produced (ounces) 7,102,348 11,905,806 10,443,151 $12,454,338 7,921,496
Mining cost/ton of ore and waste $ 0.72 $ 0.67 $ 0.68 $ 0.74 $ 0.72
Heap leaching cost/ton of ore $ 1.68 $ 2.32 $ 1.09 $ 1.29 $ 1.31
Milling cost/ton of ore $ 9.50 $ 10.67 $ 10.09 $ 9.28 $ 10.74
Production cost/ounce of gold
produced:
Direct mining expense $ 286 $ 206 $ 191 $ 187 $ 257
Deferred stripping cost (16) 15 6 3 (24)
Inventory movements and other 1 (4) (3) -- (3)
------------------------------------------------------------------------
Cash operating cost 271 217 194 190 230
Royalties 5 5 6 5 4
Production taxes 4 7 9 7 4
----------- ---------- --------- ----------- ----------
Total cash cost 280 229 209 202 238
Depreciation 71 53 48 41 53
Amortization 46 46 43 45 47
Reclamation 8 5 5 5 4
----------- ---------- --------- ----------- ----------
Total production costs $ 405 $ 333 $ 305 $ 293 $ 342
-------- --------- -------- ---------- ---------
Average gold-to-silver price ratio(1) 75:1 74:1 73:1 85:1 87:1
Capital expenditures (millions) $ 7.3 $ 8.6 $ 5.2 $ 6.7 $ 24.4
Deferred (applied) mining
expenditures (millions) $ 6.0 $ (7.3) $ (3.0) $ (1.5) $ 9.5
Heap leached:
Ore processed (tons/day) 16,671 11,966 21,682 24,090 24,806
Days of operation 364 364 364 371 364
Total ore processed (000 tons) 6,068 4,355 7,892 8,938 9,029
Gold grade (ounce/ton) 0.018 0.018 0.013 0.017 0.014
Silver grade (ounce/ton) 0.27 0.49 0.48 0.88 0.60
Gold recovery rate (2) (2) (2) (2) (2)
Silver recovery rate (2) (2) (2) (2) (2)
Gold recovered (ounces) 66,834 59,910 66,617 100,136 77,550
Silver recovered (ounces) 513,227 877,463 940,652 2,406,939 1,130,857
Milled:
Ore processed (tons/day) 9,031 7,275 7,307 7,708 6,794
Days of operation 364 364 364 371 364
Total ore processed (000 tons) 3,287 2,648 2,660 2,860 2,473
Gold grade (ounce/ton) 0.086 0.113 0.140 0.113 0.110
Silver grade (ounce/ton) 3.14 5.27 5.29 4.62 4.55
Gold recovery rate (%) 79.5 82.4 80.3 90.0 83.6
Silver recovery rate (%) 73.5 78.8 70.1 71.0 65.0
Gold recovered (ounces) 204,897 250,106 292,743 295,472 223,962
Silver recovered (ounces) 6,589,121 11,028,343 9,502,499 10,047,399 6,790,639
=======================================================================
</TABLE>
7
<PAGE> 12
(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) 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
Gold deposition in the McCoy pit is 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 limestone of the Augusta Mountain
Formation and by conglomerate/sandstone of the Panther Canyon Formation.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
McCoy/Cove Mine
Ore Reserves(1)
December 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Tonnage Average grade Content(2)
(000's short tons) (ounces per ton) (000's ounces)
------------------ ---------------- --------------
Gold Silver Gold Silver
---- ------ ---- ------
<S> <C> <C> <C> <C> <C>
Cove Pit 19,895 0.039 2.21 767 43,965
West Contact of McCoy Pit 10,557 0.020 -- 208 --
Stockpiles 4,927 0.042 2.01 208 9,893
- ---------------------------------------------------------------------------------------------------------------------------
Proven and Probable--1996 35,379 0.033 1.52 1,183 53,858
===========================================================================================================================
Proven 19,660 0.036 1.62 712 31,861
Probable 15,719 0.030 1.40 471 21,997
- ---------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable 1996 35,379 0.033 1.52 1,183 53,858
===========================================================================================================================
Total Proven and Probable--1995 47,221 0.032 1.33 1,526 62,913
===========================================================================================================================
</TABLE>
(1) See "Reserves" as to the estimation of proven and probable ore reserves.
(2) 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 72% for gold and 61% for silver.
The gold-equivalent cut-off grades are 0.006 ounce per ton for oxides and 0.034
ounce per ton for sulfides.
The prospective waste-to-ore ratio is 2.8:1.
Mining and Processing
Ore and waste rock was mined at a rate of 174,000 tons per day in 1996, a
slight increase over the 173,000 tons per day in 1995. All material requires
drilling and blasting prior to excavation. The open pit mining operation
employs four 23- yard hydraulic mining shovels, one 23-yard wheel loader, ten
150-ton and ten 190-ton mechanical haul trucks, and four 250-ton electric haul
trucks. Gold recovery from ore occurs from a 10,000 ton per day mill and from
crush and run of mine heap leaching operations.
The mining rate exceeds the capacity of the mill and heap leach operations, and
resulted in the stockpiled ore increasing to 4.9 million tons in 1996 from 2.5
million tons in 1995. The company expects the stockpiled ore to continue to
increase through 1999, when the mining operations will be completed. Processing
of the stockpiled ore will continue through 2001.
8
<PAGE> 13
The company mines at this high rate to minimize the time and expense required
to keep the Cove pit dewatered. Water pumped out of the Cove pit averaged
16,000 gallons per minute at the end of 1996. Water flows are projected to
increase in future years. The company uses infiltration ponds for water pumped
from the mine.
The company purchased four additional 190-ton haul trucks in 1996 for $4
million. The additional trucks were necessary for the mining of the West
Contact of the McCoy pit and to offset the longer haul routes from the Cove
pit.
A 10,000 ton per day mill utilizes flotation and agitation leach circuits to
recover gold and silver from high grade oxide ore and sulfide ores not amenable
to heap leaching. The mill was expanded in 1996 from 7,500 tons per day. The
expansion cost $4 million and has resulted in improved recoveries of sulfide
ore by increasing processing time. For a general description of McCoy/Cove's
mining and mill recovery process, see page 43.
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 less oxide and more sulfide ore in 1996 compared to 1995.
Mill throughput averaged 9,031 tons per day in 1996 compared to 7,275 in 1995.
Gold and silver production decreased from 1995 due to lower grades and
recoveries on the sulfide ore milled.
Heap leach gold production was up from 1995 due to more tons being processed.
The heap leach crusher averaged 10,168 tons per day in 1996 compared to 9,893
tons per day in 1995 with the balance of lower grade heap leach ore being
processed uncrushed, for a total of 16,671 tons per day in 1996 versus 11,966
tons per day in 1995. The increase is due to the higher quantity of ore mined
in 1996. Although the 1996 mining rate was similar to the rate in 1995, a
greater percentage of the 1996 material was ore compared to 1995. Heap leach
silver production decreased in 1996 compared to 1995 due to lower grades.
During 1996, the company recorded a $30.0 million provision related to the
estimated costs to remove waste rock from an unstable portion of the Cove pit
wall. The cost estimate underlying 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 the stabilization plan is finalized. This plan
could affect a portion of the McCoy/Cove reserves, if it is determined that the
cost to remove waste rock renders the portion uneconomic.
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, meant lower production levels in 1996. Production is
expected to continue to decrease over the remaining life of the mine.
In 1997, McCoy/Cove is expected to produce about 15-20% less gold compared to
the 271,731 ounces produced in 1996. Silver production is expected to be about
the same as the 7.1 million ounces produced in 1996. The decrease in gold
production is due to the expected lower grades of gold in 1997. See "Cautionary
'Safe Harbor' Statement under the United States Private Securities Litigation
Reform Act of 1995" and "Risk Factors."
9
<PAGE> 14
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 24,968 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 Regulation".
The following table sets forth operating data for the Round Mountain operation
from 1992 through 1996. The company's share of production is 50% of the ounces
shown.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gold produced (ounces) 410,974 344,434 423,504 374,694 370,585
Mining cost/ton of ore and waste $ 0.69 $ 0.61 $ 0.53 $ 0.60 $ 0.62
Heap leaching cost/ton of ore $ 0.80 $ 0.65 $ 0.66 $ 0.91 $ 1.54
Production cost/ounce of gold produced:
Direct mining expense $ 228 $ 218 $ 156 $ 205 $ 204
Deferred stripping cost (2) (23) 8 (7) 5
Inventory movements and other (5) -- 12 3 4
------------ ----------- ---------- ----------- -----------
Cash operating cost 221 195 176 201 213
Royalties paid 32 31 32 26 24
Production taxes 4 4 8 5 3
------------ ----------- ---------- ----------- -----------
Total cash cost 257 230 216 232 240
Depreciation 51 62 51 67 49
Amortization 18 20 20 20 19
Reclamation 5 5 4 4 3
------------ ----------- ---------- ----------- -----------
Total production costs $ 331 $ 317 $ 291 $ 323 $ 311
------------ ----------- ----------- ----------- -----------
Capital expenditures (millions)(1) $ 17.5 $ 11.7 $ 8.7 $ 6.6 $ 12.4
Deferred (applied) mining
expenditures (millions)(1) $ 0.4 $ 4.0 $ (1.) $ 1.3 $ (0.9)
Heap leached--Reusable Pad:
Ore processed (tons/day) 27,737 22,490 18,980 28,329 46,562
Days of operation 354 354 355 361 355
Total ore processed (000 tons) 9,819 7,961 6,738 10,227 16,530
Grade (ounce/ton) 0.036 0.034 0.040 0.033 0.036
Recovery rate (%) 66.1 70.9 78.7 69.4 58.1
Gold recovered (ounces) 231,420 192,052 216,710 256,784 311,701
Heap leached--Dedicated Pad:
Ore processed (tons/day) 87,706 66,197 54,161 39,379 --
Days of operation 354 354 355 361 --
Total ore processed (000 tons) 31,048 23,434 19,227 14,216 --
Grade (ounce/ton) 0.011 0.012 0.014 0.014 --
Recovery rate (%) (2) (2) (2) (2) --
Gold recovered (ounces) 167,004 138,700 173,544 62,368 --
High Grade Ore processed: (3)
Gold recovered (ounces) 12,550 12,244 33,052 53,376 52,020
Other:
Gold recovered (ounces) -- 1,438 198 2,166 6,864
- ---------------------------------------------------------------------------------------------------------------------
</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.
10
<PAGE> 15
Geology and Ore Reserves
Gold mineralization in the Round Mountain deposit 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.
- --------------------------------------------------------------------------------
Round Mountain Mine
Ore Reserves(1)(2)
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Average grade
Tonnage of gold Gold content(3)
(000's short tons) (ounces per ton) (000's ounces)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Round Mountain pit 326,141 0.022 7,337
Offloads and heap leach stockpiles (4) 147,843 0.011 1,612
Mill stockpiles 2,525 0.040 101
- -------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1996(5) 476,509 0.019 9,050
=============================================================================================================
Proven 370,649 0.019 6,863
Probable 105,860 0.021 2,187
- -------------------------------------------------------------------------------------------------------------
Total Proven and Probable--1996(5) 476,509 0.019 9,050
=============================================================================================================
Total Proven and Probable--1995 508,820 0.020 10,000
=============================================================================================================
</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) 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 1996 was 66.1%. The eventual recovery rate for the
dedicated pad is estimated to be approximately 50%.
(4) The offloads consist of approximately 106 million tons of previously
crushed, leached and rinsed ore. The heap leach stockpiles consist of
approximately 42 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.
(5) Total proven and probable reserves include 1,598,000 ounces of gold of
which 85% is anticipated to be recovered through a milling process. The
construction of the mill began in 1996 and is expected to be completed in
the third quarter of 1997.
The cut-off grades are 0.006 ounce of gold per ton for oxides and 0.010 ounce
per ton for non-oxides.
The prospective waste to ore ratio of pit ore is 1.55:1.
Mining and Processing
Ore and waste rock was mined at a rate of approximately 164,000 tons per day in
1996 compared to 170,000 tons per day in 1995. The decrease was due to the
reallocation of equipment to the movement of heap leach stockpiles to the
dedicated pads in 1996. 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 eleven 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. In 1997, a mill also will be used to
process ore as discussed below. Beginning in 1993 the company began processing
the lower-grade ore on the run-of-mine leach pads. Recovery rates for crushed
ore have 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
11
<PAGE> 16
excavated within the main Round Mountain ore body. The gravity plant is
expected to produce 8,000 ounces in 1997.
During 1996, the joint venture began construction of an 8,000 ton per day mill
to treat higher-grade unoxidized ore. The mill is expected to cost about $68
million (the company's share, $34 million). This facility is expected to
recover up to 85% of the gold contained in unoxidized ores by employing gravity
concentration and cyanide leaching. The mill is expected to be completed in the
third quarter of 1997.
Currently, gold recovery occurs almost entirely from heap leaching.
Higher-grade ore is crushed to less than 3/4 inches at a rate of 28,000 tons
per day and conveyed to two parallel 1.5 million square foot asphalt reusable
leach pads. This ore is leached for approximately 110 days, rinsed, removed and
placed on the dedicated leach pad and releached there. Most of the contained
gold is released on the reusable pad within the first 90 days, but Round
Mountain has determined that sufficient gold values remain to justify
additional leaching on the low-cost dedicated pad over a period of years. For
a general description of Round Mountain's mining and heap-leach recovery
process see page 44.
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) and ore removed from the
reusable leach pad is transported directly to a dedicated run-of-mine leach pad
at a rate which averaged 88,000 tons per day in 1996. 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.
In 1997, Round Mountain is expected to produce about 5% less gold compared with
the 410,974 ounces (the company's share, 205,487) produced in 1996. See
"Cautionary 'Safe Harbor' Statement under the United States Private Securities
Litigation Reform Act of 1995" and "Risk Factors."
12
<PAGE> 17
LUPIN
The Lupin mine is an underground operation located 250 miles northeast of
Yellowknife in the Nunavut Settlement Area of 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 property, 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 other mineralization at average grades of
0.320 ounces of gold per ton. The deposit is open on strike and down dip. In
1996, the company began a two year $19 million exploration program to further
explore and develop the deposit. Ulu ore is expected to be hauled to Lupin for
processing beginning in 1998, dependent on successful permitting and
development. This will allow the Lupin mill to run at approximately 2,000 tons
per day for at least four years. See "Cautionary 'Safe Harbor' Statement under
the United States Private Securities Litigation Reform Act of 1995" and "Risk
Factors."
The table below sets forth operating data for the Lupin mine from 1992 through
1996.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold produced (ounces) 166,791 172,110 180,052 217,504 214,482
Mining cost/ton of ore C$ 44.08 C$ 44.23 C$ 40.45 C$ 35.54 C$ 34.79
Milling cost/ton of ore C$ 12.39 C$ 12.26 C$ 12.03 C$ 12.27 C$ 13.49
Production cost/ounce of gold produced:
Canadian dollars:
Direct mining expense C$ 411 C$ 423 C$ 375 C$ 291 C$ 288
Deferred mine development (4) (22) (4) 5 1
Inventory movements and other 1 4 4 13 (3)
------- ------- ------- ------- ------
Cash operating cost C$ 408 C$ 405 C$ 375 C$ 309 C$ 286
U.S. dollars:
Cash operating cost US$ 299 US$ 296 US$ 274 US$ 240 US$ 238
Royalties -- -- -- -- --
Production taxes -- -- -- -- --
------- ------- ------- ------- ------
Total cash cost 299 296 274 240 238
Depreciation 71 68 64 59 57
Amortization 21 19 16 17 16
Reclamation 8 7 6 7 6
------- ------- ------- ------- ------
Total production costs $ 399 $ 390 $ 360 $ 323 $ 317
------- ------- ------- ------- ------
Capital expenditures (millions US$) $ 15.7 $ 14.5 $ 8.5 $ 4.5 $ 12.8
Deferred (applied) mining
expenditures (millions US$) $ 0.2 $ 2.8 $ 0.5 $ (0.9) $ (0.3)
Milled:
Ore processed (tons/day) 2,111 1,986 2,241 2,297 2,043
Days of operation 364 364 364 371 364
Total ore processed (000 tons) 768 723 816 852 744
Grade (ounce/ton) 0.235 0.258 0.238 0.272 0.308
Recovery rate (%) 92.5 92.5 92.9 93.7 93.5
- --------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 18
Geology and Ore Reserves
Gold at the Lupin deposit occurs in a Z-shaped isoclinally folded iron
formation of Archean age. Gold is associated with pyrrhotite, arsenopyrite and
quartz.
- --------------------------------------------------------------------------------
Lupin Mine
Ore Reserves(1)
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Average grade
Tonnage of gold Gold content(2)
(000's short tons) (ounces per ton) (000's ounces)
<S> <C> <C> <C>
Center Zone 1,008 0.292 294
East Zone 78 0.337 26
West Zone 490 0.252 123
- -------------------------------------------------------------------------------------------------------------
Total Proven and Probable--1996 1,576 0.281 443
=============================================================================================================
Proven 1,450 0.280 406
Probable 126 0.292 37
- -------------------------------------------------------------------------------------------------------------
Total Proven and Probable--1996 1,576 0.281 443
=============================================================================================================
Total Proven and Probable--1995 2,445 0.280 685
=============================================================================================================
</TABLE>
(1) See "Reserves" as to the estimation of proven and probable ore reserves.
(2) 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 in 1996 was
92.5%.
The cut-off grade is 0.161 ounce of gold per ton at the upper levels of the
mine and 0.225 ounce of gold per ton at the lower 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 4,260 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. In 1995, Lupin incorporated "pastefill", which is
composed of mine tailings and cement, into the stoping sequence. During 1997,
shrinkage and mechanical cut and fill mining techniques will be investigated
and tested.
After the ore is mined, it is hoisted to the surface for processing and
recovery of gold in a 2,300 ton per day mill where the recovered gold is cast
in dore bars prior to being shipped off site.
The company expects to operate the mill at 2,000 tons per day during 1997,
compared to 2,111 tons per day in 1996. In 1997, Lupin is expected to produce
about the same amount of gold as the 166,791 ounces produced in 1996. See
"Cautionary 'Safe Harbor' Statement under the United States Private Securities
Litigation Reform Act of 1995" and "Risk Factors."
The ore grade at Lupin declines with depth, and the deposit becomes more
erratic. The Center Zone of the three-zoned ore body also tends to be narrower.
Additional ground support is required and longer truck haulage distances is a
factor as the depth increases. The company has changed its mining techniques
and backfill process to overcome the challenges of mining at depth. Mechanized
cut and fill mining techniques may afford an opportunity to better utilize
equipment and to improve profitability at depth. All of this causes slower and
more costly mining in the deeper levels of the mine.
14
<PAGE> 19
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 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 in the Nunavut
Settlement Area of the 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.
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.
Surface facilities at the Lupin mine include a 6,300-foot compacted gravel
airstrip with an instrument landing and navigation system and runway lighting.
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.
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 1996, approximately 38% of
tailings were placed underground as paste-backfill. 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.
15
<PAGE> 20
KETTLE RIVER
The Kettle River properties are located in Ferry County in the State of
Washington and cover approximately 13,665 acres through patented and unpatented
mining claims and fee lands.
The following table sets forth operating data for the Kettle River operation
from 1992 through 1996.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gold produced (ounces) (100%) 124,910 100,419 66,782 73,431 89,849
Gold produced (ounces) (the
company's share)(1) 124,910 100,419 66,782 73,431 62,894
Mining cost/ton of ore $ 21.12 $ 22.60 $ 11.06 $ 16.12 $ 21.77
Milling cost/ton of ore $ 11.96 $ 12.76 $ 13.54 $ 12.80 $ 12.66
Production cost/ounce of gold produced:
Direct mining expense $ 190 $ 237 $ 225 $ 281 $ 296
Deferred mine development -- -- -- --
6
Inventory movements and other 11 (7) 28 (6) (15)
------------ ----------- --------- ---------- -----------
Cash operating cost 201 230 253 275 287
Royalties 10 8 5 10 1
Production taxes 2 2 2 2 2
------------ ----------- --------- ---------- -----------
Total cash cost 213 240 260 287 290
Depreciation 59 74 95 76 79
Amortization 45 45 45 53 156
Reclamation 8 7 6 2 7
------------ ----------- --------- ---------- -----------
Total production costs $ 325 $ 366 $ 406 $ 418 $ 532
------------ ------------ ---------- ---------- ----------
Capital expenditures (millions)
(the company's share) $ 8.8 $ 9.5 $ 10.0 $ 7.9 $ 7.4
Deferred (applied) mining
expenditures (millions) $ -- $ -- $ -- $ -- $ --
Milled:
Ore processed (tons/day) 1,652 1,504 1,438 1,551 1,805
Days of operation 364 364 364 371 364
Total ore processed (000 tons) 601 548 523 575 657
Grade (ounce/ton) 0.240 0.212 0.149 0.146 0.155
Recovery rate (%) 86.5 86.6 85.6 87.7 87.9
- -----------------------------------------------------------------------------------------------------------------
</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
Ore reserves at Kettle River exist at the Lamefoot and K-2 deposits. At
Lamefoot, gold occurs near the contact between Permian age siliciclastic and
carbonate rocks and is associated with silicification, magnetite, hematite,
pyrrhotite and pyrite. At K-2, gold is contained in steeply dipping quartz
carbonate veins hosted by Eocene age volcanic rocks.
16
<PAGE> 21
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Kettle River
Ore Reserves(1)
December 31, 1996
- -------------------------------------------------------------------------------------------------------------
Average grade
Tonnage of gold Gold content(2)
(000's short tons) (ounces per ton) (000's ounces)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lamefoot 1,246 0.185 231
K-2 741 0.188 139
- -------------------------------------------------------------------------------------------------------------
Total Proven and Probable--1996 1,987 0.186 370
=============================================================================================================
Proven 1,291 0.189 244
Probable 696 0.181 126
- -------------------------------------------------------------------------------------------------------------
Total Proven and Probable--1996 1,987 0.186 370
=============================================================================================================
Total Proven and Probable--1995 1,602 0.206 330
=============================================================================================================
</TABLE>
(1) See "Reserves" as to the estimation of proven and probable ore reserves.
(2) 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 1996 was 86.5%.
Cut-off grades are 0.102 ounce of gold per ton at Lamefoot and
0.140 ounce of gold per ton at K-2.
Mining and Processing
At Kettle River, a series of deposits are mined to feed a central mill. Ore
milled in 1996 came principally from Lamefoot, although some development ore
from K-2 and some stockpiled ore from Overlook was also milled. 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 trucked to the Kettle River mill where the recovered
gold is cast into dore bars prior to shipping off site.
In 1997, Kettle River is expected to produce about 5-10% more gold compared to
the 124,910 ounces produced in 1996. See "Cautionary 'Safe Harbor' Statement
under the United States Private Securities Litigation Reform Act of 1995" and
"Risk Factors."
Lamefoot
Development of the Lamefoot project began during 1992 when the portal was
collared. By December 1994, 17,500 feet of drifting was complete. Lamefoot
achieved full production in June 1995, at a rate of 1,500 tons per day.
Longhole open stoping is utilized as the mining method, with delayed backfill.
Zones with ore widths of 50 feet utilize cemented backfill in primary stopes
and unconsolidated fill in secondary stopes. Zones under 50 feet in width are
filled with unconsolidated fill. Ore is removed from the stopes using remote
control muckers and hauled to the surface using 26-ton haul trucks. Total
Lamefoot ore production in 1996 was 546,317 tons. Ore production for 1997 is
expected to be 546,000 tons.
K-2 Project--Exploration and Development
In December 1994, surface excavation for building construction and portal
clearing commenced at K-2. The portal was collared in March 1995 and a total of
10,629 feet of development was completed by the end of 1996. Stope development
began in the fourth quarter of 1996 and production commenced in January 1997.
The mining method is similar to Lamefoot, longhole open stoping, but due to the
narrow widths, cemented fill is required in the South zone. Ore production for
1997 is expected to be 192,000 tons.
17
<PAGE> 22
CONSTRUCTION PROGRAMS
Aquarius
The company owns 100% of the Aquarius project which is located in the Macklem
Township 40 kilometers east of Timmins, Ontario, Canada. The City of Timmins is
centrally located in northeastern Ontario on Highway 101 approximately 700
kilometers, by road, northwest of Toronto. All-weather primary highways connect
with Thunder Bay to the west and North Bay, Sudbury and Toronto to the south. A
new one kilometer access road from the highway to the process plant area will
be constructed to the west of the existing access road.
The project site property is on a group of 12 patented claims that grant the
company fee simple title. The patents are part of a larger land package of
leased and staked claims that cover most of the northern portion of the Macklem
Township. Environmental work on the project commenced in May 1995 and the
company expects completion, to the point of obtaining the necessary project
permits, by October 1997.
Aquarius has 1,277,000 ounces of proven and probable gold reserves at December
31, 1996 (21.7 million tons of ore at an average grade of 0.059 ounce per ton)
including 348,000 ounces of proven gold reserves (5.5 million tons of ore at an
average grade of 0.063 ounce per ton) and 929,000 ounces of probable gold
reserves (16.2 million tons of ore at an average grade of 0.057 ounce per ton).
The reserves were based on a cutoff grade of 0.013 ounces per ton. The cutoff
grade was based on a price of $375 per ounce of gold. The gold recovery is
expected to be 95%. The waste-to-ore ratio is expected to be 5.6:1.
The 1996 ore reserves have been estimated by the company and the reserve
estimation methodology was verified by the company's external geological
engineering consultant FSS Canada Consultants Inc.
Aquarius is an Archean lode gold deposit with mineralization in carbonate
altered ultramafic rocks, associated felsic intrusives, and quartz veins in
talc-chlorite schists. Clay overburden 10 to 40 meters thick overlays 30 to 80
meters of glacial till. The "nuggety" style of gold mineralization at Aquarius
is characteristic of this deposit type and leads to difficulty in the
prediction of ore grades. This difficulty is addressed by: 1) extensive
drilling, 2) advanced geostatistical analysis with multiple techniques, 3)
cross validation with production data and independent estimates, and 4) review
of the results by an expert consultant.
The company will build a frozen earth barrier around the pit perimeter to
prevent groundwater from flowing into the pit from the surrounding water table.
The circumference of the freeze curtain will be 12,000 ft (2.25 miles or 3.66
km). Current plans include 494,000 linear feet of drilling in 1,900 holes
spaced 6.3 feet apart. This will allow an adequate distance between the holes
to provide a solid barrier, and it will allow the holes to penetrate the
bedrock which has little water flow. The process is a proven technology used
successfully in construction and underground mining for over 100 years. The
process involves circulating a brine solution, that is cooled with
refrigeration units, through the holes which will remove the heat from
surronding material and allow it to freeze. The company expects that it will
take approximately four months for this process to entirely freeze the wall to
prevent water from leaking through the glacial overburden.
The first significant stage of mining will be removal of the clay and sand
overburden. This will be followed in turn by sand, silt and clay overburden
removal and rock mining. The rock mining stage will produce all of the ore to
be milled. Because of the shape of the deposit, the pit will have two separate
bottoms with a ridge of waste rock separating them. Mining will be phased to
exploit the more southerly of the two segments first. This will permit some
backfilling of waste material from the excavation of the northerly segment.
The ore will be crushed in three stages so that approximately 80% of the ore
will be less than 3/8 inch in size. The secondary and tertiary crushers and all
interconnecting screens and conveyors are located indoors to minimize problems
with wet or frozen ore. The mill will contain both gravity and leach circuits.
Two centrifugal separators will process the ore that is amenable to recovery by
gravity
18
<PAGE> 23
separation techniques. A ball mill and a series of six agitated cyanide leach
tanks will process the ore not amenable to recovery by gravity separation
techniques. The mill has been designed to process 8,300 tons per day. Power
will be supplied to the project from Ontario Hydro, the main utility provider
in the province of Ontario. There will be two sources for water supply. Fresh
water will come from one or more wells located near the minesite development.
Water also will be reclaimed from the tailings area.
The average annual production rate is expected to be 166,000 ounces. Average
cash operating costs are expected to be $218 per ounce, depreciation and
amortization is expected to be $94 per ounce and reclamation is expected to be
$4 per ounce for a total production cost of $316 per ounce. See "Cautionary
'Safe Harbor' Statement under the United States Private Securities Litigation
Reform Act of 1995" and "Risk Factors."
During the operating phase of the mine, the company's workforce will consist of
94 people including a general manager overseeing the administration,
safety/security training, process mill and environmental departments. Mining
operations manpower will be supplied by a mining contractor.
Tree clearing and road construction can be started under the permits presently
in hand. The company expects to award detail design and engineering work for
the mill in February 1997; start construction in June 1997 in order to close in
the building before winter; and complete the mill in October 1998. The company
expects to start the freeze wall program in March 1997; receive mining permits
in October 1997; initiate freezing in December 1997; finish freezing and start
pit dewatering in April 1998; start overburden mining in May 1998; and haul the
first ore to the mill in November 1998. The first full year of operation will
be 1999. Initial capital is estimated to be $100 million which the company
expects to finance with a new $75 million unsecured corporate credit facility,
existing working capital and cash flow from the company's four existing gold
mines.
The company capitalized $6.1 million of Aquarius project expenditures in 1996
and $1.0 million in 1995. The company expects to capitalize construction costs
of $65 million and mine development costs of $4 million in 1997. The company
also incurred acquisition costs of $7.8 million in 1995.
Paredones Amarillos
The company owns 60% of the Paredones Amarillos project, located in the Mexican
state of Baja California Sur, 65 kilometers southeast of the state capital La
Paz which has a population of 140,000. The remaining 40% of the project is
owned by subsidiaries of Viceroy Resource Corporation ("Viceroy"). The
moderate, semi-arid climate provides an attractive environment for operations.
Steep hills with elevations ranging between 300 meters and 800 meters above sea
level characterize the terrain. The project covers an area of 12,757 hectares
held through 16 mining concessions controlled by the joint venture. Thirteen of
the concessions have been approved for exploration, two for exploitation and
one is pending. All relevant duties, fees and taxes for these concessions have
been paid, as required by law. The concessions provide the legal right to the
joint venture to proceed with mining activities.
The site can be accessed from paved state highways followed by 15 kilometers of
gravel road. The joint venture will upgrade the existing gravel road to provide
safe access to the proposed operation.
The joint venture has routinely received approvals for exploration activities.
The joint venture expects that Mexico's environmental agencies will similarly
approve the proposed mine development. Since Mexico has recently developed a
sophisticated system of environmental regulations, the joint venture has
maintained a continuous dialogue with agency staff to ensure that all
regulatory requirements are identified. The most significant environmental
permitting requirements include: receiving approval of a recently submitted
Environmental Impact Statement; obtaining a Change in Land Use permit; issuance
of a Construction License; and issuance of an Operating License.
Paredones Amarillos has 1,292,000 ounces of proven and probable gold reserves
(the company's share, 775,200 ounces) at December 31, 1996 (40.0 million tons
of ore at an average grade of
19
<PAGE> 24
0.032 ounce per ton) including 332,000 ounces of proven gold reserves (9.7
million tons of ore at an average grade of 0.034 ounce per ton) and 960,000
ounces of probable gold reserves (30.3 million tons of ore at an average grade
of 0.032 ounce per ton). The reserves were based on a cutoff grade of 0.015
ounce per ton. The cutoff grade was based on a price of $375 per ounce of gold.
The gold recovery rate is expected to be 91%.
The 1996 ore reserves have been estimated by the joint venture and the reserve
estimation methodology was verified by the joint venture's external geological
engineering consultant H. A. Simons Ltd.
The main ore host to the Paredones Amarillos mineralization is a 10 to 80 meter
thick northeast to east-west striking, 15 to 45 degree southeast dipping
cataclasite and mylonite unit. The cataclasite is a dense, competent rock
composed of approximately 50% crushed quartz and feldspar fragments in a matrix
of sericite and minor chlorite and fine-grained quartz. The cataclasite hosts
approximately 80% of the gold resource, the granodiorite 20%, and the diorite
only a minor fraction.
Ore and waste rock will be open pit mined from 10 meter high benches with an
expected waste-to-ore ratio of 4.15:1 using blasting followed by conventional
open pit methods. Current plans call for three 13.5-yard excavators and a
maximum of thirteen 95-ton rear dump haul trucks to be used. Ore will be
delivered to a primary gyratory crusher. The ore will then be reduced further
by means of a semiautogenous grinding mill and two ball mills. Following the
whole-ore-leach circuit, gold will be recovered using a carbon
adsorption-desorption recovery process. The barren (stripped of gold) solution
will be sent to the acidification, volatilization and recovery process to
recover cyanide, which will be recycled back to the leach cycle. The mill has
been designed to process 10,000 tons per day. The tailings impoundment
facilities will include the main embankment, a lined decant pond, the lined
impoundment pond, and a groundwater monitoring system.
The mine is expected to produce an average of 128,000 ounces of gold per year
(the company's share, 77,000 ounces). Average cash operating costs are
expected to be $223 per ounce, depreciation and amortization is expected to be
$108 per ounce and reclamation is expected to be $7 per ounce for a total
production cost of $338 per ounce. See "Cautionary 'Safe Harbor' Statement
under the United States Private Securities Litigation Reform Act of 1995."
The Comision Federal de Electricidad ("CFE") provides diesel-generated
electrical power to Baja California Sur through a grid. The joint venture will
construct a new 18 kilometer transmission line which will connect with the
existing line located to the north of the mine site.
The joint venture has initiated water exploration activities in August 1996
using a local firm. The company has met with the Comision Nacional del Agua
("CNA"), the regulatory body which grants water rights. The state also
maintains significant water rights. No water may be taken from any aquifer
without the appropriate water right, which stipulates the amount of water to be
taken and the particular aquifer from which the water may be drawn. The CNA has
provided a listing of well owners who are being contacted concerning the lease
or sale of a portion of their well rights. Proceeding with construction
requires obtaining sufficient water.
The joint venture expects that all employees will be Mexican nationals except
for the general manager, the operations manager and the mill manager. The
number of employees will range from 250 to 300 during the life of the mine.
The joint venture awarded the detail design and engineering work in February
1997 and expects to start detail engineering and limited procurement in
February 1997; start construction in July 1997 and commission the plant in
August 1998. The first full year of operations is expected to be 1999. Initial
capital cost of the Paredones Amarillos project is expected to be $111 million
(the company's share, $67 million). The company expects to finance its share
with a $36 million non-recourse project loan (subject
20
<PAGE> 25
to arrangement of satisfactory terms), existing working capital and the
operating cash flow from the company's four existing gold mines.
The company capitalized $6.6 million of Paredones Amarillos project
expenditures in 1996 and $1.2 million in 1995. The company expects to
capitalize construction costs of $44 million in 1997.
DEVELOPMENT PROGRAMS
Kingking
During 1995, the company and TVI Pacific Inc. ("TVI") formed alliances with
Filipino corporations to create Kingking Mines Inc. ("KMI"), a corporation
under the laws of the Republic of the Philippines. KMI has signed an option
agreement to acquire a 100% interest in the Kingking project after completion
of a bankable feasibility study and a $67.0 million payment in 1998. A
contingent payment of up to $18.0 million also would be payable if there were a
significant increase in mineralization at Kingking.
The company and its Philippine affiliates have an initial interest in the
option of 75%, but the agreements provide for the acquisition and disposition
of interests such that the interests of the company and its Philippine
affiliates ultimately could be between 60% and 100% of the Kingking project.
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 and its Philippine
affiliates' 75% share, 169 million tons) at average grades of 0.017 ounce 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
are being considered by KMI.
In 1995, KMI began an extensive two-year advanced exploration and confirmation
drilling program. By December 31, 1996, KMI had completed 45,400 meters of
drilling. An updated feasibility study is expected to be completed by KMI in
the second quarter of 1997. Drilling within the confines of the mineralized
area outlined by Benguet indicates significantly more tons are being found at
similar or slightly lower grades than those outlined by Benguet's earlier work.
Drilling on step-out targets is continuing to the areas where earlier work
indicated there is material richer in gold and leaner in Copper, Casagumayan
and Tiogdan, to identify potential extensions of the main deposit or satellite
deposits. Mapping, sampling and drilling are under way at two other targets,
Binutaan and Diat. The company capitalized $11.2 million of expenditures in
1996 and $2.9 million in 1995 related to the two-year work program. The company
expects to capitalize another $5 million of expenditures in 1997. The company
also incurred acquisition costs of $28.8 million in 1995.
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.
As part of its strategic alliance with TVI, the company purchased 14.0 million
common shares of TVI, representing 15.4% of TVI's common shares outstanding for
$13.0 million, of which $1.0 million has been recorded by the company as a
premium for property options.
KMI'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 KMI's purchase option, the issuance
of appropriate permits and the ability of KMI to obtain required financing.
21
<PAGE> 26
Santa Elina
On July 16, 1996, the company completed a series of transactions with Santa
Elina Gold Corporation ("Santa Elina") and Sercor Ltd. ("Sercor", a private
company that owned 67% of Santa Elina). The transactions enabled the company to
increase its ownership of the outstanding common shares of Santa Elina from 7%
to 50% by issuing 8,830,915 common shares. The company increased its ownership
of Santa Elina to 51% through additional share purchases totaling $7.0 million
($6.0 million in the fourth quarter of 1996 and $1.0 million in the first
quarter of 1997). See note 3 to the company's consolidated financial
statements.
Santa Elina has made claims on over 25 million hectares. Most of this land is
located on known gold belts throughout Brazil but has not been extensively
explored. Santa Elina's new management team is prioritizing the exploration
program to maximize the value of the assets. Exploration joint ventures are
being considered with qualified third parties where appropriate.
Chapada Development Property
Santa Elina holds an 83% interest (the company's share, 42.3%) in this
large-tonnage copper and gold deposit in Brazil. The company has an option to
purchase a 50% direct interest in this property from Santa Elina, which, if
exercised, would increase the company's interest in the property to 66.8%. Upon
exercise of 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 50% direct interest in the proven and probable reserves, as reported
in the final feasibility study. If the option is exercised and additional
reserves are later mined, the company would pay Santa Elina a net smelter
return royalty of 3.5% on the company's 50% direct interest in the revenue
after the initial reserves identified in the feasibility study are depleted.
Until a decision is made on exercising the option, the company will continue to
show its Chapada interest at 50%.
Santa Elina has outlined 113 million minable tons of mineralized material (the
company's 50% share, 56.7 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.
In 1996, Santa Elina began a work program to further expand the currently
outlined mineralization. At December 31, 1996, Santa Elina has completed a
total of 37,500 meters of drilling. A detailed feasibility study is expected to
be completed in mid 1997. Among the issues being addressed in the study is the
cost of transporting concentrates 1,000 miles to a deepwater port. Santa Elina
spent $9.3 million on the Chapada property during 1996 (the company's share
since the July 16, 1996 acquisition, $6.1 million) and expects to capitalize
another $1 million in 1997 (the company's share, $0.5 million).
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 properties
Santa Elina owns 83% (the company's share, 42.3%) of Seo Francisco, a gold
target located near the border between Brazil and Bolivia. During late 1996
and early 1997, four drill rigs have been working to better define the
mineralization. Initial metallurgical testing indicates good gold recoveries
from heap leaching. This information will be incorporated into an initial
feasibility study that is scheduled for completion in late 1997.
Santa Elina owns 83% (the company's share, 42.3%) of Fazenda Nova, a gold
target located in central Brazil. Santa Elina has identified six targets at
Fazenda Nova. During late 1996 and early 1997, five drill rigs have been
working at the site. In 1997, Santa Elina will prepare an initial feasibility
study on Lavrinha, the first target drilled, and begin drilling at the five
other identified targets.
22
<PAGE> 27
Santa Elina expects to complete a detailed feasibility study on heap leaching
at the Seo Vicente mine in early 1997. Santa Elina also will evaluate a higher
grade underground target in 1997. This property's existing operations were
temporarily suspended in January 1997 and the mine will be reopened only if the
new study shows that the mine can be operated profitably.
Work is also being conducted on a hydropower plant proposed for the Guapore
River as a potential source of low-cost power for several of Santa Elina's gold
projects in Brazil.
The company included $4.4 million of Santa Elina spending in exploration
expense in 1996.
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. In addition to the United States and Canada, the company conducted
exploration in Mexico, Central America, South America, the Philippines and West
Africa in 1996.
In 1996, the company conducted exploration drilling on the Kilgore property in
Idaho and increased its ownership to 100% from 51%. Through its 24% interest in
Etruscan Enterprises Ltd., an initial feasibility study on the Koma Bangou
property in Niger, West Africa, was completed, but the company no longer holds
any interest in the project, as the company sold its interest in Etruscan in
the same transaction that increased its ownership of the Kilgore property.
The company established a strategic alliance and joint venture with Minefinders
Corporation, an exploration company that holds the Dolores project, located in
the State of Chihuahua, Mexico. Drilling activity has been underway since
August 1996. Subject to certain conditions, the company is entitled to acquire
a 60% interest in Dolores. The company also owns a 15.0% interest in
Minefinders.
The company has a 50% interest in the Youga project in Burkina Faso and the
adjacent Nangodi property located directly across the border in Ghana. The
company's joint venture partner is Ashanti Goldfields Company, who is the
operator.
The company established joint ventures on the Huaco Cucho and the Patacancha
properties in Peru. In 1996, 2,000 meters of drilling have been completed on
these properties. The company can earn a 50% interest in each property.
Exploration offices have been established in Mexico, Chile, Brazil, Peru and
the Philippines, in addition to the existing offices in the U.S. and Canada, to
conduct regional activities effectively.
Exploration expense totaled $46.6 million in 1996 compared to $46.5 million in
1995 and $27.1 million in 1994. The budget for exploration expense for 1997 is
currently $31 million, dependent on opportunities, of which approximately 70%
is expected to be spent outside the U.S. and Canada. A similar percentage was
spent outside the U.S. and Canada during 1996 and 1995. The company conducts
its own exploration and participates in farm in/farm out exploration
arrangements.
ALASKA-JUNEAU
At December 31, 1996, the company wrote off its entire remaining investment in
the Alaska-Juneau project of $57.1 million, and established a reserve of $20.0
million to cover estimated reclamation and closure responsibilities. Actual
spending related to reclamation and closure costs may differ from the current
estimate of $20.0 million. The provision for future reclamation and closure
costs is reviewed periodically and adjusted as additional information becomes
available. Alaska-Juneau's reserves of 3.4 million ounces and other
mineralization of 30.1 million tons at an average grade of 0.052 ounce of gold
23
<PAGE> 28
per ton were removed from the company's total gold reserves and other
mineralization as of December 31, 1996.
The company's decision to write off its entire remaining investment in the
Alaska-Juneau project resulted from a new feasibility study completed in
December 1996. The study was based on a new mine plan incorporating extensive
geological information from a two-year underground drilling program. The
significantly increased information indicated much less minable material at
only a marginally higher grade. The new mining plan developed from this
information incorporated narrower mining zones than previously planned, a
reduced scale of operations and higher-cost mining methods. The lower reserves
and higher operating costs could not be offset by savings from the newer
concept of submarine tailings disposal. In total, these factors rendered the
project uneconomic as currently designed.
SUNNYSIDE
In 1996, Sunnyside Gold Corporation (SGC), an indirect wholly owned subsidiary
of the company, finalized 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. SGC
estimates that it will take a minimum of seven years for all of the conditions
of the consent decree agreement to be fulfilled by both parties. SGC has $10.0
million accrued at December 31, 1996 for future reclamation costs at the
Sunnyside mine. SGC's provision for future reclamation costs is reviewed
periodically and adjusted as additional information becomes available.
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 1996, approximately 25% of gold production was delivered against forward
sales and gold loans at an average price of $375 per ounce. This compares with
22% of gold production at an average price of $395 in 1995 and 19% of gold
production at an average price of $370 in 1994. Approximately 45% of silver
production was delivered against forward sales at an average price of $5.85 per
ounce in 1996, compared to 47% at an average price of $5.48 in 1995 and 50% at
an average price of $4.56 in 1994.
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.
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.
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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, 1996 are set out in note 15 to the company's consolidated
financial statements. Subsequent to December 31, 1996, the company repurchased
its 218,000 ounce gold swap, repurchased all of its 654,000 ounces of gold and
8.5 million ounces of silver forward sales positions and entered into new gold
put and call option positions as described 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 licenses under NIWA were deemed to
continue under the NWTWA.
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 incidents, 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.
Pursuant to an agreement (the "Nunavut Agreement") dated May 25, 1993 between
the Inuit of Canada's eastern arctic region and Her Majesty the Queen in right
of Canada, which agreement comes into force on April 1, 1999, the Inuit have
been granted ownership of approximately 360,000 square kilometers of land in an
area referred to as the Nunavut Settlement Area, including ownership of
subsurface rights in approximately 37,500 square kilometers of those lands. The
company's Lupin mine is located in this Nunavut Settlement Area. Existing third
party interests in lands in the Nunavut Settlement Area are protected under the
Nunavut Agreement. Where a third party has been granted a mining lease under
the Canada Mining Regulations in lands comprising the Nunavut Settlement Area,
that interest will continue in accordance with the terms and conditions on
which it was granted, including any rights granted under the legislation which
gave rise to the interest. However, where any successor legislation would have
the effect of diminishing the rights afforded to the federal government, it
will not bind the Inuit without its consent. The Inuit are entitled to receive
whatever compensation is payable by the interest holder for the use or
exploitation of mineral rights. The federal government will continue to
administer the third party interest on behalf of the Inuit, unless the third
party and the Inuit enter into an agreement under which the third party agrees
to the administration of their interest by the Inuit. In the event such an
agreement is
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<PAGE> 30
reached, the applicable legislation will cease to apply to the third party
interest. Existing subsurface interests in such lands will continue to be
administered in accordance with applicable legislation relating to those
interests and are not affected by the Nunavut Agreement.
New third party interests in lands in the Nunavut Settlement Area will now be
granted, in the case of surface rights, by the appropriate regional Inuit
association and, in the case of subsurface rights, by Nunavut Tungavik
Incorporated which will hold subsurface title to Inuit owned lands and who will
be additionally responsible, in consultation with the appropriate regional
Inuit associations, for the administration and management of those subsurface
rights.
Also under the Nunavut Agreement 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
licenses 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, licenses would be obtained from the Northwest Territories Water
Board under the NWTWA.
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 than all other
"non-Canadian" investors with respect to reviews by Investment Canada. Direct
acquisitions of Canadian businesses 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 from 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.
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.
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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 may consider 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.
Legislation to change the general mining laws applicable to operations on
federal lands has been introduced into the 105th Congress, which convened in
January 1997, and additional introductions are expected. The result of such
proposals is speculative.
The most material direct economic impact of potential 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 likely to be
exempt from any proposed royalty). The company's applications for patents are
being processed, and the company expects the government 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. 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.
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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.
Mexico
The mining industry of Mexico operates under the authority of the federal
government, which regulates prospecting, land tenure, safety, environmental
protection, exports, taxation, labor and social legislation and business
transactions.
The company believes that its Mexican ventures are carrying on their business
efforts in substantial compliance with applicable laws and regulations.
Mexican industry is regulated with respect to environmental matters by the
Secretariat for Environment, Natural Resources and Fisheries ("SEMARNAP"). This
agency is the successor to the authority previously held by Secretariat for
Social development ("SEDESOL"). SEMARNAP formulates and issues environmental
laws, regulations and standards, under authority granted December 28, 1994.
Mexican companies are governed generally by the Commercial Law of Mexico and
the Civil Law of Mexico. Mining is also governed by the Mining Law and
Regulations of Mexico. The company's Mexican subsidiaries are organized under
the Commercial Law and registered with the Mexican Public Registry of Commerce
in Mexico City.
Mexican environmental laws applicable to discharges of water, control of air
quality and management of hazardous substances will apply to the company's
Mexican operations. In addition, the company is subject to the reclamation
requirements of the Federal environmental laws. The Paredones Amarillos project
is subject to additional reclamation and ecological protection requirements
because part of it is located in the buffer zone for an Ecological Reserve. The
company believes that it is in substantial compliance with all applicable
corporate, environmental, reclamation and social welfare statutes.
Mineral rights in Mexico are the property of the federal government, which
allows private parties to develop minerals under a system of concessions
regulated by the Mining Law and Regulations. Only Mexican nationals or Mexican
corporations may own concessions, and the rights of concessionaires to develop
their minerals are not unlimited but must respect those of surface occupants.
The federal government recognizes the rights of associations of landholders
("ejidos") who, though they do not own individual titles, have rights to
enjoyment of parcels of land arising from membership in a group. The company's
Caopas project has been the subject of lengthy discussions whith an ejido to
clarify the terms and compensation under which the project will be developed.
The company's Paredones Amarillos project has been registered with the Mining
Public Registry, which endorses mineral ownership agreements and acts as the
agency for notice of their existence and legal sufficiency. The company has
expended substantial effort in clarifying its title to the concessions on which
its Mexican projects depend; it believes that its concessions are validly
issued by the federal government and that they give the company full rights
allowed under the Mining Law and regulations.
Philippines
Under the 1987 Philippine Constitution, the State owns all lands of the public
domain which includes minerals and other natural resources. Exploration,
development and utilization of natural resources are under the full control and
supervision of the State which may undertake such activities itself or enter
into co-production, joint venture or production sharing agreements with
citizens of the Philippines or corporations or associations whose share capital
is at least 60% owned by citizens of the Philippines.
In February, 1995 the Philippine Mining Act (the "Mining Act") was enacted and
in 1996 revised rules and regulations were promulgated under the Mining Act.
The Mining Act and such rules and regulations deal comprehensively with the
exploration, development, utilization and processing of all mineral resources.
The Mining Act sets out the extent and method of allowable participation of
foreign investments in the mining industry. The Mining Act also deals with mine
safety and environmental
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protection. The Department of Environment and Natural Resources is the main
department of the government which regulates mining activities. Various other
agencies such as the Mines and Geosciences Bureau, the Environmental Management
Bureau, the Forest Management Bureau and the National Water Resources Board
also deal with ancillary aspects of the mining industry.
Under the Mining Act, mining operations may be undertaken through a mineral
agreement which is a contract between the Philippine government and a
contractor. There are generally three different types of such agreements,
namely, a mineral production-sharing agreement, a co-production agreement or a
joint venture agreement. Any one of the foregoing agreements gives the
contractor, who must be a qualified person, the exclusive right to conduct
mining operations and to extract all mineral resources in the contract area. A
qualified person is a citizen of the Philippines with capacity to contract or a
corporation, partnership, association, or cooperative organized or authorized
to engage in mining, with technical and financial capability to undertake
mineral resources development, duly registered in accordance with Philippine
law and with at least 60% of its share capital owned by citizens of the
Philippines.
The Mining Act mandates compliance by mining firms operating within the
Philippines with all the environmental laws of the Philippines. It requires
contractors to undertake an environmental protection and enhancement program
covering the period of the mineral agreement or permit. The environmental
program is required to be incorporated in the work program which the contractor
or permittee must submit as an accompanying document to the application for a
mineral agreement or permit. The work program is required to include plans
regarding the rehabilitation of mineralized areas. Principally, this involves
compliance with the Philippine Environmental Impact Assessment System which
requires that prior to the operation of any environmentally critical project,
an environmental clearance certificate be secured on the approval of an
environmental impact statement with respect to such project. Any violation of
the terms and conditions of the environmental clearance certificate could
result in the cancellation of that certificate or the payment of a fine.
Brazil
Under Brazil's federal constitution, mineral resources are the property of the
Brazilian Federation and, accordingly, they can only be explored through an
official permit granted by the federal government. Mining activity is regulated
by the Departamento Nacional de Produceo Mineral ("DNPM"). In general, few
restrictions exist on foreign investments in the mining industry in Brazil.
Mining claims in Brazil may take the form of applications for prospecting,
exploration permits or mining concessions. An application for prospecting is
filed with the DNPM and is the first step in obtaining an exploration permit.
The exploration permit, once granted, gives the applicant the right to explore
the area covered by the permit. An application for prospecting must be
supported by an exploration plan and must comply with certain other
requirements. Provided the area of interest is not already covered by a
pre-existing application or exploration permit and all requirements are met,
the DNPM will normally grant the permit on a priority of application basis.
Mining concessions may be obtained only by corporations. A corporation normally
has one year from receipt of DNPM approval of its report on the results of its
exploration activities to apply for a mining concession for the intended area.
The application must include a mining plan and an economic feasibility
analysis. A mining concession gives the holder the right to extract and process
the minerals contained in the deposit, in accordance with the plan approved by
the DNPM and to market mine production. The holder of a mining concession has
ownership of the mine production and the mining concession enables the holder
to exploit the mine deposit until it is exhausted, generally with no fixed
term. The holder of a mining concession also is entitled to sell or lease the
concession, subject to government approval, which will normally be granted.
Once a mining concession is granted, a mining company is required to obtain an
operating permit for each mine that it wishes to operate. The operating permit
is renewed annually subject to compliance with environmental matters.
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The surface of land covered by a DNPM mining concession often is owned by
private third parties. If a mining company is unable to negotiate a voluntary
agreement with the landowner for the use of surface, under Brazilian law,
sufficient land can be condemned to enable the mining company to access the
mineral deposit, subject to payment of compensation to the landowner and always
subject to all otherwise applicable land use and environmental regulations.
Special provisions and restrictions apply whenever mining activity is conducted
on sites located along frontier areas or inside certain specified Indian
protection areas. A frontier area is an area within 150 kilometers of the
border of the Brazilian national territory.
Employees
At December 31, 1996, the company employed 2,281 persons excluding temporary
employees directly involved in short-term programs, broken down as follows.
McCoy/Cove 514
Round Mountain, including ancillary services 599
Lupin, including aviation, winter road and Ulu 556
Kettle River 219
Exploration and development, including local
nationals 197
Technical and corporate staff 161
Other, including Alaska and Sunnyside 35
-----
2,281
=====
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.
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Executive Officers of the Registrant
The executive officers of the company are listed below.
<TABLE>
<CAPTION>
Position with the company and business experience within the
Name Age last five years
- ---------------------------------------------------------------------------------------------------
<S> C> <C>
JOHN L. AZLANT 50 Senior Vice President, Business Development of the company since
November 1993; prior thereto Senior Vice President and Chief
Financial Officer of Pegasus Gold Inc.
SCOTT A. CALDWELL 40 Vice President, Operations of the company since January 1997;
Vice President, Project Development of the company from July
1996 to January 1997; Vice President, Operations of Compania
Minera Dona Ines de Collahuasi S.A. (Chile) from August 1995 to
July 1996; Senior Mines Manager of PT Freeport Indonesia Company
from June 1989 to June 1995; prior thereto Mines Manager of PT
Freeport Indonesia Company
PETER H. CHEESBROUGH 45 Senior Vice President, Finance and Chief Financial Officer of
the company since June 1993, prior thereto Vice President,
Controller and Principal Accounting Officer of the company
RICHARD C. KRAUS 50 President and Chief Executive Officer of the company since June
1994; prior thereto President and Chief Operating Officer of the
company
ROBERT L. LECLERC, Q.C. 52 Chairman of the company since May 1996; Chairman and Chief
Executive Officer and partner, Milner Fenerty (barristers and
solicitors) from December 1993 to June 1996; prior thereto
partner of Milner Fenerty
GERALD A. TYWONIUK 35 Vice President, Controller and Principal 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 D. WUNDER 47 Senior Vice President, Project Development of 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>
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<PAGE> 36
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 $50 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 and other
uninsurable underground 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 leach pads or tailings dams in
sufficient quantities to cause water or surface pollution and there is some
risk of environmental impairment liability under 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. 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
unpredictable pit wall failure. Open pit mining is conducted in phases and a
pit wall failure in one area would not necessarily affect overall pit design or
mining in unaffected areas. See "McCoy/Cove" regarding the company's $30.0
million provision related to the estimated costs to remove waste rock from an
unstable portion of the Cove pit wall.
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."
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 16 to the company's consolidated financial statements.
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<PAGE> 37
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 100% interests in the McCoy, Borealis, Manhattan, Sunnyside 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 to obtain the low interest rates associated with bullion
financings. The Borealis, Manhattan, Sunnyside and Illipah mines have
subsequently been mined out and closed.
In 1990, the company brought the Kettle River mine in Washington state into
commercial production. In 1992, the company increased its ownership interest to
100% from 70% when the company's 30% partner withdrew from the Kettle River
joint venture.
Beginning in 1993, the company increased exploration activities significantly.
Exploration programs are being funded at all operating properties and also at
many other locations along the major gold belts of North America, Central
America, South America, West Africa and the Philippines. Most of the company's
exploration expenditures were made outside of the United States and Canada.
In 1995, the company added five development properties: Paredones Amarillos in
Mexico, Chapada in Brazil, Kingking in the Philippines, and Aquarius and Ulu in
Canada. The company sold its interest in the Kensington project to its joint
venture partner in 1995.
In 1996, the company continued its high level of exploration and development
activities. Underground development began at Ulu in 1996 and construction is
expected to begin at Aquarius and Paredones Amarillos in 1997. Feasibility
studies and further exploration are in progress at Chapada and Kingking, and
initial feasibility studies are expected to be completed in 1997. The company
wrote off its entire remaining investment in the Alaska-Juneau project in 1996.
During 1996, the company increased its ownership from 7% to 51% of the
outstanding common shares of Santa Elina Gold Corporation ("Santa Elina").
Santa Elina holds interests in mining properties, principally in Brazil, and
also in Bolivia.
RISK FACTORS
Mining and Processing
The company's business operations are subject to risks and hazards inherent in
the mining industry, including but not limited to unanticipated variations in
grade and other geological problems, water conditions, surface or underground
conditions, metallurgical and other processing problems, mechanical equipment
performance problems, the unavailability of materials and equipment, accidents,
labor force and force majeure factors, unanticipated transportation costs and
weather conditions, any of which can materially and adversely affect, among
other things, the development of properties, production quantities and rates,
costs and expenditures and production commencement dates.
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The company's processing facilities are dependent on continuous mine feed to
remain in operation. Insofar as the company's mines may not maintain material
stockpiles of ore or material in process, any significant disruption in either
mine feed or processing throughput, whether due to equipment failures, adverse
weather conditions, supply interruptions, labor force disruptions or other
issues, may have an immediate adverse effect on the results of operations of
the company. A significant reduction in mine feed or processing throughput at a
particular mine could cause the unit cost of production to increase to the
point where the company could determine that some or all of the company's
reserves were uneconomic to exploit.
In the case of development projects, including new pits or underground mines at
currently operated properties or expansions of existing mines, although the
company utilizes the operating history of its existing mines to derive
estimates of future operating costs and capital requirements, such estimates
may differ materially from actual operating results. The economic feasibility
of any individual project is based upon, among other things, the interpretation
of geological data obtained from drill holes and other sampling techniques,
feasibility studies (which derive estimates of cash operating costs based upon
anticipated tonnage and grades of ore to be mined and processed), the
configuration of the ore body, expected recovery rates of metals from the ore,
comparable facility and equipment costs, anticipated climatic conditions,
estimates of labor productivity and other factors. Such development projects
also are subject to the successful completion of final feasibility studies,
issuance of necessary permits and receipt of adequate financing. Although the
company's feasibility studies are completed with the company's knowledge of the
operating history of similar ore bodies in the region, the actual operating
results of its development projects may differ materially from those
anticipated, and uncertainties related to operations are even greater in the
case of development projects.
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.
As a result of the foregoing risks, among other things, expenditures on any and
all projects, actual production quantities and rates, and cash costs may be
materially and adversely affected and may differ materially from anticipated
expenditures, production quantities and rates, and costs, just as estimated
production dates may be delayed materially, in each case especially to the
extent development projects are involved. Any such events can materially and
adversely affect the company's business, financial condition, results of
operations and cash flows.
Uncertainty of Reserve and Other Mineralization Estimates
There are numerous uncertainties inherent in estimating proven and probable
reserves and other mineralization, including many factors beyond the control of
the company. The estimation of reserves and other mineralization involves
subjective judgments about many relevant factors, and the accuracy of any such
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
estimate. Assumptions about prices are subject to great uncertainty and gold
and silver prices have fluctuated widely in recent years. See "Gold and Silver
Price Volatility." No assurance can be given that the volume and grade of
reserves mined and processed and recovery rates will not be less than
anticipated. Declines in the market price of gold and related precious metals
also may render reserves or other mineralization containing relatively lower
grades of mineralization uneconomic to exploit. If the price realized by the
company for its gold or silver bullion were to decline substantially below the
price at which ore reserves were calculated for a sustained period of time, the
company potentially could experience reductions in reserves and asset
write-downs. Under certain such circumstances, the company may discontinue the
development of a project or mining at one or more of its properties. Further,
changes in operating and capital costs and other factors, including but not
limited to short-term operating factors such
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<PAGE> 39
as the need for sequential development of ore bodies and the processing of new
or different ore grades and ore types, may materially and adversely affect
reserves.
Gold and Silver Price Volatility
The profitability of the company's current operations is directly related and
sensitive to the market price of gold and silver. Gold and silver prices
fluctuate widely and are affected by numerous factors beyond the company's
control, including expectations with respect to the rate of inflation, the
exchange rates of the dollar and other currencies, interest rates, forward
selling by producers, central bank sales and purchases of gold and silver,
production and cost levels in major gold-producing regions such as South
Africa and the former Soviet Union, global or regional political, economic
or financial situations and a number of other factors. See "Gold Prices"
and "Silver Prices."
The current demand for, and supply of, gold and silver affect the prices of
such minerals, but not necessarily in the same manner as current demand and
supply affect the prices of other commodities. The potential supply of gold
consists of new mine production plus existing stocks of bullion and fabricated
gold held by governments, financial institutions, industrial organizations and
individuals. Since mine production in any single year constitutes a very small
portion of the total potential supply of gold, normal variations in current
production do not necessarily have a significant effect on the supply of gold
or on its price. If gold or silver prices should decline below the company's
cash costs of production and remain at such levels for any sustained period,
the company could determine that it is not economically feasible to continue
commercial production at any or all of its mines. Although the company has a
hedging program in place to reduce the risk associated with gold and silver
price volatility, there is no assurance that the company's hedging strategies
will be successful. See "Precious Metal Sales and Hedging Activities."
The prices used in estimating the company's ore reserves at December 31, 1996
were $375 per ounce of gold and $5.00 per ounce of silver. The market prices
were $369 per ounce of gold and $4.87 per ounce of silver at December 31, 1996.
If the company were to determine that its reserves and future cash flows should
be calculated at a significantly lower gold price than that used at December
31, 1996, 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 may be required.
Exploration and Development
Exploration for gold and related precious metals is highly speculative in
nature, involves many risks and frequently is unsuccessful. There can be no
assurance that the company's exploration efforts will result in the discovery
of significant gold or silver mineralization or that any mineralization
discovered will result in an increase of the company's proven or probable
reserves. If proven or probable reserves are developed, it may take a number of
years and substantial expenditures from the initial phases of drilling until
production is possible, during which time the economic feasibility of
production may change. No assurance can be given that the company's exploration
programs will result in the replacement of current production with new reserves
or that the company's development program will be able to extend the life of
the company's existing mines. In the event that new reserves are not developed,
the company will not be able to sustain its current level of gold or silver
production beyond the life of its existing reserves.
Insurance and Mining Risks
The business of gold and silver mining is generally subject to a number of
risks and hazards, including environmental conditions, industrial accidents,
labor disputes, encountering unusual or unexpected geological conditions,
ground or slope failures, cave-ins, changes in the regulatory environment and
natural phenomena such as inclement weather conditions, floods, blizzards and
earthquakes. Such occurrences could result in damage to, or destruction of,
mineral properties or production facilities, personal injury or death,
environmental damage to a joint venture's properties or the properties of
others, delays in mining, monetary losses and possible legal liability. The
company maintains insurance against certain risks that are typical in the gold
mining industry and in amounts that the company believes to be reasonable, but
which may not provide adequate coverage in certain unforeseen circumstances.
However, insurance against certain risks (including certain liabilities for
environmental pollution or other hazards as a result of exploration and
35
<PAGE> 40
production) is not generally available to the company or to other companies
within the industry on acceptable terms. See "Insurance and Mining Risks."
Governmental Regulation
The company's mining operations and exploration activities are subject to
extensive foreign or U.S. federal, state and local laws and regulations
governing exploration, development, production, exports, taxes, labor
standards, waste disposal, protection and remediation of the environment,
reclamation, historic and cultural resources preservation, mine safety and
occupational health, toxic substances and other matters. See "Governmental
Regulation." The costs of discovering, evaluating, planning, designing,
developing, constructing, operating and closing the company's mines and other
facilities in compliance with such laws and regulations is significant. It is
possible that the costs and delays associated with compliance with such laws
and regulations could become such that the company would not proceed with the
development or operation of a mine.
As part of its normal course operating and development activities, the company
has expended significant resources, both financial and managerial, to comply
with governmental regulations and permitting requirements, and anticipates that
it will continue to do so in the future. Moreover, it is possible that future
developments, such as increasingly strict environmental protection laws,
regulations and enforcement policies thereunder, and claims for damages to
property and persons resulting from the company's operations, could result in
substantial costs and liabilities in the future.
The company is required to obtain governmental permits to develop its reserves
and for expansion or advanced exploration activities at its operating
properties and its exploration properties. Obtaining the necessary governmental
permits is a complex and time-consuming process involving numerous foreign or
U.S. federal, state and local agencies. The duration and success of each
permitting effort are contingent upon many variables not within the company's
control. In the case of foreign operations, governmental approvals, licenses
and permits are, as a practical matter, subject to the discretion of the
applicable governments or governmental officials. In the context of
environmental protection permitting, including the approval of reclamation
plans, the company must comply with known standards, existing laws and
regulations that may entail greater or lesser costs and delays depending on the
nature of the activity to be permitted and the interpretation of the laws and
regulations implemented by the permitting authority. The failure to obtain
certain permits, or the imposition of extensive conditions upon certain
permits, could have a material adverse effect on the company's business,
operations and prospects.
In past sessions of the United States Congress, both the House of
Representatives and Senate have considered legislation that seeks to reform the
General Mining Law of 1872, as amended (the "Mining Law"), which governs the
location and maintenance of unpatented mining claims and related activities on
federal lands. As part of the most recent budget reconciliation process, each
of the Senate and the House of Representatives passed separate legislation that
sought to reform the Mining Law, although such legislation was not enacted into
law. The company anticipates that if Congress were to enact legislation
modifying the Mining Law, such legislation may impose a royalty on production
of minerals from unpatented mining claims, and could contain new requirements
for mined land reclamation and other environmental control measures. The extent
to which any such new legislation would affect existing unpatented mining
claims or mining operations thereon is unclear at this time. Any reform of the
Mining Law based on these initiatives could increase the costs of mining
activities on unpatented mining claims, and as a result could have an adverse
effect on the company and its results of operations. Until such time, if any,
as new reform legislation is enacted, the ultimate effects and costs of
compliance on the company cannot be estimated. See "Governmental Regulation."
Risk of International Operations
In certain countries in which the company has assets and operations, such
assets and operations are subject to various political, economic and other
uncertainties, including, among other things, the risks of war or civil unrest,
expropriation, nationalization, renegotiation or nullification of existing
concessions, licenses, permits, approvals and contracts, taxation policies,
foreign exchange and repatriation restrictions, changing
36
<PAGE> 41
political conditions, international monetary fluctuations, currency controls
and foreign governmental regulations that favor or require the awarding of
drilling contracts to local contractors or require foreign contractors to
employ citizens of, or purchase supplies from, a particular jurisdiction. In
addition, in the event of a dispute arising from foreign operations, the
company may be subject to the exclusive jurisdiction of foreign courts or may
not be successful in subjecting foreign persons to the jurisdiction of courts
in the United States or Canada. The company also may be hindered or prevented
from enforcing its rights with respect to a governmental instrumentality
because of the doctrine of sovereign immunity. It is not possible for the
company to accurately predict such developments or changes in law or policy or
to what extent any such developments or changes may have a material adverse
effect on the company's operations.
Title to Properties
Certain of the company's United States mineral rights consist of unpatented
lode mining claims. Unpatented mining claims may be located on U.S. federal
public lands open to appropriation, and may be either lode claims or placer
claims depending upon the nature of the deposit within the claim. In addition,
unpatented millsite claims, which may be used for processing operations or
other activities ancillary to mining operations, may be located on federal
public lands that are non-mineral in character. Unpatented mining claims and
millsites are unique property interests, and are generally considered to be
subject to greater title risk than other real property interests because the
validity of unpatented mining claims is often uncertain and is always subject
to challenges of third parties or contests by the federal government. The
validity of an unpatented mining claim, in terms of both its location and its
maintenance, is dependent on strict compliance with a complex body of federal
and state statutory and decisional law. In addition, there are few public
records that definitively control the issues of validity and ownership of
unpatented mining claims. The Mining Law includes provisions for obtaining a
patent, which is essentially equivalent to fee title, for an unpatented mining
claim upon compliance with certain statutory requirements (including the
discovery of a valuable mineral deposit).
Competition
The company encounters strong competition from other mining companies in
connection with the acquisition of properties producing or capable of producing
precious metals. As a result of this competition, some of which is with
companies with greater financial resources than the company, the company may be
unable to acquire attractive mining properties on terms it considers
acceptable. The company also competes with other mining companies for skilled
mine workers. Such competition may result in higher turnover and greater labor
costs for the company. See "Employees."
Exchange Rates
The profitability of the company's Canadian operations is affected by
fluctuations in the Canadian dollar exchange rate for U.S. dollars. See
"Exchange Rates."
The profitability of the company's Paredones Amarillos project in Mexico will
be affected by fluctuations in the Mexican peso exchange rate for U.S. dollars.
The company used an exchange rate of 7.5 Mexican pesos to one U.S. dollar in
its feasibility study. See "Construction Programs--Paredones Amarillos."
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.
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.
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<PAGE> 42
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.
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.
DRILLING
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.
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.
In-Fill Drilling--Drilling between widely spaced holes (typically up to 200
feet apart) to establish or upgrade the ore reserve classification.
Rotary Drilling--Drilling with a bit that breaks the rock into chips. The chips
are continually flushed from the hole (outside the drill pipe) and are
collected in sequence for geological examination and assay.
Reverse-Circulation Drilling--A type of Rotary Drilling that uses a
double-walled drill pipe. Compressed air, water or other drilling medium is
forced down the space between the two pipes to the drill bit, and the drilled
chips are flushed back up to the surface through the center tube of the drill
pipe.
Step-Out Drilling--Drilling at widely spaced intervals (typically in increments
of 300 feet) outward from known deposits to test for extensions of
mineralization.
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:
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.
Headframe Exploration--Exploration for a separate ore body "within sight of the
headframe" of an existing mine.
Definition Exploration--Exploration that defines an ore body, or searches for
extensions to it, once it has been discovered.
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<PAGE> 43
FEASIBILITY STUDIES--Determinations of the economic feasibility of mining a
deposit, based on progressively greater levels of information.
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.
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.
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.
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.
Cut-off Grade--The minimum grade of ore that can be mined and processed
economically.
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.
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.
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<PAGE> 44
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."
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.
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.
Proven Ore Reserves--"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 Reserves--"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.
The Canadian and U.S. regulations are presented in "Reserves."
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
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.
RAMP--An underground tunnel providing access for exploration or the movement of
materials and equipment between mine levels.
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<PAGE> 45
RECOVERY RATE--The percentage of metals recovered in a mineral separation
process. Recovery rates vary considerably depending on physical, metallurgical
and economic circumstances.
RESERVES--See Ore Reserves.
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.
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.
STOPE--An underground working area where ore is mined.
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.
WASTE-TO-ORE 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.
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,
-------------------------------------------------------------------
1997* 1996 1995 1994 1993 1992
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
High $369 $415 $396 $396 $406 $360
Low 346 367 372 370 326 330
Average 356 388 384 384 360 344
End of Period 346 369 387 383 392 333
</TABLE>
* Through January 31, 1997
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,
-------------------------------------------------------------
1997* 1996 1995 1994 1993 1992
----------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
High $5.03 $5.79 $6.01 $ 5.76 $5.37 $4.32
Low 4.65 4.67 4.36 4.63 3.55 3.63
Average 4.76 5.18 5.20 5.29 4.30 3.94
End of Period 4.83 4.87 5.11 4.87 5.08 3.67
</TABLE>
* Through January 31, 1997
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<PAGE> 46
EXCHANGE RATES
The exchange rates of the Canadian dollar to the U.S. dollar at the end of each
period and the high, the low and the average exchange rates for each period,
were as follows (such rates, which are expressed in Canadian dollars, being the
noon buying rates in New York City for cable transfers in U.S. dollars as
certified for customs purposes by the Federal Reserve Bank of New York).
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------------
1997* 1996 1995 1994 1993 1992
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
High C$ 1.3357 C$ 1.3310 C$ 1.3285 C$ 1.3103 C$ 1.2428 C$ 1.1420
Low 1.3742 1.3822 1.4238 1.4078 1.3443 1.2885
Average 1.3494 1.3638 1.3689 1.3699 1.2939 1.2143
End of Period 1.3474 1.3697 1.3655 1.4030 1.3255 1.2714
</TABLE>
* Through January 31, 1997
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."
MINE PROCESSING
Milling is the traditional method of recovering gold from ore. McCoy/Cove,
Lupin and Kettle River use milling as will Aquarius and Paredones Amarillos.
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 43.
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. Details of the process vary from mine to mine, but the
principles remain the same. To describe how the heap leach process works, the
Round Mountain mine's reusable leach pad process is illustrated on page 44.
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<PAGE> 47
GENERAL DESCRIPTION OF MINING AND MILL RECOVERY PROCESS
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 the McCoy/Cove operation, where the company has both oxide ores and sulfide
ores.
Ore is blasted and trucked from 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.
A giant jaw crusher reduces all of the ore to eight inches or
smaller.
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 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
under-flow, which still contains some gold and silver, skips the
next step.
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.
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.
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.
The leftover solids from the leach tanks, called tailings, are
pumped to a treatment plant, where the contaminants are
neutralized using sulfur dioxide (SO2) 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.
[FLOW CHART]
43
<PAGE> 48
GENERAL DESCRIPTION OF MINING AND HEAP-LEACH RECOVERY PROCESS
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.
Ore is mined and hauled by truck from the open pit. Ore is
gold-bearing rock.
Crushing reduces the ore to less than three-quarters of an inch
in size. Lime is added to stabilize the cyanide.
After being loaded onto the impermeable leach pad, the ore is
sprinkled for approximately 110 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. At the end of the leach cycle, the
leached ore is washed with water and drained.
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.
The gold and silver are stripped from the carbon, forming a
highly concentrated solution. The carbon is regenerated and
returned to the adsorption circuit.
The precious metals in the concentrated solution are
electrolytically deposited on steel wool cathodes in the
electrowinning cells.
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.
The dore bars are shipped to a precious metals refinery for final
processing into pure gold and silver.
[FLOW CHART]
44
<PAGE> 49
ITEM 3--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 "Business and Properties--Other--Government Regulations."
SUMMA
See note 16 to the company's consolidated financial statements.
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 1996.
45
<PAGE> 50
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 and Geneva (April 1987)
Germany--Frankfurt, Berlin and Dusseldorf (November 1988)
The following table sets forth for the period from January 1, 1995 through
February 28, 1997 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>
The Toronto Stock Exchange American Stock Exchange
--------------------------- -----------------------
High Low Volume High Low Volume
(Canadian Dollars) (shares in (U.S. Dollars) (shares in
thousands) thousands)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
Fourth Quarter 15.25 12.00 14,306 11.25 8.88 32,295
1996
- ----
First Quarter 20.25 14.38 54,064 14.75 10.50 54,646
Second Quarter 19.13 14.40 14,822 14.13 10.50 29,577
Third Quarter 15.20 11.45 16,007 11.25 8.44 26,632
October 12.45 10.40 4,704 9.13 7.75 8,908
November 11.20 8.15 12,863 8.38 6.06 23,960
December 10.40 8.00 5,002 7.50 5.88 17,057
1997
- ----
January 9.50 8.10 3,556 7.00 6.00 17,878
- --------------------------------------------------------------------------------------------------
</TABLE>
On January 31, 1997, the closing price of the common shares on The Toronto
Stock Exchange and on the American Stock Exchange was C$8.70 and U.S.$6.44,
respectively.
On January 31, 1997, the company had 139,357,131 common shares outstanding held
by approximately 65,000 registered and nominee shareholders.
DIVIDENDS
The company has suspended payment of dividends beginning in 1997. This will
save approximately $21 million over the next two years for mine development,
based on the company's prior practice of paying dividends totaling $0.0750 per
share per year as was done in 1996, 1995 and 1994. Dividends payable to
Canadian residents had been converted to and paid in Canadian dollars.
The declaration and payment of future dividends is dependent upon the company's
capital requirements, earnings and economic outlook. See "Certain Tax
Matters--Canadian Federal Income Tax Considerations" for information with
respect to Canadian withholding tax applicable to non-Canadian shareholders.
46
<PAGE> 51
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 aliens 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.
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.
47
<PAGE> 52
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA(1)
Year ended December 31
millions of U.S. dollars except
for gold price and per share data 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA
Revenue $ 337.3 $ 360.7 $ 377.6 $ 366.5 $ 312.4
Average gold price realized per ounce $ 384 $ 388 $ 387 $ 360 $ 357
Earnings (loss) before taxes(2) $ (176.1) $ (44.7) $ 13.0 $ 9.7 $ (29.4)
Earnings (loss) before preferred
share dividends(2) $ (176.7) $ (41.6) $ 17.3 $ 10.2 $ (27.4)
Net earnings (loss)(2) $ (176.7) $ (50.1) $ 8.0 $ 3.6 $ (31.7)
Earnings (loss) per common share(2) $ (1.31) $ (0.43) $ 0.07 $ 0.03 $ (0.30)
Effective tax rate (0.4%) 7.2% (33.3%) (5.1%) 6.9%
Return on assets (20.7%) (5.7%) 0.9% 0.4% (3.5%)
Return on invested capital (23.8%) (4.8%) 2.8% 2.1% (2.9%)
Return on average common
shareholders' equity (32.7%) (9.1%) 1.6% 0.7% (6.8%)
Weighted average common
shares outstanding (millions) 134.4 116.2 112.5 108.2 105.2
BALANCE SHEET DATA
Working capital (deficiency) $ (52.9) $ 109.6 $ 186.2 $ 148.9 $ 31.1
Current ratio 0.74 1.84 4.24 2.01 1.42
Total assets $ 832.1 $ 871.2 $ 881.7 $ 990.5 $ 936.6
Gold, silver and currency financings $ 182.9 $ 152.8 $ 132.7 $ 217.4 $ 220.1
Deferred income taxes $ 8.4 $ 8.1 $ 8.4 $ 14.6 $ 20.0
Common shareholders' equity $ 492.3 $ 588.9 $ 509.7 $ 513.7 $ 440.3
Common shares outstanding (millions) 139.4 129.9 112.7 112.2 105.2
Book value per common share $ 3.53 $ 4.53 $ 4.52 $ 4.58 $ 4.19
OTHER DATA
Dividends paid on common shares - total $ 10.1 $ 9.0 $ 8.5 $ 8.1 $ 7.9
- per share $ 0.0750 $ 0.0750 $ 0.0750 $ 0.0750 $ 0.0750
Dividends paid on 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 operations $ 25.8 $ 66.3 $ 108.1 $ 107.5 $ 76.5
Capital and exploration spending $ 161.7 $ 138.3 $ 66.8 $ 44.4 $ 81.4
- ----------------------------------------------------------------------------------------------------------------
</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 16 to the company's consolidated
financial statements. 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>
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings (loss) before income taxes $ (173.9) $ (41.2) $ 17.2 $ 9.7 $ (29.4)
Net earnings (loss) $ (174.5) $ (46.5) $ 7.3 $ 8.5 $ (31.7)
Earnings (loss) per common share $ (1.30) $ (0.40) $ 0.07 $ 0.08 $ (0.30)
Total assets $ 919.6 $ 881.3 $ 872.6 $ 975.2 $ 917.1
Deferred income taxes $ 55.0 $ 8.1 $ 8.4 $ 9.7 $ 20.0
Common shareholders' equity $ 533.1 $ 599.0 $ 500.6 $ 503.3 $ 420.8
- -------------------------------------------------------------------------------------------------
</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 million ($0.03 per
share) in two exploration properties. In 1996, the company recorded a $30.0
million ($0.22 per share) provision related to the estimated costs to
remove waste rock from an unstable portion of the Cove pit wall at the
McCoy/Cove mine in Nevada and recorded a $77.1 million ($0.57 per share)
provision to write off the $57.1 million book value of its Alaska-Juneau
development property in Alaska and to accrue $20.0 million for estimated
reclamation and closure costs.
(3) All of the outstanding shares of preferred stock of subsidiary were
redeemed or converted into common shares of the company during 1995.
48
<PAGE> 53
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 1994 through 1996 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--Risk Factors" and "Commitments and
Contingencies" for a discussion of certain factors which should be considered
in evaluating these statements.
SUMMARY
The company's net loss in 1996 was $176.7 million. Total production costs in
1996 were $373 per ounce of gold, which includes $254 per ounce cash operating
cost, $98 per ounce depreciation and amortization, $11 per ounce royalties, $7
per ounce reclamation and mine closure, and $3 per ounce production taxes.
Total production costs do not include exploration and development, provisions,
interest and other, general and administrative, income tax expense and
preferred stock dividends. The average price realized in 1996 was $384 per
ounce of gold, including forward sales and loan repayments, which was below the
average market price of $388 per ounce of gold in 1996. Total working capital
provided from operations was $25.8 million in 1996 after cash exploration and
development expenses of $56.6 million.
RESULTS OF OPERATIONS
The company had a net loss of $176.7 million ($1.31 per share) in 1996,
compared to a net loss of $50.1 million ($0.43 per share) in 1995 and net
earnings of $8.0 million ($0.07 per share) in 1994 . The 1996 results compared
to 1995 reflect the provision for the Alaska-Juneau development property ($77.1
million), the provision for the McCoy/Cove pit wall stabilization ($30.0
million), lower precious metals sales ($20.4 million), increased operating
costs ($8.9 million) and lower gold price realized ($3.0 million), partially
offset by the absence of dividends on preferred stock ($8.5 million) and
decreased exploration and development ($6.2 million). The 1995 results
compared to 1994 reflect significantly increased exploration and development
expenses ($23.3 million), lower precious metal sales ($13.5 million), increased
operating costs ($11.1 million), increased environmental expenses at Sunnyside
($11.7 million) and lower silver prices realized ($4.5 million).
Revenue derived from the sale of gold and silver bullion is directly affected
by the market prices of gold and silver and the volume of production. The
significant majority of revenues continue to be derived from gold sales. The
price of gold and silver is affected by many factors which are beyond the
company's control. See "Business and Properties--Risk Factors."
49
<PAGE> 54
The gold and silver ounces sold and other revenue data for the last three years
are set out below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
REVENUE DATA
Year ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gold
- ----
Ounces sold 777,512 758,635 823,841
Average price realized per ounce $ 384 $ 388 $ 387
Average market price per ounce $ 388 $ 384 $ 384
Revenue (millions of U.S. dollars) $ 298.9 $ 294.6 $ 318.8
Percentage of total revenue 89% 82% 84%
Silver
- ------
Ounces sold 7,098,417 12,234,835 10,196,356
Average price realized per ounce $ 5.41 $ 5.40 $ 5.77
Average market price per ounce $ 5.18 $ 5.19 $ 5.29
Revenue (millions of U.S. dollars) $ 38.4 $ 66.1 $ 58.8
Percentage of total revenue 11% 18% 16%
- ----------------------------------------------------------------------------------------------------------
Total Revenue (millions of U.S. dollars) $ 337.3 $ 360.7 $ 377.6
==========================================================================================================
</TABLE>
The effects of changes in sales volume and prices were:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
VARIANCES
thousands of U.S. dollars
Year ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Change in volume $ (20,412) $ (13,478) $ (24,600)
Higher (lower) prices:
Gold (3,002) 1,135 22,512
Silver -- (4,527) 13,153
- ----------------------------------------------------------------------------------------------------------
Increase (decrease) in gold and silver
revenue from the previous year $ (23,414) $ (16,870) $ 11,065
==========================================================================================================
</TABLE>
The increase in gold revenue from 1995 to 1996 was primarily due to higher
production resulting from more tons processed at Round Mountain and higher
production resulting from more tons processed and higher grades at Kettle
River, partially offset by lower production resulting from lower grades and
recoveries at McCoy/Cove, lower production resulting from lower grades at Lupin
and lower prices realized ($384 per ounce in 1996 versus $388 per ounce in
1995). The decrease in silver revenue was due to lower production resulting
from lower grades. The decrease in gold and silver revenue from 1994 to 1995
was primarily due to lower production resulting from less tons heap leached and
lower grades milled at McCoy/Cove, lower production resulting from lower grades
at Round Mountain and lower production resulting from less tons processed at
Lupin, partially offset by higher production resulting from higher grades at
Kettle River. 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
50
<PAGE> 55
agreements and swaps, to reduce the impact of fluctuations in crude oil prices
on its operating costs. During 1995 and 1994, 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 in the
cost of 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 1996, approximately 25% of gold production was delivered against forward
sales and gold loans at an average price of $375 per ounce. This compares with
22% of gold production in 1995 at an average price of $395 and 19% of gold
production in 1994 at an average price of $370. Approximately 45% of silver
production was delivered against forward sales at an average price of $5.85 per
ounce in 1996, compared to 46% at an average price of $5.48 in 1995 and 50% at
an average price of $4.56 in 1994.
In the first quarter of 1997 the company repurchased its 218,000 ounce gold
swap hedging its $84.0 million bond obligation and repurchased all of its gold
and silver forward positions which consisted of 654,000 ounces of gold with
delivery dates ranging from 1997 to 2002 and 8.5 million ounces of silver with
delivery dates ranging from 1997 to 1999. To protect against a decrease in
gold prices, the company purchased 450,000 ounces of gold put options priced at
$345 per ounce and sold 300,000 ounces of gold call options priced at $394 per
ounce. After these subsequent events, the company had gold loan obligations
covering approximately 4% of its expected 1997 gold production. The company's
hedging activities and commitments at December 31, 1996 are described in note
15 of the company's consolidated financial statements.
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, utilities and
environmental compliance. 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 operating cost per
ounce.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
RECONCILIATION OF CASH OPERATING
COSTS PER OUNCE TO FINANCIAL STATEMENTS
thousands of U.S. dollars, except per ounce amounts 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating costs per financial statements $ 221,126 $ 212,182 $ 201,128
Change in finished goods inventory and other amounts 70 (4,188) (2,268)
Co-product cost of silver produced (25,568) (35,003) (27,778)
- -------------------------------------------------------------------------------------------------
Cash operating costs $ 195,628 $ 172,991 $ 171,082
=================================================================================================
Gold ounces produced 768,919 754,762 817,946
Cash operating costs per ounce $ 254 $ 229 $ 209
=================================================================================================
Percentage increase from prior year 10.9% 9.6% --%
=================================================================================================
</TABLE>
In 1996, the average cash operating cost per ounce was $254 compared with $229
in 1995 and $209 in 1994. Cash operating costs per ounce were higher in 1996
reflecting increased mining costs per ounce at McCoy/Cove and Round Mountain.
Cash operating costs by mine are set out in "Business and
Properties--Operations Summary." The company's consolidated cash operating cost
target is $265-275 per ounce of gold produced in 1997. This increase is
primarily the result of declining production and resulting higher costs per
ounce at McCoy/Cove, as previously expected in its life-of-mine plan.
51
<PAGE> 56
The decrease in depreciation and amortization was primarily due to
amortization. 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 $3.5
million decrease in total amortization expense in 1996 reflects lower silver
production. On a per gold ounce basis, amortization was $34 in 1996, compared
to $36 in 1995 and $33 in 1994. On a per gold ounce basis, depreciation was
$64 in 1996 compared to $61 in 1995 and $56 in 1994.
Royalties are described in note 16 to the company's consolidated financial
statements. Royalty expense increased in 1996 primarily due to higher
production at Round Mountain and Kettle River, partially offset by lower
production at McCoy/Cove.
Production taxes decreased in 1996 compared to 1995 and 1994 due to the lower
production and higher costs at the Nevada mines. Less cash flow reduces the
net profit on which the production taxes are calculated.
General and administrative costs have increased in 1996 compared to 1995 and
1994, reflecting increased support for the company's international focus,
permitting, exploration and business development activities.
Exploration was $46.6 million in 1996 compared to $46.5 million in 1995 and
development was $17.0 million in 1996 compared to $23.3 million in 1995. The
decrease in development expense in 1996 was primarily due to the reduction in
activity and personnel at the Alaska-Juneau development property (decreased
cash spending of $2.3 million in 1996 compared to 1995) and lower amortization
at Alaska-Juneau and Kensington properties (decreased amortization of $2.9
million in 1996 compared to 1995).
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. In addition to the United States and Canada, the company conducted
exploration in Mexico, Central America, South America, the Philippines and West
Africa in 1996. 1997 exploration expense is budgeted at $31 million, but is
dependent on opportunities.
Interest and other includes net interest expense of $2.1 million in 1996
compared to net interest income of $4.8 million in 1995 and net interest income
of $4.1 million in 1994, reflecting decreased cash on hand and increased
currency financings in 1996. The 1996 amount also includes a $1.5 million
accrual related to Summa royalty litigation offset by a $2.5 million gain on
the sale of the company's investment in Cluff Resources plc and a $1.9 million
gain on the sale of the company's investment in Etruscan Enterprises Ltd.
The provision for Alaska-Juneau development property represents the company's
entire remaining investment in A-J of $57.1 million and a $20.0 million accrual
for estimated reclamation and closure costs. The provision resulted from a new
feasibility study concluding that the project as currently designed would not
be economically feasible. See "Business and Properties--Alaska-Juneau."
The provision for McCoy/Cove pit wall stabilization represents the estimated
cost to remove waste rock from an unstable portion of the Cove pit wall. The
estimate of the provision is based on a preliminary evaluation of the tons to
be removed and the associated costs, both of which will be further refined as
McCoy/Cove completes its stabilization plan. See "Business and
Properties--McCoy/Cove."
Income tax recovery (expense) is described in note 8 to the company's
consolidated financial statements.
52
<PAGE> 57
The 1996 net earnings also reflect the absence of dividends on preferred stock
of Echo Bay Finance Corp., compared to dividends of $8.5 million in 1995 and
$9.3 million in 1994. All of the preferred shares were converted or redeemed
during the third and fourth quarters of 1995.
For 1997, the company expects gold production to be in the range of 700,000 to
725,000 ounces and silver production to be about the same as 1996. The decline
in production is due to lower expected grades and recoveries at McCoy/Cove. The
company's consolidated cash operating cost target is $265-275 per ounce of gold
produced in 1997, primarily the result of the expected declining production and
resulting higher costs at McCoy/Cove. See "Business and Properties--
McCoy/Cove," "--Cautionary 'Safe Harbor' Statement under the United States
Private Securities Litigation Reform Act of 1995" and "--Risk Factors."
CAPITAL, EXPLORATION AND DEVELOPMENT SPENDING
In 1996, the company incurred cash development property expense of $13.2
million and cash exploration expense of $43.4 million. Approximately 70% of the
exploration expense was incurred outside of the U.S. and Canada. The company
expects to incur $31 million of cash exploration expense in 1997, dependent on
opportunities, with approximately 70% of the expenditure outside of the U.S.
and Canada.
In 1996, the company capitalized $37.7 million in acquisition and development
property costs including $11.2 million at Kingking, $6.1 million at Chapada,
$6.1 million at Aquarius, and $6.6 million at Paredones Amarillos. For 1997,
the company expects to capitalize $5 million at Kingking. On its construction
programs, the company expects to spend $69 million at Aquarius and $44 million
at Paredones Amarillos of the total capital budgets of $100 million and $67
million respectively.
Capital expenditures at the company's operating mines in 1996 were $49.3
million including $7.3 million at McCoy/Cove which was primarily related to the
mill expansion and additional haul trucks; $17.5 million at Round Mountain
which primarily related to the mill construction; $15.7 million at Lupin, of
which $14.5 million was Ulu development costs; and $8.8 million at Kettle River
which was primarily related to K-2 exploration and development. For 1997, the
company expects a similar level of capital spending including $23 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 and by a drawdown of existing
cash balances. Working capital provided by operations before exploration and
development properties expenses was $82.3 million in 1996.
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 $8.8 million in these
exploration-oriented companies during 1996 in addition to the $45.4 million
invested during 1995.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Working capital provided from operations amounted to $25.8 million for 1996
compared to $66.3 million in 1995. The 1996 results reflect lower silver
production levels partially offset by higher gold production levels ($20.4
million); increased operating costs ($8.9 million); increased interest expense
($2.1 million expense in 1996 compared to $4.8 million income in 1995); the
absence of 1995's conveyance of Canadian Development Expenses ($4.8 million);
and lower gold prices ($3.0 million) partially offset by lower cash exploration
and development expense ($3.8 million). 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 $4.1
million in 1996.
53
<PAGE> 58
The company's financing activities provided $77.0 million in 1996. Outflows
were $48.3 million, primarily related to gold loan repayments of $38.2 million
and common share dividends of $10.1 million. The company had currency
borrowings in the amount of $34.7 million, issued $85.8 million of shares in
conjunction with the acquisition of Santa Elina, and received proceeds of $4.8
million on exercise of stock options.
The company had $189.5 million in investing activities during 1996; for mining
properties, plant and equipment ($103.7 million); acquisition of Santa Elina
($97.1 million), partially offset by the receipt of $13.8 million in cash on
the sale of mining properties and other assets including the investment in
Cluff Resources plc ($5.5 million) and the investment of Etruscan Enterprises,
Ltd. ($8.3 million).
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:
o Working capital provided by operations before exploration and
development properties expenses was $82.3 million in 1996.
o The company had $103.2 million in cash at December 31, 1996.
o The company had $111.5 million in unutilized credit facilities at
December 31, 1996.
o The company expects to secure a new $75 million unsecured corporate
credit facility to finance a portion of the construction costs at
Aquarius.
o The company expects to secure a $36 million non-recourse project loan
to finance a portion of the construction costs at Paredones Amarillos.
o The company received proceeds of $63.3 million in the first quarter of
1997 in connection with the repurchase of its 218,000 ounce gold
commitment which hedged its $84.0 million bond obligation and the
repurchase of all of its gold and silver forward sales positions,
consisting of 654,000 ounces of gold and 8.5 million ounces of silver.
o Pursuant to a shelf registration statement filed with the United
States Securities and Exchange Commission in 1994, the company may
offer from time to time up to $200 million in aggregate principal
amount of debt securities, common shares, and/or guarantees of debt
securities issued by Echo Bay Resources, Inc., a wholly owned
subsidiary of the company. In connection with the U.S. shelf
registration, the company also filed a shelf debt prospectus and a
shelf equity prospectus with Canadian securities regulatory
authorities. Under these prospectuses, the company could issue up to
$125 million of debt securities and up to 10 million common shares.
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.
54
<PAGE> 59
During 1995 and 1994, 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 in the
cost of 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 5 and 15 to the company's consolidated
financial statements.
The company's obligation to purchase Canadian dollars are described in note 15
to the company's consolidated financial statements.
The company's crude oil commitments are described in note 15 to the company's
consolidated statements.
During 1995, the company and TVI Pacific formed alliances with Filipino
corporations to create Kingking Mines Inc. ("KMI"), a corporation under the
laws of the Republic of the Philippines. KMI has signed an option agreement to
acquire a 100% interest in the Kingking project after completion of a bankable
feasibility study and a $67.0 million payment in 1998. A contingent payment of
up to $18.0 million also would be payable if there were a significant increase
in mineralization at Kingking. The company and its Philippine affiliates have
an initial interest in the option of 75%, but the agreements provided for the
acquisition and disposition of interests such that the interests of the company
and its Philippine affiliates ultimately could be between 60% and 100% of the
Kingking project.
Also during 1995, the company obtained an option to acquire a 50% interest in
the Chapada development property, located in Brazil. Upon exercise of 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.
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."
The company's operations are subject to certain royalty obligations as
described in note 16 to the company's consolidated financial statements.
Lease commitments are described in note 16 to the company's consolidated
financial statements.
The company's provisions for future reclamation and closure costs at the former
Sunnyside mine in Colorado and the Alaska-Juneau development property in Alaska
are reviewed periodically and may be adjusted as additional information becomes
available.
55
<PAGE> 60
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management's Responsibility for Financial Reporting . . . . . . . . 57
Report of Independent Chartered Accountants . . . . . . . . . . . . 58
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . 59
Consolidated Statement Of Earnings . . . . . . . . . . . . . . . . 60
Consolidated Statement Of Retained Earnings (Deficit) . . . . . . . 60
Consolidated Statement Of Cash Flow . . . . . . . . . . . . . . . . 61
</TABLE>
56
<PAGE> 61
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 entirely of outside directors. 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 performed 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 27, 1997
57
<PAGE> 62
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, 1996 and 1995 and the consolidated statements of earnings,
retained earnings (deficit) and cash flow for each of the years in the
three-year period ended December 31, 1996. 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, 1996 and 1995 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, 1996 in accordance with accounting principles generally accepted
in Canada.
Edmonton, Canada (signed) Ernst & Young
January 27, 1997 Chartered Accountants
58
<PAGE> 63
ECHO BAY MINES LTD.
CONSOLIDATED BALANCE SHEET
December 31
<TABLE>
<CAPTION>
thousands of U.S. dollars 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 103,196 $ 185,843
Interest and accounts receivable 9,739 14,749
Inventories (note 1) 33,941 34,173
Prepaid expenses and other assets 6,573 5,353
- -------------------------------------------------------------------------------
153,449 240,118
Plant and equipment (note 2) 233,984 255,868
Mining properties (note 2) 405,011 318,219
Long-term investments and other assets (note 4) 39,701 56,956
- -------------------------------------------------------------------------------
$ 832,145 $ 871,161
===============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 72,421 $ 61,781
Income and mining taxes payable 3,651 2,547
Gold and other financings (note 5) 129,445 41,135
Deferred income (note 5) 876 25,053
- -------------------------------------------------------------------------------
206,393 130,516
Gold and other financings (note 5) 53,478 111,679
Deferred income (note 5) 1,581 --
Other long-term obligations (note 6) 69,992 32,018
Deferred income taxes 8,392 8,096
Commitments and contingencies (notes 15 and 16)
Common shareholders' equity:
Common shares (note 10), no par value,
unlimited number authorized; issued
and outstanding - 139,355,781 shares
(129,880,804 shares in 1995) 709,534 618,965
Deficit (201,931) (15,109)
Foreign currency translation (15,294) (15,004)
- -------------------------------------------------------------------------------
492,309 588,852
- -------------------------------------------------------------------------------
$ 832,145 $ 871,161
===============================================================================
</TABLE>
See accompanying notes.
59
<PAGE> 64
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENT OF EARNINGS
Year ended December 31
<TABLE>
<CAPTION>
thousands of U.S. dollars,
except for per share data 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 337,316 $ 360,730 $ 377,600
- -------------------------------------------------------------------------------------------------
Expenses:
Operating costs 221,126 212,182 201,128
Royalties (note 16) 9,625 8,434 10,039
Production taxes 2,440 4,322 6,528
Depreciation and amortization 86,491 89,403 85,538
Reclamation and mine closure 6,298 5,005 4,654
General and administrative 13,577 12,169 10,447
Exploration and development 63,619 69,796 46,539
Interest and other (note 7) 3,090 4,161 (271)
Provision for Alaska-Juneau development property (note 6) 77,134 -- --
Provision for McCoy/Cove pit wall stabilization (note 6) 30,000 -- --
- -------------------------------------------------------------------------------------------------
513,400 405,472 364,602
- -------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (176,084) (44,742) 12,998
Income tax expense (recovery) (note 8) 618 (3,206) (4,323)
- -------------------------------------------------------------------------------------------------
Earnings (loss) before preferred stock dividends (176,702) (41,536) 17,321
Preferred stock dividends of subsidiary (note 11) -- 8,524 9,298
- -------------------------------------------------------------------------------------------------
Net earnings (loss) $(176,702) $ (50,060) $ 8,023
=================================================================================================
Earnings (loss) per share $ (1.31) $ (0.43) $ 0.07
=================================================================================================
Weighted average number of shares outstanding (thousands) 134,434 116,233 112,514
=================================================================================================
</TABLE>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (DEFICIT)
Year ended December 31
<TABLE>
<CAPTION>
thousands of U.S. dollars 1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ (15,109) $ 44,140 $ 44,560
Net earnings (loss) (176,702) (50,060) 8,023
- ------------------------------------------------------------------------------------
(191,811) (5,920) 52,583
- ------------------------------------------------------------------------------------
Dividends on common shares (note 10) (10,120) (8,978) (8,443)
Excess of redemption price of preferred shares
redeemed over original proceeds (note 11) -- (211) --
- ------------------------------------------------------------------------------------
(10,120) (9,189) (8,443)
- ------------------------------------------------------------------------------------
Balance, end of year $(201,931 ) $ (15,109) $ 44,140
====================================================================================
</TABLE>
See accompanying notes.
60
<PAGE> 65
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENT OF CASH FLOW
Year ended December 31
<TABLE>
<CAPTION>
thousands of U.S. dollars 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net earnings (loss) $(176,702) $ (50,060) $ 8,023
Add (deduct):
Depreciation 56,737 56,182 53,682
Amortization 29,754 33,221 31,856
Preferred stock dividends of subsidiary (note 11) -- 8,524 9,298
Provision for McCoy/Cove pit wall stabilization (note 6) 30,000 -- --
Provision for Alaska-Juneau development property (note 6) 77,134 -- --
Non-cash portion of exploration and development expense 7,035 9,365 8,902
Deferred income taxes 305 (448) (5,702)
Environmental expenses at non-producing properties -- 12,899 --
Gain on sale of assets (4,469) (5,506) (1,282)
Other 5,970 2,120 3,366
- --------------------------------------------------------------------------------------------------
Working capital provided by operations 25,764 66,297 108,143
Change in cash invested in working capital related to
operations:
Interest and accounts receivable (184) (2,667) 1,822
Inventories 1,368 (3,563) 468
Prepaid expenses and other assets (361) (134) (1,817)
Accounts payable and accrued liabilities 3,245 6,695 (12,182)
Income and mining taxes payable 69 701 (4,207)
- --------------------------------------------------------------------------------------------------
29,901 67,329 92,227
- --------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Currency borrowings 34,714 28,015 --
Debt repayments (38,179) (9,853) (84,853)
Preferred stock dividends of subsidiary (note 11) -- (8,524) (9,298)
Common share dividends (note 10) (10,120) (8,978) (8,443)
Preferred share conversions and redemptions (note 11) -- (136,505) (2)
Common shares issued on acquisition
of Santa Elina, net of issuance costs (note 3) 85,801 -- --
Common share issues, net of issuance costs (note 10) 4,768 135,904 3,055
- --------------------------------------------------------------------------------------------------
76,984 59 (99,541)
- --------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Mining properties, plant and equipment (103,667) (81,538) (35,727)
Cost of Santa Elina acquisition (note 3) (97,069) -- --
Short-term investments -- -- 234,441
Long-term investments and other assets (3,499) (47,557) (10,719)
Proceeds on sale of mining properties and long-term 13,809 44,655 --
investments
Other 894 1,368 1,649
- --------------------------------------------------------------------------------------------------
(189,532) (83,072) 189,644
- --------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (82,647) (15,684) 182,330
Cash and cash equivalents, beginning of year 185,843 201,527 19,197
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 103,196 $ 185,843 $ 201,527
==================================================================================================
</TABLE>
See accompanying notes.
61
<PAGE> 66
ECHO BAY MINES LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
December 31, 1996
GENERAL
Echo Bay Mines Ltd. mines, processes and explores for gold and silver. Gold
accounted for 89% of 1996 revenue, and silver 11%. The company has four
operating mines: McCoy/Cove in Nevada, U.S.A.; Round Mountain in Nevada,
U.S.A.; Lupin in Northwest Territories, Canada; and Kettle River in Washington,
U.S.A. All are 100% owned except for Round Mountain, which is 50% owned.
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, although to a lesser extent. Gold and silver prices fluctuate in
response to numerous factors beyond the company's control.
The consolidated 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 accounting principles generally accepted in
the United States (except as described in note 12 to the company's 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 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
Common share investments 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 investee's undistributed earnings or 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. The company's foreign operations that are not self-sustaining are
translated into U.S. dollars using the temporal method, which translates
monetary assets and liabilities at the year-end exchange rate, and translates
additions to non-monetary assets and liabilities, revenue and expenses at
average exchange rates. Exchange differences arising on translation are
recorded in current earnings.
62
<PAGE> 67
ECHO BAY MINES LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
December 31, 1996
REVENUE RECOGNITION
Revenue is recognized when title to delivered gold or silver passes to the
buyer.
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 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. If a project is determined not to be commercially
feasible, unrecoverable costs are expensed in the year in which the
determination is made.
63
<PAGE> 68
ECHO BAY MINES LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
December 31, 1996
Exploration costs
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 and mine closure 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, 1996 were $375 per ounce of gold and $5.00 per ounce of silver.
The market prices were $369 per ounce of gold and $4.87 per ounce of silver at
December 31, 1996. 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 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, 1996. 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 as originally granted, and the grant of permits
is often subject to appeal.
CAPITALIZATION OF INTEREST
Interest cost is capitalized 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 locks 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,
64
<PAGE> 69
ECHO BAY MINES LTD.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
December 31, 1996
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. During 1995 and 1994, 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 in the
cost of assets, when the hedged Canadian dollar transactions occur 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.
65
<PAGE> 70
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per share
and per ounce or unless otherwise noted
1. INVENTORIES
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Precious metals -- bullion $ 4,182 $ 5,944
-- in-process 11,442 10,312
Materials and supplies 18,317 17,917
- --------------------------------------------------------------------------
$ 33,941 $ 34,173
==========================================================================
</TABLE>
2. PROPERTY, PLANT AND EQUIPMENT
Net book value
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------
Net Net
Plant and Mining Book Book
Property and percentage owned Equipment Properties Value Value
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
McCoy/Cove (100%) $ 82,311 $ 91,623 $173,934 $205,430
Round Mountain (50%) 55,349 52,711 108,060 104,354
Lupin (including Ulu) (100%) 56,253 58,920 115,173 114,836
Kettle River (100%) 25,572 13,673 39,245 43,582
Alaska-Juneau (100%) (note 6) -- -- -- 61,247
Aquarius (100%) 100 14,823 14,923 8,905
Kingking (75%) 480 42,097 42,577 31,342
Paredones Amarillos (60%) 179 4,998 5,177 1,269
Santa Elina (51%) (note 3) 4,886 126,166 131,052 --
Other 8,854 -- 8,854 3,122
- ---------------------------------------------------------------------------
$233,984 $405,011 $638,995 $574,087
===========================================================================
</TABLE>
During 1995, the company and TVI Pacific formed alliances with Filipino
corporations to create Kingking Mines Inc. ("KMI"), a corporation under the
laws of the Republic of the Philippines. KMI has signed an option agreement to
acquire a 100% interest in the Kingking project after completion of a bankable
feasibility study and a $67.0 million payment in 1998. A contingent payment of
up to $18.0 million also would be payable if there were a significant increase
in mineralization at Kingking.
The company and its Philippine affiliates have an initial interest in the
option of 75%, but the agreements provide for the acquisition and disposition
of interests such that the interests of the company and its Philippine
affiliates ultimately could be between 60% and 100% of the Kingking project.
Plant and equipment
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------
Net Book Net Book
Cost Value Cost Value
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Land improvements and utility systems $ 65,131 $ 24,047 $ 63,076 $ 26,331
Buildings 161,778 57,410 160,106 68,083
Equipment 392,080 135,740 363,537 142,731
Construction in progress 16,787 16,787 18,723 18,723
- -----------------------------------------------------------------------------------
$635,776 $233,984 $605,442 $255,868
===================================================================================
</TABLE>
66
<PAGE> 71
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
Mining properties
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Producing mines' acquisition, exploration and development costs $388,515 $364,611
Less accumulated amortization 250,616 221,125
- --------------------------------------------------------------------------------------------
137,899 143,486
Development properties' acquisition, exploration and development costs 188,084 102,204
Deferred mining costs 79,028 72,529
- --------------------------------------------------------------------------------------------
$405,011 $318,219
============================================================================================
</TABLE>
3. SANTA ELINA ACQUISITION
On July 16, 1996, the company completed a series of transactions with Santa
Elina Gold Corporation ("Santa Elina") and Sercor Ltd. ("Sercor," a private
company that owned 67% of Santa Elina). The transactions enabled the company to
increase its ownership of the outstanding common shares of Santa Elina from 7%
to 50% by issuing 8,830,915 common shares to the shareholders of Santa Elina.
As a result, the company and Sercor each owned 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 the 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, the
company's share of Santa Elina's assets, liabilities, revenues and expenses are
included in the company's consolidated financial statements. The company's
share of Santa Elina's operating results is included in the company's
consolidated results of operations from the date of acquisition.
The total cost of the transactions was $106.0 million. This consists of $13.1
million to purchase the company's initial 7% interest in Santa Elina, $86.1
million to purchase the additional 43% interest in Santa Elina, the $5.3
million carrying value of the company's 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 assigned value of assets and liabilities acquired at July 16, 1996, based
on the consideration given, follows.
<TABLE>
<S> <C>
ASSETS
Cash $ 2,025
Accounts receivable 555
Inventories 281
Plant and equipment 4,433
Mining properties 114,457
Long-term investments 989
----------------------------------------
122,740
----------------------------------------
LIABILITIES
Accounts payable and
accrued liabilities 3,256
Current portion of financings 6,888
Other long-term obligations 6,596
----------------------------------------
16,740
----------------------------------------
Net assets at assigned values $106,000
----------------------------------------
</TABLE>
67
<PAGE> 72
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
Summarized below are the unaudited pro forma operating results of the company,
assuming the Santa Elina purchase had been consummated on January 1, 1995.
These pro forma results are based upon historical results of operations and not
necessarily indicative of results that would have occurred.
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Revenue $ 337,316 $ 360,730
Net loss $(180,045) $ (58,788)
Net loss per common share $ (1.29) $ (0.47)
- ---------------------------------------------------------------------------
</TABLE>
Since the completion of the above transactions, the company increased its
ownership in Santa Elina to 51% through additional share purchases of $7.0
million ($6.0 million in the fourth quarter of 1996 and $1.0 million in the
first quarter of 1997). The increased ownership does not affect the joint
control of Santa Elina, and proportionate consolidation will continue to be
used.
4. LONG-TERM INVESTMENTS AND OTHER ASSETS
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------- ----------------------------------------------
Number of Percent Market Carrying Number of Percent Market Carrying
Shares Interest Value Value Shares Interest Value Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Share investments at
cost:
TVI Pacific Inc. 14,016,845 15.4% $12,794 $11,810 11,666,667 15.7% $18,715 $7,579
Canarc Resources Corp. 3,000,000 9.0 3,724 4,153 3,000,000 10.5 3,055 4,153
Minefinders Corp. 1,280,000 15.0 2,804 1,998 -- -- -- --
Rift Resources Ltd. 1,000,000 9.8 1,059 1,465 -- -- -- --
Cluff Resources plc -- -- -- -- 3,630,800 4.8 6,033 2,899
Santa Elina Gold
Corp. (note 3) -- -- -- -- 9,000,000 6.7 9,889 13,073
Other share investments 13,928 9,913 8,157 8,315
- ---------------------------------------------------------------------------------------------------------------------------
34,309 29,339 45,849 36,019
Equity investment in:
Etruscan Enterprises
Ltd. -- -- -- -- 4,175,275 27.0 12,815 8,877
- ---------------------------------------------------------------------------------------------------------------------------
34,309 29,339 58,664 44,896
Property options 1,817 7,764
Other assets 8,545 4,296
- ---------------------------------------------------------------------------------------------------------------------------
$39,701 $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 Central and South
America, West Africa and the Philippines.
In the first quarter of 1996, the company sold its investment in Cluff
Resources plc for $5.5 million. A gain of $2.5 million was recorded on the
sale.
68
<PAGE> 73
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
Equity investment
In the fourth quarter of 1996, the company sold its investment in Etruscan
Enterprises Ltd. in exchange for $8.3 million cash and the 49% of the Kilgore
exploration property in Idaho that it did not own. The company recognized a
gain of $1.9 million on this sale.
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
at the time of option exercise.
5. GOLD AND OTHER FINANCINGS AND DEFERRED INCOME
<TABLE>
<CAPTION>
Financings Deferred Income
------------------- --------------------
1996 1995 1996 1995
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold swap $ 83,839 $ 83,625 $ -- $ --
Gold loans 33,721 41,134 2,423 27,216
Currency loan 33,846 -- -- --
Debenture payable 27,966 28,055 -- --
Other 3,551 -- 34 (2,163)
- -----------------------------------------------------------------
182,923 152,814 2,457 25,053
Less current portion 129,445 41,135 876 25,053
- -----------------------------------------------------------------
$ 53,478 $111,679 $ 1,581 $ --
=================================================================
</TABLE>
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. In 1990, bonds totaling $84.0 million were swapped for an
obligation to deliver 218,000 ounces of gold in September 1997, equivalent to a
selling price of $385 per ounce. The effective interest rate on the bond and
swap arrangement was 3.54% at December 31, 1996.
Subsequent to December 31, 1996, the company repurchased its 218,000 ounce gold
delivery commitment which hedged the $84.0 million bond obligation described
above (see also note 15). The $84.0 million bond obligation has an effective
interest rate of 10.34% and is expected to be repaid in March 1997.
Gold term loan and currency loan
At December 31, 1996, a 41,562 ounce term loan was outstanding under a gold
loan agreement (60,200 ounces at December 31, 1995). Under an August 1996
amendment, this term loan will be repaid over five years. All deferred gains
related to the gold loan have been recognized in 1996 on a basis that matched
the production originally designated for delivery. The remaining commitment is
priced at $387.50 per ounce based on the gold price at the date of
rescheduling. For financial statement presentation the outstanding gold loan
was remeasured to $369 per ounce, the gold price at December 31, 1996 ($387 per
ounce in 1995). Unrealized remeasurement gains or losses are included in
deferred income. In August 1996, the company also borrowed an additional $34.7
million in U.S. dollars to be repaid over five years.
69
<PAGE> 74
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
The gold loan agreement contains both term and revolving provisions. At
December 31, 1996, the company had no amounts outstanding, and $100.0 million
or gold equivalent available until 2001, 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 0.475%, and interest
on dollar borrowings at LIBOR plus 0.475%. At December 31, 1996, the effective
interest rates were 2.90% on the gold loan and 5.85% on the dollar borrowings.
Gold loan related to Swiss franc bonds
At December 31, 1995, the company's net gold delivery commitment related to the
Swiss franc bond and swap arrangement was 118,990 ounces at approximately $374
per ounce, including deferred amounts. In 1996, 69,267 ounces of gold were
delivered and the remaining 49,723 ounce commitment was rescheduled into
quarterly payments of 5,525 ounces beginning in the first quarter of 1997 and
ending in the first quarter of 1999. All deferred gains related to the Swiss
franc transactions have been recognized in earnings in 1996 on a basis that
matched the production originally designated for delivery. The remaining
commitment is priced at $403 per ounce based on the gold price at the date of
rescheduling. The effective rate of interest on the remaining commitment was
2.75% at December 31, 1996.
For financial statement presentation the remaining commitment was remeasured to
$369 per ounce, the gold price at December 31, 1996.
Debenture payable
A subsidiary of the company has issued a debenture in the amount of $28.0
million, bearing interest at the one-month discount rate for bankers'
acceptances plus 0.325%. The interest rate was 3.44% at December 31, 1996. This
debenture is payable in April 1997 and is secured by a letter of credit.
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 $58.5 million at December 31,
1996, primarily related 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 December 31, 1996, the company had unutilized credit facilities of $111.5
million, including the $100.0 million or gold equivalent revolving commitment.
Annual commitment fees on the unutilized credit facilities are 0.20%.
Interest payments were $9.0 million in 1996, $4.3 million in 1995 and $7.2
million in 1994.
Future gold and silver delivery commitments are summarized by year in note 15.
70
<PAGE> 75
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
6. OTHER LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------
<S> <C> <C>
Accrued reclamation and mine closure $33,263 $30,868
Provision for Alaska-Juneau development property
reclamation and closure costs 20,000 --
Provision for McCoy/Cove pit wall stabilization 28,407 --
Property acquisition costs 1,473 1,831
Other 3,912 2,069
- -------------------------------------------------------------------------
87,055 34,768
Less current portion included in accounts payable and
accrued liabilities 17,063 2,750
- -------------------------------------------------------------------------
$69,992 $32,018
=========================================================================
</TABLE>
Reclamation and mine closure
At December 31, 1996, the company's future reclamation and mine closure costs
are estimated to be $72.6 million, excluding Alaska-Juneau described below. The
aggregate obligation accrued to December 31, 1996 was $33.3 million, including
accruals of $6.3 million at operating mines in 1996, $5.0 million at operating
mines and $12.9 million at non- producing properties (note 7) in 1995 and $4.7
million at operating mines in 1994. The remaining $39.3 million will be accrued
on the unit-of-production method over the remaining life of each mine. Future
reclamation costs are determined using management's best estimates of the scope
of work to be performed and related costs. These estimates may change based on
future changes in operations, cost of reclamation activities and regulatory
requirements.
At December 31, 1996, the company recorded a provision of $77.1 million on
Alaska-Juneau development property, including its $57.1 million investment and
$20.0 million for estimated reclamation and closure costs. The provision
resulted from a new feasibility study concluding that the project as currently
designed would not be economically feasible (note 16).
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 waste rock from an unstable portion of
the Cove pit wall at the McCoy/Cove mine in Nevada. The cost estimate
underlying 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. This plan could affect a
portion of McCoy/Cove ore reserves, if it is determined that the cost to remove
waste rock renders the portion uneconomic. By December 31, 1996, total spending
for the pit wall stabilization was $1.6 million.
7. INTEREST AND OTHER
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ (6,131) $ (9,871) $(10,237)
Interest expense 8,226 5,028 6,102
Gain on sale of Cluff Resources investment (note 4) (2,509) -- --
Gain on sale of Etruscan equity investment (note 4) (1,874) -- --
Summa litigation accrual (note 16) 1,521 -- --
Gain on sale of Kensington -- (3,189) --
Gain on disposition of Muscocho shares -- (2,104) --
Environmental expenses at non-producing properties -- 12,899 --
Other 3,857 1,398 3,864
- --------------------------------------------------------------------------------------
$ 3,090 $ 4,161 $ (271)
======================================================================================
</TABLE>
71
<PAGE> 76
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
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.
8. INCOME TAX EXPENSE
Geographic components
The geographic components of earnings before income tax expense and of income
tax expense were as follows.
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings (loss) before income taxes:
Canada $ (32,792) $ (41,407) $ (15,183)
United States and other (143,292) (3,335) 28,181
- ------------------------------------------------------------------------------
$(176,084) $ (44,742) $ 12,998
==============================================================================
Current income tax expense (recovery):
Canada $ 448 $ (3,891) $ 297
United States and other (135) 1,133 1,082
- ------------------------------------------------------------------------------
313 (2,758) 1,379
- ------------------------------------------------------------------------------
Deferred income tax expense (recovery):
Canada 250 (950) (5,702)
United States and other 55 502 --
- ------------------------------------------------------------------------------
305 (448) (5,702)
- ------------------------------------------------------------------------------
Income tax expense (recovery) $ 618 $ (3,206) $ (4,323)
==============================================================================
</TABLE>
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>
1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Depreciation and amortization $ 55 $ 502 $(3,602)
Deferred mining costs -- -- (1,532)
Exploration costs -- -- (1,437)
Non-deductible reserves -- -- (355)
Non-capital losses -- -- 169
Other 250 (950) 1,055
- ------------------------------------------------------------------------------
$ 305 $ (448) $(5,702)
==============================================================================
</TABLE>
72
<PAGE> 77
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
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 1996,
43.2% in 1995 and 42.9% in 1994 for the following reasons.
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings (loss) before income taxes $(176,084) $ (44,742) $ 12,998
========================================================================================
Income tax effect of:
Expected Canadian federal and
provincial corporate income taxes $ (76,068) $ (19,329) $ 5,576
Operating loss from which no tax benefit is 64,724 14,845 --
derived
Canadian resource allowance and earned depletion (406) (1,539) (245)
Foreign earnings subject to different income tax 11,806 1,815 (11,074)
rates
Other items 562 1,002 1,420
- ----------------------------------------------------------------------------------------
Income tax expense (recovery) $ 618 $ (3,206) $ (4,323)
========================================================================================
Effective tax rate (current and deferred) (0.4%) 7.2% (33.3%)
========================================================================================
</TABLE>
Loss carryforwards
At December 31, 1996, the company had U.S. net operating loss carryforwards of
approximately $254 million to apply against future taxable income and $44
million to apply against future alternative minimum taxable income. These loss
carryforwards do not include provisions for the Alaska-Juneau development
property and for the McCoy/Cove pit wall stabilization costs (note 6), which
have not yet been recognized for income tax purposes. The net operating loss
carryforwards expire during 2001-2011. Additionally, the company has Canadian
non-capital loss carryforwards of approximately $24 million and net capital
loss carryforwards of approximately $7 million. The non-capital loss
carryforwards expire in various amounts from 1998 through 2003. The net capital
loss carryforwards 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. The proceeds were
recorded as a recovery of income taxes in 1995 because the expenses represented
unrecorded loss carryforwards for accounting purposes. The arrangement included
the issuance of debentures to the third party (note 5).
Income tax payments (recoveries)
Income tax payments (recoveries) were $0.4 million in 1996, ($3.6) million in
1995 and $4.5 million in 1994.
9. PREFERRED SHARES
The company is authorized to issue an unlimited number of preferred shares,
issuable in series. Each series is 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.
73
<PAGE> 78
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
10. COMMON SHARES
Changes in the number of common shares outstanding during the three years ended
December 31, 1996, were as follows.
<TABLE>
<CAPTION>
Number of
Shares Amount
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
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 11) 16,916,695 134,387
- ------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 129,880,804 618,965
1996: Exercise of share options 644,062 4,768
Shares issued on acquisition of Santa Elina, net of issuance
costs of $0.3 million (note 3) 8,830,915 85,801
- ------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 139,355,781 $ 709,534
============================================================================================================
</TABLE>
The company has suspended payment of dividends beginning in 1997. This will
save approximately $21.0 million over the next two years for mine development,
based on the company's prior practice of paying dividends totaling $0.075 per
share as was done in 1996, 1995 and 1994. Dividends payable to Canadian
residents have been converted to and paid in Canadian dollars.
Shelf registration
Pursuant to a shelf registration statement filed with the United States
Securities and Exchange Commission in 1994, the company may offer from time to
time up to $200 million in aggregate principal amount of debt securities,
common shares, and/or guarantees of debt securities issued by Echo Bay
Resources, Inc., a wholly owned subsidiary of the company.
In connection with the U.S. shelf registration, the company also filed a shelf
debt prospectus and a shelf equity prospectus with Canadian securities
regulatory authorities. Under these prospectuses, the company could issue up to
$125 million of debt securities and up to 10 million common shares.
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 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.
74
<PAGE> 79
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
Employee share incentive plan and director equity plan
These plans provide for the granting of options to officers, key employees, and
eligible directors to purchase common shares. 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. Options generally vest in 25% increments on the
first, second, third and fourth year anniversaries following the grant date.
Option prices are denominated in Canadian dollars.
Changes in the number of options outstanding during the three years ended
December 31, 1996 were as follows.
<TABLE>
<CAPTION>
Employee Share Incentive Plan Director Equity Plan
----------------------------- -------------------------
Weighted Weighted
Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1993 3,613,414 C$ 11.24 -- C$ --
1994: Options granted 615,618 15.80 55,200 14.63
Options exercised (468,009) 8.78 -- --
Options forfeited (16,400) 13.80 -- --
---------------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1994 3,744,623 C$ 12.29 55,200 C$ 14.63
1995: Options granted 989,400 13.33 65,000 12.50
Options exercised (317,755) 8.16 -- --
Options forfeited (113,576) 13.06 -- --
---------------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1995 4,302,692 C$ 12.81 120,200 C$ 13.48
1996: Options granted 1,065,130 12.26 40,000 18.25
Options exercised (694,758) 10.86 (2,300) 14.63
Options forfeited (244,247) 14.42 -- --
Options expired (90,150) 14.88 -- --
---------------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1996 4,338,667 C$ 12.85 157,900 C$ 14.67
===============================================================================================================
</TABLE>
The number of shares reserved for future grants at December 31, 1996 are
288,085 under the Employee Share Incentive Plan and 264,800 under the Director
Equity Plan. The number and weighted average price of shares exercisable under
the Employee Share Incentive Plan are 2,282,905 at C$12.70 at December 31,
1996; 2,502,927 at C$11.82 at December 31, 1995; and 2,245,720 at C$11.24 at
December 31, 1994. The number and weighted average price of shares exercisable
under the Director Equity Plan are 41,550 at C$13.79 at December 31, 1996 and
13,800 at C$14.63 at December 31, 1995.
Options outstanding at December 31, 1996 had the following characteristics.
<TABLE>
<CAPTION>
Employee Share Incentive Plan
- -----------------------------
Weighted Avg. Weighted Avg.
Number of Exercise Exercise Price Weighted Number of Exercise Price
Shares Price of Shares Average Years Shares of Shares
Outstanding Range Outstanding Until Expiration Exercisable Exercisable
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
239,725 C$ 5.75 - C$ 8.13 C$ 5.97 6 224,925 C$ 5.92
631,072 C$ 8.88 - C$ 9.75 C$ 9.12 3 631,072 C$ 9.12
2,104,940 C$ 10.70 - C$ 13.38 C$ 12.20 8 576,371 C$ 13.07
1,277,880 C$ 15.75 - C$ 18.88 C$ 16.46 8 804,912 C$ 16.48
85,050 C$ 19.13 - C$ 25.94 C$ 21.40 5 45,625 C$ 23.37
- ------------------------------------------------------------------------------------------------------------
</TABLE>
75
<PAGE> 80
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
<TABLE>
<CAPTION>
Director Equity Plan
- --------------------
Weighted Avg. Weighted Avg.
Number of Exercise Exercise Price of Weighted Number of Exercise Price
Shares Price Shares Average Years Shares of Shares
Outstanding Range Outstanding Until Expiration Exercisable Exercisable
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
157,900 C$ 12.50 - C$ 18.25 C$ 14.67 8 41,550 C$ 13.79
- ---------------------------------------------------------------------------------------------------------
</TABLE>
11. PREFERRED STOCK OF A SUBSIDIARY
There was no preferred stock of a subsidiary outstanding as of December 31,
1996. In July 1992, the company received net proceeds of $136.3 million from
the sale of 5.75 million shares of Series A cumulative preferred stock of a
financing subsidiary, Echo Bay Finance Corp. Quarterly dividends were paid on
the preferred shares totaling $1.75 per share annually. 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 during 1995, the entire issue of
preferred shares was converted into common shares of the company at 2.985
common shares for each $25 preferred share or redeemed for cash at $26.225 per
preferred share plus accrued dividends. During 1995, 5,667,437 preferred shares
were converted into 16,916,695 of the company's common shares, and 82,313
preferred shares were redeemed for cash of $2.2 million.
12. DIFFERENCES BETWEEN CANADIAN AND U.S. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
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 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, certain share investments are carried at cost
as long-term investments (note 4). These investments would be written down and
a loss recognized in earnings only when there is a loss in value that is other
than temporary. 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 carried at cost is $5.0 million after a nil tax
effect as of December 31, 1996 ($9.8 million at December 31, 1995).
In accordance with Canadian GAAP, the company uses the deferral method of
accounting for income taxes. Under U.S. GAAP, the company would use the
liability method of accounting for income taxes.
In accordance with Canadian GAAP, the cost of the Santa Elina acquisition
included the market value of the 8.8 million common shares ($9.75 per share or
$86.1 million) issued by the company on July 16, 1996 (note 3). Under U.S.
GAAP, the cost would be determined based on the market value of the company's
common shares on April 9, 1996, the date of the commitment agreement ($13.875
per share or $122.5 million). The difference between the methods would increase
mining properties and common
76
<PAGE> 81
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
shares under U.S. GAAP by $36.4 million. Additionally, 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 $46.6 million, net of activity after acquisition
of $1.1 million.
In accordance with Canadian GAAP, the company's mining properties are amortized
over proven and probable reserves and other mineralization. Under U.S. GAAP,
only proven and probable reserves would be used as the 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
$10.6 million lower and deficit would be $10.6 million higher at December 31,
1996 ($11.4 million lower and $11.4 million higher at December 31, 1995).
The effects on the consolidated statement of earnings of the above differences
would have been as follows.
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
Net earnings (loss) under Canadian GAAP $(176,702) $ (50,060) $ 8,023
Change in market value of foreign
exchange contracts 2,168 3,605 4,198
Application of liability method for
accounting for income taxes -- -- (4,900)
- -------------------------------------------------------------------------------
NET EARNINGS (LOSS) UNDER U.S. GAAP $(174,534) $ (46,455) $ 7,321
===============================================================================
EARNINGS (LOSS) PER SHARE UNDER U.S. GAAP $ (1.30) $ (0.40) $ 0.07
===============================================================================
</TABLE>
Selected information from the consolidated balance sheets under Canadian and
U.S. GAAP is as follows.
<TABLE>
<CAPTION>
1996 1995
----------------------------------- ------------------------------------
Canadian GAAP U.S. GAAP Canadian GAAP U.S. GAAP
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Long-term investments and other assets $ 39,701 $ 54,642 $ 56,956 $ 78,527
Mining properties $ 405,011 $ 477,517 $ 318,219 $ 306,819
Deferred income taxes $ 8,392 $ 55,038 $ 8,096 $ 8,096
Common shares $ 709,534 $ 745,962 $ 618,965 $ 618,965
Deficit $ 201,931 $ 202,528 $ 15,109 $ 18,706
COMMON SHAREHOLDERS' EQUITY $ 492,309 $ 533,110 $ 588,852 $ 599,023
=====================================================================================================================
</TABLE>
Under U.S. GAAP, the 1996 common share issuance for the acquisition of Santa
Elina and the 1995 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, common shares issued in acquisition of Santa Elina
and the cost of the Santa Elina acquisition would have been reduced by $86.1
million each for 1996, and preferred share conversions and common share issues
would have been reduced by $134.3 million each for 1995 on the consolidated
statement of cash flow.
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-Lived Assets to be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets
77
<PAGE> 82
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
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.
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 as follows.
<TABLE>
<CAPTION>
1996 1995
----------------------------------- ------------------------------------
U.S. U.S.
millions of U.S. dollars Canada and other Total Canada and other Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Deferred tax liabilities:
Tax over book depreciation
and depletion $ 23.5 $ 51.8 $ 75.3 $ 17.0 $ 35.2 $ 52.2
Other tax liabilities 7.5 -- 7.5 8.0 -- 8.0
- ------------------------------------------------------------------ -----------------------------------
Total deferred tax 31.0 51.8 82.8 25.0 35.2 60.2
- ------------------------------------------------------------------ -----------------------------------
liabilities
Deferred tax assets:
Net operating loss and
other carryforwards 13.1 93.9 107.0 5.3 87.7 93.0
Book over tax depreciation
and depletion 22.9 -- 22.9 22.6 -- 22.6
Accrued liabilities 2.7 29.1 31.8 2.5 11.3 13.8
Other tax assets 0.5 7.6 8.1 1.3 6.9 8.2
- ------------------------------------------------------------------ -----------------------------------
Total deferred tax assets
before allowance 39.2 130.6 169.8 31.7 105.9 137.6
Valuation allowance for
deferred tax assets (16.0) (126.0) (142.0) (14.3) (71.2) (85.5)
- ------------------------------------------------------------------ -----------------------------------
Total deferred tax assets 23.2 4.6 27.8 17.4 34.7 52.1
- ------------------------------------------------------------------ -----------------------------------
Net deferred tax liabilities $ 7.8 $ 47.2 $ 55.0 $ 7.6 $ 0.5 $ 8.1
================================================================== ===================================
</TABLE>
The net increase in the valuation allowance for deferred tax assets was $56.5
million for 1996 and $10.0 million for 1995.
Stock-based compensation
The U.S. Financial Accounting Standards Board ("FASB") Statement No. 123,
"Accounting for 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.
In accordance with Canadian GAAP and U.S. GAAP (under APB No. 25), the company
does not recognize compensation expense for stock option grants in the earnings
statement, as the market prices of the underlying stock on the grant dates do
not exceed the exercise prices of the options granted.
78
<PAGE> 83
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
Had the company adopted statement No. 123 for its U.S. GAAP disclosure, the
following net losses would have been reported.
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------
<S> <C> <C>
Net loss under U.S. GAAP $(174,534) $ (46,455)
Pro forma stock compensation expense,
after a nil income tax effect (2,766) (455)
- ------------------------------------------------------------------
Pro forma net loss under U.S. GAAP $(177,300) $ (46,910)
- ------------------------------------------------------------------
Pro forma loss per share under U.S. GAAP $ (1.32) $ (0.40)
==================================================================
</TABLE>
The company has utilized the Black-Scholes option valuation model to estimate
the fair value of options granted, assuming a weighted average option life of 6
years, risk-free interest rates ranging from 5.40% to 6.64%, a 1% dividend
yield and a volatility factor of 40%. The weighted average fair value of
options granted is estimated at $4.18 per share in 1996 and $4.37 per share in
1995.
Other
The estimated fair values of financial instruments are set out below and in
note 15. The fair values were determined from quoted market prices.
<TABLE>
<CAPTION>
1996 1995
---------------------------- ---------------------------
Carrying Estimated Carrying Estimated
millions of U.S. dollars Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 103.2 $ 103.2 $ 185.8 $ 185.8
Long-term investments $ 39.7 $ 44.7 $ 57.0 $ 70.7
Debenture payable and
other currency loans $ 65.4 $ 65.1 $ 28.1 $ 28.0
- -----------------------------------------------------------------------------------------------------------
</TABLE>
79
<PAGE> 84
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
13. JOINT VENTURES
Summarized below are company's 50% interest in the Round Mountain mine and, in
1996, 51% interest in Santa Elina (note 3), accounted for by the proportionate
consolidation method.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 79,865 $ 67,843 $ 79,806
Operating costs (45,437) (35,028) (37,547)
Royalties (6,482) (5,266) (6,833)
Production taxes (886) (686) (1,735)
Depreciation and amortization (14,178) (14,488) (15,050)
Reclamation and mine closure (945) -- --
Exploration (2,862) (24) (37)
Other (391) (143) 87
- -----------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES $ 8,684 $ 12,208 $ 18,691
===================================================================================
Current assets $ 63,171 $ 6,575 $ 7,911
Non-current assets 237,336 102,847 101,914
Current liabilities (16,515) (7,870) (13,789)
Non-current liabilities (18,632) (7,191) (17,332)
- -----------------------------------------------------------------------------------
EQUITY $ 265,360 $ 94,361 $ 78,704
===================================================================================
Net cash provided (used) by:
Operating activities $ 16,738 $ 42,853 $ 46,207
Investing activities (20,944) (15,415) (2,661)
Financing activities (3,339) -- --
- -----------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH $ (7,545) $ 27,438 $ 43,546
===================================================================================
</TABLE>
14. GEOGRAPHIC SEGMENT INFORMATION
Financial information regarding geographic segments is set out below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Canada $ 63,859 $ 67,026 $ 69,468
United States 273,457 293,704 308,132
- --------------------------------------------------------------------------------------
$ 337,316 $ 360,730 $ 377,600
======================================================================================
Earnings (loss) before income taxes
Canada $ (32,792) $ (41,407) $ (15,183)
United States (143,725) (2,452) 28,181
Brazil and other 433 (883) --
- --------------------------------------------------------------------------------------
(176,084) (44,742) 12,998
Income tax expense (recovery) 618 (3,206) (4,323)
- --------------------------------------------------------------------------------------
Earnings (loss) before preferred stock dividends (176,702) (41,536) 17,321
Dividends on preferred stock of subsidiary -- 8,524 9,298
- --------------------------------------------------------------------------------------
NET EARNINGS (LOSS) $(176,702) $ (50,060) $ 8,023
======================================================================================
Assets:
Canada $ 236,482 $ 350,329 $ 140,035
United States 406,750 488,250 741,628
Brazil and other 188,913 32,582 --
- --------------------------------------------------------------------------------------
TOTAL ASSETS $ 832,145 $ 871,161 $ 881,663
======================================================================================
</TABLE>
80
<PAGE> 85
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
15. HEDGING ACTIVITIES AND COMMITMENTS
In the first quarter of 1997 the company repurchased its 218,000 ounce gold
commitment which hedged the $84.0 million bond obligation (note 5) and
repurchased all of its gold and silver forward sales positions, which consisted
of 654,000 ounces of gold with delivery dates ranging from 1997 to 2002 and 8.5
million ounces of silver with delivery dates ranging from 1997 to 1999. These
transactions resulted in cash proceeds of $63.3 million which are expected to
be used, together with existing cash, to repay the $84.0 million bond
obligation in March 1997. This $63.3 million has been deferred and will be
recognized in earnings as the formerly hedged gold and silver production is
sold. The gain will be recognized in revenue as follows: $14.1 million in 1997,
$14.8 million in 1998, $27.7 million in 1999 and $6.7 million in 2000 and
beyond. To provide protection against a decrease in gold prices, the company
purchased 450,000 ounces of gold put options and sold 300,000 ounces of gold
call options for a net cost of $0.4 million.
This note to the company's consolidated financial statements shows the
company's pro forma hedge and commitments as of December 31, 1996, adjusted to
reflect the first quarter 1997 transactions described above.
Gold and silver commitments
The company's pro forma gold and silver commitments as of December 31, 1996,
adjusted to reflect the first quarter 1997 transactions described above, were
as follows.
<TABLE>
<CAPTION>
Gold Average
Loans Price of Loans
(ounces) (per ounce)
- --------------------------------------------------------------------
<S> <C> <C>
1997 27,569 $ 400
1998 29,756 399
1999 15,367 393
2000 12,031 388
2001 6,563 388
- --------------------------------------------------------------------
91,286 $ 396
====================================================================
</TABLE>
The delivery prices on the gold loans stated above represent the prices
established per the gold loan agreements. Gold loans are remeasured at each
balance sheet date, resulting in deferred losses of $2.5 million at December
31, 1996. These losses are netted against deferred income and will be included
in revenue when the production related to the loans is sold. See note 5.
81
<PAGE> 86
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
The company's pro forma option position as of December 31, 1996, adjusted to
reflect the first quarter 1997 transactions described above, 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
- ----
1997 300,000 $ 345 150,000 $ 389
1998 150,000 345 150,000 398
- -------------------------------------------------------------------------------
450,000 $ 345 300,000 $ 394
===============================================================================
Silver
- ------
1997 1,440,000 $ 5.40 1,440,000 $ 6.43
- -------------------------------------------------------------------------------
1,440,000 $ 5.40 1,440,000 $ 6.43
===============================================================================
</TABLE>
Currency position
The company's obligations to purchase Canadian dollars as of December 31, 1996
were as follows.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Canadian Exchange Rate
Dollars (C$ to U.S.$1.00)
- -------------------------------------------------------------------------------
<S> <C> <C>
1997 $ 26,200,000 1.49
1998 25,200,000 1.52
1999 25,200,000 1.56
2000 25,200,000 1.59
- -------------------------------------------------------------------------------
$101,800,000 1.54
===============================================================================
</TABLE>
Crude oil position
The company's swap contracts and forward purchase commitment as of December 31,
1996 were as follows.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Barrels of
Crude Oil Price per
Purchased Barrel
- -------------------------------------------------------------------------------
<S> <C> <C>
1997 397,000 $ 17.95
1998 390,000 17.57
1999 20,000 17.63
- -------------------------------------------------------------------------------
807,000 $ 17.76
===============================================================================
</TABLE>
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.
82
<PAGE> 87
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
Shown below are the carrying amounts and unrealized gains or losses on the
company's hedging positions at December 31, 1996 and 1995, and pro forma at
December 31, 1996, adjusted to reflect the first quarter 1997 transactions
described above.
<TABLE>
<CAPTION>
At December 31, 1996 Pro forma at December 31, 1996
- ------------------------------------------------------------------------ -------------------------------
Carrying Unrealized Carrying Unrealized
Amount Gain(loss) Amount Gain (loss)
- ------------------------------------------------------------------------ -------------------------------
1996
- ----
<S> <C> <C> <C> <C>
Gold swaps (note 5) $ 83,800 $ 7,100 $ -- $ --
Gold loans (note 5) 33,700 -- 33,700 --
Off-balance sheet instruments:
Gold forward sales -- 50,300 -- --
Silver forward sales -- 8,800 -- --
Gold options - puts 400 -- 2,300 --
- calls -- -- (1,500) --
Silver options - puts 1,000 (300) 1,000 (300)
- calls (1,000) 1,000 (1,000) 1,000
Foreign currency contracts -- 10,000 -- 10,000
Crude oil contracts -- 3,000 -- 3,000
- ------------------------------------------------------------------------ -------------------------------
$ 79,900 $ 13,700
======================================================================== ===============================
1995
- ----
Gold swaps (note 5) $ 101,480 $ 3,600
Gold loan (note 5) 23,279 --
Off-balance sheet instruments:
Gold forward sales -- 34,900
Silver forward sales -- 6,400
Gold and silver options - puts 924 (900)
- calls (546) 2,000
Foreign currency contracts -- 7,800
Crude oil contracts -- (300)
- ------------------------------------------------------------------------
$ 53,500
========================================================================
</TABLE>
Fair values are estimated for the contract settlement dates based on 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 pro forma outstanding hedged position at
December 31, 1996, adjusted to reflect the first quarter 1997 transactions
described above, would be as follows.
83
<PAGE> 88
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
<TABLE>
<CAPTION>
Amount Effect on Market Value
of of Hedged Position
Change (thousands of U.S.$)
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
Change in:
Gold prices $ 10.00/ounce $2,400
Silver prices $ 0.25/ounce 300
Canadian dollar U.S.$ 0.01 1,000
Crude oil prices $ 1.00/barrel 800
Interest rates (effect on gold and silver
options and gold loans) 1% 750
- -------------------------------------------------------------------------------------------------
</TABLE>
Hedging gains and losses represent the difference between spot or market prices
and realized amounts. Shown below are the hedging gains (losses) recognized in
earnings.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Gold loans and swaps $ (3,943) $ (612) $ 3,278
Gold forward sales 1,541 2,849 (1,278)
Silver loans and swaps -- -- 7,539
Silver forward sales 1,910 1,909 (3,703)
Gold and silver options 534 394 1,113
Operating expenses:
Foreign currency contracts 1,459 839 (705)
Crude oil contracts 1,120 326 (631)
Dividends on preferred stock of subsidiary:
Interest rate swap -- (493) 764
- ----------------------------------------------------------------------------------------------------------
$ 2,621 $ 5,212 $ 6,377
==========================================================================================================
</TABLE>
16. OTHER COMMITMENTS AND CONTINGENCIES
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, 1996, cumulative royalties of
$16.8 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. K-2 area production at Kettle
River is subject to a 5% gross proceeds royalty and a net smelter return
royalty ranging from 2% at gold prices of $300 per ounce or less to 3% at gold
prices of $400 per ounce or more.
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 $23.7 million, payable as follows: $5.9 million in 1997, $2.8
million in 1998, $2.7 million in 1999, $2.5 million in 2000, $2.5 million in
2001 and $7.3 million thereafter.
84
<PAGE> 89
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
Contingencies
At December 31, 1996, the company accrued $20.0 million for estimated
reclamation and closure costs associated with the Alaska-Juneau development
property. Actual spending related to reclamation and closure costs may differ
from the current estimate of $20.0 million. The provision for future
reclamation and closure costs is reviewed periodically and adjusted as
additional information becomes available.
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 of production at McCoy/Cove and the former Manhattan mine. Summa
Corporation filed a motion for summary judgment seeking $10.3 million for
allegedly underpaid royalties plus interest. The court denied Summa's motion.
The case is scheduled for trial in the spring of 1997. The company has accrued
$1.7 million related to the Summa litigation, including $1.5 million in 1996.
85
<PAGE> 90
QUARTERLY FINANCIAL HIGHLIGHTS
(Unaudited)
(millions of U.S. Dollars except per share data)
<TABLE>
<CAPTION>
Net Earnings
Earnings (Loss) per
Revenue (Loss) Share
- --------------------------------------------------------------------------
<S> <C> <C> <C>
1996
First quarter $ 67.8 $ (16.2) $ (0.12)
Second quarter 95.1 (14.6) (0.11)
Third quarter(1) 94.9 (42.4) (0.31)
Fourth quarter(2) 79.5 (103.5) (0.77)
- --------------------------------------------------------------------------
Total $ 337.3 $ (176.7) $ (1.31)
==========================================================================
1995
First quarter $ 84.2 $ (11.7) $ (0.10)
Second quarter 90.6 (13.0) (0.12)
Third quarter 93.5 (8.7) (0.08)
Fourth quarter 92.4 (16.7) (0.13)
- --------------------------------------------------------------------------
Total $ 360.7 $ (50.1) $ (0.43)
==========================================================================
</TABLE>
(1) Includes a $30.0 million ($0.22 per share) provision related to the
estimated costs to remove waste rock from an unstable portion of the Cove
pit wall at the McCoy/Cove mine in Nevada. See "Business and
Properties--McCoy/Cove."
(2) Includes a $77.1 million ($0.57 per share) provision to write off the $57.1
million book value of the company's Alaska-Juneau development property in
Alaska and to accrue $20.0 million for estimated reclamation and closure
costs. See "Business and Properties--Alaska-Juneau."
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.
86
<PAGE> 91
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.
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 . . . . . . . . . . . 57
Report of Independent Chartered Accountants . . . . . . . . . . . . . . . 58
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . 59
Consolidated Statement Of Earnings . . . . . . . . . . . . . . . . . . . 60
Consolidated Statement Of Retained Earnings (Deficit) . . . . . . . . . . 60
Consolidated Statement Of Cash Flow . . . . . . . . . . . . . . . . . . . 61
</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 10.6, 21, 23.1, 23.2, 23.3, 24 and 27 are filed herewith. All
other exhibits are incorporated by reference as indicated below.
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Description
------- -------------------
<S> <C>
2.1 Share Subscription and Purchase Agreement among Sercor,
Ltd., Echo Bay Mines Ltd. and Kendall Gold Corporation
(incorporated by reference to Exhibit 2.1 of the report on
Form 8-K of file no. 1-8542 filed on April 24, 1996).
2.2 Merger Agreement between Santa Elina Gold Corporation and
Kendall Gold Corporation (incorporated by reference to
Exhibit 2.2 of the report on Form 8-K of file no. 1-8542
filed on April 24, 1996).
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 Shelf registration statement, dated April 14, 1994
(incorporated herein by reference to Registration Statement
No. 33-77738 and amendments thereto).
4.2 Shareholder rights plan, dated September 2, 1994
(incorporated herein by reference to the report on Form 8-K
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).
</TABLE>
87
<PAGE> 92
<TABLE>
<S> <C>
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 of
file No. 1-8542 for the year ended December 31, 1986).
10.3 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 of file No. 1-8542
for the year ended December 31, 1992).
10.4 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 of
file No. 1-8542 for the year ended December 31, 1993).
10.5 Form of Unanimous Shareholders Agreement among Echo Bay
Mines Ltd., Sercor Limited, Paulo C. de Brito, Angela Maria
de Brito and Kendall Gold Corporation (incorporated by
reference to Exhibit 10.1 of the report on Form 8-K of file
no. 1-8542 filed on April 24, 1996).
10.6 Employment Agreement dated May 10, 1996 with Robert L. Leclerc.
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young.
23.2 Consent of FSS Canada Consultants Inc.
23.3 Consent of H. A. Simons Ltd.
24 Power of Attorney.
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
Filed on January 14, 1997, reporting the write off of the company's
Alaska-Juneau development property and corresponding $77.1 million charge
to earnings (see "Business and Properties--Alaska-Juneau), the company's
decision to proceed with construction and development of the Aquarius and
Paredones Amarillos development projects (see "Business and
Properties--Construction Programs--Aquarius" and "--Paredones Amarillos")
and the suspension of dividends on common shares (see "Market for the
Registrant's Common Shares and Related Shareholder Matters-- Dividends").
88
<PAGE> 93
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: February 13, 1997
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 February 13, 1997
- --------------------------- 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
*JOHN G. CHRISTY
*PETER CLARKE
*CARLOS A. FERRER
*RICHARD C. KRAUS
*ROBERT L. LECLERC
*JOHN F. MCOUAT *A majority of the
*MONICA E. SLOAN Board of Directors
*R. GEOFFREY P. STYLES
</TABLE>
* By /s/ Robert L. Leclerc
---------------------
February 13, 1997
Robert L. Leclerc, Attorney-in-fact
89
<PAGE> 94
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Exhibit Description
------- -------------------
<S> <C>
2.1 Share Subscription and Purchase Agreement among Sercor,
Ltd., Echo Bay Mines Ltd. and Kendall Gold Corporation
(incorporated by reference to Exhibit 2.1 of the report on
Form 8-K of file no. 1-8542 filed on April 24, 1996).
2.2 Merger Agreement between Santa Elina Gold Corporation and
Kendall Gold Corporation (incorporated by reference to
Exhibit 2.2 of the report on Form 8-K of file no. 1-8542
filed on April 24, 1996).
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 Shelf registration statement, dated April 14, 1994
(incorporated herein by reference to Registration Statement
No. 33-77738 and amendments thereto).
4.2 Shareholder rights plan, dated September 2, 1994
(incorporated herein by reference to the report on Form 8-K
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).
</TABLE>
<PAGE> 95
<TABLE>
<S> <C>
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 of
file No. 1-8542 for the year ended December 31, 1986).
10.3 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 of file No. 1-8542
for the year ended December 31, 1992).
10.4 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 of
file No. 1-8542 for the year ended December 31, 1993).
10.5 Form of Unanimous Shareholders Agreement among Echo Bay
Mines Ltd., Sercor Limited, Paulo C. de Brito, Angela Maria
de Brito and Kendall Gold Corporation (incorporated by
reference to Exhibit 10.1 of the report on Form 8-K of file
no. 1-8542 filed on April 24, 1996).
10.6 Employment Agreement dated May 10, 1996 with Robert L.
Leclerc.
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young.
23.2 Consent of FSS Canada Consultants Inc.
23.3 Consent of H. A. Simons Ltd.
24 Power of Attorney.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10.6
May 10, 1996
Mr. Robert L. Leclerc
Chairman
Echo Bay Mines Ltd. and
Echo Bay Management Corporation
6 Whitemud Place
Edmonton, Alberta
T6H 5X4
Dear Bob:
This is to confirm the agreements and understandings which have been
reached concerning your employment by Echo Bay Mines Ltd., its subsidiaries and
related companies (collectively "Echo Bay").
1. Services:
Echo Bay hereby employs you, and you hereby agree to serve, as its
Chairman. So long as you are employed hereunder, you shall continue to devote
the principal portion of your business time and energies to the business
affairs of Echo Bay and in the promotion, development and improvement of its
interests.
2. Compensation:
In consideration for the performance of your employment services Echo Bay
shall pay you an aggregate annual salary of U.S. $350,000, subject to periodic
review and adjustment. Your salary shall be paid in monthly, twice monthly, or
bi-weekly installments, depending upon the frequency of salary payments
generally applicable to senior management employees of Echo Bay.
Notwithstanding the fact your appointment as Chairman takes effect today, your
entitlement to salary shall become effective as of July 1, 1996.
3. Additional Benefits:
In addition to the foregoing you shall be entitled during the term hereof:
(a) to an option grant pursuant to the share incentive plan of
the Corporation (the "Plan"), covering an option to acquire 100,000
common shares in the capital of the Corporation, exercisable at
today's closing price as published by The Toronto Stock Exchange,
vesting six months from today, and otherwise as specified in the
customary certificate of grant delivered by the Chairman of the
Compensation Committee;
(b) to participate in any share incentive plans from time to time
established by Echo Bay, on a basis presently envisaged to involve
annual grants, commencing in or about November 1996, of options to
acquire 50,000 common shares in the capital of the Corporation,
exercisable in accordance with the Plan; and
(c) to such other benefits as may from time to time be established by
Echo Bay and applicable to employees generally. It is acknowledged
that you shall not participate in the employee cash incentive plan.
<PAGE> 2
It is specifically understood and agreed that you shall receive from Echo
Bay credit for and shall be paid effective July 1, 1996 an additional annual
amount equal to 6% of your aggregate annual salary, with such payments to be
made directly to you or into the Echo Bay Inc. Partnership Savings Plan for
United States employees, or in such other manner as may be appropriate should
you be based in Canada.
4. Termination of Services:
If Echo Bay should deliver to you written notice that your services
hereunder will no longer be required, Echo Bay will pay or cause you to be paid
a lump sum equal to twice the amount of your annual salary in effect at the
time such notice is given. If such notice is given you agree to resign
forthwith from any and all offices and directorships held by you with Echo Bay.
In addition, should Echo Bay purport to alter the scope of your duties
hereunder, in such manner that in result you suffer what would constitute a
demotion (in the context of an employer-employee relationship), you shall be
entitled to treat this as notice of constructive termination of your services
hereunder. In such event, the provisions hereinabove specified in respect of
compensation in lieu of notice shall apply mutatis mutandis.
In any case where notice of termination is given or is construed to have
been given hereunder, you shall be paid an additional sum equal to 20% of your
annual salary then in effect in lieu of any further benefits under this letter
agreement, except to the extent these would already have accrued or been earned
by you under Echo Bay's retirement or option plans.
Echo Bay shall, notwithstanding the foregoing, not be deemed to have
terminated your services if you have reached normal retirement age and Echo Bay
has indicated it no longer wishes to retain your services. For the purposes
hereof the expression "normal retirement age" shall mean, in the absence of an
agreement to the contrary by the parties, the day when you shall have reached
the full age of 65 years.
Furthermore, if during the term of your employment there should be a
"Change of Control", as defined in Exhibit A attached hereto, and thereafter
a) you do not serve as Chairman (or in a position of
similar or during such period of two years your service with Echo Bay
should terminate for any reason other than voluntary resignation,
death, disability, or retirement at or after your normal retirement
date under Echo Bay's retirement plans, or
b) you voluntarily resign your position at Echo Bay within
one year of a Change of Control as a result of a good faith
determination that, as a result of the Change of Control, you are
unable to effectively discharge the duties of the position you
occupied immediately prior to such Change of Control on or before
your last day of service with Echo Bay, Echo Bay will pay to you in
lieu of any rights, other than those accrued as of the date of
termination under Echo Bay's retirement or option plans, a lump sum
cash amount equal to three times the total of your annual salary
amount in effect at the time of Change of Control, and you shall not
be entitled to future participation in Echo Bay's insurance,
retirement, option and other fringe benefit plans.
Notwithstanding anything to the contrary contained herein, if any amount
otherwise payable under this Section 4 would constitute a "parachute payment",
as defined in Section 280 G of the 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, applicable
provisions of the Code.
In the event of a threat (actual or perceived) of a takeover bid for
voting control of the Corporation, the Secretary shall be required to estimate,
prior to the occurrence of a Change of Control, the extent to which you might
receive a "parachute payment" should your employment be terminated as a result
thereof. Such estimate by the
<PAGE> 3
Secretary and the method of its calculation shall, in the absence of compelling
evidence to the contrary, be deemed to be conclusive and binding upon the
parties hereto. The Secretary shall also be entitled to set up a reserve and
set aside sufficient funds to permit payment of the aforesaid lump sum amount
to you.
It is further understood and agreed that if the termination of service
occurs within three years of your normal retirement age, the total amount
payable under the preceding paragraphs shall be calculated as provided therein
and then multiplied by a fraction, the numerator of which is the number of
whole months remaining until the normal retirement age date and the denominator
of which is 36.
In the event of termination of your employment after a Change of Control
by reason of death or disability, you (or your designated beneficiary or
estate) will be entitled to all rights available to you under Echo Bay's
benefit and compensation plans applicable in the case of death or disability
which were in effect immediately prior to the Change of Control or, if greater,
in effect at the time of death or disability. Your death or disability after
you are eligible to receive lump sum severance payments under this agreement
shall not affect the obligation of Echo Bay to make such payments.
If you should be entitled to receive payments from Echo Bay on account of
termination of your employment under the terms of another employment or
severance agreement, or under the terms of applicable laws and regulations,
such other payments shall discharge payments under this agreement and payments
under this agreement shall discharge pro tanto such other amounts due to you.
Notwithstanding the foregoing provisions hereof, should your employment be
terminated for "cause", as that term is interpreted according to the laws of
the State or Province where you were based immediately prior to your
termination, you shall only be entitled to be compensated as determined by a
court of competent jurisdiction in such State or Province.
<PAGE> 4
If the foregoing accurately sets forth the agreements and understandings
we have reached, please sign the enclosed copy of this letter and return it to
me, whereupon it shall, effective as of May 10, 1996 become a binding agreement
enforceable in accordance with its terms.
Yours truly,
/s/ Richard C. Kraus
Richard C. Kraus
President and Chief Executive Officer,
Echo Bay Mines Ltd.
Echo Bay Management Corporation
Accepted and Agreed to by
Robert L. Leclerc and intending
to be legally bound hereby
/s/ Robert L. Leclerc
- --------------------------------
Robert L. Leclerc
<PAGE> 5
Exhibit A
"Change of Control" shall be deemed to have taken place if (i) a third
person, including a group, becomes the beneficial owner of shares of Echo Bay
Mines Ltd. (the "Company") having 20% or more of the total number of votes that
may be cast for the election of directors of the Company or (ii) there occurs
any cash tender or exchange offer, amalgamation or other business combination,
sale of assets or contested election, or any combination of the foregoing
transactions, and as a result of or in connection with either (i) or (ii),
persons who were directors of the Company before the event shall cease to
constitute a majority of the Board of Directors of the Company or any successor
to the Company.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION OF
SUBSIDIARIES OWNERSHIP INCORPORATION
- -------------------------- --------- ---------------
<S> <C> <C>
Echo Bay Inc. 100% Delaware, U.S.A.
Echo Bay Finance Corporation 100% Delaware, U.S.A.
Round Mountain Gold Corporation 100% Delaware, U.S.A.
Echo Bay Minerals Company 100% Delaware, U.S.A.
Sunnyside Gold Corporation 100% Delaware, U.S.A.
Echo Bay Exploration Inc. 100% Delaware, U.S.A.
Echo Bay Management Corporation 100% Delaware, U.S.A.
White Pine Gold Corporation 100% Delaware, U.S.A.
Echo Bay Alaska Inc. 100% Delaware, U.S.A.
Echo Bay Resources Inc. 100% Delaware, U.S.A.
633168 Alberta Ltd. 100% Alberta, Canada
633167 Alberta Ltd. 100% Alberta, Canada
Corp. Air Inc. 100% Alberta, Canada
Echo Bay Ontario Ltd. 100% Ontario, Canada
Echo Bay Sales Corporation 100% Barbados
Echo Bay Mexico, S.A. de C.V. 100% Mexico
Echo Bay Mines de Venezuela, C.A. 100% Venezuela
Kendall Gold Corp. 50% B.V.I.
Kuranakh Gold Mining Corp. 50% Russia
Echo Bay (Barbados) Ltd. 100% Barbados
Echo Bay Ecuador, S.A. 100% Ecuador
Echo Bay Mines Chile Ltda. 100% Chile
Echo Bay Capital Corporation 100% Ireland
Echo Bay Exploration Mexico SRL 100% Mexico
Servicios Echo Bay, S.A. de C.V. 100% Mexico
Minera Paradones Amarillos S.A. de C.V. 60% Mexico
Minera San Simon, S.A. de C.V. 100% Mexico
Minera Buenos Aires, S.A. de C.V. 100% Mexico
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
JURISDICTION OF
SUBSIDIARIES OWNERSHIP INCORPORATION
- -------------------------- ----------- ---------------
<S> <C> <C>
Silk Road Gold Corp. 50% The Netherlands
Echo Bay International B.V. 100% The Netherlands
Echo Bay Mexico B.V. 100% The Netherlands
Echo Bay Bolivia B.V. 100% The Netherlands
Echo Bay Chile B.V. 100% The Netherlands
Echo Bay Venezuala B.V. 100% The Netherlands
Echo Bay Ecuador B.V. 100% The Netherlands
Echo Bay Peru B.V. 100% The Netherlands
Echo Bay Brazil B.V. 100% The Netherlands
Echo Bay Ghana Exploration B.V. 100% The Netherlands
Echo Bay Philippines B.V. 100% The Netherlands
*Echo Holdings Inc. 40% The Philippines
*Echo Bay Mines Philippines Inc. 40%/64% The Philippines
*Kingking Mines Inc. 30%/48% The Philippines
Echo Bay Do Brazil Servicios Ltda. 100% Brazil
Echo Bay Mines Do Brazil Ltda. 100% Brazil
Minera Echo Bay del Peru, S.A. 100% Peru
Mercator Insurance Corporation 100% Barbados
</TABLE>
*Less than 50% ownership. Two percentages given-the first is direct ownership;
the second is direct plus indirect.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 33-77738) and related prospectus of Echo Bay Mines Ltd. and Echo
Bay Resources, Inc., the Registration Statement (Form S-8 No. 2-84687)
pertaining to the Employee Share Incentive Plan of Echo Bay Mines Ltd. and the
Registration Statement (Form S-8 No. 33-91696) pertaining to the Director
Equity Plan and amending the Employee Share Incentive Plan of Echo Bay Mines
Ltd. of our report dated January 27, 1997 with respect to the consolidated
financial statements of Echo Bay Mines Ltd. included in the Annual Report
(Form 10-K) for the year ended December 31, 1996.
Edmonton, Canada /s/ Ernst & Young
February 13, 1997
Chartered Accountants
<PAGE> 1
EXHIBIT 23.2
February 13, 1997
Echo Bay Mines Ltd.
6400 S. Fiddler's Green Circle
Suite 1000
Englewood, CO 80111
Dear Sirs:
We refer to the report on Form 10-K for the fiscal year ended
December 31, 1996 of Echo Bay Mines Ltd. proposed to be filed with the
Securities and Exchange Commission. We hereby consent to the references to our
firm and the use of summaries from our report dated February 1997 in such 10-K
in "Business and Properties--Reserves", "--Other Mineralization" and
"--Construction Programs--Aquarius/Paredones Amarillos." We also consent to the
incorporation by reference of such reference and summaries in the Registration
Statement (Form S-3 No. 33-77738) and related prospectus of Echo Bay Mines Ltd.
and Echo Bay Resources, Inc., the Registration Statement (Form S-8 No. 2-84687)
pertaining to the Employee Share Incentive Plan of Echo Bay Mines Ltd. and the
Registration Statement (Form S-8 No. 33-91696) pertaining to the Director
Equity Plan and amending the Employee Share Incentive Plan of Echo Bay Mines
Ltd.
We also confirm to you that we have read such Form 10-K and have no
reason to believe that there is any misrepresentation in the information
contained therein that is derived from our report or known to us as a result of
preparing such report.
Sincerely,
/s/ R. Mohan Srivastava
R. Mohan Srivastava
President, FSS Canada Consultants
<PAGE> 1
EXHIBIT 23.3
H. A. Simons Ltd.
Mining Group
111 Dunsmuir Street, Suite 400
Vancouver, B. C. Canada V6B 5W3
604-664-4827
Telex 04-51150
Fax 604-664-3301
February 13, 1997
Echo Bay Mines Ltd.
6400 S. Fiddler's Green Circle
Suite 1000
Englewood, CO 80111
Dear Sirs:
We refer to the report on Form 10-K for the fiscal year ended December 31, 1996
of Echo Bay Mines Ltd. proposed to be filed with the Securities and Exchange
Commission. We hereby consent to the references to our firm and the use of
summaries from our report dated November 14, 1996 in such 10-K in "Business and
Properties--Reserves", "--Other Mineralization" and "--Construction Programs--
Aquarius/Paredones Amarillos." We also consent to the incorporation by
reference of such reference and summaries in the Registration Statement
(Form S-3 No. 33-77738) and related prospectus of Echo Bay Mines Ltd.
and Echo Bay Resources, Inc., the Registration Statement (Form S-8 No. 2-84687)
pertaining to the Employee Share Incentive Plan of Echo Bay Mines Ltd. and the
Registration Statement (Form S-8 No. 33-91696) pertaining to the Director Equity
Plan and amending the Employee Share Incentive Plan of Echo Bay Mines Ltd.
We also confirm to you that we have read such Form 10-K and have no reason to
believe that there is any misrepresentation in the information contained
therein that is derived from our report or known to us as a result of
preparing such report.
Yours truly,
H. A. SIMONS LTD.
/s/ Brian McEwen
Brian McEwen
Chief Geologist
Mining Group
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, each of the undersigned, directors
and/or officers of Echo Bay Mines Ltd. (the "Company"), hereby constitutes and
appoints ROBERT L. LECLERC, Q.C. and PAUL HILTON or either one of them, his
true and lawful attorney or attorneys and agent or agents to do any and all
acts and to execute in his name, place and stead in such capacity or capacities
(whether on behalf on of the Company or otherwise) any and all instruments
which said attorney or attorneys and agent or agents may deem necessary or
advisable to enable the Company and each of the undersigned to comply with the
United States Securities Exchange Act of 1934, as amended, and any rules,
regulations, requirements or requests of the Securities and Exchange Commission
thereunder or in respect thereof in connection with the Form 10-K Annual Report
of the Company for the fiscal year ended December 31, 1996 including
specifically, but without limiting the generality of the foregoing, power and
authority to execute the respective names of the undersigned directors and/or
officers as indicated below (whether on behalf of the Company or as a director
and/or officer of the Company) on Form 10-K or any other appropriate instrument
relating to the Annual Report of the Company and each of the undersigned does
hereby ratify and confirm all that such attorney or attorneys and agent or
agents or any one of them shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has subscribed these
presents this 13th day of February 1997.
<TABLE>
<S> <C>
/s/ John N. Abell /s/ Latham C. Burns
- ------------------------------------------------ ----------------------------------------------
John N. Abell, Director Latham C. Burns, Director
/s/ Pierre Choquette /s/ John Gilray Christy
- ------------------------------------------------ ----------------------------------------------
Pierre Choquette, Director John Gilray Christy, Director
/s/ Peter Clarke /s/ Carlos A. Ferrer
- ------------------------------------------------ -----------------------------------------------
Peter Clarke, Director Carlos A. Ferrer, Director
/s/ Richard C. Kraus /s/ Robert L. Leclerc
- ------------------------------------------------ -----------------------------------------------
Richard C. Kraus, President and Chief Robert L. Leclerc, Q.C., Chairman and Director
Executive Officer and Director
/s/ John F. McOuat /s/ Monica E. Sloan
- ------------------------------------------------ ------------------------------------------------
John F. McOuat, Director Monica E. Sloan, Director
/s/ R. Geoffrey P. Styles
- ------------------------------------------------
R. Geoffrey P. Styles, Director
/s/ Peter H. Cheesbrough /s/ Gerald A. Tywoniuk
- ------------------------------------------------ ------------------------------------------------
Peter H. Cheesbrough, Senior Vice-President, Gerald A. Tywoniuk, Vice-President, Controller
Finance and Chief Financial Officer and Principal Accounting Officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements included in Echo Bay Mines, Ltd. from 10-K for the year
ended December 31, 1996, and is qualified in its entirety by reference to such
10-K.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 103,196
<SECURITIES> 0
<RECEIVABLES> 9,379
<ALLOWANCES> 0
<INVENTORY> 33,941
<CURRENT-ASSETS> 153,449
<PP&E> 635,776
<DEPRECIATION> 401,792
<TOTAL-ASSETS> 832,145
<CURRENT-LIABILITIES> 206,393
<BONDS> 53,478
0
0
<COMMON> 709,534
<OTHER-SE> (217,225)
<TOTAL-LIABILITY-AND-EQUITY> 832,145
<SALES> 337,316
<TOTAL-REVENUES> 337,316
<CGS> 221,126
<TOTAL-COSTS> 339,557
<OTHER-EXPENSES> 171,478
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,095
<INCOME-PRETAX> (176,084)
<INCOME-TAX> 618
<INCOME-CONTINUING> (176,702)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (176,702)
<EPS-PRIMARY> (1.31)
<EPS-DILUTED> (1.31)
</TABLE>
