<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1997
-------------
[ ] 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 80111-4957
Englewood, CO ----------
- ---------------------------------------- (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (303) 714-8600
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Title of Class Shares Outstanding as of
-------------- ------------------------
Common Shares July 25, 1997
without nominal or par value -------------
139,370,031
===============================================================================
<PAGE>
ECHO BAY MINES LTD.
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)............................1
ITEM 2. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations......................10
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings..........................................26
ITEM 4. Submission Of Matters To A Vote Of The Security
Holders..................................................26
ITEM 6. Exhibits And Reports On Form 8-K...........................27
SIGNATURE...............................................................28
<PAGE>
ECHO BAY MINES LTD.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET June 30 December 31
thousands of U.S. dollars 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 67,138 $ 103,196
Interest and accounts receivable 9,704 9,739
Inventories (note 2) 45,865 33,941
Prepaid expenses and other assets 4,497 6,573
- -----------------------------------------------------------------------------------------------
127,204 153,449
Plant and equipment (note 3) 241,113 233,984
Mining properties (note 3) 403,557 405,011
Long-term investments and other assets 54,944 39,701
- -----------------------------------------------------------------------------------------------
$ 826,818 $ 832,145
- -----------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 73,361 $ 72,421
Income and mining taxes payable 3,717 3,651
Gold and other financings (note 4) 14,961 129,445
Deferred income (note 4) 16,081 876
- -----------------------------------------------------------------------------------------------
108,120 206,393
Gold and other financings (note 4) 47,116 53,478
Deferred income (note 4) 52,393 1,581
Other long-term obligations 66,203 69,992
Deferred income taxes 9,197 8,392
Commitments and contingencies (notes 8 and 9)
Common shareholders' equity:
Common shares, no par value, unlimited number
authorized; issued and outstanding - 139,370,031
shares (139,355,781 shares at December 31, 1996) 709,593 709,534
Capital securities (note 5) 95,974 --
Deficit (245,230) (201,931)
Foreign currency translation (16,548) (15,294)
- -----------------------------------------------------------------------------------------------
543,789 492,309
- -----------------------------------------------------------------------------------------------
$ 826,818 $ 832,145
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to interim consolidated financial statements.
1
<PAGE>
ECHO BAY MINES LTD.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF EARNINGS Three months ended Six months ended
thousands of U.S. dollars, June 30 June 30
except for per share data 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 75,815 $ 95,086 $ 149,653 $ 162,836
- -----------------------------------------------------------------------------------------------
Expenses:
Operating costs 56,310 57,959 107,763 102,524
Royalties 2,074 2,129 4,318 4,232
Production taxes 223 787 662 1,496
Depreciation and amortization 21,348 23,519 41,321 42,016
Reclamation and mine closure 2,187 1,439 4,373 2,583
General and administrative 3,570 3,550 6,988 6,882
Exploration and development 9,940 18,013 16,430 32,021
Interest and other 400 1,990 4,041 1,144
- -----------------------------------------------------------------------------------------------
96,052 109,386 185,896 192,898
- -----------------------------------------------------------------------------------------------
Loss before income taxes (20,237) (14,300) (36,243) (30,062)
- -----------------------------------------------------------------------------------------------
Income tax expense (recovery):
Current 57 435 375 641
Deferred 438 (132) 875 56
- -----------------------------------------------------------------------------------------------
495 303 1,250 697
- -----------------------------------------------------------------------------------------------
Net loss $ (20,732) $ (14,603) $ (37,493) $ (30,759)
- -----------------------------------------------------------------------------------------------
Net loss attributable to common
shareholders (note 5) (23,256) (14,603) (40,132) (30,759)
- -----------------------------------------------------------------------------------------------
Loss per share $ (0.17) $ (0.11) $ (0.29) $ (0.24)
- -----------------------------------------------------------------------------------------------
Weighted average number of shares
outstanding (thousands) 139,370 130,514 139,364 130,391
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to interim consolidated financial statements.
2
<PAGE>
ECHO BAY MINES LTD.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT Three months ended Six months ended
OF CASH FLOW June 30 June 30
thousands of U.S. dollars 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Working capital provided from $ (220) $ 11,844 $ 954 $ 14,189
operations
Increase in cash invested in working
capital related to operations 2,348 6,898 (15,570) (11,343)
- -----------------------------------------------------------------------------------------------
2,128 18,742 (14,616) 2,846
- -----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Debt repayments (4,822) (2,464) (122,879) (4,927)
Capital securities issued, net of
issuance costs (note 5) -- -- 96,700 --
Common share dividends (note 6) -- (4,895) -- (4,895)
Common share issues, net of issuance
costs -- 134 60 4,745
Other 1,989 -- 1,989 --
- -----------------------------------------------------------------------------------------------
(2,833) (7,225) (24,130) (5,077)
- -----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Mining properties, plant and equipment (29,143) (22,067) (49,965) (48,759)
Proceeds on repurchase of the company's
-- gold and silver forward sales
(note 8) -- -- 54,963 --
-- gold swap (note 8) -- -- 8,107 --
-- foreign exchange contracts (note 8) (677) -- 5,995 --
Long-term investments and other assets (7,140) (5,667) (16,517) (6,718)
Proceeds on sale of mining properties
and longterm investments -- -- -- 5,550
Other (44) 510 105 589
- -----------------------------------------------------------------------------------------------
(37,004) (27,224) 2,688 (49,338)
- -----------------------------------------------------------------------------------------------
Net decrease in cash and cash
equivalents (37,709) (15,707) (36,058) (51,569)
Cash and cash equivalents, beginning of
period 104,847 149,981 103,196 185,843
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 67,138 $ 134,274 $ 67,138 $ 134,274
- -----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT Three months ended Six months ended
OF DEFICIT June 30 June 30
thousands of U.S. dollars 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of period $(221,974) $ (31,265) $(201,931) $ (15,109)
Net loss (20,732) (14,603) (37,493) (30,759)
Dividends on common shares (note 6) -- (4,895) -- (4,895)
Interest on capital securities, net of
nil tax effect (note 5) (2,524) -- (2,639) --
Issue costs related to capital
securities (note 5) -- -- (3,167) --
- -----------------------------------------------------------------------------------------------
Balance, end of period $(245,230) $ (50,763) $(245,230) $ (50,763)
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATD FINANCIAL STATEMENTS
June 30, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per share
and per ounce or unless otherwise noted
1. GENERAL
In the opinion of management, the accompanying unaudited consolidated statement
of earnings, consolidated statement of deficit, consolidated balance sheet and
consolidated statement of cash flow contain all adjustments, consisting only of
normal recurring accruals, necessary to present fairly in all material respects
the consolidated financial position of Echo Bay Mines Ltd. (the company) as of
June 30, 1997 and December 31, 1996 and the consolidated results of operations
and cash flow for the three and six months ended June 30, 1997 and 1996. For
further information, refer to the financial statements and related footnotes
included in the company's annual report on Form 10-K for the year ended December
31, 1996.
Certain of the comparative figures have been reclassified to conform with the
current period's presentation.
2. INVENTORIES
June 30 December 31
1997 1996
- ---------------------------------------------------------------------------
Precious metals -- bullion $ 10,901 $ 4,182
-- inprocess 9,989 11,442
Materials and supplies 24,975 18,317
- ---------------------------------------------------------------------------
$ 45,865 $ 33,941
- ---------------------------------------------------------------------------
3. PROPERTY, PLANT AND EQUIPMENT
Plant and equipment June 30 December 31
1997 1996
- ---------------------------------------------------------------------------
Cost $667,762 $635,776
Less accumulated depreciation 426,649 401,792
- ---------------------------------------------------------------------------
$241,113 $233,984
- ---------------------------------------------------------------------------
Mining properties June 30 December 31
1997 1996
- ---------------------------------------------------------------------------
Producing mines' acquisition, exploration
& development costs $395,852 $388,515
Less accumulated amortization 265,284 250,616
- ---------------------------------------------------------------------------
130,568 137,899
Development properties' acquisition, exploration
& development costs 192,503 188,084
Deferred mining costs 80,486 79,028
- ---------------------------------------------------------------------------
$403,557 $405,011
- ---------------------------------------------------------------------------
4
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATD FINANCIAL STATEMENTS
June 30, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per share
and per ounce or unless otherwise noted
4. GOLD AND OTHER FINANCINGS AND DEFERRED INCOME
<TABLE>
<CAPTION>
Financings Deferred Income
------------------------- --------------------
June 30 December 31 June 30 December 31
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold swap $ -- $ 83,839 $ -- $ --
Gold loans 26,267 33,721 4,576 2,423
Currency loan 31,242 33,846 -- --
Debenture payable -- 27,966 -- --
Capital securities (note 5) 4,026 -- -- --
Repurchase of gold and silver
forward contracts and gold swap
(note 8) -- -- 57,903 --
Repurchase of forward currency
exchange contracts (note 8) -- -- 5,995 --
Other 542 3,551 -- 34
- ----------------------------------------------------------------------------------------------
62,077 182,923 68,474 2,457
Less current portion 14,961 129,445 16,081 876
- ----------------------------------------------------------------------------------------------
$47,116 $ 53,478 $52,393 $1,581
- ----------------------------------------------------------------------------------------------
</TABLE>
In the first quarter of 1997, proceeds on issuance of $100.0 million of 11%
capital securities (note 5) and proceeds of $69.8 million on the repurchase of
the company's gold and silver forward sales, gold swap and forward currency
exchange contracts (note 8) were used to repay the company's $84.0 million bond
obligation and to repay the company's $28.0 million of debentures payable.
5. CAPITAL SECURITIES
On March 27, 1997, the company issued $100.0 million of 11% capital securities
due in April 2027. Interest on the securities, accruing from the date of
issuance, is payable semi-annually commencing October 1, 1997. In June 1997, the
company swapped a portion of its capital security interest obligation for a gold
delivery commitment. In March 2002, the company will deliver 291,358 ounces of
gold and will receive $100.0 million, a price of $343 per ounce of gold. The
company will continue to pay semi-annual interest payments of $5.5 million (11%)
to the securities holders; the banks will pay the company semi-annual interest
payments of $3.4 million (6.76%) through March 2002; and the company will pay
the banks the floating gold lease rate (currently 1.25% or $0.6 million semi-
annually). As a result of this swap, which is recorded as a reduction of
interest on the capital securities, the effective interest rate on the capital
securities was reduced to 5.5% through March 2002.
The company has the right to defer interest payments on the securities for a
period not to exceed ten consecutive semi-annual periods. The company may, at
its option, satisfy its deferred interest obligation by delivering common shares
to a trustee. The trustee would sell the company's common shares and remit the
proceeds to the holders of the securities in payment of the deferred interest
obligation.
The present value of the securities' principal amount, $4.0 million, has been
classified as debt within gold and other financings (note 4), and the present
value of the future interest payments, $96.0 million, has been classified as a
separate component of shareholders' equity, as the company has the unrestricted
ability to settle the future interest payments by issuing its own common shares.
Issue costs of $3.3 million have been allocated proportionately to reflect the
debt and equity classifications as follows: $0.1 million to deferred financing
5
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATD FINANCIAL STATEMENTS
June 30, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per share
and per ounce or unless otherwise noted
charges and $3.2 million to shareholders' equity. Interest on the debt portion
of the capital securities has been classified as interest expense on the
consolidated statement of earnings and interest on the equity portion of the
capital securities has been charged directly to the deficit on the consolidated
balance sheet. For purposes of per share calculation, the equity portion
increases the loss attributable to common shareholders.
6. DIVIDENDS ON COMMON SHARES
The company suspended the payment of dividends beginning in 1997. The company
paid a semi-annual dividend of U.S. $0.0375 per common share on June 30, 1996.
7. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES 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 and in the
footnotes to the financial statements included in the company's annual report on
Form 10-K for the year ended December 31, 1996.
In accordance with Canadian GAAP, the present value of the principal amount of
the capital securities issued in March 1997 is classified as debt within gold
and other financings, while the present value of the future interest payments is
classified as a separate component of shareholders' equity. The related issuance
costs have been allocated proportionately to deferred financing charges and
retained earnings based on the debt and equity classifications. Interest on the
capital securities has been allocated proportionately between interest expense
and deficit based on the debt and equity classifications. Under U.S. GAAP, the
face value of the securities would be classified entirely as debt within gold
and other financings; the related issuance costs would be classified as deferred
financing charges within long-term investments and other assets and would be
amortized to interest expense over the life of the securities; and the interest
on the capital securities would be classified entirely as interest expense.
Under U.S. GAAP, gold and other financings would be $96.0 million higher, and
there would be no capital securities component of shareholders' equity; and
long-term investments and other assets would be $3.0 million higher and the
deficit would be $3.0 million lower at June 30, 1997.
The effects on the consolidated statement of earnings of the GAAP differences
would have been as follows.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
1997 1996 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss under Canadian GAAP $ (20,732) $ (14,603) $ (37,493) $ (30,759)
Change in market value of
foreign exchange contracts (1,354) 146 (3,670) 807
Additional interest expense on capital
securities (2,524) -- (2,639) --
Amortization of deferred financing
on capital securities (158) -- (158) --
- -------------------------------------------------------------------------------------------
Net loss under U.S. GAAP $ (24,768) $ (14,457) $ (43,960) $ (29,952)
- -------------------------------------------------------------------------------------------
Loss per share under U.S. GAAP $ (0.18) $ (0.11) $ (0.32) $ (0.23)
- -------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATD FINANCIAL STATEMENTS
June 30, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per share
and per ounce or unless otherwise noted
New U.S. accounting standards regarding the determination of earnings per share
have recently been issued by the Financial Accounting Standards Board. The
company will initially adopt these new standards for the purpose of preparing
U.S. GAAP financial information commencing with its financial statements for the
year ended December 31, 1997. Adoption of the new standards, which involves
restatement of earnings (loss) per share amounts for prior periods, is expected
to have no material effect on the company's earnings (loss) per share amounts.
The effects on the consolidated balance sheet of the GAAP differences would have
been as follows.
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------------------ ------------------------
Canadian GAAP U.S. GAAP Canadian GAAP U.S. GAAP
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Longterm investments and other assets $ 54,944 $ 48,213 $ 39,701 $ 54,642
Mining properties 403,557 475,928 405,011 447,517
Gold and other financings 62,077 158,051 182,923 182,923
Deferred income 68,474 62,479 2,457 2,457
Deferred income taxes 9,197 55,843 8,392 55,038
Common shares 709,593 746,021 709,534 745,962
Deficit 245,230 246,623 201,931 202,528
Common shareholders' equity 543,789 472,962 492,309 533,110
- -------------------------------------------------------------------------------------------
</TABLE>
8. 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 4) 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 $63.1 million which have 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 $6.5 million
in 2000 and beyond. To provide protection against a decrease in gold prices, the
company has 300,000 ounces of gold put options and 425,000 ounces of gold call
options outstanding and 720,000 ounces of silver put options and 720,000 of
silver call options outstanding at June 30, 1997.
In the first and second quarters of 1997, the company repurchased a portion of
its outstanding forward currency exchange contracts. The contracts repurchased
consisted of a total commitment of C$75.6 million at an average C$ to US$1.00
exchange rate of 1.55, with purchase dates ranging from 1998 to 2000. The
transactions resulted in cash proceeds of $6.0 million, which have been deferred
and will be recognized as a reduction to operating costs when the hedged
Canadian dollar transactions occur. The gain will be recognized as follows: $1.9
million in 1998, $2.0 million in 1999, and $2.1 million in 2000. To provide
protection against fluctuations in the exchange rate of Canadian dollars to U.S.
dollars, the company entered into obligations to purchase C$85.6 million of
Canadian dollars at a C$ to U.S. $1.00 exchange rate of 1.37, maturing in 1997
to 2001.
In the second quarter of 1997, the company swapped a portion of its capital
security interest obligation for a commitment to deliver 291,358 ounces of gold
in March 2002 at a price of $343 per ounce of gold (note 5).
7
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATD FINANCIAL STATEMENTS
June 30, 1997
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 June 30, 1997 and December 31, 1996.
Carrying Unrealized
Amount Gain (Loss)
- ------------------------------------------------------
June 30, 1997
- -------------
Gold loans (note 4) $ 26,300 $ --
Gold swap (note 5) -- 6,000
Off-balance sheet instruments:
Gold options -- puts 1,900 1,300
-- calls (1,400) 1,300
Silver options -- puts 500 --
-- calls (500) 500
Foreign currency contracts -- 300
Crude oil contracts -- 1,200
- ------------------------------------------------------
$10,600
- ------------------------------------------------------
Carrying Unrealized
Amount Gain (Loss)
- ------------------------------------------------------
December 31, 1996
- -----------------
Gold swaps $ 83,800 $ 7,100
Gold loan 33,700 --
Off-balance sheet instruments:
Gold forward sales -- 50,300
Silver forward sales -- 8,800
Gold options -- puts 400
-- calls -- --
Silver options -- puts 1,000 (300)
-- calls (1,000) 1,000
Foreign currency contracts -- 10,000
Crude oil contracts -- 3,000
- ------------------------------------------------------
$79,900
- ------------------------------------------------------
Fair values are estimated for the contract settlement dates based upon market
quotations of various input variables. These variables were used in valuation
models which estimate the fair market value.
9. CONTINGENCIES
At December 31, 1996, the company accrued $20.0 million for estimated
reclamation and closure costs associated with the Alaska-Juneau development
property. In July 1997, the company completed an agreement that transfers
responsibility for the Alaska-Juneau project closure to an unaffiliated party.
The cost of this agreement is within the amount previously accrued.
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, in
which it claims in excess of $13 million resulting from improper deductions in
calculation of royalties payable over several years of production at McCoy/Cove
and the former Manhattan mines. Summa Corporation filed a motion for summary
judgment which was denied. The case went to trial on April 28, 1997, final
briefs were filed on June 13, 1997, and a decision by the court is awaited. The
company has $2.0 million accrued related to the Summa litigation.
8
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATD FINANCIAL STATEMENTS
June 30, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per share
and per ounce or unless otherwise noted
In 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 was based
on a preliminary evaluation of the total tons to be removed and the associated
costs. During the second quarter of 1997, the plan for stabilizing the waste
rock was finalized, and the plan will continue to be refined as McCoy/Cove
completes the stabilization work. 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. At June 30, 1997, total spending for the pit wall
stabilization was $2.7 million.
9
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
June 30, 1997
(U.S. dollars)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FINANCIAL CONDITION
Working capital provided from operations amounted to $1.0 million for the first
six months of 1997 compared to $14.2 million in the first six months of 1996.
The 1997 results reflect lower cash gold and silver prices realized ($18.5
million), increased operating costs ($5.2 million), increased reclamation and
mine closure costs ($1.8 million) and increased net interest expense ($1.1
million), partially offset by decreased cash exploration and development
spending ($12.9 million).
The increase in cash invested in working capital related to operations was $15.6
million in the first six months of 1997. The primary use of the cash invested in
working capital was an increase in finished goods inventories ($6.7 million)
primarily at the McCoy/Cove and Kettle River mines, an increase in material and
supplies inventory ($6.6 million) primarily related to the annual resupply of
diesel fuel, bulk materials and other inventory items at the Lupin mine in the
Northwest Territories of Canada and the payment of the December 1996 common
share dividend in January 1997 ($5.2 million).
In the first six months of 1997, the company repaid its $84.0 million bond
obligation and $28.0 million of debentures payable. Additionally, the company
had gold loan repayments of $5.3 million and currency loan repayments of $5.6
million.
In the first six months of 1997, the company received net proceeds of $96.7
million, which reflects issuance costs of $3.3 million, on the issuance of
capital securities.
In the first six months of 1997, the company received proceeds of $63.1 million
related to the repurchase of its 218,000-ounce gold commitment which hedged an
$84.0 million bond obligation and the repurchase of its outstanding gold and
silver forward sales. In addition, the company received proceeds of $6.0 million
related to the repurchase of a portion of its outstanding forward currency
exchange contracts.
In the first six months of 1997, the company invested $50.0 million in mining
properties, plant and equipment at operating properties ($29.7 million), at the
Aquarius and Paredones Amarillos construction projects ($14.0 million) and at
development properties ($4.9 million); and $16.5 million in long-term
investments related to the company's investment in Santa Elina Mines Corporation
($10.1 million) and other share investments ($5.2 million).
For the remainder of 1997, the company expects to incur $24 million in
exploration expenditures; $34 million of construction costs at the Aquarius and
Paredones Amarillos construction projects (see "Recent Developments -
Construction Programs"); $8 million of capitalized acquisition, exploration and
development costs at development properties including Kingking, Chapada and Ulu,
and $22 million of capital expenditures at operating properties, including the
completion of construction of the mill at Round Mountain.
10
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
June 30, 1997
(U.S. dollars)
The company has adequate resources and liquidity to pursue additional
acquisition, investment, exploration and development programs:
. Working capital provided by operations before exploration expenses
was $17.1 million for the six months ended June 30, 1997.
. The company had $67.1 million in cash at June 30, 1997.
. The company had $124.8 million in unutilized credit facilities at
June 30, 1997.
. The company will be seeking a new $75 million unsecured corporate
credit facility to finance a portion of the construction costs at
Aquarius.
. The company will be seeking a $36 million non-recourse project loan
to finance a portion of the construction costs at Paredones
Amarillos.
. 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 $100 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.
Most of the company's hedging transactions have no margin requirements. In some
instances however, mainly for longer term forward sales and options, margin
deposits are required when the market value exceeds the contract value by a
predetermined amount.
11
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1997
(U.S. dollars)
FINANCIAL REVIEW
Three month results
The company reported a net loss of $20.7 million ($0.17 per share) in the second
quarter of 1997, compared to a net loss of $14.6 million ($0.11 per share) in
the second quarter of 1996. The increase in 1997 from 1996 results from
decreased volume of precious metal sales ($10.7 million) and lower gold and
silver prices realized ($8.6 million), partially offset by decreased exploration
and development expenses ($8.1 million), decreased operating costs ($1.6
million) and decreased depreciation ($1.6 million).
Gold production decreased 7% to 190,397 ounces in the second quarter of 1997
compared to 205,601 ounces in the second quarter of 1996. Decreased production
was due to lower grades and recoveries from the mill at McCoy/Cove and lower
tons and grades at Lupin, partially offset by higher recoveries from the
reusable leach pads at Round Mountain. Silver production increased to 1.9
million ounces in the second quarter of 1997 from 1.6 million ounces in the
second quarter of 1996, primarily a result of in-process inventory changes at
McCoy/Cove. Quarterly revenues were $75.8 million in the second quarter of 1997
and $95.1 million in the second quarter of 1996.
Cash operating costs were $262 per ounce of gold in the second quarter of 1997,
versus $239 in the second quarter of 1996, reflecting the decreased production.
Six months results
The company reported a net loss of $37.5 million ($0.29 per share) in the first
six months of 1997 compared to a net loss of $30.8 million ($0.24 per share) in
the first six months of 1996. The increase in 1997 from 1996 reflects lower gold
and silver prices realized ($13.3 million), decreased volume of gold ounces sold
($5.5 million), increased operating costs ($5.2 million) and the absence in 1997
of the 1996 gain on the sale of the company's investment in Cluff Resources plc
($2.5 million), partially offset by decreased exploration and development
expenses ($15.6 million) and increased volume of silver ounces sold ($5.7
million).
Gold production increased 2% to 373,725 ounces in the first six months of 1997
compared to 366,847 ounces in the first six months of 1996. Increased production
was due to increased recoveries on the reusable leach pads and increased tons on
the dedicated leach pads at Round Mountain, increased tons on the leach pads at
McCoy/Cove, and increased tons at Kettle River, partially offset by lower grade
and recoveries from the mill at McCoy/Cove, and lower grade at Lupin. Silver
production increased to 4.4 million ounces in the second quarter of 1997 from
2.8 million ounces in the second quarter of 1996, primarily a result of in-
process inventory changes at McCoy/Cove. Revenues were $149.7 million in the
first six months of 1997 compared to $162.8 million in the first six months of
1996.
Cash operating costs were $258 per ounce of gold in the first six months of 1997
versus $249 per ounce of gold in the first six months of 1996 primarily due to
the lower production at McCoy/Cove and Lupin.
See "Operations Review" for further comments as to production and cash operating
cost changes.
The term "ounce" as used in this Form 10-Q means "troy ounce."
12
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1997
(U.S. dollars)
Revenue
Statistics for gold and silver ounces sold and other revenue data are set out
below.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
REVENUE DATA 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold
- ----
Ounces sold 187,004 216,884 358,236 372,073
Average price realized/ounce $ 350 $ 392 $ 360 $ 394
Average market price/ounce $ 343 $ 390 $ 347 $ 395
Revenue (millions of U.S. $) $ 65.4 $ 85.0 $ 129.1 $ 146.6
Percentage of total revenue 86% 89% 86% 90%
Silver
- ------
Ounces sold 1,922,826 1,749,941 3,859,172 2,855,197
Average price realized/ounce $ 5.43 $ 5.77 $ 5.34 $ 5.69
Average market price/ounce $ 4.76 $ 5.30 $ 4.88 $ 5.42
Revenue (millions of U.S. $) $ 10.4 $ 10.1 $ 20.6 $ 16.2
Percentage of total revenue 14% 11% 14% 10%
- -------------------------------------------------------------------------------------------------
Total revenue (millions of U.S. dollars) $ 75.8 $ 95.1 $ 149.7 $ 162.8
- -------------------------------------------------------------------------------------------------
The effects of changes in sales prices and volume were as follows.
REVENUE VARIANCE ANALYSIS Three months Six months
1997 VS. 1996 ended June 30 ended June 30
- -------------------------------------------------------------------------------------------------
Lower prices:
Gold $ (7.9) $ (11.9)
Silver (0.7) (1.4)
Change in volume (10.7) 0.2
- -------------------------------------------------------------------------------------------------
Decrease in revenue $ (19.3) $ (13.1)
- -------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1997
(U.S. dollars)
Production Costs
Production cost data per ounce of gold is set out below.
Three months ended Six months ended
PRODUCTION COSTS PER June 30 June 30
OUNCE OF GOLD PRODUCED 1997 1996 1997 1996
- -------------------------------------------------------------------------------
Direct mining expense $ 263 $ 259 $ 260 $ 276
Deferred stripping and mine
development costs (7) (10) (5) (20)
Inventory movements and other 6 (10) 3 (7)
- -------------------------------------------------------------------------------
Cash operating costs 262 239 258 249
Royalties 10 9 10 10
Production taxes 1 3 2 4
- -------------------------------------------------------------------------------
Total cash costs 273 251 270 263
Depreciation 62 63 63 69
Amortization 34 33 34 33
Reclamation and mine closure 10 6 10 6
- -------------------------------------------------------------------------------
Total production costs $ 379 $ 353 $ 377 $ 371
- -------------------------------------------------------------------------------
Expenses
Operating costs per ounce vary with the quantity of gold and silver sold and
with the cost of operations. The cash operating costs were $262 per ounce of
gold in the second quarter of 1997, and $239 in the second quarter of 1996. See
"Operations Review".
Reconciliation of Cash Operating
Costs per Ounce to Financial Statements Three months ended Six months ended
thousands of U.S. dollars, June 30 June 30
except per ounce amounts 1997 1996 1997 1996
- -------------------------------------------------------------------------------
Operating costs per
financial statements $ 56,310 $ 57,959 $107,763 $102,524
Change in finished goods
inventory and other 2,082 (4,731) 7,017 (334)
Coproduct cost of silver
produced (8,508) (4,089) (18,359) (10,845)
- -------------------------------------------------------------------------------
Cash operating costs $ 49,884 $ 49,139 $ 96,421 $ 91,345
- -------------------------------------------------------------------------------
Gold ounces produced 190,397 205,601 373,725 366,847
- -------------------------------------------------------------------------------
Cash operating costs per ounce $ 262 $ 239 $ 258 $ 249
- -------------------------------------------------------------------------------
The decrease in depreciation and amortization was primarily due to depreciation.
Depreciation is a fixed cost, a portion of which is charged to depreciation
expense based on the number of ounces sold and a portion of which is charged to
inventory based on the number of ounces in inventory at the quarter end date.
The decrease in the second quarter of 1997 is due to the increase in precious
metals inventory which resulted in a portion of the depreciation being charged
to inventory. In the second quarter of 1996 the precious metals inventory
decreased resulting in depreciation from the previous quarters being expensed in
the second quarter of 1996.
Reclamation and mine closure increased in the second quarter of 1997 due
primarily to increased mine closure provisions at McCoy/Cove and Lupin.
14
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1997
(U.S. dollars)
Exploration and development decreased in the second quarter of 1997 compared to
the second quarter of 1996 due to a decreased scope of international exploration
activities and due to the discontinuation of further development of the
Alaska-Juneau property.
Interest and other decreased in the second quarter of 1997 compared to the
second quarter of 1996 primarily due to decreased debt balances in 1997 which
resulted in net interest income of $0.6 million in the second quarter of 1997
compared to net interest expense of $0.1 million in the second quarter of
1996.
Reserve estimates
The price used in estimating the company's ore reserves at December 31, 1996 was
$375 per ounce of gold and $5.00 per ounce of silver. The market price for gold
and silver is currently below these levels. If the company determines that its
reserves should be calculated at a significantly lower price than 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 and/or increased amortization charges
may be required.
OPERATIONS REVIEW
Operating data by mine is set out in the table below.
Three months ended Six months ended
June 30 June 30
OPERATING DATA BY MINE 1997 1996 1997 1996
- --------------------------------------------------------------------------------
Gold production (ounces)
- ------------------------
(a) McCoy/Cove 52,541 69,574 104,827 118,464
(b) Round Mountain (50%) 64,948 57,617 121,109 97,333
(c) Lupin 42,604 48,248 79,206 88,558
(d) Kettle River 30,304 30,162 68,583 62,492
- --------------------------------------------------------------------------------
Total gold 190,397 205,601 373,725 366,847
- --------------------------------------------------------------------------------
Silver production (ounces)
- --------------------------
(a) McCoy/Cove 1,933,588 1,649,162 4,371,001 2,824,219
- --------------------------------------------------------------------------------
Total silver 1,933,588 1,649,162 4,371,001 2,824,219
- --------------------------------------------------------------------------------
Gold production decreased 7% to 190,397 ounces in the second quarter of 1997
compared to 205,601 ounces in the second quarter of 1996. Decreased production
was due to lower grades and recoveries from the mill at McCoy/Cove and lower
tons and grades at Lupin; partially offset by higher recoveries from the
reusable leach pads at Round Mountain. Silver production increased to 1.9
million ounces in the second quarter of 1997 from 1.6 million ounces in the
second quarter of 1996, primarily a result of in-process inventory changes at
McCoy/Cove. For the full year 1997, the gold production target remains at
700,000 to 725,000 ounces and the silver production target at about the same as
1996 production of 7 million ounces.
15
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1997
(U.S. dollars)
Three months ended Six months ended
June 30 June 30
OPERATING DATA BY MINE 1997 1996 1997 1996
- ------------------------------------------------------------------
Cash operating costs
- --------------------
(per ounce of gold)
-------------------
(a) McCoy/Cove $ 317 $ 256 $ 301 $ 280
(b) Round Mountain (50%) 194 202 201 208
(c) Lupin 266 264 294 276
(d) Kettle River 256 220 216 194
- ------------------------------------------------------------------
Company average $ 262 $ 239 $ 258 $ 249
- ------------------------------------------------------------------
Cash operating costs were $262 per ounce of gold in the second quarter of 1997,
compared to $239 in the second quarter of 1996. Consolidated cash operating
costs are targeted at $265-$275 per ounce of gold produced for the full year
1997.
16
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1997
(U.S. dollars)
(a) McCoy/Cove, Nevada (100% owned)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
OPERATING DATA 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold produced (ounces):
Milled 39,248 54,841 80,142 89,141
Heap leached 13,293 14,733 24,685 29,323
---------- ---------- ---------- ----------
Total gold 52,541 69,574 104,827 118,464
Silver produced (ounces):
Milled 1,824,003 1,534,328 4,179,586 2,567,905
Heap leached 109,585 114,834 191,415 256,314
---------- ---------- ---------- ----------
Total silver 1,933,588 1,649,162 4,371,001 2,824,219
Ore and waste mined (million tons) 15.0 17.2 30.5 32.7
Mining cost/ton of ore and waste $ 0.74 $ 0.71 $ 0.71 $ 0.70
Milling cost/ton of ore $ 9.20 $ 9.79 $ 8.97 $ 9.85
Heap leaching cost/ton of ore $ 1.67 $ 1.73 $ 1.66 $ 1.88
Production cost per ounce of gold
produced:
Direct mining expense $ 330 $ 302 $ 310 $ 330
Deferred stripping cost (28) (26) (19) (40)
Inventory movements and other 15 (20) 10 (10)
---------- ---------- ---------- ----------
Cash operating cost 317 256 301 280
Royalties 3 4 3 4
Production taxes -- 4 1 6
---------- ---------- ---------- ----------
Total cash cost 320 264 305 290
Depreciation 79 74 74 83
Amortization 45 46 45 46
Reclamation and mine closure 10 6 10 6
---------- ---------- ---------- ----------
Total production costs $ 454 $ 390 $ 434 $ 425
---------- ---------- ---------- ----------
Average gold-to-silver price ratio (1) 72.0:1 73.5:1 71.6:1 73.0:1
Milled:
Ore processed (tons/day) 9,565 8,680 9,821 8,129
Gold grade (ounce/ton) 0.057 0.141 0.062 0.107
Silver grade (ounce/ton) 2.98 4.15 3.17 3.47
Gold recovery rate (%) 68.6 86.5 70.3 81.1
Silver recovery rate (%) 71.7 73.9 70.9 73.4
Heap leached:
Ore processed (tons/day) 20,512 15,661 19,080 13,659
Gold grade (ounce/ton) 0.014 0.023 0.013 0.023
Silver grade (ounce/ton) 0.25 0.33 0.21 0.35
Recovery rates (2)
- -------------------------------------------------------------------------------------------
</TABLE>
/(1)/ To convert costs per ounce of gold into comparable costs per ounce of
co-product silver, divide the production cost per ounce of gold by the
period's average gold-to-silver price ratio.
/(2)/ Recovery rates on dedicated pads can only be estimated, as actual
recoveries will not be known until leaching is complete. At the
McCoy/Cove mine, the gold recovery rate is estimated at 68% for crushed
ore and 48% for uncrushed, run-of-mine ore, while the silver recovery
rate is estimated at 30% for crushed ore and 10% for uncrushed, run-of-
mine ore.
17
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1997
(U.S. dollars)
At McCoy/Cove, gold production fell and silver production rose, as expected,
reflecting the planned processing of lower grade ore at increased volumes.
McCoy/Cove produced 52,541 ounces of gold during the second quarter of 1997,
down 24% from 69,574 ounces in the second quarter of 1996 but in line with
projections for the year. Ten percent more tons were processed through the mill
and over 30% more tons placed under leach to compensate for the lower grades
encountered in this portion of the ore body. Silver production was 1,933,588
ounces in the second quarter of 1997, up 17% from the second quarter of 1996,
primarily a result of increased tons processed in the mill and changes in in-
process inventory, more than off setting the lower grade.
Cash operating costs for the second quarter of 1997 were $317 per ounce of gold
produced, compared with $256 per ounce in the second quarter of 1996. The
increased cost reflects lower gold production, slightly higher mining costs, and
the additional cost of processing the increased tonnage. Cash operating costs
are anticipated to be under $300 per ounce of gold produced in the third and
fourth quarters of 1997.
Cost reduction programs undertaken at McCoy/Cove include a reduction of staff
since the beginning of the year, lower mill operating costs per ton, and re-
engineering of the process stream.
During the second quarter of 1997, the plan for stabilizing the waste rock in
the Cove pit highwall was completed. The final geological study identifies
approximately 31.3 million tons of barren material that could potentially have
to be moved. Monitoring will be done to limit the work to the extent necessary
to allow for the safe mining of reserve ounces located below this unstable area.
Ore removal costs are estimated to range from $0.75 to $0.80 per ton. Total
costs related to the stabilization are currently estimated to fall below the $30
million accrued in the third quarter of 1996, and this estimate will be
monitored periodically as the stabilization plan is implemented. Implementation
of the plan began late in the second quarter of 1997, with approximately one-
quarter of the cash costs to occur in 1997 and the remainder in 1998-1999.
Full-year production is in line with McCoy/Cove's target of 210,000-220,000
ounces of gold and seven million ounces of silver.
Exploration drilling has hit additional gold mineralization at McCoy/Cove just
outside the southeastern edge of the Cove open pit. The mineralization is
relatively shallow and would require a stripping ratio currently estimated to be
between 3:1 and 4:1. Assays have been received on a total of nine holes drilled
to date. Thicknesses in excess of 75 feet of mineralization grading 0.07-0.09
ounce of gold/ton and 1.5-5.8 ounce of silver/ton have encouraged the company to
budget $0.8 million to drill out this area on a grid of closely spaced holes
sufficient to determine by year-end 1997 whether this material could be
classified as ore reserves. If this mineralization is proved up as reserves, it
could extend the life of the McCoy/Cove mine by one or more years.
18
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1997
(U.S. dollars)
(b) Round Mountain, Nevada (50% owned)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
OPERATING DATA 1997 1996 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold produced (ounces):
Reusable heap leach pad (50%) 39,119 32,420 71,064 58,392
Dedicated heap leach pad (50%) 25,829 22,940 50,045 36,684
Other -- 2,257 -- 2,257
-------- ------- -------- -------
Total (50%) 64,948 57,617 121,109 97,333
Ore and waste mined
(million tons) (100%) 18.4 14.2 34.8 28.7
Mining cost/ton of ore and waste $ 0.64 $ 0.71 $ 0.67 $ 0.68
Heap leaching cost/ton of ore $ 0.57 $ 0.76 $ 0.62 $ 0.78
Production cost per ounce of gold
produced:
Direct mining expense $ 191 $ 211 $ 200 $ 234
Deferred stripping costs 6 3 2 (10)
Inventory movements and other (3) (12) (1) (16)
-------- ------- -------- -------
Cash operating cost 194 202 201 208
Royalties 20 26 23 29
Production taxes 3 6 3 5
-------- ------- -------- -------
Total cash cost 217 234 227 242
Depreciation 36 46 41 53
Amortization 18 18 18 18
Reclamation and mine closure 7 5 7 5
-------- ------- -------- -------
Total production cost $ 278 $ 303 $ 293 $ 318
-------- ------- -------- -------
Reusable heap leach pad:
Ore processed (tons/day) (100%) 28,340 30,293 27,630 28,122
Grade (ounce/ton) 0.035 0.038 0.036 0.038
Recovery rate (%) 83.0 66.8 74.4 66.0
Dedicated heap leach pad:
Ore processed (tons/day) (100%) 110,154 96,461 99,467 85,709
Grade (ounce/ton) 0.010 0.013 0.010 0.013
Recovery rate (1)
- ----------------------------------------------------------------------------------
</TABLE>
/(1)/ Recovery rates on dedicated pads can only be estimated, as actual
recoveries will not be known until leaching is complete. At the Round
Mountain mine, the gold recovery rate on the dedicated heap leach pad is
estimated at 50%.
The 50% owned Round Mountain mine in Nevada was the company's largest and lowest
cost gold producer during the second quarter of 1997. Gold production was up 13%
to 64,948 ounces in the second quarter of 1997 from 57,617 ounces in the second
quarter of 1996. Significantly improved recoveries of gold on both the reusable
heap leach pad and the dedicated pad were the biggest contributors to the site's
performance during the second quarter of 1997.
Cash operating costs were $194 per ounce in the second quarter of 1997, down
from $202 in the second quarter of 1996. Lower costs were attributable to the
increased number of ounces produced.
In July, the mine produced its four millionth ounce of gold since the company
became the operator. The mine had less than half that much gold in reserves -
only 1.8 million ounces - when the company acquired its interest in 1985. With
current reserves of 9.1 million ounces, Round Mountain has twice as much gold
remaining in the
19
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1997
(U.S. dollars)
ground as the total amount mined over the past 12 years.
In July 1997 Round Mountain approved a new mining plan that will increase cash
flow and profitability, reduce cash operating costs.
The new optimized pit design will eliminate the mining of lower grade, higher-
cost material. Total material to be removed from the pit is expected to be
reduced by more than 250 million tons over the life of the mine, reducing the
up-front waste stripping by approximately 40% and enhancing economics
significantly. Reduced waste stripping brings more ounces into production
earlier and decreases cash operating costs, future capital requirements for
capital replacement, and ultimate reclamation costs.
The net result will be an increase of 30-40% in cash flow over the life of the
mine and a near-doubling of net present value of the project.
The optimized pit will reduce the mine's ore reserves by an estimated 1.2
million ounces (the company's 50% share, 600,000 ounces). This revision will
result in mining being completed in 10 years, with ore processing continuing
from stockpiles for another five years, compared with the previous plan of 14
years of mining plus seven years of stockpile processing. However, this life-
of-mine plan is based on no more gold ever being discovered at Round Mountain
(which is unlikely - given the growth in reserves seen at the site so far).
Annual production is currently planned to remain at present levels.
Round Mountain has instituted an expanded exploration strategy. Ongoing
exploration efforts at the site will be two-fold. An in-fill drilling program
will be directed at upgrading material within the pit, currently categorized as
other mineralization, to reserves. The North feeder program is focused on a
deep target to the north believed to be one of the deposit's feeder structures.
This zone is believed to have good potential for significant ore reserve
additions over the next few years. Several additional exploration sites have
been identified on the over 380,000 acre Round Mountain area of mutual interest,
only a small portion of which has been adequately explored.
Construction was completed on a new mill at Round Mountain late in July 1997
with commissioning currently under way. Full production is anticipated in the
fourth quarter of 1997. Round Mountain has already stockpiled more than 3.5
million tons of non-oxidized material over the last two years to supplement
millfeed ore in future quarters. Mill processing will result in higher
recoveries in treating the nonoxide ores than those that could have been
achieved from heap leach processing. Mill production from nonoxide ores will be
used to partially offset a reduction in heap leach production from oxide tons
mined.
Production for the full year is still expected to meet Round Mountain's target
of 190,000-200,000 ounces of gold.
20
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1997
(U.S. dollars)
(c) Lupin, Northwest Territories (100% owned)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
OPERATING DATA 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold produced (ounces) 42,604 48,248 79,206 88,558
Tons of ore mined and milled 202,175 214,882 395,105 400,387
Mining cost/ton of ore C $ 43.40 C $ 39.48 C $ 44.70 C $ 40.56
Milling cost/ton of ore C $ 11.58 C $ 11.12 C $ 11.50 C $ 11.90
Production cost per ounce of gold
produced:
Canadian dollars:
Direct mining expense C $ 367 C $ 359 C $ 393 C $ 390
Deferred mine development cost C $ 4 C $ -- C $ 11 C $ (13)
Inventory movements and other C $ (2) C $ 1 C $ (1) C $ --
----------- ----------- ----------- -----------
Cash operating cost C $ 369 C $ 360 C $ 403 C $ 377
U.S. dollars:
Cash operating cost US$ 266 US$ 264 US$ 294 US$ 276
Royalties -- -- -- --
Production taxes -- -- -- --
------- ------- ------- -------
Total cash cost 266 264 294 276
Depreciation 71 62 75 66
Amortization 28 18 28 18
Reclamation and mine closure 14 8 14 8
------- ------- ------- -------
Total production cost US$ 379 US$ 352 US$ 411 US$ 368
Milled:
Ore processed (tons/day) 2,222 2,361 2,171 2,200
Ore tons milled 202,175 214,882 395,105 400,387
Grade (ounce/ton) 0.228 0.243 0.218 0.239
Recovery rate (%) 92.3 92.4 92.2 92.4
- ----------------------------------------------------------------------------------------------
</TABLE>
Production at Lupin, located in the Northwest Territories, was 42,604 ounces
during the second quarter of 1997, down from 48,248 ounces in the second quarter
of 1996. The lower production was the result of processing fewer tons per day
and those tons having a lower grade than the second quarter of 1996.
The lower production resulted in cash operating costs increasing marginally to
$266 per ounce in the second quarter of 1997 from $264 in the second quarter of
1996. The impact of the lower production on unit costs per ounce was limited by
personnel reductions and by reductions in aviation and winter road costs.
Development is continuing at the Ulu deposit located approximately 100 miles
north of the Lupin mill. An underground ramp has been advanced to a depth of
135 meters (440 feet). Ore-grade material has been recovered and approximately
3,000 tons have already been stockpiled for transportation to the mill over an
ice road to be constructed in early 1999. As the underground ramp moves
downward, exploration drilling is under way to better understand and define the
mineralization outlined by surface drilling. The main body of the deposit
starts at a depth of approximately 150 meters (490 feet).
Current results are in line with Lupin's targeted 1997 annual production of
160,000-170,000 ounces of gold.
21
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1997
(U.S. dollars)
<TABLE>
<CAPTION>
(d) Kettle River, Washington (100% owned)
Three months ended Six months ended
June 30 June 30
OPERATING DATA 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold produced (ounces) 30,304 30,162 68,583 62,492
Tons of ore mined and milled 218,134 148,877 396,309 281,850
Mining cost/ton of ore $ 22.10 $ 22.38 $ 21.46 $ 22.31
Milling cost/ton of ore $ 9.06 $ 12.46 $ 10.19 $ 12.24
Production cost per ounce of gold
produced:
Direct mining expense $ 243 $ 211 $ 217 $ 191
Deferred mine development cost -- -- -- --
Inventory movements and other 13 9 (1) 3
-------- -------- -------- --------
Cash operating cost 256 220 216 194
Royalties 17 8 14 9
Production taxes 2 2 2 2
-------- -------- -------- --------
Total cash cost 275 230 232 205
Depreciation 65 62 57 59
Amortization 45 45 45 45
Reclamation and mine closure 12 8 12 8
-------- -------- -------- --------
Total production cost $ 397 $ 345 $ 346 $ 317
-------- -------- -------- --------
Milled:
Ore processed (tons/day) 2,397 1,636 2,178 1,549
Ore tons milled 218,134 148,877 396,309 281,850
Grade (ounce/ton) 0.162 0.244 0.198 0.258
Recovery rate (%) 85.5 83.1 87.2 85.8
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
At the Kettle River mine in Washington State, gold production was 30,304 ounces
during the second quarter of 1997 compared with 30,162 ounces in the second
quarter of 1996. Kettle River's process significantly increased tonnage during
the second quarter of 1997, offsetting lower ore grades processed. The mill
operated 91 days during the second quarter of 1997 compared with 70 days in the
second quarter of 1996.
Mining during the second quarter of 1997 was from both the Lamefoot and K-2
deposits at a ratio of about 3:1. As expected, cash operating costs rose to
$256 in the second quarter of 1997 from $220 per ounce in the second quarter of
1996, reflecting the higher mining costs and lower grades associated with the
K-2 deposit, coupled with the increased number of tons mined and milled.
Additional mineralized material has been identified in association with a
northern extension of the Lamefoot deposit. Exploration drilling was undertaken
in July, and assays are pending. This area shows good exploration potential for
additional minable ounces. Drilling is also underway at the K-2 deposit to
identify extensions of the mineralization.
Kettle River expects to meet its full-year target production of 130,000-140,000
ounces of gold.
22
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1997
(U.S. dollars)
RECENT DEVELOPMENTS
The company is currently conducting a major review of life-of-mine plans for the
company's four producing gold mines and two planned gold mines, and a complete
evaluation of the feasibility studies for the company's portfolio of development
projects, exploration properties and other assets. On completion of this work,
currently expected in the third quarter of 1997, the company will assess the
carrying values of all of the company's assets in light of both short-term and
long-term views of precious metals prices. Although no determinations can be
made before completion of the review, it is possible that material write downs
of some assets may be required.
In view of the recent drop in the gold price to 12-year lows, the company is
considering deferral of its construction program, other than construction of the
"freeze wall" at Aquarius in Canada, and deferral of a final construction
decision at Paredones Amarillos in Mexico until the gold price recovers. The
company has refocused its exploration efforts on those projects believed to
represent the most promising near-term prospects in its portfolio, principally
those in the Americas where the company already has extensive gold mining
infrastructure. As a result of a feasibility study at Kingking, which revealed
larger than estimated copper content, the company is evaluating whether the
project may be of more value to a copper producer than to the company, whose
strategic focus is gold rather than copper. Initial feasibility studies continue
at Fazenda Nova and Sao Francisco in Brazil to determine whether or not to
advance the projects for further development.
For the first six months of 1997, in connection with its exploration and
development activities, the company charged $16.4 million against current
earnings and capitalized another $15.0 million.
During the second quarter of 1997, the company continued to pursue increased
gold reserves and future production through a more focused exploration program.
As a result of the company's program of acquisition, exploration and development
activities over the last two years, the company now has a promising pipeline of
projects primarily in North, South and Central America.
Highlights of these construction, development and exploration programs are
outlined below:
Construction Programs
. In January 1997, the company made the decision to proceed with construction
of the Aquarius gold mine, located 40 kilometers east of Timmons, Ontario.
Due to the depressed gold prices, the company is considering deferral of the
construction program until the gold price recovers. Continued efforts in
1997 would be devoted primarily to completion of the frozen underground
barrier system. Underground freezing is a proven, cost-effective technology
that has been used in tunneling and shaft boring for over 100 years. Once
frozen, the "freeze wall" can be maintained indefinitely at a low annual
maintenance cost.
. In January 1997, a contingent construction decision was made on the
Paredones Amarillos gold mine in Mexico, subject to project financing and
Viceroy Resource Corporation, the company's 40% joint venture partner,
approving and obtaining its share of the financing. Due to the depressed
gold prices, the company is in discussions with its joint venture partner
regarding the deferral of construction until the gold price recovers.
Continued efforts in the final months of 1997 would be devoted to completing
the detailed engineering, finalizing the acquisition of the mill grinding
circuit, completing the acquisition of several land parcels already under
contract or option, and advancing the necessary permitting activities, water
rights, and other work that would be required to maintain the integrity of
the project and to enable the mine to proceed quickly and smoothly to
construction at such time that a final construction decision is made.
23
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1997
(U.S. dollars)
Development Properties
. The Company is currently re-evaluating, re-focusing and rationalizing its
entire portfolio of exploration and development projects in Brazil, all of
which are controlled by Echo Bay's 51%-owned subsidiary, Santa Elina Mines
Corporation. Echo Bay is prioritizing each of the projects in order to develop
a strategy for realizing the value of these assets as quickly as possible.
Pending the conclusion of this rationalization process, the company has
deferred completion of the individual feasibility studies previously begun on
these projects. There has been no deferral, however, in the ongoing
exploration drilling, geological studies, metallurgical tests, and various
other exploration and development work already well under way at these Santa
Elina projects. At Chapada, optimization work continues. Various mining
scenarios, processing methods and rates, economic parameters and other factors
are being applied to the large, near-surface minable resource of copper and
gold. At Sao Francisco a gold deposit has been outlined with low-grade but
near-surface and oxidized mineralization-promising for a low-strip-ratio, open
pit heap leaching operation. In-fill drilling of the mineralization is well
under way, and metallurgical testing suggests that the ore is amenable to heap
leaching. At Fazenda Nova, drilling is continuing to better define and expand
the mineralization. Six gold targets have been identified to date. At Guapore,
consideration is being given to a 120-megawatt 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.
. At the Kingking copper-gold project in the Philippines, the company and its
joint venture partner, TVI Pacific Inc. completed an initial feasibility study
in late April. The initial feasibility study identified a number of areas in
which project economics could be improved, including different mining rates,
throughput levels, and processing alternatives. The study indicated that
based on the results of almost two years of additional exploration drilling,
Kingking has a much larger copper content than originally estimated in 1995
when the partners acquired their option to purchase the project. The company
is currently considering whether the Kingking project might be of more value
to a copper producer than to the company, whose strategic focus is gold rather
than copper.
Exploration Properties
. At Dolores in Mexico, drilling results continue to be encouraging. Ore-grade
gold and silver mineralization has been encountered from surface to a depth
of more than 350 meters (1,150 feet) and over a strike length in excess of
2,000 meters (6,560 feet). The company has elected to become the operator of
the project, has moved in a 30-person crew, is completing construction of a
new camp, and plans to complete a minimum of 50 new drill holes by the end of
August 1997.
. At Buffalo Valley in Nevada, 15 miles north of the company's McCoy/Cove mine,
accelerated exploration drilling and engineering studies are under way. On
completion of a bankable feasibility study, the company earns an option to
purchase up to a 65% interest in Buffalo Valley from the company's strategic
alliance partner, Fairmile Gold Corp.
. At Jessup in Nevada, an expanded exploration drilling program was launched in
April to offset and expand on encouraging mineralization intercepts from
earlier drilling. The current program calls for 25 holes totaling 2,440
meters (8,000 feet). Early indications are that Jessup is a typical Nevada-
style epithermal mineralization located close to the surface.
24
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1997
(U.S. dollars)
U.S. Mining Law Revision
Several proposals to change the general mining laws applicable to operations on
U.S. federal lands have been introduced into the 105th Congress, which convened
in January 1997. In addition, the Bureau of Land Management of the U.S.
Department of the Interior has commenced a program to revise the federal
regulations applicable to activities on unpatented mining claims and to impose
more stringent reclamation and environmental protection requirements on those
activities. Until such time, if any, as new reform legislation is enacted or
administrative action is taken, the ultimate effects and costs of compliance on
the company cannot be estimated.
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, water
availability 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, joint venture relationships, 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.
25
<PAGE>
ECHO BAY MINES LTD.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Alaska-Juneau
During 1994, the U.S. Attorney began an investigation of potential Clean Water
Act violations. The investigation is to determine whether the company unlawfully
discharged pollutants from the drainage tunnel without a National Pollution
Discharge Elimination System (NPDES) permit. The outcome of this investigation
is uncertain.
Summa
See note 9 to the interim consolidated financial statements.
Other
The company also is engaged in routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
(a) The company's Annual General Meeting was held May 14, 1997.
(c) (1) Election of Directors
Votes Against
Nominee Votes For or Withheld Abstentions
------- --------- ------------- -----------
John Norman Abell 83,989,453 973,211 13,584
Latham Cawthra Burns 83,923,986 1,038,678 13,584
Pierre Choquette 83,951,680 1,010,984 13,584
John Gilray Christy 83,993,763 968,901 13,584
Peter Clarke 84,013,940 948,724 13,584
Robert Leigh Leclerc, Q.C. 83,916,279 1,046,385 13,584
John Frederick McOuat 83,961,431 1,001,233 13,584
Monica Elizabeth Sloan 83,949,444 1,013,220 13,584
Richard Geoffrey Pentland
Styles 83,942,231 1,020,433 13,584
(c) (2) Appointment of Ernst & Young as Auditors of the company.
Votes Against
Votes For or Withheld Abstentions
--------- ------------- -----------
Appointment of Ernst & Young 83,554,635 1,101,694 319,919
(c) (3) Proposed Amendment to Employee Share Incentive Plan
Votes Against
Votes For or Withheld Abstentions
--------- ------------- -----------
Amendment to Employee Share
Incentive Plan 65,683,899 18,260,822 1,031,527
26
<PAGE>
ECHO BAY MINES LTD.
(c) (4) Proposed Adoption of Restricted share Grant Plan
Votes Against
Votes For or Withheld Abstentions
--------- ------------- -----------
Adoption of Restricted Share
Gant Plan 64,704,538 19,182,787 1,088,923
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K Filed on April 17, 1997, related to clarifying
information on Santa Elina Gold Corporation's
Chapada, Sao Francisco and Sao Vicente properties
in Brazil.
Filed on April 25, 1997, announcing Richard C.
Kraus' resignation as president, chief executive
officer and director of the company.
27
<PAGE>
ECHO BAY MINES LTD.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECHO BAY MINES LTD.
------------------------------
(Registrant)
July 30, 1997
- -------------
Date
/s/ Peter H. Cheesbrough
------------------------------
PETER H. CHEESBROUGH
Senior Vice President, Finance
and Chief Financial Officer
28
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECHO BAY MINES LTD.
------------------------------
(Registrant)
July 30, 1997
- -------------
Date
------------------------------
PETER H. CHEESBROUGH
Senior Vice President, Finance
and Chief Financial Officer
29
<TABLE> <S> <C>
<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN ECHO BAY MINES, LTD. FORM 10-Q FOR THE SIX
MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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