<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Under the Securities Act of 1933
Registration No. 33-77738
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED JULY 15, 1994
$100,000,000
ECHO BAY MINES LTD.
11% CAPITAL SECURITIES DUE 2027
---------------------
The 11% junior subordinated debentures due 2027 (the "Capital Securities" or
the "Securities") of Echo Bay Mines Ltd. (the "Company") will bear interest,
payable in US dollars, at an annual rate of 11% payable semi-annually in arrears
on April 1 and October 1 of each year, commencing October 1, 1997.
The obligations of the Company under the Securities are subordinate and
junior in right of payment to all present and future Senior Indebtedness (as
defined) of the Company. Such obligations are also effectively subordinated to
claims of creditors of the Company's subsidiaries. The Company expects that,
following completion of the sale of the Securities and the use of the net
proceeds, together with other funds, to repay certain indebtedness, Senior
Indebtedness of the Company will consist primarily of (i) up to $111 million of
Company bank indebtedness and guarantees expected to be incurred in 1997 and
1998 relating to construction at the Aquarius and Paredones Amarillos mines,
(ii) Company bank debt, which was $18.4 million at December 31, 1996 and (iii)
guarantees of indebtedness of subsidiaries, which would have been $55.6 million
at December 31, 1996. At December 31, 1996, in addition to guaranteed debt, the
Company's subsidiaries had approximately $61.2 million of current payables and
certain other current liabilities. As of such date, the Company and its
subsidiaries also had $67.1 million of long-term provisions for reclamation,
mine closure and waste rock removal. The Indenture contains certain limitations
on the incurrence or issuance of other secured or unsecured debt of the Company
or its subsidiaries, including Senior Indebtedness. See "Description of the
Securities -- Certain Covenants -- Limitation on Indebtedness."
The Company has the right, at any time and from time to time, to defer
payments of interest on the Securities by extending the interest payment period
on the Securities for a period (each such period, an "Extension Period") not
exceeding 10 consecutive semi-annual periods. Except in certain limited
circumstances described herein, the Company shall not pay or declare dividends
with respect to any of its Capital Stock (as defined) or make certain payments
on pari passu or junior securities at any time when any outstanding interest on
the Securities is being deferred as contemplated above or while the Company is
in default of certain obligations. There could be multiple Extension Periods of
varying lengths, each not exceeding 10 consecutive semi-annual periods
throughout the term of the Securities. During any Extension Period, interest on
the Securities will accrue at the rate of 12% per annum, compounded
semi-annually. See "Description of the Securities -- Option to Extend Interest
Payment Periods." The Company may satisfy its obligation to pay Deferred
Interest (as defined) on any applicable Interest Payment Date (as defined) by
delivering to the Trustee (as defined) Common Shares (as defined), in which
event the holder of a Security shall be entitled to receive cash payments equal
to the Deferred Interest from proceeds of the sale of the requisite Common
Shares by the Trustee. See "Description of the Securities -- Common Shares
Payment Election." Holders of Securities will not, however, be entitled to
receive any Common Shares in satisfaction of the Company's obligation to pay
such Deferred Interest.
The Securities are redeemable prior to their maturity, at the option of the
Company, on or after April 1, 2007, in whole at any time or in part from time to
time at the Redemption Price (as defined) set forth herein. The Securities are
also redeemable by the Company, in whole but not in part, at any time following,
under certain circumstances, the occurrence of a Redemption Tax Event (as
defined), at an amount equal to 100% of the principal amount thereof. In
addition, at any time on or after April 1, 2002, and prior to April 1, 2007, the
Company may use the Net Cash Proceeds (as defined) from one or more Cash Equity
Sales (as defined) occurring after the issue date of the Securities to redeem
either (i) up to 40% of the aggregate original principal amount of the
Securities or (ii) 100% of the aggregate principal amount of the Securities then
Outstanding at the applicable Redemption Price. The Securities are also
redeemable by the Company, in whole or in part, at any time and from time to
time prior to April 1, 2007, at an amount equal to the Make-Whole Amount (as
defined). See "Description of the Securities -- Optional Redemption" and
"-- Redemption for Changes in Canadian Tax Law." The Securities will mature on
April 1, 2027.
---------------------
For a discussion of certain Canadian and US Federal income tax consequences
to holders of the Securities, see "Tax Considerations."
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE S-14 HEREOF AND PAGE 4 OF THE
PROSPECTUS FOR CERTAIN INFORMATION RELEVANT TO AN INVESTMENT IN THE SECURITIES,
INCLUDING THE PERIOD AND CIRCUMSTANCES DURING AND UNDER WHICH PAYMENT OF
INTEREST ON THE SECURITIES MAY BE DEFERRED.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS TO WHICH IT RELATES.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE(1) COMMISSION(2) COMPANY(1)(3)
----------------- ---------------- -------------
<S> <C> <C> <C>
Per Security........................................ 100% 2.875% 97.125%
Total............................................... $100,000,000 $2,875,000 $97,125,000
</TABLE>
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(1) Plus accrued interest, if any, from the date of original issuance.
(2) The Company has agreed to indemnify Goldman, Sachs & Co. against certain
liabilities, including liabilities under the United States Securities Act of
1933, as amended (the "Securities Act"). See "Underwriting."
(3) Before deducting estimated expenses of $425,000 payable by the Company.
---------------------
The Securities offered hereby are offered by Goldman, Sachs & Co., as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that the
Securities will be ready for delivery in book-entry form only through the
facilities of The Depository Trust Company ("DTC") in New York, New York on or
about March 27, 1997 against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO.
---------------------
The date of this Prospectus Supplement is March 24, 1997.
<PAGE> 2
[World map of the Company's operations showing the locations of the
Company's gold producing mines, new gold mines planned by the Company, certain
of the Company's exploration/development properties and the Company's hydropower
project.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
---------------------
THE SECURITIES HAVE NOT BEEN AND WILL NOT BE QUALIFIED FOR SALE UNDER THE
SECURITIES LAWS OF CANADA OR ANY PROVINCE OR TERRITORY OF CANADA. THE SECURITIES
ARE NOT BEING OFFERED FOR SALE AND MAY NOT BE OFFERED OR SOLD DIRECTLY OR
INDIRECTLY IN CANADA, OR TO ANY RESIDENT THEREOF, IN VIOLATION OF THE SECURITIES
LAWS OF CANADA OR ANY PROVINCE OR TERRITORY OF CANADA.
<PAGE> 3
PROSPECTUS SUPPLEMENT SUMMARY
The information in this Prospectus Supplement is qualified in its entirety
by the more detailed information and consolidated financial statements and notes
thereto appearing herein or appearing or incorporated by reference in the
accompanying Prospectus. In determining whether to purchase the Securities being
offered, prospective investors should consider carefully the information
contained in this Prospectus Supplement and the accompanying Prospectus and the
information incorporated by reference therein, including but not limited to the
sections entitled "Risk Factors" set forth in this Prospectus Supplement and the
accompanying Prospectus. Unless the context otherwise requires, references to
"Echo Bay" or the "Company" in this Prospectus Supplement and in the
accompanying Prospectus include Echo Bay Mines Ltd. and its subsidiaries. Unless
otherwise indicated, all references to dollars or $ refer to United States
dollars.
THE COMPANY
The Company is a major North American gold mining company with interests in
four operating mines, two new gold mines under development, and a number of
active exploration and development projects. The Company mines, processes and
explores for gold, and also produces a significant amount of silver. Certain of
its development properties also include copper mineralization. In 1996, the
Company produced a total of approximately 769,000 ounces of gold and 7,100,000
ounces of silver. As of December 31, 1996, the Company reported proven and
probable ore reserves of 8,573,000 ounces of gold and 53,858,000 ounces of
silver, as well as other mineralization consisting of 283.5 million tons at a
grade of 0.019 ounces of gold per ton, 1.5 million tons at a grade of 1.36
ounces of silver per ton and 225.5 million tons at a grade of 0.46% copper.
The Company conducts exploration activities in North America, Central and
South America, the Philippines, Africa and other developing countries. The
Company holds varying ownership interests in a number of strategic partnership
and joint-venture arrangements around the world. These interests include a 60%
ownership of the Paredones Amarillos project in Mexico, a 51% ownership of Santa
Elina Gold Corporation ("Santa Elina") (which has one active development project
and three advanced exploration projects in Brazil), and an option to acquire up
to a 75% interest (through various foreign subsidiaries and alliances with
Filipino associates) in the Kingking properties in the Philippines. The Company
is advancing over 20 other projects around the world that are in various stages
of exploration and development. The Company believes that its pipeline of
projects will serve as a platform for significant future growth.
In 1996, the Company achieved revenues of $337.3 million and working
capital from operations (before cash development and exploration expenses) of
$82.3 million, and incurred a net loss of $176.7 million after taking into
account provisions totaling $107.1 million related to the write-off of and
provision for the Alaska-Juneau development property and the provision for the
McCoy/Cove pit wall stabilization. As of December 31, 1996, the Company had a
debt position, net of cash, of $79.7 million. On a pro forma basis, after giving
effect to the closing of the Company's entire gold and silver forward sales
position in January 1997, this net debt position would have been $16.4 million.
As of March 21, 1997, the Company had an equity market capitalization of
approximately $950 million, based on a closing Common Share price of $6.81 on
the American Stock Exchange.
In January 1997, the Company announced its decision to proceed with the
construction of new mines at Aquarius in Canada and Paredones Amarillos in
Mexico (subject to completion of permitting and financing arrangements at each
property and obtaining adequate sources of water at Paredones Amarillos). The
Company's share of the initial capital required for the construction of these
mines is $167 million, and the Company is in the process of negotiating bank
financing commitments for these projects.
S-3
<PAGE> 4
In 1997, the Company expects a number of developments including:
- Production of approximately 700,000 to 725,000 ounces of gold
- Further exploration drilling at depth at the Round Mountain and
McCoy/Cove mines in Nevada
- Exploration drilling for extensions of the Lamefoot and K-2 deposits at
the Kettle River mine in Washington
- Completion of a mill facility at Round Mountain
- Further development of the Ulu gold deposit at the Lupin project in
Canada
- Commencement of construction at the Aquarius project in Canada
- Commencement of construction at the Paredones Amarillos project in Mexico
- Completion of a preliminary feasibility study at the Kingking project in
the Philippines
- Completion of a detailed feasibility study of the Chapada development
property and the Sao Vicente property, both in Brazil
- Preparation of initial feasibility studies at the Fazenda Nova and Sao
Francisco projects, both in Brazil
- Completion of a feasibility study on the Guapore hydroelectric power
plant in Brazil
See "Risk Factors--Disclosure Regarding Forward-Looking Statements."
STRATEGY
In recent years, in response to the maturing of certain of its operating
mines, the Company's strategic objective has been to increase the size and
quality of its reserve base and production profile. Since 1994, the Company has
made significant investments to identify and develop properties with long lives,
competitive operating cost profiles and growth potential. The Company's
exploration and development efforts have been and will continue to be driven by
the following elements of its operating strategy:
- Maintain its position as a major gold producer
- Remain focused on the exploration for and mining of gold, including
copper-gold opportunities for their significant gold content
- Acquire new reserves through exploration and development, rather than
through major acquisitions
- While maintaining focus on the United States and Canada, pursue
attractive opportunities in Central and South America, including Mexico
and Brazil, and be reactive to opportunities in selected other developing
countries outside the Americas, including the Philippines
- Engage in strategic alliances and partnerships to gain improved access to
exploration opportunities and new projects, and to lower the capital
requirements of a worldwide exploration and development program
The Company believes that the decision to begin construction of two new mines,
Aquarius and Paredones Amarillos, and a significantly upgraded project pipeline,
demonstrate the initial success of this strategy.
S-4
<PAGE> 5
MINE OPERATIONS
ROUND MOUNTAIN
The Company's 50% interest in Round Mountain, Nevada is its largest source
of gold reserves and its second largest source of production. In 1996, Round
Mountain produced 410,974 ounces of gold (the Company's share, 205,487 ounces),
a 19% increase over 1995. Its reserve base consists of over 9.0 million ounces
of gold (the Company's share, 4.5 million ounces) grading 0.019 ounces per ton,
which would be sufficient for another 15 years of production at current rates
and in accordance with the current mine plan. Cash operating cost per ounce of
gold was $221 in 1996. During 1996, construction began on an 8,000 ton per day
mill which is expected to be completed in the third quarter of 1997. The mill
will permit the recovery of up to 85% of the gold contained in non-oxide ores,
versus lower recovery rates achieved by heap leaching. In 1995, completion of a
two-year drilling program added more than two million ounces to Round Mountain's
reserves (the Company's share, one million ounces). Additional targets were
identified in 1996, and in 1997 the Company is evaluating targets at depth and
also initiating a new grassroots exploration effort on the claim block. 1997
production levels at Round Mountain are expected to be 380,000 to 400,000 ounces
of gold (the Company's share, 190,000 to 200,000 ounces).
MCCOY/COVE
McCoy/Cove, Nevada is the Company's largest source of gold production and
one of the largest silver producing mines in the world. It produced 271,731
ounces of gold and 7.1 million ounces of silver in 1996. McCoy/Cove's reserve
base consists of 1.2 million ounces of gold at an average grade of 0.033 ounces
per ton and 53.9 million ounces of silver at an average grade of 1.52 ounces per
ton. Cash operating cost per ounce of gold at McCoy/Cove was $271 in 1996. Large
volume mining methods are employed at McCoy/Cove to achieve economies of scale
and contain unit costs per ton. In 1996, the Company expanded the McCoy/Cove
mill to 10,000 tons of ore per day capacity from 7,500 tons per day; the
increased levels of mill throughput are intended to address increasing operating
costs per ounce by improving economies of scale and recovery rates. The Company
currently expects to produce approximately 210,000 to 220,000 ounces of gold at
McCoy/Cove in 1997, with silver production expected to be about the same as in
1996. The Company continues to explore its claim block and the surrounding areas
in an effort to increase reserves.
LUPIN
The Lupin mine contains the highest average ore grade of the Company's four
operating mines. As of December 31, 1996, its ore reserves consisted of 443,000
ounces of gold at an average grade of 0.281 ounces per ton. Lupin produced
166,791 ounces of gold in 1996 at a cash operating cost per ounce of $299.
Production in 1997 is expected to be approximately 160,000 to 170,000 ounces of
gold. Other mineralization at Lupin is 1.5 million tons at an average grade of
0.297 ounces of gold per ton. In 1995, the Company purchased the Ulu property,
located approximately 100 miles north of Lupin. The Ulu property has
approximately 1.9 million minable tons of other mineralization at an average
grade of 0.320 ounces of gold per ton. 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 1999. The
Company holds the mineral rights on 16,699 acres in the region, and continues to
explore for gold in the region.
KETTLE RIVER
The Kettle River mining project, including the Lamefoot and K-2 deposits
and the Kettle River mill, had the Company's lowest per ounce operating cost in
1996. Kettle River produced 124,910 ounces of gold in 1996 at a cash operating
cost per ounce of $201. The Company expects to produce 130,000 to 140,000 ounces
of gold at Kettle River in 1997. As of December 31, 1996, Kettle River's ore
reserves consisted of 370,000 ounces of gold at an average grade of 0.186 ounces
per ton. Other mineralization is 282,000 tons at an average grade of 0.181
ounces of gold per ton. The Lamefoot mine achieved full
S-5
<PAGE> 6
production in June 1995, at a rate of 1,500 tons per day. In December 1994,
surface excavation for building construction and portal clearing commenced at
the K-2 deposit. A total of 10,629 feet of development was completed by the end
of 1996 and production commenced in January 1997. Since 1990, the Company has
successfully identified and mined, or commenced mining, at six successive
deposits within the Kettle River project. In addition to further exploration at
the Lamefoot and K-2 deposits, the Company anticipates continued exploration
activity directed towards identification of additional deposits in the areas
surrounding the Kettle River mill.
DEVELOPMENT PROPERTIES
In 1995, the Company added five development properties: Aquarius and Ulu in
Canada, Paredones Amarillos in Mexico, Chapada in Brazil and Kingking in the
Philippines. The Company has decided to proceed with mine construction of
Aquarius and Paredones Amarillos (subject to completion of permitting and
financing arrangements at each property and obtaining adequate sources of water
at Paredones Amarillos), and continued further development of Ulu as discussed
above. In addition to these development projects, the Company has over 20 other
projects at various stages of development and exploration. This project pipeline
is a result of the Company's strategy to add to its ore reserve base through
global strategic alliances and increased exploration and development activity.
AQUARIUS
The Aquarius project located in the Timmins gold district of Ontario, is
one of the first results of the acquisition, exploration and development program
that the Company instituted two years ago. In January 1997, the Company
announced the completion of its feasibility study and the decision to proceed
with the Aquarius project. Aquarius had 1.3 million ounces of proven and
probable gold reserves at December 31, 1996 at an average grade of 0.059 ounces
per ton. Aquarius ore will be mined from an open pit and processed by milling.
The average annual production rate is expected to be approximately 166,000
ounces, with an estimated cash operating cost of $218 per ounce over the life of
the current reserves, subject to annual variation due to ore grade and other
factors. The Company expects to start construction in June 1997 and begin
production in late 1998. Initial capital cost is estimated to be $100 million,
which the Company expects to finance with a $75 million unsecured credit
facility currently in negotiation, existing working capital and operating cash
flow from the Company's four existing gold mines. Further exploration potential
exists on this 6,987 acre property. The Company intends to begin drilling
targets to the east and west of the existing ore body in 1997.
PAREDONES AMARILLOS
Upon construction, Paredones Amarillos is expected to be one of the largest
gold mines in Mexico. Like Aquarius, it is one of the early results of the
Company's recent exploration efforts. The Company owns 60% of the Paredones
Amarillos project, located in the Mexican state of Baja California Sur. The
remaining 40% of the project is owned by subsidiaries of Viceroy Resource
Corporation ("Viceroy"). In January 1997, the Company announced completion of
its feasibility study and a decision to proceed with the Paredones Amarillos
project. 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 application is
pending. Ore at Paredones Amarillos will be open pit mined and processed by
milling. Paredones Amarillos has 1.3 million ounces of proven and probable gold
reserves (the Company's share, 775,200 ounces) at December 31, 1996 at an
average grade of 0.032 ounces per ton. The average annual production rate is
expected to be approximately 128,000 ounces (the Company's share, 77,000
ounces), with an estimated cash operating cost of $223 per ounce over the life
of the current reserves, subject to annual variation due to ore grade and other
factors. Subject to completion of permitting, negotiation of financing
arrangements, approval of the Company's joint venture partner and securing
access to an adequate water supply, the joint venture currently expects to start
construction in July 1997, with the first full year of operations expected to be
1999. Initial capital cost of the Paredones Amarillos project is expected to be
approximately $111 million (the Company's share, $67 million). The Company
expects to finance its share with a $36 million
S-6
<PAGE> 7
non-recourse (except for completion guarantees by the Company) project loan
(subject to arrangement of satisfactory terms), existing working capital and the
operating cash flow from the Company's four existing gold mines. As indicated
above, additional mineralization exists below and to the east of the planned
pit. The Company will evaluate these and other targets at surface as the project
progresses.
KINGKING
The Company believes that the Kingking project has the potential to be one
of the largest opportunities in its project pipeline. During 1995, the Company
and TVI Pacific Inc. ("TVI") formed alliances with Filipino corporations to
create Kingking Mines Inc. ("KMI"). KMI has signed an option agreement to
acquire a 100% interest in the Kingking project from Benguet Corporation
("Benguet") after completion of a bankable feasibility study. The option
agreement provides for the payment of $67 million to Benguet if the option is
exercised on or before April 1998. KMI may delay expiration of the option until
April 1999 by making monthly payments during the delay period of up to $10.5
million in the aggregate. A contingent payment of up to $18.0 million also would
be payable if there were an increase in the mineralization of Kingking over the
gold mineralization outlined in Benguet's pre-feasibility report. The Company
and its Philippine associates have an initial interest in the option of 75%. 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 pre-feasibility
report prepared by Benguet in March 1994, Kingking has approximately 225 million
minable tons of mineralized material (the Company's and its Philippine
associates' 75% share, 169 million tons) at average grades of 0.017 ounces of
gold per ton and 0.47% copper. The Company expects to complete a preliminary
feasibility study in the second quarter of 1997.
SANTA ELINA
Santa Elina holds one of the largest exploration land positions in Brazil
and provides the Company access to several promising exploration and development
opportunities as well. In 1996, the Company completed a series of transactions
with Santa Elina and its shareholders, including 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% (now 51%). Santa Elina has four active exploration and
development projects and has mineral claims on over 25 million hectares in
Brazil. Most of this land is located on known gold belts throughout Brazil but
has not been extensively explored. Santa Elina's management team (headed by Echo
Bay's former Executive Vice President, Robert C. Armstrong) is completing
initial and final feasibility studies on several advanced properties and is
prioritizing the exploration program to maximize the value of the assets. Joint
ventures are being considered with qualified third parties where appropriate.
Santa Elina holds an 83% interest (the Company's share, 42.3%) in the
Chapada development property, a large-tonnage copper and gold opportunity in
Brazil. The Company has an option to purchase a 50% interest in the property
from Santa Elina which, if exercised, would increase the Company's interest in
the property to 67%. Santa Elina has outlined 113 million minable tons of
mineralized material at average grades of 0.012 ounces of gold per ton and 0.43%
copper based on a cutoff grade of 0.30% copper. In 1996, Santa Elina began a
work program to further expand the currently outlined mineralization, and at
December 31, 1996, had completed a total of 37,500 meters of drilling. A
detailed feasibility study is expected to be completed in mid-1997.
Santa Elina also owns 83% (the Company's share, 42.3%) of Fazenda Nova, a
gold exploration property located in central Brazil, and of Sao Francisco, a
gold exploration property located near the border between Brazil and Bolivia.
Santa Elina has identified six targets at Fazenda Nova. Santa Elina also owns
83% (the Company's share, 42.3%) of Sao Vicente, an open-pit mine and mill
currently shut down, which is being evaluated for open-pit mining and heap
leaching as well as for underground mining and milling. Santa Elina also holds
an 83% interest (the Company's share, 42.3%) in a concession to construct and
operate a hydropower plant proposed for the Guapore River. Santa Elina is
negotiating with respect to the terms of turnkey construction and operating
agreements and related project financing for the hydropower project.
S-7
<PAGE> 8
OTHER EXPLORATION PROJECTS
The Company's project pipeline also includes over 20 opportunities that are
at various stages of exploration. These include: exploration drilling on the
Kilgore property in Idaho; a strategic alliance and joint venture with
Minefinders Corporation, which holds the Dolores project in the State of
Chihuahua, Mexico; a 50% interest in the Youga project in Burkina Faso in West
Africa; and joint ventures on the Huaco Cucho and the Patacancha properties in
Peru. The Company believes that these and various other earlier stage projects
will provide a significant platform for long-term growth in ore reserves and
production.
There can be no assurance that any of the Company's exploration and
development projects will be successful. See "Risk Factors" herein and in the
accompanying Prospectus.
FINANCIAL STRATEGY
The Company's management approaches the financing of its operations under a
number of guidelines, including:
- A capitalization ratio of debt (net of cash) to total capital of 30% or
less
- A preference for financing exploration and development projects
principally with cash flow from operations
- A preference for financing project construction principally with debt
- A preference for financing acquisitions principally with equity
- The potential use of limited recourse project financing to mitigate
project and political risk, particularly at projects outside the US and
Canada
- The use of hedging transactions to reduce the impact of changes in gold
and silver prices, exchange rates, interest rates and certain other
commodity prices, but not actively engaging in the practice of trading
derivatives for profit
- The use of equity financing as a major component of the capital
structure. The Company has demonstrated its commitment to equity
financing in the past:
<TABLE>
<CAPTION>
COMMON NET
SHARES PROCEEDS
SIGNIFICANT EQUITY ISSUES SINCE 1986 (MILLION) ($MM)
------------------------------------ --------- --------
<S> <C> <C>
1996 Issuance of Common Shares to Purchase an Additional
43% Interest in Santa Elina........................... 8.8 85.8
1995 Conversion of Convertible Preferred Shares......... 16.9 --
1993 Sale of Common Shares.............................. 6.4 83.7
1992 Sale of Convertible Preferred Shares............... -- 136.3
1991 Exchange Offer for Swiss Franc Bonds............... 6.0 49.0(1)
1988 Sale of Common Shares.............................. 3.6 73.8
1987 Sale of Common Shares.............................. 3.2 65.8
1986 Sale of Common Shares.............................. 7.2 75.2
</TABLE>
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(1) Represents retirement of debt related to exchanged Swiss Franc
Bonds.
S-8
<PAGE> 9
THE OFFERING
Capitalized terms used but not defined in this section are defined under
the caption "Description of the Securities."
Securities Offered......... $100,000,000 principal amount 11% Capital
Securities due April 1, 2027 (the "Securities").
Maturity Date.............. April 1, 2027.
Interest Payment Dates..... April 1 and October 1, commencing October 1, 1997.
Extension Periods.......... The Company has the right, at any time and from
time to time, to defer payments of interest on the
Securities by extending the interest payment period
on the Securities for a period (each such period,
an "Extension Period") not exceeding 10 consecutive
semi-annual periods. Except in certain limited
circumstances described herein, the Company shall
not pay or declare dividends to holders of its
Capital Stock or make certain payments on pari
passu or junior securities at any time when any
outstanding interest on the Securities is being
deferred as contemplated above or while the Company
is in default of certain obligations. There could
be multiple Extension Periods of varying lengths,
each not exceeding 10 consecutive semi-annual
periods, throughout the term of the Securities.
During any Extension Period, interest on the
Securities will accrue at the rate of 12% per
annum, compounded semi-annually. See "Description
of the Securities -- Option to Extend Interest
Payment Periods." The Company may satisfy its
obligation to pay Deferred Interest on any
applicable Interest Payment Date by delivering to
the Trustee common shares without nominee or par
value in the capital of the Company ("Common
Shares"), in which event the holder of a Security
shall be entitled to receive cash payments equal to
the Deferred Interest from proceeds of the sale of
the requisite Common Shares by the Trustee. See
"Description of the Securities -- Common Shares
Payment Election." Holders of Securities will not,
however, be entitled to receive any Common Shares
in satisfaction of the Company's obligation to pay
such Deferred Interest.
Optional Redemption........ The Securities are redeemable prior to their
maturity, at the option of the Company, on or after
April 1, 2007, in whole at any time or in part from
time to time at the redemption prices set forth
herein. In addition, at any time on or after April
1, 2002, and prior to April 1, 2007, the Company
may use the Net Cash Proceeds from one or more Cash
Equity Sales occurring after the issue date of the
Securities to redeem either (i) up to 40% of the
aggregate original principal amount of the
Securities or (ii) 100% of the aggregate principal
amount of the Securities then Outstanding at the
redemption prices set forth herein. The Securities
are also redeemable by the Company, in whole but
not in part, at any time following, under certain
circumstances, the occurrence of a Redemption Tax
Event, at an amount equal to 100% of the principal
amount thereof. The Securities are also redeemable
by the Company, in whole or in part, at any time
and from time to time prior to April 1, 2007, at an
amount equal to the Make-Whole Amount. See
"Description of the Securities -- Optional
Redemption" and " -- Redemption for Changes in
Canadian Tax Law."
S-9
<PAGE> 10
Change of Control.......... An Event of Default will occur if upon a Change in
Control, the Company fails to offer to purchase all
outstanding Securities at a price equal to 101% of
the principal amount thereof, plus accrued interest
to the date of purchase. See "Description of the
Securities -- Change of Control Repurchase."
Ranking.................... The Securities will be unsecured and subordinated
and junior in right of payment to all Senior
Indebtedness of the Company. No payment of
principal (including redemption payments), premium,
if any, or interest on the Securities may be made
(i) if any Senior Indebtedness of the Company is
not paid when due, (ii) if any applicable grace
period with respect to a payment default on Senior
Indebtedness has ended and such default has not
been cured or waived or ceased to exist or (iii) if
the maturity of any Senior Indebtedness of the
Company has been accelerated because of a default.
Upon any distribution of assets of the Company to
creditors upon any dissolution, winding-up,
liquidation or reorganization, whether voluntary or
involuntary, or in bankruptcy, insolvency,
receivership or other proceedings, all principal,
premium, if any, and interest due on all Senior
Indebtedness of the Company must be paid in full
before the holders of the Securities are entitled
to receive or retain any payment. Upon satisfaction
of all claims of all Senior Indebtedness of the
Company then outstanding, the rights of the holders
of the Securities will be subrogated to the rights
of the holders of the Senior Indebtedness of the
Company to receive payments or distributions
applicable to such Senior Indebtedness until all
amounts owing on such Securities are paid in full.
See "Description of the
Securities -- Subordination."
The Company expects that, following completion of
the sale of the Securities and the use of the net
proceeds, together with other funds, to repay
certain indebtedness, Senior Indebtedness of the
Company will consist primarily of (i) up to $75
million of bank indebtedness relating to the
construction of the Aquarius mine and up to $36
million of guarantees of subsidiary indebtedness
relating to the construction of the Paredones
Amarillos mine, expected to be incurred in 1997 and
1998, (ii) Company bank debt, which was $18.4
million at December 31, 1996 and (iii) guarantees
of indebtedness of subsidiaries, which would have
been $55.6 million at December 31, 1996. The
Securities will also be effectively subordinated to
all indebtedness and other liabilities of the
Company's subsidiaries. At December 31, 1996, in
addition to the guaranteed indebtedness, the
Company's subsidiaries had approximately $61.2
million of current payables, accrued liabilities
and mining taxes payable. At December 31, 1996, the
Company and its subsidiaries also had $67.1 million
of long-term provisions for reclamation, mine
closure and waste rock removal.
Certain Covenants.......... The Indenture will contain covenants that will,
among other things, limit the ability of the
Company to incur indebtedness or, during an
Extension Period or in certain circumstances while
the Company is in default of certain obligations,
make certain restricted payments on pari passu or
junior securities. See "Description of the
Securities -- Certain Covenants."
Tax Considerations......... The interest that accrues on the Securities will be
treated as original issue discount ("OID"), and
holders will be required to include OID
S-10
<PAGE> 11
in gross income for United States Federal income
tax purposes, regardless of the timing of receipt
of corresponding payments. See "Tax
Considerations."
Use of Proceeds............ The net proceeds from the sale of the Securities
are estimated to be $96.7 million, which, together
with cash on hand, will be used to repay
indebtedness totaling $113.8 million (including $2
million of related expenses), for general corporate
purposes, and for working capital. See "Use of
Proceeds."
Additional Amounts......... All payments with respect to the Securities made by
the Company will be made without withholding or
deduction for Canadian taxes unless required by law
or by the interpretation or administration thereof.
If such withholding or deduction applies, the
Company will pay as additional interest such
additional amounts as may be necessary so that the
net amount received by the holders after such
withholding or deduction will not be less than the
amount that would have been received in the absence
of such withholding or deduction. See "Description
of the Securities -- Canadian Withholding Taxes".
RISK FACTORS
Prospective purchasers of the Securities should consider carefully all of
the information set forth in this Prospectus Supplement and in the Prospectus
and, in particular, should evaluate the information set forth under "Risk
Factors" herein and in the accompanying Prospectus.
S-11
<PAGE> 12
SUMMARY FINANCIAL DATA
The following table is derived in part from and is qualified by reference
to the consolidated financial statements of the Company for the fiscal years
indicated below. The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Canada ("Canadian
GAAP"). In all material respects, they conform with principles generally
accepted in the United States ("United States GAAP") (except as described in
note 12 to the Company's December 31, 1996 consolidated financial statements).
This information should be read in conjunction with Selected Financial Data and
the consolidated financial statements and the notes thereto included herein.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(MILLIONS OF DOLLARS, EXCEPT FOR PER OUNCE
DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA
- -----------------------
CANADIAN GAAP:
Revenue................................................... $ 337.3 $360.7 $377.6 $366.5 $312.4
Operating costs........................................... 221.1 212.2 201.1 212.6 202.9
Depreciation and amortization............................. 86.5 89.4 85.6 89.5 83.7
General and administrative................................ 13.6 12.2 10.4 9.3 10.6
Exploration and development............................... 63.6 69.8 46.6 24.6 5.7
Interest and other........................................ 3.1 4.2 (0.3) 2.3 8.2
Provisions and write-downs................................ 107.1 -- -- -- 18.1
Earnings (loss) before income taxes....................... (176.1) (44.8) 13.0 9.7 (29.4)
Income tax expense (recovery)............................. 0.6 (3.2) (4.3) (0.5) (2.0)
Earnings (loss) before preferred stock dividends.......... (176.7) (41.6) 17.3 10.2 (27.4)
Preferred stock dividend of subsidiary.................... -- 8.5 9.3 6.6 4.3
Net income (loss)......................................... (176.7) (50.1) 8.0 3.6 (31.7)
UNITED STATES GAAP:
Net income (loss)......................................... $(174.5) $(46.5) $ 7.3 $ 8.5 $(31.7)
BALANCE SHEET DATA
- ------------------
CANADIAN GAAP:
Cash and cash equivalents................................. $ 103.2 $185.8 $201.5 $ 19.2 $ 60.3
Working capital (deficiency).............................. (52.9) 109.6 186.2 148.9 31.1
Plant and equipment....................................... 234.0 255.9 281.1 314.8 355.7
Mining properties......................................... 405.0 318.2 327.4 358.2 393.3
Total assets.............................................. 832.1 871.2 881.7 990.5 936.6
Long-term debt............................................ 53.5 111.7 121.9 131.2 210.7
Common shareholders' equity............................... 492.3 588.9 509.7 513.7 440.3
UNITED STATES GAAP:
Total assets.............................................. 919.6 881.3 872.6 975.2 917.1
Common shareholders' equity............................... $ 533.1 $599.0 $500.6 $503.3 $420.8
OTHER DATA
- ----------
EBITDA before exploration and development(1).............. $ 89.4 $119.5 $151.2 $130.7 $ 83.7
Interest expense.......................................... 8.2 5.0 6.1 6.8 5.5
Capital expenditures...................................... 105.1 77.9 29.2 26.9 75.7
Average price realized per ounce of gold.................. $ 384 $ 388 $ 387 $ 360 $ 357
CERTAIN RATIOS
- -------------
EBITDA before exploration and development/interest
expense(1).............................................. 10.9x 23.8x 24.8x 19.3x 15.1x
Debt/EBITDA before exploration and development(1)(2)...... 2.0x 1.3x 0.9x 1.7x 2.6x
</TABLE>
- ---------------
(1) EBITDA before exploration and development expense is defined as EBITDA plus
exploration and development expense. EBITDA is defined as earnings (loss)
before income taxes, interest expense, depreciation and amortization,
provisions and write-downs and preferred stock dividends, and is presented
because it is commonly used by certain investors and analysts to analyze and
compare companies on the basis of operating performance and to determine a
company's ability to service and incur debt. EBITDA should not be considered
in isolation from or as a substitute for net income, cash flows from
operating activities or other consolidated income or cash flow statement
data prepared in accordance with generally accepted accounting principles or
as a measure of profitability or liquidity.
(2) Debt includes gold swaps, gold and silver loans, currency loans and
debentures, but not preferred shares of a subsidiary.
S-12
<PAGE> 13
PROVEN AND PROBABLE ORE RESERVES
The following tables present proven and probable ore reserves and
production and cash operating costs by property as of and for the fiscal year
ending December 31 of the years indicated. The reserve data were estimated by
the Company and, in the case of Aquarius and Paredones Amarillos, the Company's
reserve estimation methodology was verified by an external geological
consultant. See "Experts." For definitions of proven and probable ore, see
"Business -- Proven and Probable Ore Reserves."
<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)
------- -------- --------- ----------- ----------- -----------
(THOUSANDS, EXCEPT AVERAGE GRADES)
<S> <C> <C> <C> <C> <C> <C>
GOLD
PRODUCING MINES:
Round Mountain............................ 476,509 0.019 9,050 4,525 5,000 3,900
McCoy/Cove................................ 35,379 0.033 1,183 1,183 1,526 1,870
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............................. -- -- -- -- 3,442 3,442
Kensington................................ -- -- -- -- -- 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>
PRODUCTION AND CASH OPERATING COSTS
<TABLE>
<CAPTION>
CASH OPERATING
PRODUCTION (OUNCES) COST PER OUNCE(1)
------------------------------------- -------------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
GOLD
Round Mountain(2)......................... 205,487 172,217 211,752 $ 221 $ 195 $ 176
McCoy/Cove................................ 271,731 310,016 359,360 271 217 194
Lupin..................................... 166,791 172,110 180,052 299 296 274
Kettle River.............................. 124,910 100,419 66,782 201 230 253
--------- ---------- ---------- ----- ----- -----
Total gold........................ 768,919 754,762 817,946 $ 254 $ 229 $ 209
========= ========== ========== ===== ===== =====
SILVER
Total silver (all McCoy/Cove)............. 7,102,348 11,905,806 10,443,151 $3.60 $2.94 $2.66
========= ========== ========== ===== ===== =====
</TABLE>
- ---------------
(1) See "Business -- Production and Cost Data" for the definition of cash
operating costs.
(2) Represents the Company's 50% share of production at Round Mountain.
S-13
<PAGE> 14
RISK FACTORS
Purchasers of the Securities being offered hereby should carefully read
this entire Prospectus Supplement, the accompanying Prospectus and the documents
incorporated by reference in such Prospectus. Purchasers should consider, among
other things, the risk factors set forth below.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Statements that are not historical facts contained or incorporated by
reference in this Prospectus Supplement and the accompanying Prospectus are
forward-looking statements. 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 disputes, delays in start-up dates, environmental
costs and risks, the outcome of acquisition negotiations and general domestic
and international economic and political conditions and other factors described
in this Prospectus Supplement and the accompanying Prospectus and in the
Company's annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K filed with the Securities and Exchange Commission.
Many of such factors are beyond the Company's ability to control or predict.
Actual results may differ materially from those projected. Prospective
investors are cautioned not to put undue reliance on forward-looking statements,
and should not infer that there has been no change in the affairs of the Company
since the date of this Prospectus Supplement that would warrant any modification
of any forward-looking statement made in this Prospectus Supplement or the
accompanying Prospectus. For a discussion of certain of such risks and
uncertainties, see the "Risk Factors" set forth below, those in the accompanying
Prospectus, and the discussions contained in the Company's annual reports on
Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K filed
with the Securities and Exchange Commission. The Company disclaims any intent or
obligation to update publicly these forward-looking statements, whether as a
result of new information, future events or otherwise.
RECENT LOSSES
In the fiscal years ended December 31, 1996 and 1995, the Company incurred
net losses of $176.7 million and $50.1 million, respectively. The loss in 1996
included a $77.1 million write-down of and reclamation and closure provision for
the Alaska-Juneau development property and a $30.0 million provision for
McCoy/Cove pit wall stabilization. During those years, the Company incurred
exploration and development costs of $63.6 million and $69.8 million,
respectively. Operating costs increased from $212.2 million in 1995 to $221.1
million in 1996 as the Company experienced higher costs of mining and the
Company mined and processed greater volumes to offset the effects of lower
grades at McCoy/Cove. The Company expects that it will continue to incur losses
in the near future, and that its return to profitability will depend on, among
other things, an increase in the price of gold over current prices, the ability
to bring into commercial production the projects that have been the subject of
the Company's exploration and development program and the profitability of
production at existing and new mines.
S-14
<PAGE> 15
HOLDING COMPANY STRUCTURE
All of the Company's non-Canadian operations are conducted through
subsidiaries. As a result, the Company's ability to pay principal and interest
on the Securities will be dependent, in part, upon the ability of such
subsidiaries to make dividend and other payments to the Company. The instruments
defining the rights of holders of indebtedness of such subsidiaries contain
provisions that may, directly or indirectly, limit the making of such payments.
In addition, except to the extent that the Company may itself be a creditor with
recognized claims against its subsidiaries, claims of creditors of such
subsidiaries will have priority with respect to the assets and earnings of such
subsidiaries over the claims of creditors of the Company, including holders of
the Securities. As of December 31, 1996, after giving effect to the repurchase
by the Company in 1997 of its gold swap and gold and silver forward positions
and resulting realization of $63.3 million of proceeds therefrom, the sale of
the Securities and the use of the proceeds therefrom, together with other funds,
to repay certain indebtedness, the Company's subsidiaries would have had
approximately $55.6 million of outstanding indebtedness (all of which is
guaranteed by the Company) and approximately $61.2 million of current payables,
accrued liabilities and income and mining taxes payable. In addition, at
December 31, 1996, the Company's subsidiaries had $62.3 million of long-term
provisions for reclamation, mine closure and waste rock removal.
SUBORDINATION OF THE SECURITIES
Under the Indenture, the Company's obligations under the Securities will be
unsecured, subordinate and junior in right of payment to all present and future
Senior Indebtedness of the Company. The Company expects that, following
completion of the sale of the Securities and the use of the net proceeds,
together with other funds, to repay certain indebtedness, Senior Indebtedness of
the Company will consist primarily of (i) up to $75 million of bank indebtedness
relating to the construction of the Aquarius mine and up to $36 million of
guarantees of subsidiary indebtedness relating to the construction of the
Paredones Amarillos mine, expected to be incurred in 1997 and 1998, (ii) Company
bank debt, which was $18.4 million at December 31, 1996, and (iii) guarantees of
indebtedness of subsidiaries, which would have been $55.6 million at December
31, 1996. The Securities will also be effectively subordinated to all
indebtedness and other liabilities of its subsidiaries. See "-- Holding Company
Structure" for information with respect to the indebtedness of subsidiaries. By
reason of such subordination, in any bankruptcy or insolvency of the Company,
holders of Securities may receive less, ratably, than holders of Senior
Indebtedness, and holders of indebtedness which is neither Senior Indebtedness
nor the Securities may receive more, ratably, than holders of the Securities.
ADVERSE CONSEQUENCES OF FINANCIAL LEVERAGE
As of December 31, 1996, after giving effect to the sale of the Securities
and the use of the proceeds and other available funds (including the $63.3
million of proceeds from the close-out of the Company's forward position in
January 1997) to repay certain indebtedness, the Company's outstanding
consolidated indebtedness, together with the Securities, would have aggregated
$171.1 million. In addition, the Company expects to incur or guarantee
approximately $111 million of additional indebtedness over the next two years to
finance the construction of the Aquarius and Paredones Amarillos mines. At
December 31, 1996, the Company had the capacity to incur an additional $111.5
million under existing bank credit facilities, and it will likely be required to
incur indebtedness to finance construction of additional mines in the future.
The existence of such financial leverage could have important consequences to
holders of the Securities, including: (i) the Company's operating flexibility
may be limited by financial and operating covenants which limit, among other
things, its ability to incur additional indebtedness, pay dividends and make
certain acquisitions and investments, (ii) a significant portion of the
Company's operating cash flow may be needed for debt service, (iii) the Company
may be hindered in its ability to respond to changing conditions in its industry
and (iv) the Company may be more vulnerable than some of its competitors to a
downturn in economic conditions, including metals prices, affecting its
business.
S-15
<PAGE> 16
OPTION TO EXTEND INTEREST PAYMENT PERIOD AND TAX CONSEQUENCES
The Company has the right, at any time and from time to time, subject to
certain conditions, to defer payments of interest on the Securities by extending
the interest payment period on the Securities for Extension Periods each not
exceeding 10 consecutive semi-annual payment periods; provided that during any
Extension Period, interest on the Securities will accrue at the rate of 12% per
annum, compounded semi-annually. During an Extension Period, holders of
Securities will be required to continue accruing interest income for United
States Federal income tax purposes prior to receipt of cash related to such
interest income. In the event that the Company exercises this right to defer
interest payments on the Securities, then, during any Extension Period (i) the
Company shall not declare or pay dividends on, or make distributions with
respect to, or redeem, repurchase or acquire, or make a liquidation payment with
respect to, any of its Capital Stock (other than (a) as a result of an exchange
or conversion of any class or series of the Company's Capital Stock or rights to
acquire such stock for any other class or series of the Company's Capital Stock
or rights to acquire such stock, (b) the purchase of fractional interests in
shares of the Company's Capital Stock pursuant to the conversion or exchange
provisions of such Capital Stock or the security being converted or exchanged,
(c) dividends or distributions made on the Company's Capital Stock or rights to
acquire such stock with the Company's Capital Stock or rights to acquire such
stock or (d) purchases of Common Shares related to the issuance of Common Shares
or rights or options under any of the Company's benefit plans for its directors,
officers, employees or other persons within the definition of "employee" under
any employee benefit plan of the Company, or related to the issuance of Common
Shares or rights under a dividend reinvestment plan or stock purchase plan) and
(ii) the Company shall not make any payment of interest, principal or premium,
if any, on, or repay, repurchase or redeem, any debt securities (excluding, for
the avoidance of doubt, Senior Indebtedness, current payables, accrued
liabilities, provisions for reclamation, mine closure and waste rock removal,
and income and mining taxes payable, in respect of which such payments,
repayments, repurchases and redemptions may be made) issued by the Company or
any guarantee issued by the Company that, in either case, rank pari passu with
or junior to the Securities. Prior to the termination of any Extension Period,
the Company may further defer payments of interest by extending the interest
payment period on the securities; provided, however, that such Extension Period,
together with all such previous and further extensions thereof, may not exceed
10 consecutive semi-annual payment periods and no Extension Period may extend
beyond the maturity of the Securities. The Company may satisfy its obligation to
pay Deferred Interest on any applicable interest payment date by issuing and
delivering Common Shares to the Trustee, in which event the holder of a Security
shall be entitled to receive cash payments equal to the Deferred Interest from
proceeds of the sale of the requisite Common Shares by the Trustee. Upon the
termination of any Extension Period and the payment of all Deferred Interest,
the Company may commence a new Extension Period for up to 10 consecutive
semi-annual payment periods, subject to the above requirements.
Whether or not an Extension Period occurs, a Security holder will recognize
income (in the form of original issue discount) for United States Federal income
tax purposes at the rate that interest accrues on the Securities. As a result, a
Security holder will be required to include such income in gross income for
United States federal income tax purposes in advance of the receipt of cash, and
will not receive the cash related to such income from the Company if the holder
disposes of the Securities prior to the record date for payment of Interest. See
"Tax Considerations -- United States Federal Income Taxation."
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.
S-16
<PAGE> 17
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.
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 in the event of an
impairment, may be required to write-down the carrying value of a mine or mines.
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.
MINE DEVELOPMENT RISKS
The Company's ability to maintain, or increase, its annual production of
gold and silver will be dependent in significant part on its ability to bring
new mines into production, including the Aquarius project in Canada and the
Paredones Amarillos project in Mexico, and to expand 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 at new mines or at expansions of
existing mines. 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, royalty or
other ownership burdens and other factors. In addition, many of the risks
identified below at "-- Exploration Risks" are also applicable to the Company's
development projects. 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.
METAL PRICE VOLATILITY
The profitability of the Company's current operations is directly related
and sensitive to the market price of gold and silver. Future operations may also
be sensitive to changes in the price of copper. Gold, silver and other metal
prices fluctuate widely and are affected by numerous factors beyond the
Company's control, including global supply and demand, 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,
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.
S-17
<PAGE> 18
The current demand for, and supply of, gold and silver affect the prices of
such metals, 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.
The volatility of metal prices is illustrated in the following table which
sets forth the average of the daily closing prices for gold, silver and copper
for the years indicated:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Gold(1) ($ per ounce)................. 388 384 384 360 344
Silver(2) ($ per ounce)............... 5.18 5.19 5.29 4.30 3.94
Copper(3) ($ per pound)............... 1.04 1.33 1.05 0.88 1.03
</TABLE>
- ---------------
(1) On the London Bullion Market
(2) As quoted by Handy and Harman
(3) On the London Metals Exchange
As of March 24, 1997, the closing prices for the metals described above
were:
Gold: $350.20 per ounce
Silver: $5.19 per ounce
Copper: $1.10 per pound
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 "-- Metal 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. 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 and were $350.20 per ounce of
gold and $5.19 per ounce of silver at March 24, 1997, which are below the price
at which the Company has estimated its reserves. 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. In addition, 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 material
write-downs of its investment in its mining properties. Under certain of 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 as the need for sequential
S-18
<PAGE> 19
development of ore bodies and the processing of new or different ore grades and
ore types, may materially and adversely affect reserves.
EXPLORATION RISKS
Since mines have limited lives based on proven and probable ore reserves,
the Company continually seeks to replace and expand its reserves. Moreover, two
of the Company's mines, McCoy/Cove and Lupin (without taking into account
supplemental production from Ulu) are entering a period of declining production
as the existing ore reserves are depleted, which has led to significant
expansion of the Company's exploration program. Mineral exploration, at both
newly acquired properties and existing mining operations, is highly speculative
in nature, involves many risks and frequently does not result in the discovery
of minable reserves. 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. For example, a new feasibility
study completed in December 1996 on the Alaska-Juneau project concluded that the
project was uneconomic as designed, and the Company recorded a $77.1 million
provision in connection with the decision not to proceed. 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 any
mine's current level of gold or silver production beyond the life of its
existing reserves.
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.
In addition, there are a number of uncertainties inherent in any program
relating to the location of economic ore reserves, the development of
appropriate metallurgical processes, the receipt of necessary governmental
permits and the construction of mining and processing facilities. Accordingly,
there can be no assurance that the Company's acquisition and exploration
programs will yield new reserves to replace and expand current reserves.
RISKS RELATED TO JOINT VENTURE RELATIONSHIPS
The Company has entered into a number of strategic alliances and joint
venture relationships as part of its expanded exploration and development
activities. The terms of these relationships vary, but in many cases the Company
is dependent on its co-venturer for expertise in operating in environments
outside of North America as well as its relationships with governmental
officials and the indigenous people generally. In addition, under certain of the
Company's arrangements, including Santa Elina, the co-venturer has approval
rights with respect to capital and/or operating budgets and expenditures; in
these circumstances, the constraints of the capital available to the co-venturer
from third parties and/or the other exploration and development or other
opportunities available to the co-venturer may affect its willingness to proceed
with the Company's projects on terms acceptable to the Company. Further, in
connection with the development of a property, particularly for copper-gold
properties, the Company may be required to seek a partner or partners for
technical expertise in the development and operation phases of the project, and,
in certain instances, for financing until cash flow is generated from the
project for the Company's account. There can be no assurance that the Company
will be successful in partnering with companies on terms that are commercially
attractive.
MINING RISKS AND INSURANCE
The business of gold and silver mining is generally subject to a number of
risks and hazards, including environmental conditions, industrial accidents,
labor disputes, unusual or unexpected geologi-
S-19
<PAGE> 20
cal 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 the Company'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 circumstances. However,
insurance against certain risks (including certain liabilities for environmental
pollution or other hazards as a result of exploration and production) is not
generally available to the Company or to other companies in the industry on
acceptable terms. During 1996, the Company recorded a $30.0 million provision
related to estimated costs to remove waste rock from an unstable portion of the
pit wall at McCoy/Cove. See "Business -- Producing Mines -- McCoy/Cove."
GOVERNMENTAL REGULATION
The Company's mining operations and exploration activities are subject to
extensive foreign or US 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. 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 will
continue to do so in the future. Moreover, it is possible that future regulatory
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 US
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. Similar legislation has also been proposed in the current session of the US
Congress, as has other legislation which could have the effect of increasing
costs of operations. 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.
S-20
<PAGE> 21
Department of the Interior Secretary Babbitt recently announced his intention to
require the Bureau of Land Management to revise the federal regulations
applicable to activities on unpatented mining claims to impose more stringent
reclamation and environmental protection requirements on those activities. The
extent to which any such new legislation or administrative action 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, particularly the Company's operations at McCoy/Cove and, to a lesser
extent, Round Mountain. 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.
RISK OF INTERNATIONAL OPERATIONS
Many of the mineral rights and interests of the Company are subject to
government approvals, licenses and permits. Such approvals, licenses and permits
are, as a practical matter, subject to the discretion of the applicable
governments or governmental officials. No assurance can be given that the
Company will be successful in obtaining any or all of the various approvals,
licenses and permits that it seeks, that it will obtain them in a timely fashion
or that it will be able to maintain them in full force and effect without
modification or revocation.
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 political conditions,
international monetary fluctuations, currency controls and foreign governmental
regulations that favor or require the awarding of 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, including at the
McCoy/Cove, Round Mountain and Kilgore properties, consist of unpatented lode
mining claims. Unpatented mining claims may be located on US 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.
At Lupin in Canada, the Company's surface leases on most of the acreage
expired by their terms in March 1996. The mineral leases on this acreage extend
to 2009 and 2013. The Company has applied for renewal of the surface leases, and
taken the steps necessary for renewal, but has not received notice of renewal
from the applicable governmental authorities. The Company expects such renewal
to be granted; however, there can be no assurance that such renewal will be
granted or that the leases, as renewed, will
S-21
<PAGE> 22
not contain modified terms relating to reclamation and other environmental
matters. See "Business -- Producing Mines -- Lupin."
INFLATION AND CURRENCY RISKS
The Company directly or indirectly holds mining interests in several
countries, including Mexico, the Philippines, Brazil, Russia, Burkina Faso,
Ghana, Bolivia, Chile, Ecuador, Honduras and Peru, which historically have had
unstable currencies as a result of inflation, currency controls or other
reasons. Although the production resulting from such mining interests is
generally sold in US dollars, the Company is vulnerable to the effects of
inflation in its operations in certain countries, and profitability levels may
be eroded by unfavorable exchange rates. None of the countries in which the
Company holds mineral interests currently restricts the repatriation of profits,
other than through the requirement to register such distributions. While recent
years have seen a generally positive trend toward lowering inflation and
stabilizing exchange rates in these countries, there is no assurance that
governments will continue with current economic policies or that inflation will
be lower than it has been historically.
NO PRIOR MARKET FOR SECURITIES
Prior to the offering being made hereby, there has been no public market
for the Securities. The Securities will not be listed or quoted on any exchange
or in the over-the-counter market. Although the Company has been informed by the
Underwriter that it currently intends to make a market in the Securities, it is
not obligated to do so and any such market making may be discontinued at any
time without notice. Accordingly, there can be no assurance as to the
development or liquidity of any trading market for the Securities. If a trading
market does develop, the Securities may trade at a price that does not reflect
the value of accrued but unpaid interest.
S-22
<PAGE> 23
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Securities in the
Offering are estimated to be $96.7 million, after deducting estimated
underwriting commissions and other expenses of the Company. The net proceeds of
this Offering, cash on hand of $103.2 million as of December 31, 1996 and $63.3
million of cash realized from the repurchase in 1997 of the Company's gold swap
and gold and silver forward positions will be used as follows: approximately
$85.8 million will be used to pay an $83.8 million bond obligation bearing
interest at 10.34% due March 27, 1997 and unamortized discount and prepayment
penalty of approximately $2.0 million, and $28.0 million will be used to repay a
debenture bearing interest at 3.40% and maturing March 31, 1997. The remainder
will be added to the Company's available funds and used for general corporate
purposes, including capital expenditures relating to the development of the
Aquarius and Paredones Amarillos projects or expansion of the Company's existing
properties and working capital. Pending any such use, the net proceeds will be
invested in short-term US or Canadian government securities or other short-term
investment grade debt instruments.
RATIO OF EARNINGS TO FIXED CHARGES
The Company's earnings were insufficient to cover fixed charges in each of
the five fiscal years ending December 31, 1996. Earnings were insufficient to
cover fixed charges by $176.1 million in 1996, $59.7 million in 1995, $3.3
million in 1994, $5.0 million in 1993 and $38.4 million in 1992. The deficiency
of earnings to fixed charges has been computed under Canadian GAAP. Had the
deficiency been computed under United States GAAP, earnings would have been
insufficient to cover fixed charges by $173.9 million in 1996, $56.1 million in
1995, $4.0 million in 1994, $0.1 million in 1993 and $38.4 million in 1992.
As used in the above calculations, "earnings" means earnings before income
taxes and fixed charges, and "fixed charges" means interest on all indebtedness,
preferred stock dividends of a subsidiary net of related interest income/expense
from the related interest rate swap, that portion of rental expense that
management believes to be representative of interest expense and capitalized
interest.
S-23
<PAGE> 24
CAPITALIZATION
The following table sets forth the cash and cash equivalents, current
portion of gold and other financings and consolidated capitalization of the
Company as of December 31, 1996, and as adjusted to give effect to (i) the
repurchase by the Company in 1997 of its gold swap and gold and silver forward
positions and resulting realization of $63.3 million of proceeds therefrom and
(ii) the consummation of the Offering and the application of the estimated net
proceeds therefrom to repay an $83.8 million bond obligation and approximately
$2.0 million of unamortized discount and prepayment penalty related thereto and
a $28.0 million debenture. See "Use of Proceeds."
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------
ACTUAL AS ADJUSTED
-------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Cash and cash equivalents................................... $103,196 $149,361
======== ========
Current portion of gold and other financings(1)(2).......... 129,445 17,640
======== ========
Long-term gold and other financings(1)(2)................... 53,478 57,504
Shareholders' equity(2)..................................... 492,309 585,116
-------- --------
Total capitalization(2)..................................... 545,787 642,620
======== ========
</TABLE>
- ---------------
(1) Includes gold loans and swaps, and currency-denominated loans. Gold loans
consist of bullion borrowed from financial institutions and immediately sold
in the open market for cash. The borrowed bullion is repaid over time from
mine production. 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. The interest rate on bullion loans and swaps is and historically has
been low (under 2%). At December 31, 1996, total unused credit facilities
were $111.5 million. See "Description of Bank Credit Facility." In addition,
the Company is in the process of obtaining commitments for a $75 million
unsecured credit facility to finance a portion of the construction costs at
the Aquarius project and is in negotiations with respect to a $36 million
non-recourse (except for a completion guarantee of the Company) project loan
to finance a portion of the construction costs at the Paredones Amarillos
project.
(2) The capitalization has been prepared on the basis of Canadian GAAP which
differ in some respects from United States GAAP. If the data had been
prepared on the basis of United States GAAP, the total capitalization would
have been $586.6 million at December 31, 1996 and $686.6 million as adjusted
at December 31, 1996, respectively. The "As Adjusted" amounts give effect to
the proposed issuance of $96.7 million of the Securities net of expenses, of
which $4.0 million is included in "Long-term gold and other financings,"
$92.8 million, net of expenses, is included in "Shareholders' equity" and
$0.1 million is included as an asset on the Company's balance sheet. Under
United States GAAP, none of the proposed issuance of $100.0 million of the
Securities would be included in "Shareholders' equity."
S-24
<PAGE> 25
SELECTED FINANCIAL DATA
The following table is derived in part from and is qualified by reference
to the consolidated financial statements of the Company for the fiscal years
indicated below. The consolidated financial statements have been prepared in
accordance with Canadian GAAP. In all material respects, they conform with
United States GAAP (except as described below and in note 12 to the Company's
December 31, 1996 consolidated financial statements). This information should be
read in conjunction with the audited consolidated financial statements and the
notes thereto included herein. Contingencies are described in note 16 to such
financial statements.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------- ------ ------ ------ ------
(MILLIONS OF DOLLARS, EXCEPT FOR PER OUNCE
DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA
CANADIAN GAAP:
Revenue.................................................. $ 337.3 $360.7 $377.6 $366.5 $312.4
Operating costs.......................................... 221.1 212.2 201.1 212.6 202.9
Royalties................................................ 9.7 8.4 10.0 8.6 6.1
Production taxes......................................... 2.4 4.3 6.5 5.0 2.2
Depreciation and amortization............................ 86.5 89.4 85.6 89.5 83.7
Reclamation and mine closure............................. 6.3 5.0 4.7 4.9 4.3
General and administrative............................... 13.6 12.2 10.4 9.3 10.6
Exploration and development.............................. 63.6 69.8 46.6 24.6 5.7
Interest and other....................................... 3.1 4.2 (0.3) 2.3 8.2
Provision for Alaska-Juneau development property(1)...... 77.1 -- -- -- --
Provision for McCoy/Cove pitwall stabilization(1)........ 30.0 -- -- -- --
Write-down of investments(1)............................. -- -- -- -- 18.1
------- ------ ------ ------ ------
Earnings (loss) before income taxes...................... (176.1) (44.8) 13.0 9.7 (29.4)
Income tax expense (recovery)............................ 0.6 (3.2) (4.3) (0.5) (2.0)
------- ------ ------ ------ ------
Earnings (loss) before preferred stock dividends......... (176.7) (41.6) 17.3 10.2 (27.4)
Preferred stock dividend of subsidiary(2)................ -- 8.5 9.3 6.6 4.3
------- ------ ------ ------ ------
Net income (loss)........................................ $(176.7) $(50.1) $ 8.0 $ 3.6 $(31.7)
======= ====== ====== ====== ======
UNITED STATES GAAP:(3)
Net income (loss)........................................ $(174.5) $(46.5) $ 7.3 $ 8.5 $(31.7)
BALANCE SHEET DATA
CANADIAN GAAP:
Cash and cash equivalents................................ $ 103.2 $185.8 $201.5 $ 19.2 $ 60.3
Working capital (deficiency)............................. (52.9) 109.6 186.2 148.9 31.1
Plant and equipment...................................... 234.0 255.9 281.1 314.8 355.7
Mining properties........................................ 405.0 318.2 327.4 358.2 393.3
Total assets............................................. 832.1 871.2 881.7 990.5 936.6
Long-term debt........................................... 53.5 111.7 121.9 131.2 210.7
Common shareholders' equity.............................. 492.3 588.9 509.7 513.7 440.3
UNITED STATES GAAP:(3)
Total assets............................................. 919.6 881.3 872.6 975.2 917.1
Common shareholders' equity.............................. $ 533.1 $599.0 $500.6 $503.3 $420.8
OTHER DATA
EBITDA before exploration and development(4)............. $ 89.4 $119.5 $151.2 $130.7 $ 83.7
Interest expense......................................... 8.2 5.0 6.1 6.8 5.5
Cash exploration and development expenses................ 56.6 60.4 37.6 17.5 5.7
Capital expenditures..................................... 105.1 77.9 29.2 26.9 75.7
Average price realized per ounce of gold................. $ 384 $ 388 $ 387 $ 360 $ 357
CERTAIN RATIOS
EBITDA before exploration and development/interest
expense(4)............................................. 10.9x 23.8x 24.8x 19.3x 15.1x
Debt/EBITDA before exploration and development(4)(5)..... 2.0x 1.3x 0.9x 1.7x 2.6x
</TABLE>
S-25
<PAGE> 26
- ---------------
(1) 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. In 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.
(2) All of the outstanding shares of preferred stock of subsidiary were redeemed
or converted into Common Shares during 1995.
(3) The Company's consolidated financial statements are prepared in accordance
with Canadian GAAP. The primary differences affecting the Company between
Canadian and United States GAAP include the recognition of unrealized gains
or losses on foreign exchange contracts and certain share investments, the
method of accounting for income taxes, the determination of the cost of the
Santa Elina acquisition and the amortization of mining properties. See also
note 12 to the Company's consolidated financial statements.
(4) EBITDA before exploration and development expense is defined as EBITDA plus
exploration and development expense. EBITDA is defined as earnings (loss)
before income taxes, interest expense, depreciation and amortization,
provisions and write-downs and preferred stock dividends, and is presented
because it is commonly used by certain investors and analysts to analyze and
compare companies on the basis of operating performance and to determine a
company's ability to service and incur debt. EBITDA should not be considered
in isolation from or as a substitute for net income, cash flows from
operating activities or other consolidated income or cash flow statement
data prepared in accordance with generally accepted accounting principles or
as a measure of profitability or liquidity.
(5) Debt includes gold swaps, gold and silver loans, currency loans and
debentures, but not preferred shares of a subsidiary.
S-26
<PAGE> 27
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 Selected Financial Data above and the Company's consolidated financial
statements included elsewhere herein, as well as the Management's Discussion and
Analysis included in the Company's Annual Report on Form 10-K incorporated by
reference in the accompanying Prospectus. The Company's consolidated financial
statements are prepared in accordance with Canadian GAAP. In all material
respects, they conform with United States GAAP, except as described in the
Company's consolidated financial statements.
Material changes in the Company's reserves may significantly impact results
of operations and asset carrying values. See the discussion of reserves in
"Business -- Proven and Probable Ore Reserves".
The following contains statements that are, by their nature, forward
looking and uncertain. See "Risk Factors -- Disclosure Regarding Forward-Looking
Statements" for a discussion of certain factors that should be considered in
evaluating these statements.
SUMMARY
Since 1994 the Company has undertaken an expanded program of exploration
and development activity focused on building and advancing a pipeline of
projects designed to add to the Company's ore reserves and production. From 1994
through 1996, the Company incurred $179.9 million of exploration and development
expenses. The Company recently announced its decision to proceed with
construction at its Aquarius project in Canada and at the Paredones Amarillos
project in Mexico (subject to completion of permitting and financing
arrangements at each property and obtaining adequate sources of water at
Paredones Amarillos).
In 1996, the Company produced 768,919 ounces of gold, at a cash operating
cost of $254 per ounce, and 7.1 million ounces of silver, at a cash operating
cost of $3.60 per ounce, generating revenues of $337.3 million. After deducting
operating costs, royalties and taxes, interest and other items, working capital
provided from operations was $82.3 million, before cash exploration and
development expenses of $56.6 million.
In 1996, the Company recorded a $77.1 million charge for the Alaska-Juneau
property, including a $57.1 million write-off and a $20.0 million provision for
reclamation and closure costs. The Company also recorded a $30.0 million
provision for pit wall stabilization at the McCoy/Cove mine. In addition,
depreciation and amortization totaled $86.5 million in 1996. As a result, the
Company recorded a net loss of $176.7 million for 1996.
S-27
<PAGE> 28
KEY STATISTICS AND ANALYSIS
Key statistics for 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- ----------
<S> <C> <C> <C>
Gold production (ounces)........................ 768,919 754,762 817,946
Cash operating cost per ounce of gold($)........ 254 229 209
Silver production (ounces)...................... 7,102,348 11,905,806 10,443,151
Cash operating cost per ounce of silver($)...... 3.60 2.94 2.66
Average price realized per ounce:
Gold($)....................................... 384 388 387
Silver($)..................................... 5.41 5.40 5.77
Total revenue ($mm)............................. 337.3 360.7 377.6
Working capital provided from operations before
cash exploration and development expense
($mm)......................................... 82.3 126.7 145.8
Cash exploration and development expense ($mm).. 56.6 60.4 37.6
Non-cash charges ($mm):
Depreciation and amortization................. 86.5 89.4 85.6
Provision for Alaska-Juneau................... 77.1 -- --
Provision for pit wall stabilization.......... 30.0 -- --
Preferred stock dividends of subsidiary ($mm)... -- 8.5 9.3
Net earnings (loss) ($mm)....................... (176.7) (50.1) 8.0
</TABLE>
The Company has experienced declines in production and revenues over the
period 1994 to 1996. This is primarily the result of expected declines in ore
grade at the McCoy/Cove mine.
Operating costs, both in absolute dollars and on a per ounce basis have
increased as the Company increased mining and processing volumes to counter the
effects of declining ore grades at several of its mines. Mining costs at
McCoy/Cove and Round Mountain also increased as the open pits became deeper and
at Lupin as additional ground support was required at lower depths and as mining
zones became narrower. Furthermore, low production volumes also led to increased
cost per ounce as fixed costs are spread over fewer ounces.
Lower production volumes and higher operating costs have reduced revenue
and cash operating margins, and therefore working capital provided by
operations. Notwithstanding these factors, working capital provided by
operations (before cash exploration and development expenses) was $82.3 million
in 1996.
1997 production and cost targets are: 700,000 to 725,000 ounces of gold;
silver production about the same as 1996; and cash operating cost per ounce of
gold of $265 to $275 per ounce. These reflect lower expected grades and
recoveries at McCoy/Cove and resulting higher costs per ounce. See "Risk
Factors -- Disclosure Regarding Forward-Looking Statements."
Exploration and development expenses reflect the Company's stepped-up
efforts to locate and develop potential new gold deposits, and totaled $63.6
million, $69.8 million and $46.5 million in 1996, 1995 and 1994, respectively
(including non-cash portions of $7.0 million, $9.4 million and $8.9 million,
respectively). These are discretionary expenditures undertaken as the Company
attempts to replace its maturing McCoy/Cove and Lupin mines. Included in these
expenditures are development expenses for the Company's Alaska properties in the
amounts of $17.0 million, $23.3 million and $19.5 million for 1996, 1995 and
1994, respectively. There is no expense expected in Alaska for 1997, as the
Company decided in January 1997 to discontinue further development of its
Alaska-Juneau property. Further, in 1995, the Company sold its interest in the
Kensington property. The budgeted level of exploration
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<PAGE> 29
expense in 1997 is $31 million, which is subject to reduction in the event of a
significant decline in gold prices or to increase in the event of identification
of additional opportunities.
RESULTS OF OPERATIONS
1996 versus 1995
The Company had a net loss of $176.7 million in 1996, compared to a net
loss of $50.1 million in 1995. The increased loss reflects 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
expenses ($6.2 million).
Despite the net loss, the Company generated working capital from
operations, before cash exploration and development expenses, of $82.3 million
in 1996, compared with $126.7 million in 1995.
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 the Company's revenues continue to be derived from
gold sales. The price of gold and silver is affected by many factors that are
beyond the Company's control. See "Risk Factors -- Metal Price Volatility."
Gold and silver ounces sold and other revenue data for the last two fiscal
years are set out below.
<TABLE>
<CAPTION>
1996 1995
--------- ----------
<S> <C> <C>
GOLD
Ounces sold................................................ 777,512 758,635
Average price realized per ounce........................... $384 $388
Average market price per ounce............................. $388 $384
Revenue ($mm).............................................. $298.9 $294.6
Percentage of total revenue................................ 89% 82%
SILVER
Ounces sold................................................ 7,098,417 12,234,835
Average price realized per ounce........................... $5.41 $5.40
Average market price per ounce............................. $5.18 $5.19
Revenue ($mm).............................................. $38.4 $66.1
Percentage of total revenue................................ 11% 18%
Total Revenue ($mm)........................................ $337.3 $360.7
</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 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. As discussed elsewhere,
the Company has increased mining and processing volumes at several of its
operations to partially offset the effects of lower grades at McCoy/Cove.
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. In
1996, the average cash operating cost per ounce was $254 compared with $229 in
1995. Cash operating costs per ounce were higher in 1996 reflecting increased
mining and processing volumes at several of its operations (partially offsetting
lower grades at McCoy/Cove), and increased mining costs per ounce at McCoy/Cove,
Round Mountain and Lupin due to mining at deeper levels. Cash operating costs by
mine are set out in "Business -- Production and Cost Data."
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Depreciation and amortization expense was $86.5 million in 1996 compared to
$89.4 million in 1995. The decrease was primarily due to lower amortization
expense. Amortization expense varies with the quantity of gold and silver sold
and the mix of production at the four producing 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.
Royalty expense increased by $1.3 million to $9.7 million in 1996 primarily
due to higher production at Round Mountain and Kettle River, partially offset by
lower production at McCoy/Cove.
Production taxes decreased to $2.4 million in 1996 compared to $4.3 million
in 1995 due to the lower production and higher costs at the Company's Nevada
mines. Less cash flow reduces the net profit on which the production taxes are
calculated.
General and administrative costs have increased in 1996 to $13.6 million
compared to $12.2 million in 1995, reflecting increased support for the
Company's international exploration, business development and permitting
activities.
Exploration expense was $46.6 million in 1996 compared to $46.5 million in
1995 and development expense 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 the Alaska-Juneau and Kensington properties (decreased
amortization of $2.9 million in 1996 compared to 1995).
Interest and other includes net interest expense of $2.1 million in 1996
compared to net interest income of $4.8 million in 1995, reflecting decreased
cash on hand and increased currency financings in 1996. The 1996 amount also
includes a $1.5 million accrual related to the 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 the property 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 -- Alaska-Juneau."
The provision for the McCoy/Cove pit wall stabilization represents the
$30.0 million 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 -- Producing Mines -- McCoy/Cove."
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.
All of the preferred shares were converted or redeemed during the third and
fourth quarters of 1995.
1995 versus 1994
The Company had a net loss of $50.1 million in 1995 compared with net
earnings of $8.0 million in 1994. The decrease reflects 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).
In 1995, the Company generated working capital from operations of $126.7
million, before cash exploration and development expenses, compared with $145.8
million in 1994.
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<PAGE> 31
The Company had revenues of $360.7 million in 1995 compared with $377.6
million in 1994. The decrease in revenue was due to lower production levels at
three of the Company's four mines. As expected, lower grade ore was mined at the
McCoy/Cove and Round Mountain mines and slower mining at deeper levels of Lupin
were only partially offset by higher grade at Kettle River from the new Lamefoot
deposit.
The increase in exploration and development expense reflects a $19.5
million increase in exploration expense to $46.5 million and a $3.8 million
increase in development expenses to $23.3 million, for a total increase of $23.3
million. The increase in exploration expense reflects the Company's strategy to
undertake a greater program to replace its production sources at the mature
McCoy/Cove and Lupin mines. The increase in development expenditures was due to
increased intensity of exploration and permitting at the Alaska-Juneau property
and was partially offset by reduced expenses at Kensington, which was sold in
the second quarter of 1995.
Operating costs increased for two principal reasons. First, mining in 1995
at Kettle River's Lamefoot deposit involved more costly underground mining
versus the open-pit ore mining from other deposits in 1994; however, the grade
of ore processed was significantly higher and led to a reduction in cost per
ounce. Second, mining costs increased at McCoy/Cove as mining occurred at deeper
levels in the pit.
CAPITAL, EXPLORATION AND DEVELOPMENT SPENDING
Since 1994 the Company has undertaken an expanded program of exploration
and development activity focused on building and advancing a pipeline of
projects designed to add to the Company's ore reserves and production.
- In 1996, the Company incurred cash development expense of $13.2 million
and cash exploration expense of $43.4 million. Approximately 70% of the
exploration expense was incurred outside of the US and Canada. The
Company expects to incur $31 million of cash exploration expense in 1997,
dependent on gold prices and opportunities, again with approximately 70%
of the expenditure outside of the US and Canada.
- In 1996, the Company capitalized $37.7 million in acquisition and
development 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 and $1 million at Chapada. On its construction programs, in 1997
the Company expects to spend $69 million at Aquarius and $44 million at
Paredones Amarillos, which represents its share of the total capital
budgets for those projects 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 to increase mining and processing
volumes, $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 investment of
existing cash balances. Working capital provided by operations before cash
exploration and development expenses was $82.3 million in 1996.
The Company has purchased common shares of exploration-oriented companies
that give the Company access to exploration and development prospects along some
of the major gold belts of the world, including properties in South America,
West Africa and the Philippines. The Company invested a further $8.8 million in
these exploration-oriented companies during 1996.
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<PAGE> 32
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Working capital provided from operations amounted to $82.3 million for 1996
compared to $126.7 million in 1995 before incurring cash exploration and
development costs of $56.6 million and $60.4 million, respectively. 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). Most
of the exploration and development spending represents discretionary investments
for the future.
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 Common Shares in
conjunction with the Santa Elina acquisition, and received proceeds of $4.8
million on exercise of stock options.
The Company expended $189.5 million in investing activities during 1996 for
mining properties, plant and equipment ($103.7 million), and the Santa Elina
acquisition ($97.1 million), partially offset by the receipt of $13.8 million in
cash on the sale of its investments in Cluff Resources plc ($5.5 million) and
Etruscan Enterprises, Ltd. ($8.3 million).
The Company uses hedging transactions to reduce the impact of changes in
gold and silver prices, exchange rates, interest rates and certain other
commodity prices, but does not actively engage in the practice of trading
derivatives for profit. 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.
The Company believes it has adequate resources and liquidity to pursue
additional acquisition, investment, exploration and development programs:
- Working capital provided by operations before cash exploration and
development expenses was $82.3 million in 1996
- The Company had $103.2 million in cash at December 31, 1996
- The Company had $111.5 million in unutilized credit facilities at
December 31, 1996
- The Company is in the process of obtaining commitments for a new $75
million unsecured credit facility to finance a portion of the
construction costs at Aquarius
- The Company is in negotiations with respect to a $36 million non-recourse
(except for a completion guarantee of the Company) project loan to
finance a portion of the construction costs at Paredones Amarillos
- The Company has purchased common shares of exploration-oriented companies
that give the Company access to exploration and development prospects. As
of December 31, 1996, the quoted market value of these investments was
$34.3 million
- 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 $83.8 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
- The net proceeds of the sale of the Securities in the Offering are
estimated to be $96.7 million after deducting estimated underwriting
commissions and other expenses of the Company
The estimated net proceeds of the sale of the Securities of $96.7 million,
together with the $63.3 million of cash proceeds received on the 1997 repurchase
of the Company's gold swap and gold and silver forward positions, will be used
to repay an $83.8 million bond obligation and approximately $2.0 million of
unamortized discount and prepayment penalty related thereto, and a $28.0 million
debenture, with the balance added to the Company's cash on hand. After these
adjustments, the Company's December 31, 1996 cash and cash equivalent balance
would be $149.4 million.
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<PAGE> 33
BUSINESS
The Company is a major North American gold mining company with interests in
four operating mines, two new gold mines under development, and a number of
active exploration and development projects. The Company mines, processes and
explores for gold, and also produces a significant amount of silver. Certain of
its development properties also include copper mineralization. In 1996, the
Company produced a total of approximately 769,000 ounces of gold and 7,100,000
ounces of silver. As of December 31, 1996, the Company reported proven and
probable ore reserves of 8,573,000 ounces of gold and 53,858,000 ounces of
silver, as well as other mineralization consisting of 283.5 million tons at a
grade of 0.019 ounces of gold per ton, 1.5 million tons at a grade of 1.36
ounces of silver per ton and 225.5 million tons at a grade of 0.46% copper.
The Company conducts exploration activities in North America, Central and
South America, the Philippines, Africa and other developing countries. The
Company holds varying ownership interests in a number of strategic partnership
and joint-venture arrangements around the world. These interests include a 60%
ownership of the Paredones Amarillos project in Mexico, a 51% ownership of Santa
Elina Gold Corporation ("Santa Elina") (which has one active development project
and three advanced exploration projects in Brazil), and an option to acquire up
to a 75% interest (through various foreign subsidiaries and alliances with
Filipino associates) in the Kingking properties in the Philippines. The Company
is advancing over 20 other projects around the world that are in various stages
of exploration and development. The Company believes that its pipeline of
projects will serve as a platform for significant future growth.
In 1996, the Company achieved revenues of $337.3 million and working
capital from operations (before cash development and exploration expenses) of
$82.3 million, and incurred a net loss of $176.7 million after taking into
account provisions totaling $107.1 million related to the write-off of and
provision for the Alaska-Juneau development property and the provision for the
McCoy/Cove pit wall stabilization. As of December 31, 1996, the Company had a
debt position, net of cash, of $79.7 million. On a pro forma basis after giving
effect to the closing of the Company's entire gold and silver forward sales
position in January 1997, this net debt position would have been $16.4 million.
In January 1997, the Company announced its decision to proceed with the
construction of new mines at Aquarius in Canada and Paredones Amarillos in
Mexico (subject to completion of permitting and financing arrangements at each
property and obtaining adequate sources of water at Paredones Amarillos). The
Company's share of the initial capital required for the construction of these
mines is $167 million, and the Company is in the process of negotiating bank
financing commitments for these projects.
In 1997, the Company expects a number of developments including:
- Production of approximately 700,000 to 725,000 ounces of gold
- Further exploration drilling at depth at the Round Mountain and
McCoy/Cove mines in Nevada
- Exploration drilling for extensions of the Lamefoot and K-2 deposits at
the Kettle River mine in Washington
- Completion of a mill facility at Round Mountain
- Further development of the Ulu gold deposit at the Lupin project in
Canada
- Commencement of construction at the Aquarius project in Canada
- Commencement of construction at the Paredones Amarillos project in Mexico
- Completion of a preliminary feasibility study at the Kingking project in
the Philippines
- Completion of a detailed feasibility study of the Chapada development
property and the Sao Vicente property, both in Brazil
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<PAGE> 34
- Preparation of initial feasibility studies at the Fazenda Nova and Sao
Francisco projects, both in Brazil
- Completion of a feasibility study on the Guapore hydroelectric power
plant in Brazil
See "Risk Factors -- Disclosure Regarding Forward-Looking Statements."
OVERVIEW OF MINING AND RECOVERY PROCESSES
Once ore is mined, one of two processes are used to recover its gold
content. Milling is the traditional method of recovering gold from ore.
McCoy/Cove, Lupin and Kettle River use milling as will Aquarius and Paredones
Amarillos. In McCoy/Cove's process, blasted ore, which ranges in size from
powder to boulders as large as five feet across, is crushed and ground to the
consistency of fine sand. 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, flotation and regrinding,
whereas oxide ores do not. Flotation is a method of concentrating sulfide ores.
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. 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.
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. In Round Mountain's process, ore is reduced to
less than three-quarters of an inch in size. 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. 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 for final processing into pure gold and silver.
PRODUCING MINES
Round Mountain
Background and History. Round Mountain is the Company's largest source of
gold reserves and its second largest source of production. Located in Nye
County, Nevada, the mine is an open pit heap leaching operation. The Company
owns an undivided 50% interest in and operates the mine. The Company acquired
its interest and became the operator in 1985. The Company's partners are
Homestake Mining Company and Case, Pomeroy & Company, Inc., each of which owns
25% of the joint venture. Round Mountain is one of the largest open pit heap
leach gold mines in the world. At December 31, 1996, Round Mountain's proven and
probable reserves were nine million ounces of gold (the Company's share, 4.5
million ounces) grading 0.019 ounces per ton. Since the Company acquired its
interest in Round Mountain in 1985, the project has produced almost 3.8 million
ounces of gold. Under the current mine plan, the project has sufficient reserves
to continue at current production levels for 15 more years.
Operations. Gold recovery from ore occurs from three independent recovery
operations: crushed ore leaching (reusable pad); run-of-mine ore leaching
(dedicated pad); and gravity concentration. Beginning in 1993 the Company began
processing the lower-grade ore on the run-of-mine leach pads.
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<PAGE> 35
Recovery rates for crushed ore have increased and lower-grade ore and some
materials previously hauled to the waste dumps are being leached on the
run-of-mine leach pads. In 1997, a mill also will be used to process ore as
discussed below. Gravity concentration is applied only to very high grade ore
containing coarse gold. A 500 ton per day gravity recovery plant was constructed
in 1992 to process ore from a small but very high grade vein excavated within
the main Round Mountain ore body. The gravity plant is expected to produce
approximately 8,000 ounces in 1997.
Currently, gold recovery occurs almost entirely from heap leaching. 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.
Lower-grade ore and ore removed from the reusable leach pad is transported
to a dedicated run-of-mine leach pad. 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.
Recent Developments and Outlook. In 1996 Round Mountain produced 410,974
ounces of gold (the Company's share, 205,487 ounces), an increase of
approximately 19% over 1995, at a cash operating cost of $221 per ounce.
Production in 1997 is expected to be approximately 380,000 to 400,000 ounces of
gold (the Company's shares, 190,000 to 200,000 ounces). In 1996, construction
began on a $68 million (Company's share, $34 million), 8,000 ton per day mill
that will permit recovery of approximately 85% of the gold contained in
non-oxide ores. Significant quantities of ore are being stockpiled in
anticipation of the mill's completion in 1997.
In 1995, completion of a two-year, drilling program added more than two
million ounces to Round Mountain's reserves (the Company's share, 1.0 million
ounces). Additional drilling targets were identified in 1996 and in 1997, and
the joint venture is evaluating targets at depth and initiating a new grassroots
exploration effort on the claim block.
McCoy/Cove
Background and History. McCoy/Cove is the Company's largest source of gold
production and one of the largest silver producing mines in the world. The
operation combines large-scale open pit mining operations with both heap leach
and mill recovery processes. The McCoy mine is located in Lander County, Nevada,
about 30 miles from the town of Battle Mountain. The Cove deposit is one mile
northeast of the McCoy deposit. At year-end 1996, McCoy/Cove had proven and
probable reserves of 1.2 million ounces of gold at an average grade of 0.033
ounces per ton and 53.9 million ounces of silver at an average grade of 1.52
ounces per ton. Originally acquired by the Company in late 1986, McCoy was the
only deposit known to exist on the property at that time. Three months later,
the Company discovered the Cove deposit a mile away. This second deposit
contained large quantities of both gold and silver. Since its acquisition in
1986, McCoy/Cove has produced more than 2.6 million ounces of gold and 60
million ounces of silver. The majority of the ore remaining at the Cove deposit
is sulfide ore.
Operations. In order to achieve economies of scale and contain unit costs
per ton, large-volume mining methods are employed at McCoy/Cove. The Company
currently mines McCoy/Cove at a high rate in order to minimize the time and
expense required to keep the Cove pit dewatered. Because the mining rate exceeds
the capacity of the mill and heap leach operations, the Company is stockpiling
ore to be milled and heap leached at a later date. Over 75% of the gold
recovered at McCoy/Cove in 1996 was processed through the mill. The balance of
gold recovered at McCoy/Cove is processed using the heap leaching method.
Recent Developments and Outlook. In 1996, McCoy/Cove produced 271,731
ounces of gold at a cash operating cost of $271 per ounce and 7.1 million ounces
of silver. In 1996, the McCoy/Cove mill was expanded from 7,500 tons per day to
10,000 tons per day, increasing economies of scale and
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<PAGE> 36
increasing the retention time for the treatment of sulfide ores, enhancing
recoveries. This helps maintain production levels and to contain increasing
operating costs per ounce as grade has declined. Also in 1996, the Company
recorded a $30 million provision related to the estimated costs to remove waste
rock from an unstable portion of the Cove pit wall.
The Company expects to produce approximately 210,000 to 220,000 ounces of
gold at McCoy/Cove in 1997. Silver production is expected to be about the same
as in 1996. While mining at the Cove deposit is expected to be completed in 1999
and processing of the stockpiles in 2001, exploration continues on the claim
block and in the surrounding areas. Neither of the McCoy or Cove deposits have
been fully explored at depth. Management intends to undertake further drilling
in 1997. Alternatives are also being evaluated for further utilizing the
equipment, facilities and know-how that exist at this site as well as
capitalizing further on the land package associated with McCoy/Cove.
Lupin
Background and History. The Lupin mine contains the highest average ore
grade of the Company's four operating mines. The Lupin mine began production in
1982. The main Lupin mineral lease, which covers 6,997 acres, was renewed in
1992 and expires in 2013; additional mineral leases covering 9,702 acres, expire
in 2009. In addition, the Company has taken all steps necessary to renew the
Lupin surface leases which cover most of the above acreage and expired in March
1996. The Company expects such renewal to be granted by the applicable
governmental authorities, though the terms of the renewed leases may include
modified terms relating to reclamation and other environmental matters. Lupin 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. In 1995, Echo Bay acquired the Ulu deposit, located
approximately 100 miles north of Lupin as a prospective satellite operation to
extend Lupin's operating life. The Company intends to build a winter road to
haul ore mined at Ulu to the Lupin mill for processing. As of December 31, 1996,
proven and probable reserves at Lupin were 443,000 ounces of gold at an average
grade of 0.281 ounces per ton. Lupin also has 1.5 million tons of other
mineralization at an average grade of 0.297 ounces of gold per ton. In addition,
the Ulu property has about 1.9 million minable tons of other mineralization at
an average grade of 0.320 ounces of gold per ton.
Operations. The Lupin mine is the northernmost gold mine in the world
outside of Russia. A highly mechanized underground mine, Lupin operates 365 days
a year despite harsh weather conditions. Most of its supplies are trucked to the
remote site over a 360-mile winter road built across the frozen lakes between
Yellowknife and Lupin. The road is open for only 10 weeks a year. During that
time, standard tractor-trailers haul in a year's supply of diesel fuel, cement
for backfilling, chemical reagents, steel grinding media, explosives and other
supplies -- over 74,000 tons in 1996.
The ore mined at Lupin is crushed underground on three levels and is then
hoisted to the surface, where it is fed to the mill. 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 stopping method. Mining of the narrower West Zone has
also been by the long-hole open stopping method, although it has been a more
costly zone to mine than the Center Zone. In 1995, Lupin incorporated "paste
fill," which is comprised of mine tailings and cement, into the stopping
sequence. 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
distance is a factor as the depth increases. The Company has changed its mining
techniques and backfill process to address the challenges of mining at depth.
During 1997, shrinkage and mechanical cut and fill mining techniques will be
investigated and tested.
Recent Developments and Outlook. In 1996, Lupin produced 166,791 ounces of
gold at a cash operating cost per ounce of $299. In 1996, the Company began a
two year, $19 million exploration program to further explore and develop the Ulu
deposit. Ulu ore is expected to be hauled to Lupin for
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<PAGE> 37
processing beginning in 1999, depending on successful permitting and
development. Supplemental ore from the Ulu deposit is expected to offset a
reduction in the tons mined at Lupin in future years.
In 1997, Lupin production is expected to be 160,000 to 170,000 ounces of
gold. The Company holds all of the mineral rights on 16,699 acres in the region,
and continues to explore for gold in the region.
Kettle River
Background and History. The Kettle River mine had the Company's lowest per
ounce operating cost in 1996. A full year of mining from the higher-grade
Lamefoot deposit resulted in a 24% increase in production and a 13% decrease in
cash operating costs over 1995. The Kettle River properties are located in the
State of Washington and cover approximately 13,665 acres through patented and
unpatented mining claims and fee lands. As of December 31, 1996, proven and
probable reserves at Kettle River were 370,000 ounces of gold at an average
grade of 0.186 ounces of gold per ton. Other mineralization is 282,000 tons at
an average grade of 0.181 ounces of gold per ton.
Development of the Lamefoot deposit began during 1992. By December 1994,
17,500 feet of drifting had been completed. Lamefoot achieved full production in
June 1995, at a rate of 1,500 tons per day. During 1996, underground exploration
and development was undertaken on the K-2 deposit to confirm the results of
surface drilling. K-2 added 139,000 ounces to Kettle River's reserves at
year-end 1996 and has potential for further expansion.
Operations. Kettle River is made up of a series of deposits feeding a
central mill. The fifth deposit to be mined, Lamefoot, provided the majority of
the ore processed in 1996. Four deposits have already been mined out as planned,
and the Company's land reclamation programs are well under way at all four.
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. Cash operating cost
at Kettle River was $201 per ounce of gold in 1996. Production at K-2 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.
Recent Developments and Outlook. In late 1996, the mill increased
operations from five to seven days per week, maximizing mill capacity at 2,000
tons per day. The increased production capacity will partly offset the lower ore
grades planned for processing in 1997. In 1997, the Company plans to undertake
an underground exploration drill program that will investigate a northern
extension of the same structures it is mining currently at Lamefoot and will
also conduct further exploration at the K-2 deposit.
The Company will investigate other targets identified in the surrounding
area. The Company has identified and mined or begun mining at six successive
deposits in the Kettle River area. The Company believes the potential remains
good for the discovery of more deposits. Total production for 1997 is expected
to be 130,000 to 140,000 ounces of gold.
EXPLORATION AND DEVELOPMENT PROJECTS
Aquarius
Background and History. The Aquarius project located in the Timmins gold
district of Ontario, is one of the first results of the exploration and
development program that the Company instituted two years ago. The project is
located in the Macklem township 40 kilometers east of Timmins, Ontario, Canada.
Aquarius had 1.3 million ounces of proven and probable gold reserves at December
31, 1996, grading 0.059 ounces per ton. If no other reserves are located, the
site would have a project life of seven years, based on anticipated production
rates and the existing mine plan.
Operations. The first significant stage of mining will be removal of the
clay and sand overburden. The rock mining stage will produce all of the ore to
be milled. 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 mill will contain both gravity
and leach
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<PAGE> 38
circuits. Two centrifugal separators will process the ore that is amenable to
recovery by gravity separation techniques. A ball mill and a series of six
agitated cyanide leach tanks will process the remaining ore. The mill has been
designed to process 8,300 tons per day. Metallurgical work performed to date
indicates that these processes are expected to recover 95% of the contained
gold.
In order to reduce the costs of pumping water out of the pit, the Company
will use a process used successfully in construction and underground mining for
many years. The process involves the creation of a "freeze wall" perimeter
around the pit. Refrigeration stations will circulate super-cooled brine (salt
water) through a series of pipes from surface to bedrock, freezing the ground.
The barrier of frozen ground will act to redirect subsurface water away from the
pit, thereby reducing the need for further pumping. 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. Once established,
the freeze wall can be maintained for the life of the mine at considerably less
cost than continuously pumping water out of the pit. Initial capital cost for
Aquarius is estimated to be $100 million which the Company expects to finance
with a $75 million unsecured credit facility, existing working capital and
operating cash flow.
Construction activities scheduled for the summer of 1997 will be allowed to
proceed prior to the completion of the required review under the Canadian
Environmental Assessment Act. The draft environmental assessment document is
expected to be submitted in March 1997 with agency review expected to be
completed by August 1997, enabling construction of all facilities as scheduled.
Recent Developments and Outlook. Management intends to begin construction
of the mill in 1997 and begin production in late 1998. The average annual
production rate is expected to be approximately 166,000 ounces, with average
cash operating cost expected to be $218 per ounce over the life of the current
reserves, which is lower cost than all but one of the Company's mines in 1996.
The foregoing production and cost estimates are subject to annual variation due
to ore grade and other factors. Further exploration potential exists on this
6,987 acre property. Targets have been identified to both the east and west of
the existing ore body. The Company intends to begin drilling these targets in
1997. See "Risk Factors -- Disclosure Regarding Forward-Looking Statements."
Paredones Amarillos
Background and History. Upon construction, Paredones Amarillos is expected
to be one of the largest gold mines in Mexico. Like Aquarius, it is one of the
early results of the Company's recent exploration efforts. The Company owns 60%
of the project which is located in the Mexican state of Baja California Sur. The
remaining 40% of the project is owned by subsidiaries of Viceroy. As of December
31, 1996, Paredones Amarillos had 1.3 million ounces of proven and probable gold
reserves (the Company's share, 775,200 ounces) at an average grade of 0.032
ounces per ton.
Operations. The project will be an open pit mine, using blasting followed
by conventional open pit methods. Ore will be delivered to a primary gyratory
crusher, then further reduced by a grinding mill and two ball mills. Following a
whole-ore-leach circuit, gold will be recovered using a carbon adsorption-
desorption recovery process. The mill has been designed to process 10,000 tons
per day. Paredones Amarillos will recycle the mill effluent back into the
recovery circuit. Most of the key chemicals not consumed by recovery can be
reused. The gold recovery rate at this project is expected to be 91%. The
project has an estimated capital cost of approximately $111 million (the
Company's share, $67 million). The Company expects to finance its share with a
$36 million non-recourse (except for a completion guarantee of the Company)
project loan (subject to arrangement of satisfactory terms), existing working
capital and operating cash flow.
The environmental impact statement was submitted to the regulatory
authority in September 1996. Approval is currently expected in the second
quarter 1997. Additional approvals will be required for the access road, power
line, tailings impoundment and water distribution systems. The Company currently
expects that these approvals will be obtained on a basis that will allow
construction of these facilities to proceed as planned. An operating permit will
be required after start-up of the mill, to confirm that construction of
facilities was in accordance with previous approvals.
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<PAGE> 39
Recent Developments and Outlook. The mining plan indicates average annual
gold production of approximately 128,000 ounces of gold (the Company's share,
77,000 ounces). Average cash operating cost is expected to be $223 per ounce,
similar to Aquarius. The foregoing production and cost estimates are subject to
annual variation due to ore grade and other factors. In January 1997, the
Company announced its plans to proceed with construction of the Paredones
Amarillos project, subject to project financing, on Viceroy approving the
project and obtaining its share of financing, and obtaining an adequate source
of water. The joint venture expects to start construction in July 1997 and
commission the plant in August 1998. The first full year of operations is
expected to be 1999. In addition to the 1.3 million ounces of gold in reserves,
mineralization continues below and to the east of the planned pit. As mining
progresses, the Company will evaluate the potential to mine this area from an
underground ramp at the bottom of the pit. In addition to the underground
potential, other surface targets have been identified for drilling on the
31,500-acre land position. See "Risk Factors -- Disclosure Regarding
Forward-Looking Statements."
Kingking
Background and History. The Company believes that the Kingking project has
the potential to be one of the largest opportunities in its project pipeline.
During 1995, the Company and TVI formed alliances with Filipino corporations to
create KMI. KMI has signed an option agreement to acquire a 100% interest in the
Kingking project from Benguet after completion of a bankable feasibility study.
The option agreement provides for the payment of $67 million to Benguet if the
option is exercised on or before April 1998. KMI may delay expiration of the
option until April 1999 by making monthly payments during the delay period of up
to $10.5 million in the aggregate. A contingent payment of up to $18 million
also would be payable if there were an increase in mineralization of Kingking
over the gold mineralization outlined in Benguet's pre-feasibility report. The
Company and its Philippine associates 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 associates 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 pre-feasibility report prepared by
Benguet in March 1994, Kingking has approximately 225 million mineable tons of
mineralized material (the Company's and its Philippine associates' share, 169
million tons) at average grades of 0.017 ounce of gold per ton and 0.47% copper.
Mine Development and Operations. In 1995, KMI began an extensive two-year
advanced exploration and confirmation drilling program. 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 to
identify potential extensions of the main deposit or satellite deposits is
continuing in the Casagumayan and Tiogdan areas where earlier work indicated
there is material richer in gold and leaner in copper. Mapping, sampling and
drilling are under way at two other targets, Binutaan and Diat.
The Benguet initial pre-feasibility report contemplates open pit mining at
Kingking followed by processing through a concentrator and solvent
extraction/electrowinning copper treatment plant. Alternative processing methods
are being considered by KMI. On August 24, 1995, the Company purchased a 1 1/2%
basic royalty (effectively a net smelter return royalty) on the Kingking
property from Nationwide Development Corporation for $15 million, payable as
follows: $3 million in 1995; $3.3 million in 1996; $2.7 million in 1997; and $6
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.
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.
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<PAGE> 40
Recent Developments and Outlook. In 1996, KMI further explored the deposit
with 149,000 feet (45,400 meters) of additional exploration and confirmation
drilling. Once all of the detailed data generated by the drilling is analyzed,
as well as the results of mapping, sampling and metallurgical test-work, an
initial feasibility study will be completed. The current target date for
completion of this work is the second quarter of 1997. In this feasibility
study, preliminary economics will be applied to the geological information. This
will help the Company to determine what part of the mineralization could be
economically recoverable. It will also identify alternative processing methods
and preliminary production rates, operating costs and capital costs for the
project. Based on the outcome of the initial study, KMI could expect to complete
a detailed feasibility study in late 1997 or early 1998. 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. In addition, depending on the
size and mineralization of any Kingking development project, the Company may
determine to seek a partner to provide financing and/or to act as operator of
the project.
Santa Elina
Background and History. Santa Elina provides the Company with access to
several promising exploration and development opportunities as well as one of
the largest exploration land positions in Brazil. In 1996, the Company completed
a series of transactions with Santa Elina and Sercor to increase its ownership
of the outstanding common shares of Santa Elina from 7% to 50% (now 51%).
Central to the assets of Santa Elina is a land position of over 96,000 square
miles (25 million hectares) under application. Much of this land is located on
known, but not extensively explored, gold belts throughout Brazil. Santa Elina's
management team (headed by Echo Bay's former Executive Vice President, Robert C.
Armstrong) is completing initial and final feasibility studies on several
advanced properties and prioritizing the exploration program to maximize the
value of the other assets. Exploration joint ventures are being considered with
qualified third parties where appropriate. The Company's ownership of Santa
Elina provides access to several large development opportunities in Brazil.
These include:
Chapada Development Property. The Chapada property is a large, low-grade
copper-gold deposit located in Goias State, Brazil. Other mineralization at the
site is estimated to be 113 million mineable tons at average grades of 0.012
ounces of gold per ton and 0.43% copper. It is 83%-owned by Santa Elina. The
Company currently owns, indirectly, 42.3% of Chapada. Separately, the Company
also has an option entitling it to increase its ownership interest in Chapada to
67%. Chapada was originally investigated as a copper property. The focus now is
on copper-gold. In 1996, Santa Elina completed over 120,000 feet of advanced
exploration drilling. The goal was to confirm and expand the mineralization
identified at the site. During 1996, more tons of ore were outlined at about the
same or slightly lower grades. This material will be added to the evaluation of
the mineralization and incorporated into a detailed feasibility study, currently
expected to be completed in the second quarter of 1997.
Other Santa Elina Properties. Santa Elina owns 83% (the Company's share,
42.3%) of each of Fazenda Nova, a gold exploration property located in central
Brazil; Sao Francisco, a gold exploration property located near the border
between Brazil and Bolivia; and Sao Vicente, a low-grade open-pit gold mine and
mill in western Brazil, which is currently shut down.
- During 1996, five drills were active at the Fazenda Nova site. At
Lavrinha, the first target drilled, work identified a near-surface,
oxidized, low-grade gold deposit. In 1997, Santa Elina will prepare a
feasibility study on Lavrinha. If the economics are favorable, this
target could be developed as a small open-pit mine using heap leach
processing. Exploration will continue on targets identified on a large,
associated land package for additional deposits that could be processed
in the same low-cost manner.
- During late 1996, four drills worked at the Sao Francisco site to better
define the mineralization. Initial metallurgical testing indicates good
gold recoveries from heap leaching. The information
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<PAGE> 41
being gathered will be incorporated into an initial feasibility study,
currently scheduled for completion in the third quarter of 1997.
- Santa Elina expects to complete a detailed feasibility study on heap
leaching at the Sao Vicente mine in early 1997. Santa Elina also will
evaluate a higher grade underground target in 1997. This property's
existing open site mine and mill 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.
Santa Elina also holds an 83% interest in a concession to construct and
operate a hydropower plant proposed for the Guapore River. Santa Elina is
negotiating the terms of turnkey construction and operating agreements and
related project financing for the hydropower project.
Other Exploration Projects
The Company continues to add new prospects to its pipeline of projects in
various stages of exploration and development. New projects are needed to
replace those, like Aquarius and Paredones Amarillos, where construction
decisions have been made and others, such as Alaska-Juneau, that do not prove to
be economic. To continually expand and upgrade its project pipeline, the Company
actively engages in strategic alliances and joint ventures with a number of
small, entrepreneurial and exploration-oriented companies. These relationships
often provide early access to gold properties and reduce the capital cost
requirements of a global exploration and development program. Prospects in the
Company's current project pipeline include:
Dolores, Mexico. The Company established a strategic alliance and joint
venture with Minefinders Corporation, the exploration company that holds the
property. The Company can earn a 60% interest in this property. Drilling began
on the Dolores project in Mexico in August 1996. Results so far are positive; of
the first 30 holes drilled, 24 encountered gold mineralization. The Company
believes that Dolores hosts a large epithermal gold system. Trenching and
sampling to date identified at least three zones along a two-mile mineralized
section, only a small portion of which has been drilled. The current phase of
drilling includes at least 50 more holes as well as additional detailed mapping,
sampling and metallurgical test work.
Kilgore, Idaho. In late 1996, the Company increased its interest in Kilgore
to 100%. With mineralization already defined at one target and at least seven
other targets still to investigate, the property has excellent potential. The
mineralization defined is associated with only one target in a significant
mineralized system. Additional mineralization is necessary from one or more of
the other targets to be sufficient to support a central processing facility.
West Africa. In West Africa, the Company has a 50% interest in the Youga
and Bitou exploration concessions in Burkina Faso as well as the adjacent
Nangodi concessions, located directly across the border in Ghana. The Company's
joint venture partner is Ashanti Goldfields Company, which is the operator. The
properties cover a large mineralized system where local miners have been digging
high-grade gold with hand tools for years. The Company targets the "halos" of
low-grade but large-volume mineralization surrounding these excavations.
Mapping, sampling and drilling are continuing at a number of locations on the
1,309 square miles that constitute these properties. Gold mineralization was
present in 16 of the first 19 core drill holes completed on one target at Youga.
The 1997 drill program includes more holes on this target as well as additional
targets recently identified.
Peru. Positive preliminary results at Huaco Cucho, a joint venture property
in Peru, resulted in the Company establishing a similar joint venture with the
owner of the adjacent Patacancha claims. The Company's target is several
high-grade gold structures with lower-grade disseminated gold surrounding them.
In 1996, the Company completed extensive mapping, sampling and approximately
6,500 feet (2,000 meters) of drilling. Six significant structures were
identified between the two properties. The Company can earn a 50% interest in
each property.
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Expansion of Existing Operations. The Company's exploration geologists are
actively investigating additional opportunities at the mines it already operates
or plans to build. Exploration prospects are always given a high priority when
located near one of the Company's existing or future operations. K-2 was the
sixth deposit discovered at Kettle River. The Company is already exploring
Lamefoot North and an extension of K-2, and its search for a seventh separate
deposit is ongoing. At Round Mountain and McCoy/Cove, targets at depth will be
drilled in 1997. Further exploration will be conducted at Ulu. At Aquarius in
Canada, two additional targets have been identified and are being investigated.
At Paredones Amarillos in Mexico, geological mapping continues and a geochemical
stream sediment survey will be conducted in 1997.
Other Projects. During 1996, the Company also entered into additional
strategic alliances and joint ventures on a number of other early-stage
exploration properties. The Company has strengthened its presence in Mexico,
Brazil, Canada and the United States (particularly in Nevada). At December 31,
1996, the Company's exploration and development portfolio had over 30
properties, 17 of which were strategic alliances or joint ventures.
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
million to cover estimated reclamation and closure responsibilities. Actual
spending related to reclamation and closure costs may differ from the current
estimate of $20 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
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 reduced mineralization and higher
operating costs could not be offset by savings from submarine tailings disposal.
In total, these factors rendered the project uneconomic as currently designed.
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<PAGE> 43
PRODUCTION AND COST DATA
The following tables set forth, for the fiscal years indicated, the
Company's gold and silver production at its producing mines and the costs
associated with that production. See also "Selected Financial Data."
PRODUCTION AND CASH OPERATING COST DATA
<TABLE>
<CAPTION>
CASH OPERATING
PRODUCTION (OUNCES) COST PER OUNCE(1)
----------------------------------- ---------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
GOLD
Round Mountain(2).................. 205,487 172,217 211,752 $ 221 $ 195 $ 176
McCoy/Cove......................... 271,731 310,016 359,360 271 217 194
Lupin.............................. 166,791 172,110 180,052 299 296 274
Kettle River....................... 124,910 100,419 66,782 201 230 253
--------- ---------- ---------- ----- ----- -----
Total gold.................... 768,919 754,762 817,946 $ 254 $ 229 $ 209
========= ========== ========== ===== ===== =====
SILVER
Total silver (all
McCoy/Cove)................. 7,102,348 11,905,806 10,443,151 $3.60 $2.94 $2.66
========= ========== ========== ===== ===== =====
</TABLE>
PRODUCTION COSTS PER OUNCE OF GOLD PRODUCED(1)
<TABLE>
<CAPTION>
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
==== ==== ====
</TABLE>
- ---------------
(1) Effective January 1, 1996, the Company adopted the "Gold Institute
Production Cost Standard" for reporting production costs on a per ounce
basis. This standard defines cash operating costs as those costs directly
associated with the mining and milling of gold and silver, adjusted for such
items as 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.
(2) Represents the Company's 50% share of production at Round Mountain.
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<PAGE> 44
PROVEN AND PROBABLE ORE RESERVES
The following table presents proven and probable ore reserves by property
as of December 31 of the years indicated. These reserves were estimated by the
Company and, in the case of Aquarius and Paredones Amarillos, the Company's
reserve estimation methodology was verified by an external geological
consultant. See "Experts."
<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)
------- -------- --------- ----------- ----------- -----------
(THOUSANDS, EXCEPT AVERAGE GRADES)
<S> <C> <C> <C> <C> <C> <C>
GOLD
PRODUCING MINES:
Round Mountain................. 476,509 0.019 9,050 4,525 5,000 3,900
McCoy/Cove..................... 35,379 0.033 1,183 1,183 1,526 1,870
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(1)............... -- -- -- -- 3,442 3,442
Kensington(2).................. -- -- -- -- -- 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) 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."
(2) The Company sold its interest in the Kensington development property during
1995.
The definitions of proven and probable ore set forth below are those used
in Canada by certain provincial securities regulatory authorities and are set
forth in National Policy No. 2-A. These definitions are substantially the same
as those applied in the United States by the Securities and Exchange Commission,
which are based on definitions used by the United States Bureau of Mines and the
United States Geological Survey.
"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.
S-44
<PAGE> 45
"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 Company reports extractable (minable) ore reserves. Reserves do not
reflect losses in the milling or heap leaching processes, but do include
allowance for dilution of ore in the mining process.
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.
S-45
<PAGE> 46
OTHER MINERALIZATION
The following table presents other mineralization by property as of
December 31 of the years indicated. 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 in December 1994.
Kingking's other mineralization was based on estimates prepared by Benguet and
included in its March 1994 pre-feasibility study. 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.
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------ -------------------- --------------------
AVERAGE AVERAGE AVERAGE
TONS TONS (THE GRADE TONS (THE GRADE TONS (THE GRADE
(100% COMPANY'S (OUNCES COMPANY'S (OUNCES COMPANY'S (OUNCES
BASIS) SHARE) PER TON) SHARE) PER TON) SHARE) PER TON)
------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS, EXCEPT AVERAGE GRADES)
<S> <C> <C> <C> <C> <C> <C> <C>
GOLD
- ---------------------------
PRODUCING MINES:
Round Mountain............. 105,915 52,958 0.015 36,340 0.021 19,219 0.022
McCoy/Cove................. 1,473 1,473 0.029 6,767 0.036 4,786 0.015
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(1):
Aquarius................... -- -- -- 23,465 0.055 -- --
Paredones Amarillos........ -- -- -- 16,275 0.040 -- --
Alaska-Juneau(2)........... -- -- -- 30,086 0.052 33,865 0.046
Kensington(3).............. -- -- -- -- -- 1,594 0.147
------- ------- ----- ------- ----- ------ -----
-- -- -- 69,826 0.050 35,459 0.051
------- ------- ----- ------- ----- ------ -----
DEVELOPMENT PROPERTIES
UNDER OPTION(1):
Chapada(4)................. 113,400 56,700 0.012 56,700 0.012 -- --
Kingking(5)................ 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
======= ======= ===== ======= ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------ -------------------- --------------------
TONS TONS (THE AVERAGE TONS (THE AVERAGE TONS (THE AVERAGE
(100% COMPANY'S GRADE COMPANY'S GRADE COMPANY'S GRADE
BASIS) SHARE) (%) SHARE) (%) SHARE) (%)
------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
COPPER
- ---------------------------
DEVELOPMENT PROPERTIES
UNDER OPTION(1):
Chapada(4)................. 113,400 56,700 0.43% 56,700 0.43% -- --
Kingking(5)................ 225,000 168,750 0.47% 168,750 0.47% -- --
------- ------- ----- ------- ----- ------ -----
Total Copper............... 338,400 225,450 0.46% 225,450 0.46% -- --
======= ======= ===== ======= ===== ====== =====
</TABLE>
S-46
<PAGE> 47
- ---------------
(1) 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.
(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 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 other mineralization as of
December 31, 1996. See "-- Alaska-Juneau."
(3) The Company sold its interest in the Kensington development property during
1995.
(4) The Company owns an option entitling it to acquire a 50% interest in Chapada
from Santa Elina. 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.
(5) The Company and its Philippine associates have an initial interest in an
option to acquire up to a 75% interest in Kingking but the agreements
provide for the acquisition and disposition of interests such that the
interests of the Company and its Philippine associates ultimately could be
between 60% and 100% of the Kingking project. The other mineralization was
based on a gold price of $340 per ounce and a copper price of $1.00 per
pound.
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 US 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.
MANAGEMENT
The directors, executive officers and senior management of the Company are
listed below. Also listed is the President and Chief Executive Officer of the
51%-owned Santa Elina Gold Corporation.
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert L. Leclerc, Q.C. ................... 52 Director and Chairman of the Board
Richard C. Kraus........................... 50 Director, President and Chief Executive
Officer
John N. Abell.............................. 65 Director
Latham C. Burns............................ 66 Director
Pierre Choquette........................... 54 Director
John G. Christy............................ 64 Director
Peter Clarke............................... 66 Director
Carlos A. Ferrer........................... 43 Director
John F. McOuat............................. 63 Director
Monica E. Sloan............................ 43 Director
R. Geoffrey P. Styles...................... 66 Director
John L. Azlant............................. 50 Senior Vice President, Business Development
Scott A. Caldwell.......................... 40 Vice President, Operations
Peter H. Cheesbrough....................... 45 Senior Vice President, Finance and Chief
Financial Officer
Robert D. Wunder........................... 47 Senior Vice President, Project Development
</TABLE>
S-47
<PAGE> 48
OTHER SENIOR MANAGEMENT
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John J. Antony............................. 55 Vice President, Technical Services
Robert C. Armstrong........................ 53 President and Chief Executive Officer,
Santa Elina Gold Corporation
Lois-Ann L. Brodrick....................... 53 Secretary
C. Brian Cramm............................. 44 Vice President, Business Development
Donald C. Ewigleben........................ 43 Vice President, Environmental and Public
Affairs
Terry N. Fiske............................. 63 Vice President and General Counsel, US
Operations
Raymond W. Jenner.......................... 45 Vice President and Treasurer
Michael K. McMillan........................ 42 Vice President, Human Resources
</TABLE>
Robert L. Leclerc, Q.C. has been Chairman of the board of directors of the
Company since May 1996 and a director since 1992. From December 1993 to June
1996, Mr. Leclerc was Chairman and Chief Executive Officer and a partner in
Milner Fenerty. Prior thereto Mr. Leclerc was a partner in Milner Fenerty.
Richard C. Kraus has served as the President and Chief Executive Officer of
the Company since June 1994 and has been a member of the board of directors
since 1992. Prior to June 1994 Mr. Kraus was President and Chief Operating
Officer of the Company. Mr. Kraus also serves on the board of St. Mary Land and
Exploration Company.
John N. Abell has been a director of the Company since 1980. Mr. Abell also
holds directorships at Stelco Inc. and AT Plastics Inc.
Latham C. Burns has been a director of the Company since 1980. Mr. Burns
was Honorary Chairman of Nesbitt Burns Inc. prior to June 1995.
Pierre Choquette has been a director of the Company since 1996. Mr.
Choquette has been President and Chief Executive Officer of Methanex Corporation
since 1994. From 1991 to 1994 Mr. Choquette was President of Novacorp
International. Mr. Choquette also serves on the boards of directors of Methanex
Corporation and Gennum Corporation.
John G. Christy has been a director of the Company since 1980. Mr. Christy
is Chairman of Chestnut Capital Corporation. Mr. Christy holds the following
directorships: First Union Bank Advisory Board-New Jersey; First Union Bank
Advisory Board-Philadelphia; The Philadelphia Contributionship; and the 1838
Bond Debenture Trading Fund Limited.
Peter Clarke has been a director of the Company since 1993. Mr. Clarke has
worked as a consultant for the metals and mining industry since December of
1992. Prior thereto, Mr. Clarke was Senior Vice President of the Company.
Carlos A. Ferrer has been a director of the Company since 1994. Mr. Ferrer
has been a partner in Ferrer Freeman Thompson & Co., LLC since July 1995. Prior
thereto Mr. Ferrer was Managing Director at CS First Boston Corporation. Mr.
Ferrer is not standing for reelection in 1997.
John F. McOuat has been a director of the Company since 1989. Mr. McOuat is
also the President of Watts, Griffis and McOuat Limited, consulting geologists
and engineers. Mr. McOuat serves on the boards of Cominco Ltd. and Euro Nevada
Mining Corporation Ltd.
Monica E. Sloan has been a director of the Company since 1994. Ms. Sloan
has served as President of Telus Advanced Communications since August of 1995
and prior thereto Ms. Sloan was Assistant Vice President of Strategy Development
at Telus Corporation.
R. Geoffrey P. Styles has been a director of the Company since 1987. Mr.
Styles serves as a director of Onex Corp.; Working Ventures Canadian Fund Inc.;
Scott's Restaurants Inc.; The Geon Company; and Prosource Inc.
S-48
<PAGE> 49
John L. Azlant has been Senior Vice President, Business Development of the
Company since November 1993; prior thereto Mr. Azlant was Senior Vice President
and Chief Financial Officer of Pegasus Gold Inc.
Scott A. Caldwell has been Vice President, Operations of the Company since
January 1997. From July 1996 to January 1997, Mr. Caldwell was Vice President,
Project Development of the Company. From August 1995 to July 1996 Mr Caldwell
was employed with Compania Minera Dona Ines de Collahuasi S.A. (Chile) as Vice
President, Operations. Prior thereto, Mr. Caldwell was Senior Mines Manager of
PT Freeport Indonesia Company.
Peter H. Cheesbrough has been Senior Vice President, Finance and Chief
Financial Officer of the Company since June 1993. Prior thereto, Mr. Cheesbrough
was Vice President, Controller and Principal Accounting Officer of the Company.
Robert D. Wunder has been Senior Vice President, Project Development of the
Company since March 1996. Mr. Wunder was Manager, Strategic Development of BHP
Minerals from July 1995 to March 1996. From May 1993 to July 1995, Mr. Wunder
was employed as Vice President, Operations of a subsidiary of BHP Minerals
(Chile). From March 1992 to May 1993, Mr. Wunder was Executive Vice President,
Minerals Marketing of BHP Minerals (Japan). Prior thereto Mr. Wunder was General
Manager of Groote Eylandt Mining Company (Australia).
John J. Antony has been Vice President, Technical Services of the Company
since June 1996. Mr. Antony was Manager, Technology of Fluor Daniel, Inc. From
July 1993 to June 1996. Mr. Antony was employed by Pincock, Allen & Holt, Inc.
from August 1991 to July 1993 in various positions including President and Chief
Operating Officer, Executive Vice President, and Associate Principal Engineer.
Prior thereto, Mr. Antony was Vice President, Engineering of Coca Mines, Inc.
Robert C. Armstrong has been President and Chief Executive Officer of Santa
Elina Gold Corporation since August 1996. Mr. Armstrong was Executive Vice
President of the Company from June 1995 to August 1996. Mr. Armstrong was
Executive Vice President, Operations and Chief Operating Officer of the Company
from June 1994 to June 1995. Mr. Armstrong was Executive Vice President,
Operations of the Company from December 1992 to June 1994. Mr. Armstrong was
Senior Vice President, Operations of the Company from January 1992 to December
1992. Prior thereto, Mr. Armstrong was Vice President of the Company.
Lois-Ann L. Brodrick has been Secretary of the Company since May 1996.
Prior thereto, Ms. Brodrick was Assistant Secretary of the Company.
C. Brian Cramm has been Vice President, Business Development of the Company
since June 1995. Mr. Cramm was Director, Business Development of the Company
from June 1992 to June 1995. Prior thereto, Mr. Cramm was Director, Planning and
Development of the Company.
Donald C. Ewigleben has been Vice President, Environmental and Public
Affairs of the Company since August 1994. Mr. Ewigleben was Vice President,
Environmental and Governmental Affairs of Amax Gold Inc. from June 1992 to
February 1994. Prior thereto, Mr. Ewigleben was employed by Amax Gold Inc. and
Amax Coal Industries in various environmental and governmental affairs
positions.
Terry N. Fiske has been Vice President and General Counsel, US Operations
of the Company since 1990.
Raymond W. Jenner has been Vice President and Treasurer of the Company
since 1986.
Michael K. McMillan has been Vice President, Human Resources of the Company
since June 1995. Prior thereto, Mr. McMillan was Vice President, Human Resources
of Merisel, Inc.
S-49
<PAGE> 50
DESCRIPTION OF BANK CREDIT FACILITY
In August 1996, Echo Bay Inc. (the "Borrower"), a subsidiary of the
Company, and the Company and four other subsidiaries which own directly or
indirectly substantially all of the US assets of the Company, as Guarantors,
entered into an Amended and Restated Gold Bullion Loan Agreement (amending and
restating a Gold Bullion Loan Agreement dated as of January 3, 1992) with a
group of banks (the "Lenders") (as such agreement may be further amended from
time to time, the "Loan Agreement"). The Loan Agreement provides for (i) term
loans not to exceed $50 million or the gold equivalent (to be loaned as dollar
loans or gold loans valued at the advance date) and (ii) revolving loans not to
exceed at any one time $100 million or the gold equivalent (to be loaned as
dollar loans or gold loans valued at the advance date), which revolving facility
includes a $100 million facility relating to forward sales of gold. The term
loans are required to be paid quarterly over the five-year period ending August
9, 2001 (the "Maturity Date"), with total annual payments of $5 million, $7.5
million, $10 million, $12.5 million and $15 million, respectively, in periods
ending June 30, 1997, 1998, 1999 and 2000 and August 9, 2001. Gold loans bear
interest quarterly at the gold rate then in effect (as quoted by each Lender),
plus the Applicable Rate, which varies from 27.5 basis points to 75 basis points
depending on the Company's then-current senior debt rating. Based on the
Company's current senior debt rating, the Applicable Rate would be 47.5 basis
points. Interest on gold borrowings is payable either in gold or in dollars.
Dollar loans bear interest at either (i) the greater of the interest rate
announced by the agent for the Lenders or the Federal Funds rate plus 1/2 of 1%
per annum or (ii) the LIBOR rate then in effect plus the Applicable Rate. As of
December 31, 1996, there was approximately $50 million outstanding under the
term loans and no outstanding borrowings under the revolving loans.
The Company may, at its option, prepay outstanding borrowings under the
Loan Agreement prior to the Maturity Date. In addition, outstanding borrowings
are subject to mandatory prepayment in the event of a change of control of the
Company or to the extent that the value of outstanding gold and dollar loans
exceed the Lenders' commitment level.
The Loan Agreement contains certain restrictive covenants including (i) a
covenant not to incur additional debt other than (x) up to $50 million of debt
under other revolving credit facilities, (y) up to $75 million of debt drawn
against letters of credit and (z) debt incurred by the Company or the Borrower
for the acquisition, development or construction of a mine, so long as such debt
may not be repaid prior to the Maturity Date; (ii) a covenant not to encumber
the Company's business or properties with any liens other than certain permitted
liens; (iii) a covenant that the Company's subsidiaries not assume or guarantee
the indebtedness of other persons; (iv) a covenant restricting investment in
other persons (other than persons engaged in the business of exploration for or
mining of precious metals), including restrictions on loans to, and purchases of
assets or capital stock of, any person; (v) a covenant restricting mergers or
other dispositions of assets or the acquisition of substantially all the assets
or shares of another person; and (vi) a covenant not to permit a change in the
ownership or management of the Company.
An event of default under the Loan Agreement occurs if, among other events,
the Company fails to maintain at all times (but tested at the end of each fiscal
quarter) (x) a ratio of Consolidated Net Tangible Assets to consolidated
liabilities of at least 2 to 1; and (y) a Mining Group Net Present Value of the
Mining Group Future Cash Flow equal to or in excess of 1.4 times the aggregate
of the consolidated total debt of the Company and any such other debt of the
Borrower or Guarantors not reflected in the consolidated financial statements of
the Company.
"Consolidated Net Tangible Assets" means the total assets (less
depreciation and reserves) which would be included on the balance sheet, after
deducting all current liabilities other than the current portion of long-term
debt and deferred revenue and interest-bearing short term debt and after
deducting all goodwill, trade names, trademarks, patents, unamortized debt
discount and expenses and other intangibles, which intangibles do not include
deferred exploration or development expenditures relating to properties owned by
the Company or to which the Company has any right, title or interest, as set
forth in the most recent balance sheet of the Company and its consolidated
subsidiaries computed in accordance with Canadian GAAP as of the date of the
Loan Agreement.
S-50
<PAGE> 51
"Consolidated liabilities" excludes current liabilities other than the
current portion of (i) long term debt, (ii) deferred revenue, and (iii) interest
bearing short term debt; deferred income taxes; deferred revenue in respect of
gold purchase warrants or any securities or options similar thereto; and
deferred income to the extent it represents a nonfinancial obligation; and
includes preferred shares having a maturity, or which are retractable at the
option of the holder, prior to the Maturity Date.
"Mining Group Net Present Value of the Mining Group Future Cash Flow" means
at any time the Mining Group Future Cash Flow discounted at the rate of 8% (or
at such other rate as may be agreed to from time to time by the Company and the
Majority Lenders) over the estimated periods of production for the Mining Group
as set forth in the most recent Cash Flow Schedule delivered to the Lenders.
"Mining Group Future Cash Flow" means at any time the difference between
the Mining Group Revenue and the Mining Group Cost of Future Production.
"Mining Group Revenue" means at any time the sum of (a) the total revenue
from Mining Group Production which has been sold forward (provided that the
Borrower shall have disclosed the buyer's identity to the Lenders and the
buyer's creditworthiness is acceptable to the Majority Lenders); and (b) for
Mining Group Production which has not been sold forward, the lesser of the
following prices as at the date of calculation, in each case multiplied by the
unsold Mining Group Production;
(i) The average London Price for gold (in the case of gold production)
or silver (in the case of silver production) over the previous 90 days;
(ii) The average London Price for gold (in the case of gold
production) or silver (in the case of silver production) over the previous
36 months;
(iii) $400 in the case of gold, and $5.00 in the case of silver.
"Mining Group Cost of Future Production" means at any time the total
estimated cost of producing the Mining Group Production during the periods set
forth in the then applicable Cash Flow Schedule, the cost for each period to be
determined as the sum of:
(a) The total cash operating costs (before adjusting for deferred
mining costs), estimated by the Mining Group and approved by the Majority
Lenders, of producing the Mining Group Production for the period in
question; plus
(b) Sustaining Capital Expenditures; plus
(c) Development costs associated with future mines; plus
(d) Taxes and royalties other than federal, provincial or state income
taxes, which are calculated in accordance with applicable tax regulations.
"Mining Group Production" means for any period the number of ounces of gold
and silver which it is estimated the Mining Group will produce during such
period (i) from then-existing proven and probable minable reserves of the Mining
Group, and (ii) from such other reserves of the Mining Group as the Lenders
shall approve.
"Mining Group" means (i) the producing mines owned by the Company or any of
its subsidiaries as of August 9, 1996, which producing mines are included in the
Cash Flow Schedule provided to the Lenders, and (ii) properties owned by the
Company or any of its subsidiaries that are or shall be under development and
for which a feasibility study acceptable to the Lenders has been prepared
indicating the economic feasibility of production from such properties, but
excluding any future mines that are the subject of financing whose sole recourse
is to such future mine and is otherwise nonrecourse to the Borrower and the
Guarantors.
"Cash Flow Schedule" means a schedule projecting cash flow at least through
2001 provided by the Company to the Lenders on August 9, 1996, and at least
quarterly thereafter.
"Consolidated total debt of the Company" shall not include debt whose sole
recourse is to a future mine and is otherwise nonrecourse to the Borrower and
the Guarantors.
S-51
<PAGE> 52
DESCRIPTION OF THE SECURITIES
To the extent information contained in the "Description of the Securities"
in the Prospectus Supplement differs from that contained in the Prospectus, the
information contained in the Prospectus Supplement shall supersede that
contained in the Prospectus.
Set forth below is a description of the principal terms of the Securities.
The following does not purport to be complete and is subject to, and is
qualified in its entirety by reference to the Indenture, dated as of March 27,
1997, as supplemented by a supplemental indenture relating to the Securities,
dated as of March 27, 1997 (collectively, the "Indenture"), between the Company
and Bankers Trust Company, as Trustee (the "Trustee"), the form of which is
filed or incorporated by reference as an exhibit to the Registration Statement
of which this Prospectus Supplement and the accompanying Prospectus form a part.
Certain capitalized terms used herein are defined in the Indenture. The
Indenture will be qualified as an indenture under the United States Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"), and the Trustee
will be eligible and act as trustee for the purpose of compliance with the Trust
Indenture Act.
GENERAL
The Securities will be issued as unsecured junior subordinated debt under
the Indenture. The Securities will be limited in aggregate principal amount to
$100,000,000, and will mature on April 1, 2027, and will be payable in cash.
The Securities are not subject to a sinking fund provision.
The Securities will be issued in fully registered form only in
denominations of $1,000 and integral multiples thereof. The Securities will
initially be issued as a Global Security (as defined herein). See "The
Depository, Book Entry and Settlement" below. As described herein, under certain
limited circumstances, the Securities may be issued in certificated non-book
entry form in exchange for a Global Security. See "Discontinuance of DTC's
Services" below. In the event that the Securities are issued in certificated
non-book entry form, such Securities will be in denominations of $1,000 and
integral multiples thereof and may be transferred or exchanged at the offices
described below. Payments on Securities issued as a Global Security will be made
to DTC or a successor depository. In the event that the Securities are issued in
certificated non-book entry form, principal and interest will be payable, the
transfer of such Securities will be registrable and such Securities will be
exchangeable for Securities of other denominations of a like aggregate principal
amount at the corporate trust office of the Trustee; provided that payment of
interest with respect to the Securities may be made at the option of the Company
by check mailed to the address of the persons entitled thereto.
SUBORDINATION
The Indenture provides that the Securities are subordinated and junior in
right of payment to all Senior Indebtedness of the Company. No payment of
principal (including redemption payments), premium, if any, or interest on the
Securities may be made (i) if any Senior Indebtedness of the Company is not paid
when due, (ii) if any applicable grace period with respect to a payment default
on Senior Indebtedness has ended and such default has not been cured or waived
or ceased to exist, or (iii) if the maturity of any Senior Indebtedness of the
Company has been accelerated because of a default. Upon any distribution of
assets of the Company to creditors upon any dissolution, winding-up, liquidation
or reorganization, whether voluntary or involuntary, or in bankruptcy,
insolvency, receivership or other proceedings, all principal, premium, if any,
and interest due on all Senior Indebtedness of the Company must be paid in full
before the holders of the Securities are entitled to receive or retain any
payment. Upon satisfaction of all claims of all Senior Indebtedness of the
Company then outstanding, the rights of the holders of the Securities will be
subrogated to the rights of the holders of the Senior Indebtedness of the
Company to receive payments or distributions applicable to such Senior
Indebtedness until all amounts owing on such Securities are paid in full.
S-52
<PAGE> 53
The term "Senior Indebtedness" means, with respect to the Company, (i) the
principal (including redemption payments), premium, if any, interest (including,
without limitation, interest accruing on or after a bankruptcy or other similar
event, whether or not an allowed claim therein) and other payment obligations in
respect of (a) indebtedness of the Company for money borrowed and (b)
indebtedness evidenced by securities, debentures, bonds, notes or other similar
instruments issued by the Company, including any such securities issued under
any deed, indenture or other instrument to which the Company is a party
(including, for the avoidance of doubt, indentures pursuant to which
subordinated debentures have been or may be issued) and which do not contain
express terms providing that the Indebtedness evidenced thereby is subordinate
to or ranks pari passu with the Securities, (ii) all capital lease obligations
of the Company, (iii) all obligations of the Company issued or assumed as the
deferred purchase price of property, all conditional sale obligations of the
Company, all hedging agreements and agreements of a similar nature (including
interest rate swap agreements and commodity futures contracts) thereto and all
agreements relating to any such agreements, and all obligations of the Company
under any title retention agreement (but excluding trade accounts payable
arising in the ordinary course of business), (iv) all obligations of the Company
for the reimbursement of any letter of credit, banker's acceptance, security
purchase facility or similar credit transaction, (v) all obligations of the type
referred to in clauses (i) through (iv) above of other persons for the payment
of which the Company is responsible or liable as obligor, guarantor or otherwise
and (vi) all obligations of the type referred to in clauses (i) through (v)
above of other persons secured by any lien on any property or asset of the
Company (whether or not such obligation is assumed by the Company), except for
(a) any such indebtedness or other obligation that contains express terms, or is
issued under a deed, indenture or other instrument which contains express terms,
providing that it is subordinate to or ranks pari passu with the Securities, and
(b) any indebtedness between the Company and its affiliates, unless such
indebtedness has been assigned as security to the holders of other Senior
Indebtedness. Senior Indebtedness shall continue to be Senior Indebtedness and
be entitled to the benefits of the subordination provisions of the Indenture
irrespective of any amendment, modification or waiver of any term of such Senior
Indebtedness.
The Company expects that, following completion of the sale of the
Securities and the use of the net proceeds, together with other funds, to repay
certain indebtedness, Senior Indebtedness of the Company will consist primarily
of (i) up to $75 million of bank indebtedness relating to the construction of
the Aquarius mine and up to $36 million of guarantees of subsidiary indebtedness
relating to the construction of the Paredones Amarillos mine, expected to be
incurred in 1997 and 1998, (ii) Company bank debt, which was $18.4 million at
December 31, 1996, and (iii) guarantees of indebtedness of subsidiaries, which
would have been $55.6 million at December 31, 1996. The Securities will also be
effectively subordinated to all indebtedness and other liabilities of the
Company's subsidiaries. At December 31, 1996, in addition to guaranteed
indebtedness, the Company's subsidiaries would have had approximately $61.2
million of current payables, accrued liabilities and income and mining taxes
payable. At December 31, 1996, the Company and its subsidiaries also had $67.1
million of long-term provision for reclamation, mine closure and waste rock
removal.
The Indenture contains certain limitations on the incurrence or issuance of
other secured or unsecured debt of the Company, including Senior Indebtedness,
whether under the Indenture or any existing or other indenture that the Company
may enter into in the future or otherwise. See "-- Certain
Covenants -- Limitation on Indebtedness".
OPTIONAL REDEMPTION
The Securities are redeemable prior to their maturity at the option of the
Company (i) on or after April 1, 2007 in whole at any time or in part from time
to time, at the redemption prices described below, or (ii) in whole (but not in
part), at any time, in certain circumstances described under "Redemption for
Changes in Canadian Tax Law". The Securities are also redeemable at the option
of the Company (x) out of the Net Cash Proceeds of certain Cash Equity Sales or
(y) upon payment of a Make-Whole
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Amount, in each case on the terms and conditions described below. Any redemption
will be made on not less than 30 days and not more than 60 days prior written
notice.
The Redemption Price, in the case of a redemption under (i) above, shall
equal the following prices expressed in percentages of the principal amount,
together with accrued and unpaid interest thereon (including any Deferred
Interest) up to but excluding the Redemption Date, if redeemed during the
12-month period beginning on April 1 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
PRICE
YEAR ----------
<S> <C>
2007........................................... 105.5%
2008........................................... 104.4
2009........................................... 103.3
2010........................................... 102.2
2011........................................... 101.1
</TABLE>
and at 100% on or after April 1, 2012.
The Redemption Price, in the case of a redemption following a Redemption
Tax Event as described under (ii) above, shall be equal to 100% of the principal
amount of such Securities plus accrued and unpaid interest thereon (including
any Deferred Interest) to but excluding the Redemption Date.
At any time on or after April 1, 2002, and prior to April 1, 2007, the
Company may use the Net Cash Proceeds from one or more Cash Equity Sales of the
Company to redeem either (i) up to 40% of the aggregate original principal
amount of the Securities or (ii) 100% of the aggregate principal amount of the
Securities then Outstanding at the following prices expressed in percentages of
the principal amount, together with accrued and unpaid interest thereon
(including any Deferred Interest) up to but excluding the Redemption Date, if
redeemed during the 12-month period beginning on April 1 of the years indicated
below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2002........................................... 105.5%
2003........................................... 104.5
2004........................................... 103.5
2005........................................... 102.5
2006........................................... 101.5
</TABLE>
"Cash Equity Sales" means any sale of Capital Stock of the Company (other
than Redeemable Stock) occurring after the date of original issuance of the
Securities for which the Company receives cash consideration.
"Capital Stock" of any Person means any and all shares, interests,
participation or other equivalents (however designated) of corporate stock,
equity shares or other equity participation, including partnership
interests, whether general or limited, of such Person.
"Net Cash Proceeds" means the aggregate amount of cash proceeds
received from a sale of Capital Stock less, to the extent paid or payable,
all underwriting discounts and commissions with respect thereto.
Prior to April 1, 2007, the Securities will be redeemable by the Company,
in whole or in part, at any time and from time to time, at an amount equal to
the Make-Whole Amount, plus accrued and unpaid interest thereon (including any
Deferred Interest) to the Redemption Date.
"Make-Whole Amount" means, with respect to any Securities to be
redeemed, an amount equal to the greater of (i) the redemption price for
such Securities on April 1, 2007 as specified in the first table above and
(ii) as determined by a Quotation Agent (as defined below), the sum of (x)
the present values of the scheduled payments of interest on the Securities
through April 1, 2007 (without giving effect to any Extension Period (and
without duplication of any accrued and unpaid
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interest)) plus (y) the present value of 105.5% of the principal amount of
the Securities at April 1, 2007, discounted, in each case, to the
Redemption Date on a semi-annual basis (assuming a 360-day year consisting
of 30-day months) at the Adjusted Treasury Rate.
"Adjusted Treasury Rate" means, with respect to any prepayment date,
the rate per annum equal to the semi-annual bond equivalent yield to
maturity of the Comparable Treasury Issue (as defined herein), assuming a
price for the Comparable Treasury Issue (expressed as a percentage of its
principal amount) equal to the Comparable Treasury Price (as defined
herein) for such prepayment date, plus 0.75%.
"Comparable Treasury Issue" means the United States Treasury security
selected by the Quotation Agent as having a maturity comparable to April 1,
2007 that would be utilized, at the time of selection and in accordance
with customary financial practice, in pricing new issues of corporate debt
securities of comparable maturity to the remaining term of the Securities.
"Quotation Agent" means the Reference Treasury Dealer (as defined
herein) appointed by the Trustee for this purpose after consultation with
the Company.
"Reference Treasury Dealer" means: (i) Goldman, Sachs & Co. and its
successors; provided, however, that the foregoing remain a primary US
Government securities dealer in New York City (a "Primary Treasury Dealer")
and (ii) any other Primary Treasury Dealer selected by the Trustee after
consultation with the Company.
"Comparable Treasury Price" means, with respect to any prepayment
date, (i) the average of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal
amount) on the third Business Day preceding such prepayment date, as set
forth in the daily statistical release (or any successor release) published
by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m.
Quotations of US Government Securities" or (ii) if such release (or any
successor release) is not published or does not contain such prices on such
Business Day, (A) the average of the Reference Treasury Dealer Quotations
for such prepayment date, after excluding the highest and lowest such
Reference Treasury Dealer Quotations, or (B) if the Trustee obtains fewer
than three such Reference Treasury Dealer Quotations, the average of all
such Quotations.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any prepayment date, the average, as
determined by the Trustee, of the bid and asked prices for the Comparable
Treasury Issue (expressed in each case as a percentage of its principal
amount) quoted in writing to the Trustee by such Reference Treasury Dealer
at 5:00 p.m., New York City time, on the third Business Day preceding such
prepayment date.
CANADIAN WITHHOLDING TAXES
All payments made by or on behalf of the Company under or with respect to
the Securities (including interest, principal and any applicable redemption
premiums) will be made free and clear of and without withholding or deduction
for or on account of any present or future tax, duty, levy, impost, assessment
or other government charge (including penalties, interest and other liabilities
related thereto) imposed or levied by or on behalf of the Government of Canada
or of any province or territory thereof or by any authority or agency therein or
thereof having power to tax ("Canadian Taxes") unless the Company is required to
withhold or deduct Canadian Taxes by law or by the interpretation or
administration thereof by the relevant government authority or agency. If the
Company is so required to withhold or deduct any amount for or on account of
Canadian Taxes from any payment made under or with respect to the Securities,
the Company will pay as additional interest such additional amounts ("Additional
Amounts") as may be necessary so that the net amount received by each holder of
Securities (including Additional Amounts) after such withholding or deduction
will not be less than the amount the holder of Securities would have received if
such Canadian Taxes had not been withheld or deducted; provided, however, that
no Additional Amounts will be payable with respect to a payment made to a holder
of Securities (an
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<PAGE> 56
"Excluded Holder") in respect of the beneficial owner thereof (i) with which the
Company does not deal at arm's length (for purposes of the Income Tax Act
(Canada) (the "ITA")) at the time of the making of such payment, (ii) which is
subject to such Canadian Taxes by reason of its failure to comply with any
certification, identification, information, documentation or other reporting
requirement if compliance is required by law, regulation, administrative
practice or an applicable treaty as a precondition to exemption from, or a
reduction in, the rate of deduction or withholding of, such Canadian Taxes or
(iii) which is subject to such Canadian Taxes by reason of its carrying on
business in or being connected with Canada or any province or territory thereof
otherwise than by the mere holding of Securities or the receipt of payment
thereunder. The Company will make such withholding or deduction and remit the
full amount deducted or withheld to the relevant authority as and when required
in accordance with applicable law. The Company will pay all taxes, interest and
other liabilities which arise by virtue of any failure of the Company to
withhold, deduct and remit to the relevant authority on a timely basis the full
amounts required in accordance with applicable law. The Company will furnish to
the holder of the Securities, within 30 days after the date the payment of any
Canadian Taxes is due pursuant to applicable law, certified copies of tax
receipts evidencing such payment by the Company.
The foregoing obligations shall survive any termination, defeasance or
discharge of the Indenture.
REDEMPTION FOR CHANGES IN CANADIAN TAX LAW
The Securities may be redeemed, at the option of the Company, at any time
in whole but not in part, on not less than 30 days and not more than 60 days
prior written notice, at 100% of the principal amount thereof on the date of
such redemption, on or after the 91st day following the occurrence and during
the continuance of a Redemption Tax Event if within the 90-day period following
such Redemption Tax Event, the Company is unable to avoid the adverse effects of
such Redemption Tax Event by taking some Ministerial Action (as defined in the
Indenture) or pursuing some other reasonable measure that will have no adverse
effect on the Company or the holder of the Securities. A "Redemption Tax Event"
means that the Company shall have delivered to the Trustee an opinion of a
nationally recognized independent Canadian tax counsel experienced in such
matters to the effect that a relevant tax law change (as defined in the next
sentence) has occurred. A "relevant tax law" change is (i) any amendment to or
change (including any announced prospective change) in the laws (or any
regulations thereunder) of Canada or any political subdivision or taxing
authority thereof or therein, as applicable, or (ii) any amendment to or change
in an interpretation or application of such laws or regulations by any
legislative body, court, governmental agency or regulatory authority (including
the enactment of any legislation and the publication of any judicial decision or
regulatory determination), in either case, which is announced or becomes
effective after the date of the Indenture and as a result of which (assuming
that such amendment or change is enacted or is applied to the Company), there is
more than an insubstantial risk that (i) the Company could become liable to pay,
on the next date on which any amount would be payable with respect to the
Securities, any Additional Amounts (which are more than a de minimis amount), or
(ii) the Company could be denied the deduction of interest paid or payable in
respect of the Securities in computing its income for the purpose of the ITA or
a provincial income tax statute.
INTEREST
Each Security shall bear interest from the original date of issuance,
payable in US dollars, at the rate of 11% per annum, or 12% per annum during an
Extension Period, payable semi-annually in arrears on April 1 and October 1 of
each year, commencing October 1, 1997 (each an "Interest Payment Date") to the
person in whose name such Security is registered, subject to certain exceptions,
as of the close of business on the day other than Saturday, Sunday or any other
day on which banking institutions in New York City are permitted or required by
applicable law to close (the "Business Day") next preceding such Interest
Payment Date. In the event any Securities shall not continue to remain in book
entry only form, the relevant record dates for the payment of interest on the
next succeeding Interest Payment Date for such Securities will be the March 15
or September 15 next preceding the relevant Interest Payment Date.
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<PAGE> 57
The amount of interest payable for any period will be computed on the basis
of a 360-day year of twelve 30-day months. The amount of interest payable for
any period shorter than a full semi-annual period for which interest is computed
will be computed on the basis of the actual number of days elapsed per 30-day
month. Accrued interest that is not paid on the applicable Interest Payment Date
(including during an Extension Period) will bear additional interest on the
amount thereof (to the extent permitted by law) at the rate per annum of 12%
thereof, compounded semi-annually and computed on the basis of a 360-day year of
twelve 30-day months and the actual days elapsed in a partial month in a period.
The term "interest" as used herein shall include semi-annual interest payments,
interest on semi-annual interest payments not paid on the applicable Interest
Payment Date and Additional Amounts, as applicable. In the event that any date
on which interest is payable on the Securities is not a Business Day, then
payment of the interest payable on such date will be made on the next succeeding
day that is a Business Day (and without any interest or other payment in respect
of any such delay), except that, if such Business Day is in the next succeeding
calendar year, then such payment shall be made on the immediately preceding
Business Day, in each case with the same force and effect as if made on such
date.
OPTION TO EXTEND INTEREST PAYMENT PERIODS
The Company shall have the right at any time and from time to time, subject
to certain conditions, to defer payments of interest on the Securities by
extending interest payment periods for Extension Periods, each not exceeding 10
consecutive semi-annual payment periods (all interest that shall accrue on the
Securities, including, to the extent permitted by law, interest on interest,
during an Extension Period is herein called "Deferred Interest"); provided that
during any Extension Period (i) the Company shall not declare or pay dividends
on, or make a distribution with respect to, or redeem, purchase or acquire, or
make a liquidation payment with respect to, any of its Capital Stock (other than
(a) as a result of an exchange or conversion of any class or series of the
Company's Capital Stock or rights to acquire such stock for any other class or
series of the Company's Capital Stock or rights to acquire such stock, (b) the
purchase of fractional interests in shares of the Company's Capital Stock
pursuant to the conversion or exchange provisions of such Capital Stock or the
security being converted or exchanged, (c) dividends or distributions made on
the Company's Capital Stock or rights to acquire such stock with the Company's
Capital Stock or rights to acquire such stock or (d) purchases of Common Shares
related to the issuance of Common Shares or rights or options under any of the
Company's benefit plans for its directors, officers, employees or other persons
within the definition of "employee" under any employee benefit plan of the
Company, or related to the issuance of Common Shares or rights under a dividend
reinvestment plan or stock purchase plan), and (ii) the Company shall not make
any payment of interest, principal or premium, if any, on or repay, repurchase
or redeem any debt securities (excluding, for the avoidance of doubt, Senior
Indebtedness, current payables, accrued liabilities, provisions for reclamation,
mine closure and waste rock removal, and income and mining taxes payable, in
respect of which such payments, repayments, repurchase and redemptions may be
made) issued by the Company or any guarantee issued by the Company that, in
either case, rank pari passu with or junior to the Securities. Prior to the
termination of any Extension Period, the Company may further defer payments of
interest by extending the interest payment period on the Securities; provided,
however, that such further Extension Period, including all such previous and
further extensions, may not exceed 10 consecutive semi-annual payment periods
and may not extend beyond the maturity of the Securities. Upon the termination
of any Extension Period and the payment of all Deferred Interest, the Company
may commence a new Extension Period for up to 10 consecutive semi-annual payment
periods, subject to the terms set forth in this section. During an Extension
Period, interest on the Securities will accrue at the rate of 12% per annum,
compounded semi-annually, and holders of Securities will be required to accrue
interest income for United States Federal income tax purposes prior to receipt
of cash related to such interest income. See "Tax Considerations -- United
States Federal Income Taxation -- Original Issue Discount." All interest accrued
during an Extension Period shall be paid on the Interest Payment Date at the end
of such Extension Period. No interest payments will be required to be made
during an Extension Period except at the end thereof. The Company shall give the
holders of the Securities notice of its initiation of any Extension
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<PAGE> 58
Period at least ten Business Days prior to the earlier of (i) the next Interest
Payment Date or (ii) the date upon which the Company is required to give notice
to holders of the Securities of the record date or Interest Payment Date, in
each such case with respect to interest payments the payment of which is being
deferred.
COMMON SHARES PAYMENT ELECTION
The Company may elect, from time to time, to satisfy its obligation to pay
any Deferred Interest on any Interest Payment Date by delivering Common Shares
in accordance with the Indenture (the "Common Shares Payment Election"). The
Indenture provides that the Trustee shall (i) accept delivery of Common Shares
from the Company, (ii) accept bids with respect to, and consummate sales of,
such Common Shares, each as the Company shall direct in its absolute discretion,
(iii) invest the proceeds of such sales in short-term United States Government
Obligations (as defined in the Indenture), which mature prior to the applicable
Interest Payment Date, and/or use such proceeds to pay the Deferred Interest,
and (iv) perform any other action necessarily incidental thereto. The Company
shall make a Common Shares Payment Election by delivering written notice (the
"Common Shares Election Notice") to the Trustee no later than the date required
by applicable law or the rules of any stock exchange on which the Securities are
then listed. The Trustee shall, in accordance with such notice, deliver requests
for bids (each a "Common Shares Bid Request") to investment banks, brokers or
dealers selected by the Company. Such notice shall direct the Trustee to solicit
and accept only such bids, and the Common Shares Bid Request shall make the
acceptance of any bid conditional on the acceptance of such bids, that together
shall provide for the delivery and sale of Common Shares against payment of the
Common Shares Election Amount on a date (the "Common Shares Delivery Date") that
is no earlier than 180 days and no later than one Business Day prior to the
applicable Interest Payment Date. The "Common Shares Election Amount" means an
amount of aggregate proceeds, based on the bids obtained pursuant to the Common
Shares Bid Request, of the sale on the Common Shares Delivery Date, of the
Common Shares equal to, and not exceeding, the Deferred Interest payable on such
Interest Payment Date. The Common Shares Election Notice shall provide for, and
all such bids shall be subject to, the right of the Company, by delivering
written notice to the Trustee at any time prior to the consummation of such
delivery and sale on the Common Shares Delivery Date, to withdraw the Common
Shares Payment Election (which will have the effect of withdrawing the Common
Shares Bid Request), whereupon the Company shall be obligated to pay in cash all
Deferred Interest.
The Trustee shall inform the Company promptly following receipt of any bid
or bids for Common Shares. The Trustee shall accept such bid or bids as the
Company (in its absolute discretion) shall direct, provided that the aggregate
proceeds of all such sales (less any amount attributable to any fractional
Common Share), on the Common Shares Delivery Date, must equal the Common Shares
Election Amount. In connection with any bids so accepted, the Company, the
Trustee and the applicable bidders shall, not later than the Common Shares
Delivery Date, enter into customary purchase agreements (in each case, a "Common
Shares Purchase Agreement") and shall comply with all applicable laws, including
the Securities Act, the Securities Exchange Act of 1934 (the "Exchange Act"),
the applicable securities laws of Canada, the rules and regulations of any stock
exchange on which the Common Shares are then listed and the laws, rules and
regulations of any jurisdiction in which the Common Shares may be offered for
sale. The Company shall pay all fees and expenses in connection with the Common
Shares Purchase Agreements.
Provided that (i) all conditions specified in each Common Shares Purchase
Agreement to the closing of all sales thereunder have been satisfied, other than
the delivery of the Common Shares to be sold thereunder against payment of the
Common Shares Election Amount, and (ii) the purchasers under the Common Shares
Purchase Agreements shall be ready, willing and able to perform thereunder, in
each case on the Common Shares Delivery Date, the Company shall, on the Common
Shares Delivery Date, deliver to the Trustee the Common Shares to be sold on
such date and (to the extent any such Common Share would be a fractional share)
cash and an officer's certificate to the effect that all conditions precedent to
such sales, including those set forth in the Indenture and in each Common Shares
Purchase Agreement, have been satisfied. Upon such deliveries, the Trustee shall
consummate such sales on such
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Common Shares Delivery Date by delivery of the Common Shares to such purchasers
against payment to the Trustee in immediately available funds of the purchase
price therefor in an aggregate amount equal to the Common Shares Election Amount
(less any amount attributable to any fractional Common Share), whereupon the
sole right of a holder of a Security in respect of such Deferred Interest will
be to the delivery of such proceeds by the Trustee in full satisfaction of such
Deferred Interest, and the holder of such Securities will have no further
recourse to the Company in respect of such Deferred Interest (it being
understood that the Company's obligation to pay Deferred Interest in cash shall
only be discharged upon satisfaction of such conditions).
The Trustee shall use the sale proceeds of the Common Shares (together with
any cash received from the Company in respect of any fractional Common Share) to
purchase short-term United States Government Obligations, which mature prior to
the applicable Interest Payment Date, and which the Trustee is required to hold
until maturity (the "Common Shares Proceeds Investment") on the Common Shares
Delivery Date and shall on such date deposit the balance, if any, in the
respective Property Account (as defined in the Indenture) for such Securities.
The Trustee shall hold the Common Shares Proceeds Investment under its exclusive
control and shall hold such investments (but not income earned thereon) in an
irrevocable trust for the benefit of the holders of the Securities. One Business
Day prior to the applicable Interest Payment Date, the Trustee shall deposit
amounts from the proceeds of the Common Shares Proceeds Investment in the
Property Account to bring the balance of the Property Account to the Common
Shares Election Amount. On such Interest Payment Date, the Trustee shall apply
the funds held in the Property Account to payment of Deferred Interest to the
holders of record of the Securities on the record date and shall remit amounts,
if any, in respect of income earned on the Common Shares Proceeds Investment or
otherwise in excess of the Common Shares Election Amount to the Company.
The Company shall indemnify and hold harmless the Trustee and (on an
after-tax basis) the holders of Securities and any person who controls any such
holder within the meaning of any applicable securities laws, from and against
any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred by any such person
in connection with defending or investigating any such action or claim) caused
by or arising in connection with any Common Shares Payment Election or any
withdrawal thereof, except in each case for any losses, claims, damages or
liabilities caused by any such person's gross negligence or wilful misconduct.
If the indemnification provided for in this paragraph shall be unavailable to an
indemnified person or insufficient in respect of any losses, claims, damages or
liabilities referred to, then the Company shall contribute to the amount paid or
payable by such indemnified person as a result of such losses, claims, damages
or liabilities in such proportion as is appropriate to reflect the relative
fault of the Company and such indemnified person and any other equitable
considerations.
Notwithstanding the foregoing, the Company shall not be permitted to
satisfy its obligations to pay Deferred Interest with respect to the Securities
through the delivery of Common Shares if, on the Common Shares Delivery Date,
the Common Shares to be delivered are not then listed on The Toronto Stock
Exchange, the American Stock Exchange or any other significant stock exchange in
Canada or the United States on which the Common Shares are then listed. Neither
the Company's making of a Common Shares Payment Election nor the consummation of
sales of Common Shares on the Common Shares Delivery Date will (i) result in the
holders of the Securities not receiving on the applicable Interest Payment Date
cash in an aggregate amount equal to the Deferred Interest payable on such
Interest Payment Date, or (ii) entitle such holders to receive any Common Shares
in satisfaction of the Company's obligation to pay such Deferred Interest.
CHANGE OF CONTROL REPURCHASE
The occurrence of a Change of Control will constitute an Event of Default
under the Indenture if the Company does not cure such event by making an offer
to repurchase all of the outstanding Securities at a repurchase price (the
"Repurchase Price") equal to 101% of the aggregate principal amount of such
Securities plus accrued and unpaid interest thereon (including any Deferred
Interest) to the repurchase date (the "Repurchase Date").
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Within 10 Business Days following a Change of Control, notice (a "Change of
Control Notice") will be sent to each holder of Securities stating, among other
things: (i) that a Change of Control has occurred and that such holder has the
right to cause the repurchase of its Securities at the Repurchase Price; (ii)
the circumstances and relevant facts regarding such Change of Control (including
any relevant information with respect to the transaction giving rise to such
Change of Control); (iii) the instructions that a holder must follow in order to
have its Securities accepted for repurchase; and (iv) the Repurchase Date (which
shall not be less than 30 days nor more than 60 days from the date of such
notice).
"Change of Control" means the occurrence of one or more of the following
events (whether or not approved by the Board of Directors of the Company): (a)
an event or series of events by which any Person or group of Persons within the
meaning of Section 13(d) of the Exchange Act shall, as a result of a tender or
exchange offer, open market purchases, privately negotiated purchases, merger,
consolidation, issuances of securities by the Company or otherwise, be or
become, directly or indirectly, the beneficial owner (within the meaning of Rule
13d-3 and Rule 13d-5 under the Exchange Act, whether or not applicable, except
that a Person shall be deemed to have "beneficial ownership" of all securities
that such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time) of 50% or more of the combined
voting power of the then outstanding voting stock of the Company, (b) the first
day on which a majority of the members of the Board of Directors of the Company
are not Continuing Directors (as defined herein), (c) the stockholders of the
Company shall approve any plan or proposal for the liquidation or dissolution of
the Company or (d) the direct or indirect sale, assignment, lease, exchange,
disposition or other transfer, in one transaction or a series of related
transactions, of all or substantially all of the property or assets of the
Company to any Person. "Continuing Director" means any member of the Board of
Directors of the Company who was a member of such Board of Directors on the date
of original issuance of the Securities, and, as of any determination date
thereafter, shall include any member of the Board of Directors of the Company
who was nominated for election or appointed to such Board of Directors with the
affirmative vote of a majority of the Continuing Directors who were members of
such Board at the time of such nomination or appointment.
Clause (d) of the definition of Change of Control set forth in the
preceding paragraph includes a sale, assignment, lease, exchange, disposition or
other transfer of all or substantially all of the Company's assets. Although
there is a developing body of case law interpreting the phrase "substantially
all", there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a holder of Securities to require the
repurchase of such Securities as a result of a sale, assignment, lease,
exchange, disposition or other transfer of the Company's assets to another
Person may be uncertain.
The Company's ability to repurchase the Securities upon a Change of Control
may be limited by, among other things, the Company's financial resources at the
time of repurchase and the terms of the Indenture which prevent any payments in
respect of the Securities if the Company is in default in the payment of any
amount due on any Senior Indebtedness. See "Subordination". The Company expects
that some or all of its bank credit facilities will contain provisions requiring
repayment upon circumstances similar to, or the same as, a Change of Control as
defined above. There can be no assurance that the Company will have the
financial resources or be able to arrange financing on acceptable terms to pay
the Repurchase Price for all of the Securities as to which the repurchase right
is exercised, as well as other indebtedness that may also be due and payable at
such time. Both the Company's bank credit facilities and the Securities restrict
the Company's ability to incur additional indebtedness.
CERTAIN COVENANTS
Limitation on Indebtedness
The Company will not Incur any Debt, and will not permit any Restricted
Subsidiary of the Company to Incur any Debt, unless, immediately after giving
effect to the incurrence of any such Debt and the receipt and application of the
proceeds thereof, the Consolidated Cash Flow Ratio for the four full fiscal
quarters for which quarterly or annual financial statements are available next
preceding the incurrence of
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such Debt, calculated on a pro forma basis as if such Debt had been Incurred at
the beginning of such four full fiscal quarters, would be greater than 2.5 to 1.
Notwithstanding the foregoing, the Indenture will not prohibit the
Incurrence by the Company or a Restricted Subsidiary of any of the following
(collectively, "Permitted Debt"):
(i) Debt (A) under the Company's Bank Credit Facilities in an
aggregate principal amount at any time outstanding not to exceed $125
million (including the U.S. dollar equivalent on the date of Incurrence of
any amounts borrowed in another currency or in a commodity) and (B) under
one or more bank credit facilities of the Company and its Restricted
Subsidiaries in an aggregate principal amount at any time outstanding not
to exceed $111 million (including the U.S. dollar equivalent on the date of
Incurrence of any amounts borrowed in another currency) to finance the
development and construction of the Aquarius and Paredones Amarillos mines;
(ii) Debt under one or more credit facilities with banks, including
commercial banks, development banks, export credit agencies and similar
institutions which, together with any Debt Incurred under the foregoing
clause (i), does not exceed the Borrowing Base at the time such Debt is
Incurred, provided that the proceeds of any borrowing under this clause
(ii) shall be used for the acquisition, exploration, development and
construction of mining and milling properties and related equipment at
Future Development Projects;
(iii) Capital Lease Obligations and Purchase Money Obligations
Incurred in respect of assets acquired after the date of original issuance
of the Securities, as the same may from time to time be amended, restated,
or refinanced, provided that the aggregate principal amount of Debt at any
time outstanding pursuant to this clause (iii) shall not exceed $40 million
(including the U.S. dollar equivalent on the date of Incurrence of all
amounts Incurred in another currency or in a commodity);
(iv) Debt Incurred by a Person prior to the time (A) such Person
became a Restricted Subsidiary of the Company or (B) such Person is
amalgamated, merged or consolidated with or into the Company or a
Restricted Subsidiary of the Company, which Debt was not Incurred in
anticipation of such transaction and was outstanding prior to such
transaction, provided that after giving pro forma effect in the calculation
of Consolidated Cash Flow Available for Fixed Charges, Consolidated
Interest Expense, Consolidated Exploration and Development Expense and
Consolidated Tax Expense to (x) such transaction and (y) any refinancing of
Debt that occurs concurrently with such transaction, and treating any Debt
of such acquired Person as having been Incurred at the time of such
transaction, the Company could Incur at least $1.00 of additional Debt
pursuant to the ratio test specified in the first paragraph of this
covenant;
(v) Debt (A) in respect of performance, surety or appeal bonds
provided in the ordinary course of business and not in connection with the
borrowing of money, including letters of credit or letters of guarantee
securing obligations of the Company or a Restricted Subsidiary relating to
the closure, reclamation or rededication of current or past operations and
(B) arising from agreements providing for indemnification, adjustment of
purchase price or similar obligations, or from guarantees or letters of
credit, surety bonds or performance bonds securing any obligations of the
Company or a Restricted Subsidiary pursuant to such agreements, in any case
Incurred in connection with the disposition of any business, assets or
Restricted Subsidiary of the Company and not exceeding the gross proceeds
therefrom (excluding, however, guarantees of Debt Incurred by any Person
acquiring all or any portion of such business, assets or Restricted
Subsidiary of the Company for the purpose of financing such acquisition);
(vi) Debt consisting of Permitted Hedging Agreements;
(vii) the Securities; and
(viii) Debt which is exchanged for or the proceeds of which are used
to refinance or refund, or any extension or renewal of (x) any Debt
outstanding on the date of original issuance of the Securities (other than
Debt proposed to be repaid with the proceeds of the sale of the Securities)
or
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(y) Debt Incurred pursuant to the first paragraph of this covenant or
clauses (i)(B), (ii), (iv), (vii) or this clause (viii) of this paragraph
(each of the foregoing in clause (x) or (y), a "refinancing") in an
aggregate principal amount not to exceed the principal amount of the Debt
so refinanced plus the amount of any premium required to be paid in
connection with such refinancing pursuant to the terms of the Debt so
refinanced or the amount of any premium reasonably determined by the
Company as necessary to accomplish such refinancing, plus the expenses of
the Company or the Restricted Subsidiary, as the case may be, Incurred in
connection with such refinancing; provided, however, that (A) Debt the
proceeds of which is used to refinance the Securities or Debt which is pari
passu to the Securities or subordinated to the Securities shall only be
permitted if (x) in the case of any refinancing of the Securities or Debt
which pari passu to the Securities, the refinancing Debt is made pari passu
to the Securities or subordinated to the Securities and (y) in the case of
any refinancing of Debt which is subordinated to the Securities, the
refinancing Debt is subordinated to the Securities; and (B) the refinancing
Debt by its terms, or by the terms of any agreement or instrument pursuant
to which such Debt is issued, (1) does not provide for payments of
principal of such Debt at the stated maturity thereof or by way of a
sinking fund applicable thereto or by way of any mandatory redemption,
defeasance, retirement or repurchase thereof (including any redemption,
defeasance, retirement or repurchase which is contingent upon events or
circumstances, but excluding any retirement required by virtue of
acceleration of such Debt upon any event of default thereunder), in each
case prior to the stated maturity of the Debt being refinanced and (2) does
not permit redemption or other retirement (including pursuant to an offer
to purchase) of such Debt at the option of the holder thereof prior to the
final stated maturity of the Debt being refinanced, other than a redemption
or other retirement at the option of the holder of such Debt (including
pursuant to an offer to purchase) which is conditioned upon provisions
substantially similar to those described under "Change of Control" or a
requirement to make an offer to purchase following a sale of assets.
Unrestricted Subsidiaries
The Company may designate any Subsidiary of the Company to be an
"Unrestricted Subsidiary" as provided below in which event such Subsidiary and
each other Person that is then or thereafter becomes a Subsidiary of such
Subsidiary will be deemed to be an Unrestricted Subsidiary. "Unrestricted
Subsidiary" means (1) any Subsidiary designated as such by the Board of
Directors as set forth below where (a) neither the Company nor any of its other
Subsidiaries (other than another Unrestricted Subsidiary) (i) provides credit
support for, or Guarantee of, any Debt of such Subsidiary or any Subsidiary of
such Subsidiary (including any undertaking, agreement or instrument evidencing
such Debt) or (ii) is directly or indirectly liable for any Debt of such
Subsidiary or any Subsidiary of such Subsidiary, and (b) no default with respect
to any Debt of such Subsidiary or any Subsidiary of such Subsidiary (including
any right which the holders thereof may have to take enforcement action against
such Subsidiary) would permit (upon notice, lapse of time or both) any holder of
any other Debt of the Company and its Subsidiaries (other than another
Unrestricted Subsidiary) to declare a default on such other Debt or cause the
payment thereof to be accelerated or payable prior to its final scheduled
maturity and (2) any Subsidiary of an Unrestricted Subsidiary. The Board of
Directors may designate any Subsidiary to be an Unrestricted Subsidiary unless
such Subsidiary owns any Capital Stock of, or owns or holds any lien on any
property of, any other Subsidiary of the Company which is not a Subsidiary of
the Subsidiary to be so designated or otherwise an Unrestricted Subsidiary,
provided that immediately after giving effect to such designation, the Company
could Incur at least $1.00 of additional Debt pursuant to the ratio test
specified in the first paragraph under "Limitation on Indebtedness". The Board
of Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary, provided that, immediately after giving effect to such designation,
(i) no Event of Default or event that with the passing of time or the giving of
notice, or both, would constitute an Event of Default shall have occurred and be
continuing; and (ii) the Company could Incur at least $1.00 of additional Debt
pursuant to the ratio test specified in the first paragraph under the
"Limitation of Indebtedness" covenant. Any such designation by the Board of
Directors shall be evidenced by filing with the Trustee a certified copy of the
resolution of the Board of
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Directors giving effect to such designation and an officers' certificate
certifying that such designation complies with the foregoing conditions.
Restrictions on Certain Payments; Certain Other Covenants of the Company
The Company has covenanted that it will not, and will not permit any
Restricted Subsidiary of the Company to (i) declare or pay dividends on, or make
a distribution with respect to, or redeem, purchase or acquire, or make a
liquidation payment with respect to, any of the Company's Capital Stock (other
than (a) as a result of an exchange or conversion of any class or series of the
Company's Capital Stock or rights to acquire such stock for any other class or
series of the Company's Capital Stock or rights to acquire such stock, (b) the
purchase of fractional interests in shares of the Company's Capital Stock
pursuant to the conversion or exchange provisions of such Capital Stock or the
security being converted or exchanged, (c) dividends or distributions made on
the Company's Capital Stock or rights to acquire such stock with the Company's
Capital Stock or rights to acquire such stock or (d) purchases of Common Shares
related to the issuance of Common Shares or rights or options under any of the
Company's benefit plans for its directors, officers, employees or other persons
within the definition of "employee" for purposes of registration of shares of an
employee benefit plan of the Company, related to the issuance of Common Shares
or rights under a dividend reinvestment plan or stock purchase plan), and (ii)
make any payment of interest, principal or premium, if any, on or repay,
repurchase or redeem any debt securities (excluding, for the avoidance of doubt,
Senior Indebtedness, current payables, accrued liabilities, provisions for
reclamation, mine closure and waste rock removal, and income and mining taxes
payable, in respect of which such payments, repayments, repurchase and
redemptions may be made) issued by the Company or any guarantee issued by the
Company that, either case, rank pari passu with or junior to the Securities, if
at such time (x) there shall have occurred any event of which the Company has
actual knowledge that (a) with the giving of notice or the lapse of time, or
both, would constitute an "Event of Default" under the Indenture with respect to
the Securities and (b) in respect of which the Company shall not have taken
reasonable steps to cure, or (y) the Company shall have given notice of its
selection of an Extension Period as provided in the Indenture with respect to
the Securities and shall not have rescinded such notice, or such Extension
Period, or any extension thereof, shall be continuing.
Reports to Holders of Capital Securities
The Company will file with the Commission all information, documents and
reports required to be filed with the Commission pursuant to Section 13 or 15(d)
of the Exchange Act, whether or not the Company is subject to such filing
requirements, so long as the Commission will accept such filings. The Company
will file with the Trustee, within 15 days after it files them with the
Commission, copies of the annual reports and of the information, documents and
other reports (or copies of such portions of any of the foregoing as the
Commission may by rules and regulations prescribe) which the Company files with
the Commission pursuant to Section 13 or 15(d) of the Exchange Act. Regardless
of whether the Company is required to furnish such reports to its stockholders
pursuant to the Exchange Act, the Company will cause its consolidated financial
statements, comparable to that which would have been required to appear in
annual or quarterly reports filed with the Commission, to be delivered to the
Trustee, and the Trustee will deliver the same to holders of the Securities.
CERTAIN DEFINITIONS
"Bank Credit Facilities" means (i) the Amended and Restated Gold Bullion
Loan Agreement, dated as of August 9, 1996, among Echo Bay Inc., as Borrower,
the Company and certain subsidiaries of the Company, as Guarantors, the banks
thereunder, and the Bank of Nova Scotia, as Agent, (ii) the Loan Agreement,
dated as of April 29, 1994, by and among the Company, as Borrower, certain
subsidiaries of the Company, as Guarantors, and Canadian Imperial Bank of
Commerce, as Lender, and (iii) the Loan Agreement, dated as of April 29, 1994,
by and among Echo Bay Inc., as Borrower, the Company and certain subsidiaries of
the Company, as Guarantors, and Canadian Imperial Bank of Commerce, as
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Lender, including, in each case, any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, and in
each case as amended, restated, modified, renewed, refunded, replaced or
refinanced, in whole or in part, from time to time (including, for the avoidance
of doubt, with the same or different lenders).
"Borrowing Base" means, as of any date, the aggregate amount of borrowing
limits as of such date determined under the covenants of all bank or
institutional lender credit facilities of the Company and its Subsidiaries
(other than Unrestricted Subsidiaries) that determine such limits on the basis
of a borrowing base or other asset-based calculation that is determined with
respect to the Company's ore reserves (other than ore reserves held by
Unrestricted Subsidiaries).
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) real or personal property of such Person which is required to
be classified and accounted for as a capital lease or a liability on the face of
a balance sheet of such Person in accordance with generally accepted accounting
principles. The stated maturity of such obligation shall be the date of the last
payment of rent or any other amount due under such lease prior to the first date
upon which such lease may be terminated by the lessee without payment of a
penalty.
"Consolidated" or "consolidated" means consolidated in accordance with
GAAP, including, to the extent permitted by GAAP, proportionate consolidation.
"Consolidated Cash Flow Available for Fixed Charges" of the Company means
for any period the aggregate amount of working capital provided by operations as
set forth on the Company's consolidated statement of cash flow plus, to the
extent reflected in the amount of net earnings (loss) set forth on the Company's
consolidated statement of earnings for such period and not added back in the
calculation of working capital provided by operations for such period, (i)
Consolidated Interest Expense of the Company, (ii) Consolidated Exploration and
Development Expense of the Company and (iii) Consolidated Income Tax Expense of
the Company (or minus any recovery); provided that there shall be excluded from
the calculation of Consolidated Cash Flow Available for Fixed Charges, without
duplication, (a) the working capital (or deficiency) from operations of any
Person acquired by the Company or a Restricted Subsidiary of the Company in a
pooling-of-interests transaction for any period prior to the date of such
transaction, (b) the working capital (but not any deficiency) from operations of
any Person not accounted for on a Consolidated (including proportionate
consolidation) basis, except to the extent of the amount of dividends or other
distributions actually paid to the Company or a Restricted Subsidiary by such
Person during such period, (c) the working capital (or deficiency) from
operations of any Unrestricted Subsidiary and (d) the cumulative effect of
changes in accounting principles.
"Consolidated Cash Flow Ratio" of the Company means for any period the
ratio of (i) Consolidated Cash Flow Available For Fixed Charges of the Company
for such period to (ii) the sum of, without duplication, (A) Consolidated
Interest Expense of the Company for such period plus (B) the annual interest
expense (including the amortization of debt discount or premium) with respect to
any Debt of the Company or a Restricted Subsidiary proposed to be Incurred by
the Company or a Restricted Subsidiary, plus (C) the annual interest expense
(including the amortization of debt discount or premium) with respect to any
other Debt of the Company or a Restricted Subsidiary Incurred by the Company or
Restricted Subsidiaries since the end of such period to the extent not included
in Clause (ii)(A) minus (D) Consolidated Interest Expense of the Company to the
extent included in Clause (ii)(A) or (ii)(C) with respect to any Debt of the
Company or a Restricted Subsidiary that will no longer be outstanding as a
result of the Incurrence of the Debt proposed to be Incurred and the use of the
proceeds thereof or that otherwise has been repaid prior to the date of
determination; provided, however, that in making such computation, the
Consolidated Interest Expense of the Company attributable to interest on any
Debt bearing a floating interest rate shall be computed on a pro forma basis as
if the rate in effect on the date of computation had been the applicable rate
for the entire period; provided further that, in the event the Company or its
Restricted Subsidiaries has made asset dispositions or acquisitions of assets
not in the ordinary course of business (including acquisitions of other Persons
by merger,
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consolidation or purchase of Capital Stock) during or after such period, such
computation (including the calculation of Consolidated Cash Flow Available for
Fixed Charges and Consolidated Interest Expense) shall be made on a pro forma
basis as if the asset dispositions or acquisitions had taken place on the first
day of such period.
"Consolidated Exploration and Development Expense" of the Company means for
any period the consolidated exploration and development expense of the Company
included in the Company's consolidated statement of earnings for such period in
accordance with GAAP; excluding, however, the portion thereof that is
attributable to an Unrestricted Subsidiary.
"Consolidated Income Tax Expense" of the Company means for any period the
consolidated income tax expense (recovery) of the Company included in the
Company's consolidated statement of earnings for such period in accordance with
GAAP; excluding, however, the portion thereof that is attributable to an
Unrestricted Subsidiary.
"Consolidated Interest Expense" for the Company means for any period the
consolidated interest expense included in the Company's consolidated statement
of earnings (without deduction of interest income) for such period in accordance
with GAAP, including for such period without limitation or duplication (or, to
the extent not so included, with the addition of), (i) the amortization of Debt
discount or premium; (ii) any payments or fees with respect to letters of
credit, bankers acceptances or similar facilities; (iii) fees with respect to
interest rate swap or similar agreements or foreign currency hedge, exchange or
similar agreements; (iv) Preferred Stock dividends declared and payable in cash;
(v) interest (including accrued interest) on the Securities and any
substantially similar securities; and (vi) the portion of any rental obligation
allocable to interest expense; excluding, however, the portion of such
consolidated interest expense (and the portion of each of the foregoing items
(i) through (vi)) that is attributable to an Unrestricted Subsidiary.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or not
contingent, (i) every obligation of such Person for money borrowed, (ii) every
obligation of such Person evidenced by bonds, debentures, notes or other similar
instruments, including obligations Incurred in connection with the acquisition
of property, assets or businesses, (iii) every reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (iv) every obligation of such
Person issued or assumed as the deferred purchase price of property or services
(but excluding trade accounts payable or accrued liabilities arising in the
ordinary course of business), (v) every Capital Lease Obligation of such Person,
(vi) the amount of all Redeemable Stock of such Person, (vii) every obligation
to pay rent or other payment amounts of such Person with respect to any Sale and
Leaseback Transaction to which such Person is a party and (viii) every
obligation of the type referred to in Clauses (i) through (vii) of another
Person and all dividends of another Person the payment of which, in either case,
such Person has guaranteed or is responsible or liable, directly or indirectly,
as obligor, guarantor or otherwise. The "amount" or "principal amount" of Debt
at any time of determination as used herein represented by (a) any contingent
Debt, shall be the maximum principal amount thereof, (b) any Debt issued at a
price that is less than the principal amount at maturity thereof, shall be the
amount of the liability in respect thereof determined in accordance with GAAP
and (c) any Redeemable Stock, shall be the maximum fixed redemption or
repurchase price in respect thereof.
"Future Development Projects" means mining and milling projects other than
those associated with the currently existing operations commonly known as Round
Mountain, McCoy/Cove, Lupin and Kettle River, and currently contemplated
operations at Aquarius and Paredones Amarillos.
"GAAP" means generally accepted accounting principles in Canada as in
effect on the date of original issuance of the Securities and applied on a basis
consistent with prior periods.
"guarantee" by any Person means any obligations, contingent or otherwise,
of such Person guaranteeing, or giving the economic effect of guaranteeing, any
Debt of any other Person (the "primary obligor") in any manner, whether directly
or indirectly, and including, without limitation, any obligation of such Person,
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Debt or to purchase (or to advance or supply funds for the purchase of)
any security for the payment of
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such Debt, (ii) to purchase property, securities or services for the purpose of
assuring the holder of such Debt of the payment of such Debt, or (iii) to
maintain working capital, equity capital or other financial statement condition
or liquidity of the primary obligor so as to enable the primary obligor to pay
such Debt (and "guarantee", "guaranteeing" and "guarantor" shall have meanings
correlative to the foregoing); provided, however, that the guarantee by any
Person shall not include endorsements by such Person for collection or deposit,
in either case, in the ordinary course of business.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Debt or other obligation
including by acquisition of Subsidiaries or the recording, as required pursuant
to GAAP or otherwise, of any such Debt or other obligation on the balance sheet
of such Person (and "Incurrence", "Incurred", "Incurrable" and "Incurring" shall
have meanings correlative to the foregoing); provided, however, that a change in
GAAP that results in an obligation of such Person that exists at such time
becoming Debt shall not be deemed an Incurrence of such Debt.
"Permitted Hedging Agreement" of any Person means any agreement entered
into with one or more financial institutions in the ordinary course of business
that is designed to reduce costs or protect such Person against fluctuations in
interest rates, currency exchange rates or commodity prices and which reasonably
relates to then existing Debt or other financial obligations, assets then held,
commodities used in the business or production of such Person, and not, in any
such case, for purposes of speculation.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of such Person of any class or classes (however designated) that
ranks prior, as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of such
Person, to shares of Capital Stock of any other class of such Person.
"Purchase Money Obligations" of any Person means Debt of such Person
secured by a Lien on real or personal property of such Person which Debt (a)
constitutes all or a part of the purchase price or construction cost of such
property or (b) is Incurred prior to, at the time of or within 270 days after
the acquisition or substantial completion of such property for the purpose of
financing all or any part of the purchase price or construction cost thereof;
provided, however, that (w) the Debt so Incurred does not exceed 100% of the
purchase price or construction cost of such property, (x) such Lien does not
extend to or cover any property other than such item of property and any
improvements on such item, (y) the purchase price or construction cost for such
property is or should be included in "addition to property, plant and equipment"
in accordance with GAAP and (z) the purchase or construction of such property is
not part of any acquisition of a Person or business unit or line of business.
"Restricted Subsidiary" means any Subsidiary of the Company, whether
existing on or after the date of the Indenture, unless such Subsidiary is an
Unrestricted Subsidiary.
"Redeemable Stock" of any Person means any equity security of such Person
that by its terms or otherwise is required to be redeemed prior to the final
stated maturity of the Securities or is redeemable at the option of the holder
thereof at any time prior to the final stated maturity of the Securities.
"Sale and Leaseback Transaction" of any Person means an arrangement with
any lender or investor or to which such lender or investor is a party providing
for the leasing by such Person of any property or asset of such Person which has
been or is being sold or transferred by such Person more than 270 days after the
acquisition thereof or the completion of construction or commencement of
operation thereof to such lender or investor or to any person to whom funds have
been or are to be advanced by such lender or investor on the security of such
property or asset. The stated maturity of such arrangement shall be the date of
the last payment of rent or any other amount due under such arrangement prior to
the first date on which such arrangement may be terminated by the lessee without
payment of a penalty.
"Subsidiary" of any Person means (i) a corporation more than 50% of the
combined voting power of the outstanding Voting Stock of which is owned,
directly or indirectly, by such Person or by one or more other Subsidiaries of
such Person or by such Person and one or more Subsidiaries thereof, (ii) any
other Person (other than a corporation) in which such Person, or one or more
other Subsidiaries of such Person or such Person and one or more other
Subsidiaries thereof, directly or indirectly, has at least a majority
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ownership and power to direct the policies, management and affairs thereof or
(iii) any other Person not described in clauses (i) and (ii) above in which such
Person, or one or more other Subsidiaries of such Person or such Person and one
or more other Subsidiaries thereof, directly or indirectly, has a 50% ownership
and the power, pursuant to a written contract or agreement, to direct the
policies and management or the financial and other affairs thereof.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company, without the consent of any holders of the Securities, may
consolidate with or merge into, or transfer or lease its assets substantially as
an entirety (treating the Company and each of its subsidiaries as a single
consolidated entity) to, any corporation, and any other corporation may
consolidate with or merge into, or transfer or lease its assets substantially as
an entirety to, the Company, provided that the corporation (if other than the
Company) formed by such consolidation or into which the Company is merged or
which acquires or leases the assets of the Company substantially as an entirety
is organized and existing under the laws of the United States of America or
Canada or any political subdivision of either, and assumes the Company's
obligations under the Securities and the Indenture and that the Trustee is
satisfied that the transaction will not result in the successor being required
to make any deduction or withholding on account of certain Canadian taxes from
any payments in respect of the Securities, and that, after giving effect to such
transaction, no Event of Default, and no event which, after notice or lapse of
time or both, would become an Event of Default, shall have occurred and be
continuing, and the delivery of an officer's certificate and an opinion of
counsel with respect to compliance with the foregoing requirements.
EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events which has occurred and is continuing constitutes an "Event of Default"
with respect to the Securities:
(i) failure for 30 days to pay interest on the Securities in cash when
due (including pursuant to the "Common Shares Payment Election" described
above); provided that a valid extension of an interest payment period by
the Company pursuant to the "Option to Extend Interest Period" provisions
described above shall not constitute a default in the payment of interest
for this purpose;
(ii) failure to pay principal or premium, if any, on the Securities
when due whether at maturity, upon redemption, by declaration, upon the
valid tender of Capital Securities pursuant to a Change of Control Offer or
otherwise;
(iii) the occurrence of a Change of Control, unless cured by a Change
of Control Offer pursuant to the terms of the Indenture;
(iv) failure to observe or perform any other covenant contained in the
Indenture for 60 days after written notice thereof to the Company from the
Trustee or the holders of at least 25% in principal amount of the
outstanding Securities; or
(v) certain events of bankruptcy, insolvency or reorganization of the
Company under a bankruptcy or insolvency law.
The holders of a majority in aggregate principal amount of the Securities
outstanding have the separate right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee. The Trustee
or the holders of not less than 25% in aggregate principal amount of the
Securities outstanding may declare the principal of and the interest on the
Securities (including accrued interest, if any) and any other amounts payable
under the Indenture with respect to the Securities to be forthwith due and
payable immediately upon an Event of Default described in subparagraphs (i)
through (v) of the preceding paragraph, except that upon the occurrence of an
Event
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of Default specified in (v) above, the principal amount of all Securities shall
be immediately due and payable without notice. However, the holders of a
majority in aggregate principal amount of the Securities outstanding may, before
a judgment or decree on such acceleration has been obtained, annul any such
declaration or acceleration and waive the default if the default has been cured
or waived and a sum sufficient to pay all matured installments of interest and
principal due otherwise than by acceleration and any applicable premium has been
deposited with the Trustee.
The Indenture provides that, subject to the duty of the Trustee during an
Event of Default to act with the required standard of care, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request or direction of any of the holders, unless such holders shall
have offered to the Trustee reasonable security or indemnity. Subject to certain
provisions, including those requiring security or indemnification of the
Trustee, the holders of a majority in principal amount of the Securities will
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee, or exercising any trust or power
conferred on the Trustee, with respect to the Securities.
No holder of a Security will have any right to institute any proceeding
with respect to the Indenture or for any remedy thereunder, unless such holder
shall have previously given to the Trustee written notice of a continuing Event
of Default and unless also the holders of at least 25% in aggregate principal
amount of the outstanding Securities shall have written requests, and offered
reasonable indemnity, to the Trustee to institute such proceeding as trustee,
and the Trustee shall not have received from the holders of a majority in
aggregate principal amount of the outstanding Securities a direction
inconsistent with such request and shall have failed to institute such
proceeding within 60 days. However, such limitations do not apply to a suit
instituted by a holder of a Security for enforcement of payment of the principal
of and interest on such Security on or after the respective due dates expressed
in such Security.
The Company will be required to furnish to the Trustee annually a statement
as to the performance by the Company of its obligations under the Indenture and
as to any default in such performance.
MODIFICATION AND WAIVER
Without the consent of any holder of Securities, the Company and the
Trustee may amend or supplement the Indenture or the Securities to cure any
ambiguity, defect or inconsistency, or to make any change that does not
adversely affect the rights of any holder of Securities. Other modifications and
amendments of the Indenture may be made by the Company and the Trustee with the
consent of the holders of not less than a majority in aggregate principal amount
of the outstanding Securities; provided, however, that no such modification or
amendment may, without the consent of the holder of each outstanding Security
affected thereby: (a) change the stated maturity of the principal of, or any
installment of principal of, or premium, if any, or interest on any Security;
(b) reduce the principal amount of, the rate of interest on, or the premium, if
any, payable upon the redemption or repurchase following a Change of Control of,
any Security; (c) change the place or currency of payment of principal of,
premium, if any, or interest on any Security; (d) impair the right to institute
suit for the enforcement of any payment on or with respect to any Security on or
after the stated maturity or redemption date thereof; (e) modify the
subordination provisions applicable to Securities in a manner adverse to the
holders thereof; (f) reduce the percentage in principal amount of outstanding
Securities, the consent of the holders of which is required for modification or
amendment of the Indenture or for waiver of compliance with certain provisions
of the Indenture or for waiver of certain defaults or (g) modify any of the
provisions of certain sections as specified in the Indenture including the
provisions summarized in this paragraph, except to increase any such percentage
or to designate additional provisions of the Indenture which cannot be modified
or waived without the consent of the holder of each outstanding Security
affected thereby.
The holders of at least a majority in principal amount of the outstanding
Securities may on behalf of the holders of all Securities waive compliance by
the Company with certain covenants of the Indenture. The holders of not less
than a majority in principal amount of the outstanding Securities may, on behalf
of the holders of all Securities, waive any past default under the Indenture,
except a default in the payment of the principal of, premium, if any, or
interest on, any Security or in respect of a provision which under the
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Indenture cannot be modified or amended without the consent of the holder of
each outstanding Security affected thereby.
DEFEASANCE
The Company at its option (i) will be discharged from any and all
obligations in respect of the Securities (except for certain obligations to
register the transfer or exchange of Securities, to replace destroyed, stolen,
lost or mutilated Securities, and to maintain an office or agency in respect of
the Securities and hold moneys for payment in trust) or (ii) will be released
from its obligations to comply with the covenants described above under "Certain
Covenants," and the occurrence of an event described in clause (iv) under
"Events of Default" above with respect to any defeased covenants shall no longer
be an Event of Default, if in either case the Company irrevocably deposits with
the Trustee, in trust, money, Government Obligations of the government issuing
the currency in which the Securities are denominated or a combination thereof
that through the payment of interest thereon and principal thereof in accordance
with the terms will provide money in an amount sufficient to pay all the
principal of and premium, if any, and interest on the Securities on the dates
such payments are due (up to the stated maturity date, or the Redemption Date,
as the case may be) in accordance with the terms of the Securities. Such a trust
may only be established if, among other things, (a) no Event of Default
described under "Events of Default" above or event that, after notice or lapse
of time, or both, would become an Event of Default under the Indenture, shall
have occurred and be continuing on the date of such deposit, (b) the Company
shall have delivered an Opinion of Counsel to the effect that the holders of the
Securities will not recognize gain or loss for United States Federal income tax
purposes as a result of such deposit or defeasance and will be subject to United
States Federal income tax in the same manner as if such defeasance had not
occurred, and (c) such defeasance or covenant defeasance will not result in the
trust being in violation of the Investment Company Act of 1940, as amended. Such
opinion, in the case of defeasance under clause (i) above, must refer to and be
based upon a ruling of the Internal Revenue Service or a change in applicable
Federal income tax law occurring after the date of the Indenture. In the event
the Company omits to comply with its remaining obligations under the Indenture
after a defeasance of such with respect to the Securities as described under
clause (ii) above and the Securities are declared due and payable because of the
occurrence of any undefeased Events of Default, the amount of money and
Government Obligations on deposit with the Trustee may be insufficient to pay
amounts due on the Securities at the time of the acceleration resulting from
such Event of Default. However, the Company will remain liable in respect to
such payments.
Notwithstanding the description set forth under "Subordination" above, in
the event that the Company deposits money or Government Obligations in
compliance with the Indenture in order to defease all or certain of its
obligations with respect to the Securities, the money or Government Obligations
so deposited will not be subject to the subordination provisions of the
Indenture and the indebtedness evidenced by the Securities will not be
subordinated in right of payment to the holders of applicable Senior
Indebtedness to the extent of the money or Government Obligations so deposited.
REGARDING THE TRUSTEE
The Indenture contains certain limitations on the right of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize for its own account on certain property received in
respect of any such claim as security or otherwise. The Trustee will be
permitted to engage in certain other transactions; however, if it acquires any
conflicting interest and there is a default under the Securities, it must
eliminate such conflict or resign.
THE DEPOSITORY, BOOK ENTRY AND SETTLEMENT
DTC will act as securities depository for the Securities. The Securities
will be issued only as global fully registered securities (each a "Global
Security") registered in the name of Cede & Co. (DTC's nominee). One or more
fully registered Global Security certificates, representing the total aggregate
number of Securities, will be issued and will be deposited with DTC.
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The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in the global Securities
as represented by a global certificate.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing Company" within the meaning of
the New York Uniform Commercial Code and a "clearing agency" registered pursuant
to the provisions of Section 17A of the Exchange Act. DTC holds securities that
its participants ("Participants") deposit with DTC. DTC also facilitates the
settlement among Participants of securities transactions, such as transfers and
pledges, in deposited securities through electronic computerized book-entry
changes in Participants' accounts, thereby eliminating the need for physical
movement of securities certificates. Direct Participants include securities
brokers and dealers, banks, trust companies, clearing companies and certain
other organizations ("Direct Participants"). DTC is owned by a number of its
Direct Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others, such as securities brokers and
dealers, banks and trust companies that clear transactions through or maintain a
custodial relationship with a Direct Participant either directly or indirectly
("Indirect Participants"). The rules applicable to DTC and its Participants are
on file with the Securities and Exchange Commission.
Purchases of Securities within the DTC system must be made by or through
Direct Participants, which will receive a credit for the Securities on DTC's
records. The ownership interest of each actual purchaser of each Security
("Beneficial Owner") is in turn to be recorded on the Direct and Indirect
Participants' records. Beneficial Owners will not receive written confirmation
from DTC of their purchases, but Beneficial Owners are expected to receive
written confirmation providing details of the transactions, as well as periodic
statements of their holdings, from the Direct or Indirect Participants through
which the Beneficial Owners hold Securities. Transfers of ownership interests in
the Securities will be accomplished by entries made on the books of Participants
acting on behalf of Beneficial Owners. Beneficial Owners will not receive
certificates representing their ownership interests in the Securities, except in
the event that use of the book-entry system for the Securities is discontinued.
To facilitate subsequent transfers, all the Securities deposited by
Participants with DTC will be registered in the name of DTC's nominee, Cede &
Co. The deposit of Securities with DTC and their registration in the name of
Cede & Co. will effect no change in beneficial ownership. DTC will have no
knowledge of the actual Beneficial Owners of the Securities. DTC's records will
reflect only the identity of the Direct Participants to whose accounts such
Securities are credited, which may or may not be the Beneficial Owners. The
Participants will remain responsible for keeping account of their holdings on
behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements
that may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the
Securities, are being redeemed, DTC's practice is to determine by lot the amount
of the interest of each Direct Participant in such Securities to be redeemed.
Neither DTC nor Cede & Co. will itself consent or vote with respect to the
Securities. Under its usual procedures, DTC will mail an omnibus proxy to the
Direct Participants as soon as possible after the relevant record date. The
omnibus proxy assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts the Securities are credited on the record date
(identified in a listing attached to the omnibus proxy). The Company believes
that the arrangement among DTC, Direct and Indirect Participants, and Beneficial
Owners will enable the Beneficial Owners to exercise rights equivalent in
substance to the rights that can be directly exercised by a holder of a
Security.
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Payments of interest on the Securities will be made to DTC. DTC's practice
is to credit Direct Participant's accounts on the relevant payment date in
accordance with their respective holdings shown on DTC's records unless DTC has
reason to believe that it will not receive payments on such payment date.
Payments by Participants to Beneficial Owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the account of customers in bearer form or registered in "street name", and such
payments will be the responsibility of such Participants and not of DTC or the
Company, subject to any statutory or regulatory requirement to the contrary that
may be in effect from time to time. Payment of interest to DTC is the
responsibility of the Company, disbursements of such payments to Direct
Participants is the responsibility of DTC, and disbursement of such payments to
the Beneficial Owners is the responsibility of Direct and Indirect Participants.
Except as provided herein, a Beneficial Owner in a Global Security
certificate will not be entitled to receive physical delivery of Securities.
Accordingly, each Beneficial Owner must rely on the procedures of DTC, the
Direct Participants and the Indirect Participants to exercise any rights under
the Securities.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company believes to be reliable, but the
Company takes no responsibility for the accuracy thereof.
Neither the Company nor the Trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in a Global Security or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
DISCONTINUANCE OF DTC'S SERVICES
A Global Security shall be exchangeable for Securities registered in the
names of persons other than DTC or its nominee or a successor depository or its
nominee only if (i) DTC or such successor depository, as applicable, notifies
the Company that it is unwilling or unable to continue as a depository for such
Global Security and no successor depository shall have been appointed by the
Company within 90 days after the Company receives notice or becomes aware of
such condition, (ii) DTC or such successor depository, as applicable, at any
time, ceases to be a clearing agency registered under the Exchange Act at which
time DTC or such successor depository, as applicable, is required to be so
registered to act as such depository and no successor depository shall have been
appointed, (iii) the Company, in its sole discretion, determines that such
Global Security shall be so exchangeable or (iv) there shall have occurred an
Event of Default with respect to the Securities. Any Global Security that is
exchangeable pursuant to the preceding sentence shall be exchangeable for
Securities registered in such names as DTC or such successor depository, as
applicable, shall direct. It is expected that such instructions will be based
upon directions received by DTC from its Participants or such successor
depository from its participants with respect to ownership of beneficial
interests in such Global Security.
ENFORCEABILITY OF JUDGMENTS
Since a substantial portion of the Company's assets are located outside the
United States, any judgment obtained in the United States against the Company,
including any judgment with respect to the payment of principal or interest on
the Securities, may not be collectible within the United States.
The Company has been informed by its Canadian counsel, Milner Fenerty, that
the laws of the Province of Alberta permit an action to be brought in a court of
competent jurisdiction in that province on any final and conclusive judgment
against the Company for a fixed sum of money of any federal or state court
located in The City of New York (a "New York Court") with respect to the
enforcement of the Indenture and the Securities, provided that (i) the judgment
is not impeachable as void or voidable under the internal laws of the State of
New York; (ii) the court rendering such judgment had jurisdiction over the
Company according to the conflict of laws rules of Alberta (submission by the
Company in the Indenture to the jurisdiction of the New York Court will be
sufficient for this purpose); (iii) such judgment was not obtained by fraud or
in a manner contrary to natural justice and the enforcement thereof would not be
inconsistent with public policy, as such terms are applied under the laws of
Alberta; (iv) the enforcement of such judgment does not constitute, directly or
indirectly, the enforcement of foreign revenue, expropriatory or penal laws; and
(v) the action to enforce such judgment is commenced within
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the applicable limitation period. In the opinion of such counsel, there are
currently no reasons under the laws of Alberta for avoiding recognition of such
judgments of a New York Court based upon public policy.
CONSENT TO JURISDICTION
The Indenture provides that the Company will irrevocably appoint CT
Corporation System, 1633 Broadway, New York, New York 10019 as its authorized
agent for service of process in any legal action or proceeding arising out of or
relating to the Indenture or the Securities and for actions brought under
federal or state securities laws or for actions brought by the Trustee in any
New York Court, and will irrevocably submit to the nonexclusive jurisdiction of
the New York Courts for such purposes.
GOVERNING LAW
The Indenture and the Securities will be governed by, and construed in
accordance with, the laws of the State of New York.
TAX CONSIDERATIONS
UNITED STATES FEDERAL INCOME TAXATION
General
The following is a summary of the principal United States ("US") Federal
income tax considerations that may be relevant to prospective purchasers of
Securities who are US Holders. As used herein, a "US Holder" means a holder of a
Security who is a "US person", but excludes US persons subject to special
provisions of US Federal income tax law, such as tax-exempt organizations,
financial institutions, insurance companies, broker-dealers, persons having a
"functional currency" other than the United States dollar and holders that will
hold Securities as a position in a "straddle", as part of a "synthetic security"
or "hedge", or as part of a "conversion transaction" or other integrated
investment. Subject to the discussion below, a US person is a citizen or
individual resident of the United States, a corporation or partnership created
or organized in or under the laws of the United States, or of any political
subdivision thereof, or an estate or trust, the income of which is includible in
its gross income for US Federal income tax purposes without regard to its
source, and any other person subject to US Federal income tax or net income. For
taxable years beginning after December 31, 1996, or if the trustee of a trust
elects to apply the following definition to an earlier taxable year, a trust is
a US person if, and only if, (i) a court within the United States is able to
exercise primary supervision over the administration of the trust and (ii) one
or more US trustees have the authority to control all substantial decisions of
the trust. Trusts should consult their tax advisors regarding their status under
these rules.
This section is based upon current provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), existing Treasury Regulations thereunder and
current administrative rulings and court decisions, all of which are subject to
change, possibly retroactively. Subsequent changes may cause tax consequences to
vary substantially from the tax consequences described herein.
The following discussion does not address all aspects of US Federal income
taxation that might be relevant to a particular US Holder in light of the US
Holder's particular circumstances, or to certain types of persons subject to
special provisions of US Federal income tax law, such as those excluded from the
definition of a US Holder, and does not discuss any aspect of estate or
inheritance or state, local and foreign tax laws. This discussion is limited to
the US Federal income tax consequences to US Holders who will hold the
Securities as capital assets. Accordingly, each prospective US Holder should
consult, and depend on, his, her or its tax advisor in analyzing the US Federal,
state, local and foreign tax consequences of the purchase, ownership and
disposition of Securities.
Classification of the Securities
Based upon the advice of counsel, the Company believes, and the following
discussion assumes, that the Securities will be classified as indebtedness of
the Company for US Federal income tax purposes. There would not be a material
effect on US Holders if the Securities were not classified as indebtedness.
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Original Issue Discount
Each US Holder will be required to include in its gross income any original
issue discount ("OID") accrued with respect to the US Holder's Securities. All
of the stated interest that accrues on the Securities will be treated as OID
because the Company has the right to defer payments of interest on the
Securities by extending interest payment periods for up to 10 consecutive
semiannual periods. Holders of debt instruments issued with OID must report the
OID as income on an economic accrual basis regardless of the timing of actual
interest payments and without regard to their method of accounting. Actual
payments of stated interest will not be separately reported as taxable income.
The amount of OID that accrues in any month with respect to the Securities
will approximately equal the amount of interest that economically accrues on the
Securities at the stated interest rate during such month. Such accrual will
continue on a compounding basis during any period in which a payment of interest
is being deferred.
Stock Payment Mechanism
As described under "Description of the Securities -- Common Shares Payment
Election," the Company may satisfy its obligation to pay Deferred Interest on
any applicable Interest Payment Date by delivering Common Shares to the Trustee.
A US Holder then would be entitled to receive, on the Interest Payment Date, a
cash payment from the proceeds of the sale of the Common Shares equal to the
amount of the Deferred Interest. While not free from doubt, an election by the
Company to pay Deferred Interest by delivering Common Shares to the Trustee
should not affect the amount of OID required to be reported by a US Holder.
Market Discount and Bond Premium
Holders of Securities other than the Initial Holders may acquire their
Securities with market discount, acquisition premium or bond premium, as such
terms are defined for US Federal income tax purposes. Such holders are advised
to consult their tax advisors as to the income tax consequences of the
acquisition, ownership and disposition of the Securities.
Sales and Redemptions
A US Holder will generally recognize gain or loss on the sale or other
taxable disposition of a Security, including a redemption for cash, equal to the
difference between the amount realized and the US Holder's adjusted tax basis in
the Security sold or redeemed. A US Holder's adjusted tax basis in the
Securities generally will be its initial purchase price, increased by the amount
of OID previously includible in such US Holder's gross income through the date
of disposition, and decreased by payments received on the Securities. Such gain
or loss generally will be a capital gain or loss, and generally will be a
long-term capital gain or loss if the Securities have been held for more than
one year.
Source of Income
OID accrued with respect to the Securities generally will be treated as
having a source outside the United States. While a US Holder will be subject to
tax in the United States on accrued OID regardless of its source, the source of
such income may be relevant for other purposes such as the utilization of
foreign tax credits.
Information Reporting
The Company will report the OID that accrues in a year with respect to the
Securities, and any amounts paid in redemption of the Securities, annually to
the holders of record of the Securities and the Internal Revenue Service.
Backup Withholding Tax
Payments made on, and proceeds from the sale of, Securities may be subject
to a "backup" withholding tax of 31% unless the holder complies with certain
identification requirements. Any withheld
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amounts will generally be allowed as a credit against the US Holder's Federal
income tax, provided the required information is timely filed with the Internal
Revenue Service.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the principal Canadian federal income tax
consequences generally applicable to a purchaser of Securities (a "Holder") who,
at all relevant times, is not a resident of Canada for purposes of the Income
Tax Act (Canada) (the "ITA") and who deals at arm's length with the Company.
This summary is based upon the current provisions of the ITA and the
regulations passed pursuant to the ITA (the "ITA Regulations") in force as of
the date of this Prospectus Supplement, and any proposals to amend the ITA and
ITA Regulations publicly announced by the date of this Prospectus Supplement by
the federal Minister of Finance. This description is not exhaustive of all
Canadian federal income tax consequences and does not anticipate any changes in
law whether by legislative, governmental or judicial action other than the
passage of such publicly announced proposed amendments to the ITA or ITA
Regulations, nor does it take into account provincial, territorial or foreign
tax considerations which may differ from those discussed in this Prospectus
Supplement.
This summary is not intended to be, nor should it be construed to be, legal
or tax advice to any particular Holder. Prospective Holders of Securities should
consult their own Canadian tax advisors with respect to the Canadian income tax
consequences associated with their participation in this Offering.
A Holder who acquires Securities will be exempt from Canadian withholding
tax in respect of interest paid or credited to a Holder in respect of the
Securities. There are no other taxes on income or capital gains payable under
the ITA in respect of the holding, redemption or disposition of the Securities
or the receipt of interest by a Holder who does not use or hold the Securities
in carrying on a business in Canada for the purposes of the ITA and, in the case
of a Holder who carries on an insurance business in Canada and elsewhere, who
uses or holds the Securities in the course of carrying on its insurance business
outside Canada and can establish that the Securities are not effectively
connected with its insurance business carried on in Canada.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
and the Pricing Agreement, the Company has agreed to sell to Goldman, Sachs &
Co. ("Goldman Sachs"), and Goldman Sachs have agreed to purchase, the entire
principal amount of the Securities.
Under the terms and conditions of the Underwriting Agreement, Goldman Sachs
are committed to take and pay for all of the Securities, if any are taken.
Goldman Sachs propose to offer the Securities in part directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus Supplement and in part to certain securities dealers at such price
less a concession of 2.0% of the principal amount of the Securities. Goldman
Sachs may allow, and such dealers may reallow, a concession not to exceed 0.25%
of the principal amount of the Securities to certain brokers and dealers. After
the Securities are released for sale to the public, the offering price and other
selling terms may from time to time be varied by Goldman Sachs.
The Company has agreed that, during the period beginning from the date of
the Pricing Agreement and continuing to and including the date of original
issuance of the Securities, it will not offer, sell, contract to sell or
otherwise dispose of any Securities, any capital securities or any other
securities of the Company that are substantially similar to the Securities,
including any guarantee of such securities, or any securities convertible into
or exchangeable for or representing the right to receive Securities, capital
securities or any such substantially similar securities of the Company, without
the prior written consent of Goldman Sachs, except for the Securities offered in
connection with this offering.
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The Securities are a new issue of securities with no established trading
market. The Securities will not be listed on any securities exchange. The
Company has been advised by Goldman Sachs that they intend to make a market in
the Securities but are not obligated to do so and may discontinue market making
at any time without notice. No assurance can be given as to the liquidity of the
trading market for the Securities.
In connection with the offering, Goldman Sachs may purchase and sell the
Securities in the open market. These transactions may include overallotment and
stabilizing transactions and purchases to cover short positions created by
Goldman Sachs in connection with the offering. Stabilizing transactions consist
of certain bids or purchases for the purpose of preventing or retarding a
decline in the market price of the Securities; and short positions created by
Goldman Sachs involve the sale by Goldman Sachs of a greater number of
Securities than they are required to purchase from the Company in the offering.
Goldman Sachs also may impose a penalty bid, whereby selling concessions allowed
to broker-dealers in respect of the Securities sold in the offering may be
reclaimed by Goldman Sachs if such Securities are repurchased by Goldman Sachs
in stabilizing or covering transactions. These activities may stabilize,
maintain or otherwise affect the market price of the Securities, which may be
higher than the price that might otherwise prevail in the open market. These
transactions may be effected in the over-the-counter market or otherwise, and
these activities, if commenced, may be discontinued at any time.
The Company has agreed to indemnify Goldman Sachs against certain
liabilities, including liabilities under the Securities Act of 1933.
The Securities have not been and will not be qualified for sale under the
securities laws of Canada or any province or territory of Canada. The Securities
may not be offered or sold, and Goldman Sachs have agreed not to offer or sell
the Securities, directly or indirectly, in Canada, or to or for the benefit of
any resident thereof, in violation of the securities laws of Canada or any
province or territory of Canada.
Goldman Sachs or their affiliates have provided from time to time, and
expect to continue to provide in the future, investment banking services to the
Company and its affiliates, for which Goldman Sachs or their affiliates have
received or will receive customary fees and commissions.
VALIDITY OF SECURITIES
The validity of the Securities to be issued pursuant to the Offering will
be passed upon for the Company by Milner Fenerty, Calgary, Alberta, Canada, and
for the Underwriters by Cravath, Swaine & Moore, New York, New York. Certain
matters will be passed upon for the Company by Davis, Graham & Stubbs LLP,
Denver, Colorado.
EXPERTS
The reserve estimation methodology used by the Company in preparing its
estimates of ore reserves at Aquarius appearing herein and incorporated by
reference in the Prospectus has been verified by the Company's external
geological engineering consultants, FSS Canada Consultants Inc. The reserve
estimation methodology used by the Company in preparing its estimates of ore
reserves at Paredones Amarillos appearing herein and incorporated by reference
in the Prospectus has been verified by the Company's external geological
engineering consultants, H.A. Simons Ltd. Such estimates are included herein in
reliance upon the authority of such firms as experts in such matters.
The consolidated financial statements of Echo Bay Mines Ltd. appearing
elsewhere herein and in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, have been audited by Ernst & Young, independent
chartered accountants, as set forth in their report thereon included herein and
incorporated in Registration Statement (No. 33-77738) by reference. Such
consolidated financial statements are presented herein and incorporated in
Registration Statement (No. 33-77738) by reference in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
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ECHO BAY MINES LTD.
DEBT SECURITIES
GUARANTEES
COMMON SHARES
---------------------
ECHO BAY RESOURCES, INC.
GUARANTEED DEBT SECURITIES
---------------------
Echo Bay Mines Ltd. (the "Company" or "Echo Bay") may offer from time to
time (i) Debt Securities ("Debt Securities"), consisting of debentures, notes,
bonds and/or other unsecured evidences of indebtedness in one or more series,
(ii) unconditional and irrevocable guarantees ("Guarantees") of Debt Securities
issued by Echo Bay Resources, Inc. ("EBR"), a wholly-owned subsidiary of the
Company, or (iii) Common Shares without par value ("Common Shares"). EBR may
offer from time to time guaranteed Debt Securities, consisting of debentures,
notes or other unsecured evidences of indebtedness in one or more series,
guaranteed by the Company. The foregoing securities are collectively referred to
as the "Securities". Any Securities may be offered with other Securities or
separately (except for Guarantees which may only be offered with Debt Securities
of EBR). Securities may be sold for U.S. dollars, foreign currency or currency
units, including the European Currency Unit; amounts payable with respect to any
Debt Securities may likewise be payable in U.S. dollars, foreign currency or
currency units, including the European Currency Unit -- in each case, as the
Company (or in the case of Debt Securities issued by EBR, as EBR) specifically
designates. The amounts payable by the Company (or in the case of Debt
Securities issued by EBR, by EBR) in respect of Debt Securities may be
calculated by reference to the value, rate or price of one or more specified
commodities, currencies or indices as set forth in an accompanying Prospectus
Supplement. The Securities will be offered at an aggregate initial offering
price not to exceed U.S. $200,000,000 or the equivalent (based on the applicable
exchange rate at the time of sale), if Debt Securities of the Company or EBR are
issued in principal amounts denominated in one or more foreign currencies or
currency units as shall be designated by the Company or EBR, as the case may be,
at prices and on terms to be determined at the time of sale.
SEE "RISK FACTORS" FOR CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN
THE SECURITIES.
This Prospectus will be supplemented by one or more accompanying Prospectus
Supplements, which will set forth with regard to the particular Securities in
respect of which this Prospectus is being delivered (i) in the case of Debt
Securities, the Issuer (which may be the Company or EBR), title, aggregate
principal amount, currency of denomination, maturity, interest rate, if any
(which may be fixed or variable), or method of calculation thereof, time of
payment of any interest, any terms for redemption at the option of the Company,
EBR or the holder, any terms for sinking fund payments, any index or other
method used to determine the amounts payable, the ranking of such Debt
Securities (whether senior, senior subordinated or subordinated), any conversion
or exchange rights, at the option of the Company, EBR or the holder, any listing
on a securities exchange, whether such Debt Securities will be Guaranteed, the
initial public offering price and any other terms in connection with the
offering and sale of such Debt Securities, and (ii) in the case of Common
Shares, the number of Common Shares and the terms of the offering thereof. The
Prospectus Supplement will also contain information, as applicable, about
certain United States and Canadian Federal income tax considerations relating to
the Securities in respect of which this Prospectus is being delivered.
The Company and EBR may sell Securities to or through one or more
underwriters, and may also sell Securities directly to other purchasers or
through agents. Such underwriters may include Goldman, Sachs & Co., and in
Canada, Burns Fry Limited. See "Plan of Distribution". Each Prospectus
Supplement will set forth the names of any underwriters, dealers or agents
involved in the sale of the Securities in respect of which this Prospectus is
being delivered, and any applicable fee, commission or discount arrangements
with them.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENCE.
---------------------
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES UNLESS
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
The date of this Prospectus is July 15, 1994.
<PAGE> 77
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities of
the Commission at 450 Fifth Street N.W., Washington, D.C. 20549; and at its
regional offices located at Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661-2511; and 13th Floor, 7 World Trade Center, New York, New York
10048. Copies of such material can be obtained by mail from the Public Reference
Section of the Commission at 450 Fifth Street N.W., Washington, D.C. 20549, at
prescribed rates. Such reports, proxy statements and other information
concerning the Company can also be inspected and copied at the offices of the
American Stock Exchange, 86 Trinity Place, New York, New York 10006.
EBR is a wholly-owned subsidiary of the Company. It currently is not
independently subject to the information requirements of the Exchange Act. EBR
expects to receive a conditional exemption pursuant to Section 12(h) of the
Exchange Act from the informational requirements of such Act and anticipates
that no independent reports concerning EBR will be sent to holders of Debt
Securities issued by EBR.
The Company and EBR have filed with the Commission a Registration Statement
on Form S-3 (herein, together with all amendments and exhibits, referred to as
the "Registration Statement") under the Securities Act of 1933 (the "Securities
Act") with respect to the securities covered by this Prospectus. This
Prospectus, which forms part of the Registration Statement, does not contain all
of the information set forth in the Registration Statement, certain parts of
which have been omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company, EBR and such
securities, reference is hereby made to such Registration Statement, including
the exhibits filed therewith. The Registration Statement and the exhibits
thereto can be obtained by mail from or inspected and copied at the public
reference facilities maintained by the Commission as provided in the prior
paragraph.
ENFORCEMENT OF CERTAIN CIVIL LIABILITIES
The Company is a Canadian corporation and certain of its directors and
officers, as well as certain of the experts named herein, are neither citizens
nor residents of the United States. A substantial part of the assets of several
of such persons and of the Company are located outside the United States. As a
result, it may be difficult for investors to effect service of process within
the United States upon such persons or to enforce against them or the Company
within the United States judgment of courts of the United States predicated upon
the civil liability provisions of the federal securities laws of the United
States. Milner Fenerty, Canadian counsel to the Company, has advised the Company
that there is doubt as to the enforceability against such persons and the
Company in Canada, in original actions or in actions to enforce judgments of
United States courts, of liabilities predicated solely upon the federal
securities laws of the United States.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated by reference in this Prospectus:
(1) Annual Report on Form 10-K for the year ended December 31, 1993;
(2) Form 10-K/A-1 for the year ended December 31, 1993 filed on July
8, 1994;
(3) Quarterly Report on Form 10-Q for the period ended March 31, 1994;
(4) Form 10-Q/A-1 for the period ended March 31, 1994 filed on July 8,
1994;
(5) Form 8-K dated June 1, 1994 and filed on June 9, 1994; and
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<PAGE> 78
(6) The description of the Common Shares contained in the Company's
Registration Statement on Form 8-A dated August 2, 1983, and any amendment
or report filed for the purpose of updating such description.
All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering
of the securities offered hereby shall be deemed to be incorporated by reference
in this prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference shall be deemed to be modified or superseded for
purposes of this Prospectus to the extent that a statement contained herein or
in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the oral or written request of such person, a
copy of any or all of the documents incorporated herein by reference (other than
exhibits, unless such exhibits are specifically incorporated by reference in
such documents). Requests for such copies should be directed to the Secretary,
Echo Bay Mines Ltd., Suite 1210 ManuLife Place, 10180 -- 101 Street, Edmonton,
Alberta, Canada, T5J 3S4, telephone (403) 496-9002, facsimile: (403) 424-7378.
CANADIAN PROSPECTUSES
The Company has filed with Canadian securities regulatory authorities a
shelf prospectus relating to the potential offering in Canada of up to
10,000,000 common shares (including the Common Shares offered hereunder) and a
shelf prospectus relating to the potential offering in Canada of debt securities
at an aggregate initial offering price of up to U.S. $125,000,000 (including the
Debt Securities offered hereunder). Canadian securities laws do not permit the
use of an unallocated (as between common shares and debt securities) shelf
prospectus.
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<PAGE> 79
THE COMPANY
The Company mines, processes and explores for gold and silver. The
Company's revenues are derived principally from the sale of gold. In 1993 and
the first quarter of 1994, the Company produced a total of 873,890 and 253,218
ounces of gold, respectively, at average cash production costs of $214 and $199
per ounce, respectively. The Company's silver production in 1993 and the first
quarter of 1994 was 12,454,338 and 2,307,925 ounces, respectively.
Echo Bay operates four producing properties: the McCoy/Cove and the 50%
owned Round Mountain mines in Nevada, the Lupin mine in the Northwest
Territories, Canada, and the Kettle River mine in Washington. Echo Bay owns two
major development projects in Alaska: the 100% owned Alaska-Juneau project
("A-J") and the 50% owned Kensington project. The decision to commence
construction at A-J and subsequent production will be contingent on further
engineering for the mine and mill, the resolution of any legal challenges and
the Company obtaining required financing. In addition, Echo Bay has agreed to
acquire from Phelps Dodge Corporation a 55% interest in the Seven-Up Pete Joint
Venture in Montana for $114 million. The primary asset of the joint venture is
the McDonald gold deposit, a development property. Closing of the transaction is
scheduled for mid-July, following the completion of the Company's due diligence
investigation.
The Company's business strategy in recent years has focused on improving
productivity, reducing production costs and reducing debt. Steps which have been
taken to date to achieve these goals include workforce reductions, process
improvements and selective capital expenditures to improve productivity. These
efforts, together with higher production levels, have resulted in lower cash
production costs, which were $199 per ounce of gold in the first quarter of 1994
and $214 per ounce of gold in 1993, compared to $237 per ounce of gold in 1992
and $249 per ounce of gold in 1991. The Company has reduced its outstanding debt
from a high of $415.1 million at June 30, 1990 to $217.3 million at December 31,
1993 and $215.2 million at March 31, 1994. In addition, the Company had $252.5
million and $261.5 million of cash, U.S. treasury notes and other short term
investments at December 31, 1993 and March 31, 1994, respectively.
The Company was incorporated in Canada in 1964. Its executive office is
located at Suite 4050, 370 - 17th Street, Denver, Colorado, 80202, telephone
(303) 592-8000, and its registered office is located at Suite 1210 ManuLife
Place, 10180 - 101 Street, Edmonton, Alberta, Canada , T5J 3S4, telephone (403)
496-9002.
EBR is a wholly-owned subsidiary of the Company which was incorporated
under the laws of the state of Delaware on April 6, 1994. The primary purpose of
EBR is to issue guaranteed Debt Securities and to loan to or invest the proceeds
in the Company or its subsidiaries. EBR will be prohibited from issuing any
capital stock to any person other than the Company and its subsidiaries. EBR
does not now, and in the near future does not expect to, lease or own any
material facilities or operating property. EBR's principal executive offices are
located at Suite 4050, 370 - 17th Street, Denver, Colorado 80202, telephone
(303) 592-8000.
RISK FACTORS
Purchasers of the Securities being offered hereby should carefully read
this entire Prospectus and the documents incorporated by reference herein.
Purchasers should consider, among other things, the risk factors set forth below
as well as any additional risk factors contained in any Prospectus Supplement
delivered herewith.
GOLD AND SILVER PRICES
The profitability of Echo Bay's operations is significantly affected by
changes in the market price of gold and, to a lesser extent, changes in the
market price of silver. Gold prices fluctuate widely and are affected by
numerous factors beyond the Company's control, including expectations with
respect to the rate of inflation, the strength of the U.S. dollar and of other
currencies, interest rates, global and regional
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<PAGE> 80
political and economic crises, major discoveries and production costs in major
gold-producing regions. The demand for and supply of gold also affect prices but
not necessarily in the same manner as such factors affect the prices of other
commodities. Gold price declines may render projects with comparatively high
production costs per ounce temporarily or permanently uneconomic, unless forward
sales or other hedging techniques make realized prices sufficiently higher than
the then achievable spot market prices. Hedging activities protect the Company
against failing prices but may result in the Company being required to sell
production at lower than market prices and may reduce the benefits of price
increases.
RESERVE ESTIMATES
While Echo Bay's ore reserves are believed to be well established, ore
reserve estimates are necessarily imprecise and involve subjective judgments
regarding the presence and grade of mineralization. Should the Company encounter
mineralization or geological or mining conditions at any of its mines or
projects different from those predicted by historical drilling, sampling and
similar examinations, mining plans may have to be altered in a way that might
adversely affect Company operations and reduce its ore reserves.
The price used in estimating the Company's ore reserves at December 31,
1993 was $375 per ounce of gold and $4.50 per ounce of silver. The market prices
for gold and silver have been volatile and if market prices for gold and silver
decline significantly below their current levels and the Company determines that
its reserves should be calculated at significantly lower prices than used at
December 31, 1993, there would likely be a material reduction in the amount of
reserves. Should such reductions occur, material write-downs of the Company's
investment in mining properties and/or increased amortization charges may be
required.
EXPLORATION AND DEVELOPMENT RISKS
Echo Bay's long-term success will be affected by the results of its
development and exploration programs. Although Echo Bay has been able to
successfully replace a substantial portion of reserves produced from its
principal mines, continued replacement of reserves will depend on discovery of
extensions to existing ore reserves and discovery or acquisition of new ore
deposits. Furthermore, the development and operation of new mines requires the
obtaining of permits from relevant government authorities which may not in all
cases be issued, or which may be challenged by citizens' groups on environmental
or other grounds, leading to delays in project startup.
Underground work at Alaska-Juneau was interrupted in March 1994 following
the discovery of fish mortalities downstream from an old tunnel that drains
rainwater which flows through the mine. A "cease and desist" order under Section
309 of the Clean Water Act was issued on March 18, 1994 which prohibited
underground activity at the mine. The order has been modified twice and under
the modifications the Company was able to resume its underground exploration and
development activities in May 1994. In respect to underground exploration
activities, the modifications require the Company to perform in accordance with
an exploration plan following standard industry practices. The modifications do
not impose additional restrictions with respect to underground development
activities, which are subject to normal permitting requirements.
After an extensive investigation by scientific consultants retained by the
Company, no links were found between the mine and the fish mortalities.
MINING RISKS AND INSURANCE
The business of gold mining is subject to many risks and hazards, including
environmental hazards, industrial accidents, unusual or unexpected geological or
mining conditions, pressures, gasses, flooding and gold bullion theft. The
Company maintains general liability insurance of a total of $50 million for
occurrences in any year, which insurance is available for all operations. The
Company may become
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<PAGE> 81
subject to liability for pollution, accidents or other hazards against which it
is uninsured or not adequately insured.
GOVERNMENT REGULATION
Echo Bay's mining operations and exploration activities are subject to
extensive U.S. and Canadian federal, state, provincial, territorial and local
laws and regulations governing prospecting, development, transportation,
production, exports, taxes, labor standards, mine safety and occupational
health. The Company's operations are also subject to laws and regulations
concerning protection of the environment, waste disposal, remediation or
releases of hazardous substances and reclamation of land. These laws and
regulations change periodically and are generally becoming more restrictive,
which may have the effect of increasing future costs. The Company believes that
it is in substantial compliance with all applicable laws and regulations.
The U.S. Congress is actively considering a proposed major revision of the
General Mining Law, which governs mining claims and related activities on
federal public lands. A $100 annual holding fee is now imposed upon each
unpatented mining claim in lieu of the former $100 annual assessment work
requirement. The Senate and House of Representatives each has passed a separate
bill for mining law revision and following conference committee action, a law is
expected in 1994. The Company expects that when this law is effective, it will
impose a royalty upon production of minerals from federal lands, and will
contain new requirements for mined land reclamation and similar environmental
control and reclamation measures. It remains unclear to what extent such new
legislation will affect existing mining claims and operations. The effect of any
revision of the General Mining Law on the Company's U.S. operations cannot be
determined conclusively until such revision is enacted; however such legislation
could materially increase costs at McCoy/Cove, which is primarily located on
federal lands, and could impair the Company's ability to develop mineral
resources on unpatented mining claims. Ore reserves at the Company's other
United States mines and development properties are entirely on private lands,
except at Round Mountain, where approximately 20% of its reserves are on federal
lands.
SUBORDINATED NATURE OF CERTAIN DEBT SECURITIES
Certain Debt Securities may be subordinated in right of payment to all
Senior Indebtedness of the Company or EBR whether now outstanding or hereafter
created, incurred, assumed or guaranteed by the Company or EBR, as the case may
be. The Guarantees may be subordinated in right of payment to all Senior
Indebtedness of the Company. The Indentures under which any Debt Securities will
be issued may not limit the amount of Senior Indebtedness or other indebtedness
that the Company or EBR may incur. In addition, the Debt Securities and the
Guarantees may be effectively subordinated to all liabilities of the Company's
other consolidated subsidiaries. See "The Company" and "Description of Debt
Securities and Guarantees".
USE OF PROCEEDS
Unless a Prospectus Supplement indicates otherwise, the net proceeds to be
received by the Company, or EBR, as the case may be, from the issue and sale
from time to time of the Securities will be added to the general funds of the
Company to be used to finance the Company's operations and for other general
corporate purposes. Pending such application, such net proceeds may be invested
in short-term marketable securities. Each Prospectus Supplement will contain
specific information concerning the use of proceeds from the sale of Securities
to which it relates.
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<PAGE> 82
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for the Company and its subsidiaries
was as follows for the three months ended March 31, 1994 and the five years
ended December 31, 1993:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31,(1) ENDED MARCH 31,
- -------------------------------- ---------------
1989 1990 1991 1992 1993 1994
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
1.8(1) (2) 2.1 (2) 1.2 2.5
</TABLE>
NOTES:
(1) The ratio of earnings to fixed charges (or deficiency) has been computed on
the basis of the Company's results of operations as determined under
accounting principles generally accepted in Canada. There would be no
difference in such ratio (or deficiency) if it were to be computed on the
basis of the Company's results of operations as determined under accounting
principles generally accepted in the United States except for 1989, when the
ratio of earnings to fixed charges would be 2.1.
(2) Earnings were insufficient to cover fixed charges in the following amounts:
for the year ended December 31, 1990, $66.4 million; and for the year ended
December 31, 1992, $36.2 million.
The ratio of earnings to fixed charges has been computed by dividing
earnings from continuing operations available for fixed charges (income from
continuing operations before income taxes and fixed charges expensed) by fixed
charges. Fixed charges consist of interest an all indebtedness, preferred stock
dividends of a subsidiary net of related interest income from related interest
rate swaps, that portion of rental expense that management believes to be
representative of interest expense and capitalized interest.
DESCRIPTION OF DEBT SECURITIES AND GUARANTEES
Debt Securities may be issued from time to time in one or more series by
the Company or by EBR. In the event that any series of Debt Securities is issued
by EBR, such Debt Securities will be offered together with unconditional and
irrevocable guarantees issued by the Company. In the following description,
references to the Issuer refer to the Company, in the case of a series of Debt
Securities issued by the Company, and to the Company and EBR, in the case of a
series of Debt Securities issued by EBR.
The Debt Securities will constitute either indebtedness designated as
Senior Indebtedness ("Senior Debt Securities"), indebtedness designated as
Senior Subordinated Indebtedness ("Senior Subordinated Debt Securities") or
indebtedness designated as Subordinated Indebtedness ("Subordinated Debt
Securities"). The particular terms of each series of Debt Securities offered by
a particular Prospectus Supplement and, if such Debt Securities are offered by
EBR, the particular terms of the Guarantees offered in connection therewith,
will be described therein. Senior Debt Securities, Senior Subordinated Debt
Securities and Subordinated Debt Securities will each be issued under a separate
indenture (individually an "Indenture" and collectively the "Indentures") to be
entered into prior to the issuance of such Debt Securities. The Indentures will
be substantially identical, except for provisions relating to subordination and
Guarantees. See "Subordination of Senior Subordinated Debt Securities,
Subordinated Debt Securities and Guarantees". There will be a separate Trustee
(individually a "Trustee" and collectively the "Trustees") under each Indenture.
Information regarding the Trustee under an Indenture will be included in any
Prospectus Supplement relating to the Debt Securities issued thereunder.
The following discussion includes a summary description of the material
terms of the Indentures, other than terms which are specific to a particular
series of Debt Securities and which will be described in the Prospectus
Supplement relating to such series. The following summaries do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the
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<PAGE> 83
Indentures, including the definitions therein of certain terms capitalized in
this Prospectus. Wherever particular Sections, Articles or defined terms of the
Indentures are referred to herein or in a Prospectus Supplement, such Sections,
Articles or defined terms are incorporated herein or therein by reference.
GENERAL
The Debt Securities will be general unsecured obligations of the Company.
The Indentures do not limit the aggregate amount of Debt Securities which may be
issued thereunder, and Debt Securities may be issued thereunder from time to
time in separate series up to the aggregate amount from time to time authorized
for each series.
Any Debt Security issued by EBR will be unconditionally and irrevocably
guaranteed by the Company as to payment of principal, premium, if any, and
interest.
The applicable Prospectus Supplement or Prospectus Supplements will
describe the following terms of the series of Debt Securities in respect of
which this Prospectus is being delivered: (1) the issuer (which may be the
Company or EBR) and title of such Debt Securities; (2) any limit on the
aggregate principal amount of such Debt Securities; (3) whether any of such Debt
Securities are to be issuable in permanent global form ("Global Security") and,
if so, the terms and conditions, if any, upon which interests in such Debt
Securities in global form may be exchanged, in whole or in part, for the
individual Debt Securities represented thereby; (4) the person to whom any
interest on any Debt Security of the series shall be payable, if other than the
person in whose name the Debt Security is registered on the Regular Record Date;
(5) the date or dates on which such Debt Securities will mature; (6) the rate or
rates of interest, if any, or the method of calculation thereof, which such Debt
Securities will bear, and the basis upon which interest will be calculated if
other than that of a 360-day year of twelve 30-day months; (7) the date or dates
from which any such interest will accrue, the Interest Payment Dates on which
any such interest on such Debt Securities will be payable and the Regular Record
Date for any interest payable on any Interest Payment Date; (8) the place or
places where the principal of, premium, if any, and interest on such Debt
Securities will be payable; (9) the period or periods within which, the events
upon the occurrence of which, and the price or prices at which, such Debt
Securities may, pursuant to any optional or mandatory provisions, be redeemed or
purchased, in whole or in part, by the Issuer and any terms and conditions
relevant thereto; (10) the obligations of the Issuer, if any, to redeem or
repurchase such Debt Securities pursuant to any sinking fund or analogous
provisions or at the option of the Holders thereof; (11) the denominations in
which any such Debt Securities will be issuable, if other than denominations of
U.S. $1,000 and any integral multiple thereof; (12) the currency, currencies or
currency unit or units of payment of principal of, premium, if any, and interest
on such Debt Securities if other than U.S. dollars; (13) any index or formula to
be used to determine the amount of payments of principal, premium, if any, and
interest on such Debt Securities, and any commodities, currencies, currency
units or indices, or value, rate or price, relevant to such determination; (14)
if the principal of, premium, if any, or interest on such Debt Securities is to
be payable, at the election of the Issuer or a Holder thereof, in one or more
currencies or currency units other than that or those in which such Debt
Securities are stated to be payable, the currencies or currency units in which
payment of the principal of, premium, if any, and interest on such Debt
Securities as to which election is made shall be payable, and the periods within
which and the terms and conditions upon which such election is to be made; (15)
if other than the principal amount thereof, the portion of the principal amount
of such Debt Securities of the series which will be payable upon acceleration of
the Maturity thereof; (16) whether such Debt Securities are subordinate in right
of payment to any Senior Indebtedness of the Issuer and, if so, the terms and
conditions of such subordination and the aggregate principal amount of such
Senior Indebtedness outstanding as of a recent date; (17) any covenants to which
the Issuer may be subject with respect to such Debt Securities; (18) the
applicability of the provisions described under "Defeasance" below; (19) the
terms and conditions, if any, pursuant to which such Debt Securities are
convertible into or exchangeable for Common Shares or other securities; (20)
United States and Canadian Federal income tax consequences, if any; (21) the
provisions for the payment of additional amounts with respect to any Canadian
withholding taxes in certain cases; and (22) any other terms of such Debt
Securities.
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<PAGE> 84
Debt Securities may be issued at a discount from their principal amount.
United States and Canadian Federal income tax considerations and other special
considerations applicable to any such Original Issue Discount Securities will be
described in the applicable Prospectus Supplement.
If the purchase price of any series of Debt Securities is denominated in a
foreign currency or currencies or a foreign currency unit or units or if the
principal of, premium, if any, and interest on any series of Debt Securities are
payable in a foreign currency or currencies or a foreign currency unit or units,
the restrictions, elections, general tax considerations, specific terms and
other information with respect to such series of Debt Securities will be set
forth in the applicable Prospectus Supplement.
Debt Securities may be issued from time to time with payment terms which
are calculated by reference to the value, rate or price of one or more
commodities, currencies, currency units or indices. Holders of such Debt
Securities may receive a principal amount (including premium, if any) on any
principal payment date, or a payment of interest on any interest payment date,
that is greater than or less than the amount of principal (including premium, if
any) or interest otherwise payable on such dates, depending upon the value, rate
or price on the applicable dates of the applicable currency, currency unit,
commodity or index. Information as to the methods for determining the amount of
principal, premium, if any, or interest payable on any date, the currencies,
currency units, commodities or indices to which the amount payable on such date
is linked and any additional tax considerations will be set forth in the
applicable Prospectus Supplement.
Except as may be set forth in the applicable Prospectus Supplement, Holders
of Debt Securities will not have the benefit of any specific covenants or
provisions in the applicable Indenture or such Debt Securities in the event that
the Issuer engages in or becomes the subject of a highly leveraged transaction,
other than the limitations on mergers, consolidations and transfers of
substantially all of the Issuer's properties and assets as an entirety to any
person as described below under "Consolidation, Merger and Sale of Assets".
GUARANTEES
The Company will unconditionally and irrevocably guarantee, on a senior,
senior subordinated or subordinated basis, the due and punctual payment of
principal of, premium, if any, and interest on any Debt Securities that are
issued by EBR, and the due and punctual payment of any sinking fund payments
thereon, when and as the same shall become due and payable, whether at the
maturity date, by declaration of acceleration, call for redemption or otherwise.
See "Subordination of Senior Subordinated Debt Securities, Subordinated Debt
Securities and Guarantees."
SENIOR DEBT SECURITIES
The Senior Debt Securities will rank pari passu with all other unsecured
and unsubordinated debt of the Issuer and senior to the Senior Subordinated Debt
Securities and Subordinated Debt Securities.
SUBORDINATION OF SENIOR SUBORDINATED DEBT SECURITIES, SUBORDINATED DEBT
SECURITIES AND GUARANTEES
The payment of the principal of, premium, if any, and interest on the
Senior Subordinated Debt Securities and the Subordinated Debt Securities will,
to the extent set forth in the respective Indentures governing such Senior
Subordinated Debt Securities and Subordinated Debt Securities, be subordinated
in right of payment to the prior payment in full of all Senior Indebtedness.
Upon any payment or distribution of assets to creditors upon any liquidation,
dissolution, winding up, reorganization, assignment for the benefit of
creditors, marshalling of assets or any bankruptcy, insolvency or similar
proceedings of the Issuer, the holders of all Senior Indebtedness will be
entitled to receive payment in full of all amounts due or to become due thereon
before the Holders of the Senior Subordinated Debt Securities or the
Subordinated Debt Securities will be entitled to receive any payment in respect
of the principal of, premium, if any, or interest on such Senior Subordinated
Debt Securities or Subordinated Debt Securities, as the case may be. In the
event of the acceleration of the maturity of any Senior
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<PAGE> 85
Subordinated Debt Securities or Subordinated Debt Securities, the holders of all
Senior Indebtedness will be entitled to receive payment in full of all amounts
due or to become due thereon before the Holders of the Senior Subordinated Debt
Securities or Subordinated Debt Securities, as the case may be, will be entitled
to receive any payment upon the principal of, premium, if any, or interest on
such Senior Subordinated Debt Securities or Subordinated Debt Securities, as the
case may be. No payments on account of principal, premium, if any, or interest
in respect of the Senior Subordinated Debt Securities or Subordinated Debt
Securities may be made if there shall have occurred and be continuing in a
default in the payment of principal of (or premium, if any) or interest on any
Senior Indebtedness beyond any applicable grace period, or a default with
respect to any Senior Indebtedness permitting the holders thereof to accelerate
the maturity thereof, or if any judicial proceedings shall be pending with
respect to any such default. For purposes of the subordination provisions, the
payment, issuance or delivery of cash, property or securities (other than stock,
and certain subordinated securities, of the Issuer) upon conversion or exchange
or a Senior Subordinated Debt Security or Subordinated Debt Security will be
deemed to constitute payment on account of the principal of such Senior
Subordinated Debt Security or Subordinated Debt Security, as the case may be.
By reason of such provisions, in the event of insolvency, holders of Senior
Subordinated Debt Securities and Subordinated Debt Securities may recover less,
ratably, than holders of Senior Indebtedness with respect thereto.
The term "Senior Indebtedness", when used with respect to any series of
Senior Subordinated Debt Securities or Subordinated Debt Securities, is defined
to include all amounts due on and obligations in connection with any of the
following, whether outstanding at the date of execution of the Indenture or
thereafter incurred, assumed, guaranteed or otherwise created (including,
without limitation, interest accruing on or after a bankruptcy or other similar
event, whether or not an allowed claim therein):
(a) indebtedness, obligations and other liabilities (contingent or
otherwise) of the Issuer for money borrowed or evidenced by bonds,
debentures, notes or similar instruments;
(b) reimbursement obligations and other liabilities (contingent or
otherwise) of the Issuer with respect to letters of credit or bankers'
acceptances issued for the account of the Issuer and interest rate
protection agreements and currency exchange or purchase agreements;
(c) obligations and liabilities (contingent or otherwise) of the Issuer
related to capitalized lease obligations;
(d) indebtedness, obligations and other liabilities (contingent or
otherwise) of the Issuer related to agreements or arrangements designed
to protect the Issuer against fluctuations in commodity prices,
including without limitation, commodity futures contracts or similar
hedging instruments;
(e) indebtedness of others of the kinds described in the preceding clauses
(a) through (d) that the Issuer has assumed, guaranteed or otherwise
assured the payment of, directly or indirectly;
(f) indebtedness of another Person of the type described in the preceding
clauses (a) through (e) secured by any mortgage, pledge, lien or other
encumbrance on property owned or held by the Issuer; and
(g) deferrals, renewals, extensions and refundings of, or amendments,
modifications or supplements to, any indebtedness, obligation or
liability described in the preceding clauses (a) through (f) whether or
not there is any notice to or consent of the Holders of such series of
Senior Subordinated Debt Securities or Subordinated Debt Securities, as
the case may be;
except that, with respect to the Senior Subordinated Debt Securities, any
particular indebtedness, obligation, liability, guaranty, assumption, deferral,
renewal, extension or refunding shall not constitute "Senior Indebtedness" if it
is expressly stated in the governing terms, or in the assumption or guarantee,
thereof that the indebtedness involved is not senior in right of payment to the
Senior Subordinated Debt Securities or that such indebtedness is pari passu with
or junior to the Senior Subordinated Debt
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Securities and, with respect to Subordinated Debt Securities, any particular
indebtedness, obligation, liability, guaranty, assumption, deferral, renewal,
extension or refunding shall not constitute "Senior Indebtedness" if it is
expressly stated in the governing terms, or in the assumption or guarantee,
thereof that the indebtedness involved is not senior in right of payment to the
Subordinated Debt Securities or that such indebtedness is pari passu with or
junior to the Subordinated Debt Securities.
In certain circumstances, such as the bankruptcy or insolvency of the
Issuer, Canadian or U.S. bankruptcy or insolvency legislation may be applicable
and the application of such legislation may lead to different results with
respect to, for example, payments to be made to Holders of Debt Securities, or
priorities between Holders of the Debt Securities and holders of Senior
Indebtedness, than those provided for in the applicable Indenture.
If this Prospectus is being delivered in connection with a series of Senior
Subordinated Debt Securities or Subordinated Debt Securities, the accompanying
Prospectus Supplement or the information incorporated herein by reference will
set forth the approximate amount of Senior Indebtedness outstanding as of the
end of the Issuer's most recent fiscal quarter.
In the event that Senior Subordinated Debt Securities or Subordinated Debt
Securities are issued by EBR, the related Guarantees issued by the Company will
be subordinate and junior in right of payment to Senior Indebtedness of the
Company on substantially the same terms and conditions as the obligations of EBR
under the Senior Subordinated Debt Securities or the Subordinated Debt
Securities, as the case may be, will be subordinate and junior in right of
payment to Senior Indebtedness of EBR.
CONVERSION OR EXCHANGE OF DEBT SECURITIES
If so indicated in the applicable Prospectus Supplement with respect to a
particular series of Debt Securities, such series will be convertible or
exchangeable into Common Shares of the Company or other securities (including
rights to receive payments in cash or securities based on the value, rate or
price of one or more specified commodities, currencies, currency units or
indices) on the terms and conditions set forth therein.
FORM, EXCHANGE, REGISTRATION, CONVERSION, TRANSFER AND PAYMENT
Unless otherwise indicated in the applicable Prospectus Supplement, the
Debt Securities will be issued only in fully registered form in denominations of
U.S. $1,000 or integral multiples thereof. Unless otherwise indicated in the
applicable Prospectus Supplement, payment of principal, premium, if any, and
interest on the Debt Securities will be payable, and the exchange, conversion
and transfer of Debt Securities will be registerable, at the office or agency of
the Issuer maintained for such purposes. No service charge will be made for any
registration of a transfer or exchange of the Debt Securities, but the Issuer
may require payment of a sum sufficient to cover any tax or other governmental
charge imposed in connection therewith.
All monies paid by the Issuer to a Paying Agent for the payment of
principal of, premium, if any, or interest on any Debt Security which remain
unclaimed for two years after such principal, premium or interest has become due
and payable may be repaid to the Issuer and thereafter the holder of such Debt
Security may look only to the Issuer for payment thereof.
BOOK-ENTRY DEBT SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more Global Securities that will be deposited with, or on behalf
of, a depositary ("Depositary") or its nominee identified in the applicable
Prospectus Supplement. In such a case, one or more Global Securities will be
issued in a denomination or aggregate denomination equal to the portion of the
aggregate principal amount of Outstanding Debt Securities of the series to be
represented by such Global Security or Securities. Unless and until it is
exchanged in whole or in part for Debt Securities in registered form, a Global
Security may not be registered for transfer or exchange except as a whole by the
Depositary for
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such Global Security to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary or by such
Depositary or any nominee to a successor Depositary or a nominee of such
successor Depositary and except in the circumstances described in the applicable
Prospectus Supplement.
The specific terms of the depositary arrangement with respect to any
portion of a series of Debt Securities to be represented by a Global Security
will be described in the applicable Prospectus Supplement. The Issuer expects
that the following provisions will apply to depositary arrangements.
Unless otherwise specified in the applicable Prospectus Supplement, Debt
Securities which are to be represented by a Global Security to be deposited with
or on behalf of a Depositary will be represented by a Global Security registered
in the name of such Depositary or its nominee. Upon the issuance of such Global
Security, and the deposit of such Global Security with or on behalf of the
Depositary for such Global Security, the Depositary will credit, on its
book-entry registration and transfer system, the respective principal amounts of
the Debt Securities represented by such Global Security to the accounts of
institutions that have accounts with such Depositary or its nominee
("participants"). The accounts to be credited will be designated by the
underwriters or agents of such Debt Securities or by the Issuer, if such Debt
Securities are offered and sold directly by the Issuer. Ownership of beneficial
interests in such Global Security will be limited to participants or Persons
that may hold interests through participants. Ownership of beneficial interests
by participants in such Global Security will be shown on, and the transfer of
that ownership interest will be effected only through, records maintained by the
Depositary or its nominee for such Global Security. Ownership of beneficial
interests in such Global Security by Persons that hold through participants will
be shown on, and the transfer of that ownership interest within such participant
will be effected only through, records maintained by such participant. The laws
of some jurisdictions require that certain purchasers of securities take
physical delivery of such securities in certificated form. The foregoing
limitations and such laws may impair the ability to transfer beneficial
interests in such Global Securities.
So long as the Depositary for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depositary or such nominee, as
the case may be, will be considered the sole owner or Holder of the Debt
Securities represented by such Global Security for all purposes under the
applicable Indenture. Unless otherwise specified in the applicable Prospectus
Supplement, owners of beneficial interests in such Global Security will not be
entitled to have Debt Securities of the series represented by such Global
Security registered in their names, will not receive or be entitled to receive
physical delivery of Debt Securities of such series in certificated form and
will not be considered the Holders thereof for any purposes under the applicable
Indenture. Accordingly, each Person owning a beneficial interest in such Global
Security must rely on the procedures of the Depositary for such Global Security
and, if such Person is not a participant, on the procedures of the participant
through which such Person owns its interest, to exercise any rights of a Holder
under the applicable Indenture. The Issuer understands that under existing
industry practices, if the Issuer requests any action of Holders or an owner of
a beneficial interest in such Global Security desires to give notice or take any
action a Holder is entitled to give or take under an Indenture, the Depositary
for such Global Security would authorize the participants to give such notice or
take such action, and participants would authorize beneficial owners owning
through such participants to give such notice or take such action or would
otherwise act upon the instructions of beneficial owners owning through them.
Principal of, premium, if any, and interest on a Global Security will be
payable in the manner described in the applicable Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, if the
Depositary for any series of Debt Securities represented by a Global Security is
at any time unwilling or unable to continue as Depositary or ceases to be a
clearing agency registered or in good standing under the Exchange Act and a
successor Depositary is not appointed by the Issuer within 90 days after the
Issuer receives notice or becomes aware of such condition, the Issuer will issue
such Debt Securities in definitive certificated form in exchange for such Global
Security. In addition, the Company may at any time and in its sole discretion
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determine not to have any of the Debt Securities of a series represented by one
or more Global Securities and, in such event, will issue Debt Securities of such
series in definitive certificated form in exchange for all of the Global
Security or Securities representing such Debt Securities.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture with respect to
Debt Securities of any series: (a) failure to pay principal (or premium, if any)
on any Debt Security of that series when due, whether or not such failure is a
result of the subordination provisions of the Indenture with respect to such
series; (b) failure to pay any interest on any Debt Security of that series when
due, continued for 30 days, whether or not such failure is a result of the
subordination provisions of the Indenture with respect to such series; (c)
failure to make any sinking fund payment, when due, in respect of any Debt
Security of that series; (d) failure to perform any other covenant of the Issuer
in the applicable Indenture or any other covenant to which the Issuer may be
subject with respect to Debt Securities of that series (other than a covenant
solely for the benefit of a series of Debt Securities other than that series),
continued for 90 days after written notice as provided in the applicable
Indenture; (e) failure to pay when due on final maturity (after the expiration
of any applicable grace period), or upon acceleration, any indebtedness for
money borrowed by the Issuer in excess of U.S. $10 million; (f) certain events
of bankruptcy, insolvency or reorganization; and (g) any other Event of Default
provided with respect to Debt Securities of that series.
If an Event of Default with respect to Outstanding Debt Securities of any
series shall occur and be continuing, either the Trustee or the Holders of at
least 25% in principal amount of the Outstanding Debt Securities of that series,
by notice as provided in the applicable Indenture, may declare the principal
amount (or, if the Debt Securities of that series are Original Issue Discount
Securities, such portion of the principal amount as may be specified in the
terms of that series) of all Debt Securities of that series to be due and
payable immediately, except that upon the occurrence of an Event of Default
specified in (f) above, the principal amount (or in the case of Original Issue
Discount Securities, such portion) of all Debt Securities shall be immediately
due and payable without notice. However, at any time after a declaration of
acceleration with respect to Debt Securities of any series has been made, but
before judgment or decree based on such acceleration has been obtained, the
Holders of a majority in principal amount of the Outstanding Debt Securities of
that series may, under certain circumstances, rescind and annul such
acceleration. For information as to waiver of defaults, see "Modification and
Waiver" below.
The Indentures will provide that, subject to the duty of the respective
Trustees thereunder during an Event of Default to act with the required standard
of care, each such Trustee will be under no obligation to exercise any of its
rights or powers under the respective Indentures at the request or direction of
any of the Holders, unless such Holders shall have offered to such Trustee
reasonable security or indemnity. Subject to certain provisions, including those
requiring security or indemnification of the applicable Trustee, the Holders of
a majority in principal amount of the Outstanding Debt Securities of any series
will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to such Trustee, or exercising any trust or
power conferred on such Trustee, with respect to the Debt Securities of that
series.
No Holder of a Debt Security of any series will have any right to institute
any proceeding with respect to the applicable Indenture or for any remedy
thereunder, unless such Holder shall have previously given to the applicable
Trustee written notice of a continuing Event of Default and unless also the
Holders of at least 25% in aggregate principal amount of the Outstanding Debt
Securities of the same series shall have written requests, and offered
reasonable indemnity, to such Trustee to institute such proceeding as trustee,
and the Trustee shall not have received from the Holders of a majority in
aggregate principal amount of the Outstanding Debt Securities of the same series
a direction inconsistent with such request and shall have failed to institute
such proceeding within 60 days. However, such limitations do not apply to a suit
instituted by a Holder of a Debt Security for enforcement of payment of the
principal of and interest on such Debt Security on or after the respective due
dates expressed in such Debt Security.
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The Issuer will be required to furnish to the Trustees annually a statement
as to the performance by the Issuer of its obligations under the respective
Indentures and as to any default in such performance.
MODIFICATION AND WAIVER
Without the consent of any Holder of Outstanding Debt Securities, the
Issuer and the Trustees may amend or supplement the Indentures or the Debt
Securities to cure any ambiguity, defect or inconsistency, or to make any change
that does not adversely affect the rights of any Holder of Debt Securities.
Other modifications and amendments of the respective Indentures may be made by
the Issuer and the applicable Trustee with the consent of the Holders of not
less than a majority in aggregate principal amount of the Outstanding Debt
Securities of each series affected thereby; provided, however, that no such
modification or amendment may, without the consent of the Holder of each
Outstanding Debt Security affected thereby: (a) change the Stated Maturity of
the principal of, or any instalment of principal of, or premium, if any, or
interest on any Debt Security; (b) reduce the principal amount of, the rate of
interest on, or the premium, if any, payable upon the redemption of, any Debt
Security; (c) reduce the amount of principal of an Original Issue Discount
Security payable upon acceleration of the Maturity thereof; (d) change the place
or currency of payment of principal of, premium, if any, or interest on any Debt
Security; (e) impair the right to institute suit for the enforcement of any
payment on or with respect to any Debt Security on or after the Stated Maturity
or Redemption Date thereof; (f) modify the conversion or exchange provisions
applicable to convertible or exchangeable Debt Securities in a manner adverse to
the holders thereof; (g) modify the subordination provisions applicable to
Senior Subordinated Debt Securities or Subordinated Debt Securities in a manner
adverse to the Holders thereof; (h) reduce the percentage in principal amount of
Outstanding Debt Securities of any series, the consent of the Holders of which
is required for modification or amendment of the applicable Indenture or for
waiver of compliance with certain provisions of the applicable Indenture or for
waiver of certain defaults or (i) modify any of the provisions of certain
sections as specified in the Indenture including the provisions summarized in
this paragraph, except to increase any such percentage or to designate
additional provisions of the Indenture, which, with respect to such series,
cannot be modified or waived without the consent of the Holder of each
Outstanding Debt Security affected thereby.
The Holders of at least a majority in principal amount of the Outstanding
Debt Securities of any series may on behalf of the Holders of all Debt
Securities of that series waive, insofar as that series is concerned, compliance
by the Company with certain covenants of the applicable Indenture. The Holders
of not less than a majority in principal amount of the Outstanding Debt
Securities of any series may, on behalf of the Holders of all Debt Securities of
that series, waive any past default under the applicable Indenture with respect
to that series, except a default in the payment of the principal of, premium, if
any, or interest on, any Debt Security of that series or in respect of a
provision which under the applicable Indenture cannot be modified or amended
without the consent of the Holder of each Outstanding Debt Security of that
series affected.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Issuer, without the consent of any Holders of any series of outstanding
Debt Securities, may consolidate with or merge into, or transfer or lease its
assets substantially as an entirety (treating the Issuer and each of its
Subsidiaries as a single consolidated entity) to, any corporation, and any other
corporation may consolidate with or merge into, or transfer or lease its assets
substantially as an entirety to, the Issuer, provided that the corporation (if
other than the Issuer) formed by such consolidation or into which the Issuer is
merged or which acquires or leases the assets of the Issuer substantially as an
entirety is organized and existing under the laws of the United States of
America or Canada or any political subdivision of either, and assumes the
Issuer's obligations under each series of Outstanding Debt Securities and the
Indentures applicable thereto and that the Trustee is satisfied that the
transaction will not result in the successor being required to make any
deduction or withholding on account of certain Canadian taxes from any payments
in respect of the Securities, and that, after giving effect to such transaction,
no Event of Default, and no event which, after notice or lapse of time or both,
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would become an Event of Default, shall have occurred and be continuing, and the
delivery of an officer's certificate and an opinion of counsel with respect to
compliance with the foregoing requirements.
DEFEASANCE
If so indicated in the applicable Prospectus Supplement with respect to the
Debt Securities of a series, the Issuer at its option (i) will be discharged
from any and all obligations in respect of the Debt Securities of such series
(except for certain obligations to register the transfer or exchange of Debt
Securities of such series, to replace destroyed, stolen, lost or mutilated Debt
Securities of such series, and to maintain an office or agency in respect of the
Debt Securities and hold moneys for payment in trust) or (ii) will be released
from its obligations to comply with certain covenants specified in the
applicable Prospectus Supplement with respect to the Debt Securities of such
series, and the occurrence of an event described in clause (d) under "Events of
Default" above with respect to any defeased covenants, and clauses (e) and (g)
under "Events of Default" above shall no longer be an Event of Default, if in
either case the Issuer irrevocably deposits with the applicable Trustee, in
trust, money, Government Obligations of the government issuing the currency in
which the Debt Securities of the relevant series are denominated or a
combination thereof that through the payment of interest thereon and principal
thereof in accordance with the terms will provide money in an amount sufficient
to pay all the principal of and premium, if any, and interest on the Securities
of such series on the dates such payments are due (up to the Stated Maturity
Date, or the Redemption Date, as the case may be) in accordance with the terms
of such Debt Securities. Such a trust may only be established if, among other
things, (a) no Event of Default described under "Events of Default" above or
event that, after notice or lapse of time, or both, would become an Event of
Default under the applicable Indenture, shall have occurred and be continuing on
the date of such deposit, or, with regard to an Event of Default described under
clause (f) under "Events of Default" above or an event that, after notice or
lapse of time, or both, would become an Event of Default described under such
clause (f), shall have occurred and be continuing at any time during the period
ending on the 123rd day following such date of deposit, (b) the Issuer shall
have delivered an Opinion of Counsel to the effect that the Holders of the Debt
Securities will not recognize gain or loss for United States Federal income tax
purposes as a result of such deposit or defeasance and will be subject to United
States Federal income tax in the same manner as if such defeasance had not
occurred, and (c) such defeasance or covenant defeasance will not result in the
trust being in violation of the Investment Company Act of 1940. Such opinion, in
the case of defeasance under clause (i) above, must refer to and be based upon a
ruling of the Internal Revenue Service or a change in applicable Federal income
tax law occurring after the date of the applicable Indenture. In the event the
Issuer omits to comply with its remaining obligations under the applicable
Indenture after a defeasance of such Indenture with respect to the Debt
Securities of any series as described under clause (ii) above and the Debt
Securities of such series are declared due and payable because of the occurrence
of any undefeased Event of Default, the amount of money and Government
Obligations on deposit with the applicable Trustee may be insufficient to pay
amounts due on the Debt Securities of such series at the time of the
acceleration resulting from such Event of Default. However, the Issuer will
remain liable in respect to such payments.
Notwithstanding the description set forth under "Subordination of Senior
Subordinated Debt Securities and Subordinated Debt Securities and Guarantees"
above, in the event that the Issuer deposits money or Government Obligations in
compliance with the Indenture that governs any Senior Subordinated Debt
Securities or Subordinated Debt Securities, as the case may be, in order to
defease all or certain of its obligations with respect to the applicable series
of Debt Securities, the money or Government Obligations so deposited will not be
subject to the subordination provisions of the applicable Indenture and the
indebtedness evidenced by such series of Debt Securities will not be
subordinated in right of payment to the holders of applicable Senior
Indebtedness to the extent of the money or Government Obligations so deposited.
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GOVERNING LAW
The Indentures, the Debt Securities and the Guarantees will be governed by,
and construed in accordance with, the laws of the State of New York.
REGARDING THE TRUSTEES
The Indentures contain certain limitations on the right of each Trustee,
should it become a creditor of the Issuer, to obtain payment of claims in
certain cases, or to realize for its own account on certain property received in
respect of any such claim as security or otherwise. Each Trustee will be
permitted to engage in certain other transactions; however, if it acquires any
conflicting interest and there is a default under the Debt Securities issued
under the applicable Indenture, it must eliminate such conflict or resign.
DESCRIPTION OF SHARE CAPITAL
GENERAL
The authorized share capital of the Company consists of an unlimited number
of Common Shares, without par value, of which 112,473,950 were outstanding on
March 31, 1994, and an unlimited number of preferred shares, issuable in series,
none of which are currently outstanding. In addition, as of March 31, 1994,
17,163,732 Common Shares have been reserved for issuance upon conversions of the
U.S. $1.75 Series A Cumulative Convertible Preferred Stock (the "Convertible
Preferred Stock") of Echo Bay Finance Corp. ("Finance") and 3,352,960 Common
Shares have been reserved for issuance upon the exercise of outstanding options.
COMMON SHARES
The holders of Common Shares have one vote for each share held and are not
entitled to cumulative votes for the election of directors. Each Common Share is
entitled to participate equally in such dividends as may be declared by the
Board of Directors of the Company out of funds legally available therefor and is
entitled to share equally in any distribution to holders of Common Shares on
liquidation. The holders of Common Shares have no preemptive, conversion or
redemption rights. Each outstanding Common Share is fully paid and
nonassessable.
PREFERRED SHARES
The Board of Directors of the Company may issue preferred shares from time
to time in one or more series, subject to the provisions of the Articles of
Incorporation of the Company. When any preferred shares of the Company are
outstanding, no dividends may be paid or declared on outstanding Common Shares
unless all dividends on preferred shares of all series shall have been paid in
full with respect to past dividend periods, and the full dividends thereon for
the then current dividend period shall have been declared and a sum set apart
for payment thereof. Any sinking fund requirements with respect to preferred
shares of the Company must also be complied with before dividends on Common
Shares may be paid.
EBM CONVERTIBLE PREFERRED SHARES
The Company has created and must keep available 5,750,000 U.S. $1.75
Cumulative Redeemable Convertible Preferred Shares, Series A, without par value,
of the Company (the "EBM Convertible Preferred Shares") for issuance upon
exchange of the Convertible Preferred Stock issued by Finance pursuant to
certain exchange events ("Exchange Events"). Exchange Events include the failure
of Finance to pay any dividend on the Convertible Preferred Stock in full
(whether or not declared), the failure of Finance to make any redemption payment
in respect of the redemption of Convertible Preferred Stock, the bankruptcy,
liquidation or winding up of Finance or the Company, the failure of Finance to
maintain a net worth attributable to common stockholders' equity in excess of
$2.5 million or the failure of
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the Company to own, directly or indirectly, 100% of the outstanding capital
stock of Finance (other than the Convertible Preferred Stock). Among other
things, the EBM Convertible Preferred Shares are entitled to a liquidation
preference of $25.00 per share.
PLAN OF DISTRIBUTION
The Company may offer and sell the Debt Securities and Common Shares to or
through underwriters or dealers, and also may offer and sell Debt Securities and
Common Shares, directly to other purchasers or through agents. EBR may sell Debt
Securities, together with Guarantees issued by the Company, to or through
underwriters, and may also sell Debt Securities, together with Guarantees issued
by the Company, directly to other purchasers through agents. In either case,
such underwriters may include Goldman, Sachs & Co., and in Canada, Burns Fry
Limited, and any such group of underwriters may be represented by firms
including Goldman, Sachs & Co. or Burns Fry Limited.
Each Prospectus Supplement will set forth the terms of the offering of the
particular series of Securities to which the Prospectus Supplement relates,
including the name or names of any underwriters, dealers or agents, the purchase
price or prices of the Securities, the proceeds to the Company or EBR from the
sale of such series of Securities, the use of such proceeds, any initial public
offering price or purchase price of such series of Securities, any underwriting
discount or commission, any discounts, concessions or commissions allowed or
reallowed or paid by any underwriters to other dealers, any commissions paid to
any agents and the securities exchanges, if any, on which such Securities will
be listed. Any initial public offering price or purchase price and any
discounts, concessions or commissions allowed or reallowed or paid by any
underwriter to other dealers may be changed from time to time.
Sales of Common Shares offered pursuant to any Prospectus Supplement may be
effected from time to time in one or more transactions on the American Stock
Exchange or, in appropriate circumstances, The Toronto Stock Exchange, or in
negotiated transactions or any combination of such methods of sale, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, or at other negotiated prices.
In connection with distributions of Common Shares or otherwise, the Company
may enter into hedging transactions with broker-dealers in connection with which
such broker-dealers may sell Common Shares registered hereunder in the course of
hedging through short sales the positions they assumed with the Company.
In connection with the sale of Securities, underwriters or agents may
receive compensation from the Company or EBR or from purchasers of Securities
for whom they may act as agents in the form of discounts, concessions or
commissions, Underwriters may sell Securities to or through dealers, and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agents. Underwriters, dealers and agents that participate
in the distribution of Securities may be deemed to be underwriters, and any
discounts or commissions received by them from the Company or EBR and any profit
on the resale of Securities by them may be deemed to be underwriting discounts
and commissions under the Securities Act. Any such underwriter or agent will be
identified, and any such compensation received from the Company or EBR will be
described, in the applicable Prospectus Supplement.
Under agreements which may be entered into by the Company or EBR,
underwriters and agents who participate in the distribution of Securities may be
entitled to indemnification by the Company or EBR against certain liabilities,
including liabilities under Canadian and U.S. securities legislation.
If so indicated in the applicable Prospectus Supplement, the Company will
authorize underwriters or other persons acting as the Company's agent to solicit
offers by certain institutions to purchase Debt Securities from the Company or
EBR pursuant to contracts providing for payment and delivery on a future date.
Institutions with which such contracts may be made include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all cases such
institutions must be approved by the Company. The obligations of any
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purchaser under any such contract will be subject to the condition that the
purchase of the offered Debt Securities shall not at the time of delivery be
prohibited under the laws of the jurisdiction to which such purchaser is
subject. The underwriters and such other agents will not have any responsibility
in respect of the validity or performance of such contracts.
The Company and EBR may grant underwriters who participate in the
distribution of Securities an option to purchase additional Securities to cover
over-allotments, if any.
The place and date of delivery for the Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement.
Unless otherwise indicated in the applicable Prospectus Supplement, the
Securities in respect of which this Prospectus is being delivered (other than
Common Shares) will be a new issue of securities, will not have an established
trading market when issued and will not be listed on any securities exchange.
Any underwriters or agents to or through whom such Securities are sold by the
Company or EBR for public offering and sale may make a market in such
Securities, but such underwriters or agents will not be obligated to do so and
may discontinue any market making at any time without notice. No assurance can
be given as to the liquidity of the trading market for any such Securities.
Certain of the underwriters and their affiliates may from time to time
perform various commercial banking and investment banking services for the
Company, for which customary compensation is received.
EXPERTS
The consolidated financial statements of the Company, included in its
Annual Report on Form 10-K for the year ended December 31, 1993, have been
audited by Ernst & Young, independent chartered accountants, as set forth in
their report thereon included therein and incorporated herein by reference. Such
consolidated financial statements are, and audited financial statements to be
included in subsequently filed documents will be, incorporated herein by
reference in reliance upon the reports of Ernst & Young pertaining to such
financial statements (to the extent covered by consents filed with the
Securities and Exchange Commission) given upon the authority of such firm as
experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters relating to the validity of the securities, other
than the validity of the Common Shares, will be passed upon for the Company by
Davis, Graham & Stubbs, Denver, Colorado. Certain legal matters relating to the
validity of the Common Shares, and certain other matters with respect to
Canadian law in connection with the Securities, will be passed upon for the
Company by Milner Fenerty, Calgary, Alberta. Robert L. Leclerc, Q.C., a director
and secretary of the Company, is Chairman and Chief Executive Officer of Milner
Fenerty and the beneficial owner of 29,150 common shares of the Company
(including options to purchase 19,150 common shares). Certain legal matters will
be passed upon for the underwriters, if any, by Cravath, Swaine & Moore, New
York, New York, or by the counsel named in the applicable Prospectus Supplement.
18
<PAGE> 94
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management's Responsibility for Financial Reporting......... F-2
Report of Independent Chartered Accountants................. F-3
Consolidated Balance Sheet.................................. F-4
Consolidated Statement Of Earnings.......................... F-5
Consolidated Statement Of Retained Earnings (Deficit)....... F-6
Consolidated Statement Of Cash Flow......................... F-7
Summary of Significant Accounting Policies.................. F-8
Notes to Consolidated Financial Statements.................. F-12
Quarterly Financial Highlights (unaudited).................. F-36
</TABLE>
F-1
<PAGE> 95
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
F-2
<PAGE> 96
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.
/s/ Ernst & Young
Chartered Accountants
Edmonton, Canada
January 27, 1997
F-3
<PAGE> 97
ECHO BAY MINES LTD.
CONSOLIDATED BALANCE SHEET
DECEMBER 31
<TABLE>
<CAPTION>
1996 1995
------------ -----------
(THOUSANDS OF U.S. DOLLARS)
<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.
F-4
<PAGE> 98
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
(THOUSANDS OF U.S. DOLLARS,
EXCEPT FOR PER SHARE DATA)
<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>
See accompanying notes.
F-5
<PAGE> 99
ECHO BAY MINES, LTD.
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (DEFICIT)
YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- -------
(THOUSANDS OF U.S. DOLLARS)
<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.
F-6
<PAGE> 100
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENT OF CASH FLOW
YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- --------
(THOUSANDS OF U.S. DOLLARS)
<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
investments......................................... 13,809 44,655 --
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.
F-7
<PAGE> 101
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.
F-8
<PAGE> 102
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.
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.
F-9
<PAGE> 103
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, 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.
F-10
<PAGE> 104
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.
F-11
<PAGE> 105
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>
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
--------------------------------- --------
PLANT AND MINING NET BOOK NET 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.
F-12
<PAGE> 106
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
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>
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.
F-13
<PAGE> 107
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
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>
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.
F-14
<PAGE> 108
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
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> <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.
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.
F-15
<PAGE> 109
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
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.
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.
F-16
<PAGE> 110
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
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.
F-17
<PAGE> 111
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-18
<PAGE> 112
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
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>
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.
F-19
<PAGE> 113
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
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>
F-20
<PAGE> 114
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
derived................................... 64,724 14,845 --
Canadian resource allowance and earned
depletion................................. (406) (1,539) (245)
Foreign earnings subject to different income
tax rates................................. 11,806 1,815 (11,074)
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.
F-21
<PAGE> 115
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
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.
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
F-22
<PAGE> 116
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
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.
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
-------------------------- --------------------------
AVERAGE AVERAGE
NUMBER OF WEIGHTED NUMBER OF WEIGHTED
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$14.63 at December 31, 1995.
F-23
<PAGE> 117
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
Options outstanding at December 31, 1996 had the following characteristics.
Employee Share Incentive Plan
<TABLE>
<CAPTION>
WEIGHTED AVG. WEIGHTED AVG.
NUMBER OF EXERCISE PRICE WEIGHTED NUMBER OF EXERCISE PRICE
SHARES EXERCISE OF SHARES AVERAGE YEARS SHARES OF SHARES
OUTSTANDING PRICE RANGE OUTSTANDING UNTIL EXPIRATION EXERCISABLE EXERCISABLE
- ----------- --------------- -------------- ---------------- ----------- --------------
<C> <C> <C> <C> <C> <C>
239,725 C$ 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>
Director Equity Plan
<TABLE>
<CAPTION>
WEIGHTED AVG. WEIGHTED AVG.
NUMBER OF EXERCISE PRICE WEIGHTED NUMBER OF EXERCISE PRICE
SHARES EXERCISE OF SHARES AVERAGE YEARS SHARES OF SHARES
OUTSTANDING PRICE RANGE OUTSTANDING UNTIL EXPIRATION EXERCISABLE EXERCISABLE
- ----------- --------------- -------------- ---------------- ----------- --------------
<C> <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
F-24
<PAGE> 118
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
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 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>
F-25
<PAGE> 119
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
Selected information from the consolidated balance sheets under Canadian
and U.S. GAAP is as follows.
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
CANADIAN CANADIAN
GAAP U.S. GAAP 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 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.
F-26
<PAGE> 120
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
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.
CANADA AND OTHER TOTAL CANADA AND OTHER TOTAL
------ --------- ------- ------ --------- ------
(MILLIONS OF U.S. DOLLARS)
<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 liabilities.... 31.0 51.8 82.8 25.0 35.2 60.2
------ ------- ------- ------ ------ ------
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.
F-27
<PAGE> 121
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
(MILLIONS OF U.S. DOLLARS)
<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>
F-28
<PAGE> 122
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
F-29
<PAGE> 123
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
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>
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.
F-30
<PAGE> 124
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
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 PRICE
LOANS 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.
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>
F-31
<PAGE> 125
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
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.
F-32
<PAGE> 126
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
PRO FORMA AT
AT DECEMBER 31, 1996 DECEMBER 31, 1996
---------------------- ----------------------
CARRYING UNREALIZED CARRYING UNREALIZED
AMOUNT GAIN (LOSS) AMOUNT GAIN (LOSS)
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
1996
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)
-------
$53,500
=======
</TABLE>
Fair values are estimated for the contract settlement dates based on market
quotations of various input variables. These variables are used in valuation
models that estimate the fair market value.
The credit risk exposure related to all hedging activities is limited to
the unrealized gains on outstanding contracts based on current market prices. To
reduce counterparty credit exposure, the company deals only with large
credit-worthy financial institutions, and limits credit exposure to each. In
addition, to allow for situations where positions may need to be reversed, the
company deals only in markets it considers highly liquid.
Most of the company's hedging transactions have no margin requirements. In
some instances, however, mainly for the longer-term forward sales and options,
margin deposits are required when the market value exceeds the contract value by
a predetermined amount.
F-33
<PAGE> 127
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
The fair value of the company's hedged position can be affected by market
conditions beyond the company's control. The effect of changes in various market
factors on the company's pro forma outstanding hedged position at December 31,
1996, adjusted to reflect the first quarter 1997 transactions described above,
would be as follows.
<TABLE>
<CAPTION>
AMOUNT OF EFFECT ON MARKET VALUE
CHANGE OF HEDGED POSITION
------------ ----------------------
(THOUSANDS OF U.S.$)
<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
F-34
<PAGE> 128
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1996
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
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.
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.
F-35
<PAGE> 129
ECHO BAY MINES LTD.
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.
(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.
F-36
<PAGE> 130
=========================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SECURITIES DESCRIBED IN THIS PROSPECTUS
SUPPLEMENT OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
---------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Supplement Summary............ S-3
Risk Factors............................. S-14
Use of Proceeds.......................... S-23
Ratio of Earnings to Fixed Charges....... S-23
Capitalization........................... S-24
Selected Financial Data.................. S-25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. S-27
Business................................. S-33
Management............................... S-47
Description of Bank Credit Facility...... S-50
Description of the Securities............ S-52
Tax Considerations....................... S-72
Underwriting............................. S-74
Validity of Securities................... S-75
Experts.................................. S-75
PROSPECTUS
Available Information.................... 2
Enforcement of Certain Civil
Liabilities............................ 2
Incorporation of Certain Documents By
Reference.............................. 2
Canadian Prospectuses.................... 3
The Company.............................. 4
Risk Factors............................. 4
Use of Proceeds.......................... 6
Ratio of Earnings to Fixed Charges....... 7
Description of Debt Securities and
Guarantees............................. 7
Description of Share Capital............. 16
Plan of Distribution..................... 17
Experts.................................. 18
Legal Matters............................ 18
FINANCIAL STATEMENTS
Index to Financial Statements............ F-1
</TABLE>
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$100,000,000
ECHO BAY MINES LTD.
11% CAPITAL SECURITIES
DUE 2027
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PROSPECTUS SUPPLEMENT
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GOLDMAN, SACHS & CO.
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