<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
-------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File Number 1-8542
----------
ECHO BAY MINES LTD.
-----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Incorporated under the laws
of Canada None
--------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 1000, 6400 S. Fiddlers Green Circle
Englewood, CO 80111-4957
- ----------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 714-8600
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Title of Class Shares Outstanding as of
-------------- July 31, 1998
Common Shares -------------
without nominal or par value 140,607,145
================================================================================
<PAGE>
ECHO BAY MINES LTD.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. Condensed Financial Statements (Unaudited)..........................................................1
ITEM 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations..............10
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings..................................................................................23
ITEM 4. Submission Of Matters To A Vote Of The Security Holders............................................23
ITEM 6. Exhibits And Reports On Form 8-K...................................................................23
SIGNATURE....................................................................................................24
</TABLE>
i
<PAGE>
ECHO BAY MINES LTD.
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET June 30 December 31
thousands of U.S. dollars 1998 1997
- --------------------------------------------------------------------------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 19,958 $ 16,953
Short-term investments 5,408 10,325
Interest and accounts receivable 3,759 5,927
Inventories (note 2) 38,942 41,168
Prepaid expenses and other assets 3,759 5,068
- -------------------------------------------------------------------------------
71,826 79,441
Plant and equipment (note 3) 217,858 238,948
Mining properties (note 3) 102,533 107,820
Long-term investments and other assets 13,548 6,558
- -------------------------------------------------------------------------------
$ 405,765 $ 432,767
===============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 63,441 $ 82,371
Income and mining taxes payable 4,041 3,494
Gold and other financings (note 4) 14,379 14,779
Deferred income (note 4) 10,416 7,461
------------------------------------------------------------------------------
92,277 108,105
Gold and other financings (note 4) 45,774 51,745
Deferred income (note 4) 57,996 54,708
Other long-term obligations 49,588 56,607
Deferred income taxes 7,799 7,941
Commitments and contingencies (notes 5 and 9)
Common shareholders' equity:
Common shares, no par value, unlimited number
authorized; issued and outstanding - 140,607,145
(139,370,031 shares in 1997) (note 7) 713,343 709,593
Capital securities (note 5) 104,565 95,753
Deficit (643,037) (631,320)
Foreign currency translation (22,540) (20,365)
- -------------------------------------------------------------------------------
152,331 153,661
- -------------------------------------------------------------------------------
$ 405,765 $ 432,767
===============================================================================
</TABLE>
See accompanying notes to interim consolidated financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENT OF EARNINGS Three months ended Six months ended
thousands of U.S. dollars, June 30 June 30
except for per share data 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 65,346 $ 75,815 $118,201 $ 149,653
- -------------------------------------------------------------------------------------------------------------------
Expenses:
Operating costs 42,433 56,310 75,738 107,763
Royalties 2,218 2,074 3,940 4,318
Production taxes 329 223 683 662
Depreciation and amortization 17,416 21,348 31,318 41,321
Reclamation and mine closure 1,536 2,187 3,187 4,373
General and administrative 2,067 3,570 4,324 6,988
Exploration and development 2,602 9,940 5,782 16,430
Interest and other (note 6) (5,423) (905) (1,385) 1,736
Provision for impaired assets and other charges -- 1,305 -- 2,305
- -------------------------------------------------------------------------------------------------------------------
63,178 96,052 123,587 185,896
- -------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 2,168 (20,237) (5,386) (36,243)
- -------------------------------------------------------------------------------------------------------------------
Income tax expense:
Current 102 57 174 375
Deferred -- 438 -- 875
- -------------------------------------------------------------------------------------------------------------------
102 495 174 1,250
- -------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 2,066 $ (20,732) $ (5,560) $ (37,493)
===================================================================================================================
Net loss attributable to common shareholders
(note 5) $ (1,458) $ (23,256) $(11,717) $ (40,132)
===================================================================================================================
Loss per share $ (0.01) $ (0.17) $ (0.08) $ (0.29)
===================================================================================================================
Weighted average number of shares outstanding
(thousands) 139,751 139,370 139,560 139,364
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT Three months ended Six months ended
OF DEFICIT June 30 June 30
thousands of U.S. dollars 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of period $(641,579) $(221,974) $(631,320) $(201,931)
Net earnings (loss) 2,066 (20,732) (5,560) (37,493)
Interest on capital securities, net of nil tax effect (note 5) (3,524) (2,524) (6,157) (2,639)
Issue costs related to capital securities (note 5) -- -- -- (3,167)
- -----------------------------------------------------------------------------------------------------------------
Balance, end of period $(643,037) $(245,230) $(643,037) $(245,230)
===================================================================================================================
</TABLE>
See accompanying notes to interim consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENT Three months ended Six months ended
OF CASH FLOW June 30 June 30
thousands of U.S. dollars 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------
CASH PROVIDED FROM (USED IN):
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net cash flows provided from (used in) operating
activities $16,761 $ 2,128 $ (231) $ (14,616)
- ---------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Debt repayments (4,164) (4,822) (8,328) (122,879)
Capital securities issued, net of issuance costs
(note 5) -- -- -- 96,700
Common share issues, net of issuance costs -- -- -- 60
Other (114) 1,989 (226) 1,989
- ---------------------------------------------------------------------------------------------------
(4,278) (2,833) (8,554) (24,130)
- ---------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Mining properties, plant and equipment (5,237) (29,143) (9,866) (49,965)
Proceeds on repurchase of the company's
-- gold and silver forward sales (note 9) -- -- 8,673 54,963
-- gold swap -- -- -- 8,107
-- foreign exchange contracts -- (677) -- 5,995
Short-term investments 604 -- 3,018 --
Long-term investments and other assets (975) (7,140) (453) (16,517)
Proceeds on sale of investment in santa elina (note 6) 6,252 -- 6,252 --
Proceeds on the sale of plant and equipment (note 6) 141 -- 2,450 64
Proceeds on the sale of mining properties (note 6) -- -- 1,195 --
Deferral of gain on restructuring of capital securities
swap (note 9) 1,073 -- 1,073 --
Other (610) (44) (552) 41
- ---------------------------------------------------------------------------------------------------
1,248 (37,004) 11,790 2,688
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 13,731 (37,709) 3,005 (36,058)
Cash and cash equivalents, beginning of period 6,227 104,847 16,953 103,196
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $19,958 $ 67,138 $19,958 $ 67,138
===================================================================================================
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
1. GENERAL
In the opinion of management, the accompanying unaudited consolidated statement
of earnings, consolidated statement of deficit, consolidated balance sheet and
consolidated statement of cash flow contain all adjustments, consisting only of
normal recurring accruals, necessary to present fairly in all material respects
the consolidated financial position of Echo Bay Mines Ltd. (the Company) as of
June 30, 1998 and December 31, 1997 and the consolidated results of operations
and cash flow for the three and six months ended June 30, 1998 and 1997. For
further information, refer to the financial statements and related footnotes
included in the Company's annual report on Form 10-K for the year ended December
31, 1997.
Certain of the comparative figures have been reclassified to conform with the
current period's presentation.
2. INVENTORIES
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Precious metals -- bullion $14,638 $14,882
-- in-process 8,753 9,792
Materials and supplies 15,551 16,494
- ----------------------------------------------------------------------------------------------
$38,942 $41,168
==============================================================================================
3. PROPERTY, PLANT AND EQUIPMENT
Plant and equipment June 30 December 31
1998 1997
- ----------------------------------------------------------------------------------------------
Cost $664,228 $672,062
Less accumulated depreciation 446,370 433,114
- ----------------------------------------------------------------------------------------------
$217,858 $238,948
==============================================================================================
Mining properties June 30 December 31
1998 1997
- ----------------------------------------------------------------------------------------------
Producing mines' acquisition, exploration & development costs $268,780 $266,081
Less accumulated amortization 208,136 198,912
- ----------------------------------------------------------------------------------------------
60,644 67,169
Development properties' acquisition, exploration & development costs 24,915 24,787
Deferred mining costs 16,974 15,864
- ----------------------------------------------------------------------------------------------
$102,533 $107,820
==============================================================================================
</TABLE>
4
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
4. GOLD AND OTHER FINANCINGS AND DEFERRED INCOME
<TABLE>
<CAPTION>
Financings Deferred Income
--------------------- ---------------------
June 30 December 31 June 30 December 31
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold loans $14,502 $18,637 $ 4,892 $ 6,481
Currency loans 41,036 43,640 -- --
Capital securities (note 5) 4,615 4,247 -- --
Repurchase of gold and silver forward contracts -- -- 56,452 48,991
Repurchase of forward currency exchange contracts -- -- 5,995 5,995
Deferred gain on restructuring of capital securities swap
(note 9) -- -- 1,073 --
Other -- -- -- 702
- ------------------------------------------------------------------------------------------------------------
60,153 66,524 68,412 62,169
Less current portion 14,379 14,779 10,416 7,461
- ------------------------------------------------------------------------------------------------------------
$45,774 $51,745 $57,996 $54,708
============================================================================================================
</TABLE>
<TABLE>
<C> <S>
5. CAPITAL SECURITIES
</TABLE>
On March 27, 1997, the Company issued $100.0 million of 11% capital securities
due in April 2027. In 1997, the Company swapped a portion of its capital
security interest obligation for a gold delivery commitment. Under the
agreement, in 2002 the Company would have delivered 291,358 ounces of gold and
would have received $100.0 million, a price of $343 per ounce of gold. The
agreement reduced the Company's effective interest rate on the capital
securities to a fixed rate of 4.24% plus the floating gold lease rate, or 6.03%.
In the first quarter of 1998, the Company restructured the gold swap agreement.
The restructuring resulted in a conversion of the swap ounces into forward sales
commitments (note 9). Following the restructuring, the effective interest rate
on the capital securities reverted to 11%, or 12% compounded semi-annually
during a period of interest deferral.
The Company has the right to defer interest payments on the capital securities
for a period not to exceed 10 consecutive semi-annual periods. During a period
of interest deferral, interest accrues at a rate of 12% per annum, compounded
semi-annually, on the full principal amount and deferred interest. The Company,
at its option, may satisfy its deferred interest obligation by delivering common
shares to the indenture trustee for the capital securities. The trustee would
sell the Company's shares and remit the proceeds to the holders of the
securities in payment of the deferred interest obligation. In March 1998, the
Company exercised its right to defer its April 1998 interest payment to holders
of the capital securities until gold prices improve. The deferred interest
accrued at June 30, 1998, totaling $6.2 million, has been classified within the
equity component of the capital securities obligation on the balance sheet as
the Company has the option to satisfy the deferred interest by delivering common
shares.
5
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
6. INTEREST AND OTHER
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ (93) $ (973) $ (182) $ (2,118)
Interest expense 1,086 957 3,529 4,145
Interest capitalized -- (523) -- (523)
Gain on sale of investment in Santa Elina (6,252) -- (6,252) --
(Gain) loss on sale of other share investments (95) -- 962 58
Unrealized loss on share investments 357 -- 1,206 --
Gain on sale of plant and equipment (134) (149) (1,186) (330)
Gain on sale of interests in mining properties -- -- (1,195) --
Summa litigation accrual -- 233 -- 633
Other (292) (450) 1,733 (129)
- ------------------------------------------------------------------------------------------------------------
$(5,423) $(905) $(1,385) $ 1,736
============================================================================================================
</TABLE>
Gain on sale of investment in Santa Elina
In 1997, the Company recorded $143.6 million in provisions for impaired assets
related to its investment in Santa Elina Mines Corporation ("Santa Elina")
which effectively eliminated the carrying value of the investment. In April
1998, the Company sold its investment in Santa Elina, comprised of 58% of Santa
Elina's shares and the shareholder loans made by the Company to Santa Elina. As
a result of the sale, the Company received $6.3 million in cash, net of selling
costs, and a 48.1% interest in the Chapada exploration property in Brazil, to
which the Company has assigned no accounting value. The purchase agreement
calls for the Chapada property to be marketed and sold at the earliest
opportunity.
(Gain) loss on sale of other share investments
In the first quarter of 1998, the Company sold its investment in the common
shares of Ashanti Goldfields Company Ltd. for $2.0 million. A loss of $0.6
million was recognized on the sale. Additionally, the Company received $0.5
million in proceeds and recognized a loss of $0.3 million on the sale of its
investment in the preferred shares of Ashanti Goldfields. Additionally, the
Company sold its investment in the common shares of Canarc Resource Corp. for
$0.4 million. A loss of $0.1 million was recognized on the sale.
Gain on sale of plant and equipment
In the first quarter of 1998, the Company realized proceeds of $2.3 million and
recorded a gain of $1.1 million on the sale of plant and equipment, primarily
related to redundant Lupin winter road assets.
Gain on sale of interests in mining properties
In the first quarter of 1998, the Company sold its interests in certain mining
properties, including the Lik property in the Northwest Territories, Canada.
The Company realized total proceeds of $1.2 million on the sale of these
interests, which had no book value.
7. COMMON SHARES
In the second quarter of 1998, the Company issued 1,237,114 common shares at
$3.03 per share to Nationwide Development Corporation in settlement of the
Company's remaining obligation to its joint venture partner in the Kingking
property.
6
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
8. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
U.S. GAAP financial statements
The Company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in Canada. These differ in some
respects from those in the United States, as described below and in the
footnotes to the financial statements included in the Company's annual report on
Form 10-K for the year ended December 31, 1997.
In accordance with Canadian GAAP, the Company classifies certain components of
its capital securities obligation, including portions of accrued interest,
within equity on the balance sheet (note 5). Under U.S. GAAP, all amounts
related to the capital securities would be classified within liabilities on the
balance sheet. As a result, under U.S. GAAP, accounts payable and accrued
liabilities would be $3.0 million higher, other long-term obligations would be
$6.2 million higher, debt would be $95.4 million higher, and the equity
component of the capital securities obligation would be $104.6 million lower.
The effects on the consolidated statement of earnings of the GAAP differences
would have been as follows.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings (loss) under Canadian GAAP $ 2,066 $(20,732) $ (5,560) $(37,493)
Recognition of severance expense -- -- (4,980) --
Unrealized/realized loss on share investments (680) -- (428) --
Change in market value of foreign exchange contracts (2,614) (1,354) (1,158) (3,670)
Amortization of mining properties 542 (90) 1,033 (135)
Additional interest expense on capital securities (3,524) (2,524) (6,157) (2,639)
Amortization of deferred financing on capital securities (159) (158) (317) (158)
- ------------------------------------------------------------------------------------------------------------------------------
Net loss under U.S. GAAP $(4,369) $(24,858) $(17,567) $(44,095)
==============================================================================================================================
Loss per share under U.S. GAAP $(0.03) $(0.18) $(0.13) $(0.32)
==============================================================================================================================
</TABLE>
The effects on the consolidated balance sheet of the GAAP differences would have
been as follows.
<TABLE>
<CAPTION>
Foreign Mining Santa Elina
Canadian Exchange Share Properties Acquisition/ Capital U.S.
June 30, 1998 GAAP Contracts Investments Amortization Write-off Securities GAAP
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Short-term investments $ 5,408 $ -- $ 135 $ -- $ -- $ -- $ 5,543
Long-term investments and other assets 13,548 -- -- -- -- 2,375 15,923
Mining properties 102,533 -- -- (10,493) -- -- 92,040
Accounts payable and accrued liabilities 63,441 -- -- -- -- 3,000 66,441
Gold and other financings 60,153 -- -- -- -- 95,385 155,538
Deferred income 68,412 (5,995) -- -- -- -- 62,417
Other long-term obligations 49,588 5,292 -- -- -- 6,180 61,060
Common shares 713,343 -- -- -- 36,428 -- 749,771
Capital securities 104,565 -- -- -- -- (104,565) --
Deficit 643,037 (703) (5,748) 10,493 36,428 (2,375) 681,132
Net unrealized loss on share
investments -- -- 5,613 -- -- -- 5,613
Common shareholders' equity 152,331 703 135 (10,493) -- (102,190) 40,486
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
Effective January 1, 1998, for purposes of preparing U.S. GAAP financial
information, the Company adopted U.S. Financial Accounting Standards Board
("FASB") Statement No. 130, "Reporting Comprehensive Income," which requires the
reporting of all changes in equity during a period from non-owner sources as
part of a full set of financial statements. These changes would include foreign
currency translation adjustments and activity related to unrealized gains or
losses included as a separate component of common shareholders' equity under
U.S. GAAP. The following statement of comprehensive loss would be disclosed in
accordance with U.S. GAAP.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal quarters of fiscal
years beginning after June 15, 1999. The impact of the new standard on the
Company's financial information prepared under U.S. GAAP has not yet been
determined.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss under U.S. GAAP $(4,369) $(24,858) $(17,567) $(44,095)
Other comprehensive income (loss), after a nil income tax effect:
Foreign currency translation adjustments (3,492) (465) (2,175) (1,254)
Unrealized gain (loss) on share investments:
Net unrealized holding gain (loss) arising during the period 876 (13,666) 345 (15,074)
Reclassification adjustment for net (gain) loss recognized in
earnings (95) -- 685 58
- ---------------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) 781 (13,666) 1,030 (15,016)
- ---------------------------------------------------------------------------------------------------------------------
Other comprehensive loss (2,711) (14,131) (1,145) (16,270)
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive loss $(7,080) $(38,989) $(18,712) $(60,365)
=====================================================================================================================
</TABLE>
Additionally, under U.S. GAAP, the equity section of the balance sheet would
present a subtotal for accumulated other comprehensive loss, as follows.
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Foreign currency translation $(22,540) $(20,365)
Net unrealized loss on share investments (5,613) (6,643)
- -------------------------------------------------------------------------------------------------
Accumulated other comprehensive loss $(28,153) $(27,008)
=================================================================================================
</TABLE>
9. HEDGING ACTIVITIES AND COMMITMENTS
In the first quarter of 1998, the Company received proceeds of $8.7 million on
the repurchase of a portion of its outstanding gold forward sales. The
repurchased forward sales include 50,000 ounces of gold scheduled for delivery
in each of the five years 1998 to 2002 at forward prices of $395 per ounce in
1998 and 1999 and $374 per ounce in years 2000 to 2002, for a total of 250,000
ounces of gold. Additionally, related to the repurchase, the Company eliminated
contingent forward sales of up to an additional 75,000 ounces of gold at $400
per ounce in each of the three years 2000 to 2002. These forward sales had been
contingent upon the spot gold price reaching various levels above $400 per
ounce. This $8.7 million has been deferred and will be recognized in earnings as
the formerly hedged production is sold. The deferred gain is scheduled to be
recognized in revenue as follows: $1.8 million in 1998, $1.8 million in 1999,
$1.7 million in 2000, $1.7 million in 2001, and $1.7 million in 2002.
8
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
In the first quarter of 1998, the Company entered into gold forward sales
contracts of 270,000 ounces at an average price of $319 per ounce and silver
forward sales contracts of 19.0 million ounces at an average price of $6.01 per
ounce. These hedge positions are designed to ensure the economic viability of
the ore located beneath the unstable portion of the Cove pit wall. The
remediation of the Cove pit wall resumed in the second quarter of 1998.
In the second quarter of 1997, the Company swapped a portion of its capital
security interest obligation for a commitment to deliver 291,358 ounces of gold
in March 2002 at a price of $343 per ounce of gold (note 5). During the first
quarter of 1998, the Company restructured the gold swap agreement. The
restructuring resulted in a conversion of the swap ounces to forward sales
commitments, as follows: 57,925 ounces at $379 per ounce in 1998, 175,509
ounces at $379 per ounce in 1999, and 57,925 ounces at $379 per ounce in 2000.
Gains realized on the conversion, in the form of forward prices contracted in
excess of market, will be deferred and recognized in 2002, when the formerly
hedged production is sold.
Shown below are the carrying amounts and unrealized gains or losses on the
Company's hedging position at June 30, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------
Carrying Unrealized Carrying Unrealized
Amount Gain (Loss) Amount Gain (Loss)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold loans (note 4) $14,500 $ -- $18,600 $ --
Gold swap on capital securities (note 5) -- -- -- 19,700
Off-balance sheet instruments:
Gold forward sales -- 20,800 -- 10,900
Silver forward sales -- 7,800 -- (6,000)
Gold options -- puts purchased 1,800 2,700 2,800 11,300
-- calls sold -- (700) 700
Silver options -- calls sold (1,700) (1,500) (1,700) (2,500)
-- puts sold (8,600) (6,600) -- --
--calls purchased 8,600 2,600 -- --
Foreign currency contracts -- (5,300) -- (4,100)
Crude oil contracts -- (500) -- 500
- ------------------------------------------------------------------------------------------------------------------------------
$20,000 $30,500
==============================================================================================================================
</TABLE>
Fair values are estimated for the contract settlement dates based upon market
quotations of various input variables. These variables were used in valuation
models which estimate the fair market value.
9
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
June 30, 1998
(U.S. Dollars)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
During 1997, in response to the decline in the market price of gold, the Company
deferred final construction decisions on two planned gold mines, Paredones
Amarillos in Mexico and Aquarius in Canada, and deferred further development of
the Ulu satellite deposit near the Lupin mine in the Northwest Territories of
Canada. In addition, the Company refocused its exploration effort, narrowing it
to those projects believed to represent its most promising near-term prospects,
principally located near the Company's operating mines and development projects
located in the Americas. Further, general and administrative expenditures have
been reduced reflecting the downsizing effected in 1997.
In January 1998, following further declines in the market price of gold, the
Company temporarily suspended operations at the Lupin mine and reduced
operations at the McCoy/Cove mine in Nevada pending a significant improvement in
the market price of gold.
The Company's profitability is determined in large part by gold and silver
prices. Market prices of gold and silver are determined by factors beyond the
Company's control. The Company reduces the risk of future price declines by
hedging a portion of its production. The principal hedging tools used are gold
and silver loans, fixed and floating forward sales contracts, spot-deferred
contracts, swaps and options.
The Company has protected itself against price declines in 1998 by hedging its
entire planned gold production for the remaining two quarters of 1998 at a
minimum average price of $337 per ounce, along with 3.9 million ounces of silver
at $5.68 per ounce. The gold hedge position includes purchased put options of
150,000 ounces at $310 per ounce, therefore the Company has the ability to
realize a gold price greater than the $337 per ounce if the market price of gold
exceeds $310 per ounce. In addition, the Company has hedged approximately
330,000 ounces of gold in 1999 at a minimum average price of $363 per ounce and
4.0 million ounces of silver at $5.77 per ounce.
In the first quarter of 1998, the Company entered into gold forward sales
contracts of 270,000 ounces at an average price of $319 per ounce and silver
forward sales contracts of 19.0 million ounces at an average price of $6.01 per
ounce for deliveries in years 1998 to 2001. These hedge positions are designed
to ensure the economic viability of the ore located beneath the unstable portion
of the Cove pit wall. The remediation of the Cove pit resumed in the second
quarter of 1998.
In March 1997, the Company issued $100.0 million of 11% capital securities due
2027 (see note 5 to the interim consolidated financial statements). The Company
has the right to defer interest payments on the capital securities for up to 10
consecutive semi-annual periods. During a period of interest deferral, interest
accrues at a rate of 12% per annum, compounded semi-annually on the full
principal amount and deferred interest. The Company, at its option, may satisfy
its deferred interest obligation by delivering common shares to the indenture
trustee for sale, the proceeds of which would be remitted to the holders of the
securities in payment of the deferred interest. In March 1998, the Company
exercised its right to defer its April 1998 interest payment.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows used in operating activities amounted to $0.2 million for the
first six months of 1998 compared to $14.6 million for the first six months of
1997. The 1998 results reflect decreased operating costs ($32.0 million), a
10
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
June 30, 1998
(U.S. Dollars)
decrease in inventory balances in the first six months of 1998 ($3.5 million)
compared to an increase in the first six months of 1997 ($10.0 million),
decreased cash exploration and development spending ($10.6 million), decreased
general and administrative spending ($2.7 million) and higher cash silver prices
realized ($2.6 million); partially offset by decreased gold sales volume ($28.9
million), the 1998 payment of severance costs accrued at the end of 1997 ($10.0
million), the payment of legal and closure costs accrued in the third quarter of
1997 related to the provision for impaired assets ($5.3 million), and lower cash
gold prices realized ($1.8 million).
Cash used in financing activities was $8.6 million in the first six months of
1998, primarily related to the repayment of gold and currency borrowings.
Net cash provided from investing activities totaled $11.8 million in the first
six months of 1998. Included were proceeds from the first quarter 1998
repurchase of a portion of the Company's gold forward sales position ($8.7
million), proceeds on the sale of the Company's investment in Santa Elina ($6.3
million), proceeds on the sale of mining properties, plant and equipment ($3.6
million), and proceeds on the sale of certain share investments ($3.0 million);
partially offset by $9.9 million invested in mining properties, plant and
equipment.
The Company had $20.0 million in cash and cash equivalents and $5.4 million in
short-term investments at June 30, 1998.
At June 30, 1998, the Company's current debt was $14.4 million and its long-term
debt was $45.8 million.
The Company had $85 million in unutilized credit facilities at June 30, 1998, of
which $32 million was actually available for borrowing in view of the low gold
price. Depressed gold prices limit the Company's ability to borrow under its
revolving credit facility, which is measured at the end of each quarter.
Continuation of gold prices at depressed levels could have the effect of
reducing or eliminating the Company's capacity to borrow under its existing
credit facilities. For this reason, the Company and its lenders began
discussions in January 1998 aimed at restructuring the terms of its existing
credit facilities to provide more borrowing flexibility during extended periods
of depressed gold prices. While those discussions continue, the Company's
flexibility has increased since January under the existing covenants because of
the Company's reduced cost structure, improved operating results and additional
hedge position. The Company believes it is currently in compliance in all
material respects with the covenants under the credit facility.
In January 1998, the Company received $8.7 million in cash on the repurchase of
a portion of its outstanding gold forward sales contracts. At June 30, 1998,
the estimated value of the Company's hedge portfolio was $20.0 million.
Most of the Company's hedging transactions have no margin requirements. In some
instances, however, mainly for longer term forward sales and options, margin
deposits are required when the market value exceeds the contract value by a
predetermined amount.
For 1998, the Company expects to incur $13 million in capital expenditures. The
Company will rely on its operating cash flow and credit facilities to fund its
planned 1998 capital expenditures. The Company will carefully monitor its
discretionary spending in view of the current low gold price environment and the
cost structure at the Company's operating mines.
11
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1998
(U.S. Dollars)
FINANCIAL REVIEW
Three month results
The Company reported net earnings of $2.1 million (a $0.01 loss on a per share
basis after interest on the capital securities) in the second quarter of 1998,
compared to a net loss of $20.7 million ($0.17 per share) in the second quarter
of 1997. The 1998 results compared to 1997 reflect decreased operating costs
($13.9 million), proceeds on the sale of the Company's investment in Santa Elina
($6.3 million), decreased exploration and development expenses ($7.3 million),
lower depreciation and amortization expense ($3.9 million), reduced general and
administrative costs ($1.5 million) and increased silver sales volume and prices
realized ($1.7 million); partially offset by decreased volume of gold sales
($10.4 million), and lower gold prices realized ($1.8 million).
Gold production decreased 26% to 140,198 ounces in the second quarter of 1998
compared to 190,397 ounces in the second quarter of 1997. Decreased production
was due to the absence of production from the Lupin mine resulting from the
January 1998 temporary suspension of operations and lower mill grades and
recoveries at McCoy/Cove; partially offset by production from Round Mountain's
mill, which began operating at the end of 1997. Silver production increased
slightly to 2.1 million ounces in the second quarter of 1998 from 1.9 million
ounces in the second quarter of 1997, reflecting increased mill tonnages at
McCoy/Cove partially offset by lower mill grades. Quarterly revenues were $65.3
million in the second quarter of 1998 and $75.8 million in the second quarter of
1997.
Cash operating costs were $208 per ounce of gold in the second quarter of 1998,
versus $262 in the second quarter of 1997, reflecting the impact of the third
quarter 1997 write-down of McCoy/Cove's deferred mining balances, lower reagent
consumption and manpower reductions at McCoy/Cove, higher ore grades processed
at Kettle River, and the absence in 1998 of the higher-cost Lupin production.
Total production costs were $315 per ounce in the second quarter of 1998, versus
$379 per ounce in the second quarter of 1997.
Six months results
The Company reported a net loss of $5.6 million ($0.08 per share) in the first
six months of 1998 compared to a net loss of $37.5 million ($0.29 per share) in
the first six months of 1997. The 1998 results compared to 1997 reflect
decreased operating costs ($32.0 million), decreased exploration and development
expense ($10.6 million), decreased depreciation and amortization ($10.0
million), proceeds on the sale of the Company's investment in Santa Elina ($6.3
million), increased silver sales volume and prices realized ($4.0 million) and
decreased general and administrative expense ($2.7 million); partially offset by
decreased volume of gold ounces sold ($29.7 million) and lower gold prices
realized ($5.8 million).
Gold production decreased 27% to 273,363 ounces in the first six months of 1998
compared to 373,725 ounces in the first six months of 1997. Decreased production
was due to the absence in 1998 of Lupin production and lower mill grades and
gold recovery at McCoy/Cove; partially offset by production from Round
Mountain's mill, which began operating at the end of 1997. Silver production
decreased slightly to 4.3 million ounces in the first six months of 1998 from
4.4 million ounces in the first six months 1997, primarily a result of lower
mill grades partially offset by increased mill tonnages. Revenues were $118.2
million in the first six months of 1998 compared to $149.7 million in the first
six months of 1997.
Cash operating costs were $208 per ounce of gold in the first six months of 1998
versus $258 per ounce of gold in the first six months of 1997 due to the impact
of the third quarter 1997 write-down of McCoy/Cove's deferred mining balances,
lower reagent consumption and manpower reductions at McCoy/Cove and the absence
in 1998 of the higher-cost Lupin production; partially offset by increased
costs at Kettle River due to lower production.
12
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1998
(U.S. Dollars)
The term ounce as used in this Form 10-Q means "troy ounce".
Revenue
Statistics for gold and silver ounces sold and other revenue data are set out
below.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
REVENUE DATA 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold
- ----
Ounces sold 157,277 187,004 275,871 358,236
Average price realized/ounce - revenue basis $ 338 $ 350 $ 339 $ 360
Average price realized/ounce - cash basis (1) $ 346 $ 346 $ 344 $ 351
Average market price/ounce $ 300 $ 343 $ 297 $ 347
Revenue (millions of U.S. $) $ 53.1 $ 65.4 $ 93.5 $ 129.1
Percentage of total revenue 81% 86% 79% 86%
Silver
- ------
Ounces sold 2,184,608 1,922,826 4,200,705 3,859,172
Average price realized/ounce - revenue basis $ 5.59 $ 5.43 $ 5.88 $ 5.34
Average price realized/ounce - cash basis (1) $ 5.43 $ 5.00 $ 5.59 $ 4.98
Average market price/ounce $ 5.74 $ 4.76 $ 5.98 $ 4.88
Revenue (millions of U.S. $) $ 12.2 $ 10.4 $ 24.7 $ 20.6
Percentage of total revenue 19% 14% 21% 14%
- -----------------------------------------------------------------------------------------------------
Total revenue (millions of U.S. dollars) $ 65.3 $ 75.8 $ 118.2 $ 149.7
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes non-cash items effecting gold and silver revenues, such as the
recognition of deferred income or deferral of revenue to future periods for
hedge accounting purposes.
The effects of changes in sales prices and volume were as follows.
<TABLE>
<CAPTION>
REVENUE VARIANCE ANALYSIS Three months ended Six months ended
1998 VS. 1997 June 30 June 30
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lower gold prices $ (1.8) $ (5.8)
Higher silver prices 0.3 2.2
Change in volume (9.0) (27.9)
- -------------------------------------------------------------------------------------------------------
Decrease in revenue $(10.5) $(31.5)
- -------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1998
(U.S. Dollars)
Production Costs
Production cost data per ounce of gold is set out below.
<TABLE>
<CAPTION>
Three months ended Six months ended
PRODUCTION COSTS PER June 30 June 30
OUNCE OF GOLD PRODUCED 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Direct mining expense $ 213 $ 263 $ 209 $ 260
Deferred stripping and mine development costs (10) (7) (4) (5)
Inventory movements and other 5 6 3 3
- -----------------------------------------------------------------------------------------------
Cash operating costs 208 262 208 258
Royalties 12 10 11 10
Production taxes 2 1 2 2
- -----------------------------------------------------------------------------------------------
Total cash costs 222 273 221 270
Depreciation 59 62 58 63
Amortization 25 34 25 34
Reclamation and mine closure 9 10 7 10
- -----------------------------------------------------------------------------------------------
Total production costs $ 315 $ 379 $ 311 $ 377
===============================================================================================
</TABLE>
Expenses
Operating costs per ounce vary with the quantity of gold and silver sold and
with the cost of operations. Cash operating costs were $208 per ounce of gold
in the second quarter of 1998 and $262 in the second quarter of 1997. See
"Operations Review".
<TABLE>
<CAPTION>
RECONCILIATION OF CASH OPERATING
COSTS PER OUNCE TO FINANCIAL STATEMENTS Three months ended Six months ended
thousands of U.S. dollars, June 30 June 30
except per ounce amounts 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating costs per financial statements $ 42,433 $ 56,310 $ 75,738 $107,763
Change in finished goods inventory and other (4,624) 2,082 (549) 7,017
Co-product cost of silver produced (8,648) (8,508) (18,329) (18,359)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash operating costs $ 29,161 $ 49,884 $ 56,860 $ 96,421
===================================================================================================================================
Gold ounces produced 140,198 190,397 273,363 373,725
===================================================================================================================================
Cash operating costs per ounce $ 208 $ 262 $ 208 $ 258
===================================================================================================================================
</TABLE>
Depreciation and amortization decreased in the second quarter of 1998 compared
to the second quarter of 1997 due to the impact of the third quarter 1997 write-
downs of ore body carrying values at Lupin and Kettle River and reduced
depreciation rates at Lupin resulting from the January 1998 temporary suspension
of operations.
Exploration and development decreased in the second quarter of 1998 compared to
the second quarter of 1997 due to a decreased scope of exploration activities.
General and administrative expenses decreased in the second quarter of 1998 due
to the downsizings undertaken in 1997 in response to depressed gold prices.
Reserve estimates
The price used in estimating the Company's ore reserves at December 31, 1997 was
$350 per ounce of gold and $5.00 per ounce of silver. The market price for gold
is currently well below this level. If the Company determines that its reserves
should be calculated at a significantly lower price than used at December 31,
1997, there would likely be a material reduction in the amount of gold reserves.
14
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1998
(U.S. Dollars)
For example, the Company estimates that, based on extrapolation of information
developed in reserve calculation, but without the same degree of analysis as
required for reserve calculation, if the Company's reserves at December 31, 1997
were based on a price of $325 per ounce of gold, reserves at the operating
properties would decrease approximately 8%. If the Company's reserves at
December 31, 1997 were calculated at $375 per ounce of gold, reserves at the
operating properties would increase approximately 3%. The Company estimates
that such changes in gold price assumptions would not result in material impacts
to the reserve estimations for Aquarius and Paredones Amarillos. Should any
significant reductions in reserves occur, material write-downs of the Company's
investment in mining properties and/or increased amortization charges may be
required.
OPERATIONS REVIEW
Operating data by mine is set out in the table below.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
OPERATING DATA BY MINE 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold production (ounces)
- ------------------------
(a) Round Mountain (50%) 73,020 64,948 139,087 121,109
(b) McCoy/Cove 35,591 52,541 75,444 104,827
(c) Kettle River 31,587 30,304 58,832 68,583
Lupin -- 42,604 -- 79,206
- ------------------------------------------------------------------------------------------------------------------------------
Total gold 140,198 190,397 273,363 373,725
==============================================================================================================================
Silver production (ounces)
- --------------------------
(b) McCoy/Cove 2,054,173 1,933,588 4,312,629 4,371,001
- ------------------------------------------------------------------------------------------------------------------------------
Total silver 2,054,173 1,933,588 4,312,629 4,371,001
==============================================================================================================================
</TABLE>
Gold production decreased 26% to 140,198 ounces in the second quarter of 1998
compared to 190,397 ounces in the second quarter of 1997. Decreased production
was due to the absence of production from Lupin resulting from the January 1998
temporary suspension of operations and lower mill grades and recoveries at
McCoy/Cove, partially offset by production from Round Mountain's mill, which
began operating at the end of 1997. Silver production increased slightly to 2.1
million ounces in the second quarter of 1998 from 1.9 million ounces in the
second quarter of 1997, reflecting increased mill tonnages partially offset by
lower mill grades at McCoy/Cove. For the full year 1998, the Company's gold
production target is between 500,000 and 520,000 ounces and the silver
production target is between 7 and 8 million ounces.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
OPERATING DATA BY MINE 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash operating costs (per ounce of gold)
- ----------------------------------------
(a) Round Mountain (50%) $ 187 $ 194 $ 190 $ 201
(b) McCoy/Cove 221 317 211 301
(c) Kettle River 225 256 241 216
Lupin -- 266 -- 294
- ------------------------------------------------------------------------------------------------------------------------------
Company average $ 208 $ 262 $ 208 $ 258
==============================================================================================================================
</TABLE>
Cash operating costs were $208 per ounce of gold in the second quarter of 1998,
compared to $262 in the second quarter of 1997. Based on the results of
operations in the first six months of 1998, the Company has revised its original
target for consolidated cash operating costs of $245 to $255 per ounce of gold
produced for the full year 1998. Cash operating costs are now targeted at $215
to $225 per ounce.
15
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1998
(U.S. Dollars)
(a) Round Mountain, Nevada (50% owned)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
OPERATING DATA 1998 1997 1998 1997
============================================================================================
<S> <C> <C> <C> <C>
Gold produced (ounces):
Heap leached - reusable pad (50%) 28,238 39,119 58,645 71,064
Heap leached - dedicated pad (50%) 31,308 25,829 53,946 50,045
Milled 12,401 -- 24,640 --
Other 1,073 -- 1,856 --
-------- -------- -------- --------
Total (50%) 73,020 64,948 139,087 121,109
Ore and waste mined (million tons) (100%) 17.3 18.4 33.4 34.8
Mining cost/ton of ore and waste $ 0.63 $ 0.64 $ 0.64 $ 0.67
Heap leaching cost/ton of ore $ 0.60 $ 0.57 $ 0.63 $ 0.62
Milling cost/ton of ore and waste $ 3.10 -- $ 3.50 --
Production cost per ounce of gold produced:
Direct mining expense $ 179 $ 191 $ 186 $ 200
Deferred stripping cost 7 6 8 2
Inventory movements and other 1 (3) (4) (1)
-------- -------- -------- --------
Cash operating cost 187 194 190 201
Royalties 21 20 19 23
Production taxes 1 3 1 3
-------- -------- -------- --------
Total cash cost 209 217 210 227
Depreciation 41 36 40 41
Amortization 18 18 18 18
Reclamation and mine closure 7 7 7 7
-------- -------- -------- --------
Total production costs $ 275 $ 278 $ 275 $ 293
-------- -------- -------- --------
Heap leached - reusable pad:
Ore processed (tons/day) (100%) 19,869 28,340 23,118 27,630
Grade (ounce/ton) 0.042 0.035 0.039 0.036
Recovery rate (%) 69.7 83.0 72.0 74.4
Heap leached - dedicated pad:
Ore processed (tons/day) (100%) 128,231 110,154 118,495 99,467
Grade (ounce/ton) 0.010 0.010 0.010 0.010
Recovery rate (1)
Milled:
Ore processed (tons/day) (100%) 8,460 -- 7,815 --
Grade (ounce/ton) 0.043 -- 0.048 --
Recovery rate (%) 76.2 -- 74.5 --
============================================================================================
</TABLE>
(1) Recovery rates on dedicated pads can only be estimated, as actual recoveries
will not be known until leaching is complete. At the Round Mountain mine,
the gold recovery rate on the dedicated heap leach pad is estimated at 50%.
At 50%-owned Round Mountain in Nevada, the Company's portion of gold production
totaled 73,020 ounces in the second quarter of 1998, up 12% from 64,948 ounces a
year ago. The increase in production resulted principally from the startup of a
new mill late last year to process large quantities of nonoxide ore. The mill
produced 24,802 ounces of gold in the second quarter of 1998 (the Company's 50%
share, 12,401 ounces).
Round Mountain's cash operating costs were reduced to $187 per ounce of gold
produced in the second quarter of 1998, down from $194 a year ago, reflecting
improved cost control and more ounces produced under a new mining plan adopted
late last year. The new plan optimizes the design of the open pit, eliminating
the mining of more
16
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1998
(U.S. Dollars)
than 250 million tons of waste rock and low-grade, high-cost material over the
life of the mine.
Round Mountain expects to meet or exceed its full-year production target of
460,000 to 480,000 ounces of gold (the Company's 50% share, 230,000 to 240,000
ounces). The success of the new mining plan in reducing costs over the first
half of 1998 has enabled Round Mountain to significantly lower its cash
operating cost target for the full year. The mine's new cash operating cost
target for 1998 is $200 to $210 per ounce of gold produced, down from $230 to
$240 originally targeted at the beginning of the year.
17
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1998
(U.S. Dollars)
(b) McCoy/Cove, Nevada (100% owned)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
OPERATING DATA 1998 1997 1998 1997
=====================================================================================================
<S> <C> <C> <C> <C>
Gold produced (ounces):
Milled 22,459 39,248 47,881 80,142
Heap leached 13,132 13,293 27,563 24,685
---------- ---------- ---------- ----------
Total gold 35,591 52,541 75,444 104,827
Silver produced (ounces):
Milled 1,945,022 1,824,003 4,081,171 4,179,586
Heap leached 109,151 109,585 231,458 191,415
---------- ---------- ---------- ----------
Total silver 2,054,173 1,933,588 4,312,629 4,371,001
Ore and waste mined (million tons) 10.9 15.0 18.5 30.5
Mining cost/ton of ore and waste $ 0.67 $ 0.74 $ 0.69 $ 0.71
Milling cost/ton of ore $ 5.82 $ 9.20 $ 6.05 $ 8.97
Heap leaching cost/ton of ore $ 1.55 $ 1.67 $ 1.56 $ 1.66
Production cost per ounce of gold produced:
Direct mining expense $ 244 $ 330 $ 218 $ 310
Deferred stripping cost (30) (28) (14) (19)
Inventory movements and other 7 15 7 10
---------- ---------- ---------- ----------
Cash operating cost 221 317 211 301
Royalties 3 3 3 3
Production taxes 3 -- 2 1
---------- ---------- ---------- ----------
Total cash cost 227 320 216 305
Depreciation 58 79 55 74
Amortization 40 45 39 45
Reclamation and mine closure 9 10 8 10
---------- ---------- ---------- ----------
Total production costs $ 334 $ 454 $ 318 $ 434
---------- ---------- ---------- ----------
Average gold-to-silver price ratio (1) 52.5:1 72.0:1 49.6:1 71.6:1
Milled:
Ore processed (tons/day) 12,205 9,565 11,560 9,821
Gold grade (ounce/ton) 0.035 0.057 0.038 0.062
Silver grade (ounce/ton) 2.43 2.98 2.52 3.17
Gold recovery rate (%) 50.4 68.6 53.2 70.3
Silver recovery rate (%) 71.5 71.7 72.8 70.9
Heap leached:
Ore processed (tons/day) 12,061 20,512 12,041 19,080
Gold grade (ounce/ton) 0.019 0.014 0.020 0.013
Silver grade (ounce/ton) 0.21 0.25 0.29 0.21
Recovery rates (2)
=====================================================================================================
</TABLE>
(1) To convert costs per ounce of gold into comparable costs per ounce of co-
product silver, divide the production cost per ounce of gold by the period's
average gold-to-silver price ratio.
(2) Recovery rates on dedicated pads can only be estimated, as actual recoveries
will not be known until leaching is complete. At the McCoy/Cove mine, the
gold recovery rate is estimated at 68% for crushed ore and 48% for
uncrushed, run-of-mine ore, while the silver recovery rate is estimated at
35% for crushed ore and 10% for uncrushed, run-of-mine ore.
At McCoy/Cove in Nevada, gold production was 35,591 ounces in the second quarter
of 1998, down 32% from 52,541 ounces a year ago, reflecting the planned
processing of lower-grade ores. Silver production was 2,054,173 ounces in the
second quarter of 1998, up 6% from 1,933,588 ounces a year ago, a function of
28% higher mill throughput levels overcoming lower silver grades processed.
18
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1998
(U.S. Dollars)
Cash operating costs were reduced to $221 per ounce of gold produced in the
second quarter of 1998 from $317 per ounce a year ago, in spite of lower ore
grades and recoveries. The reduction in the cash operating costs resulted
primarily from a series of operating improvements effected in December 1997.
These improvements included a 20% reduction in McCoy/Cove's workforce.
Additionally, mining was discontinued in the smaller McCoy pit and refocused on
mill ounces from the Cove pit, and milling costs were significantly reduced.
Cash operating costs were also positively impacted by the $47.0 million write-
down of McCoy/Cove's carrying value in the third quarter of 1997, which reduced
deferred mining costs by a like amount over the remaining life of the mine, and
also by significantly lower gold prices relative to co-product silver prices.
The gold-to-silver price equivalency ratio, which was 52.5:1 in the second
quarter of 1998 compared to 72.0:1 in the second quarter of 1997, is used to
calculate co-product costs.
Mining resumed at the McCoy pit in March 1998 at lower costs following the
completion of optimization studies. Remediation work on the Cove pit began in
June 1998.
Because of the cost reductions achieved in the first half of the year,
McCoy/Cove has reduced its full-year 1998 cash operating cost target to $220 to
$230 per ounce of gold produced, down from $260 to $270 per ounce targeted at
the beginning of the year. The mine expects to meet its full-year production
targets of 160,000 to 170,000 ounces of gold and 7 to 8 million ounces of
silver.
19
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1998
(U.S. Dollars)
(c) Kettle River, Washington (100% owned)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
OPERATING DATA 1998 1997 1998 1997
==========================================================================================
<S> <C> <C> <C> <C>
Gold produced (ounces) 31,587 30,304 58,832 68,583
Tons of ore mined and milled 179,586 218,134 371,355 396,309
Mining cost/ton of ore $ 22.44 $ 22.10 $ 21.65 $ 21.46
Milling cost/ton of ore $ 10.37 $ 9.06 $ 10.05 $ 10.19
Production cost per ounce of gold produced:
Direct mining expense $ 222 $ 243 $ 240 $ 217
Deferred mine development cost -- -- -- --
Inventory movements and other 3 13 1 (1)
-------- -------- -------- --------
Cash operating cost 225 256 241 216
Royalties 14 17 13 14
Production taxes 1 2 1 2
-------- -------- -------- --------
Total cash cost 240 275 255 232
Depreciation 62 65 67 57
Amortization 5 45 5 45
Reclamation and mine closure 12 12 12 12
-------- -------- -------- --------
Total production costs $ 319 $ 397 $ 339 $ 346
-------- -------- -------- --------
Milled:
Ore processed (tons/day) 1,973 2,397 2,040 2,178
Grade (ounce/ton) 0.210 0.162 0.193 0.198
Recovery rate (%) 83.6 85.5 82.1 87.2
==========================================================================================
</TABLE>
The Kettle River mine in Washington State produced 31,587 ounces of gold in the
second quarter of 1998, compared with 30,304 ounces a year ago. Ore grades were
higher, offsetting lower recovery rates and tonnages processed.
Cash operating costs were reduced to $225 per ounce of gold produced in the
second quarter of 1998 from $256 a year ago, principally a function of higher
ore grades processed.
Results were in line with Kettle River's full-year production and cost targets
of 100,000 to 110,000 ounces of gold at a cash operating cost of $240 to $250
per ounce.
20
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1998
(U.S. Dollars)
RECENT DEVELOPMENTS
In January 1998, the Company announced a temporary suspension of operations at
the Lupin mine until gold prices improve significantly. As a result of the
suspension of operations, approximately 500 employees were terminated. At the
end of the first quarter of 1998, the preparation of the mine and facilities to
continue in a care and maintenance mode had been substantially completed. The
annual care and maintenance costs for Lupin are being expensed as incurred.
During the first six months of 1998, the Company incurred $2.5 million in such
costs.
In 1997, the Company deferred final construction decisions on its two planned
gold mines, Paredones Amarillos in Mexico and Aquarius in Canada, and deferred
further development of the Ulu deposit in Canada. During 1998, development
holding costs for these projects will be expensed as incurred.
The Company has refocused its search for new gold reserves and production. The
Company's exploration program is now concentrated on those projects believed to
represent the most promising near-term prospects in its portfolio, principally
those located in the Americas where the Company already has extensive gold
mining infrastructure.
For the first six months of 1998, in connection with its exploration and
development activities, the Company charged $5.8 million against current
earnings.
Highlights of the Company's development and exploration programs are outlined
below.
Development Properties
At the 100% owned Aquarius gold mine in the Timmins gold district of Ontario,
the Company has completed the frozen earth system around the pit perimeter to
prevent groundwater from flowing into the pit from the surrounding water table.
The Company does not plan to operate the freeze barrier during the period of
project deferral. During the first six months of 1998, the Company capitalized
$0.7 million related to the completion of the freeze barrier construction and
incurred $0.3 million in holding costs related to Aquarius.
At 60% owned Paredones Amarillos, detailed engineering work and limited
procurement at the end of 1997 was estimated to be 45% complete. Holding
expenditures will include permitting activities, water development and other
work required to maintain the integrity of the project and enable development to
proceed quickly and smoothly to construction at such time as a final
construction decision is made. The Company will expense its share of 1998
holding costs. During the first six months of 1998, the Company capitalized $0.5
million and expensed $0.2 million in holding costs related to Paredones
Amarillos.
Other Projects
In 1997, the Company recorded $143.6 million in provisions for impaired assets
related to its investment in Santa Elina Mines Corporation ("Santa Elina")
which effectively eliminated the carrying value of the investment. In April
1998, the Company sold its investment in Santa Elina, comprised of 58% of Santa
Elina's shares and the shareholder loans made by the Company to Santa Elina. As
a result of the sale, the Company received $6.3 million in cash, net of selling
costs, and a 48.1% interest in the Chapada exploration property in Brazil, to
which the Company has assigned no accounting value. The purchase agreement
calls for the Chapada property to be marketed and sold at the earliest
opportunity.
21
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1998
(U.S. Dollars)
At the 50% owned Kuranakh project located in the Sakha Republic of the Russian
Federation, negotiations progress with the government committee established for
defining the terms of the production sharing agreement, which will provide the
producer with a fixed life-of-project tax structure in return for a portion of
the ounces being delivered to the Russian government.
U.S. Mining Law Revision
In recent years, several proposals to change the general mining laws applicable
to operations on U.S. federal lands have been introduced into Congress. In
addition, the Bureau of Land Management of the U.S. Department of the Interior
has commenced a program to revise the federal regulations applicable to
activities on unpatented mining claims and to impose more stringent reclamation
and environmental protection requirements on those activities. Until such time,
if any, as new reform legislation is enacted or administrative action is taken,
the ultimate effects and costs of compliance on the Company cannot be estimated.
CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
With the exception of historical matters, the matters discussed in this report
are forward looking statements that involve risks and uncertainties that could
cause actual results to differ materially from targeted or projected results.
Such forward looking statements include statements regarding targets, or
expectations, for gold and silver production, cash operating costs and certain
significant expenses, percentage increases and decreases in production from the
Company's principal mines, potential increases in reserves, production, cash
flow and profitability, 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 or re-commencement or
finalization of arrangements with governmental authorities or co-venturers with
respect to new projects. Factors that could cause actual results to differ
materially include, among others, changes in gold and silver prices,
unanticipated grade, geological, metallurgical, processing, access,
transportation of supplies, water availability or other problems, results of
current exploration activities, results of pending and future feasibility
studies, changes in project parameters as plans continue to be refined,
political, economic and operational risks of foreign operations, joint venture
relationships, availability of materials and equipment, the timing of receipt of
governmental permits, force majeure events, the failure of plant, equipment or
processes to operate in accordance with specifications or expectations,
accidents, labor relations, delays in start-up dates, environmental costs and
risks, the outcome of acquisition negotiations and general domestic and
international economic and political conditions, as well as other factors
described herein or in the Company's filings with the U.S. Securities and
Exchange Commission. Many of these factors are beyond the Company's ability to
predict or control. Readers are cautioned not to put undue reliance on forward-
looking statements.
22
<PAGE>
ECHO BAY MINES LTD.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Alaska-Juneau
During 1994, the U.S. Attorney began an investigation of potential criminal
Clean Water Act violations at the Alaska-Juneau property. The investigation was
to determine whether the Company unlawfully discharged pollutants from the
drainage tunnel without a National Pollution Discharge Elimination System
(NPDES) permit. On September 2, 1997, the U.S. Attorney sent a letter stating
that "...the United States will not proceed with a criminal prosecution for
Federal Clean Water Act violations at this time." While this does not foreclose
possible criminal charges at a later date if the Department of Justice finds new
information warranting prosecution, as a practical matter, this ends the threat
of a criminal action. A civil action could be taken by the EPA.
Other
The Company also is engaged in routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
(a) The Company's Annual General Meeting was held June 11, 1998.
(c) (1) Election of Directors
<TABLE>
<CAPTION>
Votes Against
Nominee Votes For or Withheld
- ------- --------- -----------
<S> <C> <C>
John Norman Abell 79,148,234 1,162,802
Latham Cawthra Burns 79,098,571 1,212,093
Pierre Choquette 79,122,460 1,188,204
John Gilray Christy 79,160,672 1,149,992
Peter Clarke 79,168,487 1,142,177
Robert Leigh Leclerc, Q.C. 79,183,619 1,127,045
John Frederick McOuat 79,140,391 1,170,273
Monica Elizabeth Sloan 79,116,689 1,193,975
Richard Geoffrey Pentland Styles 79,108,335 1,202,329
</TABLE>
(c) (2) Appointment of Ernst & Young as Auditors of the Company.
<TABLE>
<CAPTION>
Votes Against
Votes For or Withheld
--------- -----------
<S> <C> <C>
Appointment of Ernst & Young 79,510,781 348,232
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K None.
23
<PAGE>
ECHO BAY MINES LTD.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECHO BAY MINES LTD.
--------------------------------------
(Registrant)
August 5, 1998
- ------------------------------
Date
/s/ Tom S. Q. Yip
-----------------
TOM S. Q. YIP
Vice President, Controller and Principal
Accounting Officer
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS INCLUDED IN THE ECHO BAY MINES FORM 10-Q FOR THE QUARTER ENDED JUNE
30, 1998.
</LEGEND>
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 19,958
<SECURITIES> 5,408
<RECEIVABLES> 3,759
<ALLOWANCES> 0
<INVENTORY> 38,942
<CURRENT-ASSETS> 71,826
<PP&E> 974,897
<DEPRECIATION> 654,506
<TOTAL-ASSETS> 405,765
<CURRENT-LIABILITIES> 92,277
<BONDS> 0
0
0
<COMMON> 713,343
<OTHER-SE> (561,012)
<TOTAL-LIABILITY-AND-EQUITY> 405,765
<SALES> 118,201
<TOTAL-REVENUES> 118,201
<CGS> 75,738
<TOTAL-COSTS> 43,452
<OTHER-EXPENSES> 4,397
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,347
<INCOME-PRETAX> (5,386)
<INCOME-TAX> 174
<INCOME-CONTINUING> (5,560)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,560)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
