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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number 1-8542
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ECHO BAY MINES LTD.
(Exact name of registrant as specified in its charter)
Incorporated under the laws of Canada None
- ------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 1000, 6400 S. Fiddlers Green Circle 80111-4957
Englewood, CO ----------
- ----------------------------------------- (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 714-8600
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common shares, no par value American Stock Exchange
____________________
Securities registered pursuant to Section 12(g) of the Act: None
----
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of the voting securities held by
non-affiliates of the registrant at March 13, 1998............ U.S.$270,377,860
----------------
Number of common shares outstanding as of March 13, 1998........... 139,370,031
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I
ITEMS 1 AND 2-BUSINESS AND PROPERTIES...................................... 1
INTRODUCTION............................................................. 1
OPERATIONS SUMMARY....................................................... 2
Gold and Silver Production.............................................. 2
Production Costs........................................................ 2
Revenue................................................................. 3
RESERVES................................................................. 4
Change in Proven and Probable Reserves.................................. 5
OTHER MINERALIZATION..................................................... 6
CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995................................ 7
ROUND MOUNTAIN........................................................... 8
Geology and Ore Reserves................................................ 10
Mining and Processing................................................... 10
MCCOY/COVE............................................................... 12
Geology and Ore Reserves................................................ 13
Mining and Processing................................................... 14
LUPIN.................................................................... 16
Geology and Ore Reserves................................................ 17
Mining and Processing................................................... 18
Supplies, Utilities and Transportation.................................. 18
Water Supply and Waste Disposal......................................... 19
KETTLE RIVER............................................................. 20
Geology and Ore Reserves................................................ 20
Mining and Processing................................................... 21
DEVELOPMENT PROGRAMS..................................................... 22
Aquarius................................................................ 22
Paredones Amarillos..................................................... 23
OTHER PROJECTS........................................................... 24
Kingking................................................................ 24
Santa Elina............................................................. 25
Kuranakh................................................................ 25
EXPLORATION.............................................................. 26
ALASKA-JUNEAU............................................................ 26
SUNNYSIDE................................................................ 26
OTHER.................................................................... 27
Precious Metal Sales and Hedging Activities............................. 27
Governmental and Environmental Regulation............................... 28
Employees............................................................... 32
Executive Officers of the Registrant.................................... 34
Insurance and Mining Risks.............................................. 35
Supplies, Utilities and Transportation.................................. 35
Waste Disposal.......................................................... 35
Royalties............................................................... 36
History of the Company.................................................. 36
RISK FACTORS............................................................. 37
Recent Losses........................................................... 37
</TABLE>
i
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<TABLE>
<CAPTION>
<S> <C>
Liquidity............................................................... 37
Gold and Silver Prices.................................................. 38
Estimation of Asset Carrying Values..................................... 38
Uncertainty of Reserve and Other Mineralization Estimates............... 39
Mining and Processing................................................... 39
Mine Development Risks.................................................. 40
Exploration Risks....................................................... 40
Mining Risks and Insurance.............................................. 41
Governmental Regulation................................................. 41
Risk of International Operations........................................ 42
Title to Properties..................................................... 43
Inflation and Currency Risks............................................ 43
GLOSSARY................................................................. 44
GOLD PRICES.............................................................. 48
SILVER PRICES............................................................ 48
EXCHANGE RATES........................................................... 48
CONVERSION TABLE......................................................... 48
MINE PROCESSING.......................................................... 49
ITEM 3-LEGAL PROCEEDINGS................................................... 52
ALASKA-JUNEAU............................................................ 52
SUMMA.................................................................... 52
QUI TAM ACTION........................................................... 52
OTHER.................................................................... 52
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 52
PART II
ITEM 5-MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER
MATTERS........................................................... 53
MARKET INFORMATION....................................................... 53
DIVIDENDS................................................................ 53
CERTAIN TAX MATTERS...................................................... 54
United States Federal Income Tax Considerations......................... 54
Canadian Federal Income Tax Considerations.............................. 54
ITEM 6-SELECTED FINANCIAL DATA............................................. 55
ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS..................................................... 57
SUMMARY.................................................................. 57
RESULTS OF OPERATIONS.................................................... 57
Revenue................................................................. 57
Gold and Silver Hedging................................................. 58
Operating Costs......................................................... 58
Royalties............................................................... 58
Production Taxes........................................................ 58
Depreciation and Amortization........................................... 58
Reclamation and Mine Closure............................................ 59
General and Administrative.............................................. 59
Exploration and Development............................................. 59
</TABLE>
ii
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<TABLE>
<CAPTION>
<S> <C>
Interest and Other..................................................... 59
Provision for Impaired Assets and Other Charges........................ 60
Income Tax Expense..................................................... 60
Dividends on Preferred Stock of Subsidiary............................. 60
LIQUIDITY AND CAPITAL RESOURCES......................................... 60
COMMITMENTS AND CONTINGENCIES........................................... 61
IMPACT OF YEAR 2000..................................................... 62
ITEM 8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS........................................... 63
QUARTERLY FINANCIAL HIGHLIGHTS............................................ 63
ITEM 9-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................. 101
PART III
ITEM 10-DIRECTORS OF THE REGISTRANT....................................... 101
ITEM 11-EXECUTIVE COMPENSATION............................................ 101
ITEM 12-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.... 101
ITEM 13-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 102
PART IV
ITEM 14-EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.. 102
SIGNATURES................................................................ 105
</TABLE>
iii
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PART I
ITEMS 1 AND 2-BUSINESS AND PROPERTIES
INTRODUCTION
In this report, the "Company" refers to Echo Bay Mines Ltd. and its subsidiaries
unless the context specifies otherwise. The Company's financial statements are
presented in accordance with generally accepted accounting principles in Canada.
In this report, all dollar amounts are expressed in U.S. dollars unless
specified otherwise.
The Company mines, processes and explores for gold. The Company also produces a
significant amount of silver at its McCoy/Cove mine in Nevada. In 1997, the
Company re-focused its exploration efforts on projects principally located in
the Americas where the Company already has an extensive gold mining
infrastructure. The Company's interest in operating properties is set out below.
All are operated by the Company.
<TABLE>
<CAPTION>
PERCENTAGE
OWNERSHIP
MINE LOCATION INTEREST
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Round Mountain Nevada, U.S.A. 50%
McCoy/Cove Nevada, U.S.A. 100%
Lupin Nunavut Settlement Area of the Northwest Territories, Canada 100%
Kettle River Washington, U.S.A. 100%
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</TABLE>
The Company's operations in 1997 and 1998, were, and will continue to be,
materially affected by the price of gold, which declined from $369 at year end
1996 to $293 at year end 1997, and has been in the $300 range and lower in 1998.
In 1997, the Company produced a total of 721,075 ounces of gold at an average
cash operating cost of $249 per ounce. 1997 silver production was 11,021,708
ounces. In 1997, the Company reported a net loss of $420.5 million on revenues
of $305.4 million, after expensing $34.9 million on exploration and development
and recording a provision for impaired assets and other charges of $362.7
million. At December 31, 1997, the Company had 7.5 million ounces of gold
reserves and 46.5 million ounces of silver reserves.
In the third quarter of 1997, in view of the drop in the gold price, the Company
deferred final construction decisions on its two planned gold mines, Aquarius in
Canada and Paredones Amarillos in Mexico. See "Development Programs-Aquarius"
and "-Paredones Amarillos."
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 until the gold price improves
significantly. In 1998, the Company expects to produce from 500,000 to 520,000
ounces of gold at an average cash operating cost of $245 to $255 per ounce and
between 7 and 8 million ounces of silver. For a general identification of risk
factors involved in the Company's business, see "Cautionary `Safe Harbor'
Statement under the United States Private Litigation Reform Act of 1995" and
"Risk Factors."
1
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OPERATIONS SUMMARY
Gold and Silver Production
- --------------------------
Gold and silver production for the last three years is provided below.
<TABLE>
<CAPTION>
GOLD PRODUCTION (OUNCES) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Round Mountain (50%) 238,840 205,487 172,217
McCoy/Cove 187,034 271,731 310,016
Lupin 165,335 166,791 172,110
Kettle River 129,866 124,910 100,419
- ------------------------------------------------------------------------------------------------------------------------
Total gold 721,075 768,919 754,762
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Percentage increase (decrease) from prior year (6.2%) 1.9% (7.7%)
- ------------------------------------------------------------------------------------------------------------------------
SILVER PRODUCTION (OUNCES) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
Total silver-all from McCoy/Cove 11,021,708 7,102,348 11,905,806
- ------------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease) from prior year 55.2% (40.3%) 14.0%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Production Costs
- ----------------
Effective January 1, 1996, the Company adopted the "Gold Institute Production
Cost Standard" for reporting production costs on a per ounce basis. This
standard defines cash operating costs as those costs directly associated with
the mining and milling of gold and silver, adjusted for such items as changes in
in-process inventories. Other cash costs, specifically royalties and production
taxes, are defined as those costs resulting from, but not directly related to,
the production of gold and silver. Non-cash costs are defined as costs accounted
for ratably over the life of an operation, including depreciation, amortization,
and reclamation costs.
Prior period per ounce costs have been restated to conform with the new
standard.
<TABLE>
<CAPTION>
PRODUCTION COSTS PER OUNCE OF GOLD PRODUCED 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Direct mining expense $ 251 $ 262 $ 231
Deferred stripping and mine development costs (3) (9) 1
Inventory movements and other 1 1 (3)
- ------------------------------------------------------------------------------------------------------------------------
Cash operating costs 249 254 229
Royalties 9 11 9
Production taxes 1 3 5
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Total cash costs 259 268 243
Depreciation 58 64 61
Amortization 32 34 36
Reclamation and mine closure 10 7 6
- ------------------------------------------------------------------------------------------------------------------------
Total production costs $ 359 $ 373 $ 346
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Percent increase (decrease) from prior year (3.8%) 7.8% 8.1%
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CASH OPERATING COSTS PER OUNCE OF GOLD 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Round Mountain $ 207 $ 221 $ 195
McCoy/Cove 271 271 217
Lupin 284 299 296
Kettle River 227 201 230
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Company consolidated weighted average $ 249 $ 254 $ 229
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Percentage increase (decrease) from prior year (2.0%) 10.9% 9.6%
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</TABLE>
In 1997, the average cash operating cost per ounce was $249 compared with $254
in 1996 and $229 in 1995. Cash operating costs per ounce were lower in 1997
reflecting increased dedicated pad tonnage and reusable pad recovery at Round
Mountain and reduced maintenance and administrative costs and increased
operating efficiencies at Lupin; partially offset by lower mill grades at Kettle
River. Cash operating costs per ounce were higher in 1996 compared with 1995
due to increased mining costs per ounce at
2
<PAGE>
McCoy/Cove and Round Mountain. The Company's consolidated cash operating cost
target is $245 to $255 per ounce of gold produced in 1998.
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.
The reconciliation of cash operating costs per ounce to the financial statements
reflects increased finished goods inventory at December 31, 1997 and increased
silver production in 1997 compared to 1996, as follows.
<TABLE>
<CAPTION>
RECONCILIATION OF CASH OPERATING
COSTS PER OUNCE TO FINANCIAL STATEMENTS
thousands of U.S. dollars, except per ounce amounts
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating costs per financial statements $213,120 $221,126 $212,182
Change in finished goods inventory and other 10,956 70 (4,188)
Co-product cost of silver produced (44,528) (25,568) (35,003)
- ------------------------------------------------------------------------------------------------------------------------
Cash operating costs $179,548 $195,628 $172,991
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Gold ounces produced 721,075 768,919 754,762
Cash operating costs per ounce $ 249 $ 254 $ 229
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Percentage increase (decrease) from prior year (2.0%) 10.9% 9.6%
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</TABLE>
The gold and silver ounces sold and other revenue data for the last three years
are set out below.
<TABLE>
<CAPTION>
REVENUE DATA
Year ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gold
- ----
Ounces sold 698,337 777,512 758,635
Average price realized per ounce $ 362 $ 384 $ 388
Average market price per ounce $ 332 $ 388 $ 384
Revenue (millions of U.S. dollars) $ 252.6 $ 298.9 $ 294.6
Percentage of total revenue 83% 89% 82%
Silver
- ------
Ounces sold 10,037,753 7,098,417 12,234,835
Average price realized per ounce $ 5.26 $ 5.41 $ 5.40
Average market price per ounce $ 4.87 $ 5.18 $ 5.19
Revenue (millions of U.S. dollars) $ 52.8 $ 38.4 $ 66.1
Percentage of total revenue 17% 11% 18%
- --------------------------------------------------------------------------------------------------------------------------
Total revenue (millions of U.S. dollars) $ 305.4 $ 337.3 $ 360.7
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The effects of changes in sales volume and prices were:
<TABLE>
<CAPTION>
VARIANCES
thousands of U.S. dollars
Year ended December 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Decrease in volume $(14,501) $(20,412) $(13,478)
Higher (lower) prices:
Gold (15,880) (3,002) 1,135
Silver (1,506) -- (4,527)
- ------------------------------------------------------------------------------------------------------------------------
Decrease in gold and silver
revenue from the previous year $(31,887) $(23,414) $(16,870)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
The decrease in gold revenue from 1996 to 1997 was primarily due to lower gold
prices realized ($362 per ounce in 1997 compared to $384 per ounce in 1996) and
lower gold ounces produced at McCoy/Cove resulting from lower mill grades and
recoveries, partially offset by increased gold production at Round Mountain
resulting from more tons processed. The increase in silver revenues from 1996
to 1997 was due to increased production reflecting higher mill grades, partially
offset by lower silver prices realized ($5.26 per ounce in 1997 versus $5.41 per
ounce in 1996). The increase in gold revenue from 1995 to 1996 was primarily
due to higher production resulting from more tons processed at Round Mountain
and higher production resulting from more tons processed and higher grades at
Kettle River, partially offset by lower production resulting from lower grades
and recoveries at McCoy/Cove, lower production resulting from lower grades at
Lupin and lower prices realized ($384 per ounce in 1996 vs. $388 per ounce in
1995). The decrease in silver revenue from 1995 to 1996 was due to lower
production resulting from lower grades.
RESERVES
The following table presents ore reserves by property. These reserves were
estimated by the Company. A description of each mine follows the "Reserves" and
"Other Mineralization" sections. See "Risk Factors" for a discussion of items
which could affect the Company's reserve estimates.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Ore Reserves(1)
(thousands, except average grades)
(proven and probable at December 31)
1997 1996 1995
--------------------------------------------- ------------ ------------
Average Contained Contained Contained
grade Contained ounces (the ounces (the ounces (the
(ounces ounces Company's Company's Company's
Tons per ton) (100%) share) share) share)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GOLD
- -----
PRODUCING MINES:
Round Mountain 401,325 0.018 7,037 3,519 4,525 5,000
McCoy/Cove 24,737 0.037 915 915 1,183 1,526
Lupin (2) 2,018 0.269 543 543 443 685
Kettle River 1,734 0.196 339 339 370 330
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Total producing mines 8,834 5,316 6,521 7,541
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DEVELOPMENT PROPERTIES:
Aquarius 19,977 0.064 1,274 1,274 1,277 --
Paredones Amarillos 46,993 0.032 1,482 889 775 --
Alaska-Juneau(3) -- -- -- -- -- 3,442
-------------------------------------------------------
Total development properties 2,756 2,163 2,052 3,442
-------------------------------------------------------
Total gold 11,590 7,479 8,573 10,983
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SILVER
- ------
McCoy/Cove 24,737 1.88 46,525 46,525 53,858 62,913
-------------------------------------------------------
Total silver 46,525 46,525 53,858 62,913
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</TABLE>
(1) The definitions of proven and probable ore are those used in Canada by
certain provincial securities regulatory authorities and are set forth in
National Policy No. 2-A. The definitions are substantially the same as those
applied in the United States by the Securities and Exchange Commission which
are based on definitions used by the United States Bureau of Mines and the
United States Geological Survey. See "Glossary-Ore Reserves".
(2) In January 1998, the Company temporarily suspended operations at the Lupin
mine pending a significant increase in the gold price. See "Lupin".
(3) In 1996, the Company decided not to proceed with development of its Alaska-
Juneau project, wrote off its entire remaining investment in the project of
$57.1 million and established a reserve of $20.0 million to cover
4
<PAGE>
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."
The Company reports extractable (minable) ore reserves. Reserves do not reflect
recovery losses in the milling or heap leaching processes, but do include
allowance for dilution of ore in the mining process.
Ore reserves were estimated based on a gold price of $350 per ounce at December
31, 1997 ($375 per ounce at December 31, 1996 and 1995) and a silver price of
$5.00 per ounce at December 31, 1997, 1996 and 1995. The market price for gold
is currently below the level used in calculating reserves at December 31, 1997.
If the market price for gold continues at its current level and the Company
determines that its reserves should be calculated at a significantly lower gold
price than that used at December 31, 1997, there would be a reduction in the
amount of gold reserves. 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 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.
Change in Proven and Probable Reserves
- --------------------------------------
The reconciliation of the change in proven and probable reserves from December
31, 1996 to December 31, 1997 is as follows.
<TABLE>
<CAPTION>
(millions of ounces)
Gold Silver
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Proven and probable reserves at December 31, 1996 8.6 53.9
Extensions, discoveries and adjustments
-- Round Mountain (1) (0.7) --
-- McCoy/Cove -- 0.8
-- Lupin 0.3 --
-- Kettle River 0.1 --
Development property additions
-- Aquarius 0.1 --
-- Paredones Amarillos 0.1 --
Production (2) (0.9) (7.6)
Change in gold price assumptions (0.1) (0.6)
---------------------------------------
Proven and probable reserves at December 31, 1997 7.5 46.5
---------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In 1997, a new optimized open pit design was adopted at Round Mountain to
increase cash flow and profitability and reduce cash operating costs over
the life of the mine by eliminating the mining of lower-grade, higher-cost
non-oxidized material. The new design reduces proven and probable ore
reserves by 1.2 million ounces (the Company's share, 600,000 ounces).
(2) Production represents previously modeled, in-situ ounces mined during 1997;
this amount does not reflect recovery losses from heap leaching and milling.
For further information on ore reserves for specific mines, see the mines'
descriptions in "Business and Properties."
5
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OTHER MINERALIZATION
The following table presents other mineralization by property. Other
mineralization for producing mines and development properties is generally
estimated by the Company.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Other Mineralization(1)
(thousands, except average grades) (at December 31)
1997 1996 1995
----------------------------------- --------------------- ---------------------
Tons Average Tons Average Tons Average
Tons (the grade (the grade (the grade
(100% Company's (ounces Company's (ounces Company's (ounces
basis) share) per ton) share) per ton) share) per ton)
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
GOLD
- ----
PRODUCING MINES:
Round Mountain 142,264 71,132 0.016 52,958 0.015 36,340 0.021
McCoy/Cove 635 635 0.025 1,473 0.029 6,767 0.036
Lupin (including Ulu) (2) 2,194 2,194 0.358 3,365 0.310 3,640 0.300
Kettle River 149 149 0.174 282 0.181 1,097 0.186
--------------------------------------------------------------------------------
145,242 74,110 0.027 58,078 0.033 47,844 0.048
--------------------------------------------------------------------------------
DEVELOPMENT AND OTHER
PROPERTIES(3):
Aquarius 826 826 0.062 -- -- 23,465 0.055
Paredones Amarillos 665 399 0.018 -- -- 16,275 0.040
Alaska-Juneau (4) -- -- -- -- -- 30,086 0.052
Chapada(5) -- -- -- 56,700 0.012 56,700 0.012
Kingking(6) -- -- -- 168,750 0.017 168,750 0.017
1,491 1,225 0.048 225,450 0.016 295,276 0.024
--------------------------------------------------------------------------------
Total gold 146,733 75,335 0.027 283,528 0.019 343,120 0.027
--------------------------------------------------------------------------------
SILVER
- ------
PRODUCING MINES:
McCoy/Cove 635 635 0.99 1,473 1.36 6,767 0.65
--------------------------------------------------------------------------------
Total silver 635 635 0.99 1,473 1.36 6,767 0.65
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Tons Tons Tons
Tons (the Average (the Average (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 AND OTHER
properties (3):
Chapada(5) -- -- -- 56,700 0.43% 56,700 0.43%
Kingking(6) -- -- -- 168,750 0.47% 168,750 0.47%
---------------------------------------------------------------------------
Total copper -- -- -- 225,450 0.46% 225,450 0.46%
---------------------------------------------------------------------------
</TABLE>
(1) Other mineralization has not been included in the proven and probable ore
reserve estimates because even though enough drilling, trenching, and/or
underground work indicate a sufficient amount and grade to warrant further
exploration or development expenditures, these resources do not qualify
under the U.S. Securities and Exchange Commission standards as commercially
minable ore bodies until further drilling, metallurgical work, and other
economic and technical feasibility factors based upon such work are
resolved.
(2) In January 1998, the Company temporarily suspended operations at the Lupin
mine pending a significant increase in the gold price. See "Lupin".
6
<PAGE>
(3) The Company's construction and production decision at its development
properties is dependent on the issuance of appropriate permits and the
ability of the Company to obtain required financing. See "Development
Programs."
(4) In 1996, the Company decided not to proceed with development of its Alaska-
Juneau project, wrote off its entire remaining investment in the project of
$57.1 million and established a reserve of $20.0 million to cover estimated
reclamation and closure responsibilities. Alaska-Juneau's other
mineralization of 30.1 million tons at an average grade of 0.052 ounces of
gold per ton was removed from the Company's ore reserves as of December 31,
1996. See "Alaska-Juneau."
(5) In 1996 and 1995, the Company owned an option entitling it to acquire a 50%
direct interest in the Chapada property from Santa Elina Mines Corporation.
The Company elected not to exercise this option in 1997. The Company owned
7% of the common shares of Santa Elina at year end 1995, 51% of the common
shares at year end 1996, and 58% of the common shares at year end 1997. The
Company had indirect Chapada interests of 6% in 1995, 42% in 1996 and 48% in
1997. In 1997, the Company wrote off its entire investment in Santa Elina of
$143.6 million. The Company's share of Chapada's other mineralization of
56.7 million tons at average grades of 0.012 ounces of gold per ton and
0.43% copper was removed from the Company's estimates of other
mineralization as of December 31, 1997. See "Santa Elina".
(6) In 1997, the Company decided not to proceed with development of its Kingking
project and wrote off its entire investment in the project of $50.0 million.
The Company's share of Kingking's other mineralization of 168.8 million tons
at average grades of 0.017 ounces of gold per ton and 0.47% copper was
removed from the Company's estimates of other mineralization as of December
31, 1997. See "Kingking".
CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
With the exception of historical matters, the matters discussed in this report
are forward looking statements that involve risks and uncertainties that could
cause actual results to differ materially from targeted or projected results.
Such forward looking statements include statements regarding targets for gold
and silver production, cash operating costs and certain significant expenses,
percentage increases and decreases in production from the Company's principal
mines, schedules for completion of detailed feasibility studies and initial
feasibility studies, potential increases in reserves and production, the timing
and scope of future drilling and other exploration activities, expectations
regarding receipt of permits and commencement of mining or production,
anticipated grades and recovery rates, the ability to secure financing, and
potential acquisitions or increases in property interests. 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 or other problems, results of current
exploration activities, results of pending and future feasibility studies,
changes in project parameters as plans continue to be refined, political,
economic and operational risks of foreign operations, availability of materials
and equipment, the timing of receipt of governmental permits, force majeure
events, the failure of plant, equipment or processes to operate in accordance
with specifications or expectations, accidents, labor relations, delays in
start-up dates, environmental costs and risks, the outcome of acquisition
negotiations and general domestic and international economic and political
conditions, as well as other factors described herein or in the Company's
filings with the U.S. Securities and Exchange Commission. Many of these factors
are beyond the Company's ability to predict or control. Readers are cautioned
not to put undue reliance on forward-looking statements. See "Risk Factors" for
items which could affect forward-looking statements.
7
<PAGE>
ROUND MOUNTAIN
The Company owns an undivided 50% interest in and operates the Round Mountain
gold mine, acquired in 1985. Subsidiaries of Homestake Mining Company and Case,
Pomeroy & Company, Inc., each own an undivided 25% interest in the mine. Mining
equipment, crushing facilities, heap leaching facilities, milling facilities,
gold extraction and recovery facilities, administration and maintenance
buildings and other equipment are included in the joint venture.
The mine, located 60 miles north of Tonopah in Nye County, Nevada, consists of
open-pit mining operations on patented and unpatented mining claims covering
approximately 24,968 acres. The Company has completed all steps currently
required under U.S. law to convert the minable land to patented status and has
filed application for patents. The patents have not been issued to date and are
currently under audit. See "Other-Government Regulation and Environmental
Issues".
In 1997, the joint venture partners implemented a new, optimized pit design
which eliminates the mining of lower-grade, higher-cost non-oxidized material.
While the new pit design is expected to result in increased cash flows over the
life of the mine, it reduces Round Mountain's gold reserves by 1.2 million
ounces of gold (the Company's share, 0.6 million ounces). The revision will
result in mining being completed in nine years (assuming no new gold
discoveries) plus four years of stockpile processing, compared with the previous
plan of 14 years of mining plus seven years of stockpile processing.
Construction of an 8,000 ton per day mill to treat higher-grade non-oxidized ore
was completed in the fourth quarter of 1997, at a total cost of $64 million (the
Company's share, $32 million). The mill processed approximately 274,000 tons in
its first 63 days of operation. The recovery during the initial quarter of
operations was 60%. Efforts are underway to fine tune the process, and the
facility is expected to recover up to 80-85% of the gold contained in non-
oxidized ores by employing gravity concentration and cyanide leaching.
8
<PAGE>
The following table sets forth operating data for the Round Mountain operation
from 1993 through 1997. The Company's share of production is 50% of the ounces
shown.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gold produced (ounces) 477,680 410,974 344,434 423,504 374,694
Mining cost/ton of ore and waste $ 0.65 $ 0.69 $ 0.61 $ 0.53 $ 0.60
Heap leaching cost/ton of ore $ 0.61 $ 0.80 $ 0.65 $ 0.66 $ 0.91
Milling cost/ton of ore $ 4.38 -- -- -- --
Production cost/ounce of gold produced:
Direct mining expense $ 208 $ 228 $ 218 $ 156 $ 205
Deferred stripping cost 2 (2) (23) 8 (7)
Inventory movements and other (3) (5) -- 12 3
-------- -------- -------- -------- --------
Cash operating cost 207 221 195 176 201
Royalties paid 22 32 31 32 26
Production taxes 4 4 4 8 5
-------- -------- -------- -------- --------
Total cash cost 233 257 230 216 232
Depreciation 39 51 62 51 67
Amortization 18 18 20 20 20
Reclamation and mine closure 7 5 5 4 4
-------- -------- -------- -------- --------
Total production costs $ 297 $ 331 $ 317 $ 291 $ 323
-------- -------- -------- -------- --------
Capital expenditures (millions)(1) $ 30.7 $ 17.5 $ 11.7 $ 8.7 $ 6.6
Deferred (applied) mining
expenditures (millions)(1) $ 1.0 $ 0.4 $ 4.0 $ (1.7) $ 1.3
Heap leached-reusable pad:
Ore processed (tons/day) 26,608 27,737 22,490 18,980 28,329
Days of operation 359 354 354 355 361
Total ore processed (000 tons) 9,552 9,819 7,961 6,738 10,227
Grade (ounce/ton) 0.036 0.036 0.034 0.040 0.033
Recovery rate (%) 74.9 66.1 70.9 78.7 69.4
Gold recovered (ounces) 268,518 231,420 192,052 216,710 256,784
Heap leached-dedicated pad:
Ore processed (tons/day) 107,716 87,706 66,197 54,161 39,379
Days of operation 359 354 354 355 361
Total ore processed (000 tons) 38,670 31,048 23,434 19,227 14,216
Grade (ounce/ton) 0.010 0.011 0.012 0.014 0.014
Recovery rate (%) (2) (2) (2) (2) (2)
Gold recovered (ounces) 195,558 167,004 138,700 173,544 62,368
Milled: (3)
Ore processed (tons/day) n.m. -- -- -- --
Days of operation 63 -- -- -- --
Total ore processed (000 tons) 274 -- -- -- --
Gold grade (ounce/ton) 0.041 -- -- -- --
Gold recovery rate (%) 60.0 -- -- -- --
Gold recovered (ounces) 6,410 -- -- -- --
High grade ore processed: (4)
Gold recovered (ounces) 7,194 12,550 12,244 33,052 53,376
Other:
Gold recovered (ounces) -- -- 1,438 198 2,166
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) The Company's 50% share.
(2) For dedicated leach pads, a gold recovery rate cannot be calculated until
leaching is complete. The eventual recovery rate is estimated to be
approximately 50%.
(3) Construction of an 8,000 ton per day mill to treat higher-grade non-
oxidized ore was completed in the fourth quarter of 1997.
(4) A high grade occurrence was discovered April 1992. A small gravity plant
was constructed to recover these ounces.
n.m. Not meaningful.
9
<PAGE>
Geology and Ore Reserves
- ------------------------
Gold mineralization in the Round Mountain deposit is associated with Tertiary
volcanism and Caldera Formation. The deposit is hosted by a thick sequence of
rhyolitic ash-flow tuffs deposited on a Paleozoic and Cretaceous basement.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Round Mountain Mine
Ore Reserves(1)(2)
December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------
Average grade
Tonnage of gold Gold content(3)
(000's short tons) (ounces per ton) (000's ounces)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Round Mountain pit 257,537 0.021 5,372
Offloads and heap leach stockpiles (4) 140,163 0.011 1,525
Mill stockpiles 3,492 0.037 130
High grade ore 133 0.075 10
- ------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1997 401,325 0.018 7,037
- ------------------------------------------------------------------------------------------------------------------------
Proven 295,138 0.017 4,982
Probable 106,187 0.019 2,055
- ------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1997 401,325 0.018 7,037
- ------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1996 476,509 0.019 9,050
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company's share is 50% of the reserves presented.
(2) See "Reserves" as to the estimation of proven and probable ore reserves.
(3) Reserves include allowances for dilution in mining but do not reflect losses
in the leaching process. The average leach recovery rate for the reusable
pad in 1997 was 75%. The eventual average recovery rate for the dedicated
pad is estimated to be approximately 50%. The mill recovery rate was 60% in
1997 but is expected to increase to approximately 80-85%.
(4) The offloads consist of approximately 98 million tons of previously crushed,
leached and rinsed ore. The heap leach stockpiles consist of approximately
42 million tons of previously unprocessed ore. Sampling and metallurgical
testing conducted in 1994 and 1995 confirmed that this material can be
profitably processed on the dedicated leach pads.
The cut-off grades are 0.006 ounce of gold per ton for oxides and 0.010 ounce
per ton for non-oxides.
The prospective waste to ore ratio of pit ore is 0.94:1.
Mining and Processing
- ---------------------
Ore and waste rock was mined at a rate of approximately 197,000 tons per day in
1997 compared to 164,000 tons per day in 1996. The increase was due to an
increased movement of stockpiled ore and previously leached material to the
dedicated pads and an increase in dedicated pad capacity in 1997. All mined
material requires drilling and blasting prior to excavation. The open pit mining
operation employs three 28-yard electric mining shovels, and seventeen 150-ton,
eleven 190-ton and nine 85-ton mechanical haul trucks.
Gold recovery from ore occurs from four independent recovery operations. These
include crushed ore (reusable pad) leaching, run-of-mine ore (dedicated pad)
leaching, gravity concentration, and, beginning in the fourth quarter of 1997,
the milling of higher grade non-oxidized ore as discussed below. Beginning in
1993 the Company began processing the lower grade ore on the run-of-mine leach
pads. Recovery rates for crushed ore have increased and lower grade ore and some
material previously hauled to the waste dumps is being leached on the run-of-
mine leach pads.
10
<PAGE>
Heap leaching is used to recover gold below a cut-off grade of 0.018 ounce per
ton. Ore is crushed to less than 3/4 inches at a rate of 30,000 tons per day
and conveyed to two parallel 1.5 million square foot asphalt reusable leach
pads. This ore is leached for approximately 100 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. Heap leach production from
the reusable pad was higher compared to 1996 due to higher recoveries partially
offset by lower tonnages. In 1997, the 26,608 tons of ore per day were
processed on the reusable heap leach pad, compared to 27,737 tons per day in
1996. For a general description of Round Mountain's mining and heap-leach
recovery process see page 51.
Lower grade ore (down to a cut-off grade of 0.006 ounce per ton for oxidized
ores and 0.010 ounce per ton for non-oxidized ores) and ore removed from the
reusable leach pad is transported directly to a dedicated run-of-mine leach pad
at a rate which averaged 108,000 tons per day in 1997, compared to 88,000 tons
per day in 1996 resulting in higher production from the dedicated 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. The existing dedicated leach
pad covers approximately 16.4 million square feet and has a capacity of
approximately 131 million tons.
In February 1998, construction of a 7.87 million square foot dedicated pad
facility and solution pumping system was completed, sufficient to treat ore
mined through 1999.
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 4,000 ounces
in 1998.
Construction of an 8,000 ton per day mill to treat higher-grade non-oxidized ore
was completed in the fourth quarter of 1997, at a total cost of $64 million (the
Company's share, $32 million). The mill processed approximately 274,000 tons in
its first 63 days of operation. The recovery during the initial quarter of
operations was 60%. Efforts are underway to fine tune the process, and the
facility is expected to recover up to 80-85% of the gold contained in non-
oxidized ores by employing gravity concentration and cyanide leaching.
In 1998, Round Mountain is expected to produce about the same amount of gold as
1997's production of 477,680 ounces (the Company's share, 238,840). See
"Cautionary `Safe Harbor' Statement under the United States Private Securities
Litigation Reform Act of 1995" and "Risk Factors."
11
<PAGE>
MCCOY/COVE
The McCoy/Cove property commenced production in April 1986 as an open pit heap
leaching operation. The McCoy mine and surrounding property, which was purchased
by the Company in September 1986, is located in Lander County, Nevada, about 30
miles southwest of the town of Battle Mountain. The Cove deposit, located one
mile northeast of the McCoy deposit, was discovered in early 1987. Open pit
mining of the Cove deposit began in early 1988. A 7,500 ton per day mill,
completed in July 1989, utilizes flotation and agitation leach circuits to
recover gold and silver from sulfide ores not amenable to heap leaching and from
high-grade oxide ore. The mill was expanded to 10,000 tons per day during 1996.
The McCoy/Cove property consists of approximately 2,560 unpatented claims
covering approximately 44,989 acres of United States federal land administered
by the Bureau of Land Management of the Department of the Interior. The Company
has completed all steps currently required under U.S. law to convert the land to
patented status and has filed applications for patents. The patents have not
been issued to date and are currently under audit. See "Other-Government
Regulation and Environmental Issues".
During 1996, the Company recorded a $30.0 million provision related to the
estimated costs to remove waste rock from an unstable portion of the Cove pit
wall. The cost estimate underlying the provision is based on an evaluation of
the total tons to be removed and the associated costs, both of which will be
further refined during the first half of 1998. In March 1998, The Company sold
forward 270,000 ounces of gold, related to McCoy/Cove production, at an average
price of $319 per ounce and 16.0 million ounces of silver at an average price of
$6.01 per ounce, with delivery dates from 1998 to 2001. Based on this current
hedge position, the Company plans to proceed with the pit wall remediation in
the second half of 1998. By December 31, 1997, total spending for the pit wall
stabilization was $5.6 million.
In 1997, the Company conducted a major review of the life-of-mine plans for its
producing properties, and as a result, recorded a $47.0 million provision for
impaired assets related to McCoy/Cove. The need for and the amount of the
provision was determined by comparing asset carrying values to estimated future
net cash flows from existing reserves.
In January 1998, in light of the fall in gold prices during 1997, the Company
decided to scale back operations at McCoy/Cove. As a result, the McCoy/Cove
work force was reduced by approximately 20%. Mining activities were refocused
on the higher-margin mill ounces from the Cove pit. Mining was temporarily
discontinued in the smaller, higher-cost McCoy pit. Based on a reengineered
McCoy pit design, mining is scheduled to resume at the McCoy pit near the end of
the first quarter of 1998 at a lower cost.
12
<PAGE>
The following table sets forth operating data for the McCoy/Cove operation from
1993 through 1997.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gold produced (ounces) 187,034 271,731 310,016 359,360 395,608
Silver produced (ounces) 11,021,708 7,102,348 11,905,806 10,443,151 12,454,338
Mining cost/ton of ore and waste $ 0.74 $ 0.72 $ 0.67 $ 0.68 $ 0.74
Heap leaching cost/ton of ore $ 1.70 $ 1.68 $ 2.32 $ 1.09 $ 1.29
Milling cost/ton of ore $ 8.82 $ 9.50 $ 10.67 $ 10.09 $ 9.28
Production cost/ounce of gold produced:
Direct mining expense $ 276 $ 286 $ 206 $ 191 $ 187
Deferred stripping cost (10) (16) 15 6 3
Inventory movements and other 5 1 (4) (3) --
----------- ---------- ----------- ----------- -----------
Cash operating cost 271 271 217 194 190
Royalties 3 5 5 6 5
Production taxes (1) 4 7 9 7
----------- ---------- ----------- ----------- -----------
Total cash cost 273 280 229 209 202
Depreciation 66 71 53 48 41
Amortization 44 46 46 43 45
Reclamation and mine closure 10 8 5 5 5
----------- ---------- ----------- ----------- -----------
Total production cost $ 393 $ 405 $ 333 $ 305 $ 293
----------- ---------- ----------- ----------- -----------
Average gold-to-silver price ratio(1) 67:1 75:1 74:1 73:1 85:1
Capital expenditures (millions) $ 2.2 $ 7.3 $ 8.6 $ 5.2 $ 6.7
Deferred (applied) mining
expenditures (millions) $ 3.7 $ 6.0 $ (7.3) $ (3.0) $ (1.5)
Heap leached:
Ore processed (tons/day) 17,840 16,671 11,966 21,682 24,090
Days of operation 364 364 364 364 371
Total ore processed (000 tons) 6,494 6,068 4,355 7,892 8,938
Gold grade (ounce/ton) 0.018 0.018 0.018 0.013 0.017
Silver grade (ounce/ton) 0.29 0.27 0.49 0.48 0.88
Gold recovery rate (2) (2) (2) (2) (2)
Silver recovery rate (2) (2) (2) (2) (2)
Gold recovered (ounces) 55,129 66,834 59,910 66,617 100,136
Silver recovered (ounces) 396,928 513,227 877,463 940,652 2,406,939
Milled:
Ore processed (tons/day) 9,315 9,031 7,275 7,307 7,708
Days of operation 364 364 364 364 371
Total ore processed (000 tons) 3,391 3,287 2,648 2,660 2,860
Gold grade (ounce/ton) 0.061 0.086 0.113 0.140 0.113
Silver grade (ounce/ton) 4.54 3.14 5.27 5.29 4.62
Gold recovery rate (%) 64.3 79.5 82.4 80.3 90.0
Silver recovery rate (%) 69.7 73.5 78.8 70.1 71.0
Gold recovered (ounces) 131,905 204,897 250,106 292,743 295,472
Silver recovered (ounces) 10,624,780 6,589,121 11,028,343 9,502,499 10,047,399
- -----------------------------------------------------------------------------------------------------------
</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) As dedicated leach pads are used at McCoy/Cove, a gold recovery rate cannot
be calculated until leaching is complete. The ultimate recovery rate for
crushed ore is estimated to be about 68% for gold and 35% for silver and for
run-of-mine ore, 48% for gold and 10% for silver.
Geology and Ore Reserves
- ------------------------
Gold deposition in the McCoy pit is associated with the intrusion of a Tertiary-
age quartz diorite stock into Mesozoic sedimentary formations including
quartzites, conglomerates, and limestones. Gold occurs in the Skarn Formation
proximal to the intrusion and as a stockwork-type deposit in the highly
fractured sediments.
13
<PAGE>
The Cove deposit is a sediment hosted gold-silver deposit that is spatially
associated with a sequence of argillically altered felsite dikes. Gold and
silver mineralization occurs both as a rind around the altered intrusion and
away from the intrusions along favorable horizons such as permeable beds and
fractured zones. Cove ore is hosted by limestone of the Augusta Mountain
Formation and by conglomerate/sandstone of the Panther Canyon Formation.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
McCoy/Cove Mine
Ore Reserves(1)
December 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------
Tonnage Average grade Content(2)
(000's short tons) (ounces per ton) (000's ounces)
-------------------- ------------------------------------ ------------------------------
Gold Silver Gold Silver
------------------ ---------------- ------------------ ----------
<S> <C> <C> <C> <C> <C>
Cove Pit 15,529 0.041 2.39 631 37,143
West Contact of McCoy Pit 4,519 0.030 -- 136 --
Stockpiles 4,689 0.031 2.00 148 9,382
- ----------------------------------------------------------------------------------------------------------------------------
Proven and Probable-1997 24,737 0.037 1.88 915 46,525
- ----------------------------------------------------------------------------------------------------------------------------
Proven 14,157 0.038 1.96 533 27,767
Probable 10,580 0.036 1.77 382 18,758
- ----------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1997 24,737 0.037 1.88 915 46,525
- ----------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1996 35,379 0.033 1.52 1,183 53,858
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See "Reserves" as to the estimation of proven and probable ore reserves.
(2) Reserves include allowances for dilution in mining but do not reflect losses
in the recovery process. Recovery rates for the life-of-mine are estimated
to be 69% for gold and 67% for silver.
The gold-equivalent cut-off grades are 0.008 ounce per ton for oxides and 0.053
ounce per ton for sulfides.
The prospective waste-to-ore ratio is 3.3:1.
Mining and Processing
- ---------------------
Ore and waste rock was mined at a rate of approximately 148,000 tons per day in
1997, a decrease compared to 174,000 tons per day in 1996. Additionally in 1997,
14,000 tons per day were mined as part of the Cove pit wall instability
remediation. Mining during 1997 was from deeper levels of the Cove pit
resulting in lower production levels compared to 1996. All material requires
drilling and blasting prior to excavation. The open pit mining operation employs
four 23-yard hydraulic mining shovels, one 23-yard wheel loader, ten 150-ton and
ten 190-ton mechanical haul trucks. Gold recovery from ore occurs from a 10,000
ton per day mill and from crush and run-of-mine heap leaching operations.
Stockpiled ore decreased slightly from 4.9 million tons in 1996 to 4.7 million
tons in 1997. The Company expects the stockpiled ore to fluctuate as a function
of the mine plan. Mining operations are expected to run through 2000, with the
processing of the stockpiled ore continuing through 2002.
The Company mines at this high rate to minimize the time and expense required to
keep the Cove pit dewatered. Water pumped out of the Cove pit averaged 17,500
gallons per minute at the end of 1997. Water flows are projected to increase in
future years. The Company uses infiltration ponds for water pumped from the
mine.
A 10,000 ton per day mill utilizes flotation and agitation leach circuits to
recover gold and silver from high grade oxide ore and sulfide ores not amenable
to heap leaching. The mill was expanded in 1996 from 7,500 tons per day which
has resulted in improved recoveries of sulfide ore by increasing processing
time. For a general description of McCoy/Cove's mining and mill recovery
process, see page 50.
14
<PAGE>
The ore mined from the Cove pit was all oxide in the early years of production.
Oxide ore is replaced by sulfide ore at depth. Almost all of the remaining ore
at Cove is sulfide. Overall recovery rates and production levels decline as more
sulfides are processed. In the second half of 1997, McCoy/Cove began processing
carbonaceous ore that had in past years been mined from the Cove pit and
stockpiled.
The mill processed less sulfide and more carbonaceous ore in 1997 compared to
1996. Mill throughput averaged 9,315 tons per day in 1997 compared to 9,031 in
1996. Gold production decreased and silver production increased compared to
1996. Gold production decreased due to lower grades and lower recovery from
carbonaceous ores. Silver production increased due to higher grades and greater
throughput, slightly offset by lower recovery from carbonaceous ores.
Heap leach gold production was lower compared to 1996 due to lower recoveries
from McCoy ores. The heap leach crusher averaged 11,444 tons per day in 1997
compared to 10,168 tons per day in 1996 with the balance of lower grade heap
leach ore being processed uncrushed, for a total of 17,840 tons per day in 1997
versus 16,671 tons per day in 1996. The increased tonnage is due to higher
crusher throughput and a higher quantity of run-of-mine ore in 1997. Heap leach
silver production decreased in 1997 compared to 1996 due to lower recoveries.
The Company finished mining the high grade sulfide zone at Cove in 1995. The
lower grade of the remaining sulfides, coupled with lower recovery rates, meant
lower production from sulfides during 1997 and 1996. Production is expected to
continue to decrease over the remaining life of the mine.
In 1998, McCoy/Cove is expected to produce about 10% to 15% less gold compared
to the 187,034 ounces produced in 1997. Silver production is expected to
decrease about 25% to 30% from the 11.0 million ounces produced in 1997. The
expected decrease in gold and silver production in 1998 is due to the expected
lower grades and recovery rates as well as the decision to postpone the mining
and processing of lower grade, higher-cost ores from the McCoy pit. See
"Cautionary `Safe Harbor' Statement under the United States Private Securities
Litigation Reform Act of 1995" and "Risk Factors."
15
<PAGE>
LUPIN
The Lupin mine is an underground operation located 250 miles northeast of
Yellowknife in the Nunavut Settlement Area of the Northwest Territories of
Canada, 56 miles south of the Arctic Circle. Production began in October 1982.
The Lupin mining leases cover 16,699 acres. The principal lease was renewed for
21 years in 1992, and, provided the Company has complied with its terms, is
renewable for further 21 year periods subject to any applicable regulations then
in effect. The lease was granted by the Department of Indian Affairs and
Northern Development on behalf of the Crown and is subject to the provisions of
the Territorial Lands Act and the Canada Mining Regulations. The lease is in
good standing. See "Other-Government Regulation and Environmental Issues" for
discussion regarding Inuit ownership interests.
In 1995, the Company purchased the Ulu property, located approximately 100 miles
north of Lupin, from BHP Minerals for $10 million. A 5% net smelter royalty is
payable to BHP after the recovery of 675,000 ounces of gold. The Ulu property
has approximately 1.5 million minable tons of other mineralization at an average
grade of 0.374 ounces of gold per ton. The deposit is open on strike and down
dip. In the third quarter of 1997, the Company deferred further development of
Ulu in light of the downturn in gold prices. See "Cautionary `Safe Harbor'
Statement under the United States Private Securities Litigation Reform Act of
1995" and "Risk Factors."
In 1997, the Company conducted a major review of the life-of-mine plans for its
producing properties, and, as a result, recorded a $65.0 million provision for
impaired assets related to the Lupin and Ulu properties. The need for and the
amount of the provision was determined by comparing asset carrying values to
estimated future net cash flows from existing reserves.
In January 1998, the Company temporarily suspended operations at the Lupin mine
until the gold price improves significantly. By the end of the first quarter of
1998, preparation of the mine and facilities to continue in a care and
maintenance mode are expected to be complete. Annual care and maintenance cost
are estimated to be approximately $2.5 million. As a result of the suspension
of operations, Lupin terminated approximately 500 employees.
During the period of suspension, the Company will complete a study to determine
the optimal operating and economic parameters which would allow the resumption
of production. During this period, a small group of maintenance and security
personnel will be employed to monitor the mine and facilities.
16
<PAGE>
The table below sets forth operating data for the Lupin mine from 1993 through
1997.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gold produced (ounces) 165,335 166,791 172,110 180,052 217,504
Mining cost/ton of ore C$ 46.09 C$ 44.08 C$ 44.23 C$ 40.45 C$ 35.54
Milling cost/ton of ore C$ 11.77 C$ 12.39 C$ 12.26 C$ 12.03 C$ 12.27
Production cost/ounce of gold produced:
Canadian dollars:
Direct mining expense C$ 381 C$ 411 C$ 423 C$ 375 C$ 291
Deferred mine development 13 (4) (22) (4) 5
Inventory movements and other (1) 1 4 4 13
-------- -------- -------- -------- --------
Cash operating cost C$ 393 C$ 408 C$ 405 C$ 375 C$ 309
-------- -------- -------- -------- --------
U.S. dollars:
Cash operating cost US$ 284 US$ 299 US$ 296 US$ 274 US$ 240
Royalties -- -- -- -- --
Production taxes -- -- -- -- --
-------- -------- -------- -------- --------
Total cash cost 284 299 296 274 240
Depreciation 71 71 68 64 59
Amortization 24 21 19 16 17
Reclamation and mine closure 14 8 7 6 7
-------- -------- -------- -------- --------
Total production cost US$ 393 US$ 399 US$ 390 US$ 360 US$ 323
-------- -------- -------- -------- --------
Capital expenditures (millions US$) $ 12.3 $ 15.7 $ 14.5 $ 8.5 $ 4.5
Deferred (applied) mining
expenditures (millions US$) $ (1.8) $ 0.2 $ 2.8 $ 0.5 $ (0.9)
Milled:
Ore processed (tons/day) 2,167 2,111 1,986 2,241 2,297
Days of operation 364 364 364 364 371
Total ore processed (000 tons) 789 768 723 816 852
Grade (ounce/ton) 0.226 0.235 0.258 0.238 0.272
Recovery rate (%) 92.6 92.5 92.5 92.9 93.7
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Geology and Ore Reserves
- ------------------------
Gold at the Lupin deposit occurs in a Z-shaped isoclinally folded iron formation
of Archean age. Gold is associated with pyrrhotite, arsenopyrite and quartz.
<TABLE>
<CAPTION>
Lupin Mine
Ore Reserves(1)
December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------
Average grade
Tonnage of gold Gold content(2)
(000's short tons) (ounces per ton) (000's ounces)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Center Zone 743 0.282 210
East Zone 202 0.221 45
West Zone 1,073 0.269 288
- ------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1997 2,018 0.269 543
- ------------------------------------------------------------------------------------------------------------------------
Proven 1,454 0.275 400
Probable 564 0.254 143
- ------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1997 2,018 0.269 543
- ------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1996 1,576 0.281 443
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
(1) See "Reserves" as to the estimation of proven and probable ore reserves.
(2) Reserves do not reflect losses in the milling process but do include
allowance for dilution of ore in the mining process. The mining recovery
factor was estimated at 85%. The average mill recovery rate in 1997 was
92.6%.
The cut-off grade used in the reserve calculation is 0.146 ounce of gold per ton
at the upper levels of the mine and 0.204 ounce of gold per ton at the lower
levels of the mine.
Mining and Processing
- ---------------------
Access to the Lupin underground mine, removal of ore and waste, and movement of
personnel within the mine, is by a shaft developed to a depth of 3,970 feet and
by a ramp driven to a depth of 4,430 feet.
The ore in the Center and East Zones has been mined by the sub-level, long-hole
open stoping method. Mining of the narrower West Zone has also been by the long-
hole open stoping method, although it has been a more costly zone to mine than
the Center Zone. In 1995, Lupin incorporated "pastefill", which is composed of
mine tailings and cement, into the stoping sequence.
After the ore is mined, it is hoisted to the surface for processing and recovery
of gold in a 2,300 ton per day mill, where the recovered gold is cast in dore
bars prior to being shipped off site. The mill processed 2,167 tons per day in
1997 compared to 2,111 tons per day in 1996. Ore grades were lower in 1997 than
in 1996, which resulted in a slight reduction in gold production in 1997.
The ore grade at Lupin declines with depth, and the deposit becomes more
erratic. The Center Zone of the three-zoned ore body also tends to be narrower.
Additional ground support is required and longer truck haulage distances is a
factor as the depth increases. The Company has changed its mining techniques and
backfill process to overcome the challenges of mining at depth. Mechanized cut
and fill mining techniques may afford an opportunity to better utilize equipment
and to improve profitability at depth. All of this causes slower and more costly
mining in the deeper levels of the mine.
During 1997, a study was completed which determined that an internal winze was
feasible to access ore below the current depth of the ramp. The winze will
allow the hoisting of ore from the deeper areas of the mine, replacing the
costly trucking methodology currently used. During the period of suspended
operations, a study will be completed to determine the optimal operating
parameters to allow a resumption of operations.
Supplies, Utilities and Transportation
- --------------------------------------
The Lupin mine and mill facilities are in a remote location in the sub-Arctic
region of Canada which requires the Company to respond to certain unusual
conditions. At the mine, the Company maintains supplies of spare parts and other
materials, including fuel, and standby systems of piping and pumping in excess
of what would be required at less remote locations.
The principal supplies needed for the operation of the Lupin mine are diesel
fuel, chemical reagents (including lime, cyanide and zinc), cement, grinding
media, drill steel, equipment parts, lubricants, food and explosives. The
largest single item is diesel fuel, which is used principally to generate power.
A diesel-powered generating plant provides power for all the Lupin facilities.
The powerhouse has a primary installed capacity of approximately 18,000
kilowatts which is supplemented by additional standby generators having a
combined capacity of 1,500 kilowatts. Heating for the Lupin facilities is
obtained by utilizing waste heat from these generators augmented by oil-fired
boilers.
All equipment, materials and supplies must be transported to the mine from
Edmonton or Yellowknife. Personnel are transported from these locations and from
Kugluktuk (formerly Coppermine) and Cambridge Bay in the Nunavut Settlement Area
of the Northwest Territories. Each year since 1983, the Company has completed a
360-mile ice road commencing 40 miles northeast of Yellowknife and ending at the
Lupin mine as the most economical way of transporting bulk items, including
fuel, to the mine. During the 1998 winter road season, a small amount of fuel
will be delivered to Lupin along with other supplies which Lupin
18
<PAGE>
committed to purchasing prior to the suspension of operations. The cost of the
fuel and other supplies amount to approximately $1.5 million. Costs of operating
the winter road during the suspension of operations will have minimal financial
impact on the Company, as there will be cost recovery through third party user
fees. The timing of the decision to resume operations at Lupin will be dependent
on the availability of the winter road, as well as the market price of gold and
the results of the Company's optimization studies.
In order to operate the winter road, the Company is required to obtain certain
permits from the government of the Northwest Territories. To date, the Company
has experienced no significant difficulties in obtaining these permits. The
winter road is usable for approximately 12 weeks each year beginning in mid-
January during which time tractor-trailers can transport all of the Company's
annual requirements for diesel fuel, chemical reagents and certain other
supplies. There are on-site facilities for the storage of approximately 5.4
million U.S. gallons of diesel fuel, which is in excess of the mine's annual
requirements. At January 31, 1998, approximately 1.1 million U.S. gallons of
diesel fuel was on-site. This fuel, along with an additional 0.6 million U.S.
gallons of diesel fuel that was trucked to the site in March 1998, will be
sufficient to sustain Lupin in a care and maintenance mode until early 1999.
Surface facilities at the Lupin mine include a 6,300-foot compacted gravel
airstrip with an instrument landing and navigation system and runway lighting.
Supplies and personnel that must be brought in by air are transported
principally on a leased Boeing 727, which carries up to 114 passengers, or up to
35,000 pounds of freight, or a combination of both passengers and freight. The
Company is assessing the marketability of certain assets not related to the
mining operations, including assets such as the Boeing 727 and its hangar
facilities.
Voice and data communications with the Lupin mine are maintained via satellite,
which provides for uninterrupted communications regardless of adverse weather
conditions. Satellite communications will be continued during the suspension of
operations.
Water Supply and Waste Disposal
- -------------------------------
Water for mining, milling and domestic use is obtained on site by pumping from
Contwoyto Lake. Tailings from the mill are pumped into a tailings pond or pumped
underground as part of the paste-backfill. In 1997, approximately 32% of
tailings were placed underground as paste-backfill. Water from the tailings pond
is processed through a water treatment plant and monitored for compliance with
Northwest Territories' standards prior to discharge. The Company's water
license, which is renewable on application, expires May 31, 2000.
19
<PAGE>
KETTLE RIVER
The Kettle River properties are located in Ferry County in the State of
Washington and cover approximately 15,045 acres through patented and unpatented
mining claims and fee lands.
In 1997, the Company conducted a major review of the life-of-mine plans for its
producing properties, and, as a result, recorded a $15.0 million provision for
impaired assets related to Kettle River. The need for and the amount of the
provision was determined by comparing asset carrying values to estimated future
net cash flows from existing reserves.
The following table sets forth operating data for the Kettle River operation
from 1993 through 1997.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gold produced (ounces) 129,866 124,910 100,419 66,782 73,431
Mining cost/ton of ore $ 21.53 $ 21.12 $ 22.60 $ 11.06 $ 16.12
Milling cost/ton of ore $ 10.58 $ 11.96 $ 12.76 $ 13.54 $ 12.80
Production cost/ounce of gold produced:
Direct mining expense $ 231 $ 190 $ 237 $ 225 $ 281
Deferred mine development -- -- -- -- --
Inventory movements and other (4) 11 (7) 28 (6)
-------- -------- -------- ------- -------
Cash operating cost 227 201 230 253 275
Royalties 14 10 8 5 10
Production taxes 2 2 2 2 2
-------- -------- -------- ------- -------
Total cash cost 243 213 240 260 287
Depreciation 54 59 74 95 76
Amortization 36 45 45 45 53
Reclamation and mine closure 12 8 7 6 2
-------- -------- -------- ------- -------
Total production cost $ 345 $ 325 $ 366 $ 406 $ 418
-------- -------- -------- ------- -------
Capital expenditures (millions) $ 3.8 $ 8.8 $ 9.5 $ 10.0 $ 7.9
Deferred (applied) mining
expenditures (millions) $ -- $ -- $ -- $ -- $ --
Milled:
Ore processed (tons/day) 2,118 1,652 1,504 1,438 1,551
Days of operation 364 364 364 364 371
Total ore processed (000 tons) 771 601 548 523 575
Grade (ounce/ton) 0.197 0.240 0.212 0.149 0.146
Recovery rate (%) 85.4 86.5 86.6 85.6 87.7
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Geology and Ore Reserves
- ------------------------
Ore reserves at Kettle River exist at the Lamefoot and K-2 deposits. At
Lamefoot, gold occurs near the contact between Permian age siliciclastic and
carbonate rocks and is associated with silicification, magnetite, hematite,
pyrrhotite and pyrite. At K-2, gold is contained in steeply dipping quartz
carbonate veins hosted by Eocene age volcanic rocks.
20
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Kettle River
Ore Reserves(1)
December 31, 1997
- ------------------------------------------------------------------------------------------------------------------------
Average grade
Tonnage of gold Gold content(2)
(000's short tons) (ounces per ton) (000's ounces)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lamefoot 923 0.201 185
K-2 811 0.189 154
- ------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1997 1,734 0.196 339
- ------------------------------------------------------------------------------------------------------------------------
Proven 1,237 0.194 247
Probable 497 0.186 92
- ------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1997 1,734 0.196 339
- ------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1996 1,987 0.186 370
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See "Reserves" as to the estimation of proven and probable ore reserves.
(2) Reserves do not reflect losses in the milling process but do include
allowance for dilution in the mining process. The average mill recovery rate
of gold in 1997 was 85.4%.
Cut-off grades are 0.102 ounce of gold per ton at Lamefoot and 0.139 ounce of
gold per ton at K-2.
Mining and Processing
- ---------------------
At Kettle River, a series of deposits are mined to feed a central mill. In 1997,
approximately 70% of ore milled came from Lamefoot. Production commenced at K-
2, the sixth deposit developed at Kettle River, in January 1997. Lamefoot
commenced production in December 1994.
Development of the Lamefoot project began during 1992 when the portal was
collared. By December 1994, 17,500 feet of drifting was complete. Lamefoot
achieved full production in June 1995, at a rate of 1,500 tons per day. Longhole
open stoping is utilized as the mining method, with delayed backfill. Zones with
ore widths of 50 feet utilize cemented backfill in primary stopes and
unconsolidated fill in secondary stopes. Zones under 50 feet in width are filled
with unconsolidated fill. Ore is removed from the stopes using remote control
muckers and hauled to the surface using 26-ton haul trucks. Total Lamefoot ore
production in 1997 was 548,889 tons. Ore production for 1998 is expected to be
505,000 tons.
In December 1994, surface excavation for building construction and portal
clearing commenced at K-2. The portal was collared in March 1995 and a total of
10,629 feet of development was completed by the end of 1996. Stope development
began in the fourth quarter of 1996 and production commenced in January 1997.
The mining method is similar to Lamefoot, longhole open stoping, but due to the
narrow widths, cemented fill is required in the South zone. Total K-2 ore
production in 1997 was 229,525 tons. Ore production for 1998 is expected to be
approximately the same number of tons as in 1997.
Mining operations are expected to continue through at least the year 2000 at
Kettle River depending upon the success of the Company's exploration activities.
Ore from all sources is trucked to the Kettle River mill where the recovered
gold is cast into dore bars prior to shipping off site. The mill processed
approximately 2,100 tons of ore per day in 1997, compared to 1,700 tons per day
in 1996. Production increased compared to 1996 due to increased tonnages offset
partially by lower grades.
In 1998, Kettle River is expected to produce about 15% less gold compared to the
129,866 ounces produced in 1997. See "Cautionary `Safe Harbor' Statement under
the United States Private Securities Litigation Reform Act of 1995" and "Risk
Factors."
21
<PAGE>
DEVELOPMENT PROGRAMS
Aquarius
- --------
During the third quarter of 1997, the Company deferred a final construction
decision on the Aquarius project until the gold price improves significantly.
The Company owns 100% of the Aquarius project which is located in Macklem
Township 40 kilometers east of Timmins, Ontario, Canada. The City of Timmins is
centrally located in northeastern Ontario on Highway 101 approximately 700
kilometers, by road, northwest of Toronto. All-weather primary highways connect
with Thunder Bay to the west and North Bay, Sudbury and Toronto to the south.
The project site is located two kilometers south of Highway 101.
The project site is on a group of 12 patented claims that grant the Company fee
simple title. The patents are part of a larger land package of leased and staked
claims that cover most of the northern portion of Macklem Township.
Environmental work on the project commenced in May 1995 and the Company expects
completion, to the point of obtaining the necessary project permits, in the
second quarter of 1998.
Aquarius has 1,274,000 ounces of proven and probable gold reserves at December
31, 1997 (20.0 million tons of ore at an average grade of 0.064 ounce per ton)
including 401,000 ounces of proven gold reserves (6.0 million tons of ore at an
average grade of 0.066 ounce per ton) and 873,000 ounces of probable gold
reserves (14.0 million tons of ore at an average grade of 0.063 ounce per ton).
The reserves were based on a cutoff grade of 0.014 ounces per ton. The cutoff
grade was based on a price of $350 per ounce of gold. The gold recovery is
expected to be 95%. The waste-to-ore ratio is expected to be 6.5:1.
Aquarius is an Archean lode gold deposit with mineralization in carbonate
altered ultramafic rocks, associated felsic intrusives, and quartz veins in
talc-chlorite schists. Clay overburden 10 to 40 meters thick overlays 30 to 80
meters of glacial till. The "nuggety" style of gold mineralization at Aquarius
is characteristic of this deposit type and leads to difficulty in the prediction
of ore grades. This difficulty is addressed by: 1) extensive drilling, 2)
advanced geostatistical analysis with multiple techniques, 3) cross validation
with production data and independent estimates, and 4) review of the results by
an expert consultant.
By the end of 1997, the Company neared completion of the frozen earth system
around the pit perimeter to prevent groundwater from flowing into the pit from
the surrounding water table. The circumference of the freeze system is 12,000 ft
(2.25 miles, equivalent to 3.66 km). The system includes over 600,000 linear
feet of drilling in more than 2,300 holes spaced 6.3 feet apart. This will allow
an adequate distance between the holes to provide a solid barrier, and it will
allow the holes to penetrate the bedrock which has little water flow. The
process has been used successfully in construction and underground mining for
over 100 years. The process involves circulating a brine solution that is cooled
with refrigeration units, through the holes which will remove the heat from
surrounding material and allow it to freeze. The Company expects that it will
take approximately four months for this process to entirely freeze the wall to
prevent water from leaking through the glacial overburden. The Company does not
plan to operate the frozen earth system during the period of project deferral.
The first planned 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.
Because of the shape of the deposit, the pit will have two separate bottoms with
a ridge of waste rock separating them. Mining will be phased to exploit the more
northerly of the two segments first.
The ore will be crushed in three stages so that approximately 80% of the ore
will be less than 3/8 inch in size. The secondary and tertiary crushers and all
interconnecting screens and conveyors are located indoors to minimize problems
with wet or frozen ore. The mill will contain both gravity and leach circuits.
Two centrifugal separators will process the ore that is amenable to recovery by
gravity separation techniques. A ball mill and a series of six agitated cyanide
leach tanks will process the ore not amenable to recovery by
22
<PAGE>
gravity separation techniques. The mill has been designed to process 8,300 tons
per day. Power will be supplied to the project from Ontario Hydro, the main
utility provider in the province of Ontario. There will be two sources for water
supply. Fresh water will come from one or more wells located near the minesite
development. Water also will be reclaimed from the tailings area.
Based on the current mine plan, the average annual production rate is expected
to be 166,000 ounces; average cash operating costs are expected to be $218 per
ounce, depreciation and amortization is expected to be $94 per ounce and
reclamation is expected to be $4 per ounce for a total production cost of $316
per ounce. See "Cautionary `Safe Harbor' Statement under the United States
Private Securities Litigation Reform Act of 1995" and "Risk Factors."
During the operating phase of the mine, the total site workforce is expected to
consist of approximately 215 people.
Powerline and substation construction was completed in 1997. Tree clearing and
road construction were started, but completion was deferred. The remainder of
the engineering, procurement, and construction activities are currently deferred
until the gold price improves.
The Company capitalized $39.9 million of Aquarius project expenditures in 1997
and $6.1 million in 1996. The Company expects to expense development holding
costs of approximately $1.5 million related to the Aquarius project in 1998.
The Company incurred acquisition costs of $7.8 million in 1995.
Paredones Amarillos
- -------------------
During the third quarter of 1997, the Company deferred a final construction
decision on the Paredones Amarillos project until the gold price improves
significantly.
The Company owns 60% of the Paredones Amarillos project, located in the Mexican
state of Baja California Sur, 65 kilometers southeast of the state capital La
Paz which has a population of 140,000. The remaining 40% of the project is owned
by subsidiaries of Viceroy Resource Corporation ("Viceroy"). The moderate, semi-
arid climate provides an attractive environment for operations. Steep hills with
elevations ranging between 300 meters and 800 meters above sea level
characterize the terrain. The project covers an area of 12,757 hectares held
through 16 mining concessions controlled by the joint venture. Thirteen of the
concessions have been approved for exploration, two for exploitation and one is
pending. All relevant duties, fees and taxes for these concessions have been
paid, as required by law. The concessions provide the legal right to the joint
venture to proceed with mining activities.
The site can be accessed from paved state highways followed by 10 kilometers of
gravel road that the joint venture will upgrade to provide safe access to the
proposed operation, and 7 kilometers of new gravel road to be constructed over a
current jeep trail.
The joint venture has routinely received approvals for exploration activities.
The joint venture expects that Mexico's environmental agencies will similarly
approve the proposed mine development. Since Mexico has recently developed a
sophisticated system of environmental regulations, the joint venture has
maintained an ongoing dialogue with agency staff to ensure that all regulatory
requirements are identified. The most significant environmental permitting
requirements include: receiving approval of a recently submitted Environmental
Impact Statement; obtaining a Change in Land Use permit; issuance of a
Construction License; and issuance of an Operating License. In 1997, the
Company received approval for the Environmental Impact Statement and obtained a
Change in Land Use permit.
Paredones Amarillos has 1,482,000 ounces of proven and probable gold reserves
(the Company's share, 889,200 ounces) at December 31, 1997 (47.0 million tons of
ore at an average grade of 0.032 ounce per ton) including 376,000 ounces of
proven gold reserves (11.0 million tons of ore at an average grade of 0.034
ounce per ton) and 1,106,000 ounces of probable gold reserves (36.0 million tons
of ore at an average grade of 0.031 ounce per ton). The reserves were based on a
cutoff grade of 0.014 ounce per ton.
23
<PAGE>
The cutoff grade was based on a price of $350 per ounce of gold. The gold
recovery rate is expected to be 91%.
The main ore host to the Paredones Amarillos mineralization is a 10 to 80 meter
thick northeast to east-west striking, 15 to 45 degree southeast dipping
cataclasite and mylonite unit. The cataclasite is a dense, competent rock
composed of approximately 50% crushed quartz and feldspar fragments in a matrix
of sericite and minor chlorite and fine-grained quartz. The cataclasite hosts
approximately 80% of the gold resource, the granodiorite 20%, and the diorite
only a minor fraction.
Ore and waste rock will be open pit mined from 10 meter high benches with an
expected waste-to-ore ratio of 4.4:1 using blasting followed by conventional
open pit methods. Current plans call for three 13.5-yard excavators and a
maximum of thirteen 95-ton rear dump haul trucks to be used. Ore will be
delivered to a primary gyratory crusher. The ore will then be reduced further by
means of a semiautogenous grinding mill and two ball mills. Following the whole-
ore-leach circuit, gold will be recovered using a carbon adsorption-desorption
recovery process. The barren (stripped of gold) solution will be sent to the
acidification, volatilization and recovery process to recover cyanide, which
will be recycled back to the leach cycle. The mill has been designed to process
11,000 tons per day. The tailings impoundment facilities will include the main
embankment, a lined decant pond, the lined impoundment pond, and a groundwater
monitoring system.
Based on the current mine plan, the mine is expected to produce an average of
128,000 ounces of gold per year (the Company's share, 77,000 ounces); average
cash operating costs are expected to be $223 per ounce, depreciation and
amortization is expected to be $72 per ounce and reclamation is expected to be
$6 per ounce for a total production cost of $303 per ounce. See "Cautionary
`Safe Harbor' Statement under the United States Private Securities Litigation
Reform Act of 1995."
The Comision Federal de Electricidad ("CFE") provides diesel-generated
electrical power to Baja California Sur through a grid. A new power line under
construction from La Paz to Cabo San Lucas is anticipated to supply power to the
site. The joint venture will construct a new 18 kilometer transmission line
which will connect with the new line to the north of the mine site.
Water rights for the project have been purchased, or are under option
agreements, totaling 1.8 million cubic meters annually. Water acquisitions have
been from a basin northwest of the project. Adequate water supplies for the
life of the mine are available.
The joint venture expects that all employees will be Mexican nationals except
for the general manager, the operations manager and the mill manager. The number
of employees will range from 250 to 300 during the life of the mine.
Detail engineering and limited procurement began in February 1997, and by the
end of 1997, these activities were estimated to be 45% complete.
The Company capitalized $8.0 million of Paredones Amarillos project expenditures
in 1997 and $6.6 million in 1996. The Company expects to expense development
holding costs of approximately $0.9 million in 1998.
OTHER PROJECTS
Kingking
- --------
The Company's option interest in the Kingking project required the delivery of a
bankable feasibility study by October 25, 1997, or the remittance of option
delay payments of $750,000 per month for the first six months and $1.0 million
per month for the subsequent six months. The terms of the Kingking option
agreement, which included a $67.0 million option exercise price to be paid in
1998, plus a contingent payment of up to $18.0 million based upon the extent of
the defined mineralization, rendered the project totally uneconomic. The
Company elected not to exercise its option and no delay payments have been or
24
<PAGE>
will be made. Following a $50.0 million write-down recorded in the third
quarter of 1997, the carrying values of Kingking's assets are nil (see note 9 to
the consolidated financial statements). The Company's share of Kingking's other
mineralization of 168,750 tons at average grades of 0.017 ounces of gold per ton
and 0.47% copper was removed from the Company's estimates of other
mineralization as of December 31, 1997.
Santa Elina
- -----------
On July 16, 1996, the Company completed a series of transactions with Santa
Elina Gold Corporation ("Santa Elina") and Sercor Ltd. ("Sercor", a private
company that owned 67% of Santa Elina). The transactions enabled the Company to
increase its ownership of the outstanding common shares of Santa Elina from 7%
to 50% by issuing 8,830,915 common shares. The Company increased its ownership
of Santa Elina to 58% through additional share purchases totaling $7.0 million
and through shares acquired when the Company's joint venture partner exercised
its right to repay $13.5 million of outstanding loans from the Company maturing
in September 1997 by transferring shares in Santa Elina pledged as collateral.
See note 5 to the Company's consolidated financial statements.
The Company is attempting to sell part or all of its 58% interest in Santa
Elina. In light of current market conditions for gold and copper, the joint
venture has terminated all programs and activities and moved Santa Elina into a
care and maintenance phase. Santa Elina currently does not have sufficient cash
or other sources of liquidity to continue its operations. Sercor and the
Company have not committed to invest any additional funds in Santa Elina. As a
result, it is uncertain whether Santa Elina will be able to continue to develop
its assets or to continue in business.
In the third and fourth quarters of 1997, the Company wrote off its entire
investment in Santa Elina of $143.6 million (see note 9 to the consolidated
financial statements). The Company's share of Santa Elina's other
mineralization of 56.7 million tons at average grades of 0.012 ounces of gold
per ton and 0.43% copper was removed from the Company's estimates of other
mineralization as of December 31, 1997.
The Company included $8.8 million of Santa Elina spending in exploration expense
in 1997.
Kuranakh
- --------
The Company owns 50% of the Kuranakh project which is located in the Sakha
Republic in the eastern part of the Russian Federation. The remaining 50% of
the project is owned by two Russian companies, OAO Aldanzoloto (30%) and OAO
Sakhazoloto (20%). The Kuranakh project is an early stage project for which no
reserves have been established by the Company. Further work at Kuranakh is
subject to the ability of the Company and its partners to negotiate
acceptable production sharing and gold sales agreements with the Russian
government, additional feasibility analysis, and arrangement of acceptable
financing. The property is near the town of Nizhny Kuranakh which has a
population of 10,000. The administrative center, Yakutsk, is 250 kilometers to
the northeast and has a population of 200,000. The main industry of the area
centers around gold and diamond mining. The property is served by rail and by
an all weather road.
The mineralization in the Kuranakh property is quartz adularia, low temperature,
sediment hosted, epithermal deposits, comparable in many respects with the
sediment hosted gold deposits that occur in the Great Basin of the Western
United States. The deposits are confined to the contact between Cambrian
limestone and overlying Jurassic clastics and the original sulfides are almost
completely oxidized. The deposits have been subject to complete weathering with
only rarely preserved sulfides. A karst surface appears to have developed at the
clastic limestone contract before mineralization. Gold mining over the last 40
years has concentrated on the higher grade ores, leaving large quantities of
lower grade material.
Over the past three years, the Company has expended $9.2 million on the project,
primarily related to drilling, metallurgical testing (including a pilot scale
heap leach test), pre-feasibility studies to determine initial project
viability, as well as completion of an environmental audit and initiation of
baseline
25
<PAGE>
studies. The current mine plan calls for ore to be recovered from numerous open
pits and stockpiles and then delivered to crushing and leaching facilities.
Currently the Company and its partners are negotiating a production sharing
agreement and a gold sales agreement with the Russian governments. If these
negotiations reach a successful conclusion, the Company expects to commission a
feasibility study to finalize project capital and operating parameters.
EXPLORATION
The Company explores for extensions of known reserves at its mines and
development properties as well as conducting exploration for new gold deposits.
During 1997, the Company refocused its search for new gold reserves and
production under an exploration program that concentrated on those projects
believed to represent the most promising near-term prospects in its portfolio.
Exploration efforts are now focused on projects principally located in the
Americas where the Company already has an extensive gold mining infrastructure.
Particular emphasis is placed on those prospects located near the Company's four
existing gold mines and two planned new mines, located in Canada, the United
States and Mexico, where extensive processing facilities already exist or are
planned. In addition to North America, the Company conducted exploration
activities in Central America, South America, Russia and West Africa in 1997.
This refocusing of exploration strategy has resulted in the closure of several
exploration offices including those in Vancouver, British Columbia; Lima, Peru;
and Spokane, Washington.
In 1997, the Company funded work on a number of projects in the United States
and Canada. Among them are two early-to-intermediate-stage exploration projects
- - Bald Peak and Jessup. Bald Peak is located in Mineral County, Nevada and Mono
County, California. The Jessup property is located in Churchill County, Nevada
and is a joint venture with Americomm Resources in which the Company is the
operator. Exploration activities in Canada are focused on projects within haul
distance to the Aquarius development project. No other exploration is planned
in Canada, including the Northwest Territories.
In 1996, the Company established a strategic alliance and joint venture with
Minefinders Corporation, an exploration company that holds the Dolores project,
located in the State of Chihuahua, Mexico. In the third quarter of 1997, the
Company sold back its right to buy a future 60% interest in the Dolores project
to Minefinders in exchange for C$4.0 million in cash and 1.25 million common
shares of Minefinders. The transaction increased the Company's ownership of
Minefinders to 25% of the common shares outstanding, and resulted in the Company
being repaid for all of its direct exploration expenses at Dolores. In return,
the Company gave up its future right to acquire a 60% interest in the Dolores
project, which would have required the Company to fund all exploration and
development costs on the property through completion of a bankable feasibility
study within two years and then pay to Minefinders a minimum of US$12.0 million
in cash to purchase 60% of the proven and probable gold-equivalent ounces as
defined in the feasibility study at US$20 per ounce.
ALASKA-JUNEAU
At December 31, 1996, the Company wrote off its entire remaining investment in
the Alaska-Juneau project of $57.1 million, and established a reserve of $20.0
million to cover estimated reclamation and closure responsibilities. In July
1997, the Company entered into an agreement which transferred certain
responsibilities for the Alaska-Juneau project closure to a third party
environmental firm. The third party's performance under the contract is
supported by corporate guarantees and surety bonds. Total 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.
SUNNYSIDE
In 1996, Sunnyside Gold Corporation ("SGC"), an indirect wholly owned subsidiary
of the Company, finalized a consent decree with the state of Colorado that set
standards for the release of all reclamation and
26
<PAGE>
water treatment permits and resolved future enforcement issues regarding
groundwater seeps and springs. SGC estimates that it will take a minimum of
seven years for all of the conditions of the consent decree agreement to be
fulfilled by both parties. SGC has $7.9 million accrued at December 31, 1997 for
future reclamation costs at the Sunnyside mine. SGC's provision for future
reclamation costs is reviewed periodically and adjusted as additional
information becomes available.
OTHER
Precious Metal Sales and Hedging Activities
- -------------------------------------------
The Company's dore bars are further refined by third parties before they are
sold as gold or silver bullion. The refined gold and silver is sold to banks or
precious metal dealers.
The Company's profitability is subject to changes in gold and silver prices,
exchange rates, interest rates and certain commodity prices. To reduce the
impact of such changes, the Company attempts to lock in the future value of
certain of these items through hedging transactions. These transactions are
accomplished through the use of derivative financial instruments, the value of
which is derived from movements in the underlying prices or rates.
The gold- and silver-related instruments used in these transactions include
commodity loans, fixed and floating forward contracts, spot-deferred contracts,
swaps and options. Sensitivity to changing metal prices is reduced, and future
revenues are hedged, as the Company's future production will satisfy these loans
and other delivery commitments.
In 1997, approximately 6% of gold production was delivered against forward sales
and gold loans at an average price of $397 per ounce, excluding deferred gains
recognized related to the repurchase of forward sales contracts. This compares
with 25% of gold production at an average price of $375 in 1996 and 22% of gold
production at an average price of $395 in 1995. Approximately 7% of silver
production was delivered against forward sales at an average price of $5.32 per
ounce in 1997, excluding deferred gains recognized related to the repurchase of
forward sales contracts. This compares to 45% at an average price of $5.85 in
1996 and 47% at an average price of $5.48 in 1995. The decrease in the
percentages of production delivered against forward sales and gold loans in 1997
compared to 1996 and 1995 is attributable primarily to the January 1997
repurchase of the Company's outstanding gold and silver forward sales contracts.
The Company did not rebuild its forward portfolio until the third and fourth
quarters of 1997. In response to the depressed market price for gold, the
Company has fully hedged its 1998 gold production, and will realize a minimum
average price of $340 per ounce of gold in 1998.
In March 1998, related to McCoy/Cove production, the Company sold forward
270,000 ounces of gold at an average price of $319 per ounce and 16.0 million
ounces of silver at an average price of $6.01 per ounce, with delivery dates
from 1998 to 2001. Based on this current hedge position, the Company plans to
proceed with the pit wall remediation in the second half of 1998.
The Company engages in forward currency-exchange contracts to reduce the impact
on the Lupin mine's operating costs caused by fluctuations in the exchange rate
of U.S. dollars to Canadian dollars. Forward currency transactions more closely
link profitability of Canadian operations to the price of gold in U.S. dollars.
The Company also engages in crude oil hedging activities, including forward
purchase agreements and swaps, to reduce the impact of fluctuations in crude oil
prices on its operating costs.
The Company used interest rate swap agreements to effectively convert its fixed-
rate preferred stock dividends into floating-rate dividends. All of the
Company's preferred shares were redeemed for cash or converted into common
shares in 1995. The interest rate swap agreements expired on December 31, 1995.
In 1997, the Company swapped a portion of its 11% interest obligation for the
capital securities for a gold delivery commitment. The swap reduced the
Company's effective interest rate to a fixed rate of 4.24% plus
27
<PAGE>
the floating gold lease rate. The Company restructured the gold swap agreement
in the first quarter of 1998 into gold forward sales with delivery dates in
1998, 1999 and 2000. See note 7 to the consolidated financial statements.
All purchases and sales of derivatives are connected to production of gold or
silver, or to financial commitments, and are not entered into for speculative
gain.
The Company's forward sales positions, gold loan and swap repayment schedules,
option position, currency position and crude oil position at December 31, 1997,
adjusted for first quarter 1998 transactions, are set out in note 18 to the
Company's consolidated financial statements.
Governmental and Environmental Regulation
- -----------------------------------------
Canada
The mining industry in the Northwest Territories operates under Canadian federal
and territorial legislation governing prospecting, development, production,
environmental protection, exports, income taxes, labor standards, mine safety
and other matters. The Company believes its Canadian operations are operating in
substantial compliance with applicable law. The operation of the Lupin mine is
subject to substantial regulation by government authorities, which is in many
instances discretionary.
The Company's Lupin operation is presently subject to environmental regulation
primarily by the Federal Department of Indian Affairs and Northern Development
("DIAND") and the Northwest Territories Water Board, which are responsible for
administering the Northwest Territories Water Act (Canada) ("NWTWA") that on
June 15, 1993, replaced the Northern Inland Waters Act (Canada) ("NIWA")
pursuant to which DIAND previously exercised jurisdiction over the operation.
The Company's existing licenses under NIWA were deemed to continue under the
NWTWA.
On January 19, 1995, the Canadian Environmental Assessment Act ("CEAA") came
into force. Any changes or additions to existing operations at Lupin may be
subject to environmental assessment by the federal government under the CEAA
before any permits or licenses are issued under the NWTWA in respect of those
changes or additions to existing operations.
The federal Departments of Fisheries & Oceans and Environment have an
enforcement role in the event of environmental incidents, but presently have no
direct, regulatory role in relation to Lupin.
Lupin is also subject to enforcement by the Northwest Territories Department of
Natural Resources pursuant to the Northwest Territories Environmental Protection
Act ("NWTEPA"). NWTEPA contains requirements to obtain licenses and permits
which may, in the future, affect the Lupin operation, but those requirements are
not presently in force. The Company believes it is in substantial compliance
with all relevant territorial environmental law.
Pursuant to an agreement (the "Nunavut Agreement") dated May 25, 1993 between
the Inuit of Canada's eastern arctic region and Her Majesty the Queen in right
of Canada, which agreement comes into force on April 1, 1999, the Inuit have
been granted ownership of approximately 360,000 square kilometers of land in an
area referred to as the Nunavut Settlement Area, including ownership of
subsurface rights in approximately 37,500 square kilometers of those lands. The
Company's Lupin mine is located in this Nunavut Settlement Area. Existing third
party interests in lands in the Nunavut Settlement Area are protected under the
Nunavut Agreement. Where a third party has been granted a mining lease under the
Canada Mining Regulations in lands comprising the Nunavut Settlement Area, that
interest will continue in accordance with the terms and conditions on which it
was granted, including any rights granted under the legislation which gave rise
to the interest. However, where any successor legislation would have the effect
of diminishing the rights afforded to the federal government, it will not bind
the Inuit without its consent. The Inuit are entitled to receive whatever
compensation is payable by the interest holder for the use or exploitation of
mineral rights. The federal government will continue to administer the third
party interest on behalf of the Inuit, unless the third party and the Inuit
enter into an agreement under which the third party
28
<PAGE>
agrees to the administration of their interest by the Inuit. In the event such
an agreement is reached, the applicable legislation will cease to apply to the
third party interest. Existing subsurface interests in such lands will continue
to be administered in accordance with applicable legislation relating to those
interests and are not affected by the Nunavut Agreement.
New third party interests in lands in the Nunavut Settlement Area will now be
granted, in the case of surface rights, by the appropriate regional Inuit
association and, in the case of subsurface rights, by Nunavut Tungavik
Incorporated which will hold subsurface title to Inuit owned lands and who will
be additionally responsible, in consultation with the appropriate regional Inuit
associations, for the administration and management of those subsurface rights.
Also under the Nunavut Agreement the jurisdiction previously exercised by the
Northwest Territories Water Board under the NWTWA will effectively be exercised
by the Nunavut Water Board. Once the Nunavut Water Board is established, the
Company will be subject to its jurisdiction and any further approvals or
licenses will have to be obtained from that Board. In the meantime, any changes
or additions to existing operations that may require additional, or amendments
to existing, licenses would be obtained from the Northwest Territories Water
Board under the NWTWA.
On January 1, 1994, the North American Free Trade Agreement ("NAFTA") between
Canada, the United States and Mexico came into force. The NAFTA amends the
Investment Canada Act and its regulations and guidelines in that the investors
of the United States and Mexico are treated more favorably than all other "non-
Canadian" investors with respect to reviews by Investment Canada. Direct
acquisitions of Canadian businesses by investors from the United States or
Mexico are only subject to review if the acquisitions exceed a certain threshold
which is adjusted annually according to the formula set out in Annex I to the
NAFTA. However, indirect acquisitions of Canadian businesses by investors from
the United States or Mexico are not subject to review.
The Competition Act (Canada) requires parties to certain transactions, if the
parties to and the circumstances of the transaction meet certain size thresholds
as designated in the Act, to provide the Director of Investigation and Research
(the "Director") with detailed information about the transaction and the
parties, and to observe a waiting period prior to closing. Without the
Director's pre-clearance of the transaction by the expiration of the waiting
period, the transaction will not be permitted to be completed. In order to be
notifiable, transactions must meet the basic size threshold, namely, the parties
to the transaction together with their affiliates (defined to include parent,
subsidiary and sister corporations) must have assets in Canada or gross revenues
from sales in, from or into Canada that exceed C$400 million. Assuming the size
threshold is met, additional thresholds based on the type of transaction must be
met before notification is required.
United States
The Company's U.S. operations are subject to comprehensive regulation with
respect to operational, environmental, safety and similar matters by federal
agencies including the U.S. Department of the Interior, the U.S. Department of
Agriculture (U.S. Forest Service), the U.S. Environmental Protection Agency
("EPA"), the U.S. Mine Safety and Health Administration ("MSHA") and similar
state and local agencies. Failure to comply with applicable laws, regulations
and permits can result in injunctive actions, damages and civil and criminal
penalties. If the Company expands or changes its existing operations or proposes
any new operations, it may be required to obtain additional or amended permits
or authorizations in accordance with the National Environmental Policy Act
(NEPA). The Company spends substantial time, effort and funds in planning,
constructing and operating its facilities to ensure compliance with U.S.
environmental and other regulatory requirements. Such efforts and expenditures
are common throughout the U.S. mining industry and generally should not have a
material adverse effect on the Company's competitive position.
The Company believes its U.S. operations are in substantial compliance with
applicable air and water quality laws and regulations and that it has acquired
or applied for all permits required under such laws or requested by the states
in which it is operating.
29
<PAGE>
Certain wastes from mining and mineral processing operations are currently
exempt from regulation under the Bevill amendment to the federal Resource
Conservation and Recovery Act ("RCRA"). However, Congress may consider revision
and reauthorization of RCRA, as well as the federal Clean Water Act and
Endangered Species Act, each of which substantially affects mine development and
operations. The effect of any revised or additional regulation on the Company's
U.S. operations cannot be determined until the legislative process is completed
and new administrative rules are issued, but they can have a significant impact
upon operations of all mining companies and increase the costs of those
operations.
Legislation to change the general mining laws applicable to operations on
federal lands has been introduced into the 105th Congress, which convened in
January 1997, and additional introductions may be made in 1998. The result of
such proposals is speculative.
The most material direct economic impact of potential mining law revision could
be from the imposition of royalties for production at the McCoy/Cove mine in
Nevada, which is from unpatented lode mining claims on federal land, and (to a
lesser degree) at the 50%-owned Round Mountain mine in Nevada, 19% of whose
reserves are unpatented lode mining claims on federal land. However, the Company
has completed all of the steps currently required under U.S. law to convert the
McCoy/Cove and Round Mountain claims to patented status. The Company's
applications for patents are being processed, and the Company expects the
government to complete its administrative review in accordance with the
regulations, although the Company can not predict with certainty whether those
patents will be issued or the time frame for such issuance.
The federal Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("CERCLA"), commonly called the "Superfund Act," contains stringent
reporting requirements for the release or disposal of hazardous substances, with
substantial fines for noncompliance. In addition, under CERCLA, any party
responsible for the release or threatened release of a hazardous substance into
the environment is liable for all clean-up costs. Responsible parties under
CERCLA include the owner or operator of the site where the release occurs or
anyone who owned or operated the site when a disposal was made, regardless of
culpability. Mining wastes are subject to CERCLA regulation if they contain
hazardous substances, and EPA has included several mining sites on its list of
high-priority sites for clean-up under CERCLA.
The Stibnite property near Yellow Pine, Idaho is the subject of a preliminary
investigation/site assessment ("PI/SA") by the Environmental Protection Agency
that indicates that the site may be eligible for inclusion on the National
Priorities List ("NPL") under CERCLA. During 1985, Copper Range Company, then an
acquired subsidiary of the Company, and from November 1985 to December 1989,
Round Mountain Gold Corporation, a subsidiary of the Company, owned a 20%
interest in a joint venture that controlled several claims in the Stibnite area.
Copper Range Company, a subsidiary of the Company from January 1985 until
November 1985, is on the list of present and former owners or operators of
properties at the Stibnite site. Round Mountain Gold Corporation, because it
owned 20% of the joint venture between November 1985 and December 1989, also
may have liability for a share of the cleanup costs at the site, if cleanup is
undertaken pursuant to CERCLA. At this time, it is not possible to estimate the
size of the potential cost of cleanup, or to state how much of that liability,
if any, might be the responsibility of Round Mountain Gold Corporation. However,
in early 1997 a voluntary Administrative Order on Consent was entered into
between the State of Idaho Division of Environmental Quality and the three
principal companies involved in the site pursuant to which remediation studies
are being conducted, and the current operator is conducting permitted mining
operations which include remediation of the site. No CERCLA cost recovery
action against Round Mountain Gold Corporation or the Company is presently
anticipated.
Various types of dust control, revegetation and similar reclamation-related
measures are generally required for the Company's Nevada operations under
specific state air or water quality and mine reclamation rules and permits. The
Bureau of Land Management ("BLM") and Forest Service permits and Plans of
Operations for the Company's Nevada operations also contain some reclamation-
related requirements. The
30
<PAGE>
Kettle River project is similarly subject to requirements for reclamation of
disturbed surface areas by agreement with the State of Washington. The Company
believes its operations are in substantial compliance with these reclamation
requirements.
The Company believes that all of its U.S. operations are currently being
conducted in substantial compliance with applicable MSHA and similar state
labor, health and safety rules.
Mexico
The Mexican mining industry operates under the authority of the federal
government, which regulates the location of mining concessions, prospecting,
safety, environmental protection, exports, taxation, labor and social
legislation and business transactions. Land tenure is governed by laws issued
by each state in Mexico, although federal rules allow mining companies to obtain
surface rights through easements, temporary occupation orders or expropriations.
The Company believes that its Mexican ventures are carrying on their business
efforts in substantial compliance with applicable laws and regulations.
Mexican industry is mainly regulated with respect to environmental matters by
the Secretariat for Environment, Natural Resources and Fisheries ("SEMARNAP").
This agency is the successor to the authority previously held by Secretariat for
Social Development ("SEDESOL"). SEMARNAP formulates and issues environmental
laws, regulations and standards, under authority granted upon its creation on
December 28, 1994 and the specific provisions of the General Law of Ecological
Balance and Environmental Protection of January 28, 1988.
Mexican companies are governed generally by the federal General Law of
Commercial Companies (federal statute) and the Civil Codes of the various States
of the country. Mining is also governed by the federal Mining Law and its
Regulations. The Company's Mexican subsidiaries are organized under the General
Law of Commercial Companies and registered with the Mexican Public Registry of
Commerce and the Mining Public Registry in Mexico City.
Mexican environmental laws applicable to discharges of water, control of air
quality and management of hazardous substances will apply to the Company's
Mexican operations. In addition, the Company is subject to the reclamation
requirements of the Federal environmental laws. The Paredones Amarillos project
is subject to additional reclamation and ecological protection requirements
because part of it is located in the buffer zone for an Ecological Reserve Area.
The Company believes that it is in substantial compliance with all applicable
corporate, environmental, reclamation and social welfare statutes.
Mineral rights in Mexico are the property of the federal government, which
allows private parties to develop minerals under a system of concessions
regulated by Article 27 of the Mexican Federal Constitution, the Mining Law and
its Regulations. Only Mexican nationals or Mexican corporations may own
concessions, and the rights of concessionaires to develop their minerals are not
unlimited but must respect those of surface occupants. The federal government
recognizes the rights of associations of community landholders ("ejidos") who,
though they do not own individual titles, have rights to enjoyment of parcels of
land arising from membership in a group. The Company's Caopas project has been
the subject of lengthy discussions with an ejido to clarify the terms and
compensation under which the project will be developed. The Company's projects
and the relevant mining concessions have been registered with the Mining Public
Registry, which endorses mineral ownership agreements and acts as the agency for
notice of their existence and legal sufficiency. The Company has expended
substantial effort in clarifying its title to the concessions on which its
Mexican projects depend; it believes that its concessions are validly issued by
the federal government and that they give the Company full rights allowed under
the Mining Law and its Regulations.
31
<PAGE>
Brazil
Under Brazil's federal constitution, mineral resources are the property of the
Brazilian Federation and, accordingly, they can only be explored through an
official permit granted by the federal government. Mining activity is regulated
by the Departamento Nacional de Producao Mineral ("DNPM"). In general, few
restrictions exist on foreign investments in the mining industry in Brazil.
Mining claims in Brazil may take the form of applications for prospecting,
exploration permits or mining concessions. An application for prospecting is
filed with the DNPM and is the first step in obtaining an exploration permit.
The exploration permit, once granted, gives the applicant the right to explore
the area covered by the permit. An application for prospecting must be supported
by an exploration plan and must comply with certain other requirements. Provided
the area of interest is not already covered by a pre-existing application or
exploration permit and all requirements are met, the DNPM will normally grant
the permit on a priority of application basis.
Mining concessions may be obtained only by corporations. A corporation normally
has one year from receipt of DNPM approval of its report on the results of its
exploration activities to apply for a mining concession for the intended area.
The application must include a mining plan and an economic feasibility analysis.
A mining concession gives the holder the right to extract and process the
minerals contained in the deposit, in accordance with the plan approved by the
DNPM and to market mine production. The holder of a mining concession has
ownership of the mine production and the mining concession enables the holder to
exploit the mine deposit until it is exhausted, generally with no fixed term.
The holder of a mining concession also is entitled to sell or lease the
concession, subject to government approval, which will normally be granted. Once
a mining concession is granted, a mining company is required to obtain an
operating permit for each mine that it wishes to operate. The operating permit
is renewed annually subject to compliance with environmental matters.
The surface of land covered by a DNPM mining concession often is owned by
private third parties. If a mining company is unable to negotiate a voluntary
agreement with the landowner for the use of surface, under Brazilian law,
sufficient land can be condemned to enable the mining company to access the
mineral deposit, subject to payment of compensation to the landowner and always
subject to all otherwise applicable land use and environmental regulations.
Special provisions and restrictions apply whenever mining activity is conducted
on sites located along frontier areas or inside certain specified Indian
protection areas. A frontier area is an area within 150 kilometers of the border
of the Brazilian national territory.
Employees
- ---------
At December 31, 1997, the Company employed 2,001 persons excluding temporary
employees directly involved in short-term programs, broken down as follows.
<TABLE>
<S> <C>
McCoy/Cove (1) 443
Round Mountain, including ancillary services 648
Lupin, including aviation, winter road and Ulu (1) 554
Kettle River 192
Exploration and development, including local nationals 80
Technical and corporate staff (1) 68
Other, including Alaska and Sunnyside 16
-----
2,001
=====
</TABLE>
(1) In January 1998, the Company temporarily suspended operations at Lupin and
scaled back operations at McCoy/Cove, each until the gold price improves
significantly. These actions resulted in the termination of approximately
500 Lupin employees and approximately 100 McCoy/Cove employees. In
addition, decreased activity caused by the downturn in the gold price
resulted in the Company's technical and corporate staff being reduced by
approximately 25 employees.
32
<PAGE>
A sufficient supply of qualified workers is available for both Canadian and U.S.
operations, although the continuation of such supply depends upon a number of
factors, including, principally, the demand occasioned by other projects. None
of the Company's employees are represented by labor unions. The Company believes
it generally has good relations with its employees. The Company provides its
employees with a competitive compensation package and comprehensive benefits
program.
33
<PAGE>
Executive Officers of the Registrant
- ------------------------------------
The executive officers of the Company are listed below.
<TABLE>
<CAPTION>
Position with the Company and business experience within the
Name Age last five years
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LOIS-ANN L. BRODRICK 54 Vice President and Corporate Secretary of the Company since March 1998; Corporate
Secretary of the Company from May 1996 to March 1998; prior thereto Assistant
Corporate Secretary of the Company
PETER H. CHEESBROUGH 46 Senior Vice President, Finance and Chief Financial Officer of
the Company since June 1993, prior thereto Vice President,
Controller and Principal Accounting Officer of the Company
DONALD C. EWIGLEBEN 44 Vice President, Environmental and Public Affairs of the Company
since August 1994; Vice President, Environmental and
Governmental Affairs of Amax Gold Inc. from June 1992 to
February 1994; prior thereto various Environmental and
Governmental Affairs positions at Amax Gold Inc. and Amax Coal
Industries
ROBERT L. LECLERC, Q.C. 53 Chairman and Chief Executive Officer of the Company since April
1997; Chairman of the Company from May 1996 to April 1997;
Chairman and Chief Executive Officer and partner, Milner Fenerty
(barristers and solicitors) from December 1993 to June 1996;
prior thereto partner of Milner Fenerty
JERRY L.J. MCCRANK 47 Vice President, Operations of the Company since March 1998; prior
thereto various senior operations positions with the Company
TOM S.Q. YIP 40 Vice President, Controller and Principal Accounting Officer of the Company since
March 1998; Controller and Principal Accounting Officer of the Company from
September 1997 to March 1998; prior thereto various corporate financial positions
with the Company
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
Insurance and Mining Risks
- --------------------------
The Company carries insurance against property damage, including boiler and
machinery insurance, and also comprehensive general liability insurance of a
total of $50 million per occurrence, which is available to all operations. The
Company carries special liability policies applicable to aircraft and motor
vehicles. It is also insured against dishonesty and gold and silver bullion
thefts, as well as losses of goods in transit. The property damage and boiler
and machinery insurance policies include coverage for business interruption,
resulting from an insured loss, subject to a five day waiting period and a
maximum indemnification period of one year.
Risks not insured against include mine cave-ins, mine floodings and other
uninsurable underground hazards, and most types of environmental pollution
against which the Company cannot insure or against which it has elected not to
insure.
The Company believes that it has taken adequate precautions to minimize the risk
of environmental pollution. However, with respect to certain mines, there is
some risk that cyanide may escape from leach pads or tailings dams in sufficient
quantities to cause water or surface pollution and there is some risk of
environmental impairment liability under environmental laws. See "Government
Regulation and Environmental Issues."
Underground mining is generally subject to certain types of risks and hazards,
including unusual or unexpected formations, pressures, cave-ins, flooding and
other conditions. The Company has not experienced any significant cave-ins at
its underground mines. In addition, because mining can be conducted on a number
of different levels at the same time, a cave-in in one area would not
necessarily affect mining in other areas.
Open-pit mining, such as that conducted at certain of the Company's mines, is
generally subject to certain types of risks and hazards, primarily unpredictable
pit wall failure. Open pit mining is conducted in phases and a pit wall failure
in one area would not necessarily affect overall pit design or mining in
unaffected areas. See "McCoy/Cove" regarding the Company's $30.0 million
provision related to the estimated costs to remove waste rock from an unstable
portion of the Cove pit wall.
Supplies, Utilities and Transportation
- --------------------------------------
The principal supplies needed for the operation of the Company's mines are
explosives, diesel fuel, chemical reagents (including cyanide, lime, sulfur
dioxide, sodium hydroxide and zinc dust), cement, equipment parts and
lubricants.
Power is supplied to the Company's mines by power companies or by diesel
generators. Each mine has access to adequate water.
Each of the U.S. mines has good road access by either paved or gravel roads from
state highways.
See also "Lupin-Supplies, Utilities and Transportation."
Waste Disposal
- --------------
Heap leaching is done with a weak cyanide solution held within a closed circuit,
which includes the leach pads and surface holding ponds. Leached ore from the
reusable pad at Round Mountain is washed and deposited adjacent to the mine
site. Where dedicated pads are used, the leached ore remains on the pads. Mill
processing may use a cyanide leaching solution, which is contained within the
mills' processing circuits. See "Government Regulation and Environmental
Issues."
See also "Lupin-Water Supply and Waste Disposal."
35
<PAGE>
Royalties
- ---------
Production from the Company's mines is subject to certain royalties. These are
described in note 19 to the Company's consolidated financial statements.
History of the Company
- ----------------------
The Company was incorporated in Canada in 1964. Between 1964 and 1982, the
Company developed and operated several silver mines near Port Radium in the
Northwest Territories of Canada and produced 35.5 million ounces of silver.
These silver reserves were mined out in 1982.
In 1979, the Company optioned the Lupin gold property, located 190 miles east of
Port Radium. Construction of the Lupin mine began in August 1980, and commercial
production commenced in October 1982. During 1982 through 1984, the Company
concentrated efforts on developing the Lupin mine.
With earnings generated from Lupin, the Company initiated an aggressive
acquisition, exploration and development program.
During 1985 and 1986, the Company acquired a 50% interest in the Round Mountain
mine and 100% interests in the McCoy, Borealis, Manhattan, Sunnyside and Illipah
mines. The Cove deposit was discovered adjacent to the McCoy mine in early 1987,
and major expansions at McCoy/Cove and Round Mountain were started in 1988. The
mine expansions were substantially funded by borrowing gold and silver. Gold and
silver financing allowed the Company to hedge future production and to obtain
the low interest rates associated with bullion financings. The Borealis,
Manhattan, Sunnyside and Illipah mines have subsequently been mined out and
closed.
In 1990, the Company brought the Kettle River mine in Washington state into
commercial production. In 1992, the Company increased its ownership interest to
100% from 70% when the Company's 30% partner withdrew from the Kettle River
joint venture.
Beginning in 1993, the Company increased exploration activities significantly.
Exploration programs were funded at all operating properties and also at many
other locations along the major gold belts of North America, Central America,
South America, West Africa. Most of the Company's exploration expenditures were
made outside of the United States and Canada.
In 1995, the Company added five development properties: Paredones Amarillos in
Mexico, Chapada in Brazil, Kingking in the Philippines, and Aquarius and Ulu in
Canada. The Company sold its interest in the Kensington project to its joint
venture partner in 1995.
In 1996, underground development began at Ulu and the Company wrote off its
entire remaining investment in the Alaska-Juneau project.
During 1996 and 1997, the Company increased its ownership from 7% to 58% of the
outstanding common shares of Santa Elina Mines Corporation ("Santa Elina"),
which holds interests in mining properties, principally in Brazil, and also in
Bolivia.
Beginning in 1997, the Company narrowed the focus of its exploration program to
projects in North, South and Central America where the Company already has
extensive gold mining infrastructure.
In 1997, in response to the declining gold prices beginning in the second
quarter of 1997 and continuing to an 18-year low in the fourth quarter of 1997,
the Company deferred final construction decisions on the Aquarius and Paredones
Amarillos development properties and deferred further development of the Ulu
deposit.
36
<PAGE>
During 1997, the Company conducted a major review of life-of-mine plans for its
four producing gold mines and a complete evaluation of the Company's portfolio
of development projects, exploration properties and other assets. In light of
the downturn in precious metals prices and the results of recently completed
feasibility and engineering studies, the Company assessed the recoverability of
those assets. As a result, the Company recorded $346.0 million in provisions
for impaired assets in 1997 as described in note 9 to the Company's consolidated
financial statements.
In January 1998, the Company temporarily suspended operations at the Lupin mine
and reduced operations at the McCoy/Cove mine, each until a significant recovery
in the gold price occurs.
RISK FACTORS
Recent Losses
- -------------
The Company incurred net losses of $420.5 million in 1997, $176.7 million in
1996 and $50.1 million in 1995. The loss in 1997 reflects a $362.7 million
provision for impaired assets and other charges, including provisions related to
the Kingking project ($50.0 million); Santa Elina ($143.6 million); the Lupin
($65.0 million), McCoy/Cove ($47.0 million) and Kettle River ($15.0 million)
operating properties; $25.4 million to write down certain share investments to
market value and to provide for estimated legal and closure costs; and $16.7
million related to severance costs. The loss in 1996 included a $77.1 million
write-down and reclamation and closure provision for the Alaska-Juneau
development property and a $30.0 million provision for the McCoy/Cove pit wall
stabilization. The Company incurred exploration and development expenses of
$34.9 million in 1997, $63.6 million in 1996 and $69.8 million in 1995. 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, a
significant 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. See "Liquidity", "Gold and Silver
Prices," "Uncertainty of Reserve and Other Mineralization Estimates" and
"Estimation of Asset Carrying Values" for additional disclosure with respect to
factors which may affect the carrying values of the Company's assets, and the
Company's results of operations and financial condition generally.
Liquidity
- ---------
The cash operating costs at the Company's four operating mines averaged $249 per
ounce in 1997. Total production costs were $359 per ounce during the same
period. In the current low gold price environment, the Company's cost structure
has significant implications for the Company's liquidity and flexibility to
invest funds in exploration and development. While the Company continues to
generate cash flow from operations at current gold prices before taking into
account cash exploration and development expenses, the amount of cash flow
available for acquisitions, investments, exploration and development is very
limited. As a result, the Company is carefully monitoring its discretionary
spending, though it intends to continue to conduct exploration and development
activities consistent with a more focused program.
The Company's existing credit facilities provide some additional liquidity. At
December 31, 1997, the Company had not utilized $85.0 million of the amounts
committed thereunder, of which $29.5 million was actually available for
borrowing in view of the credit facility covenant limitations. However, the
amounts available for borrowing under the credit facilities vary with precious
metals prices, among other factors, and continuation of gold prices at depressed
levels could have the effect of reducing or eliminating the Company's capacity
to borrow under the credit facilities. The Company and its lenders are in
negotiations aimed at restructuring the terms of its credit facilities in order
to provide more liquidity than is currently available in the event of a
continued period of depressed gold prices. The Company believes it is currently
in compliance in all respects with covenants under the credit facility. To
remain in compliance throughout 1998 (assuming the credit facilities are not
amended), the Company has taken certain actions to reduce its expenses, such as
reductions in budgeted new project and exploration expenditures for 1998, and
increased hedging activities and may be required to seek additional external
financing and to further reduce discretionary spending, absent a substantial
improvement in gold prices. There can be no assurance that the Company will be
successful in attracting external financing on terms and conditions favorable to
it. In
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the event the Company is unsuccessful in restructuring the credit facilities or
in accessing external financing on acceptable terms, it may be required to
curtail other discretionary expenditures.
Gold and Silver Prices
- ----------------------
The profitability of the Company's current operations is directly related and
sensitive to the market price of gold and silver. Gold prices are currently and
have recently been at depressed levels. Gold, silver and other metals 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 to 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.
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. In January 1998, the Company temporarily suspended
operations at the Lupin mine and reduced operations at the McCoy/Cove mine
pending significant improvement in gold prices. Although the Company has a
hedging program in place to reduce the risk associated with gold and silver
price volatility, there is no assurance that the Company's hedging strategies
will be successful. See "Other-Precious Metal Sales and Hedging Activities."
Furthermore, should the Company experience a prolonged period of depressed gold
prices and prepare its reserve calculations and/or life-of-mine plans at
significantly lower prices than those used at year-end 1997, the Company could
experience additional material write-downs of its investment in mining
properties. See "Uncertainty of Reserve and Other Mineralization Estimates" and
"Estimation of Asset Carrying Value."
Estimation of Asset Carrying Values
- -----------------------------------
The Company periodically undertakes a detailed review of the life-of-mine plans
for its four operating properties and an evaluation of the Company's portfolio
of development projects, exploration projects and other assets. In light of
both the short-term and long-term view of precious metals prices and the results
of feasibility and engineering studies, the Company assesses the recoverability
of the carrying values of those assets. For operating mines and development
properties, the carrying values are compared to estimated future net cash flows
from each property; for other assets, carrying values are compared to estimated
net realizable values based on market comparables and, for share investments,
quoted market values. For purposes of estimating future cash flows for its
producing gold mines and development projects in its 1996 and 1997 reviews, the
Company has used price assumptions of $350 per ounce for gold, except that for
purposes of the 1997 estimation, a price assumption of $300 per ounce was used
for 1998. As a result of the 1997 carrying value analysis, in 1997 the Company
recorded $346.0 million in provisions for impaired assets. The provisions
included $50.0 million to write off the Kingking project in the Philippines;
$143.6 million to write off the Company's investment in Santa Elina Mines
Corporation in Brazil; $127.0 million to reduce the carrying values of Lupin
($65.0 million), McCoy/Cove ($47.0 million) and Kettle River ($15.0 million);
and $25.4 million to write down certain share investments to market value and to
provide for estimated legal and closure costs. See note 9 to the consolidated
financial statements for further detail of the components of these provisions.
The Company intends to assess the carrying values of its assets on an ongoing
basis as required by generally accepted accounting principles. Factors which
may affect carrying values include, but are not limited to, gold and silver
prices, capital cost estimates, mining, processing and other operating costs,
grade and metallurgical characteristics of ore, mine design and timing of
production. There can be no assurance
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that, particularly in the event of a prolonged period of depressed gold prices,
the Company will not be required to take additional material write-downs of its
operating and development properties.
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 and are currently at
depressed levels. See "Gold and Silver Prices." 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, 1997 were $350 per
ounce of gold and $5.00 per ounce of silver. The market prices were $293 per
ounce of gold and $6.13 per ounce of silver at December 31, 1997. The market
price of gold is below the price at which the Company estimates 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,
1997, there would likely be a reduction in the amount of gold reserves.
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%. 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 mining properties. Under certain such circumstances, the Company
may discontinue the development of a project or mining at one or more of its
properties. For example, in 1997, the Company conducted a major review of life-
of-mine plans for its four producing mines and evaluated its portfolio of
development projects, exploration properties and other assets, which resulted in
the recording of $346.0 million in provisions for impaired assets (see note 9 to
the consolidated financial statements). The Company also recently deferred
final construction decisions on two planned gold mines (Aquarius and Paredones
Amarillos) and deferred further development of the Ulu satellite deposit.
Additionally, in January 1998, the Company temporarily suspended operations at
the Lupin mine and reduced operations at the McCoy/Cove mine until a significant
recovery in the gold price occurs. 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 development of ore bodies and the
processing of new or different ore grades and ore types, may materially and
adversely affect reserves.
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 disruptions, 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.
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.
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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, precious metals
price assumptions, and other factors. Based on this analysis, 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. In 1997, the
Company completed a major review of life-of-mine plans for the Company's four
producing gold mines and performed a complete evaluation of the Company's
portfolio of development projects, exploration properties and other assets. As
a result of this process, in 1997 the Company recorded provisions to write down
the carrying values of its producing mines, including Lupin ($65.0 million),
McCoy/Cove ($47.0 million) and Kettle River ($15.0 million). This complex
process continues for the life of every mine. See "Estimation of Asset Carrying
Values"
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. Recently
the Company deferred final construction decisions on Aquarius and Paredones
Amarillos and deferred further development of the Ulu satellite deposit in
Canada. 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 analysis with
respect to 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),
precious metals price assumptions, 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 under "Exploration Risks" are also applicable to the Company's
development projects. Such development projects are also 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.
Exploration Risks
- -----------------
Since mines have limited lives based on proven and probable 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) have entered a period of declining production
as the existing ore reserves are depleted, which has led to significant emphasis
on 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,
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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. Similarly, the feasibility study the Kingking project completed in the
third quarter of 1997 indicated that the project was uneconomic with the option
agreement in place and the Company recorded a $50.0 million provision to write
off its entire investment in the project. 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
reserve estimates.
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.
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 geological conditions, ground or slope failures,
cave-ins, changes in the regulatory environment and natural phenomena such as
inclement weather conditions, floods, blizzards and earthquakes. Such
occurrences could result in damage to, or destruction of, mineral properties or
production facilities, personal injury or death, environmental damage to 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 within 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 "Other-
Insurance and Mining Risks."
Governmental Regulation
- -----------------------
The Company's mining operations and exploration activities are subject to
extensive foreign or U.S. federal, state and local laws and regulations
governing exploration, development, production, exports, taxes, labor standards,
waste disposal, protection and remediation of the environment, reclamation,
historic and cultural resources preservation, mine safety and occupational
health, toxic substances and other matters. See "Other-Governmental Regulation
and Environmental Issues." 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 are
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 of operating and development activities, the
Company has expended significant resources, both financial and managerial, to
comply with governmental regulations and permitting requirements, and
anticipates that it will continue to do so in the future. Moreover, it is
possible that future 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.
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<PAGE>
The Company is required to obtain governmental permits to develop its reserves
and for expansion or advanced exploration activities at its operating properties
and its exploration properties. Obtaining the necessary governmental permits is
a complex and time-consuming process involving numerous foreign or U.S. federal,
state and local agencies. The duration and success of each permitting effort are
contingent upon many variables not within the Company's control. In the case of
foreign operations, governmental approvals, licenses and permits are, as a
practical matter, subject to the discretion of the applicable governments or
governmental officials. In the context of environmental protection permitting,
including the approval of reclamation plans, the Company must comply with known
standards, existing laws and regulations that may entail greater or lesser costs
and delays depending on the nature of the activity to be permitted and the
interpretation of the laws and regulations implemented by the permitting
authority. The failure to obtain certain permits, or the imposition of extensive
conditions upon certain permits, could have a material adverse effect on the
Company's business, operations and prospects.
In past sessions of the United States Congress, both the House of
Representatives and Senate have considered legislation that seeks to reform the
General Mining Law of 1872, as amended (the "Mining Law"), which governs the
location and maintenance of unpatented mining claims and related activities on
federal lands. As part of the most recent budget reconciliation process, each of
the Senate and the House of Representatives passed separate legislation that
sought to reform the Mining Law, although such legislation was not enacted into
law. Similar legislation has also been proposed in the current session of the
U.S. 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. 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 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. See "Other-Governmental Regulation and Environmental
Issues."
Risk of International Operations
- --------------------------------
Many of the mineral rights and interests of the Company are subject to
governmental 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 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
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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 Round
Mountain and McCoy/Cove properties, consist of unpatented lode mining claims.
Unpatented mining claims may be located on U.S. federal public lands open to
appropriation, and may be either lode claims or placer claims depending upon the
nature of the deposit within the claim. In addition, unpatented millsite claims,
which may be used for processing operations or other activities ancillary to
mining operations, may be located on federal public lands that are non-mineral
in character. Unpatented mining claims and millsites are unique property
interests, and are generally considered to be subject to greater title risk than
other real property interests because the validity of unpatented mining claims
is often uncertain and is always subject to challenges of third parties or
contests by the federal government. The validity of an unpatented mining claim,
in terms of both its location and its maintenance, is dependent on strict
compliance with a complex body of federal and state statutory and decisional
law. In addition, there are few public records that definitively control the
issues of validity and ownership of unpatented mining claims.
Inflation and Currency Risks
- ----------------------------
The Company directly or indirectly holds mining interests in several countries,
including Mexico, Brazil, Russia, Burkina Faso, Mali, Ghana, Chile and Honduras,
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 U.S. 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. See "Exchange
Rates".
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GLOSSARY
The following terms are described to aid in understanding the Company's Form 10-
K. Geological terms are generally not included.
ADIT - A tunnel driven horizontally into the side of the mountain or hill to
gain access to mineralization for exploration or mining.
ASSAY - A chemical test performed on a sample of ore, mineral or rock to
determine the mineralized content.
CALL OPTION - An option contract that gives the holder the right, but not the
obligation, to buy a specific commodity on a specific future date at a fixed
price.
CONCENTRATE - A metal-rich product from a mineral separation process such as
flotation. The metals are "concentrated" from ore and the remainder is discarded
as neutralized tailings. The contained metals are recovered from the
concentrates either by leaching or by smelting.
CONTANGO - The premium paid over spot prices on a forward contract. The contango
is based on the difference between the cost of leasing gold and current money
interest rates.
DILUTION - The unwanted but unavoidable inclusion of some barren or low-grade
rock along with the ore being mined. This lowers the grade of the mined
material.
DORE - An unrefined bar of bullion containing an alloy of gold, silver and
impurities. The Company ships dore bars to refiners for further processing, then
sells them to precious metal dealers, mainly banks and their affiliates.
DRIFT - An underground horizontal passage providing access to a mineralized
area.
DRILLING
Blasthole Drilling - The drilling of holes in rock to insert with an explosive
charge. The drill holes are usually about 10-25 feet apart. The ensuing
synchronized blast will break up the rock so it can be dug out.
Diamond (or Core) Drilling - Drilling with a hollow diamond-studded bit to cut
out a solid rock core. A column of rock is extracted from inside the drill rod
for geological examination and assay.
In-Fill Drilling - Drilling between widely spaced holes (typically up to 200
feet apart) to establish or upgrade the ore reserve classification.
Rotary Drilling - Drilling with a bit that breaks the rock into chips. The chips
are continually flushed from the hole (outside the drill pipe) and are collected
in sequence for geological examination and assay.
Reverse-Circulation Drilling - A type of Rotary Drilling that uses a double-
walled drill pipe. Compressed air, water or other drilling medium is forced down
the space between the two pipes to the drill bit, and the drilled chips are
flushed back up to the surface through the center tube of the drill pipe.
Step-Out Drilling - Drilling at widely spaced intervals (typically in increments
of 300 feet) outward from known deposits to test for extensions of
mineralization.
EXERCISE (OR STRIKE) PRICE - The price at which the underlying commodity or
security can be bought, sold, or settled on exercise of the option contract. In
the case of a call option, the exercise price is the price at which the buyer of
the option has the right to purchase the underlying commodity or security. In
the case of a put option, the exercise price is the price at which the buyer of
the option has the right to sell the underlying commodity or security.
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EXPLORATION - Exploration can be divided into three basic categories:
Grassroots Exploration - Exploration for ore in an area that has the correct
geologic setting, although no ore may have been found yet in that precise
location.
Headframe Exploration - Exploration for a separate ore body "within sight of the
headframe" of an existing mine.
Definition Exploration - Exploration that defines an ore body, or searches for
extensions to it, once it has been discovered.
FEASIBILITY STUDIES - Determinations of the economic feasibility of mining a
deposit, based on progressively greater levels of information.
Initial Feasibility (Level 1) - A preliminary estimate of what the economic
parameters of mining a deposit are likely to be, based on a particular mining
plan, process flow sheet, facility design, infrastructure, and estimated capital
and operating costs. A Level 1 estimate usually describes an installation that
might be built. The deposit is classified as other mineralization.
Detailed/Optimized Feasibility (Level 2) - A refinement and reassessment of the
initial study, based on extensive additional information, detailed engineering,
and optimization work. This provides a level of confidence such that a decision
to build the project can be made. A Level 2 estimate generally describes an
installation that probably will be built, rather than an installation which is
conceptual only. The deposit is now classified as ore reserves.
Definitive Feasibility (Level 3) - Yet a further increase in the level of
engineering and other detailed work. The designs and estimates provided in the
Level 3 estimate are for the installation that will be built with minimal
modifications. The Company would not normally proceed to this level of detail
before making a construction decision unless it were to be required for stand-
alone project financing.
FLOTATION - A process for concentrating minerals based on the selective adhesion
of certain minerals to air bubbles in a mixture of water and ground-up ore. When
the right chemicals are added to a frothy water bath of ore that has been ground
to the consistency of talcum powder, the minerals will float to the surface. The
metal-rich flotation concentrate is then skimmed off the surface.
FORWARD CONTRACT - A legal agreement to buy or sell a commodity at a specific
price on a future date.
GOLD LOAN - A low interest cost method of debt financing that also acts to hedge
future selling prices. A gold producer borrows gold bullion from a bank or
dealer and sells it on the spot market, thereby establishing the sales price for
the quantity of gold borrowed. The producer replaces the borrowed gold from its
future production according to an agreed upon schedule. A gold loan allows the
producer to receive the proceeds from the sale of the borrowed gold immediately,
rather than as the metal is produced.
GRADE - The metal content of ore. With precious metals, grade is expressed as
troy ounces per ton of ore.
Cut-off Grade-The minimum grade of ore that can be mined and processed
economically.
HEAP LEACHING - A low-cost leaching process in which ore is placed in a large
heap on an impermeable pad. The solvent, a weak cyanide solution, is dripped or
sprinkled over the heap and collected at the bottom after percolating through
the ore and dissolving the metals. See the illustration in "Mine Processing."
LEACHING - The extraction of a soluble metallic compound from ore by dissolving
the metals in a solvent. See also Heap Leaching.
LEACH CYCLE - The average amount of time that ore is leached.
45
<PAGE>
LEACH PAD - A large, impermeable foundation or pad used as a base for ore during
heap leaching. The pad prevents the leach solution from escaping out of the
circuit.
Dedicated Pad - A Leach Pad which is constructed to permanently accommodate one
ore heap. The pad forms the tailings pile when economic recovery has been
reached and the pad neutralized.
Reusable Pad - A pad where ore is loaded and then unloaded at the end of each
Leach Cycle. The pad, made of durable materials, can be reused continually.
MILL - A plant where ore is ground, usually to fine powder, and the metals are
extracted by physical and/or chemical processes. See the illustration in "Mine
Processing."
MINERALIZATION - Mineral-bearing rock. In this report, mineralization generally
refers to the presence of gold and silver established by widely spaced drilling.
It is referred to as "other mineralization" to distinguish it from "proven and
probable reserves." See Ore Reserves.
ORE BODY - A mineral deposit that can be mined at a profit under existing
economic conditions.
ORE PASS - A vertical or steeply inclined raise used to move ore by gravity to
the mine level where it will be crushed and hoisted to surface.
ORE RESERVES - The tonnage and grade of an economically and legally extractable
ore body. The Company's reserves are minable reserves and do not reflect losses
in the recovery process. They include allowance for dilution of ore in the
mining process. Securities regulations in both Canada and the U.S. set strict
requirements for proven and probable ore reserves.
Proven Ore Reserves - "Proven ore" or "measured ore" means that material for
which tonnage is computed from dimensions revealed in outcrops or trenches or
underground workings or drill holes and for which the grade is computed from the
results of adequate sampling, and for which sites for inspection, sampling and
measurement are so spaced and the geological character so well defined that the
size, shape and mineral content are established, and for which the computed
tonnage and grade are judged to be accurate within limits which shall be stated
and for which it shall be stated whether the tonnage and grade of proven ore or
measured ore are "in-situ" or extractable, with dilution factors shown, and
reasons for the use of these dilution factors clearly explained.
Probable Ore Reserves - "Probable ore" or "indicated ore" means that material
for which tonnage and grade are computed partly from specific measurements,
samples or production data, and partly from projection for a reasonable distance
on geological evidence, and for which the sites available for inspection,
measurement and sampling are too widely or otherwise inappropriately spaced to
outline the material completely or to establish its grade throughout.
The Canadian and U.S. regulations are presented in "Reserves."
46
<PAGE>
OTHER MINERALIZATION - See Mineralization.
OUNCE - Throughout this report, the terms "ounce" and "milliounce" are used as
abbreviations for the troy ounce measure of weight. The troy ounce has been used
exclusively as a precious metals measurement, probably since the 16th century.
One troy ounce = 1.097 avoirdupois ounces
= 31.103 grams
One milliounce = 0.001 ounce
PUT OPTION - An option contract that gives the holder the right, but not the
obligation, to sell a specific commodity on a specific future date at a fixed
price.
RAMP - An underground tunnel providing access for exploration or the movement of
materials and equipment between mine levels.
RECOVERY RATE - The percentage of metals recovered in a mineral separation
process. Recovery rates vary considerably depending on physical, metallurgical
and economic circumstances.
RESERVES - See Ore Reserves.
RUN-OF-MINE ORE - Uncrushed ore in its natural state just as it is when blasted.
SHAFT - A vertical accessway to a mine. Shafts are used for the movement of
personnel and materials, including ore and nonmineralized rock.
SPOT DEFERRED SALE - Similar to a forward sale except the date of sale may be
deferred many times before the gold is ultimately delivered. The contango will
increase at each deferral or roll forward.
STOPE - An underground working area where ore is mined.
SWAP - Transactions that generally involve the contractual exchange of interest
payment obligations, currency positions, or commodities (or any combination
thereof), on a specified amount of notional principal for a specified period of
time.
TAILINGS - The neutralized material discarded after the economically recoverable
metals have been extracted from the ore by Milling or Heap Leaching.
TON - The short ton is used throughout this report. It is a unit of weight equal
to 2,000 pounds or 907.2 kilograms.
WASTE-TO-ORE RATIO - In an open pit mine, large quantities of nonmineralized
rock often cover up the ore and must be removed. The stripping ratio is the
number of tons of nonmineralized material removed per ton of ore mined.
47
<PAGE>
GOLD PRICES
The following table sets forth annual high, low, average and end of period
afternoon fixing gold prices in U.S. dollars per troy ounce on the London
Bullion Market.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------
1998* 1997 1996 1995 1994 1993
------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
High $ 305 $ 367 $ 415 $ 396 $ 396 $ 406
Low 279 283 367 372 370 326
Average 294 332 388 384 384 360
End of Period 295 293 369 387 383 392
</TABLE>
* Through March 13, 1998
SILVER PRICES
The following table sets forth annual high, low, average and end of period noon
prices in U.S. dollars per troy ounce as quoted by Handy & Harman.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------
1998* 1997 1996 1995 1994 1993
------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
High $7.81 $6.13 $5.79 $6.01 $5.76 $5.37
Low 5.53 4.18 4.67 4.36 4.63 3.55
Average 6.33 4.87 5.18 5.20 5.29 4.30
End of Period 6.24 6.13 4.87 5.11 4.87 5.08
</TABLE>
* Through March 13, 1998
EXCHANGE RATES
The exchange rates of the Canadian dollar to the U.S. dollar at the end of each
period and the high, the low and the average exchange rates for each period,
were as follows (such rates, which are expressed in Canadian dollars, being the
noon buying rates in New York City for cable transfers in U.S. dollars as
certified for customs purposes by the Federal Reserve Bank of New York).
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------
1998* 1997 1996 1995 1994 1993
------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
High C$1.4075 C$ 1.3353 C$ 1.3310 C$ 1.3285 C$ 1.3103 C$ 1.2428
Low 1.4637 1.4358 1.3822 1.4238 1.4078 1.3443
Average 1.4330 1.3838 1.3638 1.3689 1.3699 1.2939
End of Period 1.4100 1.4352 1.3697 1.3655 1.4030 1.3255
</TABLE>
* Through March 13, 1998
CONVERSION TABLE
For ease of reference, the following conversion factors are provided.
1 mile = 1.6093 kilometers
1 foot = 0.305 meter
1 acre = 0.4047 hectare
1 U.S. gallon = 3.785 liters
1 short ton = 2,000 pounds
= 907.2 kilograms
1 troy ounce = 1.097 avoirdupois ounces
= 31.103 grams
The term "ounce" as used in this report means "troy ounce."
48
<PAGE>
MINE PROCESSING
Milling is the traditional method of recovering gold from ore. All of the
Company's producing mines use milling as will Aquarius and Paredones Amarillos.
Details of the process vary from mine to mine, but the principles remain the
same. The mill recovery process at the McCoy/Cove operation, where both oxide
ores and sulfide ores are processed, is illustrated on page 50.
Heap leaching is a low-cost gold recovery process that can only be successfully
applied to certain oxidized, permeable ores. It has a lower recovery rate than
milling but is a less expensive process. Heap leaching is particularly suited to
large, low-grade oxide ore deposits. Both Round Mountain and McCoy/Cove use heap
leaching. Details of the process vary from mine to mine, but the principles
remain the same. To describe how the heap leach process works, the Round
Mountain mine's reusable leach pad process is illustrated on page 51.
49
<PAGE>
GENERAL DESCRIPTION OF MINING AND MILL RECOVERY PROCESS
Milling is the traditional method of recovering gold from ore. Details of the
process vary from mine to mine, but the principles remain the same. (Heap
leaching is another method of recovering gold from certain types of low-grade
ore, described on the next page.) Here is how the mill recovery process works
at the McCoy/Cove operation, where the Company has both oxide ores and sulfide
ores.
Ore is blasted and trucked from an open pit to the mill. Ore is gold-bearing
rock. After it's blasted, it ranges from powder to boulders as large as five
feet across.
A giant jaw crusher reduces all of the ore to eight inches or smaller.
Crushed ore is ground to the consistency of fine sand in a series of three
grinding mills. Steel balls tumble with the ore and water inside huge
rotating drums, pulverizing the ore and liberating most of the gold and
silver.
After grinding, sulfide ores need two extra steps that oxide ores don't:
flotation and regrinding.
Flotation is a method of concentrating sulfide ores. The mineral particles
are floated to the surface by a froth of induced air, where they concentrate
and are skimmed off. The remaining under-flow, which still contains some gold
and silver, skips the next step.
The sand-size concentrated sulfide particles are reground even finer, to the
size of talcum powder. This frees the precious metals from the sulfides
trapping them.
Oxide ores, sulfide ore underflows, and reground sulfide concentrates all go
to large leaching tanks, where a cyanide solution dissolves the gold and
silver from the solids like hot water leaches tea from tea leaves.
After 36 to 96 hours, zinc powder is added to the "pregnant" leach solution.
This precipitates the gold and silver from the solution in the form of
metallic powder. The powder is collected on filters and smelted into bullion
bars. The bars are shipped to refineries for further processing into the pure
metals.
The leftover solids from the leach tanks, called tailings, are pumped to a
treatment plant, where the contaminants are neutralized using sulfur dioxide
(SO2) and air. The tailings are then pumped to a lined tailings pond. The
solids settle to the bottom, and the water that doesn't evaporate is
recirculated back to the mill.
50
<PAGE>
GENERAL DESCRIPTION OF MINING AND HEAP-LEACH RECOVERY PROCESS
Heap leaching is a gold recovery process that can only be applied to permeable
ores. It has a lower recovery rate than milling, but lower-grade ores can be
economically heap leached rather than milled because heap leaching costs are
much lower. Here is how Round Mountain's reusable leach pad process works. The
details, but not the principles, vary among individual mines.
Ore is mined and hauled by truck from the open pit. Ore is gold-bearing rock.
Crushing reduces the ore to less than three-quarters of an inch in size. Lime is
added to stabilize the cyanide.
After being loaded onto the impermeable leach pad, the ore is sprinkled for
approximately 90 days with a weak sodium cyanide solution. This penetrates the
ore, dissolving the almost-microscopic bits of gold and silver. The "pregnant"
solution drains to the collection area at the lower side of the pad and flows to
a pump. At the end of the leach cycle, the leached ore is washed with water and
drained.
The pregnant solution is pumped through a series of tanks containing activated
carbon, which removes the gold and silver from the cyanide solution. The
"barren" solution is recycled back to the leach pads.
The gold and silver are stripped from the carbon, forming a highly concentrated
solution. The carbon is regenerated and returned to the adsorption circuit.
The precious metals in the concentrated solution are electrolytically deposited
on steel wool cathodes in the electrowinning cells.
The gold precipitated on the cathodes is then placed into an electrorefining
cell, where the gold is plated out in the form of foil. The foil is fire-refined
into dore bars containing about half gold and half silver, together with minor
amounts of impurities.
The dore bars are shipped to a precious metals refinery for final processing
into pure gold and silver.
51
<PAGE>
ITEM 3-LEGAL PROCEEDINGS
ALASKA-JUNEAU
During 1994, the U.S. Attorney began an investigation of potential 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
changes 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, but there has been
no indication that such an action has been considered.
See "Business and Properties-Other-Government Regulation and Environmental
Issues."
SUMMA
In 1995, Summa Corporation commenced in Nevada state court a lawsuit against the
Company and the predecessor owner of the McCoy/Cove and Manhattan mines in which
it claimed in excess of $13.0 million resulting from alleged improper deductions
in calculation of royalties payable over several years of production at
McCoy/Cove and the former Manhattan mine. The case went to trial in April 28,
1997, and the court found for the Company, holding the Company's method of
calculation is correct and that it is not in breach of the agreement to pay
royalties. The court also awarded substantial costs and attorneys' fees to the
Company. The results are being appealed by Summa to the Nevada Supreme Court.
The Company has $1.9 million accrued related to the Summa litigation.
QUI TAM ACTION
In 1997, private parties acting on behalf of the United States in a qui tam
action commenced suit in federal court against 14 mining companies, including
the Company. A qui tam suit is one brought by private parties seeking remedies
for alleged wrong-doing to which the government is allegedly entitled but has
declined to seek recovery. The complaint asserts that because of foreign
ownership of the companies, they are not entitled to locate, operate or patent
mining claims on federal public lands. It seeks invalidation of all such mining
claims held by the companies and recovery of triple the value of production from
them, and from their allegedly unlawfully patented claims. In March 1998, the
federal district court ruled in favor on the defendants' motion to dismiss the
complaint. This ruling is subject to appeal.
OTHER
The Company is also engaged in routine litigation incidental to its business.
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 1997.
52
<PAGE>
PART II
ITEM 5-MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
The Company's common shares were first sold to the public at $2.36 per share in
April 1983 after giving effect to the six-for-five share split in 1983 and the
two-for-one share split in 1987. The Company's stock exchange listings, together
with the date of listing, are set out below.
Canada-Toronto and Montreal (April 1983)
United States-American (October 1983)
France-Paris (March 1985)
Belgium-Brussels (October 1985)
Switzerland-Zurich (April 1987)
Germany-Frankfurt (November 1988)
The following table sets forth for the period from January 1, 1996 through
February 28, 1998 the high and low reported prices and trading volume of the
common shares on The Toronto Stock Exchange and the American Stock Exchange.
<TABLE>
<CAPTION>
The Toronto Stock Exchange American Stock Exchange
------------------------------------ -----------------------------------
High Low Volume High Low Volume
(Canadian Dollars) (shares in (U.S. Dollars) (shares in
thousands) thousands)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996
- ----
First Quarter $20.25 $14.38 54,064 $14.75 $10.50 54,646
Second Quarter 19.13 14.40 14,822 14.13 10.50 29,577
Third Quarter 15.20 11.45 16,007 11.25 8.44 26,632
Fourth Quarter 12.45 8.00 22,569 9.13 5.88 49,925
1997
- ----
First Quarter 10.80 8.10 9,264 7.94 6.00 36,001
Second Quarter 9.40 7.35 8,533 6.88 5.31 25,854
Third Quarter 8.15 6.55 5,402 5.94 4.75 21,262
October 8.10 5.65 2,249 5.88 4.00 12,155
November 5.90 3.05 4,193 4.25 2.19 15,117
December 4.12 2.85 5,933 2.88 2.00 17,001
1998
- ----
January 3.65 2.37 6,049 2.63 1.56 38,763
February 3.10 2.67 1,749 2.19 1.81 6,765
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
On March 13, 1998, the closing price of the common shares on The Toronto Stock
Exchange and on the American Stock Exchange was C$2.80 and U.S. $1.94,
respectively.
On March 13, 1998, the Company had 139,370,031 common shares outstanding held by
approximately 65,000 registered and nominee shareholders.
DIVIDENDS
The Company has suspended payment of dividends beginning in 1997. This will save
approximately $10.5 million per annum based on the Company's prior practice of
paying dividends totaling $0.0750 per share per year as was done in 1996, 1995
and 1994. Historically, dividends payable to Canadian residents have been
converted to and paid in Canadian dollars.
53
<PAGE>
The declaration and payment of future dividends is dependent upon the Company's
capital requirements, earnings and economic outlook. Additonally, in the first
quarter of 1998, the Company exercised its right to temporarily defer its April
1998 interest payment to holders of the capital securities. During the deferral
period, the Company is prohibited from paying dividends.
See "Certain Tax Matters-Canadian Federal Income Tax Considerations" for
information with respect to Canadian withholding tax applicable to non-Canadian
shareholders.
CERTAIN TAX MATTERS
The following paragraphs summarize certain United States and Canadian federal
income tax considerations in connection with the receipt of dividends paid on
common shares of the Company and certain Canadian federal income tax
considerations in connection with a disposition of common shares by nonresidents
of Canada. These tax considerations are stated in brief and general terms and
are based on United States and Canadian law currently in effect. There are other
potentially significant United States and Canadian federal income tax
considerations and state, provincial or local income tax considerations with
respect to ownership and disposition of the common shares which are not
discussed herein. The tax considerations relative to ownership and disposition
of the common shares may vary from taxpayer to taxpayer depending on the
taxpayer's particular status. Accordingly, prospective purchasers should consult
with their tax advisors regarding tax considerations which may apply to their
particular situation.
United States Federal Income Tax Considerations
- -----------------------------------------------
Dividends on common shares paid to citizens or residents of the U.S. or to U.S.
corporations (including any Canadian federal income tax withheld) will be
generally subject to U.S. federal ordinary income taxation to the extent that a
shareholder (including a corporation) received a distribution out of the
shareholder's ratable share of the Company's earnings and profits. To the
extent that the amount of the dividend distribution exceeds the shareholder's
ratable share, such excess would not be taxable but would reduce the
shareholder's basis in the Company's common stock. To the extent that the
distribution exceeds the shareholder's adjusted basis in the shares (i.e. cost
less all non-taxable dividend distributions), the excess would be taxable as a
gain as if the shareholder had sold or exchanged the shares. Such dividends
will not be eligible for the deduction for dividends received by corporations
(unless such corporation owns by vote and value at least 10% of the stock of the
Company, in which case a portion of such dividend may be eligible for such
deduction).
U.S. corporations, U.S. citizens and U.S. residents will generally be entitled,
subject to certain limitations, to a credit against their U.S. federal income
tax for Canadian federal income taxes withheld from such dividends. Taxpayers
may claim a deduction for such taxes if they do not elect to claim such tax
credit. No deduction for foreign taxes may be claimed by an individual taxpayer
who does not itemize deductions. Because the application of the foreign tax
credit depends upon the particular circumstances of each shareholder,
shareholders are urged to consult their own tax advisors in this regard.
Nonresident aliens and foreign corporations will be subject to U.S. federal
income taxation at graduated rates upon dividends or gain with respect to their
common shares (and may be entitled to such tax credit or such deduction), if
such income or gain is treated as effectively connected with the conduct of the
recipient's trade or business within the United States.
Canadian Federal Income Tax Considerations
- ------------------------------------------
Dividends paid on common shares held by non-residents of Canada will generally
be subject to Canadian withholding tax. This withholding tax is levied at the
basic rate of 25%, although this rate may be reduced by the terms of any
applicable tax treaty. The Canada-U.S. tax treaty provides that the withholding
rate on dividends paid to U.S. residents on common shares is generally 5%.
Generally, a non-resident of Canada who holds common shares as capital property
will not be subject to Canadian federal income tax on capital gains realized on
the disposition of his common shares.
54
<PAGE>
ITEM 6-SELECTED FINANCIAL DATA
The following table is derived in part from the audited consolidated financial
statements of the Company. The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in Canada.
In all material respects, they conform with principles generally accepted in the
United States (except as described in footnote 1 to this table and note 15 to
the Company's consolidated financial statements). This information should be
read in conjunction with the audited consolidated financial statements and the
notes thereto.
55
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA(1)
Year ended December 31
millions of U.S. dollars except
for gold price and per share data 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA
Revenue $ 305.4 $ 337.3 $ 360.7 $ 377.6 $ 366.5
Average gold price realized per ounce $ 362 $ 384 $ 388 $ 387 $ 360
Earnings (loss) before taxes(2) $(418.7) $(176.1) (44.7) $ 13.0 $ 9.7
Earnings (loss) before preferred share dividends(1) $(420.5) $(176.7) $ (41.6) $ 17.3 $ 10.2
Net earnings (loss)(2) $(420.5) $(176.7) $ (50.1) $ 8.0 $ 3.6
Net earnings (loss) attributable to common
shareholders(3) $(426.2) $(176.7) $ (50.1) $ 8.0 $ 3.6
Earnings (loss) per common share(2) $ (3.06) $ (1.31) $ (0.43) $ 0.07 $ 0.03
Effective tax rate (0.4%) (0.4%) 7.2% (33.3%) (5.1%)
Weighted average common shares outstanding (millions) 139.4 134.4 116.2 112.5 108.2
BALANCE SHEET DATA
Working capital (deficiency) (28.7) (52.9) $ 109.6 $ 186.2 $ 148.9
Current ratio 0.73 0.74 1.84 4.24 2.01
Total assets $ 432.8 $ 832.1 $ 871.2 $ 881.7 $ 990.5
Gold, silver and currency financings $ 66.5 $ 182.9 $ 152.8 $ 132.7 $ 217.4
Deferred income taxes $ 7.9 $ 8.4 $ 8.1 $ 8.4 $ 14.6
Common shareholders' equity $ 153.7 $ 492.3 $ 588.9 $ 509.7 $ 513.7
Common shares outstanding (millions) 139.4 139.4 129.9 112.7 112.2
OTHER DATA
Dividends paid on common shares - total $ -- $ 10.1 $ 9.0 $ 8.5 $ 8.1
- per share $ -- $0.0750 $0.0750 $ 0.0750 $0.0750
Dividends paid on convertible preferred
shares of subsidiary(4) - total $ -- $ -- $ 8.5 $ 10.1 $ 10.1
- per share $ -- $ -- $ 1.75 $ 1.75 $ 1.75
Net cash flows provided from (used in) operating
activities $ (9.2) $ 29.9 $ 67.3 $ 92.2 $ 101.7
Capital and exploration spending $ 151.1 $ 161.7 $ 138.3 $ 66.8 $ 44.4
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) This information should be read in conjunction with the Company's audited
consolidated financial statements and accompanying notes. Contingencies are
described in notes 9, 18 and 19 to the Company's consolidated financial
statements. The Company's consolidated financial statements are prepared in
accordance with Canadian generally accepted accounting principles. Had the
consolidated financial statements been prepared in accordance with
accounting principles generally accepted in the United States, certain
selected financial data would be disclosed as follows. See also note 15 to
the Company's consolidated financial statements.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings (loss) before income taxes (505.8) (173.1) (39.2) $ 19.2 $ 13.9
Net earnings (loss) (460.6) (173.7) (44.6) $ 9.3 $ 12.7
Earnings (loss) per common share $ (3.30) $ (1.29) (0.38) $ 0.08 $ 0.12
Total assets $ 423.9 $ 919.6 $ 881.3 $872.6 $975.2
Deferred income taxes $ 7.9 $ 55.0 $ 8.1 $ 8.4 $ 9.7
Common shareholders' equity $ 55.9 $ 533.1 $ 599.0 $500.6 $503.3
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(2) In 1997, the Company recorded a $362.7 million provision for impaired assets
and other charges ($2.60 per share). In 1996, the Company recorded a $30.0
million ($0.22 per share) provision related to the estimated costs to remove
waste rock from an unstable portion of the Cove pit wall at the McCoy/Cove
mine in Nevada and recorded a $77.1 million ($0.57 per share) provision to
write off the $57.1 million book value of its Alaska-Juneau development
property in Alaska and to accrue $20.0 million for estimated reclamation and
closure costs.
(3) After interest expense on the equity portion of the capital securities,
issued in March 1997. See note 7 to the consolidated financial statements.
(4) All of the outstanding shares of preferred stock of subsidiary were redeemed
or converted into common shares of the Company during 1995.
56
<PAGE>
ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial results of the Company's operations
for the years 1995 through 1997 should be read in conjunction with the financial
data and the Company's consolidated financial statements, included elsewhere in
this report. The Company's consolidated financial statements are prepared in
accordance with accounting principles generally accepted in Canada. In all
material respects, they conform with those principles generally accepted in the
United States, except as described in note 15 to the Company's consolidated
financial statements, and also with International Accounting Standards.
Material changes in the Company's reserves may significantly impact results of
operations and asset carrying values. See the discussion of reserves in
"Business and Properties-Reserves".
The following contains statements that are, by their nature, forward looking and
uncertain. See "Cautionary 'Safe Harbor' Statement under the United States
Private Litigation Reform Act of 1995," "Business and Properties-Risk Factors"
and "Commitments and Contingencies" for a discussion of certain factors which
should be considered in evaluating these statements.
SUMMARY
The Company had a net loss of $420.5 million ($3.06 per share) in 1997, compared
with net losses of $176.7 million ($1.31 per share) in 1996 and $50.1 million
($0.43 per share) in 1995.
The 1997 results reflect $346.0 million in provisions for asset impairment
recognized as a result of a major asset reevaluation and downsizing program
undertaken by the Company in response to gold market conditions (see note 9 to
the consolidated financial statements). The 1997 results also reflect $16.7
million of severance expense related to the downsizing, lower gold and silver
prices realized and lower volume of gold sold.
The average gold price realized by the Company in 1997 was $362 per ounce,
including forward sales, loan repayments and the recognition of deferred gains
related to repurchased forward sales contracts. This was above the average
market price of $332 per ounce in 1997 but lower than the $384 per ounce average
price realized in 1996. The Company has hedged its entire estimated 1998 gold
production at a minimum average price of $340 per ounce, so 1998 revenue and
cash flow will not be reduced by any potential further decline in the gold
price.
Revenue will be reduced in 1998 from 1997 due to lower planned production
resulting from a temporary suspension of operations at Lupin and a scale-back of
operations at McCoy/Cove, the Company's two highest-cost mines, in response to
market conditions. Production targets for 1998 are 500,000 to 520,000 ounces of
gold and 7 to 8 million ounces of silver.
In 1997, net cash flows used in operating activities were $9.2 million after
cash exploration and development expenses of $34.5 million.
The Company's sharply reduced exploration and development programs, in response
to market conditions, may be expected to limit the discovery and development of
new reserves. Over the long term, this could have adverse implications since
Lupin and McCoy/Cove are nearing the ends of their mine lives.
RESULTS OF OPERATIONS
Revenue
- -------
Revenue declined to $305.4 million in 1997 principally due to lower gold prices
realized and lower production at McCoy/Cove and Lupin related to declining ore
grades. In 1996, revenue declined to $337.3 million from $360.7 million in
1995, primarily because of decreased silver production, a function of the
57
<PAGE>
planned processing of lower silver grades at the McCoy/Cove mine, only partly
offset by increased gold production at other mines.
Gold and Silver Hedging
- -----------------------
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, forward sale contracts, spot-deferred contracts, swaps and
options. The Company's hedging activities and commitments are described in
detail in note 18 to the consolidated financial statements.
In 1997, the Company delivered 6% of its gold production against forward sales
and gold loans at an average price of $397 per ounce, excluding the recognition
of deferred gains on repurchased forward sales contracts. This compares with
25% of gold production in 1996 at an average price of $375 and 22% of 1995
production at an average price of $395.
The Company delivered 7% of its silver production against forward sales in 1997
at an average price of $5.32 per ounce, excluding the recognition of deferred
gains on repurchased forward sales contracts, 45% in 1996 at an average price of
$5.85 and 47% in 1995 at an average price of $5.48 per ounce.
Including transactions completed in the first quarter of 1998, the Company has
protected itself against price declines in 1998 by hedging its entire planned
1998 gold production at a minimum average price of $340 per ounce, along with
5.9 million ounces of silver at $5.44 per ounce. In addition, the Company has
hedged approximately 330,000 ounces of gold in 1999 at a minimum average price
of $365 per ounce and 4.0 million ounces of silver at $5.77 per ounce.
Operating Costs
- ---------------
Consolidated cash operating costs were $249 per ounce of gold produced in 1997,
$254 in 1996 and $229 in 1995. The 1997 decrease reflected a series of cost-
reduction initiatives, along with increased dedicated pad tonnage and higher
reusable pad recoveries at Round Mountain. The 1996 increase was principally
due to the planned mining of lower-grade ores. Cash operating costs per ounce
vary with the number of tons and grade of ore processed. They generally reflect
mining and processing costs, most significantly labor, consumable materials,
repairs of machinery and equipment, fuel, utilities and environmental
compliance.
The Company's cash operating cost target for 1998 is $245 to $255 per ounce of
gold produced.
Royalties
- ---------
Royalties decreased to $8.3 million in 1997 from $9.6 million in 1996 primarily
due to lower precious metals prices. They increased in 1996 from $8.4 million
in 1995 because of higher gold production. The Company's target for 1998 is $8
to $9 million, reflecting similar levels of royalty bearing production. Details
of the Company's royalties are provided in note 19 to the consolidated financial
statements.
Production Taxes
- ----------------
Production taxes decreased in both 1997 and 1996 due to lower precious metals
prices and lower gold production at McCoy/Cove. Less cash flow reduces the net
profit on which the production taxes are calculated. Production taxes are
expected to be about the same in 1998 as 1997.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization decreased to $79.3 million from $86.5 million in
1996. Amortization varies with the quantity of gold and silver sold and the mix
of production from the various mines. The quantities of the Company's proven
and probable reserves and other mineralization also affect amortization expense,
58
<PAGE>
as the Company's investment is amortized over these ounces. In 1997, the $2.3
million decrease in amortization expense resulted primarily from the impact of
the third quarter 1997 write-down of ore body carrying values at Lupin and
Kettle River. The $4.9 million decrease in depreciation expense reflected the
fact that as McCoy/Cove approaches the end of its useful life, major groups of
its assets are fully depreciated and not being replaced. In 1996, the $2.6
million decrease in depreciation and amortization resulted principally from
reduced silver production, partly offset by increased gold production.
For 1998, the Company expects depreciation and amortization expense to be in the
range of $65 to $70 million, down significantly from $79.3 million in 1997,
$86.5 million in 1996 and $89.4 million in 1995. The main reason for the
expected decline is the write-down in late 1997 of the carrying values of the
Lupin and Kettle River mines (note 9 to the consolidated financial statements).
On a per-ounce basis, depreciation and amortization expense was $90 in 1997, $98
in 1996 and $97 in 1995. The depreciation portion alone was $58 in 1997, $64 in
1996 and $61 in 1995. The amortization portion was $32 in 1997, $34 in 1996 and
$36 in 1995.
Reclamation and Mine Closure
- ----------------------------
Reclamation and mine closure expense increased each year, reflecting increased
accruals for reclamation and closure activities (see notes 8 and 9 to the
consolidated financial statements). For 1998, the Company expects this expense
to be in the range of $7 to $8 million.
General and Administrative
- --------------------------
General and administrative costs were sharply reduced in 1997, reflecting the
downsizings undertaken in response to depressed gold prices. These costs had
risen in 1996, mostly due to increased permitting, exploration and business
development activities.
In 1998, the Company expects general and administrative costs to decline
further. The 1998 target is $9 to $10 million, down from $10.9 million in 1997.
Exploration and Development
- ---------------------------
Exploration and development expense was nearly halved, to $34.9 million in 1997
from $63.6 million in 1996, in response to depressed gold prices. In 1996, it
declined more modestly from $69.8 million in 1995, reflecting a reduction in
activity and personnel at the Alaska-Juneau development project. The Alaska-
Juneau project was written off at year-end 1996. Exploration and development
expenses in 1995 and 1996 reflected the Company's stepped-up efforts to locate
and develop potential new gold deposits in response to the maturation of the
McCoy/Cove and Lupin mines.
For 1998, the Company has further reduced its exploration and development budget
to a total of $7 million. The budget will be reviewed if gold prices improve.
Interest and Other
- ------------------
Interest and other expenses are described in note 10 to the consolidated
financial statements. The net interest expense portion was $2.6 million in 1997
and $2.1 million in 1996, compared with net interest income of $4.8 million in
1995, reflecting decreased cash on hand and increased currency financings
beginning in 1996. The other portion includes an unrealized loss of $6.6
million in 1997 due to market declines in the Company's share investment
portfolio, partially offset by a $3.9 million gain on the sale of an option
interest in an exploration property.
59
<PAGE>
Provision for Impaired Assets and Other Charges
- -----------------------------------------------
Provision for impaired assets and other charges of $362.7 million in 1997
consists of $346.0 million in provisions for impaired assets and $16.6 million
for severance costs (note 9 to the consolidated financial statements), in
response to market conditions.
The $346.0 provision includes $50.0 million to write off the Kingking project in
the Philippines; $143.6 million to write off the Company's investment in Santa
Elina; $127.0 million to reduce the carrying values of Lupin ($65.0 million),
McCoy/Cove ($47.0 million) and Kettle River ($15.0 million); and $25.4 million
to write down certain share investments and other assets to market value and to
provide for estimated legal and closure expenses.
The $107.1 million charge in 1996 consisted of $77.1 million to write off the
Company's entire investment in the Alaska-Juneau project, including a $20.0
million reserve to cover estimated reclamation and closure responsibilities, and
a $30.0 million provision for McCoy/Cove pit wall stabilization. See note 9 to
the consolidated financial statements.
Income Tax Expense
- ------------------
Income tax expense is described in note 11 to the consolidated financial
statements.
Dividends on Preferred Stock of Subsidiary
- ------------------------------------------
Dividends on preferred stock of subsidiary were eliminated in late 1995 when the
Company eliminated the entire issue of convertible preferred stock of a
subsidiary (note 14 to the consolidated financial statements).
LIQUIDITY AND CAPITAL RESOURCES
In December 1997, the price of gold fell as low as $281.35 per ounce, its lowest
level in 18 years. The Company needs a significantly higher gold price before
it will resume operations at the Lupin mine, proceed with construction of the
Aquarius or the Paredones Amarillos mines, expand its exploration activities, or
pursue new acquisitions or investments.
The lower gold prices reduced 1997 cash flows. Net cash flows used in operating
activities were $9.2 million in 1997, compared with net cash flows provided from
operations of $29.9 million in 1996. The 1997 results reflect lower precious
metals prices realized ($31.5 million); lower gold sales volume partially offset
by higher silver sales volume ($14.5 million); timing differences on accounts
payable related primarily to the payment of interest and dividends ($12.1
million); and an increase in inventories in 1997 compared with a decrease in
1996 ($7.1 million), partially offset by lower cash development and exploration
expense ($22.1 million) and decreased operating costs ($8.0 million). Most of
the exploration and development property spending represents discretionary
investments for the future.
Cash used in financing activities was $24.0 million in 1997. Outflows were
primarily related to debt repayments of $131.7 million. The Company had net
proceeds of $96.7 million on the issuance of capital securities and currency
borrowings in the amount of $15.5 million.
Net cash used in investing activities in 1997 totaled $53.0 million. Included
were $112.0 million for mining properties, plant and equipment and $21.6 million
for long-term investments (including $13.5 million in Santa Elina and $7.6
million in other investments), partially offset by proceeds of $69.1 million
from the Company's repurchase of its outstanding gold and silver forward sales,
a 218,000-ounce gold delivery commitment that hedged an $84.0 million bond
obligation, and foreign currency exchange contracts, plus proceeds of $11.0
million on the sale of various share investments and the option interest in the
Dolores property in Mexico.
60
<PAGE>
At December 31, 1997, the Company had $85.0 million in unutilized credit
facilities, of which $29.5 million was actually available for borrowing due to
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 are in
discussions aimed at restructuring the terms of its existing credit facilities
to provide more liquidity than is currently available in the event of a
continued period of depressed gold prices.
At year-end 1997, the Company had $17.0 million in cash and cash equivalents and
$10.3 million in short-term investments. In January 1998, it received an
additional $8.7 million in cash on the repurchase of a portion of its
outstanding gold forward sales. See note 18 to the consolidated financial
statements.
At December 31, 1997, the Company's current debt was $14.8 million and its long-
term debt was $51.7 million.
In March 1997, the Company issued $100.0 million of 11% capital securities due
2027 (note 7 to the 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. The Company,
at its option, may satisfy its deferred interest obligation by delivering common
shares to a trustee for sale, the proceeds of which would be remitted to the
holders of the securities in payment of the deferred interest. The present
value of the capital securities' principal amount, $4.2 million at year-end
1997, is classified as debt. The present value of the future interest payments,
$95.8 million, is a separate component of shareholders' equity. In March 1998,
the Company exercised its right to defer its April 1998 interest payment to
holders of the capital securities.
In response to market conditions, during 1997 the Company reduced its planned
1997 capital expenditures from $189 million to $104 million. The Company has
further reduced its 1998 capital expenditure budget to a total of $13 million.
The Company will rely on its operating cash flow and credit facilities to fund
its planned 1998 capital expenditures. The Company will monitor carefully its
discretionary spending in view of the current low gold price environment and the
cost structure of its operating mines.
COMMITMENTS AND CONTINGENCIES
The Company's profitability is subject to changes in gold and silver prices,
exchange rates, interest rates and certain commodity prices. To reduce the
impact of such changes, the Company attempts to lock in the future value of
certain of these items through hedging transactions. These transactions are
accomplished through the use of derivative financial instruments, the value of
which is derived from movements in the underlying prices or rates.
The gold- and silver-related instruments used in these transactions include
commodity loans, fixed and floating forward contracts, 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. In 1997, the Company swapped a portion of its 11%
interest obligation for the capital securities for a gold delivery commitment,
reducing its effective interest rate. In the first quarter of 1998, the Company
restructured the gold swap agreement. The restructuring resulted in the
conversion of the swap ounces to forward sales commitments. See note 18 to the
consolidated financial statements. During 1995, the
61
<PAGE>
Company used interest rate swap agreements to effectively convert its fixed-rate
preferred stock dividends into floating-rate dividends. The interest rate swap
agreements expired on December 31, 1995.
Gains and losses resulting from hedging activities are recognized in earnings on
a basis consistent with the hedged item. When hedged production is sold, revenue
is recognized in amounts implicit in the commodity loan, delivery commitment or
option agreement. Gains or losses on foreign currency and crude oil hedging
activities are recorded in operating costs, or capitalized in the cost of
assets, when the hedged Canadian dollars are purchased and when crude oil
supplies are used in operations. Gains and losses on early termination of
hedging contracts are deferred until the hedged items are recognized in
earnings.
The Company's forward sales commitments, gold loan and swap commitments and
option positions are described in notes 6, 7 and 18 to the Company's
consolidated financial statements.
The Company's obligation to purchase Canadian dollars are described in note 18
to the Company's consolidated financial statements.
The Company's crude oil commitments are described in note 18 to the Company's
consolidated statements.
The Company's operations are subject to laws and regulations concerning
protection of the environment. These laws and regulations change periodically
and are generally becoming more restrictive, which may have the effect of
increasing future costs. See "Business and Properties-Other-Government
Regulation and Environmental Issues."
The Company's operations are subject to certain royalty obligations as described
in note 19 to the Company's consolidated financial statements.
Lease commitments are described in note 19 to the Company's consolidated
financial statements.
The Company's provisions for future reclamation and closure costs at the former
Sunnyside mine in Colorado and the Alaska-Juneau development property in Alaska
are reviewed periodically and may be adjusted as additional information becomes
available.
Other commitments and contingencies are discussed in notes 9, 18 and 19 to
the consolidated financial statements.
IMPACT OF YEAR 2000
Some of the Company's computer programs are written using two digits rather than
four to define the applicable year, and may therefore recognize the digits "00"
as the year 1900 rather than 2000. This could result in a system failure or
miscalculation causing disruption of operations including, among other things, a
temporary inability to process transactions, pay invoices or engage in similar
normal business activities. The Company has completed an assessment of the year
2000 issue and will modify or upgrade portions of its software. The Company
believes that following these modifications or upgrades, the issue will not
result in any significant impact on the operations of the Company or its
computer systems. All work is expected to be completed by the end of 1998 at an
estimated total cost of less than $1 million. These costs are being expensed as
incurred. To date, the Company has completed approximately 20% of the project,
which is on schedule. The expected costs and date of completion are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources and
other factors. However, there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those anticipated.
62
<PAGE>
ITEM 8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management's Responsibility For Financial Reporting......... 64
Report Of Independent Chartered Accountants................. 65
Consolidated Balance Sheet.................................. 66
Consolidated Statement Of Earnings.......................... 67
Consolidated Statement Of Retained Earnings (Deficit)....... 67
Consolidated Statement Of Cash Flow......................... 68
Notes To Consolidated Financial Statements.................. 69
</TABLE>
63
<PAGE>
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 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 management and the Audit
Committee.
/s/ Robert L. Leclerc
---------------------
Robert L. Leclerc, Q.C.
Chairman and Chief Executive Officer and Director
/s/ Peter H. Cheesbrough
------------------------
Peter H. Cheesbrough
Senior Vice President, Finance and
Chief Financial Officer
March 17, 1998
64
<PAGE>
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, 1997 and 1996 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, 1997. 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, 1997 and 1996 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, 1997 in accordance with accounting principles generally accepted in Canada.
Edmonton, Canada (signed) Ernst & Young
January 26, 1998, except for Chartered Accountants
Notes 7, 18 and 19, as to which
the date is March 17, 1998
65
<PAGE>
ECHO BAY MINES LTD.
CONSOLIDATED BALANCE SHEET
December 31
<TABLE>
<CAPTION>
thousands of U.S. dollars 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,953 $ 103,196
Short-term investments (note 2) 10,325 --
Interest and accounts receivable 5,927 9,739
Inventories (note 3) 41,168 33,941
Prepaid expenses and other assets 5,068 6,573
- ---------------------------------------------------------------------------------------------------
79,441 153,449
Plant and equipment (note 4) 238,948 233,984
Mining properties (note 4) 107,820 405,011
Long-term investments and other assets (note 2) 6,558 39,701
- ---------------------------------------------------------------------------------------------------
$ 432,767 $ 832,145
===================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 82,371 $ 72,421
Income and mining taxes payable 3,494 3,651
Gold and other financings (note 6) 14,779 129,445
Deferred income (note 6) 7,461 876
- ---------------------------------------------------------------------------------------------------
108,105 206,393
Gold and other financings (note 6) 51,745 53,478
Deferred income (note 6) 54,708 1,581
Other long-term obligations (note 8) 56,607 69,992
Deferred income taxes 7,941 8,392
Commitments and contingencies (notes 9, 18 and 19)
Common shareholders' equity:
Common shares (note 13), no par value,
unlimited number authorized; issued
and outstanding - 139,370,031 shares
(139,355,781 shares in 1996) 709,593 709,534
Capital securities (note 7) 95,753 --
Deficit (631,320) (201,931)
Foreign currency translation (20,365) (15,294)
- ---------------------------------------------------------------------------------------------------
153,661 492,309
- ---------------------------------------------------------------------------------------------------
$ 432,767 $ 832,145
===================================================================================================
</TABLE>
See accompanying notes.
66
<PAGE>
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENT OF EARNINGS
Year ended December 31
<TABLE>
<CAPTION>
thousands of U.S. dollars,
except for per share data 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 305,429 $ 337,316 $ 360,730
- -----------------------------------------------------------------------------------------------------------
Expenses:
Operating costs 213,120 221,126 212,182
Royalties (note 19) 8,304 9,625 8,434
Production taxes 865 2,440 4,322
Depreciation and amortization 79,316 86,491 89,403
Reclamation and mine closure 8,819 6,298 5,005
General and administrative 10,948 13,577 12,169
Exploration and development 34,927 63,619 69,796
Interest and other (note 10) 5,191 3,090 4,161
Provision for impaired assets and other charges (note 9) 362,665 107,134 --
- -----------------------------------------------------------------------------------------------------------
724,155 513,400 405,472
- -----------------------------------------------------------------------------------------------------------
Loss before income taxes (418,726) (176,084) (44,742)
Income tax expense (recovery) (note 11) 1,782 618 (3,206)
- -----------------------------------------------------------------------------------------------------------
Loss before preferred stock dividends (420,508) (176,702) (41,536)
Preferred stock dividends of subsidiary (note 14) -- -- 8,524
- -----------------------------------------------------------------------------------------------------------
Net loss $ (420,508) $ (176,702) $ (50,060)
===========================================================================================================
Net loss attributable to common shareholders (note 7) $ (426,222) $ (176,702) $ (50,060)
===========================================================================================================
Loss per share $ (3.06) $ (1.31) $ (0.43)
===========================================================================================================
Weighted average number of shares outstanding (thousands) 139,367 134,434 116,233
- -----------------------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (DEFICIT)
Year ended December 31
<TABLE>
<CAPTION>
thousands of U.S. dollars 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ (201,931) $ (15,109) $ 44,140
Net loss (420,508) (176,702) (50,060)
Dividends on common shares (note 13) -- (10,120) (8,978)
Excess of redemption price of preferred shares
redeemed over original proceeds (note 14) -- -- (211)
Interest on capital securities, net of nil tax effect (note 7) (5,714) -- --
Issue costs related to capital securities (note 7) (3,167) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (631,320) $ (201,931) $ (15,109)
=============================================================================================================================
</TABLE>
See accompanying notes.
67
<PAGE>
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENT OF CASH FLOW
Year ended December 31
<TABLE>
<CAPTION>
thousands of U.S. dollars 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net loss (420,508) (176,702) $(50,060)
Add (deduct):
Depreciation 51,887 56,737 56,182
Amortization 27,429 29,754 33,221
Preferred stock dividends of subsidiary (note 14) -- -- 8,524
Non-cash portion of provision for impaired assets and other charges (note 9) 355,782 107,134 --
Unrealized losses on share investments (note 2) 6,643 -- --
Deferred income included in revenue (note 18) (14,079) -- --
Non-cash portion of exploration and development expense 436 7,035 9,365
Deferred income taxes (336) 305 (448)
Environmental expenses at non-producing properties -- -- 12,899
Gain on sale of assets (8,847) (4,469) (5,506)
Other 1,120 5,970 2,120
Change in cash invested in operating assets and liabilities:
Interest and accounts receivable 2,178 (184) (2,667)
Inventories (5,753) 1,368 (3,563)
Prepaid expenses and other assets 2,812 (361) (134)
Accounts payable and accrued liabilities (8,824) 3,245 6,695
Income and mining taxes payable 856 69 701
- -----------------------------------------------------------------------------------------------------------------------
(9,204) 29,901 67,329
- -----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Currency borrowings 15,538 34,714 28,015
Debt repayments (131,749) (38,179) (9,853)
Capital securities issued, net of issuance costs (note 7) 96,700 -- --
Equity portion of interest on capital securities (note 7) (4,270) -- --
Preferred stock dividends of subsidiary (note 14) -- -- (8,524)
Common share dividends (note 13) -- (10,120) (8,978)
Preferred share conversions and redemptions (note 14) -- -- (136,505)
Common shares issued on acquisition of Santa Elina, net of issuance costs -- 85,801 --
(note 5)
Common share issues, net of issuance costs (note 13) 59 4,768 135,904
Other (296) -- --
- -----------------------------------------------------------------------------------------------------------------------
(24,018) 76,984 59
- -----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Mining properties, plant and equipment (112,001) (103,667) (81,538)
Cost of Santa Elina acquisition (note 5) -- (97,069) --
Proceeds on repurchase of Company's
- gold and silver forward sales (note 18) 54,963 -- --
- gold swap (note 18) 8,107 -- --
- foreign exchange contracts (note 18) 5,995 -- --
Short-term investments 3,089 -- --
Long-term investments and other assets (21,626) (3,499) (47,557)
Proceeds on sale of mining properties -- -- 32,551
Proceeds on sale of long-term investments 7,894 13,809 12,104
Other 558 894 1,368
- -----------------------------------------------------------------------------------------------------------------------
(53,021) (189,532) (83,072)
- -----------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (86,243) (82,647) (15,684)
Cash and cash equivalents, beginning of year 103,196 185,843 201,527
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 16,953 $ 103,196 $ 185,843
=======================================================================================================================
</TABLE>
See accompanying notes.
68
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Echo Bay Mines Ltd. mines, processes and explores for gold and silver. Gold
accounted for 83% of 1997 revenue, and silver 17%. In 1997, the Company had four
operating mines: Round Mountain in Nevada, USA.; McCoy/Cove in Nevada, USA.;
Lupin in the Northwest Territories, Canada; and Kettle River in Washington, USA.
All are 100% owned except for Round Mountain, which is 50% owned. In January
1998, the Company temporarily suspended operations at Lupin until the gold price
improves significantly.
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 15, 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, each of which by contractual
arrangement is jointly controlled by all parties having an equity interest in
the joint venture, 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
Short-term common share investments are recorded at the lower of cost or market
based on quoted market prices, with unrealized losses included in income. Long-
term common share investments are recorded at cost. A provision for loss is
recorded in income if there were a decline in the market value of a long-term
share investment that was other than temporary. If the Company's share
investment represents more than a 20% ownership interest and the Company can
exercise significant influence over the investee, the equity method of
accounting is used. 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.
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
69
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
expenses at average exchange rates. Exchange differences arising on translation
are recorded in current earnings.
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. For per share calculations, the amount of
capital securities interest that is charged directly to the deficit increases
the loss attributable to common shareholders. 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 properties - mining costs
Mining costs are the costs incurred at producing properties 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. These deferred costs are
charged to operating costs in the period in which the related 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.
70
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
Development properties
At properties identified as having the potential to add to the Company's proven
and probable reserves, the direct costs of acquisition, exploration and
development are capitalized as they are incurred. Determination as to reserve
potential is based on results of feasibility studies which indicate whether a
property is economically feasible. After drilling has confirmed the shape and
continuity of mineralization, initial feasibility studies are then optimized.
If production commences, these costs are transferred to "producing mines'
acquisition, exploration and development costs" and amortized against earnings
as described above. If a project is determined not to be commercially feasible,
unrecovered 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.
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, 1997 were $350 per ounce of gold and $5.00 per ounce of silver
($375 per ounce of gold and $5.00 per ounce of silver at December 31, 1996).
The market prices were $293 per ounce of gold and $6.13 per ounce of silver at
December 31, 1997 ($369 per ounce of gold and $4.87 per ounce of silver at
December 31, 1996). If the Company were to determine that its reserves and
future cash flows should be calculated at a significantly lower gold price than
the $350 per ounce price used at December 31, 1997, 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 additional
material write-downs of its investment in its mining properties (note 9). Under
certain of such circumstances, the Company might discontinue the development of
a project or mining at one or more of its properties or might temporarily
suspend operations at a producing property and place that property in a "care
and maintenance" mode. Reserves could also be materially and adversely affected
by changes in operating and capital costs and other factors, including but not
limited to short-term operating factors such as the need for sequential
development of ore bodies and the processing of new or different ore grades and
ore types.
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.
71
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
The Company reviews the carrying value of each mine by comparing the net book
value with the estimated undiscounted future cash flow from the property. For
purposes of this analysis, the net book value of each mine includes offsets for
deferred income amounts relating to the 1997 repurchase of hedging instruments
and reclamation and mine closure accruals. Precious metals price assumptions
used in these analyses were $300 per ounce of gold and $5.00 per ounce of silver
for 1998, and $350 per ounce of gold and $5.00 per ounce of silver in years
thereafter. In 1996, carrying value analyses were performed using gold and
silver price assumptions of $385 per ounce of gold and $5.25 per ounce of silver
for all future years. If the net book value exceeds the undiscounted future
cash flow, then the excess is expensed. The Company completed a major review of
the life-of-mine plans in the third quarter of 1997 and recorded a $127.0
million provision for impaired assets related to producing mines (note 9).
Changes in the significant assumptions underlying future cash flow estimates,
including assumptions regarding precious metals prices, 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 and floating forward contracts, 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. In 1997, the Company swapped a portion of its capital
security interest obligation for a gold delivery commitment, effectively
reducing its interest obligation. During 1995, the Company used interest rate
swap agreements to effectively convert its fixed-rate preferred stock dividends
into floating-rate dividends.
Gains and losses resulting from hedging activities are recognized in earnings on
a basis consistent with the hedged item. When hedged production is sold, revenue
is recognized in amounts implicit in the commodity loan, delivery commitment or
option agreement. Gains or losses on foreign currency and crude oil hedging
activities are recorded in operating costs, or capitalized in the cost of
assets, when the hedged Canadian dollar transactions occur and when crude oil
supplies are used in operations. Gains and losses on early termination of
hedging contracts are deferred until the hedged items are recognized in
earnings.
72
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
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 original gold swap agreement related to the capital securities, in
March 2002 the Company would have delivered 291,358 ounces of gold and would
have received $100.0 million. Semi-annually through March 2002, the Company
would have paid the bank's floating gold lease rate and received fixed-rate
interest. The net swap income was recognized as an adjustment to interest on
the capital securities. In the first quarter of 1998, the Company restructured
the gold swap agreement, converting the swap ounces to forward sales commitments
(note 18).
Under the interest rate swap agreements related to the preferred stock
dividends, 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.
2. INVESTMENTS AND OTHER ASSETS
Historically, the Company has purchased common shares of exploration-oriented
companies to provide the Company access to exploration and development prospects
around the world. During 1997, the Company reclassified these share investments
from long-term to short-term investments, in light of the Company's intent to
dispose of these assets. The investments are carried at the lower of cost or
market, based on quoted market prices.
At December 31, 1997, the Company's short-term investment portfolio was
comprised of the following share investments.
<TABLE>
<CAPTION>
Quoted
Number of Percent Original Market Carrying
Shares Interest Cost Value Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
TVI Pacific Inc. 14,016,845 15.4% $12,053 $ 915 $ 915
Minefinders Corporation Ltd. 3,500,000 25.0 8,156 5,030 5,030
Canarc Resource Corp. 3,000,000 8.6 4,933 1,372 1,372
Rift Resources Ltd. 1,000,000 9.8 1,394 207 207
Fairmile Gold Corp. 825,000 4.2 1,176 81 81
Ashanti Goldfields Company Ltd. 302,222 0.3 4,394 2,607 2,607
Mar-West Resources Ltd. 125,000 0.8 200 113 113
- ----------------------------------------------------------------------------------------------------------------------------
$32,306 $10,325 $10,325
============================================================================================================================
</TABLE>
73
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
Long-term investments and other assets were as follows.
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------------
Carrying Number of Percent Market Carrying
Value Shares Interest Value Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Share investments at cost:
TVI Pacific Inc. $ -- 14,016,845 15.4% $12,794 $11,810
Canarc Resource Corp. -- 3,000,000 9.0 3,724 4,153
Minefinders Corporation Ltd. -- 1,280,000 15.0 2,804 1,998
Rift Resources Ltd. -- 1,000,000 9.8 1,059 1,465
Other share investments -- 13,928 9,913
- --------------------------------------------------------------------------------------------------------------
-- 34,309 29,339
Property options -- 1,817
Other assets 6,558 8,545
- --------------------------------------------------------------------------------------------------------------
$ 6,558 $39,701
==============================================================================================================
</TABLE>
3. INVENTORIES
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Precious metals -- bullion $14,882 $ 4,182
-- in-process 9,792 11,442
Materials and supplies 16,494 18,317
- -----------------------------------------------------------------------------------------------------
$41,168 $33,941
=====================================================================================================
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Net book value
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Net Net
Plant and Mining Book Book
Property and percentage owned Equipment Properties Value Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
McCoy/Cove (100%) $ 59,717 $ 34,294 $ 94,011 $173,934
Round Mountain (50%) 76,271 48,333 124,604 108,060
Lupin (including Ulu) (100%) 40,430 -- 40,430 115,173
Kettle River (100%) 15,907 406 16,313 39,245
Aquarius (100%) 38,639 14,145 52,784 14,923
Paredones Amarillos (60%) 378 10,642 11,020 5,177
Santa Elina (51% in 1996) (note 5) -- -- -- 131,052
Kingking (75% in 1996 ) -- -- -- 42,577
Other 7,606 -- 7,606 8,854
- ---------------------------------------------------------------------------------------------------------------------------
$238,948 $107,820 $346,768 $638,995
===========================================================================================================================
</TABLE>
74
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
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>
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Net Book Net Book
Cost Value Cost Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Land improvements and utility systems $ 63,196 $ 15,973 $ 65,131 $ 24,047
Buildings 162,231 51,717 161,778 57,410
Equipment 393,494 118,117 392,080 135,740
Construction in progress 53,141 53,141 16,787 16,787
- ---------------------------------------------------------------------------------------------------------------------------
$672,062 $238,948 $635,776 $233,984
===========================================================================================================================
</TABLE>
Mining properties
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Producing mines' acquisition, exploration and development costs $266,081 $388,515
Less accumulated amortization 198,912 250,616
- -----------------------------------------------------------------------------------------------------------------------
67,169 137,899
Development properties' acquisition, exploration and development costs 24,787 188,084
Deferred mining costs 15,864 79,028
- -----------------------------------------------------------------------------------------------------------------------
$107,820 $405,011
=======================================================================================================================
</TABLE>
During 1997, the Company wrote down the carrying values of a number of its
operating and development properties (note 9).
5. SANTA ELINA ACQUISITION
In July 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) that increased the Company's 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. Following the transaction, 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 accounted for the transactions as the purchase of an additional 43%
of Santa Elina. The total cost of the transactions was $106.0 million. The
purchase price was allocated to the net assets of Santa Elina based on the
relative fair values, with the majority allocated to mining properties. Santa
Elina has been accounted for using the proportionate consolidation method, as
the Company and Sercor jointly control Santa Elina.
The Company subsequently increased its ownership in Santa Elina to 58% 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) and through shares
acquired when the joint venture partner exercised its right to repay outstanding
loans from the Company maturing in September 1997 by transferring shares in
Santa Elina pledged as collateral ($13.5 million in the third quarter of 1997).
The increased ownership does not affect the joint control of Santa Elina.
75
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
Summarized below are the unaudited pro forma operating results of the Company,
assuming the Santa Elina purchase had been consummated on January 1, 1995. These
pro forma results are based upon historical results of operations and are 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>
During 1997, the Company recorded $143.6 million in provisions for impaired
assets related to Santa Elina that effectively eliminated the carrying value of
its investment (note 9). Santa Elina currently does not have sufficient cash or
other sources of liquidity to continue its operations. Sercor and the Company
have not committed to invest any additional funds in Santa Elina. As a result,
it is uncertain whether Santa Elina will be able to continue to develop its
assets or to continue in business.
6. GOLD AND OTHER FINANCINGS AND DEFERRED INCOME
<TABLE>
<CAPTION>
Financings Deferred Income
-------------------------------------- --------------------------------------
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold swap $ -- $ 83,839 $ -- $ --
Gold loans 18,637 33,721 6,481 2,423
Currency loan 43,640 33,846 -- --
Capital securities (note 7) 4,247 -- -- --
Debenture payable -- 27,966 -- --
Repurchase of gold and silver forward
contracts and gold swap (note 18) -- -- 48,991 --
Repurchase of forward currency
exchange contracts (note 18) -- -- 5,995 --
Other -- 3,551 702 34
- ----------------------------------------------------------------------------------------------------------------------
66,524 182,923 62,169 2,457
Less current portion 14,779 129,445 7,461 876
- ----------------------------------------------------------------------------------------------------------------------
$ 51,745 $ 53,478 $ 54,708 $ 1,581
======================================================================================================================
</TABLE>
In the first and second quarters of 1997, the Company repaid an $84.0 million
bond obligation and a $28.0 million debenture payable with the proceeds received
on the issuance of $100.0 million of 11% capital securities (note 7) and the
$69.1 million in proceeds received on the repurchase of the Company's gold and
silver forward sales, gold swap and forward currency exchange contracts (note
18).
Gold swap
A gold swap refers to a currency loan and a related, independently arranged,
future gold delivery commitment. Taken together, the loan and commitment create
an obligation effectively denominated in gold and representing a hedge 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. In the first quarter of 1997, the Company
repurchased its 218,000 ounce gold delivery commitment that hedged the $84.0
million bond obligation (note 18) and repaid the $84.0 million bond obligation.
76
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
Gold term loan and currency loan
At December 31, 1997, a 36,094 ounce term loan was outstanding under a gold loan
agreement (41,562 ounces at December 31, 1996) that will be repaid in quarterly
installments through the second quarter of 2001. The commitment is priced at
$388 per ounce. For financial statement presentation the gold loan was
remeasured to $293 per ounce, the gold price at December 31, 1997 ($369 per
ounce in 1996). Unrealized remeasurement gains or losses are included in
deferred income. The Company also has outstanding a $28.6 million currency
borrowing under the agreement that will be repaid in quarterly installments
through the second quarter of 2001.
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, 1997, the effective
interest rates were 2.99% on the gold term loan and 6.69% on the currency term
loan.
The gold loan agreement contains both term and revolving provisions. At December
31, 1997, the Company had $15.0 million outstanding, and up to $85.0 million or
gold equivalent, subject to covenant limitations, available until 2001, under
the revolving commitment. At December 31, 1997, the effective interest rate on
the revolving loan was 6.64%.
Gold loan
At December 31, 1997, a 27,623 ounce gold loan (49,723 ounces at December 31,
1996) was outstanding, which the Company will repay in quarterly payments of
5,525 ounces through the first quarter of 1999. The gold loan is priced at $403
per ounce. For financial statement presentation the gold loan was remeasured to
$293 per ounce, the gold price at December 31, 1997 ($369 per ounce in 1996).
Unrealized remeasurement gains or losses are included in deferred income. The
effective rate of interest on the gold loan was 2.00% at December 31, 1997.
Debenture payable
In 1995, a subsidiary of the Company issued a debenture in the amount of $28.0
million, secured by a letter of credit and bearing interest at the one-month
discount rate for bankers' acceptances plus 0.325%. The debenture was repaid in
March 1997.
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. To remain in
compliance throughout 1998, the Company has taken certain actions to reduce
expenses, such as a temporary suspension of operations at Lupin and operational
changes at McCoy/Cove, the reduction of support personnel, and reductions in
budgeted new project and exploration expenditures. The Company may be required
to seek additional external financing and to further reduce discretionary
spending, absent a substantial improvement in gold prices.
At December 31, 1997, the Company had $85.0 million in unutilized credit
facilities, of which $29.5 million was actually available for borrowing in view
of the covenant limitations imposed by the credit facilities. The amounts
available for borrowing under the credit facilities vary with precious metals
prices, among other factors, and continuation of gold prices at depressed levels
could have the effect of reducing or eliminating the Company's capacity to
borrow under the credit facilities. The Company and its lenders are
77
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
in negotiations aimed at restructuring the terms of its credit facilities to
provide more liquidity than is currently available in the event of a continued
period of depressed gold prices. Annual commitment fees on the unutilized credit
facilities are 0.35% .
The Company had letter of credit facilities of $55.0 million, of which $32.1
million was outstanding at December 31, 1997, primarily related to the bonding
of future reclamation obligations. Annual fees on the letters of credit range
from 0.50% to 0.75%.
Interest payments were $9.4 million in 1997, $9.0 million in 1996 and $4.3
million in 1995.
Future gold and silver delivery commitments are summarized by year in note 18.
7. CAPITAL SECURITIES
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.
Additionally, 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 1997. 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 18).
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 would accrue at a rate of 12% per annum,
compounded semi-annually. The Company, at its option, may satisfy its deferred
interest obligation by delivering common shares to the trustee. 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 temporarily defer its April
1998 interest payment to holders of the capital securities until gold prices
improve. During the deferral period, interest will accrue at a rate of 12% per
annum, compounded semi-annually.
The present value of the capital securities' principal amount, $4.2 million, has
been classified as debt within gold and other financings (note 6). The present
value of the future interest payments, $95.8 million, has been classified as a
separate component of shareholders' equity, as the Company has the unrestricted
ability to settle the future interest payments by issuing its own common shares
to the trustee for sale. Issue costs of $3.3 million have been allocated
proportionately to reflect the debt and equity classifications at issuance as
follows: $0.1 million to deferred financing charges and $3.2 million to
shareholders' equity. Interest on the debt portion of the capital securities
has been classified as interest expense on the consolidated statement of
earnings, and interest on the equity portion of the capital securities has been
charged directly to deficit on the consolidated balance sheet. For purposes of
per share calculations, the equity portion increases the loss attributable to
common shareholders. See note 15 for a discussion of differences in treatment
of the capital securities under generally accepted accounting principles in the
United States.
78
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
8. OTHER LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued reclamation and mine closure $40,969 $33,263
Provision for Alaska-Juneau development property
reclamation and closure costs 2,510 20,000
Provision for McCoy/Cove pit wall stabilization 24,387 28,407
Other 7,115 5,385
- -------------------------------------------------------------------------------------------------
74,981 87,055
Less current portion included in accounts payable and
accrued liabilities 18,374 17,063
- -------------------------------------------------------------------------------------------------
$56,607 $69,992
=================================================================================================
</TABLE>
Reclamation and mine closure
At December 31, 1997, the Company's future reclamation and mine closure costs
are estimated to be $77.9 million, excluding Alaska-Juneau described below. The
aggregate obligation accrued to December 31, 1997 was $41.0 million, including
accruals of $8.8 million in 1997, $6.3 million in 1996, and $17.9 million in
1995. The remaining $36.9 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 related
to the 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. In July 1997, the
Company entered into an agreement that transferred certain responsibilities for
the Alaska-Juneau project closure to a third party environmental firm. The
third party's performance under the contract is supported by a corporate
guarantee and surety bonds. By December 31, 1997, total spending for Alaska-
Juneau's reclamation and closure was $17.5 million.
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. Remediation work that would
permit mining in the affected portion of the Cove pit began in 1997. At
December 31, 1997, total spending for the pit wall stabilization was $5.6
million.
9. PROVISION FOR IMPAIRED ASSETS AND OTHER CHARGES
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for impaired assets $346,029 $ -- $ --
Severance expense 16,636 -- --
Provision for Alaska-Juneau development property (note 8) -- 77,134 --
Provision for McCoy/Cove pit wall stablization (note 8) -- 30,000 --
- -------------------------------------------------------------------------------------------------------------------
$362,665 $107,134 $ --
===================================================================================================================
</TABLE>
79
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
Provision for impaired assets
1997, the Company completed a major review of the life-of-mine plans for its
four producing mines and performed an evaluation of the Company's portfolio of
projects, exploration properties and other assets. In light of both
the short-term and long-term views of precious metals prices and the results of
recently completed feasibility and engineering studies, the Company assessed the
recoverability of the carrying values of these assets. For operating mines and
development properties, the need for and amounts of the write-downs were
established by comparing carrying values to estimated future net cash flows from
each property. For purposes of estimating future cash flows, price assumptions
of $350 per ounce of gold were used except for 1998, for which a price of $300
per ounce of gold was used. For other assets, carrying values were compared to
estimated net realizable values based on market comparables and, with respect to
share investments, quoted market values. As a result, the Company recorded a
$346.0 million provision for impaired assets in 1997.
<TABLE>
<CAPTION>
Acquisition
Deferred and develop- Plant and Other Legal and
mining ment costs equipment assets (net) closure costs Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating properties:
McCoy/Cove $47,000 $ -- $ -- $ -- $ -- $ 47,000
Lupin 17,198 43,435 4,367 -- -- 65,000
Kettle River -- 11,220 3,780 -- -- 15,000
- ------------------------------------------------------------------------------------------------------------------------------
64,198 54,655 8,147 -- -- 127,000
- ------------------------------------------------------------------------------------------------------------------------------
Other properties:
Kingking -- 46,183 314 3,467 -- 49,964
Santa Elina -- 138,878 5,873 (1,133) -- 143,618
- ------------------------------------------------------------------------------------------------------------------------------
-- 185,061 6,187 2,334 -- 193,582
- ------------------------------------------------------------------------------------------------------------------------------
Share investments -- -- -- 15,641 -- 15,641
Other -- -- -- 2,116 7,690 9,806
- ------------------------------------------------------------------------------------------------------------------------------
$64,198 $239,716 $14,334 $20,091 $7,690 $346,029
==============================================================================================================================
</TABLE>
The Company's option interest in the Kingking project required the delivery of a
bankable feasibility study by October 25, 1997, or the remittance of option
delay payments of $750,000 per month for the first six months and $1.0 million
per month for the subsequent six months. The Company elected not to exercise
its option interest in Kingking. Following the $50.0 million write-down
recorded in the third quarter of 1997, the carrying value of the Kingking
project is nil.
The Company's investment in Santa Elina consisted primarily of a copper/gold
project, a number of small gold exploration properties, a significant land
position and a hydro-power project in the feasibility stage. In the third and
fourth quarters of 1997, the Company recorded write-downs of its Santa Elina
investment totaling $143.6 million, reducing the carrying value to nil.
The provision for impaired assets is based in part on certain management
assumptions regarding the future market price of gold. If the market price were
to decline significantly below that experienced in 1997 and remain depressed, it
is possible that additional provisions for impairment would be required and that
operations at some of the Company's producing mines may be curtailed or
suspended. In January 1998,
80
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
the Company temporarily suspended operations at the Lupin mine until the gold
price improves significantly.
In connection with the review of asset values, the Company reclassified certain
of its share investments in exploration-oriented companies from long-term to
short-term investments, in light of the Company's intent to dispose of the
assets (note 2). Correspondingly, the investments were adjusted to, and
continue to be carried at, the lower of cost or market based on quoted market
prices.
Severance expense
During 1997, in response to reduced activity resulting from the downturn in gold
prices, the Company reduced the number of executives and support personnel by
approximately 75%. Additionally, the Company temporarily suspended operations at
the Lupin mine and reduced operations at McCoy/Cove mine until a significant
recovery in the gold price occurs. As a result, the Company reduced the number
of Lupin employees by approximately 90% and the number of McCoy/Cove employees
by approximately 20%. In 1997, the Company recognized $16.7 million in
severance expense related to these actions.
10. INTEREST AND OTHER
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $(2,517) $(6,131) $(9,871)
Interest expense 5,686 8,226 5,028
Interest capitalized (523) -- --
Unrealized loss on share investments (note 2) 6,643 -- --
Gain on sale of option interest in Dolores project (3,877) -- --
Gain on sale of Etruscan investment (833) (1,874) --
Loss on sale of Pioneer Group investment 281 -- --
Summa litigation accrual 633 1,521 --
Gain on sale of Cluff Resources investment -- (2,509) --
Gain on sale of Kensington project -- -- (3,189)
Gain on sale of Muscocho shares -- -- (2,104)
Environmental expenses at non-producing properties -- -- 12,899
Other (302) 3,857 1,398
- --------------------------------------------------------------------------------------------------------------------
$ 5,191 $ 3,090 $ 4,161
====================================================================================================================
</TABLE>
Gain on sale of option interest in Dolores project
In 1996, the company established a strategic alliance and joint venture with
Minefinders Corporation Ltd., an exploration company that holds the Dolores
project, located in the State of Chihuahua, Mexico. In the third quarter of
1997, the company sold back its right to buy a future 60% interest in the
Dolores project to Minefinders in exchange for C$4.0 million in cash and 1.25
million common shares of Minefinders. The transaction increased the company's
ownership of Minefinders to 25% of the common shares outstanding and resulted in
the Company being repaid for all of its direct exploration expenses at Dolores.
The Company recognized a gain of $3.9 million on the transaction.
Gain on sale of Etruscan investment
In 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
the sale. Additionally, in the second quarter of 1997, the Company obtained
81
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
906,043 common shares in Etruscan at C$3.45 per share through the exercise of
warrants. The Company subsequently sold the shares, recognizing a gain of $0.8
million.
Loss on sale of Pioneer Group investment
In the third quarter of 1997, the Company sold its investment in Pioneer Group
Inc. for $4.2 million. A loss of $0.3 million was recognized on the sale.
Summa litigation accrual
In 1996, the Company recorded a $1.5 million accrual related to the 1995 lawsuit
filed by Summa Corporation against the Company and the predecessor owner of the
McCoy/Cove and Manhattan mines related to alleged improper deductions in
calculation of royalties for the mines. The court ruled in April 1997 that the
Company had not breached the royalty agreement with Summa Corporation. The
results are being appealed by Summa to the Nevada Supreme Court.
Gain on sale of Cluff Resources investment
In 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.
Gain on sale of Kensington project
In 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 sale of Muscocho shares
In 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.
82
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
11. INCOME TAX EXPENSE
Geographic components
The geographic components of earnings before income tax expense and of income
tax expense were as follows.
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loss before income taxes:
Canada $(131,289) $ (32,792) $(41,407)
United States and other (287,437) (143,292) (3,335)
- -----------------------------------------------------------------------------------------------------------------------
$(418,726) $(176,084) $(44,742)
=======================================================================================================================
Current income tax expense (recovery):
Canada $ 559 $ 448 $ (3,891)
United States and other 1,559 (135) 1,133
- -----------------------------------------------------------------------------------------------------------------------
2,118 313 (2,758)
- -----------------------------------------------------------------------------------------------------------------------
Deferred income tax expense (recovery):
Canada -- 250 (950)
United States and other (336) 55 502
- -----------------------------------------------------------------------------------------------------------------------
(336) 305 (448)
- -----------------------------------------------------------------------------------------------------------------------
Income tax expense (recovery) $ 1,782 $ 618 $ (3,206)
=======================================================================================================================
</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.
There are no material timing differences, either individually or in aggregate,
for any of the years presented.
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% for the
following reasons.
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loss before income taxes $(418,726) $(176,084) $(44,742)
========================================================================================================================
Income tax effect of:
Expected Canadian federal and
provincial corporate income taxes $(180,890) $ (76,068) $(19,329)
Operating loss from which no tax benefit is derived 161,385 64,724 14,845
Canadian resource allowance and earned depletion (2,081) (406) (1,539)
Foreign losses subject to different income tax rates 23,978 11,806 1,815
Other items (610) 562 1,002
- ------------------------------------------------------------------------------------------------------------------------
Income tax expense (recovery) $ 1,782 $ 618 $ (3,206)
========================================================================================================================
Effective tax rate (current and deferred) (0.4%) (0.4%) 7.2%
========================================================================================================================
</TABLE>
Loss carryforwards
At December 31, 1997, the Company had U.S. net operating loss carryforwards of
approximately $365 million to apply against future taxable income and $162
million to apply against future alternative minimum taxable income. These loss
carryforwards do not include the provision for impaired assets (note 9) or the
provision for the McCoy/Cove pit wall stabilization costs (note 8), which have
not yet been recognized for income tax purposes. The net operating loss
carryforwards expire at various times from 2001 to 2012. Additionally, the
Company has Canadian non-capital loss carryforwards of approximately
83
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
$19 million and net capital loss carryforwards of approximately $9 million. The
non-capital loss carryforwards expire in 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 6).
Income tax payments (recoveries)
Income tax payments (recoveries) were $0.2 million in 1997, $0.4 million in 1996
and ($3.6) million in 1995.
12. 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.
13. COMMON SHARES
Changes in the number of common shares outstanding during the three years ended
December 31, 1997 were as follows.
<TABLE>
<CAPTION>
Number of
Shares Amount
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1994 112,681,803 $483,061
1995: Exercise of share options 282,306 1,517
Conversion of preferred shares of subsidiary 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 5) 8,830,915 85,801
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 139,355,781 709,534
1997: Exercise of share options 14,250 59
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 139,370,031 $709,593
==================================================================================================================
</TABLE>
The Company suspended the payment of dividends beginning in 1997. The Company
paid dividends totaling $0.075 per share in 1996 and 1995. Historically,
dividends payable to Canadian residents were converted to and paid in Canadian
dollars. The Company is prohibited from paying common share dividends during a
period of interest deferral related to the capital securities (note 7).
Shareholder rights plan
Under the Company's shareholder rights plan, if any person or group were to
announce an intention to acquire, or were to acquire, 20% or more of the
Company's common shares without complying with the conditions of a "permitted
bid," then the owners of each share of common stock (other than the acquiring
person or group) would become entitled to exercise a right to buy one additional
common share at 50% of the lowest share price on The Toronto Stock Exchange
during the prior 90 days. The plan expires in 2004, subject to reconfirmation by
shareholders in 1999.
84
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
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.
Restricted share grant plan
Effective February 1997, the Company adopted a restricted share grant plan to
provide incentive to officers of the Company. An aggregate of 750,000 common
shares of the Company have been reserved for issuance under the plan. There are
no grants currently outstanding.
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.
Options granted in 1997 vest at 50% on the first anniversary and 25% on the
second and third anniversaries. Option prices are denominated in Canadian
dollars.
Changes in the number of options outstanding during the three years ended
December 31, 1997 were as follows.
<TABLE>
<CAPTION>
Employee Share Incentive Plan Director Equity Plan
----------------------------------- ------------------------------------
Weighted Weighted
Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding, December 31, 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 expired (90,150) 14.88 -- --
Options forfeited (244,247) 14.42 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1996 4,338,667 C$ 12.85 157,900 C$ 14.67
1997: Options granted 1,414,060 8.00 52,000 8.00
Options exercised (14,250) 5.75 -- --
Options expired (13,760) 9.75 -- --
Options forfeited (732,598) 12.25 (14,950) 14.91
- --------------------------------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1997 4,992,119 C$ 11.60 194,950 C$ 12.87
================================================================================================================================
</TABLE>
The number of shares reserved for future grants at December 31, 1997 are
9,612,502 under the Employee Share Incentive Plan and 422,700 under the Director
Equity Plan. The number and weighted average price of shares exercisable under
the Employee Share Incentive Plan are 2,746,121 at C$12.78 at December 31, 1997;
2,282,905 at C$12.70 at December 31, 1996; and 2,502,927 at C$11.82 at December
31, 1995.
85
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
The number and weighted average price of shares exercisable under the
Director Equity Plan are 74,800 at C$14.22 at December 31, 1997; 41,550 at
C$13.79 at December 31, 1996; and 13,800 at C$14.63 at December 31, 1995.
Options outstanding at December 31, 1997 had the following characteristics.
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Number of Average Exercise Average Number of Average Exercise
Shares Exercise Price of Shares Years Until Shares Price of Shares
Outstanding Price Range Outstanding Expiration Exercisable Exercisable
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Employee Share Incentive Plan
- -----------------------------
1,455,112 C$ 5.75 - C$ 8.13 C$ 7.69 9 227,924 C$ 6.00
598,132 8.88 - 9.75 9.16 3 598,132 9.16
1,740,141 10.70 - 13.38 12.25 7 906,598 12.67
1,152,346 15.75 - 18.88 16.49 7 989,689 16.45
46,388 19.13 - 21.50 19.73 6 23,778 19.83
Director Equity Plan
- --------------------
194,950 C$ 8.00 - C$ 18.25 C$ 12.87 8 74,800 C$ 14.22
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
14. PREFERRED STOCK OF A SUBSIDIARY
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.
15. 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, and the deficit would be $1.9 million
lower at December 31, 1997.
In accordance with Canadian GAAP, the present value of the principal amount of
the capital securities issued in March 1997 is classified as debt within gold
and other financings, while the present value of the
86
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
future interest payments is classified as a separate component of shareholders'
equity. The related issuance costs have been allocated proportionately to
deferred financing charges and retained earnings based on the debt and equity
classifications. Interest on the capital securities has been allocated
proportionately to interest expense and deficit based on the debt and equity
classifications. Under U.S. GAAP, the face value of the securities would be
classified entirely as debt within gold and other financings; the related
issuance costs would be classified as deferred financing charges within long-
term investments and other assets and would be amortized to interest expense
over the life of the securities; and the interest on the capital securities
would be classified entirely as interest expense. Under U.S. GAAP, gold and
other financings would be $95.8 million higher; there would be no capital
securities component of shareholders' equity; long-term investments and other
assets would be $2.7 million higher; and the deficit would be $2.7 million lower
at December 31, 1997.
In accordance with Canadian GAAP, in 1996 certain share investments were carried
at cost as long-term investments (note 2). These investments would have been
written down and a loss recognized in earnings only if there were a loss in
value that is other than temporary. Under U.S. GAAP, these investments would
have been 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 was $5.0 million after a
nil tax effect as of December 31, 1996.
In accordance with Canadian GAAP, in 1997 the Company's portfolio of share
investments was reclassified from long-term investments to short-term
investments in light of the Company's intent to dispose of these assets (note
2). In accordance with Canadian GAAP, the investments are carried at the lower
of cost or market based on quoted market prices. Under U.S. GAAP, the Company
would have deemed the decline in fair values of its investments as of September
30, 1997 as other than temporary (note 9). Accordingly, the investments would
have been marked down to market, with the unrealized losses included in
earnings. Subsequently, at December 31, 1997, these investments would have been
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 loss on share investments was $6.6 million after a nil tax effect as
of December 31, 1997.
The Company previously disclosed a difference of $36.4 million between Canadian
and U.S. GAAP regarding the cost of the July 1996 Santa Elina acquisition, which
under U.S. GAAP would have increased mining properties and common shares by
$36.4 million. Additionally, the Company disclosed a difference between Canadian
and U.S. GAAP regarding Santa Elina resulting from differences between the
allocated values and the tax bases of assets acquired and liabilities assumed.
Under U.S. GAAP, this would result in an increased allocation to mining
properties of $46.6 million and a corresponding deferred income tax liability
related to the tax effect of the future amortization resulting from the
increased basis. The valuation difference of $36.4 million and the deferred tax
difference of $46.6 million have been eliminated following the write-off of the
Santa Elina assets in 1997 (note 9). Due to the increased basis in Santa Elina
under U.S. GAAP, the 1997 write-off under U.S. GAAP would exceed the write-off
of $143.6 million recognized under Canadian GAAP by $36.4 million, comprised of
the original valuation difference ($36.4 million) and the deferred tax
difference ($46.6 million), offset by the recognition of a deferred tax benefit
($46.6 million). As a result, under U.S. GAAP, the deficit would be $36.4
million higher at December 31, 1997.
87
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
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.
On a cumulative basis under U.S. GAAP, mining properties and common
shareholders' equity would be $11.5 million lower and deficit would be $11.5
million higher at December 31, 1997 ($10.6 million lower and $10.6 million
higher at December 31, 1996).
In accordance with Canadian GAAP, the severance costs associated with the
temporary suspension of operations at Lupin were recognized on the commitment
date (generally defined as the date the severance plan is established and
approved by management) which occurred in 1997. Conditions for recognizing
involuntary termination benefits under U.S. GAAP include similar criteria as
Canadian GAAP. Additionally, however, the benefit arrangement must also be
communicated to employees. As the Lupin severance activities were not
communicated to employees prior to December 31, 1997, under U.S. GAAP the
related costs would be recognized in 1998. Under U.S. GAAP, accrued liabilities
and the deficit would be $5.0 million lower, and common shareholders' equity
would be $5.0 million higher, at December 31, 1997.
In accordance with Canadian GAAP, in 1996 and 1995 the Company accounted for its
investment in the Kingking project using a proportionate consolidation method.
Under U.S. GAAP, the investment would have been accounted for under a full
consolidation, with an offsetting minority interest. No material difference
existed between the two methodologies in 1996 and 1995.
The effects on the consolidated statement of earnings of the above differences
would have been as follows.
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss under Canadian GAAP $(420,508) $(176,702) $(50,060)
Write-off of Santa Elina properties, net of income
tax benefit of $46.6 million (note 9) (36,428) -- --
Change in market value of foreign exchange contracts (8,110) 2,168 3,605
Amortization of mining properties (958) 832 1,900
Unrealized loss on share investments (note 2) 6,643 -- --
Recognition of severance expense 4,980 -- --
Additional interest expense on capital securities (5,714) -- --
Amortization of deferred financing costs on capital
securities (475) -- --
- -------------------------------------------------------------------------------------------------------------------
Net loss under U.S. GAAP $(460,570) $(173,702) $(44,555)
===================================================================================================================
Loss per share under U.S. GAAP $ (3.30) $ (1.29) $ (0.38)
===================================================================================================================
</TABLE>
88
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
The effects of the GAAP differences on the consolidated balance sheet would have
been as follows.
<TABLE>
<CAPTION>
Long-term
Foreign Mining Santa Elina
Canadian Exchange Share Properties Acquisition/ Capital Severance U.S.
December 31, 1997 GAAP Contracts Investments Amortization Write-off Securities Costs GAAP
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term investments and
other assets $ 6,558 $ -- $ -- $ -- $ -- $ 2,692 $ -- $ 9,250
Mining properties 107,820 -- -- (11,526) -- -- -- 96,294
Accounts payable
and accrued liabilities 82,371 -- -- -- -- -- (4,980) 77,391
Gold and other financings 66,524 -- -- -- -- 95,753 -- 162,277
Deferred income 62,169 (5,995) -- -- -- -- -- 56,174
Other long-term obligations 56,607 4,134 -- -- -- -- -- 60,741
Common shares 709,593 -- -- -- 36,428 -- -- 746,021
Capital securities 95,753 -- -- -- -- (95,753) -- --
Deficit 631,320 (1,861) (6,643) 11,526 36,428 (2,692) (4,980) 663,098
Common shareholders' equity 153,661 1,861 -- (11,526) -- (93,061) 4,980 55,915
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Long-term
Foreign Mining
Canadian Exchange Share Properties Santa Elina U.S.
December 31, 1996 GAAP Contracts Investments Amortization Acquisition GAAP
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Long-term investments and other assets $ 39,701 $ 9,971 $ 4,970 $ -- $ -- $ 54,642
Mining properties 405,011 -- -- (10,568) 83,074 477,517
Deferred income taxes 8,392 -- -- -- 46,646 55,038
Common shares 709,534 -- -- -- 36,428 745,962
Deficit 201,931 (9,971) -- 10,568 -- 202,528
Common shareholders' equity 492,309 9,971 4,970 (10,568) 36,428 533,110
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The continuity of shareholders' equity from December 31, 1996 to December
31, 1997 under U.S. GAAP would have been as follows.
1997
---------------------------------------------------------------------
Balance, beginning of year $ 533,110
Net loss (460,570)
Common shares issued 59
Foreign currency translation (5,071)
Change in unrealized gain (loss) on share investments (11,613)
---------------------------------------------------------------------
Balance, end of year $ 55,915
=====================================================================
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.
89
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
Effective January 1, 1996, for the purpose of preparing U.S. GAAP financial
information, the Company adopted U.S. Financial Accounting Standards Board
("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. There were no material differences between Canadian
andU.S. GAAP related to the provisions for asset impairment recorded in 1997
(note 9).
New U.S. accounting standards regarding the determination of earnings per share
have been issued by the FASB. The Company adopted these new standards for the
purpose of preparing U.S. GAAP financial information commencing with its
financial statements for the year ended December 31, 1997. Adoption of the new
standards, which involves restatement of earnings (loss) per share amounts for
prior periods, had no material effect on the Company's earnings (loss) per share
amounts under U.S. GAAP.
The FASB recently issued new accounting standards regarding the reporting of
comprehensive income, which the Company will adopt for purposes of preparing
U.S. GAAP financial information for the year ended December 31, 1998.
Comprehensive income is defined as non-owner changes in stockholders' equity,
including net earnings (loss) for the period. The Company will present all
other comprehensive income items in addition to net earnings (loss) as part of
the note reconciling Canadian and U.S. GAAP information.
New Canadian and U.S. accounting standards have been issued regarding the
disclosure of segment information. The Company will adopt the new standards for
the year ended December 31, 1998. Adoption of the new standards is expected to
have no material effect on the Company's segment disclosures, but may require
certain additional disclosures related to long-lived assets. Additionally, the
Company will be required to present interim segment information in years
following 1998.
90
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
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>
1997 1996
-------------------------------------------- ----------------------------------------------
U.S. U.S.
millions of U.S. dollars Canada and other Total Canada and other Total
- -------------------------------------------------------------------------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Deferred tax liabilities:
Tax over book depreciation
and depletion $ 7.3 $ 9.8 $ 17.1 $ 23.5 $ 51.8 $ 75.3
Other tax liabilities 7.0 4.1 11.1 7.5 -- 7.5
- -------------------------------------------------------------------------- ----------------------------------------------
Total deferred tax liabilities 14.3 13.9 28.2 31.0 51.8 82.8
- -------------------------------------------------------------------------- ----------------------------------------------
Deferred tax assets:
Net operating loss and
other carryforwards 12.0 134.9 146.9 13.1 93.9 107.0
Book over tax depreciation
and depletion 37.5 -- 37.5 22.9 -- 22.9
Accrued liabilities 7.0 35.4 42.4 2.7 29.1 31.8
Other tax assets 24.8 5.2 30.0 0.5 7.6 8.1
- -------------------------------------------------------------------------- ----------------------------------------------
Total deferred tax assets
before allowance 81.3 175.5 256.8 39.2 130.6 169.8
Valuation allowance for
deferred tax assets (73.3) (163.2) (236.5) (16.0) (126.0) (142.0)
- -------------------------------------------------------------------------- ----------------------------------------------
Total deferred tax assets 8.0 12.3 20.3 23.2 4.6 27.8
- -------------------------------------------------------------------------- ----------------------------------------------
Net deferred tax liabilities $ 6.3 $ 1.6 $ 7.9 $ 7.8 $ 47.2 $ 55.0
========================================================================== ==============================================
</TABLE>
The net increase in the valuation allowance for deferred tax assets was $94.5
million for 1997 and $56.5 million for 1996.
Stock-based compensation
FASB Statement No. 123, "Accounting for Stock-Based Compensation," 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.
91
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
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>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss under U.S. GAAP $ (460,570) $ (173,702) $ (44,555)
Pro forma stock compensation expense,
after a nil income tax effect (2,126) (2,766) (455)
- -----------------------------------------------------------------------------------------------------
Pro forma net loss under U.S. GAAP $ (462,696) $ (176,468) $ (45,010)
=====================================================================================================
Pro forma loss per share under U.S. GAAP $ (3.32) $ (1.31) $ (0.39)
=====================================================================================================
</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%, dividend yields
ranging from nil to 1% and a volatility factor of 40%. The weighted average fair
value of options granted is estimated at $3.98 per share in 1997, $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
18. The fair values were determined from quoted market prices or estimated
using discounted cash flow analysis.
<TABLE>
<CAPTION>
1997 1996
------------------------------ -----------------------------
Carrying Estimated Carrying Estimated
millions of U.S. dollars Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 17.0 $ 17.0 $ 103.2 $ 103.2
Short-term investments $ 10.3 $ 10.3 $ -- $ --
Long-term investments and other assets $ 6.6 $ 6.6 $ 39.7 $ 44.7
Debenture payable and
other currency loans $ 43.6 $ 43.6 $ 65.4 $ 65.1
Capital securities $ 4.2 $ 4.2 $ -- $ --
- -------------------------------------------------------------------------------------------------------
</TABLE>
92
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
16. JOINT VENTURES
Summarized below are the Company's 50% interest in the Round Mountain mine and
58% interest in Santa Elina in 1997 (51% interest in 1996) (note 5), accounted
for by the proportionate consolidation method. In 1997, the Company wrote off
its entire investment in Santa Elina of $143.6 million (note 9).
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 79,864 $ 79,865 $ 67,843
Operating costs (48,413) (45,437) (35,028)
Royalties (5,250) (6,482) (5,266)
Production taxes (942) (886) (686)
Depreciation and amortization (13,548) (14,178) (14,488)
Reclamation and mine closure (1,673) (945) --
Exploration (8,615) (2,862) (24)
Provision for impaired assets (142,056) -- --
Other (2,693) (391) (143)
- --------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes $(143,326) $ 8,684 $ 12,208
====================================================================================================================
Current assets $ 62,781 $ 63,171 $ 6,575
Non-current assets 123,435 237,336 102,847
Current liabilities (11,031) (16,515) (7,870)
Non-current liabilities (29,214) (18,632) (7,191)
- --------------------------------------------------------------------------------------------------------------------
Equity $ 145,971 $265,360 $ 94,361
====================================================================================================================
Net cash provided (used) by:
Operating activities $ 7,910 $ 16,738 $ 42,853
Investing activities (28,383) (20,944) (15,415)
Financing activities 15,811 (3,339) --
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash $ (4,662) $ (7,545) $ 27,438
====================================================================================================================
</TABLE>
93
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
17. GEOGRAPHIC SEGMENT INFORMATION
Financial information regarding geographic segments is set out below.
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Canada $ 68,959 $ 63,859 $ 67,026
United States 236,470 273,457 293,704
- ----------------------------------------------------------------------------------------------------------
$ 305,429 $ 337,316 $360,730
==========================================================================================================
Earnings (loss) before income taxes
Canada $(131,289) $ (32,792) $(41,407)
United States (98,186) (143,725) (2,452)
Brazil and other (189,251) 433 (883)
- ----------------------------------------------------------------------------------------------------------
(418,726) (176,084) (44,742)
Income tax expense (recovery) 1,782 618 (3,206)
- ----------------------------------------------------------------------------------------------------------
Loss before preferred stock dividends (420,508) (176,702) (41,536)
Dividends on preferred stock of subsidiary -- -- 8,524
- ----------------------------------------------------------------------------------------------------------
Net loss $(420,508) $(176,702) $(50,060)
==========================================================================================================
Assets:
Canada $ 125,346 $ 236,482 $350,329
United States 296,962 406,750 488,250
Brazil and other 10,459 188,913 32,582
- ----------------------------------------------------------------------------------------------------------
Total assets $ 432,767 $ 832,145 $871,161
==========================================================================================================
</TABLE>
18. HEDGING ACTIVITIES AND COMMITMENTS
In the first quarter of 1997, the Company repurchased its 218,000 ounce gold
commitment that hedged the $84.0 million bond obligation (note 6). The Company
also repurchased all of its gold and silver forward sales positions, which
consisted of 654,000 ounces of gold with delivery dates ranging from 1997 to
2002 and 8.5 million ounces of silver with delivery dates ranging from 1997 to
1999. These transactions resulted in cash proceeds of $63.1 million, which the
Company used, together with existing cash, to repay the $84.0 million bond
obligation in March 1997. This $63.1 million has been deferred and will be
recognized in earnings as the formerly hedged gold and silver production is
sold. The remaining deferred gain is currently expected to be recognized in
revenue as follows: $3.6 million in 1998, $38.8 million in 1999, $3.3 million
in 2000, $1.9 million in 2001, and $1.4 million in 2002 and beyond.
In the first and second quarters of 1997, the Company repurchased a portion of
its outstanding foreign currency exchange contracts. The contracts repurchased
consisted of a total commitment of C$75.6 million at an average C$ to US$1.00
exchange rate of 1.55, with purchase dates ranging from 1998 to 2000. The
transactions resulted in cash proceeds of $6.0 million, which have been deferred
and will be recognized as a reduction to operating costs when the hedged
Canadian dollar transactions occur. The remaining deferred gain is currently
expected to be recognized as follows: $3.8 million in 1999 and $2.2 million in
2000.
94
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
In January 1998, the Company temporarily suspended operations at the Lupin mine
until a significant recovery in the gold price occurs. Deferred revenue amounts
related to the 1997 repurchase of Lupin gold forwards and foreign currency
exchange contracts that were originally scheduled for 1998 recognition will
continue to be deferred and will be matched to production and cash disbursements
in years subsequent to 1998.
In January 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 the 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 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 remaining 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.
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 16.0 million ounces at an average price of $6.01 per
ounce. These hedge positions relate to McCoy/Cove production and will ensure
the realization of adequate precious metals prices which will allow the Company
to proceed with remediation of the Cove pit wall in the second half of 1998
(note 8).
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 7). 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.
This note to the Company's consolidated financial statements shows the Company's
pro forma hedge and commitments at December 31, 1997, adjusted to reflect the
first quarter 1998 transactions described above.
95
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
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 at December 31, 1997,
adjusted to reflect the first quarter 1998 transactions described above, were as
follows.
<TABLE>
<CAPTION>
Forward Price of Gold Average Price
Sales(1) Forward Sales(1) Loans/Swap of Loans/Swap
(ounces) (per ounce) (ounces) (per ounce)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold
- ----
1998 107,925 $ 384 29,756 $399
1999 255,509 374 15,367 393
2000 207,925 336 12,031 388
2001 90,000 321 6,563 388
- -----------------------------------------------------------------------------------------------------------
661,359 $ 356 63,717 $394
===========================================================================================================
Silver
- ------
1998 5,900,000 $5.44
1999 4,000,000 5.77
2000 6,000,000 6.02
2001 6,000,000 6.02
- ---------------------------------------------------------------
21,900,000 $5.82
===============================================================
</TABLE>
(1) The Company had contingent forward sales of up to 12,500 ounces of gold at
$389 per ounce in each quarter during the years 2000 through 2007. The
number of ounces in this contingent forward sale will be determined based on
the spot price of gold two days before the end of the previous quarter and
the quantity of gold delivered in the previous quarter. These contingent
obligations have not been included above.
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 gains of $6.5 million at December 31,
1997. Remeasurement gains or losses are recorded in deferred income and are
included in revenue when the production related to the loans is delivered
(note 6).
The Company's pro forma option position at December 31, 1997, adjusted to
reflect the first quarter 1998 transactions described above, was as follows.
<TABLE>
<CAPTION>
Put Options Purchased Put Options Sold Call Options Purchased Call Options Sold
--------------------------------------------------------------------------------------------------------------------
Strike Price Strike Price Strike Price Strike Price
Ounces per Ounce Ounces per Ounce Ounces per Ounce Ounces per Ounce
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gold
1998 392,500 $ 323 -- $ -- -- $ -- 150,000 $ 399
1999 57,500 320 -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
450,000 $ 322 -- $ -- -- $ -- 150,000 $ 399
============================================================================================================================
Silver
1998 -- $ -- 2,000,000 $ 4.75 3,915,000 $ 9.00 2,165,000 $ 5.94
1999 -- -- 2,000,000 4.75 3,000,000 9.00 1,835,000 5.77
2000 -- -- 5,000,000 4.75 5,000,000 9.00 -- --
2001 -- -- 5,000,000 4.75 5,000,000 9.00 -- --
- ----------------------------------------------------------------------------------------------------------------------------
-- $ -- 14,000,000 $ 4.75 16,915,000 $ 9.00 4,000,000 $ 5.86
============================================================================================================================
</TABLE>
96
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
Currency position
The Company's obligations to purchase Canadian dollars at December 31, 1997 were
as follows.
<TABLE>
<CAPTION>
Canadian Exchange Rate
Dollars (C$ to U.S.$1.00)
- --------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 50,000,000 1.37
1999 49,000,000 1.36
2000 24,000,000 1.34
- --------------------------------------------------------------------------------
$123,000,000 1.36
================================================================================
</TABLE>
Crude oil position
The Company's swap contracts and forward purchase commitment at December 31,
1997 were as follows.
<TABLE>
<CAPTION>
Crude Oil Price per
Purchased Barrel
- --------------------------------------------------------------------------------
<S> <C> <C>
1998 390,000 $ 17.57
1999 20,000 17.63
- --------------------------------------------------------------------------------
410,000 $ 17.58
================================================================================
</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.
97
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
Shown below are the carrying amounts and unrealized gains or losses on the
Company's hedging positions at December 31, 1997 and 1996, and at March 13,
1998, adjusted to reflect the first quarter 1998 transactions described above.
<TABLE>
<CAPTION>
At December 31, 1997 At March 13, 1998
------------------------------------------------------------------------------------
Carrying Unrealized Carrying Unrealized
Amount Gain (loss) Amount Gain (loss)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold loans (note 6) $18,600 $ -- $18,600 $ --
Gold swap on capital securities (note 7) -- 19,700 -- --
Off-balance sheet instruments:
Gold forward sales -- 10,900 -- 22,900
Silver forward sales -- (6,000) -- (1,900)
Gold options -- puts 2,800 11,300 2,800 9,000
-- calls (700) 700 (700) 700
Silver options -- puts -- -- (8,600) (6,300)
-- calls (1,700) (2,500) 5,000 1,000
Foreign currency contracts -- (4,100) -- (2,500)
Crude oil contracts -- 500 -- (800)
- -------------------------------------------------------------------------------------------------------------------------------
$30,500 $22,100
===============================================================================================================================
<CAPTION>
At December 31, 1996
------------------------------------------
Carrying Unrealized
Amount Gain (loss)
- ----------------------------------------------------------------------------------
<S> <C> <C>
Gold swaps (note 6) $83,800 $ 7,100
Gold loan (note 6) 33,700 --
Off-balance sheet instruments:
Gold forward sales -- 50,300
Silver forward sales -- 8,800
Gold options -- puts 400 --
-- calls -- --
Silver options -- puts 1,000 (300)
-- calls (1,000) 1,000
Foreign currency contracts -- 10,000
Crude oil contracts -- 3,000
- ----------------------------------------------------------------------------------
$79,900
==================================================================================
</TABLE>
Fair values are estimated for the contract settlement dates based on market
quotations of various input variables. These variables are used in valuation
models that estimate the fair market value.
The credit risk exposure related to all hedging activities is limited to the
unrealized gains on outstanding contracts based on current market prices. To
reduce counterparty credit exposure, the Company deals only with large credit-
worthy financial institutions, and limits credit exposure to each. In addition,
to allow for situations where positions may need to be reversed, the Company
deals only in markets it considers highly liquid.
98
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
Most of the Company's hedging transactions have no margin requirements. In some
instances, however, mainly for the longer-term forward sales and options, margin
deposits are required when the market value exceeds the contract value by a
predetermined amount.
The fair value of the Company's hedged position can be affected by market
conditions beyond the Company's control. The effect of changes in various market
factors on the Company's outstanding hedged position at March 13, 1998, adjusted
to reflect the first quarter 1998 transactions described above, would be as
follows.
<TABLE>
<CAPTION>
Amount Effect on Market Value
of of Hedged Position
Change (thousands of U.S.$)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Change in:
Gold prices $ 10.00/ounce $ 9,800
Silver prices $ 0.25/ounce $ 4,300
Canadian dollar U.S.$ 0.01 $ 1,000
Crude oil prices $ 1.00/barrel $ 300
Interest rates (effect on gold and silver
options, gold loans and swaps) 1% $ 5,200
- --------------------------------------------------------------------------------------------------------------------
</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>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Gold loans and swaps $1,891 $(3,943) $ (612)
Gold forward sales 1,001 1,541 2,849
Silver forward sales 508 1,910 1,909
Gold and silver options 420 534 394
Operating costs:
Foreign currency contracts 1,317 1,459 839
Crude oil contracts 1,343 1,120 326
Interest expense:
Gold swap on capital securities (note 7) 156 -- --
Dividends on preferred stock of subsidiary:
Interest rate swap -- -- (493)
- -------------------------------------------------------------------------------------------------------------------
$6,636 $ 2,621 $5,212
===================================================================================================================
</TABLE>
19. 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 3.0%, reduced to 1.5% after $75.0 million has been paid. For
the period from inception through December 31, 1997, cumulative royalties of
$19.2 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.
99
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
A portion of production from the Lamefoot area of the Kettle River mine is
subject to a 5% net smelter return royalty. K-2 area production at Kettle River
is subject to a 5% gross proceeds royalty and a net smelter return royalty
ranging from 2% at gold prices of $300 per ounce or less to 3% at gold prices of
$400 per ounce or more.
Operating lease commitments
The Company's principal lease commitments are for office premises and equipment.
The Company's commitments under the remaining terms of the leases are
approximately $16.7 million, payable as follows: $3.5 million in 1998, $2.6
million in 1999, $2.5 million in 2000, $1.9 million in 2001, $1.9 million in
2002 and $4.3 million thereafter.
Contingencies
In 1997, private parties acting on behalf of the United States in a qui tam
action commenced suit in federal court against 14 mining companies, including
the Company. A qui tam suit is one brought by private parties seeking remedies
for alleged wrong-doing to which the government is allegedly entitled but has
declined to seek recovery. The complaint asserts that because of foreign
ownership of the companies, they are not entitled to locate, operate or patent
mining claims on federal public lands. It seeks invalidation of all such mining
claims held by the companies and recovery of triple the value of production from
them, and from their allegedly unlawfully patented claims. In March 1998, the
federal district court ruled in favor on the defendants' motions to dismiss the
complaint. This ruling is subject to appeal.
100
<PAGE>
QUARTERLY FINANCIAL HIGHLIGHTS
(Unaudited)
(millions of U.S. dollars except per share data)
<TABLE>
<CAPTION>
Net Loss per
Revenue Loss Share
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997
First quarter $ 73.8 $ (16.8) $(0.12)
Second quarter 75.8 (20.7) (0.17)
Third quarter 74.5 (327.5) (2.36)
Fourth quarter 81.3 (55.5) (0.41)
- ----------------------------------------------------------------------------------------------------
Total $305.4 $(420.5) $(3.06)
====================================================================================================
1996
First quarter $ 67.8 $ (16.2) $(0.12)
Second quarter 95.1 (14.6) (0.11)
Third quarter 94.9 (42.4) (0.31)
Fourth quarter 79.5 (103.5) (0.77)
- ----------------------------------------------------------------------------------------------------
Total $337.3 $(176.7) $(1.31)
====================================================================================================
</TABLE>
In 1997, these losses include provisions for impaired assets of $309.8 million
($2.22 per share) in the third quarter and $36.2 million ($0.26 per share) in
the fourth quarter, and $11.2 million ($0.08 per share) for severance costs in
the fourth quarter. In 1996, the losses reflect $77.1 million ($0.57 per share)
to write off the $57.1 million book value of the Alaska-Juneau development
project and to accrue $20.0 million for estimated reclamation and closure costs
at the site in the fourth quarter (see "Business and Properties-Alaska-Juneau"),
and $30.0 million ($0.22 per share) for pit wall stabilization at the McCoy/Cove
mine in the third quarter (see "Business and Properties-McCoy/Cove") . See note
9 to the consolidated financial statements.
ITEM 9-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10-DIRECTORS OF THE REGISTRANT
The information about the directors of the company required by this item is
located in the Echo Bay Mines Ltd. proxy statement to be filed within 120 days
after the end of the fiscal year. Information about the executive officers of
the company required by this item appears in Part I of this Annual Report on
Form 10-K.
ITEM 11-EXECUTIVE COMPENSATION
The information required by this item appears in the Echo Bay Mines Ltd. proxy
statement to be filed within 120 days after the end of the fiscal year.
ITEM 12-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this item appears in the Echo Bay Mines Ltd. proxy
statement to be filed within 120 days after the end of the fiscal year.
101
<PAGE>
ITEM 13-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears in the Echo Bay Mines Ltd. proxy
statement to be filed within 120 days after the end of the fiscal year.
PART IV
ITEM 14-EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements included in Part II, Item 8 Echo Bay Mines Ltd.
Page
----
Management's Responsibility For Financial Reporting................ 64
Report Of Independent Chartered Accountants........................ 65
Consolidated Balance Sheet......................................... 66
Consolidated Statement Of Earnings................................. 67
Consolidated Statement Of Retained Earnings (Deficit).............. 67
Consolidated Statement Of Cash Flow................................ 68
Notes To Consolidated Financial Statements......................... 69
2. Financial Statement Schedules included in Part IV
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
3. Exhibits required to be filed by Item 601 of Regulation S-K
Exhibits 21, 23.1, 24 and 27 are filed herewith. All other exhibits are
incorporated by reference as indicated below.
Exhibit
No. Exhibit Description
------ -------------------
2.1 Share Subscription and Purchase Agreement among Sercor, Ltd., Echo
Bay Mines Ltd. and Kendall Gold Corporation (incorporated by
reference to Exhibit 2.1 of the report on Form 8-K of file no. 1-
8542 filed on April 24, 1996).
2.2 Merger Agreement between Santa Elina Gold Corporation and Kendall
Gold Corporation (incorporated by reference to Exhibit 2.2 of the
report on Form 8-K of file no. 1-8542 filed on April 24, 1996).
3.1 Restated Articles of Incorporation of the Registrant (incorporated
herein by reference to Exhibit 3(a) of Registration Statement No.
2-84687).
3.2 By-Laws of the Registrant (incorporated herein by reference to
Exhibit 3(b) of Registration Statement No. 2-84687).
102
<PAGE>
4.1 Shareholder rights plan, dated September 2, 1994 (incorporated
herein by reference to the report on Form 8-K of file No. 1-8542
which was made effective on October 14, 1994).
4.2 Shelf registration statement, as amended, dated February 12, 1998
(incorporated herein by reference to Registration Statement 333-
35857 and amendments thereto).
4.3 Indenture and First Supplemental Indenture between Echo Bay Mines
Ltd. and Bankers Trust Company and Global Security for 11% Capital
Securities dated March 27, 1997 (incorporated herein by reference
to the report on Form 8-K of file No. 1-8542 which was made
effective on March 31, 1997).
10.1 Employee Share Incentive Plan (incorporated herein by reference to
Exhibit 10(n) of Registration Statement No. 2-84687).
10.2 Amendment dated 2/18/86, to the Employee Share Incentive Plan
described in 10.1 above (incorporated herein by reference to
Exhibit 10.29 of the report on Form 10-K of file No. 1-8542 for
the year ended December 31, 1986).
10.3 Form of Deferred Compensation Agreement between the company and
certain senior executives (incorporated herein by reference to
Exhibit 10.11 of the report on Form 10-K of file No. 1-8542 for
the year ended December 31, 1993).
10.4 Form of Unanimous Shareholders Agreement among Echo Bay Mines
Ltd., Sercor Limited, Paulo C. de Brito, Angela Maria de Brito and
Kendall Gold Corporation (incorporated by reference to Exhibit
10.1 of the report on Form 8-K of file no. 1-8542 filed on April
24, 1996).
10.5 Employment Agreement dated May 10, 1996 with Robert L. Leclerc
(incorporated herein by reference to exhibit 10.6 of the report on
Form 10-K of file No. 1-8542 for the year ended December 31,
1996).
10.6 Share Incentive Plan and Restricted Share Grant Plan (incorporated
herein by reference to Registration Statement on Form S-8, file
No. 333-31835).
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young.
24 Power of Attorney.
27 Financial Data Schedule.
103
<PAGE>
(b) Reports on Form 8-K
Filed on November 6, 1997, related to the provision for impaired assets
recorded in the third quarter of 1997.
Filed on November 6, 1997, related to the third quarter 1997 results.
Filed on January 6, 1998 related to the temporary suspension of operations
at the Lupin mine, reduction of operations at the McCoy/Cove mine and
further actions taken to reduce costs.
Filed on February 20, 1998 related to press release dated February 17,
1998, regarding 1997 results.
Filed on March 23, 1998 related to the deferral of interest on the
capital securities and the resignation of Scott A. Caldwell.
104
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ECHO BAY MINES LTD.
By: /s/ Robert L. Leclerc
------------------------------------
Robert L. Leclerc, Q C., Chairman,
Chief Executive Officer and Director
Date: March 27, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacity and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert L. Leclerc Chairman, Chief Executive March 27, 1998
- -------------------------------------- Officer and Director
Robert L. Leclerc, Q. C.
Senior Vice President,
/s/ Peter H. Cheesbrough Finance and Chief Financial
- -------------------------------------- Officer
Peter H. Cheesbrough
/s/ Tom S. Q. Yip Vice President, Controller and
- -------------------------------------- Principal Accounting Officer
Tom S. Q. Yip
* JOHN N. ABELL
* LATHAM C. BURNS
* PIERRE CHOQUETTE
* JOHN G. CHRISTY
* PETER CLARKE
* ROBERT L. LECLERC
* JOHN F. MCOUAT
* MONICA E. SLOAN
* R. GEOFFREY P. STYLES * A majority of the
Board of Directors
* By /s/ Lois-Ann L. Brodrick March 27, 1998
--------------------------------------
Lois-Ann L. Brodrick, Attorney-in-fact
</TABLE>
105
<PAGE>
Exhibits 21, 23.1, 24 and 27 are filed herewith. All other exhibits are
incorporated by reference as indicated below.
<TABLE>
<CAPTION>
Exhibit No. Exhibit Description
- ----------- -------------------
<C> <S>
2.1 Share Subscription and Purchase Agreement among Sercor, Ltd., Echo Bay Mines
Ltd. and Kendall Gold Corporation (incorporated by reference to Exhibit 2.1 of
the report on Form 8-K of file no. 1-8542 filed on April 24, 1996).
2.2 Merger Agreement between Santa Elina Gold Corporation and Kendall Gold
Corporation (incorporated by reference to Exhibit 2.2 of the report on Form 8-K
of file no. 1-8542 filed on April 24, 1996).
3.1 Restated Articles of Incorporation of the Registrant (incorporated herein by
reference to Exhibit 3(a) of Registration Statement No. 2-84687).
3.2 By-Laws of the Registrant (incorporated herein by reference to Exhibit 3(b) of
Registration Statement No. 2-84687).
4.1 Shareholder rights plan, dated September 2, 1994 (incorporated herein by
reference to the report on Form 8-K of file No. 1-8542 which was made effective
on October 14, 1994).
4.2 Shelf registration statement, as amended, dated February 12, 1998 (incorporated
herein by reference to Registration Statement 333-35857 and amendments thereto).
4.3 Indenture and First Supplemental Indenture between Echo Bay Mines Ltd. and
Bankers Trust Company and Global Security for 11% Capital Securities dated
March 27, 1997 (incorporated herein by reference to the report on Form 8-K of
file No. 1-8542 which was made effective on March 31, 1997).
10.1 Employee Share Incentive Plan (incorporated herein by reference to Exhibit
10(n) of Registration Statement No. 2-84687).
10.2 Amendment dated 2/18/86, to the Employee Share Incentive Plan described in 10.1
above (incorporated herein by reference to Exhibit 10.29 of the report on Form
10-K of file No. 1-8542 for the year ended December 31, 1986).
10.3 Form of Deferred Compensation Agreement between the company and certain senior
executives (incorporated herein by reference to Exhibit 10.11 of the report on
Form 10-K of file No. 1-8542 for the year ended December 31, 1993).
10.4 Form of Unanimous Shareholders Agreement among Echo Bay Mines Ltd., Sercor
Limited, Paulo C. de Brito, Angela Maria de Brito and Kendall Gold Corporation
(incorporated by reference to Exhibit 10.1 of the report on Form 8-K of file
no. 1-8542 filed on April 24, 1996).
10.5 Employment Agreement dated May 10, 1996 with Robert L. Leclerc (incorporated
herein by reference to exhibit 10.6 of the report on Form 10-K of file No.
1-8542 for the year ended December 31, 1996).
10.6 Share Incentive Plan and Restricted Share Grant Plan (incorporated herein by
reference to Registration Statement on Form S-8, file No. 333-31835).
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young.
24 Power of Attorney.
27 Financial Data Schedule
</TABLE>
i
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
JURISDICTION OF
SUBSIDIARIES OWNERSHIP INCORPORATION
- ----------------------------------------- ---------- ---------------------
Echo Bay Inc. 100% Delaware, U.S.A.
Echo Bay Finance Corporation 100% Delaware, U.S.A.
Round Mountain Gold Corporation 100% Delaware, U.S.A.
Echo Bay Minerals Company 100% Delaware, U.S.A.
Sunnyside Gold Corporation 100% Delaware, U.S.A.
Echo Bay Exploration Inc. 100% Delaware, U.S.A.
Echo Bay Management Corporation 100% Delaware, U.S.A.
White Pine Gold Corporation 100% Delaware, U.S.A.
Echo Bay Alaska Inc. 100% Delaware, U.S.A.
Echo Bay Resources Inc. 100% Delaware, U.S.A.
633168 Alberta Ltd. 100% Alberta, Canada
Echo Bay Sales Ltd. 100% Alberta, Canada
Corp. Air Inc. 100% Alberta, Canada
Echo Bay Sales Corporation 100% Barbados
Echo Bay Mexico, S.A. de C.V. 100% Mexico
Echo Bay Mines de Venezuela, C.A. 100% Venezuela
Santa Elina Mines Corp. 58% British Virgin Islands
Kuranakh Gold Mining Corp. 50% Russia
Echo Bay (Barbados) Ltd. 100% Barbados
Echo Bay Ecuador, S.A. 100% Ecuador
Echo Bay Mines Chile Ltda. 100% Chile
Echo Bay Capital Corporation 100% Ireland
Echo Bay Exploration Mexico SRL 100% Mexico
Servicios Echo Bay, S.A. de C.V. 100% Mexico
Minera Paradones Amarillos S.A. de C.V. 60% Mexico
Minera San Simon, S.A. de C.V. 100% Mexico
Minera Buenos Aires, S.A. de C.V. 100% Mexico
<PAGE>
JURISDICTION OF
SUBSIDIARIES OWNERSHIP INCORPORATION
- ----------------------------------------- --------- ----------------------
Silk Road Gold Corp. 50% The Netherlands
Echo Bay International B.V. 100% The Netherlands
Echo Bay Mexico B.V. 100% The Netherlands
Echo Bay Honduras B.V. 100% The Netherlands
Echo Bay Chile B.V. 100% The Netherlands
Echo Bay Venezuala B.V. 100% The Netherlands
Echo Bay Ecuador B.V. 100% The Netherlands
Echo Bay Peru B.V. 100% The Netherlands
Echo Bay Brazil B.V. 100% The Netherlands
Echo Bay Ghana Exploration B.V. 100% The Netherlands
Echo Bay Philippines B.V. 100% The Netherlands
*Echo Holdings Inc. 40% The Philippines
*Echo Bay Mines Philippines Inc. 40%/64% The Philippines
*Kingking Mines Inc. 30%/48% The Philippines
Echo Bay Do Brazil Servicios Ltda. 100% Brazil
Echo Bay Mines Do Brazil Ltda. 100% Brazil
Minera Echo Bay del Peru, S.A. 100% Peru
Mercator Insurance Corporation 100% Barbados
* Less than 50% ownership. Two percentages given - the first is direct
ownership; the second is direct plus indirect.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 333-35857) and related prospectus of Echo Bay Mines Ltd. and Echo Bay
Resources, Inc., the Registration Statement (Form S-8 No. 2-84687) pertaining to
the Employee Share Incentive Plan of Echo Bay Mines Ltd. and the Registration
Statement (Form S-8 No. 33-91696) pertaining to the Director Equity Plan and
amending the Employee Share Incentive Plan of Echo Bay Mines Ltd. of our report
dated January 26, 1998, except for Notes 7, 18 and 19, as to which the date is
March 17, 1998, with respect to the consolidated financial statements of Echo
Bay Mines Ltd. included in this Annual Report (Form 10-K) for the year ended
December 31, 1997.
Edmonton, Canada /s/ Ernst & Young
March 27, 1998 Chartered Accountants
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, each of the undersigned, directors and/or
officers of Echo Bay Mines Ltd. (the "Company"), hereby constitutes and appoints
LOIS-ANN L. BRODRICK, PETER H. CHEESBROUGH and RONALD R. LEVINE or either one of
them, his true and lawful attorney or attorneys and agent or agents to do any
and all acts and to execute in his name, place and stead in such capacity or
capacities (whether on behalf on of the Company or otherwise) any and all
instruments which said attorney or attorneys and agent or agents may deem
necessary or advisable to enable the Company and each of the undersigned to
comply with the United States Securities Exchange Act of 1934, as amended, and
any rules, regulations, requirements or requests of the Securities and Exchange
Commission thereunder or in respect thereof in connection with the Form 10-K
Annual Report of the Company for the fiscal year ended December 31, 1997
including specifically, but without limiting the generality of the foregoing,
power and authority to execute the respective names of the undersigned directors
and/or officers as indicated below (whether on behalf of the Company or as a
director and/or officer of the Company) on Form 10-K or any other appropriate
instrument relating to the Annual Report of the Company and each of the
undersigned does hereby ratify and confirm all that such attorney or attorneys
and agent or agents or any one of them shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, each of the undersigned has subscribed these presents
this 9th day of March 1998.
/s/ John N. Abell /s/ Latham C. Burns
- ------------------------------ ------------------------------
John N. Abell, Director Latham C. Burns, Director
/s/ Pierre Choquette /s/ John Gilray Christy
- ------------------------------ ------------------------------
Pierre Choquette, Director John Gilray Christy, Director
/s/ Peter Clarke /s/ Robert L. Leclerc
- ------------------------------ ------------------------------
Peter Clarke, Director Robert L. Leclerc, Q.C., Chairman and
Chief Executive Officer and Director
/s/ John F. McOuat /s/ Monica E. Sloan
- ------------------------------ ------------------------------
John F. McOuat, Director Monica E. Sloan, Director
/s/ R. Geoffrey P. Styles
- ------------------------------
R. Geoffrey P. Styles, Director
/s/ Peter H. Cheesbrough /s/ Tom S.Q. Yip
- ------------------------------ ------------------------------
Peter H. Cheesbrough, Tom S.Q. Yip, Controller and
Senior Vice-President, Principal Accounting Officer
Finance and Principal
Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements included in Echo Bay Mines Ltd Form 10-K for the year
ended December 31, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 16,953
<SECURITIES> 10,325
<RECEIVABLES> 5,927
<ALLOWANCES> 0
<INVENTORY> 41,168
<CURRENT-ASSETS> 79,441
<PP&E> 978,794
<DEPRECIATION> 632,026
<TOTAL-ASSETS> 432,767
<CURRENT-LIABILITIES> 108,105
<BONDS> 0
0
0
<COMMON> 709,593
<OTHER-SE> (555,932)
<TOTAL-LIABILITY-AND-EQUITY> 432,767
<SALES> 305,429
<TOTAL-REVENUES> 305,429
<CGS> 213,120
<TOTAL-COSTS> 321,372
<OTHER-EXPENSES> 402,783
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,646
<INCOME-PRETAX> (418,726)
<INCOME-TAX> 1,782
<INCOME-CONTINUING> (420,508)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (420,508)
<EPS-PRIMARY> (3.06)
<EPS-DILUTED> (3.06)
</TABLE>
