<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1998
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-8542
------
ECHO BAY MINES LTD.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Incorporated under the laws
of Canada None
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 1000, 6400 S. Fiddlers Green Circle
Englewood, CO 80111-4957
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (303) 714-8600
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Shares Outstanding as of
Title of Class April 24, 1998
- ---------------------------- ------------------------
Common Shares 139,370,031
without nominal or par value
<PAGE>
ECHO BAY MINES LTD.
INDEX
<TABLE>
<CAPTION>
<S> <C>
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. Condensed Financial Statements (Unaudited)..................................... 1
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................... 11
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................................. 25
ITEM 6. Exhibits and Reports on Form 8-K............................................... 25
SIGNATURE................................................................................... 26
</TABLE>
i
<PAGE>
ECHO BAY MINES LTD.
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET March 31 December 31
thousands of U.S. dollars 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $6,227 $16,953
Short-term investments 6,387 10,325
Interest and accounts receivable 7,207 5,927
Inventories (note 2) 44,753 41,168
Prepaid expenses and other assets 4,935 5,068
- -----------------------------------------------------------------------------------------------------------
69,509 79,441
Plant and equipment (note 3) 228,286 238,948
Mining properties (note 3) 105,392 107,820
Long-term investments and other assets 13,071 6,558
- -----------------------------------------------------------------------------------------------------------
$416,258 $432,767
- -----------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $60,791 $82,371
Income and mining taxes payable 3,750 3,494
Gold and other financings (note 4) 15,658 14,779
Deferred income (note 4) 14,410 7,461
- -----------------------------------------------------------------------------------------------------------
94,609 108,105
Gold and other financings (note 4) 48,002 51,745
Deferred income (note 4) 53,569 54,708
Other long-term obligations 61,819 56,607
Deferred income taxes 8,040 7,941
Commitments and contingencies (notes 5, 8 and 9)
Common shareholders' equity:
Common shares, no par value, unlimited number authorized;
issued and outstanding - 139,370,031 shares 709,593 709,593
Capital securities (note 5) 101,253 95,753
Deficit (641,579) (631,320)
Foreign currency translation (19,048) (20,365)
- ------------------------------------------------------------------------------------------------------------
150,219 153,661
- ------------------------------------------------------------------------------------------------------------
$416,258 $432,767
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to interim consolidated financial statements.
1
<PAGE>
ECHO BAY MINES LTD.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF EARNINGS Three months ended
thousands of U.S. dollars, March 31
except for per share data 1997 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue $52,855 $73,838
- -------------------------------------------------------------------------------------------------------------------------------
Expenses:
Operating costs 33,305 51,453
Royalties 1,722 2,244
Production taxes 354 439
Depreciation and amortization 13,902 19,973
Reclamation and mine closure 1,651 2,186
General and administrative 2,257 3,418
Exploration and development 3,180 6,490
Interest and other (note 6) 4,038 2,641
Provision for impaired assets and other charges -- 1,000
- -------------------------------------------------------------------------------------------------------------------------------
60,409 89,844
- --------------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (7,554) (16,006)
- --------------------------------------------------------------------------------------------------------------------------------
Income tax expense:
Current 72 318
Deferred -- 437
- --------------------------------------------------------------------------------------------------------------------------------
72 755
- --------------------------------------------------------------------------------------------------------------------------------
Net loss $ (7,626) $(16,761)
- --------------------------------------------------------------------------------------------------------------------------------
Net loss attributable to common shareholders (note 5) $(10,259) $(16,876)
- --------------------------------------------------------------------------------------------------------------------------------
Loss per share $ (0.07) $ (0.12)
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding (thousands) 139,370 139,357
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to interim consolidated financial statements
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT Three months ended
OF CASH FLOW March 31
thousands of U.S. dollars 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
NET CASH FLOWS USED IN OPERATING ACTIVITIES $(16,992) $(16,744)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
DEBT REPAYMENTS (4,164) (118,057)
CAPITAL SECURITIES ISSUED, NET OF ISSUANCE COSTS (NOTE 5) -- 96,700
COMMON SHARE ISSUES, NET OF ISSUANCE COSTS -- 60
OTHER (112) --
- ------------------------------------------------------------------------------------------------------------------------------------
(4,276) (21,297)
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
MINING PROPERTIES, PLANT AND EQUIPMENT (4,629) (20,822)
PROCEEDS ON REPURCHASE OF THE COMPANY'S
- GOLD AND SILVER FORWARD SALES (NOTE 8) 8,673 54,963
- GOLD SWAP -- 8,107
- FOREIGN EXCHANGE CONTRACTS -- 6,672
SHORT-TERM INVESTMENTS 2,414 --
LONG-TERM INVESTMENTS AND OTHER ASSETS 522 (9,377)
PROCEEDS ON THE SALE OF PLANT AND EQUIPMENT (NOTE 6) 2,309 164
PROCEEDS ON THE SALE OF MINING PROPERTIES (NOTE 6) 1,195 --
OTHER 58 (15)
- ------------------------------------------------------------------------------------------------------------------------------------
10,542 39,692
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,726) 1,651
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 16,953 103,196
- ------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $6,227 $104,847
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT THREE MONTHS ENDED
OF DEFICIT MARCH 31
THOUSANDS OF U.S. DOLLARS 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE, BEGINNING OF PERIOD $(631,320) $(201,931)
NET LOSS (7,626) (16,761)
INTEREST ON CAPITAL SECURITIES, NET OF NIL TAX EFFECT (NOTE 5) (2,633) (115)
ISSUE COSTS RELATED TO CAPITAL SECURITIES (NOTE 5) -- (3,167)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $(641,579) $(221,974)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to interim consolidated financial statements
3
<PAGE>
ECHO BAY MINES, LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
Tabular dollar amounts in thousands of U.S. dollars,
except amounts per share and per ounce or unless otherwise noted
1. GENERAL
In the opinion of management, the accompanying unaudited consolidated statement
of earnings, consolidated statement of deficit, consolidated balance sheet and
consolidated statement of cash flow contain all adjustments, consisting only of
normal recurring accruals, necessary to present fairly in all material respects
the consolidated financial position of Echo Bay Mines Ltd. (the Company) as of
March 31, 1998 and December 31, 1997 and the consolidated results of operations
and cash flow for the three months ended March 31, 1998 and 1997. For further
information, refer to the financial statements and related footnotes included in
the Company's annual report on Form 10-K for the year ended December 31, 1997.
Certain of the comparative figures have been reclassified to conform with the
current period's presentation.
2. INVENTORIES
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Precious metals -- bullion $ 21,538 $ 14,882
-- in-process 9,565 9,792
Materials and supplies 13,650 16,494
- ---------------------------------------------------------------------------------------------------------
$ 44,753 $ 41,168
- ---------------------------------------------------------------------------------------------------------
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Plant and equipment March 31 December 31
1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cost $669,121 $672,062
Less accumulated depreciation 440,835 433,114
- ---------------------------------------------------------------------------------------------------------
$228,286 $238,948
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Mining properties March 31 December 31
1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Producing mines' acquisition, exploration & development costs $268,464 $266,081
Less accumulated amortization 203,697 198,912
- ---------------------------------------------------------------------------------------------------------
64,767 67,169
Development properties' acquisition, exploration & development
costs 25,339 24,787
Deferred mining costs 15,286 15,864
- ---------------------------------------------------------------------------------------------------------
$105,392 $107,820
- ---------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise dated
4. GOLD AND OTHER FINANCINGS AND DEFERRED INCOME
<TABLE>
<CAPTION>
Financings Deferred Income
-------------------------------- -------------------------------
March 31 December 31 March 31 December 31
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold loans $17,076 $18,637 $ 5,181 $ 6,481
Currency loans 42,337 43,640 - -
Capital securities (note 5) 4,247 4,247 - -
Repurchase of gold and silver forward
contracts - - 56,803 48,991
Repurchase of forward currency
exchange contracts - - 5,995 5,995
Other - - - 702
- --------------------------------------------------------------------------------------------------------
63,660 66,524 67,979 62,169
Less current portion 15,658 14,779 14,410 7,461
- --------------------------------------------------------------------------------------------------------
$48,002 $51,745 $53,569 $54,708
- --------------------------------------------------------------------------------------------------------
</TABLE>
5. 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, in 1997, the agreement reduced the Company's effective interest
rate on the capital securities to a fixed rate of 4.24% plus the floating gold
lease rate, or 6.03%. In the first quarter of 1998, the Company restructured
the gold swap agreement. The restructuring resulted in a conversion of the swap
ounces into forward sales commitments (note 8). Additionally, following the
restructuring, the effective interest rate on the capital securities will be
11%, or 12% compounded semi-annually during a period of interest deferral.
The Company has the right to defer interest payments on the capital securities
for a period not to exceed 10 consecutive semi-annual periods. During a period
of interest deferral, interest accrues at a rate of 12% per annum, compounded
semi-annually, on the full principal amount and deferred interest. The Company,
at its option, may satisfy its deferred interest obligation by delivering common
shares to the 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 defer
its April 1998 interest payment to holders of the capital securities until gold
prices improve. The deferred interest accrued at March 31, 1998, totaling $5.5
million, has been classified within the equity component of the capital
securities obligation on the balance sheet as the Company has the option to
satisfy the deferred interest by delivering common shares.
5
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
6. INTEREST AND OTHER
<TABLE>
<CAPTION>
Three months ended
March 31
1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income $ (89) $(1,145)
Interest expense 2,443 3,188
Unrealized loss on share investments 849 --
Gain on sale of plant and equipment (1,052) (181)
Gain on sale of interests in mining properties (1,195) --
Loss on sale of Ashanti Goldfields common share investment 642 --
Loss on sale of Ashanti Goldfields preferred share investment 277 --
Loss on sale of Canarc Resource investment 110 --
Summa litigation accrual -- 400
Other 2,053 379
- -----------------------------------------------------------------------------------------------
$4,038 $2,641
- -----------------------------------------------------------------------------------------------
</TABLE>
Gain on sale of plant and equipment
In the first quarter of 1998, the Company realized proceeds of $2.3 million and
recorded a gain of $1.1 million on the sale of plant and equipment, primarily
related to redundant Lupin winter road assets.
Gain on sale of interests in mining properties
In the first quarter of 1998, the Company sold its interests in certain mining
properties, including the Lik property in the Northwest Territories, Canada.
The Company realized total proceeds of $1.2 million on the sale of these
interests, which had no book value.
Loss on sale of Ashanti Goldfields investments
In the first quarter of 1998, the Company sold its investment in the common
shares of Ashanti Goldfields Company Ltd. for $2.0 million. A loss of $0.6
million was recognized on the sale. Additionally, the Company received $0.5
million in proceeds and recognized a loss of $0.3 million on the sale of its
investment in the preferred shares of Ashanti Goldfields.
Loss on sale of Canarc Resource investment
In the first quarter of 1998, the Company sold its investment in Canarc Resource
Corp. for $0.4 million. A loss of $0.1 million was recognized on the sale.
7. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
U.S. GAAP financial statements
The Company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in Canada. These differ in some
respects from those in the United States, as described below and in the
footnotes to the financial statements included in the Company's annual report on
Form 10-K for the year ended December 31, 1997.
Under Canadian GAAP, the Company has classified the deferred interest on the
capital securities accrued at March 31, 1998 within the equity component of the
capital securities obligation (note 5). Under U.S. GAAP, the accrued interest
would be classified within other long-term obligations. As a result, under U.S.
GAAP, the
6
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
equity component of the capital securities obligation would be $5.5 million
lower and other long-term obligations would be $5.5 million higher.
The effects on the consolidated statement of earnings of the GAAP differences
would have been as follows.
<TABLE>
<CAPTION>
Three months ended
March 31
1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Net loss under Canadian GAAP $ (7,626) $(16,761)
Recognition of severance expense (4,980) --
Unrealized/realized loss on share investments 252 --
Change in market value of foreign exchange contracts 1,456 (2,316)
Amortization of mining properties 491 (45)
Additional interest expense on capital securities (2,633) (115)
Amortization of deferred financing on capital securities (158) --
- ---------------------------------------------------------------------------------------------
Net loss under U.S. GAAP $(13,198) $(19,237)
- ---------------------------------------------------------------------------------------------
Loss per share under U.S. GAAP $ (0.09) $ (0.14)
- ---------------------------------------------------------------------------------------------
</TABLE>
The effects on the consolidated balance sheet of the GAAP differences would have
been as follows.
<TABLE>
<CAPTION>
Long-term Mining
Foreign Properties Santa Elina
Canadian Exchange Share Amorti- Acquisition/ Capital U.S.
March 31, 1998 GAAP Contracts Investments zation Write-off Securities GAAP
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Short-term investments $ 6,387 $ -- $ 34 $ -- $ -- $ -- $ 6,421
Long-term investments and
other assets 13,071 -- -- -- -- 2,534 15,605
Mining properties 105,392 -- -- (11,035) -- -- 94,357
Gold and other financings 63,660 -- -- -- -- 95,753 159,413
Deferred income 67,979 (5,995) -- -- -- -- 61,984
Other long-term obligations 61,819 2,678 -- -- -- 5,500 69,997
Common shares 709,593 -- -- -- 36,428 -- 746,021
Capital securities 101,253 -- -- -- -- (101,253) --
Deficit 641,579 (3,317) (6,428) 11,035 36,428 (2,534) 676,763
Net unrealized loss on
share investments -- -- 6,394 -- -- -- 6,394
Common shareholders' equity 150,219 3,317 34 (11,035) -- (98,719) 43,816
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
<TABLE>
<CAPTION>
Long-term Mining
Foreign Properties Santa Elina
Canadian Exchange Share Amorti- Acquisition/ Capital Severance U.S.
December 31, 1997 GAAP Contracts Investments zation 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
Net unrealized loss
on share
investments -- -- 6,643 -- -- -- -- 6,643
Common shareholders'
equity 153,661 1,861 -- (11,526) -- (93,061) 4,980 55,915
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Effective January 1, 1998, for purposes of preparing U.S. GAAP financial
information, the Company adopted U.S. Financial Accounting Standards Board
("FASB") Statement No. 130, "Reporting Comprehensive Income," which requires the
reporting of all changes in equity during a period from non-owner sources as
part of a full set of financial statements. These changes would include foreign
currency translation adjustments and activity related to unrealized gains or
losses included as a separate component of common shareholders' equity under
U.S. GAAP. The following statement of comprehensive income would be disclosed
in accordance with U.S. GAAP.
<TABLE>
<CAPTION>
Three months ended
March 31
1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net loss under U.S. GAAP $(13,198) $(19,237)
Other comprehensive income, after a nil income tax effect:
Foreign currency translation adjustments 1,317 (789)
Unrealized (gains) losses on share investments:
Net unrealized holding gain arising during the period (531) (1,408)
Reclassification adjustment for net losses recognized in earnings 780 58
- --------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) 249 (1,350)
- --------------------------------------------------------------------------------------------------------
Other comprehensive income 1,566 (2,139)
- --------------------------------------------------------------------------------------------------------
Comprehensive income $(11,632) $(21,376)
- --------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
ECHO BAY MINES LTD
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
Additionally, under U.S. GAAP, the equity section of the balance sheet would
present a subtotal for accumulated other comprehensive income, as follows.
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Foreign currency translation $(19,048) $(20,365)
Net unrealized loss on share investments (6,394) (6,643)
- ----------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income $(25,442) $(27,008)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
8. HEDGING ACTIVITIES AND COMMITMENTS
In the first quarter of 1998, the Company received proceeds of $8.7 million on
the repurchase of a portion of its outstanding gold forward sales. The
repurchased forward sales include 50,000 ounces of gold scheduled for delivery
in each of the five years 1998 to 2002 at forward prices of $395 per ounce in
1998 and 1999 and $374 per ounce in years 2000 to 2002, for a total of 250,000
ounces of gold. Additionally, related to the repurchase, the Company eliminated
contingent forward sales of up to an additional 75,000 ounces of gold at $400
per ounce in each of the three years 2000 to 2002 contingent upon the spot gold
price reaching various levels above $400 per ounce. This $8.7 million has been
deferred and will be recognized in earnings as the formerly hedged production is
sold. The deferred gain is scheduled to be recognized in revenue as follows:
$1.8 million in 1998, $1.8 million in 1999, $1.7 million in 2000, $1.7 million
in 2001, and $1.7 million in 2002.
In the first quarter of 1998, the Company entered into gold forward sales
contracts of 270,000 ounces at an average price of $319 per ounce and silver
forward sales contracts of 19.0 million ounces at an average price of $6.01 per
ounce. These hedge positions are designed to ensure the economic viability of
the ore located beneath the unstable portion of the Cove pit wall. The
remediation of the Cove pit wall is scheduled to resume in the second half of
1998.
In the second quarter of 1997, the Company swapped a portion of its capital
security interest obligation for a commitment to deliver 291,358 ounces of gold
in March 2002 at a price of $343 per ounce of gold (note 5). During the first
quarter of 1998, the Company restructured the gold swap agreement. The
restructuring resulted in a conversion of the swap ounces to forward sales
commitments, as follows: 57,925 ounces at $379 per ounce in 1998, 175,509
ounces at $379 per ounce in 1999, and 57,925 ounces at $379 per ounce in 2000.
9
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
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 position at March 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
- -------------------------------------------------------------------------------------------------------------
Carrying Unrealized Carrying Unrealized
Amount Gain (Loss) Amount Gain (Loss)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold loans (note 4) $17,100 $ -- $18,600 $ --
Gold swap on capital securities (note 5) -- -- -- 19,700
Off balance sheet instruments:
Gold forward sales -- 16,900 -- 10,900
Silver forward sales -- (5,500) -- (6,000)
Gold options - puts purchased 2,200 4,700 2,800 11,300
- calls sold (400) 400 (700) 700
Silver options - calls sold (1,700) (3,900) (1,700) (2,500)
- puts sold (8,600) (7,300) -- --
- calls purchased 8,600 6,400 -- --
Foreign currency contracts -- (2,700) -- (4,100)
Crude oil contracts -- (100) -- 500
- -------------------------------------------------------------------------------------------------------------
$ 8,900 $30,500
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Fair values are estimated for the contract settlement dates based upon market
quotations of various input variables. These variables were used in valuation
models which estimate the fair market value.
9. 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. The appeals period expired in the first quarter of 1998 without
appeal.
10
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
March 31, 1998
(U.S. Dollars)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
During 1997, in response to the decline in the market price of gold, the Company
deferred final construction decisions on two planned gold mines, Paredones
Amarillos in Mexico and Aquarius in Canada, and deferred further development of
the Ulu satellite deposit near the Lupin mine in the Northwest Territories of
Canada. In addition, the Company refocused its exploration effort, narrowing it
to those projects believed to represent the most promising near-term prospects,
principally located near the Company's operating mines and development projects
located in the Americas. Further, general and administrative expenditures have
been reduced reflecting the downsizing effected in 1997.
In January 1998, following further declines in the market price of gold, the
Company temporarily suspended operations at the Lupin mine and reduced
operations at the McCoy/Cove mine in Nevada pending a significant improvement in
the market price of gold.
The Company's profitability is determined in large part by gold and silver
prices. Market prices of gold and silver are determined by factors beyond the
Company's control. The Company reduces the risk of future price declines by
hedging a portion of its production. The principal hedging tools used are gold
and silver loans, fixed and floating forward sales contracts, spot-deferred
contracts, swaps and options.
The Company has protected itself against price declines in 1998 by hedging its
entire planned gold production for the remaining three quarters of 1998 at a
minimum average price of $341 per ounce, along with 4.9 million ounces of silver
at $5.60 per ounce. This gold hedge position includes purchased put options of
195,000 ounces at $310 per ounce, therefore the Company has the ability to
realize a gold price greater than the $341 per ounce if the market price of gold
exceeds $310 per ounce. In addition, the Company has hedged approximately
330,000 ounces of gold in 1999 at a minimum average price of $363 per ounce and
4.0 million ounces of silver at $5.77 per ounce.
In the first quarter of 1998, the Company entered into gold forward sales
contracts of 270,000 ounces at an average price of $319 per ounce and silver
forward sales contracts of 19.0 million ounces at an average price of $6.01 per
ounce for deliveries in years 1998 to 2001. These hedge positions are designed
to ensure the economic viability of the ore located beneath the unstable portion
of the Cove pit wall. The remediation of the Cove pit wall is scheduled to
resume in the second half of 1998.
In March 1997, the Company issued $100.0 million of 11% capital securities due
2027 (note 5 to the interim consolidated financial statements). The Company has
the right to defer interest payments on the capital securities for up to 10
consecutive semi-annual periods. During a period of interest deferral, interest
accrues at a rate of 12% per annum, compounded semi-annually on the full
principal amount and deferred interest. The Company, at its option, may satisfy
its deferred interest obligation by delivering common shares to a trustee for
sale, the proceeds of which would be remitted to the holders of the securities
in payment of the deferred interest. In March 1998, the Company exercised its
right to defer its April 1998 interest payment to holders of the capital
securities.
11
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
March 31, 1998
(U.S. Dollars)
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows used in operating activities amounted to $17.0 million for the
first three months of 1998 compared to $16.8 million for the first three months
of 1997. The 1998 results reflect decreased gold sales volume ($19.6 million),
the 1998 payment of severance costs accrued at the end of 1997 ($9.2 million),
and lower cash gold prices realized ($1.9 million); partially offset by
decreased operating costs ($18.1 million), a lesser increase in inventories for
the first three months of 1998 ($0.6 million) compared to the first three months
of 1997 ($8.4 million), decreased cash exploration and development spending
($3.2 million), higher cash silver prices realized ($1.6 million) and decreased
general and administrative spending ($1.2 million).
Cash used in financing activities was $4.3 million in the first quarter of 1998,
primarily related to the repayment of gold and currency borrowings.
Net cash provided from investing activities totaled $10.5 million in the first
quarter of 1998. Included were proceeds of $8.7 million on the first quarter
1998 repurchase of a portion of the Company's gold forward sales position,
proceeds on the sale of mining properties, plant and equipment ($3.5 million),
and proceeds on the sale of certain share investments ($2.9 million); partially
offset by $4.6 million invested in mining properties, plant and equipment.
The Company had $6.2 million in cash and cash equivalents and $6.4 million in
short-term investments at March 31, 1998.
At March 31, 1998, the Company's current debt was $15.7 million and its long-
term debt was $48.0 million.
The Company had $85.0 million in unutilized credit facilities at March 31, 1998,
of which $25 million was actually available for borrowing in view of the low
gold price. Depressed gold prices limit the Company's ability to borrow under
its revolving credit facility, which is measured at the end of each quarter.
Continuation of gold prices at depressed levels could have the effect of
reducing or eliminating the Company's capacity to borrow under its existing
credit facilities. For this reason, the Company and its lenders 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. The Company believes it is currently
in compliance in all material respects with covenants under the credit facility.
In March 1998, the Company exercised its right to defer its April 1998 interest
payment of $5.5 million to holders of the capital securities. The Company has
the right to defer interest payments on the capital securities for up to 10
consecutive semi-annual periods. During a period of interest deferral, interest
accrues at a rate of 12% per annum, compounded semi-annually on the full
principal amount and deferred interest. The Company, at its option, may satisfy
its deferred interest obligation by delivering common shares to the indenture
trustee for sale, the proceeds of which would be remitted to the holders of the
securities in payment of the deferred interest.
In January 1998, the Company received $8.7 million in cash on the repurchase of
a portion of its outstanding gold forward sales contracts. At March 31, 1998,
the estimated value of the Company's hedge portfolio is $8.9 million.
Most of the company's hedging transactions have no margin requirements. In some
instances however, mainly for longer term forward sales and options, margin
deposits are required when the market value exceeds the contract value by a
predetermined amount.
12
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
March 31, 1998
(U.S. Dollars)
For 1998, the Company expects to incur $13 million in capital expenditures.
The Company will rely on its operating cash flow and credit facilities to fund
its planned 1998 capital expenditures. The Company will carefully monitor its
discretionary spending in view of the current low gold price environment and the
cost structure at the Company's operating mines.
13
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998
(U.S. Dollars)
FINANCIAL REVIEW
The Company reported a net loss of $7.6 million ($0.07 per share) in the first
quarter of 1998, compared to a net loss of $16.8 million ($0.12 per share) in
the first quarter of 1997. The decreased loss in 1998 from 1997 results from
decreased operating costs ($18.1 million), lower depreciation and amortization
expense ($6.1 million), decreased exploration and development expenses ($3.3
million), higher silver prices realized ($2.0 million) and reduced general and
administrative costs ($1.2 million); partially offset by decreased volume of
gold sales ($19.6 million), and lower gold prices realized ($3.7 million).
Gold production decreased 27% to 133,165 ounces in the first quarter of 1998
compared to 183,328 ounces in the first quarter of 1997. Decreased production
was due to the absence of production from the Lupin mine resulting from the
January 1998 temporary suspension of operations and lower mill grades and
recoveries at McCoy/Cove and Kettle River; partially offset by production from
Round Mountain's mill, which began operating at the end of 1997. Silver
production decreased slightly to 2.3 million ounces in the first quarter of 1998
from 2.4 million ounces in the first quarter of 1997, reflecting lower mill
grades at McCoy/Cove. Quarterly revenues were $52.9 million in the first
quarter of 1998 and $73.8 million in the first quarter of 1997.
Cash operating costs were $208 per ounce of gold in the first quarter of 1998,
versus $255 in the first quarter of 1997, primarily due to the absence in 1998
of the higher-cost Lupin production, the impact of the third quarter 1997 write-
down of McCoy/Cove's deferred mining balances, and lower reagent consumption and
manpower reductions at McCoy; partially offset by increased costs at Kettle
River due to lower production. Total production costs were $313 per ounce in
the first quarter of 1998, versus $375 per ounce in the first quarter of 1997.
See "Operations Review" for further comments as to production and cash operating
cost changes.
The term "ounce" as used in this Form 10-Q means "troy ounce."
14
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998
(U.S. Dollars)
Revenue
Statistics for gold and silver ounces sold and other revenue data are set out
below.
<TABLE>
<CAPTION>
Three months ended
March 31
REVENUE DATA 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Gold
- ----
Ounces sold 118,594 171,232
Average price realized/ounce $ 341 $ 372
Average market price/ounce $ 294 $ 352
Revenue (millions of U.S. dollars) $ 40.4 $ 63.6
Percentage of total revenue 76% 86%
Silver
- ------
Ounces sold 2,016,097 1,936,345
Average price realized/ounce $ 6.19 $ 5.25
Average market price/ounce $ 6.23 $ 4.99
Revenue (millions of U.S. dollars) $ 12.5 $ 10.2
Percentage of total revenue 24% 14%
- ---------------------------------------------------------------------------------------------------
Total revenue (millions of U.S. dollars) $ 52.9 $ 73.8
- ---------------------------------------------------------------------------------------------------
</TABLE>
The effects of changes in sales prices and volume were as follows.
<TABLE>
<CAPTION>
REVENUE VARIANCE ANALYSIS Three months ended
1998 VS. 1997 March 31
- ------------------------------------------------------------------
<S> <C>
Lower gold prices $ (3.7)
Higher silver prices 2.0
Change in volume (19.2)
- ------------------------------------------------------------------
Decrease in revenue $(20.9)
- ------------------------------------------------------------------
</TABLE>
Production Cost
Production cost data per ounce of gold is set out below.
<TABLE>
<CAPTION>
Three months ended
PRODUCTION COSTS PER March 31
OUNCE OF GOLD PRODUCED 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Direct mining expense $205 $258
Deferred stripping and mine development costs 1 (2)
Inventory movements and other 2 (1)
- --------------------------------------------------------------------------------
Cash operating costs 208 255
Royalties 9 10
Production taxes 2 2
- --------------------------------------------------------------------------------
Total cash costs 219 267
Depreciation 63 63
Amortization 26 35
Reclamation and mine closure 9 10
- --------------------------------------------------------------------------------
Total production costs $317 $375
- --------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998
(U.S. Dollars)
Expenses
Operating costs per ounce vary with the quantity of gold and silver sold and
with the cost of operations. Cash operating costs were $208 per ounce of gold
in the first quarter of 1998 and $255 in the first quarter of 1997. See
"Operations Review".
<TABLE>
<CAPTION>
RECONCILIATION OF CASH OPERATING
COSTS PER OUNCE TO FINANCIAL STATEMENTS Three months ended
thousands of U.S. dollars, March 31
except per ounce amounts 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating costs per financial statements $ 33,305 $ 51,453
Change in finished goods inventory and other 4,012 5,046
Co-product cost of silver produced (9,689) (9,750)
- ------------------------------------------------------------------------------------------------------------------
Cash operating costs $ 27,628 $ 46,749
- ------------------------------------------------------------------------------------------------------------------
Gold ounces produced 133,165 183,328
- ------------------------------------------------------------------------------------------------------------------
Cash operating costs per ounce $ 208 $ 255
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Royalties decreased in the first quarter of 1998 compared to the first quarter
1997 due to decreased production levels and lower gold prices.
Depreciation and amortization decreased in the first quarter of 1998 compared to
the first quarter of 1997 due to the impact of the third quarter 1997 write-
downs of ore body carrying values at Lupin and Kettle River and reduced
depreciation rates at Lupin resulting from the January 1998 temporary suspension
of operations.
Exploration and development decreased in the first quarter of 1998 compared to
the first quarter of 1997 due to a decreased scope of exploration activities.
General and administrative expenses decreased in the first quarter of 1998 due
to the downsizings undertaken in 1997 in response to depressed gold prices.
Reserve estimates
The price used in estimating the Company's ore reserves at December 31, 1997 was
$350 per ounce of gold and $5.00 per ounce of silver. The market price for gold
is currently well below this level. If the Company determines that its reserves
should be calculated at a significantly lower price than used at December 31,
1997, there would likely be a material reduction in the amount of gold reserves.
For example, the Company estimates that, based on extrapolation of information
developed in reserve calculation, but without the same degree of analysis as
required for reserve calculation, if the Company's reserves at December 31, 1997
were based on a price of $325 per ounce of gold, reserves at the operating
properties would decrease approximately 8%. If the Company's reserves at
December 31, 1997 were calculated at $375 per ounce of gold, reserves at the
operating properties would increase approximately 3%. The Company estimates
that such changes in gold price assumptions would not result in material impacts
to the reserve estimations for Aquarius and Paredones Amarillos. Should any
significant reductions in reserves occur, material write-downs of the Company's
investment in mining properties and/or increased amortization charges may be
required.
16
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998
(U.S. Dollars)
OPERATIONS REVIEW
Operating data by mine is set out in the table below.
<TABLE>
<CAPTION>
Three months ended
March 31
OPERATING DATA BY MINE 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Gold production (ounces)
- ------------------------
(a) Round Mountain (50%) 66,067 56,161
(b) McCoy/Cove 39,853 52,286
(c) Kettle River 27,245 38,279
Lupin -- 36,602
- ---------------------------------------------------------------------------------------------------
Total gold 133,165 183,328
- ---------------------------------------------------------------------------------------------------
Silver production (ounces)
- --------------------------
(b) McCoy/Cove 2,258,456 2,437,413
- ---------------------------------------------------------------------------------------------------
Total silver 2,258,456 2,437,413
- ---------------------------------------------------------------------------------------------------
</TABLE>
Gold production decreased 27% to 133,165 ounces in the first quarter of 1998
compared to 183,328 ounces in the first quarter of 1997. Decreased production
was primarily due to the absence of production from Lupin resulting from the
January 1998 temporary suspension of operations and lower mill grades and
recoveries at McCoy/Cove and Kettle River, partially offset by production from
Round Mountain's mill, which began operating at the end of 1997. Silver
production decreased slightly to 2.3 million ounces in the first quarter of 1998
from 2.4 million ounces in the first quarter of 1997, reflecting lower mill
grades at McCoy/Cove. For the full year 1998, the gold production target is
between 500,000 and 520,000 ounces and the silver production target is between 7
and 8 million ounces.
<TABLE>
<CAPTION>
Three months ended
March 31
OPERATING DATA BY MINE 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash operating costs
- --------------------
(per ounce of gold)
-------------------
(a) Round Mountain (50%) $194 $210
(b) McCoy/Cove 203 285
(c) Kettle River 258 185
Lupin -- 325
- ---------------------------------------------------------------------------------------------------
Company average $208 $255
- ---------------------------------------------------------------------------------------------------
</TABLE>
Cash operating costs were $208 per ounce of gold in the first quarter of 1998,
compared to $255 in the first quarter of 1997. Consolidated cash operating
costs are targeted at $245 to $255 per ounce of gold produced for the full year
1998. Based on first quarter 1998 operating results, the Company expects to
meet or do better than these targets.
17
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998
(U.S. Dollars)
(a) Round Mountain, Nevada (50% owned)
<TABLE>
<CAPTION>
Three months ended
March 31
OPERATING DATA 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Gold produced (ounces):
Reusable heap leach pad (50%) 30,407 31,945
Dedicated heap leach pad (50%) 22,638 24,216
Milled (50%) 12,239 --
Other (50%) 783 --
-------- --------
Total (50%) 66,067 56,161
Ore and waste mined (million tons) (100%) 16.1 16.3
Mining cost/ton of ore and waste $ 0.65 $ 0.70
Heap leaching cost/ton of ore $ 0.68 $ 0.69
Milling cost/ton of ore $ 3.98 --
Production cost per ounce of gold produced:
Direct mining expense $ 194 $ 211
Deferred stripping cost 10 --
Inventory movements and other (10) (1)
-------- --------
Cash operating cost 194 210
Royalties 17 27
Production taxes 2 3
-------- --------
Total cash cost 213 240
Depreciation 40 47
Amortization 18 18
Reclamation and mine closure 7 7
-------- --------
Total production cost $ 278 $ 312
-------- --------
Reusable heap leach pad:
Ore processed (tons/day) (100%) 26,366 26,904
Grade (ounce/ton) 0.036 0.037
Recovery rate (%) 74.9 65.5
Dedicated heap leach pad:
Ore processed (tons/day) (100%) 108,297 88,539
Grade (ounce/ton) 0.010 0.011
Recovery rate (1)
Milled:
Ore processed (tons/day) (100%) 7,169 --
Grade (ounce/ton) 0.053 --
Recovery rate (%) 72.6 --
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Recovery rates on dedicated pads can only be estimated, as actual recoveries
will not be known until leaching is complete. At the Round Mountain mine,
the gold recovery rate on the dedicated heap leach pad is estimated at 50%.
At 50%-owned Round Mountain in Nevada, the Company's portion of gold production
totaled 66,067 ounces in the first quarter of 1998, up 18% from 56,161 ounces in
the first quarter of 1997. The increase in production resulted principally from
the successful startup of a new mill late last year to process large quantities
of nonoxide ore. The mill produced 24,478 ounces of gold in the first quarter
of 1998 (the Company's 50% share, 12,239 ounces). During the first quarter of
1998, Round Mountain also produced the first ounces of gold from a new dedicated
heap leach pad, supplementing production from the existing dedicated pad.
Round Mountain's cash operating costs were reduced to $194 per ounce of gold
produced in the first quarter of
18
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998
(U.S. Dollars)
1998, down from $210 a year ago, reflecting the lower costs of a new mining plan
adopted late last year. The new plan optimizes the design of the open pit,
eliminating the mining of more than 250 million tons of waste rock and low-
grade, high-cost material over the life of the mine.
Based on the first quarter 1998 results, the Company expects Round Mountain to
meet or do better than its full-year production and cost targets of 460,000 to
480,000 ounces of gold (Echo Bay's 50% share, 230,000 to 240,000 ounces) at a
cash operating cost of $230 to $240 per ounce of gold produced.
19
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998
(U.S. dollars)
(b) McCoy/Cove, Nevada (100% owned)
<TABLE>
<CAPTION>
Three months ended
March 31
OPERATING DATA 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gold produced (ounces):
Milled 25,422 40,894
Heap leached 14,431 11,392
--------- ---------
Total gold 39,853 52,286
Silver produced (ounces):
Milled 2,136,149 2,355,583
Heap leached 122,307 81,830
--------- ---------
Total silver 2,258,456 2,437,413
Ore and waste mined (million tons) 7.6 15.5
Mining cost/ton of ore and waste $0.74 $0.69
Milling cost/ton of ore $6.31 $8.76
Heap leaching cost/ton of ore $1.57 $1.64
Production cost per ounce of gold produced:
Direct mining expense $196 $293
Deferred stripping cost (1) (12)
Inventory movements and other 8 4
--------- ---------
Cash operating cost 203 285
Royalties 3 4
Production taxes 2 2
--------- ---------
Total cash cost 208 291
Depreciation 53 70
Amortization 38 45
Reclamation and mine closure 8 10
--------- ---------
Total production costs $307 $416
--------- ---------
Average gold-to-silver price ratio (1) 47.3:1 71.2:1
Milled:
Ore processed (tons/day) 10,916 10,076
Gold grade (ounce/ton) 0.041 0.066
Silver grade (ounce/ton) 2.62 3.34
Gold recovery rate (%) 55.8 71.8
Silver recovery rate (%) 74.2 70.2
Heap leached:
Ore processed (tons/day) 12,021 17,648
Gold grade (ounce/ton) 0.020 0.012
Silver grade (ounce/ton) 0.37 0.17
Recovery rates (2)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) To convert costs per ounce of gold into comparable costs per ounce of co-
product silver, divide the production cost per ounce of gold by the period's
average gold-to-silver price ratio.
(2) Recovery rates on dedicated pads can only be estimated, as actual
recoveries will not be known until leaching is complete. At the McCoy/Cove
mine the gold recovery rate is estimated at 68% for crushed ore and 48%
for uncrushed, run-of-mine ore, while the silver recovery rate is estimated
at 35% for crushed ore and 10% for uncrushed, run-of-mine ore.
20
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998
(U.S. dollars)
At McCoy/Cove in Nevada, production of both gold and silver was lower in the
first quarter of 1998 compared to the first quarter of 1997, reflecting the
planned processing of lower-grade ores. Gold production totaled 39,853 ounces
in the first quarter of 1998, down 24% from 52,286 ounces a year ago, and silver
production totaled 2,258,456 ounces in the first quarter of 1998, down 7% from
2,437,413 ounces in the first quarter of 1997.
Cash operating costs were reduced sharply, to $203 per ounce of gold produced in
the first quarter of 1998 from $285 per ounce in the first quarter of 1997. Of
the $82 reduction in cost per ounce produced, $34 resulted from a series of
operating improvements. The 450-person workforce was downsized by more than 20%.
Mining was discontinued in the smaller McCoy pit in December 1997, pending
completion of optimization studies aimed at reducing costs. Based on a
reengineered McCoy pit design, mining then resumed in March 1998 at a lower
cost. Mining activities were refocused on mill ounces from the Cove pit. Milling
costs were significantly reduced. Remediation work on the Cove pit was postponed
until the second half of 1998.
In addition, a $47.0 million write-down of McCoy/Cove's carrying value in the
third quarter of 1997 reduced deferred mining costs by a like amount over the
remaining life of the mine, resulting in a reduction of $40 per ounce in
McCoy/Cove's cash operating cost in the first quarter of 1998.
Cash operating costs increased by $38 per ounce due to lower grades and
recoveries. This was more than offset by a decrease of $46 per ounce due to
significantly lower gold prices relative to co-product silver prices, which
reduced the gold-to-silver price equivalency ratio to 47.3:1 in the first
quarter of 1998 from 71.2:1 in the first quarter of 1997. The price equivalency
ratio is used to calculate co-product costs.
Based on the results in the first quarter of 1998, the Company expects
McCoy/Cove to meet or do better than its 1998 cash operating cost target of $260
to $270 per ounce of gold produced. The mine's production targets for 1998 are
160,000 to 170,000 ounces of gold and 7 to 8 million ounces of silver.
21
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998
(U.S. dollars)
c) Kettle River, Washington (100% owned)
<TABLE>
<CAPTION>
Three months ended
March 31
OPERATING DATA 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gold produced (ounces) 27,245 38,279
Tons of ore mined 193,453 187,659
Mining cost/ton of ore $ 20.91 $ 20,68
Milling cost/ton of ore $ 9.76 $ 11.57
Production cost per ounce of gold produced:
Direct mining expense $ 260 $ 196
Deferred mine development cost -- --
Inventory movements and other (2) (11)
-------- --------
Cash operating cost 258 185
Royalties 11 11
Production taxes 1 2
-------- --------
Total cash cost 270 198
Depreciation 72 51
Amortization 5 45
Reclamation and mine closure 12 12
-------- --------
Total production cost $ 359 $ 306
======== ========
Milled:
Ore processed (tons/day) 2,107 1,958
Ore tons milled 191,769 178,175
Grade (ounce/ton) 0.176 0.243
Recovery rate (%) 80.5 88.6
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Kettle River mine in Washington State produced 27,245 ounces of gold in the
first quarter of 1998, down 29% from 38,279 ounces a year ago, reflecting the
processing of lower-grade ores as planned. Recovery rates were also lower,
principally a function of the lower grades. Kettle River processed increased
tonnages of ore, helping to partly offset the lower ore grades.
As expected, costs rose per ounce of gold produced in the first quarter 1998,
reflecting the lower grades and increased tonnages processed. Cash operating
costs increased to $258 per ounce in the first quarter of 1998 from $185 a year
ago.
First quarter 1998 results were in line with Kettle River's full-year production
and cost targets of 100,000 to 110,000 ounces of gold at a cash operating cost
of $240 to $250 per ounce.
22
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998
(U.S. dollars)
RECENT DEVELOPMENTS
In January 1998, the Company announced a temporary suspension of operations at
the Lupin mine until gold prices improve significantly. As a result of the
suspension of operations, approximately 500 employees were terminated. At the
end of the first quarter of 1998, the preparation of the mine and facilities to
continue in a care and maintenance mode had been substantially completed. The
annual care and maintenance costs for Lupin are being expensed as incurred.
During the first quarter of 1998, the Company incurred $1.7 million in such
costs.
In 1997, the Company deferred final construction decisions on its two planned
gold mines, Paredones Amarillos in Mexico and Aquarius in Canada, and deferred
further development of the Ulu deposit in Canada. During 1998, development
holding costs for these projects will be expensed as incurred.
The Company has refocused its search for new gold reserves and production. The
Company's exploration program is now concentrated on those projects believed to
represent the most promising near-term prospects in its portfolio, principally
those located in the Americas where the Company already has extensive gold
mining infrastructure. Particular emphasis is placed on those prospects located
near the Company's three producing gold mines, the Lupin mine, and two planned
new mines, located in Canada, the United States and Mexico, where extensive
processing facilities already exist or are planned.
For the first three months of 1998, in connection with its exploration and
development activities, the Company charged $3.2 million against current
earnings and capitalized $1.7 million.
Highlights of the Company's development and exploration programs are outlined
below.
Development Properties
At the 100% owned Aquarius gold mine in the Timmins gold district of Ontario,
the Company has completed the frozen earth system around the pit perimeter to
prevent groundwater from flowing into the pit from the surrounding water table.
The Company does not plan to operate the freeze barrier during the period of
project deferral. During the first quarter of 1998, the Company capitalized
$0.7 million related to the completion of the freeze barrier construction and
incurred $0.1 million in holding costs related to Aquarius.
At 60% owned Paredones Amarillos, the Company will expense its share of 1998
holding costs, which are estimated at $0.9 million. Detailed engineering work
and limited procurement at the end of 1997 was estimated to be 45% complete.
Holding expenditures will include permitting activities, water development and
other work required to maintain the integrity of the project and enable
development to proceed quickly and smoothly to construction at such time as a
final construction decision is made. During the first quarter of 1998, the
Company capitalized $0.4 million and expensed $0.2 million in holding costs
related to Paredones Amarillos.
Exploration Properties
The Company continued work on a number of projects in the Americas during the
first quarter of 1998. Among them are three early-to-intermediate stage
exploration projects in Nevada, including Ratto Canyon, Bald Peak and Jessup.
Other Projects
At the 50% owned Kuranakh project located in the Sakha Republic of the Russian
Federation, negotiations progress with the government committee established for
defining the terms of the production sharing agreement and the gold sales
agreement.
23
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998
(U.S. dollars)
U.S. Mining Law Revision
In recent years, several proposals to change the general mining laws applicable
to operations on U.S. federal lands have been introduced into Congress. In
addition, the Bureau of Land Management of the U.S. Department of the Interior
has commenced a program to revise the federal regulations applicable to
activities on unpatented mining claims and to impose more stringent reclamation
and environmental protection requirements on those activities. Until such time,
if any, as new reform legislation is enacted or administrative action is taken,
the ultimate effects and costs of compliance on the Company cannot be estimated.
CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
With the exception of historical matters, the matters discussed in this report
are forward looking statements that involve risks and uncertainties that could
cause actual results to differ materially from targeted or projected results.
Such forward looking statements include statements regarding targets for gold
and silver production, cash operating costs and certain significant expenses,
percentage increases and decreases in production from the company's principal
mines, schedules for completion of detailed feasibility studies and initial
feasibility studies, potential increases in reserves and production, the timing
and scope of future drilling and other exploration activities, expectations
regarding receipt of permits and commencement of mining or production,
anticipated recovery rates and potential acquisitions or increases in property
interests or finalization of arrangements with governmental authorities or co-
venturers with respect to new projects. Factors that could cause actual results
to differ materially include, among others, changes in gold and silver prices,
unanticipated grade, geological, metallurgical, processing, access,
transportation of supplies, water availability or other problems, results of
current exploration activities, results of pending and future feasibility
studies, changes in project parameters as plans continue to be refined,
political, economic and operational risks of foreign operations, joint venture
relationships, availability of materials and equipment, the timing of receipt of
governmental permits, force majeure events, the failure of plant, equipment or
processes to operate in accordance with specifications or expectations,
accidents, labor relations, delays in startup 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.
24
<PAGE>
ECHO BAY MINES LTD.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Alaska-Juneau
During 1994, the U.S. Attorney began an investigation of potential Clean Water
Act violations at the Alaska-Juneau property. The investigation was to determine
whether the Company unlawfully discharged pollutants from the drainage tunnel
without a National Pollution Discharge Elimination System (NPDES) permit. On
September 2, 1997, the U.S. Attorney sent a letter stating that "...the United
States will not proceed with a criminal prosecution for Federal Clean Water Act
violations at this time." While this does not foreclose possible criminal
charges at a later date if the Department of Justice finds new information
warranting prosecution, as a practical matter, this ends the threat of a
criminal action. A civil action could be taken by the EPA.
Qui Tam Action
See note 9 to the interim consolidated financial statements.
Other
The Company also is engaged in routine litigation incidental to its business.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K 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.
25
<PAGE>
ECHO BAY MINES LTD.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECHO BAY MINES LTD.
---------------------------------------
(Registrant)
May 6, 1998
- -----------------------------
Date
/s/ Tom S. Q. Yip
---------------------------------------
TOM S. Q. YIP
Vice President, Controller and Principal
Accounting Officer
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS INCLUDED IN THE ECHO BAY MINES FORM 10-Q FOR THE QUARTER ENDED MARCH
31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,227
<SECURITIES> 6,387
<RECEIVABLES> 7,207
<ALLOWANCES> 0
<INVENTORY> 44,753
<CURRENT-ASSETS> 69,509
<PP&E> 978,210
<DEPRECIATION> 644,532
<TOTAL-ASSETS> 416,258
<CURRENT-LIABILITIES> 94,609
<BONDS> 0
0
0
<COMMON> 709,593
<OTHER-SE> (559,374)
<TOTAL-LIABILITY-AND-EQUITY> 416,258
<SALES> 52,855
<TOTAL-REVENUES> 52,855
<CGS> 33,305
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<OTHER-EXPENSES> 7,218
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<INTEREST-EXPENSE> 2,354
<INCOME-PRETAX> (7,554)
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