<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A-1
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 1997
------------------
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 1-8542
------
ECHO BAY MINES LTD.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Incorporated under the laws
of Canada None
- ---------------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 1000, 6400 S. Fiddlers Green Circle
Englewood, CO 80111-4957
- ---------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 714-8600
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Title of Class
-------------- Shares Outstanding as of
Common Shares November 14, 1997
without nominal or par value ------------------------
139,370,031
================================================================================
<PAGE>
ECHO BAY MINES LTD.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. Condensed Financial Statements (Unaudited).................... 1
ITEM 2. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations.................................... 13
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings............................................. 31
ITEM 6. Exhibits And Reports On Form 8-K.............................. 31
SIGNATURE.................................................................. 32
</TABLE>
i
<PAGE>
ECHO BAY MINES LTD.
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET September 30 December 31
thousands of U.S. dollars 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,910 $ 103,196
Short-term investments (note 7) 13,828 --
Interest and accounts receivable 18,293 9,739
Inventories (note 2) 48,734 33,941
Prepaid expenses and other assets 5,070 6,573
- ----------------------------------------------------------------------------------------------------------------------------
91,835 153,449
Plant and equipment (note 3) 241,791 233,984
Mining properties (note 3) 139,605 405,011
Long-term investments and other assets 9,717 39,701
- ----------------------------------------------------------------------------------------------------------------------------
$ 482,948 $ 832,145
============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 81,319 $ 72,421
Income and mining taxes payable 3,441 3,651
Gold and other financings (note 4) 15,182 129,445
Deferred income (note 4) 16,041 876
- ----------------------------------------------------------------------------------------------------------------------------
115,983 206,393
Gold and other financings (note 4) 41,938 53,478
Deferred income (note 4) 45,112 1,581
Other long-term obligations 55,500 69,992
Deferred income taxes 9,993 8,392
Commitments and contingencies (notes 7, 9 and 10)
Common shareholders' equity:
Common shares, no par value, unlimited number authorized;
issued and outstanding - 139,370,031 shares
(139,355,781 shares at December 31, 1996) 709,593 709,534
Capital securities (note 5) 95,974 --
Deficit (574,247) (201,931)
Foreign currency translation (16,898) (15,294)
- ----------------------------------------------------------------------------------------------------------------------------
214,422 492,309
- ----------------------------------------------------------------------------------------------------------------------------
$ 482,948 $ 832,145
============================================================================================================================
</TABLE>
1
<PAGE>
ECHO BAY MINES LTD.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF EARNINGS Three months ended Nine months ended
thousands of U.S. dollars, September 30 September 30
except for per share data 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 74,450 $ 94,936 $ 224,103 $ 257,772
- ------------------------------------------------------------------------------------------------------------------------
Expenses:
Operating costs 50,242 57,940 158,005 160,464
Royalties 2,335 3,021 6,653 7,253
Production taxes 491 253 1,153 1,749
Depreciation and amortization 20,228 21,964 61,549 63,980
Reclamation and mine closure 2,226 1,985 6,599 4,568
General and administrative 1,955 2,850 8,943 9,732
Exploration and development 11,145 17,107 27,575 49,128
Provision for impaired assets (note 7) 309,800 -- 309,800 --
Provision for McCoy/Cove pit wall stabilization -- 30,000 -- 30,000
Interest and other 3,039 2,105 7,080 3,249
- ------------------------------------------------------------------------------------------------------------------------
401,461 137,225 587,357 330,123
- ------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (327,011) (42,289) (363,254) (72,351)
- ------------------------------------------------------------------------------------------------------------------------
Income tax expense (recovery):
Current (68) 126 307 767
Deferred 582 -- 1,457 56
- ------------------------------------------------------------------------------------------------------------------------
514 126 1,764 823
------------------------------------------------------------------------------------------------------------------------
Net loss $(327,525) $ (42,415) $(365,018) (73,174)
========================================================================================================================
Net loss attributable to common shareholders (note 5) $(329,017) $ (42,415) $(369,149) (73,174)
========================================================================================================================
Loss per share $ (2.36) $ (0.31) $ (2.65) $ (0.55)
========================================================================================================================
Weighted average number of shares outstanding 139,370 137,604 139,366 132,795
(thousands)
========================================================================================================================
</TABLE>
2
<PAGE>
ECHO BAY MINES LTD.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT Three months ended Nine months ended
OF CASH FLOW September 30 September 30
thousands of U.S. dollars 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net cash flows provided from (used in) operating activities $(14,328) $ 12,390 $ (28,944) $ 15,236
- --------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Debt repayments (4,706) (3,958) (127,585) (8,885)
Capital securities issued, net of issuance costs (note 5) -- -- 96,700 --
Currency borrowings -- 34,714 -- 34,714
Common share dividends (note 6) -- -- -- (4,895)
Common share issues, net of issuance costs -- -- 60 4,745
Common shares issued on acquisition of
Santa Elina, net of issuance costs -- 85,801 -- 85,801
Other (2,174) -- (185) --
- --------------------------------------------------------------------------------------------------------------
(6,880) 116,557 (31,010) 111,480
- --------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Mining properties, plant and equipment (41,581) (26,724) (91,546) (75,483)
Proceeds on repurchase of the company's
-gold and silver forward sales (note 9) -- -- 54,963 --
-gold swap (note 9) -- -- 8,107 --
-foreign exchange contracts (note 9) -- -- 5,995 --
cost of Santa Elina acquisition -- (91,069) -- (91,069)
Long-term investments and other assets (6,749) (599) (23,266) (7,317)
Proceeds on sale of long-term investments 7,894 -- 7,894 5,550
Other 416 210 521 799
- --------------------------------------------------------------------------------------------------------------
(40,020) (118,182) (37,332) (167,520)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (61,228) 10,765 (97,286) (40,804)
Cash and cash equivalents, beginning of period 67,138 134,274 103,196 185,843
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 5,910 $ 145,039 $ 5,910 $ 145,039
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT THREE MONTHS ENDED NINE MONTHS ENDED
OF DEFICIT SEPTEMBER 30 SEPTEMBER 30
thousands of U.S. dollars 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of period $(245,230) $(50,763) $(201,931) $(15,109)
Net loss (327,525) (42,415) (365,018) (73,174)
Dividends on common shares (note 6) -- -- -- (4,895)
Interest on capital securities, net of nil tax effect (note 5) (1,492) -- (4,131) --
Issue costs related to capital securities (note 5) -- -- (3,167) --
- ----------------------------------------------------------------------------------------------------------------
Balance, end of period $(574,247) $(93,178) $(574,247) $(93,178)
================================================================================================================
</TABLE>
3
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
1. GENERAL
In the opinion of management, the accompanying unaudited consolidated statement
of earnings, consolidated statement of deficit, consolidated balance sheet and
consolidated statement of cash flow contain all adjustments, consisting only of
normal recurring accruals, necessary to present fairly in all material respects
the consolidated financial position of Echo Bay Mines Ltd. (the company) as of
September 30, 1997 and December 31, 1996 and the consolidated results of
operations and cash flow for the three and nine months ended September 30, 1997
and 1996. For further information, refer to the financial statements and
related footnotes included in the company's annual report on Form 10-K for the
year ended December 31, 1996.
Certain of the comparative figures have been reclassified to conform with the
current period's presentation.
2. INVENTORIES
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Precious metals -- bullion $18,064 $ 4,182
-- in-process 9,753 11,442
Materials and supplies 20,917 18,317
- --------------------------------------------------------------------------------------------------------------------------
$48,734 $33,941
==========================================================================================================================
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Plant and equipment September 30 December 31
1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cost $676,916 $635,776
Less accumulated depreciation 435,125 401,792
- --------------------------------------------------------------------------------------------------------------------------
$241,791 $233,984
==========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Mining properties September 30 December 31
1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Producing mines' acquisition, exploration & development costs $264,180 $388,515
Less accumulated amortization 193,287 250,616
- --------------------------------------------------------------------------------------------------------------------------
70,893 137,899
Development properties' acquisition, exploration & development costs 53,667 188,084
Deferred mining costs 15,045 79,028
- --------------------------------------------------------------------------------------------------------------------------
$139,605 $405,011
==========================================================================================================================
</TABLE>
During the third quarter of 1997, the company wrote down the carrying value of a
number of its operating and development properties (note 7). Before the write-
downs, the net book value of plant and equipment was $252.4 million and the net
book value of mining properties was $412.0 million.
4
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
4. GOLD AND OTHER FINANCINGS AND DEFERRED INCOME
<TABLE>
<CAPTION>
Financings Deferred Income
-------------------------------------- --------------------------------------
September 30 December 31 September 30 December 31
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold swap $ -- $ 83,839 $ -- $ --
Gold loans 23,153 33,721 4,827 2,423
Currency loan 29,941 33,846 -- --
Debenture payable -- 27,966 -- --
Capital securities (note 5) 4,026 -- -- --
Repurchase of gold and silver forward
contracts and gold swap (note 9) -- -- 50,331 --
Repurchase of forward currency
exchange contracts (note 9) -- -- 5,995 --
Other -- 3,551 -- 34
- ------------------------------------------------------------------------------------------------------------------------------
57,120 182,923 61,153 2,457
Less current portion 15,182 129,445 16,041 876
- ------------------------------------------------------------------------------------------------------------------------------
$41,938 $ 53,478 $45,112 $1,581
==============================================================================================================================
</TABLE>
In the first and second quarters of 1997, proceeds on issuance of $100.0 million
of 11% capital securities (note 5) and proceeds of $69.1 million on the
repurchase of the company's gold and silver forward sales, gold swap and forward
currency exchange contracts (note 9) were used to repay the company's $84.0
million bond obligation and to repay the company's $28.0 million of debentures
payable.
5. CAPITAL SECURITIES
On March 27, 1997, the company issued $100.0 million of 11% capital securities
due in April 2027. Interest on the securities, accruing from the date of
issuance, is payable semi-annually commencing October 1, 1997. In June 1997,
the company swapped a portion of its capital security interest obligation for a
gold delivery commitment. In March 2002, the company will deliver 291,358
ounces of gold and will receive $100.0 million, a price of $343 per ounce of
gold. The company will continue to pay semi-annual interest payments of $5.5
million (11%) to the securities holders; the banks will pay the company semi-
annual interest payments of $3.4 million (6.76%) through March 2002; and the
company will pay the banks' floating gold lease rate (currently 2.25%, or $1.1
million, semi-annually). As a result of this swap, which is recorded as a
reduction of interest on the capital securities, the effective interest rate on
the capital securities will be the fixed rate of 4.24% (11% minus 6.76%) plus
the floating gold lease rate. The effective interest rate at September 30, 1997
was 6.5%.
The company has the right to defer interest payments on the capital securities
for a period not to exceed ten consecutive semi-annual periods. The company
may, at its option, satisfy its deferred interest obligation by delivering
common shares to a trustee. The trustee would sell the company's common shares
and remit the proceeds to the holders of the securities in payment of the
deferred interest obligation.
The present value of the capital securities' principal amount, $4.0 million,
has been classified as debt within gold and other financings (note 4), and the
present value of the future interest payments, $96.0 million, has been
classified as a separate component of shareholders' equity, as the company has
the unrestricted ability to settle the future interest payments by issuing its
own common shares 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
5
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
capital securities has been classified as interest expense on the consolidated
statement of earnings and interest on the equity portion of the capital
securities has been charged directly to the deficit on the consolidated
balance sheet. For purposes of per share calculation, the equity portion
increases the loss attributable to common shareholders. See note 8 for a
discussion of differences in treatment of the capital securities under U.S.
GAAP.
6. DIVIDENDS ON COMMON SHARES
The company suspended the payment of dividends beginning in 1997. The company
paid a semi-annual dividend of U.S. $0.0375 per common share on June 30, 1996.
7. PROVISION FOR IMPAIRED ASSETS
In October 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 development 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 those 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 $375 per ounce of gold were used except for 1998, for which
a price of $325 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, in
the third quarter of 1997, the company recorded a $309.8 million provision for
impaired assets as follows.
<TABLE>
<CAPTION>
Acquisition,
Deferred and develop- Plant and Other Legal and
mining ment costs equipment assets 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
- ------------------------------------------------------------------------------------------------------------
Development properties:
Kingking -- 46,183 314 3,467 -- 49,964
Santa Elina -- 107,389 -- -- -- 107,389
- ------------------------------------------------------------------------------------------------------------
-- 153,572 314 3,467 -- 157,353
- ------------------------------------------------------------------------------------------------------------
Share investments -- -- -- 15,641 -- 15,641
Other -- -- -- 2,116 7,690 9,806
- ------------------------------------------------------------------------------------------------------------
$64,198 $208,227 $8,461 $21,224 $7,690 $309,800
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The company's option interest in the Kingking development 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 values of the Kingking
project is nil.
The company's investment in Santa Elina consists primarily of a copper/gold
project, a number of small gold development properties, a significant
exploration land position and a hydro-power project in a feasibility stage. The
company's investment was written down to its estimated net realizable value
based on market comparables.
The provision for impaired assets is based in part on certain management
assumptions regarding the future market price of gold. Should the market price
decline significantly below that experienced in the quarter ended
6
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
September 30, 1997 and remain depressed, it is possible that an additional
provision for impairment will be required and that the operation of some of
the company's mines may be suspended.
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, considering the company's intent to dispose of the
assets. Correspondingly, the investments were written down to the lower of cost
or market based on quoted market prices as of September 30, 1997. The following
summarizes the carrying values of the short-term share investments before and
after the write-down to market values.
<TABLE>
<CAPTION>
Historical Carrying Write-down Carrying Value
Value (1) to Market September 30, 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TVI Pacific Inc. $12,605 $(10,230) $ 2,375
Canarc Resources Corp. 4,268 (2,837) 1,431
Minefinders Corp. Ltd. 5,094 -- 5,094
Ashanti Goldfields Company Ltd. 4,394 (1,447) 2,947
Rift Resources Ltd. 1,445 (1,127) 318
Kit Resources Corp. 1,149 -- 1,149
Other 514 -- 514
- -----------------------------------------------------------------------------------------------------------
$29,469 $(15,641) $13,828
===========================================================================================================
</TABLE>
(1) Net of amortization of property options paid.
8. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP)
U.S. GAAP financial statements
The company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in Canada. These differ in some
respects from those in the United States, as described below and in the
footnotes to the financial statements included in the company's annual report on
Form 10-K for the year ended December 31, 1996.
In accordance with Canadian GAAP, the present value of the principal amount of
the capital securities issued in March 1997 is classified as debt within gold
and other financings, while the present value of the future interest payments is
classified as a separate component of shareholders' equity. The related
issuance costs have been allocated proportionately to deferred financing charges
and retained earnings based on the debt and equity classifications. Interest on
the capital securities has been allocated proportionately 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 $96.0 million higher, and
there would be no capital securities component of shareholders' equity; and
long-term investments and other assets would be $2.9 million higher and the
deficit would be $2.9 million lower at September 30, 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
7
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
U.S. GAAP regarding Santa Elina due to the recognition of a deferred tax
liability of $46.6 million under U.S. GAAP resulting from differences between
the allocated values and the tax bases of assets acquired and liabilities
assumed. Under U.S. GAAP, the recognition of deferred taxes would have increased
mining properties and deferred taxes. The valuation difference of $36.4 million
and a portion of the deferred tax difference ($35.5 million) have been
eliminated following the $107.4 million write-down of the Santa Elina assets in
the third quarter 1997 (note 7). Due to the increased basis in Santa Elina under
U.S. GAAP, the third quarter 1997 write-down under U.S. GAAP would exceed the
write-down of $107.4 million recognized under Canadian GAAP by $36.4 million,
comprised of the original valuation difference ($36.4 million), a portion of the
deferred tax difference ($35.5 million), offset by the recognition of a deferred
tax benefit ($35.5 million). As a result, under U.S. GAAP, the deficit would be
$36.4 million higher at September 30, 1997.
In accordance with Canadian GAAP, in the third quarter of 1997 certain share
investments in exploration-oriented companies were reclassified from long-term
investments to short-term investments in light of the company's intent to
dispose of these assets. Correspondingly, the investments were written down to
the lower of cost or market based on quoted market prices as of September 30,
1997 (note 7). Under U.S. GAAP, these investments would be marked-to-market at
September 30, 1997, with unrealized gains or losses included in current
earnings. Therefore, under U.S. GAAP, an additional $1.2 million unrealized
gain on share investments would be recognized in earnings. As a result, short-
term investments would be $1.2 million higher, and the deficit would be $1.2
million lower, at September 30, 1997.
The effects on the consolidated statement of earnings of the GAAP differences
would have been as follows.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss under Canadian GAAP $(327,525) $(42,415) $(365,018) $(73,174)
Write-down of Santa Elina properties, (net of
income tax benefit of $35.5 million) (note (36,428) -- (36,428) --
7)
Mark-to-market of share investments 1,158 -- 1,158 --
Change in market value of
foreign exchange contracts (246) 1,323 (3,916) 2,130
Amortization of mining properties (868) 1,412 (1,003) 832
Additional interest expense on capital
securities (1,492) -- (4,131) --
Amortization of deferred financing
on capital securities (158) -- (317) --
- ----------------------------------------------------------------------------------------------
Net loss under U.S. GAAP $(365,559) $(39,680) $(409,655) $(70,212)
==============================================================================================
Loss per share under U.S. GAAP $ (2.62) $ (0.29) $ (2.94) $ (0.53)
==============================================================================================
</TABLE>
8
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
The effects on the consolidated balance sheet of the GAAP differences would have
been as follows.
<TABLE>
<CAPTION>
Long-term
Foreign Mining Santa Elina
Canadian Exchange Share Properties Acquisition/ Capital U.S.
September 30, 1997 GAAP Contracts Investments Amortization Write-down Securities GAAP
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Short-term investments $ 13,828 $ -- $ 1,158 $ -- $ -- $ -- $ 14,986
Long-term investments and
other assets 9,717 60 -- -- -- 2,850 12,627
Mining properties 139,605 -- -- (11,571) 11,117 -- 139,151
Gold and other financings 57,120 -- -- -- -- 95,974 153,094
Deferred income 61,153 (5,995) -- -- -- -- 55,158
Deferred income taxes 9,993 -- -- -- 11,117 -- 21,110
Common shares 709,593 -- -- -- 36,428 -- 746,021
Capital securities 95,974 -- -- -- -- (95,974) --
Deficit 574,247 (6,055) (1,158) 11,571 36,428 (2,850) 612,183
Common shareholders' equity 214,422 6,055 1,158 (11,571) -- (92,807) 117,257
- --------------------------------------------------------------------------------------------------------------------------
</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>
New U.S. accounting standards regarding the determination of earnings per share
have recently been issued by the Financial Accounting Standards Board (FASB).
The company will initially adopt these new standards for the purpose of
preparing U.S. GAAP financial information commencing with its financial
statements for the year ended December 31, 1997. Adoption of the new standards,
which involves restatement of earnings (loss) per share amounts for prior
periods, is expected to have no material effect on the company's earnings (loss)
per share amounts.
The 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, which is currently comprised of changes in the
company's foreign currency translation account, 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
9
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
additional disclosures related to long-lived assets. Additionally, the company
will be required to present interim segment information in years following 1998.
9. HEDGING ACTIVITIES AND COMMITMENTS
In the first quarter of 1997 the company repurchased its 218,000 ounce gold
commitment which hedged the $84.0 million bond obligation (note 4) and
repurchased all of its gold and silver forward sales positions, which consisted
of 654,000 ounces of gold with delivery dates ranging from 1997 to 2002 and 8.5
million ounces of silver with delivery dates ranging from 1997 to 1999. These
transactions resulted in cash proceeds of $63.1 million which have been deferred
and will be recognized in earnings as the formerly hedged gold and silver
production is sold. The gain will be recognized in revenue as follows: $14.1
million in 1997, $14.8 million in 1998, $27.7 million in 1999 and $6.5 million
in 2000 and beyond. To provide protection against a decrease in gold prices,
the company has 525,000 ounces of gold put options and 225,000 ounces of gold
call options outstanding and 360,000 ounces of silver put options and 2,440,000
of silver call options outstanding at September 30, 1997. Additionally, in the
third and fourth quarters of 1997 the company entered into various gold and
silver forward sales commitments. These commitments were as follows.
<TABLE>
<CAPTION>
Price of
Forward Forward
Sales Sales
(ounces) (1) (per ounce) (1)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Gold
- ----
Balance of 1997 12,500 $389.40
1998 100,000 392.40
1999 100,000 392.40
2000 50,000 374.40
2001 50,000 374.40
2002 and beyond 50,000 374.40
- ------------------------------------------------------------------------------------------
362,500 $384.85
==========================================================================================
Silver
- ------
1998 3,000,000 $ 5.35
1999 1,000,000 5.44
- ------------------------------------------------------------------------------------------
4,000,000 $ 5.37
==========================================================================================
</TABLE>
(1) The company also has contingent forward sales of up to an additional 75,000
ounces of gold at $400 per ounce in each of the three years 2000 through
2002 contingent upon the spot gold price reaching various levels above $400
per ounce. The company also has 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.
In the first and second quarters of 1997, the company repurchased a portion of
its outstanding forward currency exchange contracts. The contracts repurchased
consisted of a total commitment of C$75.6 million at an average C$ to US$1.00
exchange rate of 1.55, with purchase dates ranging from 1998 to 2000. The
transactions resulted in cash proceeds of $6.0 million, which have been deferred
and will be recognized as a reduction to operating costs when the hedged
Canadian dollar transactions occur. The gain will be recognized as follows:
$1.9 million in 1998, $2.0 million in 1999, and $2.1 million in 2000. To
provide protection against fluctuations in the exchange rate of Canadian dollars
to U.S. dollars, the company entered into obligations to purchase C$79.3 million
of Canadian dollars at a C$ to U.S. $1.00 exchange rate of 1.36 maturing in 1997
to 2001.
10
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
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).
Shown below are the carrying amounts and unrealized gains or losses on the
company's hedging positions at September 30, 1997 and December 31, 1996.
<TABLE>
<CAPTION>
Carrying Unrealized
Amount Gain (Loss)
- -----------------------------------------------------------------------------------------------------------------------------
September 30, 1997
- ------------------
<S> <C> <C>
Gold loans (note 4) $ 23,200 $ --
Gold swap on capital securities (note 5) -- 10,000
Off-balance sheet instruments:
Gold forward sales -- (900)
Silver forward sales -- (600)
Gold options - puts 2,200 3,100
- calls (1,100) 1,400
Silver options - puts 200 (100)
- calls (900) (400)
Foreign currency contracts -- 100
Crude oil contracts -- 1,400
- -----------------------------------------------------------------------------------------------------------------------------
$ 14,000
=============================================================================================================================
Carrying Unrealized
Amount Gain (Loss)
- -----------------------------------------------------------------------------------------------------------------------------
December 31, 1996
- -----------------
Gold swaps $ 83,800 $ 7,100
Gold loan 33,700 --
Off-balance sheet instruments:
Gold forward sales -- 50,300
Silver forward sales -- 8,800
Gold options - puts 400 --
- calls -- --
Silver options - puts 1,000 (300)
- calls (1,000) 1,000
Foreign currency contracts -- 10,000
Crude oil contracts -- 3,000
- -----------------------------------------------------------------------------------------------------------------------------
$79,900
=============================================================================================================================
</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.
10. CONTINGENCIES
Private parties acting on behalf of the United States in a qui tam action have
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 the 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
11
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
unlawfully patented claims. Legal counsel is unable at this early stage to
predict the outcome of this action, but counsel has advised the company that
it believes upon initial analysis that the complaint lacks substantial merit.
The company intends to take appropriate responses and defenses.
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 million resulting from alleged improper
deductions in calculation of royalties payable over several years of production
at McCoy/Cove and the former Manhattan mines. The case went to trial on April
28, 1997, and the court found for the company, holding that the company's method
of calculation is correct and that it is not in breach of the agreement to pay
royalties. The result is subject to appeal by Summa. The company has $2.0
million accrued related to the Summa litigation.
In 1996, the company recorded a $30.0 million provision related to the estimated
costs to remove waste rock from an unstable portion of the Cove pit wall at the
McCoy/Cove mine in Nevada. The cost estimate underlying the provision was based
on a preliminary evaluation of the total tons to be removed and the associated
costs. During the second quarter of 1997, the plan for stabilizing the waste
rock was finalized, and the plan will continue to be refined as McCoy/Cove
completes the stabilization work. This plan could affect a portion of
McCoy/Cove ore reserves if it is determined that the cost to remove waste rock
renders the portion uneconomic. At September 30, 1997, total spending for the
pit wall stabilization was $4.0 million.
12
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
September 30, 1997
(U.S. dollars)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
For the nine months ended September 30, 1997, the company achieved revenues of
$224.1 million, had net cash flows used in operating activities (before cash
exploration expenses) of $1.7 million, and incurred a net loss of $365.0
million, after taking into account a provision of $309.8 million discussed
below. For the year 1996, the company achieved revenues of $337.3 million and
net cash flows from operating activities (before cash development and
exploration expenses) of $86.5 million, and incurred a net loss of $176.7
million after taking into account provisions totaling $107.1 million related to
the write-off of and provision for the Alaska-Juneau development property and
the provision for the McCoy/Cove pit wall stabilization. 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, the price of gold, 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.
In the third quarter of 1997, the company conducted a major review of life-of-
mine plans for its four producing gold mines and a complete evaluation of the
feasibility studies and other analyses for the company's portfolio of
development projects, exploration properties and other assets. On completion of
this work, the company assessed the carrying values of all of the company's
assets in light of both short-term and long-term views of precious metals
prices. For purposes of estimating future cash flows for the producing gold
mines and development projects, price assumptions of $375 per ounce of gold were
used except for 1998 where a price of $325 per ounce was used. For other assets,
net realizable values were determined by reviewing market comparables, and, with
respect to share investments, quoted market prices. As a result of the review,
the company recorded a $309.8 million provision for impaired assets. The
provision was comprised of $50.0 million related to the Kingking project in the
Philippines, $107.4 million related to Santa Elina's activities in Brazil,
$127.0 million related to operating mines including Lupin ($65.0 million),
McCoy/Cove ($47.0 million) and Kettle River ($15.0 million), and $25.4 million
related to certain share investments, closure and legal costs (see note 7 to the
condensed financial statements for more information related to the components of
this provision).
The revised life-of-mine plans, based on proven and probable reserves only,
indicate the following remaining mine lives at the operating properties: at
Round Mountain, nine years of mining and a further four years of processing
stockpiled ore; at McCoy/Cove, three years of mining and a further two years of
processing stockpiled ore; at Lupin, three years of mining; and at Kettle River,
three years of mining. The remaining mine lives at Lupin and Kettle River
reflect the industry practice of developing reserves at underground mines
approximately three years in advance of production due to the high cost of
development.
The cash operating costs at the company's four operating mines averaged $256 per
ounce for the first nine months of 1997. Total production costs were $373 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 the more focused program described
elsewhere in this Form 10-Q.
The company's existing credit facilities provide some additional liquidity. At
September 30, 1997, the company had not utilized $124.8 million of the amounts
committed thereunder, of which $40.9 million was actually available for
borrowing in view of the credit facility covenant limitations, based on the
average spot price of gold for the third quarter of 1997 of $324 per ounce. The
amounts available for borrowing under the credit facilities vary with precious
metals prices, among other factors. Further reductions in these prices could
have the effect of reducing or eliminating the company's capacity to borrow
under the credit facilities. The company believes it is currently in compliance
in all respects with the covenants under the credit facility. To remain in
compliance in 1998, the company may be required to seek additional external
financing or reduce discretionary spending, including spending for exploration
and development activities, absent a substantial improvement in gold prices.
13
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
September 30, 1997
(U.S. dollars)
There can be no assurance that the company will be successful in attracting
external financing on terms and conditions favorable to it. In the event the
company is unsuccessful in accessing external financing on acceptable terms, it
may be required to substantially curtail its planned exploration and development
activities.
The company has refocused its exploration activities to emphasize North, Central
and South America, where it has more extensive experience and where political
and economic conditions are more stable. The company will reduce exploration
efforts in the other parts of the world, which the company has concluded
generally present greater costs and risks. The company will continue to explore
selectively outside the Americas. The company's refocused program of
exploration activities has a number of promising projects at varying stages of
evaluation, ranging from promising initial exploration drilling to more advanced
projects at or near the company's existing operations.
In August 1997, the company deferred final construction decisions on two planned
gold mines, Paredones Amarillos in Mexico and Aquarius in Canada and has
deferred further development of the Ulu satellite deposit pending an improvement
in gold prices.
As of September 30, 1997, the company's outstanding consolidated indebtedness
aggregated $57.1 million. In addition, the company expects to incur or
guarantee approximately $111 million of additional indebtedness to finance the
construction of the Aquarius and Paredones Amarillos mines, assuming that gold
prices increase to a level that would support a construction decision. At
September 30, 1997, the company had the ability to borrow an additional $40.9
million under existing bank credit facilities, and it will likely be required to
incur additional indebtedness to finance construction of additional mines in the
future. The existence of such financial leverage could have important
consequences, including: (i) the company's operating flexibility may be limited
by financial and operating covenants which limit, among other things, its
ability to incur additional indebtedness, pay dividends and make certain
acquisitions and investments, (ii) a significant portion of the company's
operating cash flow may be needed for debt service, (iii) the company may be
hindered in its ability to respond to changing conditions in its industry and
(iv) the company may be more vulnerable than some of its competitors to a
downturn in economic conditions, including metals prices, affecting its
business.
The profitability of the company's current operations is directly related and
sensitive to the market price of gold and silver, which are currently at low
levels. Gold, silver and other metal prices fluctuate widely and are affected
by numerous factors beyond the company's control, including global supply and
demand, expectations with respect to the rate of inflation, the exchange rates
of the dollar and other currencies, interest rates, forward selling by
producers, central bank sales and purchases, production and cost levels in major
gold-producing regions such as South Africa and the former Soviet Union, global
or regional political, economic or financial situations and a number of other
factors. If gold or silver prices should decline below the company's cash costs
of production at any of its mines and remain at such levels for any sustained
period, the company could determine that it is not economically feasible to
continue commercial production at such mines. Although the company has a
hedging program in place to reduce the risk associated with gold and silver
price volatility, there is no assurance that these hedging strategies will be
successful. At September 30, 1997, the company's hedge position guarantees a
gold price of at least $338 per ounce on 80% of 1998 production.
The market prices of gold and silver were $369 per ounce and $4.87 per ounce,
respectively, at December 31, 1996 and were $304 per ounce and $5.12 per ounce,
respectively, at November 17, 1997, which are below the price at which the
company has estimated its reserves. If the company were to determine that its
reserves and future cash flows should be calculated at a significantly lower
gold price than the $375 per ounce
14
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
September 30, 1997
(U.S. dollars)
price used at December 31, 1996, there would likely be a material reduction in
the amount of gold reserves. In addition, if the price realized by the company
for its gold or silver bullion were to decline substantially below the price at
which ore reserves were calculated for a sustained period of time, the company
potentially could experience additional material write-downs of its investment
in its mining properties. Under certain of such circumstances, the company may
discontinue the development of a project or mining at one or more of its
properties. Further, changes in operating and capital costs and other factors,
including but not limited to short-term operating factors such as the need for
sequential development of ore bodies and the processing of new or different ore
grades and ore types, may materially and adversely affect reserves.
15
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
September 30, 1997
(U.S. dollars)
FINANCIAL CONDITION
Net cash flows used in operating activities amounted to $28.9 million for the
first nine months of 1997 compared to net cash flows provided from operating
activities of $15.2 million provided from operations in the first nine months of
1996. The 1997 results reflect significantly lower cash gold and silver prices
realized ($28.2 million), decreased gold sales volume ($29.3 million); the
increase in accounts receivable related to third quarter 1997 gold sales ($10.6
million) a larger increase in inventories for the first nine months of 1997
($12.1 million) compared to the first nine months of 1996 ($5.1 million);
partially offset by decreased cash exploration and development spending ($15.1
million), increased silver sales volume ($11.1 million), and timing differences.
In the first nine months of 1997, the company repaid its $84.0 million bond
obligation and $28.0 million of debentures payable. Additionally, the company
had gold loan repayments of $8.2 million and currency loan repayments of $7.4
million.
In the first nine months of 1997, the company received net proceeds of $96.7
million, which reflects issuance costs of $3.3 million, on the issuance of
capital securities.
In the first nine months of 1997, the company received proceeds of $63.1 million
related to the repurchase of its 218,000-ounce gold commitment which hedged an
$84.0 million bond obligation and the repurchase of its outstanding gold and
silver forward sales. In addition, the company received proceeds of $6.0
million related to the repurchase of a portion of its outstanding forward
currency exchange contracts.
In the first nine months of 1997, the company invested $91.6 million in mining
properties, plant and equipment primarily at operating properties ($37.5
million), at the Aquarius and Paredones Amarillos construction projects ($31.7
million), and at the Alaska-Juneau project related to closure costs ($17.0
million); and $23.3 million in long-term investments including the company's
investment in Santa Elina Mines Corporation ($13.5 million) and other share
investments ($7.6 million).
For the remainder of 1997, the company expects to incur $10 million in
exploration expenditures; $15 million of construction costs at the Aquarius and
Paredones Amarillos construction projects (see "Recent Developments -
Construction Programs"); and $11 million of capital expenditures at operating
properties. It is expected that the company will draw $15 to $25 million from
its available credit facilities to fund these expenditures.
The company estimates that it has adequate resources and liquidity to pursue
limited additional exploration and development programs:
* The company had $5.9 million in cash at September 30, 1997.
* The company had $124.8 million in committed unutilized credit
facilities, of which $40.9 million was actually available for
borrowing in view of the covenant limitations imposed by the credit
facilities, at September 30, 1997. The amounts available for
borrowing under the credit facilities vary with precious metals
prices, among other factors, and were determined based on a gold
price of $324 per ounce. Further reductions in these prices could
have the effect of reducing or eliminating the company's capacity to
borrow under the credit facilities.
* The company suspended the payment of dividends beginning in 1997. The
company estimates that this will save a total of $21.0 million in
1997 and 1998, based on the company's previous practice of paying
annual dividends totaling $0.075 per share.
16
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
September 30, 1997
(U.S. dollars)
The company intends to carefully monitor its discretionary spending in view of
the current low gold price environment and the cost structure at the company's
operating mines, but to conduct exploration and development activities
consistent with the more focused program described elsewhere in this Form 10-Q.
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.
17
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended
September 30, 1997
(U.S. dollars)
FINANCIAL REVIEW
Three month results
The company reported a net loss of $327.5 million ($2.36 per share) in the third
quarter of 1997, compared to a net loss of $42.4 million ($0.31 per share) in
the third quarter of 1996. The increased loss in 1997 from 1996 results from
the provision for impaired assets discussed at note 7 of the company's interim
consolidated financial statements ($309.8 million), decreased volume of gold
sales ($23.7 million), and lower gold and silver prices realized ($2.0 million);
partially offset by the 1996 provision for the McCoy/Cove pit wall stabilization
($30.0 million), decreased operating costs ($7.8 million), decreased exploration
and development expenses ($5.9 million), and increased volume of silver sales
($5.3 million).
Gold production decreased 19% to 177,502 ounces in the third quarter of 1997
compared to 218,043 ounces in the third quarter of 1996. Decreased production
was due to in-process inventory changes and lower grades and recoveries from the
mill at McCoy/Cove, partially offset by higher recoveries from the reusable
leach pads at Round Mountain. Silver production increased to 3.3 million ounces
in the third quarter of 1997 from 2.1 million ounces in the third quarter of
1996, primarily a result of higher mill and heap leach grades at McCoy/Cove.
Quarterly revenues were $74.5 million in the third quarter of 1997 and $94.9
million in the third quarter of 1996.
Cash operating costs were $251 per ounce of gold in the third quarter of 1997,
versus $243 in the third quarter of 1996, primarily due to the decreased
production at McCoy/Cove. Total production costs were $365 per ounce in the
third quarter of 1997, versus $356 per ounce in the third quarter of 1996.
Nine months results
The company reported a net loss of $365.0 million ($2.65 per share) in the first
nine months of 1997 compared to a net loss of $73.2 million ($0.55 per share) in
the first nine months of 1996. The increased loss in 1997 from 1996 reflects
the provision for impaired assets ($309.8 million), decreased volume of gold
ounces sold ($29.3 million), and lower gold and silver prices realized ($15.5
million); partially offset by the 1996 provision for the McCoy/Cove pit wall
stabilization ($30.0 million), decreased exploration and development expenses
($21.6 million) and increased volume of silver ounces sold ($11.1 million).
Gold production decreased 6% to 551,227 ounces in the first nine months of 1997
compared to 584,890 ounces in the first nine months of 1996. Decreased
production was due to lower grade and recoveries from the mill at McCoy/Cove and
lower grade at Lupin; partially offset by increased recoveries on the reusable
leach pads and increased tons on the dedicated leach pads at Round Mountain,
increased tons on the leach pads at McCoy/Cove, and increased tons at Kettle
River. Silver production increased to 7.6 million ounces in the first nine
months of 1997 from 4.9 million ounces in the first nine months of 1996,
primarily a result of in-process inventory changes higher mill grade and
increased tons on the leach pads at McCoy/Cove. Revenues were $224.1 million in
the first nine months of 1997 compared to $257.8 million in the first nine
months of 1996.
Cash operating costs increased to $256 per ounce of gold in the first nine
months of 1997 from $247 per ounce of gold in the first nine months of 1996
primarily due to the lower production at McCoy/Cove and Lupin. Total production
costs were $373 per ounce in the first nine months of 1997 and $366 per ounce in
the first nine months of 1996.
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."
18
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended
September 30, 1997
(U.S. dollars)
Revenue
Statistics for gold and silver ounces sold and other revenue data are set out
below.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
REVENUE DATA 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold
- ----
Ounces sold 156,862 217,686 515,098 589,759
Average price realized/ounce $ 380 $ 390 $ 366 $ 393
Average market price/ounce $ 324 $ 385 $ 342 $ 392
Revenue (millions of U.S. $) $ 59.7 $ 84.9 $ 188.7 $ 231.5
Percentage of total revenue 80% 89% 84% 90%
Silver
- ------
Ounces sold 2,893,077 1,889,247 6,752,249 4,744,444
Average price realized/ounce $ 5.11 $ 5.29 $ 5.24 $ 5.53
Average market price/ounce $ 4.41 $ 5.06 $ 4.77 $ 5.33
Revenue (millions of U.S. $) $ 14.8 $ 10.0 $ 35.4 $ 26.3
Percentage of total revenue 20% 11% 16% 10%
- -------------------------------------------------------------------------------------------------
Total revenue (millions of U.S. dollars) $ 74.5 $ 94.9 $ 224.1 $ 257.8
=================================================================================================
</TABLE>
The effects of changes in sales prices and volume were as follows.
<TABLE>
<CAPTION>
REVENUE VARIANCE ANALYSIS Three months ended Nine months ended
1997 vs. 1996 September 30 September 30
- -----------------------------------------------------------------------------------------------------------------------------
Lower prices:
<S> <C> <C>
Gold $ (1.5) $(13.5)
Silver (0.5) (2.0)
Change in volume (18.4) (18.2)
- -----------------------------------------------------------------------------------------------------------------------------
Decrease in revenue $(20.4) $(33.7)
=============================================================================================================================
</TABLE>
Production Cost
Production cost data per ounce of gold is set out below.
<TABLE>
<CAPTION>
Three months ended Nine months ended
PRODUCTION COSTS PER September 30 September 30
OUNCE OF GOLD PRODUCED 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Direct mining expense $ 248 $ 235 $ 256 $ 261
Deferred stripping and mine
development costs 4 8 (2) (9)
Inventory movements and other (1) -- 2 (5)
- --------------------------------------------------------------------------------------------------------------------------------
Cash operating costs 251 243 256 247
Royalties 11 12 10 11
Production taxes 2 1 2 3
- --------------------------------------------------------------------------------------------------------------------------------
Total cash costs 264 256 268 261
Depreciation 57 58 61 65
Amortization 34 34 34 33
Reclamation and mine closure 10 8 10 7
================================================================================================================================
Total production costs $ 365 $ 356 $ 373 $ 366
================================================================================================================================
</TABLE>
19
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended
September 30, 1997
(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 $251 per ounce of gold
in the third quarter of 1997 and $243 in the third quarter of 1996. See
"Operations Review".
<TABLE>
<CAPTION>
RECONCILIATION OF CASH OPERATING
COSTS PER OUNCE TO FINANCIAL STATEMENTS Three months ended Nine months ended
thousands of U.S. dollars, September 30 September 30
except per ounce amounts 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating costs per
financial statements $ 50,242 $ 57,940 $158,005 $160,464
Change in finished goods
inventory and other 6,645 1,616 14,138 1,411
Co-product cost of silver
produced (12,334) (6,572) (31,029) (17,407)
- -------------------------------------------------------------------------------------------------------------------------------
Cash operating costs $ 44,553 $ 52,984 $141,114 $144,468
===============================================================================================================================
Gold ounces produced 177,502 218,043 551,227 584,890
===============================================================================================================================
Cash operating costs per ounce $ 251 $ 243 $ 256 $ 247
===============================================================================================================================
</TABLE>
Royalties decreased in the third quarter of 1997 compared to the third quarter
1996 due to decreased production levels and lower precious metals prices.
Exploration and development decreased in the third quarter of 1997 compared to
the third quarter of 1996 due to a decreased scope of international exploration
activities and due to the discontinuation of further development of the Alaska-
Juneau property.
General and administrative expenses decreased in the third quarter of 1997 due
to the July 1997 corporate office downsizing which reduced the number of Denver-
based employees from 116 to 75.
Interest and other increased in the third quarter of 1997 compared to the third
quarter of 1996 due to expenses related to terminations ($3.2 million);
partially offset by net gains on sales of share investments and other assets,
($0.7 million), decreased relocation expense ($0.5 million), and decreased debt
balances in 1997 which resulted in net interest expense of $0.5 million in the
third quarter of 1997 compared to net interest expense of $1.2 million in the
third quarter of 1996.
Reserve estimates
The price used in estimating the company's ore reserves at December 31, 1996 was
$375 per ounce of gold and $5.00 per ounce of silver. The market price for gold
and silver is currently below these levels. If the company determines that its
reserves should be calculated at a significantly lower price than used at
December 31, 1996, there would likely be a material reduction in the amount of
gold reserves.
20
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended
September 30, 1997
(U.S. dollars)
OPERATIONS REVIEW
Operating data by mine is set out in the table below.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
OPERATING DATA BY MINE 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold production (ounces)
- ------------------------
(a) McCoy/Cove 39,073 85,754 143,900 204,218
(b) Round Mountain (50%) 62,803 59,415 183,912 156,748
(c) Lupin 42,072 41,295 121,278 129,853
(d) Kettle River 33,554 31,579 102,137 94,071
- ------------------------------------------------------------------------------------------------------------------------------
Total gold 177,502 218,043 551,227 584,890
==============================================================================================================================
Silver production (ounces)
- --------------------------
(a) McCoy/Cove 3,271,677 2,092,987 7,642,678 4,917,206
- ------------------------------------------------------------------------------------------------------------------------------
Total silver 3,271,677 2,092,987 7,642,678 4,917,206
==============================================================================================================================
</TABLE>
Gold production decreased 19% to 177,502 ounces in the third quarter of 1997
compared to 218,043 ounces in the third quarter of 1996. Decreased production
was due to in-process inventory changes and lower grades and recoveries from the
mill at McCoy/Cove; partially offset by higher recoveries from the reusable
leach pads at Round Mountain. Silver production increased to 3.3 million ounces
in the third quarter of 1997 from 2.1 million ounces in the third quarter of
1996, primarily a result of higher mill and heap leach grades at McCoy/Cove. For
the full year 1997, the gold production target is between 700,000 and 725,000
ounces and the silver production target is between 9 and 10 million ounces.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
OPERATING DATA BY MINE 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash operating costs
- --------------------
(per ounce of gold)
- --------------------
(a) McCoy/Cove $ 270 $ 239 $ 291 $ 263
(b) Round Mountain (50%) 212 228 205 215
(c) Lupin 296 310 294 287
(d) Kettle River 218 201 217 196
- ------------------------------------------------------------------------------------------------------------------------------
Company average $ 251 $ 243 $ 256 $ 247
==============================================================================================================================
</TABLE>
Cash operating costs were $251 per ounce of gold in the third quarter of 1997,
compared to $243 in the third quarter of 1996. Consolidated cash operating
costs are targeted at $260 to $270 per ounce of gold produced for the full year
1997.
21
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended
September 30, 1997
(U.S. dollars)
(a) McCoy/Cove, Nevada (100% owned)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
OPERATING DATA 1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold produced (ounces):
Milled 25,564 66,256 105,706 155,397
Heap leached 13,509 19,498 38,194 48,821
---------- ---------- ---------- ----------
Total gold 39,073 85,754 143,900 204,218
Silver produced (ounces):
Milled 3,174,066 1,965,862 7,353,652 4,533,767
Heap leached 97,611 127,125 289,026 383,439
---------- ---------- ---------- ----------
Total silver 3,271,677 2,092,987 7,642,678 4,917,206
Ore and waste mined (million tons) 12.2 16.1 42.7 48.8
Mining cost/ton of ore and waste $ 0.79 $ 0.70 $ 0.73 $ 0.70
Milling cost/ton of ore $ 9.08 $ 9.60 $ 9.01 $ 9.76
Heap leaching cost/ton of ore $ 1.69 $ 1.35 $ 1.67 $ 1.64
Production cost per ounce of gold produced:
Direct mining expense $ 275 $ 238 $ 298 $ 291
Deferred stripping cost (2) 6 (12) (20)
Inventory movements and other (3) (5) 5 (8)
---------- ---------- ---------- ----------
Cash operating cost 270 239 291 263
Royalties 3 5 3 5
Production taxes -- -- 1 3
---------- ---------- ---------- ----------
Total cash cost 273 244 295 271
Depreciation 67 58 72 72
Amortization 45 46 45 46
Reclamation and mine closure 10 10 10 8
---------- ---------- ---------- ----------
Total production costs $ 395 $ 358 $ 422 $ 397
---------- ---------- ---------- ----------
Average gold-to-silver price ratio (1) 71.7:1 76.0:1 71.6:1 74.2:1
Milled:
Ore processed (tons/day) 8,332 10,008 9,324 8,756
Gold grade (ounce/ton) 0.065 0.080 0.063 0.097
Silver grade (ounce/ton) 6.74 3.30 4.23 3.41
Gold recovery rate (%) 59.9 80.4 67.1 80.9
Silver recovery rate (%) 71.0 73.7 70.9 73.5
Heap leached:
Ore processed (tons/day) 17,567 22,393 18,576 16,570
Gold grade (ounce/ton) 0.024 0.015 0.016 0.019
Silver grade (ounce/ton) 0.36 0.23 0.26 0.30
Recovery rates (2)
- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) To convert costs per ounce of gold into comparable costs per ounce of co-
product silver, divide the production cost per ounce of gold by the period's
average gold-to-silver price ratio.
(2) Recovery rates on dedicated pads can only be estimated, as actual recoveries
will not be known until leaching is complete. At the McCoy/Cove mine, the
gold recovery rate is estimated at 68% for crushed ore and 48% for
uncrushed, run-of-mine ore, while the silver recovery rate is estimated at
30% for crushed ore and 10% for uncrushed, run-of-mine ore.
22
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended
September 30, 1997
(U.S. dollars)
At McCoy/Cove in Nevada, gold production fell and silver production rose, as
expected, reflecting the planned processing of carbonaceous ores leaner in gold
but richer in silver. Carbonaceous ore types are processed in a more complex
milling circuit and have lower gold recovery rates. McCoy/Cove produced 39,073
ounces of gold during the third quarter of 1997 as a result, down 54% from
85,754 ounces in the third quarter of 1996. However, silver grades in
carbonaceous material were significantly higher in the third quarter of 1997
than the third quarter of 1996, and silver production rose 56% to 3,271,677
ounces from 2,092,987 ounces a year ago.
The area of the open pit being mined in the fourth quarter of 1997 contains less
carbonaceous material. However, based on the results of mining this material
during the third quarter of 1997, McCoy/Cove now expects to produce a total of
about 10% less gold and 30% more silver in 1997 than it had originally targeted
at the beginning of the year. The mine's full-year 1997 production goal is
between 190,000 and 200,000 ounces of gold, down from a target of between
210,000 and 220,000 ounces earlier, and between 9 and 10 million ounces of
silver, up from 7 million ounces targeted originally.
Cash operating costs were $270 per ounce of gold produced in the third quarter
of 1997, up 13% from $239 in the third quarter of 1996, but down 15% from $317
in the second quarter of 1997. Cost reduction programs resulted in savings of
$2.9 million in the third quarter of 1997 compared to the third quarter of 1996.
Significant cost savings components include a reduction in the number of
employees, lower mill reagent consumption, and reductions in a number of
services and supplies.
Additional mineralization has been discovered just outside the planned ultimate
perimeter of the Cove open pit. This mineralization has the potential of adding
to production and extending mine life at McCoy/Cove. Initial drilling results
have encouraged the company to budget $800,000 to drill out this area on a grid
of closely spaced holes sufficient to determine by year end 1997 whether or not
this material can be classified as ore reserves. A drilling program totaling 55
drill holes is currently being completed. The extension of the deposit remains
open to the south.
23
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended
September 30, 1997
(U.S. dollars)
(b) Round Mountain, Nevada (50% owned)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
OPERATING DATA 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold produced (ounces):
Reusable heap leach pad (50%) 33,591 32,251 104,655 90,643
Dedicated heap leach pad (50%) 26,573 24,681 76,618 61,365
Other (50%) 2,639 2,483 2,639 4,740
-------- -------- -------- --------
Total (50%) 62,803 59,415 183,912 156,748
Ore and waste mined (million tons) (100%) 18.9 12.1 53.6 40.9
Mining cost/ton of ore and waste $ 0.66 $ 0.79 $ 0.67 $ 0.71
Heap leaching cost/ton of ore $ 0.64 $ 0.81 $ 0.63 $ 0.79
Production cost per ounce of gold produced:
Direct mining expense $ 205 $ 208 $ 202 $ 224
Deferred stripping cost 6 15 5 --
Inventory movements and other 1 5 (2) (9)
-------- -------- -------- --------
Cash operating cost 212 228 205 215
Royalties 24 37 23 32
Production taxes 7 3 4 4
-------- -------- -------- --------
Total cash cost 243 268 232 251
Depreciation 33 47 38 50
Amortization 18 18 18 18
Reclamation and mine closure 7 5 7 5
-------- -------- -------- --------
Total production cost $ 301 $ 338 $ 295 $ 324
-------- -------- -------- --------
Reusable heap leach pad:
Ore processed (tons/day) (100%) 26,185 27,224 27,145 27,823
Grade (ounce/ton) 0.032 0.032 0.035 0.036
Recovery rate (%) 80.9 72.5 76.2 68.1
Dedicated heap leach pad:
Ore processed (tons/day) (100%) 101,209 107,544 100,052 92,987
Grade (ounce/ton) 0.010 0.010 0.010 0.011
Recovery rate (1)
===========================================================================================
</TABLE>
(1) Recovery rates on dedicated pads can only be estimated, as actual recoveries
will not be known until leaching is complete. At the Round Mountain mine,
the gold recovery rate on the dedicated heap leach pad is estimated at 50%.
The 50% owned Round Mountain mine in Nevada was the company's largest and lowest
cost gold producer in the third quarter of 1997. The company's share of gold
production rose to 62,803 ounces in the third quarter of 1997 from 59,415 ounces
in the third quarter of 1996. Cash operating costs were reduced to $212 per
ounce in the third quarter of 1997 from $228 per ounce of gold produced in the
third quarter of 1996.
During the third quarter of 1997, Round Mountain approved a new mining plan that
increases projected cash flow and profitability and reduces projected cash
operating costs over the current mine life. The new, optimized open pit design
eliminates the mining of more than 250 million tons of waste rock and low-grade,
high cost material over the life of the mine, reducing the up-front waste
stripping by approximately 40% and enhancing the economics significantly.
Reduced waste stripping brings more ounces into production earlier and decreases
cash operating costs, future capital requirements for equipment replacement, and
ultimate reclamation costs.
24
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended
September 30, 1997
(U.S. dollars)
Reflecting the new mining plan, Round Mountain has increased its full-year 1997
production target to between 440,000 and 460,000 ounces of gold (the company's
50% share, between 220,000 and 230,000 ounces) from its earlier goal of between
380,000 and 400,000 ounces of gold (the company's 50% share, between 190,000 and
200,000 ounces).
The optimized open pit design is expected to reduce the mine's current ore
reserves by approximately 1.2 million ounces of gold (the company's share,
600,000 ounces). This revision will result in mining being completed in 10
years, with ore processing continuing from stockpiles for another five years,
compared with the previous plan of 14 years of mining plus seven years of
stockpile processing. This life-of-mine plan is based on no more gold being
discovered at Round Mountain.
In July 1997, Round Mountain produced its four millionth ounce of gold since the
company became the operator. The mine had less than half that much gold in
reserves --only 1.8 million ounces (100% basis)-- when the company acquired its
interest in 1985. With reserves of 9.1 million ounces at year-end 1996 (100%
basis), Round Mountain has twice as much gold remaining in the ground as the
total amount mined in the past 12 years.
In September 1997, the mill at Round Mountain achieved full production. The
mine stockpiled more than three million tons of nonoxidized material over the
last two years to supplement millfeed ore mined in future quarters. Mill
recoveries are currently averaging approximately 85% of the contained gold,
roughly double the recovery rates that could be achieved by heap leaching these
nonoxidized ores. As the open pit is gradually deepened at Round Mountain, mill
production from increasing tonnages of deeper, nonoxide ores is expected to
offset a reduction in heap leach production from decreasing quantities of
shallower oxide tonnages mined.
Round Mountain is also expanding its exploration efforts. An in-fill drilling
program will focus on upgrading material within the pit to proven and probable
reserves from its current categorization as other mineralization. In addition,
a program of exploration drilling is being directed at a deep target to the
northwest, thought to be one of the deposit's feeder structures, the North
Feeder zone. Finally, several additional exploration targets have been
identified on the Round Mountain claim block, only a small portion of which has
been adequately explored.
25
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended
September 30, 1997
(U.S. dollars)
c) Lupin, Northwest Territories (100% owned)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
OPERATING DATA 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold produced (ounces) 42,072 41,295 121,278 129,853
Tons of ore mined and milled 199,861 192,449 594,966 592,836
Mining cost/ton of ore C $50.82 C $47.76 C $46.75 C $42.90
Milling cost/ton of ore C $12.72 C $13.28 C $11.91 C $12.35
Production cost per ounce of gold produced:
Canadian dollars:
Direct mining expense C $ 382 C $ 408 C $ 389 C $ 396
Deferred mine development cost C $ 28 C $ 13 C $ 17 C $ (5)
Inventory movements and other C $ -- C $ 3 C $ (1) C $ 1
------ ------ ------ ------
Cash operating cost C $ 410 C $ 424 C $ 405 C $ 392
U.S. dollars:
Cash operating cost US $ 296 US $ 310 US $ 294 US $ 287
Royalties -- -- -- --
Production taxes -- -- -- --
------- ------- ------- -------
Total cash cost 296 310 294 287
Depreciation 72 71 74 68
Amortization 28 18 28 18
Reclamation and mine closure 14 8 14 8
------- ------- ------- -------
Total production cost US $ 410 US $ 407 US $ 410 US $ 381
------- ------- ------- -------
Milled:
Ore processed (tons/day) 2,196 2,115 2,179 2,172
Ore tons milled 199,861 192,449 594,966 592,836
Grade (ounce/ton) 0.226 0.231 0.221 0.237
Recovery rate (%) 93.0 92.9 92.4 92.5
- -------------------------------------------------------------------------------------------------------
</TABLE>
The Lupin mine in the Northwest Territories produced 42,072 ounces of gold in
the third quarter of 1997, compared with 41,295 ounces in the third quarter of
1996. Cash operating costs were reduced to $296 per ounce of gold produced in
the third quarter of 1997 from $310 in the third quarter of 1996. Quarterly
results are in line with Lupin's targeted 1997 production of between 160,000 and
170,000 ounces of gold.
Lupin has introduced new mining and blasting methods at depth, including
mechanized cut-and-fill in addition to long-hole open stoping in some of the
deepest levels of the mine. These changes have proved successful in reducing
waste rock dilution, improving millhead ore grade and controlling costs.
Reflecting this success, a revision of the mining plan is currently being
finalized. The new mining plan will include the addition in early 1998 of a new
winze (an internal shaft and hoist between underground levels of the mine) to
further improve cost-effectiveness of mining at depth in future periods.
These improvements, in conjunction with other cost savings being put in place at
the site, indicate that mining can continue economically below the 1480-meter
level into mineralization previously identified but considered uneconomic. It
is now believed that this deeper mineralization can extend Lupin's life by at
least one additional year at current production rates. The necessary work is
under way to upgrade as much of this mineralization as possible by year-end 1998
to proven and probable reserves. Therefore, there is no immediate requirement
to develop the satellite Ulu deposit, located about 100 miles away, as a source
of supplemental feed for the Lupin mill. Development of this deposit has
accordingly been deferred.
26
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended
September 30, 1997
(U.S. dollars)
(d) Kettle River, Washington (100% owned)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
OPERATING DATA 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold produced (ounces) 33,554 31,579 102,137 94,071
Tons of ore mined and milled 185,137 148,406 581,446 430,256
Mining cost/ton of ore $ 20.95 $ 19.24 $ 21.30 $ 21.25
Milling cost/ton of ore $ 11.18 $ 12.93 $ 10.50 $ 12.48
Production cost per ounce of gold produced:
Direct mining expense $ 229 $ 194 $ 221 $ 192
Deferred mine development cost -- -- -- --
Inventory movements and other (11) 7 (4) 4
-------- -------- -------- --------
Cash operating cost 218 201 217 196
Royalties 17 8 15 9
Production taxes 2 2 2 2
-------- -------- -------- --------
Total cash cost 237 211 234 207
Depreciation 60 58 58 59
Amortization 45 45 45 45
Reclamation and mine closure 12 8 12 8
-------- -------- -------- --------
Total production cost $ 354 $ 322 $ 349 $ 319
-------- -------- -------- --------
Milled:
Ore processed (tons/day) 2,034 1,631 2,130 1,576
Ore tons milled 185,137 148,406 581,446 430,256
Grade (ounce/ton) 0.216 0.244 0.217 0.253
Recovery rate (%) 83.8 87.1 86.1 86.3
- --------------------------------------------------------------------------------------------
</TABLE>
The Kettle River mine in Washington State produced 33,554 ounces of gold in the
third quarter of 1997, compared with 31,579 ounces a year ago. Kettle River
processed significantly increased tonnages during the third quarter of 1997,
offsetting lower ore grades processed. The mill operated seven days a week in
the third quarter of 1997, up from five days a week in the third quarter of
1996. Seven-day workweeks are scheduled to continue. Kettle River expects to
meet its full-year production target of between 130,000 and 140,000 ounces of
gold.
Kettle River mines a series of deposits in sequence to feed a central mill. The
fifth and sixth deposits, Lamefoot and K-2, are now in concurrent production at
a ratio of about 3:1. As expected, cash operating costs rose to $218 per ounce
of gold produced in the third quarter of 1997 from $201 in the third quarter of
1996, reflecting the higher mining costs and lower grades of the K-2 deposit,
along with the increased number of tons mined and milled.
Exploration is under way on both the northern extension of the Lamefoot deposit
and a new target identified as Zone 7. In addition, K-2 remains open both to
the north and to the south. Stepped-up exploration programs are now planned in
each of these areas.
27
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended
September 30, 1997
(U.S. dollars)
RECENT DEVELOPMENTS
During the third quarter of 1997, the company conducted 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. In light of both 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 those assets. As a result, the company recorded a $309.8
million provision for impaired assets in the third quarter of 1997, as discussed
in note 7 to the interim consolidated financial statements.
In view of the recent drop in the gold price to 12-year lows, in the third
quarter of 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. The deferral of
final construction decisions beyond 1997 will reduce the company's 1997 capital
expenditure requirements to a total of not more than $49 million from the
originally planned $114 million for the two new mines.
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 four producing gold mines 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 nine months of 1997, in connection with its exploration and
development activities, the company charged $27.6 million against current
earnings and capitalized another $61.1 million.
Highlights of these 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's 1997 capital expenditure requirements are reduced to $39 million
from the originally planned $70 million. Of that, $26.4 million was spent
through September 30, 1997. The remaining amount to be spent during 1997 will
be devoted primarily to completion of the frozen underground barrier system.
The barrier system is being constructed to block groundwater from flowing into
the proposed pit. Once frozen, the underground "freeze wall" can be
maintained indefinitely at a nominal cost. Underground freezing is a proven,
cost-effective technology that has been used in tunneling and shaft boring for
over 100 years.
* At 60% owned Paredones Amarillos, the company's share of 1997 capital
expenditures will not exceed $10 million, down from $44 million planned
originally. Of this, $5.3 million was spent through September 30, 1997. The
remaining amount to be spent during 1997 will be devoted to detailed
engineering work, 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.
28
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended
September 30, 1997
(U.S. dollars)
* The company's option interest in the Kingking development 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
is pursuing an exit strategy for the Kingking project and did not exercise its
option. Following the $50.0 million write-down recorded in the third quarter
of 1997, the carrying values of the Kingking assets are nil (see note 7 to the
interim consolidated financial statements).
Exploration Properties
* The company is re-evaluating, re-focusing and rationalizing its entire
portfolio of exploration and development projects in Brazil, all of which are
controlled by the company's 58%-owned joint venture, Santa Elina Mines
Corporation. In the third quarter of 1997, the company wrote down its
investment in Santa Elina by $107.4 million to its estimated net realizable
value (see note 7 to the interim consolidated financial statements). The
company is prioritizing each of the projects in order to develop a strategy
for realizing the value of these assets as quickly as possible. Pending the
conclusion of this rationalization process, the company has deferred
completion of the individual feasibility studies previously begun on certain
of these projects. The company is continuing, however, with the ongoing
exploration drilling, geological studies, metallurgical tests, and various
other exploration and development work already well under way at these Santa
Elina projects.
* In the third quarter of 1997 the company sold back its right to buy a future
60% interest in the Dolores gold exploration project in Mexico to Minefinders
Corporation Ltd. 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. In addition, the company
was 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 costs
on the property through completion of a bankable feasibility study within two
years and then to pay Minefinders a minimum of $12 million in cash to purchase
60% of the proven and probable gold-equivalent ounces (as defined in the
feasibility study at $20 per ounce).
* The company funded work on a number of projects in the Americas in the third
quarter of 1997. Among them are three early-to-intermediate stage exploration
projects in Nevada-Ratto Canyon, Bald Peak and Jessup. In Chile, the company
owns 100% of the Etreus project, located near the border of Argentina, where
drill rigs began drilling in October 1997.
U.S. Mining Law Revision
Several proposals to change the general mining laws applicable to operations on
U.S. federal lands have been introduced into the 105th Congress, which convened
in January 1997. In addition, the Bureau of Land Management of the U.S.
Department of the Interior has commenced a program to revise the federal
regulations applicable to activities on unpatented mining claims and to impose
more stringent reclamation and environmental protection requirements on those
activities. Until such time, if any, as new reform legislation is enacted or
administrative action is taken, the ultimate effects and costs of compliance on
the company cannot be estimated.
29
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Nine Months Ended
September 30, 1997
(U.S. dollars)
CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
With the exception of historical matters, the matters discussed in this report
are forward looking statements that involve risks and uncertainties that could
cause actual results to differ materially from targeted or projected results.
Such forward looking statements include statements regarding targets for gold
and silver production, cash operating costs and certain significant expenses,
percentage increases and decreases in production from the company's principal
mines, schedules for completion of detailed feasibility studies and initial
feasibility studies, potential increases in reserves and production, the timing
and scope of future drilling and other exploration activities, expectations
regarding receipt of permits and commencement of mining or production,
anticipated recovery rates and potential acquisitions or increases in property
interests. Factors that could cause actual results to differ materially
include, among others, changes in gold, silver and copper prices, unanticipated
grade, geological, metallurgical, processing, access, transportation of
supplies, water availability or other problems, results of current exploration
activities, results of pending and future feasibility studies, changes in
project parameters as plans continue to be refined, political, economic and
operational risks of foreign operations, joint venture relationships,
availability of materials and equipment, the timing of receipt of governmental
permits, force majeure events, the failure of plant, equipment or processes to
operate in accordance with specifications or expectations, accidents, labor
relations, delays in 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.
30
<PAGE>
ECHO BAY MINES LTD.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Alaska-Juneau
During 1994, the U.S. Attorney began an investigation of potential Clean Water
Act violations. The investigation is to determine whether the company
unlawfully discharged pollutants from the drainage tunnel without a National
Pollution Discharge Elimination System (NPDES) permit. The outcome of this
investigation is uncertain.
Qui Tam Action
See note 10 to the interim consolidated financial statements.
Summa
See note 10 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 November 6, 1997, related to the
provision for impaired assets and restructuring
costs recorded in the third quarter of 1997.
Filed on November 6, 1997, related to the third
quarter 1997 results.
31
<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)
February 11, 1998
- -----------------
Date
/s/ Tom S. Q. Yip
-----------------
TOM S. Q. YIP
Controller and Principal
Accounting Officer
32
<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-Q FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,910
<SECURITIES> 13,828
<RECEIVABLES> 18,293
<ALLOWANCES> 0
<INVENTORY> 48,734
<CURRENT-ASSETS> 91,835
<PP&E> 1,009,808
<DEPRECIATION> 628,412
<TOTAL-ASSETS> 482,948
<CURRENT-LIABILITIES> 115,983
<BONDS> 0
0
0
<COMMON> 709,593
<OTHER-SE> (495,171)
<TOTAL-LIABILITY-AND-EQUITY> 482,948
<SALES> 224,103
<TOTAL-REVENUES> 224,103
<CGS> 158,005
<TOTAL-COSTS> 242,902
<OTHER-EXPENSES> 342,543
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,912
<INCOME-PRETAX> (363,254)
<INCOME-TAX> 1,764
<INCOME-CONTINUING> (365,018)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (365,018)
<EPS-PRIMARY> (2.65)
<EPS-DILUTED> (2.65)
</TABLE>
