<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________to_____________
Commission File Number 1-8542
------
ECHO BAY MINES LTD.
(Exact name of registrant as specified in its charter)
Incorporated under the laws of Canada None
- ------------------------------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 1000, 6400 S. Fiddlers Green Circle 80111-4957
Englewood, CO ----------
-------------------- (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 714-8600
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common shares, no par value American Stock Exchange
____________________
Securities registered pursuant to Section 12(g) of the Act: None
----
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _________
----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of the voting securities held by non-affiliates
of the registrant at February 19, 1999....................... U.S.$264,341,433
----------------
Number of common shares outstanding as of February 19, 1999.. 140,607,145
----------------
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I
<S> <C>
ITEMS 1 AND 2-BUSINESS AND PROPERTIES..................................................................... 1
INTRODUCTION........................................................................................... 1
OPERATIONS SUMMARY..................................................................................... 1
Gold and Silver Production............................................................................ 1
Production Costs...................................................................................... 2
Revenue............................................................................................... 3
RESERVES............................................................................................... 4
Change in Proven and Probable Reserves................................................................ 5
OTHER MINERALIZATION................................................................................... 6
CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995............................................................... 7
ROUND MOUNTAIN......................................................................................... 8
Geology and Ore Reserves.............................................................................. 9
Mining and Processing................................................................................. 10
MCCOY/COVE............................................................................................. 12
Geology and Ore Reserves.............................................................................. 14
Mining and Processing................................................................................. 14
KETTLE RIVER........................................................................................... 16
Geology and Ore Reserves.............................................................................. 17
Mining and Processing................................................................................. 17
LUPIN.................................................................................................. 19
Geology and Ore Reserves.............................................................................. 20
Mining and Processing................................................................................. 21
Supplies, Utilities and Transportation................................................................ 21
Water Supply and Waste Disposal....................................................................... 22
DEVELOPMENT PROGRAMS................................................................................... 23
Aquarius.............................................................................................. 23
Paredones Amarillos................................................................................... 24
OTHER PROJECTS......................................................................................... 26
Kuranakh.............................................................................................. 26
Kingking.............................................................................................. 26
Santa Elina........................................................................................... 27
EXPLORATION............................................................................................ 27
ALASKA-JUNEAU.......................................................................................... 27
SUNNYSIDE.............................................................................................. 28
OTHER.................................................................................................. 28
Precious Metal Sales and Hedging Activities........................................................... 28
Governmental and Environmental Regulation............................................................. 29
Employees............................................................................................. 33
Executive Officers of the Registrant.................................................................. 34
Mining Risks and Insurance............................................................................ 35
Supplies, Utilities and Transportation................................................................ 35
Waste Disposal........................................................................................ 35
Royalties............................................................................................. 35
History of the Company................................................................................ 36
RISK FACTORS........................................................................................... 37
Recent Losses......................................................................................... 37
</TABLE>
i
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<TABLE>
<S> <C>
Liquidity and Capital Resources....................................................................... 37
Gold and Silver Prices................................................................................ 38
Estimation of Asset Carrying Values................................................................... 38
Uncertainty of Reserve and Other Mineralization Estimates............................................. 39
Mining and Processing................................................................................. 39
Mine Development Risks................................................................................ 40
Exploration Risks..................................................................................... 40
Mining Risks and Insurance............................................................................ 41
Governmental Regulation............................................................................... 41
Risk of International Operations...................................................................... 42
Title to Properties................................................................................... 42
Inflation and Currency Risks.......................................................................... 43
Year 2000 Risks....................................................................................... 43
GLOSSARY............................................................................................... 44
GOLD PRICES............................................................................................ 48
SILVER PRICES.......................................................................................... 48
EXCHANGE RATES......................................................................................... 48
CONVERSION TABLE....................................................................................... 48
MINE PROCESSING........................................................................................ 49
ITEM 3-LEGAL PROCEEDINGS.................................................................................. 52
ALASKA-JUNEAU.......................................................................................... 52
OTHER.................................................................................................. 52
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................ 52
PART II
ITEM 5-MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS.......................... 53
MARKET INFORMATION..................................................................................... 53
DIVIDENDS.............................................................................................. 53
CERTAIN TAX MATTERS.................................................................................... 54
United States Federal Income Tax Considerations....................................................... 54
Canadian Federal Income Tax Considerations............................................................ 55
ITEM 6-SELECTED FINANCIAL DATA............................................................................ 56
ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 58
SUMMARY................................................................................................ 58
RESULTS OF OPERATIONS.................................................................................. 58
Revenue............................................................................................... 58
Gold and Silver Hedging............................................................................... 59
Operating Costs....................................................................................... 59
Royalties............................................................................................. 59
Production Taxes...................................................................................... 59
Depreciation and Amortization......................................................................... 60
Reclamation and Mine Closure.......................................................................... 60
General and Administrative............................................................................ 60
Exploration and Development........................................................................... 60
Interest and Other.................................................................................... 60
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Provision for Impaired Assets and Other Charges....................................................... 61
Income Tax Expense.................................................................................... 61
LIQUIDITY AND CAPITAL RESOURCES........................................................................ 61
COMMITMENTS AND CONTINGENCIES.......................................................................... 62
IMPACT OF YEAR 2000.................................................................................... 63
ITEM 7A-QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK........................................ 64
ITEM 8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................................ 66
INDEX TO FINANCIAL STATEMENTS.......................................................................... 66
QUARTERLY FINANCIAL HIGHLIGHTS............................................................................ 99
ITEM 9-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............... 99
PART III
ITEM 10-DIRECTORS OF THE REGISTRANT....................................................................... 99
ITEM 11-EXECUTIVE COMPENSATION............................................................................ 99
ITEM 12-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................... 99
ITEM 13-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................... 99
PART IV
ITEM 14-EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.................................................................................... 100
SIGNATURES................................................................................................ 103
</TABLE>
iii
<PAGE>
PART I
ITEMS 1 AND 2-BUSINESS AND PROPERTIES
INTRODUCTION
In this report, the "Company" refers to Echo Bay Mines Ltd. and its subsidiaries
unless the context specifies otherwise. The Company's financial statements are
presented in accordance with generally accepted accounting principles in Canada.
In this report, all dollar amounts are expressed in U.S. dollars unless
specified otherwise.
The Company mines, processes and explores for gold. The Company also produces a
significant amount of silver at its McCoy/Cove mine in Nevada. In 1998, the
Company had three operating mines: Round Mountain in Nevada, USA; McCoy/Cove in
Nevada, USA; and Kettle River in Washington, USA. All are 100% owned except for
Round Mountain, which is 50% owned.
The Company's operations in 1998 were, and will continue to be, materially
affected by the price of gold, which declined from $369 per ounce at year end
1996 to $290 per ounce at year end 1997, and averaged $294 per ounce in 1998. In
1997, in view of the drop in the gold price, the Company deferred final
construction decisions on its two planned gold mines, Aquarius in Canada and
Paredones Amarillos in Mexico. See "Development Programs-Aquarius" and "-
Paredones Amarillos." In January 1998, the Company temporarily suspended
operations at its 100% owned Lupin mine in the Nunavut Settlement Area of the
Northwest Territories, Canada. See "Lupin."
The Company's exploration efforts focus on projects principally located in North
America where the Company already has an extensive gold mining infrastructure.
In 1998, the Company produced a total of 536,438 ounces of gold at an average
cash operating cost of $208 per ounce. 1998 silver production was 9,412,823
ounces. In 1998, the Company reported a net loss of $20.1 million on revenues
of $232.2 million. At December 31, 1998, the Company had 6.8 million ounces of
gold reserves and 38.8 million ounces of silver reserves.
In 1999, the Company expects to produce from 455,000 to 475,000 ounces of gold
at an average cash operating cost of $235 to $245 per ounce and between 7 and 8
million ounces of silver. For a general identification of risk factors involved
in the Company's business, see "Cautionary 'Safe Harbor' Statement under the
United States Private Litigation Reform Act of 1995" and "Risk Factors."
OPERATIONS SUMMARY
Gold and Silver Production
- --------------------------
Gold and silver production for the last three years is provided below.
<TABLE>
<CAPTION>
GOLD PRODUCTION (OUNCES) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Round Mountain (50%) 255,252 238,840 205,487
McCoy/Cove 167,494 187,034 271,731
Kettle River 113,692 129,866 124,910
Lupin -- 165,335 166,791
- -----------------------------------------------------------------------------------------------------------------------
Total gold 536,438 721,075 768,919
=======================================================================================================================
Percentage increase (decrease) from prior year (25.6%) (6.2%) 1.9%
=======================================================================================================================
<CAPTION>
SILVER PRODUCTION (OUNCES) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<C> <C> <C>
Total silver-all from McCoy/Cove 9,412,823 11,021,708 7,102,348
- -----------------------------------------------------------------------------------------------------------------------
Percentage increase (decrease) from prior year (14.6%) 55.2% (40.3%)
=======================================================================================================================
</TABLE>
1
<PAGE>
Production Costs
- ----------------
<TABLE>
<CAPTION>
PRODUCTION COSTS PER OUNCE OF GOLD PRODUCED 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Direct mining expense $ 209 $ 251 $ 262
Deferred stripping and mine development costs (1) (3) (9)
Inventory movements and other -- 1 1
- -----------------------------------------------------------------------------------------------------------------------
Cash operating costs 208 249 254
Royalties 11 9 11
Production taxes 2 1 3
- -----------------------------------------------------------------------------------------------------------------------
Total cash costs 221 259 268
Depreciation 62 58 64
Amortization 25 32 34
Reclamation and mine closure 9 10 7
- -----------------------------------------------------------------------------------------------------------------------
Total production costs $ 317 $ 359 $ 373
=======================================================================================================================
Percentage increase (decrease) from prior year (11.7%) (3.8%) 7.8%
=======================================================================================================================
<CAPTION>
CASH OPERATING COSTS PER OUNCE OF GOLD PRODUCED 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Round Mountain $ 198 $ 207 $ 221
McCoy/Cove 203 271 271
Kettle River 244 227 201
Lupin -- 284 299
- -----------------------------------------------------------------------------------------------------------------------
Company consolidated weighted average $ 208 $ 249 $ 254
=======================================================================================================================
Percentage increase (decrease) from prior year (16.5%) (2.0%) 10.9%
=======================================================================================================================
</TABLE>
In 1998, the average cash operating cost per ounce was $208 compared with $249
in 1997 and $254 in 1996. Cash operating costs per ounce were lower in 1998
reflecting the third quarter 1997 write-down of deferred mining balances
(mining costs incurred in prior periods ratably charged to future production
ounces), lower reagent consumption and manpower reductions at McCoy/Cove, lower
costs due to higher production and due to the 1997 change in mine plan at Round
Mountain, and the absence in 1998 of higher cost Lupin production. These
decreases were partially offset by higher costs associated with a full year's
mill production at Round Mountain and increased costs at Kettle River due to
lower production. Cash operating costs per ounce were lower in 1997 compared
with 1996 due to increased dedicated pad tonnage and reusable pad recovery at
Round Mountain and reduced maintenance and administrative costs and increased
operating efficiencies at Lupin; partially offset by lower mill grades at Kettle
River. The Company's consolidated cash operating cost target is $235 to $245
per ounce of gold produced in 1999.
Operating costs include mining and processing costs for gold and silver sold
during the year. The most significant of these costs are labor, consumable
materials, repairs of machinery and equipment, fuel, utilities and environmental
compliance. The cost of transporting personnel and freight to the Lupin mine is
also a significant cost for that operation. Operating costs vary with the
quantity of gold and silver sold and with the cash operating cost per ounce.
The reconciliation of cash operating costs per ounce to the financial statements
for the last three years is provided below.
RECONCILIATION OF CASH OPERATING
COSTS PER OUNCE TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Thousands of U.S. dollars, except per ounce amounts 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating costs per financial statements $148,769 $213,120 $221,126
Change in finished goods inventory and other (1,704) 10,956 70
Co-product cost of silver produced (35,486) (44,528) (25,568)
- -----------------------------------------------------------------------------------------------------------------------
Cash operating costs $111,579 $179,548 $195,628
=======================================================================================================================
Gold ounces produced 536,438 721,075 768,919
=======================================================================================================================
Cash operating costs per ounce $ 208 $ 249 $ 254
=======================================================================================================================
</TABLE>
2
<PAGE>
Revenue
- -------
The gold and silver ounces sold and other revenue data for the last three years
are set out below.
REVENUE DATA
<TABLE>
<CAPTION>
Year ended December 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gold
- ----
Ounces sold 553,130 698,337 777,512
Average price realized per ounce - revenue basis $ 333 $ 362 $ 384
Average price realized per ounce - cash basis/(1)/ $ 340 $ 345 $ 390
Average market price per ounce $ 294 $ 332 $ 388
Revenue (millions of U.S. dollars) $ 183.9 $ 252.6 $ 298.9
Percentage of total revenue 79% 83% 89%
Silver
- ------
Ounces sold 8,198,867 10,037,753 7,098,417
Average price realized per ounce - revenue basis $ 5.88 $ 5.26 $ 5.41
Average price realized per ounce - cash basis/(1)/ $ 5.36 $ 4.99 $ 5.39
Average market price per ounce $ 5.54 $ 4.87 $ 5.18
Revenue (millions of U.S. dollars) $ 48.3 $ 52.8 $ 38.4
Percentage of total revenue 21% 17% 11%
- -------------------------------------------------------------------------------------------------------------------------
Total revenue (millions of U.S. dollars) $ 232.2 $ 305.4 $ 337.3
=========================================================================================================================
</TABLE>
/(1)/ Excludes non-cash items affecting gold and silver revenues, such as the
recognition of deferred income or deferral of revenue to future periods
for hedge accounting purposes.
The effects of changes in sales volume and prices were:
REVENUE VARIANCES
<TABLE>
<CAPTION>
Thousands of U.S. dollars
Year ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Decrease in volume $(62,291) $(14,501) $(20,412)
Lower gold prices (16,040) (15,880) (3,002)
Higher (lower) silver prices 5,083 (1,506) --
- ----------------------------------------------------------------------------------------------------------------------
Decrease in total revenue from the previous year $(73,248) $(31,887) $(23,414)
======================================================================================================================
</TABLE>
The decrease in gold revenue from 1997 to 1998 was due to decreased gold sales
volume reflecting the absence of production from Lupin and decreased mill grades
at McCoy/Cove and Kettle River in 1998, and lower gold prices realized ($333 per
ounce in 1998 compared to $362 per ounce in 1997). The decrease in silver
revenues from 1997 to 1998 was due to decreased production reflecting lower mill
grades, partially offset by higher silver prices realized ($5.88 per ounce in
1998 versus $5.26 per ounce in 1997). The decrease in gold revenue from 1996 to
1997 was primarily due to lower gold prices realized ($362 per ounce in 1997
compared to $384 per ounce in 1996) and lower gold ounces produced at McCoy/Cove
resulting from lower mill grades and recoveries, partially offset by increased
gold production at Round Mountain resulting from more tons processed. The
increase in silver revenues from 1996 to 1997 was due to increased production
reflecting higher mill grades, partially offset by lower silver prices realized
($5.26 per ounce in 1997 versus $5.41 per ounce in 1996).
3
<PAGE>
RESERVES
The following table presents ore reserves by property. These reserves were
estimated by the Company. A description of each mine follows the "Reserves" and
"Other Mineralization" sections. See "Risk Factors" for a discussion of items
which could affect the Company's reserve estimates.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Ore Reserves/(1)/
(thousands, except average grades)
(proven and probable at December 31)
1998 1997 1996
------------------------------------------------ ----------- -----------
Average Contained Contained Contained
grade Contained ounces (the ounces (the ounces (the
(ounces ounces Company's Company's Company's
Tons per ton) (100%) share) share) share)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GOLD
- ----
MINES:
Round Mountain 358,597 0.018 6,375 3,188 3,519 4,525
McCoy/Cove 21,684 0.032 699 699 915 1,183
Kettle River 1,171 0.202 237 237 339 370
Lupin/(2)/ 2,018 0.269 543 543 543 443
------------------------------------------------------
Total mines 7,854 4,667 5,316 6,521
======================================================
DEVELOPMENT PROPERTIES:
Aquarius 19,159 0.066 1,263 1,263 1,274 1,277
Paredones Amarillos 44,717 0.032 1,448 869 889 775
------------------------------------------------------
Total development properties 2,711 2,132 2,163 2,052
------------------------------------------------------
Total gold 10,565 6,799 7,479 8,573
======================================================
SILVER
- ------
McCoy/Cove 21,684 1.790 38,809 38,809 46,525 53,858
------------------------------------------------------
Total silver 38,809 38,809 46,525 53,858
======================================================
</TABLE>
/(1)/ The definitions of proven and probable ore are those used in Canada by
certain provincial securities regulatory authorities and are set forth in
National Policy No. 2-A. The definitions are substantially the same as
those applied in the United States by the Securities and Exchange
Commission which are based on definitions used by the United States Bureau
of Mines and the United States Geological Survey. See "Glossary-Ore
Reserves."
/(2)/ In January 1998, the Company temporarily suspended operations at the Lupin
mine. See "Lupin."
The Company reports extractable (minable) ore reserves. Reserves do not reflect
recovery losses in the milling or heap leaching processes, but do include
allowance for dilution of ore in the mining process.
Ore reserves were estimated based on a gold price of $325 per ounce at December
31, 1998 ($350 per ounce at December 31, 1997 and $375 per ounce at December 31,
1996) and a silver price of $5.75 per ounce at December 31, 1998 ($5.00 per
ounce at December 31, 1997 and 1996.) The market price for gold is currently
below the level used in estimating reserves at December 31, 1998. If the market
price for gold continues at its current level and the Company determines that
its reserves should be estimated at a significantly lower gold price than that
used at December 31, 1998, there would be a reduction in the amount of gold
reserves. For example, the Company estimates that, based on extrapolation of
information developed in reserve calculation, but without the same degree of
analysis as required for reserve estimation, if the Company's reserves at
December 31, 1998 were based on a price of $300 per ounce of gold, reserves at
the operating properties would decrease approximately 12% and reserves at the
4
<PAGE>
development properties would decrease approximately 17%. If the Company's
reserves at December 31, 1998 were estimated at $350 per ounce of gold, reserves
at the operating properties would increase approximately 4% and reserves at
development properties would increase approximately 2%. Should any significant
reductions in reserves occur, material write-downs of the Company's investment
in mining properties and/or increased amortization charges may be required.
Change in Proven and Probable Reserves
- --------------------------------------
The reconciliation of the change in proven and probable reserves from December
31, 1997 to December 31, 1998 is as follows.
<TABLE>
<CAPTION>
(millions of ounces)
Gold Silver
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Proven and probable reserves at December 31, 1997 7.5 46.5
Extensions, discoveries and adjustments
-- McCoy/Cove 0.1 6.7
Production /(1)/ (0.8) (14.7)
Change in gold and silver price assumptions -- 0.3
- -------------------------------------------------------------------------------------------------------------
Proven and probable reserves at December 31, 1998 6.8 38.8
=============================================================================================================
</TABLE>
/(1)/ Production represents previously modeled, in-situ ounces mined during
1998; this amount does not reflect recovery losses from heap leaching and
milling.
For further information on ore reserves for specific mines, see the mines'
descriptions in "Business and Properties."
5
<PAGE>
OTHER MINERALIZATION
The following table presents other mineralization by property. Other
mineralization for producing mines and development properties is generally
estimated by the Company.
<TABLE>
<CAPTION>
Other Mineralization/(1)/
(thousands, except average grades) (at December 31)
1998 1997 1996
-------------------------------- ------------------------ -------------------
Tons Average Tons Average Tons Average
Tons (the grade (the grade (the grade
(100% Company's (ounces Company's (ounces Company's (ounces
basis) share) per ton) share) per ton) share) per ton)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
GOLD
- ----
MINES:
Round Mountain 108,285 54,143 0.015 71,132 0.016 52,958 0.015
McCoy/Cove 425 425 0.146 635 0.025 1,473 0.029
Kettle River 188 188 0.223 149 0.174 282 0.181
Lupin (including Ulu)/(2)/ 2,194 2,194 0.358 2,194 0.358 3,365 0.310
---------------------------------------------------------------------------------
111,092 56,950 0.030 74,110 0.027 58,078 0.033
---------------------------------------------------------------------------------
DEVELOPMENT AND OTHER
PROPERTIES/(3)/:
Aquarius 785 785 0.064 826 0.062 -- --
Paredones Amarillos 342 205 0.020 399 0.018 -- --
Chapada/(4)/ -- -- -- -- -- 56,700 0.012
Kingking/(5)/ -- -- -- -- -- 168,750 0.017
---------------------------------------------------------------------------------
1,127 990 0.055 1,225 0.048 225,450 0.016
---------------------------------------------------------------------------------
Total gold 112,219 57,940 0.030 75,335 0.027 283,528 0.019
=================================================================================
SILVER
- ------
MINES:
McCoy/Cove 425 425 6.151 635 0.986 1,473 1.358
---------------------------------------------------------------------------------
Total silver 425 425 6.151 635 0.986 1,473 1.358
=================================================================================
<CAPTION>
Tons Tons Tons
Tons (the Average (the Average (the Average
(100% Company's grade Company's grade Company's grade
basis) share) (%) share) (%) share) (%)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
COPPER
- ------
OTHER PROPERTIES /(3)/:
Chapada/(4)/ -- -- -- -- -- 56,700 0.43%
Kingking/(5)/ -- -- -- -- -- 168,750 0.47%
---------------------------------------------------------------------------------
Total copper -- -- -- -- -- 225,450 0.46%
=================================================================================
</TABLE>
/(1)/ Other mineralization has not been included in the proven and probable ore
reserve estimates because even though enough drilling, trenching, and/or
underground work indicate a sufficient amount and grade to warrant further
exploration or development expenditures, these resources do not qualify
under the U.S. Securities and Exchange Commission standards as
commercially minable ore bodies until further drilling, metallurgical
work, and other economic and technical feasibility factors based upon such
work are resolved.
/(2)/ In January 1998, the Company temporarily suspended operations at the Lupin
mine. See "Lupin."
/(3)/ The Company's construction and production decisions at its development
properties is dependent on the issuance of appropriate permits and the
ability of the Company to obtain required financing. See "Development
Programs."
6
<PAGE>
/(4)/ In 1996, the Company owned an option entitling it to acquire a 50% direct
interest in the Chapada property from Santa Elina Mines Corporation. The
Company elected not to exercise this option in 1997. The Company owned 51%
of the common shares of Santa Elina at year end 1996 and 58% of the common
shares at year end 1997. The Company had indirect Chapada interests of 42%
in 1996 and 48% in 1997. In 1997, the Company wrote off its entire
investment in Santa Elina of $143.6 million. The Company's share of
Chapada's other mineralization of 56.7 million tons at average grades of
0.012 ounces of gold per ton and 0.43% copper was removed from the
Company's estimates of other mineralization as of December 31, 1997. See
"Other Projects."
/(5)/ In 1997, the Company decided not to proceed with development of its
Kingking project and wrote off its entire investment in the project of
$50.0 million. The Company's share of Kingking's other mineralization of
168.8 million tons at average grades of 0.017 ounces of gold per ton and
0.47% copper was removed from the Company's estimates of other
mineralization as of December 31, 1997. See "Other Projects."
CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
With the exception of historical matters, the matters discussed in this report
are forward looking statements that involve risks and uncertainties that could
cause actual results to differ materially from targeted or projected results.
Such forward looking statements include statements regarding targets for gold
and silver production, cash operating costs and certain significant expenses,
percentage increases and decreases in production from the Company's principal
mines, schedules for completion of detailed feasibility studies and initial
feasibility studies, potential increases in reserves and production, the timing
and scope of future drilling and other exploration activities, expectations
regarding receipt of permits and commencement of mining or production,
anticipated grades and recovery rates, the ability to secure financing, and
potential acquisitions or increases in property interests. Factors that could
cause actual results to differ materially include, among others, changes in gold
and silver prices, unanticipated grade, geological, metallurgical, processing,
access, transportation of supplies or other problems, results of current
exploration activities, results of pending and future feasibility studies,
changes in project parameters as plans continue to be refined, political,
economic and operational risks of foreign operations, availability of materials
and equipment, the timing of receipt of governmental permits, force majeure
events, the failure of plant, equipment or processes to operate in accordance
with specifications or expectations, impacts of the year 2000 problem and its
effect on critical third party suppliers to the Company's operations, the
ability of the Company to complete remediation plans to its information
technology and operating systems to address the year 2000 issue, accidents,
labor relations, delays in start-up dates, environmental costs and risks, the
outcome of acquisition negotiations and general domestic and international
economic and political conditions, as well as other factors described herein or
in the Company's filings with the U.S. Securities and Exchange Commission. Many
of these factors are beyond the Company's ability to predict or control.
Readers are cautioned not to put undue reliance on forward-looking statements.
See "Risk Factors" for items which could affect forward-looking statements.
7
<PAGE>
ROUND MOUNTAIN
The Company owns an undivided 50% interest in and operates the Round Mountain
gold mine, acquired in 1985. Subsidiaries of Case, Pomeroy & Company, Inc. and
Homestake Mining Company each own an undivided 25% interest in the mine. Mining
equipment, crushing facilities, heap leaching facilities, milling facilities,
gold extraction and recovery facilities, administration and maintenance
buildings and other equipment are included in the joint venture.
The mine, located 60 miles north of Tonopah in Nye County, Nevada, consists of
open-pit mining operations on contiguous patented and unpatented mining claims
covering approximately 27,500 acres. The Company has completed all steps
currently required under U.S. law to convert the minable land to patented status
and has filed application for patents. The patents have not been issued to date
and are currently in the process of government review. See "Other-Government
Regulation and Environmental Issues."
The following table sets forth operating data for the Round Mountain operation
from 1994 through 1998. The Company's share of production is 50% of the ounces
shown.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gold produced (ounces) 510,504 477,680 410,974 344,434 423,504
Mining cost/ton of ore and waste $ 0.66 $ 0.65 $ 0.69 $ 0.61 $ 0.53
Heap leaching cost/ton of ore $ 0.74 $ 0.61 $ 0.80 $ 0.65 $ 0.66
Milling cost/ton of ore $ 3.36 $ 4.38 -- -- --
Production cost/ounce of gold produced:
Direct mining expense $ 209 $ 208 $ 228 $ 218 $ 156
Deferred stripping cost (7) 2 (2) (23) 8
Inventory movements and other (4) (3) (5) -- 12
-------- -------- -------- -------- --------
Cash operating cost 198 207 221 195 176
Royalties paid 20 22 32 31 32
Production taxes 3 4 4 4 8
-------- -------- -------- -------- --------
Total cash cost 221 233 257 230 216
Depreciation 46 39 51 62 51
Amortization 18 18 18 20 20
Reclamation and mine closure 7 7 5 5 4
-------- -------- -------- -------- --------
Total production costs $ 292 $ 297 $ 331 $ 317 $ 291
-------- -------- -------- -------- --------
Capital expenditures (millions)/(1)/ $ 12.6 $ 30.7 $ 17.5 $ 11.7 $ 8.7
Deferred (applied) mining
expenditures (millions)/(1)/ $ 1.7 $ (0.4) $ 0.4 $ 4.0 $ (1.7)
Heap leached-reusable pad:
Ore processed (tons/day) 18,953 26,608 27,737 22,490 18,980
Days of operation 361 359 354 354 355
Total ore processed (000 tons) 6,842 9,552 9,819 7,961 6,738
Grade (ounce/ton) 0.036 0.036 0.036 0.034 0.040
Recovery rate (%) 70.6 74.9 66.1 70.9 78.7
Gold recovered (ounces) 182,378 268,518 231,420 192,052 216,710
Heap leached-dedicated pad:
Ore processed (tons/day) 101,892 107,716 87,706 66,197 54,161
Days of operation 361 359 354 354 355
Total ore processed (000 tons) 36,783 38,670 31,048 23,434 19,227
Grade (ounce/ton) 0.010 0.010 0.011 0.012 0.014
Recovery rate (%) /(2)/ /(2)/ /(2)/ /(2)/ /(2)/
Gold recovered (ounces) 221,396 195,558 167,004 138,700 173,544
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Milled: /(3)/
Ore processed (tons/day) 7,993 n.m. -- -- --
Days of operation 361 63 -- -- --
Total ore processed (000 tons) 2,885 274 -- -- --
Gold grade (ounce/ton) 0.045 0.041 -- -- --
Gold recovery rate (%) 77.9 60.0 -- -- --
Gold recovered (ounces) 97,686 6,410 -- -- --
High grade ore processed:/(4)/
Gold recovered (ounces) 9,044 7,194 12,550 12,244 33,052
Other:
Gold recovered (ounces) -- -- -- 1,438 198
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ The Company's 50% share.
/(2)/ For dedicated leach pads, a gold recovery rate cannot be calculated
until leaching is complete. The eventual recovery rate is estimated to
be approximately 50%.
/(3)/ Construction of an 8,000 ton per day mill to treat higher-grade non-
oxidized ore was completed in the fourth quarter of 1997.
/(4)/ A high grade occurrence was discovered April 1992. A small gravity plant
was constructed to recover these ounces.
n.m. Not meaningful.
Geology and Ore Reserves
- ------------------------
Gold mineralization in the Round Mountain deposit is associated with Tertiary
volcanism and Caldera Formation. The deposit is hosted by a thick sequence of
rhyolitic ash-flow tuffs deposited on a Paleozoic and Cretaceous basement.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Round Mountain Mine
Ore Reserves/(1)(2)/
December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Average grade
Tonnage of gold Gold content/(3)/
(000's short tons) (ounces per ton) (000's ounces)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Round Mountain pit 232,372 0.021 4,893
Offloads and heap leach stockpiles/(4)/ 123,407 0.011 1,367
Mill stockpiles 2,818 0.041 115
- ------------------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1998 358,597 0.018 6,375
- ------------------------------------------------------------------------------------------------------------------------------------
Proven 280,075 0.018 4,938
Probable 78,522 0.018 1,437
- ------------------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1998 358,597 0.018 6,375
- ------------------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1997 401,325 0.018 7,037
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ The Company's share is 50% of the reserves presented.
/(2)/ See "Reserves" for a discussion of the estimation of proven and probable
ore reserves.
/(3)/ Reserves include allowances for dilution in mining but do not reflect
losses in the leaching process. The average leach recovery rate for the
reusable pad in 1998 was 71%. The eventual average recovery rate for the
dedicated pad is estimated to be approximately 50%. The mill recovery rate
was 78% in 1998.
9
<PAGE>
/(4)/ The offloads consist of approximately 81 million tons of previously
crushed, leached and rinsed ore. The heap leach stockpiles consist of
approximately 42 million tons of previously unprocessed ore. Sampling and
metallurgical testing conducted in 1994 and 1995 confirmed that this
material can be profitably processed on the dedicated leach pads.
The cut-off grades are 0.006 ounce of gold per ton for oxides and 0.010 ounce
per ton for non-oxides.
The prospective waste to ore ratio of pit ore is 0.85:1.
Mining and Processing
- ---------------------
Ore and waste rock was mined at a rate of 195,629 tons per day in 1998 compared
to 197,178 tons per day in 1997. All mined material requires drilling and
blasting prior to excavation. The open pit mining operation employs three 28-
cubic yard electric mining shovels, one 22-cubic yard hydraulic mining shovel,
and seventeen 150-ton, thirteen 190-ton and nine 85-ton mechanical haul trucks.
Gold recovery from ore occurs from four independent recovery operations. These
include crushed ore (reusable pad) leaching, run-of-mine ore (dedicated pad)
leaching, gravity concentration, and the milling of higher grade non-oxidized
ore. Beginning in 1993 the Company began processing the lower grade ore on the
run-of-mine leach pads.
Heap leaching on the reusable pad is used to recover gold above a cut-off grade
of 0.018 ounce per ton. Ore is crushed to less than 3/4 inches at a rate of
30,000 tons per day and conveyed to two parallel 1.5 million square foot asphalt
reusable leach pads. This ore is leached for approximately 100 days, rinsed,
removed and placed on the dedicated leach pad and releached. Most of the
contained gold is released from the reusable pad within the 100 days, but Round
Mountain has determined that sufficient gold values remain to justify additional
leaching on the low-cost dedicated pad over a period of years. Heap leach
production from the reusable pad was 182,378 in 1998 compared to 268,518 in 1997
due to decreased tonnages. In 1998, 18,953 tons of ore per day were processed
on the reusable heap leach pad, compared to 26,608 tons per day in 1997. For a
general description of Round Mountain's mining and heap-leach recovery process
see page 51.
Lower grade oxidized ore (down to a cut-off grade of 0.006 ounce per ton) and
ore removed from the reusable leach pad is transported directly to a dedicated
run-of-mine leach pad at a rate which averaged 101,892 tons per day in 1998,
compared to 107,716 tons per day in 1997. Ore is placed in 50 foot thick layers
for leaching. After completion of an initial leaching cycle of approximately 100
days, additional layers of ore are placed until the heap reaches an ultimate
height of 300 feet. The dedicated leach pad is constructed in phases as
capacity is needed. The existing dedicated leach pad covers approximately 16.4
million square feet and has a capacity of approximately 131 million tons.
Current mining rates consume approximately 3 to 4 million square feet of
dedicated leach pad per year.
Gravity concentration is applied only to very high grade ore containing coarse
gold. A 500 ton per day gravity recovery circuit was constructed in 1992 to
process ore from a small but very high grade vein excavated within the main
Round Mountain ore body. The gravity plant is expected to produce approximately
25,000 ounces in 1999.
In 1997, the joint venture partners implemented a new, optimized pit design
which eliminates the mining of lower-grade, higher-cost non-oxidized material.
While the new pit design is expected to result in increased cash flows over the
life of the mine, it reduced Round Mountain's gold reserves by 1.2 million
ounces of gold (the Company's share, 0.6 million ounces). Under the revised
plan, mining is expected to be complete in another eight years (assuming no new
gold discoveries) plus four years of stockpile processing.
10
<PAGE>
Construction of an 8,000 ton per day mill to treat higher-grade non-oxidized ore
was completed in 1997, at a total cost of $64 million (the Company's share, $32
million). The mill processed approximately 2.9 million tons in 1998, its first
full year of operations. The facility recovers up to 75 to 85% of the gold
contained in non-oxidized ores by employing gravity concentration and cyanide
leaching.
In 1999, Round Mountain is expected to produce about 5% to 10% less gold than
1998's production of 510,504 ounces (the Company's share, 255,252 ounces)
reflecting expected lower ore tons in 1999 due to higher waste removal. See
"Cautionary 'Safe Harbor' Statement under the United States Private Securities
Litigation Reform Act of 1995" and "Risk Factors."
11
<PAGE>
MCCOY/COVE
The McCoy/Cove property commenced production in April 1986 as an open pit heap
leaching operation. The McCoy mine and surrounding property, which was
purchased by the Company in September 1986, is located in Lander County, Nevada,
about 30 miles southwest of the town of Battle Mountain. The Cove deposit,
located one mile northeast of the McCoy deposit, was discovered in early 1987.
Open pit mining of the Cove deposit began in early 1988. A 7,500 ton per day
mill, completed in July 1989, utilizes flotation and agitation leach circuits to
recover gold and silver from sulfide ores not amenable to heap leaching and from
high-grade oxide ore. In 1996, the mill was expanded to 10,000 tons per day.
The McCoy/Cove property consists of approximately 2,246 unpatented claims
covering approximately 40,000 acres of United States federal land administered
by the Bureau of Land Management of the Department of the Interior. The Company
has completed all steps currently required under U.S. law to convert the land to
patented status and has filed applications for patents. The patents have not
been issued to date and are currently in the process of government review. See
"Other-Government Regulation and Environmental Issues."
During 1996, the Company recorded a $30.0 million provision related to the
estimated costs to remove waste rock from a portion of the Cove pit wall that
had collapsed. The cost estimate underlying the provision is based on an
evaluation of the total tons to be removed and the associated cost per ton. In
March 1998, the Company hedged the reserves affected by the collapsed portion of
the Cove pit wall by selling forward 270,000 ounces of gold at an average price
of $319 per ounce and 19.0 million ounces of silver at an average price of $6.01
per ounce, with delivery dates from 1998 to 2001. Based on this hedge position,
the Company proceeded with the pit wall remediation in the second half of 1998.
By December 31, 1998, total spending for the pit wall remediation was $14.8
million. The remediation is expected to be completed by mid-1999.
In 1997, as a result of the lower gold prices, the Company recorded a $47.0
million provision for impaired assets related to McCoy/Cove. The need for and
the amount of the provision were determined by comparing asset carrying values
to estimated future net cash flows from existing reserves.
In January 1998, in response to the continued low gold prices, the Company
decided to scale back operations at McCoy/Cove. As a result, the McCoy/Cove
work force was reduced by approximately 20%. Mining activities were refocused
on the higher-margin mill ounces from the Cove pit. Mining was discontinued in
the smaller, higher-cost McCoy pit. Based on a reengineered pit design, mining
resumed in the McCoy pit in the second quarter of 1998 at a lower cost.
The following table sets forth operating data for the McCoy/Cove operation from
1994 through 1998.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gold produced (ounces) 167,494 187,034 271,731 310,016 359,360
Silver produced (ounces) 9,412,823 11,021,708 7,102,348 11,905,806 10,443,151
Mining cost/ton of ore and waste $ 0.71 $ 0.74 $ 0.72 $ 0.67 $ 0.68
Heap leaching cost/ton of ore $ 1.74 $ 1.70 $ 1.68 $ 2.32 $ 1.09
Milling cost/ton of ore $ 6.09 $ 8.82 $ 9.50 $ 10.67 $ 10.09
Production cost/ounce of gold
Direct mining expense $ 200 $ 276 $ 286 $ 206 $ 191
Deferred stripping cost (1) (10) (16) 15 6
Inventory movements and other 4 5 1 (4) (3)
---------- ----------- ---------- ----------- -----------
Cash operating cost 203 271 271 217 194
Royalties 3 3 5 5 6
Production taxes 2 (1) 4 7 9
---------- ----------- ---------- ----------- -----------
Total cash cost 208 273 280 229 209
Depreciation 52 66 71 53 48
Amortization 37 44 46 46 43
Reclamation and mine closure 9 10 8 5 5
---------- ----------- ---------- ----------- -----------
Total production cost $ 306 $ 393 $ 405 $ 333 $ 305
---------- ----------- ---------- ----------- -----------
</TABLE>
12
<PAGE>
<TABLE>
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average gold-to-silver price ratio/(1)/ 54:1 67:1 75:1 74:1 73:1
Capital expenditures (millions) $ 1.3 $ 2.2 $ 7.3 $ 8.6 $ 5.2
Deferred (applied) mining
expenditures (millions) $ 0.5 $ 3.7 $ 6.0 $ (7.3) $ (3.0)
Heap leached:
Ore processed (tons/day) 11,296 17,840 16,671 11,966 21,682
Days of operation 364 364 364 364 364
Total ore processed (000 tons) 4,112 6,494 6,068 4,355 7,892
Gold grade (ounce/ton) 0.021 0.018 0.018 0.018 0.013
Silver grade (ounce/ton) 0.26 0.29 0.27 0.49 0.48
Gold recovery rate /(2)/ /(2)/ /(2)/ /(2)/ /(2)/
Silver recovery rate /(2)/ /(2)/ /(2)/ /(2)/ /(2)/
Gold recovered (ounces) 53,096 55,129 66,834 59,910 66,617
Silver recovered (ounces) 398,006 396,928 513,227 877,463 940,652
Milled:
Ore processed (tons/day) 11,829 9,315 9,031 7,275 7,307
Days of operation 364 364 364 364 364
Total ore processed (000 tons) 4,306 3,391 3,287 2,648 2,660
Gold grade (ounce/ton) 0.046 0.061 0.086 0.113 0.140
Silver grade (ounce/ton) 2.95 4.54 3.14 5.27 5.29
Gold recovery rate (%) 57.8 64.3 79.5 82.4 80.3
Silver recovery rate (%) 69.8 69.7 73.5 78.8 70.1
Gold recovered (ounces) 114,398 131,905 204,897 250,106 292,743
Silver recovered (ounces) 9,014,817 10,624,780 6,589,121 11,028,343 9,502,499
- ----------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ To convert costs per ounce of gold into comparable costs per ounce of co-
product silver, divide the production cost per ounce of gold by the
period's average gold-to-silver price ratio.
/(2)/ As dedicated leach pads are used at McCoy/Cove, a gold recovery rate
cannot be calculated until leaching is complete. The ultimate recovery
rate for crushed ore is estimated to be about 68% for gold and 35% for
silver and for run-of-mine ore, 48% for gold and 10% for silver.
13
<PAGE>
Geology and Ore Reserves
- ------------------------
Gold deposition in the McCoy pit is associated with the intrusion of a Tertiary-
age quartz diorite stock into Mesozoic sedimentary formations including
quartzites, conglomerates, and limestones. Gold occurs in the Skarn Formation
proximal to the intrusion and as a stockwork-type deposit in the highly
fractured sediments.
The Cove deposit is a sediment hosted gold-silver deposit that is spatially
associated with a sequence of argillically altered felsite dikes. Gold and
silver mineralization occurs both as a rind around the altered intrusion and
away from the intrusions along favorable horizons such as permeable beds and
fractured zones. Cove ore is hosted by limestone of the Augusta Mountain
Formation and by conglomerate/sandstone of the Panther Canyon Formation.
<TABLE>
<CAPTION>
McCoy/Cove Mine
Ore Reserves/(1)/
December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Tonnage Average grade Content/(2)/
(000's short tons) (ounces per ton) (000's ounces)
-------------------- ------------------------------------- ---------------------------------
Gold Silver Gold Silver
---- ------ ---- ------
<S> <C> <C> <C> <C> <C>
Cove Pit 14,045 0.034 1.957 483 27,481
West Contact of McCoy Pit 2,121 0.031 -- 66 --
Stockpiles 5,518 0.027 2.053 150 11,328
- -----------------------------------------------------------------------------------------------------------------------------------
Proven and Probable-1998 21,684 0.032 1.790 699 38,809
- -----------------------------------------------------------------------------------------------------------------------------------
Proven 12,683 0.032 1.958 411 24,837
Probable 9,001 0.032 1.552 288 13,972
- -----------------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1998 21,684 0.032 1.790 699 38,809
- -----------------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1997 24,737 0.037 1.881 915 46,525
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ See "Reserves" for a discussion of the estimation of proven and probable
ore reserves.
/(2)/ Reserves include allowances for dilution in mining but do not reflect
losses in the recovery process. Recovery rates for the life-of-mine are
estimated to be 69% for gold and 67% for silver.
The gold-equivalent cut-off grades are 0.008 ounce per ton for oxides and 0.100
ounce per ton for high- grade sulfides and 0.038 ounce per ton for low-grade
sulfides.
The prospective waste-to-ore ratio is 2.1:1.
Mining and Processing
- ---------------------
Ore and waste rock was mined at a rate of 120,677 tons per day in 1998, compared
to 148,348 tons per day in 1997. In 1998, 12.9 million tons were mined as part
of the Cove pit wall remediation. Mining during 1998 was from deeper levels of
the Cove pit resulting in lower production levels compared to 1997. All material
requires drilling and blasting prior to excavation. The open pit mining
operation employs four 23-cubic yard hydraulic mining shovels, one 23-cubic yard
wheel loader, nine 150-ton and ten 190-ton mechanical haul trucks. Gold recovery
from ore occurs from a 10,000 ton per day mill and from crush and run-of-mine
heap leaching operations.
Stockpiled ore increased slightly from 4.7 million tons in 1997 to 5.5 million
tons in 1998. The Company expects the stockpiled ore to fluctuate as a function
of the mine plan. Mining operations are expected to run through 2000, with the
processing of the stockpiled ore continuing through 2002.
14
<PAGE>
The Company mines at a high rate to minimize the time and expense required to
keep the Cove pit dewatered. Water pumped out of the Cove pit averaged 17,400
gallons per minute at the end of 1998. Water flows are projected to increase in
future years. The Company uses infiltration ponds for water pumped from the
mine.
A 10,000 ton per day mill utilizes flotation and agitation leach circuits to
recover gold and silver from high grade oxide ore and sulfide ores not amenable
to heap leaching. The mill was expanded in 1996 from 7,500 tons per day which
has resulted in improved recoveries of sulfide ore by increasing processing
time. For a general description of McCoy/Cove's mining and mill recovery
process, see page 50.
The ore mined from the Cove pit was all oxide in the early years of production.
Oxide ore is replaced by sulfide ore at depth. Almost all of the remaining ore
at Cove is sulfide. Overall recovery rates and production levels decline as more
sulfides are processed. In the second half of 1997, McCoy/Cove began processing
carbonaceous ore that had in past years been mined from the Cove pit and
stockpiled.
The mill processed more sulfide and less carbonaceous ore in 1998 compared to
1997. Mill throughput averaged 11,829 tons per day in 1998 compared to 9,315 in
1997. Gold and silver production decreased compared to 1997 due to lower mill
grades and recoveries, partially offset by higher throughput.
Heap leach gold production was slightly lower compared to 1997 due to fewer tons
processed partially offset by higher grade. The heap leach crusher averaged
11,296 tons per day in 1998 compared to 11,444 tons per day in 1997. In 1997,
additional lower-grade heap leach ore was processed uncrushed, for a total of
17,840 tons per day in 1997. No such run-of-mine ore was processed in 1998.
The Company finished mining the high grade sulfide zone at Cove in 1995. The
lower grade of the remaining sulfides, coupled with lower recovery rates, meant
lower production from sulfides during 1998 and 1997.
In 1999, McCoy/Cove is expected to produce about 20% to 30% less gold compared
to the 167,494 ounces produced in 1998. Silver production is expected to
decrease about 15% to 25% from the 9.4 million ounces produced in 1998. The
expected decrease in gold and silver production in 1999 is due to planned lower
grades and recovery rates. See "Cautionary 'Safe Harbor' Statement under the
United States Private Securities Litigation Reform Act of 1995" and "Risk
Factors."
15
<PAGE>
KETTLE RIVER
The Kettle River properties are located in Ferry County in the State of
Washington and cover approximately 8,100 acres through patented and unpatented
mining claims and fee lands.
In 1997, as a result of the lower gold prices, the Company recorded a $15.0
million provision for impaired assets related to Kettle River. The need for and
the amount of the provision were determined by comparing asset carrying values
to estimated future net cash flows from existing reserves.
The following table sets forth operating data for the Kettle River operation
from 1994 through 1998.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gold produced (ounces) 113,692 129,866 124,910 100,419 66,782
Mining cost/ton of ore $ 21.65 $ 21.53 $ 21.12 $ 22.60 $ 11.06
Milling cost/ton of ore $ 10.71 $ 10.58 $ 11.96 $ 12.76 $ 13.54
Production cost/ounce of gold produced:
Direct mining expense $ 238 $ 231 $ 190 $ 237 $ 225
Deferred mine development -- -- -- -- --
Inventory movements and other 6 (4) 11 (7) 28
-------- -------- -------- -------- -------
Cash operating cost 244 227 201 230 253
Royalties 12 14 10 8 5
Production taxes 1 2 2 2 2
-------- -------- -------- -------- -------
Total cash cost 257 243 213 240 260
Depreciation 77 54 59 74 95
Amortization 5 36 45 45 45
Reclamation and mine closure 12 12 8 7 6
-------- -------- -------- -------- -------
Total production cost $ 351 $ 345 $ 325 $ 366 $ 406
-------- -------- -------- -------- -------
Capital expenditures (millions) $ 1.5 $ 3.8 $ 8.8 $ 9.5 $ 10.0
Deferred (applied) mining
expenditures (millions) $ -- $ -- $ -- $ -- $ --
Milled:
Ore processed (tons/day) 2,017 2,118 1,652 1,504 1,438
Days of operation 364 364 364 364 364
Total ore processed (000 tons) 734 771 601 548 523
Grade (ounce/ton) 0.187 0.197 0.240 0.212 0.149
Recovery rate (%) 82.8 85.4 86.5 86.6 85.6
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
Geology and Ore Reserves
- ------------------------
Ore reserves at Kettle River exist at the Lamefoot and K-2 deposits. At
Lamefoot, gold occurs near the contact between Permian age siliciclastic and
carbonate rocks and is associated with silicification, magnetite, hematite,
pyrrhotite and pyrite. At K-2, gold is contained in steeply dipping quartz
carbonate veins hosted by Eocene age volcanic rocks.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Kettle River
Ore Reserves/(1)/
December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------
Average grade
Tonnage of gold Gold content/(2)/
(000's short tons) (ounces per ton) (000's ounces)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Lamefoot 646 0.196 126
K-2 525 0.211 111
- ------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1998 1,171 0.202 237
- ------------------------------------------------------------------------------------------------------------------------
Proven 832 0.205 171
Probable 339 0.195 66
- ------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1998 1,171 0.202 237
- ------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1997 1,734 0.196 339
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ See "Reserves" for a discussion of the estimation of proven and probable
ore reserves.
/(2)/ Reserves do not reflect losses in the milling process but do include
allowance for dilution in the mining process. The average mill recovery
rate of gold in 1998 was 83%.
Cut-off grades are 0.120 ounce of gold per ton at Lamefoot and 0.131 ounce of
gold per ton at K-2.
Mining and Processing
- ---------------------
At Kettle River, a series of deposits are mined to feed a central mill. In 1998,
approximately 63% of ore milled came from Lamefoot. Production commenced at K-
2, the sixth deposit developed at Kettle River, in January 1997. In 1998,
approximately 37% of ore milled came from K-2.
Development of the Lamefoot project began during 1992 when the portal was
collared. By December 1994, 17,500 feet of drifting was complete. Lamefoot
commenced production in December 1994. Lamefoot achieved full production in
June 1995, at a rate of 1,500 tons per day. Longhole open stoping is utilized
as the mining method, with delayed backfill. Zones with ore widths of 50 feet
utilize cemented backfill in primary stopes and unconsolidated fill in secondary
stopes. Zones under 50 feet in width are filled with unconsolidated fill. Ore
is removed from the stopes using remote control muckers and hauled to the
surface using 26-ton haul trucks. Total Lamefoot ore production in 1998 was
435,163 tons compared to 548,889 in 1997 due to longer underground ore hauls
related to deeper mining activity at Lamefoot. Ore production for 1999 is
expected to be approximately 375,000 tons.
In December 1994, surface excavation for building construction and portal
clearing commenced at K-2. The portal was collared in March 1995 and a total of
10,629 feet of development was completed by the end of 1996. Stope development
began in the fourth quarter of 1996 and production commenced in January 1997.
The mining method is similar to Lamefoot, longhole open stoping, but due to the
narrow widths, cemented fill is required in the South zone. Total K-2 ore
production in 1998 was 243,867 tons. Ore production for 1999 is expected to be
approximately 250,000 tons.
Mining operations are expected to continue through at least the year 2000 at
Kettle River, depending upon the success of the Company's exploration
activities.
17
<PAGE>
Ore from all sources is trucked to the Kettle River mill where the recovered
gold is cast into dore bars prior to shipping off site. The mill processed
approximately 2,000 tons of ore per day in 1998, compared to 2,100 tons per day
in 1997. Production decreased in 1998 compared to 1997 due to decreased
tonnages at the Lamefoot mine and lower mill grades.
In 1999, Kettle River is expected to produce about 10% to 20% less than the
113,692 ounces of gold produced in 1998. See "Cautionary 'Safe Harbor' Statement
under the United States Private Securities Litigation Reform Act of 1995" and
"Risk Factors."
18
<PAGE>
LUPIN
The Lupin mine is an underground operation located 250 miles northeast of
Yellowknife in the Nunavut Settlement Area of the Northwest Territories of
Canada, 56 miles south of the Arctic Circle. Production began in October 1982.
The Lupin mining leases cover 16,699 acres. The principal lease was renewed for
21 years in 1992, and provided the Company has complied with its terms, is
renewable for further 21 year periods subject to any applicable regulations then
in effect. The lease was granted by the Department of Indian Affairs and
Northern Development on behalf of the Crown and is subject to the provisions of
the Territorial Lands Act and the Canada Mining Regulations. The lease is in
good standing. See "Other-Government Regulation and Environmental Issues" for
discussion regarding Inuit ownership interests.
In 1995, the Company purchased the Ulu property, located approximately 100 miles
north of Lupin. The property is subject to a 5% net smelter royalty after the
recovery of 675,000 ounces of gold. The Ulu property has approximately 1.5
million minable tons of other mineralization at an average grade of 0.374 ounce
of gold per ton. The deposit is open on strike and down dip. In the third
quarter of 1997, the Company deferred further development of Ulu in light of the
downturn in gold prices.
In 1997, as a result of the lower gold prices, the Company recorded a $65.0
million provision for impaired assets related to the Lupin and Ulu properties.
The need for and the amount of the provision were determined by comparing asset
carrying values to estimated future net cash flows from existing reserves.
In January 1998, the Company temporarily suspended operations at the Lupin mine
until the gold price improves. By the end of the first quarter of 1998,
preparation of the mine and facilities to continue in a care and maintenance
mode was complete. Annual care and maintenance costs are estimated to be
approximately $3.2 million. As a result of the suspension of operations, Lupin
terminated approximately 500 employees. A small group of maintenance and
security personnel remain employed to monitor the mine and facilities during the
period of suspension.
The Company has completed an initial study reviewing the feasibility of re-
commencing operations at Lupin. The study encompassed a review of mining
methodology, operational practices and organizational structure with a view to
reducing costs while maintaining the high level of safety achieved over the
first fifteen years of operations. Under the proposed new mine plan, the
installation of an internal hoisting system would enhance the economics of
mining at levels lower than the current crushing and hoisting system will allow.
Additionally, under the new plan, mining and processing rates would be reduced
to 1,800 tons per day from the previous level of 2,100 tons per day, resulting
in planned average production of 150,000 ounces per year compared to 165,335
ounces achieved in 1997. Revised work schedules, coupled with a streamlining of
the organizational structure, would reduce labor costs. The study estimates
that under the proposed plan cash costs over the life of the mine would average
between $245 to $255 per ounce of gold compared to $284 per ounce of gold for
the full year 1997. Work will continue to address other areas for optimization.
Recommissioning of the Lupin mine will only be undertaken when the Company can
secure a satisfactory cash margin over the cash operating costs.
See "Cautionary 'Safe Harbor' Statement under the United States Private
Securities Litigation Reform Act of 1995" and "Risk Factors."
19
<PAGE>
The table below sets forth operating data for the Lupin mine from 1994 through
1998.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gold produced (ounces) -- 165,335 166,791 172,110 180,052
Mining cost/ton of ore -- C$ 46.09 C$ 44.08 C$ 44.23 C$ 40.45
Milling cost/ton of ore -- C$ 11.77 C$ 12.39 C$ 12.26 C$ 12.03
Production cost/ounce of gold produced:
Canadian dollars:
Direct mining expense -- C$ 381 C$ 411 C$ 423 C$ 375
Deferred mine development -- 13 (4) (22) (4)
Inventory movements and other -- (1) 1 4 4
-- -------- -------- -------- --------
Cash operating cost C$ 393 C$ 408 C$ 405 C$ 375
-------- -------- -------- --------
U.S. dollars:
Cash operating cost -- US$ 284 US$ 299 US$ 296 US$ 274
Royalties -- -- -- -- --
Production taxes -- -- -- -- --
-------- -------- -------- --------
Total cash cost -- 284 299 296 274
Depreciation -- 71 71 68 64
Amortization -- 24 21 19 16
Reclamation and mine closure -- 14 8 7 6
-------- -------- -------- --------
Total production cost -- US$ 393 US$ 399 US$ 390 US$ 360
-------- -------- -------- --------
Capital expenditures (millions US$) -- $ 12.3 $ 15.7 $ 14.5 $ 8.5
Deferred (applied) mining
expenditures (millions US$) -- $ (1.8) $ 0.2 $ 2.8 $ 0.5
Milled:
Ore processed (tons/day) -- 2,167 2,111 1,986 2,241
Days of operation -- 364 364 364 364
Total ore processed (000 tons) -- 789 768 723 816
Grade (ounce/ton) -- 0.226 0.235 0.258 0.238
Recovery rate (%) -- 92.6 92.5 92.5 92.9
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Geology and Ore Reserves
- ------------------------
Gold at the Lupin deposit occurs in a Z-shaped isoclinally folded iron formation
of Archean age. Gold is associated with pyrrhotite, arsenopyrite and quartz.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Lupin Mine
Ore Reserves/(1)/
December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------
Average grade
Tonnage of gold Gold content/(2)/
(000's short tons) (ounces per ton) (000's ounces)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Center Zone 743 0.282 210
East Zone 202 0.221 45
West Zone 894 0.265 236
McPherson Zone 179 0.289 52
- ------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1998 2,018 0.269 543
- ------------------------------------------------------------------------------------------------------------------------
Proven 1,454 0.275 400
Probable 564 0.254 143
- ------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1998 2,018 0.269 543
- ------------------------------------------------------------------------------------------------------------------------
Total Proven and Probable-1997 2,018 0.269 543
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
/(1)/ See "Reserves" for a discussion of the estimation of proven and probable
ore reserves.
/(2)/ Reserves do not reflect losses in the milling process but do include
allowance for dilution of ore in the mining process. The mining recovery
factor was estimated at 85%. The average mill recovery rate in 1997 was
93%.
The cut-off grade used in the reserve calculation is 0.150 ounce of gold per ton
at the upper levels of the mine and 0.204 ounce of gold per ton at the lower
levels of the mine.
Mining and Processing
- ---------------------
Access to the Lupin underground mine, removal of ore and waste, and movement of
personnel within the mine, is by a shaft developed to a depth of 3,970 feet and
by a ramp driven to a depth of 4,430 feet.
The ore in the Center, West and East Zones has been mined by the sub-level,
long-hole open stoping method. In 1995, Lupin incorporated "pastefill", which
is composed of mine tailings and cement, into the stoping sequence.
After the ore is mined, it is hoisted to the surface for processing and recovery
of gold in a 2,300 ton per day mill, where the recovered gold is cast in dore
bars prior to being shipped off site. The mill processed 2,167 tons per day in
1997.
The ore grade at Lupin declines with depth, and the deposit becomes more
erratic. The Center Zone of the three-zoned ore body also tends to be narrower.
Additional ground support is required and longer truck haulage distances are a
factor as the depth increases. All of this causes slower and more costly mining
in the deeper levels of the mine. The Company has changed its mining techniques
and backfill process to address the challenges of mining at depth. Mechanized
cut and fill mining techniques may afford an opportunity to better utilize
equipment and to improve profitability at depth.
During 1997, a study was completed which determined that an internal winze was
feasible to access ore below the current depth of the ramp. The winze will
allow the hoisting of ore from the deeper areas of the mine, replacing the
costly trucking methodology historically used.
Supplies, Utilities and Transportation
- --------------------------------------
The Lupin mine and mill facilities are in a remote location in the sub-Arctic
region of Canada which requires the Company to respond to difficult weather and
other conditions. At the mine, the Company maintains supplies of spare parts
and other materials, including fuel, in excess of what would be required at less
remote locations.
The principal supplies needed for the operation of the Lupin mine are diesel
fuel, chemical reagents (including lime, cyanide and zinc), cement, grinding
media, drill steel, equipment parts, lubricants, food and explosives. The
largest single item is diesel fuel, which is used principally to generate power.
A diesel-powered generating plant provides power for all the Lupin facilities.
The powerhouse has a primary installed capacity of approximately 18,000
kilowatts which is supplemented by additional standby generators having a
combined capacity of 1,500 kilowatts. Heating for the Lupin facilities is
obtained by utilizing waste heat from these generators augmented by oil-fired
boilers.
All equipment, materials and supplies must be transported to the mine from
Edmonton or Yellowknife. Personnel are transported from these locations and
from Kugluktuk (formerly Coppermine) and Cambridge Bay in the Nunavut Settlement
Area of the Northwest Territories. Each year since 1983, the Company has
completed a 360-mile ice road commencing 40 miles northeast of Yellowknife and
ending at the Lupin mine as the most economical way of transporting bulk items,
including fuel, to the mine. During the 1998 winter road season, a small amount
of fuel was delivered to Lupin along with other supplies which Lupin committed
to purchase prior to the suspension of operations. The cost of the fuel and
other supplies amounted to approximately $1.5 million. Costs of operating the
winter road during the suspension of operations will have minimal financial
impact on the Company, as there will be cost
21
<PAGE>
recovery through third party user fees. The timing of the decision to resume
operations at Lupin will be dependent on the availability of the winter road, as
well as the market price of gold.
In order to operate the winter road, the Company is required to obtain certain
permits from the government of the Northwest Territories. To date, the Company
has experienced no significant difficulties in obtaining these permits. The
winter road is usable for approximately 12 weeks each year beginning in mid-
January during which time tractor-trailers can transport all of the Company's
annual requirements for diesel fuel, chemical reagents and certain other
supplies. There are on-site facilities for the storage of approximately 5.4
million U.S. gallons of diesel fuel, which is in excess of the mine's annual
requirements.
Surface facilities at the Lupin mine include a 6,300-foot compacted gravel
airstrip with an instrument landing and navigation system and runway lighting.
Supplies and personnel that must be brought in by air are transported
principally on a leased Boeing 727, which carries up to 114 passengers, or up to
35,000 pounds of freight, or a combination of both passengers and freight.
Voice and data communications with the Lupin mine are maintained via satellite,
which provides for uninterrupted communications regardless of weather
conditions. Satellite communications will be continued during the suspension of
operations.
Water Supply and Waste Disposal
- -------------------------------
Water for mining, milling and domestic use is obtained on site by pumping from
Contwoyto Lake. Tailings from the mill are pumped into a tailings pond or
pumped underground as part of the paste-backfill. In 1997, approximately 32% of
tailings were placed underground as paste-backfill. Water from the tailings pond
is processed through a water treatment plant and monitored for compliance with
Northwest Territories' standards prior to discharge. The Company's water
license, which is renewable on application, expires May 31, 2000.
22
<PAGE>
DEVELOPMENT PROGRAMS
Aquarius
- --------
In 1997, the Company deferred a final construction decision on the Aquarius
project.
The Company owns 100% of the Aquarius project which is located in Macklem
Township, 40 kilometers east of Timmins, Ontario, Canada. The City of Timmins
is centrally located in northeastern Ontario on Highway 101 approximately 700
kilometers, by road, northwest of Toronto. All-weather primary highways connect
with Thunder Bay to the west and North Bay, Sudbury and Toronto to the south.
The project site is located two kilometers south of Highway 101.
The project site is on a group of 12 patented claims that grant the Company fee
simple title. The patents are part of a larger land package of leased and
staked claims that cover most of the northern portion of Macklem Township.
Environmental work on the project commenced in May 1995 and the Company expects
completion and approval of the Comphrensive Study Review (CSR) by the end of the
third quarter of 1999. This will allow the Company to proceed with full project
permitting.
Aquarius has 1,263,000 ounces of proven and probable gold reserves at December
31, 1998 (19.2 million tons of ore at an average grade of 0.066 ounces per ton).
The reserves were based on a cutoff grade of 0.015 ounce per ton. The cutoff
grade was based on a price of $325 per ounce of gold. The gold recovery is
expected to be 95%.
Aquarius is an Archean lode gold deposit with mineralization in carbonate
altered ultramafic rocks, associated felsic intrusives, and quartz veins in
talc-chlorite schists. Clay overburden 10 to 40 meters thick overlays 30 to 80
meters of glacial till. The "nuggety" style of gold mineralization at Aquarius
is characteristic of this deposit type and leads to difficulty in the prediction
of ore grades. This difficulty is addressed by: i) extensive drilling, ii)
advanced geostatistical analysis with multiple techniques, iii) cross validation
with production data and independent estimates, and iv) review of the results by
an expert consultant.
In 1998, the Company completed the frozen earth system around the pit perimeter
to prevent groundwater from flowing into the pit from the surrounding water
table. The circumference of the freeze system is 12,000 ft (2.25 miles,
equivalent to 3.66 km). The system includes over 600,000 linear feet of
drilling in more than 2,200 holes spaced 6.3 feet apart. This will allow an
adequate distance between the holes to provide a solid barrier, and it will
allow the holes to penetrate the bedrock which has little water flow. The
process has been used successfully in construction and underground mining for
over 100 years. The process involves circulating a brine solution that is
cooled with refrigeration units, through the holes which will remove the heat
from surrounding material and allow it to freeze. The Company expects that it
will take approximately four months for this process to entirely freeze the wall
to prevent water from leaking through the glacial overburden. The Company does
not plan to operate the frozen earth system during the period of project
deferral. All facilities and equipment are on a scheduled care and maintenance
program designed to fully preserve all assets.
The first planned stage of mining will be removal of the clay and sand
overburden. The rock mining stage will produce all of the ore to be milled.
Due to the shape of the deposit, the pit will have two separate bottoms with a
ridge of waste rock separating them. Mining will be phased to exploit the more
northerly of the two segments first.
The ore will be crushed in three stages so that approximately 80% of the ore
will be less than 3/8 inch in size. The secondary and tertiary crushers and all
interconnecting screens and conveyors are located indoors to minimize problems
with wet or frozen ore. The mill will contain both gravity and leach circuits.
Two centrifugal separators will process the ore that is amenable to recovery by
gravity separation techniques. A ball mill and a series of six agitated cyanide
leach tanks will process the ore not
23
<PAGE>
amenable to recovery by gravity separation techniques. The mill has been
designed to process 8,300 tons per day.
Electrical power will be supplied to the project from Ontario Hydro, the main
utility provider in the province of Ontario. There will be two sources for
water supply. Fresh water will come from one or more wells located near the
minesite development. Water will also be reclaimed from the tailings area.
Based on the current mine plan, the average annual production rate is expected
to be 166,000 ounces; average cash operating costs are expected to be $218 per
ounce, depreciation and amortization is expected to be $94 per ounce and
reclamation is expected to be $4 per ounce for a total production cost of $316
per ounce. See "Cautionary 'Safe Harbor' Statement under the United States
Private Securities Litigation Reform Act of 1995" and "Risk Factors."
During the operating phase of the mine, the total site workforce is expected to
consist of approximately 215 people.
Powerline and substation construction was completed in 1997. Tree clearing and
road construction were started, but completion was deferred. The remainder of
the engineering, procurement, and construction activities are currently deferred
until the gold price improves.
During 1998, the Company capitalized $0.7 million related to the completion of
the freeze barrier construction and expensed $0.5 million in holding costs
related to Aquarius. The Company capitalized $39.9 million of Aquarius project
expenditures in 1997 and $6.1 million in 1996. The Company incurred acquisition
costs of $7.8 million in 1995. As of December 31, 1998, the additional
investment required to start-up the Aquarius project is expected to be
approximately $60 million. The Company expects to expense development holding
costs of approximately $0.8 million related to the Aquarius project in 1999.
Paredones Amarillos
- -------------------
In 1997, the Company deferred a final construction decision on the Paredones
Amarillos project. During the period of deferred construction, the Company
continues to look for opportunities to optimize the Paredones Amarillos project.
The Company owns 60% of the Paredones Amarillos project, located in the Mexican
state of Baja California Sur, 65 kilometers southeast of the state capital La
Paz. The remaining 40% of the project is owned by subsidiaries of Viceroy
Resource Corporation ("Viceroy"). The moderate, semi-arid climate provides an
attractive environment for operations. Steep hills with elevations ranging
between 300 meters and 800 meters above sea level characterize the terrain. The
project covers an area of 12,757 hectares held through 16 mining concessions
controlled by the joint venture. Thirteen of the concessions have been approved
for exploration, two for exploitation and one is pending. All relevant duties,
fees and taxes for these concessions have been paid, as required by law. The
concessions provide the legal right to the joint venture to proceed with mining
activities.
The site can be accessed from paved state highways followed by 10 kilometers of
gravel road that the joint venture will upgrade to provide safe access to the
proposed operation, and 7 kilometers of new gravel road to be constructed over a
current jeep trail.
The joint venture has routinely received approvals for exploration activities,
and expects that Mexico's environmental agencies will similarly approve the
proposed mine development. Since Mexico has recently developed a sophisticated
system of environmental regulations, the joint venture has maintained an ongoing
dialogue with agency staff to ensure that all regulatory requirements are
identified. The most significant environmental permitting requirements include:
receiving approval of a recently submitted Environmental Impact Statement;
obtaining a Change in Land Use permit; issuance of a Construction
24
<PAGE>
License; and issuance of an Operating License. In 1997, the Company received
approval for the Environmental Impact Statement and obtained a Change in Land
Use permit.
Paredones Amarillos has 1,448,000 ounces of proven and probable gold reserves
(the Company's share, 869,000 ounces) at December 31, 1998 (44.7 million tons of
ore at an average grade of 0.032 ounce per ton). The reserves were based on a
cutoff grade of 0.015 ounce per ton. The cutoff grade was based on a price of
$325 per ounce of gold. The gold recovery rate is expected to be 91%.
The main ore host to the Paredones Amarillos mineralization is a 10 to 80 meter
thick northeast to east-west striking, 15 to 45 degree southeast dipping
cataclasite and mylonite unit. The cataclasite is a dense, competent rock
composed of approximately 50% crushed quartz and feldspar fragments in a matrix
of sericite and minor chlorite and fine-grained quartz. The cataclasite hosts
approximately 80% of the gold resource, the granodiorite 20%, and the diorite
only a minor fraction.
Ore and waste rock will be open pit mined from 10 meter high benches with an
expected waste-to-ore ratio of 4.4:1 using blasting followed by conventional
open pit methods. Current plans call for three 13.5-yard excavators and a
maximum of thirteen 95-ton rear dump haul trucks to be used. Ore will be
delivered to a primary gyratory crusher. The ore will then be reduced further
by means of a semiautogenous grinding mill and two ball mills. Following the
whole-ore-leach circuit, gold will be recovered using a carbon adsorption-
desorption recovery process. The barren (stripped of gold) solution will be
sent to the acidification, volatilization and recovery process to recover
cyanide, which will be recycled back to the leach cycle. The mill has been
designed to process 11,000 tons per day. The tailings impoundment facilities
will include the main embankment, a lined decant pond, the lined impoundment
pond, and a groundwater monitoring system.
Based on the current mine plan, the mine is expected to produce an average of
128,000 ounces of gold per year (the Company's share, 77,000 ounces); average
cash operating costs are expected to be $223 per ounce, depreciation and
amortization is expected to be $108 per ounce and reclamation is expected to be
$7 per ounce for a total production cost of $338 per ounce. See "Cautionary
'Safe Harbor' Statement under the United States Private Securities Litigation
Reform Act of 1995."
The Comision Federal de Electricidad ("CFE") provides diesel-generated
electrical power to Baja California Sur through a grid. A new power line under
construction from La Paz to Cabo San Lucas is anticipated to supply power to the
site. The joint venture will construct a new 18 kilometer transmission line
which will connect with the new line to the north of the mine site.
Water rights for the project, totaling 1.8 million cubic meters annually, have
been purchased or are under option agreements. Adequate water supplies for the
life of the mine are available.
The joint venture expects that a majority of employees at the mine will be
Mexican nationals. The number of employees will range from 250 to 300 during
the life of the mine.
Detail engineering and limited procurement began in February 1997, these
activities were suspended at the end of 1997 and are estimated to be 40%
complete.
The Company capitalized $8.0 million of Paredones Amarillos project expenditures
in 1997 and $6.6 million in 1996. During 1998, the Company capitalized $0.5
million and expensed $0.4 million in holding costs related to Paredones
Amarillos. As of December 31, 1998, the additional investment required to
start-up the Paredones Amarillos project is expected to be approximately $59
million (the Company's share). The Company expects to expense its share of
development holding costs of approximately $0.3 million in 1999.
25
<PAGE>
OTHER PROJECTS
Kuranakh
- --------
The Company owns 50% of Kuranakh Gold Mining Company ("KGMC") which owns the
Kuranakh project located in the Aldan district of the Sakha Republic in the
eastern part of Russia near the town of Nizhny Kuranakh. The remaining 50% of
the KMGC is owned by two Russian companies, OAO Aldanzoloto (30%) and OAO
Sakhazoloto (20%).
The town of Aldan, located approximately 28 kilometers southeast of the
property, is connected to the rest of Russia by a recently completed spur of the
Trans-Siberia Railway and by an all-weather road north to Yakutsk, the
administrative center of the Sakha Republic, and south to the Russian highway
system.
Gold mining was initiated in Aldan in 1921 and remains an important part of the
local economy. Lode gold mineralization was discovered at Kuranakh in the late
1950's and large scale open-pit mining has occurred since 1965.
The mineralization in the Kuranakh property is quartz adularia, low temperature,
sediment hosted, epithermal deposits, comparable in many respects with the
sediment hosted gold deposits that occur in the Great Basin of the Western
United States. The deposits are confined to the contact between Cambrian
limestone and overlying Jurassic clastics and the original sulfides are almost
completely oxidized. The deposits have been subject to complete weathering with
only rarely preserved sulfides. A karst surface appears to have developed at
the clastic limestone contract before mineralization. Gold mining over the last
40 years has concentrated on the higher grade ores, leaving large quantities of
lower grade material.
Currently, KGMC is negotiating with the government of the Russian Federation to
define the terms of a production sharing agreement (PSA). It is critical that
this PSA provide the Kuranakh project with a favorable fixed life-of-project tax
structure and gold sales agreement which will enable KGMC to advance the
project. Successful conclusion of these negotiations is expected in 1999, after
which the Company expects to commission a feasibility study to finalize project
capital and operating parameters, and to support project financing. The Company
pending completion of the PSA and the feasibility study has established no
reserves.
Over the past four years, KGMC has spent $14 million on the project, $11 million
of which has been funded by the Company, mainly to confirm mineralization,
establish the viability of heap leaching, initiate baseline studies and to
advance PSA negotiations.
Mining is expected to be by conventional open pit methods from numerous open
pits and stockpiles; processing will incorporate primary crushing followed by
coarse/fine separation with separate recovery treatment for each of the separate
ore streams.
Kingking
- --------
The Company held an option to purchase a controlling interest in a gold and
copper project called "Kingking", in the Philippines. The Company's option
interest in the Kingking project required the delivery to Benguet Corporation,
the optionor, of a bankable feasibility study by October 25, 1997, or the
remittance of option delay payments of $750,000 per month for the first six
months and $1.0 million per month for the subsequent six months. The terms of
the Kingking option agreement, which included a $67.0 million option exercise
price to be paid in 1998, plus a contingent payment of up to $18.0 million based
upon the extent of the defined mineralization, rendered the project uneconomic.
The Company elected not to exercise its option. Following a $50.0 million write-
down recorded in 1997, the carrying values of Kingking's assets are nil (see
note 8 to the consolidated financial statements). The Company's share of
Kingking's other mineralization of 168.7 million tons at average grades of 0.017
ounces of gold per ton and 0.47% copper was removed from the Company's estimates
of other mineralization as of December 31, 1997.
26
<PAGE>
In the second quarter of 1998, the Company issued 1,237,114 common shares to
Nationwide Development Corporation ("Nadecor"), which held an ownership interest
in the Kingking project unrelated to that of Benguet Corporation. The share
issuance settled any obligations of the Company owed to Nadecor.
Santa Elina
- -----------
On July 16, 1996, the Company completed a series of transactions with Santa
Elina Gold Corporation ("Santa Elina") and Sercor Ltd. ("Sercor", a private
company that owned 67% of Santa Elina). The transactions enabled the Company to
increase its ownership of the outstanding common shares of Santa Elina from 7%
to 50% by issuing 8,830,915 common shares. In 1996 and 1997, the Company
increased its ownership of Santa Elina to 58%. See note 4 to the Company's
consolidated financial statements.
In 1997, the Company wrote off its entire investment in Santa Elina of $143.6
million (see note 8 to the consolidated financial statements). The Company's
share of Santa Elina's other mineralization of 56.7 million tons at average
grades of 0.012 ounces of gold per ton and 0.43% copper was removed from the
Company's estimates of other mineralization as of December 31, 1997.
In April 1998, the Company sold its investment in Santa Elina, comprised of 58%
of Santa Elina's common shares and the shareholder loans made by the Company to
Santa Elina. As a result of the sale, the Company received $6.3 million in
cash, net of selling costs, and a 48.1% interest in the Chapada property in
Brazil, to which the Company has assigned no book value. The purchase agreement
calls for the Chapada property to be marketed and sold by Santa Elina at the
earliest opportunity.
EXPLORATION
The Company explores for extensions of known reserves at its mines and
development properties in addition to conducting exploration for new gold
deposits. The Company's exploration program concentrated on those projects
believed to represent the most promising near-term prospects in its portfolio.
In particular, exploration efforts are focused on projects located where the
Company already has, or plans an extensive gold mining infrastructure,
principally those prospects in North America.
In 1998, efforts at Round Mountain focused on identification and exploration in
the areas surrounding the minesite. Three targets were drilled to better
understand the underlying geological structures. At McCoy/Cove, target
satellites to the Cove and McCoy pits were tested by geochemical surveys and by
drilling. During the year, further exploration at Kettle River added 22,000
ounces to reserves and the Company continues to evaluate opportunities within
the region for extending the life of the project. Limited drilling was
completed at Lupin aimed at better understanding the McPherson Zone, discovered
in 1997.
In 1998, the Company used joint ventures to advance a number of exploration
projects, such as the Odgen property located near the Aquarius project, the
Kilgore property in Idaho and the Youga/Nangodi property in Burkina Faso, West
Africa. In 1999, other than West Africa, no exploration activity is planned
outside of North America.
ALASKA-JUNEAU
In 1996, the Company wrote off its entire remaining investment in the Alaska-
Juneau project of $57.1 million, and established a reserve of $20.0 million to
cover estimated reclamation and closure responsibilities. In July 1997, the
Company entered into an agreement which transferred certain responsibilities for
the Alaska-Juneau project closure to a third party environmental firm. The
third party's performance under the contract is supported by corporate
guarantees and surety bonds. Total actual spending related to reclamation and
closure costs to date is $17.9 million. The provision for future reclamation
and closure costs is reviewed periodically and adjusted as additional
information becomes available.
27
<PAGE>
SUNNYSIDE
In 1996, Sunnyside Gold Corporation ("SGC"), an indirect wholly owned subsidiary
of the Company, finalized a consent decree with the state of Colorado that set
standards for the release of all reclamation and water treatment permits and
resolved future enforcement issues regarding groundwater seeps and springs. SGC
estimates that it will take a minimum of an additional five years for all of the
conditions of the consent decree agreement to be fulfilled by both parties. SGC
has $6.8 million accrued at December 31, 1998 for future reclamation costs at
the Sunnyside mine. SGC's provision for future reclamation costs is reviewed
periodically and adjusted as additional information becomes available.
OTHER
Precious Metal Sales and Hedging Activities
- -------------------------------------------
The Company's dore bars are further refined by third parties before they are
sold as gold or silver bullion. The refined gold and silver is sold to banks or
precious metal dealers.
The Company's profitability is subject to changes in gold and silver prices,
exchange rates, interest rates and certain commodity prices. To reduce the
impact of such changes, the Company attempts to lock in the future value of
certain of these items through hedging transactions. These transactions are
accomplished through the use of derivative financial instruments, the value of
which is derived from movements in the underlying prices or rates.
The gold-and silver-related instruments used in these transactions include
commodity loans, fixed and floating forward contracts, spot-deferred contracts,
swaps and options. Sensitivity to changing metal prices is reduced, and future
revenues are hedged, as the Company's future production will satisfy these loans
and other delivery commitments.
In 1998, the Company delivered approximately 96% of gold production against
forward sales, put options and gold loans at an average commitment price of $341
per ounce. This compares with 33% of gold production at an average price of
$397 in 1997 and 25% of gold production at an average price of $375 in 1996.
Approximately 50% of silver production was delivered against forward sales at an
average cash price of $5.44 per ounce in 1998. This compares to 7% at an
average price of $5.32 in 1997 and 45% at an average price of $5.85 in 1996.
Deliveries in 1997 and 1998 reflect the impact of the January 1997 repurchase of
the Company's outstanding gold and silver forward sales contracts and the
replacement of these contracts with put options. The Company did not rebuild
its forward portfolio until the third and fourth quarters of 1997.
In 1999, the Company has protected itself against price declines by hedging over
90% of its planned 1999 gold production at a minimum average price of $349 per
ounce, along with 5.2 million ounces of silver at $5.76 per ounce. In addition,
the Company has hedged approximately 266,000 ounces of gold in 2000 at $339 per
ounce and 7.5 million ounces of silver at a minimum average price of $6.00 per
ounce.
In March 1998, related to McCoy/Cove production, the Company sold forward
270,000 ounces of gold at an average price of $319 per ounce and 19.0 million
ounces of silver at an average price of $6.01 per ounce, with delivery dates
from 1998 to 2001. Based on this hedge position, the Company proceeded with the
pit wall remediation in the second half of 1998.
The Company engages in forward currency-exchange contracts to reduce the impact
on the Lupin mine's operating costs caused by fluctuations in the exchange rate
of U.S. dollars to Canadian dollars. Forward currency transactions more closely
link profitability of Canadian operations to the price of gold in U.S. dollars.
The Company also engages in crude oil hedging activities, including forward
purchase agreements and swaps, to reduce the impact of fluctuations in crude oil
prices on its operating costs.
28
<PAGE>
In 1997, the Company swapped a portion of its 11% interest obligation for the
capital securities for a gold delivery commitment. The swap reduced the
Company's effective interest rate to a fixed rate of 4.24% plus the floating
gold lease rate. The Company restructured the gold swap agreement in the first
quarter of 1998 into gold forward sales with delivery dates in 1998, 1999 and
2000. See note 16 to the consolidated financial statements.
All purchases and sales of derivatives are connected to production of gold or
silver, or to financial commitments, and are not entered into for speculative
gain.
The Company's forward sales positions, gold loan and swap repayment schedules,
option position, currency position and crude oil position at December 31, 1998
are set out in note 16 to the Company's consolidated financial statements.
Governmental and Environmental Regulation
- -----------------------------------------
Canada
The mining industry in the Northwest Territories operates under Canadian federal
and territorial legislation governing prospecting, development, production,
environmental protection, exports, income taxes, labor standards, mine safety
and other matters. The Company believes its Canadian operations are operating
in substantial compliance with applicable law. The operation of the Lupin mine
is subject to substantial regulation by government authorities, which is in many
instances discretionary.
The Company's Lupin operation is presently subject to environmental regulation
primarily by the Federal Department of Indian Affairs and Northern Development
("DIAND") and the Northwest Territories Water Board, which are responsible for
administering the Northwest Territories Waters Act (Canada) ("NWTWA") that on
June 15, 1993, replaced the Northern Inland Waters Act (Canada) ("NIWA")
pursuant to which DIAND previously exercised jurisdiction over the operation.
The Company's existing licenses under NIWA were deemed to continue under the
NWTWA.
On January 19, 1995, the Canadian Environmental Assessment Act ("CEAA") came
into force. Any changes or additions to existing operations at Lupin may be
subject to environmental assessment by the federal government under the CEAA
before any permits or licenses are issued under the NWTWA in respect of those
changes or additions to existing operations.
The federal Departments of Fisheries & Oceans and Environment have an
enforcement role in the event of environmental incidents, but presently have no
direct, regulatory role in relation to Lupin.
Lupin is also subject to enforcement by the Northwest Territories Department of
Resources, Wildlife and Economic Development pursuant to the Northwest
Territories Environmental Protection Act ("NWTEPA"). NWTEPA contains
requirements to obtain licenses and permits which may, in the future, affect the
Lupin operation. The Company believes it is in substantial compliance with all
relevant territorial environmental law.
Pursuant to an agreement (the "Nunavut Agreement") dated May 25, 1993 between
the Inuit of Canada's eastern arctic region and Her Majesty the Queen in right
of Canada, which agreement comes into force on April 1, 1999, the Inuit have
been granted ownership of approximately 360,000 square kilometers of land in an
area referred to as the Nunavut Settlement Area, including ownership of
subsurface rights in approximately 37,500 square kilometers of those lands. The
Company's Lupin mine is located in this Nunavut Settlement Area. Existing third
party interests in lands in the Nunavut Settlement Area are protected under the
Nunavut Agreement. Where a third party has been granted a mining lease under
the Canada Mining Regulations in lands comprising the Nunavut Settlement Area,
that interest will continue in accordance with the terms and conditions on which
it was granted, including any rights granted under the legislation which gave
rise to the interest. However, where any successor legislation would have the
effect of diminishing the rights afforded to the federal government, it will not
bind the Inuit without its consent. The Inuit are entitled to receive whatever
compensation is payable by the interest holder for the
29
<PAGE>
use or exploitation of mineral rights. The federal government will continue to
administer the third party interest on behalf of the Inuit, unless the third
party and the Inuit enter into an agreement under which the third party agrees
to the administration of their interest by the Inuit. In the event such an
agreement is reached, the applicable legislation will cease to apply to the
third party interest. Existing subsurface interests in such lands will continue
to be administered in accordance with applicable legislation relating to those
interests and are not affected by the Nunavut Agreement.
New third party interests in lands in the Nunavut Settlement Area will now be
granted, in the case of surface rights, by the appropriate regional Inuit
association and, in the case of subsurface rights, by Nunavut Tungavik
Incorporated which will hold subsurface title to Inuit owned lands and who will
be additionally responsible, in consultation with the appropriate regional Inuit
associations, for the administration and management of those subsurface rights.
Also, under the Nunavut Agreement the jurisdiction previously exercised by the
Northwest Territories Water Board under the NWTWA is now effectively exercised
by the Nunavut Water Board. The Company is subject to the jurisdiction of the
Nunavut Water Board and any further approvals or licenses will have to be
obtained from that Board.
On January 1, 1994, the North American Free Trade Agreement ("NAFTA") between
Canada, the United States and Mexico came into force. The NAFTA amends the
Investment Canada Act and its regulations and guidelines in that the investors
of the United States and Mexico are treated more favorably than all other "non-
Canadian" investors with respect to reviews by Investment Canada. Direct
acquisitions of Canadian businesses by investors from the United States or
Mexico are only subject to review if the acquisitions exceed a certain threshold
which is adjusted annually according to the formula set out in Annex I to the
NAFTA. However, indirect acquisitions of Canadian businesses by investors from
the United States or Mexico are not subject to review.
The Competition Act (Canada) requires parties to certain transactions, if the
parties to and the circumstances of the transaction meet certain size thresholds
as designated in the Act, to provide the Director of Investigation and Research
(the "Director") with detailed information about the transaction and the
parties, and to observe a waiting period prior to closing. Without the
Director's pre-clearance of the transaction by the expiration of the waiting
period, the transaction will not be permitted to be completed. In order to be
notifiable, transactions must meet the basic size threshold, namely, the parties
to the transaction together with their affiliates (defined to include parent,
subsidiary and sister corporations) must have assets in Canada or gross revenues
from sales in, from or into Canada that exceed C$400 million. Certain
additional thresholds based on the type of transaction must also be met before
notification is required.
United States
The Company's U.S. operations are subject to comprehensive regulation with
respect to operational, environmental, safety and similar matters by federal
agencies including the U.S. Department of the Interior (Bureau of Land
Management), the U.S. Department of Agriculture (U.S. Forest Service), the U.S.
Environmental Protection Agency ("EPA"), the U.S. Mine Safety and Health
Administration ("MSHA") and similar state and local agencies. Failure to comply
with applicable laws, regulations and permits can result in injunctive actions,
damages and civil and criminal penalties. If the Company expands or changes its
existing operations or proposes any new operations, it may be required to obtain
additional or amended permits or authorizations in accordance with the National
Environmental Policy Act (NEPA). The Company spends substantial time, effort
and funds in planning, constructing and operating its facilities to ensure
compliance with U.S. environmental and other regulatory requirements. Such
efforts and expenditures are common throughout the U.S. mining industry and
generally should not have a material adverse effect on the Company's competitive
position.
30
<PAGE>
The Company believes its U.S. operations are in substantial compliance with
applicable air and water quality laws and regulations and that it has acquired
or applied for all permits required under such laws or requested by the states
in which it is operating.
Certain wastes from mining and mineral processing operations are currently
exempt from regulation under the Bevill amendment to the federal Resource
Conservation and Recovery Act ("RCRA"). However, Congress may consider revision
and reauthorization of RCRA, as well as the federal Clean Water Act and
Endangered Species Act, each of which substantially affects mine development and
operations. The effect of any revised or additional regulation on the Company's
U.S. operations cannot be determined until the legislative process is completed
and new administrative rules are issued, but they can have a significant impact
upon operations of all mining companies and increase the costs of those
operations.
New laws and regulations, amendments to existing laws and regulations, or more
stringent enforcement of existing laws and regulations, could have a material
adverse impact on the Company's results of operations and financial condition,
although the results of such actions are speculative. During the 1998
legislative session, legislation was considered in the United States Congress
which proposed a number of modifications to the General Mining Law of 1872,
which has traditionally governed the location and maintenance of unpatented
mining claims and related activities on federal land. Among these modifications
were proposals which would have (i) imposed a royalty on production from
unpatented mining claims, (ii) increased the cost of holding and maintaining
such claims, and (iii) imposed more specific reclamation requirements and
standards for operations on such claims. None of these proposed modifications
was enacted into law. The same or similar proposals may be considered by
Congress in 1999 as well. In addition, the Bureau of Land Management is
currently working on proposed administrative revisions to federal regulations
which govern surface activities (including reclamation) on unpatented mining
claims. The potential impact on the Company as a result of such congressional or
administrative action is difficult to predict. See "Risk Factors-Governmental
Regulation."
The most material direct economic impact of potential mining law revision could
be from the imposition of royalties on production at the McCoy/Cove mine in
Nevada, which is from unpatented lode mining claims on federal land, and (to a
lesser degree) at the 50%-owned Round Mountain mine in Nevada, 19% of whose
reserves are unpatented lode mining claims on federal land. However, the
Company has completed all of the steps currently required under U.S. law to
convert the McCoy/Cove and Round Mountain claims to patented status. The
Company's applications for patents are being processed, and the Company expects
the government to complete its administrative review in accordance with the
regulations, although the Company can not predict with certainty whether those
patents will be issued or the time frame for such issuance. See "Risk Factors -
Government Regulations."
The federal Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("CERCLA"), commonly called the "Superfund Act," contains stringent
reporting requirements for the release or disposal of hazardous substances, with
substantial fines for noncompliance. In addition, under CERCLA, any party
responsible for the release or threatened release of a hazardous substance into
the environment is liable for all clean-up costs. Responsible parties under
CERCLA include the owner or operator of the site where the release occurs or
anyone who owned or operated the site when a disposal was made, regardless of
culpability. Mining wastes are subject to CERCLA regulation if they contain
hazardous substances, and EPA has included several mining sites on its list of
high-priority sites for clean-up under CERCLA.
The Stibnite property near Yellow Pine, Idaho is the subject of a preliminary
investigation/site assessment ("PI/SA") by the Environmental Protection Agency
that indicates that the site may be eligible for inclusion on the National
Priorities List ("NPL") under CERCLA. During 1985, Copper Range Company, then
an acquired subsidiary of the Company, and from November 1985 to December 1989,
Round Mountain Gold Corporation, a subsidiary of the Company, owned a 20%
interest in a joint venture that controlled several claims in the Stibnite area.
Copper Range Company, a subsidiary of the
31
<PAGE>
Company from January 1985 until November 1985, is on the list of present and
former owners or operators of properties at the Stibnite site. Round Mountain
Gold Corporation, because it owned 20% of the joint venture between November
1985 and December 1989, also may have liability for a share of the cleanup costs
at the site, if cleanup is undertaken pursuant to CERCLA. At this time, it is
not possible to estimate the size of the potential cost of cleanup, or to state
how much of that liability, if any, might be the responsibility of Round
Mountain Gold Corporation. However, in early 1997 a voluntary Administrative
Order on Consent was entered into between the State of Idaho Division of
Environmental Quality and the three principal companies involved in the site
pursuant to which remediation studies are being conducted, and the current
operator is conducting permitted mining operations which include remediation of
the site. No CERCLA cost recovery action against Round Mountain Gold Corporation
or the Company is presently anticipated.
Various types of dust control, revegetation and similar reclamation-related
measures are generally required for the Company's Nevada operations under
specific state air or water quality and mine reclamation rules and permits. The
Bureau of Land Management ("BLM") and Forest Service permits and Plans of
Operations for the Company's Nevada operations also contain some reclamation-
related requirements. The Kettle River project is similarly subject to
requirements for reclamation of disturbed surface areas by agreement with the
State of Washington. The Company believes its operations are in substantial
compliance with these reclamation requirements.
The Company believes that all of its U.S. operations are currently being
conducted in substantial compliance with applicable MSHA and similar state
labor, health and safety rules.
Mexico
The Mexican mining industry operates under the authority of the federal
government, which regulates the location of mining concessions, prospecting,
safety, environmental protection, exports, taxation, labor and social
legislation and business transactions. Land tenure is governed by laws issued
by each state in Mexico, although federal rules allow mining companies to obtain
surface rights through easements, temporary occupation orders or expropriations.
The Company believes that its Mexican ventures are carrying on their business
efforts in substantial compliance with applicable laws and regulations.
Mexican industry is mainly regulated with respect to environmental matters by
the Secretariat for Environment, Natural Resources and Fisheries ("SEMARNAP").
This agency is the successor to the authority previously held by Secretariat for
Social Development ("SEDESOL"). SEMARNAP formulates and issues environmental
laws, regulations and standards, under authority granted upon its creation on
December 28, 1994 and the specific provisions of the General Law of Ecological
Balance and Environmental Protection of January 28, 1988.
Mexican companies are governed generally by the federal General Law of
Commercial Companies (federal statute) and the Civil Codes of the various States
of the country. Mining is also governed by the federal Mining Law and its
Regulations. The Company's Mexican subsidiaries are organized under the General
Law of Commercial Companies and registered with the Mexican Public Registry of
Commerce and the Mining Public Registry in Mexico City.
Mexican environmental laws applicable to discharges of water, control of air
quality and management of hazardous substances will apply to the Company's
Mexican operations. In addition, the Company is subject to the reclamation
requirements of the Federal environmental laws. The Paredones Amarillos project
is subject to additional reclamation and ecological protection requirements
because part of it is located in the buffer zone for an Ecological Reserve Area.
Minera Paredones Amarillos, S.A. de C.V., a wholly owned subsidiary of the
Company, is engaged in negotiations with SEMARNAP and the State Environmental
Agency of Baja California Sur in order to arrange the schedule and method for
compliance of the special conditions to which the Paredones project is subject
because of its location.
32
<PAGE>
The Company believes that it is in substantial compliance with all applicable
corporate, environmental, reclamation and social welfare statutes.
Mineral rights in Mexico are the property of the federal government, which
allows private parties to develop minerals under a system of concessions
regulated by Article 27 of the Mexican Federal Constitution, the Mining Law and
its Regulations. Only Mexican nationals or Mexican corporations may own
concessions, and the rights of concessionaires to develop their minerals are not
unlimited but must respect those of surface occupants. The federal government
recognizes the rights of associations of community landholders ("ejidos") who,
though they do not own individual titles, have rights to enjoyment of parcels of
land arising from membership in a group. The Company's Caopas project has been
the subject of lengthy discussions with an ejido to clarify the terms and
compensation under which the project will be developed. The Company's projects
and the relevant mining concessions have been registered with the Mining Public
Registry, which endorses mineral ownership agreements and acts as the agency for
notice of their existence and legal sufficiency. The Company has expended
substantial effort in clarifying its title to the concessions on which its
Mexican projects depend; it believes that its concessions are validly issued by
the federal government and that they give the Company full rights allowed under
the Mining Law and its Regulations.
Employees
- ---------
At December 31, 1998, the Company employed 1,268 persons excluding temporary
employees directly involved in short-term programs, broken down as follows.
<TABLE>
<S> <C>
McCoy/Cove 352
Round Mountain, including ancillary services 646
Lupin 40
Kettle River 169
Exploration and development 14
Technical and corporate staff 38
Other, including Alaska and Sunnyside 9
-----
1,268
=====
</TABLE>
A sufficient supply of qualified workers is available for both Canadian and U.S.
operations, although the continuation of such supply depends upon a number of
factors, including, principally, the demand occasioned by other projects. None
of the Company's employees are represented by labor unions. The Company believes
it generally has good relations with its employees. The Company provides its
employees with a competitive compensation package and comprehensive benefits
program.
33
<PAGE>
Executive Officers of the Registrant
- ------------------------------------
The executive officers of the Company are listed below.
<TABLE>
<CAPTION>
Position with the Company and business experience within the
Name Age last five years
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LOIS-ANN L. BRODRICK 55 Vice President and Corporate Secretary of the Company since
March 1998; Corporate Secretary of the Company from May 1996 to
March 1998; prior thereto Assistant Corporate Secretary of the
Company
PETER H. CHEESBROUGH 47 Senior Vice President, Finance and Chief Financial Officer of
the Company
DONALD C. EWIGLEBEN 45 Vice President, Environmental and Public Affairs of the Company
since August 1994; Vice President, Environmental and
Governmental Affairs of Amax Gold Inc. from June 1992 to
February 1994
ROBERT L. LECLERC, Q.C. 54 Chairman and Chief Executive Officer of the Company since April
1997; Chairman of the Company from May 1996 to April 1997; prior
thereto Chairman and Chief Executive Officer and partner, Milner
Fenerty (barristers and solicitors)
JERRY L.J. MCCRANK 48 Vice President, Operations of the Company since March 1998;
prior thereto various senior operations positions with the
Company
TOM S.Q. YIP 41 Vice President, Controller and Principal Accounting Officer of
the Company since March 1998; Controller and Principal
Accounting Officer of the Company from September 1997 to March
1998; prior thereto various corporate financial positions with
the Company
---------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
Mining Risks and Insurance
- --------------------------
The Company carries insurance against property damage, including boiler and
machinery insurance, and also comprehensive general liability insurance of a
total of $50 million per occurrence, which is available to all operations. The
Company carries special liability policies applicable to aircraft and motor
vehicles. It is also insured against dishonesty and gold and silver bullion
thefts, as well as losses of goods in transit. The property damage and boiler
and machinery insurance policies include coverage for business interruption,
resulting from an insured loss, subject to a five day waiting period and a
maximum indemnification period of one year.
Risks not insured against include mine cave-ins, mine floodings and other
uninsurable underground hazards, and most types of environmental pollution
against which the Company cannot insure or against which it has elected not to
insure.
The Company believes that it has taken adequate precautions to minimize the risk
of environmental pollution. However, with respect to certain mines, there is
some risk that cyanide may escape from leach pads or tailings dams in sufficient
quantities to cause water or surface pollution and there is some risk of
environmental impairment liability under environmental laws. See "Government
Regulation and Environmental Issues."
Underground mining is generally subject to certain types of risks and hazards,
including unusual or unexpected formations, pressures, cave-ins, flooding and
other conditions. The Company has not experienced any significant cave-ins at
its underground mines. In addition, because mining can be conducted on a number
of different levels at the same time, a cave-in in one area would not
necessarily affect mining in other areas.
Open-pit mining, such as that conducted at certain of the Company's mines, is
generally subject to certain types of risks and hazards, primarily unpredictable
pit wall failure. Open pit mining is conducted in phases and a pit wall failure
in one area would not necessarily affect overall pit design or mining in
unaffected areas. See "McCoy/Cove" regarding the Company's 1996 $30.0 million
provision related to the estimated costs to remove waste rock from a portion of
the Cove pit wall that had collapsed.
Supplies, Utilities and Transportation
- --------------------------------------
The principal supplies needed for the operation of the Company's mines are
explosives, diesel fuel, chemical reagents (including cyanide, lime, sulfur
dioxide, sodium hydroxide and zinc dust), cement, equipment parts and
lubricants.
Power is supplied to the Company's mines by power companies or by diesel
generators. Each mine has access to adequate water.
Each of the U.S. mines has good road access by either paved or gravel roads from
state highways.
See also "Lupin-Supplies, Utilities and Transportation."
Waste Disposal
- --------------
Heap leaching is done with a weak cyanide solution held within a closed circuit,
which includes the leach pads and surface holding ponds. Leached ore from the
reusable pad at Round Mountain is washed and deposited adjacent to the mine
site. Where dedicated pads are used, the leached ore remains on the pads. Mill
processing may use a cyanide leaching solution, which is contained within the
mills' processing circuits. See "Government Regulation and Environmental
Issues."
See also "Lupin-Water Supply and Waste Disposal."
Royalties
- ---------
Production from the Company's mines is subject to certain royalties. These are
described in note 17 to
35
<PAGE>
the Company's consolidated financial statements.
History of the Company
- ----------------------
The Company was incorporated in Canada in 1964. Between 1964 and 1982, the
Company developed and operated several silver mines near Port Radium in the
Northwest Territories of Canada and produced 35.5 million ounces of silver.
These silver reserves were mined out in 1982.
In 1979, the Company optioned the Lupin gold property, located 190 miles east of
Port Radium. Construction of the Lupin mine began in August 1980, and
commercial production commenced in October 1982. During 1982 through 1984, the
Company concentrated efforts on developing the Lupin mine.
With earnings generated from Lupin, the Company initiated an aggressive
acquisition, exploration and development program.
During 1985 and 1986, the Company acquired a 50% interest in the Round Mountain
mine and 100% interests in the McCoy, Borealis, Manhattan, Sunnyside and Illipah
mines. The Cove deposit was discovered adjacent to the McCoy mine in early
1987, and major expansions at McCoy/Cove and Round Mountain were started in
1988. The mine expansions were substantially funded by borrowing gold and
silver. Gold and silver financing allowed the Company to hedge future
production and to obtain the low interest rates associated with bullion
financings. The Borealis, Manhattan, Sunnyside and Illipah mines have
subsequently been mined out and closed.
In 1985, the Company acquired a 100% interest in the Alaska-Juneau project near
Juneau, Alaska. In 1987, the Company entered into a joint venture related to
the Kensington project near Juneau, Alaska, in which the Company held a 50%
interest.
In 1990, the Company brought the Kettle River mine in Washington state into
commercial production. In 1992, the Company increased its ownership interest to
100% from 70% when the Company's 30% partner withdrew from the Kettle River
joint venture.
Beginning in 1993, the Company increased exploration activities significantly.
Exploration programs were funded at all operating properties and also at many
other locations along the major gold belts of North America, Central America,
South America and West Africa. Most of the Company's exploration expenditures
were made outside of the United States and Canada.
In 1995, the Company added five development properties: Paredones Amarillos in
Mexico, Chapada in Brazil, Kingking in the Philippines, and Aquarius and Ulu in
Canada. The Company sold its interest in the Kensington project to its joint
venture partner in 1995.
In 1996, underground development began at Ulu and the Company wrote off its
entire remaining investment in the Alaska-Juneau project.
During 1996 and 1997, the Company increased its ownership from 7% to 58% of the
outstanding common shares of Santa Elina Mines Corporation ("Santa Elina"),
which holds interests in mining properties, principally in Brazil, and also in
Bolivia.
In 1997, in response to the declining gold prices, in the fourth quarter of
1997, the Company deferred final construction decisions on the Aquarius and
Paredones Amarillos development properties and deferred further development of
the Ulu deposit and the Company narrowed the focus of its exploration program
principally to projects in North America where the Company already has extensive
gold mining infrastructure.
36
<PAGE>
During 1997, the Company recorded $346.0 million in provisions for impaired
assets and recorded $16.7 million for related severance costs as described in
note 8 to the Company's consolidated financial statements.
In January 1998, the Company temporarily suspended operations at the Lupin mine.
RISK FACTORS
Recent Losses
- -------------
The Company incurred net losses of $20.1 million in 1998, $420.5 million in
1997, and $176.7 million in 1996. The loss in 1998 reflects reduced operating
costs and decreased exploration and development expense compared to 1997,
partially offset by lower revenues resulting from lower gold and silver volumes
and decreased average gold price realized. The loss in 1997 reflects a $362.7
million provision for impaired assets and other charges, including provisions
related to the Kingking project ($50.0 million); Santa Elina ($143.6 million);
the Lupin ($65.0 million), McCoy/Cove ($47.0 million) and Kettle River ($15.0
million) operating properties; $25.4 million to write down certain share
investments to market value and to provide for estimated legal and closure
costs; and $16.7 million related to severance costs. The loss in 1996 included a
$77.1 million write-down and reclamation and closure provision for the Alaska-
Juneau development property and a $30.0 million provision for the McCoy/Cove pit
wall remediation. The Company incurred exploration and development expenses of
$12.0 million in 1998, $34.9 million in 1997, and $63.6 million in 1996. The
Company expects that it will continue to incur losses in the near future due to
declining production as both McCoy/Cove and Kettle River near the end of their
mine lives, absent any new discoveries. Return to profitability will depend on,
among other things, a significant increase in the price of gold over current
prices, the ability to bring into commercial production the projects that have
been the subject of the Company's exploration and development programs and the
profitability of production at existing and new mines. See "Liquidity," "Gold
and Silver Prices," "Uncertainty of Reserve and Other Mineralization Estimates"
and "Estimation of Asset Carrying Values" for additional disclosure with respect
to factors which may affect the carrying values of the Company's assets, and the
Company's results of operations and financial condition generally.
Liquidity and Capital Resources
- -------------------------------
The cash operating costs at the Company's three operating mines averaged $208
per ounce in 1998 and are expected to increase to between $235 and $245 per
ounce in 1999. Total production costs were $317 per ounce in 1998. In the
current low gold price environment, the Company's cost structure has significant
implications for the Company's liquidity and flexibility to invest funds in
exploration and development. While the Company continues to generate cash flow
from operations at current gold prices, before taking into account cash
exploration and development expenses, the amount of cash flow available for
acquisitions, investments, exploration and development is very limited. As a
result, the Company is carefully monitoring its discretionary spending, though
it intends to continue to conduct exploration and development activities
consistent with a more focused program.
The Company's existing credit facilities provide some additional liquidity. The
Company currently has $18.0 million outstanding, and up to $32.0 million or gold
equivalent, subject to covenant limitations, available until 2001, under its
revolving credit facility. The Company currently has no restrictions on the
borrowing capacity of this line based on the trailing 90-day average spot price
of $294 per ounce of gold. A depressed gold price can limit the Company's
ability to borrow under the revolving credit facility, which is measured at the
end of each quarter. Continuation of gold prices at depressed levels could have
the effect of reducing or eliminating the Company's borrowing capacity under
this facility. The Company believes it is currently in compliance with the
covenants under the credit facility. The Company took certain actions in 1998 to
improve cash flows, such as reductions in new project and exploration
expenditures and increased hedging activities. These actions continue in 1999.
While management believes existing loan facilities and other capital resources
are adequate for 1999, the Company may be required to seek additional external
financing and to further reduce discretionary spending. There can be no
assurance that the Company would be successful in attracting external financing
on terms and conditions favorable to it.
37
<PAGE>
Certain regulatory agencies may require security to be provided for some or all
of the cost to restore land disturbed during operations. The Company has
provided letters of credit, surety bonds and corporate guarantees as security
for these future reclamation costs. Future reclamation costs are determined
using management's best estimates of the scope of work to be performed and the
related costs. See note 7 to the consolidated financial statements. These
estimates may change based on future changes in operations, costs, reclamation
activities and regulatory requirements. See "Governmental and Environmental
Regulation." The Company is currently in compliance with all reclamation bonding
requirements. In the event that the Company is unable to secure the necessary
letters of credit or surety bonds or to provide the necessary corporate
guarantees to secure reclamation obligations, the Company could be in violation
of its operating permits which could have a significant impact on the Company's
ability to continue operating at the specific location. Future reclamation
obligations are expected to be funded from operating cash flows.
Gold and Silver Prices
- ----------------------
The profitability of the Company's current operations is directly related and
sensitive to the market price of gold and silver. Gold prices are currently and
have been at depressed levels since the beginning of 1997. Gold and silver
prices fluctuate widely and are affected by numerous factors beyond the
Company's control, including global supply and demand, expectations with respect
to the rate of inflation, the exchange rates of the dollar to other currencies,
interest rates, forward selling by producers, central bank sales and purchases,
production and cost levels in major gold-producing regions such as South Africa
and the former Soviet Union, global or regional political, economic or financial
situations and a number of other factors.
The current demand for, and supply of, gold and silver affect the prices of such
metals, but not necessarily in the same manner as current demand and supply
affect the prices of other commodities. The potential supply of gold consists
of new mine production plus existing stocks of bullion and fabricated gold held
by governments, financial institutions, industrial organizations and
individuals. Since mine production in any single year constitutes a very small
portion of the total potential supply of gold, normal variations in current
production do not necessarily have a significant effect on the supply of gold or
on its price. If gold or silver prices should decline below the Company's cash
costs of production and remain at such levels for any sustained period, the
Company could determine that it is not economically feasible to continue
commercial production at any or all of its mines. In January 1998, the Company
temporarily suspended operations at the Lupin mine. Although the Company has a
hedging program in place to reduce the risk associated with gold and silver
price volatility, there is no assurance that the Company's hedging strategies
will be successful. See "Other-Precious Metal Sales and Hedging Activities."
Furthermore, should the Company experience a prolonged period of depressed gold
prices and prepare its reserve calculations and/or life-of-mine plans at
significantly lower prices than those used at year-end 1998, the Company could
experience additional material write-downs of its investment in mining
properties. See "Uncertainty of Reserve and Other Mineralization Estimates" and
"Estimation of Asset Carrying Value."
Estimation of Asset Carrying Values
- -----------------------------------
The Company periodically undertakes a detailed review of the life-of-mine plans
for its operating properties and an evaluation of the Company's portfolio of
development projects, exploration projects and other assets. The recoverability
of the Company's carrying values of its operating and development properties are
assessed by comparing carrying values to estimated future net cash flows from
each property. In 1998, for purposes of estimating future cash flows, price
assumptions of $325 per ounce of gold and $5.00 per ounce of silver were used,
except for 1999, for which prices of $290 per ounce of gold and $5.00 per ounce
of silver were used. For other assets, carrying values were compared to
estimated net realizable values based on market comparables or quoted market
prices. Utilizing these price assumptions, no asset impairments were evident.
In 1997, a similar analysis was performed using price assumptions of $350 per
ounce of gold and $5.00 per ounce of silver, except for 1998, for which price
assumptions were $300 per ounce of gold and $5.00 per ounce of silver. As a
result of those
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<PAGE>
assumptions, the Company recorded a $346.0 million provision for impaired assets
in 1997. See note 8 to the consolidated financial statements for further detail
of the components of these provisions.
The Company intends to assess the carrying values of its assets on an ongoing
basis as required by generally accepted accounting principles. Factors which
may affect carrying values include, but are not limited to, gold and silver
prices, capital cost estimates, mining, processing and other operating costs,
grade and metallurgical characteristics of ore, mine design and timing of
production. There can be no assurance that, particularly in the event of a
prolonged period of depressed gold prices, the Company will not be required to
take additional material write-downs of its operating and development
properties.
Uncertainty of Reserve and Other Mineralization Estimates
- ---------------------------------------------------------
There are numerous uncertainties inherent in estimating proven and probable
reserves and other mineralization, including many factors beyond the control of
the Company. The estimation of reserves and other mineralization involves
subjective judgments about many relevant factors, and the accuracy of any such
estimate is a function of the quality of available data and of engineering and
geological interpretation and judgment. Results of drilling, testing and
production subsequent to the date of an estimate may justify revision of such
estimate. Assumptions about prices are subject to great uncertainty and gold
and silver prices have fluctuated widely in recent years and are currently at
depressed levels. See "Gold and Silver Prices." No assurance can be given that
the volume and grade of reserves mined and processed and recovery rates will be
as anticipated. Declines in the market price of gold and related precious
metals also may render reserves or other mineralization containing relatively
lower grades of mineralization uneconomic to exploit. The prices used in
estimating the Company's ore reserves at December 31, 1998 were $325 per ounce
of gold and $5.75 per ounce of silver. The market prices were $286 per ounce of
gold and $4.87 per ounce of silver at December 31, 1998. The market price of
gold is below the price at which the Company estimates its reserves. If the
Company were to determine that its reserves and future cash flows should be
estimated at a significantly lower gold price than that used at December 31,
1998, there would likely be a reduction in the amount of gold reserves. For
example, the Company estimates that, based on extrapolation of information
developed in reserve estimation, but without the same degree of analysis as
required for reserve estimation, if the Company's reserves at December 31, 1998
were based on a price of $300 per ounce of gold, reserves at the operating
properties would decrease approximately 12% and reserves at development
properties would decrease approximately 17%. Under certain such circumstances,
the Company may discontinue the development of a project or mining at one or
more of its properties. The Company recently deferred final construction
decisions on two planned gold mines (Aquarius and Paredones Amarillos) and
deferred further development of the Ulu satellite deposit. Additionally, in
January 1998, the Company temporarily suspended operations at the Lupin mine.
Further, changes in operating and capital costs and other factors, including but
not limited to short-term operating factors such as the need for sequential
development of ore bodies and the processing of new or different ore grades and
ore types, may materially and adversely affect reserves.
Mining and Processing
- ---------------------
The Company's business operations are subject to risks and hazards inherent in
the mining industry, including but not limited to unanticipated variations in
grade and other geological problems, water conditions, surface or underground
conditions, metallurgical and other processing problems, mechanical equipment
performance problems, the unavailability of materials and equipment, accidents,
labor force disruptions, force majeure factors, unanticipated transportation
costs and weather conditions, any of which can materially and adversely affect,
among other things, the development of properties, production quantities and
rates, costs and expenditures and production commencement dates.
The Company's processing facilities are dependent on continuous mine feed to
remain in operation. Insofar as the Company's mines may not maintain material
stockpiles of ore or material in process, any significant disruption in either
mine feed or processing throughput, whether due to equipment failures, adverse
weather conditions, supply interruptions, labor force disruptions or other
issues, may have an immediate adverse effect on the results of operations of the
Company. A significant reduction in mine feed or processing
39
<PAGE>
throughput at a particular mine could cause the unit cost of production to
increase to the point where the Company could determine that some or all of the
Company's reserves were uneconomic to exploit.
The Company periodically reviews mining schedules, production levels and asset
lives in its life-of-mine planning for all of its operating and development
properties. Significant changes in the life-of-mine plans can occur as a result
of mining experience, new ore discoveries, changes in mining methods and rates,
process changes, investments in new equipment and technology, precious metals
price assumptions, and other factors. Based on this analysis, the Company
reviews its accounting estimates and in the event of an impairment, may be
required to write-down the carrying value of a mine or mines. This complex
process continues for the life of every mine. See "Estimation of Asset Carrying
Values."
As a result of the foregoing risks, among other things, expenditures on any and
all projects, actual production quantities and rates, and cash costs may be
materially and adversely affected and may differ materially from anticipated
expenditures, production quantities and rates, and costs, just as estimated
production dates may be delayed materially, in each case especially to the
extent development projects are involved. Any such events can materially and
adversely affect the Company's business, financial condition, results of
operations and cash flows.
Mine Development Risks
- ----------------------
The Company's ability to maintain, or increase, its annual production of gold
and silver will be dependent in significant part on its ability to bring new
mines into production, including the Aquarius project in Canada and the
Paredones Amarillos project in Mexico, and to expand existing mines. Recently
the Company deferred final construction decisions on Aquarius and Paredones
Amarillos and deferred further development of the Ulu satellite deposit in
Canada. Although the Company utilizes the operating history of its existing
mines to derive estimates of future operating costs and capital requirements,
such estimates may differ materially from actual operating results at new mines
or at expansions of existing mines. The economic feasibility analysis with
respect to any individual project is based upon, among other things, the
interpretation of geological data obtained from drill holes and other sampling
techniques, feasibility studies (which derive estimates of cash operating costs
based upon anticipated tonnage and grades of ore to be mined and processed),
precious metals price assumptions, the configuration of the ore body, expected
recovery rates of metals from the ore, comparable facility and equipment costs,
anticipated climatic conditions, estimates of labor productivity, royalty or
other ownership burdens and other factors. In addition, many of the risks
identified below under "Exploration Risks" are also applicable to the Company's
development projects. Such development projects are also subject to the
successful completion of final feasibility studies, issuance of necessary
permits and receipt of adequate financing. Although the Company's feasibility
studies are completed with the Company's knowledge of the operating history of
similar ore bodies in the region, the actual operating results of its
development projects may differ materially from those anticipated, and
uncertainties related to operations are even greater in the case of development
projects.
Exploration Risks
- -----------------
Since mines have limited lives based on proven and probable reserves, the
Company continually seeks to replace and expand its reserves. Moreover, two of
the Company's mines, McCoy/Cove and Kettle River have entered a period of
declining production as the existing ore reserves are depleted, which has led to
significant emphasis on the Company's exploration program. Mineral exploration,
at both newly acquired properties and existing mining operations, is highly
speculative in nature, involves many risks and frequently does not result in the
discovery of minable reserves. There can be no assurance that the Company's
exploration efforts will result in the discovery of significant gold or silver
mineralization or that any mineralization discovered will result in an increase
of the Company's proven or probable reserves. If proven or probable reserves
are developed, it may take a number of years and substantial expenditures from
the initial phases of drilling until production is possible, during which time
the economic feasibility of production may change. For example, a new
feasibility study completed in December 1996 on the Alaska-Juneau project
concluded that the project was uneconomic as designed, and the Company recorded
a $77.1 million provision in connection with the decision not to proceed.
Similarly, the feasibility study on the
40
<PAGE>
Kingking project completed in the third quarter of 1997 indicated that the
project was uneconomic with the option agreement in place and the Company
recorded a $50.0 million provision to write off its entire investment in the
project. No assurance can be given that the Company's exploration programs will
result in the replacement of current production with new reserves or that the
Company's development program will be able to extend the life of the Company's
existing mines. In the event that new reserves are not developed, the Company
will not be able to sustain any mine's current level of gold or silver
production beyond the life of its existing reserve estimates.
The Company encounters strong competition from other mining companies in
connection with the acquisition of properties producing or capable of producing
precious metals. As a result of this competition, some of which is with
companies with greater financial resources than the Company, the Company may be
unable to acquire attractive mining properties on terms it considers acceptable.
In addition, there are a number of uncertainties inherent in any program
relating to the location of economic ore reserves, the development of
appropriate metallurgical processes, the receipt of necessary governmental
permits and the construction of mining and processing facilities. Accordingly,
there can be no assurance that the Company's acquisition and exploration
programs will yield new reserves to replace and expand current reserves.
Mining Risks and Insurance
- --------------------------
The business of gold and silver mining is generally subject to a number of risks
and hazards, including environmental conditions, industrial accidents, labor
disputes, unusual or unexpected geological conditions, ground or slope failures,
cave-ins, changes in the regulatory environment and natural phenomena such as
inclement weather conditions, floods, blizzards and earthquakes. Such
occurrences could result in damage to, or destruction of, mineral properties or
production facilities, personal injury or death, environmental damage to the
Company's properties or the properties of others, delays in mining, monetary
losses and possible legal liability. The Company maintains insurance against
certain risks that are typical in the gold mining industry and in amounts that
the Company believes to be reasonable, but which may not provide adequate
coverage in certain circumstances. However, insurance against certain risks
(including certain liabilities for environmental pollution or other hazards as a
result of exploration and production) is not generally available to the Company
or to other companies within the industry on acceptable terms. In 1996, the
Company recorded a $30.0 million provision related to estimated costs to remove
waste rock from a portion of the pit wall at McCoy/Cove that had collapsed. See
"Other-Insurance and Mining Risks."
Governmental Regulation
- -----------------------
The Company's mining operations and exploration activities are subject to
extensive Canadian, U.S. or other foreign federal, state, provincial,
territorial and local laws and regulations governing exploration, development,
production, exports, taxes, labor standards, waste disposal, protection and
remediation of the environment, reclamation, historic and cultural resources
preservation, mine safety and occupational health, toxic substances and other
matters. See "Other-Governmental Regulation and Environmental Issues." The costs
of discovering, evaluating, planning, designing, developing, constructing,
operating and closing the Company's mines and other facilities in compliance
with such laws and regulations are significant. It is possible that the costs
and delays associated with compliance with such laws and regulations could
become such that the Company would not proceed with the development or operation
of a mine.
As part of its normal course of operating and development activities, the
Company has expended significant resources, both financial and managerial, to
comply with governmental regulations and permitting requirements, and
anticipates that it will continue to do so in the future. Moreover, it is
possible that future regulatory developments, such as increasingly strict
environmental protection laws, regulations and enforcement policies thereunder,
and claims for damages to property and persons resulting from the Company's
operations, could result in substantial costs and liabilities in the future.
The Company is required to obtain governmental permits to develop its reserves
and for expansion or advanced exploration activities at its operating properties
and its exploration properties. Obtaining the necessary governmental permits is
a complex and time-consuming process involving numerous foreign or
41
<PAGE>
U.S. federal, state and local agencies. The duration and success of each
permitting effort are contingent upon many variables not within the Company's
control. In the case of foreign operations, governmental approvals, licenses and
permits are, as a practical matter, subject to the discretion of the applicable
governments or governmental officials. In the context of environmental
protection permitting, including the approval of reclamation plans, the Company
must comply with known standards, existing laws and regulations that may entail
greater or lesser costs and delays depending on the nature of the activity to be
permitted and the interpretation of the laws and regulations implemented by the
permitting authority. The failure to obtain certain permits, or the imposition
of extensive conditions upon certain permits, could have a material adverse
effect on the Company's business, operations and prospects.
Risk of International Operations
- --------------------------------
Many of the mineral rights and interests of the Company are subject to
governmental approvals, licenses, agreements (such as the Kuranakh PSA) and
permits. Such approvals, licenses, agreements and permits are, as a practical
matter, subject to the discretion of the applicable governments or governmental
officials. No assurance can be given that the Company will be successful in
obtaining any or all of the various approvals, licenses, agreements, and permits
it seeks, that it will obtain them in a timely fashion, or on terms favorable to
it, or that it will be able to maintain them in full force and effect without
modification or revocation.
In certain countries in which the Company has assets and operations, such assets
and operations are subject to various political, economic and other
uncertainties, including, among other things, the risks of war or civil unrest,
expropriation, nationalization, renegotiation or nullification of existing
concessions, licenses, permits, approvals and contracts, taxation policies,
foreign exchange and repatriation restrictions, changing political conditions,
international monetary fluctuations, currency controls and foreign governmental
regulations that favor or require the awarding of contracts to local contractors
or require foreign contractors to employ citizens of, or purchase supplies from,
a particular jurisdiction. In addition, in the event of a dispute arising from
foreign operations, the Company may be subject to the exclusive jurisdiction of
foreign courts or may not be successful in subjecting foreign persons to the
jurisdiction of courts in the United States or Canada. The Company also may be
hindered or prevented from enforcing its rights with respect to a governmental
instrumentality because of the doctrine of sovereign immunity. It is not
possible for the Company to accurately predict such developments or changes in
law or policy or to what extent any such developments or changes may have a
material adverse effect on the Company's operations.
Title to Properties
- -------------------
Certain of the Company's United States mineral rights, including at the Round
Mountain and McCoy/Cove properties, consist of unpatented lode mining claims.
Unpatented mining claims may be located on U.S. federal public lands open to
appropriation, and may be either lode claims or placer claims depending upon the
nature of the deposit within the claim. In addition, unpatented millsite
claims, which may be used for processing operations or other activities
ancillary to mining operations, may be located on federal public lands that are
non-mineral in character. Unpatented mining claims and millsites are unique
property interests, and are generally considered to be subject to greater title
risk than other real property interests because the validity of unpatented
mining claims is often uncertain and is always subject to challenges of third
parties or contests by the federal government. The validity of unpatented
mining claims on federal lands, which constitute the bulk of the Company's
property holding at the McCoy/Cove mine in Nevada and which constitute 19% of
the reserves at the Company's 50% owned Round Mountain mine in Nevada, is often
uncertain and may be contested (by the federal government) or challenged (by
third parties) and subject to title defects. Unpatented mining claims may only
be located on U.S. federal public lands open to appropriation, and are generally
considered to be subject to greater title risk than other real property
interest. The validity of an unpatented mining claims, in terms of its location
and maintenance, is dependent on strict compliance with a complex body of
federal and state statutory and decisional law. In addition, there are few
public records that definitively control the issues of validity and ownership of
unpatented mining claims. While the Company has obtained various reports,
opinions and certificates of title with respect to certain of the unpatented
mining claims it owns or to which it has rights in accordance with what the
42
<PAGE>
Company believes is industry practice, there can be no assurance that the title
to any of its claims may not be defective.
Inflation and Currency Risks
- ----------------------------
The Company directly or indirectly holds mining interests in several countries,
including Mexico, Brazil, Russia, Burkina Faso, Ghana, and Chile, which
historically have had unstable currencies as a result of inflation, currency
controls or other reasons. Although the production resulting from such mining
interests is generally sold in U.S. dollars, the Company is vulnerable to the
effects of inflation in its operations in certain countries, and profitability
levels may be eroded by unfavorable exchange rates. None of the countries in
which the Company holds mineral interests currently restricts the repatriation
of profits, other than through the requirement to register such distributions.
While recent years have seen a generally positive trend toward lowering
inflation and stabilizing exchange rates in these countries, there is no
assurance that governments will continue with current economic policies or that
inflation will be lower than it has been historically. See "Exchange Rates."
Year 2000 Risks
- ---------------
The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. The effects of the Year 2000 issue may be
experienced before, on, or after January 1, 2000, and, if not addressed, the
impact on operations and financial reporting may range from minor errors to
significant systems failure which could affect the Company's ability to conduct
normal business operations. Similar to other companies, the year 2000 problem
affects information technology (IT) and non-IT systems commonly referred to as
embedded micro-processors in operating equipment. See "Management's Discussion
and Analysis of Financial Condition and Operating Results - Impact of Year
2000." The expected cost and date of completion of the Year 2000 project are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third party compliance and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
from those anticipated. Due to this uncertainty and the uncertainty related to
the efforts of suppliers and other third parties, it is not possible to
determine whether the effects of the Year 2000 issue will have a material effect
on the operating results of the Company.
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<PAGE>
GLOSSARY
The following terms are described to aid in understanding the Company's Form 10-
K and other periodic filings. Geological terms are generally not included.
ADIT - A tunnel driven horizontally into the side of the mountain or hill to
gain access to mineralization for exploration or mining.
ASSAY - A chemical test performed on a sample of ore, mineral or rock to
determine the mineralized content.
CALL OPTION - An option contract that gives the holder the right, but not the
obligation, to buy a specific commodity on a specific future date at a fixed
price.
CONCENTRATE - A metal-rich product from a mineral separation process such as
flotation. The metals are "concentrated" from ore and the remainder is discarded
as neutralized tailings. The contained metals are recovered from the
concentrates either by leaching or by smelting.
CONTANGO - The premium paid over spot prices on a forward contract. The contango
is based on the difference between the cost of leasing gold and current money
interest rates.
DILUTION - The unwanted but unavoidable inclusion of some barren or low-grade
rock along with the ore being mined. This lowers the grade of the mined
material.
DORE - An unrefined bar of bullion containing an alloy of gold, silver and
impurities. The Company ships dore bars to refiners for further processing, then
sells the refined gold and silver to precious metal dealers, mainly banks and
their affiliates.
DRIFT - An underground horizontal passage providing access to a mineralized
area.
DRILLING
Blasthole Drilling - The drilling of holes in rock to insert with an explosive
charge. The drill holes are usually about 10-25 feet apart. The ensuing
synchronized blast will break up the rock so it can be dug out.
Diamond (or Core) Drilling - Drilling with a hollow diamond-studded bit to cut
out a solid rock core. A column of rock is extracted from inside the drill rod
for geological examination and assay.
In-Fill Drilling - Drilling between widely spaced holes (typically up to 200
feet apart) to establish or upgrade the ore reserve classification.
Rotary Drilling - Drilling with a bit that breaks the rock into chips. The chips
are continually flushed from the hole (outside the drill pipe) and are collected
in sequence for geological examination and assay.
Reverse-Circulation Drilling - A type of Rotary Drilling that uses a double-
walled drill pipe. Compressed air, water or other drilling medium is forced down
the space between the two pipes to the drill bit, and the drilled chips are
flushed back up to the surface through the center tube of the drill pipe.
Step-Out Drilling - Drilling at widely spaced intervals (typically in increments
of 300 feet) outward from known deposits to test for extensions of
mineralization.
EXERCISE (OR STRIKE) PRICE - The price at which the underlying commodity or
security can be bought, sold, or settled on exercise of the option contract. In
the case of a call option, the exercise price is the price at which the buyer of
the option has the right to purchase the underlying commodity or security. In
44
<PAGE>
the case of a put option, the exercise price is the price at which the buyer of
the option has the right to sell the underlying commodity or security.
EXPLORATION - Exploration can be divided into three basic categories:
Grassroots Exploration - Exploration for ore in an area that has the correct
geologic setting, although no ore may have been found yet in that precise
location.
Headframe Exploration - Exploration for a separate ore body "within sight of the
headframe" of an existing mine.
Definition Exploration - Exploration that defines an ore body, or searches for
extensions to it, once it has been discovered.
FEASIBILITY STUDIES - Determinations of the economic feasibility of mining a
deposit, based on progressively greater levels of information.
Initial Feasibility (Level 1) - A preliminary estimate of what the economic
parameters of mining a deposit are likely to be, based on a particular mining
plan, process flow sheet, facility design, infrastructure, and estimated capital
and operating costs. A Level 1 estimate usually describes an installation that
might be built. The deposit is classified as other mineralization.
Detailed/Optimized Feasibility (Level 2) - A refinement and reassessment of the
initial study, based on extensive additional information, detailed engineering,
and optimization work. This provides a level of confidence such that a decision
to build the project can be made. A Level 2 estimate generally describes an
installation that probably will be built, rather than an installation which is
conceptual only. The deposit is now classified as ore reserves.
Definitive Feasibility (Level 3) - Yet a further increase in the level of
engineering and other detailed work. The designs and estimates provided in the
Level 3 estimate are for the installation that will be built with minimal
modifications. The Company would not normally proceed to this level of detail
before making a construction decision unless it were to be required for stand-
alone project financing.
FLOTATION - A process for concentrating minerals based on the selective adhesion
of certain minerals to air bubbles in a mixture of water and ground-up ore. When
the right chemicals are added to a frothy water bath of ore that has been ground
to the consistency of talcum powder, the minerals will float to the surface. The
metal-rich flotation concentrate is then skimmed off the surface.
FORWARD CONTRACT - A legal agreement to buy or sell a commodity at a specific
price on a future date.
GOLD LOAN - A low interest rate method of debt financing that also acts to hedge
future selling prices. A gold producer borrows gold bullion from a bank or
dealer and sells it on the spot market, thereby establishing the sales price for
the quantity of gold borrowed. The producer replaces the borrowed gold from its
future production according to an agreed upon schedule. A gold loan allows the
producer to receive the proceeds from the sale of the borrowed gold immediately,
rather than as the metal is produced.
GRADE - The metal content of ore. With precious metals, grade is expressed as
troy ounces per ton of ore.
Cut-off Grade-The minimum grade of ore that can be mined and processed
economically.
HEAP LEACHING - A low-cost leaching process in which ore is placed in a large
heap on an impermeable pad. The solvent, a weak cyanide solution, is dripped or
sprinkled over the heap and collected at the bottom after percolating through
the ore and dissolving the metals. See the illustration in "Mine Processing."
45
<PAGE>
LEACHING - The extraction of a soluble metallic compound from ore by dissolving
the metals in a solvent. See also Heap Leaching.
LEACH CYCLE - The average amount of time that ore is leached.
LEACH PAD - A large, impermeable foundation or pad used as a base for ore during
heap leaching. The pad prevents the leach solution from escaping out of the
circuit.
Dedicated Pad - A Leach Pad which is constructed to permanently accommodate one
ore heap. The pad forms the tailings pile when economic recovery has been
reached and the pad neutralized.
Reusable Pad - A pad where ore is loaded and then unloaded at the end of each
Leach Cycle. The pad, made of durable materials, can be reused continually.
MILL - A plant where ore is ground, usually to fine powder, and the metals are
extracted by physical and/or chemical processes. See the illustration in "Mine
Processing."
MINERALIZATION - Mineral-bearing rock. In this report, mineralization generally
refers to the presence of gold and silver established by widely spaced drilling.
It is referred to as "other mineralization" to distinguish it from "proven and
probable reserves." See Ore Reserves.
ORE BODY - A mineral deposit that can be mined at a profit under existing
economic conditions.
ORE PASS - A vertical or steeply inclined raise used to move ore by gravity to
the mine level where it will be crushed and hoisted to surface.
ORE RESERVES - The tonnage and grade of an economically and legally extractable
ore body. The Company's reserves are minable reserves and do not reflect losses
in the recovery process. They include allowance for dilution of ore in the
mining process. Securities regulations in both Canada and the U.S. set strict
requirements for proven and probable ore reserves.
Proven Ore Reserves - "Proven ore" or "measured ore" means that material for
which tonnage is computed from dimensions revealed in outcrops or trenches or
underground workings or drill holes and for which the grade is computed from the
results of adequate sampling, and for which sites for inspection, sampling and
measurement are so spaced and the geological character so well defined that the
size, shape and mineral content are established, and for which the computed
tonnage and grade are judged to be accurate within limits which shall be stated
and for which it shall be stated whether the tonnage and grade of proven ore or
measured ore are "in-situ" or extractable, with dilution factors shown, and
reasons for the use of these dilution factors clearly explained.
Probable Ore Reserves - "Probable ore" or "indicated ore" means that material
for which tonnage and grade are computed partly from specific measurements,
samples or production data, and partly from projection for a reasonable distance
on geological evidence, and for which the sites available for inspection,
measurement and sampling are too widely or otherwise inappropriately spaced to
outline the material completely or to establish its grade throughout.
The Canadian and U.S. regulations are presented in "Reserves."
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<PAGE>
OTHER MINERALIZATION - See Mineralization.
OUNCE - Throughout this report, the terms "ounce" and "milliounce" are used as
abbreviations for the troy ounce measure of weight. The troy ounce has been used
exclusively as a precious metals measurement, probably since the 16th century.
One troy ounce = 1.097 avoirdupois ounces
= 31.103 grams
One milliounce = 0.001 ounce
PUT OPTION - An option contract that gives the holder the right, but not the
obligation, to sell a specific commodity on a specific future date at a fixed
price.
RAMP - An underground tunnel providing access for exploration or the movement of
materials and equipment between mine levels.
RECOVERY RATE - The percentage of metals recovered in a mineral separation
process. Recovery rates vary considerably depending on physical, metallurgical
and economic circumstances.
RESERVES - See Ore Reserves.
RUN-OF-MINE ORE - Uncrushed ore in its natural state just as it is when blasted.
SHAFT - A vertical accessway to a mine. Shafts are used for the movement of
personnel and materials, including ore and nonmineralized rock.
SPOT DEFERRED SALE - Similar to a forward sale except the date of sale may be
deferred many times before the gold is ultimately delivered. The contango will
increase at each deferral or roll forward.
STOPE - An underground working area where ore is mined.
SWAP - Transactions that generally involve the contractual exchange of interest
payment obligations, currency positions, or commodities (or any combination
thereof), on a specified amount of notional principal for a specified period of
time.
TAILINGS - The neutralized material discarded after the economically recoverable
metals have been extracted from the ore by Milling or Heap Leaching.
TON - The short ton is used throughout this report. It is a unit of weight equal
to 2,000 pounds or 907.2 kilograms.
WASTE-TO-ORE RATIO - In an open pit mine, large quantities of nonmineralized
rock often cover up the ore and must be removed. The stripping ratio is the
number of tons of nonmineralized material removed per ton of ore mined.
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GOLD PRICES
The following table sets forth annual high, low, average and end of period
afternoon fixing gold prices in U.S. dollars per troy ounce on the London
Bullion Market.
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------------
1999* 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
High $ 291 $ 313 $ 367 $ 415 $ 396 $ 396
Low 284 273 283 367 372 370
Average 287 294 332 388 384 384
End of Period 286 286 293 369 387 383
</TABLE>
* Through February 19, 1999
SILVER PRICES
The following table sets forth annual high, low, average and end of period noon
prices in U.S. dollars per troy ounce as quoted by Handy & Harman.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------
1999* 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
High $5.71 $7.31 $6.13 $5.79 $6.01 $5.76
Low 4.92 4.72 4.18 4.67 4.36 4.63
Average 5.32 5.54 4.87 5.18 5.20 5.29
End of Period 5.59 4.87 6.13 4.87 5.11 4.87
</TABLE>
* Through February 19, 1999
EXCHANGE RATES
The exchange rates of the Canadian dollar to the U.S. dollar at the end of each
period and the high, the low and the average exchange rates for each period,
were as follows (such rates, which are expressed in Canadian dollars, being the
noon buying rates in New York City for cable transfers in U.S. dollars as
certified for customs purposes by the Federal Reserve Bank of New York).
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------
1999* 1998 1997 1996 1995 1994
---------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
High C$ 1.4870 C$ 1.4075 C$ 1.3353 C$ 1.3310 C$ 1.3285 C$ 1.3103
Low 1.5298 1.5765 1.4358 1.3822 1.4238 1.4078
Average 1.5092 1.4823 1.3838 1.3638 1.3689 1.3699
End of Period 1.4903 1.5512 1.4352 1.3697 1.3655 1.4030
</TABLE>
* Through February 19, 1999
CONVERSION TABLE
For ease of reference, the following conversion factors are provided. The term
"ounce" as used in this report means "troy ounce."
1 mile = 1.6093 kilometers
1 foot = 0.305 meter
1 acre = 0.4047 hectare
1 U.S. gallon = 3.785 liters
1 short ton = 2,000 pounds
= 907.2 kilograms
1 troy ounce = 1.097 avoirdupois ounces
= 31.103 grams
48
<PAGE>
MINE PROCESSING
Milling is the traditional method of recovering gold from ore. All of the
Company's producing mines including Lupin use milling. Details of the process
vary from mine to mine, but the principles remain the same. The mill recovery
process at the McCoy/Cove operation, where both oxide ores and sulfide ores are
processed, is illustrated on page 50.
Heap leaching is a low-cost gold recovery process that can only be successfully
applied to certain oxidized, permeable ores. It has a lower recovery rate than
milling but is a less expensive process. Heap leaching is particularly suited to
large, low-grade oxide ore deposits. Both Round Mountain and McCoy/Cove use
heap leaching. Details of the process vary from mine to mine, but the
principles remain the same. To describe how the heap leach process works, the
Round Mountain mine's reusable leach pad process is illustrated on page 51.
49
<PAGE>
GENERAL DESCRIPTION OF MINING AND MILL RECOVERY PROCESS
Milling is the traditional method of recovering gold from ore. Details of the
process vary from mine to mine, but the principles remain the same. (Heap
leaching is another method of recovering gold from certain types of low-grade
ore, described on the next page.) Here is how the mill recovery process works
at the McCoy/Cove operation, where the Company has both oxide ores and sulfide
ores.
Ore is blasted and trucked from an open pit to the mill. Ore is gold-
bearing rock. After it's blasted, it ranges from powder to boulders as
large as five feet across.
A giant jaw crusher reduces all of the ore to eight inches or smaller.
Crushed ore is ground to the consistency of fine sand in a series of three
grinding mills. Steel balls tumble with the ore and water inside huge
rotating drums, pulverizing the ore and liberating most of the gold and
silver.
After grinding, sulfide ores need two extra steps that oxide ores don't:
flotation and regrinding.
Flotation is a method of concentrating sulfide ores. The mineral particles
are floated to the surface by a froth of induced air, where they
concentrate and are skimmed off. The remaining under-flow, which still
contains some gold and silver, skips the next step.
The sand-size concentrated sulfide particles are reground even finer, to
the size of talcum powder. This frees the precious metals from the sulfides
trapping them.
Oxide ores, sulfide ore underflows, and reground sulfide concentrates all
go to large leaching tanks, where a cyanide solution dissolves the gold and
silver from the solids like hot water leaches tea from tea leaves.
After 36 to 96 hours, zinc powder is added to the "pregnant" leach
solution. This precipitates the gold and silver from the solution in the
form of metallic powder. The powder is collected on filters and smelted
into bullion bars. The bars are shipped to refineries for further
processing into the pure metals.
The leftover solids from the leach tanks, called tailings, are pumped to a
treatment plant, where the contaminants are neutralized using sulfur
dioxide (SO\\2\\) and air. The tailings are then pumped to a lined tailings
pond. The solids settle to the bottom, and the water that doesn't evaporate
is recirculated back to the mill.
50
<PAGE>
GENERAL DESCRIPTION OF MINING AND HEAP-LEACH RECOVERY PROCESS
Heap leaching is a gold recovery process that can only be applied to permeable
ores. It has a lower recovery rate than milling, but lower-grade ores can be
economically heap leached rather than milled because heap leaching costs are
much lower. Here is how Round Mountain's reusable leach pad process works. The
details, but not the principles, vary among individual mines.
Ore is mined and hauled by truck from the open pit. Ore is gold-bearing
rock.
Crushing reduces the ore to less than three-quarters of an inch in size.
Lime is added to stabilize the cyanide.
After being loaded onto the impermeable leach pad, the ore is sprinkled for
approximately 100 days with a weak sodium cyanide solution. This penetrates
the ore, dissolving the almost-microscopic bits of gold and silver. The
"pregnant" solution drains to the collection area at the lower side of the
pad and flows to a pump. At the end of the leach cycle, the leached ore is
washed with water and drained.
The pregnant solution is pumped through a series of tanks containing
activated carbon, which removes the gold and silver from the cyanide
solution. The "barren" solution is recycled back to the leach pads.
The gold and silver are stripped from the carbon, forming a highly
concentrated solution. The carbon is regenerated and returned to the
adsorption circuit.
The precious metals in the concentrated solution are electrolytically
deposited on steel wool cathodes in the electrowinning cells.
The gold precipitated on the cathodes is then placed into an
electrorefining cell, where the gold is plated out in the form of foil. The
foil is fire-refined into dore bars containing about half gold and half
silver, together with minor amounts of impurities.
The dore bars are shipped to a precious metals refinery for final
processing into pure gold and silver.
51
<PAGE>
ITEM 3-LEGAL PROCEEDINGS
ALASKA-JUNEAU
During 1994, the U.S. Attorney began an investigation of potential Clean Water
Act violations at the Alaska-Juneau property. The investigation was to
determine whether the Company unlawfully discharged pollutants from the drainage
tunnel without a National Pollution Discharge Elimination System (NPDES) permit.
On September 2, 1997, the U.S. Attorney sent a letter stating that "...the
United States will not proceed with a criminal prosecution for Federal Clean
Water Act violations at this time." While this does not foreclose possible
criminal changes at a later date if the Department of Justice finds new
information warranting prosecution, as a practical matter, this ends the threat
of a criminal action. A civil action could be taken by the EPA.
See "Business and Properties-Other-Government Regulation and Environmental
Issues."
OTHER
The Company is also engaged in routine litigation incidental to its business.
ITEM 4-SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 1998.
52
<PAGE>
PART II
ITEM 5-MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
The Company's common shares were first sold to the public at $2.36 per share in
April 1983 after giving effect to the six-for-five share split in 1983 and the
two-for-one share split in 1987. The Company's current stock exchange listings,
together with the date of listing, are set out below.
Canada-Toronto (April 1983)
United States-American (October 1983)
France-Paris (March 1985)
Belgium-Brussels (October 1985)
Switzerland-Zurich (April 1987)
Germany-Frankfurt (November 1988)
The following table sets forth for the period from January 1, 1997 through
January 31, 1999 the high and low reported prices and trading volume of the
common shares on The Toronto Stock Exchange and the American Stock Exchange.
<TABLE>
<CAPTION>
The Toronto Stock Exchange American Stock Exchange
-------------------------- ------------------------
High Low Volume High Low Volume
(Canadian Dollars) (shares in (U.S. Dollars) (shares in
thousands) thousands)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997
- ----
First Quarter 10.80 8.10 9,264 7.94 6.00 36,001
Second Quarter 9.40 7.35 8,533 6.88 5.31 25,854
Third Quarter 8.15 6.55 5,402 5.94 4.75 21,262
Fourth Quarter 8.10 2.85 12,375 5.88 2.00 44,273
1998
- ----
First Quarter 3.70 2.20 9,716 2.63 1.25 40,234
Second Quarter 5.60 3.15 5,622 3.88 2.19 20,497
Third Quarter 4.05 2.40 5,221 2.69 1.56 19,041
October 4.30 3.22 1,082 2.81 2.06 4,950
November 3.80 3.00 1,735 2.94 2.06 5,546
December 3.35 2.65 581 2.19 1.69 4,366
1999
- ----
January 3.18 2.50 859 2.19 1.63 3,244
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
On February 19, 1999, the closing price of the common shares on The Toronto
Stock Exchange and on the American Stock Exchange was C$2.65 and U.S. $1.88,
respectively.
On February 19, 1999, the Company had 140,607,145 common shares outstanding held
by approximately 66,000 registered and nominee shareholders.
DIVIDENDS
The Company suspended payment of dividends beginning in 1997. Historically,
dividends payable to Canadian residents have been converted to and paid in
Canadian dollars.
The declaration and payment of future dividends is dependent upon the Company's
capital requirements,
53
<PAGE>
earnings and economic outlook. Additionally, in 1998, the Company exercised its
right to defer its April and October interest payment to holders of the capital
securities. During the deferral period, the Company is prohibited from paying
dividends.
See "Certain Tax Matters-Canadian Federal Income Tax Considerations" for
information with respect to Canadian withholding tax applicable to non-Canadian
shareholders.
CERTAIN TAX MATTERS
The following paragraphs summarize certain United States and Canadian federal
income tax considerations in connection with the receipt of dividends paid on
common shares of the Company and certain United States and Canadian federal
income tax considerations in connection with a disposition of common shares.
These tax considerations are stated in brief and general terms and are based on
United States and Canadian law currently in effect. There are other potentially
significant United States and Canadian federal income tax considerations and
state, provincial or local income tax considerations with respect to ownership
and disposition of the common shares which are not discussed herein. The tax
considerations relative to ownership and disposition of the common shares may
vary from taxpayer to taxpayer depending on the taxpayer's particular status.
Accordingly, prospective purchasers should consult with their tax advisors
regarding tax considerations which may apply to their particular situation.
United States Federal Income Tax Considerations
- -----------------------------------------------
Dividends on common shares paid to U.S. citizens or corporations (including any
Canadian federal income tax withheld) will be generally subject to U.S. federal
ordinary income taxation to the extent that a shareholder received a
distribution out of the shareholder's ratable share of the Company's current or
accumulated earnings and profits (e.g., a taxable dividend distribution). To
the extent that the amount of the dividend distribution exceeds the
shareholder's ratable share, such excess would not be taxable but would reduce
the shareholder's basis in the Company's common stock. To the extent that the
distribution exceeds the shareholder's adjusted basis in the shares (i.e. cost
less all non-taxable dividend distributions), the excess would be taxable as a
gain as if the shareholder had sold or exchanged the shares. In this case,
holding periods for capital gain purposes would be the same as the holding
period for such stock from which that dividend would be attributed. Such
dividends will not be eligible for the deduction for dividends received by
corporations (unless such corporation owns by vote and value at least 10% of the
stock of the Company, in which case a portion of such dividend may be eligible
for such deduction).
U.S. corporations, U.S. citizens and U.S. residents will generally be entitled,
subject to certain limitations, to a credit against their U.S. federal income
tax for Canadian federal income taxes withheld from such dividends. Taxpayers
may claim a deduction for such taxes if they do not elect to claim such tax
credit. No deduction for foreign taxes may be claimed by an individual taxpayer
who does not itemize deductions. Because the application of the foreign tax
credit depends upon the particular circumstances of each shareholder,
shareholders are urged to consult their own tax advisors in this regard.
The Company believes that it is not a "passive foreign investment company" (a
"PFIC"), a "foreign personal holding company" (a "FPHC"), or a "controlled
foreign corporation" (a "CFC"), for United States Federal income tax purposes,
and the Company does not expect to become a PFIC, a FPHC or a CFC. If the
Company were, or were to become, a PFIC, a FPHC, or a CFC, some or all United
States shareholders would be required to include in their taxable income certain
undistributed amounts of the Company's income, or, in certain circumstances, to
pay an interest charge together with tax calculated at maximum rates on certain
"excess distributions," including gains on the sale of stock.
54
<PAGE>
Any United States person who owns 5% or more in value of the stock of the
Company may be required to file IRS Form 5471 with respect to the Company and
its non-United States subsidiaries to report certain acquisitions or
dispositions of stock of the Company. Annual filings of Form 5471 would be
required from any United States person owning 50% or more of the stock of the
Company or, if the Company were a FPHC or a CFC, from certain United States
persons owning 10% or more of the stock of the Company.
Canadian Federal Income Tax Considerations
- ------------------------------------------
Dividends paid on common shares held by non-residents of Canada will generally
be subject to Canadian withholding tax. This withholding tax is levied at the
basic rate of 25%, although this rate may be reduced by the terms of any
applicable tax treaty. The Canada-U.S. tax treaty provides that the withholding
rate on dividends paid to U.S. residents on common shares is 5%, if such
dividends were paid to a shareholder which is a company and which owns at least
10% of voting stock of the Company, or 15% in all other cases. Generally, a
non-resident of Canada who holds common shares as capital property will not be
subject to Canadian federal income tax on capital gains realized on the
disposition of his or her common shares provided that during the five years
preceding the disposition the non-resident, together with non-arm's-length
persons, has not at any time owned 25% or more of the issued shares of any class
of the Company.
55
<PAGE>
ITEM 6-SELECTED FINANCIAL DATA
The following table is derived in part from the audited consolidated financial
statements of the Company. The consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in Canada.
In all material respects, they conform with principles generally accepted in the
United States (except as described in footnote 1 to this table and note 13 to
the Company's consolidated financial statements). This information should be
read in conjunction with the audited consolidated financial statements and the
notes thereto.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA/(1)/
Year ended December 31
millions of U.S. dollars except
for gold price and per share data 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue $ 232.2 $ 305.4 $ 337.3 $ 360.7 $ 377.6
Average gold price realized per ounce $ 333 $ 362 $ 384 $ 388 $ 387
Earnings (loss) before taxes/(2)/ $ (19.8) $(418.7) $(176.1) $ (44.7) $ 13.0
Effective tax rate (1.8%) (0.4%) (0.4%) 7.2% (33.3%)
Earnings (loss) before preferred share dividends/(2) (4)/ $ (20.1) $(420.5) $(176.7) $ (41.6) $ 17.3
Net earnings (loss)/(2)/ $ (20.1) $(420.5) $(176.7) $ (50.1) $ 8.0
Net earnings (loss) attributable to common shareholders/(2)(3) $ (32.6) $(426.2) $(176.7) $ (50.1) $ 8.0
Earnings (loss) per common share/(2)/ $ (0.23) $ (3.06) $ (1.31) $ (0.43) $ 0.07
Weighted average common shares outstanding (millions) 140.1 139.4 134.4 116.2 112.5
BALANCE SHEET DATA
Working capital (deficiency) $ (13.9) $ (28.7) $ (52.9) $ 109.6 $ 186.2
Current ratio 0.81 0.73 0.74 1.84 4.24
Total assets $ 368.1 $ 432.8 $ 832.1 $ 871.2 $ 881.7
Gold, silver and currency financings $ 52.8 $ 66.5 $ 182.9 $ 152.8 $ 132.7
Deferred income taxes $ 7.5 $ 7.9 $ 8.4 $ 8.1 $ 8.4
Common shareholders' equity $ 133.8 $ 153.7 $ 492.3 $ 588.9 $ 509.7
Common shares outstanding (millions) 140.6 139.4 139.4 129.9 112.7
OTHER DATA
Dividends paid on common shares - total $ -- $ -- $ 10.1 $ 9.0 $ 8.5
- per share $ -- $ -- $0.0750 $0.0750 $ 0.0750
Dividends paid on convertible preferred
shares of subsidiary/ (4)/ - total $ -- $ -- $ -- $ 8.5 $ 10.1
- per share $ -- $ -- $ -- $ 1.75 $ 1.75
Net cash flows provided from (used in) operating activities $ 14.1 $ (9.2) $ 29.9 $ 67.3 $ 92.2
activities
Capital and exploration spending $ 24.1 $ 151.1 $ 161.7 $ 138.3 $ 66.8
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ This information should be read in conjunction with the Company's audited
consolidated financial statements and accompanying notes. Contingencies
are described in notes 16 and 17 to the Company's consolidated financial
statements. The Company's consolidated financial statements are prepared
in accordance with Canadian generally accepted accounting principles. Had
the consolidated financial statements been prepared in accordance with
accounting principles generally accepted in the United States, certain
selected financial data would be disclosed as follows. See also note 13 to
the Company's consolidated financial statements.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings (loss) before income taxes $ (39.5) $ (505.8) $ (173.1) $ (39.2) $ 19.2
Net earnings (loss) $ (39.9) $ (460.6) $ (173.7) $ (44.6) $ 9.3
Earnings (loss) per common share $ (0.28) $ (3.30) $ (1.29) $ (0.38) $ 0.08
Total assets $ 358.6 $ 423.9 $ 919.6 $ 881.3 $872.6
Deferred income taxes $ 7.5 $ 7.9 $ 55.0 $ 8.1 $ 8.4
Common shareholders' equity $ 12.6 $ 55.9 $ 533.1 $ 599.0 $500.6
---------------------------------------------------------------------------------------------------------------
</TABLE>
/(2)/ In 1997, the Company recorded a $362.7 million provision for impaired
assets and other charges ($2.60 per share). In 1996, the Company recorded
a $30.0 million ($0.22 per share) provision related to the estimated costs
to remove waste
56
<PAGE>
rock from a portion of the Cove pit wall that had collapsed at the
McCoy/Cove mine in Nevada and recorded a $77.1 million ($0.57 per share)
provision to write off the $57.1 million book value of its Alaska-Juneau
development property in Alaska and to accrue $20.0 million for estimated
reclamation and closure costs.
/(3)/ After interest expense on the equity portion of the capital securities,
issued in March 1997. See note 6 to the consolidated financial statements.
/(4)/ All of the outstanding shares of preferred stock of subsidiary were
redeemed or converted into common shares of the Company during 1995.
57
<PAGE>
ITEM 7-MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial results of the Company's operations
for the years 1996 through 1998 should be read in conjunction with the financial
data and the Company's consolidated financial statements, included elsewhere in
this report. The Company's consolidated financial statements are prepared in
accordance with accounting principles generally accepted in Canada. In all
material respects, they conform with those principles generally accepted in the
United States, except as described in note 13 to the Company's consolidated
financial statements.
Material changes in the Company's reserves may significantly impact results of
operations and asset carrying values. See the discussion of reserves in
"Business and Properties-Reserves."
The following contains statements that are, by their nature, forward looking and
uncertain. See "Cautionary 'Safe Harbor' Statement under the United States
Private Litigation Reform Act of 1995", "Business and Properties-Risk Factors"
and "Commitments and Contingencies" for a discussion of certain factors which
should be considered in evaluating these statements.
SUMMARY
The Company had a net loss of $20.1 million ($0.23 per share) in 1998, compared
with $420.5 million ($3.06 per share) in 1997 and $176.7 million ($1.31 per
share) in 1996.
The 1998 results reflect reduced operating costs and decreased exploration and
development spending compared to 1997, partially offset by lower revenues
resulting from lower gold and silver volumes and decreased average gold price
realized. The 1997 results reflect $346.0 million in provisions for asset
impairment (see note 8 to the consolidated financial statements) and $16.7
million of severance expense related to the downsizing, as well as lower gold
and silver prices realized and lower volume of gold sold when compared to 1996.
The average gold price realized by the Company in 1998 was $333 per ounce,
including forward sales, put options, gold loan repayments and the impact of
deferred revenue related to the restructuring of hedge positions. This was
above the average market price of $294 per ounce in 1998, but lower than the
$362 per ounce average price realized in 1997. To help protect against any
potential further decline in the gold price, the Company has hedged over 90% of
its estimated 1999 gold production at a minimum average price of $349 per ounce.
Production targets for 1999 are 455,000 to 475,000 ounces of gold and 7 to 8
million ounces of silver.
In 1998, net cash flows provided by operating activities were $14.1 million
after cash exploration and development expenses of $12.0 million.
The Company's sharply reduced exploration and development programs, in response
to market conditions, may be expected to limit the discovery and development of
new reserves. Over the long term, this could have adverse implications since
McCoy/Cove and Kettle River are nearing the ends of their mine lives.
RESULTS OF OPERATIONS
Revenue
- -------
Revenue declined to $232.2 million in 1998 from $305.4 million in 1997
principally due to decreased gold and silver sales volume ($62.3 million)
reflecting declining grades at McCoy/Cove and Kettle River and the absence of
production at Lupin due to the temporary suspension of operations in January
1998. Revenue was also impacted by lower gold prices realized in 1998 compared
to 1997 ($16.0 million). In
58
<PAGE>
1997, revenue declined to $305.4 million from $337.3 million in 1996, reflecting
lower gold prices realized and lower production at McCoy/Cove and Lupin related
to declining ore grades.
Gold and Silver Hedging
- -----------------------
The Company's profitability is determined in large part by gold and silver
prices. Market prices of gold and silver are determined by factors beyond the
Company's control. The Company reduces the risk of future price declines by
hedging a portion of its production. The principal hedging tools used are gold
and silver loans, forward sale contracts, spot-deferred contracts, swaps and
options. The Company's hedging activities and commitments are described in
detail in note 16 to the consolidated financial statements.
In 1998, the Company delivered approximately 96% of gold production against
forward sales, put options and gold loans at an average commitment price of $341
per ounce. This compares with 33% of gold production at an average price of
$397 in 1997 and 25% of gold at an average price of $375 in 1996. Approximately
50% of silver production was delivered against forward sales at an average cash
price of $5.44 per ounce in 1998. This compares to 7% at an average price of
$5.32 in 1997 and 45% at an average price of $5.85 in 1996. Deliveries in 1997
reflect the impact of the January 1997 repurchase of the Company's outstanding
gold and silver forward sales contracts and replacement of these contracts with
put options. The Company did not rebuild its forward portfolio until the third
and fourth quarters of 1997.
In 1999, the Company has protected itself against price declines by hedging over
90% of its planned 1999 gold production at a minimum average price of $349 per
ounce, along with 5.2 million ounces of silver at $5.76 per ounce.
Operating Costs
- ---------------
Consolidated cash operating costs were $208 per ounce of gold produced in 1998,
$249 in 1997 and $254 in 1996. The 1998 decrease results from the impact of
third quarter 1997 write-down deferred mining balances, lower reagent usage and
manpower reductions at McCoy/Cove, lower stripping costs at Round Mountain
associated with the change in the mine plan instituted in 1997 and the absence
of higher-cost production from Lupin in 1998. These reductions in cost per
ounce were partially offset by lower mill grades at McCoy/Cove and Kettle River.
The 1997 decrease reflected a series of cost-reduction initiatives, along with
increased dedicated pad tonnage and higher reusable pad recoveries at Round
Mountain. The 1996 increase was principally due to the planned mining of lower-
grade ores. Cash operating costs per ounce vary with the number of tons and
grade of ore processed. They generally reflect mining and processing costs,
most significantly labor, consumable materials, repairs of machinery and
equipment, fuel, utilities and environmental compliance.
The Company's cash operating cost target for 1999 is $235 to $245 per ounce of
gold produced, reflecting the anticipated lower production levels.
Royalties
- ---------
Royalties decreased to $7.5 million in 1998 and $8.3 million in 1997 from $9.6
million in 1996 primarily due to lower precious metals prices. The Company's
target for 1999 is $7 to $8 million, reflecting similar levels of royalty
bearing production. Details of the Company's royalties are provided in note 17
to the consolidated financial statements.
Production Taxes
- ----------------
Production taxes increased in 1998 compared to 1997 due to timing differences.
Production taxes decreased in 1997 compared to 1996, reflecting lower precious
metals prices and lower gold production
59
<PAGE>
at McCoy/Cove. Less cash flow reduces the net profit on which the production
taxes are calculated. Production taxes are expected to be about the same in 1999
as 1998.
Depreciation and Amortization
- -----------------------------
Depreciation and amortization decreased to $63.3 million from $79.3 million in
1997. Amortization varies with the quantity of gold and silver sold and the mix
of production from the various mines. The quantities of the Company's proven
and probable reserves and other mineralization also affect amortization expense,
as the Company's investment is amortized over these ounces. Amortization
expense of $17.5 million in 1998 and $27.4 million in 1997 compared to $29.8 in
1996 reflect the impact of the third quarter 1997 write-down of ore body
carrying values at Kettle River. 1998 depreciation was further decreased by the
absence of Lupin production in 1998. Depreciation expense was $45.8 million in
1998, $51.9 million in 1997, and $56.7 million in 1996. The decreases in
depreciation expense in 1998 and 1997 from 1996 reflect the fact that as
McCoy/Cove approaches the end of its useful life, major groups of its assets are
fully depreciated and not being replaced. 1998 depreciation expense was also
impacted by reduced depreciation of Lupin assets during the temporary suspension
of operations.
On a per-ounce basis, depreciation and amortization expense was $87 in 1998, $90
in 1997 and $98 in 1996. The depreciation portion alone was $62 in 1998, $58 in
1997 and $64 in 1996. The amortization portion was $25 in 1998, $32 in 1997 and
$34 in 1996.
For 1999, the Company expects depreciation and amortization expense to be in the
range of $55 to $60 million, down from $63.3 million in 1998.
Reclamation and Mine Closure
- ----------------------------
Reclamation and mine closure expense decreased in 1998 compared to 1997
primarily due to the absence of production at the Lupin mine, and increased from
1996 to 1997, reflecting increased accruals for reclamation and closure
activities (see note 7 to the consolidated financial statements). For 1999, the
Company expects this expense to be in the range of $5 to $6 million.
General and Administrative
- --------------------------
General and administrative costs were sharply reduced in 1998 and 1997,
reflecting the downsizings and cost reduction initiatives undertaken in response
to depressed gold prices. These costs had risen in 1996, mostly due to
increased permitting, exploration and business development activities. For
1999, the Company expects general and administrative costs to be in the range of
$7 to $8 million.
Exploration and Development
- ---------------------------
Exploration and development expense was $12.0 million in 1998, down from $34.9
million in 1997, in response to depressed gold prices. Exploration and
development expenses in 1996 reflected the Company's stepped-up efforts to
locate and develop potential new gold deposits in response to the maturation of
the McCoy/Cove and Kettle River mines.
For 1999, the Company expects its exploration and development expenditures to
total $10 to $12 million, similar to 1998. This budgeted amount will be
reviewed if gold prices improve.
Interest and Other
- ------------------
Interest and other expenses are described in note 9 to the consolidated
financial statements. The net interest expense portion was $5.2 million in
1998, $2.6 million in 1997, and $2.1 million in 1996. In 1998, the other
portion includes the net gains on the sale of various assets of $7.9 million,
partially offset by an unrealized loss of $3.0 million due to market declines in
the Company's share investment portfolio.
60
<PAGE>
Provision for Impaired Assets and Other Charges
- -----------------------------------------------
Provision for impaired assets and other charges of $362.7 million in 1997
consisted of $346.0 million in provisions for impaired assets and $16.7 million
for severance costs. The $346.0 provision included $50.0 million to write off
the Kingking project in the Philippines; $143.6 million to write off the
Company's investment in Santa Elina; $127.0 million to reduce the carrying
values of Lupin ($65.0 million), McCoy/Cove ($47.0 million) and Kettle River
($15.0 million); and $25.4 million to write down certain share investments and
other assets to market value and to provide for estimated legal and closure
expenses.
The $107.1 million charge in 1996 consisted of $77.1 million to write off the
Company's entire investment in the Alaska-Juneau project, including a $20.0
million reserve to cover estimated reclamation and closure responsibilities, and
a $30.0 million provision for McCoy/Cove pit wall remediation.
See note 8 to the consolidated financial statements.
Income Tax Expense
- ------------------
Income tax expense is described in note 10 to the consolidated financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
In December 1997, the price of gold fell as low as $281 per ounce, its lowest
level in 18 years. In 1998, the market price of gold averaged $294 per ounce.
The Company needs a significantly higher gold price before it will resume
operations at the Lupin mine, proceed with construction of the Aquarius or the
Paredones Amarillos mines, expand its exploration activities, or pursue new
acquisitions or investments.
Net cash flows provided from operating activities were $14.1 million in 1998,
compared with net cash flows used in operating activities of $9.2 million in
1997, and net cash flows provided from operating activities of $29.9 million in
1996. The 1998 results reflect decreased cash operating costs and decreased
exploration and development spending, partially offset by lower gold and silver
revenues.
Net cash used in investing activities in 1998 totaled $4.3 million. Included
was $27.0 million invested in mining properties, plant and equipment. This was
partly offset by proceeds from the first quarter 1998 repurchase of a portion of
the Company's gold forward position ($8.7 million), proceeds on the sale of the
Company's investment in Santa Elina ($6.3 million), proceeds on the sale of
mining properties, plant and equipment ($5.0 million) and proceeds on the sale
of certain share investments ($3.0 million.)
Cash used in financing activities was $18.8 million in 1998, primarily related
to debt repayments.
The Company currently has $18.0 million outstanding, and up to $32.0 million or
gold equivalent, subject to covenant limitations, available until 2001, under
its revolving credit facility. The Company currently has no restrictions on the
borrowing capacity of this line based on the trailing 90-day average spot price
of $294 per ounce of gold. A depressed gold price can limit the Company's
ability to borrow under the revolving credit facility, which is measured at the
end of each quarter. Continuation of gold prices at depressed levels could have
the effect of reducing or eliminating the Company's borrowing capacity under
this facility. The Company believes it is currently in compliance with the
covenants under the credit facility. The Company took certain actions in 1998 to
improve cash flows, such as reductions in new project and exploration
expenditures and increased hedging activities. The Company is continuing with
these efforts in 1999.
At year-end 1998, the Company had $8.0 million in cash and cash equivalents and
$3.3 million in short-term investments.
61
<PAGE>
At December 31, 1998, the Company's current debt was $11.7 million and its long-
term debt was $41.1 million.
In March 1997, the Company issued $100.0 million of 11% capital securities due
2027 (note 6 to the consolidated financial statements). The Company has the
right to defer interest payments on the capital securities for up to 10
consecutive semi-annual periods. During a period of interest deferral, interest
accrues at a rate of 12% per annum, compounded semi-annually. The Company, at
its option, may satisfy its deferred interest obligation by delivering common
shares to a trustee for sale, the proceeds of which would be remitted to the
holders of the securities in payment of the deferred interest. The present value
of the capital securities' principal amount, $4.7 million, has been classified
as debt within gold and other financings (note 5). The present value of the
future interest payments of $95.3 million, accrued interest related to the April
1999 interest payment plus deferred interest accrued at December 31, 1998 of
$12.7 million has been classified within 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. The Company
has exercised its right to defer both its April 1998 and October 1998 interest
payments to holders of the capital securities.
The Company expects to spend $12 million for capital expenditures in 1999. The
Company will rely on its operating cash flow and credit facilities to fund its
planned 1999 capital expenditures. The Company will continue to monitor its
discretionary spending in view of the current low gold price environment and the
cost structure of its operating mines.
COMMITMENTS AND CONTINGENCIES
The Company's profitability is subject to changes in gold and silver prices,
exchange rates, interest rates and certain commodity prices. To reduce the
impact of such changes, the Company attempts to lock in the future value of
certain of these items through hedging transactions. These transactions are
accomplished through the use of derivative financial instruments, the value of
which is derived from movements in the underlying prices or rates.
The gold- and silver-related instruments used in these transactions include
commodity loans, fixed and floating forward contracts, spot-deferred contracts,
swaps and options. Sensitivity to changing metal prices is reduced, and future
revenues are hedged, as the Company's future production will satisfy these loans
and other delivery commitments. The Company engages in forward currency-exchange
contracts to reduce the impact on the Lupin mine's operating costs caused by
fluctuations in the exchange rate of U.S. dollars to Canadian dollars. The
Company also engages in crude oil hedging activities, including forward purchase
agreements and swaps, to reduce the impact of fluctuations in crude oil prices
on its operating costs. In 1997, the Company swapped a portion of its 11%
interest obligation for the capital securities for a gold delivery commitment,
reducing its effective interest rate. In the first quarter of 1998, the Company
restructured the gold swap agreement. The restructuring resulted in the
conversion of the swap ounces to forward sales commitments. See note 16 to the
consolidated financial statements.
Gains and losses resulting from hedging activities are recognized in earnings on
a basis consistent with the hedged item. When hedged production is sold, revenue
is recognized in amounts implicit in the commodity loan, delivery commitment or
option agreement. Gains or losses on foreign currency and crude oil hedging
activities are recorded in operating costs, or capitalized in the cost of
assets, when the hedged Canadian dollars are purchased and when crude oil
supplies are used in operations. Gains and losses on early termination of
hedging contracts are deferred until the hedged items are recognized in
earnings.
The Company's forward sales commitments, gold loan and swap commitments and
option positions are described in note 16 to the Company's consolidated
financial statements.
62
<PAGE>
The Company's obligation to purchase Canadian dollars are described in note 16
to the Company's consolidated financial statements.
The Company's crude oil commitments are described in note 16 to the Company's
consolidated statements.
See "Qualitative and Quantitative Disclosures about Market Risk."
The Company's operations are subject to laws and regulations concerning
protection of the environment. These laws and regulations change periodically
and are generally becoming more restrictive, which may have the effect of
increasing future costs. See "Business and Properties-Other-Government
Regulation and Environmental Issues."
The Company's operations are subject to certain royalty obligations as described
in note 17 to the Company's consolidated financial statements.
Lease commitments are described in note 17 to the Company's consolidated
financial statements.
The Company's provisions for future reclamation and closure costs at the former
Sunnyside mine in Colorado and the Alaska-Juneau development property in Alaska
are reviewed periodically and may be adjusted as additional information becomes
available.
Other commitments and contingencies are discussed in notes 16 and 17 to the
consolidated financial statements.
IMPACT OF YEAR 2000
The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. The effects of the Year 2000 issue may be
experienced before, on, or after January 1, 2000, and, if not addressed, the
impact on operations and financial reporting may range from minor errors such as
slower transaction processing and slower financial reporting to significant
systems failure which could affect the Company's ability to conduct normal
business operations, which may result in the interruption of metal production.
The Company is assessing the Year 2000 issue and is in the process of modifying
or upgrading portions of its software to address the issue. The estimated cost
of this remediation is estimated to be less than $1 million and is being
expensed as incurred. To date, the Company has completed a substantial portion
of the planned modifications to information technology, and expects this work to
be concluded by the end of the first quarter of 1999. The Company is also
performing modifications to embedded computer systems within operating
equipment. The Company plans to complete modifications to critical operating
systems such as the crusher, mill and truck dispatch systems by the end of the
second quarter 1999. Contingency plans have and continue to be developed for
other equipment, such as the rolling back of clocks for date-sensitive
equipment. Additionally, critical third party suppliers of reagents, power, fuel
and other mine site supplies have been contacted to inquire about uninterrupted
delivery of major operating parts and materials. The Company intends to have
fully stocked inventories of critical supplies at the end of 1999. A prolonged
delay in the delivery of key supplies such as electrical power, fuel and
reagents could result in the interruption of metal production.
Although the Company expects its systems to be year 2000 compliant before
December 31, 1999, it cannot predict the outcome or success of the year 2000
compliance programs of its suppliers. The Company also cannot predict whether it
will find additional problems that would result in unplanned upgrades of
applications after December 31, 1999.
The expected cost and date of completion of the Year 2000 project are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources,
third party compliance and other factors. However, there can be no guarantee
that these estimates will be achieved, and actual results could differ from
those anticipated. It is not possible to be certain that all aspects of the Year
2000 issue affecting the Company, including those related to the efforts of
suppliers, or other third parties, will be fully resolved.
63
<PAGE>
ITEM 7A-QUALITATIVE AND QUANTITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company's profitability is subject to changes in gold and silver prices,
exchange rates, interest rates and certain commodity prices. To reduce the
impact of such changes, the Company locks in the future value of certain of
these items through hedging transactions. These transactions are accomplished
through the use of derivative financial instruments, the value of which is
derived from movements in the underlying prices or rates.
The gold- and silver-related instruments used in these transactions include
commodity loans, fixed and floating forward contracts, spot-deferred contracts,
swaps and options. Sensitivity to changing metal prices is reduced, and future
revenues are hedged, as the Company's future production will satisfy these loans
and other delivery commitments. The Company engages in forward currency-exchange
contracts to reduce the impact on the Lupin mine's operating costs caused by
fluctuations in the exchange rate of U.S. dollars to Canadian dollars. The
Company also engages in crude oil hedging activities, including forward purchase
agreements and swaps, to reduce the impact of fluctuations in crude oil prices
on its operating costs. In 1997, the Company swapped a portion of its capital
security interest obligation for a gold delivery commitment, effectively
reducing its interest obligation.
The Company assesses the exposure that may result from a hedging transaction
prior to entering into the commitment, and only enters into transactions which
it believes accurately hedge the underlying risk and could be safely held to
maturity. The Company does not actively engage in the practice of trading
derivative securities for profit. The Company regularly reviews its unrealized
gains and losses on hedging transactions.
64
<PAGE>
The following table provides information as of December 31, 1998 about the
Company's derivative financial instruments and other financial instruments that
are sensitive to changes in commodity prices and interest rates.
<TABLE>
<CAPTION>
Expected Year of Maturity
-------------------------------------------------------------
(Amounts in millions of U.S. Fair Value
dollars, except amounts per There- of Financial
ounce or unless otherwise noted) 1999 2000 2001 2002 2003 after Instruments
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Short-term investments $ 3.3 -- -- -- -- -- $ 3.3
Liabilities:
Currency loans $ 7.8 $ 10.7 $ 22.5 -- -- -- $41.0
Gold loans $ 6.9
Ounces 15,367 8,658 -- -- -- --
Price per ounce $ 393 $ 388 -- -- -- --
Capital securities /(1)/ $ 4.9
Principal $100.0
Fixed interest rate /(2)/ 11% 11% 11% 11% 11% 11%
Derivative financial instruments:
Gold forward sales $25.4
Ounces 255,509 257,925 90,000 -- -- --
Price per ounce $ 374 $ 341 $ 321 -- -- --
Silver forward sales $12.9
Ounces (000's) 5,185 6,500 6,500 -- -- --
Price per ounce $ 5.82 $ 6.00 $ 6.00 -- -- --
Gold put options purchased $ 0.4
Ounces 158,400 -- 50,000 50,000 50,000 --
Price per ounce $ 304 -- $ 310 $ 310 $ 310 --
Gold call options sold $ --
Ounces 25,000 -- -- -- -- --
Price per ounce $ 300 -- -- -- -- --
Silver put options purchased $(0.4)
Ounces (000's) -- 1,000 1,000 -- -- --
Price per ounce -- $ 6.00 $ 6.00 -- -- --
Silver call options sold $(0.5)
Ounces (000's) 2,210 -- -- -- -- --
Price per ounce $ 5.67 -- -- -- -- --
Silver put options sold $(5.9)
Ounces (000's) 2,000 7,500 7,500 -- -- --
Price per ounce $ 4.75 $ 4.75 $ 4.75 -- -- --
Silver call options purchased $ 1.1
Ounces (000's) 3,000 6,500 6,500 -- -- --
Price per ounce $ 9.00 $ 9.00 $ 9.00 -- -- --
Foreign currency contracts $(6.8)
Canadian dollars (000's) 49,000 24,000 -- -- -- --
Exchange rate (C$ toUS$1.00) 1.36 1.34 -- -- -- --
Crude oil contracts $(0.1)
Barrrels 20,000 -- -- -- -- --
Price per barrel $ 17.63 -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ At December 31, 1998, the present value of the $100.0 million principal
payment in 2027 is $4.9 million. At December 31, 1998, the fair value of
the entire capital securities obligation, including the interest
component, is $52.0 million.
/(2)/ During a period of interest deferral, the interest rate on the capital
securities is 12%, compounded semi-annually.
65
<PAGE>
ITEM 8-FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management's Responsibility For Financial Reporting...................... 67
Report Of Independent Chartered Accountants.............................. 68
Consolidated Balance Sheet............................................... 69
Consolidated Statement Of Operations..................................... 70
Consolidated Statement Of Deficit........................................ 70
Consolidated Statement Of Cash Flow...................................... 71
Notes To Consolidated Financial Statements............................... 72
</TABLE>
66
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying financial statements and related data are the responsibility of
management. Management has prepared the statements in accordance with accounting
principles generally accepted in Canada.
The integrity of the financial reporting process is also the responsibility of
management. Management maintains systems of internal controls designed to
provide reasonable assurance that transactions are authorized, assets are
safeguarded, and reliable financial information is produced. Management selects
accounting principles and methods that are appropriate to the Company's
circumstances, and makes decisions affecting the measurement of transactions in
which estimates or judgments are required to determine the amounts reported.
The Board of Directors is responsible for ensuring that management fulfills its
responsibilities for financial reporting. The Board carries out this
responsibility principally through its Audit Committee.
The Audit Committee consists entirely of outside directors. The Committee meets
periodically with management and the external auditors to discuss internal
financial controls, auditing matters and financial reporting issues. The
Committee satisfies itself that each party is properly discharging its
responsibilities; reviews the quarterly and annual financial statements and the
external auditors' report; and recommends the appointment of the external
auditors for review by the Board and approval by the shareholders.
The external auditors audit the financial statements annually on behalf of the
shareholders. They also performed certain procedures related to the Company's
unaudited interim financial statements and report their findings to the Audit
Committee. The external auditors have free access to management and the Audit
Committee.
/s/ Robert L. Leclerc
-------------------------------------------------
Robert L. Leclerc, Q.C.
Chairman and Chief Executive Officer and Director
/s/ Peter H. Cheesbrough
-------------------------------------------------
Peter H. Cheesbrough
Senior Vice President, Finance and
Chief Financial Officer
January 25, 1999
67
<PAGE>
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
The Board of Directors
Echo Bay Mines Ltd.
We have audited the consolidated balance sheets of Echo Bay Mines Ltd. as at
December 31, 1998 and 1997 and the consolidated statements of operations,
deficit and cash flow for each of the years in the three-year period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as at
December 31, 1998 and 1997 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1998 in
accordance with accounting principles generally accepted in Canada.
Edmonton, Canada (signed) Ernst & Young LLP
January 25, 1999 Chartered Accountants
68
<PAGE>
ECHO BAY MINES LTD.
CONSOLIDATED BALANCE SHEET
December 31
<TABLE>
<CAPTION>
thousands of U.S. dollars 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,987 $ 16,953
Short-term investments 3,336 10,325
Interest and accounts receivable 3,585 5,927
Inventories (note 2) 37,929 41,168
Prepaid expenses and other assets 6,635 5,068
- --------------------------------------------------------------------------------------------------------
59,472 79,441
Plant and equipment (note 3) 196,670 238,948
Mining properties (note 3) 95,738 107,820
Long-term investments and other assets 16,196 6,558
- --------------------------------------------------------------------------------------------------------
$ 368,076 $ 432,767
- --------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 45,336 $ 82,371
Income and mining taxes payable 2,941 3,494
Gold and other financings (note 5) 11,652 14,779
Deferred income (note 5) 13,455 7,461
- --------------------------------------------------------------------------------------------------------
73,384 108,105
Gold and other financings (note 5) 41,119 51,745
Deferred income (note 5) 52,588 54,708
Other long-term obligations (note 7) 59,718 56,607
Deferred income taxes 7,513 7,941
Commitments and contingencies (notes 16 and 17)
Common shareholders' equity:
Common shares (note 12), no par value, unlimited
number authorized; issued and outstanding -
140,607,145 shares (139,370,031 shares in 1997) 713,343 709,593
Capital securities (note 6) 110,862 95,753
Deficit (663,875) (631,320)
Foreign currency translation (26,576) (20,365)
- --------------------------------------------------------------------------------------------------------
133,754 153,661
- --------------------------------------------------------------------------------------------------------
$ 368,076 $ 432,767
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
69
<PAGE>
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENT OF OPERATIONS
Year ended December 31
<TABLE>
<CAPTION>
thousands of U.S. dollars,
except for per share data 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 232,181 $ 305,429 $ 337,316
- ------------------------------------------------------------------------------------------------------------------
Expenses:
Operating costs 148,769 213,120 221,126
Royalties (note 17) 7,547 8,304 9,625
Production taxes 1,618 865 2,440
Depreciation and amortization 63,286 79,316 86,491
Reclamation and mine closure 6,295 8,819 6,298
General and administrative 8,027 10,948 13,577
Exploration and development 12,010 34,927 63,619
Interest and other (note 9) 4,398 5,191 3,090
Provision for impaired assets and other charges (note 8) -- 362,665 107,134
- ------------------------------------------------------------------------------------------------------------------
251,950 724,155 513,400
- ------------------------------------------------------------------------------------------------------------------
Loss before income taxes (19,769) (418,726) (176,084)
Income tax expense (note 10) 354 1,782 618
- ------------------------------------------------------------------------------------------------------------------
Net loss $ (20,123) $ (420,508) $ (176,702)
- ------------------------------------------------------------------------------------------------------------------
Net loss attributable to common shareholders (note 6) $ (32,555) $ (426,222) $ (176,702)
- ------------------------------------------------------------------------------------------------------------------
Loss per share $ (0.23) $ (3.06) $ (1.31)
- ------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding (thousands) 140,084 139,367 134,434
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENT OF DEFICIT
Year ended December 31
<TABLE>
<CAPTION>
thousands of U.S. dollars 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ (631,320) $ (201,931) $ (15,109)
Net loss (20,123) (420,508) (176,702)
Dividends on common shares (note 12) -- -- (10,120)
Interest on capital securities, net of nil tax effect (note 6) (12,432) (5,714) --
Issue costs related to capital securities (note 6) -- (3,167) --
- ------------------------------------------------------------------------------------------------------------------
Balance, end of year $ (663,875) $ (631,320) $ (201,931)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
70
<PAGE>
ECHO BAY MINES LTD.
CONSOLIDATED STATEMENT OF CASH FLOW
Year ended December 31
<TABLE>
<CAPTION>
thousands of U.S. dollars 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED FROM (USED IN):
OPERATING ACTIVITIES
Net loss $ (20,123) $ (420,508) $ (176,702)
Add (deduct):
Depreciation 45,792 51,887 56,737
Amortization 17,494 27,429 29,754
Non-cash portion of provision for impaired assets and other charges (note 8) -- 355,782 107,134
Unrealized losses on share investments 3,013 6,643 --
Deferred (income) loss included in revenue (note 16) (5,381) (14,079) 4,244
Deferral of gains on restructuring of hedge commitments (note 16) 5,236 -- --
Non-cash portion of exploration and development expense -- 436 7,035
Net gain on sale of assets (note 9) (7,942) (8,847) (4,469)
Other (90) 784 2,031
Change in cash invested in operating assets and liabilities:
Interest and accounts receivable 1,898 2,178 (184)
Inventories 3,743 (5,753) 1,368
Prepaid expenses and other assets (2,309) 2,812 (361)
Accounts payable and accrued liabilities (26,748) (8,824) 3,245
Income and mining taxes payable (512) 856 69
- ------------------------------------------------------------------------------------------------------------------------------
14,071 (9,204) 29,901
- ------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Mining properties, plant and equipment (26,971) (112,001) (103,667)
Investment in Santa Elina (note 4) -- -- (11,268)
Proceeds on repurchase of Company's
- gold and silver forward sales (note 16) 8,673 54,963 --
- gold swap (note 16) -- 8,107 --
- foreign exchange contracts (note 16) -- 5,995 --
Proceeds on sale of short-term investments 3,018 3,089 --
Long-term investments and other assets (534) (21,626) (3,499)
Proceeds on sale of investment in Santa Elina (note 4) 6,252 -- --
Proceeds on sale of plant and equipment 3,763 1,920 801
Proceeds on sale of mining properties 1,195 -- --
Proceeds on sale of long-term investments -- 7,894 13,809
Other 342 (1,362) 93
- ------------------------------------------------------------------------------------------------------------------------------
(4,262) (53,021) (103,731)
- ------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Currency borrowings -- 15,538 34,714
Debt repayments (18,327) (131,749) (38,179)
Capital securities issued, net of issuance costs (note 6) -- 96,700 --
Equity portion of interest on capital securities (note 6) -- (4,270) --
Common share dividends (note 12) -- -- (10,120)
Common share issues, net of issuance costs (note 12) -- 59 4,768
Other (448) (296) --
- ------------------------------------------------------------------------------------------------------------------------------
(18,775) (24,018) (8,817)
- ------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (8,966) (86,243) (82,647)
Cash and cash equivalents, beginning of year 16,953 103,196 185,843
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 7,987 $ 16,953 $ 103,196
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
71
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Echo Bay Mines Ltd. mines, processes and explores for gold and silver. Gold
accounted for 79% of 1998 revenue and silver 21%. In 1998, the Company had
three operating mines: Round Mountain in Nevada, USA; McCoy/Cove in Nevada, USA;
and Kettle River in Washington, USA. All are 100% owned except for Round
Mountain, which is 50% owned. In January 1998, the Company temporarily
suspended operations at its Lupin mine in the Northwest Territories, Canada.
The Company's financial position and operating results are directly affected by
the market price of gold in relation to the Company's production costs. Silver
price fluctuations also affect the Company's financial position and operating
results, although to a lesser extent. Gold and silver prices fluctuate in
response to numerous factors beyond the Company's control.
The consolidated financial statements are prepared on the historical cost basis
in accordance with accounting principles generally accepted in Canada and, in
all material respects, conform with accounting principles generally accepted in
the United States, except as described in note 13. The statements are expressed
in U.S. dollars.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Certain of the comparative figures have been reclassified to conform with the
current year's presentation.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Interests in joint ventures, each of which by contractual
arrangement is jointly controlled by all parties having an equity interest in
the joint venture, are accounted for using the proportionate consolidation
method to consolidate the Company's share of the joint ventures' assets,
liabilities, revenues and expenses.
Share investments
Short-term investments, comprised of publicly traded common shares, are recorded
at the lower of cost or quoted market prices, with unrealized losses included in
income. Long-term common share investments are recorded at cost. A provision
for loss is recorded in income if there were a decline in the market value of a
long-term share investment that was other than temporary. If the Company's
share investment represents more than a 20% ownership interest and the Company
can exercise significant influence over the investee, the equity method of
accounting is used. The equity method reports the investment at cost, adjusted
for the Company's pro rata share of the investee's undistributed earnings or
losses since acquisition.
Foreign currency translation
The Company's self-sustaining Canadian operations are translated into U.S.
dollars using the current-rate method, which translates assets and liabilities
at the year-end exchange rate and translates revenue and expenses at average
exchange rates. Exchange differences arising on translation are recorded as a
separate component of shareholders' equity. The change in the balance is
attributable to fluctuations in the exchange rate of U.S. dollars to Canadian
dollars. The Company's foreign operations that are not self-sustaining are
translated into U.S. dollars using the temporal method, which translates
monetary
72
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
assets and liabilities at the year-end exchange rate, and translates
additions to non-monetary assets and liabilities, revenue and expenses at
average exchange rates. Exchange differences arising on translation are
recorded in current earnings.
Revenue recognition
Revenue is recognized when title to delivered gold or silver passes to the
buyer.
Earnings (loss) per share
Earnings (loss) per share is calculated based on the weighted average number of
common shares outstanding during the year. For per share calculations, the
amount of capital securities interest that is charged directly to the deficit
decreases the earnings, or increases the loss, attributable to common
shareholders. Fully diluted earnings (loss) per share is the same as basic
earnings (loss) per share because the Company's outstanding options and
restrictive share grants are not dilutive.
Cash and cash equivalents
The Company considers to be cash equivalents all highly liquid debt instruments
purchased with a maturity of three months or less.
Inventories
Precious metals inventories are valued at the lower of cost, using the "first-
in, first-out" method, or net realizable value. Materials and supplies are
valued at the lower of average cost or replacement cost.
Plant and equipment
Plant and equipment are recorded at cost. Depreciation is provided using the
straight-line method over each asset's estimated economic life to a maximum of
20 years.
Mining properties - producing mines' acquisition, exploration and development
costs
Mining properties are recorded at cost of acquisition. Mine exploration and
development costs include expenditures incurred to develop new ore bodies, to
define further mineralization in existing ore bodies and to expand the capacity
of operating mines. These expenditures are amortized against earnings on the
unit-of-production method over the expected economic life of each mine.
Mining properties - mining costs
Mining costs are the costs incurred at producing properties to remove ore and
waste from an open pit or underground mine. These costs are deferred when they
relate to gold that will be produced in future years. These deferred costs are
charged to operating costs in the period in which the related production occurs.
For open pit mining operations, mining costs are deferred when the ratio of tons
mined per ounce of gold recovered exceeds the average ratio estimated for the
life of the mine. These deferred costs are charged to operating costs when the
actual ratio is below the average ratio.
For underground mining operations, these costs include the cost of accessing and
developing new production areas.
73
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
Development properties
At properties identified as having the potential to add to the Company's proven
and probable reserves, the direct costs of acquisition, exploration and
development are capitalized as they are incurred. Determination as to reserve
potential is based on results of feasibility studies which indicate whether a
property is economically feasible. After drilling has confirmed the shape and
continuity of mineralization, initial feasibility studies are then optimized.
If production commences, these costs are transferred to "producing mines'
acquisition, exploration and development costs" and amortized against earnings
as described above. If a project is determined not to be commercially feasible,
unrecovered costs are expensed in the year in which the determination is made.
Exploration costs
The costs of exploration programs not anticipated to result in additions to the
Company's reserves and other mineralization in the current year are expensed as
incurred.
Reclamation and mine closure costs
Estimated site restoration and closure costs for each producing mine are charged
against operating earnings on the unit-of-production method over the expected
economic life of each mine.
Review of life-of-mine plans and carrying values
Plant and equipment are depreciated and mining properties are amortized over
their anticipated economic lives. Each year, the Company estimates ore reserves
and prepares a comprehensive mining plan for the then-anticipated remaining life
of each property. The prices used in estimating the Company's ore reserves at
December 31, 1998 were $325 per ounce of gold and $5.75 per ounce of silver.
Based on year-end ore reserves and the current life-of-mine plan for each of the
Company's properties, the Company reviews its accounting estimates and makes
needed adjustments. This complex process continues for the life of every mine.
The Company reviews the carrying value of each mine by comparing the net book
value with the estimated undiscounted future cash flow from the property. For
purposes of this analysis, the net book value of each mine is reduced by
deferred hedging gains pertaining to future production from that mine as well as
reclamation and mine closure accruals. If the net book value exceeds the
undiscounted future cash flow, then a corresponding impairment write-down is
recorded.
Reserve risks
If the Company were to determine that its reserves and future cash flows should
be calculated at a significantly lower gold price than the $325 per ounce price
used at December 31, 1998, there would likely be a material reduction in the
amount of gold reserves. In addition, if the price realized by the Company for
its gold or silver bullion were to decline substantially below the price at
which ore reserves were calculated for a sustained period of time, the Company
potentially could experience material write-downs of its investment in its
mining properties (note 8). Under certain of such circumstances, the Company
might discontinue the development of a project or mining at one or more of its
properties or might temporarily suspend operations at a producing property and
place that property in a "care and maintenance" mode. Reserves could also be
materially and adversely affected by changes in operating and capital costs and
other factors, including but not limited to, short-term operating factors such
as the
74
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
need for sequential development of ore bodies and the processing of new or
different ore grades and ore types.
Significant changes in the life-of-mine plans can occur as a result of mining
experience, new ore discoveries, changes in mining methods and rates, process
changes, investments in new equipment and technology, and other factors.
Changes in the significant assumptions underlying future cash flow estimates,
including assumptions regarding precious metals prices, may have a material
effect on future carrying values and operating results.
Capitalization of interest
Interest cost is capitalized on construction programs until the facilities are
ready for their intended use.
Hedging activities
The Company's profitability is subject to changes in gold and silver prices,
exchange rates, interest rates and certain commodity prices. To reduce the
impact of such changes, the Company locks in the future value of certain of
these items through hedging transactions. These transactions are accomplished
through the use of derivative financial instruments, the value of which is
derived from movements in the underlying prices or rates.
The gold- and silver-related instruments used in these transactions include
commodity loans, fixed and floating forward contracts, spot-deferred contracts,
swaps and options. Sensitivity to changing metal prices is reduced, and future
revenues are hedged, as the Company's future production will satisfy these loans
and other delivery commitments. The Company engages in forward currency-
exchange contracts to reduce the impact on the Lupin mine's operating costs
caused by fluctuations in the exchange rate of U.S. dollars to Canadian dollars.
The Company also engages in crude oil hedging activities, including forward
purchase agreements and swaps, to reduce the impact of fluctuations in crude oil
prices on its operating costs. In 1997, the Company swapped a portion of its
capital security interest obligation for a gold delivery commitment, effectively
reducing its interest obligation.
Gains and losses resulting from hedging activities are recognized in earnings on
a basis consistent with the hedged item. When hedged production is sold,
revenue is recognized in amounts implicit in the commodity loan, delivery
commitment or option agreement. Gains or losses on foreign currency and crude
oil hedging activities are recorded in operating costs, or capitalized in the
cost of assets, when the hedged Canadian dollar transactions occur and when
crude oil supplies are used in operations. Gains and losses on early
termination of hedging contracts are deferred until the hedged items are
recognized in earnings.
The carrying values of gold loans are remeasured using the market value of gold
at the reporting date. Differences between these values and the loan proceeds
that were originally received are recorded as deferred income and will be
included in revenue when the production related to the loans is delivered.
75
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
2. INVENTORIES
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Precious metals -- bullion $ 14,704 $14,882
-- in-process 8,568 9,792
Materials and supplies 14,657 16,494
- --------------------------------------------------------------------------------
$ 37,929 $41,168
- --------------------------------------------------------------------------------
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Net book value 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Plant and Mining Net Book Net Book
Property and percentage owned Equipment Properties Value Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Round Mountain (50%) $ 73,881 $48,106 $121,987 $124,604
McCoy/Cove (100%) 43,095 22,135 65,230 94,011
Lupin (100%) 30,873 -- 30,873 40,430
Kettle River (100%) 7,013 1,430 8,443 16,313
Aquarius (100%) 36,394 13,087 49,481 52,784
Paredones Amarillos (60%) 2,452 10,980 13,432 11,020
Other 2,962 -- 2,962 7,606
- -------------------------------------------------------------------------------------------------------------------
$196,670 $95,738 $292,408 $346,768
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Plant and equipment 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Net Book Net Book
Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Land improvements and utility systems $ 77,151 $ 13,950 $ 79,619 $ 16,382
Buildings 149,442 46,343 145,808 51,308
Equipment 386,161 95,598 393,494 118,117
Construction in progress 40,779 40,779 53,141 53,141
- -------------------------------------------------------------------------------------------------------------------
$ 653,533 $196,670 $672,062 $238,948
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Mining properties 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Producing mines' acquisition, exploration and development costs $270,585 $266,081
Less accumulated amortization 216,810 198,912
- -------------------------------------------------------------------------------------------------------------------
53,775 67,169
Development properties' acquisition, exploration and development costs 24,067 24,787
Deferred mining costs 17,896 15,864
- -------------------------------------------------------------------------------------------------------------------
$ 95,738 $107,820
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
4. SANTA ELINA ACQUISITION
In 1996, the Company completed a series of transactions with Santa Elina Gold
Corporation ("Santa Elina") and Sercor Ltd. ("Sercor," a private company that
owned 67% of Santa Elina) that increased the Company's ownership of the
outstanding common shares of Santa Elina from 7% to 50% by issuing 8,830,915
common shares to the shareholders of Santa Elina, which held mining interests in
Brazil and Bolivia.
The Company accounted for the transactions, which had a total cost of $106.0
million, as the purchase of
76
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
an additional 43% of Santa Elina. The purchase price was allocated to the net
assets of Santa Elina based on the relative fair values, with the majority
allocated to mining properties. During 1997 and 1996, the Company increased its
ownership in Santa Elina to 58%. Santa Elina was accounted for using the
proportionate consolidation method, as the Company and Sercor jointly controlled
Santa Elina.
In 1997, the Company recorded $143.6 million in provisions for impaired assets
related to its investment in Santa Elina which effectively eliminated the
carrying value of the investment (note 8). In April 1998, the Company sold its
investment in Santa Elina, receiving $6.3 million in cash, net of selling costs,
and a 48.1% interest in the Chapada exploration property in Brazil, to which the
Company has assigned no book value. The purchase agreement calls for the
Chapada property to be marketed and sold at the earliest opportunity.
5. GOLD AND OTHER FINANCINGS AND DEFERRED INCOME
<TABLE>
<CAPTION>
Financings Deferred Income
------------------------------------ --------------------------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
Gold loans $ 6,867 $18,637 $ 3,478 $ 6,481
Currency loans 41,035 43,640 -- --
Capital securities (note 6) 4,869 4,247 -- --
Repurchase of gold and silver forward
contracts and gold swap (note 16) -- -- 52,283 48,991
Repurchase of forward currency
exchange contracts (note 16) -- -- 5,995 5,995
Deferred gain on restructuring of
capital securities swap (note 16) -- -- 4,287 --
Other -- -- -- 702
- ---------------------------------------------------------------------------- --------------------------------------
52,771 66,524 66,043 62,169
Less current portion 11,652 14,779 13,455 7,461
- ---------------------------------------------------------------------------- --------------------------------------
$41,119 $51,745 $52,588 $54,708
- ---------------------------------------------------------------------------- --------------------------------------
</TABLE>
Gold term loan and currency loans
The Company has a term and revolving facility with a syndicate of commercial
banks under which the Company can borrow either gold or dollars. The facility
is convertible between gold and dollar borrowings. Interest on gold borrowings
is calculated at the banks' gold rate plus 1.25%, and interest on dollar
borrowings at LIBOR plus 1.25%. At December 31, 1998, the effective interest
rates were 3.07% on the gold term loan and 6.53% on the currency term loan.
At December 31, 1998, an 18,502 ounce term loan was outstanding under the
facility (36,094 ounces at December 31, 1997). The gold loan was restructured
in 1996, resulting in a restructured gold loan price of $388 per ounce. For
financial statement presentation the gold loan was remeasured to $286 per ounce,
the gold price at December 31, 1998 ($293 per ounce at December 31, 1997).
Unrealized remeasurement gains or losses are included in deferred income. The
Company also has outstanding a $26.0 million currency borrowing under the
facility. The facility requires that the aggregate gold and currency commitment
be repaid quarterly at a specified principal amount in dollars and/or the
equivalent number of ounces valued at the original gold loan price of $349 per
ounce. Both the gold and currency loans were originally scheduled to be repaid
in quarterly installments through the second quarter of 2001. In the third and
fourth quarters of 1998, the Company opted to accelerate its repayment of gold
ounces and
77
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars, except amounts per
share and per ounce or unless otherwise noted
decelerate its repayment of the currency loan from the original repayment
schedule. The difference between the restructured gold loan price of $388 per
ounce and the spot price on the repayment date for these accelerated ounces will
be deferred and recognized in earnings in accordance with the original repayment
schedule.
At December 31, 1998, the Company had $15.0 million outstanding, and up to $45.0
million or gold equivalent, subject to covenant limitations, available until
2001, under the revolving credit facility. Of this $45.0 million, $43.6 million
was actually available for borrowing in view of the current gold price. A
depressed gold price limits the Company's ability to borrow under the revolving
credit facility, which is measured at the end of each quarter. Continuation of
gold prices at depressed levels could have the effect of reducing or eliminating
the Company's borrowing capacity under this facility. At December 31, 1998, the
effective interest rate on the revolving loan was 6.50%. Annual commitment fees
on the unutilized credit facility are 0.5%.
Subsequent to December 31, 1998, the Company and its lenders amended the
facility, resulting in an increase to the interest spread on gold and currency
borrowings by 50 basis points. Additionally, borrowings under the revolving
credit facility were reduced to a limit of $50.0 million from $60.0 million.
Gold loan
At December 31, 1998, a 5,523 ounce gold loan (27,623 ounces at December 31,
1997) was outstanding, which the Company will repay in the first quarter of
1999. The gold loan is priced at $403 per ounce. For financial statement
presentation the gold loan was remeasured to $286 per ounce, the gold price at
December 31, 1998 ($293 per ounce at December 31, 1997). Unrealized
remeasurement gains or losses are included in deferred income. The effective
rate of interest on the gold loan was 2.40% at December 31, 1998.
Other information
Certain of the Company's financing arrangements require it to maintain specified
ratios of assets to liabilities and cash flow to debt. The Company is in
compliance with these ratios and other covenant requirements.
The Company had $30.2 million in outstanding letters of credit at December 31,
1998, primarily related to the bonding of future reclamation obligations. At
December 31, 1998, annual fees on the letters of credit range from 0.55% to
1.25%.
Interest payments were $7.2 million in 1998, $9.4 million in 1997 and $9.0
million in 1996.
Future gold and silver delivery commitments are summarized by year in note 16.
6. CAPITAL SECURITIES
On March 27, 1997, the Company issued $100.0 million of 11% capital securities
due in April 2027. The effective interest rate on the capital securities is 11%,
or 12% compounded semi-annually during a period of interest deferral.
78
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
The Company has the right to defer interest payments on the capital securities
for a period not to exceed 10 consecutive semi-annual periods. During a period
of interest deferral, interest accrues at a rate of 12% per annum, compounded
semi-annually, on the full principal amount and deferred interest. The Company,
at its option, may satisfy its deferred interest obligation by delivering common
shares to the indenture trustee for the capital securities. The trustee would
sell the Company's shares and remit the proceeds to the holders of the
securities in payment of the deferred interest obligation. The Company has
exercised its right to defer its April 1998 and October 1998 interest payments
to holders of the capital securities.
The present value of the capital securities' principal amount, $4.7 million, has
been classified as debt within gold and other financings (note 5). The present
value of the future interest payments of $95.3 million plus deferred accrued
interest at December 31, 1998 of $12.7 million has been classified within 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. Interest on the debt portion of the capital securities
has been classified as interest expense on the consolidated statement of
earnings, and interest on the equity portion of the capital securities has been
charged directly to deficit on the consolidated balance sheet. For purposes of
per share calculations, the equity portion increases the loss attributable to
common shareholders. See note 13 for a discussion of differences in treatment of
the capital securities under generally accepted accounting principles in the
United States.
7. OTHER LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued reclamation and mine closure $42,891 $40,969
Provision for Alaska-Juneau development property reclamation and closure costs 2,096 2,510
Provision for McCoy/Cove pit wall remediation 15,183 24,387
Other 14,291 7,115
- ----------------------------------------------------------------------------------------------------------
74,461 74,981
Less current portion included in accounts payable and accrued liabilities 14,743 18,374
- ----------------------------------------------------------------------------------------------------------
$59,718 $56,607
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Reclamation and mine closure
At December 31, 1998, the Company's future reclamation and mine closure costs
are estimated to be $81.8 million, excluding Alaska-Juneau described below. The
aggregate obligation accrued to December 31, 1998 was $42.9 million, including
accruals of $6.3 million in 1998, $8.8 million in 1997, and $6.3 million in
1996. The remaining $38.9 million will be accrued on the unit-of-production
method over the remaining life of each mine. Future reclamation costs are
determined using management's best estimates of the scope of work to be
performed and related costs. These estimates may change based on future changes
in operations, cost of reclamation activities and regulatory requirements.
In 1996, the Company recorded a provision of $77.1 million related to the
Alaska-Juneau development property, including its $57.1 million investment and
$20.0 million for estimated reclamation and closure costs. The provision
resulted from a new feasibility study concluding that the project as currently
designed would not be economically feasible. In 1997, the Company entered into
an agreement that transferred certain responsibilities for the Alaska-Juneau
project closure to a third party environmental firm. The third party's
performance under the contract is supported by a corporate guarantee and surety
79
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
bonds. By December 31, 1998, total spending for Alaska-Juneau's reclamation and
closure was $17.9 million.
Provision for McCoy/Cove pit wall remediation
In 1996, the Company recorded a $30.0 million provision related to the estimated
costs to remove waste rock from a portion of the Cove pit wall that had
collapsed at the McCoy/Cove mine in Nevada. Remediation work that would permit
mining in the affected portion of the Cove pit began in 1997. At December 31,
1998, total spending for the pit wall remediation was $14.8 million. The current
portion of the provision balance, $9.1 million, was classified within accounts
payable and accrued liabilities at December 31, 1998.
8. PROVISION FOR IMPAIRED ASSETS AND OTHER CHARGES
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for impaired assets $ -- $346,029 $ --
Severance expense -- 16,636 --
Provision for Alaska-Juneau development property (note 7) -- -- 77,134
Provision for McCoy/Cove pit wall remediation (note 7) -- -- 30,000
- ------------------------------------------------------------------------------------------------------
$ -- $362,665 $ 107,134
- ------------------------------------------------------------------------------------------------------
</TABLE>
Provision for impaired assets
The recoverability of the Company's carrying values of its operating and
development properties are assessed by comparing carrying values to estimated
future net cash flows from each property. For purposes of estimating future cash
flows at December 31, 1998, price assumptions of $325 per ounce of gold and
$5.00 per ounce of silver were used, except for 1999, for which prices of $290
per ounce of gold and $5.00 per ounce of silver were used. For other assets,
carrying values are compared to estimated net realizable values based on market
comparables or quoted market prices.
In 1997, a similar analysis was performed using price assumptions of $350 per
ounce of gold and $5.00 per ounce of silver, except for 1998, for which prices
of $300 per ounce of gold and $5.00 per ounce of silver were used. The Company
recorded a $346.0 million provision for impaired assets in 1997, as follows.
<TABLE>
<CAPTION>
Acquisition
Deferred and develop- Plant and Other Legal and Total
mining ment costs equipment assets (net) closure costs 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating properties:
McCoy/Cove $ 47,000 $ -- $ -- $ -- $ -- $ 47,000
Lupin 17,198 43,435 4,367 -- -- 65,000
Kettle River -- 11,220 3,780 -- -- 15,000
- ---------------------------------------------------------------------------------------------------------------------
64,198 54,655 8,147 -- -- 127,000
- ---------------------------------------------------------------------------------------------------------------------
Other properties:
Kingking -- 46,183 314 3,467 -- 49,964
Santa Elina -- 138,878 5,873 (1,133) -- 143,618
- ---------------------------------------------------------------------------------------------------------------------
-- 185,061 6,187 2,334 -- 193,582
- ---------------------------------------------------------------------------------------------------------------------
Share investments -- -- -- 15,641 -- 15,641
Other -- -- -- 2,116 7,690 9,806
- ---------------------------------------------------------------------------------------------------------------------
$ 64,198 $ 239,716 $ 14,334 $ 20,091 $ 7,690 $ 346,029
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
80
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
In 1997, the Company elected not to exercise its option interest in the Kingking
project and wrote down its carrying value to nil. In the second quarter of 1998,
the Company issued 1,237,114 common shares at $3.03 per share to Nationwide
Development Corporation ("Nadecor"), which held an ownership interest in the
Kingking project. The share issuance settled any obligations of the Company owed
to Nadecor.
In 1997, the Company wrote off its $143.6 million investment in Santa Elina,
which included a copper/gold project, a number of small gold exploration
properties, a significant land position and a hydro-power project in the
feasibility stage (note 4).
9. INTEREST AND OTHER
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ (328) $(2,517) $(6,131)
Interest expense 5,559 5,686 8,226
Interest capitalized -- (523) --
Unrealized loss on share investments 3,013 6,643 --
Gain on sale of investment in Santa Elina (note 4) (6,252) -- --
(Gain) loss on sale of other share investments 962 (466) (4,383)
(Gain) loss on sale of plant and equipment (1,457) (2,293) 172
Gain on sale of interests in mining properties (1,195) (3,877) --
Other 4,096 2,538 5,206
- ----------------------------------------------------------------------------------------------
$ 4,398 $ 5,191 $ 3,090
- ----------------------------------------------------------------------------------------------
</TABLE>
10. INCOME TAX EXPENSE
Geographic components
The geographic components of earnings before income tax expense and of income
tax expense were as follows.
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before income taxes:
Canada $(23,471) $(131,289) $ (32,792)
United States and other 3,702 (287,437) (143,292)
- -------------------------------------------------------------------------------------------
$(19,769) $(418,726) $(176,084)
- -------------------------------------------------------------------------------------------
Current income tax expense (recovery):
Canada $ 354 $ 559 $ 448
United States and other -- 1,559 (135)
- -------------------------------------------------------------------------------------------
354 2,118 313
- -------------------------------------------------------------------------------------------
Deferred income tax expense (recovery):
Canada -- -- 250
United States and other -- (336) 55
- -------------------------------------------------------------------------------------------
-- (336) 305
- -------------------------------------------------------------------------------------------
Income tax expense $ 354 $ 1,782 $ 618
- -------------------------------------------------------------------------------------------
</TABLE>
Effective tax rate
The effective tax rate on the Company's earnings differed from the combined
Canadian federal and
81
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
provincial corporate income tax rate of 43.2% for the following reasons.
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loss before income taxes $(19,769) $(418,726) $(176,084)
- ------------------------------------------------------------------------------------------------------------------------------
Income tax effect of:
Expected Canadian federal and provincial corporate income taxes $ (8,540) $(180,890) $ (76,068)
Operating loss from which no tax benefit is derived 12,720 161,385 64,724
Canadian resource allowance and earned depletion (2,349) (2,081) (406)
Foreign losses subject to different income tax rates (1,687) 23,978 11,806
Other items 210 (610) 562
- ------------------------------------------------------------------------------------------------------------------------------
Income tax expense $ 354 $ 1,782 $ 618
- ------------------------------------------------------------------------------------------------------------------------------
Effective tax rate (current and deferred) (1.8%) (0.4%) (0.4%)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Loss carryforwards
At December 31, 1998, the Company had U.S. net operating loss carryforwards of
approximately $403 million to apply against future taxable income and $198
million to apply against future alternative minimum taxable income. These loss
carryforwards do not include the provision for impaired assets (note 8) or the
provision for the McCoy/Cove pit wall remediation costs (note 7), which have not
yet been recognized fully for income tax purposes. The net operating loss
carryforwards expire at various times from 2001 to 2018. Additionally, the
Company has Canadian non-capital loss carryforwards of approximately $65 million
and net capital loss carryforwards of approximately $23 million. The non-capital
loss carryforwards expire in 2005. The net capital loss carryforwards have no
expiration date.
Income tax payments
Income tax payments were $1.6 million in 1998, $0.2 million in 1997 and $0.4
million in 1996.
11. PREFERRED SHARES
The Company is authorized to issue an unlimited number of preferred shares,
issuable in series. Each series is to consist of such number of shares and to
have such designation, rights, privileges, restrictions and conditions as may be
determined by the directors. No preferred shares are currently issued.
12. COMMON SHARES
Changes in the number of common shares outstanding during the three years ended
December 31, 1998 were as follows.
<TABLE>
<CAPTION>
Number of
Shares Amount
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1995 129,880,804 $618,965
1996: Exercise of share options 644,062 4,768
Shares issued on acquisition of Santa Elina, net of issuance
costs of $0.3 million (note 4) 8,830,915 85,801
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 139,355,781 709,534
1997: Exercise of share options 14,250 59
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 139,370,031 709,593
1998: Issuance of shares to Nationwide Development Corporation (note 8) 1,237,114 3,750
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 140,607,145 $713,343
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
82
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
Dividends
The Company has not paid dividends since 1996 and is prohibited from paying
common share dividends during a period of interest deferral related to the
capital securities (note 6).
Shareholder rights plan
Under the Company's shareholder rights plan, if any person or group were to
announce an intention to acquire, or were to acquire, 20% or more of the
Company's common shares without complying with the conditions of a "permitted
bid," then the owners of each share of common stock (other than the acquiring
person or group) would become entitled to exercise a right to buy one additional
common share at 50% of the lowest share price on The Toronto Stock Exchange
during the prior 90 days. The plan expires in 2004, subject to reconfirmation by
shareholders in 1999.
A "permitted bid," which does not trigger the entitlement to acquire shares
under the plan, is one that complies with applicable securities law in all
jurisdictions where at least 5% of the Company's common shares are owned; is
made to all shareholders for all outstanding shares; is open for a minimum of 60
days; takes up no shares until at least 66-2/3% of the outstanding shares have
been tendered to the bid, including those owned by the acquiring person or
group; and meets certain other conditions.
Restricted share grant plan
Effective February 1997, the Company adopted a restricted share grant plan to
provide incentive to officers of the Company. An aggregate of 750,000 common
shares of the Company have been reserved for issuance under the plan. The
Company granted 400,000 shares under the plan in November 1998, none of which
had vested at December 31, 1998. The vesting of the shares is at the discretion
of the Compensation Committee of the Board of Directors.
Employee Share Incentive Plan and Director Equity Plan
These plans provide for the granting of options to officers, key employees, and
eligible directors to purchase common shares. Outstanding share options under
the plans are exercisable at prices equal to the market value on the date of
grant. The option holder may exercise each share option over a period of 10
years from the date of grant. Options generally vest in 25% increments on the
first, second, third and fourth year anniversaries following the grant date.
Option prices are denominated in Canadian dollars.
83
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
Changes in the number of options outstanding during the three years ended
December 31, 1998 were as follows.
<TABLE>
<CAPTION>
Employee Share Incentive Plan Director Equity Plan
----------------------------- ---------------------------
Weighted Weighted
Number of Average Number of Average
Shares Exercise Price Shares Exercise Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding, December 31, 1995 4,302,692 C$ 12.81 120,200 C$ 13.48
1996: Options granted 1,065,130 12.26 40,000 18.25
Options exercised (694,758) 10.86 (2,300) 14.63
Options expired (90,150) 14.88 -- --
Options forfeited (244,247) 14.42 -- --
- -------------------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1996 4,338,667 C$ 12.85 157,900 C$ 14.67
1997: Options granted 1,414,060 8.00 52,000 8.00
Options exercised (14,250) 5.75 -- --
Options expired (13,760) 9.75 -- --
Options forfeited (732,598) 12.25 (14,950) 14.91
- -------------------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1997 4,992,119 C$ 11.60 194,950 C$ 12.87
1998: Options granted 857,906 3.59 45,500 3.70
Options expired (78,700) 9.75 -- --
Options forfeited (794,005) 10.35 -- --
- -------------------------------------------------------------------------------------------------------------------
Options outstanding, December 31, 1998 4,977,320 C$ 10.44 240,450 C$ 11.14
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The number of shares reserved for future grants at December 31, 1998 are
4,635,182 under the Employee Share Incentive Plan and 182,250 under the Director
Equity Plan. The number and weighted average price of shares exercisable under
the Employee Share Incentive Plan are 3,352,269 at C$12.29 at December 31, 1998;
2,746,121 at C$12.78 at December 31, 1997; and 2,282,905 at C$12.70 at December
31, 1996. The number and weighted average price of shares exercisable under the
Director Equity Plan are 123,825 at C$13.69 at December 31, 1998; 74,800 at
C$14.22 at December 31, 1997; and 41,550 at C$13.79 at December 31, 1996.
Options outstanding at December 31, 1998 had the following characteristics.
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Number of Average Exercise Average Number of Average Exercise
Shares Exercise Price of Shares Years Until Shares Price of Shares
Outstanding Price Range Outstanding Expiration Exercisable Exercisable
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Employee Share Incentive Plan
-----------------------------
1,028,356 C$ 3.59 - C$ 5.75 C$ 3.95 9 170,450 C$ 5.75
861,192 6.75 - 8.13 7.93 8 484,072 7.88
990,478 8.88 - 10.70 9.86 5 764,470 9.62
1,461,944 12.88 - 16.25 14.03 5 1,312,149 14.11
635,350 16.50 - 21.50 17.02 5 621,128 16.96
Director Equity Plan
--------------------
97,500 C$ 3.70 - C$ 8.00 C$ 5.99 9 13,000 C$ 8.00
142,950 12.50 - 18.25 14.64 6 110,825 14.36
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
84
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
13. DIFFERENCES BETWEEN CANADIAN AND U.S. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
U.S. GAAP financial statements
The Company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in Canada. These differ in some
respects from those in the United States as described below.
In accordance with Canadian GAAP, certain long-term foreign exchange contracts
are considered to be hedges of the cost of goods to be purchased in foreign
currencies in future periods. Gains and losses related to changes in market
values of such contracts are recognized as a component of the cost of goods when
the related hedged purchases occur. Under U.S. GAAP, changes in market value
would be included in current earnings.
In accordance with Canadian GAAP, the Company's short-term share investments are
carried at the lower of cost or market based on quoted market prices. Prior to
1997, these share investments were carried at cost as long-term investments in
accordance with Canadian GAAP and would have been written down through earnings
only if there were a loss in value that was other than temporary. Under U.S.
GAAP, these investments would have been marked to market, with unrealized gains
or losses excluded from earnings and reported as a separate component of common
shareholders' equity, net of tax.
In accordance with Canadian GAAP, the severance costs associated with the
temporary suspension of operations at Lupin were recognized on the commitment
date (generally defined as the date the severance plan is established and
approved by management) which occurred in 1997. Conditions for recognizing
involuntary termination benefits under U.S. GAAP include similar criteria as
Canadian GAAP. Additionally, however, the benefit arrangement must also be
communicated to employees. As the Lupin severance activities were not
communicated to employees prior to December 31, 1997, under U.S. GAAP the
related costs would be recognized in 1998.
In accordance with Canadian GAAP, the present value of the principal amount of
the capital securities issued in 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 (note 6). The
deferred accrued interest is classified within this equity component as the
Company has the option to satisfy the deferred interest by delivering common
shares. The related issuance costs were 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.
In accordance with Canadian GAAP, certain of the Company's mining properties are
amortized over proven and probable reserves and other mineralization. Under U.S.
GAAP, only proven and probable reserves would be used as the basis for
amortization.
85
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
The Company previously disclosed a difference of $36.4 million between Canadian
and U.S. GAAP regarding the cost of the 1996 Santa Elina acquisition, which
under U.S. GAAP would have increased mining properties and common shares by
$36.4 million. Additionally, the Company disclosed a difference between Canadian
and U.S. GAAP regarding Santa Elina resulting from differences between the
allocated values and the tax bases of assets acquired and liabilities assumed.
Under U.S. GAAP, this would result in an increased allocation to mining
properties of $46.6 million and a corresponding deferred income tax liability
related to the tax effect of the future amortization resulting from the
increased basis. The valuation difference of $36.4 million and the deferred tax
difference of $46.6 million have been eliminated following the write-off of the
Santa Elina assets in 1997 (note 8). Due to the increased basis in Santa Elina
under U.S. GAAP, the 1997 write-off under U.S. GAAP would exceed the write-off
of $143.6 million recognized under Canadian GAAP by $36.4 million, comprised of
the original valuation difference ($36.4 million) and the deferred tax
difference ($46.6 million), offset by the recognition of a deferred tax benefit
($46.6 million).
In accordance with Canadian GAAP, in 1996 the Company accounted for its
investment in the Kingking project using a proportionate consolidation method.
Under U.S. GAAP, the investment would have been accounted for under a full
consolidation, with an offsetting minority interest. No material difference
existed between the two methodologies in 1996.
The effects on the consolidated statement of earnings of the above differences
would have been as follows.
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss under Canadian GAAP $(20,123) $(420,508) $(176,702)
Change in market value of foreign exchange contracts (2,640) (8,110) 2,168
Unrealized loss on share investments 912 6,643 --
Recognition of severance expense (4,980) 4,980 --
Additional interest expense on capital securities (12,432) (5,714) --
Amortization of deferred financing costs on capital
securities (633) (475) --
Amortization of mining properties -- (958) 832
Write-off of Santa Elina properties, net of income tax
benefit of $46.6 million (note 8) -- (36,428) --
- ------------------------------------------------------------------------------------------------------------------------
Net loss under U.S. GAAP $(39,896) $(460,570) $(173,702)
- ------------------------------------------------------------------------------------------------------------------------
Loss per share under U.S. GAAP $ (0.28) $ (3.30) $ (1.29)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
86
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
The effects of the GAAP differences on the consolidated balance sheet would have
been as follows.
<TABLE>
<CAPTION>
Mining
Foreign Properties Santa Elina
Canadian Exchange Share Amorti- Acquisition/ Capital U.S.
December 31, 1998 GAAP Contracts Investments zation Write-off Securities GAAP
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Short-term investments $ 3,336 $ -- $ 1 $ -- $ -- $ -- $ 3,337
Long-term investments and
other assets 16,196 -- -- -- -- 2,059 18,255
Mining properties 95,738 -- -- (11,526) -- -- 84,212
Accounts payable and accrued
liabilities 45,336 -- -- -- -- 3,000 48,336
Gold and other financings 52,771 -- -- -- -- 95,131 147,902
Deferred income 66,043 (5,995) -- -- -- -- 60,048
Other long-term obligations 59,718 6,774 -- -- -- 12,731 79,223
Common shares 713,343 -- -- -- 36,428 -- 749,771
Capital securities 110,862 -- -- -- -- (110,862) --
Deficit 663,875 779 (7,555) 11,526 36,428 (2,059) 702,994
Foreign currency translation 26,576 -- 7 -- -- -- 26,583
Net unrealized loss on share
investments -- -- 7,547 -- -- -- 7,547
Common shareholders' equity 133,754 (779) 1 (11,526) -- (108,803) 12,647
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Mining
Foreign Properties Santa Elina
Canadian Exchange Share Amorti- Acquisition/ Capital Severance U.S.
December 31, 1997 GAAP Contracts Investments zation Write-off Securities Costs GAAP
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term investments
and other assets $ 6,558 $ -- $ -- $ -- $ -- $ 2,692 $ -- $ 9,250
Mining properties 107,820 -- -- (11,526) -- -- -- 96,294
Accounts payable and
accrued liabilities 82,371 -- -- -- -- -- (4,980) 77,391
Gold and other
financings 66,524 -- -- -- -- 95,753 -- 162,277
Deferred income 62,169 (5,995) -- -- -- -- -- 56,174
Other long-term
obligations 56,607 4,134 -- -- -- -- -- 60,741
Common shares 709,593 -- -- -- 36,428 -- -- 746,021
Capital securities 95,753 -- -- -- -- (95,753) -- --
Deficit 631,320 (1,861) (6,643) 11,526 36,428 (2,692) (4,980) 663,098
Net unrealized loss on
share investments -- -- 6,643 -- -- -- 6,643
Common shareholders'
equity 153,661 1,861 -- (11,526) -- (93,061) 4,980 55,915
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
87
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
The continuity of shareholders' equity from December 31, 1997 to December 31,
1998 under U.S. GAAP would have been as follows.
<TABLE>
<CAPTION>
1998
- -------------------------------------------------------------------------------
<S> <C>
Balance, beginning of year $ 55,915
Net loss (39,896)
Common shares issued 3,750
Foreign currency translation (6,218)
Change in unrealized gain (loss) on share investments (904)
- -------------------------------------------------------------------------------
Balance, end of year $ 12,647
- -------------------------------------------------------------------------------
</TABLE>
Effective January 1, 1998, for purposes of preparing U.S. GAAP financial
information, the Company adopted U.S. Financial Accounting Standards Board
("FASB") Statement No. 130, "Reporting Comprehensive Income," which requires the
reporting of all changes in equity during a period from non-owner sources as
part of a full set of financial statements. These changes would include foreign
currency translation adjustments and activity related to unrealized gains or
losses included as a separate component of common shareholders' equity under
U.S. GAAP.
The following statement of comprehensive loss would be disclosed in accordance
with U.S. GAAP.
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss under U.S. GAAP $(39,896) $(460,570) $(173,702)
- -----------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), after a nil income tax
effect:
Unrealized gain/loss on share investments:
Net unrealized holding loss arising during the period (904) (11,613) (4,860)
Reclassification adjustment for net (gain) loss
recognized in earnings 962 15,175 (4,383)
- -----------------------------------------------------------------------------------------------------------------------
Net unrealized income (loss) 58 3,562 (9,243)
Foreign currency translation adjustments (6,218) (5,071) (290)
- -----------------------------------------------------------------------------------------------------------------------
Other comprehensive loss (6,160) (1,509) (9,533)
- -----------------------------------------------------------------------------------------------------------------------
Comprehensive loss $(46,056) $(462,079) $(183,235)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Additionally, under U.S. GAAP, the equity section of the balance sheet would
present a subtotal for accumulated other comprehensive loss, as follows.
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Foreign currency translation $(26,583) $(20,365)
Net unrealized loss on share investments (7,547) (6,643)
- -----------------------------------------------------------------------------------------
Accumulated other comprehensive loss $(34,130) $(27,008)
- -----------------------------------------------------------------------------------------
</TABLE>
88
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
U.S. GAAP tax disclosure
Significant components of the Company's deferred tax liabilities and assets
under U.S. GAAP disclosure requirements would have been as follows.
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------- -----------------------------
U.S. U.S.
millions of U.S. dollars Canada and other Total Canada and other Total
- ------------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Deferred tax liabilities:
Tax over book depreciation and depletion $ 11.1 $ -- $ 11.1 $ 7.3 $ 9.8 $ 17.1
Other tax liabilities 5.1 3.3 8.4 7.0 4.1 11.1
- ------------------------------------------------------------------------- -----------------------------
Total deferred tax liabilities 16.2 3.3 19.5 14.3 13.9 28.2
- ------------------------------------------------------------------------- -----------------------------
Deferred tax assets:
Net operating loss and other carryforwards 38.1 142.8 180.9 12.0 134.9 146.9
Book over tax depreciation and depletion 32.9 10.8 43.7 37.5 -- 37.5
Accrued liabilities 3.9 27.5 31.4 7.0 35.4 42.4
Other tax assets 19.1 4.7 23.8 24.8 5.2 30.0
- ------------------------------------------------------------------------- -----------------------------
Total deferred tax assets before allowance 94.0 185.8 279.8 81.3 175.5 256.8
Valuation allowance for deferred tax assets (83.2) (184.6) (267.8) (73.3) (163.2) (236.5)
- ------------------------------------------------------------------------- -----------------------------
Total deferred tax assets 10.8 1.2 12.0 8.0 12.3 20.3
- ------------------------------------------------------------------------- -----------------------------
Net deferred tax liabilities $ 5.4 $ 2.1 $ 7.5 $ 6.3 $ 1.6 $ 7.9
- ------------------------------------------------------------------------- -----------------------------
</TABLE>
The net increase in the valuation allowance for deferred tax assets was $31.3
million for 1998 and $94.5 million for 1997.
Stock-based compensation
FASB Statement No. 123, "Accounting for Stock-Based Compensation," gives the
option to either follow fair value accounting or to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25")
and related Interpretations. The Company has determined that it will elect to
continue to follow APB No. 25 and related Interpretations in accounting for its
employee and director stock options in financial information prepared in
conformity with U.S. GAAP.
In accordance with Canadian GAAP and U.S. GAAP (under APB No. 25), the Company
does not recognize compensation expense for stock option grants in the earnings
statement, as the market prices of the underlying stock on the grant dates do
not exceed the exercise prices of the options granted.
Had the Company adopted Statement No. 123 for its U.S. GAAP disclosure, the
following net losses would have been reported.
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss under U.S. GAAP $(39,896) $(460,570) $(173,702)
Pro forma stock compensation expense,
after a nil income tax effect (1,654) (2,126) (2,766)
- --------------------------------------------------------------------------------------------------------------
Pro forma net loss under U.S. GAAP $(41,550) $(462,696) $(176,468)
- --------------------------------------------------------------------------------------------------------------
Pro forma loss per share under U.S. GAAP $ (0.30) $ (3.32) $ (1.31)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The Company has utilized the Black-Scholes option valuation model to estimate
the fair value of options granted, assuming a weighted average option life of 6
years, risk-free interest rates ranging from 4.87%
89
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
to 6.64%, dividend yields ranging from nil to 1% and volatility factor of 50%
for 1998 grants and 40% for 1997, 1996 and 1995 grants. The weighted average
fair value of options granted is estimated at $1.27 per share in 1998, $3.98 per
share in 1997 and $4.18 per share in 1996.
Other
The estimated fair values of financial instruments are set out below and in note
16. The fair values were determined from quoted market prices or estimated
using discounted cash flow analysis.
<TABLE>
<CAPTION>
1998 1997
-------------------------------------- --------------------------------------
Carrying Estimated Carrying Estimated
millions of U.S. dollars Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 8.0 $ 8.0 $17.0 $17.0
Short-term investments 3.3 3.3 10.3 10.3
Long-term investments and other assets 16.2 16.2 6.6 6.6
Currency loans 41.0 41.0 43.6 43.6
Capital securities 4.9 4.9 4.2 4.2
- ----------------------------------------------------------------------------- --------------------------------------
</TABLE>
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for fiscal quarters of fiscal
years beginning after June 15, 1999. The impact of the new standard on the
Company's financial information prepared under U.S. GAAP has not yet been
determined.
Effective January 1, 1996, for the purpose of preparing U.S. GAAP financial
information, the Company adopted U.S. Financial Accounting Standards Board
("FASB") Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," which requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present. There were no material differences between Canadian and
U.S. GAAP related to the provisions for asset impairment recorded in 1997 (note
8).
14. JOINT VENTURES
Summarized below are the Company's 50% interest in the Round Mountain mine in
1998, 1997 and 1996, and 58% interest in Santa Elina in 1997 and 51% interest in
Santa Elina in 1996 (note 4), accounted for by the proportionate consolidation
method. In 1997, the Company wrote off its entire investment in Santa Elina of
$143.6 million (note 8).
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 87,748 $ 79,864 $ 79,865
Expenses:
Operating costs 51,359 48,413 45,437
Royalties 5,078 5,250 6,482
Production taxes 654 942 886
Depreciation and amortization 16,274 13,548 14,178
Reclamation and mine closure 1,787 1,673 945
Exploration 613 8,615 2,862
Provision for impaired assets -- 142,056 --
Other 3,281 2,693 391
- -------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes $ 8,702 $(143,326) $ 8,684
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
90
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $ 69,461 $ 62,781 $ 63,171
Non-current assets 120,956 123,435 237,336
Current liabilities (9,370) (11,031) (16,515)
Non-current liabilities (19,965) (29,214) (18,632)
- -------------------------------------------------------------------------------------------------------------------
Equity $161,082 $ 145,971 $265,360
- -------------------------------------------------------------------------------------------------------------------
Net cash provided from (used in):
Operating activities $ 16,286 $ 7,910 $ 16,738
Investing activities (12,438) (28,383) (20,944)
Financing activities -- 15,811 (3,339)
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash $ 3,848 $ (4,662) $ (7,545)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
15. SEGMENT INFORMATION
The Company's management regularly evaluates the performance of the Company by
reviewing operating results on a minesite by minesite basis. As such, the
Company considers each producing minesite to be an operating segment. In 1998,
the Company had three operating mines: Round Mountain in Nevada, USA; McCoy/Cove
in Nevada, USA; and Kettle River in Washington, USA. All are 100% owned except
for Round Mountain, which is 50% owned. In January 1998, the Company
temporarily suspended operations at its Lupin mine in the Northwest Territories,
Canada.
In making operating decisions and allocating resources, the Company's management
specifically focuses on the production levels and cash operating costs generated
by each operating segment, as summarized in the following tables.
<TABLE>
<CAPTION>
Gold Production (ounces) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Round Mountain (50%) 255,252 238,840 205,487
McCoy/Cove 167,494 187,034 271,731
Kettle River 113,692 129,866 124,910
Lupin -- 165,335 166,791
- ------------------------------------------------------------------------------------------------------------------
Total gold 536,438 721,075 768,919
- ------------------------------------------------------------------------------------------------------------------
Silver Production (ounces) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Total silver-all from McCoy/Cove 9,412,823 11,021,708 7,102,348
- ------------------------------------------------------------------------------------------------------------------
Cash Operating Costs per Ounce of Gold Produced 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Round Mountain $ 198 $ 207 $ 221
McCoy/Cove 203 271 271
Kettle River 244 227 201
Lupin -- 284 299
- ------------------------------------------------------------------------------------------------------------------
Company consolidated weighted average $ 208 $ 249 $ 254
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
91
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
<TABLE>
<CAPTION>
Reconciliation of Cash Operating
Costs per Ounce to Financial Statements 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating costs by minesite:
Round Mountain $ 51,502 $ 48,549 $ 45,580
McCoy/Cove 66,606 89,577 99,802
Kettle River 29,016 27,665 25,260
Lupin 1,645 47,329 50,484
- --------------------------------------------------------------------------------------------------------------
Total operating costs per financial statements 148,769 213,120 221,126
Change in finished goods inventories and other (1,704) 10,956 70
Co-product cost of silver produced (35,486) (44,528) (25,568)
- --------------------------------------------------------------------------------------------------------------
Cash operating costs $111,579 $179,548 $195,628
- --------------------------------------------------------------------------------------------------------------
Gold ounces produced 536,438 721,075 768,919
- --------------------------------------------------------------------------------------------------------------
Cash operating costs per ounce $ 208 $ 249 $ 254
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's management generally monitors revenues on a consolidated basis.
Information regarding the Company's consolidated revenues is provided below.
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total gold and silver revenues $232,181 $305,429 $337,316
Average gold price realized per ounce $ 333 $ 362 $ 384
Average silver price realized per ounce $ 5.88 $ 5.26 $ 5.41
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization by minesite is as follows.
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Round Mountain $16,274 $13,548 $14,178
McCoy/Cove 29,034 36,126 43,198
Kettle River 9,315 11,438 13,045
Lupin 6,233 15,885 15,085
Depreciation of non-minesite assets 2,430 2,319 985
- ------------------------------------------------------------------------------------------------------------
Total depreciation and amortization per financial
statements $63,286 $79,316 $86,491
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Total assets by minesite are as follows.
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Minesites:
Round Mountain $135,302 $133,540
McCoy/Cove 84,119 110,130
Kettle River 14,928 23,751
Lupin 38,010 52,187
Development properties:
Aquarius 49,527 54,112
Paredones Amarillos 16,451 17,111
Non-minesite assets 29,739 41,936
- -----------------------------------------------------------------------------------------
Total assets $368,076 $432,767
- -----------------------------------------------------------------------------------------
</TABLE>
92
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
Capital expenditures by minesite are as follows.
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Round Mountain $12.6 $30.7 $17.5
McCoy/Cove 1.3 2.2 7.3
Kettle River 1.5 3.8 8.8
Lupin -- 12.3 15.7
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Financial information regarding geographic areas is set out below
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Canada $ 11,360 $ 68,959 $ 63,859
United States 220,821 236,470 273,457
- ------------------------------------------------------------------------------------------------------------
Total revenue $232,181 $305,429 $337,316
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Canada $ 92,457 $125,346 $236,482
United States 267,843 296,962 406,750
Other 7,776 10,459 188,913
- ------------------------------------------------------------------------------------------------------------
Total assets $368,076 $432,767 $832,145
- ------------------------------------------------------------------------------------------------------------
</TABLE>
16. HEDGING ACTIVITIES AND COMMITMENTS
In the third quarter of 1998, relating to outstanding gold and currency
borrowings under a gold loan agreement, the Company opted to accelerate its
repayment of gold ounces and decelerate its repayment of the currency loan from
the original repayment schedule (note 5). The difference between the
restructured gold loan price and the spot price on the repayment date for these
accelerated ounces will be deferred and recognized in earnings in accordance
with the original repayment schedule.
In the first quarter of 1998, the Company received proceeds of $8.7 million on
the repurchase of a portion of its outstanding gold forward sales. The
repurchased forward sales include 50,000 ounces of gold scheduled for delivery
in each of the five years 1998 to 2002 at forward prices of $395 per ounce in
1998 and 1999 and $374 per ounce in years 2000 to 2002, for a total of 250,000
ounces of gold. Additionally, related to the repurchase, the Company eliminated
contingent forward sales of up to an additional 75,000 ounces of gold at $400
per ounce in each of the three years 2000 to 2002. These forward sales had been
contingent upon the spot gold price reaching various levels above $400 per
ounce. This gain has been deferred and will be recognized in earnings as the
formerly hedged production is sold. The deferred gain is scheduled to be
recognized in revenue as follows: $1.8 million in 1999, $1.7 million in 2000,
$1.7 million in 2001, and $1.7 million in 2002.
In the first quarter of 1998, the Company entered into gold forward sales
contracts of 270,000 ounces at an average price of $319 per ounce and silver
forward sales contracts of 19.0 million ounces at an average price of $6.01 per
ounce. These hedge positions are designed to ensure the economic viability of
93
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
the ore located beneath the portion of the Cove pit wall that had collapsed. The
remediation of the Cove pit wall resumed in the second quarter of 1998 (note 7).
In January 1998, the Company temporarily suspended operations at the Lupin mine.
Deferred revenue amounts related to the 1997 repurchase of Lupin gold forwards
that were originally scheduled for 1998 and 1999 recognition will continue to be
deferred and will be matched to production in years subsequent to 1999.
In 1997, the Company repurchased its 218,000 ounce gold commitment that hedged
an $84.0 million bond obligation. The Company also repurchased all of its gold
and silver forward sales positions, which consisted of 654,000 ounces of gold
with delivery dates ranging from 1997 to 2002 and 8.5 million ounces of silver
with delivery dates ranging from 1997 to 1999. These transactions resulted in
cash proceeds of $63.1 million, which the Company used, together with existing
cash, to repay the $84.0 million bond obligation 1997. This gain has been
deferred and will be recognized in earnings as the formerly hedged gold and
silver production is sold. The remaining deferred gain is currently expected to
be recognized in revenue as follows: $9.1 million in 1999, $33.0 million in
2000, $1.9 million in 2001, and $1.4 million in 2002.
In 1997, the Company repurchased a portion of its outstanding foreign currency
exchange contracts. The contracts repurchased consisted of a total commitment
of C$75.6 million at an average C$ to US$1.00 exchange rate of 1.55, with
purchase dates ranging from 1998 to 2000. The transactions resulted in cash
proceeds of $6.0 million, which have been deferred and will be recognized as a
reduction to operating costs when the hedged Canadian dollar transactions occur.
In 1997, the Company swapped a portion of its capital security interest
obligation for a commitment to deliver 291,358 ounces of gold in 2002 at a price
of $343 per ounce of gold (note 5). During the first quarter of 1998, the
Company restructured the gold swap agreement. The restructuring resulted in a
conversion of the swap ounces to forward sales commitments, as follows: 57,925
ounces at $379 per ounce in 1998, 175,509 ounces at $379 per ounce in 1999, and
57,925 ounces at $379 per ounce in 2000. Gains realized on the conversion, in
the form of forward prices contracted in excess of market, will be deferred and
recognized in 2002, when the formerly hedged production is sold. Revenue will
be deferred related to the restructuring as follows: $4.3 million in 1998,
$13.0 million in 1999, $4.3 million in 2000. The total deferral of $21.6
million will be recognized in revenue in 2002.
94
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
Gold and silver commitments
The Company's gold and silver commitments at December 31, 1998 were as follows.
<TABLE>
<CAPTION>
Forward Price of Average
Sales/(1)/ Forward Sales/(1)/ Gold Loans Price of Loans
(ounces) (per ounce) (ounces) (per ounce)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold
- ----
1999 255,509 $ 374 15,367 $ 393
2000 257,925 341 8,658 388
2001 90,000 321 -- --
- ---------------------------------------------------------------------------------------------------------------------
603,434 $ 352 24,025 $ 391
- ---------------------------------------------------------------------------------------------------------------------
Silver
- ------
1999 5,185,000 $ 5.82
2000 6,500,000 6.00
2001 6,500,000 6.00
- ---------------------------------------------------------------------------
18,185,000 $ 5.95
- ---------------------------------------------------------------------------
</TABLE>
/(1)/ The Company has contingent forward sales of up to 60,000 ounces of gold
at $360 per ounce in each quarter from the first quarter of 2001 through
the second quarter of 2008. The number of ounces in this contingent
forward sale will be determined based on the spot price of gold two days
before the end of the previous quarter and the quantity of gold delivered
in the previous quarter. These contingent obligations have not been
included above.
The delivery prices on the gold loans stated above represent the prices
established per the gold loan agreements. Gold loans are remeasured at each
balance sheet date, resulting in deferred gains of $2.5 million at December 31,
1998. Remeasurement gains or losses are recorded in deferred income and are
included in revenue when the production related to the loans is delivered (note
5).
The Company's option position at December 31, 1998 was as follows.
<TABLE>
<CAPTION>
Put Options Purchased /(1)/ Put Options Sold Call Options Purchased Call Options Sold
--------------------------------------------------------------------------------------------------------------------
Strike Price Strike Price Strike Price Strike Price
Ounces per Ounce Ounces per Ounce Ounces per Ounce Ounces per Ounce
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gold
- ----
1999 158,400 $ 304 -- $ -- -- $ -- 25,000 $ 300
2001 50,000 310 -- -- -- -- -- --
2002 50,000 310 -- -- -- -- -- --
2003 50,000 310 -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
308,400 $ 307 -- $ -- -- $ -- 25,000 $ 300
- ----------------------------------------------------------------------------------------------------------------------------
Silver
- ------
1999 -- $ -- 2,000,000 $ 4.75 3,000,000 $ 9.00 2,210,000 $ 5.67
2000 1,000,000 6.00 7,500,000 4.75 6,500,000 9.00 -- --
2001 1,000,000 6.00 7,500,000 4.75 6,500,000 9.00 -- --
- ----------------------------------------------------------------------------------------------------------------------------
2,000,000 $ 6.00 17,000,000 $ 4.75 16,000,000 $ 9.00 2,210,000 $ 5.67
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ The 50,000 of gold put options with a strike price of $310 per ounce in
years 2001 to 2003 are contingent, and the Company will forfeit these
options if the 60,000 ounces of contingent gold forward sales at $360 per
ounce are required to be
95
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
delivered against in each of those years. The contingent options were
included in the gold forward table above to reflect the minimum price the
Company will receive on these ounces.
Currency position
The Company's obligations to purchase Canadian dollars at December 31, 1998 were
as follows.
<TABLE>
<CAPTION>
Canadian Exchange Rate
Dollars (C$ to U.S.$1.00)
- ----------------------------------------------------------------
<S> <C> <C>
1999 $ 49,000,000 1.36
2000 24,000,000 1.34
- ----------------------------------------------------------------
$ 73,000,000 1.35
- ----------------------------------------------------------------
</TABLE>
Crude oil position
At December 31, 1998, the Company has a forward purchase commitment to purchase
20,000 barrels of crude oil at $17.63 per barrel in 1999.
Other hedging activity information
The Company assesses the exposure that may result from a hedging transaction
prior to entering into the commitment, and only enters into transactions which
it believes accurately hedge the underlying risk and could be safely held to
maturity. The Company does not actively engage in the practice of trading
derivative securities for profit. The Company regularly reviews its unrealized
gains and losses on hedging transactions.
Shown below are the carrying amounts and unrealized gains or losses on the
Company's hedging positions at December 31, 1998 and 1997.
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
--------------------------------------- ---------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C>
Gold loans (note 5) $ 6,900 $ -- $ 18,600 $ --
Gold swap on capital securities (note 6) -- -- -- 19,700
Off-balance sheet instruments:
Gold forward sales -- 25,400 -- 10,900
Silver forward sales -- 12,900 -- (6,000)
Gold options -- puts purchased 1,600 400 2,800 11,300
-- calls sold -- -- (700) 700
Silver options -- puts purchased 2,500 (400) -- --
-- calls sold (3,400) (500) (1,700) (2,500)
-- puts sold (10,100) (5,900) -- --
-- calls purchased 10,100 1,100 -- --
Foreign currency contracts -- (6,800) -- (4,100)
Crude oil contracts -- (100) -- 500
- ------------------------------------------------------------------------------- ---------------------------------------
$ 26,100 $ 30,500
- ------------------------------------------------------------------------------- ---------------------------------------
</TABLE>
Fair values are estimated for the contract settlement dates based on market
quotations of various input variables. These variables are used in valuation
models that estimate the fair market value.
96
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
The credit risk exposure related to all hedging activities is limited to the
unrealized gains on outstanding contracts based on current market prices. To
reduce counterparty credit exposure, the Company deals only with large credit-
worthy financial institutions and limits credit exposure to each. In addition,
to allow for situations where positions may need to be reversed, the Company
deals only in markets it considers highly liquid.
Most of the Company's hedging transactions have no margin requirements. In some
instances, however, mainly for the longer-term forward sales and options, margin
deposits are required when the market value exceeds the contract value by a
predetermined amount.
The fair value of the Company's hedged position can be affected by market
conditions beyond the Company's control. The effect of changes in various
market factors on the Company's outstanding hedged position at December 31, 1998
would be as follows.
<TABLE>
<CAPTION>
Effect on
Amount of Market Value of
Change Hedged Position
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Change in:
Gold prices $ 10.00/ounce $ 6,500
Silver prices $ 0.25/ounce $ 3,800
Canadian dollar U.S.$ 0.01 $ 700
Interest rates (effect on gold and silver options and gold loans) 1% $ 3,800
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Hedging gains and losses represent the difference between spot or market prices
and realized amounts. Shown below are the hedging gains (losses) recognized in
earnings.
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Gold loans and swaps $ 3,096 $1,891 $(3,943)
Gold forward sales 7,179 1,001 1,541
Silver forward sales 3,118 508 1,910
Gold and silver options 11,122 3,131 534
Operating costs:
Foreign currency contracts (2,805) 1,317 1,459
Crude oil contracts (636) 1,343 1,120
Interest expense:
Gold swap on capital securities (note 6) -- 156 --
- -------------------------------------------------------------------------------------------------------------------
$21,074 $9,347 $ 2,621
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
17. OTHER COMMITMENTS AND CONTINGENCIES
Royalties
Round Mountain mine production is subject to a net smelter return royalty
ranging from 3.53% at gold prices of $320 per ounce or less to 6.35% at gold
prices of $440 per ounce or more. Its production is also subject to a gross
revenue royalty of 3.0%, reduced to 1.5% after $75.0 million has been paid. For
the period from inception through December 31, 1998, cumulative royalties of
$21.5 million have been paid on the gross revenue royalty.
McCoy/Cove production is subject to a 2% net smelter return royalty. This
royalty is based on sales less
97
<PAGE>
ECHO BAY MINES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Tabular dollar amounts in thousands of U.S. dollars except amounts per
share and per ounce or unless otherwise noted
certain deductions.
A portion of production from the Lamefoot area of the Kettle River mine is
subject to a 5% net smelter return royalty. K-2 area production at Kettle River
is subject to a 5% gross proceeds royalty and a net smelter return royalty
ranging from 2% at gold prices of $300 per ounce or less to 3% at gold prices of
$400 per ounce or more.
Operating lease commitments
The Company's principal lease commitments are for office premises and equipment.
The Company incurred $2.1 million in rental expense in 1998, net of $1.0 million
in rental income related to office subleases. The Company's commitments under
the remaining terms of the leases are approximately $15.7 million, payable as
follows: $4.9 million in 1999, $3.0 million in 2000, $2.0 million in 2001, $1.9
million in 2002, $1.5 million in 2003 and $2.4 million thereafter.
Year 2000 Issue
The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. The effects of the Year 2000 issue may be
experienced before, on, or after January 1, 2000, and, if not addressed, the
impact on operations and financial reporting may range from minor errors to
significant systems failure which could affect the Company's ability to conduct
normal business operations. The Company is assessing the Year 2000 issue and is
in the process of modifying or upgrading portions of its software to address the
issue. It is not possible to be certain that all aspects of the Year 2000 issue
affecting the Company, including those related to the efforts of suppliers or
other third parties, will be fully resolved.
98
<PAGE>
QUARTERLY FINANCIAL HIGHLIGHTS
(Unaudited)
(millions of U.S. dollars except per share data)
<TABLE>
<CAPTION>
Net Earnings Loss per
Revenue (Loss) Share
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
First quarter $ 52.9 $ (7.6) $(0.07)
Second quarter 65.3 2.1 (0.01)
Third quarter 55.6 (6.0) (0.06)
Fourth quarter 58.4 (8.6) (0.09)
- ---------------------------------------------------------------------------------------------------------
Total $232.2 $ (20.1) $(0.23)
- ---------------------------------------------------------------------------------------------------------
1997
First quarter $ 73.8 $ (16.8) $(0.12)
Second quarter 75.8 (20.7) (0.17)
Third quarter 74.5 (327.5) (2.36)
Fourth quarter 81.3 (55.5) (0.41)
- ---------------------------------------------------------------------------------------------------------
Total $305.4 $(420.5) $(3.06)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
In 1997, these losses include provisions for impaired assets of $309.8 million
($2.22 per share) in the third quarter and $36.2 million ($0.26 per share) in
the fourth quarter, and $11.2 million ($0.08 per share) for severance costs in
the fourth quarter. See note 8 to the consolidated financial statements.
ITEM 9-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10-DIRECTORS OF THE REGISTRANT
The information about the directors of the Company required by this item is
located in the Echo Bay Mines Ltd. proxy statement to be filed within 120 days
after the end of the fiscal year. Information about the executive officers of
the Company required by this item appears in Part I of this Annual Report on
Form 10-K.
ITEM 11-EXECUTIVE COMPENSATION
The information required by this item appears in the Echo Bay Mines Ltd. proxy
statement to be filed within 120 days after the end of the fiscal year.
ITEM 12-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this item appears in the Echo Bay Mines Ltd. proxy
statement to be filed within 120 days after the end of the fiscal year.
ITEM 13-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears in the Echo Bay Mines Ltd. proxy
statement to be filed within 120 days after the end of the fiscal year.
99
<PAGE>
PART IV
ITEM 14-EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements included in Part II, Item 8 Echo Bay Mines Ltd.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management's Responsibility For Financial Reporting........................ 67
Report Of Independent Chartered Accountants................................ 68
Consolidated Balance Sheet................................................. 69
Consolidated Statement Of Operations....................................... 70
Consolidated Statement Of Deficit.......................................... 70
Consolidated Statement Of Cash Flow........................................ 71
Notes To Consolidated Financial Statements................................. 72
</TABLE>
2. Financial Statement Schedules included in Part IV
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
3. Exhibits required to be filed by Item 601 of Regulation S-K
Exhibits 10.7, 21, 23.1, 24 and 27 are filed herewith. All other exhibits
are incorporated by reference as indicated below.
Exhibit
No. Exhibit Description
----- -------------------
2.1 Share Subscription and Purchase Agreement among Sercor, Ltd.,
Echo Bay Mines Ltd. and Kendall Gold Corporation (incorporated by
reference to Exhibit 2.1 of the report on Form 8-K of file no. 1-
8542 filed on April 24, 1996).
2.2 Merger Agreement between Santa Elina Gold Corporation and Kendall
Gold Corporation (incorporated by reference to Exhibit 2.2 of the
report on Form 8-K of file no. 1-8542 filed on April 24, 1996).
3.1 Restated Articles of Incorporation of the Registrant
(incorporated herein by reference to Exhibit 3(a) of Registration
Statement No. 2-84687).
3.2 By-Laws of the Registrant (incorporated herein by reference to
Exhibit 3(b) of Registration Statement No. 2-84687).
4.1 Shareholder rights plan, dated September 2, 1994 (incorporated
herein by reference to the report on Form 8-K of file No. 1-8542
which was made effective on October 14, 1994).
4.2 Shelf registration statement, as amended, dated February 12, 1998
(incorporated herein by reference to Registration Statement 333-
35857 and amendments thereto).
100
<PAGE>
4.3 Indenture and First Supplemental Indenture between Echo Bay Mines
Ltd. and Bankers Trust Company and Global Security for 11%
Capital Securities dated March 27, 1997 (incorporated herein by
reference to the report on Form 8-K of file No. 1-8542 which was
made effective on March 31, 1997).
10.1 Employee Share Incentive Plan (incorporated herein by reference
to Exhibit 10(n) of Registration Statement No. 2-84687).
10.2 Amendment dated February 18, 1986, to the Employee Share
Incentive Plan described in 10.1 above (incorporated herein by
reference to Exhibit 10.29 of the report on Form 10-K of file No.
1-8542 for the year ended December 31, 1986).
10.3 Director Equity Plan and amendment to Employee Share Incentive
Plan (incorporated herein by reference to Registration Statement
on Form S-8, file No. 33-91696).
10.4 Employment Agreement dated May 10, 1996 with Robert L. Leclerc
(incorporated herein by reference to exhibit 10.6 of the report
on Form 10-K of file No. 1-8542 for the year ended December 31,
1996).
10.5 Employee Share Incentive Plan and Restricted Share Grant Plan
(incorporated herein by reference to Registration Statement on
Form S-8, file No. 333-31835).
10.6 Registration Statement dated May 14, 1998 (incorporated herein by
reference to Registration Statement on Form S-3, file No. 333-
52613 and amendments thereto).
10.7 Second Amended and Restated Gold Bullion Loan Agreement dated as
of February 11, 1999.
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
24 Power of Attorney.
27 Financial Data Schedule.
101
<PAGE>
(b) Reports on Form 8-K
Filed on January 6, 1998 related to the temporary suspension of operations
at the Lupin mine, reduction of operations at the McCoy/Cove mine and
further actions taken to reduce costs.
Filed on February 20, 1998 related to press release dated February 17,
1998, regarding 1997 results.
Filed on March 23, 1998 related to the deferral of interest on the capital
securities and the resignation of Scott A. Caldwell.
Filed on September 22, 1998, related to the deferral of the October 1998
interest payment on the capital securities.
Filed on November 5, 1998, regarding the Second Supplemental Indenture
dated September 15, 1998 related to the capital securities.
102
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ECHO BAY MINES LTD.
By: /s/ Robert L. Leclerc
---------------------------------------------
Robert L. Leclerc, Q C., Chairman,
Chief Executive Officer and Director
Date: February 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacity and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert L. Leclerc Chairman, Chief Executive February 24, 1999
- -------------------------------------------
Robert L. Leclerc, Q. C. Officer and Director
/s/ Peter H. Cheesbrough Senior Vice President, Finance
- -------------------------------------------
Peter H. Cheesbrough and Chief Financial Officer
/s/ Tom S. Q. Yip Vice President, Controller and
- -------------------------------------------
Tom S. Q. Yip Principal Accounting Officer
* JOHN N. ABELL
* LATHAM C. BURNS
* PIERRE CHOQUETTE
* JOHN G. CHRISTY
* PETER CLARKE
* ROBERT L. LECLERC
* JOHN F. MCOUAT
* MONICA E. SLOAN
* R. GEOFFREY P. STYLES * A majority of the
Board of Directors
* By /s/ Lois-Ann L. Brodrick February 24, 1999
--------------------------------------
Lois-Ann L. Brodrick, Attorney-in-fact
</TABLE>
103
<PAGE>
Exhibits 10.7, 21, 23.1, 24 and 27 are filed herewith. All other exhibits are
incorporated by reference as indicated below.
Exhibit No. Exhibit Description
- ----------- -------------------
2.1 Share Subscription and Purchase Agreement among Sercor,
Ltd.,Echo Bay Mines Ltd. and Kendall Gold Corporation
(incorporated byreference to Exhibit 2.1 of the report
on Form 8-K of file no. 1-8542 filed on April 24, 1996).
2.2 Merger Agreement between Santa Elina Gold Corporation
and Kendall Gold Corporation (incorporated by reference
to Exhibit 2.2 of the report on Form 8-K of file no.
1-8542 filed on April 24, 1996).
3.1 Restated Articles of Incorporation of the Registrant
(incorporated herein by reference to Exhibit 3(a) of
Registration Statement No. 2-84687).
3.2 By-Laws of the Registrant (incorporated herein by
reference to Exhibit 3(b) of Registration Statement
No. 2-84687).
4.1 Shareholder rights plan, dated September 2, 1994
(incorporated herein by reference to the report on Form
8-K of file No. 1-8542 which was made effective on
October 14, 1994).
4.2 Shelf registration statement, as amended, dated February
12, 1998 (incorporated herein by reference to
Registration Statement 333-35857 and amendments thereto).
4.3 Indenture and First Supplemental Indenture between Echo
Bay Mines Ltd. and Bankers Trust Company and Global
Security for 11% Capital Securities dated March 27, 1997
(incorporated herein by reference to the report on Form
8-K of file No. 1-8542 which was made effective on March
31, 1997).
10.1 Employee Share Incentive Plan (incorporated herein by
reference to Exhibit 10(n) of Registration Statement
No. 2-84687).
10.2 Amendment dated February 18, 1986, to the Employee Share
Incentive Plan described in 10.1 above (incorporated
herein by reference to Exhibit 10.29 of the report on
Form 10-K of file No. 1-8542 for the year ended December
31, 1986).
10.3 Director Equity Plan and amendment to Employee Share
Incentive Plan (incorporated herein by reference to
Registration Statement on Form S-8, file No. 33-91696).
10.4 Employment Agreement dated May 10, 1996 with Robert L.
Leclerc (incorporated herein by reference to exhibit
10.6 of the report on Form 10-K of file No. 1-8542 for
the year ended December 31, 1996).
10.5 Employee Share Incentive Plan and Restricted Share Grant
Plan (incorporated herein by reference to Registration
Statement on Form S-8, file No. 333-31835).
10.6 Registration Statement dated May 14, 1998 (incorporated
herein by reference to Registration Statement on Form
S-3, file No. 333-52613 and amendments thereto).
10.7 Second Amended and Restated Gold Bullion Loan Agreement dated as
of February 11, 1999.
21 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
24 Power of Attorney.
27 Financial Data Schedule.
i
<PAGE>
Exhibit 10.7
[EXECUTION COPY]
SECOND AMENDED AND RESTATED
GOLD BULLION LOAN AGREEMENT,
dated as of February 11, 1999
(amending and restating the Amended and Restated
Gold Bullion Loan Agreement,
dated as of August 9, 1996),
among
ECHO BAY INC.,
as Borrower,
ECHO BAY MINES LTD.
and certain of its Subsidiaries,
as Guarantors,
CERTAIN FINANCIAL INSTITUTIONS
FROM TIME TO TIME
PARTIES HERETO,
as the Banks,
and
THE BANK OF NOVA SCOTIA,
as Agent.
<PAGE>
TABLE OF CONTENTS
-----------------
Section Page
- ------- ----
ARTICLE 1.CERTAIN DEFINITIONS AND ACCOUNTING TERMS
1.1. Certain Defined Terms............................................... 2
ARTICLE 2.LOAN AND RETURN OF GOLD AND DOLLARS; FORWARD SALES OF GOLD
2.1. Term Advances of Gold or Dollars.................................... 17
2.2. Revolving Advances of Gold or Dollars............................... 18
2.3. Making the Advances................................................. 19
2.4. Delivery and Return of Dollars...................................... 20
2.5. Delivery and Return of Gold......................................... 20
2.6. Issuance Procedures................................................. 21
2.7. Other Banks' Participation.......................................... 21
2.8. Disbursements....................................................... 22
2.9. Reimbursement....................................................... 22
2.10. Deemed Disbursements................................................ 22
2.11. Nature of Reimbursement Obligations................................. 23
2.12. Interest............................................................ 24
2.13. Payment Dates....................................................... 26
2.14. Fees................................................................ 26
2.15. Reduction of the Revolving Commitment, Letter of Credit Commitment.. 27
2.16. Optional Prepayment................................................. 27
2.17. Mandatory Prepayment................................................ 27
2.18. Amount and Allocation of Partial Prepayments........................ 28
2.19. Conversion of Borrowings............................................ 29
2.20. Risk of Loss........................................................ 30
2.21. Inability to Provide Gold or Dollars at LIBOR....................... 30
2.22. Yield Protection.................................................... 32
2.23. Payments and Computations........................................... 33
2.24. Advance, Conversion, Renewal or Payment on Business Day............. 34
2.25. Sharing of Payments, Etc............................................ 34
2.26. Forward Sales....................................................... 35
i
<PAGE>
ARTICLE 3.CONDITIONS OF LENDING AND FORWARD SALES
<TABLE>
<CAPTION>
<C> <S> <C>
3.1. Conditions Precedent to Borrowing or Forward Sale.................... 36
3.2. Conditions Precedent to All Advances, Forward Sales, Conversions
and Renewals......................................................... 37
</TABLE>
ARTICLE 4.REPRESENTATIONS AND WARRANTIES
<TABLE>
<CAPTION>
<C> <S> <C>
4.1. Representations and Warranties of the Borrower and the Guarantors..... 38
4.2. Warranties of the Banks With Respect to the Gold...................... 42
4.3. Warranties of the Borrower and the Guarantors With Respect to the Gold 42
</TABLE>
ARTICLE 5.COVENANTS OF THE BORROWER AND THE GUARANTORS
<TABLE>
<CAPTION>
<C> <S> <C>
5.1. Affirmative Covenants................................................. 42
5.2. Negative Covenants.................................................... 47
</TABLE>
ARTICLE 6.ABSOLUTE CONTINUING GUARANTEE
<TABLE>
<CAPTION>
<C> <S> <C>
6.1. Undertaking........................................................... 51
6.2. Unconditional Guarantee............................................... 52
</TABLE>
ARTICLE 7.EVENTS OF DEFAULT
<TABLE>
<CAPTION>
<C> <S> <C>
7.1. Events of Default..................................................... 56
</TABLE>
ARTICLE 8.THE AGENT
<TABLE>
<CAPTION>
<C> <S> <C>
8.1. Authorization and Action.............................................. 60
8.2. Notification of Banks................................................. 60
8.3. Agent's Reliance, Etc................................................. 60
8.4. The Bank of Nova Scotia and Affiliates................................ 60
8.5. Bank Credit Decision.................................................. 61
8.6. Indemnification....................................................... 61
8.7. Successor Agent....................................................... 61
</TABLE>
ii
<PAGE>
ARTICLE 9.MISCELLANEOUS
<TABLE>
<CAPTION>
<C> <S> <C>
9.1. Waivers, Amendments, Etc...................................... 62
9.2. Notices, Etc.................................................. 63
9.3. No Waiver; Remedies........................................... 63
9.4. Accounting Terms.............................................. 63
9.5. Costs, Expenses and Taxes..................................... 63
9.6. Right of Setoff............................................... 64
9.7. Successors and Assigns; Governing Law......................... 65
9.8. Consent to Jurisdiction....................................... 67
9.9. Waiver of Jury Trial.......................................... 67
9.10. Execution in Counterparts..................................... 67
9.11. Confidentiality............................................... 67
9.12. Severability.................................................. 68
</TABLE>
iii
<PAGE>
SECOND AMENDED AND RESTATED
GOLD BULLION LOAN AGREEMENT
---------------------------
THIS SECOND AMENDED AND RESTATED GOLD BULLION LOAN AGREEMENT, dated as of
February 11, 1999 (as further amended, supplemented, amended and restated or
otherwise modified from time to time, this "Agreement"), made and entered into
---------
as of the Amendment Effective Date (such capitalized term and other terms used
in this Agreement to have the meanings set forth in Article 1), by and among
---------
ECHO BAY, INC., a Delaware corporation (the "Borrower"), ECHO BAY MINES LTD., a
--------
corporation incorporated under the laws of Canada (the "Parent"), ROUND MOUNTAIN
------
GOLD CORPORATION, a Delaware corporation ("RMGC"), ECHO BAY MINERALS COMPANY, a
----
Delaware corporation, (subject to Section 5.2(j)), ECHO BAY CAPITAL CORPORATION,
an Irish corporation ("EBCC") and ECHO BAY EXPLORATION INC., a Delaware
----
corporation (together with the Parent, individually a "Guarantor" and
---------
collectively the "Guarantors"), each of the financial institutions named from
----------
time to time in Schedule 1 hereto, including any Assignee Bank (individually a
----------
"Bank" and collectively the "Banks") and THE BANK OF NOVA SCOTIA, a Canadian
- ----- -----
chartered bank ("Scotiabank"), as agent for the Banks (in such capacity, the
----------
"Agent").
- ------
W I T N E S S E T H:
-------------------
WHEREAS, the Borrower (directly and through its Subsidiaries and others) is
engaged in the business of exploring for, developing, owning interests in and
operating precious metals properties, including gold mines, and requires funds
to finance, directly or indirectly, the acquisition of precious metals property
interests, for working capital needs and for other general corporate purposes;
WHEREAS, the Borrower, the Banks, signatories to this Agreement on the
Amendment Effective Date and the Agent are parties to the Amended and Restated
Gold Bullion Loan Agreement, dated as of August 9, 1996 (as amended or otherwise
modified prior to the Amendment Effective Date, the "Existing Agreement"),
------------------
pursuant to which (i) the Banks agreed to lend to the Borrower, on a revolving
basis, an amount not to exceed $60,000,000 or Gold equivalent, (ii) the Banks
agreed to make available to the Borrower a facility relating to Forward Sales
forming part of the revolving credit contemplated under the Existing Agreement
and (iii) the Banks made the Term Advances to the Borrower in an amount of
approximately $50,000,000;
WHEREAS, the Borrower and the Guarantors have requested, and the Banks are
willing, on the terms and subject to the conditions hereinafter set forth, to
(i) amend and restate in its entirety the Existing Agreement in accordance with
the terms hereof, (ii) continue as Term Advances hereunder the Term Advances
outstanding under the Existing Agreement, (iii) continue as Revolving Advances
hereunder the Existing Revolving Advances and continue
1
<PAGE>
to lend to the Borrower on a revolving basis, subject to the terms and
conditions hereof, an aggregate amount (inclusive of Existing Revolving
Advances) not to exceed at any time outstanding $50,000,000, or Gold equivalent
for the corporate purposes described in the first recital, (iv) make available
-------------
to the Borrower a facility relating to Forward Sales which facility would form
part of the Revolving Commitment and (v) issue the Letter of Credit in a Stated
Amount not to exceed $4,000,000 pursuant to the Letter of Credit Commitment;
WHEREAS, in order to induce the Banks and the Agent to enter into this
Agreement and as a condition precedent to the Banks agreeing to amend and
restate the Existing Agreement on the terms of this Agreement and continue to
make Borrowings under this Agreement, each Guarantor is required to execute and
deliver this Agreement and confirm its existing guaranty of the Obligations;
WHEREAS, it is in the best interests of each Guarantor to execute this
Agreement inasmuch as each Guarantor will derive substantial direct and indirect
benefits from the Borrowings made from time to time to the Borrower by the Banks
pursuant to this Agreement; and
WHEREAS, the Parent holds all of the voting equity securities of the
Borrower;
NOW, THEREFORE, the parties hereto agree as set forth above and as follows.
ARTICLE 1.
CERTAIN DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.1. Certain Defined Terms. As used in this Agreement and unless
---------------------
otherwise expressly indicated, the following terms shall have the following
meanings (such meanings to be equally applicable to both the singular and plural
forms of the terms defined).
"Additional Costs" has the meaning assigned to it in Section 2.21(c).
---------------- ---------------
"Advance" means, collectively, a Term Advance, a Revolving Advance or
-------
Letter of Credit Outstandings, as the case may be.
"Advances" means all of the outstanding Term Advances or Revolving
--------
Advances, and the issued and outstanding Letter of Credit, as the case may be.
"Advance Date" means the date of making an Advance or issuance (or
------------
extension) of the Letter of Credit.
"Advance Date Value" means, as to any Advance of Gold, either the Dollar
------------------
Value of the Gold advanced on the Advance Date or on the date of a conversion
from Dollars to Gold
2
<PAGE>
pursuant to Section 2.19(b) or, at the Borrower's option set forth in the
---------------
relevant Notice of Borrowing, the sale price per Ounce under a forward sale
contract entered into after the Amendment Effective Date and prior to the
Maturity Date for the number of Ounces of Gold being advanced on a particular
Advance Date, which contract requires delivery of said number of Ounces by the
Borrower on said Advance Date, notice of which in form satisfactory to the Agent
shall have been provided by the Borrower to each Bank promptly after such
contract has been executed, with notification of the Borrower's intent to borrow
an equal number of Ounces of Gold on the delivery date under the contract.
"Affiliate" means any Person directly or indirectly controlling or
---------
controlled by or under common control with the Borrower; provided that, for
--------
purposes of this definition, "control," as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of such Person, whether
through the ownership of voting securities or by contract or otherwise.
"Agent" has the meaning assigned to that term in the introduction to this
-----
Agreement, and also shall refer to each other Person appointed as the successor
Agent pursuant to Section 8.7.
-----------
"Aggregate Term Commitment" means the maximum Dollar amount that may be
-------------------------
outstanding as Term Advances, which shall not exceed $32,500,000 on the
Amendment Effective Date, as such amount may be reduced from time to time in
accordance with the terms of this Agreement.
"Amendment Effective Date" means February 11, 1999.
------------------------
"Applicable Commitment Fee Rate" means 0.5% per annum.
------------------------------
"Applicable Rate" means (i) prior to the Amended Effective Date, the rate
---------------
determined pursuant to the terms of the Existing Agreement (which shall be
deemed to be zero, in the case of Base Borrowings) and (ii) on and subsequent to
the Amendment Effective Date, 1.75% per annum (in the case of LIBOR Borrowings)
and .75% per annum (in the case of Base Borrowings).
"Assignee Bank" has the meaning assigned to that term in Section 9.7(b).
------------- --------------
"Assignment Agreement" has the meaning assigned to that term in Section
-------------------- -------
9.7(b).
- ------
"Authorized Officer or Agent" means, as to any Obligor, any of such
---------------------------
Obligor's Chairman, President or any Vice President and each other officer or
agent of such Obligor authorized by the Board of Directors of such Obligor to
act on behalf of such Obligor under this Agreement or any Instrument executed
pursuant hereto.
3
<PAGE>
"Banks" has the meaning assigned to that term in the introduction to this
-----
Agreement (and shall include the Bank that is also acting in the capacity as the
Issuer).
"Base Borrowing" means any Advance of Dollars bearing interest at a rate
--------------
based on the Base Rate.
"Base Rate" means a fluctuating interest rate per annum equal at all times
---------
to the greater of: (a) the rate of interest announced by the Agent in Atlanta,
Georgia from time to time in its sole discretion as the Agent's "base rate"
applicable to all loans by the Agent to its customers which bear interest at a
rate related to the Agent's "base rate"; and (b) the Federal Funds Effective
Rate plus 1/2 of 1% per annum. If the Agent shall have determined (which
determination shall be conclusive, absent manifest error) that it is unable to
ascertain the Federal Funds Effective Rate for any reason, including, without
limitation, the inability or failure of the Agent to obtain sufficient bids or
publications in accordance with the terms hereof, the rate announced by the
Agent as its base rate shall be the Base Rate until the circumstances giving
rise to such inability no longer exist. For purposes of this paragraph,
"Federal Funds Effective Rate" means, for any period, a fluctuating interest
- -----------------------------
rate per annum equal, for each day during such period, to the weighted average
of the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers as published for such day (or,
if such day is not a Business Day, for the next preceding Business Day) by the
Federal Reserve Bank of New York or, for any day on which such rate is not so
published for such day by the Federal Reserve Bank of New York, the average of
the quotations for such day for such transactions received by the Agent from
three federal funds brokers of recognized standing selected by the Agent. Any
change in the Base Rate shall take effect on the day specified in the public
announcement of change to the Agent's base rate. The Agent's base rate is set
by the Agent based on various factors, including the Agent's costs and desired
return, general economic conditions and other factors, and is used as a
reference point for pricing some loans. The Agent may price other loans at,
above or below the Agent's base rate.
"Borrower" has the meaning assigned to that term in the introduction to
--------
this Agreement.
"Borrowing" means, collectively, as the context may require, (i) the
---------
issuance of, or the continuation or extension of the Stated Expiry Date of, the
Letter of Credit, (ii) the continuation of Existing Revolving Advances as
Revolving Advances hereunder and the subsequent making of a Revolving Advance or
loaning of Gold hereunder and (iii) the continuation of Term Advances under the
Existing Agreement as Term Advances hereunder.
"Breakage Costs" means all costs and losses which a Bank may incur as a
--------------
result of any repayment of Gold borrowed hereunder or principal on LIBOR
Advances hereunder on a date other than a scheduled maturity date for the
applicable Borrowing and all costs and losses which a Bank may incur as a result
of any failure of the Borrower to borrow Gold or Dollars hereunder after giving
written notice of its intent to borrow hereunder to the Agent pursuant to
Section 2.3, or any failure of the Borrower to deliver Gold hereunder as
- -----------
required by the terms of any Forward Sale, such Bank's good faith computation of
such costs and losses to be conclusive and binding
4
<PAGE>
in the absence of manifest error, and the amount thereof to be paid in same day
funds upon demand by such Bank or the Agent; provided, however, that a Bank
-------- -------
shall not be deemed to have incurred a cost or loss by reason of fluctuations in
the price of Gold between the date of any repayment of Gold and any scheduled
maturity date for the applicable Advance.
"Business Day" means a day of the year on which banks are open for business
------------
in New York, New York, Atlanta, Georgia, Toronto, Ontario, Canada and London,
England.
"Cash Flow Schedule" means a schedule projecting cash flow to be provided
------------------
by the Parent to the Banks on the Amendment Effective Date and at least
quarterly thereafter on or before 60 days after the end of the Borrower's fiscal
quarter and annually on or before 90 days after the end of the Borrower's Fiscal
Year, in substantially the form of Schedule 4 hereto, or in such other form as
----------
the Parent and the Banks shall agree.
"Ceiling Dollar Value" means (a) as to any Bank, for Borrowings (other than
--------------------
Letter of Credit Outstandings) made under a Commitment (other than the Letter of
Credit Commitment), 150% of such Bank's then existing Commitment, (b) as to all
Banks' Revolving Commitments, 150% of the aggregate amount of the Banks'
Revolving Commitments as of the Amendment Effective Date, and (c) as to all
Banks' Term Commitments, 150% of the aggregate amount of the Banks' Term
Advances as of the Amendment Effective Date, in each case as such Revolving
Commitments or Term Advances may be permanently reduced from time to time
pursuant to this Agreement.
"Changes in Ownership or Management" shall be deemed to have occurred
----------------------------------
whenever (i) Parent shall cease to own directly or indirectly 100% of each
outstanding class of equity securities of the Borrower or a Guarantor; or (ii)
the management or operation of any significant portion of the Borrower's mining
properties is conducted by any Person other than full-time employees of the
Borrower or the Parent and other than qualified and competent contract operators
acting under the active supervision of the Borrower or the Parent and having no
interest in the equity or profits of the Borrower or in the gold or proceeds
thereof produced by the Borrower unless such Person is a Person in which an
investment is permitted under Section 5.2(d) hereof.
--------------
"Code" means the Internal Revenue Code of 1986, and the regulations
----
thereunder, in each case as amended, reformed or otherwise modified from time to
time.
"Commitment" of each Bank and the Issuer means either the Term Commitment,
----------
the Letter of Credit Commitment or the Revolving Commitment of such Bank or The
Issuer, as the case may be.
"Commitments" of each Bank and the Issuer means the Term Commitment, the
-----------
Letter of Credit Commitment and the Revolving Commitment of such Bank or the
Issuer, as the case may be.
5
<PAGE>
"Commitment Termination Event" means
----------------------------
(a) the occurrence of any Event of Default described in clause (e) of
----------
Section 7.1; or
-----------
(b) the occurrence and continuance of any other Event of Default and
either (i) the declaration of all or any portion of the Advances to be due
and payable pursuant to Section 7.1, or (ii) the giving of notice by the
-----------
Agent, acting at the direction of the Majority Banks, to the Borrower that
the Commitments have been terminated.
"Confirmation of Borrowing" means a confirmation of each Borrowing of Gold
-------------------------
by the Borrower, on the Borrower's letterhead and in the form set forth in
Exhibit B hereto, signed by an Authorized Officer or Agent of the Borrower.
- ---------
"Consolidated Net Tangible Assets" means total assets (less depreciation
--------------------------------
and reserves) which would be included on the balance sheet, after deducting all
current liabilities other than the current portion of long-term debt and
deferred revenue and interest bearing short-term debt and after deducting all
goodwill, trade names, trademarks, patents, unamortized debt discount and
expenses and other intangibles, which intangibles do not include deferred
exploration or development expenditures relating to properties owned by the
Parent or to which the Parent has any right, title or interest as set forth in
the most recent balance sheet of the Parent and its consolidated Subsidiaries
and computed in accordance with generally accepted accounting principles in
Canada as of August 9, 1996.
"Contango" means the excess of (a) the price that a Bank has agreed to pay
--------
to the Borrower on the delivery date of a Forward Sale over (b) the Forward Sale
Amount.
"Credit Extension Request" means, as the context may require, any Issuance
------------------------
Request or Notice of Borrowing.
"Debt" means (i) obligations under the Notes, Gold Receipts (calculated at
----
the Dollar Value of the Gold outstanding on the day the obligation is
determined) and this Agreement, (ii) indebtedness for borrowed money or gold or
for the deferred purchase price of property or services where such purchase
price is deferred for more than 60 days, (iii) obligations as lessee under
leases which shall have been or should be, in accordance with GAAP, recorded as
capital leases, (iv) obligations under direct or indirect guarantees in respect
of, and obligations (contingent or otherwise) to purchase or otherwise acquire,
or otherwise to assure a creditor against loss in respect of, indebtedness or
obligations of others of the kinds referred to in clause (ii) or (iii) above,
(v) liabilities in respect to unfunded vested benefits under plans covered by
Title IV of ERISA, and (vi) all obligations, contingent or otherwise, relative
to the face amount of the Letter of Credit.
6
<PAGE>
"Default" means any Event of Default or any condition, occurrence or event
-------
which, with the giving of notice or passage of time (or both) would constitute
an Event of Default.
"Delivered"; "Delivery"; or "Deliver" means that the party receiving Gold
--------- -------- -------
hereunder shall have received or shall receive confirmation from a bullion
depository that it is holding Gold for such party's account.
"Disbursement" is defined in Section 2.8.
------------ -----------
"Disbursement Date" is defined in Section 2.8.
----------------- -----------
"Dollars" and the sign "$" each mean lawful money of the United States of
------- -
America.
"Dollar Value", when used with reference to the value of any Gold, shall
------------
mean, as of the date of determination, the value, expressed in Dollars, of such
Gold determined at the London Price on such date or another price basis if
agreed in writing by the Borrower and the Banks.
"EBCC" is defined in the preamble.
---- --------
"EBCC Transaction" means the winding up of EBCC, the transfer of certain of
----------------
its operating assets to certain other Guarantors and other aspects relating
thereto, as more fully described in the letter, dated September 23, 1998 (the
"September 23 Letter"), from the Borrower and certain Guarantors to the Banks, a
- --------------------
copy of which was attached as Exhibit A to the First Amendment, dated December
24, 1998, to the Existing Agreement.
"Environmental Laws" means any Governmental Requirement pertaining to land
------------------
use, air, soil, surface water, groundwater (including the protection, cleanup,
removal, remediation or damage thereof), public or employee health or safety or
any other environmental matter, including, without limitation, the following
laws as the same may be amended from time to time: (1) Clean Air Act (42 U.S.C.
(S) 7401, et seq.); (2) Clean Water Act (33 U.S.C. (S) 1251, et seq.); (3)
Resource Conservation and Recovery Act (42 U.S.C. (S) 6901, et seq.); (4)
Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C.
(S) 9601, et seq.); (5) Safe Drinking Water Act (42 U.S.C. (S) 300f, et seq.);
(6) Toxic Substances Control Act (15 U.S.C. (S) 2601, et seq.); (7) Rivers and
Harbors Act (33 U.S.C. (S) 401, et seq.); (8) Endangered Species Act (16 U.S.C.
(S) 1531, et seq.); and (9) Occupational Safety and Health Act (29 U.S.C. (S)
651, et seq.); together with any other foreign or domestic laws (federal, state,
provincial or local) relating to emissions, discharges, releases or threatened
releases of any Hazardous Substance into ambient air, land, surface water,
groundwater, personal property or structures, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport, discharge or handling of any Hazardous Substance.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended, and any successor statute thereto of similar import, together with the
regulations thereunder, in
7
<PAGE>
each case as in effect from time to time. References to sections of ERISA also
refer to any successor sections thereto.
"Event of Default" has the meaning assigned to that term in Section 7.1.
---------------- -----------
"Existing Agreement" has the meaning assigned to it in the second recital.
------------------ --------------
"Existing Revolving Advances" means Revolving Advances made under (and as
---------------------------
defined in) the Existing Agreement outstanding on the Amendment Effective Date.
"Fiscal Year" means any period of twelve consecutive calendar months ending
-----------
on December 31; references to a Fiscal Year with a number corresponding to any
calendar year (e.g., the "1999 Fiscal Year") refer to the Fiscal Year ending on
---- ----------------
December 31 of such calendar year.
"Forward Sale" means a contract entered into pursuant to this Agreement
------------
relating to the sale of Gold by the Borrower to any Bank for delivery at a
specified future date.
"Forward Sale Amount" means the total number of Dollars equal to the number
-------------------
of Ounces subject to each Forward Sale multiplied by the Dollar Value per Ounce
on the date of quotation with respect to such sale.
"GAAP" means (i) in the case of the Parent, those generally accepted
----
Canadian accounting principles applied in the preparation of the Parent's
audited financial statements for the year ending December 31, 1996, (ii) in the
case of the Borrower and each other U.S. Subsidiary, those generally accepted
U.S. accounting principles applied in the preparation of the financial
statements of the Borrower for the year ending December 31, 1996 and (iii) in
the case of EBCC, those generally accepted Irish accounting principles applied
in the preparation of the financial statements of EBCC for the year ending
December 31, 1996.
"Gold" means various amounts of Ounces of gold Delivery of which would be
----
settlement conforming in all respects with the requirements of the London
bullion market.
"Gold Rate" has the meaning assigned to it in Section 2.12.
--------- ------------
"Gold Receipt" means either a Term Gold Receipt or a Revolving Gold
------------
Receipt, as the case may be.
"Gold Receipts" means either all of the Term Gold Receipts and Revolving
-------------
Gold Receipts or with respect to a Bank that Bank's Term Gold Receipt and
Revolving Gold Receipt, as the case may be.
8
<PAGE>
"Governmental Agency" means the federal governments of the United States of
-------------------
America, Canada and any other country in which a Guarantor or the Borrower is
doing business, and the government of any state, province, territory, county,
municipality or other political subdivision thereof or any governmental body,
agency, authority, department or commission (including, without limitation, any
taxing authority) or any instrumentality or officer thereof (including, without
limitation, any court or tribunal) exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government and any
corporation, partnership or other entity directly or indirectly owned by or
controlled by the foregoing.
"Governmental Requirements" means all legal requirements in effect from
-------------------------
time to time including all laws, statutes codes, acts, ordinances, orders,
judgments, decrees, injunctions, rules, regulations, permits, licenses,
authorizations, and such other directions and requirements of all Governmental
Agencies and all instruments of record, foreseen or unforeseen and ordinary or
extraordinary, including but not limited to any change in any law, regulation or
the interpretation thereof by any Governmental Agency, relating at any time to
the business or operations of the Borrower or any Guarantor or to any of the
property owned, leased or used by the Borrower or any Guarantor, including,
without limitation, the development, design, construction, acquisition, start-
up, ownership and operation and maintenance of property.
"Guarantor" and "Guarantors" have the meanings assigned to them in the
--------- ----------
introduction to this Agreement and includes any other Affiliate of the Borrower
or a Guarantor which (i) may hereafter have an ownership interest in properties
included in the Mining Group, or (ii) enters into a sale and leaseback
transaction with the Borrower or a Guarantor (provided, that the Borrower and
--------
the Guarantors may effect one or more such transactions from and after August 9,
1996 in an aggregate amount of $5,000,000 without causing the purchaser to
become a Guarantor hereunder), and, in either case, except as provided in
Section 5.1(l), has become a party to this Agreement as a Guarantor through the
- --------------
execution and delivery of a Supplement to this Agreement in substantially the
form of Exhibit L hereto. The Parent is one of the Guarantors.
---------
"Hazardous Substance" means any pollutant, contaminant, toxic or hazardous
-------------------
substance, material constituent or waste as such terms are defined in or
pursuant to any Environmental Law.
"herein", "hereof", "hereto", "hereunder" and similar terms contained in
------ ------ ------ ---------
this Agreement or any other Instrument refer to this Agreement or such other
Instrument, as the case may be, as a whole and not to any particular Section,
paragraph or provision of this Agreement or such other Instrument.
"including" and "include" means including without limiting the generality
--------- -------
of any description preceding such term.
"Instruments" means the Notes and the Gold Receipts.
-----------
9
<PAGE>
"Interest Period" means, with respect to any Borrowing, a period from the
---------------
Advance Date or date of conversion or renewal with respect to such Borrowing to
a date which is (a) one, two, three or six months thereafter, in the case of a
LIBOR Borrowing, and (b) one month, two months, three months, six months or
twelve months thereafter, in the case of a Borrowing of Gold; provided that:
--------
(a) The Interest Period for any Borrowing shall commence on the
Advance Date or date of conversion or renewal with respect to such
Borrowing;
(b) If any Interest Period would otherwise expire on a day which is
not a Business Day, such Interest Period shall expire on the next
succeeding Business Day (or, in the case of an Interest Period respecting a
Borrowing of Gold, the next succeeding Business Day that is followed by a
Business Day); provided, however, that if any Interest Period in respect of
-------- -------
a LIBOR Borrowing would otherwise expire on a day which is not a Business
Day but is a day of the month after which no further Business Day occurs in
such month, such Interest Period shall expire on the next preceding
Business Day;
(c) Any Interest Period in respect of a LIBOR Borrowing which begins
on the last Business Day of a calendar month (or on a day for which there
is no numerically corresponding day in the calendar month at the end of
such Interest Period) shall, subject to clause (d) below, end on the last
----------
Business Day of a calendar month;
(d) No Interest Period for any Borrowing shall extend beyond the
Maturity Date;
(e) There shall be no more than five Interest Periods respecting
Borrowings of Dollars at any one time under a Commitment and not more than
five Interest Periods respecting Borrowings of Gold outstanding at any one
time under a Commitment;
(f) If the Borrower shall fail to request an initial Interest Period
with respect to a LIBOR Borrowing or a Gold Borrowing pursuant to Section
-------
2.3, the Borrower shall be deemed to have selected an Interest Period of
---
one month; and
(g) If the aggregate amount of Advances other than Base Rate
Borrowings under a Commitment, valued as set forth in Section 2.1(a) or
--------------
Section 2.2(a), as applicable, during any period set forth in Section
-------------- -------
2.1(b) or Section 2.2(b), as applicable, would exceed such Commitment
------ --------------
during the next succeeding period, a sufficient number of Interest Periods
for the Borrowings under such Commitment shall be designated to expire at
the end of the current period so that the amounts involved, plus any Base
Borrowings with respect to such Commitment, will equal or exceed the
reduction in Commitment to occur at the commencement of the succeeding
period.
10
<PAGE>
"Issuance Request" means an issuance or extension request and certificate
----------------
duly executed by an Authorized Officer or Agent of the Borrower, substantially
in the form of Exhibit A-2 hereto.
-----------
"Issuer" means Scotiabank in its capacity as issuer of the Letter of Credit
------
(or, if Scotiabank is not able to issue the Letter of Credit, another Lender
(with its consent)).
"Letter of Credit" means a standby letter of credit in a Stated Amount not
----------------
to exceed $4,000,000 substantially in the form of Exhibit A-3 hereto issued by
-----------
the Issuer pursuant to the terms of this Agreement.
"Letter of Credit Commitment" means, with respect to the Issuer, the
---------------------------
Issuer's obligation to issue the Letter of Credit pursuant to this Agreement
and, with respect to each Bank, the obligations of each such Bank to participate
in the Letter of Credit pursuant to Section 2.7.
-----------
"Letter of Credit Commitment Amount" means, on any date, a maximum amount
----------------------------------
of $4,000,000, as such amount may be permanently reduced from time to time
pursuant to the terms of this Agreement.
"Letter of Credit Outstandings" means, on any date, an amount equal to the
-----------------------------
sum of (i) the then aggregate amount which is undrawn and available under the
Letter of Credit, plus (ii) the then aggregate amount of all unpaid and
----
outstanding Reimbursement Obligations.
"LIBOR" means the rate (rounded upwards if necessary to the nearest whole
-----
one-sixteenth of one percent (1/16%)) equal to the product of Base LIBOR times
Statutory Reserves. "Base LIBOR" means the rate per annum determined by the
----------
Agent (which determination shall be conclusive in the absence of manifest error)
to be the average of the rate at which The Bank of Nova Scotia is offered
Dollars deposits in the interbank Eurodollar market at about 11:00 A.M. London
time, two Business Days prior to the beginning of the Interest Period for any
LIBOR Borrowing, for delivery on the first day thereof for the number of months
comprised therein and in an amount equal to the amount of such LIBOR Borrowing.
"LIBOR Borrowing" means any Borrowing bearing interest at a rate based on
---------------
LIBOR.
"Location Discount" means, at any time, the amount (in Dollars) per Ounce,
-----------------
if any, determined by the Agent in good faith, to be paid by the party
Delivering Gold to the party receiving Gold, if Delivery is to be made at a
location other than London, England, pursuant to Section 2.5.
-----------
"Location Premium" means, at any time, the amount (in Dollars) per Ounce,
----------------
if any, determined by the Agent in good faith, to be paid by the party receiving
Gold hereunder to the party delivering Gold hereunder, if such Delivery is to be
made at a location other than London, England, pursuant to Section 2.5.
-----------
11
<PAGE>
"London Price" means, as of any date of determination, the afternoon fixing
------------
price per Ounce of Gold or Silver, as the case may be, in the London bullion
market on such date; provided, that if there shall have been no such price fixed
--------
in the London bullion market on such date, reference shall be made to the
publicly quoted price per Ounce of Gold or Silver, as the case may be, in such
other market allowing physical Delivery of gold or silver, as the case may be,
as may be reasonably selected by the Agent after consultation with the Borrower
and the Banks.
"Majority Banks" means, at any time when no Advance is outstanding
--------------
hereunder, Banks having at least 60% of the aggregate amounts of all of the
Banks' Revolving Commitments and, at any time while Advances are outstanding,
Banks holding at least 60% of the outstanding aggregate principal amount of the
Term Advances and the Revolving Advances.
"Maturity Date" means August 9, 2001.
-------------
"Mining Group" means (i) the producing mines owned by the Parent or any of
------------
its Subsidiaries on August 9, 1996, which mines are included in the form of Cash
Flow Schedule attached as Schedule 4 hereto, and (ii) properties owned on August
----------
9, 1996 by the Parent or any of its Subsidiaries (or thereafter acquired) that
were (on August 9, 1996) or subsequently became under development and for which
a feasibility study acceptable to the Banks has been prepared indicating the
economic feasibility of production from such properties, but excluding any
future mines that are the subject of financing whose sole recourse is to such
future mine and is otherwise nonrecourse to the Borrower and the Guarantors.
"Mining Group Cost of Future Production" means at any time the total
--------------------------------------
estimated cost of producing the Mining Group Production during the periods set
forth in the then applicable Cash Flow Schedule, the cost for each period to be
determined as the sum of:
(a) The total cash operating costs (before adjusting for deferred
mining costs), estimated by the Mining Group and approved by the Majority
Banks, of producing the Mining Group Production for the period in question;
plus
----
(b) Sustaining Capital Expenditures; plus
----
(c) Development costs associated with future mines; plus
----
(d) Taxes and royalties other than federal, provincial or state
income taxes, which taxes and royalties shall be calculated in accordance
with applicable tax regulations.
"Mining Group Future Cash Flow" means at any time the difference between
-----------------------------
the Mining Group Revenue and the Mining Group Cost of Future Production.
12
<PAGE>
"Mining Group Net Present Value of the Mining Group Future Cash Flow" means
-------------------------------------------------------------------
at any time the Mining Group Future Cash Flow discounted at the rate of 8% (or
at such other rate as may be agreed to from time to time by the Parent and the
Majority Banks) over the estimated periods of production for the Mining Group as
set forth in the most recent Cash Flow Schedule delivered to the Banks.
"Mining Group Production" means for any period the number of Ounces of Gold
-----------------------
and Silver which it is estimated the Mining Group will produce during such
period (i) from then existing proven and probable minable reserves of the Mining
Group, and (ii) from such other reserves of the Mining Group as the Banks shall
approve.
"Mining Group Revenue" means at any time the sum of
--------------------
(a) The total revenue from Mining Group Production which has been
sold forward (provided that the Borrower shall have disclosed the buyer's
identity to the Banks and the buyer's creditworthiness is acceptable to the
Majority Banks); and
(b) For Mining Group Production which has not been sold forward, the
lesser of the following prices as at the date of calculation, in each case
multiplied by the unsold Mining Group Production;
(i) The average London Price for Gold (in the case of Gold
production) or Silver (in the case of Silver production) over the
previous 90 days;
(ii) The average London Price for Gold (in the case of Gold
production) or Silver (in the case of Silver production) over the
previous 36 months;
(iii) $400 in the case of Gold, and $5.00 in the case of Silver.
"Non-U.S. Bank" means any Bank (including each Assignee Bank) that is not
-------------
(i) a citizen or resident of the United States, (ii) a corporation, partnership
or other entity created or organized in or under the laws of the United States
or any state thereof, or (iii) any estate or trust that is subject to U.S.
federal income taxation regardless of the source of its income.
"Note" means either a Term Note or a Revolving Note, as the case may be.
----
"Notes" means either with respect to all Banks all of the Term Notes and
-----
Revolving Notes or with respect to a particular Bank such Bank's Term Note and
Revolving Note.
"Notice Date" has the meaning ascribed to it in Section 2.26(g).
----------- ---------------
"Notice of Borrowing" means a notice of each Borrowing by the Borrower, on
-------------------
the Borrower's letterhead and in the form set forth in Exhibit A-1 hereto,
-----------
signed by an Authorized Officer or Agent of the Borrower.
13
<PAGE>
"Notice of Conversion of Gold or Dollars" means a notice by the Borrower,
---------------------------------------
on the Borrower's letterhead and in the form set forth in Exhibit G hereto,
---------
signed by an Authorized Officer or Agent of the Borrower.
"Notice of Conversion or Renewal of Interest" means a notice by the
-------------------------------------------
Borrower, on the Borrower's letterhead and in the form set forth in Exhibit H
---------
hereto, signed by an Authorized Officer or Agent of the Borrower.
"Obligations" means all obligations (monetary or otherwise), including
-----------
Reimbursement Obligations, of the Borrower and each other Obligor arising under
or in connection with this Agreement and each other Instrument.
"Obligor" means the Borrower and each Guarantor.
-------
"Operating Assets" means the Mining Group plus any and all equipment owned
----------------
by the Parent or any of its subsidiaries that is used in the operations of the
Mining Group.
"Organic Document" means, relative to any Obligor, as applicable, its
----------------
certificate of incorporation, by-laws or other constating documents.
"Ounces" means fine troy ounces of Gold or Silver, as the case may be.
------
"Parent" means Echo Bay Mines Ltd., a corporation organized under the laws
------
of Canada.
"Percentage" means, with respect to any Bank, the percentage set forth
----------
opposite the name of such Bank in Schedule 1 hereto, as modified from time to
----------
time by an Assignment Agreement.
"Person" means an individual, partnership, corporation (including a
------
business trust or bank), joint venture or other entity, or a foreign state or
political subdivision thereof or of any agency of such state or subdivision.
"Plan" means a pension plan providing benefits for employees of the
----
Borrower or any affiliate (as such term is defined in the definition of
"Termination Event" herein) and covered by Title IV of ERISA.
"Quarterly Payment Date" means the last day of each March, June, September
----------------------
and December, or, if such day is not a Business Day, the next succeeding
Business Day.
"Regulatory Change" shall mean, with respect to any Bank, any change after
-----------------
the date of this Agreement in United States federal or state, or any foreign,
laws or regulations (including Regulation D of the Federal Reserve Board) or the
adoption or making after such date of any interpretations, directives or
requests applying to a class of banks including such Bank of or
14
<PAGE>
under any United States federal or state, or any foreign, laws or regulations
(whether or not having the force of law) by any court or governmental or
monetary authority charged with the interpretation or administration thereof.
"Reimbursement Obligation" is defined in Section 2.9.
------------------------ -----------
"Revolving Advance" has the meaning assigned to it in Section 2.2(a).
----------------- --------------
"Revolving Borrowing" has the meaning assigned to it in Section 2.2(a).
------------------- --------------
"Revolving Commitment" of a Bank has the meaning assigned to it in Section
-------------------- -------
2.2(b).
- ------
"Revolving Commitment Amount" means, on the Amendment Effective Date, a
---------------------------
maximum amount equal to $50,000,000, as such amount may be reduced from time to
time pursuant to the terms of this Agreement.
"Revolving Commitment Termination Date" means the earliest of
-------------------------------------
(a) the Maturity Date;
(b) the date on which the Revolving Commitment Amount is terminated
in full or reduced to zero pursuant to Section 2.15; and
------------
(c) the date on which any Commitment Termination Event occurs.
Upon the occurrence of any event described in the preceding clauses (b) or (c),
----------- ---
the Revolving Commitments shall terminate automatically and without any further
action.
"Revolving Gold Receipt" means a receipt in the form of Exhibit D hereto
---------------------- ---------
delivered by the Borrower to a Bank.
"Revolving Note" means a promissory note in the form of Exhibit F hereto
-------------- ---------
delivered by the Borrower to a Bank (as such promissory note may be amended,
endorsed or otherwise modified from time to time), evidencing the aggregate Debt
of the Borrower to such Bank resulting from outstanding Revolving Advances, and
also means all other promissory notes accepted from time to time in substitution
therefor or renewal thereof.
"RMGC" is defined in the preamble.
---- --------
"Silver" means various amounts of Ounces of silver delivery of which would
------
be settlement conforming in all respects with the requirements of the London
bullion market.
15
<PAGE>
"Stated Amount" means on any date, the total amount then available to be
-------------
drawn under the Letter of Credit.
"Stated Expiry Date" is defined in Section 2.6.
------------------ -----------
"Statutory Reserves" means a fraction (expressed as a decimal), the
------------------
numerator of which is the number one and the denominator of which is the number
one minus the aggregate of the maximum reserve percentages (including any
marginal, special, emergency or supplemental reserves) expressed as a decimal
established by the Federal Reserve Board for a member bank in the Federal
Reserve System, for Eurocurrency Liabilities (as defined in Regulation D of the
Federal Reserve Board). Such reserve percentages shall include those imposed
under such Regulation D. LIBOR Borrowings shall be deemed to constitute
Eurocurrency Liabilities and as such shall be deemed to be subject to such
reserve requirements without benefit of or credit for proration, exceptions or
offsets which may be available from time to time to each Bank under such
Regulation D. Statutory Reserves shall be adjusted automatically on and as of
the effective date of any change in any reserve percentage.
"Subsidiary" means, with respect to any Person, any corporation, limited
----------
liability company, partnership or other entity of which more than 50% of the
outstanding securities (or other ownership interest) having ordinary voting
power to elect the board of directors, managers or other voting members of the
governing body of such corporation, limited liability company, partnership or
other entity (irrespective of whether at the time securities (or other ownership
interest) of any other class or classes of such corporation, limited liability
company, partnership or other entity shall or might have voting power upon the
occurrence of any contingency) is at the time directly or indirectly owned or
controlled by such Person, by such Person and one or more other Subsidiaries of
such Person, or by one or more other Subsidiaries of such Person. Unless the
context otherwise specifically requires, the term "Subsidiary" shall be a
reference to a Subsidiary of the Parent.
"Sustaining Capital Expenditures" means those amounts required to maintain
-------------------------------
the current level of mine operations until the end of the then existing proven
and probable minable reserves of the Mining Group.
"Taxes" has the meaning assigned to it in Section 6.2(i).
----- --------------
"Term Advance" means the Term Advances made to the Borrower under (and as
------------
defined in) the Existing Agreement and outstanding under this Agreement on the
Amendment Effective Date.
"Term Commitment" means, as to any Bank on any date, such Bank's Percentage
---------------
of the Aggregate Term Commitment, as such amount may be reduced from time to
time in accordance with the terms of this Agreement.
16
<PAGE>
"Term Gold Receipt" means a receipt in the form of Exhibit C hereto
----------------- ---------
delivered by the Borrower to a Bank.
"Term Note" means a promissory note in the form of Exhibit E hereto
--------- ---------
delivered by the Borrower to a Bank (as such promissory note may be amended,
endorsed or otherwise modified from time to time), evidencing the aggregate
Indebtedness of the Borrower to such Bank resulting from outstanding Term
Advances, and also means all other promissory notes accepted from time to time
in substitution therefor or renewal thereof.
"Termination Event" means (i) a Reportable Event described in section 4043
-----------------
of ERISA and the regulations issued thereunder (other than a Reportable Event
not subject to the provision for thirty day notice to the Pension Benefit
Guaranty Corporation under such regulations), or (ii) the withdrawal of the
Borrower or any of its affiliates from a Plan during a plan year in which it was
a "substantial employer" as defined in section 4001(a)(2) of ERISA, or (iii) the
filing of a notice of intent to terminate a Plan in a distress termination or
the treatment of a Plan amendment as a distress termination under section
4041(c) of ERISA, or (iv) the institution of proceedings to terminate a Plan by
the Pension Benefit Guaranty Corporation under section 4042 of ERISA, or (v) any
other event or condition which might constitute grounds under section 4042 of
ERISA for the termination of, or the appointment of a trustee to administer, any
Plan.
For purposes of this definition, the term "affiliate" means any member
(whether or not incorporated) of a group which is under common control (within
the meaning of the regulations under section 414 of the Code) and of which the
Borrower is a member.
ARTICLE 2.
LOAN AND RETURN OF GOLD AND DOLLARS; FORWARD SALES OF GOLD
SECTION 2.1. Term Advances of Gold or Dollars.
--------------------------------
(a) Term Advances. Each of the parties hereto acknowledges and agrees
-------------
that the Term Advances outstanding under (and as defined in) the Existing
Agreement (18,502.254 Ounces of Gold valued at the Advance Date Value of $349.40
per Ounce of Gold and $26,035,312.50 in Term Advances of Dollars) shall continue
as the Term Advances under this Agreement. Subject to Section 2.17(a), the
---------------
aggregate Dollar Value of each Bank's Percentage of Term Advances outstanding
may be in excess of such Bank's Term Commitment if such excess is solely
attributable to an increase in the spot market price of Gold above the Advance
Date Values of Advances of Gold. No additional borrowings of Term Advances
under this Agreement are permitted on or after the Amendment Effective Date.
(b) Repayment of Term Advances. The Term Advances shall be repaid on each
--------------------------
Quarterly Payment Date in four equal installments of Dollars per year (or the
equivalent number
17
<PAGE>
of Ounces valued at their respective Advance Date Values)
which shall total the following aggregate annual principal repayment amounts for
each of the following periods:
Amortization Annual Principal
Period Amount
- ------------------------------------------- -------------------------
07/01/98 through (and including) 06/30/99 $10,000,000
07/01/99 through (and including) 06/30/00 $12,500,000
07/01/00 through (and including) 06/30/01 $15,000,000 (or, if
different, the then
outstanding principal
amount of all Term
Advances).
All repayments and prepayments of the Term Advances shall be permanent and may
not be reborrowed. Each repayment or prepayment of the Term Advances shall
reduce ratably (i) each Bank's Term Advances hereunder and (ii) each Bank's
Percentage of the maximum aggregate number of Ounces of Gold (85,000 on the
Amendment Effective Date) which may be outstanding under the Term Commitment.
(c) Term Notes and Term Gold Receipts. The Borrower acknowledges and
---------------------------------
agrees that each Term Note and Term Gold Receipts delivered under the terms of
the Existing Agreement shall continue to evidence that Bank's Term Advances of
Dollars and Term Advances of Gold, as applicable.
SECTION 2.2. Revolving Advances of Gold or Dollars.
-------------------------------------
(a) Revolving Advances. Each of the parties hereto acknowledges and
------------------
agrees that the Existing Revolving Advances ($18,000,000 principal amount
outstanding on the Amendment Effective Date) shall continue as Revolving
Advances under this Agreement. In addition, each Bank severally agrees, on the
terms and conditions set forth herein, to make advances ("Revolving Advances")
------------------
on a revolving basis to the Borrower of various amounts of Gold or Dollars from
time to time on any Business Day during the period from the Amendment Effective
Date to but not including the Revolving Commitment Termination Date; provided,
--------
that each Bank's Percentage of Revolving Advances shall be limited to an amount
which, when added to all such Bank's previous Revolving Advances outstanding
(valuing Revolving Advances in Ounces at their respective Advance Date Values
and valuing Revolving Advances of Dollars at
18
<PAGE>
the principal amount thereof), shall not exceed such Bank's Percentage of the
then existing Revolving Commitment Amount. Subject to Section 2.17(a), the
---------------
aggregate Dollar Value of each Bank's Percentage of Revolving Advances
outstanding may be in excess of such Bank's Revolving Commitment if such excess
is solely attributable to an increase in the spot market price of Gold above the
Advance Date Values of Advances of Gold. Each borrowing under this Section (a
"Revolving Borrowing") that is a Revolving Borrowing of Dollars shall be in an
-------------------
aggregate amount of $2,000,000, or any greater integral multiple of $1,000,000.
Each Revolving Borrowing of Gold hereunder shall be in an aggregate amount of
10,000 Ounces, or any greater integral multiple of 1,000 Ounces. Each Revolving
Borrowing hereunder shall consist of Revolving Advances made on the same date by
the Banks ratably according to their respective Percentages. Subject to the
terms and conditions of this Agreement, Revolving Advances which are repaid or
prepaid pursuant to Section 2.16 or Section 2.17(a) may be reborrowed.
------------ --------------
(b) Revolving Commitment Limits. Subject to the paragraph below in this
---------------------------
clause, the sum of (i) the aggregate outstanding principal amount of Dollars and
(ii) number of Ounces (valued at their respective Advance Date Values) of
Revolving Advances which any Bank shall be committed to have outstanding
hereunder shall not at any one time exceed such Bank's Percentage of the then
existing Revolving Commitment Amount (each Bank's Percentage of such amounts in
effect from time to time, as such amounts may be reduced as provided in Section
-------
2.15, being herein referred to in respect of each Bank as its "Revolving
- ---- ---------
Commitment"). The Revolving Commitment shall terminate on the Revolving
- ----------
Commitment Termination Date and all outstanding Revolving Advances shall be
payable on the Maturity Date (unless such Revolving Advances are due and
repayable on an earlier date in accordance with the terms of this Agreement).
The aggregate number of Ounces which any Bank shall be committed to have
outstanding under its Revolving Commitment shall not at any one time exceed such
Bank's Percentage of 150,000 Ounces of Gold, as reduced by any cancellation or
reduction of the Revolving Commitment Amount pursuant to Section 2.15.
------------
(c) Revolving Notes and Revolving Gold Receipts. The Borrower
-------------------------------------------
acknowledges and agrees that each Revolving Note and Revolving Gold Receipt
delivered under the terms of the Existing Agreement shall continue to evidence
that Bank's Revolving Advances of Dollars and Revolving Advances of Gold, as
applicable.
SECTION 2.3. Making the Advances. Each Borrowing of Dollars shall be made
-------------------
upon three Business Days' notice and each Borrowing of Gold shall be made upon
fourteen days' notice, each by irrevocable written notice pursuant to a Notice
of Borrowing from the Borrower to the Agent (which shall give prompt notice
thereof, and of each other notice received from the Borrower hereunder, to each
Bank) setting forth (i) the Advance Date, which shall be a Business Day (or, in
the case of an Advance of Gold, a Business Day which is followed by a Business
Day), (ii) the requested number of Ounces or of Dollars, (iii) the form of the
settlement of the proposed Borrowing as described in Section 2.5 (if the
-----------
proposed Borrowing is in Gold), (iv)
19
<PAGE>
whether the Borrowing is to be a Base Borrowing or a LIBOR Borrowing (if the
proposed Borrowing is in Dollars) and the applicable Interest Period (if the
proposed Borrowing is a LIBOR Borrowing or Borrowing of Gold), (v) whether the
Borrower intends to make interest payments in Gold or in Dollars (if the
proposed Borrowing is in Gold) and (vi) such additional information as is
required by the Notice of Borrowing. In the event that the Borrower fails to
borrow Gold or Dollars after delivering a Notice of Borrowing hereunder to the
Agent, the Borrower shall pay any resulting Breakage Costs to the Banks, and
provided such Breakage Costs are promptly paid upon the request of the Banks,
such failure to borrow shall not be a default hereunder.
SECTION 2.4. Delivery and Return of Dollars. Not later than 11:00 A.M.
------------------------------
(Atlanta time) on the day of a Borrowing of Dollars, each Bank shall provide the
Agent, to an account the Agent shall specify from time to time by notice to each
Bank, with immediately available Dollars covering such Bank's Percentage of the
Advance, and upon the satisfaction of the conditions set forth in Article 3 with
---------
respect to such Borrowing, the Agent shall pay over such Dollars by wire
transfer to the account of the Borrower specified in its Notice of Borrowing.
No Bank, including, the Agent, shall have any liability to any Person whatsoever
for the failure of any other Bank to fund properly under this Agreement.
Repayments of Dollars and cash payments of interest shall be made to the Agent
at an account located in the United States to be specified by the Agent.
SECTION 2.5. Delivery and Return of Gold. Not later than 11:00 A.M.
---------------------------
(London time) on the date of a Borrowing of Gold, each Bank shall provide the
Agent, at its designated account in London, England (or elsewhere, if so agreed
between the Agent and such Bank), with Gold covering such Bank's Percentage of
the Advance, and upon satisfaction of the conditions set forth in Article 3 with
---------
respect to such Borrowing, the Agent shall Deliver such Gold to the Borrower.
No Bank, including the Agent, shall have any liability to any Person whatsoever
for the failure of any other Bank to Deliver Gold properly under this Agreement.
Each Borrowing of Gold shall be Delivered to the Borrower at its then designated
account in London, England, unless the Borrower's Notice of Borrowing designates
an alternate Delivery location, in which case not less than seven Business Days
prior to the Advance Date, the Agent shall notify the Borrower of the Location
Premium or Location Discount assessable in respect of such proposed alternate
location, and unless the Borrower shall notify the Agent not less than five
Business Days prior to such Advance Date of its election to receive Delivery in
London, England, the Delivery shall be made to the account designated in such
Notice, and the Location Premium or Location Discount, if any, shall be due and
payable on the Advance Date; each such Borrowing to be confirmed by a
Confirmation of Borrowing. Gold shall be returned by the Borrower on a Business
Day at the Borrower's expense by Delivery to the Agent's then designated account
in London, England, except that with the consent of the Agent (which consent
shall not be unreasonably withheld), the Borrower or the Guarantors may elect to
make any payment of principal or interest payable in Gold at a location other
than the Agent's then designated account in London, England, by notifying the
Agent, not less than ten Business Days prior to the date on which such payment
is due, of a proposed alternate payment location which such obligor desires to
use. Not less than seven Business Days prior to such due date, the Agent shall
notify the
20
<PAGE>
Borrower or the Guarantors, as the case may be, whether or not it consents to
such payment at such proposed alternate location, and, if it so consents, of the
Location Premium or Location Discount assessable in respect of such proposed
alternate location. Unless the Borrower or the Guarantors, as the case may be,
shall notify the Agent not less than five Business Days prior to such due date
of its or their election not to make payment at such proposed alternate
location, payment shall be made on such due date at such alternate location by
Delivery to an account which the Agent shall have designated in its prior
notice, and the Location Premium or Location Discount, if any, shall be due and
payable on such date. Any difference (not to exceed 100 Ounces) between the
aggregate number of Ounces so returned and the number of Ounces due shall be
settled by the parties in cash at the Dollar Value of such difference on the
date a Delivery is made.
SECTION 2.6. Issuance Procedures. By delivering to the Agent an Issuance
-------------------
Request on or before 10:00 A.M., Atlanta time, on a Business Day occurring from
and after the Amendment Effective Date but prior to the Revolving Commitment
Termination Date, the Borrower may from time to time irrevocably request on not
less than three nor more than ten Business Days' notice that the Issuer issue,
or extend the Stated Expiry Date of, the Letter of Credit, solely for the
purposes described in Section 5.2(i). The Letter of Credit shall by its terms
--------------
be stated to expire on a date (its "Stated Expiry Date") no later than the
------------------
Maturity Date; provided, that the initial term and the initial extension of the
--------
Letter of Credit shall not exceed one year, and the Stated Amount of the Letter
of Credit shall not exceed $4,000,000. Upon receipt of an Issuance Request, the
Issuer shall issue the Letter of Credit for the account of the Borrower or any
Guarantor on the date specified in the Issuance Request (but in no event shall
the Issuer be required to issue the Letter of Credit earlier than three Business
Days after its receipt of the Issuance Request) by issuing to the beneficiary
thereof the original of the Letter of Credit. The Issuer shall furnish a copy
of the Letter of Credit to the Borrower promptly after the issuance date.
Notwithstanding the foregoing, the Issuer shall not be permitted or required to
issue (or extend the Stated Expiry Date of) the Letter of Credit if, after
giving effect thereto, the Letter of Credit Outstandings would exceed the Letter
of Credit Commitment Amount.
SECTION 2.7. Other Banks' Participation'. Upon the issuance of the Letter
---------------------------
of Credit, and without further action, each Bank (other than the Issuer) shall
be deemed to have irrevocably purchased, to the extent of its Percentage, a
participation interest in the Letter of Credit (including the contingent
liability and any Reimbursement Obligation with respect thereto), and such Bank
shall, to the extent of its Percentage, be responsible for reimbursing promptly
(and in any event within one Business Day) the Issuer for Reimbursement
Obligations which have not been reimbursed by the Obligors in accordance with
Section 2.8. In addition, each Bank shall, to the extent of its Percentage, be
- -----------
entitled to receive a ratable portion of the Letter of Credit fees payable
pursuant to Section 2.14(b) (other than the issuance fees payable to the Issuer
---------------
pursuant to the last sentence of such clause) and of interest payable pursuant
to Section 2.12(b) with respect to any Reimbursement Obligation. To the extent
---------------
that any Bank has reimbursed the Issuer for a Disbursement, such Bank shall be
entitled to receive its ratable portion of any amounts subsequently received
(from an Obligor or otherwise) in respect of such Disbursement.
21
<PAGE>
SECTION 2.8. Disbursements. The Issuer will notify the Borrower and the
-------------
Agent promptly of the presentment for payment of the Letter of Credit, together
with notice of the date (the "Disbursement Date") such payment will be made
-----------------
(each such payment, a "Disbursement"). Subject to the terms and provisions of
------------
the Letter of Credit and this Agreement, the Issuer shall make such Disbursement
to the beneficiary (or its designee) of the Letter of Credit. Prior to 11:00
A.M., Atlanta time, on the first Business Day following the Disbursement Date,
the Borrower will reimburse the Agent, for the account of the Issuer, for all
amounts which the Issuer has disbursed under the Letter of Credit, together with
interest thereon at a rate per annum equal to the rate then in effect for Base
Borrowings (with the then existing Applicable Rate for Base Borrowings accruing
on such amount) for the period from the Disbursement Date through the date of
such reimbursement. Without limiting in any way the foregoing and
notwithstanding anything to the contrary contained herein or in any separate
application for the Letter of Credit, the Borrower and each other Obligor
hereby acknowledges and agrees that each Obligor is jointly and severally
obligated to reimburse the Issuer upon each Disbursement, and it shall be deemed
to be an obligor for purposes of the Letter of Credit (whether the account party
on the Letter of Credit is the Borrower, the Parent or a Subsidiary of the
Parent).
SECTION 2.9. Reimbursement. The obligation (a "Reimbursement
------------- -------------
Obligation") of the Obligors under Section 2.8 to reimburse the Issuer with
- ---------- -----------
respect to each Disbursement (including interest thereon), and, upon the failure
of the Obligors to reimburse the Issuer, each Bank's obligation under Section
-------
2.7 to reimburse the Issuer, shall be absolute and unconditional under any and
- ---
all circumstances and irrespective of any setoff, counterclaim or defense to
payment which the Obligors or such Bank, as the case may be, may have or have
had against the Issuer or any Bank, including any defense based upon the failure
of any Disbursement to conform to the terms of the Letter of Credit (if, in the
Issuer's good faith opinion, such Disbursement is determined to be appropriate)
or any non-application or misapplication by the beneficiary of the proceeds of
the Letter of Credit; provided, however, that after paying in full its
-------- -------
Reimbursement Obligation hereunder, nothing herein shall adversely affect the
right of the Obligors or such Bank, as the case may be, to commence any
proceeding against the Issuer for any wrongful Disbursement made by the Issuer
under the Letter of Credit as a result of acts or omissions constituting gross
negligence or wilful misconduct on the part of the Issuer.
SECTION 2.10. Deemed Disbursements. Upon (i) the occurrence of the
--------------------
Maturity Date, (ii) the occurrence and during the continuation of any Default
under Section 7.1(e) or (iii) notification by the Agent (acting at the direction
--------------
of the Majority Banks) to the Obligors of their obligations under this Section,
following the occurrence and during the continuation of any other Event of
Default,
(a) the Stated Amount of the Letter of Credit shall, without demand
upon or notice to the Borrower or any other Person, be deemed to have been
paid or disbursed by the Issuer (notwithstanding that such amount may not
in fact have been paid or disbursed); and
22
<PAGE>
(b) the Obligors shall be jointly and severally immediately obligated
to reimburse the Issuer for the amount deemed to have been so paid or
disbursed by the Issuer.
Amounts payable by the Obligors pursuant to this Section shall be deposited in
immediately available funds with the Agent and held as collateral security for
the Reimbursement Obligations. When all Defaults giving rise to the deemed
disbursements under this Section have been cured or waived or, if applicable,
when the originally executed Letter of Credit has terminated or been cancelled
by the beneficiary thereof and returned to the Issuer, the Agent shall return to
the Borrower all amounts then on deposit with the Agent pursuant to this Section
which have not been applied to the satisfaction of the Obligations.
SECTION 2.11. Nature of Reimbursement Obligations. The Borrower, each
-----------------------------------
other Obligor and, to the extent set forth in Section 2.7, each Bank shall
-----------
assume all risks of the acts, omissions or misuse of the Letter of Credit by the
beneficiary thereof. The Issuer shall not (except to the extent of its own
gross negligence or wilful misconduct) be responsible for:
(a) the form, validity, sufficiency, accuracy, genuineness or legal
effect of the Letter of Credit or any document submitted by any party in
connection with the application for and issuance of the Letter of Credit,
even if it should in fact prove to be in any or all respects invalid,
insufficient, inaccurate, fraudulent or forged;
(b) the form, validity, sufficiency, accuracy, genuineness or legal
effect of any instrument transferring or assigning or purporting to
transfer or assign the Letter of Credit or the rights or benefits
thereunder or the proceeds thereof in whole or in part, which may prove to
be invalid or ineffective for any reason;
(c) failure of the beneficiary to comply fully with conditions
required in order to demand payment under the Letter of Credit;
(d) errors, omissions, interruptions or delays in transmission or
delivery of any messages, by mail, cable, telegraph, telex or otherwise; or
(e) any loss or delay in the transmission or otherwise of any
document or draft required in order to make a Disbursement under the Letter
of Credit.
None of the foregoing shall affect, impair or prevent the vesting of any of the
rights or powers granted to the Issuer or any Bank hereunder. In furtherance
and not in limitation or derogation of any of the foregoing, any action taken or
omitted to be taken by the Issuer in good faith (and not constituting gross
negligence or willful misconduct) shall be binding upon each Obligor and each
such Bank, and shall not put the Issuer under any resulting liability to any
Obligor or any Bank, as the case may be. Notwithstanding anything to the
contrary contained in this Agreement, neither the Issuer nor any of the Banks
shall be relieved of responsibility for any gross
23
<PAGE>
negligence or any wilful misconduct by the Issuer or such Bank in connection
with a Deemed Disbursement.
SECTION 2.12. Interest.
--------
(a) Borrowings of Gold. The interest rate per annum payable on each
------------------
Borrowing of Gold shall be equal to the gold rate per annum (based on a three
hundred sixty day year) quoted as set forth in Schedule 2 (the "Gold Rate") by
---------- ---------
each Bank to the Borrower in respect of an Interest Period three Business Days
prior to the Advance, conversion or renewal of a Borrowing as its rate for a
loan of an Ounce of Gold in the amount requested, which quote shall be confirmed
by written notice from each Bank to the other Banks and the Borrower, plus the
Applicable Rate; provided, however, that any interest rate for Borrowings of
-------- -------
Gold hereunder shall be in no event more than the maximum allowed under
applicable law. The foregoing interest rate shall be applied to the average of
the daily Dollar Values of each Borrowing of Gold outstanding during the period
for which interest is payable. At the Borrower's option, prior to the
commencement of such Interest Period, the parties may agree upon a fixed value
to which the foregoing interest rate shall be applied during the period for
which interest is payable on any Borrowing of Gold, provided that if the
Borrower and the Banks are unable so to agree, such option shall terminate.
The Gold Rate per annum shall be quoted by each Bank consistent with the
criteria set forth in Schedule 2 hereto. If the Gold Rate per annum quoted by
----------
any Bank is for two successive Interest Periods more than 120% of the average of
the Gold Rates quoted by the other Banks, the Borrower shall afford such Bank
the opportunity to reduce its rates. If such Bank fails to reduce its rates,
the Borrower shall have the right upon thirty days' notice to each of the Banks
and upon consent by the Banks other than the Bank with the consistently higher
rates (the "Selling Bank"), such consent not to be unreasonably withheld, to
------------
terminate the Commitment of the Selling Bank and to substitute another bank of
the Borrower's choice (the "Substituting Bank") as a participant hereunder. In
-----------------
the event that the Borrower elects to select a Substituting Bank, the Selling
Bank shall sell its Advances, Notes, Gold Receipts and rights under this
Agreement to the Substituting Bank for the amount due on prepayment pursuant to
Section 2.16 and all other accrued interest and fees owing to the Selling Bank,
- ------------
which amount shall include principal, interest and Breakage Costs. Such sale
shall be without recourse or warranty except as to amount due, and the Selling
Bank thereafter shall be relieved of all further obligations hereunder. The
Substituting Bank shall be required to join in this Agreement and to assume the
obligations of the Selling Bank hereunder. The remaining Banks shall, however,
have a right of first refusal, exercisable by notice to the Borrower given
promptly after receipt of the Borrower's notice, to take the place of a
Substituting Bank by increasing their Commitments and purchasing the Notes,
participating interests under the Letter of Credit, Gold Receipts and rights
under this Agreement held by the Selling Bank on the same terms; if more than
one Bank chooses to exercise such right, they shall share in the Commitment of
the Selling Bank and in such purchases equally, unless otherwise agreed among
them.
24
<PAGE>
Interest payments on each Borrowing of Gold may be made either in Gold
(valued at the Dollar Value on the second Business Day prior to the date of
payment) or in Dollars at the option of the Borrower, provided that the Borrower
--------
shall inform the appropriate Bank of its election to make interest payments in
Gold on or before the third Business Day prior to the Borrowing, conversion or
renewal and such Bank shall have the right to designate the place of return of
interest payments made in Gold and, provided, further, that such Bank shall have
-------- -------
the right to insist that interest payments shall be made in Dollars (in which
case interest shall be paid in Dollars). From and after the date any principal
amount of any Borrowing of Gold shall become due and payable (whether at stated
maturity, upon acceleration or otherwise), the unpaid balance of principal on
Borrowings of Gold shall bear interest payable on demand from maturity, whether
scheduled or accelerated, until paid in full, at a rate per annum equal to two
times the Gold Rate per annum applicable to the Borrowing as established by the
Banks on the date of maturity, whether scheduled or accelerated, for the
applicable Borrowing, together with any Breakage Costs.
(b) Borrowings of Dollars. Borrowing of Dollars may, at the option of the
---------------------
Borrower, be Base Borrowings or LIBOR Borrowings. Borrowings of Dollars shall
bear interest from the Advance Date on the unpaid principal amount thereof from
time to time outstanding until due and payable (whether at the stated maturity,
by acceleration or otherwise) (i) in the case of Base Borrowings, at a
fluctuating rate per annum equal to the Base Rate, as from time to time in
effect plus the Applicable Rate, and (ii) in the case of LIBOR Borrowings, at a
rate per annum equal to the sum of LIBOR for the applicable Interest Period plus
the Applicable Rate; provided, however, that any interest rate for Borrowings of
-------- -------
Dollars hereunder shall be in no event more than the maximum allowed under
applicable law. From and after the date any principal amount of or interest or
fees on any Borrowing of Dollars or Borrowing of Gold or any Reimbursement
Obligation shall become due and payable or after any other monetary Obligation
is due and payable (in each case, whether at stated maturity, upon acceleration
or otherwise), the unpaid balance of Reimbursement Obligations and/or principal
and any accrued interest on Base Borrowings, Letter of Credit Outstandings and
LIBOR Borrowings and any unpaid interest on Borrowings of Gold shall bear
interest payable on demand from maturity, whether scheduled or accelerated,
until paid in full (after as well as before judgment), at a rate per annum equal
to (in the case of LIBOR Borrowings) 2% above the interest rate otherwise
applicable to such LIBOR Borrowing until the end of the applicable Interest
Period and thereafter at a rate per annum equal to the Base Rate plus the
Applicable Rate for Base Borrowings plus 2%, which rate shall change as the Base
Rate changes, or (in the case of the unpaid amount of any Reimbursement
Obligations (and interest thereon), Base Borrowings, unpaid interest on
Borrowings of Gold and other unpaid Obligations), the Base Rate plus the
Applicable Rate for Base Borrowings plus 2%, which rate shall change as the Base
Rate changes.
(c) Forward Sale Contango. A Bank that has agreed to purchase Gold as
---------------------
provided in of Section 2.26(b) shall pay the Contango to the Borrower on the
---------------
delivery date relating to the Forward Sale.
25
<PAGE>
SECTION 2.13. Payment Dates. The Borrower shall pay interest on each
-------------
outstanding Borrowing of Gold quarterly in arrears on each Quarterly Payment
Date, and on such other date as the Borrowing of Gold is paid in full. The
Borrower shall pay interest on each outstanding Base Borrowing quarterly in
arrears on each Quarterly Payment Date, and on such other date as the Base
Borrowing is paid in full. The Borrower shall pay interest on each outstanding
LIBOR Borrowing on the last day of the Interest Period applicable to such
Borrowing but not less frequently than every three months following the date of
such Borrowing, and on such date as the LIBOR Borrowing is paid in full. The
entire balance of Gold and Dollars to be returned or repaid hereunder shall be
returned or repaid, and all Letter of Credit Outstandings shall be repaid, in
each case not later than the Maturity Date. All payments of cash (and returns
of Gold in respect of interest on Gold Borrowings) hereunder shall be applied
first to interest on past due interest and overdue Letter of Credit fees, if
any, second to interest and Letter of Credit fees due on the outstanding
principal balance of the Notes or the Gold Receipts and the Letter of Credit as
designated by the Borrower (or, if the Borrower makes no designation, as
designated by the Agent), and then to principal on Base Borrowings or on LIBOR
Borrowings with Interest Periods expiring on the date of payment as designated
by the Borrower (or, if the Borrower makes no designation, as designated by the
Agent).
SECTION 2.14. Fees.
----
(a) Commitment Fee. The Borrower agrees to pay in Dollars to the Agent,
--------------
for the account of each Bank, commencing on the Amendment Effective Date and on
each Quarterly Payment Date thereafter, up to and including the Revolving
Commitment Termination Date, a commitment fee for each Bank's Revolving
Commitment and Letter of Credit Commitment, in each case at the Applicable
Commitment Fee Rate per annum of the daily average of the unused amount of (i)
in the case of the Revolving Commitment, the Revolving Commitment Amount
(determined by subtracting from the Revolving Commitment Amount the principal
amount of all outstanding Revolving Advances of Dollars and the principal amount
of all outstanding Advances of Ounces under the Revolving Commitment (valued at
their respective Advance Date Values) during the preceding calendar quarter or
portion thereof and (ii) in the case of the Letter of Credit, the Letter of
Credit Commitment Amount (which shall be deemed to be "used" upon the issuance
of the Letter of Credit in the Stated Amount of the Letter of Credit).
(b) Letter of Credit Fee. The Borrower agrees to pay to the Agent, for
--------------------
the pro rata account of the Issuer and each Bank, a Letter of Credit fee in an
--- ----
amount equal to 1.75% multiplied by the Stated Amount of the Letter of Credit on
the payment date, such fees being payable quarterly in advance on each Quarterly
Payment Date. The Borrower further agrees to pay to the Issuer an issuance fee
in such amount and on the dates agreed to by the Borrower and the Issuer.
(c) Other Fees. The Borrower agrees to pay in Dollars to the Agent, on
----------
the Amendment Effective Date, all fees accrued under the Existing Agreement
through the Amendment Effective Date, which fees shall not be refundable in
whole or in part for any reason whatsoever, including
26
<PAGE>
the failure to consummate any transaction contemplated hereby. The Borrower
shall pay in Dollars to the Agent on the Amendment Effective Date, and on each
anniversary of the Amendment Effective Date, a fee in an amount previously
agreed to by the Borrower and the Agent for its administration of this
Agreement.
SECTION 2.15. Reduction of the Revolving Commitment, Letter of Credit
-------------------------------------------------------
Commitment. The Borrower shall have the right, upon at least thirty days'
- ----------
written notice to the Agent, to terminate in whole or reduce in part the unused
portion of the Revolving Commitment Amount or the Letter of Credit Commitment,
provided that each partial reduction thereof shall be in the aggregate amount of
- --------
$2,000,000 or any greater integral multiple of $1,000,000. In addition, the
Letter of Credit Commitment shall terminate automatically upon the earlier of
(i) the Revolving Commitment Termination Date, (ii) the date the Letter of
Credit is cancelled by the beneficiary or expires in accordance with its terms
(after giving effect to any extensions (pursuant to the terms hereof) of the
Letter of Credit following its issuance) and (iii) the Disbursement Date.
SECTION 2.16. Optional Prepayment. The Borrower may, upon at least five
-------------------
days' written notice to the Agent, return ratably to the Banks Gold or Dollars
borrowed hereunder before the Maturity Date, together with interest accrued
thereon to the date of such return and any Breakage Costs, provided that any
--------
prepayment hereunder must be made on a Business Day (or, in the case of a return
of Gold, a Business Day that is followed by a Business Day). The amount of Gold
or Dollars so returned on any date shall be not less than $2,000,000 (or Ounces
with an equivalent Dollar Value) or any greater integral multiple of $1,000,000
(or Ounces with an equivalent Dollar Value). Any prepayment of Term Advances
shall permanently reduce the Aggregate Term Commitment by the amount of such
prepayment.
SECTION 2.17. Mandatory Prepayment.
--------------------
(a) Exposure Exceeds Ceiling Dollar Value. If at any time the aggregate
-------------------------------------
Dollar Value of Advances of Gold and the principal of Advances of Dollars
outstanding exceeds the Ceiling Dollar Value for the Commitment under which such
Advances were made, the Borrower will, at its option, either (i) post with the
Agent security reasonably acceptable to the Banks in such amounts (valued on the
date of posting) as will equal or exceed the excess, or (ii) promptly prepay to
the Banks such amounts of Gold and/or Dollars as will equal or exceed the
excess, in either case together with interest accrued thereon to the date of
such posting or prepayment, as the case may be, and any Breakage Costs. The
Agent agrees that (i) as soon as practicable after the amount by which the
aggregate Dollar Value of Advances of Gold and the principal of Advances of
Dollars outstanding exceeds the Ceiling Dollar Value for the Commitment under
which such Advances were made is reduced by $100,000 or more, the Agent shall
return to the Borrower the corresponding amount of collateral, and (ii) the
Agent will return remaining collateral to the Borrower, in increments of
$100,000 (or such lesser amount equal to the remaining excess), as soon as
practicable after the remaining excess of the aggregate Dollar Value of Advances
of Gold and the principal of Advances of Dollars outstanding over the
27
<PAGE>
Ceiling Dollar Value for the Commitment under which such Advances were made is
further reduced by such amount.
(b) Advances in Excess of Revolving Commitment Amount. If on any date,
-------------------------------------------------
including the dates for reduction in the Banks' Revolving Commitments as set
forth in Section 2.15, the number of Dollars and Ounces (valued at their
------------
respective Advance Date Values) of Revolving Advances outstanding under the
Revolving Commitment exceeds the then existing Revolving Commitment Amount in
effect on such date, the Borrower will on such date return to the Banks such
amounts of Gold and/or Dollars, together with interest accrued thereon to the
date of such return and any Breakage Costs, as will cause the number of Dollars
and Ounces of Revolving Advances outstanding after such return to be equal to or
less than the then existing Revolving Commitment Amount.
(c) Acquisition or Merger of the Parent. If (i) a "person" or a "group"
-----------------------------------
(within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange
Act of 1934) becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934) of more than 35% of the then outstanding voting
stock of the Parent, or (ii) the Parent shall merge or consolidate with any
Person, in each case otherwise than through a transaction consummated with the
prior approval of the Board of Directors of the Parent a majority of whose
members are Continuing Directors, then, as soon as practicable after the
occurrence of such event and in any event within five Business Days thereafter,
all Term Advances and Revolving Advances of Gold and/or Dollars shall be
returned to the Banks, together with interest accrued thereon to the date of
such return and any Breakage Costs, the Obligors shall deliver cash collateral
in Dollars to the Agent in the Stated Amount of the Letter of Credit (to be held
in an account under the sole dominion and control of, and pursuant to
documentation satisfactory to, the Agent), and all Forward Sales shall be closed
out and Breakage Costs related thereto paid by the Borrower, and the Banks'
Commitments shall be terminated. "Continuing Directors" means, as of the date
--------------------
of any such approval, (x) individuals who on the date two years prior to such
approval date were members of the Parent's Board of Directors and (y) any new
director whose nomination for election by the Parent's shareholders was approved
by a vote of at least 75% of the Directors then still in office who either were
Directors on the date two years prior to such approval date or whose nomination
for election was previously so approved.
SECTION 2.18. Amount and Allocation of Partial Prepayments. In the case
--------------------------------------------
of any partial prepayments of Gold or Dollars pursuant to Section 2.16 or
------------
Section 2.17, (a) the aggregate amount of Gold returned by the Borrower and the
- ------------
aggregate amount of Dollars returned by the Borrower shall be allocated by the
Agent among all of the Borrowings at the time outstanding under the Commitment
with respect to which such prepayment was made in such manner as shall minimize
to the greatest extent reasonably possible the amount of any Breakage Costs; (b)
the aggregate amount of each such Borrowing so prepaid shall be allocated
ratably among the respective Banks' Advances constituting such Borrowing; and
(c) subject to the provisions of clause (a) of this Section, all prepayments of
----------
Gold under Section 2.17 shall be applied first to the
------------
28
<PAGE>
outstanding Borrowing of Gold with the greatest increase in the Dollar Value
thereof as of the date of prepayment over the Advance Date Value thereof.
SECTION 2.19. Conversion of Borrowings.
------------------------
(a) Interest Rate Conversion or Renewal. Unless an Event of Default shall
-----------------------------------
have occurred and be continuing and subject to the terms and conditions of this
Agreement, the Borrower shall have the right at any time or from time to time
prior to the Maturity Date to convert Base Borrowings to LIBOR Borrowings and
LIBOR Borrowings to Base Borrowings in the same aggregate principal amount, or
to select a new Interest Period for an outstanding LIBOR Borrowing or Borrowing
of Gold, provided that: (i) the Borrower shall give the Agent notice of each
--------
such conversion or renewal as provided below; (ii) LIBOR Borrowings may be
converted or renewed (upon at least five Business Days' notice to the Agent
pursuant to a Notice of Conversion or Renewal of Interest) only on the last day
of an Interest Period for such Borrowings; (iii) Borrowings of Gold may be
renewed (on at least three Business Days' notice pursuant to a Notice of
Conversion or Renewal of Interest from the Borrower to the Agent, which shall
give at least two Business Days' notice thereof to each Bank) only on the last
day of an Interest Period for such Borrowings; and (iv) Base Borrowings may be
converted at any time upon two Business Days' notice to the Agent pursuant to a
Notice of Conversion or Renewal of Interest in a minimum aggregate principal
amount of $2,000,000. The renewal of an Interest Period for an outstanding
Borrowing of Gold shall not affect the Advance Date Value for such Borrowing of
Gold. Each Notice of Conversion or Renewal of Interest shall specify the
Borrowings to be converted or renewed, whether such Borrowings are being
converted or renewed, the duration of the Interest Period selected and the date
of conversion or renewal (which shall be a Business Day or, in the case of a
renewal of an Interest Period for a Borrowing of Gold, a Business Day that is
followed by a Business Day). In the event that the Borrower fails to renew any
Interest Period for any LIBOR Borrowing or any Gold Borrowing before the
expiration of such Interest Period, such Borrowings (if LIBOR Borrowings) will
be automatically converted into Base Borrowings on the last day of the then
current Interest Period for such Borrowings or (if Gold Borrowings) will be
automatically renewed for an Interest Period of one month.
(b) Conversion Between Gold and Dollars. Unless an Event of Default
-----------------------------------
shall have occurred and be continuing and subject to the terms and conditions of
this Agreement, the Borrower shall have the right at any time or from time to
time prior to the Maturity Date to convert Borrowings of Gold to Borrowings of
Dollars and Borrowings of Dollars to Borrowings of Gold; provided, that: (i) the
--------
Borrower shall give the Agent at least four Business Days' notice of each such
conversion from Gold to Dollars and at least fourteen days' notice of each such
conversion from Dollars to Gold pursuant to a Notice of Conversion of Gold or
Dollars; (ii) LIBOR Borrowings and Gold Borrowings may be converted only on the
last day of an Interest Period for such Borrowings; and (iii) the amount of Gold
or Dollars to be converted on any date shall be not less than $2,000,000 or any
greater integral multiple of $1,000,000 (or Ounces with an equivalent Dollar
Value (in the case of conversions from Dollars to Gold) or
29
<PAGE>
with an equivalent Advance Date Value (in the case of conversions from Gold to
Dollars)). Each Notice of Conversion of Gold or Dollars shall specify the
Borrowings to be converted, whether the Borrowing shall be converted into a
Base, LIBOR or Gold Borrowing and the duration of the Interest Period selected
(if the Borrowing is to be converted into a LIBOR or Gold Borrowing), the form
of the settlement of the Borrowing) and the date of conversion (which shall be a
Business Day, or, in the case of a conversion from Dollars to Gold, a Business
Day that is followed by a Business Day). In the event the Borrower is converting
a Borrowing of Gold into a Borrowing of Dollars pursuant to a Notice of
Conversion of Gold or Dollars, on the date of conversion, (aa) the Borrower
shall return the Gold to be converted at the Borrower's expense in accordance
with Section 2.5, together with interest accrued thereon to the date of such
-----------
return, and, (bb) the Agent shall Advance Dollars to the Borrower at the rate
and for the Interest Period designated in the Notice of Conversion of Gold or
Dollars in an amount equal to the Advance Date Value of the Gold returned. In
the event that the Borrower is converting a Borrowing of Dollars into a
Borrowing of Gold pursuant to a Notice of Conversion of Gold or Dollars, on the
date of conversion, (xx) the Borrower shall repay the principal amount of the
Borrowing to be converted, together with interest accrued thereon to the date of
such repayment, and (yy) the number of ounces of Gold with equivalent Advance
Date Value (i.e., Dollar Value on the date of conversion) to the principal of
the Dollars repaid for the Interest Period designated in the Notice of
Conversion of Gold or Dollars shall be Delivered by the Banks to the Borrower in
accordance with Section 2.5. If the Borrower converts a Borrowing of Dollars
-----------
into a Borrowing of Gold hereunder, the Borrower shall provide a Confirmation of
Borrowing in accordance with Section 2.20. Subject to the provisions of Section
------------ -------
2.18(a), all returns of Gold hereunder shall be applied first to the outstanding
- -------
Borrowing of Gold with the greatest increase in the Dollar Value thereof as of
the date of return over the Advance Date Value thereof.
SECTION 2.20. Risk of Loss. Each Bank will assume all risk of loss of, or
------------
damage to, any Gold to be Delivered by it to the Borrower until it has been
Delivered to the Agent at the agreed location. Unless the Banks receive notice
of error within seven Business Days of the Borrower's receipt of any Gold, the
Borrower's receipt of the quantity and quality of the Gold will be conclusively
deemed to be as set out in the Banks' delivery orders. The Borrower shall also
provide a Confirmation of Borrowing for each Borrowing of Gold, as soon as
practicable and in any event within seven Business Days after receipt of the
Banks' delivery orders, which Confirmation of Borrowing shall be sent to: The
Bank of Nova Scotia, at the address for notices set forth on the signature page
hereof, Attention: Vice President, with a copy to: The Bank of Nova Scotia,
ScotiaMocatta, 68th Floor, Scotia Plaza, 40 King Street West, Toronto, Ontario
M5H 1H1 CANADA, Attention: Director.
From the time any Gold is Delivered to the Borrower until such Gold is
returned to Agent, no Bank will assume any risk of loss, theft, detention of or
damage to such Gold. During such period, the Borrower assumes all risk of loss,
theft, detention of or damage to such Gold.
SECTION 2.21. Inability to Provide Gold or Dollars at LIBOR.
---------------------------------------------
30
<PAGE>
(a) Gold. Notwithstanding anything to the contrary in this Agreement, no
----
Bank or the Agent shall be liable for any failure to comply with its obligations
under or pursuant to this Article, and the Banks or the Agent shall be entitled
to terminate any arrangements respecting Advances of, conversions into or
renewals of Interest Periods respecting Gold entered into under this Article
without liability, if such failure is caused directly or indirectly, wholly or
partly, by act or omission of any government or competent authority, lack of
availability of Gold, or other contingency, circumstance or event of any nature
beyond the control of such Bank or the Agent. If any Bank is unable to make any
Advance of Gold by reason of lack of availability of Gold, and if the conditions
set forth in Sections 3.1 and 3.2 hereof are satisfied, then the Banks will,
------------ ---
upon the Borrower's request, make such an Advance to the Borrower, for a term to
be mutually agreed among the Borrower and the Banks, in an amount in Dollars
equal to the Dollar Value on the second Business Day prior to the Advance Date
of the Gold which would have been borrowed from the Banks but for their
inability, calculated on the date upon which the Banks notify the Borrower of
such inability; the interest rates on the loans shall be calculated pursuant to
Section 2.12(b). In the event that any one Bank is required to make an Advance
- ---------------
in Dollars pursuant to the foregoing sentence, all of the Banks will make their
Advances in Dollars rather than Ounces. If any Bank is unable to convert a
Borrowing of Dollars into a Borrowing of Gold by reason of lack of availability
of Gold, then the Borrowing will remain a Borrowing of Dollars. If any Bank is
unable to renew the Interest Period respecting a Borrowing of Gold by reason of
lack of availability of Gold, then the Borrower will return such Gold in the
same form and at the same place as such Gold was Delivered and the Banks shall
Advance Dollars to the Borrower at the rate and for the Interest Period agreed
between the Borrower and the Banks in an amount equal to the Advance Date Value
of the Gold returned.
(b) Dollars at LIBOR. Notwithstanding anything to the contrary in this
----------------
Agreement, no Bank or the Agent shall be liable for any failure to comply with
its obligations under or pursuant to this Article, and the Banks or the Agent
shall be entitled to terminate any arrangements respecting LIBOR Borrowings
entered into under this Article without liability, if such failure is caused
directly or indirectly, wholly or partly, by:
(i) Lack of availability in the interbank Eurodollar market of
Dollar deposits in the principal amount and for a period equal to the
relevant Interest period; or
(ii) Failure of LIBOR to accurately reflect the cost of such Bank or
the Agent of making, funding or maintaining the LIBOR Borrowing; or
(iii) Any change in financial, political or economic conditions or
currency exchange rates making it impractical for such Bank or the Agent to
make, fund or maintain the LIBOR Borrowing; or
(iv) Any change in applicable law or regulation or in the
interpretation thereof making it unlawful or impractical for such Bank or
the Agent to make, fund or maintain the LIBOR Borrowing.
31
<PAGE>
The Agent shall give notice of the foregoing to the Borrower promptly upon
receipt by the Agent of notice thereof from such Bank, and upon the sending of
such notice, any obligation of such Bank or the Agent to make, fund or maintain
the LIBOR Borrowing shall terminate and such Bank or the Agent shall make, fund
or maintain such Borrowing as a Base Borrowing.
(c) Commercial Impracticability. Without limiting the effect of the
---------------------------
provisions of clause (a) of this Section, in the event that, by reason of any
----------
Regulatory Change, a Bank either (i) incurs any incremental costs which such
Bank determines are attributable to its making or maintaining any Advances, or
its obligation to make any Advances hereunder, or any reduction in any amount
receivable by such Bank hereunder in respect of any of, such Advances or such
obligation (such increases in costs and reductions in amounts receivable being
herein called "Additional Costs") based on or measured by the excess above a
----------------
specified level of the amount of a category of deposits or other liabilities of
such Bank which includes deposits by reference to which the interest rate on
LIBOR Borrowings or Base Borrowings is determined as provided in this Agreement
or a category of extensions of credit or other assets of such Bank which
includes LIBOR Borrowings or Base Borrowings or (ii) becomes subject to
restrictions on the amount of such category of liabilities or assets which it
may hold, then, if such Bank so elects by notice to the Borrower, the obligation
of such Bank to make additional Advances of such type hereunder shall be
suspended until such Regulatory Change ceases to be in effect (in which case the
provisions of clause (b) of this Section shall be applicable).
----------
SECTION 2.22. Yield Protection.
----------------
(a) Increased Costs. If due to (i) the imposition or increase of the
---------------
taxes (other than income taxes) on amounts payable by the Borrower hereunder or
(ii) the introduction of, or any Regulatory Change (including, without
limitation, any change by way of imposition or increase of reserve requirements)
or (iii) the compliance by any Bank with any guideline or request from any
central bank or other governmental authority respecting capital requirements or
any other matter (whether or not having the force of law), there shall be any
increase in the cost to such Bank of agreeing to make or making, funding or
maintaining Advances or resulting in a reduction of the amounts which the Banks
are entitled to receive and retain hereunder, then the Borrower shall from time
to time, upon demand by such Bank, pay to such Bank additional amounts
sufficient to indemnify such Bank against such cost.
(b) Capital Requirements. In the event that at any time after August 9,
--------------------
1996 any Regulatory Change shall, in the opinion of any Bank, require that its
Commitment (or any portion thereof) be treated as an asset or otherwise be
included, for purposes of calculating the appropriate amount of capital or
equity to be maintained by such Bank or any corporation controlling such Bank
and such Regulatory Change shall have the effect of reducing the rate of return
on such Bank's or such corporation's capital or equity, as the case may be, as a
consequence of such Bank's obligations hereunder to a level below that which
such Bank or such corporation, as the case may be, could have achieved but for
such Regulatory Change (taking
32
<PAGE>
into account such Bank's or such corporation's policies, as the case may be,
with respect to capital adequacy and any payments made to such Bank pursuant to
clause (a) of this Section which relate to capital adequacy) by an amount
- ---------- -------
deemed by such Bank to be material, then from time to time following written
notice by such Bank to Borrower through the Agent of such Regulatory Change,
within five days after demand by such Bank through the Agent, the Borrower shall
pay to the Agent for the account of such Bank such additional amount or amounts
as will compensate such Bank or such corporation, as the case may be, for such
reduction.
(c) Payment of Compensation. If any Bank becomes entitled to claim any
-----------------------
additional amounts pursuant to this Section, it shall promptly notify the
Borrower through the Agent of the event by reason of which it has become so
entitled. A certificate setting forth in reasonable detail the method of
computation of any additional amounts payable pursuant to this Section,
submitted by such Bank to the Borrower through the Agent, shall be delivered to
the Borrower promptly after the initial incurrence of such additional amounts
and shall be conclusive in the absence of manifest error. The entitlement of
any Bank to claim additional compensation pursuant to this Section shall be
computed without regard to any sale by such Bank of participating interests in
any or any part of its Advances, its Commitments or any other interests
hereunder in accordance with Section 9.7(b) hereof. The covenants in this
--------------
Section shall survive the termination of this Agreement and the payment of the
Notes.
(d) Each Assignee Bank that is a Non-U.S. Bank shall, on or prior to the
date it becomes an Assignee Bank, execute and deliver to the Borrower and the
Agent, two or more (as the Borrower or the Agent may reasonably request) United
States Internal Revenue Service Forms 4224 or Forms 1001 or, solely if such Bank
or Assignee Bank is claiming exemption from United States withholding tax under
Section 871(h) or 881(c) of the Code with respect to payments of "portfolio
interest", United States Internal Revenue Service Forms W-8 and a certificate
signed by a duly authorized officer of such Bank or Assignee Bank representing
that such Bank or Assignee Bank is not a "bank" within the meaning of Section
881(c)(3)(A) of the Code, or such other forms or documents (or successor forms
or documents), appropriately completed, as may be applicable to establish the
extent, if any, to which a payment to such Bank or Assignee Bank is exempt from
withholding or deduction of Taxes; and (ii) deliver to the Borrower and the
Agent two further copies of any such form or documents on or before the date
that any such form or document expires or becomes obsolete and after the
occurrence of any event requiring a change in the most recent such form or
document previously delivered by it to the Borrower.
SECTION 2.23. Payments and Computations. The Borrower shall return each
-------------------------
Advance of Gold hereunder and under the Gold Receipts in accordance with Section
-------
2.5. The Borrower shall make each payment of Reimbursement Obligations and
- ---
money hereunder and under the Notes without setoff, deduction or counterclaim
not later than 11:00 A.M. (Atlanta time) on the day when due in Dollars to the
Agent at its address set forth after its signature to this Agreement in
immediately available funds. Funds received after that time shall be deemed to
have been received by the Agent on the next succeeding Business Day. The Agent
will promptly thereafter
33
<PAGE>
distribute to each Bank its ratable share of each such payment received by the
Agent for the account of the Banks. The Borrower hereby authorizes each Bank, if
and to the extent payment of money or return of Gold owed to such Bank is not
made when due hereunder or under a Note or Gold Receipt held by such Bank, to
charge from time to time against the Borrower's account with such Bank any
amount so due. All computations of interest under the Notes and the Gold
Receipts and the commitment fee and Letter of Credit fees payable hereunder
shall be made by the Agent on the basis of a year of three hundred sixty days
for the actual number of days (including the first day but excluding the last
day) elapsed. Whenever any payment to be made shall otherwise be due on a day
which is not a Business Day, such payment shall (except as otherwise required by
clause (b) of the definition of the term "Interest Period") be made on the next
- ---------- ---------------
succeeding Business Day and such extension of time shall be included in
computing interest and fees, if any, in connection with such payment.
SECTION 2.24. Advance, Conversion, Renewal or Payment on Business Day.
-------------------------------------------------------
All Advances or returns of Gold to be made hereunder or under any Instrument and
all renewals of Interest Periods for Gold Borrowings and conversions from
Dollars to Gold hereunder shall be made on a Business Day that is followed by a
Business Day. All Advances or payments of Dollars to be made hereunder or under
any Instrument and all renewals of Interest Periods for LIBOR Borrowings and
conversions from Gold to Dollars hereunder shall be made on a Business Day.
Whenever any Advance, conversion, renewal or return in respect of Gold, or
Advance, conversion or payment of Dollars in respect of a Base Borrowing to be
made hereunder or under any Instrument shall be stated to be due on a day which
is not a Business Day (or, in the case of an Advance, conversion, renewal or
return in respect of Gold, a Business Day that is followed by a Business Day),
such Advance, return, conversion, renewal or payment may be made on the next
succeeding Business Day (or, in the case of an Advance, conversion, renewal or
return in respect of Gold, a Business Day that is followed by a Business Day),
and such extension of time shall in such case be included in the computation of
payment of interest or commitment fee, as the case may be. Whenever any payment
of Dollars, conversion or renewal in respect of a LIBOR Borrowing to be made
hereunder or under any Note shall be stated to be due on a day which is not a
Business Day, such payment, conversion or renewal shall be made on the next
preceding Business Day.
SECTION 2.25. Sharing of Payments, Etc. If any Bank shall obtain any
------------------------
payment of Dollars or return of Gold (whether voluntary, involuntary, through
the exercise of any right of setoff, or otherwise) on account of a Note or Gold
Receipt held by it or the pro rata share of any Reimbursement Obligation owing
to it in excess of its ratable share of payments on account of the Instruments
obtained by all the Banks, such Bank shall purchase from the other Banks such
participations in the Instruments held by them as shall be necessary to cause
such purchasing Bank to share the excess payment or receipt of (including in
respect of Reimbursement Obligation) or return of Gold ratably with each of the
other Banks; provided, however, that each Bank in its discretion shall be
-------- -------
entitled to determine whether such payment or return was obtained on account of
another obligation of the Borrower or the Guarantors to the Bank; and provided
--------
further, that if all or any portion of such excess payment or return of Gold is
- -------
thereafter recovered
34
<PAGE>
by the selling Bank, the purchase shall be rescinded and the purchase price
restored to the extent of such recovery, but without interest. The Borrower
agrees that any Bank so purchasing a participation from another Bank pursuant to
this Section may exercise all its rights of payment (including the right of
setoff) with respect to such participation as fully as if such Bank were the
direct creditor of the Borrower in the amount of such participation.
SECTION 2.26. Forward Sales. To the extent any Bank's Revolving Advances
-------------
(valued at Advance Date Values) are less than its Revolving Commitment at any
time, the Borrower shall have the right to require such Bank to quote on and, if
accepted, agree to a Forward Sale on the following terms:
(a) Subject to Section 2.2(b) and clauses (c) and (e) of this
-------------- ----------- ---
Section, the Borrower shall have the right to designate the number of
Ounces of Gold to be sold and the date for delivery and payment of the
price, which shall be not later than the earlier of twelve months from the
date of quotation or the Maturity Date unless otherwise agreed by the Bank;
(b) The Bank shall agree to purchase such Gold at the price quoted
by such Bank (which price shall consist of the Dollar Value of such Gold on
the date of quotation plus the Contango) and accepted by the Borrower;
(c) The total of such Bank's Revolving Advances of Gold (valuing
such Advances in Ounces at their respective Advance Date Values) plus the
total of its Forward Sale Amounts plus the total of all outstanding Dollars
(under this Agreement and the Instruments) shall not exceed such Bank's
Revolving Commitment at any time. If such Revolving Commitment is
exceeded, the Borrower shall comply with Section 2.17(b) and when the
---------------
Borrower is in compliance with Section 2.17(b), the Borrower shall close
---------------
out such Forward Sales with said Bank as may be required to comply with
this provision, and pay any associated Breakage Costs;
(d) If the Borrower desires to obtain a Revolving Advance which
would cause such Bank's Revolving Commitment to be exceeded, but which
would be available if such Forward Sales were terminated or the number of
Ounces subject thereto reduced, the Revolving Advance shall be made, but
the excess amount of Gold shall be predelivered under outstanding Forward
Sales with such Bank, and Borrower shall pay any associated Breakage Costs;
(e) If the Borrower is in compliance with Section 2.17(a), but the
---------------
total of (i) the current Dollar Value of Gold subject to its Forward Sales
to such Bank, minus (ii) the Forward Sale Amount thereof, plus (iii) the
outstanding principal amounts of Revolving Advances in Dollars made by such
Bank, plus (iv) the current Dollar Value of Revolving Advances of Gold made
by such Bank, exceeds said Bank's Ceiling Dollar Value for Revolving
Advances, the Borrower shall forthwith, at its option either repay
sufficient
35
<PAGE>
Revolving Advances in Dollars or close out sufficient Forward Sales to
bring said total down to or below said Bank's Ceiling Dollar Value for
Revolving Advances. The Borrower shall pay all Breakage Costs associated
with such repayments or closeouts;
(f) The Dollar Value of Gold subject to Forward Sales shall not be
included in calculations of the unused amount of the aggregate amount of
the Banks' Revolving Commitments for purposes of determining the Borrower's
quarterly commitment fee; and
(g) Two Business Days prior to the date on which a Forward Sale is
due to be settled (the "Notice Date") the Borrower will give notice to the
-----------
Bank of its intention either to deliver the Gold subject to the Forward
Sale at the agreed location or, subject to the conditions of this Section,
settle the Forward Sale and enter into a new Forward Sale with any Bank.
In the latter case, to effect the settlement of the Forward Sale on the
delivery date (i) the Bank will pay to the Borrower the Contango in
accordance with Section 2.12(c) and either (ii) the Borrower will pay to
---------------
the Bank the excess, if any, of the Dollar Value of the Gold subject to the
Forward Sales on the Notice Date over the Forward Sale Amount or (iii) the
Bank will pay to the Borrower the excess, if any, of the Forward Sale
Amount over the Dollar Value of the Gold subject to the Forward Sale on the
Notice Date. Any amounts owed by the Bank to the Borrower and by the
Borrower to the Bank in respect of a Forward Sale pursuant to the preceding
sentence shall be set off against one another.
(h) Other provisions of each Forward Sale shall be as agreed between
the Borrower and said Bank. Each Bank shall furnish copies of each Forward
Sale agreement entered into.
ARTICLE 3.
CONDITIONS OF LENDING AND FORWARD SALES
SECTION 3.1. Conditions Precedent to Borrowing or Forward Sale. The
-------------------------------------------------
obligation of each Bank to continue its Existing Advances as Advances under this
Agreement and to make additional Revolving Advances or enter into Forward Sales
on the Amendment Effective Date, and the obligation of the Issuer to issue the
Letter of Credit, is (in each case) subject to the conditions precedent that
such Bank shall have received the following on or before the Advance or Forward
Sale, each dated the Amendment Effective Date, in form and substance
satisfactory to the Agent and each Bank:
(a) Copies of this Agreement, duly executed and delivered by the
Borrower, each Guarantor, each Bank and the Agent;
(b) Evidence that the amounts described in Section 2.14 have been
------------
disbursed to the Agent; and
36
<PAGE>
(c) A Cash Flow Schedule which evidences to the satisfaction of the
Agent and the Banks that the Mining Group Net Present Value of the Mining
Group Future Cash Flow is more than 1.4 times the total consolidated Debt
of the Parent on December 31, 1998; provided, however, that for purposes of
-------- -------
this clause, the "total consolidated Debt of the Parent" shall not include
Debt whose sole recourse is to a future mine and is otherwise nonrecourse
to the Borrower and the Guarantors.
SECTION 3.2. Conditions Precedent to All Advances, Forward Sales,
----------------------------------------------------
Conversions and Renewals. The obligation of each Bank or the Issuer to make
- ------------------------
each Advance or Forward Sale (including any Advance or Forward Sale on the
Amendment Effective Date), and, with respect to clause (a)(iii) below, the
---------------
obligation of each Bank to make each conversion or renewal in respect of an
outstanding Advance, shall be subject to the further conditions precedent that
on the date of such Advance or Forward Sale (and, with respect to clause
------
(a)(iii) below, such conversion or renewal):
- --------
(a) The following statements shall be true:
(i) since the date of the balance sheet referred to in Section
4.1(j), there has been no material adverse change in the financial
------
condition or operations of the Borrower or any Guarantor (provided,
--------
that before a change will be deemed to be materially adverse by reason
of a fluctuation in the price of Gold, account will be taken of the
all-in production costs of the Borrower and such Guarantor),
(ii) there is no pending or threatened action or proceeding
affecting the Borrower or any Guarantor before any court, Governmental
Agency or arbitrator which could be reasonably expected to have a
material adverse effect upon the financial position of the Borrower or
such Guarantor,
(iii) no Default shall have occurred and be continuing, or
would result from such Advance or the application of the proceeds
thereof, and
(iv) all representations and warranties in this Agreement and
each other Instrument shall be true and correct in all material
respects;
and the delivery to the Agent of a Credit Extension Request, or agreement to a
Forward Sale (and, with respect to clause (a)(iii) only, the giving of the
---------------
Notice of Conversion or Renewal of Interest or the Notice of Conversion of Gold
or Dollars) by the Borrower shall be deemed to constitute a representation and
warranty by the Borrower that at the date of such Borrowing or agreement the
foregoing statements are true; and
37
<PAGE>
(b) The Agent shall have received for such Advance or Forward Sale
the Credit Extension Request or the Notice of Conversion or Renewal of
Interest or the Notice of Conversion of Gold or Dollars, as appropriate.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES
SECTION 4.1. Representations and Warranties of the Borrower and the
------------------------------------------------------
Guarantors. In order to induce the Banks to enter into this Agreement and to
- ----------
make Advances hereunder, the Borrower and each Guarantor represents and warrants
to each Bank as set forth in this Article.
(a) Organization, Good Standing. The Borrower is a corporation duly
---------------------------
incorporated, validly existing and in good standing under the laws of
Delaware and each Guarantor is a corporation duly incorporated, validly
existing and in good standing under the laws of its jurisdiction of
incorporation. The Borrower, its Subsidiaries and the Guarantors are and
at all times will be duly qualified or otherwise authorized to do business
whenever and wherever necessary to carry on their present businesses and
operations under this Agreement and each other Instrument to which it is a
party.
(b) Authorization, No Conflict. The execution, delivery and
--------------------------
performance by the Borrower and each Guarantor of this Agreement and the
Instruments to which they are party have been duly authorized by all
necessary corporate action and do not and will not (i) require any consent
or approval of the stockholders of the Borrower or such Guarantor, (ii)
contravene the Borrower's or any Guarantor's Organic Documents, (iii)
violate any provision of any law, rule, regulation (including Regulation X
of the Board of Governors of the Federal Reserve System), order, writ,
judgment, injunction, decree, determination or award presently in effect
having applicability to the Borrower or any Guarantor, (iv) result in a
breach of or constitute a default under or require the consent of any party
pursuant to any indenture or loan or credit agreement or any other
agreement, lease or instrument to which the Borrower or any Guarantor is
party or by which they or their properties may be bound or affected, or (v)
result in, or require, the creation or imposition of any mortgage, deed of
trust, pledge, lien, security interest or other charge or encumbrance of
any nature upon or with respect to any of the properties now owned or
hereafter acquired by the Borrower or any Guarantor; and neither the
Borrower nor any Guarantor is in default under any such law, rule,
regulation, order, writ, judgment, injunction, decree, determination or
award or any such indenture, agreement, lease or instrument.
(c) No Other Action Required. No authorization or approval or other
------------------------
action by, and no notice to or filing with, any Governmental Agency or
regulatory body is required for the due execution, delivery and performance
by the Borrower or any Guarantor of this Agreement and the Instruments to
which they are (or will become) a party.
38
<PAGE>
(d) Validity and Binding Nature of Agreement and Instruments. This
--------------------------------------------------------
Agreement is, and the other Instruments to which it is a party when
delivered will be, legal, valid and binding obligations of the Borrower
enforceable against the Borrower in accordance with their respective terms,
and this Agreement is, and the other Instruments to which they are a party
when delivered will be, legal, valid and binding obligations of each
Guarantor enforceable against such Guarantor in accordance with its terms,
except to the extent that such enforcement may be limited by applicable
bankruptcy, insolvency and other similar laws affecting creditors' rights
generally.
(e) Litigation, Contingent Liabilities. There is no pending or, to
----------------------------------
Borrower's or any Guarantor's knowledge, threatened action or proceeding
affecting the Borrower or any Guarantor or any of their respective
properties before any court, Governmental Agency or arbitrator, which may
have a materially adverse effect on the respective financial condition or
operations of the Borrower or any Guarantor. None of the Borrower or the
Guarantors has any material contingent liabilities not provided for or
disclosed in the financial statements referred to in Section 4.1(j) or
--------------
otherwise permitted by this Agreement.
(f) Condition of Business and Properties. Neither the business nor
------------------------------------
the properties of the Borrower or any of the Guarantors is affected by any
fire, explosion, accident, strike, lockout or other labor dispute, drought,
storm, hail, earthquake, embargo, act of God or of the public enemy or
other casualty (whether or not covered by insurance), materially and
adversely affecting such business or properties or the operations of the
Borrower or any of the Guarantors.
(g) Other Agreements. None of the Borrower or the Guarantors is a
----------------
party to any indenture, loan or credit agreement or any lease or other
agreement or instrument or subject to any charter or corporate restriction
which would reasonably be expected to have a material adverse effect on the
business, properties, assets, operations or condition, financial or
otherwise, of the Borrower or such Guarantor, or on the ability of the
Borrower to carry out its obligations under this Agreement or the
Instruments or on the ability of any of the Guarantors to carry out its
obligations under this Agreement.
(h) No Misstatements of Fact. No information, exhibit or report
------------------------
furnished by the Borrower or any Guarantor to any Bank in connection with
the negotiation of this Agreement contained any material misstatement of
fact or omitted to state a material fact or any fact necessary to make the
statement contained therein not misleading.
(i) Regulation U. None of the Borrower or the Guarantors is engaged
------------
in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulation U issued by the
Board of Governors of the Federal Reserve System), and no proceeds of any
Advance will be used to purchase or carry
39
<PAGE>
margin stock or to extend credit to others for the purpose of purchasing or
carrying any margin stock.
(j) Financial Statements. The balance sheet of the Borrower and the
--------------------
consolidated balance sheet of the Parent as at December 31, 1995, and the
related statements of income, retained earnings and cash flows of the
Borrower and the Guarantors for the twelve months then ended, copies of
which have been furnished to each Bank, fairly present the financial
condition of the Borrower and the Guarantors as at such date and the
results of the operations of the Borrower and the Guarantors for the period
ended on such date, all in accordance with GAAP, in all cases consistently
applied, and since December 31, 1995 there has been no material adverse
change in such condition or operation.
(k) Liens. None of the assets of the Borrower or any Guarantor is
-----
subject to any mortgage, pledge, title retention lien or other lien,
encumbrance or security interest, except (i) for current taxes not
delinquent or taxes being contested in good faith and by appropriate
proceedings, (ii) liens arising in the ordinary course of business for sums
not due or sums being contested in good faith and by appropriate
proceedings, but not involving any deposits or advances or borrowed money
or the deferred purchase price of property or services, and (iii) to the
extent shown in the financial statements referred to in Section 4.1(j) or
--------------
in Schedule 3 or as otherwise permitted by this Agreement.
----------
(l) Employee Benefit Plans. Each Plan complies in all material
----------------------
respects with all applicable requirements of law and regulations and no
Termination Event with respect to a Plan has occurred.
(m) Investment Company Act. None of the Borrower or the Guarantors
----------------------
is an "investment company" or a company "controlled" by an "investment
company," within the meaning of the Investment Company Act of 1940, as
amended.
(n) Public Utility Holding Company Act. None of the Borrower or the
----------------------------------
Guarantors is a "holding company," or a "subsidiary company" of a "holding
company," or an "affiliate" of a "holding company" or of a "subsidiary
company" of a "holding company," within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
(o) Compliance With Applicable Laws. All work performed and other
-------------------------------
actions or omissions to act at the properties of the Borrower and any
Guarantor and the current condition of the properties of the Borrower and
any Guarantor comply in all material respects with all applicable laws,
ordinances, rules and regulations of any Governmental Agency and with all
directions, rules and regulations of officers of every Governmental Agency
having jurisdiction over the properties of the Borrower and any Guarantor
and
40
<PAGE>
there are no existing material violations of any such applicable laws,
ordinances, directions, rules or regulations.
(p) Environmental Matters. To the best knowledge of the Borrower
---------------------
and Guarantors, and except for normal or anticipated circumstances incurred
in the regular course of the business of the Borrower and its Subsidiaries
and the Guarantors, which circumstances do not have a materially adverse
effect on the respective financial condition or operations of the Borrower
or any Guarantor, (i) the properties and operations of the Borrower and its
subsidiaries and the Guarantors comply in all material respects with all
applicable Environmental Laws; (ii) none of the properties or operations of
the Borrower or any of its Subsidiaries or the Guarantors is subject to any
judicial or administrative proceeding alleging the material violation of
any Environmental Laws; (iii) none of the properties or operations of the
Borrower or any of its Subsidiaries or the Guarantors is the subject of any
investigation concerning any use or release of any Hazardous Substance;
(iv) none of the Borrower, any of its Subsidiaries, the Guarantors or any
predecessor of any such Persons has filed any notice under any
Environmental Laws indicating past or present material treatment, storage
or disposal of a hazardous waste or reporting a material spill or release
of a Hazardous Substance into the environment; (v) except as disclosed in
writing to the Banks, none of the Borrower, its Subsidiaries or the
Guarantors has any material contingent liability in connection with any
release of any Hazardous Substance into the environment, including any
material liability arising in connection with the acts or omissions of any
past owner or operator of any of the premises owned, leased or used by the
Borrower, any of its Subsidiaries or the Guarantors; (vi) none of the
Borrower's, any of its Subsidiaries' or the Guarantors' operations involve
the generation, transportation, treatment, storage or disposal of Hazardous
Substances (other than in the normal course of and incidental to their
business operation); (vii) none of the Borrower, its Subsidiaries or the
Guarantors has improperly disposed of any material amount of any Hazardous
Substance in, on or about any premises owned, leased or used by it or them;
(viii) each surface impoundments or underground storage tanks located in,
on or about any of the premises owned, leased or used by the Borrower, any
of its Subsidiaries or the Guarantors complies in all material respects
with applicable Environmental Laws; and (ix) (A) no Lien in favor of any
Governmental Agency for any liability under Environmental Laws exists, and
(B) no claim for damages arising from or costs incurred by such
Governmental Agency in response to a release of any Hazardous Substance
into the environment is pending or attached to any of the premises owned,
leased or used by the Borrower, any of its Subsidiaries or the Guarantors.
(q) Brokers. The Borrower and the Guarantors have not agreed to pay
-------
any brokerage fees, finder's fees or other similar fees or commissions with
respect to any of the transactions contemplated by this Agreement and, to
the best knowledge of the Borrower and the Guarantors, no person is
entitled, or intends to claim that it is entitled, to receive any such fees
or commissions in connection with any of such transactions.
41
<PAGE>
(r) No Default. No Event of Default has occurred and is continuing.
----------
SECTION 4.2. Warranties of the Banks With Respect to the Gold. Each Bank
------------------------------------------------
warrants that the Gold Delivered by it hereunder will conform to the description
of Gold herein. THERE ARE NO EXPRESS WARRANTIES WITH RESPECT TO SUCH GOLD OTHER
THAN THOSE HEREIN SPECIFIED. THERE ARE NO WARRANTIES WHICH EXTEND BEYOND THE
DESCRIPTION OF THE GOLD DESCRIBED IN THIS AGREEMENT. NO WARRANTY OF
MERCHANTABILITY, FITNESS FOR PURPOSE, OR ANY WARRANTY OF ANY OTHER NATURE SHALL
BE IMPLIED.
SECTION 4.3. Warranties of the Borrower and the Guarantors With Respect to
-------------------------------------------------------------
the Gold. The Borrower and the Guarantors warrant that the Gold returned by the
- --------
Borrower hereunder will conform to the description of the Gold herein. THERE
ARE NO EXPRESS WARRANTIES WITH RESPECT TO SUCH GOLD OTHER THAN THOSE HEREIN
SPECIFIED. THERE ARE NO WARRANTIES WHICH EXTEND BEYOND THE DESCRIPTION OF THE
GOLD DESCRIBED IN THIS AGREEMENT. NO WARRANTY OF MERCHANTABILITY, FITNESS FOR
PURPOSE, OR ANY WARRANTY OF ANY OTHER NATURE SHALL BE IMPLIED.
ARTICLE 5.
COVENANTS OF THE BORROWER AND THE GUARANTORS
SECTION 5.1. Affirmative Covenants. The Parent, the Borrower and each
---------------------
Guarantor agrees with each Bank that until all Commitments have expired or
terminated, all Obligations have been paid and performed in full and the Letter
of Credit has expired or terminated (or the Agent shall have received cash (in a
cash collateral account on terms satisfactory to the Agent) in the Stated Amount
of the Letter of Credit), the Parent and the Borrower will, and will cause their
Subsidiaries to, perform or cause to be performed the obligations set forth
below.
(a) Compliance With Laws, Etc. The Borrower and the Guarantors
-------------------------
shall comply in all material respects with all Governmental Requirements
now in force or that may be enacted hereafter and with all directions,
rules and regulations of the fire marshal, health officer, building
inspector or other officers of every Governmental Agency now having or
hereafter acquiring jurisdiction over the properties of the Borrower or the
Guarantors.
(b) Reporting Requirements.
----------------------
(i) Monthly Reports. The Borrower and the Guarantors shall
---------------
furnish to the Agent as soon as available and in any event within
twenty-one days after the end of each month, the monthly management
report of the Parent, such report to include a report as to the
quantity and quality of ore mined and Gold and Silver
42
<PAGE>
production for each mine in the Mining Group and the costs thereof in
a form acceptable to the Agent.
(ii) Quarterly Reports. The Borrower and the Guarantors shall
-----------------
furnish to the Agent and each Bank as soon as available and in any
event within sixty days after the end of each of the first three
quarters of each Fiscal Year of each of the Borrower and the
Guarantors, (x) a balance sheet of the Borrower and a consolidated
balance sheet of the Parent as of the end of such quarter, (y) a
statement of income and retained earnings of the Borrower and a
consolidated statement of income and retained earnings of the Parent
for such quarter and for the period commencing at the end of the
previous Fiscal Year and ending with the end of such quarter, and (z)
a statement of cash flows of the Borrower and a consolidated statement
of cash flows of the Parent for such quarter and for the period
commencing at the end of the previous Fiscal Year and ending with the
end of such quarter, all certified by the respective president or vice
president and treasurer of the Borrower and the Parent, together with
a Cash Flow Schedule, a production report for all mines in the Mining
Group respecting the quarter then ended and a statement setting forth
the calculation of the Mining Group Net Present Value of the Mining
Group Future Cash Flow all certified by the Borrower and the
Guarantors prepared in accordance with generally accepted industry
practices and in a manner reasonably acceptable to the Agent, and a
certificate signed by a duly authorized officer of the Borrower
stating whether or not as of the end of such quarter the statements
contained in Section 3.2(a) are true, and a certificate signed by a
--------------
duly authorized officer of the Parent stating whether or not as of the
end of such quarter the Parent is in compliance with the financial
criteria set forth in Section 7.1(k).
--------------
(iii) Annual Reports. The Borrower, the Guarantors and the
--------------
Parent shall furnish to the Agent and each Bank as soon as available
and in any event within ninety days after the end of each Fiscal Year
of each of the Borrower, the Guarantors and the Parent, (x) a balance
sheet of the Borrower and each of the Guarantors (other than the
Parent) and a consolidated balance sheet of the Parent as of the end
of such Fiscal Year, (y) a statement of income and retained earnings
of the Borrower and each of the Guarantors (other than the Parent) and
a consolidated statement of income and retained earnings of the Parent
for such Fiscal Year, and (z) a statement of cash flows of the
Borrower and each of the Guarantors (other than the Parent) and a
consolidated statement of cash flows of the Parent, certified (as to
the financial statements of the Parent) in a manner reasonably
acceptable to the Agent by independent public accountants acceptable
to the Agent, and certified by the respective president or vice
president and treasurer of the Borrower, the Guarantor and the Parent,
together with (A) a Cash Flow Schedule and a calculation of Mining
Group Net Present Value of the Mining Group Future Cash Flow, together
with the underlying statements as to the latest published ore
reserves, with year to year changes for each mine of the
43
<PAGE>
Mining Group, and statements of the estimated life of each mine
belonging to the Mining Group, projected production volumes and grades
for each such year of such life and the estimated operating costs and
capital costs anticipated to be incurred with respect to each such
mine, such life of mine plans to have been approved by both mine site
personnel and management, all of which such schedules, calculations,
statements, projections and estimates shall be subject to the review
and reasonable approval of the Agent and Majority Banks, within thirty
Business Days after the delivery thereof, it being agreed that if the
Agent or any Bank shall have questions or comments with respect to
such submissions, the Borrower shall promptly respond thereto and
provide such additional or revised data as may be reasonably required
by the Agent or such Bank; (B) a report setting forth for each mine
belonging to the Mining Group, each written summons, citation,
directive, notice, complaint, letter or other written communication
from any Governmental Agency concerning the alleged violation with
respect to such mine of any Environmental Laws, or investigation of
the Borrower or a Guarantor relating to the handling of any Hazardous
Substance, or the release thereof into the environment, or any request
for remediation, cleanup or removal of any Hazardous Substance
wherever located, by the Borrower or such Guarantor, which
investigation or request is other than routine; (C) a production
report for such year certified by the Borrower and the Parent in a
manner acceptable to the Agent, and a certificate signed by a duly
authorized officer of the Borrower stating whether or not as of the
end of such Fiscal Year the statements contained in Section 3.2(a) are
--------------
true, and a certificate signed by a duly authorized officer of the
Parent stating whether or not as of the end of such Fiscal Year, the
Parent is in compliance with the financial criteria set forth in
Section 7.1(k); (D) a detailed ore reserve report from each member of
--------------
the Mining Group in a form previously provided to the Agent; and (E)
updated five year projections for the Parent in a form acceptable to
the Agent showing cost and production summaries for each operation,
and consolidated summaries of income, sources and uses of funds
(including development capital expenditures for each operation) and
capitalization for the Parent.
(iv) Other Reports. The Borrower and the Guarantors shall
-------------
furnish to the Agent and each Bank: (A) promptly upon becoming aware
of any circumstance that could result in a material change in the
statements provided pursuant to clauses (b)(iii)(A), (b)(iii)(B) or
------------------- -----------
(b)(iii)(C) of this Section, notice setting forth the particulars
-----------
thereof and a new Cash Flow Schedule and new statements pursuant to
such clauses, which submission shall be subject to the approval of the
Agent and the Majority Banks as provided in clause (b)(iii) of this
---------------
Section; (B) promptly after the filing or receiving thereof, copies of
all reports and notices under ERISA which the Borrower or the Parent
files with or receives from the Internal Revenue Service, the Pension
Benefit Guaranty Corporation or the U.S. Department of Labor; (C)
promptly after the filing or receiving thereof, copies of all notices
44
<PAGE>
which the Borrower receives from any Governmental Agency alleging its
material noncompliance with Environmental Laws or actual or potential
liability for cleanup, remediation or removal of any Hazardous
Substance wherever located and any replies of the Borrower filed in
response thereto; (D) promptly upon becoming aware of any actual or
proposed Change in Ownership or Management, notice setting forth the
particulars thereof; (E) any reports from independent third parties
relating to environmental or ore reserve audits; and (F) such other
information respecting the condition of operations, financial or
otherwise, of the Borrower or the Guarantors as the Agent or any Bank
may from time to time reasonably request.
(c) Visitation Rights. The Borrower shall at any reasonable time
-----------------
during normal business hours and from time to time, on reasonable notice,
permit any Bank or any agents or representatives thereof (i) to examine and
make copies of and abstracts from the records and books of account of the
Borrower; (ii) to discuss the affairs, finances and accounts of the
Borrower with any of its officers or directors; and (iii) to visit and
inspect any mine in the Mining Group.
(d) Maintenance of Insurance. The Borrower and the Guarantors shall
------------------------
maintain such insurance with responsible and reputable insurance companies
or associations in such amounts and covering such risks as is satisfactory
to the Banks and as is usually carried by companies engaged in similar
businesses and owning similar properties in the same general areas in which
the Borrower and the Guarantors operate.
(e) Maintenance of Properties, Etc. The Borrower and the Guarantors
------------------------------
shall maintain and preserve all of their properties and equipment which are
material to the proper conduct of their businesses in good working order
and condition, ordinary wear and tear excepted.
(f) Keeping of Records and Books of Account. The Borrower and the
---------------------------------------
Guarantors shall keep adequate records and books of account, in which
complete entries will be made in accordance with GAAP consistently applied,
reflecting all financial transactions of the Borrower and the Guarantors.
(g) Preservation of Corporate Existence, Etc. The Borrower and the
----------------------------------------
Guarantors shall preserve and maintain their corporate existence, rights,
franchises and privileges in the jurisdictions of their incorporation, and
qualify and remain qualified as foreign corporations in each jurisdiction
in which such qualification is necessary or desirable in view of their
businesses and operations or the ownership of their properties.
(h) Conduct of Business. The Borrower shall engage solely in the
-------------------
business of exploring for, developing, owning interests in and operating
precious metals properties,
45
<PAGE>
including gold mines, and in activities incidental thereto, in accordance
with generally accepted industry practices.
(i) Notice of Default and ERISA Matters. The Borrower and the
-----------------------------------
Guarantors shall furnish to the Agent and each Bank as soon as possible,
and in any event within five Business Days after the occurrence of each
Default continuing on the date of such statement, a statement of the
respective vice president and treasurer of the Borrower and the Guarantors
setting forth the details of such Default and the action which the Borrower
proposes to take with respect thereto. The Borrower shall furnish to the
Agent and each Bank as soon as possible, and in any event within five
Business Days after the occurrence thereof, written notice of the
occurrence of any Termination Event.
(j) Payment of Taxes and Other Claims. The Borrower and the
---------------------------------
Guarantors shall pay or discharge or cause to be paid or discharged, before
the same shall become delinquent, (i) all taxes, assessments and
governmental charges levied or imposed upon them or upon their income,
profits or property, and (ii) all lawful claims for labor, materials and
supplies which, if unpaid, might by law become a lien upon their respective
property; provided, however that the Borrower and the Guarantors shall not
-------- -------
be required to pay or discharge or cause to be paid or discharged any such
tax, assessment, charge or claim whose amount, applicability or validity is
being contested in good faith by appropriate proceedings if the Borrower
and such Guarantor shall have set aside on their books adequate reserves
with respect thereto in accordance with GAAP.
(k) Forward Sale Contracts. In the event that the Borrower intends
----------------------
to use the sale price per ounce under any forward sale contract (other than
a Forward Sale) as the Advance Date Value for the Ounces of Gold to be
borrowed from the Banks on the appropriate Advance Date, upon notice to the
Banks prior to entering into the contract, the Borrower shall provide the
Banks with the opportunity to quote the price of gold to be payable under
the contract, and shall enter into such contract with the Bank or Banks
whose quotations it accepts, if any, on such terms as may otherwise be
mutually agreeable.
(l) Additional Guarantors. The Borrower and the Parent shall
---------------------
promptly cause any Person required by the provisions of this Agreement to
become a Guarantor hereunder to duly execute and deliver to the Agent and
each Bank a Supplement to this Agreement in substantially the form of
Exhibit L hereto. Without limiting the generality of the foregoing, with
---------
the written consent of the Banks, a Person that acquires from the Borrower
or a Guarantor in one or more sale and leaseback transactions Operating
Assets in an aggregate amount of $50,000 or less shall not be required to
become a Guarantor hereunder.
(m) Further Assurances. The Borrower and the Guarantors shall
------------------
promptly and duly execute and deliver to the Agent and each Bank such
documents and assurances and
46
<PAGE>
take such further action as the Banks may from time to time reasonably
request in order to carry out more effectively the intent and purpose of
this Agreement and the documents delivered pursuant hereto and to establish
and protect the rights and remedies created or intended to be created in
favor of the Agent and the Banks.
SECTION 5.2. Negative Covenants. So long as any obligation under the
------------------
Instruments shall remain outstanding or any Bank shall have any Commitment
hereunder or the Letter of Credit remains issued and outstanding (unless the
Agent shall have received as cash collateral Dollars in the Stated Amount of the
Letter of Credit in an account maintained with (and under the sole dominion and
control of) the Agent, pursuant to documentation satisfactory to the Agent, the
Borrower will not (and each Guarantor will not as to Sections 5.2(a), 5.2(b),
--------------- ------
5.2(c), 5.2(d), 5.2(e), 5.2(g) and 5.2(h)), without the written consent of the
- ------ ------ ------ ------ ------
Banks (or, in connection with Section 5.2(b), the Majority Banks):
--------------
(a) Debt. Create, incur, assume or suffer to exist, directly or
----
indirectly, any Debt except:
(i) Debt hereunder or under the Instruments, or
(ii) Debt reflected in Schedule 5 hereto, and extensions,
----------
modifications, or refinancing of such Debt; provided, however, that
-------- -------
such extensions, modifications or refinancings shall not render such
Debt senior in priority or right of payment to the Debt hereunder;
provided, further, that such Debt may not be subject to early
-------- -------
redemption or defeasance (either by sinking fund or otherwise) and may
not be prepaid or repaid in any manner prior to the Maturity Date, or
(iii) Debt under revolving credit facilities to a maximum of
$50,000,000, or
(iv) Debt which may exist for a period of up to 90 days as a
result of drawings under the letters of credit (other than the Letter
of Credit) issued in the normal course of business of developing and
operating precious metals mines; provided that the sum of (A) such
--------
Debt and (B) the undrawn face amount of all such letters of credit
(other than the Letter of Credit) shall not exceed $75,000,000 in the
aggregate, or
(v) any Debt owed by the Borrower to a Guarantor or by a
Guarantor to the Borrower, or
(vi) as to the Parent, the Borrower and EBCC, any Debt, the
proceeds of which are used directly or indirectly, and exclusively,
for the acquisition, development or construction of a mine of precious
metals, and extensions, modifications, or refinancing of such Debt;
provided, however, that such Debt or
-------- -------
47
<PAGE>
extensions, modifications or refinancings of such Debt shall not be
senior in priority or right of payment to the Obligations hereunder;
provided further, that such Debt may not be subject to early
-------- -------
redemption or defeasance (either by sinking fund or otherwise) and may
not be prepaid or repaid in any manner prior to the Maturity Date.
(b) Liens, Etc. Create, incur, assume or suffer to exist, directly
----------
or indirectly, any mortgage, deed of trust, pledge, lien, security interest
or other charge or encumbrance whether or not determined (including the
lien or retained security title of a conditional vendor) of any nature upon
or with respect to any of its properties, now owned or hereafter acquired,
or assign or otherwise convey any right to receive the production, proceeds
or income therefrom, except that the foregoing restrictions shall not apply
to mortgages, deeds of trust, pledges, liens, security interests or other
charges or encumbrances:
(i) for taxes, assessments or governmental charges or levies if
the same shall not at the time be delinquent or thereafter can be paid
without penalty, or are being contested in good faith and by
appropriate proceedings;
(ii) imposed by law, such as carriers', warehousemen's and
mechanics' liens and other similar liens arising in the ordinary
course of business in an amount which at no time exceeds $5,000,000;
(iii) arising out of pledges or deposits under workmen's
compensation laws, unemployment insurance, old age pensions, or other
social security or retirement benefits, or similar legislation;
(iv) arising out of pledges or deposits to secure performance in
connection with bids, tenders, contracts (other than contracts for the
payment of money) or leases made in the ordinary course of business to
which the Borrower or such Guarantor is a party as lessee in an amount
which at no time exceeds $1,000,000;
(v) arising out of deposits to secure public or statutory
obligations of the Borrower or such Guarantor in an amount which at no
time exceeds $2,000,000;
(vi) arising out of deposits to secure, or in lieu of, surety,
appeal or customs bonds in proceedings to which the Borrower or such
Guarantor is a party in an amount which at no time exceeds $1,000,000;
(vii) arising out of operating leases entered into in the
ordinary course of business and under which the aggregate annual
rentals do not exceed $5,000,000;
48
<PAGE>
(viii) of purchase money mortgages and other security interests
on equipment acquired, leased or held by the Borrower or the
Guarantors (including equipment held by the Borrower or such
Guarantors as lessee under leveraged leases other than those described
in clause (b)(ix) below) in the ordinary course of business to secure
--------------
the purchase price of such equipment or to secure indebtedness
incurred solely for the purpose of financing the acquisition
(including acquisition as lessee under leveraged leases), construction
or improvement of any such equipment to be subject to such mortgages
or security interests, or mortgages or other security interests
existing on any such equipment at the time of such acquisition, or
extensions, renewals or replacements of any of the foregoing for the
same or a lesser amount, provided that no such mortgage or other
security interest shall extend to or cover any equipment other than
the equipment being acquired, constructed or improved, and no such
extension, renewal or replacement shall extend to or cover any
property not theretofore subject to the mortgage or security interest
being extended, renewed or replaced, and provided, further, that, as
-------- -------
to the Borrower but not as to such Guarantor, the aggregate principal
amount of the Debt of the Borrower at any one time outstanding and
secured by mortgages and other security interests permitted by this
clause shall not exceed $5,000,000 and that any such Debt shall not
otherwise be prohibited by the terms of this Agreement;
(ix) liens and security interests outstanding on August 9, 1996
and described in Schedule 3 hereto; and
----------
(x) arising without the consent of the Borrower or such
Guarantor, including, without limitation, zoning restrictions,
easements, licenses, restrictions on the use of properties or minor
irregularities in title thereto, which do not materially impair the
use of such properties in the operations of the Borrower or such
Guarantor in the ordinary course of business or the value of such
properties for the purpose of such business;
provided, however, that, at no time shall the sum of the amounts permitted
-------- -------
pursuant to clauses (b)(ii), (b)(iv), (b)(v), (b)(vi) and (b)(vii) exceed
------- ------- ------- ------ ------- --------
$10,000,000 in the aggregate for the Borrower and the Guarantors.
(c) Assumptions, Guarantees, Etc. of Indebtedness of Other Persons.
--------------------------------------------------------------
Assume, guarantee, endorse or otherwise become directly or contingently
liable (including, without limitation, liable by way of agreement,
contingent or otherwise, to purchase, to provide funds for payment, to
supply funds to or otherwise invest in the debtor or otherwise to assure
the creditor against loss) in connection with any Debt or indebtedness of
any other Person, except guarantees by endorsement of negotiable
instruments for deposit or collection or similar transactions in the
ordinary course of business. This provision shall not apply to the Parent.
49
<PAGE>
(d) Investments in Other Persons. Make any loan or advance to any
----------------------------
Person exceeding at any one time an aggregate of $250,000, or purchase or
otherwise acquire the capital stock, assets, or obligations of, or any
interest in, any Person (other than a Person engaged in the business of
exploration for or mining for precious metals and other than readily
marketable direct obligations of the United States of America and
certificates of time deposit issued by commercial banks of recognized
standing operating in the United States of America). Notwithstanding the
foregoing, the Borrower may (i) make loans to Affiliates which are not
Guarantors, provided such loans are guaranteed by the Parent, (ii) purchase
and hold any debt securities issued or guaranteed by the United States
government, (iii) purchase and hold commercial paper, maturing not more
than nine months from the date of issue, which is issued by a corporation
organized under the laws of any state of the United States and rated at
least A-2 by Standard & Poor's Ratings Group or P-2 by Moody's Investors
Service, Inc. or (iv) purchase and hold any certificate of deposit or
bankers acceptance, maturing not more than one year from the date of issue,
which is issued by either (x) a commercial banking institution that is a
member of the Federal Reserve System and has (A) a combined capital and
surplus and undivided profits of not less than $3,000,000,000 and (B)
commercial paper rated at least A-2 or the equivalent thereof by Standard &
Poor's Ratings Group or at least P-2 by Moody's Investors Service, Inc. or
(y) any Bank.
(e) Mergers, Etc. Merge or consolidate with any Person (provided,
------------
that the Borrower or a Guarantor, as the case may be, shall be the
surviving corporation in any merger or consolidation involving such party
consented to by the Banks), or sell, assign, lease or otherwise dispose of
(whether in one transaction or in a series of transactions) all or
substantially all of its assets (whether now owned or hereafter acquired)
to any Person (other than an Affiliate of Borrower with the consent of the
Banks, which consent shall not be unreasonably withheld or delayed), or
acquire (whether in one transaction or in any series of transactions) all
or substantially all of the shares or assets of any Person (other than with
the consent of the Banks, which consent shall not be unreasonably withheld
or delayed).
(f) Investments of Certain Types. Use any Advances to acquire
----------------------------
(whether in one transaction or in a series of transactions) all or
substantially all the shares of, or shares representing a controlling
interest in, any Person otherwise than through a transaction consummated
with the prior approval of the Board of Directors of such Person a majority
of whose members are Continuing Directors. For the purposes hereof
"Continuing Directors" means, as of the date of any such approval, (x)
---------------------
individuals who on the date two years prior to such approval date were
members of such Person's Board of Directors and (y) any new Director whose
nomination for election by such Person's shareholders was approved by a
vote of at least seventy-five percent (75%) of the Directors then still in
office who either were Directors on the date two years prior to such
approval date or whose nomination for election was previously so approved.
50
<PAGE>
(g) Transfers of Assets. (x) Transfer, sell or dispose of any
-------------------
Operating Assets, if the aggregate amount of all such transfers, sales and
disposal within any 12-month period exceeds $10,000,000 in the aggregate
for the Borrower and the Guarantors (exclusive of sales and leasebacks of
Operating Assets from time to time after August 9, 1996 in an aggregate
amount not in excess of $5,000,000, which shall be permitted without
condition or limitation under this clause) or (y) distribute any property
other than (i) securities of the Parent or (ii) cash to any shareholder of
the Parent.
(h) Change in Ownership or Management. Permit a Change in Ownership
---------------------------------
or Management to occur.
(i) Use of Proceeds. Use any proceeds of any Advance to acquire any
---------------
security in any transaction which is subject to sections 13 and 14 of the
Securities Exchange Act of 1934. In addition, the Letter of Credit will be
issued only for the benefit of any one or more of United States Fidelity
and Guaranty Company, Fidelity and Guaranty Insurance Company, Fidelity and
Guaranty Insurance Underwriters, Inc. or Van-American Insurance Agency,
Inc. or any of their respective Subsidiaries or successors or assigns in
support of its $8,300,000 reclamation bond delivered by any one or more of
those parties in connection with statutory obligations of reclamation of
the Lamefoot deposit at the Kettle River Mine.
(j) Notwithstanding any other provision of this Agreement to the
contrary, Sections 5.2(a), 5.2(e), 5.2(g) and 7.1(j) shall be deemed to
permit the EBCC Transaction; provided, that the steps set forth in the
--------
September 23 Letter shall be required to occur contemporaneously with the
incurrence of Debt described in such letter, and provided, further, that
-------- -------
the Debt to be incurred in connection with EBCC Transaction shall only be
permitted to be outstanding on the date the EBCC Transaction is
consummated. Furthermore, the Banks agree that the value of assets
transferred pursuant to the EBCC Transaction shall not cause a reduction in
the basket amount permitted by Section 5.2(g). Each Bank agrees that
contemporaneously with the consummation of the EBCC Transaction, EBCC shall
cease to be a party to this Agreement and shall be released from its
obligations as a Guarantor under this Agreement, and all references to EBCC
in this Agreement shall be deemed to have been automatically deleted.
ARTICLE 6.
ABSOLUTE CONTINUING GUARANTEE
SECTION 6.1. Undertaking. For and in consideration of the entering into
-----------
by the Banks of this Agreement, and in order to induce the Banks to execute and
deliver this Agreement and to provide the Banks with further assurance of each
Obligor's payment of any and all Obligations under this Agreement, the
Instruments or any Forward Sale, the Guarantors hereby confirm their existing
joint and several guaranty, originally delivered under the terms of the Gold
Bullion Loan
51
<PAGE>
Agreement, dated as of January 3, 1992 (the "Original Agreement"), among the
------------------
Borrower, the Guarantors and the Banks (as subsequently amended and restated),
of all Obligations and without limiting the foregoing jointly and severally
absolutely, unconditionally and irrevocably guarantee the full and punctual
payment when due, whether at stated maturity, by required prepayment,
declaration, acceleration, demand or otherwise, of all Obligations now or
hereafter existing, whether for principal, interest, fees, expenses or otherwise
(including all such amounts which would become due but for the operation of the
automatic stay under Section 362(a) of the United States Bankruptcy Code, 11
U.S.C. (S)362(a), and the operation of Sections 502(b) and 506(b) of the United
States Bankruptcy Code, 11 U.S.C. (S)502(b) and (S)506(b)) or any similar
provision under other applicable bankruptcy, insolvency or similar law.
Notwithstanding the foregoing, each Guarantor shall only be liable under this
guarantee for the maximum amount of such liability that can be hereby incurred
without rendering this guarantee, as it relates to such Guarantor, voidable
under applicable fraudulent conveyance or fraudulent transfer law, and not for
any greater amount. This guarantee constitutes a guaranty of payment when due
and not of collection, and each Guarantor specifically agrees that it shall not
be necessary or required that any Bank exercise any right, assert any claim or
demand or enforce any remedy whatsoever against the Borrower, any other Obligor
or any other Person before or as a condition to the obligations of such
Guarantor hereunder. The word "Obligations" is used herein in its most
comprehensive sense and includes any and all advances, debts, Reimbursement
Obligations, interest, obligations and liabilities of the Borrower under this
Agreement or the Instruments. Without limiting the generality of the foregoing
sentence, to the extent enforceable by an action at law or in equity, this
guarantee shall include the Guarantors' guarantee to redeliver to the Banks when
due any Advance of Gold by the Banks to the Borrower under this Agreement or the
Instruments or any Forward Sale.
SECTION 6.2. Unconditional Guarantee. The Guarantors hereby agree that
-----------------------
this guarantee is an absolute, unconditional, continuing guarantee subject to
the following terms and conditions:
(a) Authorization. The Guarantors authorize the Banks, without
-------------
notice to, demand of, or consent from the Guarantors, and without affecting
its liability to the Banks hereunder, from time to time, to (i) renew,
extend, accelerate or otherwise change the time or place for payment of, or
otherwise change the terms of, the Obligations (or the Obligations of the
other Guarantors) or any part thereof, including an increase or decrease of
any rate of interest thereon; (ii) take and hold security (including other
guarantees) for the payment of the Obligations or this guarantee, and
exchange, enforce, waive, surrender, modify, impair, change, alter, renew,
continue, compromise or release in whole or in part any such security, or
fail to perfect their interest in any such security, or to establish their
priority with respect thereof; (iii) apply such security and direct the
order or manner of sale thereof as the Banks in their sole discretion may
determine; (iv) release or substitute, in whole or in part, the Borrower or
any one or more endorsers or guarantors of any of all of the Obligations;
(v) settle or compromise any or all of the Obligations with the Borrower or
any endorser or guarantor of the Obligations; and
52
<PAGE>
(vi) subordinate any or all of the Obligations to any other indebtedness of or
claim against the Borrower or any other Obligor, whether owing to or
existing in favor of the Banks or any other party. The Guarantors shall be
and remain bound hereunder notwithstanding any such renewal, extension,
acceleration, change, taking, holding, exchange, enforcement, waiver,
surrender, modification, impairment, alteration, renewal, continuation,
compromise, release, failure, application, direction, substitution,
settlement or subordination. The Banks may without notice assign this
guarantee in whole or in part.
(b) Continuing Guarantee. This is a continuing guarantee of the
--------------------
guarantee previously existing in favor of the Banks under the Original
Agreement; as amended and restated by the Existing Agreement and shall
remain effective until the transactions contemplated by this Agreement have
been completed and all Obligations have been fully and finally paid in
cash, all Commitments have been terminated and the Letter of Credit has
expired or been terminated. In the event that the Borrower becomes
insolvent or may be adjudicated bankrupt or files a petition for
reorganization, arrangement, composition or similar relief under any
present or future provision of any bankruptcy or insolvency law, or if such
a petition be filed against the Borrower, or the Borrower becomes the
subject of any proceedings under any laws or regulations of any
jurisdiction relating to the relief of debtors, and in any such proceedings
some or all of the Obligations shall be terminated or rejected or any
obligation of the Borrower thereunder modified or abrogated, the Guarantors
agree that their liability hereunder shall not thereby be affected or
modified, and such liability shall continue in full force and effect as if
no such action or proceeding had occurred. This guarantee shall continue
to be effective or reinstated, as the case may be, if any payment of any
Obligations must be returned by the Banks upon the insolvency, bankruptcy
or reorganization of the Borrower or any Obligor, or otherwise, as though
such payment had not been made.
(c) Waiver of Notice, Etc. The Guarantors waive all presentments,
---------------------
demands, notices of nonperformance, protests, notices of protest, notices
of dishonor, notices of default, and notices of acceptance of this
guarantee and of the existence, creation or incurring of new or additional
Obligations. At the option of the Banks, the Guarantors or any of them may
be joined in any action or proceeding commenced by the Banks against the
Borrower in connection with or based upon the indebtedness or any security
therefor and recovery may be had against the Guarantors in such action or
proceeding against the Guarantors, without any requirement that the Banks
first assert, prosecute or exhaust any remedy or claim against the Borrower
or any other Person. Without limiting the foregoing, the Guarantors
acknowledge that repeated and successive demands may be made and payments
made hereunder in response to such demands as and when, from time to time,
the Borrower may default in payment of the Obligations. Notwithstanding
any such payments hereunder, this guarantee shall remain in full force and
effect and shall apply to any and all subsequent defaults by the Borrower
in payment of the Obligations.
53
<PAGE>
All settlements, compromises, compositions, accounts stated and agreed
balances made in good faith between the Banks and the Borrower shall be
binding upon the Guarantors.
(d) Additional Waivers. The Guarantors waive any and all rights to
------------------
require the Banks to (i) proceed against the Borrower or the other
Guarantors, (ii) proceed against or exhaust any rights against the Borrower
or any other Person or exhaust security held from the Borrower or the other
Guarantors, or (iii) pursue any other remedy in the Banks' power
whatsoever. The Banks may, at their election, exercise any right or remedy
they may have against the Borrower or any security now or hereafter held by
the Banks, including the right to foreclose upon any such security by
judicial or nonjudicial sale and regardless of whether such sale is deemed
to be commercially reasonable, without affecting or impairing in any way
the liability of the Guarantors hereunder except to the extent the
Obligations may thereby be paid. Only the net proceeds from any such
foreclosure, after deduction of all costs and expenses authorized to be
deducted pursuant to the documents under which such security is held or by
law, shall be applied against the Obligations. The Banks may at their
discretion purchase all or any part of such security so sold or offered for
sale for their own account and may apply against the amount bid therefor
all or any part of the Obligations for which such security is held. The
Guarantors waive any defense arising out of the absence, impairment or loss
of any right of reimbursement or subrogation or other right or remedy of
the Guarantors against the Borrower or any other Obligor or any such
security, whether resulting from such election by the Banks, any defect in,
failure of or loss or absence of priority with respect to the Banks'
interest in such security, or otherwise. The Banks shall not be required
to institute or prosecute proceedings to recover any deficiency as a
condition of payment hereunder or enforcement hereof. The Guarantors waive
any defense arising by reason of any disability or other defense of the
Borrower or by reason of the cessation from any cause whatsoever of the
liability of the Borrower. The Guarantors shall have no right of
subrogation, and waive any right to enforce any remedy which the Banks now
have or may hereafter have against the Borrower, and waive any and all
benefit of or right to participate in any security now or hereafter held by
the Banks. Furthermore, the liability of each Guarantor under its
guarantee shall be absolute, unconditional and irrevocable irrespective of:
(i) any lack of validity, legality or enforceability of this
Agreement or any other Instrument;
(ii) any reduction, limitation, impairment or termination of any
Obligations for any reason, including any claim of waiver, release,
surrender, alteration or compromise, and shall not be subject to (and
each Guarantor hereby waives any right to or claim of) any defense or
setoff, counterclaim, recoupment or termination whatsoever by reason
of the invalidity, illegality, nongenuineness, irregularity,
compromise, unenforceability of, or any other event or occurrence
affecting, any Obligations or otherwise; and
54
<PAGE>
(iii) any other circumstance which might otherwise constitute a
defense available to, or a legal or equitable by such Bank in
enforcing its rights under this guarantee.
(e) Independent Obligations. The obligations hereunder are
-----------------------
independent of the obligations of the Borrower, and a separate action or
actions may be brought and prosecuted against the Guarantors, whether
action is brought against the Borrower or whether the Borrower is joined in
any such action or actions. The Guarantors waive the benefit of any
statute of limitations affecting its liability hereunder or the enforcement
thereof.
(f) Subordination. If an Event of Default has occurred and is
-------------
continuing, then any indebtedness of the Borrower now or hereafter held by
any of the Guarantors shall be subordinated and postponed to the
Obligations of the Borrower to the Banks, and the Guarantors agree that
they will not accelerate the maturity of such indebtedness; and such
indebtedness of the Borrower to any of the Guarantors, if the Banks so
request, shall be collected, enforced and received by a Guarantor as
trustee for the Banks and be paid over to the Banks, but without reducing
or affecting in any manner the liability of any of the Guarantors under the
other provisions of this guarantee. This subordination and postponement is
independent of this guarantee.
(g) Inquiry into Powers, Etc. It is not necessary for the Banks to
------------------------
inquire into the powers of the Borrower or its officers, directors,
partners or agents acting or purporting to act on its behalf, and any
indebtedness made or created in reliance upon the professed exercise of
such powers shall be guaranteed hereunder. Any sum which may not be
recoverable from the Guarantors on the basis of a guarantee shall be
recoverable from the Guarantors as the principal debtor and shall be paid
to the Banks on demand with interest. The Guarantors assume the
responsibility for being and keeping themselves informed of the financial
condition of the Borrower and of all other circumstances bearing upon the
risk of nonpayment of the indebtedness which diligent inquiry would reveal,
and agree that the Banks shall have no duty to advise the Guarantors of
information known to them regarding such condition of any such
circumstances.
(h) Assignment. The Guarantors may not assign their rights or
----------
delegate their obligations hereunder voluntarily or by operation of law
without in each case obtaining the Banks' prior written consent, and any
purported assignment or delegation without such consent shall be null and
void. Consent by the Banks to any such assignment or delegation shall not
relieve the Guarantors of any obligations or liabilities hereunder, unless
such consent so states. No such consent shall constitute consent to any
other or subsequent such assignment or delegation.
55
<PAGE>
(i) Taxes. The Guarantors will (i) pay all principal, interest, fees
-----
and all other amounts payable hereunder to the Banks free and clear and
without deduction for any and all present and future taxes, duties, levies,
compulsory loans, imposts, deductions, fees, charges, restrictions,
conditions and withholdings, of whatsoever nature, if any, and all
liabilities with respect thereto, excluding as to each Bank those which are
imposed by the United States of America, or any other country in which such
Bank's principal office or its lending branch is or may become organized or
established, or any political subdivision or taxing authority in such
respective countries and are imposed on or measured by the net income of
such Bank of its lending branch or are imposed on or measured by the gross
income, or gross receipts of, such Bank or its lending branch and are in
lieu of taxes on or measured by the net income ("Taxes"); and (ii) pay and
-----
indemnify the Banks against any liability for any United States of America
or Canada interest equalization and similar taxes, stamp or any other
transfer taxes with respect to this Agreement, and taxes (net of applicable
deduction and credits actually taken) of all jurisdictions with respect to
any amounts paid under this provision. If any Taxes or amounts to be paid
under subsection (ii) of the preceding sentence are paid by any Bank, the
Guarantors are required by applicable law to make any deduction or
withholding as aforesaid from any payment of the principal or interest
(including interest on any overdue principal) due hereunder or any other
fees or amounts due hereunder in respect of any such Taxes, and the
Guarantors shall pay such amount that after payment of any such Taxes to
the appropriate taxing authority there shall be paid to each Bank the net
amount otherwise payable hereunder in the absence of such Taxes.
(j) Agreement To Pay. All payments by or on behalf of the Guarantors
----------------
hereunder shall be in lawful money of the United States of America. The
Guarantors agree to pay reasonable attorneys' fees and all other costs and
expenses which may be incurred by the Banks in the enforcement of this
guarantee.
(k) Enforcement by Individual Bank. The Guarantors agree that each
------------------------------
Bank, acting alone, shall be entitled to enforce this guarantee.
ARTICLE 7.
EVENTS OF DEFAULT
SECTION 7.1. Events of Default. If any of the following events ("Events
----------------- ------
of Default") shall occur and be continuing:
- ----------
(a) Nonpayment of Notes, Etc. The Borrower shall fail to pay
------------------------
principal of any Note or to return any Gold when due (whether at stated
maturity or by prepayment or otherwise), or shall fail to pay interest
hereunder or on any Instrument, or any fees payable hereunder, when due; or
56
<PAGE>
(b) Representations and Warranties. Any representation or warranty
------------------------------
made by the Borrower or a Guarantor (or any of its officers) under or in
connection with this Agreement or any Instrument shall prove to have been
incorrect in any material respect when made, or any schedule, certificate,
financial statement, report, notice or other writing furnished by the
Borrower or a Guarantor to the Agent or any Bank shall prove to have been
incorrect in any material respect when made; or
(c) Noncompliance With this Agreement. The Borrower or a Guarantor
---------------------------------
shall fail to perform or observe any other term, covenant or agreement
contained in this Agreement on its part to be performed or observed and any
such failure shall remain unremedied for ten days after written notice
thereof shall have been given to such person by the Agent; or
(d) Nonpayment of Other Indebtedness for Borrowed Money. The
---------------------------------------------------
Borrower or a Guarantor shall fail to pay any Debt in excess of $500,000 in
principal amount (but excluding Debt evidenced by the Instruments) of the
Borrower (or a Guarantor), or any interest or premium thereon, when due
(whether by scheduled maturity, required prepayment, acceleration, demand
or otherwise); or any other default under any agreement or instrument
relating to any such Debt, or any other event, shall occur and shall
continue after the applicable grace period, if any, specified in such
agreement or instrument, if the effect of such default or event is to
accelerate, or to permit the acceleration of, the maturity of such Debt,
unless such default or event shall be waived by the holders or trustees for
such Debt or unless such default or event of default is being contested in
good faith and for which adequate reserves have been provided; or any such
Debt shall be declared to be due and payable, or required to be prepaid
(other than by a regularly scheduled required prepayment), prior to the
stated maturity thereof; or
(e) Bankruptcy, Insolvency, Etc. The Borrower or a Guarantor shall
---------------------------
generally not pay its debts as such debts become due, or shall admit in
writing its inability to pay its debts generally, or shall make a general
assignment for the benefit of creditors; or any proceeding shall be
instituted by or against the Borrower or a Guarantor seeking to adjudicate
it a bankrupt or insolvent, or seeking liquidation, winding up,
reorganization, arrangement, adjustment, protection, relief, or composition
of it or its debts under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors, or seeking the entry of any order for
relief or the appointment of a receiver, trustee, or other similar official
for it or for any substantial part of its property and, if instituted
against the Borrower or a Guarantor, shall remain undismissed for a period
of sixty days; or the Borrower or a Guarantor shall take any corporate
action to authorize any of the actions set forth in this subsection (e); or
(f) Judgment. A final judgment or order for the payment of money in
--------
excess of $500,000 shall be rendered against the Borrower or a Guarantor
and either (i) enforcement proceedings shall have been commenced by any
creditor upon such judgment or order or (ii) a stay of enforcement of such
judgment or order, by reason of a
57
<PAGE>
pending appeal or otherwise, shall not be in effect for any period of ten
consecutive days; or
(g) Termination Event. Any Termination Event with respect to a Plan
-----------------
shall have occurred and be continuing thirty days after notice thereof
shall have been given by the Borrower or a Guarantor to the Agent and such
Plan's aggregate Amount of Unfunded Benefit Commitments (as defined in
section 4001(a)(18) of ERISA) exceeds $500,000 (or in the case of a
Termination Event involving the withdrawal of a substantial employer, the
withdrawing employer's proportionate share of such aggregate Amount of
Unfunded Benefit Commitments exceeds such amount); or
(h) Material Adverse Change. In the reasonable opinion of the
-----------------------
Majority Banks, there shall occur any event or any condition shall exist
which materially adversely affects (i) the ability of the Borrower or a
Guarantor to perform its obligations under this Agreement, or (ii) the
business or financial condition of the Borrower or a Guarantor; provided,
--------
that before a change will be deemed to be materially adverse by reason of a
fluctuation in the price of Gold, account will be taken of the all-in
product costs of the Borrower and such Guarantor; or
(i) Change in Ownership. There shall occur any transfer, assignment
-------------------
or other event causing:
(i) The Parent to cease to own directly or indirectly one
hundred percent (100%) of each outstanding class of equity securities
of the Borrower; or
(ii) A Change in Ownership or Management; or
(j) Repudiation or Termination of the Guarantee. Any Guarantor shall
-------------------------------------------
have terminated or repudiated all or any part of its liability under
Article 6 before the transactions contemplated by this Agreement have been
---------
completed and all indebtedness hereunder has been fully and finally paid;
or
(k) Failure of the Parent to Meet Certain Financial Criteria. The
--------------------------------------------------------
Parent shall fail to, on a consolidated basis:
(i) Maintain at all times (but tested at the end of each fiscal
quarter) a ratio of Consolidated Net Tangible Assets to consolidated
liabilities of at least 2:1. For the purposes hereof, (aa)
consolidated liabilities shall exclude current liabilities other than
the current portion of (x) long-term debt and (y) deferred revenue and
(z) interest bearing short-term debt; deferred income taxes; deferred
revenue in respect of gold purchase warrants or any securities or
options similar thereto; and deferred income to the extent it
represents a nonfinancial obligation, and (bb) consolidated
liabilities shall include the Stated Amount of the Letter of Credit
and
58
<PAGE>
also preferred shares having a maturity, or which are retractable
at the option of the holder, prior to the Maturity Date; or
(ii) Ensure at all times (but tested at the end of each fiscal
quarter) the Mining Group Net Present Value of the Mining Group Future
Cash Flow is equal to, or in excess of, 1.4 times the aggregate of the
consolidated total Debt of the Parent and any such other Debt of the
Borrower or Guarantors which is not reflected in the consolidated
financial statements of the Parent. For the purposes of this clause
------
(k)(ii), (aa) all obligations in the form of Gold or Silver loans and
-------
all revenues from the repayment of Gold or Silver loans shall be
valued at the respective Advance Date Values of each such loan, and
(bb) the "consolidated total Debt of the Parent" shall include the
Stated Amount of the Letter of Credit and not include Debt whose sole
recourse is to a future mine and is otherwise nonrecourse to the
Borrower and the Guarantors; or
(l) Forward Sale. The Borrower shall be in default under any Forward
------------
Sale;
then, upon the occurrence of an event under clause (e) above, automatically,
----------
without notice of any kind, the obligation of each Bank or the Issuer to make an
Advance and enter into a Forward Sale shall terminate and the unpaid balance of
the Instruments, all interest thereon and all other amounts payable under this
Agreement and the other Instruments, shall become immediately due and payable
and at the option of each Bank, the delivery date of any one or more outstanding
Forward Sales held by such Bank shall become the date of such event; and, upon
the occurrence of an event under any other clause above, the Agent shall at the
request of the Majority Banks by notice to the Borrower, (i) declare the
obligation of each Bank or the Issuer to make an Advance and enter into a
Forward Sale to be terminated, whereupon the same shall forthwith terminate, and
(ii) declare the Instruments, all interest thereon and all other amounts payable
under this Agreement and the other Instruments to be forthwith due and payable
and at the option of each Bank, the delivery date under any one or more
outstanding Forward Sales held by such Bank to be the day of such notice;
whereupon, in any case, all Gold and Dollars borrowed hereunder shall be
returned forthwith and all such interest and all such amounts shall become and
be forthwith due and payable, together with any Breakage Costs and any other
transaction and other costs, and the Borrower shall have deposited Dollars in a
cash collateral account maintained with (and under the sole dominion and control
of) the Agent in the Stated Amount of the Letter of Credit and at the option of
each Bank, Gold subject to any one or more Forward Sales held by such Bank shall
be delivered forthwith to such Bank, without presentment, demand, protest or
further notice of any kind, all of which are hereby expressly waived by the
Borrower.
ARTICLE 8.
THE AGENT
59
<PAGE>
SECTION 8.1. Authorization and Action. Each Bank hereby appoints and
------------------------
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement and the other Instruments as are delegated to
the Agent by the terms hereof or thereof, together with such powers as are
reasonably incidental thereto. As to any matters not expressly provided for by
this Agreement and the other Instruments (including, without limitation,
enforcement or collection of the Instruments), the Agent shall not be required
to exercise any discretion or take any action, but shall be required to act or
to refrain from acting (and shall be fully protected in so acting or refraining
from acting) upon the instructions of the Majority Banks and such instructions
shall be binding upon all Banks and all holders of Instruments; provided,
--------
however, that the Agent shall not be required to take any action which exposes
- -------
the Agent to personal liability or which is contrary to this Agreement or any
other Instrument or applicable law.
SECTION 8.2. Notification of Banks. Upon receipt by the Agent from the
---------------------
Borrower of any communication calling for an action on the part of the Banks or
upon notice to or actual knowledge by the Agent of any Event of Default, it will
in turn promptly inform the other Banks in writing or by telex or electronic
facsimile transmission of the nature of such communication or of such Event of
Default, as the case may be.
SECTION 8.3. Agent's Reliance, Etc.' Neither the Agent nor any of its
--------------------- -
directors, officers, agents or employees shall be liable for any action taken or
omitted to be taken by it or them under or in connection with this Agreement or
any other Instrument, except for its or their own gross negligence or willful
misconduct. Without limitation of the generality of the foregoing, the Agent:
(i) may treat the payee of any Instrument as the holder thereof until the Agent
receives written notice of the assignment or transfer thereof signed by such
payee and in form satisfactory to the Agent; (ii) may consult with legal counsel
(including counsel for the Borrower), independent public accountants and other
experts selected by it and shall not be liable for any action taken or omitted
to be taken in good faith by it in accordance with the advice of such counsel,
accountants or experts; (iii) makes no warranty or representation to any Bank
and shall not be responsible to any Bank for any statements, warranties or
representations made in or in connection with this Agreement; (iv) shall not
have any duty to ascertain or to inquire as to the performance or observance by
the Borrower of any of the terms, covenants or conditions of this Agreement or
to inspect the property (including the books and records) of the Borrower; (v)
shall not be responsible to any Bank for the due execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Agreement, any
Instrument or any other instrument or document furnished pursuant hereto; and
(vi) shall incur no liability under or in respect of this Agreement by acting
upon any notice, consent, certificate or other instrument or writing (which may
be by telex or electronic facsimile transmission) believed by it to be genuine
and signed or sent by the proper party or parties.
SECTION 8.4. The Bank of Nova Scotia and Affiliates. With respect to its
--------------------------------------
Commitments, the Term Advances and the Revolving Advances made by it and the
Letter of Credit and other Instruments issued to it, The Bank of Nova Scotia
shall have the same rights and
60
<PAGE>
powers under this Agreement as any other Bank and may exercise the same as
though it were not the Agent; and the term "Bank" or "Banks" shall, unless
otherwise expressly indicated, include The Bank of Nova Scotia in its individual
capacity. The Bank of Nova Scotia and its affiliates may accept deposits from,
lend money to, act as trustee under indentures of, and generally engage in any
kind of business with, the Borrower, any of its Affiliates and any person or
entity who may do business with or own securities of the Borrower or any
Affiliate, all as if The Bank of Nova Scotia were not the Agent and without any
duty to account therefor to the Banks.
SECTION 8.5. Bank Credit Decision. Each Bank acknowledges that it has,
--------------------
independently and without reliance upon the Agent or any other Bank and based on
the financial statements referred to herein and such other documents and
information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement. Each Bank also acknowledges that it
will, independently and without reliance upon the Agent or any other Bank and
based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not taking action
under this Agreement or any other Instrument. Each Bank further acknowledges
that it has not, nor is it entitled to, rely on information (if any) provided to
it by agents, officers, or employees of the Agent (including any mining engineer
employed by the Agent).
SECTION 8.6. Indemnification. The Banks agree to indemnify the Agent (to
---------------
the extent not reimbursed by the Borrower), ratably according to their
respective Commitments, from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever which may be imposed on, incurred
by, or asserted against the Agent in any way relating to or arising out of this
Agreement, any other Instrument, including reasonable attorneys' fees, or any
action taken or omitted by the Agent under this Agreement or any other
Instrument, provided that no Bank shall be liable for any portion of such
--------
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting from the Agent's gross negligence or
willful misconduct or from the Borrower's failure to pay any principal, interest
or fees hereunder when due. Without limitation of the foregoing, each Bank
agrees to reimburse the Agent promptly upon demand for its ratable share of any
out-of-pocket expenses (including counsel fees) incurred by the Agent in
connection with the preparation, execution, administration, or enforcement of,
or legal advice in respect of rights and responsibilities under, this Agreement
or any other Instrument to the extent the Agent shall not have been reimbursed
for such expenses by the Borrower.
SECTION 8.7. Successor Agent. The Agent may resign at any time by giving
---------------
written notice thereof to the Banks and the Borrower and may be removed at any
time with or without cause by the Banks other than the Agent. Upon any such
resignation or removal, the Banks shall have the right to appoint a successor
Agent. If no successor Agent shall have been so appointed by the Banks, and
shall have accepted such appointment, within thirty days after the retiring
Agent's giving of notice of resignation or the Banks' removal of the retiring
Agent, then the retiring Agent may, on behalf of the Banks, appoint a successor
Agent, which shall be a
61
<PAGE>
commercial bank organized under the laws of the United States of America or of
any state hereof and having a combined capital and surplus of at least
$500,000,000. Upon the acceptance of any appointment as Agent hereunder by a
successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations under
this Agreement. After any retiring Agent's resignation or removal hereunder as
Agent, the provisions of this Article shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was Agent under this
Agreement, and Section 9.5 shall continue to inure to its benefit.
-----------
ARTICLE 9.
MISCELLANEOUS
SECTION 9.1. Waivers, Amendments, Etc. The provisions of this Agreement
------------------------
and of each other Instrument may from time to time be amended, modified or
waived, if such amendment, modification or waiver is in writing and consented to
by the Borrower and the Majority Banks; provided, however, that no such
-------- -------
amendment, modification or waiver which would:
(a) modify any requirement hereunder that any particular action be
taken by all the Banks or by the Majority Banks shall be effective unless
consented to by each Bank;
(b) modify this Section, modify Article 6, release any Guarantor,
---------
change the definition of "Majority Banks", increase the Commitment or the
--------------
Percentage of any Bank, modify any fees described in Section 2.14 or extend
------------
the Maturity Date shall be made without the consent of each Bank;
(c) extend the due date for, or modify the amount of, any scheduled
repayment or prepayment of principal of or interest on any Advance (or
modify the principal amount of or interest on any Advance) shall be made
without the consent of the holder of the Note or Gold Receipt evidencing
such Advance;
(d) increase the Stated Amount of the Letter of Credit shall be made
without the consent of the Issuer; or
(e) affect adversely the interests, rights or obligations of (i) the
Agent (in its capacity as the Agent), or the Issuer (in its capacity as the
Issuer), shall be made without the consent of the Agent or the Issuer, as
the case may be.
No failure or delay on the part of the Agent, any Bank or the holder of any Note
or Gold Receipt in exercising any power or right under this Agreement or any
other Instrument shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power or right preclude any other or further
exercise thereof or the exercise of any other power or right. No notice to or
62
<PAGE>
demand on the Borrower in any case shall entitle it to any notice or demand in
similar or other circumstances. No waiver or approval by the Agent, any Bank or
the holder of any Note or Gold Receipt under this Agreement or any other
Instrument shall, except as may be otherwise stated in such waiver or approval,
be applicable to subsequent transactions. No waiver or approval hereunder shall
require any similar or dissimilar waiver or approval thereafter to be granted
hereunder.
SECTION 9.2. Notices, Etc. All notices and other communications provided
------------
for hereunder shall be in writing (including telex and electronic facsimile
communication) and mailed, sent by facsimile or delivered, if to the Borrower or
a Guarantor, c/o Echo Bay Inc., 6400 Fiddler's Green Circle, Suite 1000,
Englewood, Colorado 90111, Attention: Vice President and Treasurer (facsimile
(303) 714-8995); if to any Bank or the Agent, at its address set forth under its
name on the signature pages hereof; or, as to each party, at such other address
as shall be designated by such party in a written notice to the other parties.
All such notices and communications shall, when mailed or sent by facsimile, be
addressed as aforesaid, except that notices to the Agent pursuant to the
provisions of Article 2 shall not be effective until received by the Agent.
---------
SECTION 9.3. No Waiver; Remedies. No failure on the part of the Agent or
-------------------
any Bank to exercise, and no delay in exercising, any right hereunder or under
any Instrument shall operate as a waiver thereof; nor shall any single or
partial exercise of any right hereunder or under any Instrument preclude any
other or further exercise thereof or the exercise of any other right. The
remedies herein provided are cumulative and not exclusive of any remedies
provided by law.
SECTION 9.4. Accounting Terms. All accounting terms not specifically
----------------
defined herein shall be construed in accordance with Canadian GAAP consistently
applied, except as otherwise stated herein. The principal amount of all
Borrowings of Gold shall be the Dollar Value of such Gold at the date of
determination of such principal amount.
SECTION 9.5. Costs, Expenses and Taxes. The Borrower agrees to pay on
-------------------------
demand all reasonable, out-of-pocket costs and expenses in connection with the
preparation, execution, delivery and administration of this Agreement, the
Instruments, and the other documents to be delivered hereunder (including any
amendments, waivers, consents, supplements or other modifications to this
Agreement or any other Instrument as may from time to time hereafter be
required) including the reasonable fees and out-of-pocket expenses of counsel
for the Agent and for any Bank with respect thereto and with respect to advising
the Agent or any Bank as to its rights and responsibilities under this Agreement
and each other Instrument, and all reasonable costs and expenses, if any, in
connection with the enforcement of this Agreement, the Instruments, and the
other documents to be delivered hereunder, provided that the Borrower shall not
be obligated to pay fees or expenses of counsel for any Bank other than the
Agent incurred in connection with the preparation, execution and delivery of
this Agreement, the Instruments and the other documents to be delivered
hereunder prior to or at the time of the Amendment Effective Date. Without
limiting the generality of the foregoing, the Borrower agrees to pay the
63
<PAGE>
reasonable fees and expenses of the Agent's mining engineer incurred from time
to time, including in connection with an annual tour and inspection of all mines
in the Mining Group.
In addition to any amounts that may become payable under Section 2.22, the
------------
Borrower shall pay any and all stamp, mortgage recording and other taxes, filing
fees or charges payable or determined to be payable in connection with the
execution and delivery of this Agreement, the Instruments, and the other
documents to be delivered hereunder, and agrees to save the Agent and each Bank
harmless from and against any and all liabilities with respect to or resulting
from any delay in paying or omission to pay such taxes, filing fees or charges.
The Borrower agrees to indemnify and hold harmless the Agent and each Bank on
demand against any taxes (including any late payment penalties or interest)
imposed by any state of the United States or any agency or political subdivision
thereof on or in respect of (i) the interest and other amounts payable on any
loan under this Agreement and (ii) any payment of indemnity under this sentence,
so that such interest and indemnity payments shall be in an aggregate amount
which, after deduction of all such taxes (including penalties and interest) in
respect of such aggregate amount, will be equal to the amount of such interest.
In addition to the payment of expenses pursuant to the preceding
paragraphs, whether or not the transactions contemplated hereby shall be
consummated, the Borrower agrees to indemnify, pay and hold harmless the Agent,
each of the Banks, and the officers, directors, employees, agents and other
Affiliates of the Agent and the Banks (collectively called the "Indemnitees")
-----------
from and against, any and all other liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, claims, costs, expenses and disbursements
of any kind or nature whatsoever (including, without limitation, the reasonable
fees and disbursements of counsel for such Indemnitees in connection with any
investigative, administrative or judicial proceeding, whether or not such
Indemnitee shall be designated a party thereto), that may be imposed on,
incurred by, or asserted against such Indemnitee, in any manner relating to or
arising out of this Agreement or the Instruments, the Banks' agreement to make
the Advances or participate in the Letter of Credit hereunder, the Issuer's
agreement to issue the Letter of Credit, the making of the Advances hereunder,
or in any way arising from any actions in connection with the transactions
contemplated hereby, or the use or intended use of the proceeds of Advances,
including in respect of any violation or alleged violation of any Environmental
Laws (the "indemnified liabilities"); provided, that the Borrower shall have no
----------------------- --------
obligation to an Indemnitee hereunder with respect to indemnified liabilities
arising from the gross negligence or willful misconduct of any such Indemnitee.
To the extent that the undertaking to indemnify, pay and hold harmless set forth
in the preceding sentence may be unenforceable because it is violative of any
law or public policy, the Borrower shall contribute the maximum portion which it
is permitted to pay and satisfy under applicable law to the payment and
satisfaction of all indemnified liabilities incurred by the Indemnitees or any
of them.
SECTION 9.6. Right of Setoff. Upon the occurrence and during the
---------------
continuance of any Event of Default, each Bank is hereby authorized at any time
and from time to time, without notice to the Borrower or the Parent (any such
notice being expressly waived by the Borrower
64
<PAGE>
and the Parent), to set off and apply any and all deposits (general or special,
time or demand, provisional or final) at any time held and other indebtedness at
any time owing by such Bank to or for the credit or the account of the Borrower
or the Parent against any and all of the obligations of the Borrower and/or the
Parent now or hereafter existing under this Agreement and the Instruments,
although such obligations may be contingent and unmatured. Each Bank agrees
promptly to notify the Borrower and the Agent after any such setoff and
application, provided that the failure to give such notice shall not affect the
validity of such setoff and application. The rights of each Bank under this
section are in addition to other rights and remedies (including, without
limitation, other rights of setoff) which the Bank may have.
SECTION 9.7. Successors and Assigns; Governing Law.
-------------------------------------
(a) Successors and Assigns. This Agreement shall be binding upon and
----------------------
shall inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that neither the Borrower, the
-------- -------
Parent nor the Guarantors may assign or transfer their respective rights or
obligations hereunder without the prior written consent of the Agent and
all Banks and the rights of sale, assignment and transfer of the Banks are
subject to the following clause (b).
----------
(b) Assignments and Participations. Any Bank may, with the prior
------------------------------
approval of the Borrower and the Agent (which approvals shall not be
unreasonably withheld, and which consent of the Borrower shall not be
required during the continuation of an Event of Default) and the Issuer,
assign and delegate to its successors and affiliates or one or more banks
or other financial institutions all or any part of any Advance or Advances
owing to the Bank and all or any part of such Bank's Commitment; provided,
--------
that (a) each such assignment and delegation shall be of a constant, and
not a varying, percentage of the assigning Bank's Revolving Commitment,
Revolving Advances, Letter of Credit Commitment and Term Advances, (b) each
such assignment and delegation shall be in a minimum aggregate amount of
$10,000,000 (or, if less, the then remaining amount of such Bank's
Advances, Commitments and obligations to reimburse Disbursements under the
terms of this Agreement), and (c) each such assignment and delegation does
not result in increased costs to the Borrower at the time of such
assignment and delegation. Each assignee (an "Assignee Bank") shall
-------------
provide the Agent written notice of such assignment and delegation,
together with payment instructions, addresses, the Schedule of Gold Rates
per annum, and related information with respect to such Assignee Bank and
such Assignee Bank and the assignor Bank shall execute and deliver to the
Borrower and the Agent an assignment agreement substantially in the form of
Exhibit K hereto (an "Assignment Agreement"). Such assignor Bank or such
--------- --------------------
Assignee Bank must also pay a processing fee to the Agent upon delivery of
any Assignment Agreement in the amount of $2,500 (which fee shall be for
the sole account of the Agent). From and after the date the Agent accepts
such Assignment Agreement, (x) the Assignee Bank thereunder shall be
automatically deemed to have become a party hereto and to the extent that
rights and obligations hereunder have been assigned and delegated to such
Assignee Bank in
65
<PAGE>
connection with such Assignment Agreement, shall have the rights and
obligations of a Bank hereunder and under any documentation executed in
connection herewith and (y) the assignor Bank, to the extent that rights
and obligations hereunder have been assigned and delegated by it in
connection with such Assignment Agreement, shall be released from its
obligations hereunder and under the related loan documentation. Within five
Business Days after its receipt of notice that the Agent has received an
executed Assignment Agreement, the Borrower shall execute and deliver to
the Agent (for delivery to the Assignee Bank) new Notes and Gold Receipts
evidencing such Bank's assigned Advances and Commitments. Any attempted
assignment and delegation not made in accordance with this subsection shall
be null and void. Notwithstanding any other provision set forth in this
Agreement, any Bank may at any time create a security interest in all or
any portion of its rights under this Agreement (including, without
limitation, the Advances owing to it and the Notes held by it) in favor of
any Federal Reserve Bank in accordance with Regulation A of the Board of
Governors of the Federal Reserve System.
Any Bank may, with prior notice to the Borrower and the Agent, at any
time sell to one or more banks or other financial institutions
participating interests in any or any part of its Advances, its Commitments
or other interests of such Bank hereunder; provided, however, that
-------- -------
(i) no participation contemplated in this clause shall relieve
such Bank from its Commitments or its other obligations hereunder or
under any other document executed in connection herewith,
(ii) such Bank shall remain solely responsible for the
performance of its Commitments and such other obligations,
(iii) the Borrower, each Guarantor and the Agent shall continue
to deal solely and directly with such Bank in connection with such
Bank's rights and obligations under this Agreement and each of the
other documents executed in connection herewith,
(iv) each participant shall be entitled to receive the same
information concerning the Borrower as a Bank hereunder, subject to
compliance with Section 9.11, and
------------
(v) no participant shall be entitled to require such Bank to
take or refrain from taking any action hereunder or under any other
document executed in connection herewith, except that such Bank may
agree with any participant that such Bank will not, without such
participant's consent, take any actions of the type described in
clause (b) or (c) of Section 9.1 with respect to the Advances and
---------- --- -----------
Commitments in which it is participating.
66
<PAGE>
(c) Governing Law. This Agreement and (except as set forth in the
-------------
next sentence), the Instruments shall be governed by, and construed in
accordance with the laws of the State of Colorado. THE LETTER OF CREDIT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNATIONAL
STANDBY PRACTICES (ISP98), INTERNATIONAL CHAMBER OF COMMERCE, PUBLICATION
NUMBER 590 (THE "ISP RULES") AND, AS TO MATTERS NOT GOVERNED BY THE ISP
---------
RULES, THE LAWS OF THE STATE OF NEW YORK.
SECTION 9.8. Consent to Jurisdiction. The Borrower and the Guarantors
-----------------------
irrevocably submit to the nonexclusive jurisdiction of (i) any United States
federal or Colorado State court sitting in the City of Denver, (ii) any United
States federal or New York State court sitting in the City of New York and (iii)
any United States federal or Georgia State court sitting in the City of Atlanta
in any action or proceeding arising out of this Agreement and agree that all
claims and matters in respect of such action and proceeding may be heard and
determined by such federal or State court. The Borrower and the Guarantors also
waive any objection they might now or hereafter have on the ground that any such
action or proceeding in such federal or State court has been brought in an
inconvenient forum. The Borrower and the Guarantors agree that service of
process may be made upon them by service on The Corporation Company at its
office in Denver in any such action or proceeding, and hereby irrevocably
appoint said The Corporation Company as Agent for service of process therein.
SECTION 9.9. Waiver of Jury Trial . THE AGENT, THE BANKS, EACH GUARANTOR
--------------------
AND THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY
RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED
HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT, THE
EXISTING AGREEMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE BANKS OR THE BORROWER.
THE BORROWER ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT
CONSIDERATION FOR THIS PROVISION AND THAT THIS PROVISION IS A MATERIAL
INDUCEMENT FOR THE AGENT AND THE BANKS ENTERING INTO THIS AGREEMENT.
SECTION 9.10. Execution in Counterparts. This Agreement may be executed
-------------------------
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
SECTION 9.11. Confidentiality. Each Bank agrees to use reasonable efforts
---------------
to ensure that any information concerning the Borrower and the Guarantors
obtained by such Bank or any authorized agents or representatives of such Bank
pursuant to this Agreement which is not
67
<PAGE>
contained in a report or other document filed with the Securities and Exchange
Commission, distributed by the Borrower or the Guarantors to shareholders or
otherwise available to the public generally or otherwise independently known by
such Bank (otherwise than by breach of these confidentiality obligations by such
Bank) will, to the extent permitted by law and except as may be required by
valid subpoena or other external reporting requirements or as may be necessary
in litigation in the sole determination of the Banks, be treated confidentially
by such Bank and will not be distributed or otherwise made available by such
Bank to any Person other than such Bank's employees, authorized agents or
representatives who have a reasonable need to know such information.
Notwithstanding the foregoing, any Bank may furnish copies of any information
received hereunder to any assignee or participant pursuant to Section 9.7
(including any potential assignee or participant, so
-----------
long as such Person agrees in writing to be bound by the terms of Section 9.7).
-----------
SECTION 9.12. Severability. In the event that any one or more provisions
------------
contained in this Agreement should for any reason be held to be unenforceable in
any respect under the laws of the United States of America or any state, such
unenforceability shall not affect any other provision hereof, and this Agreement
shall be construed in the applicable jurisdiction as if such unenforceable
provision had not been contained herein.
68
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
ECHO BAY INC.
By: /s/ Peter H. Cheesbrough
---------------------------------------------
Title: Senior Vice President, Finance & CFO
ECHO BAY MINES LTD.
By: /s/ Peter H. Cheesbrough
---------------------------------------------
Title: Senior Vice President, Finance & CFO
ROUND MOUNTAIN GOLD CORPORATION
By: /s/ Peter H. Cheesbrough
---------------------------------------------
Title: Senior Vice President, Finance & CFO
ECHO BAY MINERALS COMPANY
By: /s/ Peter H. Cheesbrough
---------------------------------------------
Title: Senior Vice President, Finance & CFO
ECHO BAY EXPLORATION INC.
By: /s/ Peter H. Cheesbrough
---------------------------------------------
Title: Senior Vice President, Finance & CFO
ECHO BAY CAPITAL CORPORATION
By: /s/ Peter H. Cheesbrough
---------------------------------------------
Title: Senior Vice President, Finance & CFO
69
<PAGE>
THE BANK OF NOVA SCOTIA
By: /s/ J.W. Richmond
--------------------------------------------
Title: Senior Relationship Manager
By: /s/ Sharon D. McIntyre
--------------------------------------------
Title: Relationship Manager
Address For Notices to Agent:
The Bank of Nova Scotia
600 Peachtree Street, N.E.
Suite 2700
Atlanta, GA 30308
Attention: Michael Silveira
Telecopy No.: (404) 888-8988
Address For Notices to Bank--Gold Borrowings:
The Bank of Nova Scotia
Scotia Capital Markets
ScotiaMocatta
40 King Street West
Scotia Plaza, 68th Floor
Toronto, Ontario M5W 2X6
CANADA
Attention: Director
Telecopy No.: (416) 866-6897
With Copy (stamped "For Advice Only") to:
The Bank of Nova Scotia
600 Peachtree Street, N.E.
Suite 2700
Atlanta, GA 30308
Attention: Michael Silveira
Telecopy No.: (404) 888-8988
70
<PAGE>
With Copy (stamped "For Advice Only") to:
The Bank of Nova Scotia
Corporate Banking - Mining
44 King Street West
Toronto, Ontario M5H 1H1
CANADA
Attention: Vice President
Telecopy No.: (416) 866-2010
Address For Notices to Bank--Base and LIBOR
Borrowings:
The Bank of Nova Scotia
600 Peachtree Street, N.E.
Suite 2700
Atlanta, GA 30308
Attention: Michael Silveira
Telecopy No.: (404) 888-8988
With Copy (stamped "For Advice Only") to:
The Bank of Nova Scotia
Corporate Banking - Mining
44 King Street West
Toronto, Ontario M5H 1H1
CANADA
Attention: Vice President
Telecopy No.: (416) 866-2010
71
<PAGE>
CANADIAN IMPERIAL BANK OF COMMERCE
By: /s/ D.T. Clee
----------------------------------
Name: D.T. Clee
Title: Managing Director
Address For Notices to Bank--Gold
Borrowings:
Canadian Imperial Bank of Commerce
Investment Bank
Precious Metals Dept.
5th Floor
161 Bay Street
Toronto, Ontario M5J 258
CANADA
Attention: George Francois
Telecopy No.: (416) 594-8333
With Copy (Stamped "For Advice
Only") to:
Canadian Imperial Bank of Commerce
Atlanta Agency
2722 Paces Ferry Road
Suite 1200
Atlanta, GA 30339
Attention: Loan Administration Department
Telex No.: 54-2413
Telecopy No.: (770) 319-4950
72
<PAGE>
With Copy to:
Canadian Imperial Bank of Commerce
Corporate Bank
Global Mining Group
161 Bay Street, BCE Place
8th Floor
Toronto, Ontario M5J 2S8
CANADA
Telecopy No.: (416) 594-8347
Also With Copy to:
Canadian Imperial Bank of Commerce
Corporate Bank
425 Lexington Avenue
8th Floor
New York, NY 10017
Telecopy No.: (212) 856-3761
Address For Notices to Bank--Base
Borrowings:
Canadian Imperial Bank of Commerce
Atlanta Agency
2722 Paces Ferry Road
Suite 1200
Atlanta, GA 30339
Attention: Loan Administration Department
Telex No.: 54-2413
Telecopy No.: (770) 319-4950
73
<PAGE>
With Copy to:
Canadian Imperial Bank of Commerce
Corporate Bank
Global Mining Group
161 Bay Street, BCE Place
8th Floor
Toronto, Ontario M5J 2S8
CANADA
Telecopy No.: (416) 594-8347
With Copy to:
Canadian Imperial Bank of Commerce
425 Lexington Avenue
8th Floor
New York, NY 10017
Telecopy No.: (212) 856-3761
Address For Notices to Bank--LIBOR
Borrowings:
Grand Cayman Branch
c/o Canadian Imperial Bank of
Commerce
Atlanta Agency
2722 Paces Ferry Road
Suite 1200
Atlanta, GA 30339
Attention: Loan Administration Department
Telex No.: 54-2413
Telecopy No.: (770) 319-4950
74
<PAGE>
With Copy to:
Canadian Imperial Bank of Commerce
Corporate Bank
Global Mining Group
161 Bay Street, BCE Place
8th Floor
Toronto, Ontario M5J 2S8
CANADA
Telecopy No.: (416) 594-8347
With Copy to:
Canadian Imperial Bank of Commerce
425 Lexington Avenue
8th Floor
New York, NY 10017
Telecopy No.: (212) 856-3761
75
<PAGE>
CREDIT SUISSE
By: /s/ Didier Siffer
--------------------------------------------
Title: Vice President
By: /s/ Graham Hunt
--------------------------------------------
Title: Director
Address For Notices to Bank--Gold Borrowings:
Credit Suisse First Boston
11 Madison Avenue
5th Floor
New York, NY 10010
Attention: Dan McEvoy
Precious Metal Desk
Telecopy No.: (212) 325-8042
With Copy to:
Credit Suisse First Boston
5 World Trade Center
8th Floor
New York, NY 10027
Attn: Gennaro Sarasola
Client Services
Telecopy No.: (212) 335-0576
76
<PAGE>
Address for Notices to Bank--Base
Borrowings:
Credit Suisse First Boston
5 World Trade Center
8th Floor
New York, NY 10027
Attn: Gennaro Sarasola
Client Services
Telecopy No.: (212) 335-0576
Address for Notices to Bank--LIBOR
Borrowings:
Credit Suisse First Boston
5 World Trade Center
8th Floor
New York, NY 10027
Attn: Gennaro Sarasola
Client Services
Telecopy No.: (212) 335-0576
77
<PAGE>
THE CHASE MANHATTAN BANK
By: /s/ James H. Ramage
------------------------
Title: Vice President
Address for Notices to Bank:
270 Park Avenue
New York, NY 10017
Attention: James H. Ramage
Telecopy: (212) 270-4724
Addresses For Notices to Bank--Gold Borrowings:
The Chase Manhattan Bank
One Chase Manhattan Plaza
New York, NY 10081
Attention: Bullion Division
1 CMP-15
Telecopy No.: (212) 552-2259
With Copy to:
270 Park Avenue
New York, NY 10017
Attention: James H. Ramage
Telecopy No.: (212) 270-4724
Address For Notices to Bank--Base and LIBOR Borrowings:
The Chase Manhattan Bank
One Chase Manhattan Plaza
New York, NY 10081
Attention: Rocky Chan
Telecopy No.: (212) 552-4455
78
<PAGE>
REPUBLIC NATIONAL BANK OF NEW YORK
By: /s/ Richard Ward
-------------------------------
Title: Vice President
Address for Notices to Bank:
Republic National Bank of New York
452 Fifth Avenue
New York, NY 10018
Attention: David C. DeMilt
Telecopy: (212) 525-6581
Addresses For Notices to Bank--Gold Borrowings:
Republic National Bank of New York
452 Fifth Avenue
New York, NY 10018
Attention: Richard D. Gibbons
Telecopy No.: (212) 525-6535
With Copy to:
Republic National Bank of New York
452 Fifth Avenue
New York, NY 10018
Attention: David C. DeMilt
Telecopy No.: (212) 525-6581
79
<PAGE>
Address For Notices to Bank--Base and LIBOR
Borrowings:
Republic National Bank of New York
452 Fifth Avenue
New York, NY 10018
Attention: Richard D. Gibbons
Telecopy No.: (212) 525-6535
80
<PAGE>
BARCLAYS BANK PLC
By: /s/ John P. McMahon
------------------------------------
Title: Vice President
Address for Notices to Bank:
Barclays Bank PLC
222 Broadway, 12th Floor
New York, NY 10038
Attention: John McMahon
Telecopy: (212) 412-5661
Addresses For Notices to Bank--Gold Borrowings:
Barclays Bank PLC
Barclays Precious Metals
6th Floor, 2 Minster Court
Mincing Lane
London, EC3R 788
Attention: Ms. Sylvia Williams
Telecopy No.: 011 44 171 621 5292
With Copy to:
Barclays Bank PLC
222 Broadway, 12th Floor
New York, NY 10038
Attention: Noreen Perez
Telecopy No.: (212) 412-5306/5307/5308
Address For Notices to Bank--Base and LIBOR
Borrowings:
Barclays Bank PLC
222 Broadway, 12th Floor
New York, NY 10038
Attention: Noreen Perez
Telecopy No.: (212) 412-5306/5307/5308
81
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
JURISDICTION OF
SUBSIDIARIES OWNERSHIP INCORPORATION
- -------------- ----------- ---------------
<S> <C> <C>
Echo Bay Inc. 100% Delaware, U.S.A.
Echo Bay Finance Corporation 100% Delaware, U.S.A.
Round Mountain Gold Corporation 100% Delaware, U.S.A.
Echo Bay Minerals Company 100% Delaware, U.S.A.
Sunnyside Gold Corporation 100% Delaware, U.S.A.
Echo Bay Exploration Inc. 100% Delaware, U.S.A.
Echo Bay Management Corporation 100% Delaware, U.S.A.
White Pine Gold Corporation 100% Delaware, U.S.A.
Echo Bay Alaska Inc. 100% Delaware, U.S.A.
Echo Bay Resources Inc. 100% Delaware, U.S.A.
Echo Bay Sales Ltd. 100% Alberta, Canada
Corp. Air Inc. 100% Alberta, Canada
Echo Bay Sales Corporation 100% Barbados
Echo Bay Mexico, S.A. de C.V. 100% Mexico
Santa Elina Mines Corp. 58% British Virgin Islands
Kuranakh Gold Mining Corp. 50% Russia
Echo Bay (Barbados) Ltd. 100% Barbados
Echo Bay Ecuador, S.A. 100% Ecuador
Echo Bay Mines Chile Ltda. 100% Chile
Echo Bay Capital Corporation 100% Ireland
Echo Bay Exploration Mexico SRL 100% Mexico
Servicios Echo Bay, S.A. de C.V. 100% Mexico
Minera Paradones Amarillos S.A. de C.V. 60% Mexico
Silk Road Gold Corp. 50% The Netherlands
Echo Bay International B.V. 100% The Netherlands
Echo Bay Mexico B.V. 100% The Netherlands
Echo Bay Venezuala B.V. 100% The Netherlands
Echo Bay Ecuador B.V. 100% The Netherlands
Echo Bay Peru B.V. 100% The Netherlands
Echo Bay Brazil B.V. 100% The Netherlands
Echo Bay Philippines B.V. 100% The Netherlands
*Echo Holdings Inc. 40% The Philippines
*Echo Bay Mines Philippines Inc. 40%/64% The Philippines
*Kingking Mines Inc. 30%/48% The Philippines
Echo Bay Do Brazil Servicios Ltda. 100% Brazil
Echo Bay Mines Do Brazil Ltda. 100% Brazil
Minera Echo Bay del Peru, S.A. 100% Peru
Mercator Insurance Corporation 100% Barbados
</TABLE>
* Less than 50% ownership. Two percentages given - the first is direct
ownership; the second is direct plus indirect.
1
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
We consent to the incorporation by reference in the following registration
statements of Echo Bay Mines Ltd. and in the related prospectuses of our report
dated January 25, 1999, with respect to the consolidated financial statements of
Echo Bay Mines Ltd. included in this Annual Report (Form 10-K) for the year
ended December 31, 1998:
1. Registration Statement on Form S-3 (No. 333-35857) pertaining to Echo Bay
Mines Ltd. and Echo Bay Resources, Inc.
2. Registration Statement on Form S-8 (No. 2-84687) pertaining to the Employee
Share Incentive Plan of Echo Bay Mines Ltd.
3. Registration Statement on Form S-8 (No. 33-91696) pertaining to the Director
Equity Plan and amending the Employee Share Incentive Plan of Echo Bay Mines
Ltd.
4. Registration on Form S-8 (No. 333-31835) pertaining to the Employee Share
Incentive Plan and Restricted Share Grant Plan of Echo Bay Mines Ltd.
Edmonton, Canada /s/ Ernst & Young LLP
February 22, 1999 Chartered Accountants
1
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, each of the undersigned, directors and/or
officers of Echo Bay Mines Ltd. (the "Company"), hereby constitutes and appoints
LOIS-ANN L. BRODRICK, PETER H. CHEESBROUGH and RONALD R. LEVINE and each or any
one of them, his or her true and lawful attorney or attorneys and agent or
agents, with full power of substitution to do any and all acts and to execute in
his or her name, place and stead in such capacity or capacities (whether on
behalf on of the Company or otherwise) any and all instruments which said
attorney or attorneys and agent or agents may deem necessary or advisable to
enable the Company and each of the undersigned to comply with the United States
Securities Exchange Act of 1934, as amended, and any rules, regulations,
requirements or requests of the Securities and Exchange Commission thereunder or
in respect thereof in connection with the Form 10-K Annual Report of the Company
for the fiscal year ended December 31, 1998, including specifically, but without
limiting the generality of the foregoing, power and authority to execute the
respective names of the undersigned directors and/or officers as indicated below
(whether on behalf of the Company or as a director and/or officer of the
Company) on Form 10-K or any other appropriate instrument relating to the Annual
Report of the Company, and each of the undersigned does hereby ratify and
confirm all that such attorney or attorneys and agent or agents or any one of
them shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF each of the undersigned has subscribed these presents
this 24th day of February, 1999.
/s/ John N. Abell /s/ Latham C. Burns
- ------------------------------------- --------------------------------------
John N. Abell, Director Latham C. Burns, Director
/s/ Pierre Choquette /s/ John Gilray Christy
- ------------------------------------- --------------------------------------
Pierre Choquette, Director John Gilray Christy, Director
/s/ Peter Clarke /s/ Robert L. Leclerc
- ------------------------------------- --------------------------------------
Peter Clarke, Director Robert L. Leclerc, Q.C., Chairman and
Chief Executive Officer and Director
/s/ John F. McOuat /s/ Monica E. Sloan
- ------------------------------------- --------------------------------------
John F. McOuat, Director Monica E. Sloan, Director
/s/ R. Geoffrey P. Styles
- -------------------------------------
R. Geoffrey P. Styles, Director
/s/ Peter H. Cheesbrough /s/ Tom S.Q. Yip
- ------------------------------------- --------------------------------------
Peter H. Cheesbrough, Senior Tom S.Q. Yip, Vice-President and
Vice-President, Finance and Controller and Principal Accounting
Principal Financial Officer Officer
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN ECHO BAY MINES, LTD. FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000722080
<NAME> ECHO BAY MINES, LTD.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 7,987
<SECURITIES> 3,336
<RECEIVABLES> 3,585
<ALLOWANCES> 0
<INVENTORY> 37,929
<CURRENT-ASSETS> 59,472
<PP&E> 966,081
<DEPRECIATION> 673,673
<TOTAL-ASSETS> 368,076
<CURRENT-LIABILITIES> 73,384
<BONDS> 0
0
0
<COMMON> 713,343
<OTHER-SE> (579,589)
<TOTAL-LIABILITY-AND-EQUITY> 368,076
<SALES> 232,181
<TOTAL-REVENUES> 232,181
<CGS> 148,769
<TOTAL-COSTS> 235,542
<OTHER-EXPENSES> 16,408
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,231
<INCOME-PRETAX> (19,769)
<INCOME-TAX> 354
<INCOME-CONTINUING> (20,123)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,123)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
