<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1999
-------------
[ ] 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
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Title of Class Shares Outstanding as of
--------------
Common Shares July 30, 1999
without nominal or par value -------------
140,607,145
<PAGE>
ECHO BAY MINES LTD.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. Condensed Financial Statements (Unaudited)........................................... 1
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................................... 25
ITEM 4. Submission of Matters to a Vote of the Security Holders.............................. 25
ITEM 6. Exhibits and Reports on Form 8-K..................................................... 25
SIGNATURE....................................................................................... 26
</TABLE>
i
<PAGE>
ECHO BAY MINES LTD.
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS (Unaudited)
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET June 30 December 31
thousands of U.S. dollars 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 6,237 $ 7,987
Short-term investments 2,755 3,336
Interest and accounts receivable 2,874 3,585
Inventories (note 2) 39,391 37,929
Prepaid expenses and other assets 8,296 6,635
- ----------------------------------------------------------------------------------------------------------------------------
59,553 59,472
Plant and equipment (note 3) 182,582 196,670
Mining properties (note 3) 87,439 95,738
Long-term investments and other assets 29,960 16,196
- ----------------------------------------------------------------------------------------------------------------------------
$ 359,534 $ 368,076
============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 27,267 $ 43,609
Income and mining taxes payable 2,903 2,941
Gold and other financings (note 4) 12,128 11,652
Deferred income (note 4) 25,951 15,182
- ----------------------------------------------------------------------------------------------------------------------------
68,249 73,384
Gold and other financings (note 4) 44,137 41,119
Deferred income (note 4) 68,807 64,363
Other long-term obligations 45,246 47,943
Deferred income taxes 7,822 7,513
Commitments and contingencies (note 9)
Common shareholders' equity:
Common shares, no par value, unlimited number authorized;
140,607,145 shares issued and outstanding 713,343 713,343
Capital securities (note 5) 117,538 110,862
Deficit (682,656) (663,875)
Foreign currency translation (22,952) (26,576)
- ----------------------------------------------------------------------------------------------------------------------------
125,273 133,754
- ----------------------------------------------------------------------------------------------------------------------------
$ 359,534 $ 368,076
============================================================================================================================
</TABLE>
See accompanying notes to interim consolidated financial statements.
1
<PAGE>
ECHO BAY MINES LTD.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS Three months ended Six months ended
thousands of U.S. dollars, June 30 June 30
except for per share data 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 50,862 $ 65,346 $ 99,644 $118,201
- ------------------------------------------------------------------------------------------------------------
Expenses:
Operating costs 34,833 42,433 67,246 75,738
Royalties 1,567 2,218 3,315 3,940
Production taxes 43 329 129 683
Depreciation and amortization 13,616 17,416 26,417 31,318
Reclamation and mine closure 1,709 1,536 3,525 3,187
General and administrative 2,034 2,067 3,907 4,324
Exploration and development 1,889 2,602 4,006 5,782
Interest and other (note 6) 2,106 (5,423) 3,060 (1,385)
- ------------------------------------------------------------------------------------------------------------
57,797 63,178 111,605 123,587
- ------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (6,935) 2,168 (11,961) (5,386)
- ------------------------------------------------------------------------------------------------------------
Income tax expense:
Current 96 102 171 174
Deferred -- -- -- --
- ------------------------------------------------------------------------------------------------------------
96 102 171 174
- ------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (7,031) $ 2,066 $(12,132) $ (5,560)
============================================================================================================
Net loss attributable to common shareholders
(note 5) $(10,455) $ (1,458) $(18,781) $(11,717)
============================================================================================================
Loss per share $ (0.07) $ (0.01) $ (0.13) $ (0.08)
============================================================================================================
Weighted average number of shares outstanding
(thousands) 140,607 139,751 140,607 139,560
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT Three months ended Six months ended
OF DEFICIT June 30 June 30
thousands of U.S. dollars 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of period $(672,201) $(641,579) $(663,875) $(631,320)
Net earnings (loss) (7,031) 2,066 (12,132) (5,560)
Interest on capital securities, net
of nil tax effect (note 5) (3,424) (3,524) (6,649) (6,157)
- ------------------------------------------------------------------------------------------------------------
Balance, end of period $(682,656) $(643,037) $(682,656) $(643,037)
=============================================================================================================
</TABLE>
See accompanying notes to interim consolidated financial statements.
2
<PAGE>
ECHO BAY MINES LTD.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT Three months ended Six months ended
OF CASH FLOW June 30 June 30
thousands of U.S. dollars 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------
CASH PROVIDED FROM (USED IN):
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net cash flows provided from operating activities $12,757 $17,834 $ 18,244 $ 842
- --------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Mining properties, plant and equipment (7,750) (5,237) (15,839) (9,866)
Proceeds on repurchase of gold forward sales -- -- 1,500 8,673
Short-term investments -- 604 485 3,018
Long-term investments and other assets (15) (975) (5,014) (453)
Proceeds on sale of investment in Santa Elina (note 6) -- 6,252 -- 6,252
Proceeds on the sale of plant and equipment 193 141 261 2,450
Proceeds on the sale of mining properties -- -- -- 1,195
Other (605) (610) (1,227) (552)
- --------------------------------------------------------------------------------------------------
(8,177) 175 (19,834) 10,717
FINANCING ACTIVITIES
Currency borrowings 3,000 -- 11,000 --
Debt repayments (4,773) (4,164) (9,771) (8,328)
Other -- (114) (1,389) (226)
- --------------------------------------------------------------------------------------------------
(1,773) (4,278) (160) (8,554)
- --------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 2,807 13,731 (1,750) 3,005
Cash and cash equivalents, beginning of period 3,430 6,227 7,987 16,953
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 6,237 $19,958 $ 6,237 $19,958
==================================================================================================
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
1. GENERAL
In the opinion of management, the accompanying unaudited consolidated balance
sheet, consolidated statement of operations, consolidated statement of deficit,
and consolidated statement of cash flow contain all adjustments, consisting only
of normal recurring accruals, necessary to present fairly in all material
respects the consolidated financial position of Echo Bay Mines Ltd. (the
Company) as of June 30, 1999 and December 31, 1998 and the consolidated results
of operations and cash flow for the three and six months ended June 30, 1999 and
1998. For further information, refer to the financial statements and related
footnotes included in the Company's annual report on Form 10-K for the year
ended December 31, 1998.
Certain of the comparative figures have been reclassified to conform with the
current period's presentation.
2. INVENTORIES
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Precious metals -- bullion $ 18,878 $ 14,704
-- in-process 6,327 8,568
Materials and supplies 14,186 14,657
- --------------------------------------------------------------------------------------------------------------------------
$ 39,391 $ 37,929
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Plant and equipment June 30 December 31
1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cost $ 663,256 $ 653,533
Less accumulated depreciation 480,674 456,863
- --------------------------------------------------------------------------------------------------------------------------
$ 182,582 $ 196,670
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Mining properties June 30 December 31
1999 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Producing mines' acquisition and development costs $ 271,364 $ 270,585
Less accumulated amortization 223,625 216,810
- --------------------------------------------------------------------------------------------------------------------------
47,739 53,775
Development properties' acquisition and development costs 24,726 24,067
Deferred mining costs 14,974 17,896
- --------------------------------------------------------------------------------------------------------------------------
$ 87,439 $ 95,738
==========================================================================================================================
</TABLE>
4
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
4. GOLD AND OTHER FINANCINGS AND DEFERRED INCOME
<TABLE>
<CAPTION>
Financings Deferred Income
---------------------------- ------------------------------
June 30 December 31 June 30 December 31
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold loans $ 1,093 $ 6,867 $ 2,646 $ 3,478
Currency loans 50,035 41,035 -- --
Capital securities (note 5) 5,137 4,869 -- --
Repurchase of gold and silver forward contracts -- -- 50,169 52,283
Repurchase of forward currency exchange contracts -- -- 5,995 5,995
Deferred gain on restructuring of capital securities swap -- -- 10,781 4,287
Premiums received on gold and silver option contracts -- -- 25,167 13,502
- ---------------------------------------------------------------------------------------------------------------------------
56,265 52,771 94,758 79,545
Less current portion 12,128 11,652 25,951 15,182
- ---------------------------------------------------------------------------------------------------------------------------
$ 44,137 $ 41,119 $ 68,807 $ 64,363
===========================================================================================================================
</TABLE>
At June 30, 1999, a 4,192-ounce gold term loan and a $26.0 million currency term
loan were outstanding under a gold loan agreement. Under the agreement, the
aggregate gold and currency commitment must 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. The gold loan was restructured in
1996, resulting in a restructured gold loan price of $388 per ounce. Since the
third quarter of 1998, the Company has opted to accelerate its quarterly gold
ounce repayments and decelerate its quarterly currency repayments 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 is being deferred and will be recognized in earnings in
accordance with the original repayment schedule.
5. CAPITAL SECURITIES
In 1997, the Company issued $100.0 million of 11% capital securities due in
April 2027. 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.
Since April 1998, the Company has exercised its right to defer its semi-annual
interest payments to holders of the capital securities. The deferred interest
accrued at June 30, 1999, totaling $19.7 million, has been classified within the
equity component of the capital securities obligation on the balance sheet as
the Company has the option to satisfy the deferred interest by delivering common
shares.
5
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
6. INTEREST AND OTHER
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ (47) $ (93) $ (115) $ (182)
Interest expense 1,129 1,086 2,229 3,529
Unrealized loss on share investments 754 357 777 1,206
(Gain) loss on sale of share investments -- (95) (485) 962
Gain on sale of plant and equipment (61) (134) (38) (1,186)
Gain on sale of interests in mining properties -- -- -- (1,195)
Gain on sale of investment in Santa Elina -- (6,252) -- (6,252)
Other 331 (292) 692 1,733
- ------------------------------------------------------------------------------------------------------------------------------
$2,106 $(5,423) $3,060 $(1,385)
==============================================================================================================================
</TABLE>
Gain on sale of investment in Santa Elina
In 1998, the Company sold its investment in Santa Elina, which had no book
value, for $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 assigned no
book value. The Company realized no gain when it sold the Chapada property in
the second quarter of 1999.
7. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
U.S. GAAP financial statements
The Company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in Canada. These differ in some
respects from those in the United States, as described below and in the
footnotes to the financial statements included in the Company's annual report on
Form 10-K for the year ended December 31, 1998.
The effects of the GAAP differences on the consolidated statement of operations
would have been as follows.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings (loss) under Canadian GAAP $(7,031) $ 2,066 $ (12,132) $ (5,560)
Recognition of severance expense -- -- -- (4,980)
Unrealized/realized (gain) loss on share investments 754 (680) 777 (428)
Change in market value of foreign exchange contracts 1,475 (2,614) 3,818 (1,158)
Amortization of mining properties -- 542 -- 1,033
Additional interest expense on capital securities (3,424) (3,524) (6,649) (6,157)
Amortization of deferred financing on capital securities (159) (159) (317) (317)
- ------------------------------------------------------------------------------------------------------------------------------
Net loss under U.S. GAAP $(8,385) $(4,369) $(14,503) $(17,567)
==============================================================================================================================
Loss per share under U.S. GAAP $ (0.06) $ (0.03) $ (0.10) $ (0.13)
==============================================================================================================================
</TABLE>
6
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
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.
June 30, 1999 GAAP Contracts Investments zation Write-off Securities GAAP
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Short-term investments $ 2,755 $ -- $ 169 $ -- $ -- $ -- $ 2,924
Long-term investments and
other assets 29,960 -- -- -- -- 1,742 31,702
Mining properties 87,439 -- -- (11,526) -- -- 75,913
Gold and other financings 56,265 -- -- -- -- 97,863 154,128
Deferred income 94,758 (5,995) -- -- -- -- 88,763
Other long-term obligations 45,246 2,956 -- -- -- 19,675 67,877
Common shares 713,343 -- -- -- 36,428 -- 749,771
Capital securities 117,538 -- -- -- -- (117,538) --
Deficit 682,656 (3,039) (8,332) 11,526 36,428 (1,742) 717,497
Foreign currency translation 22,952 -- (21) -- -- -- 22,931
Net unrealized loss on share
investments -- -- 8,184 -- -- -- 8,184
Common shareholders' equity 125,273 3,039 169 (11,526) -- (115,796) 1,159
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The following statement of comprehensive loss would be disclosed in accordance
with U.S. GAAP.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss under U.S. GAAP $(8,385) $(4,369) $(14,503) $(17,567)
Other comprehensive income (loss), after a nil income tax
effect:
Unrealized gain/loss on share investments:
Net unrealized holding gain (loss) arising during the period (1,488) 781 (637) 1,030
Reclassification adjustment for net (gain) loss recognized in
earnings -- (95) (485) 962
- ---------------------------------------------------------------------------------------------------------------------
Net unrealized income (loss) (1,488) 686 (1,122) 1,992
Foreign currency translation adjustments 2,179 (3,492) 3,652 (2,175)
- ---------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 691 (2,806) 2,530 (183)
- ---------------------------------------------------------------------------------------------------------------------
Comprehensive loss $(7,694) $(7,175) $(11,973) $(17,750)
=====================================================================================================================
</TABLE>
Additionally, under U.S. GAAP, the equity section of the balance sheet would
present a subtotal for accumulated other comprehensive loss, as follows.
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Foreign currency translation $(22,931) $(26,583)
Net unrealized loss on share investments (8,184) (7,547)
- ------------------------------------------------------------------------------------
Accumulated other comprehensive loss $(31,115) $(34,130)
====================================================================================
</TABLE>
7
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
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, 2000. The impact of the new standard on the
Company's financial information prepared under U.S. GAAP has not yet been
determined.
8. 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 the
first six months of 1999, 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
Nunavut Territory of 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>
Three months ended Six months ended
June 30 June 30
Gold Production (ounces) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Round Mountain (50%) 70,765 73,020 130,450 139,087
McCoy/Cove 29,576 35,591 61,690 75,444
Kettle River 24,715 31,587 51,680 58,832
- ---------------------------------------------------------------------------------------------------------------------------------
Total gold 125,056 140,198 243,820 273,363
=================================================================================================================================
Silver Production (ounces) - all from McCoy/Cove 1,918,479 2,054,173 4,583,317 4,312,629
=================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
Cash Operating Costs per Ounce of Gold Produced 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Round Mountain $ 195 $ 187 $ 207 $ 190
McCoy/Cove 222 221 215 211
Kettle River 243 225 235 241
- ---------------------------------------------------------------------------------------------------------------------------------
Company consolidated weighted average $ 213 $ 208 $ 215 $ 208
=================================================================================================================================
</TABLE>
8
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
<TABLE>
<CAPTION>
Three months ended Six months ended
Reconciliation of Cash Operating June 30 June 30
Costs per Ounce to Financial Statements 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating costs by minesite:
Round Mountain $ 11,504 $ 15,974 $ 23,938 $ 25,855
McCoy/Cove 17,323 18,188 31,813 33,972
Kettle River 6,006 8,271 11,495 14,266
Lupin -- -- -- 1,645
- --------------------------------------------------------------------------------------------
Total operating costs per financial statements 34,833 42,433 67,246 75,738
Change in finished goods inventories and other (215) (4,624) 3,462 (549)
Co-product cost of silver produced (7,981) (8,648) (18,287) (18,329)
- --------------------------------------------------------------------------------------------
Cash operating costs $ 26,637 $ 29,161 $ 52,421 $ 56,860
============================================================================================
Gold ounces produced 125,056 140,198 243,820 273,363
============================================================================================
Cash operating costs per ounce $ 213 $ 208 $ 215 $ 208
============================================================================================
</TABLE>
The Company's management generally monitors revenues on a consolidated basis.
Information regarding the Company's consolidated revenues is provided below.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total gold and silver revenues $ 50.9 $ 65.3 $ 99.6 $118.2
Average gold price realized per ounce $ 326 $ 338 $ 325 $ 339
Average silver price realized per ounce $ 5.27 $ 5.59 $ 5.38 $ 5.88
- -------------------------------------------------------------------------------------------
</TABLE>
9. HEDGING ACTIVITIES AND COMMITMENTS
In April 1999, the Company entered into gold forward sales and purchased gold
put options totaling 610,000 ounces at an average price of approximately $335
per ounce, scheduled for delivery in the five years from 2000 through 2004. The
Company has also sold 185,000 ounces of gold call options at $340 per ounce
expiring at various dates in 2004 and 2005. This additional hedging provides
flexibility for the Company in its consideration of reopening the Lupin mine,
which has been on care and maintenance since early 1998. If the Company decides
not to reopen Lupin, the current hedge position, including the April 1999
transactions, would hedge approximately 60% of planned gold production from the
Company's currently producing properties in the years 2000 to 2004.
Since the third quarter of 1998, the Company has opted to accelerate its
quarterly gold ounce repayments and decelerate its quarterly currency repayments
from an original repayment schedule under a loan agreement (note 4). The
difference between the restructured gold loan price and the spot price on the
repayment date for these accelerated ounces is being deferred and will be
recognized in earnings in accordance with the original repayment schedule.
9
<PAGE>
ECHO BAY MINES LTD.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
Tabular dollar amounts in thousands of U.S. dollars, except amounts
per share and per ounce or unless otherwise noted
Shown below are the carrying amounts, estimated fair values and unrealized gains
on the Company's gold loans at June 30, 1999 and December 31, 1998 (note 4).
Carrying amounts include deferred income recorded on the balance sheet related
to gold loan remeasurement.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Unrealized Carrying Estimated Unrealized
Amount Fair Value gain Amount Fair Value gain
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gold loans $1,600 $1,100 $500 $9,400 $6,900 $2,500
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Shown below are the carrying amounts and estimated fair values of the Company's
other hedging instruments at June 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold forward sales $ -- $41,500 $ -- $25,400
Silver forward sales -- 10,900 -- 12,900
Gold options - puts purchased 3,600 8,900 1,600 2,400
- calls sold (6,000) (5,800) -- --
- calls purchased 1,300 200 -- --
Silver options - puts purchased 2,500 2,000 2,500 2,100
- calls sold (6,100) (1,200) (3,400) (500)
- puts sold (9,700) (4,700) (10,100) (6,100)
- calls purchased 14,200 2,000 10,100 700
Foreign currency contracts -- (3,000) -- (6,800)
Crude oil contracts -- -- -- (100)
- -----------------------------------------------------------------------------------------------------------------------------
$50,800 $30,000
=============================================================================================================================
</TABLE>
Fair values are estimated for the contract settlement dates based upon market
quotations of various input variables. These variables were used in valuation
models that estimate the fair market value.
10
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
June 30, 1999
(U.S. dollars)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
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's operations continue to be materially affected
by the depressed price of gold, which averaged $281 per ounce during the first
six months of 1999 and was $261 per ounce on June 30, 1999.
The Company reduces the risk of future gold and silver price declines by hedging
a portion of its production. The principal hedging tools used are gold and
silver loans, fixed and floating forward sales contracts, spot-deferred
contracts, swaps and options.
As of June 30, 1999, the Company has partially protected itself against gold
price declines in 1999 and 2000 through its hedge portfolio. This portfolio
will ensure a minimum average cash price realized of $349 per ounce for over 90%
of planned 1999 gold production. For the year 2000, the Company has hedged
approximately 368,000 ounces of gold at a minimum average cash price of $338 per
ounce. In addition, the Company has hedged 5.6 million silver ounces at an
average cash price of $5.73 per ounce in 1999 and 7.5 million ounces of silver
at a minimum average cash price of $5.87 per ounce in 2000. See note 9 to the
interim consolidated financial statements.
The Company's Lupin mine, located in the Nunavut Territory of Canada, continues
on care and maintenance following the January 1998 temporary suspension of
operations. Additionally, the Company continues to defer final construction
decisions on two planned gold mines, Paredones Amarillos in Mexico and Aquarius
in Canada, and continues to defer further development of the Ulu satellite
deposit near the Lupin mine.
The Company's exploration efforts are focused on projects principally located in
North America where the Company already has extensive gold mining
infrastructure.
In March 1997, the Company issued $100.0 million of 11% capital securities due
2027 (see note 5 to the interim consolidated financial statements). The Company
has the right to defer interest payments on the capital securities for up to 10
consecutive semi-annual periods. During a period of interest deferral, interest
accrues at a rate of 12% per annum, compounded semi-annually on the full
principal amount and deferred interest. The Company, at its option, may satisfy
its deferred interest obligation by delivering common shares to the indenture
trustee for sale, the proceeds of which would be remitted to the holders of the
securities in payment of the deferred interest. The Company has exercised its
right to defer the April 1998, the October 1998 and the April 1999 interest
payments.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flow provided from operating activities was $18.2 million for the first
six months of 1999 compared to $0.8 million for the first six months of 1998.
The 1999 results compared to 1998 reflect the 1998 payment for severance and
other costs accrued at the end of 1997 related to asset impairment ($15.0
million), lower payments related to vendor, payroll and other accruals ($10.5
million), reduced operating costs ($8.5 million), higher volume of silver sold
($5.0 million), and lower exploration and development spending ($1.8 million).
These factors were partially offset by lower volume of gold sold ($18.5 million)
and an increase in inventory in the first half of 1999 compared to a decrease in
the same period in 1998 ($3.9 million).
11
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
June 30, 1999
(U.S. dollars)
Net cash used in investing activities totaled $19.8 million in the first six
months of 1999, primarily related to mining properties, plant and equipment
($15.8 million) and long-term deposits for reclamation obligations ($5.0
million), partially offset by $1.5 million received on the repurchase of gold
forwards entered into in the first quarter of 1999.
Cash used in financing activities was $0.2 million in the first six months of
1999, comprised of gold and currency loan repayments ($9.8 million) and the
repayment of a capital lease obligation ($1.4 million), largely offset by
currency borrowings of $11.0 million.
The Company had $6.2 million in cash and cash equivalents and $2.8 million in
short-term investments at June 30, 1999.
At June 30, 1999, the Company's total debt was $56.3 million, of which $12.1
million was current.
The Company currently has $24.0 million outstanding, and up to $26.0 million or
gold equivalent, subject to covenant limitations, available until August 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 $273 per ounce of gold. The Company's borrowing capacity under
the facility is measured at the end of each quarter.
At June 30, 1999, the estimated value of the Company's hedge portfolio was $50.8
million. Margin deposits could be required by certain counterparties if the
fair value of the hedge portfolio were less than the predetermined margin
threshold.
For the full year 1999, the Company expects to incur $11 million in capital
expenditures, of which $3.3 million has been incurred in the first six months of
1999. Additionally, the Company expects to incur $22 million in deferred
stripping and McCoy/Cove pit wall remediation costs for the full year 1999, of
which $12.1 million has been incurred in the first six months of 1999. The
remediation of the pit wall was completed in the second quarter of 1999. The
Company will rely on its operating cash flow and borrowing capacity under its
revolving loan facility to fund the remainder of its planned 1999 capital and
deferred mining expenditures. The Company continues to monitor its
discretionary spending in view of the depressed gold price and the cost
structure at the Company's operating mines.
12
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1999
(U.S. dollars)
FINANCIAL REVIEW
Three month results
The Company reported a net loss of $7.0 million ($0.07 per share) in the second
quarter of 1999, compared to net earnings of $2.1 million (a loss of $0.01 per
share after interest on the capital securities) in the second quarter of 1998.
The 1999 results compared to 1998 reflect decreased gold sales volume ($15.2
million), proceeds on the sale of Santa Elina recognized in the second quarter
of 1998 ($6.3 million), and lower gold and silver prices realized ($2.1
million). These factors were partially offset by lower operating costs ($7.6
million), decreased depreciation and amortization ($3.8 million), and increased
volume of silver sold ($2.9 million).
Gold production decreased 11% to 125,056 ounces in the second quarter of 1999
compared to 140,198 ounces in the second quarter of 1998. Decreased production
reflects lower mill grades and recoveries at McCoy/Cove and decreased mill
tonnage at Kettle River.
Cash operating costs were $213 per ounce of gold in the second quarter of 1999,
versus $208 in the second quarter of 1998, primarily a result of higher mining
costs at Round Mountain and lower production at Kettle River. Total production
costs were $314 per ounce in the second quarter of 1999, versus $315 per ounce
in the second quarter of 1998.
Six month results
The Company reported a net loss of $12.1 million ($0.13 per share) in the first
six months of 1999, compared to a net loss of $5.6 million ($0.08 per share) in
the first six months of 1998. The 1999 results compared to 1998 reflect
decreased gold sales volume ($18.2 million), proceeds on the sale of Santa Elina
recognized in the second quarter of 1998 ($6.3 million), and lower gold and
silver prices realized ($5.7 million). These factors were partially offset by
lower operating costs ($8.5 million), increased volume of silver sold ($5.3
million), decreased depreciation and amortization ($4.9 million), lower net
realized and unrealized losses on the Company's share investment portfolio ($1.9
million), decreased exploration and development ($1.8 million), and lower net
interest expense ($1.2 million).
Gold production decreased 11% to 243,820 ounces in the first six months of 1999
compared to 273,363 ounces in the first six months of 1998. Decreased
production was primarily due to lower mill grades and recoveries at McCoy/Cove,
lower heap leach tons placed at Round Mountain and decreased mill tonnage at
Kettle River.
Cash operating costs were $215 per ounce of gold in the first six months of
1999, versus $208 in the first six months of 1998, reflecting lower production
at all three mines and higher mining costs at Round Mountain. Total production
costs were $317 per ounce in the first six months of 1999, versus $311 per ounce
in the first six months of 1998.
The term ounce as used in this Form 10-Q means "troy ounce".
13
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1999
(U.S. dollars)
Revenue
Statistics for gold and silver ounces sold and other revenue data are set out
below.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
Revenue Data 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold
- ----
Ounces sold 112,399 157,277 222,110 275,871
Average price realized/ounce - revenue basis $ 326 $ 338 $ 325 $ 339
Average price realized/ounce - cash basis /(1)/ $ 345 $ 346 $ 348 $ 344
Average market price/ounce $ 274 $ 300 $ 281 $ 297
Revenue (millions of U.S. $) $ 36.6 $ 53.1 $ 72.2 $ 93.5
Percentage of total revenue 72% 81% 72% 79%
Silver
- ------
Ounces sold 2,708,016 2,184,608 5,101,111 4,200,705
Average price realized/ounce - revenue basis $ 5.27 $ 5.59 $ 5.38 $ 5.88
Average price realized/ounce - cash basis/(1)/ $ 5.19 $ 5.43 $ 5.26 $ 5.59
Average market price/ounce $ 5.15 $ 5.74 $ 5.22 $ 5.98
Revenue (millions of U.S. $) $ 14.3 $ 12.2 $ 27.4 $ 24.7
Percentage of total revenue 28% 19% 28% 21%
- --------------------------------------------------------------------------------------------------
Total revenue (millions of U.S. dollars) $ 50.9 $ 65.3 $ 99.6 $ 118.2
==================================================================================================
</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 prices and volume were as follows.
<TABLE>
<CAPTION>
Revenue Variance Analysis Three months ended Six months ended
1999 vs. 1998 June 30 June 30
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Lower gold prices $ (1.4) $ (3.2)
Lower silver prices (0.7) (2.5)
Change in volume (12.3) (12.9)
- ------------------------------------------------------------------------------------------------------
Decrease in revenue $(14.4) $(18.6)
======================================================================================================
</TABLE>
14
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1999
(U.S. dollars)
Production Costs
Production cost data per ounce of gold is set out below.
<TABLE>
<CAPTION>
Three months ended Six months ended
Production Costs per June 30 June 30
Ounce of Gold Produced 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Direct mining expense $ 227 $ 213 $ 220 $ 209
Deferred stripping and mine development costs (16) (10) (14) (4)
Inventory movements and other 2 5 9 3
- -------------------------------------------------------------------------------------------------------------------------------
Cash operating costs 213 208 215 208
Royalties 10 12 10 11
Production taxes -- 2 -- 2
- -------------------------------------------------------------------------------------------------------------------------------
Total cash costs 223 222 225 221
Depreciation 60 59 60 58
Amortization 20 25 21 25
Reclamation and mine closure 11 9 11 7
- -------------------------------------------------------------------------------------------------------------------------------
Total production costs $ 314 $ 315 $ 317 $ 311
===============================================================================================================================
</TABLE>
Expenses
Operating costs per ounce vary with the quantity of gold and silver sold and
with the cost of operations. Cash operating costs were $213 per ounce of gold
in the second quarter of 1999 and $208 in the second quarter of 1998. See
"Operations Review."
<TABLE>
<CAPTION>
Reconciliation of Cash Operating
Costs per Ounce to Financial Statements Three months ended Six months ended
thousands of U.S. dollars, June 30 June 30
except per ounce amounts 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating costs per financial statements $ 34,833 $ 42,433 $ 67,246 $ 75,738
Change in finished goods inventory and other (215) (4,624) 3,462 (549)
Co-product cost of silver produced (7,981) (8,648) (18,287) (18,329)
- -------------------------------------------------------------------------------------------------------------------------------
Cash operating costs $ 26,637 $ 29,161 $ 52,421 $ 56,860
===============================================================================================================================
Gold ounces produced 125,056 140,198 243,820 273,363
===============================================================================================================================
Cash operating costs per ounce $ 213 $ 208 $ 215 $ 208
===============================================================================================================================
</TABLE>
The decrease in depreciation and amortization in the second quarter of 1999
compared to the second quarter of 1998 reflects the fact that as McCoy/Cove
approaches the end of its useful life, major groups of its assets are becoming
fully depreciated and are not being replaced.
Exploration and development decreased in the second quarter of 1999 compared to
the second quarter of 1998 due to a decreased scope of exploration activities.
Reserve estimates
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 price for
gold is currently well below this level. If the Company determines that its
reserves should be estimated at a significantly lower price than that used at
December 31, 1998, there could be a material 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
15
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1999
(U.S. dollars)
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%. The Company estimates that such changes in
gold price assumptions could have material impacts to the reserve estimations
for Aquarius and Paredones Amarillos. Should any significant reductions in
reserves occur, material write-downs of the Company's investment in mining
properties and/or increased amortization charges may be required.
OPERATIONS REVIEW
Operating data by mine is set out below.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
Operating Data by Mine 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold production (ounces)
- -----------------------
(a) Round Mountain (50%) 70,765 73,020 130,450 139,087
(b) McCoy/Cove 29,576 35,591 61,690 75,444
(c) Kettle River 24,715 31,587 51,680 58,832
- ------------------------------------------------------------------------------------------------------------------------------
Total gold 125,056 140,198 243,820 273,363
==============================================================================================================================
Silver production (ounces)
- --------------------------
(b) McCoy/Cove 1,918,479 2,054,173 4,583,317 4,312,629
- ------------------------------------------------------------------------------------------------------------------------------
Total silver 1,918,479 2,054,173 4,583,317 4,312,629
==============================================================================================================================
</TABLE>
Gold production decreased 11% to 125,056 ounces in the second quarter of 1999
compared to 140,198 ounces in the second quarter of 1998. Decreased production
was primarily due to lower mill grades and recoveries at McCoy/Cove and
decreased mill tonnage at Kettle River. Silver production decreased to 1.9
million ounces in the second quarter of 1999 from 2.1 million ounces in the
second quarter of 1998, reflecting slightly lower mill recoveries. For the full
year 1999, the Company's gold production target is between 480,000 and 500,000
ounces and the silver production target is between 7 and 8 million ounces.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
Operating Data by Mine 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash operating costs (per ounce of gold)
- ----------------------------------------
(a) Round Mountain $ 195 $ 187 $ 207 $ 190
(b) McCoy/Cove 222 221 215 211
(c) Kettle River 243 225 235 241
- ------------------------------------------------------------------------------------------------------------------------------
Company average $ 213 $ 208 $ 215 $ 208
==============================================================================================================================
</TABLE>
Cash operating costs were $213 per ounce of gold in the second quarter of 1999,
compared to $208 in the second quarter of 1998. The Company has targeted
consolidated cash operating costs of $220 to $230 per ounce of gold produced for
the full year 1999.
16
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1999
(U.S. dollars)
(a) Round Mountain, Nevada (50% owned)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
OPERATING DATA 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold produced (ounces):
Heap leached - reusable pad (50%) 16,619 28,238 35,957 58,645
Heap leached - dedicated pad (50%) 24,198 31,308 49,433 53,946
Milled (50%) 27,970 12,401 43,082 24,640
Other (50%) 1,978 1,073 1,978 1,856
-------- -------- -------- --------
Total (50%) 70,765 73,020 130,450 139,087
Ore and waste mined (million tons) (100%) 18.9 17.3 37.8 33.4
Mining cost/ton of ore and waste $ 0.69 $ 0.63 $ 0.71 $ 0.64
Heap leaching cost/ton of ore $ 0.65 $ 0.60 $ 0.69 $ 0.63
Milling cost/ton of ore $ 3.03 $ 3.10 $ 3.17 $ 3.50
Production cost per ounce of gold produced:
Direct mining expense $ 194 $ 179 $ 214 $ 186
Deferred stripping cost (4) 7 (16) 8
Inventory movements and other 5 1 9 (4)
-------- -------- -------- --------
Cash operating cost 195 187 207 190
Royalties 14 21 17 19
Production taxes -- 1 -- 1
-------- -------- -------- --------
Total cash cost 209 209 224 210
Depreciation 45 41 46 40
Amortization 18 18 18 18
Reclamation and mine closure 9 7 9 7
-------- -------- -------- --------
Total production costs $ 281 $ 275 $ 297 $ 275
-------- -------- -------- --------
Heap leached - reusable pad:
Ore processed (tons/day) (100%) 10,536 19,869 14,669 23,118
Grade (ounce/ton) 0.034 0.042 0.036 0.039
Recovery rate (%) 73.1 69.7 73.8 72.0
Heap leached - dedicated pad:
Ore processed (tons/day) (100%) 118,334 128,231 104,991 118,495
Grade (ounce/ton) 0.011 0.010 0.011 0.010
Recovery rate/(1)/
Milled:
Ore processed (tons/day) (100%) 7,711 8,460 7,493 7,815
Grade (ounce/ton) 0.079 0.043 0.083 0.048
Recovery rate (%) 88.5 76.2 87.7 74.5
- --------------------------------------------------------------------------------------------
</TABLE>
/(1)/ Recovery rates on dedicated pads can only be estimated, as actual
recoveries will not be known until leaching is complete. At the Round
Mountain mine, the gold recovery rate on the dedicated heap leach pad is
estimated at 50%.
Late in 1998, the Round Mountain mine in Nevada entered a period of higher
stripping to provide access to a new phase of mining. During this process, more
of the material moved is waste with fewer tons of ore being available to place
under leach. The lower level of loading on the pads resulted in a reduction in
dedicated and reusable pad production in the second quarter of 1999 compared to
the second quarter of 1998.
17
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1999
(U.S. dollars)
Despite the lower production from the leach pads, overall production was down
only 3% in the second quarter of 1999 compared to the second quarter of 1998 as
a result of a 126% increase in mill production. This increase is a result of
the higher grade of material processed (0.079 ounces per ton in the second
quarter of 1999 compared with 0.043 ounces per ton in the second quarter of
1998). The higher-grade material is associated with the ore body's feeder
structures. Due to the small size of these structures, it is difficult to
accurately estimate the grade in advance of mining. Cash operating costs were
$195 per ounce in the second quarter of 1999, up 4% from the $187 per ounce
experienced in second quarter of 1998.
With the positive influences of higher grades milled, Round Mountain has
increased its targeted gold production for 1999 to 520,000 to 540,000 ounces
(Echo Bay's 50% share, 260,000 to 270,000 ounces), up 10% from earlier
projections. The site also anticipates a corresponding reduction in cash
operating costs of approximately 5%, with a new target range of $205 to $215 per
ounce.
18
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1999
(U.S. dollars)
(b) McCoy/Cove, Nevada (100% owned)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
OPERATING DATA 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold produced (ounces):
Milled 16,039 22,459 36,696 47,881
Heap leached 13,537 13,132 24,994 27,563
---------- ---------- ---------- ----------
Total gold 29,576 35,591 61,690 75,444
Silver produced (ounces):
Milled 1,848,331 1,945,022 4,432,671 4,081,171
Heap leached 70,148 109,151 150,646 231,458
---------- ---------- ---------- ----------
Total silver 1,918,479 2,054,173 4,583,317 4,312,629
Ore and waste mined (million tons) 12.7 10.9 24.5 18.5
Mining cost/ton of ore and waste $ 0.60 $ 0.67 $ 0.66 $ 0.69
Milling cost/ton of ore $ 5.57 $ 5.82 $ 6.10 $ 6.05
Heap leaching cost/ton of ore $ 1.56 $ 1.55 $ 1.63 $ 1.56
Production cost per ounce of gold produced:
Direct mining expense $ 244 $ 244 $ 213 $ 218
Deferred stripping cost (26) (30) (10) (14)
Inventory movements and other 4 7 12 7
---------- ---------- ---------- ----------
Cash operating cost 222 221 215 211
Royalties 2 3 2 3
Production taxes -- 3 -- 2
---------- ---------- ---------- ----------
Total cash cost 224 227 217 216
Depreciation 52 58 50 55
Amortization 27 40 27 39
Reclamation and mine closure 11 9 11 8
---------- ---------- ---------- ----------
Total production costs $ 314 $ 334 $ 305 $ 318
---------- ---------- ---------- ----------
Average gold-to-silver price ratio/(1)/ 53.4:1 52.5:1 53.9:1 49.6:1
Milled:
Ore processed (tons/day) 13,664 12,205 12,590 11,560
Gold grade (ounce/ton) 0.030 0.035 0.032 0.038
Silver grade (ounce/ton) 2.46 2.43 2.77 2.52
Gold recovery rate (%) 36.3 50.4 40.5 53.2
Silver recovery rate (%) 58.7 71.5 62.7 72.8
Heap leached:
Ore processed (tons/day) 14,029 12,061 12,809 12,041
Gold grade (ounce/ton) 0.019 0.019 0.022 0.020
Silver grade (ounce/ton) 0.22 0.21 0.23 0.29
Recovery rates/(2)/
- -----------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ To convert costs per ounce of gold into comparable costs per ounce of co-
product silver, divide the production cost per ounce of gold by the
period's average gold-to-silver price ratio.
/(2)/ Recovery rates on dedicated pads can only be estimated, as actual
recoveries will not be known until leaching is complete. At the McCoy/Cove
mine, the gold recovery rate is estimated at 68% for crushed ore and 48%
for uncrushed, run-of-mine ore, while the silver recovery rate is
estimated at 35% for crushed ore and 10% for uncrushed, run-of-mine ore.
19
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1999
(U.S. dollars)
Gold production at the McCoy/Cove mine in Nevada was down to 29,576 ounces
during the second quarter of 1999 compared to 35,591 ounces in the second
quarter of 1998. Silver production also decreased, to 1.9 million ounces in the
second quarter of 1999 compared with 2.1 million in the second quarter of 1998.
Though tons through the mill increased by almost 12% in the second quarter of
1999 compared to the same period in 1998, this only partially offset a more than
14% reduction in gold grades during the same period. Gold grade as well as the
nature of the ore adversely affected mill recoveries.
The remediation of the Cove pit wall was completed during the second quarter of
1999, allowing the site to start accessing approximately 400,000 ounces of
contained gold and 22 million ounces of contained silver. Mining will initially
encounter lower-grade heap leach ore with higher-grade mill feed starting late
in the fourth quarter of 1999. The availability of this higher-grade material
is expected to increase production and significantly reduce cash operating costs
in 2000.
Despite the lower production, cash operating costs were $222 per ounce in the
second quarter of 1999, compared with $221 in the same quarter the previous
year. The site's continuing efforts at reducing costs helped offset the effect
of the drop in gold grades. In addition, the unused portion of the remediation
accrual, approximately $5.8 million, has been pooled with deferred mining costs.
As a result, deferred stripping costs were reduced by $7 per ounce, a benefit
that will continue for the remainder of the mine life.
This success has resulted in McCoy/Cove lowering their projected cash operating
costs target to $230 to $240 per ounce, down from the $245 to $255 originally
targeted at the beginning of the year.
During the second quarter of 1999, underground mining continued on a small area
of mineralization located in the east wall of the Cove pit. The underground
workings have provided access for a developmental drift that will be used to
further investigate a second, larger area of mineralization. Underground
drilling and bulk sampling will be done to supplement the results of surface
drilling.
20
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1999
(U.S. dollars)
(c) Kettle River, Washington (100% owned)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
OPERATING DATA 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gold produced (ounces) 24,715 31,587 51,680 58,832
Tons of ore mined 159,424 172,057 313,802 365,510
Mining cost/ton of ore $ 23.91 $ 22.44 $ 24.05 $ 21.65
Milling cost/ton of ore $ 11.21 $ 10.37 $ 11.16 $ 10.05
Production cost per ounce of gold produced:
Direct mining expense $ 254 $ 222 $ 242 $ 240
Deferred mine development cost -- -- -- --
Inventory movements and other (11) 3 (7) 1
-------- -------- -------- --------
Cash operating cost 243 225 235 241
Royalties 18 14 15 13
Production taxes 1 1 1 1
-------- -------- -------- --------
Total cash cost 262 240 251 255
Depreciation 72 62 69 67
Amortization 8 5 8 5
Reclamation and mine closure 15 12 15 12
-------- -------- -------- --------
Total production costs $ 357 $ 319 $ 343 $ 339
-------- -------- -------- --------
Milled:
Ore processed (tons/day) 1,624 1,973 1,641 2,040
Tons of ore milled 147,747 179,586 298,585 371,355
Grade (ounce/ton) 0.200 0.210 0.204 0.193
Recovery rate (%) 83.7 83.6 85.0 82.1
- --------------------------------------------------------------------------------------------
</TABLE>
At the Kettle River mine in Washington State, total spending was down in the
second quarter of 1999. However, lower quarterly gold production, 24,715 ounces
in the second quarter of 1999 compared with 31,587 ounces in the second quarter
of 1998, resulted in an increase in cash operating costs to $243 per ounce in
the second quarter of 1999 from $225 per ounce in the same period in 1998. The
lower production was the result of a 7% decrease in tons mined and an over 17%
decrease in tons milled in the second quarter of 1999 compared to the second
quarter of 1998, due to fewer scheduled operating hours.
Kettle River continues to investigate extensions of the K-2 deposit.
Mineralization has been identified but additional work is required to determine
the economic viability of this ore.
21
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1999
(U.S. dollars)
RECENT DEVELOPMENTS
Lupin
In January 1998, the Company announced a temporary suspension of operations at
the Lupin property in the Nunavut Territory, Canada. During the first six
months of 1999, the Company incurred $1.5 million in care and maintenance costs
related to Lupin. These costs are being expensed as incurred. The decision on
whether to reopen the mine in the year 2000 will be made in the fourth quarter
of 1999.
Development Properties
In 1997, the Company deferred final construction decisions on its two planned
gold mines, the 100% owned Aquarius in Ontario, Canada and the 60% owned
Paredones Amarillos in Mexico. Development holding costs for these projects are
being expensed as incurred. During the first six months of 1999, the Company
expensed a combined total of $0.2 million in holding costs related to Aquarius
and Paredones Amarillos.
Alternatives continue to be evaluated for the development of the Paredones
Amarillos and Aquarius projects. Different sized operations and types of
processing technology are being reviewed with the aim of lowering capital
requirements and operating costs. Paredones Amarillos has a mine plan that
requires a gold price of $375 per ounce to achieve an acceptable rate of return
for the joint venture partners. Initial indications are that the project has
limited flexibility with regard to development alternatives. The Aquarius mine
plan requires a gold price between $325 and $350 per ounce to make it attractive
to advance into production. More work is being done on certain development
alternatives for this project.
Other projects
At the 50% owned Kuranakh project located in the Sakha Republic of the Russian
Federation, progress has slowed in the negotiations with the government
committee established for defining the terms of the production sharing
agreement, which will provide the producer with a fixed life-of-project tax
structure in return for a portion of the ounces being delivered to the Russian
government. Continued delays in this process have led the Company to restrict
spending on the project.
Exploration program
The Company's exploration program focuses on those projects principally located
in North America where the Company already has extensive gold mining
infrastructure. In addition, the Company has a 50% joint venture interest in
the Youga exploration project located in Burkina Faso, West Africa. The Company
and its joint venture partner have agreed to undertake a feasibility study,
anticipated to be complete by the end of 1999, that will include additional
development drilling and metallurgical work. For the first six months of 1999,
the Company charged $2.3 million against current earnings in connection with its
exploration activities.
U.S. Mining Law Revision
In recent years, several proposals to change the general mining laws applicable
to operations on U.S. federal lands have been introduced into Congress. In
addition, the Bureau of Land Management of the U.S. Department of the Interior
has commenced a program to revise the federal regulations applicable to
activities on unpatented mining claims and to impose more stringent reclamation
and environmental protection requirements on those activities. Until such time,
if any, as new reform legislation is enacted or administrative action is taken,
the ultimate effects and costs of compliance on the Company cannot be estimated.
22
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1999
(U.S. dollars)
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 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, and which may result in the interruption of metal
production.
The Company has assessed the Year 2000 issue and since 1997 has been 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 substantially
completed both the planned modifications to information technology and the
related user testing. The Company is also performing modifications to embedded
computer systems within operating equipment. The Company has substantially
completed modifications to critical operating systems such as the crusher, mill
and truck dispatch systems. Other critical systems continue to be tested and
modified as required. The Company expects that these modifications will be
complete by the end of the third quarter of 1999. Contingency plans have been
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 critical operating parts
and materials. Contingency plans have been developed to address a prolonged
interruption of power delivery. 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.
23
<PAGE>
ECHO BAY MINES LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1999
(U.S. dollars)
CAUTIONARY "SAFE HARBOR" STATEMENT UNDER THE UNITED STATES PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
With the exception of historical matters, the matters discussed in this report
are forward-looking statements that involve risks and uncertainties that could
cause actual results to differ materially from targeted or projected results.
Such forward-looking statements include statements regarding targets for gold
and silver production, cash operating costs and certain significant expenses,
percentage increases and decreases in production from the Company's principal
mines, schedules for completion of detailed feasibility studies and initial
feasibility studies, potential increases in reserves and production, the timing
and scope of future drilling and other exploration activities, expectations
regarding receipt of permits and commencement of mining or production,
anticipated 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.
24
<PAGE>
ECHO BAY MINES LTD.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is engaged in routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS
(a) The Company's Annual General Meeting was held June 3, 1999.
(c) (1) Election of Directors
Votes Against
Nominee Votes For or Withheld
------- ---------- -------------
John Norman Abell 73,174,000 1,271,652
Latham Cawthra Burns 73,127,429 1,318,223
Pierre Choquette 73,136,573 1,309,080
John Gilray Christy 73,172,613 1,273,039
Peter Clarke 73,202,061 1,243,591
Robert Leigh Leclerc, Q.C. 72,665,863 1,779,789
John Frederick McOuat 73,156,624 1,289,028
Monica Elizabeth Sloan 73,141,645 1,304,007
Richard Geoffrey Pentland Styles 73,137,507 1,308,145
(c) (2) Appointment of Ernst & Young LLP as Auditors of the Company.
Votes Against
Votes For or Withheld
---------- -------------
Appointment of Ernst & Young LLP 73,706,724 394,325
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K None.
25
<PAGE>
ECHO BAY MINES LTD.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ECHO BAY MINES LTD.
-----------------------------------------
(Registrant)
July 30, 1999
- -------------
Date
/s/ Tom S. Q. Yip
-----------------------------------------
TOM S. Q. YIP
Vice President, Controller and Principal
Accounting Officer
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE ECHO BAY MINES LTD. FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,237
<SECURITIES> 2,755
<RECEIVABLES> 2,874
<ALLOWANCES> 0
<INVENTORY> 39,391
<CURRENT-ASSETS> 59,553
<PP&E> 974,320
<DEPRECIATION> 704,299
<TOTAL-ASSETS> 359,534
<CURRENT-LIABILITIES> 68,249
<BONDS> 0
0
0
<COMMON> 713,343
<OTHER-SE> (588,070)
<TOTAL-LIABILITY-AND-EQUITY> 359,534
<SALES> 99,644
<TOTAL-REVENUES> 99,644
<CGS> 67,246
<TOTAL-COSTS> 100,632
<OTHER-EXPENSES> 10,973
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,114
<INCOME-PRETAX> (11,961)
<INCOME-TAX> 171
<INCOME-CONTINUING> (12,132)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,132)
<EPS-BASIC> (0.13)
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