<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
-------------------------------
[X] Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the period ended March 31, 1999
or
[ ] 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 1-11887
CANYON RESOURCES CORPORATION
(a Delaware Corporation)
I.R.S. Employer Identification Number 84-0800747
14142 Denver West Parkway, Suite 250
Golden, CO 80401
(303) 278-8464
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 the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: 46,152,074 shares of the
Company's Common Stock were outstanding as of May 1, 1999.
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<PAGE> 2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following consolidated financial statements have been prepared by
Canyon Resources Corporation ("the Company") pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations.
These consolidated financial statements should be read in conjunction
with the financial statements and accompanying notes included in the Company's
Form 10-K for the year ended December 31, 1998.
<TABLE>
<S> <C>
Consolidated Balance Sheets...................................................... Page 3
Consolidated Statements of Operations ........................................... Page 4
Consolidated Statements of Cash Flows............................................ Page 5-6
Notes to Interim Consolidated Financial Statements............................... Page 7-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .................................. Page 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK........................................................... Page 18
</TABLE>
2
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CANYON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 953,600 $ 1,985,700
Restricted cash 3,087,800 4,887,200
Accounts receivable 94,200 173,800
Inventories 5,620,900 5,372,200
Prepaid and other assets 929,800 1,165,000
------------ ------------
Total current assets 10,686,300 13,583,900
------------ ------------
Property and equipment, at cost
Mining claims and leases 24,528,400 24,508,100
Producing properties 51,233,400 51,124,700
Other 994,200 994,200
------------ ------------
76,756,000 76,627,000
Accumulated depreciation and depletion (13,268,900) (11,639,500)
------------ ------------
Net property and equipment 63,487,100 64,987,500
------------ ------------
Other Assets 3,616,200 3,300,300
------------ ------------
Total Assets $ 77,789,600 $ 81,871,700
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 2,606,600 $ 3,134,300
Notes payable - current 16,745,000 18,708,400
Accrued taxes, other than payroll and income 69,000 60,800
Accrued reclamation costs 964,000 964,000
Deferred income 3,984,600 4,090,700
Other current liabilities 941,600 961,700
------------ ------------
Total current liabilities 25,310,800 27,919,900
Notes payable - noncurrent 33,300 --
Accrued reclamation costs 2,629,900 2,704,900
Deferred income 3,399,700 4,489,500
Other noncurrent liabilities 1,441,700 1,458,500
------------ ------------
Total Liabilities 32,815,400 36,572,800
------------ ------------
Commitments and contingencies (Notes 9 and 10)
Common stock ($.01 par value) 100,000,000 shares authorized;
issued and outstanding: 46,152,100 at March 31, 1999, and
46,137,100 at December 31, 1998 461,500 461,400
Capital in excess of par value 95,349,600 95,293,500
Deficit (50,836,900) (50,456,000)
------------ ------------
Total Stockholders' Equity 44,974,200 45,298,900
------------ ------------
Total Liabilities and Stockholders' Equity $ 77,789,600 $ 81,871,700
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
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CANYON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1999 1998
------------ ------------
<S> <C> <C>
REVENUE
Sales $ 7,335,700 $ 7,391,600
------------ ------------
EXPENSES
Cost of sales 5,880,600 4,885,600
Depreciation, depletion, and amortization 1,617,500 1,267,200
Selling, general and administrative 352,400 753,400
Exploration costs 32,900 218,100
------------ ------------
7,883,400 7,124,300
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 45,300 53,800
Interest expense (194,500) (533,700)
Gain on partial prepayment of gold loan 339,300 --
Gain (loss) on asset disposals (26,800) 59,800
Other 3,500 (17,600)
------------ ------------
166,800 (437,700)
------------ ------------
Loss before cumulative effect of changes in accounting principles (380,900) (170,400)
Cumulative effect of changes in accounting principles -- (8,928,100)
------------ ------------
Net loss $ (380,900) $ (9,098,500)
============ ============
Basic and diluted loss per share:
Loss before cumulative effect of changes in accounting principles $ (0.01) $ (0.01)
Cumulative effect of changes in accounting principles -- (0.19)
------------ ------------
Net loss $ (0.01) $ (0.20)
============ ============
Weighted average shares outstanding 46,142,100 46,107,100
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE> 5
CANYON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (380,900) $(9,098,500)
----------- -----------
Adjustments to reconcile net loss to net cash used in operating
activities:
Cumulative effect of changes in accounting principles -- 8,928,100
Depreciation, depletion and amortization 1,617,500 1,267,200
Amortization of financing costs 44,500 74,300
(Gain) loss on asset dispositions 26,800 (59,800)
Other -- 13,700
Changes in assets and liabilities,
(Increase) decrease in receivables 79,600 (303,000)
(Increase) in inventories (248,700) (804,800)
(Increase) in prepaid and other assets (227,200) (312,600)
(Decrease) increase in accounts payable and accrued liabilities (359,600) 407,800
(Decrease) increase in other liabilities (1,270,900) 83,500
(Increase) decrease in restricted cash 149,400 (492,500)
----------- -----------
Total adjustments (188,600) 8,801,900
----------- -----------
Net cash used in operating activities (569,500) (296,600)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (124,800) (1,998,800)
Proceeds from asset sales 22,200 69,800
----------- -----------
Net cash used in investing activities (102,600) (1,929,000)
----------- -----------
Cash flows from financing activities:
Issuance of stock, net 56,200 2,228,600
Restricted cash utilized for debt payments 1,650,000 --
Payments on debt (1,989,300) (1,292,500)
Payments on capital lease obligations (76,900) (37,400)
----------- -----------
Net cash provided by (used in) financing activities (360,000) 898,700
----------- -----------
Net decrease in cash and cash equivalents (1,032,100) (1,326,900)
Cash and cash equivalents, beginning of year 1,985,700 3,111,000
----------- -----------
Cash and cash equivalents, end of period $ 953,600 $ 1,784,100
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
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CANYON RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
Supplemental disclosures of cash flow information:
1. The Company paid $150,400 of interest during the first three months of 1999
and $432,700 during the corresponding period of 1998.
2. The Company paid no income taxes during the first three months of 1999 and
the corresponding period of 1998.
Supplemental schedule of noncash investing and financing activities:
1. The Company financed an equipment lease buy-out in the amount of $59,200 in
1999.
2. The Company acquired equipment with a fair market value of $53,000 by
exchange of certain assets in 1999.
The accompanying notes are an integral part of these consolidated
financial statements.
6
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CANYON RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION:
During interim periods, Canyon Resources (the Company) follows the
accounting policies set forth in its Annual Report to Stockholders and its
Report on Form 10-K filed with the Securities and Exchange Commission.
Users of financial information produced for interim periods are encouraged
to refer to the footnotes contained in the Annual Report to Stockholders
when reviewing interim financial results.
The Company's financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and settlement of
liabilities and commitments in the ordinary course of business. The
Company's liquidity, however, has been adversely impacted by a sustained
period of low gold prices and high debt service requirements. Moreover,
since December 31, 1998, the Company has not been in compliance with
certain covenants relating to the Briggs Mine loan facility and has been
unable to achieve resolution of these matters with the lenders to date. As
a result, the covenant violations constitute events of default and the
lenders may, by notice to the Company, terminate the commitment and declare
all amounts immediately due and payable. The Company is in continuing
discussions with the lenders on these matters; however, there can be no
assurances that a satisfactory resolution can be achieved nor that the
lenders will not exercise any remedies available to them during the
intervening period. Accordingly, the Company has reclassified all of the
debt as current on its Balance Sheet since December 31, 1998. In addition,
in March 1999, the Company received a demand notice for an increase in
collateral of approximately $1.2 million from the Sureties who issued
certain bonds for reclamation obligations at the Briggs Mine, Kendall Mine
and McDonald Gold Project. All of these matters raise substantial doubt
about the Company's ability to continue as a going concern. The Company has
curtailed all discretionary expenditures, is currently attempting to sell
its African properties, and has retained investment banking counsel to
assist in the evaluation of potential merger or other alliance
opportunities. There can be no assurances, however, that the Company will
be successful in this regard.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). SFAS 133 requires that all
derivatives be recognized as assets or liabilities and be measured at fair
value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivatives
and whether they qualify for hedge accounting as either a fair value hedge
or a cash flow hedge. The key criterion for hedge accounting is that the
hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows of the hedging instruments and the
hedged items. SFAS 133 is effective for fiscal years beginning after June
15, 1999 but earlier adoption is permitted. There are many complexities to
this new standard and the Company is currently evaluating the impact that
SFAS 133 will have on
7
<PAGE> 8
CANYON RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
1. BASIS OF PRESENTATION: (CONTINUED)
its reported operating results and financial position and has not yet
determined whether it will adopt SFAS 133 earlier than January 1, 2000.
In the opinion of management, the accompanying interim financial
statements contain all material adjustments, consisting only of normal
recurring adjustments necessary to present fairly the financial
position, the results of operations, and the cash flows of Canyon
Resources and its consolidated subsidiaries for interim periods.
Certain prior period items have been reclassified to conform with the
current period presentation.
2. PRIOR YEAR CHANGES IN ACCOUNTING PRINCIPLES:
In the second quarter of 1998, the Company changed its method of
accounting for exploration costs on unproven properties from
capitalizing all expenditures to expensing all costs, other than
acquisition costs, prior to the establishment of proven and probable
reserves. This brought the Company's accounting method in accordance
with the predominant practice in the US mining industry and better
reflects operating income and cash flow. The $5,625,400 cumulative
effect of the change on prior years is included in the loss for 1998.
The effect of the change on the first quarter of 1998 was to increase
the loss before extraordinary item and cumulative effect of changes in
accounting principles by $189,800, or $0.01 per share.
In the fourth quarter of 1998, the Company elected early adoption of
Statement of Position No. 98-5, Reporting on the Costs of Start-Up
Activities (SOP 98-5). SOP 98-5 is otherwise effective for financial
statements for fiscal years beginning after December 15, 1998 and
requires costs of start-up activities and organization costs to be
expensed as incurred. The $3,302,700 cumulative effect of the change on
prior years is included in the loss for 1998. The effect of the change
on the first quarter of 1998 was to decrease the loss before
extraordinary item and cumulative effect of changes in accounting
principles by $134,300 which had no impact on per share amounts.
8
<PAGE> 9
CANYON RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
2. PRIOR YEAR CHANGES IN ACCOUNTING PRINCIPLES: (CONTINUED)
The following table summarizes the effect of the accounting changes on
the first quarter of 1998:
<TABLE>
<CAPTION>
Per Share
$ Amounts Amounts
----------- -------
<S> <C> <C>
Net loss as originally reported $ (114,800) $ --
Effect of exploration accounting change (189,900) (0.01)
Effect of start-up costs accounting change 134,300 --
----------- ------
Loss before cumulative effect of changes in
accounting principles (170,400) (0.01)
Cumulative effect on prior years (8,928,100) (0.19)
----------- ------
Net loss as restated $(9,098,500) $(0.20)
=========== ======
</TABLE>
3. INTERIM RESULTS:
The foregoing interim results are not necessarily indicative of the
results of operations for the full year ending December 31, 1999.
4. USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
9
<PAGE> 10
CANYON RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
5. RESTRICTED CASH:
Restricted cash consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- ----------
<S> <C> <C>
Collateral for Letter of Credit (a) $2,118,000 $2,118,000
Proceeds from asset sales reserved for debt
payments (b) 750,000 2,400,000
Unexpended proceeds from gold sales (c) 219,800 369,200
---------- ----------
$3,087,800 $4,887,200
========== ==========
</TABLE>
(a) In connection with the issuance of certain bonds for the
performance of reclamation obligations at the Kendall Mine,
Briggs Mine, and McDonald Gold Project, a bank Letter of
Credit has been provided in favor of the Sureties as partial
collateral for such bond obligations. The Letter of Credit is
fully collateralized with cash and will expire no earlier than
December 31, 1999. At the bank's option, the Letter of Credit
may be renewed for successive one-year periods.
(b) In connection with the sale of the Company's industrial
minerals assets on December 31, 1998, certain proceeds are
required to be utilized for debt reduction on the Briggs Mine
loan facility.
(c) The Briggs Mine loan facility requires all proceeds from gold
sales to be held in trust and disbursed from the collected
credit balance in certain orders of priority.
6. INVENTORIES:
Inventories consisted of the following at:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- ----------
<S> <C> <C>
Gold-in-process (a) $5,230,300 $4,962,200
Materials and supplies 390,600 410,000
---------- ----------
$5,620,900 $5,372,200
========== ==========
</TABLE>
(a) Includes all direct and indirect costs of mining, crushing,
processing, and site overhead expenses.
10
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CANYON RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
7. NOTES PAYABLE:
Notes payable consisted of the following at:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Briggs Facility (a)
o Gold Loan $16,719,100 $18,058,400
o Credit Line -- 650,000
Caterpillar Finance (b) 59,200 --
----------- -----------
$16,778,300 $18,708,400
Current portion (1) 16,745,000 18,708,400
----------- -----------
Notes Payable - Noncurrent $ 33,300 $ --
=========== ===========
</TABLE>
(1) Since December 31, 1998, the Company has not been in
compliance with certain covenants of the Briggs loan facility
and has been unable to achieve resolution of these matters
with the lenders to date. As a result, the covenant violations
constitute events of default and the lenders may, by notice to
the Company, terminate the commitment and declare all amounts
immediately due and payable. Accordingly, the Company has
classified all of the debt as current on its Balance Sheet
since December 31, 1998.
(a) On December 6, 1995, the Company's wholly owned subsidiary, CR
Briggs Corporation, obtained a $34.0 million loan facility to
finance the capital requirements of mine construction and
working capital for its Briggs Mine in California. Drawings on
the facility include $25.0 million principal in the form of a
gold loan and $9.0 million principal as dollar loans. The gold
loan portion was monetized at $388.05 per ounce, or 64,425
ounces. At March 31, 1999, there were 43,085 ounces
outstanding on the gold loan and no amounts outstanding on
dollar loans. Weighted average interest rates on the loans
during the first three months of 1999 were (i) 2.7% on the
gold loan, and (ii) 8.0% on the cash loan. For the comparable
period in 1998, weighted average interest rates on the gold
loan and dollar loans were 3.8% and 10.6%, respectively.
Interest payments of $116,300 and $421,400 were made during
the first three months of 1999 and 1998, respectively. During
the first quarter of 1999, the Company utilized $1,650,000 of
proceeds from the December 1998 sale of its industrial
minerals assets to (i) pay off a credit line amount of
$650,000, and (ii) purchase 3,451 ounces of gold at a market
price of $289.75 per ounce which was applied to the gold loan.
As a result of the partial prepayment on the gold loan, the
Company recognized a gain of
11
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CANYON RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
7. NOTES PAYABLE: (CONTINUED)
$339,300 (3,451 ounces of principal repaid by open market
purchase at $289.75 per ounce; corresponding reduction in debt
at $388.05 per ounce). This amount is shown as an other income
item on the Statement of Operations for the three months ended
March 31, 1999.
(b) In March 1999, the Company arranged to finance an equipment
lease buy-out with Caterpillar Finance in the amount of
$59,200. Terms of the financing require equal monthly payments
over two years at an interest rate of 8.5%.
8. SITE RESTORATION COSTS:
Reclamation spending at the Kendall Mine for the first three months of
1999 was $192,100. For the comparable period of 1998, spending totaled
$202,100.
9. CONTINGENT LIABILITY:
On September 25, 1997, the Company, together with its wholly owned
subsidiary, CR Montana Corporation (CR Montana), purchased a 72.25%
participating interest and underlying assets in the Seven-Up Pete
Venture (Venture) from CR Montana's partner in the Venture, Phelps
Dodge Corporation (Phelps Dodge). The Company and its wholly owned
subsidiary now own 100% of the Venture. The Venture includes the
McDonald Gold Project near Lincoln, Montana.
The Company made an initial payment of $5 million as part of a total
purchase price which will be no less than $100 million and no more than
$150 million, assuming all applicable permits for the McDonald Gold
Project are obtained. The largest part of the purchase price, $30 per
mineable reserve ounce attributable to the Phelps Dodge ownership is to
be paid after all permits for mine development are obtained. Due to the
contingent nature of the transaction, the Company has recorded only the
initial payment of $5 million as additions to mining claims and leases
during 1997.
10. OTHER CONTINGENT MATTERS:
On September 24, 1998, the Montana Department of Natural Resources
(DNRC), the entity that administers state mineral leases, unilaterally
decided to cancel the permitting extension of the 10-year lease term of
the state leases that pertain to the McDonald Gold Project. This was
provoked by Canyon's inability to continue permitting at McDonald due
to the anti-cyanide initiative, I-137, and would require the Company,
after a period of approximately seventeen months, to commence paying a
delay rental of $150,000 per
12
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CANYON RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
10. OTHER CONTINGENT MATTERS: (CONTINUED)
month in order to maintain the leases. The Company has challenged the
DNRC's action in Montana District Court and believes it will prevail in
this matter.
In September 1998, the Montana Department of Environmental Quality
(DEQ) filed a complaint in District Court alleging violations of the
Montana Water Quality Act for unpermitted discharges at the Kendall
Mine. The DEQ initially proposed a civil penalty in the amount of
$330,000, which was subsequently modified to $302,000, in connection
with the complaint. The Company is currently preparing a response to
the complaint and believes the penalty as currently assessed is without
substantial merit.
In November 1998, the Montana electorate passed an anti-cyanide mining
initiative (I-137) by a vote of 52% to 48%. I-137 bans development of
new gold and silver mines and expansions to existing mines which use
cyanide in the treatment and recovery process. For most of the campaign
period, mining companies were prevented from campaigning due to a
previously passed initiative (I-125) which prohibited
campaign-expenditures by "for-profit" entities. Ten days prior to the
election, a federal judge declared the prohibition "unconstitutional".
The mining community has filed lawsuits against I-137, based on (i)
having been denied the opportunity to campaign due to the effectiveness
of I-125 until the last few days, and (ii) due process considerations,
in that I-137 results in a taking of property without any compelling
public policy interest, since environmental safety concerns are well
protected and monitored with existing laws and regulations. The
Company's legal counsel believes that it is likely that I-137 will be
declared unconstitutional, or at a minimum, be overturned.
In March 1999, the Company received a demand notice for an increase in
collateral of approximately $1.2 million from the Sureties who issued
certain bonds for reclamation obligations at the Briggs Mine, Kendall
Mine and McDonald Gold Project. The Company is not presently able to
honor the demand due to its financial position and is unsure what
remedies, if any, the Sureties may seek for resolution on the matter.
11. CONTINGENT SALE OF EXPLORATION PROPERTY:
The Company executed an agreement during the third quarter of 1997 to
sell the Aeropuerto property in Chubut Province, Argentina for $2.0
million, payable over a sixty month period. At any time, the buyer,
upon proper notice, may terminate the agreement and its then remaining
obligations, and relinquish its interest in the property. Due to the
contingent nature of the transaction, gain will be recognized only upon
receipt of cash in excess of basis over the sixty month period.
Accordingly, the Company recorded a gain
13
<PAGE> 14
CANYON RESOURCES CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Unaudited)
11. CONTINGENT SALE OF EXPLORATION PROPERTY: (CONTINUED)
of $22,200 during the first three months of 1999 and $59,800 during
the comparable period in 1998.
12. DEFERRED INCOME:
In May, 1998, the Company liquidated a gold hedge position consisting
of forward contracts which resulted in proceeds of $11.1 million. The
gain on the liquidation was initially deferred and is being recognized
in operations based on the original settlement dates of the forward
contracts. For the three months ended March 31, 1999, $1.2 million of
the gain was recognized in operations.
13. INCOME TAXES:
The Company has not recorded a tax benefit for the current period as
the benefit is not expected to be realized during the year. The benefit
is also not expected to be realizable as a deferred tax asset at year
end as the Company anticipates recording a full valuation allowance for
all deferred tax assets, except to the extent of offsetting reversals
of expected deferred tax liabilities.
14. EARNINGS PER SHARE (EPS):
The Company computes EPS by applying the provisions of Financial
Accounting Standards No. 128, Earnings per Share. As the Company
reported net losses for the periods presented, inclusion of potential
common shares (options and warrants) would have an antidilutive effect
on per share amounts. Accordingly, the Company's basic and diluted EPS
computations are the same for the periods presented.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
The matters discussed in this report on Form 10-Q, when not historical
matters, are forward-looking statements that involve a number of risks and
uncertainties that could cause actual results to differ materially from
projected results. Such factors include, among others, the speculative nature of
mineral exploration, commodity prices, production and reserve estimates,
environmental and government regulations, availability of financing, force
majeure events, and other risk factors as described from time to time in the
Company's filings with the Securities and Exchange Commission. Many of these
factors are beyond the Company's ability to control or predict. The Company
disclaims any intent or obligation to update its forward-looking statements,
whether as a result of receiving new information, the occurrence of future
events, or otherwise.
RESULTS OF OPERATIONS
The Company recorded a net loss of $0.4 million on revenues of $7.3
million for the three months ended March 31, 1999. For the comparable period of
1998, the Company recorded a loss before cumulative effect of changes in
accounting principles of $0.2 million and a net loss of $9.1 million on revenues
of $7.4 million.
For the three months ended March 31, 1999, the Company sold 19,900
ounces of gold and 3,900 ounces of silver at an average price of $369 per
equivalent gold ounce. For the comparable period of 1998, the Company sold
14,179 ounces of gold and 3,500 ounces of silver at an average realized price of
$423 per ounce. The New York Commodity Exchange (COMEX) gold price averaged $287
and $295 per ounce for the three months ended March 31, 1999 and 1998,
respectively.
Cost of sales was $5.9 million for the three months ended March 31,
1999, as compared to $4.9 million in the prior period. Per ounce cost of gold
sold at the Briggs Mine, as computed under the Gold Institute's Production Cost
Standard, was as follows:
<TABLE>
<CAPTION>
Three months ended March 31,
1999 1998
---- ----
<S> <C> <C>
Cash operating (1) $284 $272
Total cash costs (2) $290 $278
Total production costs (3) $376 $374
</TABLE>
(1) All direct and indirect costs of the operation, excluding royalties
and accruals for site restoration. Includes inventory changes and
adjustments for deferred stripping.
(2) Cash operating costs plus royalties.
(3) Total cash costs plus depreciation, depletion, amortization and
accruals for site restoration.
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Operating costs were higher and ore grades were lower at the Briggs
Mine during the first quarter of 1999, resulting in higher unit costs as
compared to the first quarter of 1998.
Depreciation, depletion and amortization was higher in the current
period due to higher ounces sold. Selling, general, and administrative expense
was lower in the current period due to the sale of the Company's industrial
minerals business in December 1998 and to reduced corporate office expenses.
Exploration costs were lower in the current period due to curtailment of all
discretionary expenditures.
LIQUIDITY & CAPITAL RESOURCES
The Company's financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and settlement of
liabilities and commitments in the ordinary course of business. The Company's
liquidity, however, has been adversely impacted by a sustained period of low
gold prices and high debt service requirements. Moreover, since December 31,
1998, the Company has not been in compliance with certain covenants relating to
the Briggs Mine loan facility and has been unable to achieve resolution of these
matters with the lenders to date. As a result, the covenant violations
constitute events of default and the lenders may, by notice to the Company,
terminate the commitment and declare all amounts immediately due and payable.
The Company is in continuing discussions with the lenders on these matters,
however, there can be no assurances that a satisfactory resolution can be
achieved nor that the lenders will not exercise any remedies available to them
during the intervening period. Accordingly, the Company has classified all of
the debt as current on its Balance Sheet since December 31, 1998. In addition,
in March 1999, the Company received a demand notice for an increase in
collateral of approximately $1.2 million from the Sureties who issued certain
bonds for reclamation obligations at the Briggs Mine, Kendall Mine and McDonald
Gold Project. All of these matters raise substantial doubt about the Company's
ability to continue as a going concern. The Company has curtailed all
discretionary expenditures, is currently attempting to sell its African
properties, and has retained investment banking counsel to assist in the
evaluation of potential merger or other alliance opportunities. There can be no
assurances, however, that the Company will be successful in this regard.
Net cash used in operating activities during the three months ended
March 31, 1999, was $0.6 million as compared to $0.3 million used in operating
activities for the same period in 1998. Cash and cash equivalents at March 31,
1999 was $1.0 million.
The Company spent a nominal $0.1 million on capital programs for the
three months ended March 31, 1999.
During the first quarter of 1999, the Company used $1,650,000 of the
proceeds reserved from the December 1998 sale of its industrial minerals assets
to (i) pay off a credit line amount of $650,000, and (ii) purchase 3,451 ounces
of gold at a market price of $289.75 per ounce which was applied to the gold
loan. As a result of the partial prepayment on the gold loan, the Company
recognized a gain of $339,300 (3,451 ounces of principal repaid by open market
purchase at $289.75 per ounce; corresponding reduction in debt at $388.05 per
ounce). This amount is shown as an other income item on the Statement of
Operations for the three months ended March 31, 1999.
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OTHER MATTERS
Year 2000 Issue
Many computer programs utilize a two digit format to identify the
applicable year. Without modification, any date sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing, among other things, disruptions
to operations and inability to process financial transactions.
The Company has completed its inventory of systems which utilize
information technology. Noncompliant software at the Briggs Mine will be
upgraded or replaced as appropriate by June 30, 1999. Certain financial
reporting software and voice communications systems at the Company's corporate
headquarters are not year 2000 compliant and will be upgraded or replaced in the
third quarter of 1999. The associated costs are not expected to be material for
either location.
The Company continues to gather data regarding equipment used in its
operations which may have embedded chip technology. Equipment that is not year
2000 ready could fail causing a disruption to the Company's operations. The
Company expects to determine year 2000 compliance for such equipment by June 30,
1999 and to complete remediation efforts by September 30, 1999. At this time,
the Company does not expect the cost of year 2000 compliance to be material for
its non-information technology systems.
The Company relies on third parties to supply certain materials,
utilities, transportation, and other services necessary for its business
operations. During the first quarter of 1999, the Company initiated a process to
ascertain their stage of year 2000 readiness through questionnaires, interviews
and other means and is currently assessing the information gathered. The Company
expects to complete its third party assessment by June 30, 1999. As part of the
Company's contingency planning, alternate suppliers, where practical, will be
identified to reduce the risks of interruption due to third party failures.
Although the Company believes it has adequate resources and personnel
to complete its remediation efforts prior to December 31, 1999, the Company
remains at risk with respect to its ability to complete its own program and/or
to a failure by one or more of its third party suppliers to achieve year 2000
compliance within the required time frame.
McDonald Gold Project, Anti-Cyanide Mining Initiative
In November, 1998, the Montana electorate passed an anti-cyanide mining
initiative (I-137) by a vote of 52% to 48%. I-137 bans development of new gold
and silver mines and expansions to existing mines which use open-pit mining and
cyanide in the treatment and recovery process. For most of the campaign period,
mining companies were prevented from campaigning due to a previously passed
initiative (I-125) which prohibited campaign-expenditures by "for-
17
<PAGE> 18
profit" entities. Ten days prior to the election, a federal judge declared the
prohibition "unconstitutional". The mining community has filed lawsuits against
I-137, based on (i) having been denied the opportunity to campaign due to the
effectiveness of I-125 until the last few days, and (ii) due process
considerations, in that I-137 results in a taking of property without any
compelling public policy interest, since environmental safety concerns are well
protected and monitored with existing laws and regulations. The Company's legal
counsel believes that it is likely that I-137 will be declared unconstitutional,
or at a minimum, be overturned by the courts.
Environmental Regulation
In September, 1998, the DEQ filed a complaint in District Court
alleging violations of the Montana Water Quality Act for unpermitted discharges
at the Kendall Mine. The DEQ initially proposed a civil penalty in the amount of
$330,000, which was subsequently modified to $302,000, in connection with the
complaint. The Company is currently preparing a response to the complaint and
believes the penalty as currently assessed is without substantial merit.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Prices
The Company's earnings and cash flow are significantly impacted by
changes in the market price of gold. Gold prices can fluctuate widely and are
affected by numerous factors, such as demand, production levels, economic
policies of central banks, and producer hedging. During the last five years, the
average annual market price has fluctuated between $294 per ounce and $388 per
ounce. Moreover, in late 1997 and early 1998, gold prices declined to their
lowest level in eighteen years and have remained at or near that level since.
The Company currently utilizes two types of commodity instruments to
protect the selling price of a portion of its anticipated production. At March
31, 1999, approximately 43% of the recoverable reserves at the Company's Briggs
Mine was hedged through (i) short dated forward contracts totaling 163,900
ounces at an average price of approximately $309 per ounce, and (ii) a
commodity-based loan totaling 43,085 ounces at a monetized price of $388.05 per
ounce. With regard to the forward contracts, the Company can selectively extend
maturity dates and has the opportunity to deliver all of its estimated 1999 gold
production not otherwise reserved for its commodity loan repayment at prices
that exceed the March 31, 1999 market price of gold by an average of
approximately $33 per ounce. However, for purposes of illustrating the potential
impact of a change in gold price on the Company's annual profitability and cash
flow, if only 75% of its estimated production was delivered against the forward
contracts and the commodity loan, a $10 change in the price of gold would have
an impact of approximately $0.2 million. Similarly, a hedge position of only 50%
with a $10 change in the price of gold would impact the Company's profitability
and cash flow by approximately $0.4 million. The Company's commodity-based loan
was established in December 1995, by borrowing 64,425 ounces from certain
counterparties, selling the ounces in the marketplace at a price of $388.05 per
ounce, and using the proceeds of $25 million to develop and construct production
facilities at the Briggs Mine. (See Note 6 to the
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<PAGE> 19
Company's Consolidated Financial Statements for a complete discussion of the
financing arrangements for the Briggs Mine). As the gold is repaid with
production from the Briggs Mine, the Company records revenue at the monetized
amount of $388.05 with a corresponding reduction in debt. An implicit hedging
gain or loss exists at the time of repayment depending on whether the market
price of gold at the repayment date is below or above the monetized amount.
There are certain market risks associated with commodity instruments.
If the Company's counterparties fail to honor their contractual obligation to
purchase gold at agreed-upon prices, the Company may be exposed to market price
risk by having to sell gold in the open market at prevailing prices. Similarly,
if the Company fails to produce sufficient quantities of gold to meet its
forward commitments and commodity loan obligation, the Company would have to
purchase the shortfall in the open market at prevailing prices.
In May 1998, the Company liquidated a forward position that was
originally established in December 1995, resulting in proceeds of $11.1 million.
As of December 31, 1998, $8.6 million of the gain had not been recognized in
operations. During the first quarter of 1999, $1.2 million of the gain was
recognized. For the remainder of 1999, $2.9 million of the gain will be
recognized with the balance of $4.5 million recognized in 2000.
At March 31, 1999, the mark to market value of the Company's forward
contracts was approximately $4.7 million. The fair value and carrying value of
the Company's commodity-based loan at March 31, 1999 was approximately $12.1
million and $16.7 million, respectively.
Interest Rates
At March 31, 1999, the Company's debt primarily consisted of a
commodity-based (gold) loan. Interest rates for such loans are typically lower
than dollar denominated debt, as the cost of leasing gold from sources such as
central banks is relatively inexpensive (less than 2% per annum). A counterparty
to a commodity-based loan will add an applicable margin to its cost of funds for
purposes of establishing an interest rate to the producer. During the first
three months of 1999 and 1998, the interest rate on the Company's gold loan
averaged 2.7% and 3.8%. The Company is required to have the rate periodically
reset for periods that it may choose which range in duration from one to six
months. Because of the historically low rates for gold-denominated debt, the
Company is not exposed to significant interest rate risk, as a change of 100
basis points in the rate would have an impact on annual earnings and cash flow
of less than $0.150 million, based on the March 31, 1999 outstanding loan amount
of 43,085 ounces and gold prices of approximately $280 per ounce.
Foreign Currency
The price of gold is denominated in US dollars, and the Company's gold
production operations are in the United States. The Company conducts only a
minor amount of exploration activity in foreign countries and has minimal
foreign currency exposure.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS: ..............................................None
ITEM 2. CHANGES IN SECURITIES: ..........................................None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES: ................................None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS: ..............None
ITEM 5. OTHER INFORMATION: ..............................................None
ITEM 6(a) EXHIBITS:
No. 27 - Financial Data Schedule
ITEM 6(b) REPORTS ON FORM 8-K: ............................................None
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SIGNATURES
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.
CANYON RESOURCES CORPORATION
Date: May 12, 1999 /s/ Richard T. Phillips
----------------------------------
Richard T. Phillips
Treasurer
Date: May 12, 1999 /s/ Gary C. Huber
----------------------------------
Gary C. Huber
Chief Financial Officer
21
<PAGE> 22
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE
- ------ ------------------- ----
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,041,400
<SECURITIES> 0
<RECEIVABLES> 94,200
<ALLOWANCES> 0
<INVENTORY> 5,620,900
<CURRENT-ASSETS> 10,686,300
<PP&E> 76,756,000
<DEPRECIATION> 13,268,900
<TOTAL-ASSETS> 77,789,600
<CURRENT-LIABILITIES> 25,310,800
<BONDS> 33,300
0
0
<COMMON> 461,500
<OTHER-SE> 95,349,600
<TOTAL-LIABILITY-AND-EQUITY> 77,789,600
<SALES> 7,335,700
<TOTAL-REVENUES> 7,335,700
<CGS> 5,880,600
<TOTAL-COSTS> 5,880,600
<OTHER-EXPENSES> 1,650,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 194,500
<INCOME-PRETAX> (380,900)
<INCOME-TAX> 0
<INCOME-CONTINUING> (380,900)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (380,900)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
