UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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 1-8736
HOMESTAKE MINING COMPANY
(Exact name of registrant as specified in its charter)
Delaware 94-2934609
(State of Incorporation) (I.R.S. Employer
Identification No.)
650 California Street
San Francisco, California 94108-2788
(Address of principal executive office) (Zip Code)
(415) 981-8150 http://www.homestake.com
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $1.00 par value New York Stock Exchange, Inc.
Rights to Purchase Series A Participating
Cumulative Preferred Stock New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
5 1/2% Convertible Subordinated Notes Due June 23, 2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $1,373,879,899 as of March 16, 1998.
The number of shares of common stock outstanding as of March 16, 1998 was
146,763,332.
<PAGE>
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
PART I
ITEM - 1 BUSINESS
INTRODUCTION
Homestake Mining Company is a Delaware corporation incorporated in 1983
as the parent holding company of Homestake Mining Company of California
("Homestake California"), which has been engaged in the gold mining business
since 1877. Homestake is one of the largest North American-based gold mining
companies. Operations of Homestake include mineral exploration, extraction,
processing and refining. Gold bullion is Homestake's principal product. Ore and
concentrates containing gold and silver from the Eskay Creek and Snip mines in
Canada are sold directly to smelters. Homestake has significant operations in
the United States, Canada and Australia. Homestake also has operations in Chile.
Homestake is engaged in active exploration projects in the United States,
Canada, Australia, Eastern Europe, Brazil, Chile and the Andean region of South
America, and participates in a development project in Bulgaria.
Homestake California was founded to develop the Homestake Mine
discovered in the Black Hills of the Dakota Territory in 1876. Homestake was
predominately a gold mining company until its diversification into uranium
mining and production in the early 1950s and into lead and zinc in the 1960s. In
1984, Homestake further diversified into the oil and gas business, principally
as a result of the acquisition of Felmont Oil Company. In 1989 and 1990,
Homestake disposed of its oil and gas business. In 1990, Homestake closed its
last remaining uranium mine and sold its interest in its base metals business.
In 1975, Homestake made its initial investment in the Kalgoorlie gold
district of Western Australia (known as the Golden Mile) when Homestake Gold of
Australia Limited ("HGAL") acquired a 48% interest in the Kalgoorlie Mining
Associates partnership. In 1987, Homestake sold 20% of its shares of HGAL to the
public. Subsequently, HGAL increased its interest in Kalgoorlie Mining
Associates to 50% and acquired a 50% interest in adjacent joint ventures and
properties. In late 1995 and early 1996, Homestake acquired the HGAL shares that
it did not then own.
In 1989, Homestake joined with two partners in the development of a
major sulfur discovery, Main Pass 299, in the Gulf of Mexico.
In 1992, Homestake acquired International Corona Corporation (now known
as Homestake Canada, Inc.), a large Canadian gold producer. As a result of the
acquisition, Homestake added approximately 600,000 ounces to its annual gold
production and increased its gold reserves by more than 5.4 million ounces.
Homestake also acquired an interest in the high-grade Eskay Creek deposit in
British Columbia. Commercial production at Eskay Creek commenced in January
1995. Homestake now holds a 50.6% interest in the Eskay Creek mine through its
shareholding in Prime Resources Group Inc., a British Columbia company
("Prime"). The common shares of Prime are listed on the Toronto Stock Exchange,
Vancouver Stock Exchange, and the American Stock Exchange.
Homestake has adopted a gold hedging policy under which Homestake, in
the appropriate circumstances, will enter into forward sales transactions for
approximately 30% of its gold production in each of the subsequent 10 years at
prices in excess of certain targeted prices. In appropriate
2
<PAGE>
circumstances, Homestake also will use combinations of put and call option
contracts to establish an effective price floor for sales while permitting
participation in future price increases. At December 31, 1997 Homestake's gold
forward sales commitments totaled 580,052 ounces, deliverable over the period
1998-2003, at an average contract settlement price of $433.72 per ounce. The
estimated liquidation value of the contracts at December 31, 1997 was $53.1
million. During 1997, Homestake entered into a series of put and call option
contracts which provide a floor price of $325 per ounce for 900,000 ounces of
Homestake's 1998 gold production. Homestake purchased put options for 900,000
ounces of gold exercisable during 1998 at a price of $325 per ounce. Homestake
also sold call options for 900,000 ounces of gold exercisable during 1998 at a
price of $325 per ounce and purchased call options for 900,000 ounces of gold
exercisable during 1998 at $336 per ounce. Homestake also purchased put options
for 30,000 ounces of gold exercisable during the year 2000 at a price of $350
per ounce and sold call options for 15,000 ounces of gold exercisable during
2000 at an average price of $395 per ounce. The estimated liquidation value of
the option position at December 31, 1997 was $26.4 million, bringing the
liquidation value of the total hedge position to $79.5 million.
Dollar amounts in this report are in U.S. dollars unless otherwise
indicated.
See note 22 to the "CONSOLIDATED FINANCIAL STATEMENTS" beginning on
page 90 for geographic and segment information.
See "RISK FACTORS" and "CAUTIONARY STATEMENTS" beginning on pages 103
and 107, respectively, for a discussion of factors and assumptions on which
forward looking statements in this report may be based or which could cause
actual results to differ materially from those expressed in the forward looking
statements.
SIGNIFICANT 1997 AND 1998 DEVELOPMENTS
Homestake and Santa Fe Pacific Gold Corporation ("Santa Fe")
announced in December 1996 that they had entered into a definitive agreement
whereby Homestake would acquire Santa Fe. In March 1997, Santa Fe terminated the
agreement and, in accordance with the terms of the agreement, paid Homestake a
$65 million termination fee. As a result, in the first quarter of 1997 Homestake
recorded a pretax gain of $62.9 million ($47.2 million after tax), net of
transaction-related expenses of approximately $2 million incurred in 1997.
In February 1997, Homestake completed the sale of its interest in the
George Lake and Back River ventures in Canada to Kit Resources Corporation
("Kit") for $9.3 million in cash and 3.6 million shares of Kit. As a result of
this transaction, Homestake recorded a pretax gain of $13.5 million ($8.1
million after tax).
During 1997, Homestake recorded write-downs and other unusual charges
of $198.8 million ($158.7 million after tax). Due to a prolonged period of low
sulfur prices and Homestake's current assessment of estimated future cash flows,
the Company wrote off its entire $107.8 million investment in the Main Pass 299
sulfur mine in the Gulf of Mexico. The Company also wrote down the carrying
value of several of its short-lived assets or operations, certain redundant
assets and investments in certain mining securities. It also increased its
reclamation accruals at several properties to reflect revised cost estimates,
changed conditions and more stringent reclamation requirements. (See note 6 to
the "CONSOLIDATED FINANCIAL STATEMENTS" beginning on page 73.)
3
<PAGE>
In October 1997, the gravity mill for processing higher-grade sulfide
ores at Round Mountain was completed at a cost of $62.2 million (Homestake's
share - $15.5 million). Higher gold recoveries will be achieved by milling than
otherwise would be obtained by crushing and leaching the higher-grade sulfide
ore. The mill has a capacity to process 8,000 tons per day of sulfide ore.
During the fourth quarter of 1997, Prime completed construction of a
small gravity and flotation mill facility at the Eskay Creek mine site in
British Columbia, Canada, at a total capital cost of $12 million. The mill will
improve the profitability of certain Eskay Creek ore that otherwise would be
shipped directly to third-party smelters and will permit processing of lower
grade material that otherwise would not be economic for direct shipment.
In December 1997, Homestake completed construction at the Ruby Hill
mine near Eureka, Nevada, at a total capital cost of approximately $64.7
million. Initial gold production occurred on November 6, 1997. The operation is
expected to produce 110,000 ounces of gold in 1998 at a total cash cost of $123
per ounce and a total production cost of $241 per ounce.
In December 1997, Kalgoorlie Consolidated Gold Mines Pty Ltd ("KCGM")
completed a 1.6 mile decline from surface at the northern end of the Kalgoorlie
Super Pit to access from underground the upper level remnants of the Mt.
Charlotte orebody and the recently delineated northern orebody. HGAL's share of
the decline's cost is approximately $2.6 million.
In September and November of 1997, the State of South Dakota, the
United States government and the Cheyenne River Sioux Tribe filed actions
against Homestake claiming unspecified and unquantified damages to natural
resources alleged to result from disposal of mine tailings in Whitewood Creek
beginning in the nineteenth century. Disposal of the tailings in Whitewood Creek
was in compliance with all applicable laws. Further, the site was a licensed
waste disposal facility. Homestake answered the complaints denying the claims
and filed crossclaims seeking cost recoupment, contribution and indemnity from
the plaintiffs in the actions. Homestake intends to vigorously defend and, as
appropriate, join other government and non-government entities that also
disposed of material in the affected area. See "ENVIRONMENTAL MATTERS" beginning
on page 40.
On December 21, 1997, Homestake announced it had entered into an
agreement to acquire Plutonic Resources Limited ("Plutonic"), an Australian gold
producer, by an exchange of common stock for common stock. Homestake expects to
issue approximately 64.4 million shares to acquire Plutonic (0.34 of a Homestake
common share for each fully-paid Plutonic ordinary share). Following the
combination, Homestake's Australian operations will be the second largest in
that country with substantial potential for reserve growth. The new Homestake
will have 17 mines in four countries. Homestake's 1998 Australian gold
production is expected to be 850,000 ounces, or approximately 35 percent of the
Company's total production, increasing to 1 million ounces and 40 percent,
respectively, in 1999.
The transaction, which has been approved unanimously by the Boards of
both companies, is expected to close in May 1998. The transaction is subject to
approval by shareholders of both companies, qualification as a pooling of
interests for accounting purposes, and certain other conditions.
In January 1998, Homestake announced the implementation of a major
restructuring of operations at the Homestake mine to reduce operating costs.
Annual production will be reduced to approximately 150,000 to 180,000 ounces per
year. Implementation of the plan will require a major reduction in the level of
employment and a complete reorganization of the methods of operation. To
implement the plan,
4
<PAGE>
Homestake suspended underground mining while it completed the final details of
the new operating plan and readied the underground mine to begin operating on
the restructured basis. Underground crews commenced returning to work on a
limited basis on March 26, 1998, and the remaining underground work force, which
is expected to be approximately one-half of the pre-shut down work force, will
return on a phased basis through April 1998. The new operating plan involves
closing parts of the mine and concentrating on substantially fewer production
levels in order to reduce continuing infrastructure and other operating costs.
Although the new plan reduces proven and probable gold reserves by 1.5 million
ounces (before taking account of 1997 production), the improved per ounce
operating margin on the remaining reserves should increase the mine's future
total cash flow significantly.
In February 1998, Prime adopted a gold and silver hedging policy which
provides for the use of forward sales contracts for up to 40% of each of the
following five year's expected annual gold and silver production at prices in
excess of certain targeted prices.
GLOSSARY OF TERMS
See "GLOSSARY AND INFORMATION ON RESERVES" beginning on page 35 for
definitions of terms used in the following discussion.
GOLD OPERATIONS
UNITED STATES
Homestake conducts operations at the Homestake mine in the Black Hills
of South Dakota, at the Ruby Hill mine in Nevada, at the McLaughlin mine in
northern California and at the 50% owned Pinson mine in north central Nevada. In
addition, Homestake owns a 25% interest in the Round Mountain mine in central
Nevada and a 33.3% interest in the Marigold mine in north central Nevada. The
Company's principal exploration office is in Reno, Nevada.
Homestake Mine
The Homestake gold mine is located in Lawrence County in and near Lead,
South Dakota. The mine has been in operation since 1876. Homestake owns 100% of
the operation. Paved public roads provide access to the operation.
The Homestake mine properties cover approximately 11,700 acres, of
which approximately 8,200 acres are owned in fee and the remainder are held as
unpatented mining claims. All mining is conducted on owned property.
The Homestake mine is comprised of underground and open-pit (the "Open
Cut") mining operations, an ore processing plant, final product refinery, a
waste-water treatment plant, and tailings disposal facilities. The underground
mine is serviced by two 5,000-foot vertical shafts from the surface connecting
with internal shafts which provide hoisting and services to the 8,000-foot
level. Ore from underground is hoisted to the surface, crushed and transported
to the nearby processing plant. Open Cut ore is crushed and transported more
than a mile to the processing plant by an enclosed conveyor. The 7,400
tons-per-day ("TPD") capacity processing plant recovers gold through a
combination of gravity, carbon-in-pulp ("CIP") and vat leaching processes.
Recycled process water is pumped through a carbon-
5
<PAGE>
in-leach ("CIL") circuit to recover residual gold in solution. The refinery
produces 0.997 fine gold bullion. Process tails are used for underground fill or
are deposited in a tailings impoundment facility three miles from the plant.
The first phase of a major tailings dam lift expansion commenced in
1996. Construction of an interim raise of ten feet was completed in 1997 at a
cost of approximately $11.8 million, and construction of the full lift will be
completed in 1999 at a cost of approximately $18.2 million. The expansion will
provide tailings storage capacity sufficient to hold projected mining activity
through the year 2014, and additional flood storage capacity. Facilities and
equipment at this operation continue to be upgraded, and during 1997 capital
expenditures totaled approximately $16 million, principally for tailings dam
lift and electrical facilities upgrades. The facilities and equipment are
generally in good operating condition, but the basic mine and major facilities
have been in service for many years and are less efficient than more recently
designed and developed mines and facilities.
Untreated water for use in the mine's facilities is obtained from local
watersheds under Homestake mine water rights and potable water is purchased from
the Lead/Deadwood Sanitation District. Approximately 80% of the electric power
consumption is purchased under contract from Black Hills Corporation and the
remainder is provided by Homestake-owned hydroelectric facilities.
During 1997, certain Open Cut assets were deemed to be impaired and
were written down, resulting in a pre-tax charge of $12.8 million. Open Cut
mining currently is scheduled to be completed in April 1998. Open Cut ore
stockpiles will continue to be processed through the end of 1998.
As underground mining has progressed into the lower levels of the
Homestake mine, the remaining higher-grade ore deposits have become narrower,
less continuous and more difficult to mine, with resulting higher costs. On
January 26, 1998, Homestake announced that, in response to increasing costs for
the underground mine and the low gold price, it will implement a major
restructuring of operations at the Homestake mine. The new operating plan is
expected to reduce costs significantly, so as to position the mine to continue
operating for many additional years. The plan requires a substantial reduction
in annual production, a major reduction in the level of employment and a
complete reorganization of the methods of operation. The new operating plan also
involves closing parts of the mine and concentrating on substantially fewer
production levels in order to reduce continuing infrastructure and other
operating costs. This new plan, which also incorporates new capital spending
projects, is expected to result in increased productivity in tons mined per
manshift worked and should also result in higher mined ore grade due to changing
the mix of mining methods to be employed in different parts of the mine. The
combined impact of these improvements is expected to be a significant reduction
in production costs per ounce of gold produced.
To most effectively implement the new operating plan, Homestake
suspended underground mining while it completed the final details of the plan
and readied the underground mine to begin operating on the restructured basis.
During the shutdown period, operations at the mill was reduced to a level
sufficient to process ore from the Open Cut, which continued to operate during
the shutdown period. Underground crews commenced returning to work on a limited
basis on March 26, 1998, and the remaining underground work force, which is
expected to be approximately one-half of the pre-shut down work force, will
return on a phased basis through April 1998.
The new operating plan provides that upon completion of the
restructuring and restart of the mine, production will be reduced to a rate of
approximately 150,000 to 180,000 ounces per year by the beginning of 1999, and
that the total cash cost for the underground mine will be reduced from in excess
6
<PAGE>
of the current amount of $335 per ounce to approximately $280 per ounce by the
end of 1999. To achieve the new operating plan, Homestake expects to invest $20
to $30 million by the end of 1999. Before taking into account the proposed
combination with Plutonic, the restructuring is expected to reduce the Company's
weighted average cash costs by approximately $8 per ounce by the end of 1999.
Although the new operating plan reduces proven and probable gold
reserves by 1.5 million ounces (before taking account of 1997 production), the
improved per ounce operating margin on the remaining reserves should increase
the mine's future total cash flow significantly.
Hourly employees at the Homestake mine are represented by the United
Steelworkers of America. The current three year labor contract expires in May
1998. Negotiations with respect to a new contract commenced during the first
quarter of 1998. The negotiations involve a number of matters that arise as a
result of the restructuring of the operation and the reduction of the work force
described above.
During 1997, the mine operated in compliance with its environmental
permits, except that in November 1997, the mine had one reportable spill of
tailings into Whitewood Creek. The Homestake mine is under no regulatory orders
of any kind mandating specific environmental expenditures.
No royalties are payable on production from the Homestake mine. The
State of South Dakota imposes a severance tax of 10% of net profits from the
sale of gold produced in the state, plus $4 per ounce of gold sold when the
price of gold is $499 per ounce or less, increasing by $1 per ounce for each
$100 increment or part thereof in excess of $499 per ounce.
Geology
The Homestake mine is the largest known iron formation hosted gold
deposit. In its 122-year life, the mine has produced in excess of 38.9 million
ounces of gold. The Homestake gold deposit is Proterozoic in age (approximately
1.9 billion years). Mineralization is generally stratabound within the Homestake
Formation, which is a quartz-veined, sulfide-rich sedimentary sequence that has
been complexly deformed by tight folding, faulting and shearing. Ten
southeast-plunging fold structures, locally called ledges, have produced gold
ore over a vertical extent of more than 8,000 feet.
Year-end Proven and Probable Ore Reserves
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Underground:
Tons of ore (000) 11,900 19,764
Ounces of gold per ton 0.220 0.220
Contained ounces of gold (000) 2,620 4,345
Open Cut:
Tons of ore (000) 1,674 3,990
Ounces of gold per ton 0.099 0.079
Contained ounces of gold (000) 166 317
Total:
Tons of ore (000) 13,574 23,754
Ounces of gold per ton 0.205 0.196
Contained ounces of gold (000) 2,786 4,662
7
<PAGE>
Operating Data
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Production Statistics:
Tons of ore mined (000):
Underground 1,359 1,376
Open Cut 1,894 1,683
Ore grade mined (oz. gold/ton):
Underground 0.195 0.211
Open Cut 0.123 0.115
Open Cut stripping ratio (waste:ore) 2.3:1 4.9:1
Tons of ore milled (000) 2,578 2,566
Mill feed ore grade (oz. gold/ton) 0.163 0.166
Mill recovery (%) 94 95
Gold recovered (000 ozs.) 397 407
Cost per Ounce of Gold Produced:
Cash operating costs $306 $293
Other cash costs 4 11
Noncash costs 47 35
---------------- ---------------
Total production costs $357 $ 339
</TABLE>
Round Mountain Mine
The Round Mountain gold mine is an open-pit mine located in Nye County,
Nevada, about 60 miles north of Tonopah. Homestake owns a 25% interest in the
mine. Echo Bay Mines Ltd. owns a 50% interest and is the operator. The remaining
25% interest is owned by Case, Pomeroy & Company, Inc. The mine has been in
operation since 1977. Paved public roads provide access to the operations.
The Round Mountain properties cover approximately 24,968 acres of land,
of which 645 acres are privately owned, 405 acres are under patent application,
and the remainder are held under unpatented mining claims. Approximately 73% of
the total reserves are located on the privately-owned land.
Most of the ore is heap leached, and the remainder, consisting of
higher-grade sulfide ore, is milled in the recently completed mill. Ore is heap
leached using two methods. The higher-grade oxide ore is crushed and processed
on reusable heap-leach pads for 100 to 150 days and then hauled to dedicated
pads and releached. Lower grade, uncrushed run-of-mine oxide ore is heap leached
on dedicated pads along with previously leached ore from the reusable pad.
The reusable pad processing facilities consist of a gyratory crusher,
an intermediate ore storage and a reclamation system, secondary and tertiary
cone crushers and screens, a conveyor system used to transport ore to two
asphalt leach pads, and a solution pumping system. The reusable pads have a
total capacity of approximately three million tons. The separate, dedicated
heap-leach pads and solution pumping system, covering an area of 24.2 million
square feet, have the capacity to process 195 million tons of ore. Ongoing
construction of an additional 7.8 million square foot dedicated pad facility and
solution pumping system was completed in February 1998 at a cost of
approximately $13.5 million (Homestake's share - $3.4 million). This expansion
will be sufficient for mining and processing activity through mid-1999. It is
anticipated that the dedicated pad facilities will be expanded to approximately
8
<PAGE>
51.2 million square feet and 485 million tons over the life of the project.
During 1997, total ore processed averaged 134,300 TPD, the reusable heap-leach
pads processed 26,600 TPD and the balance was processed on the dedicated pads.
The average ore and waste mining rate was 197,200 TPD, and the total mining
rate, including stockpiles, was 265,000 TPD.
The gravity mill for processing higher-grade sulfide ores was completed
ahead of schedule in October 1997 and under budget at a cost of $62.2 million
(Homestake's share - $15.5 million). The mill provides higher gold recoveries
than otherwise would be obtained by crushing and leaching the higher-grade
sulfide ores on the reusable pad. The mill has a capacity to process 8,000 tons
per day of sulfide ore. Mill tailings are impounded at a newly constructed
tailings facility.
Water is supplied from company-owned wells on the property and from
water reclaimed from tailings dams. Power is purchased under contract from
Sierra Pacific Power Company.
Homestake's share of total 1997 gold production from the Round Mountain
mine was 119,959 ounces compared to 102,744 ounces in 1996. The higher 1997
production is a result of improved mining efficiency, higher grades and
recoveries from the reusable pads, and an increase in the volume of ore placed
on the dedicated pad. Gold production from gravity treatment of high-grade ores
declined to 1,799 ounces (Homestake's share) in 1997 compared to 3,137 ounces in
1996.
During the third quarter of 1997, a new Round Mountain mining plan was
approved. This new plan was the result of an intensive re-engineering effort and
resulted in moderately lower ore tons but significantly lower waste tons to be
mined. Specifically, the new plan provides for a decrease in the ore reserves of
approximately 1,261,000 ounces (100% basis) at December 31, 1997 (before taking
account of 1997 production) and a decrease in total mining requirements of 260
million tons. The combined effect of these changes is expected to increase the
mine's cash flow and profitability and to reduce total cash costs. The new
schedule and pit design will require the movement of a number of shops and other
facilities during 1998. Cost for construction of the new facilities and
demolition of the old facilities is estimated at approximately $15.5 million
(Homestake's share - $3.9 million) and should be completed by the third quarter
of 1998.
Pit water discharges began to exceed the permitted levels for arsenic
during 1997. A new pit dewatering system has since been designed that utilizes
pit water within the operation, and eliminates pit water discharges outside of
the property. During 1997, one minor air quality citation was issued by the
Nevada Bureau of Air Quality for fugitive dust emissions. Otherwise, during 1997
the mine operated in compliance with its permits.
All Round Mountain mine production is subject to a royalty determined
by a complex formula based on the price of gold. The royalties range from
approximately 3.5% of gold revenues at prices of $320 per ounce of gold to
approximately 6.4% of gold revenues at prices of $440 per ounce of gold or more.
During 1997, the royalties averaged 3.78% of revenues.
Geology
The Round Mountain ore body straddles the margin of a volcanic caldera
complex. Gold-bearing hydrothermal fluids were transported along major
structural conduits created by the volcano's collapse and associated faulting.
These ascending fluids deposited gold in permeable zones along a broad northwest
trend. Primary gold mineralization at Round Mountain occurs as electrum, a
natural gold/silver alloy, in association with quartz, adularia and pyrite.
Narrow fractures in shear zones host
9
<PAGE>
higher-grade mineralization while porous sites within the volcanic rocks host
the disseminated mineralization. Economic gold mineralization is found in both
the volcanic and surrounding sedimentary rocks as well as overlying alluvial
placers. The oblong open-pit mine is over a mile at its longest dimension and
currently more than 1,200 feet from the highest working level to the bottom of
the pit.
Homestake has a 25% share of the following amounts:
Year-end Proven and Probable Ore Reserves
(100% Basis)
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Tons of ore (000) 401,325 476,509
Ounces of gold per ton 0.018 0.019
Contained ounces of gold (000) 7,037 9,050
Operating Data (100% Basis)
1997 1996
---------------- ---------------
Production Statistics:
Tons of ore mined (000) 32,726 31,947
Stripping ratio (waste:ore) 1.2:1 0.8:1
Tons of ore crushed (000) 9,757 9,894
Tons of ore processed (000) 48,496 40,867
Weighted average ore grade
placed on the pads (oz. gold/ton) 0.015 0.017
Leach recovery - reusable pads (%) 75 66
Gold recovered (000 ozs.) 480 411
Homestake's Cost per Ounce of Gold Produced:
Cash operating costs $210 $230
Other cash costs 16 26
Noncash costs 49 61
---------------- ---------------
Total production costs $275 $317
</TABLE>
Ruby Hill Mine
The Ruby Hill mine is located one mile northwest of Eureka, Nevada.
Homestake acquired a 100% interest in the property in 1992. Access to the
property is by a 1.5 mile gravel road from U.S. Highway 50.
The Ruby Hill properties consist of approximately 24,831 acres, of
which 23,386 acres are unpatented mining claims and 1,445 acres are privately
owned.
Exploration activities have resulted in the discovery of several
mineralized zones. A positive feasibility study on the West Archimedes deposit
was completed during the fourth quarter of 1995, and construction of a mine,
heap-leach pads and a mill facility commenced in early 1997 and was completed
10
<PAGE>
in December 1997. Total capital cost, including the pre-stripping of the
overlying alluvium, was approximately $64.7 million.
The operation utilizes conventional open-pit mining methods and heap
leaching. High-grade ore is ground in a ball mill, leached and filtered, and
then combined with the crushed low-grade ore in a rotating agglomeration drum
prior to being placed on the leach pad. The feasibility study estimated that the
mine would produce an average of 105,000 ounces of gold per year over its
six-year life at a total cash cost of approximately $140 per ounce. The mine,
which poured its first gold on November 6, 1997, produced 16,629 ounces of gold
during 1997. The mine commenced commercial production effective January 1, 1998
and is budgeted to produce 110,000 ounces in 1998 at a total cash cost of $123
per ounce and a total cost of $241 per ounce.
Water is available from on-site wells and power is available from Mount
Wheeler Power Company.
A production royalty of 3% of net smelter returns is payable on
production over 500,000 ounces of gold.
Geology
The West Archimedes gold mineralization is hosted primarily within
brecciated jasperoid and decalcified limestones of the uppermost Goodwin and
Antelope Valley units of the Ordivician Pogonip Group. The micron-size gold is
finely disseminated and the ore body is entirely oxidized. Exploration and
delineation drilling are continuing in the nearby East Archimedes zone and in
the Ruby Deeps zone located below the West Archimedes deposit.
Year-end Proven and Probable Ore Reserves
(100% Basis)
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Tons of ore (000) 7,028 7,616
Ounces of gold per ton 0.098 0.099
Contained ounces of gold (000) 687 755
</TABLE>
McLaughlin Mine
The McLaughlin gold mine is located at the junction of Lake, Napa and
Yolo Counties in northern California. The McLaughlin mine commenced operation in
1985 and is 100% owned by Homestake. Access to the property is by paved road.
The McLaughlin mine properties cover approximately 16,200 acres.
Approximately 15,100 acres are owned and approximately 950 acres are leased. The
Company holds seven unpatented mining claims and six millsite claims covering
the remaining property.
Mining was completed in June 1996 and ore is now sourced exclusively
from lower-grade stockpiles which were built up over the life of the mine. The
autoclave and flotation circuits were decommissioned following the completion of
mining of high-grade ores. The plant now operates as a direct-cyanidation
circuit utilizing cyanide leaching followed by CIP circuits, pressure stripping
and electrowinning. Total mill capacity is approximately 7,600 TPD. In 1996, the
embankment at the tailings
11
<PAGE>
impoundment was raised, increasing the impoundment's capacity to allow for the
treatment of all but the lowest-grade ore remaining in the stockpiles. A final
tailings dam lift, currently scheduled to be added in 1999 at an estimated cost
of $2.4 million, will allow for the processing of the then remaining ore.
Facilities are modern and in good operating condition.
The majority of process water is recycled from the tailings pond.
Additional water is obtained from the Company's reservoir in Yolo County, which
has approximately four years of storage capacity. Electric power is purchased
under interruptible tariff from Pacific Gas and Electric Company.
Gold production, which is expected to continue through approximately
2003, has declined significantly due to the completion of mining and exhaustion
of high-grade ores. Processing costs also have declined significantly due to the
shutdown of the higher cost autoclave and flotation circuits, allowing economic
treatment of the lower-grade stockpiled ore. During 1996, the Company entered
into long term hedging contracts, which have been allocated to the McLaughlin
mine for accounting purposes, for the sale of future production to ensure
recovery of the remaining investment and to cover remaining reclamation costs.
During 1997, the mine operated in compliance with its environmental
permits.
McLaughlin mine royalties are equivalent to approximately 2% of
revenues.
Year-end Proven and Probable Ore Reserves
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Stockpiled:
Tons of ore (000) 13,908 16,627
Ounces of gold per ton 0.061 0.063
Contained ounces of gold (000) 845 1,048
Operating Data
1997 1996
---------------- ---------------
Production Statistics:
Tons of ore mined (000) - 826
Stripping ratio (waste:ore) - 4.0:1
Tons of ore milled (000) 2,719 2,485
Mill feed ore grade (oz. gold/ton) 0.075 0.096
Mill recovery (%) 58 77
Gold recovered (000 ozs.) 118 185
Cost per Ounce of Gold Produced:
Cash operating costs $247 $242
Other cash costs 7 8
Noncash costs 120 123
---------------- ----------------
Total production costs $374 $373
</TABLE>
12
<PAGE>
Pinson Mine
The Pinson gold mine is located in Humboldt County approximately 30
miles northeast of Winnemucca, Nevada. In December 1996, Homestake increased its
interest in the Pinson Partnership to 50% and became the operator of the Pinson
mine. Barrick Gold Corporation ("Barrick") owns the remaining interest. The mine
has operated since 1981. Access to the property is by paved and gravel roads.
The Pinson properties consist of approximately 36,615 acres of which
11,511 acres are held under leases, the terms of which are sufficient to allow
for the mining of all known reserves. The remaining land is comprised of 21,800
acres of unpatented mining claims and 3,303 acres of primarily fee lands. New
leases have been negotiated for portions of the property where the leases were
scheduled to expire by the year 2000. Homestake and Barrick are conducting an
extensive deep drilling exploration program on the Pinson properties.
Mining is conducted by conventional open-pit methods in several
different areas. The mine has both heap-leaching and conventional milling
facilities. In February 1998, milling was suspended and all ores currently are
processed by heap leaching. Total material mined averaged approximately 32,510
TPD in 1997. The mill has a capacity of 1,550 TPD using both CIP and CIL
methods. In 1997, 73% of total gold production was from milled ore. Low-grade
ore is treated by heap-leaching methods. The facilities are in good condition.
Water is supplied from on-site wells and power is purchased from Sierra
Pacific Power Company.
During 1997, the mine operated in compliance with all of its
environmental permits.
Production royalties averaging 3.5% of net smelter returns are
currently payable on the principal producing areas of the property. Overall, the
underlying property ownership is complex, requiring special arrangements with
respect to the commingling of ore from various locations.
Homestake's share of production from the Pinson mine was 25,829
ounces of gold in 1997 compared to 12,098 ounces in 1996.
As a result of lower gold prices, in the third quarter of 1997 the
Company reviewed its carrying value of the Pinson mine. Based on its evaluation
of the property at a $325 gold price, the Company wrote down the carrying value
of its investment in the Pinson mine to zero. However, the Company believes the
Pinson property has good exploration potential, and plans to continue with its
exploration program for portions of the property.
During 1998, Homestake and Barrick plan to spend $3 million
collectively to explore for high-grade mineralized zones at depth. Current
reserves at Pinson are sufficient for approximately one and one-half years of
mining at current operating rates.
13
<PAGE>
Geology
The Pinson deposit includes more than six zones of mineralization
largely hosted in carbonate rocks and calcareous siltstones of the Ordovician
Comus Formation. Ore bodies consist of disseminations of micron-size gold
peripheral to faults in favorable stratigraphy. High-grade stringer zones have
been identified and are the subject of continuing investigations.
Homestake has a 50% share of the following reserves:
Year-end Proven and Probable Ore Reserves
(100% Basis)
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Tons of ore (000) 1,783 2,563
Ounces of gold per ton 0.073 0.072
Contained ounces of gold (000) 131 184
</TABLE>
Operating data is presented below on a 100% basis. In December 1996,
Homestake increased its interest to 50%. Prior to December 1996, Homestake had a
26.25% share of the following amounts:
Operating Data (100% Basis)
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Production Statistics:
Tons of ore mined (000) 1,263 1,257
Stripping ratio (waste:ore) 8.2:1 6.1:1
Tons of ore milled (000) 550 549
Ore grade milled (oz. gold/ton) 0.076 0.077
Mill recovery (%) 86 79
Tons of ore leached (000) 712 669
Ore grade leached (oz. gold/ton) 0.023 0.030
Gold recovered (000 ozs.) 52 42
Homestake's Cost per Ounce of Gold Produced:
Cash operating costs $334 $355
Other cash costs 10 14
Noncash costs 54 63
---------------- ---------------
Total production costs $398 $432
</TABLE>
Marigold Mine
The Marigold gold mine is located in Humboldt County approximately
40 miles southeast of Winnemucca, Nevada. Homestake owns a 33.3% interest in the
Marigold partnership. Rayrock Mines, Inc. ("Rayrock") owns the remaining
interest and is the operator. The mine has operated since 1989. Access to the
property is via a five-mile long gravel road.
The property consists of approximately 3,920 acres of unpatented mining
claims and 14,920 acres held under leases which remain in effect as long as the
mine continues production.
14
<PAGE>
Mining is conducted by conventional open-pit methods. Ore is processed
by heap leaching and milling methods. Mill-grade ore is stockpiled and
periodically processed through the mill to maximize gold recovery. Milling
operations were intermittent during 1997. Mine facilities are in good condition.
Water is supplied from on-site wells and power is purchased from Sierra
Pacific Power Company.
During 1997, the mine operated in compliance with all its environmental
permits.
Production royalties are paid to two lease holders in amounts of 5%
of net smelter returns and 3.5% of net profits.
Homestake's share of production from the Marigold mine was 24,547
ounces of gold in 1997 compared to 24,485 ounces in 1996.
Geology
Gold mineralization at the Marigold mine is hosted largely in the
Permian Antler Formation and the Ordovician Valmy Formation and are associated
with broad bands of silicification and local decalcification. Both stratigraphy
and structure control the geometry of the mineralized zones. The ore bodies are
sediment-hosted, disseminated deposits of micron-size gold, and are entirely
oxidized.
Homestake has a 33.3% share of the following amounts:
Year-end Proven and Probable Ore Reserves
(100% Basis)
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Tons of ore (000) 15,288 18,068
Ounces of gold per ton 0.033 0.034
Contained ounces of gold (000) 504 610
Operating Data (100% Basis)
1997 1996
---------------- ---------------
Production Statistics:
Tons of ore mined (000) 2,583 2,882
Stripping ratio (waste:ore) 3.3:1 2.9:1
Tons of ore milled (000) 387 428
Ore grade milled (oz. gold/ton) 0.082 0.086
Mill recovery (%) 95 93
Tons of ore leached (000) 2,290 2,491
Ore grade leached (oz. gold/ton) 0.019 0.019
Gold recovered (000 ozs.) 74 73
15
<PAGE>
<CAPTION>
<S> <C> <C>
Homestake's Cost per Ounce of Gold Produced:
Cash operating costs $239 $231
Other cash costs 28 36
Noncash costs 34 46
---------------- ---------------
Total production costs $301 $313
</TABLE>
CANADA
Homestake has a 50% interest in the Williams and David Bell mines in
the Hemlo mining district in Ontario and a 25% net profits interest in the
Quarter Claim (adjacent to the David Bell mine). Homestake also has a 50.6%
interest in Prime, which owns the Eskay Creek and Snip mines in northwestern
British Columbia. Prime has no employees and has contracted with Homestake to
provide all necessary professional, managerial, operational and administrative
services in connection with exploration, development and operation of the Eskay
Creek and Snip mines. During 1996, mining was completed at Homestake's Nickel
Plate mine in south central British Columbia.
The Company conducts exploration and investigates mineral acquisition
and development opportunities throughout Canada. Canadian activities are managed
from an office in Vancouver, British Columbia.
Eskay Creek Mine
Prime owns 100% of the Eskay Creek gold/silver mine, located in
northwestern British Columbia approximately 50 air miles north of Stewart,
British Columbia. Through its interest in Prime, Homestake has a 50.6% interest
in the mine. Access is by 38 miles of privately owned single-lane gravel road.
Road maintenance and snow removal are provided under contract by a local
company.
The Eskay Creek property consists of five mining leases and various
other mineral and surface rights comprising approximately 3,390 acres. The
leases have remaining terms of approximately 23 to 27 years, subject to renewal
rights.
The Eskay Creek mine commenced commercial production in January 1995.
The mine is an underground operation accessible through three surface portals.
Mining is conducted by a mining contractor using equipment owned by Prime. The
mine utilizes a drift-and-fill mining method with cemented rock backfill. The
mine and facilities and equipment are new and in good condition. During 1997,
direct-shipped ore was crushed and blended in a facility located at the minesite
prior to shipment and sale to third-party smelters for final processing. Mine
waste-rock and tailings from the newly completed mill are disposed of underwater
in a nearby barren lake. Eskay Creek workers work two weeks on followed by two
weeks off.
In July 1997 Eskay Creek began construction of a gravitation and
flotation mill. Mill construction was completed ahead of schedule in November
1997 and on budget at a cost of $12 million. Mill commissioning began
immediately and commercial production commenced January 1, 1998. This mill is
expected to treat 165 tons of ore per day producing a gravity concentrate, which
is sold to a Canadian refinery, and flotation concentrates which are sold to
smelters in Japan and Canada. The mill will improve the profitability of certain
Eskay Creek ore that would otherwise be shipped directly to third-party smelters
and will permit processing of other lower grade ore that previously was not
economic for direct shipment. Recovery from the milled ores is expected to be
approximately 90% for
16
<PAGE>
gold and silver, net of third-party smelter payables. It is estimated that the
mill will produce approximately 70,000 payable ounces of gold equivalent each
year, a net increase of approximately 30,000 ounces over the levels of
production that would be achieved in the absence of the mill.
Two long-term ore sale contracts with smelters in Japan and Quebec
provide for combined target ore sales of 99,200 tons annually, with options to
increase sales to 132,300 tons, subject to mutual agreement with the smelters.
During 1997, spot ore sales totaling approximately 12,000 tons were made to one
other smelter. Ore is trucked by a contractor 164 miles to Stewart for shipment
to Japan and 224 miles to Kitwanga, British Columbia for shipment to Quebec. A
contract loading facility for ships at Stewart handles ore and concentrate
shipments destined for Japan and a company-owned loading facility is utilized at
the railhead in Kitwanga for shipments to Quebec.
Water is supplied from the Eskay and Argillite creeks and power is
produced on-site by diesel generators.
The mine produced approximately 333 TPD in 1997 and 303 TPD in 1996.
Based on existing reserves and current production rates, the mine has a
projected remaining life of approximately nine years.
Following a successful 1997 exploration program, Eskay Creek's proven
and probable ore reserves increased by approximately 376,000 ounces of gold and
18.1 million ounces of silver at December 31, 1997, (before considering 1997
production).
The planned extension of the No. 5 ramp and the associated hanging wall
exploration drift at the north end of the mine were completed in 1997.
Exploration drilling from the hanging wall drift into the NEX and HW zones
started in the fourth quarter of 1997 and was focused on upgrading and expanding
ore reserves in these zones.
During 1997 there were four occasions where water effluent permit
levels were exceeded. The incidents were properly reported and in each instance
corrective action was taken immediately. No citations have been issued and none
are expected. With these exceptions the mine operated in compliance with all
environmental permits in 1997. During 1997, the mine's environmental health and
safety programs were recognized for a number of achievements. The mine received
an environmental award from the British Columbia Mining Association and the
Ministry of Employment and Investment for British Columbia for reclamation work
conducted on the original exploration camp site. In addition, during 1997 the
mine received the British Columbia Small Mine Safety Award and the prestigious
John T. Ryan Award in recognition of its exemplary safety performance during
1996.
The mine is subject to a 1% net smelter royalty, with the exception of
a small portion of the ore body, which is subject to a 2% net smelter royalty.
There are aboriginal claims relating to areas of British Columbia and
other parts of Canada, including a claim by the Tahltan Nation to the area which
includes the Eskay Creek mine. The nature and extent and validity of such claims
has not been determined. The mine has entered into several services contracts
with the Tahltan Nation Development Corporation, and approximately 39% of the
employees at the mine are members of the Tahltan Nation. Homestake believes that
its relations with aboriginal groups, including the Tahltan Nation, are
excellent. Homestake does not believe that aboriginal claims at Eskay Creek will
have any material adverse effect. However, future exploration for and
development of new mines in Canada could be slowed and could be adversely
affected, depending on future legal
17
<PAGE>
developments in this area. The extent of any such effect, if any, is not known.
(See "RISK FACTORS" on page 103.)
Geology
The Eskay Creek ore body is a precious metal-enriched volcanogenic
massive sulfide deposit that occurs in association with volcanics of the
Jurassic-aged (141 to 195 million years) Hazelton Group. Eskay Creek
mineralization is generally stratabound and occurs in a contact mudstone and
breccia bounded below by a rhyolite flow-dome complex and overlain by volcanic
rocks in the west limb of a north-plunging fold. Sphalerite, pyrite, galena and
tetrahedrite are the most abundant ore minerals. Native gold occurs as mostly
microscopic particles located between sulfide grains, in fractures within
sulfide grains, or locked in pyrite. Gold also occurs in volcanic rocks beneath
the contact mudstone, along with coarse grained sphalerite, pyrite and galena in
quartz veins or stockworks.
Year-end Proven and Probable Ore Reserves
(100% Basis)
<TABLE>
<CAPTION>
1997 1996
----------------- ---------------
<S> <C> <C>
Tons of ore (000) 1,495 1,397
Ore grade (ozs. gold/ton) 1.693 1.732
Contained ounces of gold (000) 2,532 2,418
Ore grade (ozs. silver/ton) 78.3 79.3
Contained ounces of silver (000) 117,011 110,810
Contained gold equivalent ounces (1) (000) 4,051 3,857
Operating Data (100% Basis)
1997 1996
---------------- ---------------
Production Statistics:
Tons of ore shipped (000) 121 116
Ore grade (ozs. gold/ton) 2.158 1.922
Ore grade (ozs. silver/ton) 97.7 106.6
Ounces of payable gold (000) 245 211
Ounces of payable silver (000) 11,766 12,054
Total gold equivalent ounces (1)(000 ozs.) 417 372
Homestake's Production Cost per Ounce of Gold Equivalent:
Cash operating costs (2) $155 $167
Other cash costs 2 3
Noncash costs 35 43
---------------- ---------------
Total production costs $192 $213
<FN>
(1) Gold and silver are accounted for as co-products at Eskay Creek. Silver
production is converted into gold equivalent, using the ratio of the
average gold market price to the average silver market price. The ratio was
68.2 ounces and 74.9 ounces of silver equals one ounce of gold equivalent
for production calculations for the years ended December 31, 1997 and 1996,
respectively, and 77 ounces of silver equals one ounce of gold equivalent
for reserve calculations at both December 31, 1997 and 1996.
18
<PAGE>
(2) For comparison purposes, cash operating costs per ounce include estimated
third-party costs incurred by smelter owners and others to produce
marketable gold and silver.
</FN>
</TABLE>
Williams Mine
The Williams gold mine is located in the Hemlo Gold Camp 217 miles east
of Thunder Bay, Ontario, adjacent to the TransCanada Highway. The mine is
operated by Williams Operating Corporation ("WOC") with its own personnel.
Homestake and Teck Corporation ("Teck") each owns a 50% interest in WOC. The
mine commenced operations in 1985.
The property consists of 11 mining claims covering approximately 380
acres and one Crown mining lease. Homestake and Teck are required to provide
funds equally to WOC for all costs incurred to operate the mine. Homestake and
Teck have mutual rights of first refusal over each other's interest in the
Williams mine and shares of WOC.
The Williams mine is an underground operation which is accessible by a
4,300-foot shaft. The mine utilizes the longhole, open-stope mining method with
cemented and uncemented rock backfill. In addition, 650-750 TPD of lower-grade
ore is recovered from a nearby open pit. Waste rock from the open pit is used
for backfill in the underground operations. The mine has a 7,000 TPD capacity
mill which operated at 7,277 TPD during 1997 with gold recovery at 94.9%. The
Williams and David Bell mines share one tailings basin facility located
approximately two miles from the mill. Cyanidation and the CIP process are used
to recover gold. Water from the tailings basin is treated during the summer
months in an effluent treatment plant prior to discharge. Both mines recycle
mill make-up water from the tailings pond. The facilities and equipment are
modern and in good condition.
Fresh water for the property is supplied from Cedar Creek and power is
purchased from Ontario Hydro via a long-term contract. Propane for heating mine
air and surface facilities is purchased under contract.
During 1997, ore was mined primarily from the Block 3 and Block 4
zones. Ground control problems were experienced during the year limiting access
to high-grade stopes. However, by increasing output from the open pit and other
areas of the mine, ounces produced were as predicted. Ground conditions will
continue to be a concern, but increased use of ground support technology and
careful stope scheduling should help mitigate future problems.
The mine will continue to operate at the average ore reserve grade for
the remaining life of the operation. Approximately 43% of the ounces mined in
1997 have been replaced with reserve additions in the Block 3 zone and lower "C"
zone.
During 1997, under an agreement with Franco Nevada Ltd. ("Franco"), a
drift was driven, at Franco's expense, from the Williams property onto Franco's
adjacent property to carry out an underground exploration program. The agreement
gives WOC a right of first proposal for any mineralization which Franco may
discover during its exploration activity. During 1997 Franco conducted
approximately 33,000 feet of exploration drilling from the Franco drift.
During 1997, the mine had five minor spills. All incidents were
properly reported and corrective action was taken immediately. No citations have
been issued and none are expected. With these exceptions, the mine operated in
compliance with all environmental permits during 1997.
19
<PAGE>
The owned property is subject to three net smelter royalties totaling a
net effective rate of 2.08% and the Crown mining lease is subject to a net
smelter royalty of 0.75%.
Homestake's share of production was 201,098 ounces in 1997 compared to
205,519 ounces in 1996.
Geology
The Hemlo Gold Camp occurs within the east-west striking Heron Bay belt
of metamorphosed Archean aged rocks (3.5 billion years). The steeply dipping ore
bodies lie along the contact between overlying metasedimentary rocks and
underlying volcanic rocks. Gold mineralization is hosted primarily by a
fine-grained feldspar porphyry unit and is associated with pyrite, barite and
molybdenite.
Homestake has a 50% share of the following amounts:
Year-end Proven and Probable Ore Reserves
(100% Basis)
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Tons of ore (000) 32,926 35,449
Ounces of gold per ton 0.150 0.146
Contained ounces of gold (000) 4,929 5,169
Operating Data (100% Basis)
1997 1996
---------------- ---------------
Production Statistics:
Tons of ore milled (000) 2,656 2,583
Mill feed ore grade (oz. gold/ton) 0.160 0.167
Mill recovery (%) 95 95
Gold recovered (000 ozs.) 402 411
Homestake's Cost per Ounce of Gold Produced:
Cash operating costs $222 $214
Other cash costs 7 8
Noncash costs 40 39
---------------- ---------------
Total production costs $269 $261
</TABLE>
David Bell Mine
The David Bell gold mine is located in the Hemlo Gold Camp. The mine is
operated by the Teck-Corona Operating Corporation ("TCOC") with TCOC personnel.
Homestake and Teck each own a 50% interest in TCOC. The mine commenced
operations in 1985.
The mine is located on the same ore trend as the Williams mine. The
property consists of approximately 640 acres held under two freehold patents.
Homestake and Teck are required to provide funds equally to TCOC for all costs
incurred to operate the mine. Homestake and Teck have mutual rights of first
refusal over each other's interest in the David Bell mine and shares of TCOC.
Homestake
20
<PAGE>
and Teck each have a 50% interest in efforts to explore and develop mineral
properties within approximately two miles of the David Bell property.
The David Bell mine is an underground operation which is accessible by
a 3,819-foot shaft. Production is from stopes using longhole mining methods,
with cement, tailings, sand and waste rock utilized as backfill. Mill throughput
was 1,297 TPD in 1997. Cyanidation and CIP processes are used to recover gold.
The facilities and equipment are modern and in good condition.
Water and power supplies are the same as those at the Williams mine.
Treated reclaimed process water is used to service the underground operations.
The average width of ore at the David Bell mine is decreasing as mining
progresses away from the central core of the ore body. In an effort to optimize
ore extraction and to minimize development costs, stoping of narrow-width ore by
longitudinal longhole retreat continued during the year. Production in 1997
decreased by 6% compared to 1996 primarily as a result of processing lower grade
ore. The 1997 ore grade declined, approaching average life-of-mine reserve
grade. This trend will continue in 1998 and beyond.
Approximately 42% of the ounces mined in 1997 have been replaced with
ore reserve additions despite a 28% increase in the cut-off ore grade.
The hourly work force at David Bell is unionized and the collective
bargaining agreement with the United Steel Workers of America is in effect
through October 1998.
In December 1997, the mine had a minor propane emission. The incident
was properly reported and corrective action was taken immediately. No citation
was issued and none is expected. Except as noted, the mine operated in
compliance with all of its environmental permits during 1997 .
The property is subject to a 3% net smelter return royalty.
Homestake's share of production at the David Bell mine was 89,982
ounces in 1997 compared with 97,736 ounces in 1996.
Geology
See "Williams Mine - Geology."
Homestake has a 50% share of the following amounts:
Year-end Proven and Probable Ore Reserves
(100% Basis)
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Tons of ore (000) 4,785 5,574
Ounces of gold per ton 0.316 0.291
Contained ounces of gold (000) 1,512 1,621
21
<PAGE>
Operating Data (100% Basis)
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Production Statistics:
Tons of ore milled (000) 473 427
Mill feed ore grade (oz. gold/ton) 0.397 0.476
Mill recovery (%) 96 96
Gold recovered (000 ozs.) 180 195
Homestake's Cost per Ounce of Gold Produced:
Cash operating costs $184 $161
Other cash costs 10 11
Noncash costs 45 45
---------------- ---------------
Total production costs $239 $217
</TABLE>
Quarter Claim
The Quarter Claim constitutes approximately one-fourth of a mining
claim, which was originally part of the David Bell property, and was optioned to
and subsequently acquired by Battle Mountain Gold Company ("Battle Mountain") in
1982. Battle Mountain developed a shaft on the Quarter Claim and reserved
hoisting and milling capacity of 500 TPD at its mill to process any ore found on
the Quarter Claim. Homestake has a 25% net profits interest in all ore recovered
from the Quarter Claim. The net profits interest is based on a deemed production
rate, deemed production costs and the market price of gold. The deemed
production rate is based upon committed throughput of 500 TPD multiplied by (a)
the average ore grade of the remaining Quarter Claim reserves, (b) a recovery
factor, and (c) 95%.
Homestake's share of production at the Quarter Claim was 11,331
ounces in 1997 compared with 11,362 ounces in 1996.
Geology
See "Williams Mine -- Geology."
Homestake has a 25% share of the following amounts:
Year-end Proven and Probable Ore Reserves
(100% Basis)
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Tons of ore (000) 747 930
Ounces of gold per ton 0.258 0.258
Contained ounces of gold (000) 193 240
22
<PAGE>
Operating Data (100% Basis)
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Production Statistics:
Tons of ore milled (000) 183 183
Mill feed ore grade (oz. gold/ton) 0.257 0.257
Mill recovery (%) 96 96
Gold recovered (000 ozs.) 45 45
Homestake's Cost per Ounce of Gold Produced:
Cash operating costs $162 $156
Other cash costs 10 12
Noncash costs 1 1
---------------- ---------------
Total production costs $173 $169
</TABLE>
Snip Mine
The Snip gold mine is located at the junction of Bronson Creek and the
Iskut River, 56 air miles north of Stewart in northwestern British Columbia. In
April 1996, Prime purchased Cominco's 60% interest in the Snip mine, and now
owns 100% of the Snip mine. Through its interest in Prime, the Company has a
50.6% interest in the mine. The mine commenced operations in 1991.
The property consists of a mining lease with a remaining term of 22
years, together with four mineral claims covering approximately 4,944 acres.
The mine is serviced by aircraft which utilize a 4,500-foot long
landing strip at the minesite to transport personnel, mine concentrates, fuel
and other supplies.
The Snip mine is an underground operation serviced by adits and a
haulageway at the mill elevation level. Mining is carried out through a
combination of shrinkage, conventional and mechanized cut and fill. Backfill
consists of mill tailings and ground waste rock, which is pumped to the mine,
and underground waste rock. The mill has a capacity of 500 TPD. Mill tailings
not used for backfill are deposited in a tailings facility located adjacent to
the mine and reclaimed water is pumped back to the mill. The facilities and
equipment are modern and in good condition. Employees work three weeks on
followed by three weeks off.
Approximately 92% of the gold contained in the ore is recovered. A
gravity circuit recovers about 36% of the gold and the remaining gold is
recovered in flotation concentrates containing approximately ten ounces of gold
per ton. The concentrates are sold under a life-of-mine contract to a smelter
located in Japan.
Water is supplied from Bronson Creek and power is produced on site by
diesel generators.
The 1997 surface exploration program was not successful in making any
significant additions to the ore reserves. The underground exploration program
added modest reserves and based on current milling rates and existing reserves,
the mine is expected to operate through approximately June 1999. Diamond
drilling scheduled for the first quarter of 1998 will test the remaining
exploration targets. If the
23
<PAGE>
program is unsuccessful in identifying additional ore grade material, all
exploration activity at the Snip mine will be suspended.
During 1997, the Snip mine had two minor diesel spills. The incidents
were properly reported and corrective action was taken immediately. No citations
have been issued and none are expected. With these exceptions, the mine operated
in compliance with all environmental permits during 1997.
Homestake's share of gold production in 1997 was 115,644 ounces
compared to 101,827 ounces in 1996.
Geology
The main Twin Zone ore body at the Snip mine is a 1.5 foot to 50-foot
thick quartz-carbonate-sulfide-filled shear structure within a Triassic
sedimentary unit. Gold primarily occurs as finely disseminated grains along
pyrite grain boundaries. Other sulfides within the Twin Zone include pyrrhotite,
chalcopyrite and sphalerite, with minor arsenopyrite. The vein structure has
been traced over a strike length of 3,300 feet and has a known vertical extent
to 1,650 feet. In addition to the Twin Zone, mining is conducted on footwall and
hanging wall veins. The 150 vein is the largest of these secondary, narrow
veins. The 150 vein adjoins the Twin Zone ore body in the east and runs roughly
parallel to it for most of its strike length. In 1997 mining commenced on a
small reserve in the T West Zone, which is located to the west of the tailings
impoundment.
Year-end Proven and Probable Ore Reserves
(100% Basis)
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Tons of ore (000) 232 369
Ounces of gold per ton 0.678 0.722
Contained ounces of gold (000) 157 267
Operating Data (100% Basis)
1997 1996
---------------- ---------------
Production Statistics:
Tons of ore milled (000) 165 171
Mill feed ore grade (oz. gold/ton) 0.780 0.787
Mill recovery (%) 92 92
Gold recovered (1)(000 ozs.) 116 124
Homestake's Cost per Ounce of Gold Produced:
Cash operating costs $213 $190
Noncash costs 115 151
---------------- ---------------
Total production costs $328 $341
<FN>
(1) Includes recoverable gold contained in dore and in concentrates.
</FN>
</TABLE>
24
<PAGE>
Nickel Plate Mine
Mining and ore processing at the Nickel Plate mine, located near
Hedley, British Columbia, was completed in 1996. Reclamation of the property, in
accordance with a plan filed with British Columbia's regulatory agencies, is in
progress. At the end of 1997, approximately 79% of the total land affected by
mining activities had been reclaimed. Reclamation work includes sloping,
covering with soil, and seeding all rock dumps. It will also include treating
all water in the tailings impoundment prior to release into the environment.
When the water treatment is complete, the plant will be removed and the 80 acre
plant site area will be reclaimed. During 1997, the property operated in
compliance with all of its environmental permits.
AUSTRALIA
HGAL is a 50% owner in Australia's largest gold mining operation, the
consolidated surface and underground gold operations at Kalgoorlie, Western
Australia. HGAL also explores for gold throughout Australia. Australian
activities are managed from an office in Perth, Western Australia.
Kalgoorlie Operations
The Kalgoorlie operations are located 340 miles northeast of Perth,
Western Australia on 164 state leases and licenses covering approximately 30,000
acres adjacent to the town of Kalgoorlie. The mineral leases are granted on
application for a term of 21 years on conditions covering rental, royalties,
expenditure conditions and reporting. They are renewable in the final year.
Homestake acquired its interest in the original Kalgoorlie Mining Associates
joint venture in 1976. Mining operations in the Kalgoorlie region date back to
1893. Access to the operations is by paved road.
HGAL owns a 50% interest in the Kalgoorlie operations. Subsidiaries of
Normandy Mining Limited ("Normandy") own the other 50% interest. HGAL and
Normandy jointly own and control KCGM, which manages the operations under the
direction of a joint management committee. Prior to June 1996, HGAL and Normandy
each paid 50% of the costs but under certain circumstances Normandy was entitled
to more than 50% of the production from one area of the Super Pit (the
"Disproportionate Share"). In June 1996, HGAL purchased Normandy's rights under
the Disproportionate Share and HGAL now shares equally with Normandy in all gold
produced at the Kalgoorlie operations.
The Kalgoorlie operation is comprised of two mines, the Super Pit
open-pit mine and the Mt. Charlotte underground gold mine. Ore from both of
these operations is treated at the Fimiston mill. Two smaller facilities, the Mt
Percy and Croesus mills were closed in 1997. The Croesus mill has been
demolished and the Mt Percy mill has been mothballed. Sulfide concentrates
produced at the Fimiston mill are roasted at the Gidji roaster, located 12 miles
north of the main Kalgoorlie operations, prior to final processing at the
Fimiston mill. The facilities and equipment at the Kalgoorlie operations
generally are in good condition.
Contractors are employed to conduct the open-pit mining operations, ore
and concentrate haulage and some specialized services. Ore from the Mt.
Charlotte mine is conveyed to the Fimiston mill by an open conveyor. Fresh water
is supplied under allocation from the state water system and is piped 340 miles
from Perth. Remaining process water requirements are satisfied using salt water
taken from bores and the underground mine. Until September 1996, power was
purchased under a number of
25
<PAGE>
agreements with the state power authority. Power now is provided under a power
supply agreement with Normandy Power Pty Ltd, a company associated with
Normandy.
During 1996, the Kalgoorlie operations had a solutions spill at one of
its tailings ponds. The spill was reported timely and remediated. During 1997,
the operations were cited for the 1996 spill and paid a fine of A$2,000. Also,
during 1997, there was one instance where sulfur dioxide levels in the
Kalgoorlie area exceeded air quality limits. The Department of Environmental
Protection and KCGM are investigating to determine whether the Gidgi roaster was
a principal contributor to the event. With this possible exception, during 1997
the mine operations were in compliance with all environmental permits.
HGAL's share of gold production from the consolidated Kalgoorlie
operations was 425,914 ounces in 1997 compared to 368,816 ounces in 1996. No
royalties currently are payable on production. See "CAUTIONARY STATEMENTS -
Western Australia Royalty."
Total cash costs per ounce in 1997 were $259 compared to $291 in 1996.
Cash costs were lower in 1997 compared to 1996 primarily due to higher grades,
higher tonnage processed and lower milling costs, partially offset by higher
mining costs. In addition, there was a 5% decline in the average value of the
Australian dollar compared to the US dollar.
There are a number of native title claims relating to the area of the
Kalgoorlie operations, but the validity of those claims has not been determined.
In any event, all of the mining leases with respect to active mining operations
at Kalgoorlie are pre-1994 leases, and therefore native title claims will not
adversely affect the operations. Thirteen mining titles were granted between
January 1, 1994 and March 16, 1995, when Western Australia did not comply with
the requirement of negotiation in granting these and associated titles. Although
there has been no decision on the issue to date, titles granted during that
period may be open to challenge on native title grounds. It is possible that
proposed Commonwealth legislation may validate such titles to put them beyond
doubt. If such titles are found to be invalid due to native title, the State of
Western Australia has indicated that it will facilitate regrants and pay any
compensation due to aggrieved native title parties. KCGM is in the process of
converting two prospecting licenses to mining leases for use of the property for
waste rock disposal, and it will be necessary to comply with the right to
negotiate process of the Native Title Act in order to ensure the validity of the
grant of the mining leases. Native title issues are expected to arise in the
process. KCGM is engaged in general discussions with several of the claimants,
and KCGM has implemented aboriginal training and employment programs. Homestake
does not expect native title issues to have any material adverse effect on the
Kalgoorlie operations. (See "RISK FACTORS" on page 103)
Super Pit
This large open-pit mine is located along the "Golden Mile" ore bodies
previously mined from underground.
In 1997, 75.9 million tons of material were mined containing 10.8
million tons of ore, compared to 78.5 million tons of material mined containing
11.8 million tons of ore in 1996. HGAL's share of Super Pit gold production was
343,644 ounces in 1997 and 305,837 ounces in 1996. The increase in production in
1997 primarily was due to increases in throughput, grade and recoveries.
26
<PAGE>
Mt. Charlotte
This underground mine uses bulk mining methods and large conventional
diesel powered loaders and trucks. The main production level is 3,200 feet below
surface. Longhole mass-blast mining techniques are employed. Ore is crushed
underground with primary crushers before being hoisted to the surface and
conveyed to the Fimiston mill. In February 1997, development work began on a 1.6
mile decline from surface at the northern end of the Super Pit to access from
underground the upper level remnants of the Mt. Charlotte orebody and the
recently delineated northern orebody. The decline was completed ahead of
schedule and below budget in December 1997. HGAL's share of the decline's cost
was approximately $2.6 million.
Ore production and mill throughput increased by 13% at Mt. Charlotte
during 1997 due to successful mass blasts that allowed greater flexibility for
production.
In 1997, 1.9 million tons of ore were mined from Mt. Charlotte compared
to 1.7 million tons of ore mined in 1996. HGAL's share of gold production was
81,160 ounces in 1997 and 61,024 ounces in 1996.
Mt Percy
The Mt Percy open cuts were mined to their planned economic depth in
July 1992, at which time mining ceased. Previously stockpiled low-grade Mt Percy
ore was blended with non-refractory ore from the Super Pit and treated in the Mt
Percy mill until it was shut down in June 1997. HGAL's share of Mt Percy gold
production was 1,110 ounces in 1997 and 1,955 ounces in 1996.
Mills
The Fimiston mill is a 35,000-TPD mill with CIP leaching and refractory
sulfide flotation circuits. Approximately $90 million (100% basis) was spent
during 1995 and 1994 on an expansion program at the Fimiston mill, including a
5,000-TPD free-milling sulfide circuit to treat Mt. Charlotte ore. Additional
capital expenditures (100% basis) of $4.2 million in 1997 and $4.4 million in
1996 were incurred for efficiency improvements at the mill. The increased
capacity improved the mill's efficiency and replaced the capacity of the Oroya
mill, which was dismantled in 1995 to allow for further planned expansion of the
Super Pit. The Fimiston mill processed 12.2 million tons of ore in 1997 and 10.6
million tons in 1996.
The Gidji roaster complex, which comprises two roasters and a CIP
circuit, processes all sulfide concentrates produced at the Fimiston mill. The
Gidji roaster processed 0.3 million tons of concentrate in 1997 and 0.2 million
tons in 1996.
The Mt Percy mill, a 2,500-TPD mill with a CIP circuit, was mothballed
in June 1997.
Geology
The ore deposits mined in the Kalgoorlie Goldfields occur within an
intensely mineralized shear zone system in dolerite host rocks, within the
Norseman-Wiluna greenstone belt which is part of the Yilgarn Block of Western
Australia. The rocks are of Archaen age. The favorable structural metamorphic
and lithologic setting in conjunction with hydrothermal activity controlled gold
mineralization. During its history of operations since 1893, in excess of 45
million ounces of gold have been produced from the
27
<PAGE>
Kalgoorlie properties at depths of up to 4,000 feet from high-grade lodes and
adjacent disseminated mineralization in the Golden Mile Dolerite, and from the
large stockwork zones which characterize the Mt. Charlotte and Reward
(underground) ore bodies.
HGAL has a 50% share (subject to the Disproportionate Share prior to
June 1996) of the following amounts:
Year-end Proven and Probable Ore Reserves
(100% Basis)
<TABLE>
<CAPTION>
1997 1996
--------------- ----------------
<S> <C> <C>
Tons of ore (000) 179,346 196,589
Ounces of gold per ton 0.066 0.066
Contained ounces of gold (000) 11,847 12,892
Operating Data (100% Basis)
1997 1996
--------------- ----------------
Production Statistics:
Super Pit:
Tons of ore mined (000) 10,844 11,836
Stripping ratio (waste:ore) 6.0:1 5.6:1
Tons of ore milled (000) 11,183 10,926
Mill feed ore grade (oz. gold/ton) 0.069 0.065
Mill recovery (%) 88 87
Gold recovered (000 ozs.) 687 612
Mt Percy:
Tons of stockpiled ore milled (000) 105 200
Mill feed ore grade (oz. gold/ton) 0.025 0.025
Mill recovery (%) 83 83
Gold recovered (000 ozs.) 2 4
Mt. Charlotte:
Tons of ore mined (000) 1,919 1,694
Tons of ore milled (000) 1,931 1,707
Mill feed ore grade (oz. gold/ton) 0.091 0.079
Mill recovery (%) 92 91
Gold recovered (000 ozs.) 163 122
Combined Production Statistics:
Tons of ore mined (000) 12,763 13,530
Tons of ore milled (000) 13,219 12,833
Mill feed ore grade (oz. gold/ton) 0.072 0.067
Mill recovery (%) 89 88
Gold recovered (000 ozs.) 852 738
28
<PAGE>
<CAPTION>
<S> <C> <C>
Homestake's Consolidated Cost per Ounce of Gold
Produced:
Cash operating costs $259 $291
Noncash costs 55 60
--------------- ----------------
Total production costs $314 $351
</TABLE>
CHILE
Homestake conducts exploration programs throughout Chile. Homestake's
office is in Santiago, Chile.
In July 1996, Homestake and Corporacion Nacional del Cobre Chile
("Codelco"), a state-owned mining company in Chile, formed a new company, Agua
de la Falda S.A. ("La Falda"), to explore near Homestake's former El Hueso mine
in northern Chile. Homestake and Codelco contributed property interests in the
area to the new company. In addition, Codelco contributed the existing El Hueso
plant which had been under lease to Homestake. Homestake owns 51% of the
corporation and Codelco owns the remaining 49% interest.
La Falda holds mining properties covering approximately 8,336 acres.
Included within those properties is the new Agua de la Falda mine that was
developed, and is operated by La Falda, to mine the 187,000 ounces of oxide
reserves discovered on the property by Homestake. The Agua de la Falda mine is
located approximately three miles northeast of the former El Hueso mine, in the
Maricunga District of Chile about 600 miles north of Santiago at an elevation of
approximately 12,500 feet. Access to the property is by 14 miles of dirt road.
Construction of facilities and underground mine development for the
Agua de la Falda mine commenced in late 1996. Construction was completed ahead
of schedule and below budget at a total cost of approximately $6.5 million.
Mining commenced in January 1997 and gold production began in April 1997. The
operation utilizes both room-and-pillar and post-pillar underground mining
methods. The existing El Hueso facility is used to heap leach the Agua de la
Falda ore using the Merrill Crowe process to recover the gold from solution.
Production in 1997 was 31,417 ounces. Production is expected to average 40,000
to 45,000 ounces annually during 1998 through 2000.
Water and power is purchased from Codelco.
Exploration drilling conducted in 1997 encountered an additional oxide
ore zone, adding 300,000 tons at a grade of 0.18 ounces of gold per ton to
proven and probable reserves. This additional ore will be mined through the La
Falda mine.
No royalties are payable on the production from the current Agua de la
Falda reserves. However, any ores which may be extracted from the northern area
of the property are subject to royalty payment of 1.5% of net smelter returns on
production of over one million ounces.
Drilling and metallurgical testing continues on the much larger
Jeronimo deposit, where, to date, approximately 15 million tons of unoxidized
mineralized material (100% basis), at an average grade of 0.160 ounces per ton,
have been outlined. Metallurgical testwork is underway to develop an economic
treatment method.
29
<PAGE>
In February 1995, the El Hueso mine closed as reserves were depleted.
Reclamation of the El Hueso mine site continued during 1997. There is little
flora or fauna present in the Maricunga District, and no water sources are
located nearby. Nonetheless, continued environmental monitoring will be carried
out for a period of time.
Geology
The La Falda property is located within the Potrerillos porphyry copper
district and comprises Mesozoic marine sediments that have been overlain by
Tertiary volcanics and intruded by Tertiary porphyries. Gold mineralization has
been mined historically in sediments and volcanics but the Agua de la Falda and
Jeronimo deposits are hosted largely by a single, permeable, gently dipping
carbonate unit.
Homestake has a 51% share of the following amounts:
Year-end Proven and Probable Ore Reserves
(100% Basis)
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Tons of ore (000) 1,290 1,032
Ounces of gold per ton 0.167 0.181
Contained ounces of gold (000) 215 187
Operating Data (100% Basis)
1997
----------------
Production Statistics:
Tons of ore leached (000) 281
Ore grade (oz. gold/ton) 0.172
Recovery (%) 65
Gold recovered (000 ozs.) 31
Cost per Ounce of Gold Produced:
Cash operating costs $213
Noncash costs 82
----------------
Total production costs $295
</TABLE>
BULGARIA
During 1997, Homestake entered into agreements with Navan Resources
Plc, an Irish public company ("Navan"), with regard to the Chelopech mine and
exploration activities in Bulgaria. In November 1997, Homestake purchased a 20%
interest in Navan Bulgarian Mining BV, a Netherlands company ("Navan BV"), that
was formerly a wholly-owned subsidiary of Navan. Homestake's initial debt and
equity investment in Navan BV was $12 million. Navan BV owns a 68% interest in
Bimak AD, a Bulgarian company that owns and operates the surface facilities at
the Chelopech copper-gold mine near Sofia, Bulgaria. The other 32% of Bimak is
owned by Chelopech EAD, a government-owned corporation that owns and operates
the Chelopech mine. Bimak AD provides consulting services to Chelopech and
purchases the ore from the Chelopech mine at cost plus a 1% gross royalty.
30
<PAGE>
Homestake has agreed, under certain circumstances, to invest an
additional $18 million in debt and equity of Navan BV, which would result in
Homestake owning 51% of Navan BV, and give Homestake the right to become
operator of the project. The investment of the additional $18 million is
dependent on satisfactory outcome of the Chelopech EAD privatization and
concession grant discussions described below, approval by Homestake and Navan of
an expansion plan for the mine and mill, and receipt of financial commitments
from lenders for additional funding for the expansion plan. Under certain
circumstances, (i) each of Homestake and Navan will severally guarantee up to
$10 million of financing for an expansion and (ii) Homestake will provide up to
an additional $10 million if financing of up to $20 million from third-party
lenders is not available.
Production at the Chelopech mine in 1996 was 629,600 tons of ore at an
average grade of 0.106 ounces of gold per ton and 1.10% copper, and production
for 1997 is estimated at 658,400 tons of ore at an average grade of 0.10 ounces
per ton of gold and 1.20% copper. Production from the Bimak mill, including
recoverable gold and copper contained in concentrates and black sands sold to
others for processing, was 56,604 ounces of gold and 11.0 million pounds of
copper in 1996, and an estimated 56,318 ounces of gold and 12.9 million pounds
of copper in 1997. Mineralized material at the Chelopech mine is estimated at
approximately 28.7 million tons of ore at an average grade of 0.11 ounces of
gold per ton and 1.40% copper.
Homestake and Navan are now engaged in discussions with the Bulgarian
government regarding the privatization of Chelopech EAD and the confirmation of
secure concession rights in mineralization in and around the mine for the
privatized company. Those discussions contemplate that Navan BV or Bimak (or
other company owned by Homestake and Navan) would acquire a minimum of 80% of
Chelopech EAD, with up to 20% to be made available principally to employees of
Chelopech. Homestake is also engaged in the development of an expansion plan for
the Chelopech mine and the related Bimak mill and facilities, the implementation
of which would be dependent upon the outcome of the privatization discussions
with the Bulgarian government.
During November 1997, Homestake bought a 32% interest in Navan's
Bulgarian exploration projects and program for $4 million. Homestake is
obligated to invest an additional $4 million in the exploration program during
the next three years, which will result in Homestake's owning a 50% interest in
and having the right to become the operator of the exploration program.
SULFUR
Homestake owns an undivided 16.7% interest in the Main Pass 299 sulfur
deposit, which at December 31, 1997 contained proven recoverable reserves of
approximately 64.3 million long tons of sulfur. Freeport-McMoRan Sulphur Inc.
("FMS") owns the remaining 83.3% of the deposit and is the operator under a
joint operating agreement.
The sulfur deposit is located in the Gulf of Mexico approximately 36
miles east of Venice, Louisiana in water approximately 210 feet deep. The
deposit is approximately 1,500 feet below the sea floor. A royalty of 12.5% of
the wellhead value is payable under the terms of the federal sulfur leases.
The operating agreement provides that each participant pay its share of
capital and operating costs, and has the right to take its share of production
in kind in proportion to its undivided interest.
The sulfur deposit is being mined using the Frasch process, a method of
extraction which injects high-temperature (330(degree)) sea water to liquefy the
sulfur, which is then pumped to surface. Initial sulfur
31
<PAGE>
production commenced in 1992 and full sulfur production levels of 5,500 TPD were
reached in December 1993. Sulfur production averaged 5,200 TPD during 1997, down
from 5,500 TPD in 1996. The reduction was a planned response to a weakening
sulfur market. Based on current reserve estimates, projected costs and prices,
annual production (100% basis) is expected to average two million long tons over
a remaining reserve life currently in excess of 30 years.
FMS filters, blends, markets and delivers Homestake's share of sulfur
production under an agreement having an initial term of ten years from
commencement of production in 1992. Homestake can terminate the agreement by
giving FMS two years notice.
Homestake's realized sales price for sulfur is a blend of various
market prices, including the Tampa market, and is net of a 2.625% marketing fee.
In the third quarter of 1997, due to a prolonged period of low sulfur
prices and Homestake's current assessment of estimated future cash flows, the
Company wrote off its entire remaining $107.8 million investment in the Main
Pass 299 sulfur mine. As a result, the Company's carrying value of the Main Pass
299 sulfur mine was reduced to zero at September 30, 1997.
During sulfur exploration, oil and gas were discovered overlying the
sulfur deposit. In 1990, the participants acquired the oil and gas rights from
Chevron USA Inc.
The federal oil and gas lease requires a 16.7% royalty payment based on
wellhead value. In addition, Chevron retained the right to share in the proceeds
of future production should the price or volume realized exceed those which were
used by the parties as the basis for determining the purchase price.
Oil and gas production, which peaked during 1992, is expected to
continue to decline over the next few years. Oil production (100% basis) totaled
3.3 million barrels in 1997 compared to 3.9 million barrels in 1996. Homestake's
share of remaining recoverable oil reserves at December 31, 1997 is estimated to
be 1.1 million barrels after adjusting for the federal royalty and future
production due to Chevron. The remaining carrying value of Homestake's
investment in the Main Pass 299 oil and gas property was $3.8 million at
December 31, 1997.
Homestake has a 16.7% share of the following amounts:
Year-end Proven and Recoverable Reserves
(100% Basis)
<TABLE>
<CAPTION>
1997 1996
--------------- ----------------
<S> <C> <C>
Tons of sulfur (000) 64,287 66,182
Barrels of oil (000) 8,738 12,751
Production Statistics (100% Basis)
1997 1996
--------------- ----------------
Tons of sulfur (000) 1,894 1,950
Barrels of oil (000) 3,298 3,900
32
<PAGE>
Homestake's Per Unit Data
<CAPTION>
1997 1996
--------------- ----------------
<S> <C> <C>
Average Sales Realization:
Per ton of sulfur $59 $60
Per barrel of oil 18 19
Production Costs:
Sulfur cash operating costs per ton $66 $57
Sulfur noncash costs per ton 8 11
--------------- ----------------
Total production costs $74 $68
Oil cash operating costs per barrel $10 $5
Oil noncash costs per barrel 7 7
--------------- ----------------
Total production costs $17 $12
</TABLE>
MINERAL EXPLORATION AND DEVELOPMENT
Total exploration expenses, including in-mine grass roots exploration
at Homestake's operating mines, were $48.4 million in 1997 and $45.4 million in
1996. The Company currently plans to spend $35 million on existing Homestake
exploration projects during 1998. Expenses related to the in-mine definition
drilling at Homestake's operating mines totaled an additional $4 million in 1997
and $5 million in 1996. In-mine definition drilling expenses are included in the
individual mine property operating expenses and cost per ounce calculations.
United States
United States exploration expenses totaled approximately $13.9 million
in 1997 and $11.9 million in 1996. Domestic exploration expenses in 1998 are
budgeted to be $10.3 million.
Exploration of a deep sulfide gold system beneath the Ruby Hill open
pit established that the mineralization occurs in two zones of altered carbonate
rocks. Delineation drilling of the East Archimedes deposit completed in 1997
indicates mineralization of 7.2 million tons at an average grade of 0.073 ounces
of gold per ton. Evaluation and testing of this deposit will continue in 1998.
Exploration plans for 1998 include several wide-spaced deep holes to search for
larger concentrations of higher-grade mineralization and the testing of
additional shallow targets to search for more oxide reserves. Exploration
expenditures totaled $2.4 million during 1997 and $1.7 million of work is
planned for 1998.
At the Pinson property, 50% owned by each of Homestake and Barrick and
managed by Homestake, 1997 expenditures totaled $4.8 million (100% basis),
including $0.7 million of in-mine target drilling. Drilling of deep target zones
in 1997 yielded several holes of possible interest that will be followed up in
1998. Homestake has budgeted $1.5 million for its share of 1998 exploration
expenditures.
Homestake has secured a major land position in the old Pioche mining
district in eastern Nevada and has delineated several targets. Drill testing
began in the fourth quarter of 1997 and will continue into 1998. Expenditures
for 1997 totaled $1.5 million and $0.8 million is budgeted for 1998.
33
<PAGE>
In-mine target exploration at the Round Mountain mine (25% owned by
Homestake) expanded in 1997, and Homestake's share of expenditures was $0.5
million. A similar level of expenditures is planned for 1998.
At the Homestake mine, exploration for new targets within the mine has
resumed, and two areas of prospective iron formation have been selected for test
drilling. Total expenditures for new target testing and in-mine resource
drilling in 1997 were $1.9 million. Planned expenditures for 1998 are $1.1
million.
International
Homestake conducts gold exploration in a number of countries outside of
the United States. International exploration expenses totaled approximately
$34.5 million in 1997 and $33.5 million in 1996, and $24.9 million of
expenditures are planned for 1998.
In Canada, Homestake's exploration is conducted jointly with Prime
(Homestake 51%, Prime 49%) under an agreement that extends through 1998. This
agreement covers all of Canada except for areas of interest surrounding current
operating mines and some pre-agreement exploration properties.
At Eskay Creek, surface and in-mine target drilling in 1997 discovered
additional mineralization lateral to both the 21B and 21C zones. At the northern
end of the 21B orebody, two down-plunge exploration holes encountered
significant gold intercepts. These intercepts will be followed up with future
underground drilling. In mid-1997 an exploration agreement was signed on the
Corey property, located 8 miles south of the Eskay Creek mine and covering
similar geology. The 1997 exploration program for the Eskay Creek district
totaled $3.6 million, and 1998 expenditures are budgeted at $3.5 million.
Homestake explores for gold in several geologic belts in the Andes,
with emphasis on northern Chile, northern Argentina and central Peru. In Chile,
gold production commenced in 1997 from the oxide portion of the Jeronimo deposit
on the Agua de la Falda property. Drilling and metallurgical testing continues
on the much larger, refractory portion of the Jeronimo deposit where, to date,
approximately 15 million tons of unoxidized mineralized material, at an average
grade of 0.160 ounces of gold per ton, has been outlined. Metallurgical testwork
is underway to develop an economic treatment method. Drill testing of several
other targets is ongoing. Exploration expenditures on the property were $2.0
million in 1997 and are budgeted to be similar in 1998.
In the northern part of South America, exploration in Venezuela and
French Guiana has been disappointing. In northern Brazil, a large land package
has been acquired in a poorly explored gold belt and this will be Homestake's
exploration focus for 1998. Total exploration expenditures for the northern part
of South America were $8.4 million in 1997 and are budgeted to decrease to $2.2
million in 1998.
Homestake explores for gold in several areas of Australia, with an
emphasis on the Yilgarn area of Western Australia. During 1997, a discovery of
poly-metallic mineralization was made at the Kundip Project in the southern part
of Western Australia. The project is at an early stage and several additional
targets are being prepared for ongoing drill testing. Exploration expenditures
in Australia, including Homestake's 50% share of exploration expenditures at
Kalgoorlie, were $8.7 million in 1997 and are budgeted at $6.7 million for 1998.
34
<PAGE>
During 1997, Homestake significantly increased its involvement and
commitment in Eastern Europe. Homestake acquired a 32% interest in Navan's
Bulgarian exploration concessions for $4 million. Over the next three years,
Homestake will fund $4 million of exploration expenditures and will then hold a
50% position and will be operator of the Bulgarian exploration program.
Homestake is also exploring several concessions in western Poland with FX Energy
Inc. and investigating other properties in Hungary and Romania. Expenditures
were $1.4 million in 1997 and are budgeted to increase to $4.2 million in 1998.
GLOSSARY AND INFORMATION ON RESERVES
GLOSSARY
The following terms used in the preceding discussion mean:
"Cash operating costs" are costs directly related to the physical
activities of producing gold, and include mining, processing and other plant
costs, deferred mining adjustments, third-party refining and smelting costs,
marketing expenses, on-site general and administrative costs, in-mine drilling
expenditures that are related to production and other direct costs, but exclude
depreciation, depletion and amortization, corporate general and administrative
expense, mineral exploration expense, royalties, federal and state income and
production taxes, Canadian mining taxes, financing costs and accruals for final
reclamation.
"Other cash costs" are costs that are not related to, but may result
from, gold production activities, and include royalties and federal and state
production taxes, but excludes Canadian mining taxes.
"Total cash costs" are the sum of cash operating costs and other cash
costs.
"Noncash costs" are costs that are typically accounted for ratably over
the life of an operation and include depreciation, depletion and amortization of
capital assets, accruals for the costs of final reclamation and long-term
monitoring and care that are usually incurred at the end of mine life, and the
amortization of the economic cost of property acquisitions, but exclude
amortization of deferred tax purchase adjustments relating to property
acquisitions established in accordance with Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" as these deferred tax purchase
adjustments did not involve any economic resources of the Company.
"Total production costs" is the sum of cash operating costs, other cash
costs and noncash costs.
"In-situ deposit" refers to reserves still in the ground. This does not
include previously mined stockpiled reserves that are being stored for future
processing.
"Mineral deposit" and/or "Mineralized material" is gold-bearing
material that has been physically delineated by one or more of a number of
methods including drilling, underground work, surface trenching and other types
of sampling. This material has been found to contain a sufficient amount of
mineralization of an average grade of metal or metals to have economic potential
that warrants further exploration evaluation. While this material is not
currently or may never be classified as reserves, it is reported as mineralized
material only if the potential exists for reclassification into the reserves
category. This material has established geologic continuity, but cannot be
classified in the
35
<PAGE>
reserves category until final technical, economic and legal factors have been
determined and the project containing the material has been approved for
development. Under United States Securities and Exchange Commission standards, a
mineral deposit does not qualify as a reserve unless the recoveries from the
deposit are expected to be sufficient to recover total cash and noncash costs
for the mine and related facilities.
"Run-of-mine ore" is mined ore which has not been subjected to any
pretreatment, such as washing, sorting or crushing, prior to processing.
"Stripping ratio" is the ratio of the number of tons of waste to the
number of tons of ore extracted at an open-pit mine.
"Tonnage" and "grade" refer, respectively, to the quantity of reserves
and mineralized material and the amount of gold (or other products) contained
therein and include, in the case of reserves, estimates for mining dilution but
not for other processing losses.
"Tons" means short tons (2,000 pounds) unless otherwise specified.
"Adit" or "Portal" is a tunnel driven into a mountainside providing
access to an ore deposit.
INFORMATION ON RESERVES
Gold
The proven and probable gold ore reserves stated in this report reflect
estimated quantities and grades of gold in in-situ deposits and in stockpiles of
mined material that Homestake believes can be recovered and sold at prices
sufficient to recover the estimated future cash costs of production and
remaining investment. The estimates of cash costs of production are based on
current and projected costs. Estimated mining dilution has been factored into
the reserve calculation. The Company used a price of $325 per ounce of gold in
its mine-by-mine evaluation of short-lived properties and a price of $350 per
ounce of gold for its other gold mining properties at December 31, 1997. The
Company used a price of $375 per ounce of gold in calculating reserves at
December 31, 1996.
Silver
The proven and probable silver ore reserves have been calculated on the
same basis as gold ore reserves and were based on a spot price of $5 per ounce
of silver in 1996 and 1997.
Sulfur
Homestake's proved sulfur reserves represent the quantity of sulfur in
the Main Pass 299 deposit for which geological, engineering and marketing data
give reasonable assurance of recovery and sale under projected economic and
operating conditions. As noted above, in the third quarter of 1997, the Company
wrote down its investment in the Main Pass 299 sulfur assets to zero.
36
<PAGE>
Oil
Homestake's proved oil reserves at Main Pass 299 are the estimated
quantity of crude oil and condensate which geological and engineering data give
reasonable assurance of recovery and sale under projected operating conditions
at prices sufficient to cover the estimated future cash costs of production and
the remaining investment. The estimate is based on limited reservoir and
engineering data.
Estimation of Reserves
Gold and silver reserves are estimated for each of the properties
operated by Homestake based upon factors relevant to each deposit. Gold ore
reserves for those properties not operated by Homestake are based on reserve
information provided to Homestake by the operator. Homestake has reviewed but
has not independently confirmed the information provided by these operators.
The sulfur and oil reserves at Main Pass 299 are based on information
provided by the operator. Homestake reviewed the initial reserve data with
independent consultants. Homestake has reviewed subsequent adjustments to these
reserves but has not independently confirmed the reserve adjustments provided by
the operator.
Other Information
Ore reserves are reported as general indicators of the life of mineral
deposits. Changes in reserves generally reflect (i) efforts to develop
additional reserves; (ii) depletion of existing reserves through production;
(iii) actual mining experience; and (iv) price forecasts. Grades of ore actually
processed from time to time may be different from stated reserve grades because
of geologic variation in different areas mined, mining dilution, losses in
processing and other factors. Recovery rates vary with the metallurgical and
other characteristics and grade of ore processed.
Neither reserves nor projections of future operations should be
interpreted as assurances of the economic life of mineral deposits or of the
profitability of future operations.
OVERVIEW OF AUSTRALIAN, CANADIAN AND
UNITED STATES REGULATION OF MINING RIGHTS
Australia
The mining of hard rock minerals onshore in Australia is regulated by
State or Territory legislation and regulation which is administered by a
responsible government department within each jurisdiction. Each State and
Territory has its own separate mining regime and there is little uniformity of
legislation and regulations on an Australia-wide basis. In all States and
Federal Territories, gold, silver and uranium belong to the Crown. As a general
rule, the Crown is also vested with ownership of other minerals. Private
ownership can, however, occur in all Australian jurisdictions other than in
South Australia and the Northern Territory. In general, rights to explore, mine
and produce minerals onshore are granted by the State or Territory government
where those rights are sought.
In general, exploration is authorized by statutory title with some
jurisdictions providing for a suite of exploration titles with varying rights
and fees, according to the amount of samples that may be extracted. Such titles
are usually granted for relatively short periods and, in some cases, only upon
37
<PAGE>
approval by the relevant government department of a program of work and
expenditure or subject to minimum expenditure commitments.
Titles which allow mining may be granted, usually with priority given
to the holder of the underlying exploration title for that land, upon
application to the government department in the jurisdiction where the deposit
is located. In respect of most minerals, royalties are payable to the government
of the jurisdiction where production occurs.
A special regime applies in most jurisdictions in respect of mining on
private land. This usually obliges the title holder to pay compensation to the
landowner for losses arising from the exercise of rights to enter, explore or
mine the land.
Canada
Mining rights in Canada are within the authority of the individual
provinces. Although there are some variations among the provinces with regard to
specific features, the general requirements are similar. The ownership of and
the granting of rights to exploit minerals generally remains with the provincial
government. Persons seeking to exploit most minerals (including gold and silver)
may stake claims on government property open to exploitation. An initial fee is
payable on staking of a mining claim. There are annual minimum work requirements
although cash may be paid in lieu of minimum work requirements in most
provinces. The development of a mine requires that mining claims be converted to
mining leases. Mining leases are granted for a specific term of years (up to 21
years in Ontario and up to 30 years in British Columbia), with the right of
renewal. There are generally limited annual rental or royalty payments. There
may be overlapping use rights on the same property, such as mining and forestry,
in which case the terms on which multiple uses take place will generally be
negotiated between the parties and will be specified in the mining lease.
In December 1997, the Supreme Court of Canada re-affirmed the existence
of aboriginal tribal rights in land in British Columbia used or occupied by
their ancestors in 1846. Those rights may vary from limited rights of use up to
aboriginal title. The decision did not address how aboriginal rights or title
are to be reconciled with property and tenure rights previously sold or granted
by the government. The Court did confirm that the extent of the aboriginal
rights (including whether the rights rise to the level of "aboriginal title")
will depend on, among other things, the extent of prior aboriginal use and
occupation. The Court also confirmed that, depending on the nature of the
aboriginal rights, consultation with and compensation to (and possibly consent
of) aboriginal groups may be required in connection with sales of government
land or granting of mining, forestry and other rights to use government owned
land. In the future, it can be expected that the granting of mining claims and
mining leases may be subject to the determination of aboriginal rights in the
affected property, and may involve negotiation of training and employment,
community improvement, compensation and other agreements with aboriginal groups
having rights in the property. The law in this area is new and developing.
In some areas there are mineral rights that are privately owned, the
rights having been previously alienated by governmental action. In the case of
privately held mineral rights, the owner is free to negotiate terms on which
mining may take place. If the surface and minerals are held by different
persons, negotiations between the surface and mineral rights holder will be
required if the matter is not governed by pre-existing agreements. In some
jurisdictions disagreements over rights of surface use may be resolved by a
government agency having authority to determine use and compensation.
38
<PAGE>
United States
Title to and right to mine hard rock minerals in the United States is
governed by the law of each state, except as to public lands of the United
States federal government that are open to exploration, which are governed by
the Mining Law of 1872, as amended.
In general, real property law in the United States is based on the
English common law of real property. In general, under the law of each state in
the United States, title to minerals and the right to mine is vested in the
surface owner, unless separately alienated. The surface owner can transfer all
or part of the mineral rights separate from the surface, or can transfer the
surface and retain ownership of mineral rights. Mineral rights may be further
alienated, may be leased and subleased, and also may be subdivided among more
than one owner, including alienation with the disposing party retaining the
right to receive royalties or other payments.
If the surface and the mineral rights are held by different persons,
state laws vary as to priority and other rights as between the parties. Transfer
documents by which the surface and mineral rights were separated may govern. In
the absence of agreement or provision in title documentation, in some states,
mineral right holders have priority of use and occupancy but must compensate the
surface holder for injury to the surface estate. In some states, the mineral
right holders have priority of use and no compensation obligation. A few states
have private condemnation statutes, which permit holders of mineral rights to
exercise the power of eminent domain to secure access to minerals and to provide
a portion of the surface for use in the conduct of mining.
Mineral rights holders have no royalty or payment obligation in respect
of minerals to a government entity unless the government entity happens to hold
title to or a royalty or payment interest in the mineral rights in the same way
as a private owner. However, some states have enacted severance taxes applicable
to production of minerals from property within the jurisdiction.
Under the United States Mining Law of 1872, United States citizens
(including corporations incorporated in the United States) may stake mining
claims upon United States federal government property open to exploration
("unpatented mining claims"). An initial fee is payable on staking and annual
maintenance fees are also payable. Under current law, persons staking such
unpatented mining claims, upon the making and documenting of a discovery of most
minerals (including gold and silver) in commercial quantities, are entitled to
mine for the mineral without payment of royalties or other fees (other than the
annual claim maintenance fee). In addition, the holder of an unpatented mining
claim who has made a commercial discovery is entitled to secure title to the
mineral and surface estates of the property subject to the mining claim
("patented mining claim") at nominal cost. Only certain federal public lands,
principally in the Western United States, are open to exploration. A patented
mining claim gives the holder the full fee interest in the property. Holders of
unpatented and patented mining claims may sell or lease claims in the same way
as fee property.
39
<PAGE>
ENVIRONMENTAL MATTERS
General
Homestake has a policy of conducting extensive environmental audits of
its operations in order to minimize the impact of its operations on the
environment and to monitor compliance with applicable environmental laws and
regulations. A committee of the Homestake Board oversees the establishment and
implementation of environmental policy. Environmental audits have been conducted
on all of Homestake's operations within the last three years.
Homestake has made significant capital expenditures to minimize the
effects of its operations on the environment. Capital expenditures primarily are
for the purchase or development of environmental monitoring equipment and
containment of tailings and waste rock. In 1997, these expenditures totaled
approximately $18 million compared to $7 million in 1996. Homestake estimates
that during 1998, capital expenditures for such purposes will be approximately
$7 million and that during the five years ending December 31, 2002, such capital
expenditures will be approximately $20 million.
Homestake also incurs significant operating costs in order to protect
the environment. Operating costs include current reclamation costs, costs for
environmental monitoring and studies to identify and quantify environmental
impacts, if any, and accruals for future reclamation expenditures. Such
additional costs totaled approximately $28 million in 1997, compared with
approximately $17 million in 1996, not including related depreciation expense of
$2 million and $3 million, respectively. Homestake estimates that environmental
and related operating and depreciation costs in 1998 will be approximately $16
million and $3 million, respectively. The above amounts exclude expenditures
related to the Company's discontinued uranium operations.
Under applicable law and the terms of permits under which Homestake
operates, Homestake is required to reclaim land disturbed by its operations. In
the mining industry, most reclamation work takes place after mining and related
operations terminate. With respect to nonoperating properties, Homestake
believes that it has fully provided for all remediation liabilities and for
estimated reclamation and site restoration costs. Homestake's provisions are
evaluated regularly and adjusted when necessary. At September 30, 1997, the
Company determined that it was necessary to increase the reclamation accruals at
certain of its nonoperating properties including the Santa Fe mine in Nevada,
the Nickel Plate mine in Canada and the Grants uranium complex in New Mexico to
reflect revised estimates, changed conditions and more stringent future
reclamation requirements. Accordingly, a charge of $29.1 million was recorded at
that time. Homestake charges reclamation costs incurred in connection with its
exploration activities as expenses in the year in which incurred. For mining
operations, Homestake provides for final reclamation on a units-of-production
basis over the individual operating mine lives. In addition, Homestake has
adopted a policy of conducting reclamation concurrently with mining operations
where practical. As a result, an increasing amount of reclamation is being
conducted simultaneously with mining. At December 31, 1997 and 1996, Homestake
had accrued a total of $83 million and $55.4 million, respectively, for future
reclamation and related costs.
Homestake's operations are conducted under permits issued by regulatory
agencies. Many permits require periodic renewal or review of their conditions.
Homestake cannot predict whether it will be able to renew such permits or
whether material changes in permit conditions will be imposed.
40
<PAGE>
RCRA
The United States Environmental Protection Agency ("EPA") has not yet
issued final regulations for management of mining wastes under the United States
Resource Conservation and Recovery Act ("RCRA"). The ultimate effects and costs
of compliance with RCRA cannot be estimated at this time.
CERCLA
The United States Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA") imposes heavy liabilities on any person who
is responsible for an actual or threatened release of any hazardous substance,
including liability for oversight costs incurred by the EPA. Legislative
proposals and congressional hearings for CERCLA reauthorization have occurred in
1994 through 1997. CERCLA reauthorization is expected to be enacted in 1998.
Whitewood Creek
Mining companies operating in the Black Hills of South Dakota,
including Homestake, placed mine tailings in Whitewood Creek in Western South
Dakota beginning in the nineteenth century. Some tailings placed in Whitewood
Creek eventually flowed into the Belle Fourche River, the Cheyenne River and
downstream therefrom. Placement of mine tailings into Whitewood Creek was
authorized by the laws of the United States, the Dakota territory and the State
of South Dakota, and Whitewood Creek was later specifically designated by the
State of South Dakota as a disposal stream for mine tailings and for the
disposal of raw sewage and other municipal waste. Consequently, all mine
tailings placed by Homestake in Whitewood Creek were placed there with the
consent and encouragement of the State of South Dakota and the United States
government and in compliance with applicable laws. In response to changes in
legal requirements, Homestake ceased the placement of mine tailings into
Whitewood Creek in 1977 and for more than 20 years the Homestake mine has
impounded all mine tailings that are not redeposited in the mine.
In 1983, the United States EPA designated an 18-mile stretch of
Whitewood Creek and adjacent land as a superfund site and placed it on the
National Priorities List ("NPL") under CERCLA. The EPA asserted that the
discharges of tailings by mining companies, including Homestake, contaminated
the soil and stream bed. During the period from 1982 through 1990, extensive
studies of the superfund site were conducted at Homestake's expense to identify
any public health and environmental issues related to the site and appropriate
remedial action. In August 1990, Homestake signed a consent decree with the
United States Environmental Protection Agency ("EPA") in United States of
America v. Homestake Mining Company of California, U.S. Dist. Ct., W.D.S.D.,
Civ. Action No. 90-5101. Under the consent decree, Homestake conducted remedial
work at its expense and also reimbursed the EPA for its oversight costs.
Remedial field work was completed in 1993. The decree also provided for the
three counties in which the property is located to enact institutional controls
which would limit the future use of the property included within the area of the
superfund site. Institutional controls were adopted in all three counties. In
addition, Homestake offered to purchase all properties along Whitewood Creek
that were affected by the institutional controls. Approximately $3 million has
been spent to date to acquire property along Whitewood Creek and the Company
estimates that the total cost for purchasing all of the remaining affected
property would be an additional $3 million. These costs are expensed as and when
incurred.
The consent decree was terminated by the court on January 10, 1996. The
Whitewood Creek site was deleted from the NPL on August 13, 1996. In the
deletion notice, the EPA stated that "EPA, in consultation with the State of
South Dakota, have determined that the Site poses no significant threat to
41
<PAGE>
public health or the environment." Whitewood Creek now supports a thriving trout
fishery and the adjacent area provides significant wildlife habitat for a number
of species, as well as water and grazing for cattle and other farm animals.
In July 1997, Homestake received a letter from the United States Fish
and Wildlife Service and the Cheyenne River Sioux Tribe stating that the
Department of the Interior intended to file suit against Homestake to recover
alleged natural resource damages and assessment costs under CERCLA and the Clean
Water Act with respect to alleged releases of hazardous substances at Whitewood
Creek in South Dakota. HMCC agreed to a limited waiver of statutes of
limitations until November 25, 1997 to facilitate settlement discussion.
On September 25, 1997 the State of South Dakota filed an action against
Homestake, State of South Dakota v. Homestake Mining Company of California, U.S.
Dist. Ct., W.D.S.D., Civ. Action No. 97-5078. The action relates to the same
general matter which is the subject of the above referenced letter - placement
of mine tailings in Whitewood Creek. In the complaint, the State of South Dakota
alleged that HMCC disposed of mine tailings in Whitewood Creek and that such
disposal resulted in injuries to natural resources in Whitewood Creek and
downstream in the Belle Fourche River, the Cheyenne River and Lake Oahe on the
Missouri River (the "NRD Site"). The complaint also alleged that the State of
South Dakota incurred assessment costs. The State of South Dakota claims that it
is a trustee authorized under CERCLA to bring such action. The complaint also
contained a pendent state law claim, alleging that the tailings placed in
Whitewood Creek constitute a continuing public nuisance in and around the NRD
Site downstream from Whitewood Creek. The complaint asks for abatement of the
nuisance, damages in an unascertained amount, costs and interest.
In its answer to the state complaint, Homestake denied that there has
been any continuing damage to natural resources or nuisance caused by Homestake
as a result of the placement of tailings in Whitewood Creek. Among other
defenses, it is also the position of Homestake that as a result of the State of
South Dakota's ownership of Whitewood Creek and designation of Whitewood Creek
as an authorized disposal site under state authority, the State of South Dakota
was and is the owner and operator of the waste disposal facility and is
responsible for all past and future damages and any continuing nuisance
resulting therefrom. Homestake has also counterclaimed against the State of
South Dakota seeking cost recoupment, contribution and indemnity from the State
of South Dakota, in its capacity as an owner and operator of a disposal
facility, for expenses previously incurred and to be incurred in the future with
respect to Whitewood Creek and downstream areas.
On November 25, 1997, the United States government and the Cheyenne
River Sioux Tribe (the "Federal Trustees") filed an action against HMCC, United
States of America et al. v. Homestake Mining Company of California, U.S. Dist.
Ct, W.D.S.D., Civ. Action No. 97-5100. This action relates to the matters
referenced in the letter described above and which are the subject of the
federal cause of action brought by the State of South Dakota, described above,
with respect to the NRD Site. The complaint seeks response costs and damages in
unspecified amounts, costs and attorneys fees.
In its answer to the complaint by the Federal Trustees, Homestake
denied that there has been any continuing damage to natural resources. Among
other defenses, it is also the position of Homestake that the United States
government approved and authorized deposit of tailings in Whitewood Creek,
including designation of Whitewood Creek as a disposal site under federal
authority, and is therefore responsible for any past and future damages, and
that the matters at issue have been previously litigated and are the subject of
a prior final judgment between Homestake and the United States government.
42
<PAGE>
Homestake has also counterclaimed against the Federal Trustees seeking cost
recoupment, contribution and indemnity.
HMCC intends to vigorously defend these actions and to seek cost
recoupment, contribution and indemnity from the State of South Dakota, federal,
state and other government entities and agencies, and other persons who
participated in ownership and/or operation or otherwise encouraged use of
Whitewood Creek as a waste disposal site, who disposed of waste in Whitewood
Creek or its receiving waters, or who have owned property or otherwise conducted
activities which may have contributed to any alleged damage in the NRD Site.
In the opinion of the Company, there is no basis for the claims by the
State of South Dakota or by the federal government and the Cheyenne River Sioux
Tribe. The Company is also of the opinion that Homestake has valid defenses and
counterclaims against the State of South Dakota, the United States government
and the Cheyenne River Sioux Tribe, as well as potential counterclaims and
crossclaims against other governmental entities and agencies, and other persons
who participated in ownership and/or operation or otherwise encouraged use of
Whitewood Creek as a waste disposal site, who disposed of waste in the NRD Site,
or who have owned property or otherwise conducted activity within the NRD Site
which may have contributed to any alleged damage. The Company does not believe
that resolution of these matters will have a material adverse effect on the
business or financial condition or results of operations of the Company.
Grants Tailings
Homestake's closed uranium mill site near Grants, New Mexico is listed
on the NPL. The EPA asserted that leachate from the tailings contaminated a
shallow aquifer used by some of the residents in adjacent residential
subdivisions. Homestake paid the cost of extending the municipal water supply to
the subdivisions. Homestake also has operated a water injection and collection
system since 1976 that has significantly improved the quality of the aquifer.
The estimated costs of continued remediation are included in the accrued
reclamation liability. Homestake has settled with the EPA concerning its
oversight costs for this site and no additional oversight costs are accruing.
Homestake signed a Consent Decree with the EPA related to the ground water
issues and an Administrative Order on Consent ("AOC") for radon studies of the
adjacent subdivisions. The radon studies in the subdivisions determined that
there was no contamination or impact. The work required by the Consent Decree
and AOC has been completed and both have been terminated.
Under Nuclear Regulatory Commission ("NRC") regulations, the
decommissioning of the uranium mill tailings facilities is in accordance with
the provisions of the facility's license. The facility license sets the closure
of the two tailings impoundments as 2004 and 2013, subject to extension under
certain circumstances. The NRC and EPA signed a Memorandum of Understanding in
1993 which has established the NRC as the oversight and enforcement agency for
decommissioning and reclamation of the site. Mill decommissioning was completed
in 1994 and final closure of the Grants large tailings site is scheduled for
completion in 2003. During 1997, the Company incurred approximately $3 million
of reclamation expenditures at the Grant's facility and an additional $3.7
million is planned to be expended during 1998.
Title X of the Energy Policy Act of 1992 (the "Act") and subsequent
amendments to the Act authorized appropriations of $335 million to cover the
Federal Government's share of certain costs of reclamation, decommissioning and
remedial action for by-product material (primarily tailings) generated by
certain licensees as an incident of uranium sales to the Federal Government.
Reimbursement is
43
<PAGE>
subject to compliance with regulations of the Department of Energy ("DOE"),
which were issued in 1994. Pursuant to the Act, the DOE is responsible for 51.2%
of the past and future costs of reclaiming the Grants site in accordance with
Nuclear Regulatory Commission license requirements. Through December 31, 1997
the Company has received $21.1 million from the DOE and the accompanying balance
sheet at December 31, 1997 includes an additional receivable of $10.9 million
for the DOE's share of reclamation expenditures made by the Company through
1997. The Company believes that its share of the estimated remaining cost of
reclaiming the Grants facility is fully provided in the financial statements at
December 31, 1997.
In 1983, the State of New Mexico filed claims against Homestake for
natural resource damages resulting from the Grants site. The State has taken no
action to pursue the claims.
Lead
Prior to May 1986, Homestake Lead Company of Missouri ("HLCM"), a
wholly-owned subsidiary of the Company, was a joint venturer and partner with
subsidiaries of AMAX, Inc. ("AMAX") in the production of lead metal and lead
concentrates in Missouri. In May 1986, HLCM acquired AMAX's interest in the
Missouri facilities and operations and agreed to assume certain limited
liabilities of AMAX in connection with the Missouri facilities. In June 1991,
HLCM and AMAX were notified of a potential claim by the Jackson County,
Mississippi Port Authority for contamination of soil and water alleged to have
resulted from storage and shipment of lead dross at the Port of Pascagoula prior
to May 1986. Since that time, a number of other lead producers and former lead
producers have also been so notified. The Port of Pascagoula is taking primary
responsibility for conducting an investigation of the site, but the Port of
Pascagoula also has made claims for reimbursement against customers whose
material was stored at and shipped through the site. As a result of subsequent
investigations conducted by the Company and others, the Company believes that
most of the material at the Pascagoula site, as well as the material primarily
responsible for any contamination, is lead concentrate. Based on a review of
shipping records to date, less than half of the lead concentrate shipped through
the Port of Pascagoula was produced and sold for the account of the Company. The
State of Mississippi Department of Environmental Quality is, through regulatory
oversight, reviewing the investigation efforts and remediation plans that are
being developed by the Port Authority. Based on information currently available,
the Company believes the remediation costs should not exceed $1 million. The
Company's position is that the Port is primarily responsible for the cost of
remediation as owner of the property and as lessor with the ability to control
the activities of the stevedoring company, and also because the Port contributed
to the contamination by moving stored material from a storage building and
depositing it on the ground. The Company believes that any future costs it may
incur in connection with this matter will not be material.
Foreign Operations
Homestake believes that its foreign operations comply with applicable
laws, regulations and permit conditions and has no knowledge of any significant
environmental liability or contingent liability resulting from its foreign
operations. Homestake expects that environmental constraints in foreign
countries will become increasingly strict.
44
<PAGE>
CUSTOMERS
Sales to individual customers exceeding 10% of Homestake's consolidated
revenues are stated below. Homestake believes that the loss of any of these
customers would not have a material adverse impact on Homestake because of the
active worldwide market for gold.
<TABLE>
<CAPTION>
1997 1996
($ in thousands)
<S> <C> <C>
Customer A $143,000 $117,000
B 100,000 129,000
C 80,000 -
D - 77,000
E - 77,000
</TABLE>
CREDIT FACILITIES
See note 14 "Long-term Debt" beginning on page 80 in the Notes to the
Consolidated Financial Statements for details of the Company's credit
facilities.
EMPLOYEES
The number of full-time employees at December 31, 1997 of Homestake and
its subsidiaries was:
<TABLE>
<CAPTION>
<S> <C>
Homestake mine (1) 871
McLaughlin mine 109
Ruby Hill mine 87
Nickel Plate mine 12
Eskay Creek mine 89
Snip mine 183
Agua de la Falda mine (1) 47
United States corporate staff and other 82
Canada exploration and corporate staff 34
HGAL exploration and corporate staff 22
United States exploration 25
Uranium 8
Chile exploration and corporate staff 16
----------------
Total 1,585
</TABLE>
45
<PAGE>
The number of full-time employees (excluding contractors' employees) at
December 31, 1997 in jointly-owned operations in which Homestake participates
was:
<TABLE>
<CAPTION>
<S> <C>
Kalgoorlie Consolidated Gold Mines Pty Ltd (1) 512
Williams Operating Corporation 604
Round Mountain mine 673
Teck-Corona Operating Corporation (1) 246
Pinson Mining Company 109
Marigold Mining Company 89
Main Pass 299 144
----------------
Total 2,377
<FN>
(1) Operations where a portion of the employees are represented by a
labor union.
</FN>
</TABLE>
As a result of the reorganization of the Homestake mine operation
described above, employment at the Homestake mine is expected to be reduced by
more than 50%.
Labor relations at all locations are believed to be good. The union
contracts at Lead and David Bell will expire in May 1998 and October 1998,
respectively. Negotiations for a new contract at Lead commenced during the first
quarter of 1998. The negotiations at Lead involve a number of matters that arise
as a result of the restructuring of the operation and the reduction of work
force.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages at December 31, 1997,
their business experience and principal occupations during the past five years
and their business backgrounds are:
Jack E. Thompson - President and Chief Executive Officer since May
1996, age 47. He was President and Chief Operating Officer of the Company from
August 1994 until May 1996, and from August 1994 to June 1995, he was also
Chairman of Prime. He was Executive Vice President, Canada of the Company and
President of Prime from 1992 through August 1994. He also was President of North
American Metals Corp. from 1988 until 1993. He is a mining engineer with over 27
years of experience in mining and mine management.
Gene G. Elam - Vice President, Finance and Chief Financial Officer
since September 1990, age 58. Before joining Homestake, he was Senior Vice
President, Administrative Services of Pacific Gas and Electric Company from
April 1989 through August 1990 and was Vice President and Controller from
January 1987 through March 1989. He was President and Chief Executive Officer of
The Pacific Lumber Company from 1982 to 1986, President in 1980 and 1981, and
Chief Financial Officer from 1972 until 1980. He is a certified public
accountant with over 36 years of experience in accounting and finance.
Lee A. Graber - Vice President, Corporate Development since 1983, age
49. From 1980 to 1983, he was Manager, Corporate Development and Planning. He
has over 27 years of experience in finance and corporate development.
46
<PAGE>
Wayne Kirk - Vice President, General Counsel and Secretary since
September 1992, age 54. He was a partner in Thelen, Marrin, Johnson & Bridges
from 1976 to 1992. He has practiced law for more than 29 years.
Gregory A. Lang - Vice President, Development since March 1997, age 42.
He was the Vice President of Homestake International Minerals Limited from June
1996 until March 1997, and was General Manager, Project Development from January
1996 until June 1996 as well as General Manager of the Ruby Hill project from
October 1994 through June 1996, and was General Manager of the Nickel Plate mine
from 1993 until October 1994. He joined Homestake in 1992 as Resident Manager of
the Santa Fe mine, a position he had held with International Corona Corporation
since 1988. He is a mining engineer with over 20 years of experience in mining
and mine management.
Gillyeard J. Leathley - Senior Vice President, Operations since July
1997 and acting President and Chief Executive Officer of Prime since February
1998, age 60. He was Vice President, Operations from May 1995 until July 1997.
He joined Homestake in 1992 as Vice President, Canadian Operations. Prior to
joining Homestake, he was Senior Vice President, Operations for International
Corona Corporation from 1986 to September 1992. He has over 40 years of
experience in mining and mine management.
Donald W. T. Lewis - Vice President, Evaluations since March 1997, age
40. He was Director, North American Exploration/Evaluations from January 1996
until March 1997. He joined Homestake in 1992 as Director, Project Generation.
Prior to joining Homestake he was Exploration Manager - Western Canada for
International Corona Corporation from 1989 until 1992. He is a geologist with
more than 18 years of professional experience.
William F. Lindqvist - Vice President, Exploration since August 1995,
age 55. He rejoined Homestake from Newcrest Mining Company, where he was
Executive General Manager, Exploration. He was Vice President, Exploration at
Homestake from 1990 through 1992. He is a geologist with more than 27 years of
professional experience.
Stephen A. Orr - Vice President, U.S. Operations since December 1996,
age 42. He was the General Manager of the Homestake mine from January 1995 until
December 1996, and was Operations Manager from 1993 to 1995 and Manager, Mine
Engineering from 1992 to 1993. He was a Financial Analyst in the Corporate
Finance Department from 1990 to 1992. He has been with Homestake since 1981 and
has over 20 years of experience in mining and mine management.
David W. Peat - Vice President and Controller since December 1995, age
45. He was Controller of the Company from 1992 through November 1995. Prior to
joining Homestake in 1992, he was Vice President, Controller for International
Corona Corporation. He is a chartered accountant with over 21 years of
accounting and finance experience.
Richard A. Tastula - Vice President, Australia since August 1995, age
54. He has been Managing Director of Homestake Gold of Australia Limited since
1993, and was Director of Operations from 1991 to 1993. For 23 years prior to
that time, he held various positions with Western Mining Corporation, Limited.
He has over 32 years of experience in mining and mine management.
47
<PAGE>
Michael L. Carroll, Treasurer since April 1997, age 44. He has
been with Homestake since 1991, originally as Director of Taxes. Prior to
joining Homestake, he was Assistant Vice President for Bond International Gold
Inc. Before Bond, he was Director of Taxes for St. Joe Minerals Corporation. He
has over 20 years of accounting, finance and tax experience.
No officer is related to any other officer by blood, marriage or
adoption.
Officers are elected to serve until the next annual meeting of the
Board of Directors at which officers are elected or until their successors are
chosen.
No arrangement or understanding exists between any officer and any
other person under which any officer was elected.
ITEM 2 - PROPERTIES
See Item 1 - Business.
ITEM 3 - LEGAL PROCEEDINGS
Certain environmental proceedings in which the Company is or may become
a party are discussed on pages 40 through 44 under the caption "ENVIRONMENTAL
MATTERS."
In October 1997, Homestake and Prime entered into an agreement with
Inmet Mining Corporation ("Inmet") to purchase (Homestake as to 51% and Prime as
to 49%) the Troilus mine in Quebec for $110 million plus working capital. In
December 1997, Homestake and Prime terminated the agreement after determining
that, on the basis of due diligence studies, conditions to closing the
transaction would not be satisfied. On February 23, 1998, Inmet commenced
litigation against Prime and Homestake in the Superior Court of British
Columbia, disputing the termination of the agreement, and alleging that Prime
and Homestake had breached the agreement. Inmet seeks specific performance or,
in the alternative, equitable damages. Homestake believes that the agreement
with Inmet was terminated properly by Prime and Homestake and that the action by
Inmet is without merit. Homestake intends to defend this action vigorously.
The Company and its subsidiaries are defendants in various legal
actions in the ordinary course of business. In the opinion of management, such
matters will be resolved without material affect on the Company's financial
condition, results of operations or cash flow.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
48
<PAGE>
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
a. The common stock of Homestake Mining Company is registered and traded
principally on the New York Stock Exchange under the symbol "HM." It is
also listed and traded on the Australian Stock Exchange and in
Switzerland on the Basel, Geneva and Zurich stock exchanges under the
same symbol.
b. The number of holders of common stock of record as of March 16, 1998
was 21,442.
c. Information about the range of sales prices for the common stock and
the frequency and amount of dividends declared during the past two
years appears in the tables on pages 96 and 97 included under Item 8 -
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Information about certain
restrictive covenants under the Company's line of credit appears in
note 14 entitled "Long-term Debt" beginning on page 80 in the Notes to
Consolidated Financial Statements included under Item 8 - FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
d. Reference is hereby made to the note 18 entitled "Shareholders' Equity"
beginning on page 85 in the Notes to Consolidated Financial Statements
included under Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
e. The Registrant did not sell any securities during 1997 that were not
registered under the Securities Act of 1933.
49
<PAGE>
ITEM 6 - SELECTED FINANCIAL DATA
Five-Year Selected Data
(Dollar amounts in thousands, except per share and per ounce amounts)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------------- --------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Operations
Revenues $ 723,834 $ 766,936 $ 746,365 $ 705,487 $ 722,228
-------------- --------------- -------------- -------------- ---------------
Production costs 473,502 475,333 481,886 447,129 454,623
Depreciation, depletion and amortization 112,356 112,353 99,602 76,171 103,377
Administrative and general expense 40,563 36,965 37,283 38,159 40,553
Exploration expense 48,365 45,382 27,541 21,347 17,457
Interest and other expense 18,095 16,236 14,587 16,868 13,639
Write-downs and other unusual charges 198,802 8,983 24,183
Income and mining tax expense (credit) (9,211) 26,333 39,141 18,880 12,775
Minority interests 10,241 15,070 15,998 8,917 3,127
-------------- --------------- -------------- -------------- ---------------
892,713 736,655 716,038 627,471 669,734
-------------- --------------- -------------- -------------- ---------------
Net income (loss) $ (168,879)(1) $ 30,281 (2) $ 30,327 $ 78,016(3) $ 52,494(4)
============== =============== ============== ============== ===============
Per Share
Net income (loss)(basic and diluted) $ (1.15)(1) $ 0.21 (2) $ 0.22 $ 0.57(3) $ 0.38(4)
============== =============== ============== ============== ===============
Dividends paid $ 0.15 $ 0.20 $ 0.20 $ 0.175 $ 0.10
============== =============== ============== ============== ===============
Financial Position
Cash and short-term investments $ 235,946 $ 219,757 $ 212,373 $ 205,180 $ 134,719
Other current assets 140,024 159,591 156,344 137,619 103,491
Property, plant and equipment - net 812,046 1,007,030 846,776 808,221 830,228
Other long-term assets 116,713 95,730 106,140 50,948 52,812
-------------- --------------- -------------- -------------- ---------------
$ 1,304,729 $ 1,482,108 $ 1,321,633 $ 1,201,968 $ 1,121,250
============== =============== ============== ============== ===============
Current liabilities $ 108,906 $ 116,731 $ 98,421 $ 96,895 $ 104,350
Long-term debt 263,855 185,000 185,000 185,000 189,191
Other long-term obligations 142,382 114,168 120,418 110,719 93,674
Deferred income and mining taxes 155,449 201,454 189,925 136,274 164,030
Minority interests 102,387 96,203 92,012 84,310 54,761
Shareholders' equity 531,750 768,552 635,857 588,770 515,244
-------------- --------------- -------------- -------------- ---------------
Total liabilities and shareholders' equity $ 1,304,729 $ 1,482,108 $ 1,321,633 $ 1,201,968 $1,121,250
============== =============== ============== ============== ===============
Ratios
Debt to equity 50% 24% 29% 31% 37%
Return on shareholders' equity (26)% 4% 5% 14% 11%
Capital Expenditures $ 131,474 $ 105,923 $ 80,979 $ 88,654 $ 57,825
Operating Statistics
Gold production (thousands of ounces) 1,996 1,968 1,877 1,696 1,918
Average gold price realized per ounce $333 $389 $386 $384 $359
Total cash costs per ounce $237 $248 $257 $252 $229
Reserves
Gold (millions of ounces) 17.0 20.4 21.5 17.9 18.4
Eskay Creek silver (millions of ounces) 59.2 56.1 47.4 51.5 55.1
Sulfur (millions of long tons) 10.7 11.0 11.4 11.7 11.0
50
<PAGE>
<FN>
1. Includes a write-down of Homestake's investment in the Main Pass 299 sulfur
mine of $84.9 million ($107.8 million pretax) or $0.58 per share, an
increase in the accrual for estimated future reclamation expenditures of
$21.5 million ($29.1 million pretax) or $0.15 per share; a reduction in the
carrying values of short-lived mining properties of $20.3 million ($26.9
million pretax) or $0.14 per share, a write-down of certain investments of
$22.9 million ($24.8 million pretax) or $0.16 per share, other charges
consisting primarily of foreign exchange losses on intercompany redeemable
preferred stock and losses on an intercompany gold loan of $9.1 million
($10.2 million pretax) or $0.06 per share, a gain of $47.2 million ($62.9
million pretax) or $0.32 per share on the fee received upon termination of
Homestake's merger agreement with Santa Fe Pacific Gold Corporation, and a
gain $8.1 million ($13.5 million pretax) or $0.06 per share on the sale of
the George Lake and Back River joint venture interests in the Northwest
Territories of Canada.
2. Includes income of $24 million or $0.16 per share from a reduction in the
Company's accrual for prior year income taxes, a foreign currency exchange
loss on intercompany advances of $7.4 million ($8.9 million pretax) or
$0.05 per share primarily related to the Company's Canadian-dollar
denominated advances to HCI, write-downs of $8.3 million ($9 million
pretax) or $0.06 per share in the carrying value of investments in mining
company securities, costs of $2.8 million ($3.4 million pretax) or $0.02
per share related to the now terminated proposed merger with Santa Fe, and
proceeds of $4.9 million ($5.5 million pretax) or $0.03 per share from a
litigation recovery.
3. Includes a gain of $12.6 million ($15.7 million pretax) or $0.09 per share
on the sale of the Company's interest in the Dee mine and a gain of $11.2
million (no tax expense) or $0.08 per share on dilution of the Company's
interest in Prime.
4. Includes expense of $12.8 million ($16 million pretax) or $0.09 per share
for the write-down of oil assets at Main Pass 299 and expense of $6.8
million ($8.2 million pretax) or $0.05 per share for restructuring and
business combination costs.
</FN>
</TABLE>
51
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unless specifically stated otherwise, the following information relates to
amounts included in the consolidated financial statements, without reduction for
minority interests. Homestake reports per ounce production costs in accordance
with the "Gold Institute Production Cost Standard".)
RESULTS OF OPERATIONS
Homestake Mining Company ("Homestake" or the "Company") recorded a net
loss of $168.9 million or $1.15 per share during 1997 compared to net income of
$30.3 million or $0.21 per share during 1996 and $30.3 million or $0.22 per
share during 1995. The 1997 loss includes net nonrecurring expenses amounting to
$103.4 million or $0.70 per share compared to net nonrecurring income of $10.4
million or $0.07 per share in 1996 and $6.7 million or $0.05 per share in 1995.
Nonrecurring items in 1997 included:
- $84.9 million ($107.8 million pretax) write-down of Homestake's
investment in the Main Pass 299 sulfur mine
- $22.9 million ($24.8 million pretax) write-down of certain
investments
- $20.3 million ($26.9 million pretax) reduction in the carrying
values of short-lived mining properties
- $21.5 million ($29.1 million pretax) increase in the accrual for
estimated future reclamation expenditures
- $9.1 million ($10.2 million pretax) in other charges, primarily
foreign exchange losses on intercompany redeemable preferred
stock and losses on an intercompany gold loan
- $47.2 million ($62.9 million pretax) gain on the fee received
from Santa Fe Pacific Gold Corporation ("Santa Fe") upon
termination of Homestake's merger agreement with Santa Fe
- $8.1 million ($13.5 million pretax) gain on the sale of the
George Lake and Back River joint venture interests in the
Northwest Territories of Canada
Nonrecurring items in 1996 included:
- $24 million reduction in the accrual for prior year income taxes
- $4.9 million ($5.5 million pretax) of proceeds from a litigation
recovery
- $8.3 million ($9 million pretax) write-down of mining investments
- $7.4 million ($8.9 million pretax) of foreign exchange losses
primarily on advances to Homestake's wholly-owned subsidiary,
Homestake Canada Inc. ("HCI")
- $2.8 million ($3.4 million pretax) of expenses related to the
termination of Homestake's proposed combination with Santa Fe
Nonrecurring items in 1995 included a gain of $4.2 million ($5.4
million pretax) on the sale of the Company's remaining uranium inventory.
Excluding the effect of the nonrecurring items, Homestake incurred a
net loss of $65.5 million or $0.45 per share in 1997 compared to earnings of
$19.9 million or $0.14 per share in 1996 and
52
<PAGE>
$23.6 million or $0.17 per share in 1995. The lower 1997 results primarily are
due to significantly lower gold prices, higher exploration expenditures and
increased administrative and general expenses. After adjusting for nonrecurring
items, the reduction in 1996 earnings from 1995 reflects higher gold prices,
higher gold production and sales volumes and lower per ounce total cash costs,
offset by higher depreciation charges, substantially increased exploration
expenditures and lower returns from the Main Pass 299 sulfur operations.
Gold Operations: The results of the Company's operations are affected
significantly by the market price of gold. Gold prices are influenced by
numerous factors over which the Company has no control, including expectations
with respect to the rate of inflation, the relative strength of the United
States dollar and certain other currencies, interest rates, global or regional
political or economic crises, demand for gold for jewelry and industrial
products, and sales by holders and producers of gold in response to these
factors.
Homestake's gold hedging policy provides for the use of forward sales
contracts for up to 30% of each of the following ten year's expected annual gold
production at prices in excess of certain targeted prices, and the use of
combinations of put and call option contracts to establish minimum floor prices
while allowing participation in future increases in the price of gold. In 1997,
Homestake entered into a series of put and call options which provide a floor
price of $325 per ounce for 900,000 ounces of 1998 production while allowing for
full participation in any increase in the price of gold above $336 per ounce. In
1996, Homestake sold for future delivery, at an average price of $426 per ounce,
680,100 ounces of the gold expected to be recovered from the McLaughlin mine
stockpiles through 2003. During 1997, the Company delivered or financially
settled 120,100 ounces of gold at an average realized price of $385 per ounce
under the McLaughlin program. Revenues in 1996 and 1995 include 70,000 and
113,200 ounces of gold sold at average prices of $421 per ounce and $398 per
ounce, respectively, under the Nickel Plate mine hedging program which was
completed in 1996. These hedging activities increased revenues by approximately
$6.5 million, $2.1 million and $1.2 million during 1997, 1996 and 1995,
respectively. The estimated liquidation value of Homestake's gold hedging
position at December 31, 1997 was approximately $80 million. See note 21 to the
consolidated financial statements for further information and details of these
hedging programs.
In February 1998, Prime adopted a gold and silver hedging policy which
provides for the use of forward sales contracts for up to 40% of each of the
following five year's expected annual gold and silver production at prices in
excess of certain targeted prices.
A significant portion of the Company's operating expenses is incurred
in Australian and Canadian currencies. The Company's profitability is impacted
by fluctuations in these currencies' exchange rates relative to the United
States dollar. Under the Company's foreign currency protection program, the
Company has entered into a series of foreign currency option contracts which
establish trading ranges within which the United States dollar may be exchanged
for Australian and Canadian dollars. During 1997, both the Australian and
Canadian currencies weakened significantly in relation to the U.S. dollar and
the Company recorded foreign currency losses of $28.5 million under this program
of which $20.4 million were unrealized at December 31, 1997. See note 21 to the
consolidated financial statements for additional information regarding this
program.
Revenues from gold and ore sales totaled $633.1 million during 1997
compared to revenues of $712.2 million in 1996 and $675.2 million in 1995. The
decrease in revenue during 1997 reflects significantly lower gold prices
partially offset by higher production. The increase in revenues in 1996
53
<PAGE>
from 1995 reflects higher sales volumes and higher gold prices. During 1997, the
Company sold 2,012,800 equivalent ounces of gold at an average price of $333 per
ounce compared to 1,952,400 equivalent ounces of gold sold at an average price
of $389 per ounce in 1996 and 1,873,500 equivalent ounces sold at an average
price of $386 per equivalent ounce during 1995.
Total gold production increased to 1,996,000 equivalent ounces during
1997 compared to 1,968,100 equivalent ounces produced during 1996 and 1,877,300
equivalent ounces produced during 1995. The higher 1997 production primarily is
due to production increases at the Kalgoorlie, Eskay Creek, Snip and Round
Mountain operations, the commencement of production at the La Falda mine, and
initial production at the Ruby Hill mine, partially offset by significantly
lower production at the McLaughlin mine and the absence of production from the
Nickel Plate mine. The increase in production during 1996 from 1995 primarily is
due to production increases at the Kalgoorlie, Eskay Creek, David Bell and Round
Mountain operations and the purchase of an additional 60% interest in the Snip
mine, partially offset by lower production following the completion of mining
operations at the McLaughlin and Nickel Plate mines.
Consolidated Production Costs per Ounce:
<TABLE>
<CAPTION>
(per ounce of gold) 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Direct mining costs $210 $222 $233
Deferred stripping adjustments 4 7 2
Costs of third-party smelters 17 17 16
Other 1 (5) (1)
- ----------------------------------------------------------------------------------------------
Cash Operating Costs 232 241 250
Royalties 4 4 4
Production taxes 1 3 3
- ----------------------------------------------------------------------------------------------
Total Cash Costs 237 248 257
Depreciation and amortizaton 51 53 46
Reclamation 3 5 5
- ----------------------------------------------------------------------------------------------
Total Production Costs $291 $306 $308
- ----------------------------------------------------------------------------------------------
</TABLE>
Homestake's consolidated total cash cost per equivalent ounce amounted
to $237 during 1997 compared to $248 and $257 during 1996 and 1995,
respectively. The lower 1997 total cash costs per ounce primarily reflect higher
production and a weaker Australian dollar at the Kalgoorlie operations, higher
shipments and higher gold grades at the Eskay Creek mine and higher production
at the Round Mountain mine, partially offset by lower grades at the Williams and
David Bell mines. The decrease in total cash costs per ounce during 1996 from
1995 primarily reflects higher silver grades at the Eskay Creek mine, higher
production and the purchase of the disproportionate sharing arrangement at the
Kalgoorlie operations, higher production at the David Bell mine, and an increase
in ownership at the low-cost Snip mine, partially offset by lower production at
the McLaughlin mine and the effects of a stronger Australian dollar.
Homestake's total noncash cost per equivalent ounce was $54 during 1997
compared to $58 and $51 per ounce during 1996 and 1995, respectively. The
decrease in noncash costs in 1997 primarily is due to reserve expansions at the
Eskay Creek and Snip mines. The increase in 1996 noncash costs from 1995
reflects additional depreciation and amortization charges resulting from the
purchases of the
54
<PAGE>
Homestake Gold of Australia Limited ("HGAL") minority interests, the
disproportionate sharing arrangement and the additional interest in the Snip
mine.
Reconciliation of Total Cash Costs per Ounce to Financial Statements:
<TABLE>
<CAPTION>
(thousands of dollars, except per ounce amounts) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Production Costs per Financial Statements $ 473,502 $ 475,333 $ 481,886
Costs not included in Homestake's
production costs:
Costs of third-party smelters (1) 34,530 33,098 29,214
Production costs of equity-accounted investments 1,947 12,907 11,752
Sulfur and oil production costs (25,477) (23,208) (26,917)
Reclamation accruals (6,569) (9,579) (8,754)
By-product silver revenues (2,610) (3,059) (2,334)
Inventory movements and other (6,620) 2,993 (2,659)
- -------------------------------------------------------------------------------------------------------------------------
Production Costs for Per Ounce Calculation Purposes $ 468,703 $ 488,485 $ 482,188
- -------------------------------------------------------------------------------------------------------------------------
Ounces Produced During the Year 1,995,948 (2) 1,968,119 1,877,329
Total Cash Costs Per Ounce $ 237 $ 248 $ 257
<FN>
(1) Eskay Creek sells ore containing gold and silver directly to third-party
smelters. For comparison purposes, cash operating costs per ounce include
estimated third-party costs incurred by smelters and others to produce
marketable gold and silver.
(2) Includes 16,600 ounces produced at the Ruby Hill mine during 1997, prior to
commercial production, which are excluded from the calculation.
</FN>
</TABLE>
As a result of lower gold prices, at September 30 and December 31, 1997
the Company reviewed the carrying values of its gold mining operations using a
$325 per ounce gold price for its short-lived operations and a $350 per ounce
gold price for its operations with longer lives. The Company determined that
impairment write-downs totaling $26.9 million were required to reduce the
carrying values of several of its assets or operations with short remaining
lives, including the Pinson mine in Nevada, the Homestake mine's Open Cut, and
low-grade stockpiled ore and certain redundant mining equipment at the
Kalgoorlie operations. The Company determined that no adjustments to the
carrying values of its longer-lived operations were required.
At the Homestake mine in South Dakota, production decreased slightly to
397,300 ounces during 1997 from 407,300 ounces during 1996 and 402,900 ounces
during 1995. The decrease in production in 1997 primarily is a result of a
decrease in the grade of ore from the underground operations partially offset by
an increase in the grade of ore from the Open Cut. The increase in 1996
production from 1995 is a result of an increase in production from the Open Cut,
partially offset by lower production from the underground operations. During
1995, harder than normal ore from the Open Cut had reduced mill throughput.
Total cash costs of $310 per ounce during 1997 compare to total cash costs of
$304 per ounce during 1996 and $303 per ounce during 1995.
In January 1998, the Company announced the implementation of a major
restructuring of operations at the Homestake mine in order to reduce operating
costs. Gold production will be reduced to approximately 150,000 to 180,000
ounces per year by the beginning of 1999. To implement the plan, the
55
<PAGE>
Company suspended underground mining while it completed the final details of the
new operating plan and readied the underground mine to begin operating on the
restructured basis. Open Cut ore stockpiles continued to be processed through
the mill at an accelerated rate while the underground operations were suspended.
The new operating plan involves closing parts of the mine and concentrating on
substantially fewer production levels. The new operating plan, which has
resulted in a 1.5 million ounce reduction in reserves before considering 1997
production, should increase the mine's future total cash flow significantly.
Underground crews commenced returning to work on a limited basis on March 26,
1998, and the remaining underground work force, which is expected to be about
one-half of the size of the pre-shutdown work force, will return on a phased
basis through April 1998.
Production at the McLaughlin mine in northern California decreased to
118,500 ounces during 1997 from 185,500 ounces during 1996 and 241,800 ounces
during 1995. In June 1996, mining operations were completed and the autoclaves
were shut down as the ore body was depleted. Through 2003, lower-grade
stockpiled ore will be processed through a conventional carbon-in-pulp circuit.
The effect of the decrease in production on unit operating costs largely has
been offset by a reduction in expenditures. Total cash costs in 1997 were $254
per ounce compared to $250 per ounce in 1996 and $242 per ounce in 1995.
The Company's share of production from the Round Mountain mine in
Nevada totaled 120,000 ounces in 1997 compared to production of 102,700 ounces
in 1996 and 86,100 ounces in 1995. The higher 1997 production is a result of
higher recoveries on the reusable pad and an increase in the volume of ore
placed on the dedicated pad. The increase in 1996 production from 1995 was due
to higher grades and volumes of ore placed on the reusable pad and an increase
in dedicated pad capacity. Total cash costs of $226 per ounce in 1997 compare to
total cash costs of $256 per ounce and $254 per ounce in 1996 and 1995,
respectively. The decrease in cash costs in 1997 is due to the higher
production.
During the third quarter of 1997, a new Round Mountain mining plan was
approved. The new plan is expected to increase the mine's cash flow and
profitability and reduce total cash costs. Primarily as result of the new plan,
Homestake's share of Round Mountain ore reserves decreased by approximately
315,000 ounces at December 31, 1997, before considering 1997 production. A new
8,000 tons-per-day gravity mill to process higher-grade sulfide ores commenced
commercial production in November 1997. The mill, which is expected to produce
approximately 23,000 ounces (Homestake's share) of gold during 1998, was
constructed at a cost $62.2 million (Homestake's share - $15.5 million).
Development of the new Ruby Hill mine in Nevada was completed in 1997
at a total capital cost of $64.7 million. The mine, which poured its first gold
on November 6, 1997, produced 16,600 ounces of gold during 1997. The mine
commenced commercial production effective January 1, 1998 and is budgeted to
produce 110,000 ounces of gold in 1998 at a total cash cost of $123 per ounce.
The Eskay Creek mine in British Columbia, Canada sold 121,500 tons of
ore containing 244,700 ounces of gold and 11.8 million ounces of silver during
1997 (equivalent to approximately 417,300 ounces of gold), compared to 115,900
tons of ore sold in 1996 containing 211,300 ounces of gold and 12.1 million
ounces of silver (equivalent to approximately 372,300 ounces of gold), and
104,100 tons of ore sold during 1995 containing 196,500 ounces of gold, and 9.9
million ounces of silver (equivalent to approximately 331,300 ounces of gold).
The increase in 1997 shipments reflects slightly higher shipments under the two
long-term smelter contracts and 12,000 tons of spot sales to an additional
smelter. The higher shipments in conjunction with higher gold grades and a
decrease in the gold/silver equivalency ratio were the primary reasons for the
45,000-ounce increase in production during 1997. The increase in shipments in
1996 from 1995 reflects 14,000 tons of spot ore sales to two additional
smelters. Total cash costs, including third-party smelter costs, decreased to
$157 per equivalent ounce during 1997
56
<PAGE>
from $170 per equivalent ounce during 1996 from $185 per equivalent ounce during
1995. The lower 1997 costs per ounce primarily are a result of higher
production, higher gold grades and productivity improvements, partially offset
by lower silver grades. The lower 1996 costs per ounce in comparison to 1995
primarily are a result of lower development costs, and higher gold and silver
ore grades.
Following a successful 1997 exploration program, Homestake's 50.6%
share of Eskay Creek's proven and probable ore reserves increased by
approximately 190,000 ounces of gold and 9.1 million ounces of silver at
December 31, 1997, before considering 1997 production. The new gravity/flotation
mill facility at the Eskay Creek mine site, which was constructed at a cost of
$12 million, was commissioned in December 1997. The mill, which is expected to
increase annual production by approximately 30,000 ounces of gold over the
remaining mine life, will improve the profitability of certain Eskay Creek ore
that would otherwise be shipped directly to third-party smelters and upgrade
other material that previously was not economic.
The Company's share of gold production from the Williams mine in the
Hemlo mining camp in Canada amounted to 201,100 ounces at a total cash cost of
$229 per ounce during 1997 compared to 205,500 ounces at a total cash cost of
$222 per ounce during 1996 and 202,600 ounces produced at a total cash cost of
$222 per ounce during 1995. The slight decrease in production and corresponding
increase in total cash costs during 1997 primarily is due to lower ore grades.
Production at the Williams mine is expected to remain at current levels for the
next few years.
The Company's share of production at the David Bell mine, also in the
Hemlo mining camp, amounted to 90,000 ounces during 1997 compared to production
of 97,700 ounces during 1996 and 79,400 ounces during 1995. The decrease in
production during 1997 is due to lower ore grades partially offset by higher
throughput. During 1996, mining in the higher-grade areas of the mine offset
production difficulties that had reduced throughput. An accelerated development
program was initiated to increase throughput by providing access to additional
mining areas. Total cash costs were $194 per ounce during 1997 compared to $172
per ounce during 1996 and $203 per ounce during 1995. Production is expected to
decline further in 1998 as the grade of ore to be mined approaches the remaining
life-of-mine reserve grade.
Homestake's share of production from the Snip mine increased to 115,600
ounces during 1997 from 101,800 ounces during 1996 and 51,300 ounces during
1995. Excluding the effects of the purchase of the additional 60% interest in
the mine in April 1996, production decreased by 6% during 1997. The lower
production primarily is due to lower mill throughput caused by an increase in
more labor-intensive conventional mining as the remaining ore blocks become
narrower as the mine nears the end of its economic life. Total cash costs
increased to $213 per ounce during 1997 from $190 per ounce during 1996 and $176
per ounce during 1995. Production in 1998 is expected to be derived primarily
from conventional mining areas. As a result, total cash costs are expected to
increase further and 1998 production is expected to be approximately 100,000
ounces.
HGAL's share of production from the Kalgoorlie operations in Western
Australia increased to 425,900 ounces during 1997 from 368,800 ounces during
1996 and 311,400 ounces during 1995. The increase in HGAL's share of production
during 1997 reflects higher mill throughput, ore grades and recoveries. The
increase in HGAL's share of production during 1996 from 1995 primarily was a
result of an increase in mill throughput and the purchase of the
disproportionate sharing arrangement from HGAL's joint venture partner. During
1995, HGAL paid 13,000 ounces to its joint venture partner under the
disproportionate sharing arrangement. In addition, the lower 1995 production
reflects a temporary decline in production while the new Fimiston mill additions
were integrated with the existing complex,
57
<PAGE>
and lower production at the Mt. Charlotte mine due to operational difficulties
which hampered production early in the year. Total cash costs at the Kalgoorlie
operations decreased to $259 per ounce during 1997 from $291 per ounce in 1996
and $296 per ounce in 1995. The decrease in cash costs in 1997 reflects the
higher production, the installation of a recycle crusher at the Fimiston mill
earlier in the year, and a weakening of the Australian dollar in relation to the
U.S. dollar. The reduction in cash costs in 1996 from 1995 reflects higher
production, partially offset by the effects of a stronger Australian dollar.
The new Agua de la Falda mine (51% owned by Homestake, 49% by Codelco)
commenced mining operations late in 1996 and the first gold was poured in April
1997. The mine produced 31,400 ounces of gold during 1997. Both the average ore
grade and ore production rates have been higher than expected. As a result,
total cash costs of $213 per ounce are well below earlier estimates. The
operation expects to produce between 40,000 and 45,000 ounces of gold in 1998.
Main Pass 299: The Company has a 16.7% undivided interest in the Main Pass 299
sulfur mine and oil recovery operations in the Gulf of Mexico. At December 31,
1997 the Main Pass 299 sulfur mine had proven recoverable reserves of
approximately 64.3 million long tons (100% basis) of sulfur. Main Pass 299 oil
production, which peaked in 1992, is expected to continue to decline over the
next few years. During 1997, continuing low sulfur prices, reduced sales volumes
and higher operating costs for both sulfur and oil operations resulted in
Homestake recording a Main Pass 299 operating loss of $3.6 million compared to
operating profits of $1.3 million and $5.7 million during 1996 and 1995,
respectively.
The sulfur operations incurred an operating loss of $4.5 million in
1997 compared to an operating loss of $3.1 million in 1996 and operating
earnings of $3.7 million in 1995. In response to the continued weak market for
sulfur, Main Pass 299 maintained the reduced production levels established in
1996. The Company's share of sulfur revenues totaled $18.3 million during 1997
compared to $20.1 million during 1996 and $30.5 million during 1995. During
1997, the Company sold 307,000 tons of sulfur at an average price of $59 per ton
compared to 333,300 tons of sulfur at an average price of $60 per ton during
1996 and 445,600 tons at an average price of $68 per ton during 1995. The
Company's share of production was 316,000 tons in 1997 compared to 325,000 tons
in 1996 and 365,100 tons in 1995.
Planned write-downs during the third quarter of 1997 by Homestake's
joint venture partners caused the Company to reexamine the carrying value of its
investment in Main Pass 299. Due to a prolonged period of low sulfur prices and
Homestake's current assessment of estimated future cash flows from the Main Pass
299 sulfur mine, the Company recorded a write-down of $107.8 million in its
investment in Main Pass 299. As a result of this write-down, the Company's
carrying value of the Main Pass 299 sulfur property, plant and equipment was
reduced to zero at September 30, 1997.
The Company's share of oil revenues amounted to $8.5 million in 1997
compared to $10.7 million and $10.1 million in 1996 and 1995, respectively.
Operating earnings from oil operations totaled $0.9 million in 1997 compared to
operating earnings of $4.4 million in 1996 and $2.1 million in 1995. The lower
1997 operating results reflect lower oil sales volumes and prices and higher
production costs. The improved 1996 results in comparison to 1995 primarily are
due to higher oil prices and lower operating costs, partially offset by a
decline in production.
58
<PAGE>
Other income: A loss of $13.2 million in 1997 compares to income of $8.9 million
in 1996 and $13.8 million in 1995. The 1997 figure includes foreign currency
losses of $34.1 million and a gain of $13.5 million from the sale of the George
Lake and Back River joint venture interests in the Northwest Territories of
Canada. Other income in 1996 includes a $2.9 million gain from the litigation
recovery and $8.9 million of foreign exchange losses, primarily on advances to
HCI, which are denominated in Canadian dollars.
Depreciation, depletion and amortization: Depreciation, depletion and
amortization of $112.4 million during 1997 compares to $112.4 million during
1996 and $99.6 million during 1995. Depreciation, depletion and amortization
expense in 1997 reflects higher production offset by reserve expansions at the
Eskay Creek and Snip mines. The increase in depreciation, depletion and
amortization in 1996 from 1995 primarily is due to higher production, and
additional depreciation charges resulting from the purchases of the HGAL
minority interests, the disproportionate sharing arrangement and the additional
interest in the Snip mine.
Administrative and general expense: During 1997, administrative and general
expense increased to $40.6 million from $37 million and $37.3 million during
1996 and 1995, respectively. This increase primarily reflects increased
corporate development activity and the costs associated with employee
relocations to the new Agua de la Falda and Ruby Hill mines.
Exploration expense: Exploration expense, excluding capitalized costs associated
with development stage projects, increased to $48.4 million during 1997 from
$45.4 million in 1996 and $27.5 million in 1995. The increase in exploration
expense in 1997 primarily is due to increased activity as the Company continues
to pursue numerous prospective exploration targets and prospects. During 1997,
advanced exploration continued in the northern part of South America at the El
Foco concession in Venezuela, the St. Pierre concession in French Guiana and the
Tapajos area in Brazil. Exploration results were disappointing in Venezuela and
French Guiana, and exploration efforts in this part of the world in 1998 will be
directed to the largely under explored Tapajos area. Exploration in the Yilgarn
area of Western Australia resulted in the discovery of poly-metallic
mineralization at the Kundip project. In addition, exploration activities were
conducted at and around the Kalgoorlie, Eskay Creek, Homestake, Snip, La Falda,
Ruby Hill and Pinson operations. The Company currently plans to spend $35
million on existing Homestake exploration projects during 1998.
Income and mining taxes: The Company's income and mining tax rate was 5.5%
during 1997 compared to 37% and 46% during 1996 and 1995, respectively. The low
1997 effective tax rate is due to the geographic mix of pretax income and
losses. During 1997, the Company had pretax income of $50.6 million in Canada,
and pretax losses of $167.6 million, $37.1 million and $13.8 million in the
United States, Australia and other foreign jurisdictions, respectively. The
effective Canadian tax rate was 57% during 1997, reflecting high statutory tax
rates and certain nondeductible expenses. In the United States, where the
Company is subject to the Alternative Minimum Tax, the effective rate was 16% in
1997. The effective Australian tax rate was 32% in 1997 reflecting the statutory
rate of 36% and certain nondeductible expenses. No tax benefit was recognized on
losses incurred in other foreign jurisdictions, primarily South America
exploration expenditures, due to the uncertainty of their realization. On a
consolidated basis the tax benefits related to the losses incurred the United
States and Australia are largely offset by the tax expense recorded with respect
to the Canadian earnings, and the result is a consolidated tax benefit of only
$9.2 million.
59
<PAGE>
Income and mining tax expense in 1996 includes a $24 million decrease
in the consolidated tax provision due to a reduction in prior years' income tax
accruals for certain contingencies which were resolved in 1996. The 1996 tax
expense also includes a $2.6 million gain relating to the tax portion of a
litigation recovery.
At December 31, 1997 and 1996 the Company had tax valuation allowances
of $89.7 million and $72.2 million, respectively. While circumstances could
occur which would permit the Company to reduce its deferred tax valuation
allowances in future years, based on the Company's current projections it does
not expect significant future reductions. Events that would allow the Company to
reduce such allowances in the future would include (i) generating substantial
taxable income in Chile, (ii) an acceleration of the payment of the Company's
post-retirement benefit obligations and (iii) the future disposal of certain
non-amortizable United States and Australia land and mineral properties at such
time as the Company determines the properties have no further significant
exploration potential.
See note 7 to the consolidated financial statements for further
discussion of tax matters.
Minority interests: Income allocable to minority interests in consolidated
subsidiaries amounted to $10.2 million in 1997 compared to $15.1 million in 1996
and $16 million in 1995. The decrease in income allocable to minority interests
in 1997 is due to reduced earnings from the Eskay Creek and Snip mines both of
which are owned by Prime Resources Group Inc. ("Prime"), a 50.6%-owned
subsidiary of Homestake, and an increase in exploration expenditures incurred by
the Company's 51%-owned subsidiary, Agua de la Falda S.A.
LIQUIDITY AND CAPITAL RESOURCES
During 1997, Homestake's cash and equivalents and short-term investment
balances increased by $16.2 million to $235.9 million. Net cash provided by
operations in 1997 amounted to $102.3 million compared to $180.4 million and
$153.5 million in 1996 and 1995, respectively. The decrease in cash provided by
operations primarily is due to lower gold prices. Investing activities in 1997
include capital expenditures of $131.5 million, a $16 million investment in
mining and exploration interests in Bulgaria, and $13.4 million of proceeds from
asset sales. Financing activities in 1997 include dividends paid of $24.2
million and net additional borrowings of $84.3 million.
The Company has a United States/Canadian/Australian cross-border credit
facility providing a total availability of $275 million. The Company pays a
commitment fee of 0.15% per annum on the unused portion of this facility. The
credit facility is available through September 2001 and provides for borrowings
in United States, Canadian, or Australian dollars, or gold, or a combination of
these. The credit agreement requires a minimum consolidated net worth of $500
million. At December 31, 1997 HGAL had borrowed $48.9 million under this
agreement primarily to repay intercompany advances. The interest rate on these
borrowings is based on the Australian Bank Bill Swap Rate plus 0.4%. At December
31, 1997 this rate was 5.25%.
In 1993, the Company sold $150 million of 5.5% convertible subordinated
notes maturing June 23, 2000. Interest on the notes is payable semi-annually in
June and December. The notes are convertible into the Company's common shares at
a rate of $23.06 per common share and are redeemable by the Company in whole at
any time.
60
<PAGE>
In December 1996, Homestake and Santa Fe announced that they had
entered into an agreement whereby Homestake would acquire Santa Fe by an
exchange of common stock for common stock. In March 1997, the Company announced
that Santa Fe had terminated the agreement and, in accordance with the terms of
the merger agreement, had paid Homestake a $65 million termination fee. As a
result, Homestake recorded a gain of $62.9 million ($47.2 million after tax),
net of merger related expenses incurred in 1997 of $2.1 million.
In February 1997, Homestake completed the sale of its interests in the
George Lake and Back River joint ventures in Canada to Kit Resources Corporation
("Kit") for $9.3 million in cash and 3.6 million shares of Kit common stock. As
a result of this transaction, the Company recorded a pretax gain of $13.5
million ($8.1 million after tax).
In April 1997, the Company filed a shelf registration with the
Securities and Exchange Commission for the potential sale of up to 20 million
shares of Homestake common stock. The proceeds from any such offering would be
available for general corporate purposes, which could include capital
expenditures, repayment of debt and future acquisitions which have the potential
to add to the Company's gold reserves and future gold production.
In July 1997, Lawrence County, South Dakota issued $30 million of South
Dakota Solid Waste Disposal Revenue Bonds ("Waste Disposal Bonds") and $18
million of South Dakota Pollution Control Refunding Revenue Bonds ("Pollution
Control Bonds"), both of which are due in 2032. Proceeds from the Waste Disposal
Bonds were loaned to the Company and proceeds from the Pollution Control Bonds
were used to redeem outstanding South Dakota pollution control bonds. The
Company is responsible for funding principal and interest payments on these
bonds. See note 14 to the Consolidated Financial Statements for further
information on these bonds.
In 1995, Homestake acquired for $24 million a 10% interest in Navan
Resources plc ("Navan"), an Irish public company with diverse mineral interests
in Europe. At December 31, 1996 Homestake reduced the carrying value of its
investment in Navan to the quoted market value through a $7.2 million charge to
income. During 1997, Homestake recorded additional write-downs of $10.1 million
with respect to the carrying value of the investment in Navan.
In November 1997, Homestake purchased a 20% interest in Navan Bulgarian
Mining BV ("Navan BV"), a wholly-owned subsidiary of Navan, for $12 million.
Homestake has agreed, under certain circumstances, to invest an additional $18
million in Navan BV, which would result in Homestake owning 51% of Navan BV, and
give Homestake the right to become operator of the Chelopech project in
Bulgaria. See note 11 to the Consolidated Financial Statements for further
information on this investment.
During November 1997, Homestake acquired a 32% interest in Navan's
Bulgarian exploration projects and program for $4 million. Homestake is
obligated to invest an additional $4 million in the exploration program during
the next three years, which will result in Homestake's owning a 50% interest in
and having the right to become the operator of the exploration program.
In April 1996, Prime purchased Cominco's 60% interest in the Snip mine
for $39.3 million in cash.
In June 1996, the Company paid $51.4 million to purchase past and all
future rights and entitlements under the disproportionate sharing arrangement
covering gold production from a portion of
61
<PAGE>
the Super Pit operation at the Kalgoorlie operations. The Company now shares
equally with its joint venture partner in all gold produced at the Kalgoorlie
operations.
During the fourth quarter of 1995 and the first quarter of 1996,
Homestake acquired the 18.5% of HGAL it did not already own. The total purchase
price was $164.9 million, including $141.7 million for 8.5 million newly issued
shares of the Company, $19.5 million in cash and $3.7 million of transaction
expenses.
Additions to property, plant and equipment in 1997 totaled $131.5
million compared to $105.9 million and $81 million in 1996 and 1995,
respectively. Capital additions in 1997 include $56.1 million for construction
and development work at the Ruby Hill mine, $14.8 million at the Round Mountain
mine primarily for the new mill, $13.7 million at the Kalgoorlie operations
primarily for a decline from surface and a ventilation raise at the Mt.
Charlotte mine, $15.4 million at the Eskay Creek mine primarily for the
construction of the new gravity/flotation mill, and $16 million at the Homestake
mine primarily for a tailings dam lift and improvements in the underground
operations. The remaining expenditures primarily were for replacement capital to
maintain existing production capacity.
In addition to sustaining capital, planned capital expenditures of
approximately $50 million at Homestake's existing operations during 1998
include, $13 million at the Homestake mine primarily for the operations
restructuring and completion of the tailings dam lift, and $14 million at the
Kalgoorlie operations primarily to extend the new Mt. Charlotte decline further
into the mine's workings and increase the flotation capacity at the Fimiston
mill.
Total dividends paid by the Company, including $2.2 million of
dividends paid by Prime to its minority shareholders, amounted to $24.2 million
in 1997 compared to $31.5 million and $27.6 million during 1996 and 1995,
respectively. During 1997, Homestake reduced its dividend rate to two
semi-annual payments of $.05 each.
The Company paid cash income and mining taxes (net of tax refunds) of
$66.2 million in 1997 compared to $17.1 million and $22.7 million in 1996 and
1995, respectively. The 1997 tax payments include $30.9 million of final
payments for the 1996 tax year and $35.3 million of estimated payments for the
1997 tax year. The increase in tax payments is due to the exhaustion of the
majority of the Company's Canadian income and mining tax pools during 1996.
The Company spent $3.1 million for reclamation-related expenditures
during 1997 at its discontinued uranium facility at Grants, New Mexico. In
accordance with the Energy Policy Act of 1992, the United States Department of
Energy ("DOE") is responsible for 51.2% of all past and future reclamation
expenditures at this facility. The Company has received $21 million to date from
the DOE and the accompanying balance sheet at December 31, 1997 includes a
receivable of $10.9 million for the DOE's share of reclamation expenditures made
by the Company through 1997. The total future cost for reclamation, remediation,
monitoring and maintaining compliance at the Grants site is estimated to be
$17.5 million. The Company believes that its share of the estimated remaining
cost of reclaiming the Grants facility is fully provided in the financial
statements at December 31, 1997.
The Company evaluates its accruals for remediation, reclamation and
site restoration regularly. The Company believes it has fully provided for all
remediation liabilities and for estimated reclamation and site restoration costs
at its nonoperating properties. At its operating properties, the Company is
providing for estimated ultimate reclamation relating to ongoing and end-of-mine
life restoration and closure costs over the lives of its individual operations
using the units-of-production method.
62
<PAGE>
At September 30, 1997, the Company determined that it was necessary to
increase the reclamation accruals at certain of its nonoperating properties
including the Santa Fe mine in Nevada, the Nickel Plate mine in Canada and the
Grants uranium complex in New Mexico to reflect revised estimates, changed
conditions and more stringent future reclamation requirements. Accordingly, a
charge of $29.1 million was recorded at that time.
See note 20 to the consolidated financial statements for discussion of
certain legal matters.
The Company has completed a review of its computer-based operating
systems and has developed a plan to ensure all of these systems will be year
2000 compliant. The Company does not expect to incur significant costs in this
regard.
Future results will be impacted by such factors as the market price of
gold, silver and sulfur, the Company's ability to expand its ore reserves and
the fluctuations of foreign currency exchange rates. The Company believes that
the combination of cash, short-term investments, available lines of credit and
future cash flows from operations will be sufficient to meet normal operating
requirements, planned capital expenditures, and anticipated dividends.
Plutonic Resources Limited: On December 21, 1997, Homestake announced it had
entered into an agreement to acquire Plutonic Resources Limited ("Plutonic"), an
Australian gold producer, by an exchange of common stock for common stock.
Homestake expects to issue approximately 64.4 million shares to acquire Plutonic
(0.34 of a Homestake common share for each Plutonic fully-paid ordinary share).
Following completion of this transaction, Homestake's Australian
operations will be the second largest in that country with substantial potential
for reserve growth. Homestake will have 17 mines in four countries. Homestake's
1998 Australian gold production is expected to be 850,000 ounces, or
approximately 35 percent of the Company's total production, increasing to 1
million ounces and 40 percent, respectively, in 1999.
The transaction, which has been approved unanimously by the Boards of
both companies, is expected to close in May 1998. The transaction is subject to
approval by shareholders of both companies, qualification as a pooling of
interests for accounting purposes, and certain other conditions.
63
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
<TABLE>
<CAPTION>
<S> <C>
Statements of Consolidated Operations..........................................................65
Consolidated Balance Sheets....................................................................66
Statements of Consolidated Shareholders' Equity................................................67
Statements of Consolidiated Cash Flows.........................................................68
Notes to Consolidated Financial Statements..................................................69-93
Report of Independent Auditors.................................................................94
Management's Responsibility for Financial Reporting............................................95
Quarterly Selected Data........................................................................96
Common Stock Price Range.......................................................................97
</TABLE>
64
<PAGE>
Homestake Mining Company and Subsidiaries
Statements of Consolidated Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the years ended December 31, 1997, 1996 and 1995 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Gold and ore sales $ 633,093 $ 712,186 $ 675,222
Sulfur and oil sales 26,821 30,749 40,620
Interest income 14,215 15,054 16,737
Gain on termination of Santa Fe merger (note 4) 62,925
Other income (note 5) (13,220) 8,947 13,786
- -------------------------------------------------------------------------------------------------------------------------------
723,834 766,936 746,365
- -------------------------------------------------------------------------------------------------------------------------------
Costs and Expenses
Production costs 473,502 475,333 481,886
Depreciation, depletion and amortization 112,356 112,353 99,602
Administrative and general expense 40,563 36,965 37,283
Exploration expense 48,365 45,382 27,541
Interest expense 11,259 10,644 11,297
Write-downs and other unusual charges (note 6) 198,802 8,983
Other expense 6,836 5,592 3,290
- -------------------------------------------------------------------------------------------------------------------------------
891,683 695,252 660,899
- -------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Taxes and Minority Interests (167,849) 71,684 85,466
Income and Mining Taxes (note 7) 9,211 (26,333) (39,141)
Minority Interests (10,241) (15,070) (15,998)
- -------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (168,879) $ 30,281 $ 30,327
===============================================================================================================================
Net Income (Loss) Per Share (Basic and Diluted) $ (1.15) $ 0.21 $ 0.22
===============================================================================================================================
Average Shares Used in the Computation 146,719 146,311 138,117
===============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
65
<PAGE>
Homestake Mining Company and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share amount)
<TABLE>
<CAPTION>
December 31, 1997 and 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 94,725 $ 89,599
Short-term investments 141,221 130,158
Receivables (note 8) 40,366 47,650
Inventories (note 9) 69,258 91,127
Deferred income and mining taxes (note 7) 20,894 12,263
Other 9,506 8,551
- ---------------------------------------------------------------------------------------------------------------------------------
Total current assets 375,970 379,348
Property, Plant and Equipment - net (notes 3 and 10) 812,046 1,007,030
Investments and Other Assets
Noncurrent investments (note 11) 32,321 39,606
Other assets (note 12) 84,392 56,124
- ---------------------------------------------------------------------------------------------------------------------------------
Total investments and other assets 116,713 95,730
- ---------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 1,304,729 $ 1,482,108
=================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 43,843 $ 36,171
Accrued liabilities (note 13) 64,786 42,174
Income and other taxes payable 277 38,386
- ---------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 108,906 116,731
Long-term Liabilities
Long-term debt (note 14) 263,855 185,000
Other long-term obligations (note 15) 142,382 114,168
- ---------------------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 406,237 299,168
Deferred Income and Mining Taxes (note 7) 155,449 201,454
Minority Interests in Consolidated Subsidiaries 102,387 96,203
Shareholders' Equity (note 18)
Capital stock, $1 par value per share:
Preferred - 10,000 shares authorized; no shares outstanding
Common - 250,000 shares authorized; shares outstanding:
1997 - 146,735; 1996 - 146,672 146,735 146,672
Additional paid-in capital 478,707 477,880
Retained earnings (deficit) (80,801) 110,085
Accumulated currency translation adjustments (14,907) 37,753
Other 2,016 (3,838)
- ---------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 531,750 768,552
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 1,304,729 $ 1,482,108
=================================================================================================================================
</TABLE>
Commitments and Contingencies - see notes 20 and 21.
See notes to consolidated financial statements.
66
<PAGE>
Homestake Mining Company and Subsidiaries
Statements of Consolidated Shareholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Retained Currency
For the years ended Common Paid-in Earnings Translation
December 31, 1997, 1996 and 1995 Stock Capital (Deficit) Adjustments Other Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1994 $ 137,785 $ 339,785 $ 106,405 $ 8,869 $ (4,074) $ 588,770
Net income 30,327 30,327
Dividends paid (27,587) (27,587)
Exercise of stock options 206 2,680 2,886
Stock issued for purchase of HGAL
minority interests (note 3) 2,550 39,849 42,399
Currency translation adjustments (1,041) (1,041)
Change in unrealized loss on
investments 162 162
Other (59) (59)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1995 140,541 382,314 109,145 7,828 (3,971) 635,857
Net income 30,281 30,281
Dividends paid (29,341) (29,341)
Exercise of stock options 167 2,431 2,598
Stock issued for purchase of HGAL
minority interests (note 3) 5,976 93,370 99,346
Currency translation adjustments 29,925 29,925
Change in unrealized loss on
investments 10 10
Other (12) (235) 123 (124)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1996 146,672 477,880 110,085 37,753 (3,838) 768,552
Net loss (168,879) (168,879)
Dividends paid (22,007) (22,007)
Exercise of stock options 63 827 890
Currency translation adjustments (52,660) (52,660)
Change in unrealized loss on
investments 3,638 3,638
Other 2,216 2,216
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 $ 146,735 $ 478,707 $ (80,801) $ (14,907) $ 2,016 $ 531,750
==================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
67
<PAGE>
Homestake Mining Company and Subsidiaries
Statements of Consolidated Cash Flows
(In thousands)
<TABLE>
<CAPTION>
For the years ended December 31, 1997, 1996 and 1995 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operations
Net income (loss) $ (168,879) $ 30,281 $ 30,327
Reconciliation to net cash provided by operations:
Depreciation, depletion and amortization 112,356 112,353 99,602
Write-downs and other unusual charges (note 6) 198,802 8,983
Foreign currency exchange losses on intercompany
debt (note 5) 5,657 8,943 883
Gains on asset disposals (16,712) (3,836) (5,024)
Deferred income and mining taxes (note 7) (46,071) (15,615) 19,475
Minority interests 10,241 15,070 15,998
Reclamation - net 784 (1,472) (6,044)
Other noncash items - net 2,327 6,984 5,634
Effect of changes in operating working capital items:
Receivables (2,198) 13,754 821
Inventories 9,208 (15,851) 1,324
Accounts payable 7,399 (450) (852)
Accrued liabilities and taxes payable (11,058) 21,451 (7,456)
Other 433 (217) (1,231)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 102,289 180,378 153,457
- ----------------------------------------------------------------------------------------------------------------------------
Investment Activities
Decrease (increase) in short-term investments (11,063) (63,742) 33,063
Proceeds from asset sales 13,359 16,141 13,295
Additions to property, plant and equipment (131,474) (105,923) (80,979)
Increase in restricted cash (15,990)
Investments in mining companies (17,312) (12,224) (37,314)
Purchase of HGAL minority interests (note 3) (6,435) (16,714)
Purchase of interest in Snip mine (note 3) (39,279)
Other (2,430) 3,264 3,296
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investment activities (164,910) (208,198) (85,353)
- ----------------------------------------------------------------------------------------------------------------------------
Financing Activities
Borrowings 102,270
Debt repayments (18,000)
Dividends paid on common shares - Homestake (22,007) (29,341) (27,587)
- Prime minority interests (2,151) (2,205)
Common shares issued 889 2,599 2,886
Other 4,235
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 65,236 (28,947) (24,701)
- ----------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Equivalents 2,511 409 (3,147)
- ----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Equivalents 5,126 (56,358) 40,256
Cash and Equivalents, January 1 89,599 145,957 105,701
- ----------------------------------------------------------------------------------------------------------------------------
Cash and Equivalents, December 31 $ 94,725 $ 89,599 $ 145,957
============================================================================================================================
</TABLE>
See notes to consolidated financial statements.
68
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Note 1: Nature of Operations
Homestake Mining Company ("Homestake" or the "Company") is engaged in gold
mining and related activities including exploration, extraction,
processing, refining and reclamation. Gold bullion, the Company's principal
product, is produced and sold in the United States, Canada, Australia and
Chile. Ore and concentrates, containing gold and silver from the Eskay
Creek and Snip mines in Canada, are sold directly to smelters. Through its
investment in Main Pass 299, the Company also produces and sells sulfur and
oil.
Note 2: Significant Accounting Policies
The consolidated financial statements include Homestake and its
majority-owned subsidiaries and their undivided interests in joint ventures
after elimination of intercompany amounts. At December 31, 1997 the Company
owned 50.6% of Prime Resources Group Inc. ("Prime") and 51% of Agua de la
Falda S.A. with the remaining interests reflected as minority interests in
the consolidated financial statements. Undivided interests in gold mining
operations (the Round Mountain, Pinson and Marigold mines in the United
States; Homestake Gold of Australia Limited's ("HGAL") interest in the gold
mining operations in Kalgoorlie, Western Australia; and Homestake Canada
Inc.'s ("HCI") interests in the Williams and David Bell mines in Canada)
and in the sulfur and oil recovery operations at Main Pass 299 in the Gulf
of Mexico are reported using pro rata consolidation whereby the Company
reports its proportionate share of assets, liabilities, income and
expenses.
Use of estimates: The preparation of financial statements in conformity
with United States generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the 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.
Cash and equivalents include all highly-liquid investments with a maturity
of three months or less at the date of purchase. The Company minimizes its
credit risk by investing its cash and equivalents with major international
banks and financial institutions located principally in the United States,
Canada and Australia. The Company believes that no concentration of credit
risk exists with respect to investment of its cash and equivalents.
Short-term investments principally consist of highly-liquid United States
and foreign government and corporate securities with original maturities in
excess of three months. The Company classifies all short-term investments
as available-for-sale securities. Unrealized gains and losses on these
investments are recorded as a separate component of shareholders' equity,
except that declines in market value judged to be other than temporary are
recognized in determining net income.
Inventories, which include finished products, ore in process, stockpiled
ore, ore in transit, and supplies, are stated at the lower of cost or net
realizable value. The cost of gold produced by certain United States
operations is determined principally by the last-in, first-out method
("LIFO"). The cost of other inventories is determined primarily by
averaging methods.
Exploration costs are expensed as incurred. All costs related to property
acquisitions are capitalized.
69
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Development costs: Following completion of a favorable feasibility study,
development costs incurred to place new mines into production and to
complete major development projects at operating mines are capitalized.
Ongoing costs to maintain production are expensed as incurred.
Depreciation, depletion and amortization of mining properties, mine
development costs and major plant facilities is computed principally by the
units-of-production method based on estimated proven and probable ore
reserves. Proven and probable ore reserves reflect estimated quantities of
ore which can be recovered economically in the future from known mineral
deposits. Such estimates are based on current and projected costs and
prices. Other equipment and plant facilities are depreciated using
straight-line or accelerated methods principally over estimated useful
lives of three to ten years.
Property evaluations: Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If deemed impaired, an
impairment loss is measured and recorded based on the fair value of the
asset, which generally will be computed using discounted cash flows.
Estimated future net cash flows from each mine are calculated using
estimates of proven and probable ore reserves, estimated future sales
prices (considering historical and current prices, price trends and related
factors), production costs, capital and reclamation costs. (See note 6.)
The Company's estimates of future cash flows are subject to risks and
uncertainties. Therefore, it is possible that changes could occur which may
affect the recoverability of the Company's investments in mineral
properties and other assets.
Undeveloped properties upon which the Company has not performed
sufficient exploration work to determine whether significant mineralization
exists are carried at original acquisition cost. If it is determined that
significant materialization does not exist, the property would be written
down to estimated net realizable value at the time of such determination.
Reclamation and remediation: Reclamation costs and related accrued
liabilities, which are based on the Company's interpretation of current
environmental and regulatory requirements, are accrued and expensed,
principally by the units-of-production method based on estimated proven and
probable ore reserves. Remediation liabilities, including estimated
governmental oversight costs, are expensed upon determination that a
liability has been incurred and where a minimum cost or reasonable estimate
of the cost can be determined. (See note 6.)
The Company provides for all costs of reclamation, including long-term
care and monitoring and maintenance costs. The Company uses undiscounted
current costs in preparing its estimates of future reclamation costs. The
Company regularly updates its estimates of reclamation costs. Amounts to be
received from the United States Federal Government for its 51.2% share of
the cost of future reclamation activities at the Grants, New Mexico uranium
facility are offset against the remaining estimated Grants reclamation
liabilities. Receivables are recorded for the United States Federal
Government's share of reclamation expenditures at the Grants uranium
facility in the period that such expenditures are made.
Based on current environmental regulations and known reclamation
requirements, the Company has included its best estimates of these
obligations in its reclamation accruals. However, the Company's estimates
of its ultimate reclamation liabilities could change as a result of changes
in regulations or cost estimates.
70
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Noncurrent investments include investments in mining securities and assets
held in trust to fund employee benefits.
Investments in mining securities that have readily determinable fair
values and assets held in trust to fund employee benefits are classified as
available-for-sale investments. Unrealized gains and losses on these
investments are recorded as a separate component of shareholders' equity,
except that declines in market value judged to be other than temporary are
recognized in determining net income. Realized gains and losses on these
investments are included in determining net income. (See note 6.)
Product sales are recognized when title passes at the shipment or delivery
point.
Derivative financial instruments: The Company uses derivative financial
instruments as part of an overall risk-management strategy. These
instruments are used as a means of hedging exposure to precious metals
prices and foreign currency exchange rates. The Company does not hold or
issue derivative financial instruments for trading purposes. The Company's
accounting for derivative financial instruments is in accordance with the
concepts established in Statement of Financial Accounting Standards
("SFAS") No. 80, "Accounting for Futures Contracts," SFAS No. 52, "Foreign
Currency Translation," American Institute of Certified Public Accountants
Statement of Positions 86-2, "Accounting for Options," and various Emerging
Issues Task Force ("EITF") pronouncements.
The Company uses forward sales contracts and combinations of put and
call options to hedge its exposure to precious metals prices. The
underlying hedged production is designated at the inception of the hedge.
Deferral accounting is applied only if the derivatives continue to reduce
the price risk associated with the underlying hedged production. Contracted
prices on forward sales contracts and options are recognized in product
sales as the designated production is delivered or sold. In the event of
early settlement of hedge contracts, gains and losses are deferred and
recognized in income at the originally designated delivery date.
The Company uses combinations of put and call options to hedge its
exposure to foreign currency exchange rates. Currently, these options do
not qualify for deferral accounting and, accordingly, are marked to market
at each balance sheet date. Realized and unrealized gains and losses on
these options are recognized in other income.
Income taxes: The Company follows the liability method of accounting for
income taxes whereby deferred income taxes are recognized for the tax
consequences of temporary differences by applying statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of certain assets and liabilities.
Changes in deferred tax assets and liabilities include the impact of any
tax rate changes enacted during the year. Mining taxes represent Canadian
provincial taxes levied on mining operations.
Foreign currency: Substantially all assets and liabilities of foreign
subsidiaries are translated at exchange rates in effect at the end of each
period. Revenues and expenses are translated at the average exchange rate
for the period. Accumulated currency translation adjustments are included
as a separate component of shareholders' equity. Foreign currency
transaction gains and losses are included in the determination of net
income.
Pension plans and other postretirement benefits: Pension costs related to
United States employees are determined using the projected unit credit
actuarial method. Pension plans are funded through annual contributions. In
addition, the Company provides medical and life insurance benefits for
certain retired employees and accrues the cost of such benefits over the
period in which active
71
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
employees become eligible for the benefits. The costs of the postretirement
medical and life insurance benefits are paid at the time such benefits are
provided.
Net income per share is computed by dividing net income by the weighted
average number of common shares outstanding during the year. Basic and
diluted net income per share are the same since the exercise of stock
options and the conversion of the 5.5% convertible subordinated notes would
produce anti-dilutive results.
Preparation of financial statements: Certain amounts for 1996 and 1995 have
been reclassified to conform to the current year's presentation. All dollar
amounts are expressed in United States dollars unless otherwise indicated.
Comprehensive income: In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS 130, "Reporting Comprehensive Income." SFAS 130
establishes standards for the reporting and display of comprehensive
income. The purpose of reporting comprehensive income is to present a
measure of all changes in shareholders' equity that result from recognized
transactions and other economic events of the period, other than
transactions with shareholders in their capacity as shareholders. SFAS 130
will be effective for Homestake's 1998 financial statements. Adoption of
SFAS 130 will result in additional disclosures in Homestake's financial
statements but will not impact the Company's reported net income or net
income per share.
Note 3: Acquisitions and Divestitures
Homestake Gold of Australia Limited: During the fourth quarter of 1995 and
the first quarter of 1996, Homestake acquired the 18.5% of HGAL it did not
already own. The total purchase price was $164.9 million, including $141.7
million for 8.5 million newly issued shares of the Company, $19.5 million
in cash and $3.7 million of transaction expenses. The acquisition of the
HGAL minority interests was accounted for as a purchase.
Snip Mine: On April 30, 1996 Prime purchased Cominco Ltd.'s ("Cominco") 60%
interest in the Snip mine in British Columbia, Canada for $39.3 million in
cash. As a result of this purchase Prime became the sole owner of the Snip
mine.
Agua de la Falda S.A.: In July 1996, Homestake and Corporacion Nacional del
Cobre Chile ("Codelco"), a state-owned mining company in Chile, formed a
new company, Agua de la Falda S.A. ("La Falda") to conduct exploration and
mining activities near Homestake's former El Hueso mine in northern Chile.
Homestake owns 51% of the corporation and Codelco owns 49%. Codelco and
Homestake have contributed property interests in the area to the new
company. In addition, Codelco contributed the existing El Hueso plant,
which had been under lease to Homestake. Homestake also contributed $5.1
million for exploration and development, including $3.7 million of
exploration and development expenditures incurred prior to the formation of
La Falda.
Pinson Mining Company: In December 1996, Homestake increased its interest
in the Pinson Mining Company partnership ("Pinson Partnership") from 26.25%
to 50% and became the operator of the Pinson mine. Barrick Gold Corporation
("Barrick") owns the remaining 50% interest. The purchase price for the
additional 23.75% partnership interest consisted of $4.4 million in cash, a
net smelter royalty on certain future Pinson Partnership production and
assumption of a proportionate increase of the Pinson Partnership's
liabilities, including reclamation.
72
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
George Lake and Back River Joint Ventures: In February 1997, Homestake
sold its interests in the George Lake and Back River joint ventures in
Canada to Kit Resources Corporation ("Kit") for $9.3 million in cash and
3.6 million shares of Kit common stock. As a result of this transaction,
the Company recorded a pretax gain of $13.5 million in the first quarter
of 1997, which was included in other income. The write-downs of noncurrent
investments recorded in the third and fourth quarters of 1997 (see note 6)
includes $5.5 million related to the Company's investment in Kit.
Torres Mining Complex: In 1995, the Company sold its 28% equity interest in
the Torres silver mining complex in Mexico for $6 million. This sale
resulted in a pretax gain of $2.7 million, which was included in other
income.
Note 4: Gain on Termination of Santa Fe Merger
In March 1997, Santa Fe Pacific Gold Corporation terminated its previously
announced merger agreement with Homestake and paid Homestake a $65 million
termination fee. As a result, in 1997 the Company recorded a pretax gain of
$62.9 million ($47.2 million after tax), net of merger related expenses of
$2.1 million incurred in 1997. Other expense for the year ended December
31, 1996 included $3.4 million of expenses related to this proposed merger.
Note 5: Other Income
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------
<S> <C> <C> <C>
Gains on asset disposals $ 16,712 $ 3,836 $ 5,024
Royalty income 2,425 2,888 2,252
Foreign currency contract gains
(losses) (28,453) 1,632 (151)
Foreign currency exchange losses on
intercompany advances (5,657) (8,943) (883)
Pension curtailment gain 1,868
Other 1,753 7,666 7,544
-----------------------------------------------------------
$ (13,220) $ 8,947 $ 13,786
===========================================================
</TABLE>
Note 6: Write-downs and Other Unusual Charges
<TABLE>
<CAPTION>
1997 1996
-------------------------------------
<S> <C> <C>
Write-down of Homestake's investment
in the Main Pass 299 sulfur mine (a) $ 107,761
Reduction in the carrying values of
short-lived mining properties (b) 26,885
Increase in the estimated accrual for
future reclamation expenditures (c) 29,156
Write-downs of noncurrent investments (d) 24,770 $ 8,983
Other (e) 10,230
-------------------------------------
$ 198,802 $ 8,983
=====================================
73
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
<FN>
(a) Homestake owns a 16.7% undivided interest in the Main Pass 299 sulfur
mine located in the Gulf of Mexico. Planned write-downs by Homestake's
joint venture partners caused the Company to reexamine the carrying
value of its investment in Main Pass 299. Due to a prolonged period of
low sulfur prices and Homestake's current assessment of estimated
future cash flows from the Main Pass 299 sulfur mine, in the third
quarter of 1997 the Company recorded a write-down of $107.8 million in
its investment in Main Pass 299. As a result of this write-down, the
Company's carrying value of the Main Pass 299 sulfur property, plant
and equipment was reduced to zero at September 30, 1997.
(b) As a result of lower gold prices, the Company reviewed the carrying
values of its gold mining operations using a $325 per ounce gold price
for its short-lived operations and a $350 per ounce gold price for its
operations with longer lives. The Company determined that impairment
write-downs were required to reduce the carrying value of several of
its assets or operations with short remaining lives, including the
Pinson mine in Nevada, the Homestake mine's Open Cut in South Dakota,
and low-grade stockpiled ore and certain redundant mining equipment at
the Kalgoorlie operations in Western Australia. The Company determined
that no adjustments to the carrying values of its longer-lived
operations were required.
(c) As a result of a review of the Company's reclamation liabilities, the
Company determined that it was necessary to increase the reclamation
accruals at certain of its nonoperating properties including the Santa
Fe mine in Nevada, the Nickel Plate mine in Canada and the Grants
uranium complex in New Mexico to reflect revised estimates, changed
conditions and more stringent future reclamation requirements.
(d) Low gold prices and lower market valuations for junior mining companies
have caused the value of certain of the Company's noncurrent
investments in other companies to decline significantly. The Company
recorded in income the reductions in the carrying values that it deemed
to be other than temporary. (See note 11.)
(e) Other consists primarily of foreign exchange losses on intercompany
redeemable preferred stock and a loss on repayment of an intercompany
gold loan.
</FN>
</TABLE>
74
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Note 7: Income Taxes
The provision for income and mining taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------------
<S> <C> <C> <C>
Current
Income taxes
Federal $ 1,023 $ (1,999) $ 7,375
Canadian 26,048 28,367 1,928
Other (8) 616 115
-------------------------------------------------------------
27,063 26,984 9,418
Canadian mining taxes 9,797 14,964 10,248
-------------------------------------------------------------
Total current taxes 36,860 41,948 19,666
-------------------------------------------------------------
Deferred
Income taxes
Federal (29,203) (3,879) (3,743)
State 2,026 (1,300) 436
Canadian (7,039) (14,588) 25,347
Other foreign (12,035) 1,981 (2,041)
-------------------------------------------------------------
(46,251) (17,786) 19,999
Canadian mining taxes 180 2,171 (524)
-------------------------------------------------------------
Total deferred taxes (46,071) (15,615) 19,475
-------------------------------------------------------------
Total income and mining taxes $ (9,211) $ 26,333 $ 39,141
=============================================================
</TABLE>
The provision for income taxes is based on pretax income (loss) before
minority interests as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C>
United States $ (167,570) $ (14,003) $ 17,607
Canada 50,592 95,548 71,333
Other foreign (50,871) (9,861) (3,474)
--------------------------------------------------------------
$ (167,849) $ 71,684 $ 85,466
==============================================================
</TABLE>
75
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Deferred tax liabilities and assets as of December 31, 1997 and 1996 relate
to the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------------------------------
<S> <C> <C>
Deferred tax liabilities
Depreciation and other resource property differences
United States $ 18,598 $ 64,855
Canada - Federal 29,906 32,395
Canada - Provincial 61,509 69,069
Australia 61,319 74,869
-------------------------------------
171,332 241,188
Other 19,048 15,342
-------------------------------------
Gross deferred tax liabilities 190,380 256,530
-------------------------------------
Deferred tax assets
Tax loss carry-forwards
Canada - Federal 2,001
Australia 7,698 16,680
Chile 23,943 19,929
Other 2,512 162
-------------------------------------
34,153 38,772
Reclamation costs
United States 16,827 6,783
Other 9,685 6,226
-------------------------------------
26,512 13,009
Employee benefit costs 27,816 26,959
Alternative minimum tax credit carry-forwards - 14,215
Land and other resource property 11,337 15,225
Inventory 7,924
Foreign tax credit carry-forwards 5,857 12,725
Unrealized foreign exchange losses 9,157 2,543
Write-downs of noncurrent investments 9,410 2,869
Other 13,394 13,174
-------------------------------------
Gross deferred tax assets 145,560 139,491
Deferred tax asset valuation allowances (89,735) (72,152)
-------------------------------------
Net deferred tax assets 55,825 67,339
-------------------------------------
Net deferred tax liability $ 134,555 $ 189,191
=====================================
Net deferred tax liability consists of
Current deferred tax assets $ (20,894) $ (12,263)
Long-term deferred tax liability 155,449 201,454
-------------------------------------
Net deferred tax liability $ 134,555 $ 189,191
=====================================
</TABLE>
The classification of deferred tax assets and liabilities is based on
the related asset or liability creating the deferred tax. Deferred taxes
not related to a specific asset or liability are classified based on the
estimated period of reversal. The $89.7 million deferred tax valuation
allowance at December 31, 1997 represents the portion of the Company's
consolidated deferred tax assets which, based on projections at December
31, 1997, the Company does not believe that realization is "more likely
than
76
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
not." The deferred tax valuation allowance consists of United States,
Chile, Australia and Canada unrealized deferred tax assets of $56.6
million, $27.1 million, $5.7 million, and $.3 million, respectively. The
increase in the valuation allowance for deferred tax assets of $17.6
million in 1997 is comprised primarily of the following: an increase of
$9.9 million for future alternative minimum tax credits that the Company
projects it will be unable to utilize; an increase of $6.2 million for
potential capital losses for which the Company currently has no tax
strategy to utilize; an increase of $6.3 million for additional unrealized
tax loss carry-forwards in South America; and a decrease of $6.8 million
for a reduction of the Company's foreign tax credit carryover. For income
tax purposes, the Company has United States foreign tax credit
carry-forwards of approximately $5.9 million, which are due to expire at
various times through the year 2003.
The largest portion of the $89.7 million of unrealized deferred tax
assets is comprised of $46.8 million of future United States ($40.8
million), Australia ($5.7 million), and Canada ($.3 million) tax benefits
relating to expenses that the Company projects will not be deductible for
tax return purposes until after the year 2011. In projecting United States
source income beyond this period, the Company currently does not meet the
SFAS 109 "more likely than not" criteria required to recognize the United
States tax benefits. In addition, there currently is not a tax strategy
which would result in the realization of the Australian tax benefit. The
remaining $42.9 million principally is comprised of future Chilean tax
benefits, United States foreign tax credit carry-forwards and future
alternative minimum tax credits that the Company projects it will be unable
to realize.
Major items causing the Company's income tax provision to differ from
the federal statutory rate of 35% were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C>
Income tax (credit) based on statutory rate $(58,748) $ 25,089 $ 29,913
Percentage depletion (900) (7,611) (9,879)
Earnings in foreign jurisdictions
at different rates 559 (1,899) (1,019)
State income taxes,
net of federal benefit 1,219 333 340
Australian investment allowance (125) (2,097)
Unrealized minimum tax credits 21,201 5,645 4,790
Reduction of prior year accruals (24,048)
Other nondeductible losses 16,784 13,340 6,231
Deferred tax assets not recognized in
prior years (2,504) (1,262)
Foreign taxes withheld 465 1,430 1,965
Litigation recovery (2,629)
Other - net 357 2,052 435
------------------------------------------------------
Total income taxes (19,188) 9,198 29,417
Canadian mining taxes 9,977 17,135 9,724
------------------------------------------------------
Total income and mining taxes $ (9,211) $ 26,333 $ 39,141
======================================================
</TABLE>
77
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
The Company's 1996 income tax expense includes a $24 million benefit
relating to a reduction of prior years' income tax accruals for certain
contingencies which were resolved in 1996 and a $2.6 million benefit
relating to the tax portion of litigation recovery proceeds.
Deferred tax assets not recognized in prior years include reversals of
prior year valuation allowances of $2.5 million in 1996 and $1.3 million in
1995.
Note 8: Receivables
<TABLE>
<CAPTION>
December 31,
1997 1996
----------------------------------------
<S> <C> <C>
Trade accounts $ 23,180 $ 24,485
U.S. Government receivable (see note 20) 5,500 5,500
Interest and other 11,686 17,665
----------------------------------------
$ 40,366 $ 47,650
========================================
</TABLE>
Note 9: Inventories
<TABLE>
<CAPTION>
December 31,
1997 1996
----------------------------------------
<S> <C> <C>
Finished products $ 15,546 $ 21,132
Ore and in-process 25,881 39,980
Supplies 27,831 30,015
----------------------------------------
$ 69,258 $ 91,127
========================================
</TABLE>
At December 31, 1997 and 1996, the cost of certain finished gold
inventories in the United States stated on the LIFO cost basis totaled $5.5
million and $2.1 million, respectively. Such inventories would have
approximated $6.2 million and $3.7 million, respectively, if stated at the
lower of market or current year average production costs.
At December 31, 1997 and 1996, ore stockpiles in the amounts of $14.5
million and $10.9 million, respectively, not expected to be processed
within the 12 months following the end of each year are included in other
noncurrent assets (see note 12).
Note 10: Property, Plant and Equipment
<TABLE>
<CAPTION>
December 31,
1997 1996
------------------------------------------
<S> <C> <C>
Mining properties and development costs $ 952,040 $ 1,013,309
Plant and equipment 981,229 932,826
Land and royalty interests 4,325 3,905
Construction and mine development in progress 21,628 20,260
------------------------------------------
1,959,222 1,970,300
Accumulated depreciation, depletion and
amortization (1,147,176) (963,270)
------------------------------------------
$ 812,046 $ 1,007,030
==========================================
</TABLE>
78
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
At September 30, 1997 the Company wrote down the carrying value of its
16.7% undivided interest in the Main Pass 299 sulfur mine and the carrying
values of certain short-lived mining properties (see note 6).
Note 11: Noncurrent Investments
<TABLE>
<CAPTION>
December 31,
1997 1996
----------------------------------------
<S> <C> <C>
Navan Resources plc (note 6) $ 6,685 $ 16,800
Navan Bulgarian Mining BV 12,000
Other investments (note 6) 13,636 22,806
----------------------------------------
$ 32,321 $ 39,606
========================================
</TABLE>
In 1995, Homestake acquired for $24 million a 10% interest in Navan
Resources plc ("Navan"), an Irish public company with diverse mineral
interests in Europe. At December 31, 1996 Homestake reduced the carrying
value of its investment in Navan to the quoted market value. The resulting
charge of $7.2 million was recorded in income. During 1997, Homestake
recorded in income additional write-downs of $10.1 million with respect to
the carrying value of the investment in Navan.
In November 1997, Homestake purchased a 20% interest in Navan Bulgarian
Mining BV ("Navan BV"), a wholly-owned subsidiary of Navan, for $12
million. Navan BV is a Netherlands company, which in turn owns 68% of Bimak
AD, a Bulgarian company that owns and operates the surface facilities at
the Chelopech copper-gold mine near Sofia, Bulgaria. The other 32% of Bimak
is owned by Chelopech EAD ("Chelopech"), a government-owned corporation
that owns and operates the Chelopech mine. Bimak AD provides consulting
services to Chelopech and purchases the ore from the Chelopech mine at cost
plus a 1% gross royalty. Homestake has agreed, under certain circumstances,
to invest an additional $18 million in Navan BV, which would result in
Homestake owning 51% of Navan BV, and give Homestake the right to become
operator of the project. The investment of the additional $18 million is
dependent on certain conditions including Navan BV acquiring at least 80%
of Chelopech, securing the Chelopech mine concession, approval by Homestake
and Navan of an expansion plan for the mine and mill, and receipt of
financial commitments from lenders for additional funding for the expansion
plan.
During November 1997, Homestake acquired a 32% interest in Navan's
Bulgarian exploration projects and program for $4 million. Homestake is
obligated to invest an additional $4 million in the exploration program
during the next three years, which will result in Homestake's owning a 50%
interest in and having the right to become the operator of the exploration
program.
Note 12: Other Assets
<TABLE>
<CAPTION>
December 31,
1997 1996
----------------------------------------
<S> <C> <C>
Assets held in trust (see note 16) $ 38,975 $ 25,252
Restricted cash (see note 14) 15,990
Ore stockpiles (see note 9) 14,508 10,946
U.S. Government receivable (see note 20) 5,362 10,663
Other 9,557 9,263
----------------------------------------
$ 84,392 $ 56,124
========================================
</TABLE>
79
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Note 13: Accrued Liabilities
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------------------------------
<S> <C> <C>
Accrued payroll and other compensation $ 21,848 $ 23,085
Accrued reclamation and closure costs 11,818 10,055
Unrealized loss on foreign currency exchange contracts 20,416
Other 10,704 9,034
-------------------------------------
$ 64,786 $ 42,174
=====================================
</TABLE>
Note 14: Long-term Debt
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------------------------------
<S> <C> <C>
Convertible subordinated notes (due 2000) $ 150,000 $ 150,000
Pollution control bonds
Lawrence County, South Dakota (due 2032) 48,000
Lawrence County, South Dakota (due 2003) 18,000
State of California (due 2004) 17,000 17,000
Borrowings under credit agreement (due 2001) 48,855
-------------------------------------
$ 263,855 $ 185,000
=====================================
</TABLE>
Convertible subordinated notes: The Company's 5.5% convertible subordinated
notes, which mature on June 23, 2000, are convertible into common shares at
a price of $23.06 per common share and are redeemable by the Company in
whole at any time. Interest on the notes is payable semi-annually in June
and December. Issuance costs of $3.9 million were capitalized and are being
amortized over the life of the notes.
Pollution control bonds: In July 1997, Lawrence County, South Dakota issued
$30 million of South Dakota Solid Waste Disposal Revenue Bonds ("Waste
Disposal Bonds") and $18 million of South Dakota Pollution Control
Refunding Revenue Bonds ("Pollution Control Bonds"), both of which are due
in 2032. Proceeds from the Waste Disposal Bonds were lent to the Company
and proceeds from the Pollution Control Bonds were used to redeem
outstanding South Dakota pollution control bonds. The Company is
responsible for funding principal and interest payments on these bonds.
Proceeds from the Waste Disposal Bonds are being used for construction of a
new tailings dam lift and other qualifying expenditures at the Homestake
mine. Qualifying expenditures of $14 million had been incurred through
December 31, 1997. The remaining $16 million, which is held in a trustee
account, is included in "other assets" in the accompanying balance sheet at
December 31, 1997.
The Company pays interest monthly on the pollution control bonds based
on variable short-term, tax-exempt obligation rates. Interest rates at
December 31, 1997 and 1996 were 4.6% and 4.3%, respectively. No principal
payments are required until cancellation, redemption or maturity.
Bondholders have the right to tender the bonds for payment at any time on
seven days notice. The Company has arrangements with underwriters to
remarket any tendered bonds and also with a bank to
80
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
provide liquidity and credit support to the Company and to purchase and
hold for up to 15 months any tendered bonds that the underwriters are
unable to remarket.
Lines of credit: The Company has a United States/Canadian/Australian
cross-border credit facility providing a total availability of $275
million. The Company pays a commitment fee of .15% per annum on the unused
portion of this facility. The credit facility is available through
September 20, 2001 and provides for borrowings in United States, Canadian
or Australian dollars, or gold or a combination of these. The credit
agreement requires a minimum consolidated net worth of $500 million. During
1997 HGAL borrowed A$75 million (equal to US$48.9 million at the December
31, 1997 exchange rate) under the credit agreement primarily for the
repayment of intercompany debt. Interest on these Australian dollar
borrowings are payable quarterly or semiannually, depending on the interest
rate period as determined on each borrowing date, based on the Australian
Bank Bill Swap Rate plus .4%. The interest rate at December 31, 1997 was
5.25%.
In addition, Prime has an $11 million credit facility. No amount has been
borrowed under this credit agreement.
Note 15: Other Long-term Obligations
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------------------------------
<S> <C> <C>
Accrued reclamation and closure costs $ 71,178 $ 45,388
Accrued pension and other postretirement
benefit obligations (see note 16) 60,942 59,273
Other 10,262 9,507
-------------------------------------
$ 142,382 $ 114,168
=====================================
</TABLE>
While the ultimate amount of reclamation and site restoration costs to
be incurred in the future is uncertain, the Company has estimated that the
aggregate amount of these costs for operating properties, plus previously
accrued reclamation and remediation liabilities for nonoperating
properties, will be approximately $160 million. This figure includes
approximately $9 million of reclamation costs at the Grants uranium
facility which will be funded by the United States Federal Government. At
December 31, 1997 the Company had accrued $83 million for estimated
ultimate reclamation and site restoration costs and remediation liabilities
(see notes 13 and 20).
Note 16: Employee Benefit Plans
Pension plans: The Company has pension plans covering substantially all
United States employees. Plans covering salaried and other nonunion
employees provide pension benefits based on years of service and the
employee's highest compensation during any 60 consecutive months prior to
retirement. Plans covering union employees provide defined benefits for
each year of service.
81
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Pension costs for 1997, 1996 and 1995 for Company-sponsored United
States employee plans included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned
during the year $ 4,308 $ 4,519 $ 3,573
Interest cost on projected
benefit obligations 15,958 15,319 14,476
Actual net return on assets (43,955) (34,693) (44,788)
Net amortization 26,523 20,696 32,405
Pension curtailment gain (1,868)
------------------------------------------------------------
$ 2,834 $ 3,973 $ 5,666
============================================================
</TABLE>
Assumptions used in determining net periodic pension cost for 1997,
1996 and 1995 include discount rates of 7%, 7%, and 8%, respectively, an
assumed rate of increase in compensation of 5% for each year and an assumed
long-term rate of return on assets of 8.5% for each year. Assumptions used
in determining the projected benefit obligations at December 31, 1997 and
1996 include discount rates of 7% and an assumed rate of increase in
compensation of 5%.
The funded status and amounts recognized for pension plans in the
consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
Plans Where Plans Where
----------------------------------- ------------------------------------
Accumulated Accumulated
Assets Exceed Benefits Assets Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
----------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value
of benefit obligations
Vested benefits $(165,437) $ (15,122) $(162,100) $ (17,700)
=================================== ====================================
Accumulated benefits $(186,583) $ (20,035) $(180,800) $ (18,900)
=================================== ====================================
Projected benefits $(210,156) $ (27,195) $(202,200) $ (21,000)
Plan assets at fair value (1) 257,147 224,064
----------------------------------- ------------------------------------
Plan assets in excess of (less than)
projected benefit obligation 46,991 (27,195) 21,864 (21,000)
Unrecognized net loss (gain) (45,960) (1,666) (22,467) 51
Unrecognized net transition
obligation (asset) amortized
over 15 years (2,810) 365 (3,364) 547
Unrecognized prior service
cost (benefit) (398) 8,020 141 2,459
Additional minimum liability (251) (957)
----------------------------------- ------------------------------------
Pension liability recognized
in the consolidated balance
sheets $ (2,177) $ (20,727) $ (3,826) $ (18,900)
=================================== ====================================
<FN>
(1) Approximately 99% and 98% of the plan assets were invested in listed stocks
and bonds and the balance was invested in fixed-rate insurance contracts at
December 31, 1997 and 1996, respectively.
</FN>
</TABLE>
82
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Amounts shown under "plans where accumulated benefits exceed assets"
at December 31, 1997 and 1996 consist of liabilities for a nonqualified
supplemental pension plan covering certain employees and a nonqualified
pension plan covering directors of the Company. These plans are unfunded.
The Company has established a grantor trust, consisting of money market
funds, mutual funds and corporate-owned life insurance policies, to provide
funding for the benefits payable under these nonqualified plans and certain
other deferred compensation plans. The grantor trust, which is included in
other assets, amounted to $39.0 million at December 31, 1997 and $25.3
million at December 31, 1996.
Certain of the Company's foreign operations participate in pension
plans. The Company's share of contributions to these plans was $1.5 million
in 1997, $1.4 million in 1996, and $1.1 million in 1995.
Postretirement benefits other than pensions: The Company provides medical
and life insurance benefits for certain retired employees, primarily
retirees of the Homestake mine. Retirees generally are eligible for
benefits upon retirement if they are at least age 55 and have completed
five years of service. Net periodic postretirement benefit costs were $2.6
million in 1997, $3.1 million in 1996 and $3.5 million in 1995.
The actuarial assumptions used in determining net periodic
postretirement benefit costs include discount rates of 7% for 1997 and 1996
and 8% for 1995, initial health care trend rates of 9.5% for 1997, 10% for
1996 and 11.5% for 1995, grading down to an ultimate health care cost trend
rate of 5%. The ultimate trend rate is expected to be achieved by 2006.
Actuarial gains and losses are amortized over five years. The actuarial
assumptions used in determining the Company's accumulated postretirement
benefit obligation at December 31, 1997 and 1996 include a discount rate of
7%. A one percentage-point increase in the assumed health care cost trend
rate would result in an increase of approximately $5.6 million in the
accumulated postretirement benefit obligation at December 31, 1997 and an
increase of approximately $.6 million in net periodic postretirement
benefit costs for 1997.
The following table sets forth amounts recorded in the Company's
consolidated balance sheets at December 31, 1997 and 1996. The Company has
not funded any of its estimated future obligation.
<TABLE>
<CAPTION>
December 31,
1997 1996
--------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation
Retirees $(27,000) $(29,000)
Fully-eligible active plan participants (1,000) (1,000)
Other active plan participants (9,000) (7,000)
--------------------------------------
(37,000) (37,000)
Unrecognized net gain (4,995) (4,364)
Unrecognized prior service cost 557 617
--------------------------------------
Accumulated postretirement benefit obligation
liability recognized in the consolidated
balance sheets $(41,438) $(40,747)
======================================
</TABLE>
83
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Stock option and share rights plan: The Company's 1996 Stock Option and
Share Rights Plan ("1996 Plan") provides for grants of up to 6 million
common shares. At December 31, 1997, stock options and share rights for 1.0
million shares were outstanding under the 1996 Plan and stock options for
2.5 million shares were outstanding under prior plans. The exercise price
of each stock option granted under these plans is equal to the market price
of the Company's stock on the date of grant and an option's maximum term is
ten years. Options usually vest over a four-year period.
A summary of the status of the Company's stock options as of December
31, 1997, 1996 and 1995 and changes during the years ending on those dates
is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------
Number Average Number Average Number Average
of Price Per of Price Per of Price Per
Shares Share Shares Share Shares Share
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1 2,603 2,309 2,301
Granted 794 $15.11 466 $19.19 361 $15.58
Exercised (63) 13.99 (168) 19.71 (206) 13.90
Expired (46) 32.27 (4) 19.38 (147) 16.92
-------- --------- ----------
Balance at December 31 3,288 2,603 2,309
======== ========= ==========
Options exercisable at
December 31 2,041 1,854 1,500
Fair value of options granted
during the year $4.95 $5.84 $5.06
</TABLE>
The fair value of each stock option is estimated on the date of grant
using a Black-Scholes option-pricing model with the following
weighted-average assumptions: an expected life of 1.7, 1.8 and 1.8 years
from the vest date (with incremental vesting over four years) for 1997,
1996 and 1995, respectively, expected volatility of 30.9%, 31.7% and 33.3%
for 1997, 1996 and 1995, respectively, a dividend yield of 1%, 1% and 1.3%
for 1997, 1996 and 1995, respectively, and a risk-free interest rate of
6.6%, 5.4% and 6.9% in 1997, 1996 and 1995, respectively.
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------- ------------------------------------
Range of Weighted-Average Weighted-Average Weighted-Average
Exercise Prices Number Remaining Exercise Price Number Exercise Price
Per Share Outstanding Contractual Life Per Share Exercisable Per Share
- --------------------- --------------- --------------------- ------------------ ---------------- -----------------
<S> <C> <C> <C> <C> <C>
$12.18 to $15.23 1,315 7.2 years $14.19 548 $12.94
15.38 to 19.13 1,392 6.0 years 17.16 956 16.81
19.70 to 39.79 581 3.1 years 27.36 537 27.92
--------------- --------------
3,288 2,041
=============== ==============
</TABLE>
At December 31, 1997, there were .2 million share rights (1996:nil)
outstanding under the 1996 plan. Share rights are converted into common
stock when certain performance measurement or vesting criteria are met.
84
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
An additional 5 million and 6 million shares were available for future
grants at December 31, 1997 and 1996, respectively.
The Company elected to use the pro forma disclosure provisions of SFAS
123, "Accounting for Stock-Based Compensation," and has applied Accounting
Principles Board Opinion 25 and related Interpretations in accounting for
its stock options. Accordingly, no compensation cost has been recognized
for the Company's stock options. The compensation cost for share rights is
being recognized based on the fair value of the Company's stock over the
period that the performance measurement and vesting criteria are estimated
to be met. Had compensation expense for the Company's stock options been
determined based on the fair value of options at the grant dates as
calculated in accordance with SFAS 123, the Company's net income and
earnings per share for the years ended December 31, 1997 and 1996 would
have been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- ------------------------------- -------------------------------
Loss Earnings Earnings
Net Loss Per Share Net Income Per Share Net Income Per Share
------------- ------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
As reported $ (168,879) $ (1.15) $ 30,281 $ 0.21 $ 30,327 $ 0.22
Pro forma (170,830) (1.16) 28,913 0.20 29,773 0.22
</TABLE>
During the initial phase-in period of SFAS 123, disclosures are not
likely to be representative of the pro forma effects on reported net income
for future years, as the disclosures only include the pro forma effects of
options granted on or after January 1, 1995.
Other plans: Substantially all full-time United States employees of the
Company are eligible to participate in the Company's defined contribution
savings plans. The Company's matching contribution was approximately $2.6
million in 1997, $2.2 million in 1996 and $1.6 million in 1995.
Note 17: Fair Value of Financial Instruments
At December 31, 1997 and 1996 the carrying values of the Company's cash and
equivalents and short-term investments, noncurrent investments, long-term
debt and foreign currency options approximated their estimated fair values.
The estimated total liquidation value at December 31, 1997 of the gold
forward sales contracts and the gold put and call option contracts held by
the Company at that date is approximately $80 million. No amounts are
included in the accompanying balance sheet at December 31, 1997 for these
contracts (see note 21).
Note 18: Shareholders' Equity
Other equity includes deductions of $1.4 million and $3.5 million at
December 31, 1997 and 1996, respectively, for loans made to certain former
HCI employees and directors for the purchase of HCI common shares. The
loans are non-interest bearing, are collateralized by a pledge of shares,
and are not required to be paid until the securities purchased are equal to
or greater than the value of the respective loans.
In September 1997, the Company's Board of Directors extended the term
of the Rights Agreement until October 2007 and amended certain terms of
the Rights Agreement. A summary of the amended Rights Agreement is as
follows:
85
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Each share of common stock includes and trades with a right. Rights are
not exercisable currently. Rights will become exercisable on a date
designated by the Board of Directors following the commencement of, or
announcement of an intent to commence, a tender offer by any person, entity
or group for 15% or more of the Company's common stock. When so
exercisable, each right initially entitles the owner to purchase from the
Company one one-hundredth of a share of Series A Participating Preferred
Stock, par value $1 per share, at a price of $75 per share (the "Purchase
Price"). In addition, if any person, entity or group (an "Acquiring
Person") acquires 15% or more of the Company's common stock, each right
(whether or not previously exercisable) thereafter entitles the owner
(other than an Acquiring Person or its affiliates and associates) to
purchase for the Purchase Price the number of one one-hundredth of a share
of Series A Preferred Stock equal to the Purchase Price divided by one-half
of the market price of the Company's common stock. In lieu of the rights
holder exercising such right, the Board of Directors has the option to
issue, in exchange for each right, one-half of the number of shares of
preferred stock (or common stock having a value equal to the Purchase
Price) that would be issuable on exercise of the right. If the Board of
Directors has not exchanged shares for the rights and the Company engages
in a business combination with an Acquiring Person (or affiliate or
associate thereof), the holder of rights will be entitled to purchase for
the Purchase Price (i) common stock of the surviving company or its
publicly held affiliate having a market value equal to twice the Purchase
Price, or (ii) common stock of the surviving company having a book value
equal to twice the Purchase Price if the surviving company and its
affiliates are not publicly held. The numbers of shares and the Purchase
Price are subject to adjustment for stock dividends, stock splits and other
changes in capitalization. The rights expire on October 15, 2007.
Note 19: Additional Cash Flow Information
Cash paid for interest and for income and mining taxes is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C>
Interest, net of amounts capitalized $ 10,848 $ 10,643 $ 11,292
Income and mining taxes 66,227 17,163 22,650
</TABLE>
Certain investing and financing activities of the Company affected its
financial position but did not affect its cash flows. During the 1995
fourth quarter and the 1996 first quarter, the Company issued 2.6 million
common shares and 6 million common shares valued at $42.4 million and $99.3
million, respectively, as part of the purchase consideration in the
acquisition of the HGAL minority interests (see note 3).
Note 20: Contingencies
Environmental Contingencies
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") imposes heavy liabilities on persons who discharge hazardous
substances. The Environmental Protection Agency ("EPA") publishes a
National Priorities List ("NPL") of known or threatened releases of such
substances.
Grants: Homestake's former uranium millsite near Grants, New Mexico is
listed on the NPL. The EPA asserted that leachate from the tailings
contaminated a shallow aquifer used by adjacent residential subdivisions.
Homestake paid the costs of extending the municipal water supply to the
affected homes and continues to operate a water injection and collection
system that has significantly improved the quality of the aquifer. The
Company has decommissioned and disposed of the mills and
86
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
has covered the tailings impoundments at the site. The total future cost
for reclamation, remediation, monitoring and maintaining compliance at the
Grants site is estimated to be $17.5 million.
Title X of the Energy Policy Act of 1992 (the "Act") and subsequent
amendments to the Act authorized appropriations of $335 million to cover
the Federal Government's share of certain costs of reclamation,
decommissioning and remedial action for by-product material (primarily
tailings) generated by certain licensees as an incident of uranium sales to
the Federal Government. Reimbursement is subject to compliance with
regulations of the Department of Energy ("DOE"), which were issued in 1994.
Pursuant to the Act, the DOE is responsible for 51.2% of past and future
costs of reclaiming the Grants site in accordance with Nuclear Regulatory
Commission license requirements. Through December 31, 1997, Homestake had
received $21 million from the DOE and the accompanying balance sheet at
December 31, 1997 includes an additional receivable of $10.9 million (see
notes 8 and 12) for the DOE's share of reclamation expenditures made by
Homestake through 1997. Homestake believes that its share of the estimated
remaining cost of reclaiming the Grants facility is fully provided in the
financial statements at December 31, 1997.
In 1983, the state of New Mexico made a claim against Homestake for
unspecified natural resource damages resulting from the Grants tailings.
New Mexico has taken no action to enforce its claim.
Whitewood Creek: Whitewood Creek was a site where mining companies
operating in the Black Hills of South Dakota, including Homestake, placed
mine tailings (ground rock) beginning in the nineteenth century. Some
tailings placed in Whitewood Creek eventually flowed into the Belle Fourche
River, the Cheyenne River and Lake Oahe. Placement of mine tailings into
Whitewood Creek was authorized by the laws of the United States, the Dakota
territory and the State of South Dakota, and Whitewood Creek was later
specifically designated by the State of South Dakota as a disposal stream
for mine tailings and for the disposal of raw sewage and other municipal
waste. In response to changes in legal requirements, Homestake ceased the
placement of mine tailings into Whitewood Creek and for many years the
Homestake mine has impounded all mine tailings that are not redeposited in
the mine.
Deposits of tailings along an 18-mile stretch of Whitewood Creek
formerly constituted a site on the NPL. The EPA asserted that discharges of
tailings by mining companies, including Homestake, contaminated the soil
and streambed. Homestake signed a Consent Decree with the EPA and carried
out remedial work. The site was deleted from the NPL on August 13, 1996. In
the deletion notice, the EPA stated that "EPA, in consultation with the
State of South Dakota, have determined that the Site poses no significant
threat to public health or the environment."
In September, 1997 the State of South Dakota filed an action against
Homestake, alleging that Homestake's disposal of mine tailings in Whitewood
Creek resulted in injuries to natural resources in Whitewood Creek, the
Belle Fourche River, the Cheyenne River and Lake Oahe (collectively the
"NRD Site"). The complaint also alleges that the tailings constitute a
continuing public nuisance. The complaint asks for abatement of the
nuisance, response costs, damages in an unspecified amounts, litigation
costs and interest. In November 1997, the United States government and the
Cheyenne River Sioux Tribe (the "federal trustees") filed a similar action
alleging injuries to natural resource and seeking response costs, damages
in unspecified amounts, litigation costs and attorneys fees.
In its answers, Homestake denies that there has been any continuing
damage to natural resources or nuisance as a result of the placement of
tailings in Whitewood Creek. Among other defenses, it is
87
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
also the position of Homestake that as a result of the State of South
Dakota's ownership of Whitewood Creek and state and federal designation of
Whitewood Creek as an authorized disposal site, the State of South Dakota
and the federal government are responsible for all past and future damages.
Homestake has also counterclaimed against the State of South Dakota and the
federal trustees seeking cost recoupment, contribution and indemnity.
Homestake intends to vigorously defend this action and to seek
recovery, contribution and indemnity from the State of South Dakota and the
federal trustees for past and future expenditures. Homestake also expects
to seek recovery, contribution and indemnity from other government entities
and other persons who participated in ownership and/or operation of
Whitewood Creek as a waste disposal site or who disposed of waste in the
NRD Site.
In the opinion of Homestake, there is no basis for the claims by the
State of South Dakota or by the federal trustees. Homestake is also of the
opinion that Homestake has valid defenses and counterclaims against the
State of South Dakota and the federal trustees, and cross-claims for
recovery, contribution and indemnity against other government entities and
other persons who participated in ownership and/or operation of Whitewood
Creek as a waste disposal site or who disposed of waste in the NRD Site.
Homestake does not believe that resolution of these matters will have a
material effect on the business or financial condition or results of
operations of Homestake.
Other Contingencies
In addition to the above, the Company is party to legal actions and
administrative proceedings and is subject to claims arising in the ordinary
course of business. The Company believes the disposition of these matters
will not have a material adverse effect on its financial position or
results of operations.
Note 21: Foreign Currency, Gold and Other Commitments
Under the Company's foreign currency protection program, the Company has
entered into a series of foreign currency option contracts which
established trading ranges within which the United States dollar may be
exchanged for foreign currencies by setting minimum and maximum exchange
rates. Net unrealized gains (losses) on contracts outstanding at December
31, 1997 and 1996 were $(20.4) million and $.3 million, respectively. Other
income for the years ended December 31, 1997, 1996 and 1995 included income
(losses) of $(28.5) million, $1.6 million, and $(.2) million, respectively,
related to the foreign currency protection program. At December 31, 1997
the Company had foreign currency contracts outstanding as follows:
<TABLE>
<CAPTION>
Weighted-Average Exchange
Amount Covered Rates to U.S. Dollars Expiration
Currency (U.S. Dollars) Put Options Call Options Dates
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Canadian $196,040 0.72 0.76 1998
Canadian 67,440 0.71 0.74 1999
Canadian 50,770 0.70 0.73 2000
Australian 104,750 0.74 0.77 1998
Australian 61,600 0.68 0.72 1999
Australian 3,000 0.65 0.68 2000
--------------
$483,600
==============
</TABLE>
88
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
In addition to amounts related to the foreign currency option
contracts, the Company recorded mark-to-market foreign currency losses on
intercompany debt of $5.7 million in 1997, $8.9 million in 1996, and $.9
million in 1995 which were included in other income. These foreign currency
exchange losses are related to the Company's Canadian and Australian dollar
denominated advances to HCI and HGAL.
In 1996, the Company entered into forward sales commitments for 680,100
ounces expected to be produced from the McLaughlin mine stockpiles from
1997 through 2003. In addition, during the second quarter of 1997 the
Company entered into forward sales commitments for 20,000 ounces of gold to
be produced in 2001 and 2002. Gold sales for 1997 include 120,100 ounces at
an average price of $385 per ounce. Gold sales for 1996 and 1995 included
70,000 ounces and 88,800 ounces sold under the now-completed Nickel Plate
mine program at an average price of $421 per ounce and $398 per ounce,
respectively.
At December 31, 1997 the Company's forward sales commitments were as
follows:
<TABLE>
<CAPTION>
Average Price of
Forward Sales Forward Sales
Year (ounces) (per ounce)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
1998 120,000 $399
1999 109,900 415
2000 85,100 430
2001 95,000 441
2002 95,000 457
2003 75,000 481
--------------
580,000
==============
</TABLE>
To provide protection against a decrease in gold prices, during the
third quarter of 1997 the Company entered into a series of put and call
option contracts which provide a floor price of $325 per ounce for 900,000
ounces of Homestake's 1998 gold production. The Company purchased put
options for 900,000 ounces of gold exercisable during 1998 at a price of
$325 per ounce. The Company also sold call options for 900,000 ounces of
gold exercisable during 1998 at a price of $325 per ounce and purchased
call options for 900,000 ounces of gold exercisable during 1998 at $336 per
ounce. These option contracts were established at no net cost to the
Company.
The Company also purchased put options for 30,000 ounces of gold
exercisable during 2000 at a price of $350 per ounce and sold call options
for 15,000 ounces of gold exercisable during 2000 at an average price of
$395 per ounce.
The Company does not require or place collateral for its foreign
currency and gold hedging derivatives. However, the Company minimizes its
credit risk by dealing with only major international banks and financial
institutions.
The Company has entered into various commitments during the ordinary
course of its business, which include commitments to perform assessment
work and other obligations necessary to maintain or protect its interests
in mining properties, financing and other obligations to joint ventures and
89
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
partners under venture and partnership agreements, and commitments under
federal and state environmental health and safety permits.
Note 22: Geographic and Segment Information
The Company primarily is engaged in gold mining and related activities.
Interests in joint ventures are included in segment operations and
identifiable assets. Operating earnings, which are defined as operating
revenues less operating costs and exploration expenses, exclude corporate
income and expenses, and income and mining taxes. Identifiable assets
represent those assets used in a segment's operations. Corporate assets are
principally cash and equivalents, short-term investments and assets related
to operations not significant enough to require classification as a
business segment.
90
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C>
Revenues
United States (1,2) $ 330,698 $ 310,881 $ 349,461
Canada (3) 261,167 304,530 264,548
Australia 120,787 147,241 120,898
Latin America 11,182 4,284 11,458
-------------------------------------------------------
$ 723,834 $ 766,936 $ 746,365
=======================================================
Exploration Expense
United States $ 13,902 $ 11,861 $ 12,750
Canada 8,406 9,751 2,797
Australia 8,750 7,863 4,745
Latin America and other 17,307 15,907 7,249
-------------------------------------------------------
$ 48,365 $ 45,382 $ 27,541
=======================================================
Operating Earnings (Loss)
United States (4) (144,105) $ 23,124 $ 32,623
Canada (3) 82,186 103,640 86,662
Australia (5) (10,473) 1,914 4,516
Latin America and other (16,523) (14,606) (6,544)
-------------------------------------------------------
$ (88,915) $ 114,072 $ 117,257
=======================================================
Identifiable Assets as of December 31
United States $ 507,845 $ 522,565 $ 618,267
Canada 427,388 494,083 432,087
Australia 353,885 451,973 264,238
Latin America and other 15,611 13,487 7,041
-------------------------------------------------------
$1,304,729 $1,482,108 $1,321,633
=======================================================
<FN>
(1) Includes a gain of $62.9 million in 1997 on the fee received upon
termination of Homestake's merger agreement with Santa Fe Pacific Gold
Corporation.
(2) Includes foreign currency exchange losses of $5.7 million in 1997 and
$8.9 million in 1996 related to the Company's Canadian and Australian
dollar denominated advances to HCI and HGAL.
(3) Includes a gain of $13.5 million in 1997 on the sale of the George
Lake and Back River joint venture interests in the Northwest
Territories of Canada.
(4) Includes write-downs in 1997 of $107.8 million on Homestake's
investment in the Main Pass 299 sulfur mine and $20.8 million in the
carrying values of short-lived mining properties.
(5) Includes write-downs in 1997 of $6.1 million in the carrying values of
short-lived mining properties.
</FN>
</TABLE>
91
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
SEGMENT INFORMATION
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C>
Revenues
Gold $ 633,093 $ 713,774 $ 677,377
Sulfur and oil 26,821 30,749 40,620
Interest and other (1,2,3) 63,920 22,413 28,368
---------------------------------------------------------
$ 723,834 $ 766,936 $ 746,365
=========================================================
Operating Earnings (Loss)
Gold (3,4) $ 22,472 $ 112,800 $ 111,564
Sulfur and oil (5) (111,387) 1,272 5,693
---------------------------------------------------------
Operating earnings (loss) (88,915) 114,072 117,257
Net corporate expense (2,6,7) (78,934) (42,388) (31,791)
---------------------------------------------------------
Income (Loss) Before Taxes and Minority Interests $ (167,849) $ 71,684 $ 85,466
=========================================================
Depreciation, Depletion and Amortization
Gold $ 106,328 $ 105,020 $ 90,237
Sulfur and oil 5,013 6,302 8,055
Corporate 1,015 1,031 1,310
---------------------------------------------------------
$ 112,356 $ 112,353 $ 99,602
=========================================================
Exploration Expense
Gold $ 48,365 $ 45,382 $ 27,541
=========================================================
Additions to Property, Plant and Equipment
Gold (8) $ 129,621 $ 262,235 $ 147,549
Sulfur and oil 1,181 1,541 1,604
Corporate 672 440 483
---------------------------------------------------------
$ 131,474 $ 264,216 $ 149,636
=========================================================
Identifiable Assets as of December 31
Gold $ 976,590 $1,038,156 $ 870,512
Sulfur and oil 15,181 126,499 134,990
Corporate:
Cash and equivalents and short-term
investments 235,946 219,757 212,373
Other 77,012 97,696 103,758
---------------------------------------------------------
$1,304,729 $1,482,108 $1,321,633
=========================================================
<FN>
(1) Includes a gain of $62.9 million in 1997 on the fee received upon
termination of Homestake's merger agreement with Santa Fe Pacific Gold
Corporation.
(2) Includes foreign currency exchange losses of $5.7 million in 1997 and
$8.9 million in 1996 related to the Company's Canadian and Australian
dollar denominated advances to HCI and HGAL.
(3) Includes a gain of $13.5 million in 1997 on the sale of the George
Lake and Back River joint venture interests in the Northwest
Territories of Canada.
92
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
(4) Includes write-downs in 1997 of $26.9 million in the carrying values
of short-lived mining properties.
(5) Includes a write-down in 1997 of $107.8 million on Homestake's
investment in the Main Pass 299 sulfur mine.
(6) Includes, in 1997, write-downs of $24.8 million in the carrying value
of investments in mining company securities, an increase of $29.1
million in the accrual for estimated future reclamation expenditures,
and $10.2 million in other charges, primarily foreign exchange losses
on intercompany redeemable preferred stock and losses on an
intercompany gold loan.
(7) Includes write-downs in 1996 of $9 million in the carrying value of
investments in mining company securities.
(8) Includes additions to property, plant and equipment of $35.6 million
in 1996 related to the purchase of Cominco's 60% interest in the Snip
mine and additions of $122.6 million and $68.7 million in 1996 and
1995, respectively, related to the acquisition of the 18.5% of HGAL
the Company did not already own (including deferred tax purchase
adjustments of $32.5 million and $18.2 million, respectively).
</FN>
</TABLE>
In June 1997, the FASB issued SFAS 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS 131 specifies revised
guidelines for determining an entity's operating segments and the type and
level of financial information to be disclosed. SFAS 131 is effective for
fiscal years beginning after December 15, 1997. Adoption of SFAS 131 will
not have a material impact on Homestake's current geographic and segment
disclosures.
Sales to individual customers exceeding 10% of the Company's
consolidated revenues were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C>
Customer A $ 143,000 $ 117,000 $ 102,000
B 100,000 129,000 92,000
C 80,000
D 77,000
E 77,000
F 101,000
G 91,000
</TABLE>
Because of the active worldwide market for gold, Homestake believes
that the loss of any of these customers would not have a material adverse
impact on the Company.
Note 23: Plutonic Resources Limited
On December 21, 1997, Homestake announced it had entered into an
agreement to acquire Plutonic Resources Limited ("Plutonic"), an Australian
gold producer, by an exchange of common stock for common stock. Homestake
expects to issue approximately 64.4 million shares to acquire Plutonic
(0.34 of a Homestake common share for each fully-paid Plutonic ordinary
share).
The transaction, which has been approved unanimously by the Boards of
both companies, is expected to close in May 1998. The transaction is
subject to approval by shareholders of both companies, qualification as a
pooling of interests for accounting purposes, and certain other
conditions.
93
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Shareholders and
Board of Directors of
Homestake Mining Company:
We have audited the consolidated balance sheets of Homestake Mining Company and
Subsidiaries as of December 31, 1997 and 1996, and the related statements of
consolidated operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Homestake Mining
Company and Subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
- ---------------------------
Coopers & Lybrand L.L.P.
San Francisco, California
February 9, 1998
94
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements of Homestake Mining Company
and Subsidiaries are prepared by the Company's management in conformity with
generally accepted accounting principles. Management is responsible for the
fairness of the financial statements, which include estimates based on
judgments.
The Company maintains accounting and other control systems which management
believes provide reasonable assurance that financial records are reliable for
the purposes of preparing financial statements and that assets are properly
safeguarded and accounted for. Underlying the concept of reasonable assurance is
the premise that the cost of controls should not be disproportionate to the
benefits expected to be derived from such controls. The Company's internal
control structure is reviewed by its internal auditors and to the extent
necessary by the external auditors in connection with their independent audit of
the Company's consolidated financial statements.
The external auditors conduct an independent audit of the consolidated
financial statements in accordance with generally accepted auditing standards in
order to express their opinion on these financial statements. These standards
require that the external auditors plan and perform the audit to obtain
reasonable assurance that the financial statements are free of material
misstatement.
The Audit Committee of the Board of Directors, composed entirely of outside
directors, meets periodically with management, internal auditors and the
external auditors to discuss the annual audit, internal control, internal
auditing and financial reporting matters. The external auditors and the internal
auditors have direct access to the Audit Committee.
/s/Jack E. Thompson
- --------------------
Jack E. Thompson
President and Chief Executive Officer
/s/Gene G. Elam
- --------------------
Gene G. Elam February 9, 1998
Vice President, Finance and
Chief Financial Officer
95
<PAGE>
Quarterly Selected Data
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997:
Revenues $250,187 $168,659 $158,224 $ 146,764 $ 723,834
Net income (loss) 49,860 (1) (16,222) (163,682)(2) (38,835) (3) (168,879)(1,2,3)
Per common share:
Net income (loss) $ 0.34 (1) $ (0.11) $ (1.12)(2) $ (0.26) (3) $ (1.15)(1,2,3)
Dividends paid 0.05 0.05 - 0.05 0.15
1996:
Revenues $202,808 $201,492 $183,683 $ 178,953 $ 766,936
Net income 13,653 (4) 6,776 7,427 (5) 2,425 (5,6,7) 30,281 (4,5,6,7)
Per common share:
Net income $ 0.09 (4) $ 0.05 $ 0.05 (5) $ 0.02 (5,6,7) $ 0.21 (4,5,6,7)
Dividends paid 0.05 0.05 0.05 0.05 0.20
<FN>
(1) Includes a gain of $47.2 million ($62.9 million pretax) or $0.32 per
share, on the fee received upon termination of Homestake's merger
agreement with Santa Fe Pacific Gold Corporation and a gain of $8.1
million ($13.5 million pretax) or $0.06 per share on the sale of the
George Lake and Back River joint venture interests in the Northwest
Territories of Canada.
(2) Includes write-downs and unusual charges of $145.1 million ($183.6 million
pretax) or $0.99 per share, including (i) a write-down of $84.9 million
($107.8 million pretax) of Homestake's investment in the Main Pass 299
sulfur mine, (ii) a reduction of $18.2 million ($24.3 million pretax) in
the carrying value of short-lived mining properties, (iii) an increase of
$21.5 million ($29.1 million pretax) in the estimated accrual for future
reclamation expenditures, (iv) write-downs of $14.7 million ($16.5 million
pretax) of certain mining investments, and (v) other charges of $5.8
million ($5.9 million pretax) primarily related to foreign exchange losses
on intercompany redeemable preferred stock.
(3) Includes write-downs and unusual charges of $13.6 million ($15.2 million
pretax) or $0.09 per share including, (i) a reduction of $2.1 million
($2.6 million pretax) in the carrying value of short-lived mining
properties, (ii) write-downs of $8.2 million ($8.3 million pretax) of
certain mining investments, and (iii) other charges of $3.3 million ($4.3
million pretax) primarily losses on an intercompany gold loan.
(4) Includes income of $4.9 million ($5.5 million pretax) or $0.03 per share
from a litigation recovery.
(5) Includes $2.7 million or $0.02 per share and $21.3 million or $0.14 per
share in the third and fourth quarters, respectively, for reductions in
the Company's accrual for prior year income taxes.
(6) Includes foreign currency exchange losses on intercompany advances of $7.2
million ($8.7 million pretax) or $0.05 per share and $7.4 million ($8.9
million pretax) or $0.05 per share in the 1996 fourth quarter and
year-to-date periods, respectively, primarily related to the Company's
Canadian-dollar denominated advances to HCI.
(7) Includes write-downs of $8.3 million ($9 million pretax) or $0.06 per
share in the carrying value of investments in mining company securities.
</FN>
</TABLE>
96
<PAGE>
Common Stock Price Range
(Prices as quoted on the New York Stock Exchange)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997: High $16.63 $15.25 $15.38 $15.56 $16.63
Low 13.13 12.75 12.31 8.31 8.31
1996: High $20.63 $20.88 $18.00 $16.63 $20.88
Low 15.75 16.88 14.25 13.63 13.63
</TABLE>
97
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEMS 10, 11, 12 AND 13
In accordance with General Instruction G(3), Items 10, 11, 12 and 13
(with the exception of certain information pertaining to executive officers,
which is included in Part I hereof) have been omitted from this report as that
information will be provided by amendment.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORMS 8-K
(a) 1. Financial Statements:
Refer to Part II, Item 8.
2. Financial Statement Schedules:
Schedules for the years ended December 31, 1997, 1996, and
1995 -
II Valuation and Qualifying Accounts
Report of Independent Auditors
Schedules not listed are omitted because they are not required
or because the required information is included elsewhere in
this report.
3. Exhibits
3.1 Restated Certificate of Incorporation of Homestake Mining
Company (incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement No. 33-48526 on Form S-4
filed on June 10, 1992 (the "1992 S-4 Registration
Statement")).
3.2 Amendment to Restated Certificate of Incorporation of
Homestake Mining Company dated June 3, 1991 (incorporated by
reference to Exhibit 3.2 to the 1992 S-4 Registration
Statement).
3.3 Certificate of Correction of the Restated Certificate of
Incorporation of Homestake Mining Company dated February 10,
1992 (incorporated by reference to Exhibit 3.3 to the 1992 S-4
Registration Statement).
3.4 Bylaws (as amended through January 30, 1998) of Homestake
Mining Company (incorporated by reference to Exhibit 3.5 to
the Registrant's Report on Form 8-K dated February 9, 1998).
98
<PAGE>
3.5 Rights Agreement dated October 16, 1987 (incorporated by
reference to Exhibit 1 to the Registrant's Registration
Statement on Form 8-A dated October 16, 1987).
3.6 Amendment No. 1 dated as of October 15, 1997 to the Rights
Agreement dated as of October 16, 1987 (incorporated by
reference to Exhibit 4 to the Registrant's Form 8-A/A filed
on October 16, 1997).
3.7 Certificate of Designation of Series A Participating
Cumulative Preferred Stock of Homestake Mining Company
(incorporated by reference to Exhibit 2 to the Registrant's
Registration Statement on Form 8-A dated October 16, 1987).
3.8 Amendment to Certificate of Designation of Series A
Participating Cumulative Preferred Stock of Homestake Mining
Company (incorporated by reference to Exhibit 3.6 to the
Registrant's Report on Form 8-K dated November 20, 1996).
4.1 Indenture dated as of January 23, 1993 between Homestake
Mining Company, Issuer and The Chase Manhattan Bank, N.A.,
Trustee, with respect to U.S. $150,000,000 principal amount of
5 1/2% Convertible Subordinated Notes due January 23, 2000
(incorporated by reference to Exhibit 4.2 to the Registrant's
Form 8-K Report dated as of June 23, 1993).
10.1 Credit Agreement dated as of September 20, 1996 between the
Registrant, the Lenders, The Chase Manhattan Bank of Canada as
Canadian Administrative Agent for Lenders, Chase Securities
Australia Limited, ACN 002 888 011, as Australian
Administrative Agent for Lenders, Chase Securities Inc., as
Arranger, The Chase Manhattan Bank, as Administrative Agent
for Lenders, and Canadian Imperial Bank of Commerce, as
Documentation Agent for Lenders (incorporated by reference to
Exhibit 10.1 to the Registrant's Form 8-K dated as of
September 20, 1996).
10.2 First Amendment and Waiver to Credit Agreement dated as of
April 3, 1997 among the Registrant, the Lenders, Canadian
Imperial Bank of Commerce, as Documentation Agent, The Chase
Manhattan Bank of Canada as Canadian Administrative Agent,
Chase Securities Australia Limited, as Australian
Administrative Agent, Chase Securities Inc., as Arranger, and
The Chase Manhattan Bank , as Administrative Agent
(incorporated by reference to Exhibit 10.1 to the Registrant's
Form 8-K dated June 18, 1997).
10.3 Second Amendment, dated as of July 18, 1997, to Credit
Agreement among the Registrant, the Lenders, Canadian
Imperial Bank of Commerce, as Documentation Agent, The Chase
Manhattan Bank of Canada as Canadian Administrative Agent,
Chase Securities Australia Limited, as Australian
Administrative Agent, Chase Securities Inc., as Arranger,
and The Chase Manhattan Bank, as Administrative Agent
(incorporated by reference to Exhibit 10.2 to the
Registrant's Form 8-K dated August 27, 1997).
10.4 Third Amendment, dated as of July 29, 1997, to Credit
Agreement among the Registrant, the Lenders, Canadian
Imperial Bank of Commerce, as Documentation Agent, The Chase
Manhattan Bank of Canada as Canadian Administrative Agent,
Chase Securities Australia Limited, as Australian
Administrative Agent, Chase Securities Inc., as Arranger,
and The Chase Manhattan Bank, as Administrative Agent
(incorporated by reference to Exhibit 10.3 to the
Registrant's Form 8-K dated August 27, 1997).
10.5 Agreement dated July 4, 1995 between Noranda Exploration
Company Limited, Teck Corporation and International Corona
Resources Limited (a subsidiary of International Corona
Corporation, now Homestake Canada Inc. and a subsidiary of
Registrant), relating to development of the Quarter Claim mine
(incorporated by reference to Exhibit 10.1 to the Registrant's
Form 10-K Report for the year ended December 31, 1995).
* 10.6 Form of Change of Control Severance Plan of Registrant
(incorporated by reference to Exhibit 10.2 to the Registrant's
Form 10-K Report for the year ended December 31, 1995).
99
<PAGE>
* 10.7 Deferred Compensation Plan of Homestake Mining Company
effective October 1, 1995 (incorporated by reference to
Exhibit 10.3 to the Registrant's Form 10-K Report for the year
ended December 31, 1995).
* 10.8 Amended and Restated Executive Supplemental Retirement
Plan of Homestake Mining Company effective August 1, 1995
(incorporated by reference to Exhibit 10.4 to the Registrant's
Form 10-K Report for the year ended December 31, 1995).
* 10.9 Supplemental Retirement Plan of Homestake Mining Company,
amended and restated effective as of January 1, 1990
(including November 29, 1990 modification) (incorporated by
reference to Exhibit 10.5 to the Registrant's Form 10-K Report
for the year ended December 31, 1995).
* 10.10 Master Trust under the Homestake Mining Company Deferred
Compensation Plans as of December 5, 1995 (incorporated by
reference to Exhibit 10.6 to the Registrant's Form 10-K Report
for the year ended December 31, 1995).
* 10.11 Retirement plan for outside directors of the Registrant
dated as of July 21, 1994 (incorporated by reference to
Exhibit 10.2 to the Registrant's Form 8-K dated March 20,
1995).
10.12 Combination Implementation Agreement dated December 22, 1997
between Homestake Mining Company and Plutonic Resources
Limited (incorporated by reference to Appendix A to the
Registrant's Preliminary Proxy Statement dated January 26,
1998 and as amended March 11, 1998).
10.13 Agreement dated October 9, 1991 between the Registrant and
Chevron Minerals Ltd. (incorporated by reference to Exhibit
10(b) to the Registrant's Form 10-K for the year ended
December 31, 1991).
10.14 Guarantee dated December 18, 1991 between the Registrant and
Chevron Minerals Ltd. (incorporated by reference to Exhibit
10(c) to the Registrant's Form 10-K for the year ended
December 31, 1991).
10.15 Agreement dated May 4, 1990 for the sale of the Registrant's
42.5% partnership interest in The Doe Run Company
(incorporated by reference to Exhibit 28(a) to the
Registrant's Form 8-K dated May 18, 1990).
10.16 Purchase and sale agreement dated January 15, 1989 between the
Registrant's subsidiary, Homestake Gold of Australia Limited,
and North Kalgoorlie Mines Limited (and Group Companies) and
Kalgoorlie Lake View Pty. Ltd. (incorporated by reference to
Exhibit 10(g) to the Registrant's Form 10-K for the year ended
December 31, 1989).
10.17 Agreement Amending Joint Venture Agreement made 19 June 1996
between Homestake Gold of Australia Limited, North Kalgoorlie
Mines Pty Ltd. and Kalgoorlie Consolidated Gold Mines Pty Ltd.
(incorporated by reference to Exhibit 10.14 to the
Registrant's Form 10-K for the year ended December 31, 1996).
10.18 Joint Operating Agreement dated May 1, 1988 between
Freeport-McMoRan Resources Partners, IMC Fertilizer, Inc. and
Felmont Oil Corporation (a subsidiary of Registrant, now named
Homestake Sulphur Company) relating to the Main Pass Block 299
sulfur project (incorporated by reference to Exhibit 10.16 to
the Registrant's Form 10-K for the year ended December 31,
1992).
10.19 Amendment No. 1 dated July 1, 1993 to Joint Operating
Agreement between Freeport McMoRan Resources Partners, IMC
Fertilizer, Inc. and Homestake Sulphur Company (incorporated
by reference to Exhibit 10.8 to the Registrant's Form 10-K for
the year ended December 31, 1993).
10.20 Amendment No. 2 dated November 30, 1993 to Joint Operating
Agreement between Freeport McMoRan Resources Partners, IMC
Fertilizer, Inc. and Homestake Sulphur
100
<PAGE>
Company (incorporated by reference to Exhibit 10.9 to the
Registrant's Form 10-K for the year ended December 31, 1993).
10.21 Letter dated June 17, 1996, amending Amendment No. 1 to Joint
Operating Agreement between Freeport McMoran Resource
Partners, IMC Fertilizer Inc. and Homestake Sulphur Company
(incorporated by reference to Exhibit 10.18 to the
Registrant's Form 10-K for the year ended December 31, 1996).
10.22 Amended and Restated Project Agreement (David Bell Mine) dated
as of April 1, 1986 among Teck Corporation, International
Corona Resources Ltd. (a subsidiary of International Corona
Corporation, now Homestake Canada Inc. and a subsidiary of
Registrant), Teck-Hemlo Inc., Corona-Hemlo Inc. (a subsidiary
of International Corona Corporation, now Homestake Canada Inc.
and a subsidiary of Registrant) (incorporated by reference to
Exhibit 10.17 to the Registrant's Form 10-K for the year ended
December 31, 1992).
10.23 Amended and Restated Operating Agreement (David Bell Mine)
among Teck Corporation, International Corona Resources Ltd. (a
subsidiary of International Corona Corporation, now Homestake
Canada Inc. and a subsidiary of Registrant), Teck Mining Group
Limited, Teck-Corona Operating Corporation, Teck-Hemlo Inc.
and Corona-Hemlo Inc. (a subsidiary of International Corona
Corporation, now Homestake Canada Inc. and a subsidiary of
Registrant) (incorporated by reference to Exhibit 10.18 to the
Registrant's Form 10-K for the year ended December 31, 1992).
10.24 Project Agreement (Williams Mine) dated August 11, 1989 among
Teck Corporation, Corona Corporation (now Homestake Canada
Inc. and a subsidiary of Registrant) and Williams Operating
Corporation (incorporated by reference to Exhibit 10.19 to the
Registrant's Form 10-K for the year ended December 31, 1992).
10.25 Operating Agreement (Williams Mine) dated August 11, 1989
among Teck Corporation, Corona Corporation (now Homestake
Canada Inc. and a subsidiary of Registrant), Teck Mining Group
Limited and Williams Operating Corporation (incorporated by
reference to Exhibit 10.20 to the Registrant's Form 10-K for
the year ended December 31, 1992).
10.26 Shareholders' Agreement dated August 11, 1989 among Corona
Corporation (now Homestake Canada Inc. and a subsidiary of
Registrant), Teck Corporation and Williams Operating
Corporation (incorporated by reference to Exhibit 10.21 to the
Registrant's Form 10-K for the year ended December 31, 1992).
* 10.27 Share Incentive Plan effective July 1, 1988 of International
Corona Corporation (now Homestake Canada Inc. and subsidiary
of Registrant), as amended October 22, 1991 (incorporated by
reference to Exhibit 10.32 to the Registrant's Form 10-K for
the year ended December 31, 1992).
10.28 Shareholder Agreement dated January 1, 1989 among Homestake
Mining Company, Case, Pomeroy & Company, Inc. and Hadley Case
(incorporated by reference to Exhibit 10(a) to the
Registrant's Form 10-K for the year ended December 31, 1988).
10.29 Amendment dated March 27, 1992 to Shareholder Agreement dated
January 1, 1989 among Homestake Mining Company, Case, Pomeroy
& Company, Inc., and Hadley Case (incorporated by reference to
Exhibit 10.14 to the 1992 S-4 Registration Statement).
* 10.30 Consulting agreement dated July 24, 1992, between Stuart
T. Peeler and the Registrant (incorporated by reference to
Exhibit 10.36 to the Registrant's Form 10-K for the year ended
December 31, 1992).
* 10.31 Consulting agreement dated March 1, 1993 between William A.
Humphrey and the Registrant (incorporated by reference to
Exhibit 10.27 to the Registrant's Form 10-K for the year ended
December 31, 1993).
101
<PAGE>
* 10.32 Consulting agreement dated as of May 15, 1996 between Harry M.
Conger and the Registrant (incorporated by reference to
Exhibit 10.30 to the Registrant's Form 10-K for the year ended
December 31, 1996).
* 10.33 Long Term Incentive Plan of 1983 of Homestake Mining Company
(incorporated by reference to Exhibit 10(g) to the
Registrant's Registration Statement on Form S-14 dated May 16,
1984).
* 10.34 Employees' Stock Option and Share Rights Plan-1988
(incorporated by reference to Exhibit 10(n) to the
Registrant's Form 10-K for the year ended December 31, 1987).
* 10.35 1996 Stock Option and Share Rights Agreement (incorporated by
reference to Exhibit A to the Registrant's Proxy Statement for
the 1996 Annual Meeting of Shareholders).
11 Computation of Earnings Per Share.
21 Subsidiaries of the Registrant.
23 Consent of Coopers & Lybrand L.L.P., Independent Auditors.
27 Financial Data Schedule.
* Compensatory plan or management contract.
102
<PAGE>
(b) Reports Filed on Form 8-K
Two reports on Form 8-K were filed during the fourth quarter of 1997.
The report on Form 8-K dated December 16, 1997 was submitted 1) to
announce that Homestake Canada Inc. and Prime Resources Group Inc. had
terminated the agreement to purchase the Troilus mine; 2) to report
that the United States government and the Cheyenne River Sioux Tribe
filed an action against the Company relating to natural resources
damage claims due to the placement of tailings in Whitewood Creek and
3) to report commencement of a third arbitration proceeding with
Goldstake Exploration Inc.
The report on Form 8-K dated December 31, 1997 announced the proposed
business combination of the Registrant and Plutonic Resources Limited.
RISK FACTORS
Risks Inherent in Gold Exploration, Development and Production
The business of gold exploration, development and production by its
nature involves significant risks. Among other things, the business depends on
successful location of reserves and skillful management. Gold exploration is
highly speculative in nature, involves many risks and frequently is
non-productive. Once mineralization is discovered and determined to be
economically recoverable, it usually takes a number of years from the initial
phase of exploration until production commences, during which time the economic
feasibility of production may change. Substantial expenditures are required to
establish reserves through drilling, to determine means of production and
metallurgical processes to extract the metal from ore, and, in the case of new
properties, to construct mining and processing facilities.
Mining is subject to a variety of risks and hazards, including rock
falls and slides, cave-ins, flooding and other weather conditions, and other
acts of God. Homestake maintains property and liability insurance consistent
with industry practice, but such insurance contains exclusions and limitations
on coverage. For example, coverage for environmental liability generally is
limited and may be totally unavailable. There can be no assurance that insurance
will continue to be available at economically acceptable premiums. Production
costs also can be affected by unforeseen changes in ore grades and recoveries,
permitting requirements, environmental factors, work interruptions, operating
circumstances, unexpected changes in the quantity or quality of reserves,
unstable or unexpected ground conditions, and technical issues.
The United States, Australia and Canada are the locations of
substantially all of Homestake's operating activities. Homestake also conducts
development, operations and exploration activities in a number of other
countries. Some countries have higher levels of political and economic risk than
others, including potential for government instability, uncertainty of laws and
legal enforcement and compliance, defects in or uncertainty as to title to
mining property, expropriation of property, restrictions on production, export
controls, currency non-convertibility, fluctuations in currency exchange rates,
inflation and other general economic and political uncertainties.
103
<PAGE>
Risks of Gold and Silver Price Fluctuations and Hedging Activities
The results of Homestake's operations are affected significantly by the
market price of gold and, to a lesser extent, by the market price of silver. The
markets for gold and silver are worldwide markets. Gold and silver prices are
subject to volatile price movements over short periods of time and are
influenced by numerous factors over which Homestake has no control, including
expectations with respect to the rate of inflation, the relative strength of the
United States, Canadian and Australian dollars, interest rates, global or
regional political or economic crises, demand for jewelry and industrial
products containing gold and silver, speculation, and sales by central banks and
other holders and producers of gold and silver in response to these factors. The
supply of gold and silver includes a combination of new mine production,
recycling of industrial products containing gold and silver, and sales from
existing stocks of bullion and fabricated gold and silver held by governments,
public and private financial institutions, and individuals.
In general, hedging enables a gold producer to "lock in" a future price
for hedged gold that is higher than the then current spot price for gold.
However, to the extent that sales of future gold production are hedged, the
ability to realize future increases in gold prices may be reduced, subject to
the gold producer's ability to extend the expiry dates of the hedge contracts.
Homestake engages in hedging programs.
Homestake has adopted a gold hedging policy under which Homestake will,
in appropriate circumstances, enter into forward-sales transactions for
approximately 30% of its gold production in each of the subsequent ten years at
prices in excess of certain targeted prices. Homestake will also, in appropriate
circumstances, use combinations of put and call option contracts, which provide
an effective price floor for sales while permitting participation in future
price increases. To the extent Homestake has not hedged its production in
forward-sales transactions or established price floors, Homestake's
profitability is fully exposed to fluctuations in the current price of gold and
silver in world markets.
Homestake's results are also affected to a lesser degree by the market
prices for sulfur and for crude oil. Sulfur prices are affected principally by
the demand for fertilizer and the availability of by-product sulfur recovered
during the refining and processing of oil and natural gas. Crude oil prices are
affected principally by supply and demand for gasoline and fuel oil as well as
global or regional political or economic crises.
Risks Associated with Reserve Realization
Gold and silver reserves reported by Homestake reflect estimated
quantities and grades of gold and silver in deposits and in stockpiles of mined
material that Homestake believes can be mined, processed and sold at prices
sufficient to recover the estimated future cash costs of production, remaining
investment and anticipated additional capital expenditures. Reserves are
estimates based upon drilling results, past experience with mining properties,
experience of the person making the reserve estimates and many other factors.
Reserve estimation is an interpretive process based upon available data. The
actual quality and characteristics of ore deposits cannot be known until mining
has taken place. Furthermore, reserves are valued based on estimates of future
costs and future prices. Homestake's gold reserves at December 31, 1997 are
based on an assumed price of $325 per ounce for short-lived operations, and $350
per ounce for other operations. Homestake's silver reserves at December 31, 1997
and 1996 are based on an assumed price of $5 per ounce. Homestake gold reserves
at December 31, 1996 are based on an assumed price of $375 per ounce.
104
<PAGE>
Actual quality and characteristic of ore deposits and gold and silver
prices will differ from the assumptions used to develop reserves. Such
differences may be significant.
Sulfur and oil reserve realization is subject to similar risks. In the
third quarter of 1997, Homestake wrote off its entire sulfur mine investment in
light of the continued depressed world market for sulfur.
Risks of Government Regulation of Mining Activities
Homestake's mining operations and exploration activities are subject to
extensive regulation governing development, production, labor standards,
occupational health, waste disposal, use of toxic substances, environmental
regulations, mine safety and other matters in all jurisdictions in which it
operates. Changes in regulations can have material impacts on anticipated levels
of production, costs and profitability. There can be no assurance that all
required permits and government approvals can be secured and maintained on an
economic basis.
The United States Mining Law of 1872 (the "Mining Law") has been the
subject of substantial debate and proposals for change for several years. While
changes in the Mining Law may occur, Homestake cannot predict when or if changes
will occur, or the extent to which any new legislation will exempt or otherwise
"grandfather" existing mining operations, unpatented mining claims on which
commercial discoveries have been made or unpatented mining claims for which the
patenting process is partially complete. Under current law, persons staking
unpatented mining claims on United States federal government property open to
exploration (unpatented mining claims), upon the making and documenting of a
discovery of most minerals (including gold and silver) in commercial quantities,
are entitled to mine the property without payment of royalties and to secure
title to the property (patented mining claims) at nominal cost. Under proposals
made in recent years to amend the Mining Law, the United States government would
be entitled to receive royalties based on either the gross or net value of
production from government-owned property. This would have only minimal impact
on Homestake's current operations, as substantially all of Homestake's current
operations in the United States, other than its operations at Ruby Hill, are
conducted on privately held land. It is possible that Homestake may be required
to pay royalties on production from the Ruby Hill operation, which would
increase the production cost over current estimates, but the amount of the
increase, if any, is not predictable. Expansion at Homestake's Round Mountain
mine also may occur on government-owned property, as to which royalties
similarly might be payable. Should the Mining Law be so amended, it could reduce
the amount of future exploration and development activity conducted by Homestake
on federal government-owned property in the United States.
Risks of Currency Fluctuations
Gold is sold throughout the world principally based on the US dollar
price, but operating expenses of gold mining companies generally are incurred in
local currencies. Homestake's operations principally are based in the United
States, Canada and Australia. Homestake's Canadian and Australian subsidiaries
engage in currency hedging programs in Canadian and Australian dollars to
protect against significant currency fluctuations relative to the US dollar.
105
<PAGE>
Risks of Native Title Claims
Australia
The decision of the High Court of Australia in 1992 in Mabo and Others
v Queensland (No. 2) recognized traditional native title rights to land. That
decision and the Racial Discrimination Act raised the possibility that mining
and exploration tenements granted by the Crown after October 31, 1975 over areas
in which there were existing native title rights might be invalid to the extent
of any inconsistency with those native title rights. The High Court recently
held in The Wik Peoples v Queensland that the grant of pastoral leases will not
necessarily extinguish native title rights. (Many mining leases have been
granted over areas of pastoral leasehold.)
The Commonwealth and States have passed legislation in relation to
native title which provides for native title claims to be made. This legislation
is subject to amendments currently before Parliament. The legislation provides
for a right to negotiate before the grant or renewal of certain tenements (other
than renewals of tenements as of right, in accordance with the terms of their
original grant or renewals of validated tenements) after January 1, 1994.
Negotiations must take place between the native title holders or claimants, the
grantee party and the government party.
The native title legislation also validates mining tenements granted
before January 1, 1994 and suspends native title over the mining tenements area.
Any compensation for the suspension is payable by the government that granted
the tenement.
There are native title claims relating to the area of Homestake's 50%
owned Kalgoorlie operations. However, all of the mining leases with respect to
active mining operations at Kalgoorlie are pre-1994 leases and therefore native
title claims will not adversely affect the operations.
Some of Homestake's exploration tenements in Australia are subject to
multiple native title claims. Should Homestake be successful in its exploration
activities in these areas and seek to convert its interests to mining leases, it
will be necessary to comply with the right to negotiate provisions of the Native
Title Act and any agreement reached as a result of negotiations may include
provisions with respect to payment of compensation by Homestake to the native
title claimants. If agreement cannot be reached and the matter has to be
determined by the National Native Title Tribunal, the National Native Title
Tribunal is entitled to include in its determination as to whether or not the
titles may be granted, conditions with respect to compensation of native title
claimants. The requirements for negotiation and the possibility of a requirement
to pay compensation may result in delay and increased costs for mining in the
affected mining areas.
Canada
In the Delgamuukw decision in December 1997, the Supreme Court of
Canada affirmed that aboriginal tribal groups continue to have aboriginal rights
in lands in British Columbia used or occupied by their ancestors in 1846. Those
rights may vary from rights of limited use up to aboriginal title. The decision
has created uncertainty regarding property rights in Canada (including mineral
and other resource rights), particularly in British Columbia and other areas
where treaties were not concluded with aboriginal groups. The Court stated these
principles in broad terms, and did not apply them to any particular lands. The
decision also did not address how aboriginal rights or title are to be
reconciled with property and tenure rights previously sold or granted by the
government. The Court did confirm that the extent of the aboriginal rights
(including whether the rights rise to the level of aboriginal title) will
106
<PAGE>
depend on, among other things, the extent of prior aboriginal use and
occupation. The Court also stated that, depending on the nature of the
aboriginal rights, consultation with and compensation to (and possibly consent
of) aboriginal groups may be required in connection with sales of
government-owned land or granting of mining, forestry and other rights to use
government-owned land. The Court indicated that rights of compensation derive
from the government's fiduciary obligations to the aboriginal groups. The
application of the principles enunciated in the decision will not be possible
until subsequent decisions provide clarification, and the application of these
principles to any particular land will not be possible until the exact nature of
historical aboriginal use and occupancy and the resulting rights in the
particular property has been determined.
There are aboriginal claims that extend to the areas of British
Columbia in which the Eskay Creek and Snip mines are located. These mining
operations are conducted under government mining leases which grant the
exclusive right to mine. There has not been any determination of the existence
of any valid claim of aboriginal rights or title in these areas. Homestake does
not expect any interruption of its existing mining operations, and Homestake
does not believe that its existing Canadian operations will be materially
adversely affected by aboriginal claims. However, Homestake expects that future
Canadian activities, including exploration and development of new mines, could
be slowed and could be adversely affected, depending on future legal
developments in this area and the extent of aboriginal rights in any particular
property.
United States
There are no native title issues for Homestake's properties in the
United States.
CAUTIONARY STATEMENTS
This report contains certain forward-looking statements (as such term
is defined in the United States Private Securities Litigation Reform Act of
1995) and information that is based on the beliefs of the management of
Homestake, as well as assumptions made by and information currently available to
the management of Homestake. Any statements made in this report that are not
historical in nature, including statements preceded by the words "anticipate,"
"believe," "estimate," "expect," "intend," "will" and similar expressions, as
they relate to Homestake or the management of Homestake, are forward-looking
statements. Estimates of reserves, future production and future cash costs per
ounce of gold-equivalent production are also forward-looking statements.
The purpose of these cautionary statements is to identify certain
important factors and assumptions on which forward looking statements may be
based or which could cause actual results to differ materially from those
expressed in forward looking statements. The important factors and assumptions
set forth below should be read in conjunction with "Risk Factors" herein.
Reserves
Information with respect to ore reserves has been prepared in
accordance with SEC definitions and practices. Gold and silver reserves reported
by Homestake reflect estimated quantities and grades of gold and silver in
deposits and in stockpiles of mined material that Homestake believes can be
mined, processed and sold at prices sufficient to recover the estimated future
cash costs of production, remaining investment, and anticipated additional
capital expenditures. Estimates of costs of production are based on
107
<PAGE>
current and projected costs taking into account past experience and expectations
as to the future. Estimated mining dilution is factored into reserve
calculations.
Reserves are reported as general indicators of the life of mineral
deposits. Reserves should not be interpreted as assurances of mine lives or of
the profitability of current or future operations. Reserves are estimated for
each property based upon factors relevant to each deposit. Reserves are
estimates based upon drilling results, past experience with the property,
experience of the persons making the reserve estimates and many other factors.
Reserve estimation is an interpretive process based upon available data, and the
actual quality and characteristics of ore deposits cannot be known until mining
has taken place.
Changes in reserves over time generally reflect (i) efforts to develop
additional reserves, (ii) depletion of existing reserves through production,
(iii) actual mining experience, (iv) continued testing and development of
additional information and (v) price and cost forecasts. Grades of ore actually
processed may be different from the stated reserve grades because of geologic
variations in different areas mined, mining dilution, losses in processing and
other factors. Recovery rates vary with the metallurgical and other
characteristics and grade of ore processed.
Gold and silver reserve calculations for properties operated by
Homestake are prepared by Homestake. Gold and silver reserve calculations for
properties not operated by Homestake are based on information provided to
Homestake by the operator. Homestake periodically reviews such information but
does not independently confirm the information provided by these operators.
Homestake gold reserves at December 31, 1997 are based on an assumed price of
$325 per ounce for short-lived operations, and $350 per ounce for other
operations. Homestake's silver reserves at December 31, 1997 and 1996 are based
on an assumed price of $5 per ounce. Homestake's gold reserves at December 31,
1996 are based on an assumed price of $375 per ounce.
Actual quality and characteristics of ore deposits and gold and silver
prices will differ from the assumptions used to develop reserves. Such
differences may be significant.
Homestake's sulfur reserves represent the quantity of sulfur in the
Main Pass 299 deposit for which geological, engineering and marketing data give
reasonable assurance of recovery and sale under projected economic and operating
conditions at prices sufficient to cover the estimated future cash costs of
production, and estimated future capital expenditures. Homestake's proven oil
reserves at Main Pass 299 are the estimated quantity of crude oil and condensate
which geological and engineering data give reasonable assurance of recovery and
sale under projected operating conditions at prices sufficient to cover the
estimated future cash costs of production, the remaining investment, and
estimated future capital expenditures. The estimates are based on limited
reservoir and engineering data. The reserve estimates are based on information
provided by the operator. The operator principally relies on oil reserve
estimations performed by third-party petroleum engineers. In the third quarter
of 1997, Homestake wrote off its entire investment in the sulfur mine in light
of the continued depressed market for sulfur.
Estimates of Production
Estimates of future production and mine life for particular properties
are derived from annual mining plans that have been developed based on, among
other things, mining experience, reserve estimates, assumptions regarding ground
conditions and physical characteristics of ores (such as hardness and presence
or absence of certain metallurgical characteristics), and estimated rates and
costs
108
<PAGE>
of production. Actual production may vary from estimates for a variety of
reasons, including risks and hazards of the types discussed above, actual ore
mined varying from estimates of grade and metallurgical and other
characteristics, mining dilution, strikes and other actions by labor at
unionized locations, restrictions imposed by government agencies and other
factors. Estimates of production from properties not yet in production or from
operations that are to be expanded are based on similar factors (including, in
some instances, feasibility reports prepared by company personnel and/or outside
consultants) but, as such estimates do not have the benefit of actual
experience, there is a greater likelihood that actual results will vary from the
estimates.
Estimates of Operating Costs and Capital Costs; Capital Projects
Estimates of cash costs for mining operations are developed based on
past experience, reserve and production estimates, anticipated mining and ground
conditions, metallurgical recoveries, estimated costs of materials, supplies and
utilities, exchange rates and other items. Estimates of amortization of noncash
costs are based on total capital costs and reserve estimates and may change at
least annually based on actual amounts of unamortized capital and changes in
reserve estimates. If the net book value of mining operations exceeds the fair
value, usually determined based on the estimated future undiscounted cash flows
from that mine, then an impairment loss based on the discounted cash flows would
be recognized as an expense in the period such evaluation is made.
Estimates for reclamation and environmental remediation costs are
developed based on existing and expected legal requirements, past reclamation
experience, cost estimates provided by company employees and third parties and
other factors. Estimates also reflect assumptions with respect to actions of
government agencies, including exercise of discretion and the amount of time
government agencies may take in completing processes required under applicable
laws and regulations. As a result, final costs may vary significantly from
estimates. Homestake periodically reevaluates its reclamation cost estimates and
reclamation reserves to take account of such factors.
Estimates of future capital costs are based on a variety of factors and
may include past operating experience, estimated levels of future production,
estimates by and contract terms with third-party suppliers, expectations as to
government and legal requirements, feasibility reports (which may be prepared by
company personnel and/or outside consultants) and other factors. Capital cost
estimates for new projects under development generally are subject to greater
uncertainties than additional capital costs for existing operations.
Estimated periods for completion of capital projects are based on many
factors, including Homestake's experience in completing capital projects, and
estimates provided by and contract terms with contractors, engineers, suppliers
and others involved in design and construction of projects. Estimates also
reflect assumptions with respect to factors beyond the control of Homestake,
including, but not limited to, the time government agencies may take in
processing applications, issuing permits and otherwise completing processes
required under applicable laws and regulations. Actual time to completion may
vary significantly from estimates.
Estimates of exploration costs are based upon many factors such as past
exploration costs, estimates of the level and cost of future activities, and
assumptions regarding anticipated results on each property. Actual costs may
vary during the year as a result of such factors as actual exploration results
(which could result in increasing or decreasing expenditures for particular
properties), changed conditions, and acquisitions and dispositions of property.
109
<PAGE>
Taxes
Homestake's operations are conducted in a number of jurisdictions, with
differing rates of taxation. The Canadian statutory tax rate, including federal
and provincial income tax and mining tax is approximately 49%. The applicable
United States tax rate is 21% (20% alternative minimum tax plus 1% state tax).
The Australian statutory rate is 36%.
Homestake's effective tax rate varies from the statutory rate because
of certain differences between the tax laws and the accounting treatment of
income and expenditures. For example, some of Homestake's foreign exploration
costs are expensed for accounting purposes but are not yet deductible for tax
purposes. Therefore, the tax benefit related to those expenditures cannot be
recognized until there is sufficient taxable income generated in the
jurisdictions where such expenditures are incurred. In addition, certain
Canadian accounting expenses cannot be deducted in calculating the mining tax.
Homestake also has limited ability to utilize foreign tax credits in calculating
its United States income tax.
Homestake's overall effective tax rate is dramatically impacted by the
geographic mix of its pretax income and losses. A greater proportion of income
in a high tax jurisdiction, like Canada, may cause the consolidated effective
tax rate to rise.
Homestake's overall effective rate can also fluctuate significantly
during a period of low gold prices, because the tax rate is the ratio of tax
expense to pretax income. Low pretax income or pretax losses can produce
unusually high or unusually low effective tax rates (including the possibility
of negative rates). This can occur if mining and income tax expense continues to
accrue on profitable mines in high tax jurisdictions while losses are incurred
in low tax jurisdictions. The tax expense in the high tax jurisdiction is not
fully offset by the tax benefit from losses generated in the low tax
jurisdictions. As a result, as the income and tax expenses from all
jurisdictions are blended into a consolidated total, the overall effective rate
is disproportionately impacted.
Western Australia Royalty
Homestake has operations in the State of Western Australia. Until
recently, no royalties have been payable on gold production in Western
Australia. However, in late 1997, a gold royalty was formally adopted. The
principal features of the royalty are as follows:
o A 1.25% royalty will be payable between July 1, 1998 and June 30,
2000 on the realized value of all gold produced, increasing to
2.5% on or after July 1, 2000. No royalty is payable in respect of
production prior to July 1, 1998.
o Realized value is to be calculated by multiplying the total gold
produced during each month by the average of the gold spot prices
for that month.
o If, in any quarter between July 1, 2000 and June 30, 2005 the
average spot gold price for any quarter is less than A$450 per
ounce, the rate of royalty for that quarter will fall to 1.25%.
o An exemption from payment of the royalty will apply in respect of
the first 2,500 ounces of gold produced during each financial year
from gold produced or obtained from the same gold royalty project.
A "gold royalty project" is defined as one or more mining
tenements from which anyone (not just the royalty paying producer
in question) produces or obtains gold that is treated or processed
at a common treatment facility or combination of treatment
facilities (other than a refinery).
110
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HOMESTAKE MINING COMPANY
Date March 26, 1998 By:/s/ J.E. Thompson
--------------- -----------------
J. E. Thompson
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Capacity Date
/s/ G. G. Elam Vice President,Finance March 26, 1998
- ------------- and Chief Financial Officer
G. G. Elam (Principal Financial Officer)
/s D. W. Peat Vice President and Controller March 26, 1998
- ------------- (Principal Accounting Officer)
D. W. Peat
(Signatures continued on following page.)
111
<PAGE>
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/Harry M. Conger Chairman of the Board March 26, 1998
- ----------------- and Director
Harry M. Conger
/s/Jack E. Thompson President, Chief Executive March 26, 1998
- -------------------- Officer and Director
Jack E. Thompson
/s/ M. Norman Anderson Director March 26, 1998
- ---------------------
M. Norman Anderson
/s/ Richard R. Burt Director March 26, 1998
- ------------------
Richard R. Burt
/s/ Robert H. Clark, Jr. Director March 26, 1998
- -----------------------
Robert H. Clark, Jr.
/s/ Robert Durham Director March 26, 1998
- ----------------
G. Robert Durham
/s/ Douglas W. Fuerstenau Director March 26, 1998
- ------------------------
Douglas W. Fuerstenau
/s/ Henry G. Grundstedt Director March 26, 1998
- -----------------------
Henry G. Grundstedt
/s/ John Neerhout, Jr. Director March 26, 1998
- ----------------------
John Neerhout, Jr.
/s/ Peter J. Neff Director March 26, 1998
- -----------------
Peter J. Neff
/s/ Stuart T. Peeler Director March 26, 1998
- --------------------
Stuart T. Peeler
/s/ Carol A. Rae Director March 26, 1998
- ---------------
Carol A. Rae
/s/ Jeffrey L. Zelms Director March 26, 1998
- --------------------
Jeffrey L. Zelms
</TABLE>
112
<PAGE>
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
BALANCE AT BALANCE
BEGINNING AT END OF
DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS PERIOD
- ---------------------------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSET VALUATION ALLOWANCES (1)
<S> <C> <C> <C> <C>
Year ended December 31, 1997 $ 72,152 $ 25,956 $ 8,373 (2) $ 89,735
Year ended December 31, 1996 $ 59,611 $ 17,551 $ 5,010 (3) $ 72,152
Year ended December 31, 1995 $ 49,839 $ 11,034 $ 1,262 (3) $ 59,611
<FN>
(1) For further information see Note 7, Income Taxes, in the Notes to the
Consolidated Financial Statements.
(2) Deductions in 1997 relate to a reduction of the Company's foreign tax
credit carryover and realization of certain deferred tax assets.
(3) Deductions in 1996 and 1995 relate to the realization of certain United
States deferred tax assets.
</FN>
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Shareholders and Board of Directors
Homestake Mining Company
We have audited the consolidated financial statements of Homestake Mining
Company and Subsidiaries as of December 31, 1997 and 1996, and for each of the
three years in the period ended December 31, 1997, which financial statements
are included on pages 65 through 93 of this Form 10K. We have also audited the
financial statement schedules listed on Item 14(a)(2) of this Form 10-K. These
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Homestake Mining
Company and Subsidiaries as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedules referred to above, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information required to be included therein.
/s/ Coopers & Lybrand L.L.P.
- ---------------------------
Coopers & Lybrand L.L.P.
San Francisco, California
February 9, 1998
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Method of Filing
- ------- ----------------
<S> <C> <C>
11 Computation of Earnings Per Share Filed herewith electronically
21 Subsidiaries of Registrant Filed herewith electronically
23 Consent of Coopers & Lybrand L.L.P. Filed herewith electronically
27 Financial Data Schedule Filed herewith electronically
</TABLE>
EXHIBIT 11
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
BASIC:
<S> <C> <C> <C>
Earnings:
Net income (loss) $(168,879) $ 30,281 $ 30,327
=============== ============== =============
Net income (loss) applicable to basic earnings
per share calculation $(168,879) $ 30,281 $ 30,327
=============== ============== =============
Weighted average number of shares outstanding 146,719 146,311 138,117
=============== ============== =============
Net income (loss) per share - basic $ (1.15) $ 0.21 $ 0.22
=============== ============== =============
DILUTED:
Earnings:
Net income (loss) $(168,879) $ 30,281 $ 30,327
Add:
Interest relating to 5.5% convertible
subordinated notes, net of tax 6,517 6,517 6,517
Amortization of issuance costs relating to 5.5%
convertible subordinated notes, net of tax 443 443 443
--------------- -------------- -------------
Net income (loss) applicable to diluted
earnings per share calculation $(161,919) $ 37,241 $ 37,287
=============== ============== =============
Weighted average number of shares outstanding:
Common shares 146,719 146,311 138,117
Additional average shares outstanding assuming:
Exercise of stock options (treasury method) 31 216 212
Conversion of 5.5% convertible subordinated notes 6,505 6,505 6,505
--------------- -------------- -------------
153,255 153,032 144,834
=============== ============== =============
Net income (loss) per share - diluted (a) $ (1.06) $ 0.24 $ 0.26
=============== ============== =============
<FN>
(a) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although it is contrary to paragraph 13 of SFAS 128 because it
produced an anti-dilutive result.
</FN>
</TABLE>
EXHIBIT 21
SUBSIDIARIES 0F REGISTRANT
- -------------------------------------------------------------------------------
Homestake Mining Company, a Delaware Corporation and its Subsidiaries
Interest of Homestake Mining Company is 100% unless otherwise noted
( )Denotes state, province or country of incorporation
- -------------------------------------------------------------------------------
Homestake Mining Company (Delaware)
HMGLD Corp. (Delaware)
Homestake Mining Company of California (California)
Denay Creek Gold Mining Company (California)
Homestake Canada Inc. (Ontario)
588982 Ontario Inc. (Ontario)
E & B Explorations Inc. (Delaware)
Galveston Resources (Nevada), Inc. (Nevada)
Prime Resources Group Inc. (British Columbia) - 50.6%
PRG Project Development Corp. (British Columbia) - 50.6%
Teck-Corona Operating Company (Ontario) - 50%
Williams Operating Company (Ontario) - 50%
Homestake de Argentina, S.A. (Buenos Aires)
Homestake do Brazil, S.A. (Brazil)
Homestake Forest Products Company (California)
Homestake Gold of Australia Limited (South Australia)
Homestake Australia Limited (South Australia)
Homestake Superannuation Fund Pty Ltd. (Queensland)
Kalgoorlie Consolidated Gold Mines Pty Ltd.(Western Australia)- 50%
KCGM Engineering Services Pty Ltd (Western Australia) - 50%
Homestake Guyane S.A.R.L. (French Guiana)
Mont-Or S.A.R.L. (French Guiana) - 55%
Homestake International Minerals Limited (California)
Homestake Lead Company of Missouri (California)
Homestake Nevada Corporation (California)
Homestake - Santa Fe Mine Inc. (Nevada)
Homestake Sulphur Company (Delaware)
Homestake Venezuela, S.A. (Venezuela)
Minera Rio Carichapo, S.A. (Venezuela)
La Jara Mesa Mining Company (New Mexico)
Minera Homestake Chile, S.A. (Chile)
Agua de la Falda, S.A. (Chile) - 51%
Minera La Esperanza, S.A. (Venezuela)
Minera Rio Guarampin, S.A. (Venezuela)
Minera Rio Marwani, S.A. (Venezuela)
Whitewood Development Corporation (California)
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the following Registration
Statements of Homestake Mining Company: Post-Effective Amendment No . 3 to No.
2-90905 on Form S-8 (originally filed on Form S-3); No. 33-26049 on Form S-8;
No. 2-66538 on Form S-8; Post-Effective Amendment No. 1 to No. 33-48526 on Form
S-8 (originally files on Form S-4); No. 333-17357 on Form S-8; No. 333-17359 on
Form S-8; and No. 333-24711 on Form S-3 of our report dated February 9, 1998,
appearing on Form 10-K of Homestake Mining Company for the year ended December
31, 1997.
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
Coopers & Lybrand
San Francisco, California
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at December 31, 1997 and the related Statement of
Consolidated Income for the year ended December 31, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 94,725
<SECURITIES> 141,221
<RECEIVABLES> 40,366
<ALLOWANCES> 0
<INVENTORY> 69,258
<CURRENT-ASSETS> 357,970
<PP&E> 1,959,222
<DEPRECIATION> 1,147,176
<TOTAL-ASSETS> 1,304,729
<CURRENT-LIABILITIES> 108,906
<BONDS> 263,855
0
0
<COMMON> 146,735
<OTHER-SE> 385,015
<TOTAL-LIABILITY-AND-EQUITY> 1,304,729
<SALES> 659,914
<TOTAL-REVENUES> 723,834
<CGS> 585,858 <F1>
<TOTAL-COSTS> 626,421 <F2>
<OTHER-EXPENSES> 254,003 <F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,259
<INCOME-PRETAX> (167,849)
<INCOME-TAX> (9,211)
<INCOME-CONTINUING> (168,879)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (168,879)
<EPS-PRIMARY> (1.15)
<EPS-DILUTED> (1.15)
<FN>
<F1> Includes Production costs and Depreciation, depletion and amortization
from the Statement of Consolidated Operations.
<F2> Includes Production costs, Depreciation, depletion and amortization, and
Administrative and general expense from Statement of Consolidated
Operations.
<F3> Includes Exploration expense, Write-downs and other unusual charges, and
Other expense from Statement of Consolidated Operations.
</FN>
</TABLE>
