UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 22, 1998 (June 18, 1998)
HOMESTAKE MINING COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 1-8736 94-2934609
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification Number)
incorporation)
650 California Street, San Francisco, California 94108-2788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 981-8150
http://www.homestake.com
<PAGE>
Item 5. Other Items
1. On June 18, 1998 Registrant reported interim operating results for the
one-month and five-month periods ended May 31, 1998. This summary
financial information was the first to be published following the
business combination with Plutonic Resources Limited ("Plutonic") on
April 30, 1998, which was accounted for as a pooling of interests. A
copy of Registrant's news release is attached as Exhibit 99.3.
Consolidated financial statements of Homestake Mining Company for the
years ended December 31, 1997, 1996 and 1995 have been prepared to give
retroactive effect to the merger with Plutonic and are attached as
Exhibit 99.4.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
7(c) Exhibits
99.3 News Release, dated June 18, 1998 reporting interim results
following the acquisition of Plutonic
99.4 Consolidated Financial Statements and Supplementary Data
(restated to include Plutonic)
<TABLE>
<CAPTION>
Page
For the Years Ended December 31, 1997, 1996 and 1995:
<S> <C>
Management's Discussion and Analysis 1
Cautionary Statement Under the Private Securities Litigation Reform Act 14
Statements of Consolidated Operations for the Years
Ended December 31, 1997, 1996 and 1995 15
Consolidated Balance Sheets as of December 31, 1997 and 1996 16
Statements of Consolidated Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 17
Statements of Consolidated Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995 18
Notes to Consolidated Financial Statements 19
Report of Independent Auditors 46
Management's Responsibility for Financial Reporting 47
Quarterly Selected Data 48
Five-Year Selected Data 50
27 Restated Financial Data Schedules for the years ended
December 31, 1997, 1996 and 1995 (included in electronic
filing through EDGAR)
</TABLE>
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: June 22, 1998
HOMESTAKE MINING COMPANY
(Registrant)
By: /s/ David W. Peat
-----------------
David W. Peat
Vice President and Controller
EXHIBIT 99.3
NEWS RELEASE
Contact:
Gene G. Elam Michael A. Steeves
Vice President, Finance and Director, Investor Relations
Chief Financial Officer (415) 983-8169
(415) 981-8150
HOMESTAKE REPORTS INTERIM RESULTS
FOLLOWING ACQUISITION OF PLUTONIC
SAN FRANCISCO, CA - June 18, 1998 - Homestake Mining Company (NYSE: HM)
today reported interim operating results for the one-month and five-month
periods ended May 31, 1998. This summary financial information is the first to
be published following the business combination with Plutonic Resources Limited
on April 30, 1998, which was accounted for as a pooling of interests. The merger
agreement between Homestake and Plutonic and pooling-of-interests accounting
require publishing of results for at least thirty days of combined operations.
Homestake recorded net losses of $9.2 million or $0.04 per share and
$34.8 million or $0.16 per share during the one-month and five-month periods
ended May 31, 1998, respectively. The month's results include $15 million of
pretax foreign exchange losses, primarily unrealized noncash mark-to-market
adjustments on the Company's foreign currency protection program. The five-month
results include $20.7 million of pretax expenses relating to the business
combination with Plutonic, $15.8 million of pretax foreign exchange losses and
$8.9 million of pretax costs associated with the restructuring of the
underground operations at the Homestake mine in South Dakota. Excluding the
effects of these significant charges, Homestake recorded income before taxes and
minority interests of $8 million and $23.9 million in the one-month and
five-month periods ended May 31, 1998, respectively.
Homestake's and Plutonic's combined operations have performed very well
during 1998, producing 230,800 ounces of gold and gold equivalent at a total
cash cost of $199 per ounce during the month of May and 1,094,900 ounces of gold
and gold equivalent at a total cash cost of $207 per ounce during the five-month
period ended May 31, 1998.
A significant portion of the Company's operating costs is denominated
in Australian and Canadian dollars. The Company's foreign currency protection
program was established to mitigate the effects of a strengthening of either of
these currencies by establishing ranges within which the United States dollar
may be exchanged for
1
<PAGE>
Australian and Canadian dollars. Australian and Canadian exchange rates have
declined significantly since the Company entered into its current foreign
exchange contracts and have caused the Company to record the noncash foreign
exchange losses described above. If these currencies remain depressed throughout
the life of the foreign currency contracts, at the time the contracts are
settled, the Company will have realized an equal and offsetting benefit through
lower reported US dollar operating costs.
During June 1998, Homestake closed out one million ounces of the
Australian dollar-denominated forward gold contracts which Plutonic had entered
into prior to its acquisition by Homestake. The pretax gain of $5 million
realized as a result of this action will be deferred and recorded in income as
the originally designated production is delivered.
Homestake Mining Company is an international gold mining company with
substantial operations and exploration in the United States, Australia and
Canada. Homestake also has active exploration programs in Latin America and in
Eastern Europe, and development and/or evaluation projects in Chile and
Bulgaria. It has received numerous industry environmental and safety awards for
its responsible environmental, health and safety stewardships.
2
<PAGE>
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
Summarized Financial Results (Unaudited)
($ in millions, except per share amounts)
<TABLE>
<CAPTION>
One Month Five Months
Ended Ended
May 31, 1998 May 31, 1998
------------ ------------
<S> <C> <C>
Revenues $ 81.2 $ 351.7
Expenses $ 88.5 $ 373.2
Loss before taxes and minority interests $ (7.3) $ (21.5)
Net loss $ (9.2) $ (34.8)
Net loss per share $ (0.04) $ (0.16)
Average shares used in the computation (millions) 211.1 210.8
</TABLE>
Components of Loss Before Taxes and Minority Interests (Unaudited)
($ in millions - pretax)
<TABLE>
<CAPTION>
One Month Five Months
Ended Ended
May 31, 1998 May 31, 1998
------------ ------------
<S> <C> <C>
Income before significant charges, taxes
and minority interests $ 8.0 $ 23.9
Significant charges:
Business combination costs (.3) (20.7)
Homestake mine restructuring costs - (8.9)
Foreign exchange losses (15.0) (15.8)
--------- ---------
Total significant charges (15.3) (45.4)
--------- ---------
Loss before taxes and minority interests $ (7.3) $ (21.5)
========= =========
</TABLE>
3
<PAGE>
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
Summarized Balance Sheet (Unaudited)
($ in millions)
<TABLE>
<CAPTION>
May 31, 1998
--------------
<S> <C>
Current assets $ 445.7
Noncurrent assets 1,092.8
------------
Total assets $ 1,538.5
============
Current liabilities $ 151.1
Long-term liabilities 511.6
Deferred taxes 142.6
Minority interests 114.1
------------
919.4
Shareholders' equity 619.1
------------
Total liabilities and shareholders' equity $ 1,538.5
=============
</TABLE>
4
EXHIBIT 99.4
HOMESTAKE MINING COMPANY
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
<TABLE>
<CAPTION>
Page
For the Years Ended December 31, 1997, 1996 and 1995:*
<S> <C>
Management's Discussion and Analysis 1
Cautionary Statement Under the Private Securities Litigation Reform Act 14
Statements of Consolidated Operations for the Years
Ended December 31, 1997, 1996 and 1995 15
Consolidated Balance Sheets as of December 31, 1997 and 1996 16
Statements of Consolidated Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995 17
Statements of Consolidated Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995 18
Notes to Consolidated Financial Statements 19
Report of Independent Auditors 46
Management's Responsibility for Financial Reporting 47
Quarterly Selected Data 48
Five-Year Selected Data 50
<FN>
* Restated to reflect the April 30, 1998 pooling-of-interests business
combination with Plutonic Resources Limited.
</FN>
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Years Ended December 31, 1997, 1996 and 1995
(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.")
On April 30, 1998 Homestake Mining Company ("Homestake" or the "Company")
acquired 100% of Plutonic Resources Limited ("Plutonic"), a publicly-traded
Australian gold producer, by issuing 64.4 million Homestake common shares. This
business combination has been accounted for as a pooling of interests, and
accordingly, the Company's consolidated financial statements have been restated
to include Plutonic for all prior periods.
RESULTS OF OPERATIONS
Homestake recorded a net loss of $230.6 million or $1.10 per share
during 1997 compared to net income of $45.8 million or $0.22 per share during
1996 and $49.9 million or $0.25 per share during 1995. The 1997 loss includes
net nonrecurring expenses amounting to $159.2 million or $0.76 per share
compared to net nonrecurring income of $18.3 million or $0.08 per share in 1996
and $19.6 million or $0.10 per share in 1995.
Significant 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
- $60.1 million ($84.7 million pretax) reduction in the carrying values of
resource assets
- $45.7 million ($47.9 million pretax) write-down of certain investments
- $21.5 million ($29.1 million pretax) increase in the accrual for estimated
future reclamation expenditures
- $12.7 million ($15.8 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
- $10.4 million ($10.4 million pretax) gain on cancellation of option to
acquire 19.9% of Great Central Mines Limited ("Great Central")
- $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
Significant nonrecurring items in 1996 included:
- $24 million reduction in the accrual for prior year income taxes
- $7.9 million ($7.9 million pretax) gain of the sale of the investment in
Eagle Mining Corporation NL ("Eagle Mining")
- $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")
1
<PAGE>
Significant nonrecurring items in 1995 included:
- $12.9 million ($12.9 million pretax) recognition of previously
unrecognized tax benefits
- $4.2 million ($5.4 million pretax) gain on the sale of the Company's
remaining uranium inventory
Excluding the effect of the nonrecurring items, Homestake incurred a net
loss of $71.4 million or $0.34 per share in 1997 compared to earnings of $27.5
million or $0.14 per share in 1996 and $30.3 million or $0.15 per share in 1995.
The lower 1997 results primarily are due to significantly lower gold prices,
partially offset by higher gold production and sales volumes and lower per ounce
total cash costs. After adjusting for nonrecurring items, the reduction in 1996
earnings from 1995 reflects higher per ounce total cash costs, higher
depreciation charges, substantially increased exploration expenditures and lower
returns from the Main Pass 299 sulfur operations, partially offset by higher
gold prices and increased gold production and sales volumes.
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 current gold hedging policy provides for the use of forward
sales contracts to hedge 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.
During 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.
During 1997, 1996 and 1995, the Company delivered 535,900, 438,400 and
446,700 ounces of its Australian gold production into Australian dollar
denominated forward gold contracts at average prices of $429, $482 and $440 per
ounce, respectively. At December 31, 1997 the Company had committed 1,227,500
ounces of its future Australian gold production for sale under Australian dollar
denominated forward gold contracts at an average price of $330 (A$507) per
ounce. During 1997, 1996 and 1995, the Company delivered or financially settled
120,100, 70,000 and 113,200 ounces of its North American gold production at
average prices of $385, $421 and $398 per ounce, respectively. At December 31,
1997 the Company had committed 580,000 ounces of its future North American
production for sale through the year 2003 at an average price of $434 per ounce.
The Company's hedging activities increased revenues by approximately $25
million, $43 million and $55 million during 1997, 1996 and 1995, respectively.
The estimated liquidation value of the Company's gold hedging position at
December 31, 1997 was approximately $110 million. See note 21 to the
consolidated financial statements for further information and details of these
hedging programs.
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
2
<PAGE>
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, ore and concentrate sales totaled $863.6 million
during 1997 compared to revenues of $921.7 million in 1996 and $872 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
from 1995 reflects higher sales volumes and higher gold prices. During 1997, the
Company sold 2,548,700 equivalent ounces of gold at an average price of $353 per
ounce compared to 2,390,800 equivalent ounces of gold sold at an average price
of $406 per ounce in 1996 and 2,320,200 equivalent ounces of gold sold at an
average price of $396 per equivalent ounce during 1995.
Total gold equivalent production increased to 2,544,300 ounces during
1997 compared to 2,417,900 equivalent ounces produced during 1996 and 2,226,000
equivalent ounces produced during 1995. The higher 1997 production primarily is
due to production increases at the Plutonic, Kalgoorlie, Eskay Creek, Lawlers,
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
lower production at the McLaughlin and Peak Hill mines, 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, Darlot, Plutonic and Round Mountain operations, the
acquisition of an 80% interest in the Mt Morgans mine in late 1995 and the
purchase of an additional 60% interest in the Snip mine in early 1996, 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 $222 $244 $236
Deferred stripping adjustments 5 1 4
Costs of third-party smelters 14 14 13
Other 1 (4) (1)
- ---------------------------------------------------------------------------------------------------
Cash Operating Costs 242 255 252
Royalties 3 4 4
Production taxes 1 2 2
- ---------------------------------------------------------------------------------------------------
Total Cash Costs 246 261 258
Depreciation and amortizaton 54 57 50
Reclamation 3 5 5
- ---------------------------------------------------------------------------------------------------
Total Production Costs $303 $323 $313
- ---------------------------------------------------------------------------------------------------
</TABLE>
Homestake's reported consolidated total cash cost per gold equivalent
ounce amounted to $246 during 1997 compared to $261 and $258 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, Plutonic and
Lawlers operations, higher shipments and higher grades at the
3
<PAGE>
Eskay Creek mine and higher production at the Round Mountain mine, partially
offset by lower grades at the Williams and David Bell mines. The increase in
total cash costs per ounce during 1996 from 1995 primarily reflects the effects
of a stronger Australian dollar, higher costs at the Plutonic mine and lower
production at the McLaughlin mine, partially offset by 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 and Darlot mines, higher grades and cost reduction efforts at the Lawlers
mine and an increase in ownership at the low-cost Snip mine.
Homestake's total noncash cost per equivalent ounce was $57 during 1997
compared to $62 and $55 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 Homestake Gold of Australia Limited ("HGAL") minority
interests, the disproportionate sharing arrangement, the 80% interest in the Mt
Morgans mine 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 $ 627,639 $ 615,491 $ 609,117
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 (8,950) (11,346) (14,078)
By-product silver revenues (2,610) (3,059) (2,334)
Inventory movements and other (6,435) 6,846 (32,336)
- --------------------------------------------------------------------------------------------------------------------
Production Costs for Per Ounce Calculation Purposes $ 620,644 $ 630,729 $ 574,418
- --------------------------------------------------------------------------------------------------------------------
Ounces Produced During the Year 2,544,325 (2) 2,417,930 2,226,028
Total Cash Costs Per Ounce $ 246 $ 261 $ 258
- --------------------------------------------------------------------------------------------------------------------
<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 cost per ounce
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 $84.7 million were required to reduce the
carrying values of several of its assets or operations with short remaining
lives, including the Mt Morgans and Peak Hill mines in Australia, the Pinson
mine in Nevada, the Homestake mine's Open Cut, low-grade stockpiled ore and
exploration properties at certain
4
<PAGE>
locations in Western Australia, and redundant mining equipment at the Kalgoorlie
operations. The Company determined that no adjustments to the carrying values of
its longer-lived operations were required.
United States
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. 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 commenced a major restructuring of
operations at the Homestake mine in order to reduce operating costs. The Company
suspended underground mining for approximately 60 days 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 mine plan, which resulted in a decrease in
proven and probable ore reserves of 1.5 million ounces before considering 1997
production, is designed to improve the grade of ore recovered through the
increased use of mechanized cut-and-fill mining methods. When fully implemented,
the plan will reflect a reorganization of underground activities and a
significant reduction in work force that will generate considerable cost savings
and will increase the mine's future total earnings and cash flow. Homestake
expects to invest $30 million by the end of 1999 in the restructuring process to
purchase equipment and to upgrade facilities and infrastructure. Once the new
operating plan is fully implemented by the end of 1999, annual gold production
is expected to be between 150,000 and 180,000 ounces. Total cash costs for the
underground operations are projected to decline to $280 per ounce from recent
levels of approximately $335 per ounce.
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 total 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 ton-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).
5
<PAGE>
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 expected to
produce 110,000 ounces of gold in 1998 at a total cash cost of approximately
$130 per ounce.
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 orebody 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.
Canada
The Eskay Creek mine in British Columbia, Canada sold ore containing
417,300, 372,300 and 331,300 equivalent ounces of gold during 1997, 1996 and
1995, respectively. 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 gold equivalent 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 from $170 per
equivalent ounce during 1996 and $185 per equivalent ounce during 1995. The
lower 1997 costs per ounce primarily are a result of the higher shipments,
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 ore grades.
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 over the mine's
remaining life, will improve the profitability of certain Eskay Creek ore and
permit the treatment of material that previously was uneconomic.
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 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.
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.
6
<PAGE>
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. Operations at the Snip mine are expected to be completed in early 1999.
Australia
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. 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 United States dollar. The reduction in cash
costs in 1996 from 1995 reflects higher production, partially offset by the
effects of a stronger Australian dollar.
Production at the Plutonic mine in Western Australia increased to
274,600 ounces in 1997 compared to 183,700 and 165,900 ounces in 1996 and 1995,
respectively. The increase in 1997 production primarily is due to an increase in
throughput following an expansion of the mill in late 1996 and an increase in
production from the higher-grade areas of the underground operations. The
Plutonic mine is being transformed over time from an open-pit operation to one
of Australia's largest underground gold mining operations. During 1997, ore
sourced from the underground operations provided 26% of total production
compared to 22% in 1996 and 3% in 1995. The increase in 1996 production from
1995 was the result of higher ore grades in both the open-pit and underground
operations and an increase in throughput following the expansion of the mill.
Total cash costs of $234 per ounce in 1997 compare to $276 per ounce during 1996
and $219 per ounce during 1995. The construction of an on-site gas-fired power
station during 1997 is expected to continue to reduce cash operating costs.
Production at the Darlot mine in Western Australia increased to 65,200
ounces in 1997 compared to 62,800 and 41,100 ounces during 1996 and 1995,
respectively. Production had been hindered in 1995 by delays in developing the
underground orebody, completion of open-pit mining, and a high proportion of
harder primary ore which reduced mill throughput. Total cash costs of $320 per
ounce in 1997 compare to $345 per ounce during 1996 and $379 per ounce in 1995.
During 1996, exploration drilling at the Darlot property resulted in the
discovery of a previously unknown mineralized zone, the Centenary deposit. At
December 31, 1997 the Centenary deposit was estimated to contain 1.4 million
ounces of gold reserves. Access to the Centenary orebody is through an extension
of the Darlot decline. Ore from the Centenary deposit will be processed through
the existing Darlot plant and facilities.
7
<PAGE>
Production at the Lawlers mine in Western Australia increased to 87,500
ounces in 1997 from 50,600 and 42,500 ounces during 1996 and 1995, respectively.
This increase in production primarily was due to higher-grade ore sourced from
the New Holland pit. The higher production in conjunction with successful cost
reduction efforts reduced total cash costs to $260 per ounce in 1997 from $417
per ounce during 1996 and $447 per ounce in 1995.
In October 1995, the Company acquired an 80% interest in the Mt Morgans
mine in Western Australia. The Company's share of production from the Mt Morgans
mine was 73,600 ounces in 1997 compared to 75,000 ounces in 1996 and 24,900
ounces for the fourth quarter of 1995. Total cash costs were $380 in 1997
compared to $341 per ounce in 1996 and $268 during the fourth quarter of 1995.
Mining operations at Mt Morgans likely are to cease during 1998.
The Company's share of production from the Peak Hill mine (66.7%
interest) in Western Australia decreased to 33,100 ounces from 60,400 ounces in
1996 and 56,700 ounces in 1995. Cash operating costs were $269 per ounce in 1997
compared to $163 per ounce during 1996 and $136 per ounce in 1995. The decrease
in production and corresponding increase in total cash costs is attributable to
declining reserves and the impact of treating an increasing proportion of
lower-grade ore stockpiles.
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.
Other income: Other income of $.7 million in 1997 compares to $25.6 million in
1996 and $17.5 million in 1995. Other income in 1997 includes foreign currency
exchange losses of $34.1 million, income of $10.4 million related to an
agreement to sell a right to cancel the Company's option to acquire 19.9% of
Great Central, and a gain of $13.5 million from the sale of the George Lake and
Back River joint venture interests. Other income in 1996 includes a gain of $7.9
8
<PAGE>
million on the sale of an investment in Eagle Mining which had been acquired in
1995, income of $4.7 million on the execution of the agreement to cancel the
Company's option to acquire shares of Great Central, and $8.9 million of foreign
exchange losses, primarily on Canadian dollar denominated advances to HCI.
Depreciation, depletion and amortization: Depreciation, depletion and
amortization of $162.8 million during 1997 compares to $151.9 million during
1996 and $125.6 million during 1995. Depreciation, depletion and amortization
expense in 1997 reflects higher production partially 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 and the disproportionate sharing arrangement, and
the acquisitions of the 80% interest in the Mt Morgans mine and the additional
interest in the Snip mine.
Exploration expense: Exploration expense, excluding capitalized costs associated
with development stage projects, of $65.2 million in 1997 compares to $67.4
million in 1996 and $43.3 million in 1995. During 1997, the Company continued to
concentrate its exploration efforts in and around its existing operations.
Significant expenditures were made at the Eskay Creek, Pinson, La Falda and Ruby
Hill operations as well as on the extensive land position surrounding the
Company's operations in Western Australia. Exploration in Western Australia
resulted in the discovery of poly-metallic mineralization at the Kundip project
during 1997 and the Centenary deposit at the Darlot mine in 1996. Exploration
also 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. The Company currently plans to spend
approximately $58 million on its existing exploration projects during 1998.
Income and mining taxes: The Company's income and mining tax rate was 7.9%
during 1997 compared to 27.4% and 41.2% 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, $115.3 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 19.3% 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 in 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 $19.5 million.
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.
At December 31, 1997 and 1996 the Company had tax valuation allowances
of $107.9 million and $100.7 million, respectively. While circumstances could
occur which would permit the Company to reduce its deferred tax valuation
allowances in future years, based on the
9
<PAGE>
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 postretirement benefit obligations
and (iii) the future disposal of certain nonamortizable 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 $4 million in 1997 compared to $13.3 million in 1996
and $15 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 increases in exploration expenditures incurred by
the Company's 51%-owned subsidiary, Agua de la Falda S.A. and the Company's
62.1%-owned subsidiary, Lachlan Resources NL ("Lachlan").
LIQUIDITY AND CAPITAL RESOURCES
During 1997, Homestake's cash and equivalents and short-term investment
balances increased by $30.5 million to $265.3 million. Net cash provided by
operations in 1997 amounted to $160 million compared to $182.2 million and
$220.1 million in 1996 and 1995, respectively. The decrease in cash provided by
operations during 1997 primarily is due to lower gold prices, partially offset
by the receipt of the $65 million Santa Fe merger termination fee. Investing
activities in 1997 include capital expenditures of $204.6 million, the repayment
of a $37.2 million (A$50 million) loan made by the Company to Edensor Nominees
Pty, Ltd. ("Edensor"), a $16 million investment in mining and exploration
interests in Bulgaria, and $33.5 million of proceeds from asset sales. Financing
activities in 1997 include dividends paid of $33.9 million and net additional
borrowings of $76.8 million.
The Company has a United States/Canadian/Australian cross-border credit
facility ("Cross-border Facility") providing a total availability of $275
million. The Company pays a commitment fee of up to 0.225% 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 (A$75 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 a margin of up to 0.625%. At December
31, 1997 this rate was 5.25%.
In June 1997, the Company replaced its unsecured debt facility with an
Australian bank with a $260 million (A$400 million) unsecured syndicated debt
facility ("Syndicated Facility") with a syndicate of seven banks. This facility,
which provides for borrowings in either Australian or United States dollars,
consists of a $186 million (A$285 million) revolving debt facility which expires
in June 2002 and a $75 million (A$115 million) standby facility which expires in
September 1998. The Company pays a commitment fee of 0.175% per annum on the
unused portion of this facility. Interest is charged at the Australian Bank Bill
Swap Rate plus a margin of 0.33%. At December 31, 1997 this rate was 5.35%. At
December 31, 1997 the Company had drawn down $110.7 million (A$170 million)
under this facility.
10
<PAGE>
The Syndicated Facility Agreement provides that any lender may elect to
terminate its respective commitment to this facility and request repayment of
any outstanding indebtedness for a period of sixty days following a change of
control. Homestake's acquisition of Plutonic constitutes a change of control for
purposes of this agreement. Homestake does not expect any difficulty in
refinancing these borrowings under the Company's Cross-border Facility.
In 1993, the Company sold $150 million of 5.5% convertible subordinated
notes maturing June 23, 2000. Interest on the notes is payable semiannually 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.
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 and
a 32% interest in Navan's Bulgarian exploration program and projects for $4
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.
11
<PAGE>
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 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.
In June 1996, the Company recorded a gain of $7.9 million on the sale
of its 17.3% holding in Eagle Mining. The Company had acquired its interest in
Eagle Mining in November 1995.
In July 1996, Lachlan acquired 90.7% of Archaean Gold NL ("Archaean")
for $36.8 million. In 1997, Lachlan acquired the remaining interest in Archaean.
This acquisition, which was accounted for as a purchase, was funded by a loan
from the Company to Lachlan which, together with accrued interest up to August
1997, totaled $33.2 million (A$50.9 million). The loan became noninterest
bearing in September 1997. Lachlan plans to repay this loan by issuing
additional shares to the Company which will increase the Company's interest in
Lachlan from approximately 62% to 81%.
In 1995, the Company agreed to provide Edensor with a loan facility up
to $37 million (A$50 million) and was granted an option to acquire 19.9% of the
issued capital of Great Central in consideration for this loan. In July 1996, an
agreement was concluded for the sale of a right to cancel the Company's option
to acquire 19.9% of the shares of Great Central. The Company was paid $4.7
million in 1996 and a further $10.4 million in 1997 in respect to this
agreement.
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.
In October 1995, the Company acquired most of Dominion Mining Limited's
("Dominion") gold assets including an 80% interest in the Mt Morgans mine. The
net purchase price after working capital adjustments was $39.1 million. As part
of its agreement with Dominion, the Company offered Dominion shareholders the
opportunity to apply their individual entitlements to a return of Dominion
capital to subscribe for shares of the Company which resulted in 2.3 million
shares of the Company being issued to Dominion shareholders on January 29, 1996
for consideration of $32.1 million.
Additions to property, plant and equipment in 1997 totaled $204.6
million compared to $170 million and $110.2 million in 1996 and 1995,
respectively. Capital additions in 1997 include $56.1 million for construction
and development work at the Ruby Hill mine, $38.5 million at the Plutonic mine,
primarily for underground development and construction of the gas-fired power
station, $16.1 million at the Darlot mine primarily for the Centenary decline
and various efficiency improvement projects, $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.
12
<PAGE>
In addition to sustaining capital, planned capital expenditures of
approximately $80 million at the Company's existing operations during 1998
include; $19.6 million and $15.2 million at Darlot and Plutonic mines,
respectively, primarily for underground development, $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 to
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 $33.9 million
in 1997 compared to $45.5 million and $39.6 million during 1996 and 1995,
respectively. During 1997, Homestake reduced its dividend rate to two semiannual
payments of $.05 each.
The Company paid cash income and mining taxes (net of tax refunds) of
$66.2 million in 1997 compared to $15.9 million and $28.6 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 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
restoration and closure costs over the lives of its individual operations using
the units-of-production method.
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. During 1998, Homestake
expects to incur approximately $15 million of transaction costs and $11 million
of implementation costs, including $7 million of post-combination severance and
lease termination costs, in connection with the acquisition of Plutonic. 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.
13
<PAGE>
Cautionary Statement Under the Private Securities Litigation Reform Act
This report contains forward-looking statements that are based on management's
expectations and assumptions. They include statements preceded by the words
"believe," "estimate," "expect," "intend," "will", and similar expressions, and
estimates of reserves, future production and mine life, costs per ounce,
reclamation and remediation costs, dates of construction completion, costs of
capital projects and commencement of operations, exploration costs and taxes.
Actual results may differ materially from expectations.
Among the important factors that could cause actual results to differ
materially are the following. Reserve estimation is an interpretive process
based on drilling results and past experience as well as estimates of ore
characteristics and mining dilution, prices, costs of mining and processing,
capital expenditures and many other factors. Actual quality and characteristics
of ore deposits cannot be known until ore is actually mined. Reserves change
over time to reflect actual experience. Grades of ore processed at any time also
may vary from reserve estimates due to geologic variations within areas mined.
Production and mine lives may vary from estimates for particular properties and
for the Company as a whole because of changes in reserves, variation in ore
mined from estimated grade and metallurgical characteristics, unexpected ground
conditions, mining dilution, labor actions, and government restrictions. Cash
costs may vary due to changes from reserve and production estimates, unexpected
mining conditions, and changes in estimated costs of equipment, supplies,
utilities, labor costs and exchange rates. Noncash costs estimates, based on
total capital costs and reserve estimates, change based on actual amounts of
unamoritized capital, changes in estimates of final reclamation, and changes in
reserves. Reclamation and remediation cost estimates are based on existing and
expected legal requirements, past experience, cost estimates by the Company and
others, and expectations regarding government action and time for government
agencies to act, all of which change over time and require periodic
reevaluation. Capital cost estimates are based on operating experience, expected
production, estimates by and contract terms with third-party suppliers, expected
legal requirements, feasibility reports by Company personnel and others, and
other factors. Factors involved in estimated time for completion of projects
include the Company's experience in completing capital projects, estimates by
and contract terms with contractors, engineers, suppliers and others involved in
design and construction of projects, and estimated time for the government to
process applications, issue permits and take other actions. Changes in any
factor may cause costs and time for completion to vary significantly from
estimates. There is a greater likelihood of variation for properties and
facilities not yet in production due to lack of actual experience. Exploration
cost estimates are based on past experience, estimated levels of future activity
and assumptions regarding results on particular property and change based on
actual exploration results (increasing or decreasing expenditures), changed
conditions and property acquisitions and dispositions. Tax estimates reflect
expectations regarding geographic sources of income, locations of expenditures
and expected tax rates in each jurisdiction, and change as the mix of income,
expenditures and tax rates change.
14
<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 $ 863,628 $ 921,685 $ 871,959
Sulfur and oil sales 26,821 30,749 40,620
Interest income 17,320 20,392 19,152
Gain on termination of Santa Fe merger (note 4) 62,925
Other income (note 5) 721 25,620 17,520
- ---------------------------------------------------------------------------------------------------------------------
971,415 998,446 949,251
- ---------------------------------------------------------------------------------------------------------------------
Costs and Expenses
Production costs 627,639 615,491 609,117
Depreciation, depletion and amortization 162,781 151,852 125,639
Administrative and general expense 48,905 48,664 44,469
Exploration expense 65,238 67,363 43,281
Interest expense 20,756 19,140 12,459
Write-downs and other unusual charges (note 6) 285,315 8,983
Other expense 6,836 5,592 3,965
- ---------------------------------------------------------------------------------------------------------------------
1,217,470 917,085 838,930
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Taxes and Minority Interests (246,055) 81,361 110,321
Income and Mining Taxes (note 7) 19,458 (22,328) (45,422)
Minority Interests (4,009) (13,268) (14,957)
- ---------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (230,606) $ 45,765 $ 49,942
=====================================================================================================================
Net Income (Loss) Per Share (Basic and Diluted) $ (1.10) $ 0.22 $ 0.25
=====================================================================================================================
Average Shares Used in the Computation 210,537 210,027 199,385
=====================================================================================================================
</TABLE>
The accompanying notes are an integral part of these restated financial
statements (see note 3 for information concerning the 1998 acquisition of
Plutonic Resources Limited).
15
<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 $ 124,083 $ 104,657
Short-term investments 141,221 130,158
Receivables (note 8) 43,529 53,471
Inventories (note 9) 103,925 139,015
Deferred income and mining taxes (note 7) 19,372 13,298
Other 13,154 12,403
- ------------------------------------------------------------------------------------------------------------------
Total current assets 445,284 453,002
Property, Plant and Equipment - net (notes 3 and 10) 1,021,147 1,276,039
Investments and Other Assets
Noncurrent investments (note 11) 41,094 82,009
Other assets (note 12) 102,009 128,280
- ------------------------------------------------------------------------------------------------------------------
Total investments and other assets 143,103 210,289
- ------------------------------------------------------------------------------------------------------------------
Total Assets $ 1,609,534 $ 1,939,330
==================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 59,930 $ 53,498
Accrued liabilities (note 13) 68,641 49,490
Current portion of long-term debt (note 14) 73,649
Income and other taxes payable 277 38,386
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 128,848 215,023
Long-term Liabilities
Long-term debt (note 14) 374,593 254,668
Other long-term obligations (note 15) 152,610 123,475
- ------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 527,203 378,143
Deferred Income and Mining Taxes (note 7) 161,862 218,379
Minority Interests in Consolidated Subsidiaries 108,116 103,960
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 - 210,696; 1996 - 210,419 210,696 210,419
Additional paid-in capital 602,999 601,987
Retained earnings (deficit) (97,553) 164,837
Accumulated currency translation adjustments (33,381) 58,264
Other 744 (11,682)
- ------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 683,505 1,023,825
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 1,609,534 $ 1,939,330
==================================================================================================================
</TABLE>
Commitments and Contingencies - see notes 20 and 21.
The accompanying notes are an integral part of these restated financial
statements (see note 3 for information concerning the 1998 acquisition of
Plutonic Resources Limited).
16
<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) $ (230,606) $ 45,765 $ 49,942
Reconciliation to net cash provided by operations:
Depreciation, depletion and amortization 162,781 151,852 125,639
Write-downs and other unusual charges (note 6) 285,315 8,983
Foreign currency exchange losses on intercompany
debt (note 5) 5,657 8,943 883
Gains on asset disposals (16,926) (12,305) (5,575)
Deferred income and mining taxes (note 7) (56,318) (19,620) 25,756
Minority interests 4,009 13,268 14,957
Reclamation - net 2,970 (20) (720)
Other noncash items - net 11,345 (2,498) 4,215
Effect of changes in operating working capital items:
Receivables (372) 12,337 529
Inventories 2,932 (44,947) 16,438
Accounts payable 9,582 4,808 (2,028)
Accrued liabilities and taxes payable (18,720) 24,183 (12,772)
Other (1,625) (8,572) 2,788
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 160,024 182,177 220,052
- ---------------------------------------------------------------------------------------------------------------------------
Investment Activities
Decrease (increase) in short-term investments (11,063) (63,742) 33,063
Proceeds from asset sales 33,494 49,221 15,557
Additions to property, plant and equipment (204,629) (169,950) (110,180)
Increase in restricted cash (15,990)
Investments in mining companies (22,950) (65,006) (100,940)
Receipt (advance) to Edensor (note 12) 37,210 (6,599) (30,599)
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 (186,358) (298,526) (206,517)
- ---------------------------------------------------------------------------------------------------------------------------
Financing Activities
Borrowings 102,270 56,775 88,968
Debt repayments (25,442) (9,788) (10,009)
Dividends paid on common shares - Homestake (31,784) (43,278) (39,619)
- Prime minority interests (2,151) (2,205)
Common shares issued 1,289 35,113 3,178
Other 4,234
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 48,416 36,617 42,518
- ---------------------------------------------------------------------------------------------------------------------------
Effect of Exchange Rate Changes on Cash and Equivalents (2,656) 2,541 (4,127)
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Equivalents 19,426 (77,191) 51,926
Cash and Equivalents, January 1 104,657 181,848 129,922
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Equivalents, December 31 $ 124,083 $ 104,657 $ 181,848
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these restated financial
statements (see note 3 for information concerning the 1998 acquisition of
Plutonic Resources Limited).
17
<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 $ 198,993 $ 433,624 $ 152,027 $ 22,951 $ (8,219) $ 799,376
Net income 49,942 49,942
Dividends paid (39,619) (39,619)
Exercise of stock options 340 2,838 3,178
Stock issued for purchase of HGAL
minority interests (note 3) 2,550 39,849 42,399
Currency translation adjustments (10,132) (10,132)
Change in unrealized loss on
investments 3,555 3,555
Other (59) (59)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1995 201,883 476,311 162,350 12,819 (4,723) 848,640
Net income 45,765 45,765
Dividends paid (43,278) (43,278)
Exercise of stock options 299 2,726 3,025
Stock issued for purchase of
assets of Dominion (note 3) 2,273 29,815 32,088
Stock issued for purchase of HGAL
minority interests (note 3) 5,976 93,370 99,346
Currency translation adjustments 45,445 45,445
Change in unrealized loss on
investments (7,082) (7,082)
Other (12) (235) 123 (124)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1996 210,419 601,987 164,837 58,264 (11,682) 1,023,825
Net loss (230,606) (230,606)
Dividends paid (31,784) (31,784)
Exercise of stock options 277 1,012 1,289
Currency translation adjustments (91,645) (91,645)
Change in unrealized loss on
investments 10,210 10,210
Other 2,216 2,216
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 $ 210,696 $ 602,999 $ (97,553) $ (33,381) $ 744 $ 683,505
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these restated financial
statements (see note 3 for information concerning the 1998 acquisition of
Plutonic Resources Limited).
18
<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
Basis of presentation: The consolidated financial statements include
Homestake and its majority-owned subsidiaries, including Plutonic Resources
Limited ("Plutonic") which was acquired on April 30, 1998 (see note 3), and
their undivided interests in joint ventures after elimination of
intercompany amounts. The Company owns 50.6% of Prime Resources Group Inc.
("Prime"), 51% of Agua de la Falda S.A. and 62.1% of Lachlan Resources NL
("Lachlan") 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; Plutonic's interests in
the Mt Morgans and Peak Hill mines in 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.
19
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
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.
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 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 production, 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 mineralization 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 quantities
of ore which can be recovered economically in the future from known mineral
deposits. 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 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
20
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
reclamation liabilities. Receivables are recorded for the 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.
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
21
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
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 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. The Company's
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
Plutonic Resources Limited: On April 30, 1998 Homestake completed the
acquisition of Plutonic, a publicly-traded Australian gold producer, by an
exchange of common stock for common stock. As a result of the acquisition,
Homestake is now the second-largest gold producer in Australia. Homestake
issued 64.4 million common shares to acquire Plutonic, including 63.9
million shares in exchange for all of the Plutonic common shares
outstanding based on an exchange ratio of .34 Homestake common shares for
each fully-paid Plutonic common share, and .5 million Homestake common
shares for the Plutonic partly paid shares and options outstanding.
The business combination with Plutonic has been accounted for as a
pooling of interests and accordingly, Homestake's consolidated financial
statements have been restated to include Plutonic for all periods. Combined
and separate results for Homestake and Plutonic for the years ended
December 31, 1997, 1996 and 1995 are as follows:
22
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
<TABLE>
<CAPTION>
Homestake Plutonic
Historical Historical (a) Adjustments (b) Combined
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Revenues $ 723,834 $ 248,519 $ (938) $ 971,415
Net loss (168,879) (33,998) (27,729) (230,606)
Shareholders' equity at December 31 531,750 186,577 (34,822) 683,505
Year ended December 31, 1996:
Revenues 766,936 238,065 (6,555) 998,446
Net income 30,281 18,984 (3,500) 45,765
Shareholders' equity at December 31 768,552 268,168 (12,895) 1,023,825
Year ended December 31, 1995:
Revenues 746,365 163,069 39,817 949,251
Net income 30,327 20,126 (511) 49,942
Shareholders' equity at December 31 635,857 221,510 (8,727) 848,640
a) The Plutonic historical results of operations have been adjusted to
reflect i) presentation of Plutonic's results of operations in accordance
with United States generally accepted accounting principles and the format
and classifications utilized by Homestake, and ii) translation into U.S.
dollars using the average exchange rate for each period. Shareholders'
equity has been translated into U.S. dollars using the end-of-period
exchange rates.
b) In combining the historical results of Homestake and Plutonic,
certain adjustments were made to conform Plutonic's accounting policies to
Homestake's accounting policies. The effect of these adjustments on
combined net income (loss) is as follows:
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C>
Revenue recognition $ 377 $ (3,318) $ 11,515
Reclamation expense (1,215) (1,430) (5,324)
Depreciation, depletion and amortization (6,958) (2,305)
Income taxes (19,933) 1,248 (4,397)
---------------------------------------------------------------
$ (27,729) $ (3,500) $ (511)
===============================================================
</TABLE>
Homestake estimates that transaction costs related to the merger will total
approximately $15 million and post-combination severance and lease
termination costs will total approximately $7 million. The merger
transaction expenses are being charged to operations as incurred, primarily
in the first half of 1998, and the estimated post-combination severance and
lease termination costs will be expensed as of the date of the combination.
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.
23
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Mt Morgans Mine: In October 1995, the Company acquired most of Dominion
Mining Limited's ("Dominion") gold assets, including an 80% interest in the
Mt Morgans mine. The net purchase price after working capital adjustments
was $39.1 million. As part of its agreement with Dominion, the Company
offered Dominion shareholders the opportunity to subscribe for shares of
the Company instead of receiving a return of Dominion capital. As a result,
2.3 million shares of the Company were issued to Dominion shareholders on
January 29, 1996 for consideration of $32.1 million.
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.
Archaean Gold NL: In July 1996, Lachlan acquired 90.7% of Archaean Gold NL
("Archaean") for $36.8 million. In April 1997, Lachlan acquired the
remaining interest in Archaean. This acquisition, which was accounted for
as a purchase, was funded by a loan from the Company to Lachlan which,
together with capitalized interest up to August 1997, totaled $33.2 million
(A$50.9 million). The loan became noninterest bearing in September 1997.
Lachlan plans to repay this loan by issuing additional shares to the
Company which will increase the Company's interest in Lachlan from
approximately 62% to 81%.
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
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.
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) include $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.
24
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
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 $ 16,926 $ 12,305 $ 5,575
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
Gain on sale of Great Central option
(see note 12) 10,419 4,699
Other 5,061 11,171 10,727
------------------------------------------
$ 721 $ 25,620 $ 17,520
==========================================
</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 resource assets (b) 84,655
Increase in the estimated accrual for
future reclamation expenditures (c) 29,156
Write-downs of noncurrent investments (d) 47,932 $ 8,983
Other (e) 15,811
-------------------------------
$ 285,315 $ 8,983
===============================
<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-
25
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
downs were required to reduce the carrying value of several of its
assets or operations with short remaining lives, including the Mt
Morgans and Peak Hill mines in Western Australia, the Pinson mine in
Nevada, the Homestake mine's Open Cut in South Dakota, low-grade
stockpiled ore and exploration properties at certain locations in
Western Australia and 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>
26
<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
Australian (22,282) (2,024) 4,240
----------------------------------------------
(56,498) (21,791) 26,280
----------------------------------------------
Canadian mining taxes 180 2,171 (524)
----------------------------------------------
Total deferred taxes (56,318) (19,620) 25,756
----------------------------------------------
Total income and mining taxes $ (19,458) $ 22,328 $ 45,422
==============================================
</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
Australia (115,323) 7,840 25,684
Other foreign (13,754) (8,024) (4,303)
-------------------------------------------
$(246,055) $ 81,361 $ 110,321
===========================================
</TABLE>
27
<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 112,356 136,523
-----------------------------
222,369 302,842
Other 31,697 19,360
-----------------------------
Gross deferred tax liabilities 254,066 322,202
-----------------------------
Deferred Tax Assets
Tax loss carry-forwards
Canada - Federal 2,001
Australia 52,868 88,956
Chile 23,943 19,929
Other 2,512 162
-----------------------------
79,323 111,048
Reclamation costs
United States 16,827 6,783
Other 13,393 9,638
-----------------------------
30,220 16,421
Employee benefit costs 28,716 27,732
Alternative minimum tax credit carry-forwards 14,215
Land and other resource property 18,750 15,225
Inventory 23,149
Foreign tax credit carry-forwards 5,857 12,725
Unrealized foreign exchange losses 9,157 2,543
Write-downs of noncurrent investments 9,619 3,722
Other 14,705 14,161
-----------------------------
Gross deferred tax assets 219,496 217,792
Deferred tax asset valuation allowances (107,920) (100,671)
-----------------------------
Net deferred tax assets 111,576 117,121
-----------------------------
Net deferred tax liability $ 142,490 $ 205,081
=============================
Net deferred tax liability consists of
Current deferred tax assets $ (19,372) $ (13,298)
Long-term deferred tax liability 161,862 218,379
-----------------------------
Net deferred tax liability $ 142,490 $ 205,081
=============================
</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 $107.9 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 not". The deferred tax valuation allowance consists of United States,
Chile, Australia and
28
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
Canada unrealized deferred tax assets of $56.6 million, $27.1 million,
$23.9 million, and $.3 million, respectively. The increase in the valuation
allowance for deferred tax assets of $7.2 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; a decrease of $6.8 million for a reduction of the Company's
foreign tax credit carryover; and a decrease of $8.4 million for
utilization of previously unbenefited losses in Australia. 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 $107.9 million of unrealized deferred tax
assets is comprised of $65.0 million of future United States ($40.8
million), Australia ($23.9 million), and Canada ($.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 $ (86,120) $ 28,476 $ 38,612
Percentage depletion (900) (7,611) (9,879)
Earnings in foreign jurisdictions
at different rates 273 (2,009) (27)
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 34,874 2,875 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 (322) 5,235 (2,975)
------------------------------------------
Total income taxes (29,435) 5,193 35,698
Canadian mining taxes 9,977 17,135 9,724
------------------------------------------
Total income and mining taxes $ (19,458) $ 22,328 $ 45,422
==========================================
</TABLE>
29
<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 $ 24,612 $ 27,373
U.S. Government receivable (see note 20) 5,500 5,500
Interest and other 13,417 20,598
-----------------------------------
$ 43,529 $ 53,471
===================================
</TABLE>
Note 9: Inventories
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------------------------------
<S> <C> <C>
Finished products $ 33,019 $ 41,080
Ore and in-process 37,811 62,183
Supplies 33,095 35,752
-------------------------------------
$ 103,925 $ 139,015
=====================================
</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 $32.1
million and $43.3 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 $ 1,103,705 $ 1,217,461
Plant and equipment 1,091,814 1,023,087
Land and royalty interests 4,487 4,103
Construction and mine development in progress 22,459 36,374
---------------------------------
2,222,465 2,281,025
Accumulated depreciation, depletion and
amortization (1,201,318) (1,004,986)
---------------------------------
$ 1,021,147 $ 1,276,039
=================================
</TABLE>
30
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
During 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 (see note 6) $ 6,685 $ 16,800
Navan Bulgarian Mining BV 12,000
Other investments (see note 6) 22,409 65,209
----------------------------------
$ 41,094 $ 82,009
==================================
</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
and a 32% interest in Navan's Bulgarian exploration projects and program
for $4 million. Navan BV is a Netherlands company, which in turn owns 68%
of Bimak AD ("Bimak"), 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 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.
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) 32,125 43,292
U.S. Government receivable (see note 20) 5,362 10,663
Note receivable - Edensor 39,810
Other 9,557 9,263
---------------------------------------
$ 102,009 $ 128,280
=======================================
</TABLE>
In 1995, the Company provided Edensor Nominees Pty, Ltd ("Edensor") with a loan
facility of $39.8 million and was granted an option to acquire 19.9% of the
issued capital of Great Central Mines Limited ("Great Central") in consideration
for this loan. In July 1996, the Company sold a right to cancel the
31
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
option to acquire 19.9% of the shares of Great Central. The Company received,
and recorded in other income, $10.4 million in 1997 and $4.7 million in 1996
with respect to the cancellation of the option. In 1997, Edensor repaid the
amounts borrowed from the Company.
Note 13: Accrued Liabilities
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------------------------
<S> <C> <C>
Accrued payroll and other compensation $ 23,898 $ 25,212
Accrued reclamation and closure costs 11,818 10,055
Unrealized loss on foreign currency exchange contracts 20,416
Other 12,509 14,223
-------------------------------
$ 68,641 $ 49,490
===============================
</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
Cross-border credit facility (due 2001) 48,855
Plutonic syndicated credit facility (due 2000-2002) 110,738
Plutonic credit facility 143,317
----------------------------
374,593 328,317
Less current portion 73,649
----------------------------
$ 374,593 $ 254,668
============================
</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 semiannually 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
32
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
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 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.
Cross-border credit facility: 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 up to
0.225% 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 is 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 a margin of up to 0.625%.
The average interest rate on borrowings outstanding 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.
Plutonic syndicated credit facility: In June 1997, Plutonic replaced its
credit facility with an Australian bank with a credit facility with a
syndicate of banks providing a total availability of $260 million (A$400
million), including a $185.6 million (A$285 million) revolving debt
facility that reduces on stated amortization rates and matures in June 2002
and a $75 million (A$115 million) standby facility which expires in
September 1998. The facility provides for borrowings in either United
States or Australian dollars and is subject to a number of financial
covenants. Interest on the revolving facility is based on the Australian
Bank Bill Swap Rate plus a margin of 0.33%. The average interest rate on
the $110.7 million (A$170 million) of borrowings outstanding at December
31, 1997 was 5.35%.
The aggregate maturities of long-term debt in the years subsequent to
December 31, 1997 are as follows: $167.9 million in 2000, $67.4 million in
2001, $74.3 million in 2002 and $65 million in 2004 and thereafter.
Note 15: Other Long-term Obligations
<TABLE>
<CAPTION>
December 31,
1997 1996
--------------------------------
<S> <C> <C>
Accrued reclamation and closure costs $ 80,428 $ 54,138
Accrued pension and other postretirement
benefit obligations (see note 16) 60,942 59,273
Other 11,240 10,064
--------------------------------
$ 152,610 $ 123,475
================================
</TABLE>
33
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
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 $175 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 $92 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.
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%.
34
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
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>
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 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 $2.3 million
in 1997, $2.1 million in 1996, and $1.6 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.
35
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
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>
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
million shares were outstanding under the 1996 Plan and stock options for
3.5 million shares were outstanding under prior plans. The exercise price
of each stock option granted under these plans is equal to or greater than
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.
36
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
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 3,738 3,053 3,177
Granted 794 $15.11 1,435 $19.32 429 $15.24
Exercised (63) 13.99 (743) 6.24 (400) 8.12
Expired (148) 22.04 (7) 16.43 (153) 16.78
--------- ---------- ----------
Balance at December 31 4,321 3,738 3,053
========= ========== ==========
Options exercisable at
December 31 2,248 1,933 2,102
Fair value of options granted
during the year $4.95 $4.35 $4.91
</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>
$11.79 to $14.90 1,028 5.7 years $13.41 659 $12.71
15.15 to 15.75 1,338 6.0 years 15.30 394 15.52
15.78 to 19.13 1,374 5.3 years 17.72 658 17.54
19.70 to 39.79 581 3.1 years 27.36 537 27.92
--------------- ------------
4,321 2,248
=============== ============
</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.
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
37
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
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, 1996 and 1995 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 $ (230,606) $ (1.10) $ 45,765 $ 0.22 $ 49,942 $ 0.25
Pro forma (233,317) (1.11) 43,637 0.21 49,323 0.25
</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 was approximately $110 million. No amounts are
included in the accompanying balance sheet at December 31, 1997 for these
contracts (see note 21).
Note 18: Shareholders' Equity
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:
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
38
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
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 $ 19,506 $ 18,785 $ 12,143
Income and mining taxes, net of refunds 66,227 15,896 28,574
</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.
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 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
39
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
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 amount, 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 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
40
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
counterclaims against the State of South Dakota and the federal trustees,
and claims for 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 Forwards Dates
- --------------------------------------------------------------------------------------------------------------
<S> <C> <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 20,000 0.68 1998
Australian 104,750 0.74 0.77 1998
Australian 61,600 0.68 0.72 1999
Australian 3,000 0.65 0.68 2000
--------------
$503,600
==============
</TABLE>
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, respectively.
During 1997, 1996 and 1995, the Company delivered 535,900, 438,400 and
446,700 ounces of its Australian gold production into Australian dollar
denominated forward gold contracts at average prices of $429, $482 and $440
per ounce, respectively. At December 31, 1997 the Company had committed
1,227,500 ounces of its future Australian gold production for sale under
Australian dollar denominated forward gold contracts at an average price of
$330 (A$507) per ounce. During 1997, 1996 and 1995, the Company delivered
or financially settled 120,100, 70,000 and 113,200 ounces of its North
American gold production at average prices of $385, $421, and $398 per
ounce,
41
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
respectively. At December 31, 1997 the Company had committed 580,000 ounces
of its future North American production for sale through the year 2003 at
an average price of $434 per ounce.
At December 31, 1997 the Company's forward sales commitments were as
follows:
<TABLE>
<CAPTION>
US$ Denominated Australian $ Denominated
-------------------------------------------- ----------------------------------------------
Average Price of Average Price of
Forward Sales Forward Sales Forward Sales Forward Sales
Year (ounces) (US$ per ounce) (ounces) (US$ per ounce)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 120,000 $399 945,490 $315
1999 109,900 415 82,000 423
2000 85,100 430 24,800 343
2001 95,000 441 24,800 343
2002 95,000 457 74,800 397
2003 75,000 481 75,600 343
----------------- ------------------
580,000 1,227,490
================= ==================
</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
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.
42
<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 (4) 368,368 378,751 323,784
Latin America 11,182 4,284 11,458
------------------------------------------
$ 971,415 $ 998,446 $ 949,251
==========================================
Exploration Expense
United States $ 13,902 $ 11,861 $ 12,750
Canada 8,406 9,751 2,797
Australia 25,623 29,844 20,485
Latin America and other 17,307 15,907 7,249
------------------------------------------
$ 65,238 $ 67,363 $ 43,281
==========================================
Operating Earnings (Loss)
United States (5) $ (144,105) $ 23,124 $ 32,623
Canada (3) 82,186 103,640 86,662
Australia (6) (87,057) 10,123 32,844
Latin America and other (16,523) (14,606) (6,544)
------------------------------------------
$ (165,499) $ 122,281 $ 145,585
==========================================
Identifiable Assets as of December 31
United States $ 507,845 $ 522,565 $ 618,267
Canada 427,388 494,083 432,087
Australia 658,690 909,195 615,995
Latin America and other 15,611 13,487 7,041
------------------------------------------
$1,609,534 $1,939,330 $1,673,390
==========================================
<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 gains of $10.4 million in 1997 and $4.7 million in 1996 with
respect to the cancellation of an option to acquire Great Central Mines
Limited and a gain of $7.9 million in 1996 on the sale of the
investment in Eagle Mining Corporation NL.
(5) Includes write-downs in 1997 of $107.8 million in Homestake's
investment in the Main Pass 299 sulfur mine and $20.8 million in the
carrying values of resource assets.
(6) Includes write-downs in 1997 of $63.9 million in the carrying values
of resource assets.
</FN>
</TABLE>
43
<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 $ 863,628 $ 923,273 $ 874,114
Sulfur and oil 26,821 30,749 40,620
Interest and other (1,2,3) 80,966 44,424 34,517
--------------------------------------
$ 971,415 $ 998,446 $ 949,251
======================================
Operating Earnings (Loss)
Gold (3,4) $ (54,112) $ 121,009 $ 139,892
Sulfur and oil (5) (111,387) 1,272 5,693
--------------------------------------
Operating earnings (loss) (165,499) 122,281 145,585
Net corporate expense (1,2,6,7) (80,556) (40,920) (35,264)
--------------------------------------
Income (Loss) Before Taxes and
Minority Interests $ (246,055) $ 81,361 $ 110,321
======================================
Depreciation, Depletion and Amortization
Gold $ 155,924 $ 144,171 $ 115,675
Sulfur and oil 5,013 6,302 8,055
Corporate 1,844 1,379 1,909
--------------------------------------
$ 162,781 $ 151,852 $ 125,639
======================================
Exploration Expense
Gold $ 65,238 $ 67,363 $ 43,281
======================================
Additions to Property, Plant and Equipment
Gold (8) $ 200,991 $ 325,490 $ 175,150
Sulfur and oil 1,181 1,541 1,604
Corporate 2,457 1,212 2,083
--------------------------------------
$ 204,629 $ 328,243 $ 178,837
======================================
Identifiable Assets as of December 31
Gold $1,248,797 $ 1,477,079 $1,183,165
Sulfur and oil 15,181 126,499 134,990
Corporate:
Cash and equivalents and short-term
investments 265,304 234,815 248,264
Other 80,252 100,937 106,971
--------------------------------------
$1,609,534 $ 1,939,330 $1,673,390
======================================
<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, gains of $10.4 million in 1997 and $4.7 million in 1996
with respect to the cancellation of an option to acquire Great Central
Mines Limited and a gain of $7.9 million in 1996 on the sale of the
investment in Eagle Mining Corporation NL.
44
<PAGE>
Homestake Mining Company and Subsidiaries
Notes to Consolidated Financial Statements
(Unless otherwise noted, all tabular amounts are in thousands)
(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 gains in 1997 of $13.5 million 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 $84.7 million in the carrying values
of resource assets.
(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 $47.9 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 $15.8 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 104,500 42,700
C 100,000 129,000 92,000
D 96,200 140,400 171,300
E 101,000
</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.
45
<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, restated for all periods
presented to give effect to the business combination with Plutonic Resources
Limited on April 30, 1998, accounted for as a pooling of interests. 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
May 21, 1998
46
<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 purpose 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
Vice President, Finance and
Chief Financial Officer May 21, 1998
47
<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 $317,338 $226,060 $217,737 $ 210,280 $ 971,415
Net income (loss) 48,256 (1) (64,857)(2) (155,561)(3) (58,444)(4) (230,606)(1,2,3,4)
Per common share:
Net income
(loss) (10) $ 0.23 (1) $ (0.31)(2) $ (0.74)(3) $ (0.28)(4) (1.10)(1,2,3,4)
Dividends paid (11) 0.05 0.05 0.05 0.15
1996:
Revenues $223,230 $265,933 $265,580 $ 243,703 $ 998,446
Net income 4,375 (5) 18,252 (6) 7,134 (7) 16,004 (7,8,9) 45,765 (5,6,7,8,9)
Per common share:
Net income (10) $ 0.02 (5) $ 0.09 (6) $ 0.03 (7) $ 0.08 (7,8,9) $ 0.22 (5,6,7,8,9)
Dividends paid (11) 0.05 0.05 0.05 0.05 0.20
<FN>
(1) Includes a gain of $47.2 million ($62.9 million pretax) or $0.22 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 $0.04 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 $50 million ($65.1 million
pretax) or $0.24 per share including (i) a reduction of $31.9 million ($45
million pretax) in the carrying value of resource assets, (ii) write-downs
of $14.5 million ($14.5 million pretax) of certain mining investments, and
(iii) other charges of $3.6 million ($5.6 million pretax).
(3) Includes write-downs and unusual charges of $145.1 million ($183.6 million
pretax) or $0.69 per share including (i) a write-down of $84.9 million
($107.8 million pretax) in Homestake's investment in the Main Pass 299
sulfur mine, (ii) a reduction of $18.2 million ($24.3 million pretax) in
the carrying values of resource assets, (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.
(4) Includes write-downs and unusual charges of $29.8 million ($36.6 million
pretax) or $0.14 per share including (i) a reduction of $10 million ($15.4
million pretax) in the carrying values of resource assets, (ii) write-downs
of $16.4 million ($16.9 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.
(5) Includes income of $4.9 million ($5.5 million pretax) or $0.02 per share
from a litigation recovery.
(6) Includes a gain of $7.9 million ($7.9 million pretax) or $0.04 per share
on the sale of the investment in Eagle Mining Corporation NL.
(7) Includes $2.7 million or $0.01 per share and $21.3 million or $0.10 per
share in the third and fourth quarters, respectively, for reductions in the
Company's accrual for prior year income taxes.
(8) Includes foreign currency exchange losses on intercompany advances of $7.2
million ($8.7 million pretax) or $0.03 per share and $7.4 million ($8.9
million pretax) or $0.04 per share in the 1996 fourth
48
<PAGE>
quarter and year-to-date periods, respectively, primarily related to the
Company's Canadian-dollar denominated advances to HCI.
(9) Includes write-downs of $8.3 million ($9 million pretax) or $0.04 per share
in the carrying value of investments in mining company securities.
(10) Basic and diluted earnings per share.
(11) Homestake only.
</FN>
</TABLE>
49
<PAGE>
Five-Year Selected Data (1)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 971,415 $ 998,446 $ 949,251 $ 829,935 $ 855,834
Net income (loss) (230,606)(2) 45,765 (3) 49,942 93,631 (4) 68,734 (5)
Net income (loss) per share (6) (1.10)(2) 0.22 (3) 0.25 0.47 (4) 0.36 (5)
Total assets 1,609,534 1,939,330 1,673,390 1,460,968 1,355,928
Long-term debt 374,593 254,668 274,292 188,085 198,266
Other long-term obligations 152,610 123,475 127,558 111,065 93,685
Deferred income
and mining taxes 161,862 218,379 202,607 147,278 173,258
Minority interest 108,116 103,960 100,380 94,140 55,164
Shareholders' equity 683,505 1,023,825 848,640 799,376 700,545
Dividends per share (7) 0.15 0.20 0.20 0.175 0.10
<FN>
(1) Five-year selected financial data reflects the 1998 combination of
Homestake and Plutonic on a pooling-of-interests basis, accordingly all
periods have been restated.
(2) Includes a gain of $47.2 million ($62.9 million pretax) or $0.22 per share
on the fee received upon termination of Homestake's merger agreement with
Santa Fe Pacific Gold Corporation, a gain of $10.4 million ($10.4 million
pretax) or $0.05 per share with respect to the cancellation of an option to
acquire Great Central Mines Limited, and a gain of $8.1 million ($13.5
million pretax) or $0.04 per share on the sale of the George Lake and Back
River joint venture interests in the Northwest Territories of Canada, and
write-downs and unusual charges of $224.9 million ($285.3 million pretax)
or $1.07 per share including (i) a write-down of $84.9 million ($107.8
million pretax) in Homestake's investment in the Main Pass 299 sulfur mine,
(ii) a reduction of $60.1 million ($84.7 million pretax) in the carrying
values of resource assets, (iii) write-downs of $45.7 million ($47.9
million pretax) of certain investments, (iv) an increase of $21.5 million
($29.1 million pretax) in the accrual for estimated future reclamation
expenditures, and (v) other charges of $12.7 million ($15.8 million pretax)
consisting primarily of foreign exchange losses on intercompany redeemable
preferred stock and losses on an intercompany gold loan.
(3) Includes income of $24 million or $0.11 per share from a reduction in the
Company's accrual for prior year income taxes, a gain of $7.9 million ($7.9
million pretax) or $0.04 per share from the sale of the investment in Eagle
Mining Corporation NL, a foreign currency exchange loss on intercompany
advances of $7.4 million ($8.9 million pretax) or $0.04 per share primarily
related to the Company's Canadian-dollar denominated advances to HCI,
write-downs of $8.3 million ($9 million pretax) or $0.04 per share in the
carrying values of investments in mining company securities, and proceeds
of $4.9 million ($5.5 million pretax) or $0.02 per share from a litigation
recovery.
(4) Includes a gain of $12.6 million ($15.7 million pretax) or $0.06 per share
on the sale of the Company's interest in the Dee mine and a gain of $11.2
million ($11.2 million pretax) or $0.06 per share on dilution of the
Company's interest in Prime.
(5) Includes expense of $12.8 million ($16 million pretax) or $0.07 per share
for the write-down of oil assets at Main Pass 299 and expense of $6.8
million ($8.2 million pretax) or $0.03 per share for restructuring and
business combination costs.
(6) Basic and diluted earnings per share.
(7) Homestake only.
</FN>
</TABLE>
50
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets at December 31, 1997, 1996 and 1995 and the related
Statements of Consolidated Operations for the years ended December 31, 1997,
1996 and 1995, (restated to reflect the April 30, 1998 pooling of interests with
Plutonic Resources Limited) and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 124,083 104,657 181,848
<SECURITIES> 141,221 130,158 66,416
<RECEIVABLES> 43,529 53,471 62,081
<ALLOWANCES> 0 0 0
<INVENTORY> 103,925 139,015 117,316
<CURRENT-ASSETS> 445,284 453,002 464,199
<PP&E> 2,222,465 2,281,025 1,905,064
<DEPRECIATION> 1,201,318 1,004,986 877,339
<TOTAL-ASSETS> 1,609,534 1,939,330 1,673,390
<CURRENT-LIABILITIES> 128,848 215,023 119,913
<BONDS> 374,593 254,668 274,292
0 0 0
0 0 0
<COMMON> 210,696 210,419 201,883
<OTHER-SE> 472,809 813,406 646,757
<TOTAL-LIABILITY-AND-EQUITY> 1,609,534 1,939,330 1,673,390
<SALES> 890,449 952,434 912,579
<TOTAL-REVENUES> 971,415 998,446 949,251
<CGS> 790,421 <F1> 767,343 <F1> 734,756 <F1>
<TOTAL-COSTS> 839,326 <F2> 816,007 <F2> 779,225 <F2>
<OTHER-EXPENSES> 357,389 <F3> 81,938 <F3> 47,246 <F3>
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 20,756 19,140 12,459
<INCOME-PRETAX> (246,055) 81,361 110,321
<INCOME-TAX> (19,458) 22,328 45,422
<INCOME-CONTINUING> (230,606) 45,765 49,942
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (230,606) 45,765 49,942
<EPS-PRIMARY> (1.10) 0.22 0.25
<EPS-DILUTED> (1.10) 0.22 0.25
<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>
