UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the Quarterly Period Ended March 31, 1998
( ) Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from _______ to ________
Commission File Number 1-8736
HOMESTAKE MINING COMPANY
A Delaware Corporation
IRS Employer Identification No. 94-2934609
650 California Street
San Francisco, California 94108-2788
Telephone: (415) 981-8150
http://www.homestake.com
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
-----------
The number of shares of common stock outstanding as of April 23, 1998 was
146,780,900.
Page 1
<PAGE>
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
A. Condensed Consolidated Balance Sheets (unaudited)
(In thousands, except per share amount)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents $ 130,232 $ 94,725
Short-term investments 120,288 141,221
Receivables 45,127 40,366
Inventories:
Finished products 15,886 15,546
Ore and in process 23,799 25,881
Supplies 27,120 27,831
Deferred income and mining taxes 20,894 20,894
Other 8,420 9,506
---------------- ----------------
Total current assets 391,766 375,970
---------------- ----------------
Property, plant and equipment - at cost 1,978,030 1,959,222
Accumulated depreciation, depletion and amortization (1,179,475) (1,147,176)
---------------- ----------------
Property, plant and equipment - net 798,555 812,046
---------------- ----------------
Investments and other assets
Noncurrent investments 32,360 32,321
Other assets 84,689 84,392
---------------- ----------------
Total investments and other assets 117,049 116,713
---------------- ----------------
Total Assets $ 1,307,370 $ 1,304,729
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 33,038 $ 43,843
Accrued liabilities:
Payroll and other compensation 33,465 21,848
Reclamation 12,919 11,818
Unrealized loss on foreign currency exchange contracts 11,441 20,416
Other 22,729 10,704
Income and other taxes payable 8,157 277
---------------- ----------------
Total current liabilities 121,749 108,906
---------------- ----------------
Long-term liabilities
Long-term debt 264,673 263,855
Other long-term obligations 134,243 142,382
---------------- ----------------
Total long-term liabilities 398,916 406,237
---------------- ----------------
Deferred income and mining taxes 153,151 155,449
Minority interests in consolidated subsidiaries 110,629 102,387
Shareholders' equity
Capital stock, $1 par value per share:
Preferred - 10,000 shares authorized; no shares outstanding
Common - 250,000 shares authorized; shares outstanding:
1998 - 146,770; 1997 - 146,735 146,770 146,735
Other shareholders' equity 376,155 385,015
---------------- ----------------
Total shareholders' equity 522,925 531,750
---------------- ----------------
Total Liabilities and Shareholders' Equity $ 1,307,370 $ 1,304,729
================ ================
</TABLE>
See notes to condensed consolidated financial statements.
2
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HOMESTAKE MINING COMPANY AND SUBSIDIARIES
B. Condensed Statements of Consolidated Operations (unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
----------------- ----------------
<S> <C> <C>
Revenues
Gold and ore sales $ 153,227 $ 164,213
Sulfur and oil sales 6,133 6,952
Interest income 3,998 3,329
Gain on termination of Santa Fe merger 62,925
Other income 10,985 12,768
----------------- ----------------
174,343 250,187
----------------- ----------------
Costs and Expenses
Production costs 104,150 118,114
Depreciation, depletion and amortization 29,544 28,155
Administrative and general expense 10,180 9,561
Exploration expense 7,218 8,335
Interest expense 3,528 2,582
Other expense 11,687 642
----------------- ----------------
166,307 167,389
----------------- ----------------
Income Before Taxes and Minority Interests 8,036 82,798
Income and Mining Taxes (8,097) (29,779)
Minority Interests (4,550) (3,159)
----------------- ----------------
Net Income (Loss) $ (4,611) $ 49,860
================= ================
Net Income (Loss) Per Share (Basic and Diluted) $ (0.03) $ 0.34
================= ================
Average Shares Used in the Computation 146,749 146,682
================= ================
Dividends Paid Per Common Share $ - $ 0.05
================= ================
</TABLE>
See notes to condensed consolidated financial statements.
3
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HOMESTAKE MINING COMPANY AND SUBSIDIARIES
C. Condensed Statements of Consolidated Cash Flows (unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
--------------- ---------------
<S> <C> <C>
Cash Flows from Operations
Net income (loss) $ (4,611) $ 49,860
Reconciliation to net cash provided by operations:
Depreciation, depletion and amortization 29,544 28,155
Gains on asset disposals (101) (13,575)
Deferred taxes, minority interests and other (10,725) 18,273
Effect of changes in operating working capital items 5,240 (16,267)
--------------- ---------------
Net cash provided by operations 19,347 66,446
--------------- ---------------
Investment Activities
Decrease in short-term investments 21,637 14,956
Additions to property, plant and equipment (7,796) (22,806)
Proceeds from asset sales 191 9,425
Other (1,194) 881
--------------- ---------------
Net cash provided by investment activities 12,838 2,456
--------------- ---------------
Financing Activities
Common shares issued 510 781
Dividends paid - (7,334)
Other 2,812 2,659
--------------- ---------------
Net cash provided by (used in) financing activities 3,322 (3,894)
--------------- ---------------
Net increase in cash and equivalents 35,507 65,008
Cash and equivalents, January 1 94,725 89,599
--------------- ---------------
Cash and equivalents, March 31 $ 130,232 $ 154,607
=============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)
1. The condensed consolidated financial statements included herein should
be read in conjunction with the financial statements and notes thereto,
which include information as to significant accounting policies, in the
Company's Annual Report on Form 10-K for the year ended December 31,
1997.
The information furnished in this report reflects all adjustments
which, in the opinion of management, are necessary for a fair statement
of the results for the interim periods. Except as described in notes 2
through 5, such adjustments consist of items of a normal recurring
nature. Results of operations for interim periods are not necessarily
indicative of results for the full year.
All dollar amounts are in United States dollars unless otherwise
indicated.
2. On December 21, 1997, Homestake announced it had entered into an
agreement to acquire Plutonic Resources Limited ("Plutonic"), an
Australian gold producer, by an exchange of common stock for common
stock. Homestake expects to issue approximately 64.4 million shares to
acquire Plutonic (0.34 of a Homestake common share for each Plutonic
fully-paid ordinary share).
The transaction, which has been approved unanimously by the Boards of
both companies, is expected to close on April 30, 1998. The transaction
is subject to approval by shareholders of both companies, qualification
as a pooling of interests for accounting purposes, and certain other
conditions. Transaction costs of $2.4 million ($2.4 million after tax)
related to this acquisition are included in other expense for the three
months ended March 31, 1998.
3. In January 1998, the Company announced that it would implement 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 is specifically 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 complete reorganization of underground activities,
a significant reduction in the mine's work force and a reduction in
future gold production.
Other expense during the three months March 31, 1998 includes $8.9
million ($5.9 million after tax) of costs associated with the temporary
suspension of operations and the reduction in work force of 450
employees. These costs primarily represent wage payments to the work
force during the temporary shutdown and severance payments and benefit
costs for the severed employees, and are net of approximately $9.3
million of pension and benefit plan curtailment gains.
4. 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, 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.
5. 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 ($8.1 million after tax) in the first quarter of
1997, which is included in other income.
5
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HOMESTAKE MINING COMPANY AND SUBSIDIARIES
6. 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.
At March 31, 1998 the Company had forward currency contracts
outstanding as follows (dollar amounts in thousands):
<TABLE>
<CAPTION>
Weighted-Average Exchange
Amount Covered Rates to U.S. Dollars Expiration
Currency (U.S. Dollars) Put Options Call Options Dates
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Canadian $ 146,410 0.72 0.75 1998
Canadian 104,280 0.70 0.73 1999
Canadian 77,340 0.69 0.72 2000
Canadian 2,000 0.70 0.73 2001
Australian 76,650 0.74 0.77 1998
Australian 72,500 0.68 0.71 1999
Australian 42,800 0.66 0.69 2000
----------------
$ 521,980
</TABLE>
7. In 1996, the Company entered into forward sales commitments for 680,100
ounces of gold during the period 1997 through 2003. Gold sales for the
first quarter of 1998 include 30,000 ounces at an average price of $394
per ounce compared to 30,000 ounces at an average price of $380 per
ounce in the 1997 first quarter under the forward sales program.
At March 31, 1998 the Company's gold forward sales commitments were as
follows:
<TABLE>
<CAPTION>
Average Price of
Forward Sales Forward Sales
Year (ounces) (per ounce)
- -----------------------------------------------------------------------------------
<S> <C> <C>
1998 90,000 $401
1999 109,900 415
2000 85,100 430
2001 95,000 441
2002 95,000 457
2003 75,000 481
-------------
550,000
=============
</TABLE>
To provide protection against a decrease in gold prices, during the
third quarter of 1997 the Company entered into a series of put and call
option contracts to provide a floor price of $325 per ounce for 900,000
ounces of Homestake's expected 1998 gold production. Gold sales during
the first quarter of 1998 include 225,000 ounces at an average price
$325 per ounce under this program. At March 31, 1998 the Company owned
put options for 675,000 ounces of gold exercisable during 1998 at a
price of $325 per ounce. The Company also had written call options
outstanding for 675,000 ounces of gold exercisable during 1998 at a
price of $325 per ounce and owned call options for 675,000 ounces of
gold exercisable during 1998 at a price of $336 per ounce.
At March 31, 1998 the Company also owned put options for 30,000 ounces
of gold exercisable during 2000 at a price of $350 per ounce and had
written call options
6
<PAGE>
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
outstanding for 15,000 ounces of gold exercisable during 2000 at an
average price of $395 per ounce.
In February 1998, Prime Resources Group Inc. ("Prime"), a 50.6%-owned
subsidiary of the Company, adopted a gold and silver hedging policy
which provides for the use of forward sales contracts for up to 40% of
each of the following five year's expected annual gold and silver
production at prices in excess of certain targeted prices. At March 31,
1998 Prime had forward sales outstanding for approximately 7 million
ounces of silver during the period 1999 through 2001 at an average
price of $6.27 per ounce.
8. Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("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 requires that the components of comprehensive
income be displayed in annual financial statements with the same
prominence as other financial statements and that the total amount of
comprehensive income be reported in interim periods. Homestake's
comprehensive income (loss) for the three months ended March 31, 1998
and 1997 was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
--------------- ---------------
<S> <C> <C>
Net Income (Loss) $ (4,611) $ 49,860
Other Comprehensive Income (Loss)
Currency translation adjustments 4,572 (6,372)
Unrealized losses on securities (2,035) (2,057)
--------------- ---------------
Total Other Comprehensive Income (Loss) 2,537 (8,429)
--------------- ---------------
Comprehensive Income (Loss) $ (2,074) $ 41,431
=============== ===============
</TABLE>
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132 ("SFAS 132"),
"Employers' Disclosures about Pensions and Other Postretirement
Benefits." SFAS 132 revises employers' disclosures about pension and
other postretirement benefit plans. It does not change the measurement
or recognition of those plans. SFAS 132 standardizes the disclosure
requirements for pensions and other postretirement benefits to the
extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures. SFAS 132 will
be effective for the Company's financial statements for the year ended
December 31, 1998.
9. 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
7
<PAGE>
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
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 March 31,
1998, Homestake had received $21 million from the DOE and the
accompanying balance sheet at March 31, 1998 includes an additional
receivable of $11 million for the DOE's share of reclamation
expenditures made by Homestake through that date. Homestake believes
that its share of the estimated remaining cost of reclaiming the Grants
facility is fully provided in the financial statements at March 31,
1998.
In 1983, the state of New Mexico made a claim against Homestake for
unspecified natural resource damages resulting from the Grants
tailings. New Mexico has taken no action to enforce its claim.
Whitewood Creek: Whitewood Creek was a site where mining companies
operating in the Black Hills of South Dakota, including Homestake,
placed mine tailings (ground rock) beginning in the nineteenth century.
Some tailings placed in Whitewood Creek eventually flowed into the
Belle Fourche River, the Cheyenne River and Lake Oahe. Placement of
mine tailings into Whitewood Creek was authorized by the laws of the
United States, the Dakota territory and the State of South Dakota, and
Whitewood Creek was later specifically designated by the State of South
Dakota as a disposal stream for mine tailings and for the disposal of
raw sewage and other municipal waste. In response to changes in legal
requirements, Homestake ceased the placement of mine tailings into
Whitewood Creek and for many years the Homestake mine has impounded all
mine tailings that are not redeposited in the mine.
Deposits of tailings along an 18-mile stretch of Whitewood Creek
formerly constituted a site on the NPL. The EPA asserted that
discharges of tailings by mining companies, including Homestake,
contaminated the soil and streambed. Homestake signed a Consent Decree
with the EPA and carried out remedial work. The site was deleted from
the NPL on August 13, 1996. In the deletion notice, the EPA stated that
"EPA, in consultation with the State of South Dakota, have determined
that the Site poses no significant threat to public health or the
environment."
In September, 1997 the State of South Dakota filed an action against
Homestake, alleging that Homestake's disposal of mine tailings in
Whitewood Creek resulted in injuries to natural resources in Whitewood
Creek, the Belle Fourche River, the Cheyenne River and Lake Oahe
(collectively the "NRD Site"). The complaint also alleges that the
tailings constitute a continuing public nuisance. The complaint asks
for abatement of the nuisance, response costs, damages in an
unspecified amounts, litigation costs and interest. In November 1997,
the United States government and the Cheyenne River Sioux Tribe (the
"federal trustees") filed a similar action alleging injuries to natural
resource and seeking response costs, damages in unspecified amounts,
litigation costs and attorneys fees.
8
<PAGE>
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
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 counterclaims against
the State of South Dakota and the federal trustees, and cross-claims
for recovery, contribution and indemnity against other government
entities and other persons who participated in ownership and/or
operation of Whitewood Creek as a waste disposal site or who disposed
of waste in the NRD Site. Homestake does not believe that resolution of
these matters will have a material effect on the business or financial
condition or results of operations of Homestake.
9
<PAGE>
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
(Unless specifically stated otherwise, the following information relates to
amounts included in the consolidated financial statements without reduction for
minority interests.)
RESULTS OF OPERATIONS
Homestake recorded a net loss of $4.6 million or $.03 per share during the first
quarter of 1998 compared to net income of $49.9 million or $.34 per share during
the first quarter of 1997. The 1998 first quarter includes $5.9 million ($8.9
million pretax) or $.04 per share of costs associated with a temporary
suspension of underground mining operations at the Homestake mine and a
reduction in that mine's work force, gains on the sale of investments of $3.1
million ($4 million pretax) or $.02 per share, and $2.4 million ($2.4 million
pretax) or $.02 per share of transaction costs with respect to the pending
acquisition of Plutonic Resources Limited ("Plutonic"). The 1997 first quarter
included after-tax gains of $47.2 million ($62.9 million pretax) or $.32 per
share from the termination fee received from Santa Fe Pacific Gold Corporation
("Santa Fe") upon termination of Homestake's merger agreement with Santa Fe, and
$8.1 million ($13.5 million pretax) or $.06 per share from the sale of the
George Lake and Back River joint venture interests in the Northwest Territories
of Canada.
Excluding the effect of nonrecurring items, the Company had net earnings of $.6
million or $.01 per share during the 1998 first quarter compared to a net loss
of $5.4 million or $.04 per share during the 1997 first quarter. The improved
1998 results reflect higher gold production and lower unit operating costs,
offset by a $39 per ounce decrease in the average realized gold price received.
Gold production for the 1998 first quarter of 517,900 ounces was 29,400 ounces
higher than 1997 first quarter production of 488,500 ounces. However, gold and
ore sales for the first quarter of 1998 decreased to $153.2 million from $164.2
million during the first quarter of 1997 reflecting significantly lower gold
prices. During the first three months of 1998, 513,700 equivalent ounces of gold
were sold at an average realized price of $314 per ounce compared to 484,700
equivalent ounces of gold sold at an average realized price of $353 per ounce
during the first three months of 1997.
In January 1998, the Company announced that it would implement 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 specifically
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 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 the 1997 levels of approximately
$335 per ounce.
Domestic production increased slightly to 182,300 ounces during the first
quarter of 1998 from 179,700 ounces during the first quarter of 1997. The
increase primarily is due to the commencement of production at the new Ruby Hill
mine in Nevada, offset by the temporary suspension of mining in the underground
operations at the Homestake mine. The Ruby Hill
10
<PAGE>
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
mine, which commenced commercial production effective January 1, 1998, produced
30,600 ounces of gold at a total cash cost $129 per ounce during the first
quarter of 1998. At the Homestake mine, gold production during the first quarter
of 1998 of 76,000 ounces was 30,400 ounces lower than production during the
first quarter of 1997. During the temporary shut down, the mill processed an
increased volume of lower-grade, lower-cost ore from the Open Cut operations.
The increased volume of Open Cut ore reduced the mine's average total cash costs
to $244 per ounce during the 1998 first quarter from $316 per ounce in the 1997
first quarter. At the McLaughlin mine, production of 30,100 ounces during the
first quarter of 1998 compares to 31,600 ounces produced during the prior year's
first quarter. Total cash costs decreased to $233 per ounce during the 1998
first quarter from $244 per ounce during the 1997 first quarter, reflecting the
operation's continued emphasis on cost controls. Homestake's share of production
at the Round Mountain mine increased by 4,900 ounces to 33,000 ounces during the
first quarter of 1998 from 28,100 ounces produced during the first quarter of
1997. The higher production is due to the start up of the new 8,000 tons-per-day
gravity mill in late 1997. The new mill, which was constructed to process
higher-grade ores, produced 6,100 ounces (Homestake share) during the quarter.
Total cash costs declined to $207 per ounce during the 1998 first quarter from
$236 per ounce during the 1997 first quarter due to cost savings associated with
the new mining plan instituted in 1997. The new plan, which optimized the design
of the open pit and requires less stripping, is expected to achieve higher
earnings and cash flow over the life of the operation.
Total foreign gold production during the first three months of 1998 increased by
26,800 ounces to 335,600 equivalent ounces over the comparable period for the
prior year. This increase in production primarily is due to a significant
increase in production at the Eskay Creek mine in British Columbia and
production from the La Falda mine in Chile, which commenced operations in the
second quarter of 1997, partially offset by production decreases at Williams,
David Bell and Snip mines in Canada and at the Kalgoorlie operations in Western
Australia.
Production at the Eskay Creek mine increased to 141,100 gold equivalent ounces
during the first quarter of 1998 from 94,600 gold equivalent ounces during the
first quarter of 1997. This increase is due to 20% higher gold grades in the ore
shipped directly to third-party smelters, concentrate sales from the recently
commissioned on-site gravity/flotation mill, and a decrease in the gold/silver
equivalency ratio. During the first quarter, 1,800 tons of concentrate
containing 21,600 equivalent ounces of gold produced by the new mill were
shipped to third-party smelters. Total cash costs, including transportation and
third-party smelter costs, were $121 per equivalent ounce during the 1998 first
quarter compared to $165 per equivalent ounce during the 1997 first quarter. The
Williams mine produced 44,700 ounces of gold at a total cash cost of $244 per
ounce during the first quarter of 1998 compared to 51,400 ounces produced at a
total cash cost of $234 per ounce during the first quarter of 1997, and the
David Bell mine produced 18,200 ounces at a total cash cost of $238 per ounce
during the first quarter of 1998 compared to 23,000 ounces produced at a total
cash cost of $194 per ounce during the first quarter of 1997. The lower
production and corresponding increase in cash costs per ounce at both of these
operations is due to lower ore grades partially offset by an increase in mill
throughput. The grade of ore mined during the 1997 first quarter at both of
these operations was higher than the average remaining respective reserve
grades. In addition, temporary hoisting difficulties at the David Bell mine
limited planned production from higher-grade stopes late in the 1998 quarter,
while changes in the mining sequence at the Williams mine delayed production of
higher-grade stopes until later in 1998. Homestake's share of production at the
Snip mine decreased to 23,700 ounces during the 1998 first quarter from 28,200
ounces during the 1997 first quarter. The decrease production at the Snip mine
is due to lower ore grades and mill throughput. The remaining Snip mine ore
blocks are becoming smaller and narrower which is requiring an ever-increasing
proportion of more labor-intensive conventional mining versus lower-cost
mechanized mining. As a result, total cash costs increased from $204 per ounce
during the first quarter of 1997 to $224 per ounce during the first quarter of
1998.
11
<PAGE>
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
HGAL's share of production at the Kalgoorlie operations in Western Australia
totaled 94,100 ounces during the first three months of 1998 compared to 108,300
ounces during the first three months of 1997. The decrease in production
reflects a 15% decrease in ore grades resulting from an increase during the
current quarter in the volume of lower-grade stockpiled ore processed. Total
cash costs decreased to $262 per ounce during the 1998 first quarter from $273
per ounce during the 1997 first quarter, primarily reflecting improved operating
efficiencies at the Fimiston mill and a significantly weaker Australian dollar
in relation to the US dollar, partially offset by the decrease in production.
The Company's consolidated total cash cost per equivalent ounce decreased to
$203 during the 1998 first quarter from $245 during the 1997 first quarter.
The Company's share of revenues at the Main Pass 299 operations in the Gulf of
Mexico totaled $6.1 million during the first quarter of 1998 compared to $7
million during the first quarter of 1997, and operating losses of $.7 million
were recorded during the 1998 first quarter compared to operating losses of $.6
million during the first quarter of 1997. The 1998 results reflect lower oil
prices and sales volumes, offset by lower depreciation charges following the
write down of the sulfur assets at September 30, 1997.
Homestake's gold hedging policy provides for the use of forward sales contracts
for up to 30% of each of the following ten year's expected annual gold
production at prices in excess of certain targeted prices, and the use of
combinations of put and call option contracts to establish minimum floor prices
while allowing participation in future increases in the price of gold. In 1997,
Homestake entered into a series of put and call options which provide a floor
price of $325 per ounce for 900,000 ounces of 1998 production while allowing for
full participation in any increase in the price of gold above $336 per ounce. In
1996, Homestake sold 680,100 ounces of gold for future delivery through 2003, at
an average price of $426 per ounce.
Gold sales during the first quarter of 1998 include 225,000 ounces at an average
price of $325 per ounce under the Company's price protection program. In
addition, 1998 first quarter gold sales include 30,000 ounces at an average
price of $394 per ounce compared to 30,000 ounces at an average price of $380
per ounce in the 1997 first quarter under the forward sales program. These
hedging activities increased gold revenues by approximately $9.5 million or $19
per ounce.
At March 31, 1998 the Company had committed 550,000 ounces of its future gold
production at an average price of $436 per ounce under forward sales contracts.
In addition, the Company owned put options for 675,000 ounces of gold
exercisable during 1998 at a price of $325 per ounce. The Company also had
written call options outstanding for 675,000 ounces of gold exercisable during
1998 at a price of $325 per ounce and owned call options for 675,000 ounces of
gold exercisable during 1998 at a price of $336 per ounce. The Company also
owned put options for 30,000 ounces of gold exercisable during 2000 at a price
of $350 per ounce and had written call options outstanding for 15,000 ounces of
gold exercisable during 2000 at an average price of $395 per ounce.
In February 1998, Prime adopted a gold and silver hedging policy which provides
for the use of forward sales contracts for up to 40% of each of the following
five year's expected annual gold and silver production at prices in excess of
certain targeted prices. At March 31, 1998 Prime had forward sales outstanding
for approximately 7 million ounces of silver during the period 1999 through 2001
at an average price of $6.27 per ounce.
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
12
<PAGE>
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
program, the Company has entered into a series of foreign currency option
contracts which establish trading ranges within which the United States dollar
may be exchanged for Australian and Canadian dollars. At March 31, 1998 the
Company had a recorded net unrealized loss of $11.4 million on open contracts
under this program.
Other income for the first three months of 1998 includes foreign currency
exchange gains of $5 million and gains on sales of investments of $4 million.
Other income in 1997 includes a $13.5 million gain on sale of the George
Lake/Back River joint venture interests and a net foreign currency exchange
losses of $1.7 million.
Depreciation, depletion and amortization expense increased to $29.5 million
during the 1998 first quarter from $28.2 million during the first quarter of
1997 reflecting the higher gold production, offset by reduced depreciation
charges following the write downs of property, plant and equipment at certain
short-lived mining operations recorded in the third and fourth quarters of 1997.
Exploration expense for the first three months of 1998 decreased to $7.2 million
during the first quarter of 1998 from $8.3 million during the first quarter of
1997. The Company continues to pursue numerous prospective exploration targets
and prospects and currently expects to spend approximately $35 million on
existing Homestake exploration projects during 1998.
Other expense for the first three months of 1998 includes $8.9 million of costs
associated with a temporary suspension of underground mining operations at the
Homestake mine and a reduction in that mine's work force, and $2.4 million of
transaction costs with respect to the pending acquisition of Plutonic.
Income and mining tax expense for the quarter ended March 31, 1998 was $8.1
million compared to $29.8 million for the quarter ended March 31, 1997. The
decrease in tax expense primarily reflects taxes of $15.7 million provided
during 1997 on the break-up fee received from Santa Fe upon termination of
Homestake's merger agreement with Santa Fe. The Company's income and mining tax
rate was 101% in the 1998 first quarter compared to 36% in the 1997 first
quarter reflecting the geographical mix of pretax income. During the 1998 first
quarter, the Company had pretax earnings in Canada where the Company is subject
to high statutory tax rates and pretax losses in the United States where the
Company is subject to the Alternative Minimum Tax. The Company's consolidated
effective income and mining tax rate will fluctuate depending on the
geographical mix of pretax income, and is expected to remain high throughout the
remainder of 1998.
Minority interests in the income of consolidated subsidiaries increased to $4.5
million during the first quarter of 1998 from $3.2 million during the first
quarter of 1997. The increase in minority interests primarily is attributable to
higher earnings at the Eskay Creek mine which is owned by Prime Resources Group
Inc., a 50.6%-owned subsidiary of the Company.
The following chart details Homestake's gold production and total cash costs per
ounce by location, and consolidated revenue and production costs per ounce.
13
<PAGE>
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Production Total Cash Costs
(Ounces in thousands) (Dollars per ounce)
Three Months Ended Three Months Ended
March 31, March 31,
Mine (Percentage interest) 1998 1997 1998 1997
- -------------------------- --------------------------- --------------------------
<S> <C> <C> <C> <C>
Homestake (100) 76.0 106.4 $244 $316
Ruby Hill (100) (1) 30.6 - 129 -
McLaughlin (100) 30.1 31.6 233 244
Round Mountain (25) 33.0 28.1 207 236
Pinson (50) 6.4 6.4 321 312
Marigold (33) 6.2 7.2 246 229
------------ -----------
Total United States 182.3 179.7
Eskay Creek (100) (2,3) 141.1 94.6 121 165
Williams (50) 44.7 51.4 244 234
David Bell (50) 18.2 23.0 238 194
Quarter Claim (25) 2.8 2.8 171 175
Snip (100) (3,4) 23.7 28.2 224 204
------------ -----------
Total Canada 230.5 200.0
Kalgoorlie, Australia (50) 94.1 108.3 262 273
La Falda, Chile (100) (5) 11.0 - 215 -
El Hueso, Chile (100) - 0.5 - 310
------------ -----------
Total Production 517.9 488.5 $203 $245
Less Minority Interests (86.8) (60.6)
------------ -----------
Homestake's Share 431.1 427.9
============ ===========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
Per Ounce of Gold 1998 1997
- ----------------- ----------------------------
<S> <C> <C>
Revenue $314 $353
============================
Per Ounce Costs
Cash Operating Costs (6) $199 $239
Other Cash Costs (7) 4 6
----------------------------
Total Cash Costs 203 245
Noncash Costs (8) 57 54
----------------------------
Total Production Costs $260 $299
============================
<FN>
(1) The Ruby Hill mine commenced commercial production effective January 1,
1998.
(2) Gold and silver are accounted for as co-products at Eskay Creek. Silver is
converted to gold equivalent using the ratio of the silver market price to
the gold market price. These ratios were 47 ounces and 70 ounces of silver
equals one ounce of gold in the first quarters of 1998 and 1997,
respectively. Eskay Creek production includes 73,400 (54,300 in 1997)
payable ounces of gold and 3.2 million (2.8 million in 1997) payable ounces
of silver contained in ore and concentrates sold to smelters.
14
<PAGE>
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
(3) For comparison purposes, total cash costs per ounce include estimated
third-party costs incurred by smelter owners and others to produce
marketable gold and silver.
(4) Includes ounces of gold contained in dore and concentrates.
(5) The La Falda mine commenced production in April 1997.
(6) Cash operating costs are costs directly related to the physical activities
of producing gold; includes mining, milling, third-party smelting and
in-mine drilling expenditures that are related to production.
(7) Other cash costs are costs that are not directly related to, but may result
from, gold production; includes production taxes and royalties.
(8) Noncash costs are costs that typically are accounted for ratably over the
life of an operation; includes depreciation, depletion, accruals for final
reclamation. Noncash costs do not include amortization of additions to
property resulting from SFAS 109 deferred tax purchase accounting
adjustments, as these additions did not involve any economic resources of
the Company.
</FN>
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations totaled $19.3 million during the first quarter of
1998 compared to $66.4 million during the first quarter of 1997. Cash provided
by operations during the 1997 quarter includes the termination fee received from
Santa Fe upon termination of Homestake's merger agreement with Santa Fe
partially offset by $36 million in payments for income and mining taxes,
primarily payments made in the first quarter of 1997 related to Prime's 1996
taxable income. Payments for income and mining taxes of $5.5 million (net) were
made during the 1998 first quarter. Working capital at March 31, 1998 amounted
to $270 million, including $251 million in cash and equivalents and short-term
investments.
Capital additions of $7.8 million for the first quarter of 1998 compare to
additions of $22.8 million for the first quarter of 1997. Capital additions
during 1998 primarily relate to productivity improvement projects and sustaining
capital at the Company's operating mines. Capital additions in 1997 include $6.7
million for construction and development work at the Ruby Hill mine, $4.6
million at the Round Mountain mine primarily for a new mill to process the
higher-grade sulfide ore, $3.7 million primarily for a tailings dam lift and
improvements in the underground operations at the Homestake mine, and $3.2
million at the Kalgoorlie operations primarily for a decline from surface and a
ventilation raise at the Mt. Charlotte mine.
On March 10, 1997 Santa Fe terminated its previously announced merger agreement
with Homestake and paid Homestake a $65 million termination fee. As a result,
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.
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), which is included in other income.
The Company has a United States/Canadian/Australian cross-border credit facility
providing a total availability of $275 million. The Company pays a commitment
fee of 0.15% per annum on the unused portion of this facility. The credit
facility is available through September 2001 and provides for borrowings in
United States, Canadian, or Australian dollars, or gold, or a combination of
these. The credit agreement requires a minimum consolidated net worth of $500
million. At March 31, 1998 HGAL had borrowings of $49.7 million outstanding
under this
15
<PAGE>
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
agreement. The interest rate on these borrowings is based on the Australian Bank
Bill Swap Rate plus 0.4%. At March 31, 1998 this rate was 5.25%.
In February 1997, the Company paid a cash dividend of 5 cents per share. In
March 1997, the Company reduced its annual dividend rate to 10 cents per share
from 20 cents per share. On March 27, 1998 the Company declared a semi-annual
dividend of 5 cents per share, payable May 21, 1998 to shareholders of record at
the close of business on April 28, 1998.
In April 1997, the Company filed with the Securities and Exchange Commission a
shelf registration statement for the potential sale of up to 20 million shares
of 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,.
Future results will be impacted by such factors as the market price of gold,
silver and sulfur, the Company's ability to expand its ore reserves and the
fluctuations of foreign currency exchange rates. The Company believes that the
combination of cash, short-term investments, available lines of credit and
future cash flows from operations will be sufficient to meet normal operating
requirements, planned capital expenditures, and anticipated dividends.
Plutonic Resources Limited: On December 21, 1997, Homestake announced it had
entered into an agreement to acquire Plutonic Resources Limited ("Plutonic"), an
Australian gold producer, by an exchange of common stock for common stock.
Homestake expects to issue approximately 64.4 million shares to acquire Plutonic
(0.34 of a Homestake common share for each fully-paid Plutonic ordinary share).
Following completion of this transaction, Homestake's Australian operations will
be the second largest in that country with substantial potential for reserve
growth. Homestake will have 17 mines in four countries. Homestake's 1998
Australian gold production is expected to be 850,000 ounces, or approximately 35
percent of the Company's total production, increasing to 1 million ounces and 40
percent, respectively, in 1999.
The transaction, which has been approved unanimously by the Boards of both
companies, is expected to close on April 30, 1998. The transaction is subject to
approval by shareholders of both companies, qualification as a pooling of
interests for accounting purposes, and certain other conditions.
16
<PAGE>
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
Part II - OTHER INFORMATION
Item 5.
CAUTIONARY STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in this Form 10-Q that are not statements of
historical facts are "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are based on
beliefs of management, as well as assumptions made by and information currently
available to management. Forward looking statements include those preceded by
the words "believe," "estimate," "expect," "intend," "will," and similar
expressions, and include estimates of future production, costs per ounce, dates
of construction completion, costs of capital projects and commencement of
operations. Forward looking statements are subject to risks, uncertainties and
other factors that could cause actual results to differ materially from expected
results. Some important factors and assumptions that could cause actual results
to differ materially from expected results are discussed below. Those listed are
not exclusive.
Estimates of future production for particular properties and for the Company as
a whole are derived from annual mine plans that have been developed based on
mining experience, reserve estimates, assumptions regarding ground conditions
and physical characteristics of ore (such as hardness and metallurgical
characteristics), expected rates and costs of production, and estimated future
sales prices. Actual production may vary for a variety of reasons, such as the
factors described above, ore mined varying from estimates of grade and
metallurgical and other characteristics, mining dilution, actions by labor, and
government imposed restrictions. Estimates of production from properties and
facilities not yet in production are based on similar factors but there is a
greater likelihood that actual results will vary from estimates due to a lack of
actual experience. Cash cost estimates are based on such things as past
experience, reserve and production estimates, anticipated mining conditions,
estimated costs of materials, supplies and utilities, and estimated exchange
rates. Noncash cost estimates are based on total capital costs and reserve
estimates, change based on actual amounts of unamortized capital, changes in
reserve estimates, and changes in estimates of final reclamation. Estimates of
future capital costs are based on a variety of factors and include past
operating experience, estimated levels of future production, estimates by and
contract terms with third party suppliers, expectations as to government and
legal requirements, feasibility reports by Company personnel and outside
consultants, and other factors. Capital cost estimates for new projects are
subject to greater uncertainties than additional capital costs for existing
operations. Estimated time for completion of capital projects is based on such
factors as the Company's experience in completing capital projects, and
estimates provided by and contract terms with contractors, engineers, suppliers
and others involved in design and construction of projects. Estimates reflect
assumptions about factors beyond the Company's control, such as the time
government agencies take in processing applications, issuing permits and
otherwise completing processes required under applicable laws and regulations.
Actual time to completion can vary significantly from estimates.
See the Company's Form 10-K Report for the year ended December 31, 1997, Part
IV, "RISK FACTORS" and "CAUTIONARY STATEMENTS," for a more detailed discussion
of factors that may impact on expected future results.
Item 6.
(a) Exhibits Method of Filing
----------------
11 - Computation of Earnings Per Share Filed herewith
electronically
27 - Financial Data Schedule Filed herewith
electronically
17
<PAGE>
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
(b) Reports on Form 8-K
Three reports on Form 8-K were filed during the quarter ended March 31,
1998.
The report on Form 8-K dated January 27, 1998 was submitted in order to
file the following: (a) a press release announcing the restructuring of
operations at the Homestake Mine in Lead, South Dakota (b) announcement
of a special meeting of stockholders to approve issuance of Homestake
Mining Company Common Stock to acquire Plutonic Resources Limited and
(c) announcement of the annual meeting of stockholders.
The report on Form 8-K dated February 9, 1998 was submitted in order to
file the following: (a) the amended Bylaws of the Registrant increasing
the number of directors to 13 and (b) announcement of the election of
Peter J. Neff as member of the Registrant's board of directors.
The reports on Form 8-K dated February 24, 1998 was submitted in order
to file notification of Inmet's litigation against HCI and Prime in the
Supreme Court of British Columbia with respect to the Troilus mine.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HOMESTAKE MINING COMPANY
Date: April 27, 1998 By: /s/ Gene G. Elam
-------------- ----------------
Gene G. Elam
Vice President, Finance and
Chief Financial Officer
Date: April 27, 1998 By: /s/ David W. Peat
-------------- -----------------
David W. Peat
Vice President and Controller
(Chief Accounting Officer)
19
EXHIBIT 11
HOMESTAKE MINING COMPANY AND SUBSIDIARIES
Computation of Earnings Per Share (unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31,
BASIC 1998 1997
-------------- --------------
<S> <C> <C>
Earnings:
Net income (loss) applicable to basic earnings
per share calculation $ (4,611) $ 49,860
============== ==============
Weighted average number of shares outstanding 146,749 146,682
============== ==============
Net income (loss) per share - basic $ (0.03) $ 0.34
============== ==============
DILUTED
Earnings:
Net income (loss) $ (4,611) $ 49,860
Add: Interest relating to 5.5% convertible
subordinated notes, net of tax 1,630 1,630
Amortization of issuance costs relating
to 5.5% convertible subordinated notes,
net of tax 111 111
-------------- --------------
Net income (loss) applicable to fully diluted earnings
per share calculation $ (2,870) $ 51,601
============== ==============
Weighted average number of shares outstanding:
Common shares 146,749 146,682
Additional average shares outstanding assuming:
Exercise of stock options (treasury method) 62 81
Conversion of 5.5% convertible subordinated notes 6,505 6,505
-------------- --------------
153,316 153,268
============== ==============
Net income (loss) per share - diluted (a) $ (0.02) $ 0.34
============== ==============
<FN>
(a) This calculation is submitted in accordance with Regulation S-K item 601
(b)(11) although it is contrary to paragraph 13 of SFAS 128 because it
produces an anti-dilutive result. Diluted net income (loss) per share
computed in accordance with SFAS 128 was the same as basic earnings per
share.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at March 31, 1998 and the related Statement of
Consolidated Operations for the three months ended March 31, 1998 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000743872
<NAME> Homestake Mining Company
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 130,232
<SECURITIES> 120,288
<RECEIVABLES> 45,127
<ALLOWANCES> 0
<INVENTORY> 66,805
<CURRENT-ASSETS> 391,766
<PP&E> 1,978,030
<DEPRECIATION> 1,179,475
<TOTAL-ASSETS> 1,307,370
<CURRENT-LIABILITIES> 121,749
<BONDS> 264,673
0
0
<COMMON> 146,770
<OTHER-SE> 376,155
<TOTAL-LIABILITY-AND-EQUITY> 1,307,370
<SALES> 159,360
<TOTAL-REVENUES> 174,343
<CGS> 133,694 <F1>
<TOTAL-COSTS> 143,874 <F2>
<OTHER-EXPENSES> 18,905 <F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,528
<INCOME-PRETAX> 8,036
<INCOME-TAX> 8,097
<INCOME-CONTINUING> (4,611)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,611)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
<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 the Statement of Consolidated
Operations.
<F3> Includes Exploration expense and Other expense from the Statement of
Consolidated Income.
</FN>
</TABLE>
