<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
-------------------
COMMISSION FILE NUMBER 0-12207
PEGASUS GOLD INC.
(Exact name of registrant as specified in its charter)
PROVINCE OF BRITISH COLUMBIA NONE
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 W. FIRST AVE., SUITE 1500, SPOKANE, WASHINGTON 99204
(Address of principal executive offices) (Zip Code)
(509) 624-4653
(Registrant's telephone number, including area code)
-------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
41,080,460
Common Shares, without par value, outstanding at October 31, 1996
<PAGE>
PEGASUS GOLD INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
PART I. FINANCIAL INFORMATION
Page
Item #1
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996, AND DECEMBER 31, 1995 3
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996,
AND 1995 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996, AND 1995 5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1996, AND
YEAR ENDED DECEMBER 31, 1995 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
Item #2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
PART II. OTHER INFORMATION
Item #1
LEGAL PROCEEDINGS 17
Item #6
EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
In this Report, unless otherwise indicated, all dollar amounts are expressed
in U.S. Dollars.
<PAGE>
PEGASUS GOLD INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1996, and December 31, 1995
(In Thousands)
1996 1995
--------- --------
ASSETS
Current assets:
Cash and cash equivalents $7,848 $32,907
Short-term investments --- 20,083
Due from sales of products 30,557 28,545
Inventories 53,375 38,590
Other current assets 10,168 9,549
--------- --------
Total current assets 101,948 129,674
Investments 29,991 18,679
Property, plant, and equipment, net 587,274 427,112
Other assets 5,664 4,776
--------- --------
Total assets $724,877 $580,241
--------- --------
--------- --------
LIABILITIES
Current liabilities:
Accounts payable and other current liabilities $27,267 $20,281
Accrued salaries, wages, and benefits 8,907 9,223
Mining taxes payable 5,595 5,397
Current portion of obligations under capital lease 3,531 3,015
Current portion of long-term debt --- 12,719
--------- --------
Total current liabilities 45,300 50,635
Long-term debt 172,997 121,099
Capital lease obligations 23,968 22,792
Deferred income taxes 44,231 44,901
Deferred site closure and remediation 48,546 38,180
Deferred revenue 8,268 9,188
Other deferred liabilities 7,002 4,742
--------- --------
Total liabilities 350,312 291,537
--------- --------
--------- --------
Commitments and contingencies (Note 5)
SHAREHOLDERS' EQUITY
Class A preferred shares, Series 1, C$10 par value:
Authorized - 20,000,000 shares; none issued
Common shares, without value:
Authorized - 200,000,000 shares; issued
and outstanding, 1996 - 41,073,048 shares
and 1995 - 34,825,203 shares 425,209 334,214
Accumulated deficit (58,623) (49,131)
Foreign currency translation adjustment 7,979 3,621
--------- --------
Total shareholders' equity 374,565 288,704
--------- --------
Total liabilities and shareholders' equity $724,877 $580,241
--------- --------
--------- --------
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
PEGASUS GOLD INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended September 30, 1996, and 1995
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
------- ------- -------- --------
<S> <C> <C> <C> <C>
Sales $66,441 $69,493 $172,189 $187,167
Cost of sales 48,197 47,830 124,011 129,239
Depreciation and amortization 14,531 11,800 33,793 30,010
------- ------- -------- --------
62,728 59,630 157,804 159,249
------- ------- -------- --------
------- ------- -------- --------
Gross profit 3,713 9,863 14,385 27,918
------- ------- -------- --------
Operating expenses:
General and administrative 3,254 2,791 9,919 9,338
Royalties 1,360 1,481 3,616 4,317
Exploration and evaluation 1,492 3,530 5,100 14,790
Closure, remediation and related costs 6,742 923 7,742 1,918
Care and maintenance 385 --- 843 ---
Attempted business combination costs 506 --- 506 ---
------- ------- -------- --------
13,739 8,725 27,726 30,363
------- ------- -------- --------
------- ------- -------- --------
Income (loss) from operations (10,026) 1,138 (13,341) (2,445)
------- ------- -------- --------
Other income (expense):
Interest and other income 781 1,446 3,123 4,732
Interest expense, net of amounts capitalized (672) (1,757) (2,506) (5,073)
Equity in net income (loss) of affiliates 3,091 (793) 3,589 (1,089)
Gain (loss) on disposition of assets 14 6 (156) 20
------- ------- -------- --------
3,214 (1,098) 4,050 (1,410)
------- ------- -------- --------
Minority interest in loss of subsidiary --- 66 --- 948
------- ------- -------- --------
Income(loss) before income taxes (6,812) 106 (9,291) (2,907)
Income tax provision 980 --- 201 ---
------- ------- -------- --------
Net income (loss) $(7,792) $106 $(9,492) $(2,907)
------- ------- -------- --------
------- ------- -------- --------
Net income (loss) per share $(0.19) $0.00 $(0.23) $(0.08)
------- ------- -------- --------
------- ------- -------- --------
Weighted average common shares outstanding 41,135 34,836 40,679 34,753
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
PEGASUS GOLD INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1996, and 1995
(In Thousands)
1996 1995
------- -------
Operating activities:
Net loss $(9,492) $(2,907)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 34,209 30,462
Provision for closure, remediation and related costs 7,742 ---
Other, net (4,545) (2,728)
Change in working capital accounts (12,925) 9,919
------- -------
Net cash provided by operating activities 14,989 34,746
------- -------
Investing activities:
Additions to property, plant, and equipment, net (180,741) (27,988)
Sale of property, plant, and equipment 3,881 ---
Sale of short-term investments 20,083 ---
Purchase of investments (8,585) (33,288)
Acquisition of additional investment in subsidiary --- (105,309)
------- -------
Net cash used in investing activities (165,362) (166,585)
------- -------
Financing activities:
Proceeds from issuance of long-term debt 57,957 118,893
Proceeds from issuance of common shares 90,994 1,376
Payments of long-term debt (19,189) (38,286)
Debt issuance costs (1,811) (3,643)
Payments of obligations under capital lease (1,732) ---
------- -------
Net cash provided by financing activities 126,219 78,340
------- -------
Effect of exchange rate changes on cash and cash equivalents (905) (452)
------- -------
Net decrease in cash and cash equivalents (25,059) (53,951)
Cash and cash equivalents, beginning of period 32,907 89,316
------- -------
Cash and cash equivalents, end of period $7,848 $35,365
------- -------
------- -------
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
PEGASUS GOLD INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 1996, and
the Year Ended December 31, 1995
(In Thousands)
<TABLE>
<CAPTION>
Common Shares Retained Foreign
------------------- Earnings Currency
Number of (Accumulated Translation
Shares Amount Deficit) Adjustment
---------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 34,629,523 $332,110 $(46,178) $6,410
Net loss (2,953)
Common shares issued for:
Stock option plan 157,925 1,686
Employee savings plan and other 37,755 418
Foreign currency translation adjustment (2,789)
---------- -------- -------- ------
Balance, December 31, 1995 34,825,203 334,214 (49,131) 3,621
Net loss (9,492)
Common shares issued for:
Cash 6,000,000 88,238
Stock option plan 234,217 2,589
Employee savings plan and other 13,628 168
Foreign currency translation adjustment 4,358
---------- -------- -------- ------
Balance, September 30, 1996 41,073,048 $425,209 $(58,623) $7,979
---------- -------- -------- ------
---------- -------- -------- ------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company, which is organized in British Columbia, presents all financial
statements in United States dollars and under generally accepted accounting
principles as practiced in the United States.
2. These unaudited consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K. In the opinion of management, the
financial information set forth in the accompanying unaudited interim
consolidated financial statements reflects all adjustments necessary for a
fair statement of the periods reported, and all such adjustments were of a
normal and recurring nature.
3. INVENTORIES
Inventories consist of the following:
Sept. 30, Dec. 31,
1996 1995
--------- --------
(IN THOUSANDS)
Processed metals $288 $107
Stockpiled ore 4,988 3,435
Deferred mining costs 39,041 27,781
Materials and supplies 9,058 7,267
------- -------
$53,375 $38,590
------- -------
------- -------
4. SHAREHOLDER'S EQUITY
In January 1996, the Company completed a public offering in the U.S. and Canada
for 6,000,000 Common Shares at a price of C$21.00 per share (US$15.38). The net
proceeds to the Company, after deducting expenses, were $88.2 million. The
proceeds were used to fund portions of the Mt. Todd Phase II, Pullalli and
Zortman Extension capital projects, and for other general corporate purposes.
5. COMMITMENTS AND CONTINGENCIES
HEDGED PRODUCTION
At September 30, 1996, the Company's hedging program consists of the following:
Average
Price Delivery
Per Unit Period
-------- ---------
GOLD
Forward sales 710,000 ounces $452 1996-2001
Call options sold 525,000 ounces $479 1996-2001
Put options purchased 460,000 ounces $410 1996-2001
SILVER
Forward sales 2,562,000 ounces $5.14 1996-2001
LEAD
Forward sales 3,142,000 pounds $0.29 1996
ZINC
Forward sales 6,035,000 pounds $0.49 1996
7
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES, CONTINUED:
COMMON SHARES ISSUABLE
At September 30, 1996, a total of 11,294,044 Common Shares of authorized
common stock were reserved for the following:
Convertible notes 7,709,067
Stock options 3,490,816
Employee savings plan 94,161
----------
11,294,044
----------
----------
ZORTMAN EXTENSION
A plan of operation for the Zortman Extension was submitted to the regulatory
agencies in May 1992. The Final Environmental Impact Statement (FEIS) was
issued in March 1996, of the Record of Decision on the FEIS was approved on
October 25, 1996. Mining operations ceased during the first quarter and will
not commence again until a twelve month construction period of the Zortman
Extension Project is substantially complete; construction is not planned
until 1997. Gold production will continue from leaching ore previously mined
and loaded on the heap leach pads, but at a significantly reduced rate.
LEGAL PROCEEDINGS
In 1993, the Department of Health and Environmental Sciences of the State of
Montana (DHES) filed a complaint in Montana First Judicial District Court
against Pegasus Gold Corporation and Zortman Mining, Inc., alleging discharge
of pollutants in violation of the Montana Water Quality Act. On June 6,
1995, a lawsuit filed by the U.S. Environmental Protection Agency (EPA) in
United States District Court for the District of Montana alleged similar
violations under the Federal Clean Water Act. On June 6, 1995, an
organization calling itself Island Mountain Protectors and the Assiniboine
and Gros Ventre Tribes filed citizens' suits in the same court alleging
similar violations as well as violations of discharge reporting requirements
and claiming injury to certain water rights. During the third quarter, a
Consent Decree was entered by the Court in Montana settling all outstanding
litigation. Under the terms of this Consent Decree, and without ascribing
liability, the Company paid a civil penalty of $2,000,000 divided equally
between the Federal Government and the State of Montana and created a
$1,000,000 trust fund for the Fort Belknap tribes to finance projects
identified by the Fort Belknap Community Council.
The Company has also agreed to finance three supplemental environmental
projects over the next three years at an estimated cost of $1,500,000. In
addition, during 1996 and 1997, the Company will upgrade existing facilities
and construct new facilities which capture and treat mine-impacted waters,
construct a second water treatment plant and undertake additional ground and
surface water quality monitoring and analysis.
8
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES, CONTINUED:
In addition to the above, various lawsuits, claims, and proceedings have been
or may be instituted or asserted against the Company. While the ultimate
liability cannot be determined at this time, management believes the
disposition of the matters described above and other matters that are pending
or asserted will not have a material adverse effect on the financial position
of the Company or its results of operations.
Based on the Company's best estimate of its liability for these and other
matters, $3,499,000 and $5,425,000 were included in deferred site closure
and remediation for such liabilities at September 30, 1996, and December 31,
1995, respectively.
RECLAMATION AND ENVIRONMENTAL REMEDIATION
All of the Company's operations are subject to reclamation and closure
requirements. During the third quarter, the Company increased its estimate
of the future costs to reclaim and close the Beal Mountain Mine from $7,800,000
to $16,210,000 and recorded a $6,500,000 provision for final reclamation.
Increased cost estimates at Beal result from changes in mine plans and the
periodic update of final reclamation estimates. With this provision, and
additional reclamation amortization at Beal during the third quarter, all
expected reclamation expenditures at Beal are now accrued.
In the second quarter, the Company increased its estimate of
the future cost to close and reclaim the Zortman Mine from $21,787,000 to
$41,826,000 , of which $9,357,000 had been accrued at September 30, 1996.
The remaining amount will be charged to operations over the life of the mine,
on a units of production basis.
Technical and legal requirements associated with reclamation and closure are
evolving as liabilities are evaluated. It is reasonably possible that the
ultimate financial liability for these matters could exceed the amount accrued
at September 30, 1996.
PURCHASE COMMITMENTS
At September 30, 1996, the Company had capital expenditure purchase
commitments relating to the construction at Mt. Todd and Pullalli, of
approximately $20,544,000 and $6,748,000 respectively.
6. LONG-TERM DEBT
During the first quarter of 1996, Pegasus Gold Australia Pty Ltd. (PGA)
elected to prepay the entire A$25,300,000 (US$19,189,000) outstanding under
its bank term loan and overdraft facility. No gain or loss resulted from the
prepayment.
On April 19, 1996, the Company entered into a multi-currency reducing
revolving credit facility with a syndicate of banks which provides for
borrowings of up to $150,000,000. Borrowing under the facility may occur in
the U.S., Canada and Australia, and in U.S., Canadian or Australian dollars
with certain restrictions. Amounts borrowed under the facility bear interest
at various rates (depending on the location of the borrowing) plus a spread
tied to the Company's performance. The annual interest rate spread over
these rates ranges from 0.65 percent to 1.75 percent. In addition, the
Company is obligated to pay letter of credit fees which range from 0.65
percent per annum to 1.75 percent per annum on the aggregate amount of
outstanding letters of
9
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT, CONTINUED:
credit, and commitment fees which range from 0.20 percent per annum to 0.50
percent per annum on the unused amount of the revolving credit facility. The
amount available under the facility reduces annually, commencing in 1999, as
follows:
(IN THOUSANDS)
1999 $ 20,000
2000 35,000
2001 45,000
2002 50,000
--------
$150,000
--------
--------
Indebtedness under the facility is collateralized by a pledge of the shares
of the Company's significant subsidiaries. The agreement includes
restrictive covenants with respect to leverage ratios, interest coverage,
tangible net worth, ore reserve adequacy and gold hedging. Funds available
under the facility will be used to finance capital expenditures, for letters
of credit and for general corporate purposes. At September 30, 1996,
$57,997,000 was outstanding under the facility.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
The Company recorded a net loss of $7.8 million ($0.19 per share) in the
third quarter, including a provision of $6.5 million ($0.16 per share) for
final reclamation costs. Excluding the effect of this provision, the Company
would have recorded a net loss of $1.3 million ($0.03 per share) for the
third quarter of 1996, compared to net income of $0.1 million ($0.00 per
share) during the same period in 1995. For the nine months ended September
30, 1996, the Company recorded a net loss of $9.5 million ($0.23 per share),
compared to a net loss of $2.9 million ($0.08 per share) for the same period
in 1995.
For the third quarter, the net loss, before the provision for final
reclamation costs, increased compared to the same period of 1995 primarily
because of a 23 percent increase in depreciation and amortization, an 8
percent decline in gold production, costs incurred in connection with a
proposed merger, and a 12 percent increase in the cash cost per ounce of
production. These factors were offset partially by a 5 percent increase in
realized gold prices, a $2.0 million reduction in exploration and evaluation
expenses, the Company's proportionate share of earnings from affiliates, and
the capitalization of interest on construction projects.
For the year to date, the net loss, before the provision for final
reclamation costs, is essentially unchanged from the prior year as 6 percent
higher realized gold prices, a $9.7 million reduction in exploration and
evaluation expenses and the Company's share of earnings from affiliates have
been offset by a 13 percent decrease in gold production, lower by-product
revenues, and an 11 percent increase in cash costs. Gold production of
137,628 ounces and 351,248 ounces for the third quarter and year to date,
respectively, compare to gold production of 149,957 ounces and 404,346 ounces
for the same periods in 1995.
GOLD PRODUCTION
The following chart details gold production, cash production costs, and
non-cash operating costs per ounce by location.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ---------------
1996 1995 1996 1995
------ ------ ----- -----
ZORTMAN MINE:
Ounces of gold produced 8,952 28,767 29,223 81,078
Average cost per ounce produced:
Cash production cost $384 $271 $323 $276
Depreciation and amortization 125 129 119 101
Royalties -- 3 -- 6
------ ------ ----- -----
Total Production Cost $509 $403 $442 $383
------ ------ ----- -----
------ ------ ----- -----
MONTANA TUNNELS MINE:
Ounces of gold produced 18,827 23,483 56,709 66,905
Average cost per ounce produced:
Cash production cost $277 $188 $238 $180
Depreciation and amortization 177 138 164 140
Royalties 12 9 10 10
------ ------ ----- -----
Total Production Cost $466 $335 $412 $330
------ ------ ----- -----
------ ------ ----- -----
11
<PAGE>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ---------------
1996 1995 1996 1995
------ ------ ----- -----
FLORIDA CANYON MINE:
Ounces of gold produced 53,669 25,079 118,663 79,637
Average cost per ounce produced:
Cash production cost $266 $276 $261 $267
Depreciation and amortization 59 30 65 29
Royalties 10 12 10 12
------ ------ ----- -----
Total Production Cost $335 $318 $336 $308
------ ------ ----- -----
------ ------ ----- -----
BEAL MOUNTAIN MINE:
Ounces of gold produced 15,351 19,831 31,925 40,895
Average cost per ounce produced:
Cash production cost $410 $286 $354 $285
Depreciation and amortization 267 67 183 90
Royalties 4 7 3 10
------ ------ ----- -----
Total Production Cost $681 $360 $540 $385
------ ------ ----- -----
------ ------ ----- -----
BLACK PINE MINE:
Ounces of gold produced 21,590 31,765 64,244 84,312
Average cost per ounce produced:
Cash production cost $251 $253 $263 $246
Depreciation and amortization 38 51 35 39
Royalties 23 23 24 22
------ ------ ----- -----
Total Production Cost $312 $327 $322 $307
------ ------ ----- -----
------ ------ ----- -----
MT. TODD:
Ounces of gold produced 19,239 21,032 50,484 51,519
Attributable to Pegasus 2 19,239 18,302 50,484 35,983
Average cost per ounce produced:
Cash production cost $313 $326 $386 $330
Depreciation and amortization 103 55 101 62
Royalties 4 -- 1 --
------ ------ ----- -----
Total Production Cost $420 $381 $488 $392
------ ------ ----- -----
------ ------ ----- -----
CONSOLIDATED TOTALS:
Ounces of gold produced 137,628 149,957 351,248 404,346
Attributable to Pegasus 2 137,628 147,227 351,248 388,810
Average cost per ounce produced:
Cash production cost $296 $265 $289 $260
Depreciation and amortization 105 79 97 74
Royalties 10 10 10 11
------ ------ ----- -----
Total Production Cost $411 $354 $396 $345
------ ------ ----- -----
------ ------ ----- -----
Average price per ounce sold $429 $409 $427 $403
------ ------ ----- -----
------ ------ ----- -----
1 Cash production costs include all operating costs at the mines, including
overhead and applicable mining taxes and credit for by-product revenues.
2 The Company's ownership percentage in Pegasus Gold Australia was 58
percent through July 1995, 100 percent since August 1995.
12
<PAGE>
REVENUES
GOLD: Revenue from the sale of gold decreased 4 percent to $59.0 million for
the third quarter, compared to $61.4 million for the third quarter of 1995.
Lower revenues are attributable to an 8 percent decline in production offset
partially by a 5 percent increase in the realized price per ounce. Lower
overall production is attributable primarily to the planned interruption of
mining at Zortman and lower ore grades at Montana Tunnels, Beal Mountain and
Black Pine, offset partially by increased production at Florida Canyon
relating to an increase in ore volume.
Year-to-date revenue from the sale of gold was $149.9 million, or 8 percent
lower than in the first nine months of 1995. The decrease is primarily
attributable to a 13 percent decline in gold produced for the period, offset
partially by a 6 percent increase in the realized price for the period.
Lower production for the nine-month period is attributable to the factors
discussed above.
The average realized gold prices for the quarter and nine months ended
September 30, 1996, were $429 and $427 per ounce, respectively, compared to
$409 and $403 for the same periods in 1995. Increased realized prices
reflect higher spot gold prices during the first half of 1996, the impact of
higher priced contracts entered into early in 1996, and higher realized U.S.
Dollar prices on Australian Dollar denominated sales resulting from the
Company's currency protection program.
OTHER METALS: Sales of other metals decreased 9 percent to $7.4 million for
the third quarter, compared to $8.1 million during the third quarter of 1995.
Lower revenue reflects lower production of zinc and silver resulting from
lower mill feed grades at Montana Tunnels and lower silver prices, offset
partially by higher lead production and prices for the period. Realized
prices were $5.37 per ounce, $0.47 per pound, and $0.31 per pound for silver,
zinc, and lead, respectively; compared to $4.94, $0.44, and $0.27,
respectively, in the third quarter of 1995.
Year-to-date revenue from the sale of other metals decreased 8 percent to
$22.2 million compared to the first nine months of 1995. Lower revenue is
attributable primarily to lower production of zinc, lead and silver at
Montana Tunnels. Realized prices were $5.32 per ounce, $0.49 per pound, and
$0.28 per pound for silver, zinc, and lead, respectively, compared to $5.04,
$0.45, and $0.27, respectively, in the first nine months of 1995.
OPERATING COSTS
Consolidated cost of sales for the third quarter increased slightly from
$47.8 million in 1995 to $48.2 million in 1996. Year to date, cost of sales
decreased 4 percent to $124.0 million compared to $129.2 million in 1995.
The average cash cost of production was $296 and $289 per ounce for the third
quarter and year to date, respectively, compared to $265 and $260 per ounce
for the same periods in 1995. Higher cash costs are primarily attributable
to lower gold production.
Cash costs per ounce at Zortman reflect lower production from residual
leaching of ore placed on the heap leach pad in prior years. Costs incurred
at Zortman as a result of delays, in permits required for construction and
operation of the Extension Project have been classified as care and
maintenance in the Statement of Operations. All outstanding water quality
litigation was resolved without ascribing liability in the third quarter, and
permits necessary to begin construction on the Extension Project were
received in October.
Lower ore grades at Montana Tunnels and Beal Mountain have resulted in lower
production and increased cash costs. At Black Pine, lower cash costs for the
quarter are attributable to a lower stripping ratio which has offset the
effect of lower production for the period. At Florida Canyon, increased ore
tonnage and grade have resulted in record production and lower cash costs.
Process system upgrades completed during the quarter and increased solution
application rates contributed to significantly higher gold production in the
third quarter.
13
<PAGE>
At Mt. Todd, cash costs for the quarter were 4 percent lower than in the same
period in 1995. The decline is attributable to improved recovery from the
higher grade, better leaching Golf pit ore placed on the pad during the
second quarter combined with residual recovery from transition ore placed on
the pad during much of the first half of the year. In August, ore additions
to the heap leach pad ceased as tie-in of the Phase II facilities began.
Residual leaching of the heap leach pad will continue.
Depreciation and amortization charges of $105 and $97 per ounce for the third
quarter and year to date, respectively, were 33 and 31 percent higher than
during the same periods in 1995. Increased charges on a per ounce basis are
attributable to lower production, increased property, plant, and equipment
balances, and higher amortization for reclamation and closure costs. Third
quarter amortization includes $2.7 million related to the increase in the
final reclamation estimate at Beal. Royalty expense of $10 per ounce for the
quarter and year to date was unchanged from the third quarter of 1995 and was
$1 per ounce lower than during the nine-month period in 1995.
General and administrative expenses for the quarter and year to date of $3.3
million and $9.9 million, respectively, compare to costs of $2.8 million and
$9.3 million for the same periods in 1995. Increased costs reflect higher
people costs and increased governmental affairs expenditures.
Exploration and evaluation expenses of $1.5 million for the third quarter and
$5.1 million for the year to date are $2.0 million and $9.7 million lower
than during comparable periods in 1995. Reduced exploration and evaluation
expenses result from the capitalization of costs on the Diamond Hill and
Pullalli Projects during 1996 based on development decisions in 1995. In
addition, 1995 results included a $2.4 million charge to write down the
Company's investment in the Leninogorsk Tailings Project.
During the third quarter, the Company announced it would not complete its
proposed merger with Dayton Mining. Costs of $0.5 million were incurred in
connection with the proposed transaction.
OTHER INCOME (EXPENSE) AND TAXES
Interest and other income for the third quarter was $0.8 million compared to
$1.4 million for the third quarter of 1995. Lower interest income reflects
lower average cash and short-term investment balances during the third
quarter of 1996. Cash and short-term investments during much of 1995
included the proceeds of the Company's Convertible Subordinated Notes which
were used to acquire the minority interest in Pegasus Gold Australia late in
the third quarter of 1995. Year to date, interest and other income of $3.1
million was $1.6 million lower than during the first nine months of 1995 as a
result of lower average cash and short-term investment balances.
Interest expense, net of amounts capitalized, decreased $1.1 million to $0.7
million during the third quarter of 1996, respectively, as a result of the
capitalization of $2.3 million of interest costs to construction projects
during the period. Year to date, interest expense decreased by $2.6 million
to $2.5 million because increased total interest cost associated with $115
million of Convertible Subordinated Notes issued in April 1995 and borrowings
under the Company's revolving credit facility have been offset by the
capitalization of $5.7 million of interest to construction projects in 1996.
Interest of $795,000 was capitalized during the first nine months of 1995.
Equity in net income of affiliates comprises the Company's proportionate
share of earnings from the Emerging Markets Gold Fund offset by the Company's
share of losses from USMX. The income tax provision reflects a valuation
allowance of $1.1 million recorded against deferred tax assets in the U.S.
during the third quarter, offset by the recognition of certain refund claims
allowed upon resolution of certain periods reviewed by the IRS.
14
<PAGE>
ENVIRONMENTAL PROTECTION AND PERMITTING
During the quarter, all outstanding water quality litigation at Zortman was
settled without ascribing liability through entry of a Consent Decree by the
Court in Montana. On October 25, 1996, the Bureau of Land Management (BLM)
and the Montana Department of Environmental Quality issued the Record of
Decision (ROD) for the Zortman Extension Project. (See Note 5).
In July, Florida Canyon received permit amendments necessary to construct
additional on-site facilities, to increase solution pumping capacity and to
commence exploration drilling on targets outside the existing mine permit
area and at depth within existing open pits.
In the third quarter, the Company increased its estimate of the future costs
to close and reclaim the Beal Mountain Mine from $7.8 million to $16.2
million. The increase in estimated costs results primarily from changes to
the mine plans and the periodic updates to final reclamation estimates. In
the second quarter, the Company increased its estimate of the future cost to
close and reclaim the Zortman Mine from $21.8 million, to $41.8 million. The
increase in the cost estimate is attributable primarily to changes in
reclamation and closure requirements associated with the Final Environmental
Impact Statement issued in March 1996, the inclusion of costs related to
additional disturbance which will occur during mining and processing from the
Zortman Extension Project and additional requirements for improvement of
water quality defined during the third quarter. Although these estimates are
considered adequate to fund reclamation and closure work, future changes in
environmental laws and regulations, or site conditions, could significantly
change estimated costs.
FINANCING, CAPITAL INVESTMENT, AND LIQUIDITY
OVERVIEW
At September 30, 1996, the Company had working capital of $56.6 million,
including cash and short-term investments totaling $7.8 million, compared to
working capital of $79.0 million, including cash and short-term investments
of $53.0 million, at the end of 1995.
OPERATING ACTIVITIES
Cash flow provided by operating activities through the third quarter was
$15.0 million, compared to $34.7 million during the same period in 1995.
Decreased cash flow is attributable to an increase in ounces inventoried on
the heap leach pads at the Florida Canyon, Beal Mountain, and Mt. Todd mines,
combined with slower recovery from those pads. The current build-up in
inventory is expected to increase or extend production into future periods.
Cash flow from operations before working capital changes for the first nine
months of 1996 increased $3.1 million to $27.9 million compared to the same
period in 1995.
INVESTING ACTIVITIES
During the first nine months of 1996, the Company invested $180.7 million on
capital additions, $8.6 million on investments, and received $20.1 million
from the sale of short-term investments and $3.9 million from the sale of
exploration leases in Australia.
In June, the Company entered into an agreement with USMX to purchase its net
profits royalty in the Montana Tunnels Mine for $4.5 million. The Company
has advanced USMX $4.5 million in the form of a four-year term-loan secured
by the royalty interest, which will be credited against the purchase price of
the royalty at closing. Closing of the transaction is subject to final
documentation and approval of the USMX shareholders.
15
<PAGE>
During the second quarter of 1996, the Company completed the sale of its
Tanami exploration leases and data base to a third party for $3.9 million
(A$4.9 million). Under the terms of the agreement, the Company will receive
two contingent payments of $0.8 million (A$1.0 million), each upon definition
of additional reserves.
In August, the Company acquired 19.9 percent of Intermin Resource Corporation
Limited (Intermin), an Australian gold exploration company, for approximately
$4.1 million (A$5.1 million). The Company has an option to acquire up to 51
percent for an additional $27.4 million (A$34.7 million) within two years.
FINANCING ACTIVITIES
During 1996, the Company raised $88.2 million, net of expenses, from the
issuance of 6,000,000 Common Shares in Canada and the U.S., borrowed $58.0
million under its revolving credit facility, and made payments on outstanding
long-term debt amounting to $19.2 million.
In April, the Company entered into a six-year $150 million multi-currency
revolving credit facility with a syndicate of banks. Borrowings under the
facility may occur in the U.S., Canada and Australia, and in U.S., Canadian,
or Australian dollars with certain restrictions. Funds available under the
facility may be used for general corporate purposes as well as financing of
construction costs at Mt. Todd, Zortman or Pullalli. At September 30, 1996,
aggregate borrowings of $58.0 million were outstanding under the facility in
Australia and the U.S.
CONCLUSION
The Company believes that the $7.8 million of cash and short-term investments
on hand together with cash flow from operations, and remaining funds
available under the revolving credit facility described above, will be
adequate to meets its cash requirements during the period. However, capital
expenditures could increase beyond amounts currently contemplated, or the
Company's operations could generate lower than expected cash flow. To
supplement available capital during its substantial expansion program, the
Company is reviewing possible sources of additional capital and the rate of
its capital expenditure program.
SAFE HARBOR
The statements in this report which are not historical facts are forward
looking statements that involve a number of risks and uncertainties. In
addition to the factors discussed above, other factors that could cause
actual results to differ materially include the price of gold and other
commodities and currencies, production, permitting or regulatory delays,
reserve estimation, metallurgical recoveries, exploration success and reserve
growth, litigation, capital costs, and other risks detailed in the Company's
SEC filings.
16
<PAGE>
PART II. OTHER INFORMATION
PEGASUS GOLD INC.
Items 2, 3, 4, and 5 of Part II are omitted from this report as inapplicable.
Item 1. Legal Proceedings
See Part 1 - Item 1 - "Notes to Consolidated Financial Statements."
Note 5, Paragraph 4 entitled "Legal Proceedings", which information
is incorporated herein by reference.
Item 6. Exhibits and Reports on From 8-K
(a) Exhibit filed with this Form 10-Q:
11.0 Computation of Earnings Per Share
(b) Reports on Form 8-K:
Two reports on Form 8-K were filed during the quarter ended
September 30, 1996. The reports, dated September 16, 1996 and
September 27, 1996, were submitted in accordance with Item 5
"Other Events" and reported, respectively, the joint announcements
by the Company and Dayton Mining of (I) an agreement to merge an
(ii) the decision not to proceed with the merger.
17
<PAGE>
PEGASUS GOLD INC.
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.
PEGASUS GOLD INC.
(Registrant)
Date: November 14, 1996 By: /s/ Phillips S. Baker, Jr.
---------------------------------
Phillips S. Baker, Jr.
Vice President, Finance,
Chief Financial Officer, and
Principal Accounting Officer
18
<PAGE>
EXHIBIT 11.0
PEGASUS GOLD INC.
COMPUTATION OF EARNINGS PER SHARE
(in Thousands, except for share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ---------------------
1996 1995 1996 1995
------- ------ ------- -------
<S> <C> <C> <C> <C>
PRIMARY:
Earnings:
Net income (loss) applicable to primary
earnings per share calculation $(7,792) $106 $(9,492) $(2,907)
------- ------ ------- -------
------- ------ ------- -------
Weighed Average number of shares outstanding:
Common shares and equivalents 41,070 34,709 40,411 34,678
Additional shared outstanding assuming exercise
of stock options reduced by the number of shares
which could have been purchased with the
proceeds from the exercise of such options 65 127 268 75
------- ------ ------- -------
Weighted average number of shares outstanding, as
adjusted 41,135 34,836 40,679 34,753
------- ------ ------- -------
------- ------ ------- -------
Net income (loss) per share - primary $(0.19) $(0.00) $(0.23) $(0.08)
------- ------ ------- -------
------- ------ ------- -------
FULLY DILUTED:
Earnings:
Net income (loss) $(7,792) $106 $(9,492) $(2,907)
------- ------ ------- -------
Add:
Interest relating to 6.25% convertible
subordinated notes, net of tax (17) 1,002 240 2,436
Amortization of issuance costs relating to 6.25%
convertible subordinated notes, net of tax 130 130 390 234
------- ------ ------- -------
Net income (loss) applicable to fully diluted
earnings per share calculation $(7,679) $1,238 $(8,862) $(237)
------- ------ ------- -------
------- ------ ------- -------
Weighted Average number of share outstanding:
Common Shares and Equivalents 41,070 34,709 40,411 34,678
Additional shares outstanding assuming exercise
of stock options reduced by the number of shares
which could have been purchased with the
proceeds from the exercise of such options 65 300 272 227
Additional average shares outstanding assuming
conversion of 6.25% convertible subordinated notes 7,709 5,139 7,709 7,708
------- ------ ------- -------
Weighted average number of shares outstanding, as
adjusted 48,844 40,148 48,392 42,613
------- ------ ------- -------
------- ------ ------- -------
Net income (loss) per share - fully diluted(a) $(0.16) $0.03 $(0.18) $(0.01)
------- ------ ------- -------
------- ------ ------- -------
</TABLE>
(a) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15
because it produces an anti-dilutive result.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ART. 5
FOR 3RD QUARTER 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 7,848
<SECURITIES> 0
<RECEIVABLES> 30,557
<ALLOWANCES> 0
<INVENTORY> 53,375
<CURRENT-ASSETS> 101,948
<PP&E> 859,306
<DEPRECIATION> 272,032
<TOTAL-ASSETS> 724,877
<CURRENT-LIABILITIES> 45,300
<BONDS> 0
0
0
<COMMON> 425,209
<OTHER-SE> (50,644)
<TOTAL-LIABILITY-AND-EQUITY> 724,877
<SALES> 172,189
<TOTAL-REVENUES> 172,189
<CGS> 124,011
<TOTAL-COSTS> 157,804
<OTHER-EXPENSES> 21,170
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,506
<INCOME-PRETAX> (9,291)
<INCOME-TAX> 201
<INCOME-CONTINUING> (9,492)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,492)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.18)
</TABLE>
