<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 JUNE 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:
41,067,481
Common Shares, without par value, outstanding at July 31, 1996
<PAGE>
PEGASUS GOLD INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
INDEX
PART I. FINANCIAL INFORMATION
Page
----
Item #1
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996, AND DECEMBER 31, 1995 ......................... 3
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996, AND 1995 .... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996, AND 1995 ..................... 5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 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 #4
SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS .......... 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
June 30, 1996, and December 31, 1995
(In Thousands)
1996 1995
---- ----
ASSETS
Current assets:
Cash and cash equivalents ............................ $16,308 $32,907
Short-term investments ............................... 19,459 20,083
Due from sales of products ........................... 24,627 28,545
Inventories .......................................... 54,117 38,590
Other current assets ................................. 7,961 9,549
--------- --------
Total current assets ............................ 122,472 129,674
Investments ............................................... 23,180 18,679
Property, plant, and equipment, net ....................... 503,384 427,112
Other assets .............................................. 5,796 4,776
--------- --------
Total assets .................................... $654,832 $580,241
--------- --------
--------- --------
LIABILITIES
Current liabilities:
Accounts payable and other current liabilities ....... $21,315 $20,281
Accrued salaries, wages, and benefits ................ 8,678 9,223
Mining taxes payable ................................. 4,068 5,397
Current portion of long-term debt .................... -- 12,719
Current portion of obligations under capital lease ... 3,509 3,015
--------- --------
Total current liabilities ....................... 37,570 50,635
Long-term debt ............................................ 115,000 121,099
Capital lease obligations ................................. 24,309 22,792
Deferred income taxes ..................................... 42,724 44,901
Deferred site closure and remediation ..................... 38,367 38,180
Deferred revenue .......................................... 8,409 9,188
Other deferred liabilities ................................ 6,337 4,742
--------- --------
Total liabilities ............................... 272,716 291,537
--------- --------
--------- --------
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 - 41,065,117 shares
and 1995 - 34,665,366 shares ......................... 425,114 334,214
Accumulated deficit ....................................... (50,831) (49,131)
Foreign currency translation adjustment ................... 7,833 3,621
--------- --------
Total shareholders' equity 382,116 288,704
--------- --------
Total liabilities and shareholders' equity $654,832 $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 Six Months Ended June 30, 1996, and 1995
(In Thousands Except Per Share Amounts)
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales .............................. $ 56,958 $ 62,314 $ 105,748 $ 117,674
Cost of sales ...................... 41,245 43,238 75,814 81,409
Depreciation and amortization ...... 10,045 9,522 19,262 18,210
--------- --------- --------- ---------
51,290 52,760 95,076 99,619
--------- --------- --------- ---------
Gross profit ....................... 5,668 9,554 10,672 18,055
--------- --------- --------- ---------
Operating expenses:
General and administrative ...... 3,292 3,354 6,665 6,547
Royalties ....................... 1,130 1,408 2,256 2,836
Exploration and evaluation ...... 2,152 5,834 3,608 11,260
Closure, remediation and
related costs .................. 500 625 1,000 995
Care and maintenance ............ 424 --- 458 ---
--------- --------- --------- ---------
7,498 11,221 13,987 21,638
Loss from operations ............... (1,830) (1,667) (3,315) (3,583)
--------- --------- --------- ---------
Other income (expense):
Interest and other income ....... 995 2,229 2,342 3,286
Interest expense, net of amounts
capitalized .................... (724) (2,179) (1,834) (3,316)
Equity in net income (loss) of
affiliates ..................... (244) (184) 498 (296)
Gain (loss) on disposition of
assets ......................... 20 (17) (170) 14
--------- --------- --------- ---------
47 (151) 836 (312)
--------- --------- --------- ---------
Minority interest in loss of
subsidiary ........................ --- 615 --- 882
--------- --------- --------- ---------
Loss before income taxes ........... (1,783) (1,203) (2,479) (3,013)
Income tax benefit ................. (70) --- (779) ---
--------- --------- --------- ---------
Net loss ........................... $(1,713) $(1,203) $(1,700) $(3,013)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net loss per share ................. $(0.04) $(0.03) $(0.04) $(0.09)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average common shares
outstanding ....................... 41,334 34,763 40,492 34,713
--------- --------- --------- ---------
--------- --------- --------- ---------
</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 Six Months Ended June 30, 1996, and 1995
(In Thousands)
1996 1995
---- ----
Operating activities:
Net loss $ (1,700) $ (3,013)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization .............. 19,558 18,543
Other, net ................................. (1,372) (186)
Change in working capital accounts ............ (13,038) 4,012
---------- ---------
Net cash provided by operating activities .......... 3,448 19,356
---------- ---------
Investing activities:
Additions to property, plant, and equipment,
net .......................................... (88,595) (14,604)
Sale of property, plant, and equipment ........ 3,881 ---
Sale of short-term investments ................ 624 ---
Purchase of investments ....................... (4,630) (5,000)
Proceeds from investments ..................... --- 3,000
Acquisition of additional investment in
subsidiary ................................... --- (4,955)
---------- ---------
Net cash used in investing activities .............. (88,720) (21,559)
---------- ---------
Financing activities:
Proceeds from issuance of long-term debt ...... --- 115,000
Proceeds from issuance of common shares ....... 90,900 384
Payments of long-term debt .................... (19,189) (38,271)
Debt issuance costs ........................... (1,806) (3,616)
Payments of obligations under capital lease ... (1,413) ---
---------- ---------
Net cash provided by financing activities .......... 68,492 73,497
---------- ---------
Effect of exchange rate changes on cash and
cash equivalents .................................. 181 (600)
---------- ---------
Net increase (decrease) in cash and cash
equivalents ....................................... (16,599) 70,694
Cash and cash equivalents, beginning of period ..... 32,907 89,316
---------- ---------
Cash and cash equivalents, end of period ........... $ 16,308 $160,010
---------- ---------
---------- ---------
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 Six Months Ended June 30,1996, and the Year Ended December 31, 1995
(In Thousands)
<TABLE>
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 ............................... (1,700)
Common shares issued for:
Cash .............................. 6,000,000 88,238
Stock option plan ................. 234,117 2,590
Employee savings plan and other ... 5,797 72
Foreign currency translation
adjustment ............................ 4,212
----------- -------- --------- --------
Balance, June 30, 1996 ................. 41,065,117 $ 425,114 $ (50,831) $ 7,833
----------- -------- --------- --------
----------- -------- --------- --------
</TABLE>
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:
JUNE 30, DEC. 31,
1996 1995
--------- --------
(IN THOUSANDS)
Processed metals.......................... $133 $107
Stockpiled ore............................ 4,881 3,435
Deferred mining costs..................... 40,764 27,781
Materials and supplies.................... 8,339 7,267
------- -------
$54,117 $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 of the offering will be used to fund portions of
the Mt. Todd Phase II, Pullalli and Zortman Extension capital projects. The
Company also may use proceeds from this offering for the future acquisition
of mineral properties and their subsequent exploration and development, and
for other general corporate purposes.
5. COMMITMENTS AND CONTINGENCIES
HEDGED PRODUCTION
At June 30, 1996, the Company's hedging program consists of the following:
AVERAGE
PRICE DELIVERY
PER UNIT PERIOD
-------- --------
GOLD
Forward sales 656,000 ounces $452 1996-1999
Call options sold 286,000 ounces $453 1996-1997
Put options purchased 200,000 ounces $390 1996-1997
SILVER
Forward sales 2,849,000 ounces $5.17 1996-2001
LEAD
Forward sales 6,283,000 pounds $0.29 1996
ZINC
Forward sales 12,070,000 pounds $0.49 1996
7
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES, CONTINUED:
COMMON SHARES ISSUABLE
At June 30, 1996, a total of 11,301,975 Common Shares of authorized common
stock were reserved for the following:
Convertible Notes.............. 7,709,067
Stock options.................. 3,490,916
Employee Savings Plan.......... 101,992
----------
11,301,975
----------
----------
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, and issuance of the Record of Decision on the FEIS
could occur during the third quarter of 1996. Mining operations ceased
during the first quarter of 1996 and construction of the Zortman Extension
cannot proceed until the Record of Decision is received; accordingly, the
Company expects the interruption of mining operations to continue for at
least 12 months from the Record of Decision date. Gold production will
continue from leaching ore previously mined and loaded on the heap leach
pads, but at a significantly reduced rate. Although the Company expects to
receive approval for the construction and operation of the Zortman Extension,
it is possible that an unfavorable decision could be issued, or a favorable
decision could be appealed by third parties, creating further delays or
causing the project to be abandoned. If the Zortman Extension does not
proceed as planned, the Company would be required to write off the deferred
development costs associated with the project, which amounted to $21,800,000
at June 30, 1996. In addition, the Company would be required to accrue a
liability of at least $36,300,000 for reclamation and the construction of
environmental treatment facilities.
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 that they
were discharging 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, the
Island Mountain Protectors Association 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
their water rights. On July 22, 1996, the Company announced an agreement with
the EPA, the Montana Department of Environmental Quality, the Assiniboine and
Gros Ventre Tribes of the Fort Belknap Indian Reservation, and the Island
Mountain Protectors, which if approved by the Court, would settle all of the
aforementioned litigation. Under the terms of the agreement which does not
ascribe liability, the Company will pay a civil penalty of $2,000,000 divided
equally between the Federal Government and the State of Montana and create a
$1,000,000 trust fund for the Fort Belknap tribes to finance projects identified
by the Fort Belknap Community Council. During the second quarter, the Company
accrued an additional $500,000 for remediation and legal costs which is included
in deferred site closure and remediation on the balance sheet.
8
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES, CONTINUED:
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 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. Construction costs associated
with the compliance program will be capitalized and amortized over the life
of the Zortman Extension. Operating costs will be expensed as incurred.
Technical and legal requirements associated with these matters are evolving
as liabilities are evaluated. It is reasonably possible that the ultimate
liability for these matters could be higher than the amount accrued at June
30, 1996.
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, $3,440,000 and $5,425,000 are included in deferred site closure and
remediation for such liabilities at June 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 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, of which $9.3 million had been accrued at June 30, 1996.
The remaining amount will be charged to operations over the life of the mine,
on a units of production basis.
PURCHASE COMMITMENTS
At June 30, 1996, the Company had capital expenditure purchase commitments
relating to the construction at Mt. Todd and Pullalli, of approximately
$75,235,000 and $10,045,000, respectively.
9
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 June 30, 1996, no
borrowings were 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 $1.7 million ($0.04 per share) for the
second quarter of 1996, compared to a net loss of $1.2 million ($0.03 per
share) during the same period in 1995. For the six months ended June 30,
1996, the Company recorded a net loss of $1.7 million ($0.04 per share),
compared to a net loss of $3.0 million ($0.09 per share) for the same period
in 1995.
For the second quarter, the net loss increased compared to the same period of
1995 as a result of a 13 percent decrease in gold production, a 10 percent
increase in the cash cost per ounce of production, and a $500,000 charge
associated with the resolution of outstanding water quality litigation at
Zortman. These factors were offset partially by a 4 percent increase in
realized gold prices, a $3.7 million reduction in exploration and evaluation
expenses, and the capitalization of interest on construction projects.
Year to date, the improvement over 1995 results from 7 percent higher
realized gold prices, a $7.7 million reduction in exploration and evaluation
expenses and the Company's share of earnings from affiliates, offset by a 16
percent decrease in gold production, lower by-product revenues, and an 11
percent increase in cash costs. Gold production of 115,460 ounces and
213,620 ounces for the second quarter and year to date compare to gold
production of 132,166 ounces and 254,389 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
------ ------ ------ ------
ZORTMAN MINE:
Ounces of gold produced 8,064 33,142 20,271 52,312
Average cost per ounce produced:
Cash production cost $240 $272 $296 $278
Depreciation and amortization 112 87 116 85
Royalties --- 6 --- 8
------ ------ ------ ------
Total Production Cost $352 $365 $412 $371
------ ------ ------ ------
------ ------ ------ ------
MONTANA TUNNELS MINE:
Ounces of gold produced 17,708 20,979 37,882 43,422
Average cost per ounce produced:
Cash production cost $246 $178 $218 $176
Depreciation and amortization 168 149 158 141
Royalties 9 10 10 10
------ ------ ------ ------
Total Production Cost $423 $337 $386 $327
------ ------ ------ ------
------ ------ ------ ------
11
<PAGE>
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
FLORIDA CANYON MINE:
Ounces of gold produced 40,510 24,736 64,994 54,558
Average cost per ounce produced:
Cash production cost $ 259 $273 $ 258 $ 263
Depreciation and amortization 69 3 71 29
Royalties 10 13 10 12
-------- -------- -------- --------
Total Production Cost $ 338 $ 289 $ 339 $ 304
-------- -------- -------- --------
-------- -------- -------- --------
BEAL MOUNTAIN MINE:
Ounces of gold produced 9,776 13,746 16,574 21,064
Average cost per ounce produced:
Cash production cost $ 301 $ 303 $ 302 $ 284
Depreciation and amortization 107 110 104 133
Royalties 2 9 3 12
-------- -------- -------- --------
Total Production Cost $ 410 $ 422 $ 409 $ 409
-------- -------- -------- --------
-------- -------- -------- --------
BLACK PINE MINE:
Ounces of gold produced 23,790 23,800 42,654 52,546
Average cost per ounce produced:
Cash production cost $ 261 $ 238 $ 269 $ 241
Depreciation and amortization 24 35 34 31
Royalties 23 23 25 21
-------- -------- -------- --------
Total Production Cost $ 308 $ 296 $ 328 $ 293
-------- -------- -------- --------
-------- -------- -------- --------
MT. TODD:
Ounces of gold produced 15,622 15,763 31,245 30,487
Attributable to Pegasus 2 15,622 9,143 31,245 17,682
Average cost per ounce produced:
Cash production cost $ 467 $ 340 $ 431 $ 332
Depreciation and amortization 110 66 99 67
Royalties --- --- --- ---
-------- -------- -------- --------
Total Production Cost $ 577 $ 406 $ 530 $ 399
-------- -------- -------- --------
-------- -------- -------- --------
CONSOLIDATED TOTALS:
Ounces of gold produced 115,460 132,166 213,620 254,389
Attributable to Pegasus 2 115,460 125,546 213,620 241,584
Average cost per ounce produced:
Cash production cost $ 288 $ 263 $ 285 $ 257
Depreciation and amortization 87 71 90 72
Royalties 10 11 11 11
-------- -------- -------- --------
Total Production Cost $ 385 $ 345 $ 386 $ 340
-------- -------- -------- --------
-------- -------- -------- --------
Average price per ounce sold $ 424 $ 407 $ 426 $ 400
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
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 9 percent to $48.9 million for the
second quarter, compared to $53.9 million for the second quarter of 1995. Lower
revenues are attributable to a 13 percent decline in production offset partially
by a 4 percent increase in the realized price per ounce. Lower production is
attributable primarily to the temporary cessation of mining, as planned, at
Zortman and lower ore grades at Montana Tunnels, Beal Mountain and Black Pine,
offset partially by increased production from Florida Canyon due to an increase
in ore volume.
Year-to-date revenue from the sale of gold was $90.9 million, or 11 percent
lower than in the first six months of 1995. The decrease is primarily
attributable to a 16 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 six month period is attributable to the factors discussed
above.
The average realized gold prices for the quarter and six months ended June 30,
1996, were $424 and $426 per ounce, respectively, compared to $407 and $400 for
the same periods in 1995. The increased realized price per ounce reflects higher
spot gold prices 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 5 percent to $8.0 million for the
second quarter, compared to $8.5 million during the second 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 $5.35
per ounce, $0.48 per pound, and $0.34 per pound for silver, zinc, and lead,
respectively; compared to $5.60, $0.48, and $0.29, respectively, in the second
quarter of 1995.
Year-to-date revenue from the sale of other metals decreased 7 percent to $14.8
million compared to the first six months of 1995. Lower revenue is attributable
primarily to lower production of zinc, lead and silver at Montana Tunnels.
Realized prices were $5.30 per ounce, $0.49 per pound, and $0.26 per pound for
silver, zinc, and lead, respectively, compared to $5.11, $0.46, and $0.26,
respectively, in the first six months of 1995.
OPERATING COSTS
Consolidated cost of sales for the second quarter decreased 5 percent to $41.2
million compared to the same period in 1995. For the year to date, cost of
sales decreased 7 percent to $75.8 million compared to $81.4 million in 1995.
The average cash cost of production was $288 and $285 per ounce for the second
quarter and year to date, respectively, compared to $263 and $257 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 the lower production of mining and the
reclassification of care and maintenance costs associated with the delay in
construction of the Zortman Extension Project caused by the permit delay. The
resolution of the outstanding water quality litigation in July should clear the
way for federal and state agencies to issue the necessary permits and allow the
Company to begin construction of the Extension Project. Lower ore grades at
Montana Tunnels, Beal Mountain and Black Pine have resulted in lower production
and increased cash costs.
At Florida Canyon, increased ore tonnage and grade have resulted in higher
production and lower cash costs than in 1995. Despite an increase in gold
production compared to 1995, lower than expected crusher throughput resulting
from start-up problems on the new crusher, a gear failure on the old crusher,
and low solution application rates have resulted in lower than expected
production and a build-up of ounces in inventory on the leach pad.
13
<PAGE>
At Mt. Todd, increased tonnage combined with lower grade and the slow recovery
profile of the transition ore placed on the pad during much of the first half of
the year have resulted in flat gold production and increased cash costs compared
to 1995. During August, the crushing facility at Mt. Todd will come offline to
begin tie-in of Phase II and to replace the secondary crushers. The Company has
decided not to continue crushing ore for heap leaching after tie-in; instead,
all material will be processed in the Phase II milling facility which is
expected to come online during the fourth quarter.
Depreciation and amortization charges of $87 and $90 per ounce for the second
quarter and year to date were 21 and 27 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. Royalty expense of $10 per
ounce for the quarter was $1 per ounce lower than during the same period in
1995. For the year to date, royalty expense of $11 per ounce was unchanged from
1995.
Exploration and evaluation expenses of $2.2 million for the second quarter and
$3.6 million for the year to date are $3.7 million and $7.6 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 as a result of development decisions in 1995. In addition,
second quarter 1995 results included a $2.4 million charge to write down the
Company's investment in the Leninogorsk Tailings Project.
OTHER INCOME (EXPENSE) AND TAXES
Interest and other income for the second quarter was $1.0 million compared to
$2.2 million for the second quarter of 1995. Lower interest income reflects
lower average cash and short-term investment balances during the second quarter
of 1996. Cash and short-term investments during the second quarter of 1995
included the proceeds of the Company's Convertible Subordinated Notes which were
used to acquire the minority interest in Pegasus Gold Australia during the third
quarter of 1995. For the year to date, interest and other income of $2.3
million was $1.0 million lower than during the first six months of 1995 as a
result of lower average cash and short-term investment balances.
Interest expense net of amounts capitalized decreased $1.5 million to $0.7
million during the second quarter of 1996 as a result of the capitalization of
$1.8 million of interest costs to construction projects during the period. For
the year to date, interest expense decreased by $1.5 million to $1.8 million
because increased total interest cost associated with the $115 million of
Convertible Subordinated Notes issued in April 1995 was offset by the
capitalization of $3.3 million of interest in to construction projects. No
interest was capitalized during the first six 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 benefit results primarily from the recognition
of certain refund claims allowed upon resolution of certain periods reviewed by
the IRS.
ENVIRONMENTAL PROTECTION AND PERMITTING
On July 22, 1996, the Company announced the settlement of all outstanding water
quality litigation at Zortman, without ascribing any liability (See Note 5).
During 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 of
which $9.3 million had been accrued at June 30, 1996. 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
14
<PAGE>
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
second quarter. Although this estimate is considered adequate to fund
reclamation and closure work, future changes in environmental laws and
regulations could significantly change estimated costs.
In July, a Plan of Operations for the South Beal Pit Expansion Project was
approved by the USDA Forest Service. The decision is subject to a 45 day comment
and appeal period before becoming final. If final approval is obtained, the
expansion will allow the Company to recover up to an additional 40,000 ounces at
Beal Mountain and extend mining operations into 1997. Also 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 mine permit area and at depth within existing
open pits.
FINANCING, CAPITAL INVESTMENT, AND LIQUIDITY
OVERVIEW
At June 30, 1996, the Company had working capital of $84.9 million, including
cash and short-term investments totaling $35.8 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 second quarter was $3.4
million, compared to $19.4 million during the same period in 1995. The decrease
in cash flow is attributable to an increase in ounces inventoried on the heap
leach pads at the Florida Canyon and Mt. Todd mines, combined with slower
recovery from those pads. The current build-up in inventory will result in
increased production in future periods. Cash flow from operations before
working capital changes for the first six months of 1996 increased $1.1 million
to $16.5 million compared to the same period in 1995.
INVESTING ACTIVITIES
During the first six months of 1996, the Company invested $88.6 million on
capital additions, $4.6 million on investments, and received $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 and is expected to occur
during the second half of 1996.
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.
15
<PAGE>
In February, the Company signed an agreement to acquire 19.9 percent of Intermin
Resource Corporation Limited (Intermin), an Australian gold exploration company,
for approximately $4.0 million (A$5.1 million) along with an option to acquire
up to 51 percent for an additional $27.4 million (A$34.7 million) within two
years. The transaction has received the necessary Australian Stock Exchange and
Foreign Investment Review Board approvals. Closing of the transaction is
subject to Intermin's shareholder approval of a private placement and the option
to Pegasus.
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. 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.
CONCLUSION
The Company believes that the $35.8 million of cash and short-term
investments on hand together with cash flow from operations, and funding of
up to $150 million 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 expendure 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, 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 4. Submission of Matters to Vote of Security Holders
(a) The 1996 Annual General Meeting of shareholders was held on April
24, 1996.
(b) The following directors were elected at the above meeting:
Michael A. Grandin, Lindsay D. Norman, and Fred C. Schulte.
The following Directors' terms of office did not expire at the
meeting and they continued in office after the meeting: Paul
H. Atkinson, Lawrence I. Bell, Douglas R. Cook, Peter R. Kutney,
Werner G. Nennecker, and Anthony J. Petrina.
(c) The following matters were voted upon at the meeting:
<TABLE>
For Against Withheld Abstained Not Voted
--- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Election of Directors:
Mr. Grandin 26,906,281 23,300 26,300 626,924 2,125
Mr. Norman 26,908,818 23,300 13,216 626,924 2,125
Mr. Schulte 26,921,902 23,300 28,837 626,871 2,125
Re-appointment of
Coopers & Lybrand,
as Auditors of the Company
for 1996 27,476,120 51,565 12,496 45,161 2,125
Remuneration of Auditors 27,409,082 108,058 68,202 2,125
1987 Stock Option Plan -
Increase the number of
shares available from
4,225,000 to 4,775,000 23,139,626 4,095,647 108,950 243,244
1989 Non-Employee Directors'
Stock Option Plan - Extend term
to June 1, 1997 and increase
the number of shares available
from 225,000 to 297,000 26,030,834 998,428 315,961 242,244
</TABLE>
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
11.0 Computation of Earnings Per Share
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
None
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: August 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PRIMARY:
Earnings:
Net income (loss) applicable to primary
earnings per share calculation..................$(1,713) $(1,203) $(1,700) $(3,013)
------- ------- ------- -------
------- ------- ------- -------
Weighed Average number of shares outstanding:
Common shares and equivalents.................... 41,032 34,665 40,128 34,658
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...... 302 97 364 55
------- ------- ------- -------
Weighted average number of shares outstanding, as
adjusted......................................... 41,334 34,763 40,492 34,713
------- ------- ------- -------
------- ------- ------- -------
Net income (loss) per share - primary.............. $(0.04) $(0.03) $(0.04) $(0.09)
------- ------- ------- -------
------- ------- ------- -------
FULLY DILUTED:
Earnings:
Net income (loss).................................$(1,713) $(1,203) $(1,700) $(3,013)
Add:
Interest relating to 6.25% convertible
subordinated notes, net of tax.................. 18 1,434 257 1,434
Amortization of issuance costs relating to 6.25%
convertible subordinated notes, net of tax...... 130 103 260 103
------- ------- ------- -------
Net income (loss) applicable to fully diluted
earnings per share calculation................. $(1,565) $334 $(1,183) $(1,476)
------- ------- ------- -------
------- ------- ------- -------
Weighted Average number of share outstanding:
Common Shares and Equivalents..................... 41,032 34,665 40,128 34,658
Additional shares outstanding assuming exercise
of stock options reduced by the number of shares
which could have been purchased with the
proceeds from the exercise of such options....... 304 97 366 55
Additional average shares outstanding assuming
conversion of 6.25% convertible subordinated notes 7,709 5,781 7,709 3,854
------- ------- ------- -------
Weighted average number of shares outstanding, as
adjusted.......................................... 49,045 40,544 48,203 38,567
------- ------- ------- -------
------- ------- ------- -------
Net income (loss) per share - fully diluted (a)....$(0.03) $0.01 $(0.03) $(0.04)
------- ------- ------- -------
------- ------- ------- -------
</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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 16,308
<SECURITIES> 0
<RECEIVABLES> 24,627
<ALLOWANCES> 0
<INVENTORY> 54,117
<CURRENT-ASSETS> 122,472
<PP&E> 767,703
<DEPRECIATION> 264,319
<TOTAL-ASSETS> 654,832
<CURRENT-LIABILITIES> 37,570
<BONDS> 0
0
0
<COMMON> 425,114
<OTHER-SE> (42,998)
<TOTAL-LIABILITY-AND-EQUITY> 654,832
<SALES> 105,748
<TOTAL-REVENUES> 105,748
<CGS> 75,814
<TOTAL-COSTS> 95,076
<OTHER-EXPENSES> 11,317
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,834
<INCOME-PRETAX> (2,479)
<INCOME-TAX> (779)
<INCOME-CONTINUING> (1,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,700)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.03)
</TABLE>
