<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
/X/ FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
=================
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 principle executive offices) (Zip Code)
(509) 624-4653
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
COMMON SHARES WITHOUT PAR VALUE AMERICAN STOCK EXCHANGE
THE TORONTO STOCK EXCHANGE
MONTREAL EXCHANGE
=================
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
-----
The aggregate market value of the voting stock held by non affiliates of the
registrant on February 28, 1997, based on the closing price of the shares on the
American Stock Exchange was approximately $353 million.
Common shares outstanding as of February 28, 1997, was 41,167,674.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement and Information Circular for the 1997
Annual Meeting of Shareholders as filed with the Securities and Exchange
Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934
are incorporated by reference into Part III.
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PEGASUS GOLD INC.
FORM 10-K - DECEMBER 31, 1996
TABLE OF CONTENTS
Page
GLOSSARY OF MINING AND FINANCIAL TERMS.........................................4
Item # PART I
1. & 2. BUSINESS & PROPERTIES
INTRODUCTION.........................................................7
SUMMARY OF ORE RESERVES..............................................8
FLORIDA CANYON MINE.................................................10
MONTANA TUNNELS MINE................................................12
MT. TODD MINE.......................................................14
ZORTMAN MINE........................................................15
BEAL MOUNTAIN MINE..................................................17
BLACK PINE MINE.....................................................18
PULLALLI PROJECT....................................................19
BASIN CREEK.........................................................20
GOLD PRICE..........................................................20
SALES AND MARKETING.................................................20
EXPLORATION AND EVALUATION..........................................21
PROPERTY INTERESTS AND MINING CLAIMS................................21
ENVIRONMENTAL AND REGULATORY MATTERS................................22
INSURANCE...........................................................22
COMPETITION.........................................................23
EMPLOYEES...........................................................23
3. LEGAL PROCEEDINGS........................................................24
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................24
EXECUTIVE OFFICERS OF THE COMPANY........................................24
PART II
5. MARKET FOR THE REGISTRANT'S COMMON SHARES AND
RELATED SHAREHOLDER MATTERS..............................................26
6. SELECTED FINANCIAL DATA..................................................27
7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................28
8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................36
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.....................................................62
2
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PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................62
11. EXECUTIVE COMPENSATION...................................................62
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...........62
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........................62
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..........63
The Registrant will furnish a copy of any exhibit filed as part of this report
to any shareholder of record upon receipt of a written request from such person
and payment of the Registrant's reasonable expenses for furnishing such exhibit.
Requests should be made to the Secretary of the Registrant at the address set
forth on the cover page of this report.
REPORTING CURRENCY AND FINANCIAL INFORMATION
All amounts in this report are expressed in United States dollars, unless
otherwise indicated. References to "C$" are to Canadian dollars and to "A$" are
to Australian dollars.
Financial information is presented in accordance with accounting principles
generally accepted in the United States. Differences between accounting
principles generally accepted in the United States and those applied in Canada,
as applicable to the Company, are explained in Note 17 to the Consolidated
Financial Statements.
3
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GLOSSARY OF MINING AND FINANCIAL TERMS
AGGLOMERATION - mixing of mined ore with lime, cyanide, and cement prior to
loading on the heap leach pad.
ASSAY - the tests performed on a sample to determine mineral content.
BACKFILL - waste material used to fill the void created by mining an ore body.
BARREN POND - a holding area containing chemical solution from which the gold
and silver has been removed.
CARBON COLUMN CIRCUIT - a process to recover soluble gold and silver values from
a sodium-cyanide leaching solution by adsorption onto activated carbon
particles.
CASH COST PER OUNCE - includes site costs for all mining (except deferred mining
and stripping costs), processing, administration, and resource taxes; but does
not include royalties, capital, exploration, depreciation, and financing costs.
By-product revenues are deducted from total cash costs and divided by payable
gold ounces produced to arrive at net cash cost per ounce. Effective January 1,
1997, the Company will adopt the "Gold Institute Standard" for reporting of per
ounce production costs. Under that standard, cash operating costs are
consistent with the cash cost per ounce calculation described above, except that
mine site taxes are excluded. Total cash costs are consistent with the
calculation described above, except that royalties are included.
CIL - carbon-in-leach, a process for the recovery of gold from the ore. Ore is
ground finely and mixed with a dilute sodium-cyanide solution to dissolve the
gold which is absorbed onto carbon. The gold enriched carbon is stripped of the
gold and the gold is recovered either through electrolysis or precipitation.
CIP - carbon-in-pulp, a process similar to CIL except that the ore is leached
with cyanide prior to carbon loading.
CONCENTRATE - a product containing valuable metal from which most of the waste
material in the ore has been removed.
CONTAINED OUNCES - the estimate of the total number of ounces of gold contained
in an ore body, a portion of which are not recoverable.
CRUSHING AND GRINDING - the process by which ore is broken into small pieces to
prepare it for further processing.
DEFERRED MINING COSTS - the operating costs associated with recoverable gold yet
to be recovered from the heap leach pads.
DEFERRED STRIPPING COSTS - the mining costs associated with waste rock removal
that are capitalized and expensed on the basis of the average stripping ratio
for the ore body.
DILUTION - an estimate of the amount of waste mined with ore as part of normal
mining practices.
DORE - unrefined metal bars consisting of gold, silver, and impurities which
will be further refined.
DRILLING:
BLASTHOLE DRILLING - the drilling of holes in rock to insert an explosive
charge. The drill holes are usually 3 - 8 meters apart. The blast breaks
up the rock so it can be dug out.
DIAMOND DRILLING - drilling with a hollow bit which has a diamond cutting
rim to produce a cylindrical core that is used for geological study and
assays. Used in exploration.
INFILL DRILLING - drilling at shorter intervals between holes, used to
provide greater geological detail and to help establish reserve estimates.
ROTARY DRILLING - drilling with a bit that breaks the rock into chips
rather than core. Faster and cheaper than diamond drilling, the chips are
forced by water and air to the surface for examination.
4
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REVERSE CIRCULATION DRILLING - a type of rotary drilling that uses a
double-walled drill pipe. Compressed air, water or other drilling medium
is forced down the space between the two pipes to the drill bit and the
drilled chips are flushed back up to the surface through the center tube of
the drill pipe.
ELECTROWINNING - the recovery of metal by electrolysis. An electric current is
passed through a solution containing dissolved metals, which causes the
metals to be deposited on a cathode.
EXPLORATION - can be divided into three basic categories:
GRASS ROOTS EXPLORATION - exploration for ore in an area that has the
correct geologic setting, although no ore has been previously found in that
setting.
HEADFRAME EXPLORATION - exploration for a separate ore body within sight of
an existing mine.
DEFINITION EXPLORATION - exploration that defines an ore body, or searches
for extensions to the ore body, once it has been discovered.
FLOTATION - a concentration process selectively attaching valuable minerals to
air bubbles in a chemical solution.
GRADE - the amount of valuable mineral in each tonne of ore, expressed as grams
per tonne for precious metals and as a percentage by weight for other metals.
RESERVE GRADE - estimated metal content of an ore body, based on reserve
calculations.
CUT-OFF GRADE - the minimum content level at which an ore body can be
economically mined.
MILL HEAD GRADE - metal content of mined ore going into a mill for
processing.
RECOVERED GRADE - actual metal content of ore determined after mining.
GRAVITY CIRCUIT - a process of recovering gold from crushed rock or gravel using
gold's high specific gravity to separate it from the lighter material.
HEAP LEACHING - a process of extracting gold and silver by placing broken ore on
sloping, impermeable pads and applying a dilute cyanide solution that dissolves
a portion of the contained gold, which is then recovered in a carbon column or
Merrill-Crowe circuit.
HEAP LEACH PAD ("HEAP") - a large, impermeable foundation or pad used as a base
for ore during heap leaching. The leach solution is collected and does not
escape from the circuit.
MERRILL-CROWE PROCESS - a process utilized to recover soluble gold and silver
values from a sodium-cyanide leaching solution by precipitating with zinc dust
after the leaching solution is clarified and deoxygenated by vacuum treatment.
METRIC CONVERSION -
1 acre = 0.4047 hectare
1 foot = 0.3048 meters
1 mile = 1.6093 kilometers
1 ton = 0.9072 tonne
1 troy ounce = 31.1034 grams
1 ounce per ton = 34.2848 grams per tonne
MILL - a plant where ore is ground and the metals are extracted by physical
and/or chemical processes.
MILLING CIRCUIT - the combination of various processes and systems which
separate waste materials from the valuable minerals, producing a concentrate.
MINERAL POTENTIAL (EXPLORATION INFORMATION) - mineral potential includes all
estimates for the quantity and quality of mineral deposits when the specific
geologic evidence is not sufficient to assume continuity of mineralization or
when a conceptual mine plan has not been used to define the estimate. The
estimate may
5
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or may not be supported by samples and measurements but should be supported by
reasonable geo-scientific (geological, geochemical, geophysical, or other) data.
MINERALIZED MATERIAL - mineralized material includes mineralized bodies which
have been physically delineated by drilling, underground work, surface
trenching, etc., and found to contain a sufficient amount of material with an
average grade of metal or metals to warrant further exploration expenditures.
Mineralized material must be defined by a conceptual mine plan and have
established geologic continuity but does not qualify as a proven and probable
reserve until final legal, technical, and economic factors have been resolved.
MINING CLAIM - public mineral land which a party has staked or marked out in
accordance with federal, provincial, or state mining laws to acquire the right
to explore for and exploit the minerals under the surface.
NET PROFITS INTEREST - a royalty based on the profit remaining after recapture
of certain operating, capital, and other costs as determined by agreement.
NET SMELTER RETURN - a royalty based on the market value of the gold produced,
less the cost of refining and transportation.
ORE - material that can be economically mined and processed.
OUNCE - troy ounce, which is equivalent to 31.1034 grams.
OXIDE ORE - mineralized rock in which some of the original minerals have been
oxidized, making the ore more porous and permitting a more complete permeation
of cyanide solutions so that minute particles of gold in the interior of the
minerals are more readily dissolved.
PREGNANT POND - pond containing cyanide solution impregnated with gold and
silver which has percolated through the ore on the pad.
PRODUCTS - metals produced by the Company which include gold, silver, zinc, lead
and copper.
RECOVERY RATE - percentage of the valuable material recovered in the processing
of ore.
REFRACTORY MATERIAL - mineralization which cannot be recovered using
conventional means.
RESERVES:
PROVEN RESERVES - reserves for which (a) a quantity is computed from
dimensions revealed in outcrops, trenches, workings, or drill holes; grade
and/or quality are computed from the results of detailed sampling and (b)
the sites for inspection, sampling, and measurement are spaced so closely
and the geologic character is so well defined that size, shape, depth, and
mineral content of reserves are well-established. The Company's proven
reserves are within a mine plan, operating plan, and approved mine permit.
PROBABLE RESERVES - reserves for which quantity and grade and/or quality
are computed from information similar to that used for proven reserves, but
the sites for inspection, sampling, and measurement are farther apart or
otherwise less adequately spaced. The degree of assurance, although lower
than that for proven reserves, is high enough to assume continuity between
points of observation. The Company's probable reserves may not be within a
mine plan, operating plan, and approved mine permit, but there should be no
significant uncertainty concerning the issuance of these permits or
resolution of any legal or technical issues.
RUN-OF-MINE - unprocessed ore which is hauled directly to the heap leach pads
without being crushed.
STRIP (OR STRIPPING) RATIO - the tonnage of waste material removed to allow the
mining of one tonne of ore in an open-pit.
SULFIDE ORE - mineralization contained in the form of a sulfide.
TAILINGS - material removed from a milling circuit after separation of the
valuable minerals.
6
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PART I
ITEMS 1 AND 2 - BUSINESS AND PROPERTIES
INTRODUCTION
Pegasus Gold Inc. ("Pegasus," the "Company," or the "Registrant"), which is
incorporated in British Columbia, Canada, was formed in 1984 as a result of the
amalgamation of Pegasus Gold Ltd. and Montoro Gold Inc., predecessors of which
had been in existence since as early as 1961. Unless the context otherwise
indicates, references to the Company include majority owned subsidiaries.
The Company's primary business is the mining and processing of gold, and the
exploration for and development of gold producing properties. The Company
operates six mines: five in the western United States and one in the Northern
Territory of Australia. The Company produced 497,300 ounces of gold during 1996
and expects to produce 570,000 ounces of gold in 1997. The Company's mines
consist of open-pit and underground operations utilizing a combination of heap
leaching and conventional milling facilities to extract gold. The Company was
one of the first to use the heap leaching method of gold recovery and is an
industry leader in the technological refinement of the process since the method
was first employed in 1979 at the Zortman Mine.
The Company derives all of its revenue from the sale of gold, silver, zinc,
lead, and copper. In 1996, sales of gold and other metals were 88 and 12
percent of revenues, respectively.
SIGNIFICANT DEVELOPMENTS IN 1996
In January 1996, the Company completed a public offering in the United States
and Canada for 6,000,000 common shares at a price of C$21.00 per share
(US$15.38). Net proceeds of the offering were $88.2 million.
In April 1996, the Company entered into a Multi-currency Revolving Credit
Facility which provides for borrowings of up to $150 million. Borrowing under
the facility may occur in the United States, Canada, and Australia in U.S.,
Canadian or Australian dollars, with certain restrictions.
In July 1996, the Company announced an agreement to settle all outstanding water
quality litigation at the Zortman Mine. In September 1996, the litigation was
settled without ascribing liability through entry of a Consent Decree by the
Montana First Judicial Court. The settlement of outstanding litigation,
together with the issuance in October of a favorable Record of Decision by the
Bureau of Land Management and the Montana Department of Environmental Quality,
paves the way for the Company's Zortman Extension Project to proceed.
In December 1996, the Mt. Todd Mine poured the first gold from its new milling
and processing facilities. Construction of the new facilities was essentially
complete at year-end and results from initial commissioning have been
encouraging with Mt. Todd on track to achieve commercial production during the
second quarter of 1997.
During 1996, the Company completed a major expansion at the Florida Canyon Mine
and made a successful transition to self-mining. Expanded facilities more than
doubled crushing capacity to 11.1 million tonnes per annum and resulted in
significantly higher gold production.
7
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PRODUCTION
The table below sets out gold production at each of the Company's mines for the
past five years:
<TABLE>
<CAPTION>
Gold Production
(in ounces)
<S> <C> <C> <C> <C>
Mine 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------
Florida Canyon, Nevada... 183,200 111,200 91,900 109,200 90,000
Montana Tunnels, Montana. 81,600 89,200 80,200 68,900 74,700
Mt. Todd, Australia (1).. 62,600 70,000 61,200 --- ---
Zortman, Montana......... 37,000 110,900 109,500 108,500 113,000
Beal Mountain, Montana... 45,000 59,900 61,200 9,300 52,200
Black Pine, Idaho........ 87,900 108,500 65,700 66,100 48,700
Tanami, Australia (1)(3). --- --- 24,700 68,800 ---
Basin Creek, Montana (2). --- --- 700 2,800 3,500
--------- --------- --------- --------- ---------
Total 497,300 549,700 495,100 483,600 382,100
========= ========= ========= ========= =========
</TABLE>
- -----------------------
(1) Total production.
(2) Current status, see Page 20.
(3) Operations ceased April 1994.
SUMMARY OF ORE RESERVES
The proven and probable ore reserves set forth below, and appearing elsewhere in
this Form 10-K, reflect estimates of the quantities and grades of mineralized
materials which can be economically recovered based on a realized price for gold
of $400 per ounce, except at Mt. Todd which used $A545 and Montana Tunnels which
used $390, and certain assumptions regarding production costs and other metal
prices. In 1996, the Company realized an average price of approximately $426
per ounce. Although the Company has carefully prepared and verified these
reserves, such figures are estimates. Market price fluctuations of gold as well
as increased production costs or reduced recovery rates, may render the mining
of ore reserves containing lower grades of mineralization uneconomic. Moreover,
short-term factors such as the need for orderly development of ore bodies, or
the processing of different grades, could adversely impact operating results in
any particular accounting period. Probable reserves at the Florida Canyon
property require additional permits before all reserves can be mined. The
Company believes all necessary permits will be obtained.
The gold reserves set forth below represent proven and probable ore reserves at
each of the Company's properties at December 31, 1996:
Tonnes Grade Contained
Mine (000's) (g/t) Ounces (1)
------------------------------------------
Florida Canyon............. 53,133 0.59 1,013,000
Montana Tunnels............ 17,095 0.54 295,200
Mt. Todd................... 94,507 1.07 3,250,700
Zortman.................... 62,317 0.71 1,427,500
Pullalli................... 9,135 1.60 469,700
Beal Mountain.............. 637 2.09 42,800
Black Pine................. 1,802 0.57 32,800
------------
TOTAL 6,531,700
============
- --------------------
(1) Does not reflect gold equivalent ounces in other recoverable metals.
8
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MAP...
Three maps of North America, South America and Australia showing the location
of the Company's corporate headquarters, exploration offices operating mines,
and principal projects
9
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FLORIDA CANYON MINE
The Florida Canyon Mine is an open-pit, heap leaching operation located in
Pershing County approximately 64 kilometers west of Winnemucca, Nevada. Mining
operations commenced at the Florida Canyon Mine in September 1986.
OPERATING DATA
The following table contains certain operating statistics for the Florida Canyon
Mine:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CRUSHED ORE:
Ore mined (tonnes 000's)..... 11,440 5,320 4,990 4,990 4,610
Average gold grade (g/t)..... 0.79 0.84 0.79 0.72 0.62
Gold recovery percentage..... 78.0 75.0 77.8 76.5 65.0
RUN-OF-MINE ORE:
Ore mined (tonnes 000's)..... 2,440 2,320 1,540 1,360 4,010
Average gold grade (g/t)..... 0.35 0.37 0.34 0.38 0.34
Gold recovery percentage..... 45.0 45.0 47.5 52.4 49.0
Stripping ratio.............. 1.89:1 1.03:1 1.22:1 0.88:1 1.22:1
Ounces of gold recovered..... 183,200 111,200 91,900 109,200 90,000
Ounces of silver recovered... 104,700 62,600 25,300 37,600 37,800
COST PER OUNCE:
Cash production cost......... $256 $256 $259 $222 $282
Depreciation and amortization 77 32 27 47 54
Royalties.................... 10 11 11 18 12
--------- -------- --------- --------- ---------
Total production cost........ $343 $299 $297 $287 $348
========= ======== ========= ========= =========
- ------------------
</TABLE>
GEOLOGY
Gold deposits at Florida Canyon are hosted by iron oxide stained and silicified
siltstones and argillites of the Triassic Grass Valley Formation.
Mineralization occurs in structurally controlled quartz veins and stockworks
cutting silicified host rock. Structural preparation for mineralization is
localized at the junctions of northeast (Midas Trend) and northwest trending
regional structural zones. These structural intersections provided the conduits
for ascending gold bearing hydrothermal fluids which invaded brittle, fractured
host rock. Bedding within the Grass Valley Formation imparts a lithologic
control to the hydrothermally introduced mineralization.
Gold is generally associated with quartz, iron oxides, pyrite, and marcasite and
occurs in the native state averaging three to five microns. Alteration products
consist of quartz, alunite, kaolinite, adularia, and iron oxides. Oxidized ore
zones grade laterally and at depth into unoxidized zones.
ORE RESERVES
As of December 31, 1996, the Florida Canyon Mine had proven and probable ore
reserves of approximately 53.1 million tonnes, grading 0.59 grams of gold per
tonne with a stripping ratio of 2.4:1. This reserve is comprised of 31.3
million tonnes of material that will be crushed, agglomerated, and delivered to
the heap leach pads, and 21.8 million tonnes that will be delivered to the leach
pads as run-of-mine material. Ore to be crushed has an average grade of 0.74
grams of gold per tonne. The average grade of the run-of-mine material is 0.38
grams of gold per tonne. The cut-off grade for each type of material depends on
rock type and processing method. The Company expects mining operations to
continue at full production at least
10
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another six years based on current mine plans. Additional permitting is
required to mine certain portions of the ore body.
MINING AND LEACHING OPERATIONS
Material is mined by conventional open-pit, truck and loader methods. The lower
grade, run-of-mine material is delivered directly to the heap leach pad while
higher grade, crushed ore is hauled by truck to the crushing plant.
Improvements to mining and crushing operations completed in 1995 increased
crushing capacity to 11.1 million tonnes per annum by adding a second crusher.
In addition, the Company utilized a contract crusher for much of 1996. Two
crushers will be operated at least through 1997.
Leaching occurs year round by percolating an alkaline solution of dilute sodium
cyanide through the heap to dissolve the gold. Gold and silver are recovered
from the solution using a Merrill-Crowe system and two carbon absorption gold
recovery units, smelted onsite into dore and shipped to an outside refinery for
processing into gold and silver bullion. Construction of the carbon desorption
facility and refinery upgrades will be completed in early 1997.
Starting January 1, 1996, the mine began managing its own mining equipment and
personnel. Mining rates increased to nearly 14 million tonnes of ore and 26
million tonnes of overburden for 1996. The current estimate of 1997 gold
production is 175,000 ounces.
OWNERSHIP ARRANGEMENTS
The Florida Canyon property is comprised of 5,500 hectares, 3,880 hectares of
which are unpatented. The unpatented mining claims are subject to royalties of
2.5 to 5.0 percent of the net smelter return and/or 1 to 10 percent of net
profits.
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MONTANA TUNNELS MINE
The Montana Tunnels Mine is located in Jefferson County, Montana, between Butte
and Helena. The mine began production in the spring of 1987. Diamond Hill, a
satellite operation of Montana Tunnels, is an underground operation in
Broadwater, Montana. Production from Diamond Hill began in the third quarter of
1996.
OPERATING DATA
The following table contains certain operating statistics for the Montana
Tunnels Mine (including Diamond Hill in 1996):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
MILLED ORE:
Ore mined (tonnes 000's)...... 5,080 5,100 4,720 4,170 4,150
Stripping ratio............... 2.9:1 3.0:1 4.1:1 3.8:1 2.0:1
Average gold grade (g/t)...... 0.64 0.70 0.65 0.58 0.69
Average silver grade (g/t).... 11.57 10.76 10.97 15.08 15.08
Average percent lead.......... 0.23 0.20 0.24 0.20 0.22
Average percent zinc.......... 0.55 0.58 0.56 0.52 0.61
Gold recovery percentage...... 84 85 85 84 87
Silver recovery percentage.... 76 76 76 75 77
Lead recovery percentage...... 90 88 88 88 90
Zinc recovery percentage...... 86 85 86 88 90
Ounces of gold recovered...... 81,600 89,200 80,200 68,900 74,700
Ounces of silver recovered.... 921,500 1,073,200 1,085,700 1,401,100 1,325,700
Tons of lead recovered........ 7,000 7,400 9,400 7,000 7,200
Tons of zinc recovered........ 18,300 21,600 19,800 18,000 19,400
COST PER OUNCE:
Cash production cost (1)...... $289 $179 $173 $178 $115
Depreciation and amortization. 165 139 135 121 102
Royalties..................... 11 10 11 13 12
------- --------- --------- --------- ---------
Total production cost......... $465 $328 $319 $312 $229
------- --------- --------- --------- ---------
------- --------- --------- --------- ---------
- -----------------
(1) Net of by-product credits
</TABLE>
GEOLOGY
The Montana Tunnels deposit is located in the central part of a diatreme (a
volcanic vent or pipe) which has intruded older rocks. This diatreme was
emplaced along the fault contact between the Cretaceous Elkhorn Mountain
andesite and the Eocene Lowland Creek ignimbrites. The diatreme consists of
matrix-rich breccia with fragments of contiguous wall rocks and intrusive rock
from the Cretaceous Boulder batholith.
Sulfide mineralization includes pyrite, sphalerite, galena, minor chalcopyrite,
and rare electrum accompanied by a gangue of manganocalcite, siderite, and minor
quartz. The sulfides occur as disseminations in the breccia matrix and as
widely spaced multidirectional veinlets. Gold occurs as electrum and as
inclusions in pyrite, sphalerite, and galena. Silver is present mainly in
galena and as silver sulfides.
The Diamond Hill deposit consists of near vertical, pipe-like bodies of
gold-bearing skarn. The skarn is developed along a north-south structural zone
that is along a contact of late Cretaceous diorite stock and early Tertiary
volcanic rocks. The structural/contact zone is over 610 meters long and
contains at least four gold bearing skarn zones. Two additional skarn zones
have been identified from surface outcrops. The skarn is developed from both
igneous and sedimentary rocks. The igneous rocks are derived from the adjacent
diorite and volcanic rocks. The sediments have been rafted up along the
structural zone.
12
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The gold bearing skarns consist of retrograde calcium-silicate mineralization
which includes: epidote, chlorite, idocrase, actinolite, calcite, garnet,
potassium feldspar and quartz. The sulfide mineralization is predominately
pyrite with minor chalcopyrite and rare pyrrhotite. Late stage calcite veins
are also locally enriched in galena and sphalerite. The gold occurs as free
grains from micron size to four millimeters and is associated with trace amounts
of tellurium and bismuth.
ORE RESERVES
As of December 31, 1996, Montana Tunnels had proven and probable ore reserves of
approximately 17.1 million tonnes, grading 0.54 grams of gold, 10.63 grams of
silver, 0.21 percent lead and 0.62 percent zinc (average gold equivalent grade
of 1.02 grams per tonne). Ore reserves were determined using a cut-off grade of
0.55 grams of gold equivalent per tonne which results in a stripping ratio of
0.64:1. At present production rates, reserves are sufficient for a 3.5 year
mine life.
As of December 31, 1996, Diamond Hill had no proven and probable ore reserves.
All resources were classified as mineralized material. Mining is currently
planned at a rate faster than the Company will develop proven and probable
reserves.
MINING AND PROCESSING OPERATIONS
Montana Tunnels is a conventional, open-pit mining operation consisting of
drilling, blasting, loading, and truck haulage to carry ore to the crusher and
waste to the dump.
Ore is treated by conventional crushing, then autogenous and ball mill grinding
followed by sequential lead-zinc flotation. Lead and zinc concentrates are
cleaned in further flotation steps and shipped by truck, rail, or ship and sold
to various smelters. A gravity circuit recovers approximately 26 percent of the
recovered gold and a small percentage of the silver. This product is smelted
onsite to produce dore and shipped to an outside refinery for processing into
gold and silver bullion.
Diamond Hill is a small underground mining operation. Mining is conducted by a
contract miner using conventional equipment. Underground access is via a ramp
which spirals down in a modified figure eight configuration. Ore is mined by
sub-level stoping. The vertical distance between sub-levels is approximately 18
meters. Ore is hauled to the surface then hauled 110 kilometers by truck to the
Montana Tunnels mill for batch processing.
OWNERSHIP ARRANGEMENTS
The Montana Tunnels property is comprised of 3,490 hectares, 1,900 hectares of
which are unpatented. The property is subject to a 5 percent net profits
royalty interest in favor of USMX (or $60,000 per month, if greater) until
certain capital and financing costs have been recovered by payback. After
payback, USMX will become entitled to a 50 percent net profits royalty. During
1996, the Company agreed to purchase the USMX royalty. Completion of the
transaction is subject to the approval of USMX's shareholders. See Note 6 to
the Consolidated Financial Statements for more information.
The Diamond Hill property is composed of 1,300 hectares, 1,180 of which are
unpatented. The property is subject to a 15 percent net profits royalty
interest in favor of Broadwater Development after payback of certain development
costs. Based on current mine plans, estimates of mineralization, mining and
processing costs, and metal prices, it is not anticipated that payback, as
defined in the agreement, will occur. Some of the unpatented mining claims are
subject to royalties of 0.5 percent to 3.0 percent of the net smelter return.
13
<PAGE>
MT. TODD MINE
The Mt. Todd Mine is located in the Northern Territory of Australia,
approximately 230 kilometers south of Darwin and 61 kilometers northwest of
Katherine.
The project was developed in two phases. Phase I of the project, which began in
March 1993, consisted of a three-stage crushing, agglomeration, and heap leach
process which produced approximately 65,000 ounces of gold per year.
Construction of the Phase I expansion, completed in November 1994, increased the
throughput capacity from 4.0 million tonnes per year to 6.0 million tonnes per
year. Ore additions to the heap ceased in August 1996, at which time waste
stripping and ore stockpiling for Phase II operations commenced. Recovery of
gold from the heap will continue into 1997.
Construction of Phase II began in late 1995 and was essentially complete at
December 31, 1996. Final development of Phase II includes a mill, crushing
plant expansion to four stages of crushing, flotation, CIL, and associated
infrastructure including an onsite natural gas-turbine power generation plant.
The current estimate is that production will increase to approximately 260,000
ounces per year, after commencement of commercial production during 1997.
OPERATING DATA
The following table contains certain operating statistics for the Mt. Todd Mine:
Year Ended December 31,
-------------------------------------
1996 1995 1994
---- ---- ----
Ore mined (tonnes 000's)...... 4,000 5,040 3,450
Stripping ratio............... 3.23:1 1.19:1 1.00:1
Average gold grade (g/t)...... 0.99 1.02 1.17
Gold recovery percentage...... 55.0 55.0 56.0
Ounces of gold recovered (1).. 62,600 70,000 61,200
COST PER OUNCE:
Cash production cost.......... $370 $346 $331
Depreciation and amortization. 182 68 47
Royalties..................... 1 --- ---
------- ------- -------
Total production cost......... $553 $414 $378
======= ======= =======
- ------------------
(1) Pegasus' share was 54,500 ounces in 1995 and 33,200 ounces in 1994.
GEOLOGY
The Mt. Todd area is located within the southeastern part of the Pine Creek
Geosyncline, a geological province known to host many gold deposits.
Mineralization at the Batman deposit is hosted by dominantly north-south
trending and easterly dipping, sheeted quartz-sulfide veins within barren
greywacke and shale. Other smaller deposits occur to the northeast of the
Batman deposit. These also strike north-south and are oriented in an echelon
arrangement into a northeast trending corridor. Near-term exploration will
focus on these targets.
ORE RESERVES
As of December 31, 1996, the Mt. Todd Mine had proven and probable ore reserves
of 94.5 million tonnes at an average grade of 1.07 grams of gold per tonne with
an average stripping ratio of 1.91:1. The cut-off grade varies depending on
rock type and processing method. The current reserves are sufficient for
approximately nine years of operations based on current mine plans.
14
<PAGE>
MINING AND MINERAL PROCESSING OPERATIONS
Mining at Mt. Todd is carried out by open-pit methods using conventional
equipment. During Phase I, heap leach ore was crushed, agglomerated, and
stacked on a leach pad. Pad loading ceased in August 1996. Gold is extracted
from the ore by percolating a weak cyanide solution through the ore on the heap.
Solution is pumped to a recovery plant where the gold is adsorbed onto activated
carbon and then precipitated onto steel wool cathodes. The cathodes are smelted
onsite into dore, which is shipped offsite for refinement into gold bullion.
Heap leaching is expected to continue through 1997.
Phase II expanded the existing crushing plant at Mt. Todd by adding a parallel
circuit to enable the mine to crush 8.0 million tonnes per year. In addition, a
fourth stage of crushing has been added and the crushed ore will be fed to
grinding mills and ground to 150 microns. Ground material goes through
flotation and the flotation concentrate will be reground to liberate the gold
which is leached within a CIL circuit. Flotation tails will be leached in a
standard CIL circuit for residual gold recovery. Carbon stripping,
electrowinning, and dore refining will be done in a common facility onsite.
Dore will be shipped to a commercial refiner for refinement into gold bullion.
Total gold recovery after leaching both the flotation tails and the concentrate
is expected to be 84 percent. A mining contractor is being used at Mt. Todd.
OWNERSHIP ARRANGEMENTS
The Mt. Todd property consists of 132,850 hectares of mineral leases including
127,460 hectares which are held under various exploration licenses and mineral
claims. The leases are subject to a royalty of 18 percent of the gross profit
from operations, less substantial adjustments for exploration and capital
expenditures.
ZORTMAN MINE
The Zortman Mine is located in north central Montana, approximately 80
kilometers southwest of Malta. Mine operations commenced in 1979.
The Final Environmental Impact Statement ("EIS") for an extension of mining to
the Zortman deposit was issued in March 1996. A favorable Record of Decision
and operating permits were granted in October 1996. Additionally, the Company
settled outstanding water quality litigation with the United States
Environmental Protection Agency, the State of Montana, and several citizen
groups in September 1996. Construction of the Zortman Extension Project is
expected to begin in 1998 with production approximately one year after
construction commences.
OPERATING DATA
The following table contains certain operating statistics for the Zortman Mine:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
RUN-OF-MINE ORE:
Ore mined (tonnes 000's)...... 130 9,090 13,430 11,340 11,700
Stripping ratio............... 1.50:1 0.77:1 0.74:1 0.67:1 0.45:1
Average gold grade (g/t)...... 0.52 0.72 0.58 0.58 0.51
Gold recovery percentage...... 55.0 55.0 55.0 55.0 55.0
Ounces of gold recovered...... 37,000 110,900 109,500 108,500 113,000
Ounces of silver recovered.... 129,800 500,500 461,200 535,700 771,600
COST PER OUNCE:
Cash production cost.......... $322 $279 $320 $273 $231
Depreciation and amortization. 122 101 55 50 47
Royalties..................... --- 4 13 2 5
--------- --------- --------- --------- ---------
Total production cost......... $444 $384 $388 $325 $283
========= ========= ========= ========= =========
- -------------------
</TABLE>
15
<PAGE>
GEOLOGY
Disseminated gold mineralization is hosted in breccia veins, dikes, and
associated stockworks that cut tertiary aged alkaline syenite and quartz
monzonite. Mineralization occurs where the emplacement of these breccia veins
and dikes has produced increased porosity in the intrusive rocks, allowing
hydrothermal solutions to intrude. The bulk of the gold and silver is present
as electrum, but a substantial fraction of the gold occurs as tellurides. The
deposit is oxidized to depths of up to 244 meters, and the ore mined to-date has
come from the oxidized zones.
Most of the expected future mining will come from the Zortman Extension Project
where the geologic conditions are very similar to those described above. The
controlling structures continue at depth and along strike extent with the
majority of reserves consisting of sulfides and transition ores (partially
oxidized).
ORE RESERVES
As of December 31, 1996, the Zortman Mine has proven and probable ore reserves
of 62.3 million tonnes with an average grade of 0.71 grams of gold per tonne and
a stripping ratio of 0.8:1.
MINING AND HEAP LEACHING OPERATIONS
The run-of-mine ore from the open-pits at the Zortman Mine, and when
operational, the crushed ore from the Zortman Extension Project, are placed on
nearby heap leach pads, where a sprinkler and drip system applies a dilute
alkaline cyanide solution to the ore to dissolve the gold and silver. The gold
and silver laden solution is collected and pumped to recovery plants. Gold and
silver are recovered from solution through a carbon column circuit or
Merrill-Crowe process, smelted onsite into dore, and shipped to an outside
refinery for processing into gold and silver bullion.
Ore on the leach pads is leached intermittently over a five-year period. During
the first year, approximately 40 percent of the total contained gold is
recovered. Crushed ore from the Zortman Extension Project will be leached
intermittently over a two-year period with approximately 55 percent of the total
contained gold recovered during the first year.
OWNERSHIP ARRANGEMENTS
The Zortman property is comprised of 6,630 hectares, 5,940 hectares of which are
unpatented. Some of the unpatented mining claims are subject to royalties of 2
to 3 percent of the net smelter return.
16
<PAGE>
BEAL MOUNTAIN MINE
The Beal Mountain Mine is located in Silver Bow County, approximately 26
kilometers west of Butte, Montana. Commercial gold production commenced at the
Beal Mountain Mine in May 1989.
OPERATING DATA
The following table contains certain operating statistics for the Beal Mountain
Mine:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
RUN-OF-MINE ORE:
Ore mined (tonnes 000's)...... 1,720 1,490 1,630 1,540 1,520
Stripping ratio............... 1.20:1 0.79:1 0.81:1 0.89:1 1.30:1
Average gold grade (g/t)...... 1.45 1.72 1.68 1.78 1.47
Gold recovery percentage...... 66.0 70.0 70.0 70.0 72.6
Ounces of gold recovered...... 45,000 59,900 61,200 59,300 52,200
Ounces of silver recovered.... 7,800 10,200 8,700 8,600 8,000
COST PER OUNCE:
Cash production cost.......... $363 $286 $255 $211 $211
Depreciation and amortization. 159 87 106 93 89
Royalties..................... 2 10 11 10 4
--------- --------- --------- --------- ---------
Total production cost......... $524 $383 $372 $314 $304
========= ========= ========= ========= =========
- ------------------
</TABLE>
GEOLOGY
The Cretaceous Blackleaf Formation contains the mineralized host rocks at the
Beal Mountain Mine. The original mudstones, quartzites, arkoses, and shales
have been thermally altered to hornfels and calc-silicate rocks. Gold
mineralization is associated with coarser-grained, clastic rocks and
near-vertical sulfide-bearing quartz veining. Ore grade mineralization
continues to the bottom of the present drilling (approximately 244 meters).
South Beal, a mineralized zone 305 meters southeast of the main Beal deposit,
was put into production in late 1993.
ORE RESERVES
As of December 31, 1996, Beal Mountain had remaining proven and probable ore
reserves of approximately 637,000 tonnes, grading 2.09 grams of gold per tonne.
A design cut-off grade of 0.62 grams of gold per tonne was used in calculating
these reserves, resulting in a stripping ratio of 5.3:1. The expected mine life
is less than one year.
MINING AND LEACHING OPERATIONS
The ore is mined by conventional, open-pit methods; it is then crushed,
agglomerated, and loaded on the heap leach pad. A combination spray and drip
system allows leaching to continue throughout the year. The gold laden solution
is collected and pumped to a recovery plant where the gold is adsorbed onto
activated carbon, stripped, then smelted onsite into dore and shipped to an
outside refinery for processing into gold bullion.
Mining operations at Beal are expected to cease in 1997 after which reclamation
and closure activities will commence.
17
<PAGE>
OWNERSHIP ARRANGEMENTS
The Beal Mountain Mine is located on a leasehold interest of approximately 2,160
hectares. Under the terms of the lease, which may be extended for the life of
mining operations on the property, the lessor is entitled to receive a royalty
of 6 percent of the net proceeds until all capital costs and other expenses of
placing the property into production have been recovered. After payback, the
royalty increases to 30 percent. Payback is not expected to occur during the
projected life of the mine. In addition, the Company is subject to a royalty of
4.5 percent of the net smelter return on the South Beal property.
BLACK PINE MINE
The Black Pine Mine is located 109 kilometers southeast of Burley, Idaho, in
Cassia County. Mining and processing operations began in December 1991.
OPERATING DATA
The following table contains certain operating statistics for the Black Pine
Mine:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
RUN-OF-MINE ORE:
Ore mined (tonnes 000's)...... 8,730 7,050 5,810 3,270 2,850
Stripping ratio............... 0.98:1 1.16:1 1.16:1 1.30:1 1.93:1
Average gold grade (g/t)...... 0.52 0.72 0.69 0.82 1.20
Gold recovery percentage...... 60.0 59.0 54.0 80.0 65.0
Ounces of gold recovered...... 87,900 108,500 65,700 66,100 48,700
Ounces of silver recovered.... 31,000 59,300 39,100 28,600 14,900
COST PER OUNCE:
Cash production cost.......... $261 $251 $294 $244 $183
Depreciation and amortization. 35 40 53 83 109
Royalties..................... 24 22 24 20 18
--------- --------- --------- --------- ---------
Total production cost $320 $313 $371 $347 $310
========= ========= ========= ========= =========
- --------------
</TABLE>
GEOLOGY
The Black Pine Mine is comprised of multiple, low-grade, sediment-hosted,
disseminated gold deposits. Late Paleozoic, calcareous siltstones and clastic
limestones of the Pennsylvanian-Permian Oquirrh Formation are the dominant
ore-bearing hosts. Precious metal mineralization is controlled by structural
intersections in combination with favorable lithologies. Gold occurs as
disseminated, micron-sized particles associated with calcite and limonite
alteration.
ORE RESERVES
As of December 31, 1996, the Black Pine Mine had proven and probable ore
reserves of 1.8 million tonnes at an average grade of 0.57 grams of gold per
tonne. In calculating these reserves, the Company used a design cut-off grade
of 0.31 grams of gold per tonne, resulting in an average stripping ratio of
1.80:1. The current reserves are sufficient for less than one year of
operations based on current mine plans.
MINING AND LEACHING OPERATIONS
Ore is mined by conventional open-pit methods and hauled directly to the heap
leach pad. Leaching occurs over a 12-month period by percolating an alkaline
solution of dilute sodium cyanide through the heap to dissolve the gold. The
gold-laden solution is collected and pumped to a recovery plant where it is
adsorbed onto activated carbon and stripped, then smelted onsite into dore and
shipped to an outside refinery for processing into gold bullion.
18
<PAGE>
The Company uses a mining contractor at the Black Pine Mine under an agreement
which expires on September 30, 1997. Mining operations are expected to cease in
1997 after which reclamation and closure activities will commence.
OWNERSHIP ARRANGEMENTS
The Black Pine property consists of approximately 6,280 hectares, which includes
1,660 hectares of land held under state and federal leases. All land in the
proximity of mining areas is subject to a variable royalty which is
approximately 6 percent of revenue when gold is $400 per ounce.
PULLALLI PROJECT
The Pullalli Project is situated 160 kilometers northwest of Santiago, Chile, at
a relatively low elevation, close to a power line and the Pan-American Highway.
CURRENT STATUS
The Company completed a final feasibility study for the development of the
Pullalli open-pit gold mine in 1995. Detailed engineering was completed in
1996. However, due to the limited success of exploration drilling and the
current weak gold market, the Company has decided to delay the start of
construction until 1998. An exploration program designed to test the potential
of adding additional reserves to the north of the current reserve area will be
completed during 1997. Final assessment of the project will follow completion
of further exploration.
GEOLOGY
The Pullalli area consists of gold mineralization dominantly controlled by at
least four northeast-striking structures in a series of rhyolite,
meta-sedimentary and meta-volcanic rocks along the flanks of a rhyolite
intrusive complex. The gold mineralization is enhanced by north-trending dikes
and northwest-trending structures. The gold mineralization is associated with
strongly silicified lenses and veins surrounded by prominent
quartz-sericite-pyrite alteration.
ORE RESERVES
As of December 31, 1996, the Pullalli Project had proven and probable ore
reserves of 9.1 million tonnes at an average grade of 1.60 grams of gold per
tonne, resulting in a strip ratio of 3.74:1.
MINING AND LEACHING OPERATIONS
Open-pit mining using conventional equipment is expected at a rate of 2.3
million tonnes of ore per year. A crushing plant will be constructed to crush
1.5 million tonnes of ore for heap leaching and 0.77 million tonnes for milling.
Higher grade mill ore will be campaigned through the crusher daily and conveyed
to a fine-ore stockpile for continuous reclaim to the mill. Lower grade heap
leach ore will be crushed and conveyed directly to the heap for placement with a
radial stacker. Gold will be recovered by carbon adsorption.
Mill ore will be processed in a conventional grinding and agitation leach plant.
Leached product will be subjected to a cyclone washing circuit with overflow
going to a CIP plant and underflow being combined with new heap leach ore and
conveyed to the leach pad. CIP tails will report to a lined tailings pond.
Construction could begin as early as 1998 with road construction, pre-stripping
of waste and construction of dump sites, with production about 12 months later.
At full production, it is currently estimated that Pullalli will produce about
90,000 ounces of gold annually for a period of five years.
19
<PAGE>
OWNERSHIP ARRANGEMENTS
The Company controls approximately 11,600 hectares, 5,600 hectares of which
contain the reserve area and the planned site for the new facilities. The
Company acquired the mineral rights under option agreements, the terms of which
require the Company to make payments over periods of three to eight years. One
of these agreements requires the payment of a 4 percent net smelter return
royalty. The surface rights for the project belong to the "Cooperative of
Pullalli," owned by more than 100 holders. An agreement for leasing the surface
rights for the mine operation is in place.
BASIN CREEK MINE
The Basin Creek Mine is located in southwestern Montana, approximately 29
kilometers southwest of Helena. The mine began production in June 1988 and was
acquired by the Company in June 1989.
CURRENT STATUS
The Basin Creek Mine was shut down in early 1991 and placed on care and
maintenance status. Run-of-mine test work was carried out in 1992, and in 1993
the Company initiated a study of the feasibility of reopening Basin Creek as a
run-of-mine heap leach operation to help fund final reclamation costs.
In 1994, the run-of-mine study was completed and concluded that the operation
would not produce economic results. Full closure of the mine was accelerated to
decrease the Company's long-term environmental liability. During 1996, the
Company spent $2.4 million on reclamation at Basin Creek. Reclamation
expenditures for 1997 are estimated at $1.3 million and final closure is
expected to occur in 1999.
OWNERSHIP ARRANGEMENTS
The Basin Creek property is comprised of approximately 2,130 hectares, of which
490 hectares are patented.
GOLD PRICE
The results of the Company's operations are significantly affected by the market
price of gold. Gold prices fluctuate and are affected by numerous factors
beyond the Company's control, including demand for precious metals, forward
selling by producers, central bank sales and purchases of gold, production and
cost levels in major gold-producing regions such as South Africa and the former
Soviet Union, expectations with respect to the rate of inflation, the relative
strength of the U.S. dollar and of certain other currencies, interest rates,
global or regional political or economic crises and sales of gold by holders in
response to such factors. The supply of gold consists of a combination of new
mine production and existing stocks of bullion and fabricated gold held by
governments, public and private financial institutions, private individuals and
companies. If gold prices should decline below the Company's cash costs of
production and remain at such levels for a substantial period, the Company could
determine that it is not economically feasible to continue commercial production
at one or more of its mines.
SALES AND MARKETING
REFINING AND MARKETING
The Company's mines produce dore which is processed by Johnson Matthey in Salt
Lake City, Utah, Handy and Harman in South Windsor, Connecticut and the Western
Australian Mint in East Perth, Western Australia. Gold and silver can be sold
on numerous markets throughout the world, and the market price is readily
ascertainable. Lead concentrate produced at Montana Tunnels is shipped to
ASARCO in East Helena, Montana. Zinc concentrate produced at Montana Tunnels is
shipped to Cominco Ltd. in Trail, British Columbia, and to Dowa Mining Co., Ltd.
in Akita, Japan.
All of the Company's sales are delivered against contracts with a small number
of metals brokers and smelters. Due to the nature of the precious metals
market, the Company is not dependent on its significant customers to provide a
market for its refined gold and silver. However, if the Company had to replace
the
20
<PAGE>
smelters to which zinc, lead, and pyrite concentrates are shipped, the
additional transportation costs could be considerable.
HEDGING PROGRAM
The Company uses a variety of techniques to manage exposures to price
fluctuations, and movements in interest and foreign currency exchange rates.
The Company reduces its exposure by creating offsetting positions through the
use of derivative financial instruments and has established a control
environment which includes policies and procedures for risk assessment and the
approval, reporting, and monitoring of derivative instrument activities. The
Company does not use derivative financial instruments for trading or speculative
purposes. For more information about the Company's financial instruments and
hedging programs, see Note 12 to the Consolidated Financial Statements.
EXPLORATION AND EVALUATION
The Company conducts a grassroots exploration program in South America and
Australia and evaluates specific exploration and advanced business development
opportunities throughout the world. The Company focuses on pure gold properties
and polymetallic deposits with a majority gold component. In addition, the
Company pursues aggressive exploration programs at its operating mines.
Exploration activities are headquartered in Spokane, Washington, with district
exploration offices in Santiago, Chile; Mendoza, Argentina; Kalgoorlie,
Australia; and Itaituba, Brazil. The exploration department has a permanent
staff of 28 people which includes geologists and support staff. Consultants and
contract personnel are used for specific projects and tasks.
The Company spent $19.0 million on exploration and evaluation activities in
1996, including $7.7 million which was expensed, $4.3 million used to acquire a
19.9 percent interest in Intermin Resource Corporation Limited, an Australian
gold exploration company, and $7.0 million capitalized to mine site operations.
International exploration totaled $14.3 million, including $8.6 million in
Australia, $2.6 million in Chile, $1.4 million in Brazil, $1.2 million in
Argentina and $0.5 million on other international projects. United States
exploration totaled $2.4 million, including $1.7 million around U.S. mines.
Expenditures for evaluation of business opportunities globally totaled $2.3
million. For 1997, the exploration, development and evaluation budget is $11.0
million, $5.6 million of which is expected to be expensed. More than 90 percent
will be spent on projects outside the United States. In addition, Intermin will
spend $2.2 million from the proceeds of the Company's investment in 1996 on
primary exploration targets in West Australia. Actual expenditures will vary
depending on the results of exploration activities at exploration properties and
operating mines and because of the acquisition of new properties.
PROPERTY INTERESTS AND MINING CLAIMS
The Company has acquired and maintained mining claims in a manner consistent
with common mining industry practice and believes its titles are satisfactory.
However, mining claims are subject to the same risk of defective title that is
common to all real property interests. Additionally, mining claims are
self-initiated and self-maintained and therefore, possess some unique
vulnerabilities not associated with other types of property interests.
It is impossible to ascertain the validity of unpatented United States mining
claims from public real estate records and, therefore, it can be difficult or
impossible to confirm that all of the requisite steps have been followed for
location and maintenance of a claim. If the validity of an unpatented mining
claim is challenged by the Bureau of Land Management or the Forest Service on
the grounds that mineralization has not been demonstrated, the claimant has the
burden of proving the present economic feasibility of mining minerals located
thereon. Such a challenge might be raised upon submittal of a patent
application or if the government seeks to include the land in an area to be
dedicated to another use.
Unpatented U.S. mining claims are located upon public land and are subject to
procedures established by the General Mining Law of 1872. Legislation has been
introduced in prior sessions of Congress to make significant revisions to the
Mining Law, including the imposition of a royalty on the net value of minerals
mined on public lands, stricter environmental standards and conditions,
additional reclamation requirements, and new
21
<PAGE>
procedural steps which would likely result in delays in permitting. Although
legislation has not been enacted, attempts to amend the Mining Law can be
expected to continue. The extent of any changes that actually will be enacted
and the potential impact on the Company cannot be predicted.
The acquisition of interests in foreign jurisdictions may involve unique
circumstances.
ENVIRONMENTAL AND REGULATORY MATTERS
REGULATION, RECLAMATION AND REMEDIATION
The Company's activities are subject to extensive domestic and foreign federal,
state, and local laws and regulations controlling not only the mining of,
exploration for, and development of mineral properties, but also the possible
effects of such activities upon the environment. These laws are continually
changing and, as a general matter, are becoming more restrictive. The Company's
policy is to conduct business in a way that safeguards public health and the
environment. The Company believes operations are conducted in material
compliance with applicable laws and regulations. However, existing and possible
future legislation and regulations, and third party lawsuits, could cause
additional expense, capital expenditures, operating, remediation and/or
reclamation costs (including closure), in addition to restrictions and delays in
the development of the Company's properties, the extent of which cannot be
predicted but could have a material adverse effect on the Company's business or
financial condition.
The Company is required to mitigate long-term environmental impacts by
stabilizing, contouring, resloping, and revegetating various portions of a site.
While the Company performs a portion of the required work concurrently with
mining and processing operations, the majority occurs once such operations are
completed. These reclamation efforts are conducted in accordance with detailed
plans which have been reviewed and approved by the appropriate regulatory
agencies. In Montana, Idaho, and Nevada, the Company posts security to cover
the estimated costs of such reclamation as required by permit. The Company
ratably accrues and expenses the total estimated cost to complete reclamation
over the remaining life of each mine.
A total of $2.6 million was spent during 1996 for capital improvements
associated with environmental projects, an additional $2.5 million was spent to
manage and operate environmental programs for the protection of water, air, and
wildlife resources, and $4.1 million to perform reclamation. Spending in 1996
was lower than expected primarily as a result of the timing of construction of
environmental treatment facilities at the Zortman Mine. In 1997, the Company
expects to spend $8.5 million on capital projects, $2.0 million on environmental
programs, and $10.7 million on concurrent reclamation. Increased capital
spending in 1997 will result from the construction of environmental treatment
facilities at the Zortman Mine. Increased spending in 1997 for reclamation
reflects the start of reclamation and closure activities at the Beal Mountain
and Black Pine Mines.
For more information regarding the Company's reclamation programs, see Note 13
to the Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations, "Environmental
Protection."
PERMITTING
Permitting is a continuing process, and as the Company expands, it regularly
amends its existing permits and obtains new permits. The Company believes it
has obtained all permits necessary for its current operations. The Florida
Canyon Mine requires additional permits before all probable reserves can be
mined. Consequently, the inability to obtain permits in the future could reduce
the mine life.
INSURANCE
The business of gold mining is subject to certain types of risks, including
environmental hazards, industrial accidents, and theft. The Company carries
insurance against certain property damage and loss (including business
interruption), comprehensive general liability, and losses from theft of gold
and goods in transit. While the Company maintains insurance consistent with
industry practice, it is not possible to insure against all risks associated
with the mining business, or prudent to assume that insurance will continue to
be available at a reasonable cost. In January 1996, the Company evaluated its
environmental liability insurance program
22
<PAGE>
relative to the associated risks and determined that such coverage was not cost
effective and therefore, this
coverage was not purchased.
COMPETITION
The Company competes with other mining companies in connection with the
acquisition of gold and other precious metals properties. There is significant
and increasing competition for the limited number of gold acquisition
opportunities, some with other companies having substantially greater financial
resources than the Company. As a result, the Company may eventually be unable
to acquire attractive gold mining properties. The Company believes no single
company has sufficient market power to affect the price or supply of gold in the
world market.
EMPLOYEES
As of December 31, 1996, the Company employed 1,022 persons. At some mines, the
Company engages mining contractors in addition to its own employees. With the
exception of Pegasus Gold Australia Pty Ltd. ("PGA") none of the Company's
employees are covered by collective bargaining agreements. Certain employees of
the Mt. Todd Mine are covered under a collective bargaining agreement in
compliance with Australian law. The Company believes employee relations are
good.
23
<PAGE>
LEGAL PROCEEDINGS
See Note 13 to the Consolidated Financial Statements.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the fourth
quarter of 1996.
EXECUTIVE OFFICERS OF THE COMPANY
Listed below are the names and ages, as of February 28, 1997, of each of the
present executive officers of the Company together with the principal positions
and offices with the Company held by each. Executive officers are appointed
annually by the Board of Directors to serve for the ensuing year or until their
successors have been appointed. No officer is related to any other by blood,
marriage, or adoption.
NAME AGE POSITION
---- --- --------
Werner G. Nennecker..... 43... President, Chief Executive Officer and Director
Phillips S. Baker, Jr... 37... Vice President,
Finance and Chief Financial Officer
Terry D. Bauer.......... 48... Vice President,
Environmental and Governmental Affairs
Robert A. Lonergan...... 51... Vice President,
General Counsel and Corporate Secretary
Eric B. Ovlen........... 53... Vice President, Administration
James B. Hannan......... 30... Controller
Michelle G. Viau........ 39... Treasurer
- --------------------
24
<PAGE>
WERNER G. NENNECKER joined the Company in September 1992, as Senior Vice
President and Chief Operating Officer. In November 1992, Mr. Nennecker assumed
the position of President and Chief Executive Officer and became a Director of
the Company. Prior to joining Pegasus, Mr. Nennecker worked 18 years in the
mining industry with Ranchers Exploration and Santa Fe Pacific Gold Corporation.
Most recently, he held the position of President of Santa Fe Pacific Gold
Corporation. Mr. Nennecker is a Director of USMX, Inc., and Intermin Resource
Corporation Ltd.
PHILLIPS S. BAKER, JR. joined the Company in January 1994, as Vice President,
Finance and Chief Financial Officer. Prior to joining Pegasus, Mr. Baker worked
seven years for Battle Mountain Gold Company, most recently as Treasurer. He
also worked as a public accountant for Arthur Andersen & Company. He is an
Attorney and Certified Public Accountant. Mr. Baker received a Bachelor of
Business Administration in accounting from Texas A & M University and a Master
of Business Administration and Doctor of Jurisprudence from the University of
Houston. Mr. Baker is a Director of USMX, Inc. and Intermin Resource
Corporation Ltd.
TERRY D. BAUER joined the Company in October 1990 and was appointed Vice
President, Environmental and Governmental Affairs in April 1994. Prior to
joining Pegasus, he served one year as Manager of Reclamation Services for
Morrison-Knudsen, Inc. and eight years as Vice President of Sunbelt Mining
Company, a mineral resource subsidiary of Public Service Company of New Mexico,
with responsibility for engineering and environmental management. Mr. Bauer
received his Bachelor of Science degree in Mining Engineering from the Colorado
School of Mines in 1970.
ROBERT A. LONERGAN joined the Company in June 1995, as Vice President, General
Counsel and Corporate Secretary. Mr. Lonergan has more than 22 years experience
in the legal field, primarily working on issues relating to environmental
compliance, mergers and acquisitions, and business litigation. He began his
career at Cadwalader, Wickersham & Taft in New York; from 1990 to 1993, Mr.
Lonergan was Vice President, General Counsel, Secretary and a member of the
Board of Directors of Kennecott Corporation of Salt Lake City, Utah. From 1994
until June 1995, Mr. Lonergan was an adjunct faculty member of the University of
Utah and affiliated with the firm of Woodbury and Kesler. Mr. Lonergan is a
Director of Intermin Resource Corporation Ltd.
ERIC B. OVLEN joined the Company in October 1994 as Vice President,
Administration. Mr. Ovlen brings 20 years of general management,
administration, and human resources experience with multinational companies to
Pegasus. Mr. Ovlen spent the last five years before he joined the Company, as
Vice President of Administration at Oki Semiconductor of Sunnyvale, California.
JAMES B. HANNAN joined the Company in April 1995, and was appointed Controller
in November 1996. From April 1995 to October 1996, he was Assistant
Controller. Prior to joining the Company, Mr. Hannan worked as a public
accountant at Coopers & Lybrand for six years. Mr. Hannan is a Certified Public
Accountant.
MICHELLE G. VIAU joined the Company in October 1984. Since February 1996, Mrs.
Viau has been the Company's Treasurer; from December 1992 to December 1996, she
was the Controller, from November 1987 to December 1992, she was the Assistant
Controller, and from October 1984 to October 1987, she held the position of Tax
Manager. Mrs. Viau has been a Certified Public Accountant since 1980. Prior to
her employment with the Company, Mrs. Viau worked as a public accountant for
Coopers & Lybrand.
25
<PAGE>
PART II
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's common shares are traded on the American Stock Exchange, The
Toronto Stock Exchange, and the Montreal Exchange under the symbol "PGU." As of
February 28, 1997, the common shares were held by approximately 3,142 registered
shareholders. As the Company's earnings are derived almost entirely from the
mining and sale of gold, the market price of the Company's common shares is
strongly influenced by prevailing gold bullion prices. The following table sets
forth for the indicated periods, the high and low sales prices of the common
shares as reported by the American Stock Exchange and The Toronto Stock
Exchange, and the high and low gold prices per ounce on the London Bullion
Market.
<TABLE>
<CAPTION>
AMERICAN STOCK TORONTO STOCK
EXCHANGE EXCHANGE GOLD PRICES (1)
(U.S. DOLLARS) (CANADIAN DOLLARS) (U.S. DOLLARS)
----------------------- --------------------- -----------------------
HIGH LOW HIGH LOW HIGH LOW
--------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1996 FIRST QUARTER $17.88 $13.50 $24.30 $18.38 $414.80 $389.15
SECOND QUARTER 16.63 12.00 22.45 16.20 396.30 382.00
THIRD QUARTER 13.13 9.75 17.90 13.45 389.75 379.00
FOURTH QUARTER 11.38 7.50 15.30 10.30 383.60 367.40
1995 First Quarter $12.75 $10.00 $17.63 $14.13 $392.20 $371.20
Second Quarter 13.50 10.00 18.50 13.75 395.55 381.55
Third Quarter 14.38 10.00 19.38 13.50 390.45 379.40
Fourth Quarter 14.75 10.88 20.13 14.75 388.60 381.75
</TABLE>
- ---------------
(1) PM Fixing
Because of cash flow requirements for major project development, the Company did
not declare a dividend in 1996, 1995, or 1994. The declaration of future
dividends will be determined by the Board of Directors in light of the Company's
earnings, cash requirements, and other relevant considerations.
26
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial data for the
respective periods presented and should be read in conjunction with the
Consolidated Financial Statements and the related notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1996(1) 1995(1) 1994(1) 1993 1992
<S> <C> <C> <C> <C> <C>
(In Thousands, Except Per Share)
Income Statement Data:
Sales......................... $239,720 $255,579 $233,648 $215,187 $182,171
======== ======== ======== ======== ========
Income (loss) before income
taxes, and effect of change
in accounting principle....... ($21,413) ($3,532) ($61,318) $11,757 ($11,751)
======== ======== ======== ======== ========
Income (loss) before effect of
change in accounting
principle..................... ($21,603) ($2,953) ($58,735) $9,993 ($8,320)
======== ======== ======== ======== ========
Net income (loss)............... ($21,603) ($2,953) ($58,735) $9,993 ($6,341)
======== ======== ======== ======== ========
Net income (loss) per common
share:
Before effect of change in
accounting principle........ ($0.53) ($0.08) ($1.69) $0.30 ($0.29)
Effect of change in accounting
principle...................... --- --- --- --- $0.07
-------- -------- -------- -------- --------
($0.53) ($0.08) ($1.69) $0.30 ($.022)
======== ======== ======== ======== ========
Cash dividends per common
share.......................... $0.00 $0.00 $0.00 $0.10 $0.10
======== ======== ======== ======== ========
</TABLE>
- ---------------------
(1) Comparability to prior years has been affected due to the consolidation of
PGA as of April 1, 1993.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and short-term
investments............. $8,566 $52,990 $89,316 $149,313 $109,753
Total assets............ $754,208 $580,241 $453,279 $495,233 $394,022
Long-term debt (2)...... $241,178 $159,625 $58,189 $66,735 $62,995
Shareholder's equity......... $363,277 $288,704 $292,342 $341,997 $293,139
</TABLE>
- -----------------
(2) Includes short-term portion, capital lease obligations, and convertible
debt. See Notes 7 and 8 to the Consolidated Financial Statements.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
For the year ended December 31, 1996, the Company recorded a net loss of $21.6
million, or $0.53 per share, compared to a net loss of $3.0 million, or $0.08
per share, in 1995 and a net loss of $58.7 million, or $1.69 per share, in 1994.
The net loss for 1996 includes the effects of accelerated depreciation and
amortization, increased estimates of future closure and reclamation costs and
property write-downs totaling $19.4 million, or $0.48 per share. In 1994, the
net loss includes the effect of provisions for closure, reclamation and related
costs and property write-downs amounting to $52.9 million or $1.53 per share.
Excluding the effects of the above, the net losses for 1996 and 1994 would have
been $2.2 million, or $0.05 per share and $5.8 million, or $0.16 per share,
respectively.
The net loss in 1996, before the charges discussed above, improved compared to
1995 because of a 5 percent increase in realized gold prices, a $10.9 million
reduction in exploration and evaluation expenses, the Company's proportionate
share of earnings from affiliates, and the capitalization of $10.0 million of
interest on construction projects. These factors were partially offset by a 29
percent increase in depreciation and amortization, a 10 percent decrease in gold
production, an 11 percent increase in the cash cost per ounce, and costs
incurred in connection with a proposed merger.
1996 1995 1994
---- ---- ----
Gold sales (ounces)......................... 497,300 549,700 495,100
Gold revenue realized per ounce............. $426 $406 $407
Average COMEX price per ounce............... $388 $384 $384
Cash production cost per ounce, net (1)..... $291 $262 $277
Total production cost per ounce (2)......... $409 $347 $356
- -----------------------
(1) Cash production costs include all operating costs at the mines, including
overhead and applicable mining taxes and credit for by-product revenues.
(2) Includes cash production costs, royalties, and depreciation and
amortization.
STATISTICAL INFORMATION BY MINE
The following chart details gold production, cash production costs and non-cash
operating costs per ounce by location.
Year Ended December 31,
-----------------------------------
1996 1995 1994
---- ---- ----
FLORIDA CANYON MINE:
Ounces of gold....................... 183,200 111,200 91,900
Average cost per ounce:
Cash production cost............ $256 $256 $259
Depreciation and amortization 77 32 27
Royalties....................... 10 11 11
------- ------- -------
Total production cost $343 $299 $297
======= ======= =======
MONTANA TUNNELS MINE:
Ounces of gold....................... 81,600 89,200 80,200
Average cost per ounce:
Cash production cost............ $289 $179 $173
Depreciation and amortization... 165 139 135
Royalties....................... 11 10 11
------- ------- -------
Total production cost $465 $328 $319
======= ======= =======
28
<PAGE>
Year Ended December 31,
-----------------------------------
1996 1995 1994
---- ---- ----
MT. TODD MINE:
Ounces of gold....................... 62,600 70,000 61,200
Attributable to Pegasus (1).......... 62,600 54,500 33,200
Average cost per ounce:
Cash production cost............ $370 $346 $331
Depreciation and amortization... 182 68 47
Royalties....................... 1 --- ---
------- ------- -------
Total production cost $553 $414 $378
======= ======= =======
ZORTMAN MINE:
Ounces of gold....................... 37,000 110,900 109,500
Average cost per ounce:
Cash production cost............ $322 $279 $320
Depreciation and amortization... 122 101 55
Royalties....................... --- 4 13
------- ------- -------
Total production cost $444 $384 $388
======= ======= =======
BEAL MOUNTAIN MINE:
Ounces of gold....................... 45,000 59,900 61,200
Average cost per ounce:
Cash production cost............ $363 $286 $255
Depreciation and amortization... 159 87 106
Royalties....................... 2 10 11
------- ------- -------
Total production cost $524 $383 $372
======= ======= =======
BLACK PINE MINE:
Ounces of gold....................... 87,900 108,500 65,700
Average cost per ounce:
Cash production cost............ $261 $251 $294
Depreciation and amortization... 35 40 53
Royalties....................... 24 22 24
------- ------- -------
Total production cost $320 $313 $371
======= ======= =======
TANAMI MINE:
Ounces of gold....................... --- --- 24,700
Attributable to Pegasus (1).......... --- --- 13,300
Average cost per ounce:
Cash production cost............ --- --- $231
Depreciation and amortization... --- --- 24
Royalties....................... --- --- 30
------- ------- -------
Total production cost --- --- $285
======= ======= =======
CONSOLIDATED TOTALS
Ounces of gold (1)(2)................ 497,300 549,700 494,400
Attributable to Pegasus (2).......... 497,300 534,200 455,000
Average cost per ounce:
Cash production cost............ $291 $262 $277
Depreciation and amortization... 108 75 66
Royalties....................... 10 10 13
------- ------- -------
Total production cost $409 $347 $356
======= ======= =======
- ---------------
(1) The Company's ownership percentage in Mt. Todd and Tanami was 55 percent in
1994, 58 percent through July 1995, 100 percent since August 1995.
(2) Does not include the Basin Creek Mine in 1994.
29
<PAGE>
REVENUES
GOLD. The Company's primary source of revenue is the sale of gold produced by
its six mines located in the western United States and Australia. Revenue from
the sale of gold decreased 5 percent in 1996 to $211.8 million, from $223
million in 1995 ($201.3 million in 1994). Lower revenue is attributable to a 10
percent decline in production offset by a 5 percent increase in realized prices.
Lower production in 1996 compared to 1995 is primarily attributable to the
planned interruption of mining at Zortman, the cessation of heap leach
operations at Mt. Todd, and lower ore grades at Montana Tunnels, Beal Mountain,
and Black Pine, offset by a 65 percent increase in production at Florida Canyon
because of expanded operations. Total gold production decreased to 497,300
ounces from 549,700 ounces in 1995 (495,100 ounces in 1994).
The average realized gold price was $426 per ounce, compared to $406 per ounce
in 1995, and $407 per ounce in 1994. The average COMEX gold price per ounce was
$388 in 1996 compared to $384 in 1995 and 1994. The use of forward sales and
other hedging programs added $20.0 million to revenue in 1996, $12.3 million in
1995, and $10.0 million in 1994.
OTHER METALS. Montana Tunnels produces most of the Company's silver, and all of
its zinc and lead. Small quantities of silver are produced at the Company's
other U.S. mines. In 1996, the sale of other metals contributed 12 percent of
total revenue, compared to 13 percent in 1995 and 14 percent in 1994. Compared
to 1995, sales of other metals decreased 14 percent to $27.9 million, down from
$32.6 million ($32.3 million in 1994). Lower revenue reflects lower production
of silver, zinc and lead resulting from lower mill feed grades at Montana
Tunnels, offset partially by increased realized prices for silver and zinc.
Average realized prices for 1996 were $5.05 per ounce, $0.49 per pound, and
$0.28 per pound, for silver, zinc, and lead, respectively; compared to $4.96 per
ounce, $0.46 per pound, and $0.29 per pound, respectively, in 1995 ($4.87 per
ounce, $0.49 per pound, and $0.27 per pound, respectively, in 1994).
OPERATING COSTS
Consolidated cost of sales for the year decreased 2.5 percent from $176.8
million in 1995 to $172.4 million in 1996. The average cash cost of production
increased 5 percent to $291 per ounce of gold in 1996 from $262 per ounce in
1995 ($277 in 1994). Higher cash costs are primarily attributable to lower gold
production, ore grade, and by-product credits. Depreciation and amortization
charges were $108 per ounce in 1996, compared to $75 per ounce in 1995 ($66 per
ounce in 1994). Increased charges on a per ounce basis are attributable to
lower production, increased property, plant, and equipment balances, higher
amortization for reclamation and closure costs, and a change in estimated useful
lives used to calculate depreciation for certain Phase I assets at Mt. Todd.
Cash costs per ounce were unchanged at Florida Canyon as lower costs associated
with self-mining and increased production capacity were offset by lower ore
grade and an increased stripping ratio. Increased depreciation and amortization
charges reflect higher property, plant, and equipment balances from the addition
of the mine equipment fleet and the facility expansion together with higher
amortization for increased estimates of reclamation and closure costs.
At Montana Tunnels, higher cash costs reflect incremental costs of maintaining
open-pit wall stability, lower ore grade, and lower by-product credits per
ounce. During 1996, areas of the pit wall at Montana Tunnels became unstable,
requiring the movement of additional material to maintain pit access and safety.
While the Company believes the instability can be managed throughout the
remainder of the mine life at a reasonable cost, it is possible that a
significant failure could occur and render some or all of the remaining ore
uneconomic. Lower ore grades reflect the impact of high wall instability on
access to higher-grade material at the bottom of the open-pit in 1996.
At Mt. Todd, cash costs have increased primarily because of lower production,
resulting from lower grade and the cessation of additions of new ore to the pad.
In August, ore additions to the heap leach pad ceased as tie-in of the Phase II
facilities began. Residual leaching of ore on the heap leach pad will continue
through 1997. During 1996, the Company completed an evaluation of the estimated
useful lives assigned to certain assets at Mt. Todd. As a result of this
evaluation, the Company changed the estimated useful lives used to calculate
depreciation for certain assets. The effect of the charge was to increase the
net loss by $5.0 million or $0.12 per common share (see Note 3 to the
Consolidated Financial Statements).
30
<PAGE>
Cash costs per ounce at Zortman reflect lower production from residual leaching
of ore placed on the heap leach pad in prior years. Costs of $0.8 million
incurred at Zortman as a result of delays in obtaining permits required for
construction and operation of the Extension Project have been classified as care
and maintenance in the Consolidated Statements of Operations and are therefore
excluded from cash costs. All outstanding water quality litigation was resolved
in the third quarter without ascribing liability, and permits necessary to begin
construction on the Extension Project were received in October (see Note 13 to
the Consolidated Financial Statements). Increased depreciation and amortization
charges reflect increased estimates of reclamation and mine closure costs.
At Beal Mountain and Black Pine, lower ore grades have resulted in lower
production and increased cash costs. At Beal Mountain, increased depreciation
and amortization charges reflect the accrual of increased estimates of
reclamation and mine closure costs.
On a consolidated basis, the cash cost per ounce in 1995 was lower than 1994 as
a result of increased production primarily from U.S. operations.
EXPLORATION AND EVALUATION
Due largely to an emphasis on mine site activities, non-mine site exploration
and evaluation expenses decreased $10.9 million to $7.7 million in 1996 from
$18.6 million in 1995 ($20.7 million in 1994). Total exploration, including
amounts capitalized to investments and development, decreased by $7.4 million to
$19.0 million in 1996 from $26.4 million in 1995 ($24.8 million in 1994).
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, 1995 results included a $2.4
million charge to write down the Company's investment in the Leninogorsk
Tailings Project. Total expenditures in 1996 include $4.3 million capitalized
as an investment in connection with acquisition of the Company's 19.9 percent
investment in Intermin Resource Corporation Limited, an Australian exploration
company (see additional discussion in Investing Activities below). The
remaining $7.0 million has been capitalized in connection with further
development around the Company's mine sites and development projects.
In 1997, the Company expects to spend $11.0 million on exploration, evaluation,
and development, $5.6 million of which is expected to be expensed.
Approximately half of the Company's exploration program for 1997 will be
directed toward the addition of new minable reserves and resources through
exploration around existing operations and development properties. Aggressive
mine site exploration utilizing new geologic interpretations will be conducted
at Mt. Todd, Pullalli, Florida Canyon, and Diamond Hill. The non-mine site
activity will focus on reconnaissance efforts in Argentina, Brazil and Chile and
evaluation of business opportunities globally. The Company plans to enter into
exploration joint ventures on certain of its land positions during 1997.
Finally, nearly $2.2 million will be spent by Intermin Resource Corporation
Limited, with the Company's oversight, evaluating gold targets in Western
Australia. Actual exploration and evaluation expenditures will vary as a result
of the acquisition of new properties and the success of exploration activities
on existing properties. Spending on advanced projects and acquisitions, which
depends on opportunities and discoveries, cannot be projected.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased 4 percent to $12.7 million from
$13.2 million in 1995 ($14.5 million in 1994), primarily because of decreased
travel and outside service costs, partially offset by higher salary and benefit
costs, including the cost of severance, and other miscellaneous and governmental
affairs expenditures.
31
<PAGE>
OTHER INCOME (EXPENSE) AND TAXES
The Company invests its excess cash in low-risk, short-term investments.
Interest and other income of $3.7 million in 1996 decreased $1.8 million from
$5.5 million in 1995 ($5.0 million in 1994) because of lower average cash and
short-term investment balances throughout the year. 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 ("PGA", formerly "Zapopan NL") late in the third
quarter of 1995.
Interest expense, net of amounts capitalized, decreased $3.6 million to $2.4
million in 1996 from $6.0 million in 1995 ($3.5 million in 1994) because
increased total interest costs associated with the $115 million of Convertible
Subordinated Notes issued in April of 1995 and borrowings under the Company's
revolving credit facility have been offset by the capitalization of $10.0
million of interest costs to construction projects during the year. In 1995 and
1994, interest costs of $2.3 million and $441,000, respectively, were
capitalized. Increased interest expense in 1995 compared to 1994 resulted from
additional interest on the Convertible Notes. Interest expense is expected to
increase in 1997 as capitalization of interest on the Phase II expansion at Mt.
Todd will cease when the facility achieves commercial production.
The equity in net income of affiliates in 1996 comprises the Company's
proportionate share of earnings from the Emerging Markets Gold Fund offset by
the Company's share of losses from USMX, compared to losses from both in 1995
and income reported by USMX in 1994.
The income tax provision reflects a valuation allowance of $1.5 million recorded
against deferred tax assets in the U.S. during 1996, offset by the recognition
of certain claims allowed upon resolution of certain periods reviewed by the
IRS. In 1995 and 1994, the Company recorded net income tax benefits of 16.4
percent and 4.2 percent of each year's respective pre-tax loss. The low
effective rate reflects the impact of nondeductible expenses and the inability
to fully utilize net operating loss carryforwards generated in 1995 and 1994.
See Note 9 to the Consolidated Financial Statements for additional information
related to the composition of the tax provision. In the future, the Company's
effective tax rate will be highly dependent upon the relative contribution to
earnings of its operations in various tax jurisdictions which have significantly
different effective tax rates.
PROPERTY WRITE-DOWNS AND PROVISION FOR CLOSURE, RECLAMATION AND RELATED COSTS
Property write-downs and other charges taken in 1996 and 1994 are discussed in
Notes 3 and 4 to the Consolidated Financial Statements.
ENVIRONMENTAL PROTECTION AND PERMITTING
Environmental protection is a primary consideration in the design, development
and operation of the Company's current and future mines, worldwide. A total of
$2.6 million and $4.4 million was spent during 1996 and 1995 ($1.2 million in
1994), respectively, for capital improvements associated with environmental
projects. In addition, $6.6 million and $7.7 million was spent during 1996 and
1995 ($7.2 million in 1994) to manage and operate environmental programs
including concurrent reclamation.
In September 1996, all outstanding water quality litigation at Zortman was
settled without ascribing liability, through entry of a Consent Decree by the
Montana First Judicial District Court. On October 25, 1996, a Record of
Decision was issued by the Bureau of Land Management and the Montana Department
of Environmental Quality for the Zortman Extension Project.
No major spills, releases, or other significant environmental incidents occurred
at the Company's mines during 1996. All minor incidents were promptly addressed
and remedied, as appropriate.
At December 31, 1996, the Company estimates the future costs to close and
reclaim all of its current mines to be $110.4 million (see Note 13 to the
Consolidated Financial Statements). During 1996, the Company increased its
estimate of the future costs to close and reclaim the Zortman, Beal Mountain,
and Florida Canyon Mines. The increases in estimated costs result primarily
from changes to mine plans and periodic updates to final reclamation estimates
at the Company's operations. At Zortman, the increase is also
32
<PAGE>
attributable to changes in reclamation and closure requirements associated with
the Final Environmental Impact Statement and the inclusion of costs related to
additional disturbance which will occur during mining and processing from the
Zortman Extension Project, as well as requirements for improvement of water
quality as provided in the Consent Decree. In addition, the Company accrued
$3.0 million for its share of estimated future costs to close and reclaim the
Ortiz Project. See Note 13 to the Consolidated Financial Statements for
additional information. Although these estimates are considered adequate to
fund aggregate reclamation and closure work, future changes in environmental
laws and regulations could significantly change program costs. As the Company's
mining operations revise and update their closure plans, and as environmental
protection laws and administrative policies evolve, the Company will revise the
estimate of its aggregate reclamation liability.
FINANCING, CAPITAL INVESTMENT AND LIQUIDITY
OVERVIEW
At the end of 1996, the Company had working capital of $65.2 million and a
current ratio of 2.5 to 1, compared to working capital of $79.0 million and a
current ratio of 2.6 to 1 at the end of 1995. Cash and short-term investments
totaled $8.6 million at the end of 1996, compared with $53.0 million at the end
of 1995.
OPERATING ACTIVITIES
In 1996, operating activities generated cash flow of $19.7 million compared to
$43.2 million during 1995 ($10.9 million in 1994). Decreased cash flow is
primarily attributable to increases in inventory and accounts receivable.
Ounces inventoried on the heap leach pad at Florida Canyon have increased as a
result of an increased mining rate, increased recovery rate, and low solution
application rates in the first half of 1996, and at Beal Mountain due to
increased pad height and slower recovery. The current buildup in heap leach
inventory is expected to increase or extend production into future periods.
Inventory has also increased as a result of additional materials and supplies
necessary to support Phase II milling and processing facilities at Mt. Todd.
Increased accounts receivable are attributable to increased production in
December 1996, compared to December 1995, the impact of delays in completing the
refinery expansion at Florida Canyon, and a change in payment terms from one of
the Company smelters. Cash flow from operations before working capital changes
for 1996 increased slightly from $37.2 million to $38.0 million.
INVESTING ACTIVITIES
During 1996, the Company invested $233.9 million on capital additions and $8.6
million on investments and received $28.7 million from the sale of short-term
and other investments and $3.9 million from the sale of exploration leases in
Australia. In 1995, the Company invested $105.3 million to acquire the minority
interest in PGA, $51.9 million on capital additions, and $22.1 million on
short-term and other investments. In 1994, the Company invested $9.0 million
to acquire shares of PGA, $43.8 million on capital additions, $8.1 million on
other investments, and received $96.9 million from the sale of short-term
investments.
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 collateralized
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.
In the second quarter, the Company completed the sale of its Tanami exploration
leases and database to a third party for $3.9 million (A$4.9 million). Under
the terms of the agreement, the Company could receive up to two contingent
payments of $0.8 million (A$1.0 million) each, upon definition of additional
reserves.
In August, the Company acquired a 19.9 percent interest in Intermin Resource
Corporation Limited (Intermin), an Australian gold exploration company, for
approximately $4.3 million (A$5.4 million). The Company has an option to
acquire up to 51 percent of the outstanding shares of Intermin for an additional
$27.6 million (A$34.7 million) within two years of the initial acquisition.
The Company expects to spend $50.0 million in 1997 on capital additions at
operating mines and development projects, including approximately $20.0 million
to complete the commissioning of the processing facility and
33
<PAGE>
for maintenance capital at Mt. Todd and $12.0 million at Zortman on
environmental facilities and to complete the feasibility study.
Construction of the Zortman Extension and Pullalli Projects has been delayed
until 1998. The Company expects to finalize a feasibility study on the Zortman
Extension Project in mid-1997, to optimize the engineering plan, and review
options to reduce overall capital requirements. Because of the timing of the
feasibility study and the current gold price, construction has been delayed. At
Pullalli, limited exploration success on the property and the current gold
market have resulted in the decision to delay construction. Final assessment of
the project will follow completion of the current exploration program.
FINANCING ACTIVITIES
During 1996, the Company raised $91.2 million (net of expenses) from the
offering of 6,000,000 common shares in Canada and the United States, shares
issued to the Company's Employees Savings Plan, and for stock option exercises;
borrowed $97.0 million under its revolving credit facility, and made payments on
outstanding long-term debt and capital leases amounting to $22.3 million. In
1995, the Company raised $2.1 million from the issuance of common shares,
received proceeds of $117.2 million (net of costs) on long-term debt issuance
and made payments on outstanding long-term debt amounting to $44.5 million. In
1994, the Company raised $0.9 million from the issuance of common shares,
received proceeds of $0.7 million, net of costs, on long-term debt issuance,
made payments on outstanding long-term debt amounting to $12.0 million and paid
dividends of $3.5 million.
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 US $88.2 million.
The proceeds were used to fund portions of the Mt. Todd Phase II, Pullalli and
Zortman Extension capital projects as well as for general corporate purposes.
In April, the Company entered into a six-year, $150 million Multi-currency
Reducing Revolving Credit Facility with a syndicate of banks. Borrowings under
the facility may occur in the United States, Canada and Australia 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 December
31, 1996, aggregate borrowings of $100.1 million were outstanding under the
facility in Australia and the United States.
The Company also has available, pursuant to a Shelf Registration Statement filed
with the SEC in December 1993, and after the common share offering completed in
January 1996, up to $57.7 million of debt securities, common shares, or
warrants.
Because of the Company's significant cash flow requirements, the Company did not
declare a dividend in 1996, 1995 or 1994.
CONCLUSION
The Company believes that the $8.6 million of cash and cash equivalents on hand
together with cash flow from operations and funding from the revolving credit
facility described above, will be adequate to meet its cash requirements through
1997. However, cash flow from operations is subject to certain risks that could
materially impact available cash. In addition, if the Company were to violate
covenants under its revolving credit facility, its liquidity would be
significantly diminished.
HEDGING
Profitability of the Company is tied directly to the price of gold and, to a
lesser extent, the prices of its by-products, particularly zinc. The price of
gold is unpredictable and affected by many factors beyond the Company's control.
Through the use of hedging strategies, the Company manages its exposure to price
risk without eliminating all favorable price exposure. In addition, the Company
may enter into interest rate swaps and foreign currency exchange agreements to
manage fluctuations in interest and foreign exchange rates. See Note 12 to the
Consolidated Financial Statements for more information about the Company's
financial instruments and risk management.
34
<PAGE>
OUTLOOK
The Company's objective continues to be an expansion of reserves and gold
production in an attempt to bring the Company to profitability and to benefit
from improvements in the gold price. Last year was a transition year as the
Company completed the largest capital expenditure program in its history.
Capital expenditures were largely financed by issuances of equity and debt.
The Company expects to produce 570,000 ounces of gold in 1997 at an average
total cash cost of production, including royalties, of $300 per ounce. Total
production costs are expected to be $420 per ounce in 1997. The Company believes
the future net cash flows from each of its mines, based on estimated future
prices and operating, capital and reclamation costs, are adequate to recover the
carrying value of its investment in those mines.
Mt. Todd's milling facility is expected to go into commercial production in the
second quarter of 1997 and produce close to 200,000 ounces of gold during the
remainder of the year. This increased production will offset the loss of
production from Beal Mountain and Black Pine which should close in the second
half of the year.
While the exploration program is planned to be reduced from 1996 levels,
additional reserves are expected to be added primarily at existing mine sites.
However, there is no certainty that the exploration will add more reserves than
are depleted or that any additional reserves will be added. Also, the company
will continue to explore throughout the world, but this activity is subject to
the additional risks of operating in different political environments.
The Company's gold price hedging program has, in the past, provided substantial
additional revenue. The Company expects to continue to deliver against hedging
contracts to generate additional revenue in 1997. In addition, new contracts
will likely be put in place to hedge revenue in future periods.
Even though the gold price has been at a four-year low in the early first
quarter of 1997, Pegasus expects to maintain its liquidity throughout the year
due largely to the delay in the Zortman and Pullalli projects. However, 1997 is
not expected to be profitable without significantly higher gold prices.
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.
35
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Report of Independent Accountants.......................................... 37
Report on Management's Responsibility for Financial Reporting.............. 38
Consolidated Balance Sheets................................................ 39
Consolidated Statements of Operations...................................... 40
Consolidated Statements of Cash Flows...................................... 41
Consolidated Statements of Changes in Shareholders' Equity................. 42
Notes to Consolidated Financial Statements................................. 43
Quarterly Data (Unaudited)................................................. 61
36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Pegasus Gold Inc.
We have audited the consolidated balance sheets of Pegasus Gold Inc. as at
December 31, 1996, and 1995, and the consolidated statements of operations,
cash flows, and changes in shareholders' equity for the years ended December
31, 1996, 1995, and 1994. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Pegasus Gold
Inc. as at December 31, 1996, and 1995, and the results of its operations and
its cash flows for the years ended December 31, 1996, 1995, and 1994, in
accordance with United States generally accepted accounting principles. As
required by the British Columbia Company Act, we report that, in our opinion,
these principles have been applied on a consistent basis.
/s/ Coopers & Lybrand
--------------------
Chartered Accountants
Vancouver, B.C., Canada
February 14, 1997
37
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements of Pegasus Gold Inc. have
been prepared by and are the responsibility of the management of the Company.
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and reflect
management's best estimates and judgements based on currently available
information. Systems of internal control have been designed and maintained
by management to provide reasonable assurance, on a cost effective basis,
that assets are safeguarded from loss or unauthorized use and to produce
reliable accounting records for financial reporting purposes.
The external auditors conduct an independent audit of the consolidated
financial statements in accordance with generally accepted auditing standards
in order to express their opinion on these financial statements. Those
standards require that the external auditors plan and perform the audit to
obtain reasonable assurance that the financial statements are free of
material misstatement.
On behalf of the Board of Directors, the Audit Committee provides oversight
of management's performance in fulfilling its responsibilities for financial
reporting and internal control. The Audit Committee is composed entirely of
outside directors. This Committee meets regularly with management and the
external auditors to satisfy itself that management's responsibilities are
properly discharged and to review the financial statements.
/s/ Werner G. Nennecker
- -----------------------
Werner G. Nennecker
President and Chief Executive Officer
/s/ Phillips S. Baker, Jr.
- --------------------------
Phillips S. Baker, Jr.
Vice President, Finance and Chief Financial Officer
38
<PAGE>
PEGASUS GOLD INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(In Thousands)
ASSETS
1996 1995
---- ----
Current assets:
Cash and cash equivalents........................... $8,566 $32,907
Short-term investments.............................. --- 20,083
Due from sales of products.......................... 36,748 28,545
Inventories......................................... 51,997 38,590
Other current assets................................ 10,164 9,549
-------- --------
Total current assets............................. 107,475 129,674
Investments............................................ 20,987 18,679
Property, plant, and equipment, net.................... 618,940 427,112
Other assets........................................... 6,806 4,776
-------- --------
$754,208 $580,241
-------- --------
-------- --------
LIABILITIES
Current liabilities:
Accounts payable and other current liabilities...... $23,641 $20,281
Accrued salaries, wages, and benefits............... 10,350 9,223
Mining taxes payable................................ 4,610 5,397
Current portion of obligations under capital lease.. 3,626 3,015
Current portion of long-term debt................... --- 12,719
-------- --------
Total current liabilities........................ 42,227 50,635
-------- --------
Long-term debt......................................... 215,086 121,099
Capital lease obligations.............................. 22,466 22,792
Deferred income taxes.................................. 44,602 44,901
Deferred site closure and reclamation.................. 50,878 38,180
Deferred revenue....................................... 8,074 9,188
Other deferred liabilities............................. 7,598 4,742
-------- --------
Total liabilities............................... 390,931 291,537
-------- --------
Commitments and contingencies (Note 13)
SHAREHOLDERS' EQUITY
Class A preferred shares, Series 1, C$10 par value:
Authorized - 20,000,000 shares; none issued
Common shares, no par value:
Authorized - 200,000,000 shares; issued
and outstanding, 1996 - 41,092,342 shares
and 1995 - 34,825,203 shares......................... 425,382 334,214
Accumulated deficit.................................... (70,734) (49,131)
Foreign currency translation adjustment................ 8,629 3,621
-------- --------
Total shareholders' equity........................ 363,277 288,704
-------- --------
Total liabilities and shareholders' equity........ $754,208 $580,241
-------- --------
-------- --------
Approved by the Board
/s/ Lawrence I. Bell /s/ Fred C. Schulte
-------------------- -------------------
Lawrence I. Bell Fred C. Schulte
Director Director
The accompanying notes are an integral part of
the consolidated financial statements.
39
<PAGE>
PEGASUS GOLD INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996, 1995, and 1994
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Sales............................................. $239,720 $255,579 $233,648
----------- ----------- -----------
Cost of sales..................................... 172,421 176,761 169,186
Depreciation and amortization..................... 53,792 41,591 32,652
----------- ----------- -----------
226,213 218,352 201,838
----------- ----------- -----------
Gross profit...................................... 13,507 37,227 31,810
----------- ----------- -----------
Operating expenses:
General and administrative................... 12,696 13,161 14,456
Royalties.................................... 5,099 5,635 6,277
Exploration and evaluation................... 7,728 18,637 20,730
Closure, reclamation, and related costs...... 10,742 754 16,161
Care and maintenance......................... 963 1,075 ---
Property write-downs......................... 1,029 --- 35,261
Attempted business combination costs......... 506 --- ---
----------- ----------- -----------
38,763 39,262 92,885
----------- ----------- -----------
Loss from operations.............................. (25,256) (2,035) (61,075)
----------- ----------- -----------
Other income (expense):
Interest and other income.................... 3,696 5,509 4,954
Interest expense, net of amounts capitalized. (2,421) (6,030) (3,523)
Equity in net income (loss) of affiliates.... 2,587 (1,881) 71
Loss on disposition of assets and investments (19) (43) (1,795)
----------- ----------- -----------
3,843 (2,445) (293)
----------- ----------- -----------
Minority interest in loss of subsidiary........... --- 948 50
----------- ----------- -----------
Loss before income taxes.......................... (21,413) (3,532) (61,318)
Income tax provision (benefit).................... 190 (579) (2,583)
----------- ----------- -----------
Net loss.......................................... ($21,603) ($2,953) ($58,735)
----------- ----------- -----------
----------- ----------- -----------
Net loss per share................................ ($0.53) ($0.08) ($1.69)
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares outstanding........ 40,757 34,817 34,702
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
40
<PAGE>
PEGASUS GOLD INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995, and 1994
(In Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net loss.................................................. ($21,603) ($2,953) ($58,735)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization............................. 54,499 42,188 33,648
Property write-downs...................................... 1,029 --- 35,261
Provision for closure, reclamation, and related costs..... 10,742 754 16,161
Deferred amounts.......................................... 1,571 1,743 (1,373)
Payments for closure and reclamation...................... (9,750) (6,029) (693)
Other, net................................................ 1,515 1,557 18
Change in due from sale of products......................... (8,116) 4,617 (5,062)
Change in inventories....................................... (12,845) (1,682) (5,058)
Change in other current assets.............................. (519) 441 (4,464)
Change in accounts payable and accrued liabilities.......... 3,207 2,516 1,246
-------- -------- --------
Net cash provided by operating activities................... 19,730 43,152 10,949
-------- -------- --------
Investing activities:
Additions to property, plant, and equipment............... (233,861) (51,866) (43,792)
Proceeds from sale of property, plant, and equipment...... 3,881 5,380 ---
Sale (purchase) of short-term investments................. 20,083 (20,083) 96,903
Purchase of other investments............................. (8,551) (2,000) (8,068)
Proceeds from sale of other investments................... 8,614 --- ---
Other, net................................................ (793) --- ---
Acquisition of additional investment in subsidiary........ --- (105,309) (8,972)
-------- -------- --------
Net cash provided by (used in) investing activities......... (210,627) (173,878) 36,071
-------- -------- --------
Financing activities:
Proceeds from issuance of long-term debt, net............. 97,017 117,209 734
Proceeds from issuance of common shares................... 91,168 2,104 917
Payments of long-term debt................................ (19,189) (44,483) (11,991)
Payments of obligations under capital lease............... (3,139) --- ---
Dividend paid............................................. --- --- (3,456)
-------- -------- --------
Net cash provided by (used in) financing activities......... 165,857 74,830 (13,796)
-------- -------- --------
Effect of exchange rate changes on cash and
cash equivalents........................................... 699 (513) 2,798
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (24,341) (56,409) 36,022
Cash and cash equivalents, beginning of year................ 32,907 89,316 53,294
-------- -------- --------
Cash and cash equivalents, end of year...................... $8,566 $32,907 $89,316
-------- -------- --------
-------- -------- --------
</TABLE>
Supplemental disclosure (Note 15)
The accompanying notes are an integral part of
the consolidated financial statements.
41
<PAGE>
PEGASUS GOLD INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1995, and 1994
(In Thousands)
<TABLE>
<CAPTION>
Common Shares Foreign
------------- Currency
Number Accumulated Translation
of Shares Amount Deficit Adjustment
------------ ------ -------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1993................ 34,555,652 $331,193 $12,557 ($1,753)
Net loss.................................. (58,735)
Common shares issued for:
Stock option plan...................... 53,034 630
Employee savings plan and other........ 20,837 287
Foreign currency translation adjustment... 8,163
----------- ----------- ----------- -----------
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.................................. (21,603)
Common shares issued for:
Cash................................... 6,000,000 88,175
Stock option plan...................... 234,217 2,612
Employee savings plan and other........ 32,922 381
Foreign currency translation adjustment... 5,008
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 41,092,342 $425,382 ($70,734) $8,629
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
42
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Pegasus Gold Inc. (the "Company") is engaged in gold mining and related
activities, including extraction, processing, refining and reclamation. Gold
bullion, the Company's principal product, is produced and sold in the United
States and Australia. The Company is also involved in gold and other mineral
exploration, principally in North and South America, and Australia.
BASIS OF PRESENTATION
The consolidated financial statements of the Company include the accounts of
the parent company, incorporated in British Columbia, and its wholly-owned
subsidiaries. During 1995, the Company acquired the minority interest in its
previously majority-owned subsidiary, Pegasus Gold Australia Pty Ltd ("PGA,"
formerly "Zapopan N.L."). All significant intercompany accounts and
transactions have been eliminated. Certain prior year balances have been
reclassified to conform with the current year presentation with no effect on
net loss or retained earnings as previously reported.
The consolidated financial statements are presented in U.S. dollars and
prepared in accordance with accounting principles generally accepted in the
United States, which, as applied in these consolidated financial statements,
are consistent in all material respects with accounting principles generally
accepted in Canada, except as described in Note 17.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amount of revenues and expenses
during the reporting period. It is reasonably possible that actual results
could differ from those estimates.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist of highly liquid debt instruments such as
certificates of deposit, commercial paper, and money market accounts
purchased with an original maturity date of three months or less. Short-term
investments consist of similar instruments which mature more than three
months from purchase. The Company's policy is to invest cash in
conservative, highly-rated instruments and to limit the amount of credit
exposure to any one institution.
INVENTORIES
Inventories are recorded at the lower of average cost or estimated net
realizable value.
PROPERTY, PLANT, AND EQUIPMENT
PROPERTY, PLANT, AND EQUIPMENT. Property, plant, and equipment is stated at
the lower of cost or estimated net realizable value. Mining properties and
development costs and certain plant and equipment are depreciated using the
units of production method based upon proven and probable reserves. Other
assets are depreciated using the straight-line method over estimated useful
lives of five to forty years. Depreciation and amortization expense includes
the amortization of assets acquired under capital leases. Replacements and
major improvements are capitalized. Maintenance and repairs are charged to
expense based on average estimated equipment usage. Interest costs incurred
in the construction or acquisition of property, plant, and equipment are
capitalized and amortized over the useful lives of the related assets.
43
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
MINERAL EXPLORATION AND DEVELOPMENT COSTS. Significant property acquisition
payments for active exploration properties are capitalized. If no minable
ore body is discovered, previously capitalized costs are expensed in the
period the property is abandoned. Expenditures for the development of new
mines, to define further mineralization at and adjacent to existing ore
bodies, and to expand the capacity of operating mines, are capitalized and
amortized on a units of production basis over proven and probable reserves.
All other exploration expenditures are expensed as incurred.
DEFERRED STRIPPING COSTS. Mining costs associated with waste rock removal
are deferred and charged to operating expenses on the basis of the average
stripping ratio for each mine. The average stripping ratio is calculated as
a ratio of the estimated tonnes of waste material to be mined to the
estimated tonnes of ore to be mined.
ASSET IMPAIRMENT. In accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," management of the Company reviews
the net carrying value of each mine and development property on a periodic
basis. Estimated future net cash flows from each mine are calculated using
estimated future prices, operating, capital, and reclamation costs on an
undiscounted basis. Reductions in the carrying value of each mine are
recorded to the extent the net book value of the investment exceeds the
estimate of future discounted net cash flows.
The recoverability of the carrying value of development projects is evaluated
based upon estimated future net cash flows from each property determined as
described above using estimates of contained mineralization expected to be
classified as proven and probable reserves upon completion of a feasibility
study. Reductions in the carrying value of each property are recorded to the
extent that the Company's carrying value in each property exceeds its
estimate of future discounted net cash flows.
Management's estimates of gold and other metal prices, recoverable proven and
probable reserves, operating, capital, and reclamation costs are subject to
certain risks and uncertainties which may affect the recoverability of the
Company's investment in property, plant, and equipment. Although management
has made its best estimate of these factors based on current conditions, it
is reasonably possible that changes could occur in the near term which could
adversely affect management's estimate of the net cash flows expected to be
generated from its operating properties.
INVESTMENTS
The Company uses the equity method of accounting for investments in the
common stock of companies in which it owns a 20 to 50 percent interest.
Investments in the common stock of companies in which the Company owns a less
than 20 percent interest are considered available-for-sale. Permanent
impairments in investment value are recognized in the results of operations.
REVENUE RECOGNITION
Sales are recorded when products are shipped. Sales of zinc, lead, and
pyrite concentrates are provisionally priced and later adjusted in the month
the sales prices are contractually finalized.
HEDGING TRANSACTIONS
In the normal course of its business, the Company uses derivative and
financial instruments to reduce commodity price, foreign currency, interest
rate, and other business and financial risks. The Company does not hold or
issue derivative instruments for trading purposes.
44
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
COMMODITY HEDGING CONTRACTS. Option premiums, swap payments, and gains and
losses on hedging arrangements are recognized in sales when the related
production is delivered. Losses on commodity contract closeouts are
recognized in income currently. Gains are deferred and amortized to revenue
over the original term of the associated contract.
FOREIGN EXCHANGE CONTRACTS. Gains and losses on contracts designated as
hedges of identifiable foreign currency firm commitments are deferred and
included in the measurement of the related foreign currency transaction.
INTEREST RATE SWAPS. The differentials to be received or paid under
contracts designated as hedges are recognized in income over the life of the
contracts as adjustments to interest expense. Gains and losses on
terminations of interest rate contracts are recognized as other income or
expense when terminated in conjunction with the retirement of associated debt.
RECLAMATION, SITE CLOSURE AND REMEDIATION COSTS
Minimum standards for mine reclamation have been established by various
governmental agencies. Estimated reclamation, site restoration and closure
costs for each producing mine are charged to operations over the expected
life of the mine using the units of production method. Ongoing reclamation
activities are expensed in the period incurred. Remediation liabilities are
expensed upon determination that a liability has been incurred and where a
minimum cost or reasonable estimate of the cost can be determined.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign operations are translated
into U.S. dollars at the year-end exchange rates, and revenue and expenses
are translated at the average exchange rates during the period. Exchange
differences arising on translation are disclosed as a separate component of
shareholders' equity. Realized gains and losses from foreign currency
transactions are reflected in the results of operations.
NET LOSS PER SHARE
Net loss per share is calculated based upon the weighted average number of
shares of common shares and common share equivalents outstanding during the
year, unless the addition of common share equivalents would be anti-dilutive.
On a fully-dilutive basis, both net income (loss) and shares outstanding are
adjusted to assume the conversion of the convertible notes.
INCOME TAXES
The Company accounts for income taxes using the liability method which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax assets and liabilities are
determined based on the difference between the financial statements and tax
bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse.
STOCK BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS No. 123) encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue accounting for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," (APB Opinion 25) and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the
amount an employee must pay to acquire the stock.
45
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES
(In Thousands) 1996 1995
---- ----
Deferred mining costs.............. $34,134 $27,781
Materials and supplies............. 11,294 7,267
Stockpiled ore..................... 6,317 3,435
Processed metal.................... 252 107
-------- --------
$51,997 $38,590
-------- --------
-------- --------
Direct production costs associated with ore on heap leach pads are deferred
and amortized as the contained gold is recovered. Gold is recovered over a
five-year period at the Zortman Mine, and over six to twelve-month periods at
all other heap leach operations. Based upon actual metal recoveries, the
Company periodically evaluates and refines estimates used in determining the
amortization and carrying value of deferred mining costs associated with ore
under leach. Approximately 88 percent of the unrecovered gold on all leach
pads at December 31, 1996, is expected to be recovered in the next year.
3. PROPERTY, PLANT, AND EQUIPMENT
(In Thousands) 1996 1995
---- ----
Mining properties and development costs.......... $414,892 $392,432
Plant and equipment.............................. 504,116 295,683
--------- ---------
919,008 688,115
Less accumulated depreciation, depletion, and
amortization.................................... (300,068) (261,003)
--------- ---------
$618,940 $427,112
--------- ---------
--------- ---------
The following is a summary of the net book value of plant and equipment, and
of mining properties and development costs by property:
<TABLE>
<CAPTION>
Mining
Properties
and
Plant and Development Total Total
(In Thousands) Equipment Costs 1996 1995
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Zortman Mine $8,331 $19,319 $27,650 $22,743
Montana Tunnels Mine 43,259 23,668 66,927 67,312
Florida Canyon Mine 56,929 12,599 69,528 57,280
Mt. Todd Mine 207,528 210,624 418,152 252,893
Beal Mountain Mine 3,732 2,500 6,232 9,385
Black Pine Mine 1,138 5 1,143 2,352
Corporate and Other 15,871 13,437 29,308 15,147
---------- ---------- ---------- ----------
$336,788 $282,152 $618,940 $427,112
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Capitalized interest for properties under development was $9,995,000,
$2,342,000, and $441,000 in 1996, 1995, and 1994, respectively.
During 1996, construction of the Phase II facilities at Mt. Todd was
essentially completed. In connection with the Phase II start-up in the
fourth quarter, the Company completed an evaluation of the estimated useful
lives assigned to certain assets. As a result of this evaluation, the
Company changed the estimated useful lives used to calculate depreciation for
certain assets to properly reflect the expected use of these assets. The
effect of the change was to increase the net loss by $5.0 million or $0.12
per common share.
46
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY, PLANT, AND EQUIPMENT, CONTINUED:
ASSET WRITE-DOWNS
In 1996, the Company determined that estimated future cash flows associated
with certain Phase I assets at Mt. Todd were not adequate to recover the
carrying value of those assets. As a result, the Company reduced the
carrying value of those assets by $1,029,000.
In 1994, property studies and economic evaluations determined the Company
would not fully recover its investments in the Black Pine, Beal Mountain, and
Basin Creek Mines. Accordingly, the carrying value of these properties was
reduced by $35,261,000, as follows:
At Black Pine, the Company revised its ore reserve model to correct a
difference between estimated and actual grades, decreasing the reserve by
30,000 ounces of gold. The decline in reserves, coupled with the lower
grades and lower recovery, reduced expected cash flows for the remaining mine
life, which impaired the value of the Black Pine Mine. A charge of
$17,382,000 was recorded to reduce the carrying value.
At Beal Mountain, the Company determined that the Beal Extension Project
carried too great an environmental risk to proceed with its development
because of stringent water quality standards accompanying the operating
permit issued for the Beal Mountain Mine, and the possible impact on water
quality in German Gulch associated with the Extension Project. Ore reserves
were reduced by approximately 185,000 ounces, which reduced expected cash
flows for the remaining mine life and impaired the value of the Beal Mountain
Mine. Consequently, the carrying value of the mine was reduced by
$12,090,000.
At Basin Creek, the Company completed a study of the feasibility of reopening
the mine as a run-of-mine heap leach operation and concluded that such a
project would not produce economic results. Consequently, closure of the
mine was accelerated to decrease the Company's long-term environmental
liability and a write-down of $5,789,000 was recorded.
4. PROVISION FOR CLOSURE, RECLAMATION, AND RELATED COSTS
During the third quarter of 1996, 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 Mountain result from changes in mine plans
and the periodic update of final reclamation estimates. With this provision,
and additional reclamation amortization during 1996, all expected reclamation
expenditures at Beal Mountain are now accrued.
In 1996, the Company recorded a $3,000,000 provision for closure and
reclamation of the Ortiz Project in New Mexico. The additional accrual
reflects the Company's estimate of its share of the future costs required to
bring the site to final closure (see Note 13).
During 1996, the Company recorded additional legal reserves of $1,242,000,
primarily to accrue settlement costs associated with water quality litigation
at the Zortman Mine (see Note 13).
In 1994, the Company initiated annual comprehensive reviews of reclamation
and closure plans at all of its sites. The purpose of these reviews was to
ensure that environmental programs address corporate objectives, increasingly
stringent regulations, and the dynamic environmental conditions at the
Company's operations. In addition, voluntary remediation of historic mine
workings has been accelerated at some properties. Because of these actions,
the Company provided an additional $16,161,000 in 1994 for projected closure,
reclamation, and related costs based on current technology and regulations.
47
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITION OF PEGASUS GOLD AUSTRALIA ("PGA")
During 1995, the Company acquired all outstanding common shares of PGA it did
not already own for approximately $105,309,000. Acquisition of the 44 percent
minority interest has been accounted for as a purchase. The purchase price in
excess of the net book value of assets acquired is attributable to mineral
properties at PGA's Mt. Todd Mine. In the aggregate, $74,563,000 has been
allocated to property and mineral rights and will be amortized over the life of
the mine on a units of production basis. In accordance with SFAS No. 109, the
Company has provided a deferred tax liability of $45,060,000 (with a
corresponding increase in the value assigned to mineral properties) for the
deferred tax consequences of the difference between the assigned value of the
assets acquired and their tax basis.
6. INVESTMENTS
1996 1995
------- -------
(In Thousands)
Equity investments:
USMX, Inc. (30%). . . . . . . . . . . . . . . . . . . . . $8,349 $11,609
The Emerging Markets Gold Fund Limited (21%). . . . . . . 3,026 7,070
------- -------
$11,375 $18,679
Other investments:
Notes receivable. . . . . . . . . . . . . . . . . . . . . 5,289 ---
Intermin Resource Corporation Limited . . . . . . . . . . 4,323 ---
------- -------
$20,987 $18,679
------- -------
------- -------
USMX
At December 31, 1996, the remaining unamortized excess cost of the investment in
USMX, Inc. ("USMX") over its underlying net book value was $4,428,000. This
amount is being amortized using the units of production method over the
estimated ore reserves at the Montana Tunnels Mine. Montana Tunnels is operated
by the Company subject to the underlying royalty interest of USMX. At December
31, 1996, the fair value of the Company's equity interest in USMX, based on
quoted market prices, approximates its carrying value.
THE EMERGING MARKETS GOLD FUND LIMITED
On January 31, 1994, the Company entered into a subscription agreement to
purchase 160,000 common shares and 200,000 preferred shares of the Emerging
Markets Gold Fund Limited (the "Fund"), a Bermuda limited liability company, for
$20,000,000. The Fund was created to invest in direct equity and equity-related
investments in pre-development and producing gold mines in emerging markets.
Under the terms of the original agreement, the Company owned 21.3 percent of the
Fund's outstanding common shares and 26.7 percent of its outstanding preferred
shares. The preferred shares pay dividends at 5 percent per annum.
The purchase price is payable in four installments, the first and second of
which were paid on January 31, 1994, and January 3, 1995, respectively. In
1995, the Fund redeemed 33,600 of the preferred shares held by the Company for
$99 per share, plus accrued dividends. In December 1996, the Fund redeemed the
remaining 166,400 preferred shares held by the Company at $49.50 per share,
together with all unpaid dividends. The Company's investment in the Fund has
been reduced by the proceeds of $8,614,000.
NOTES RECEIVABLE
In June 1996, the Company entered into an agreement with USMX to purchase its
net profits royalty in the Montana Tunnels Mine for $4.5 million. Pending
approval of the agreement by the shareholders of USMX,
48
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INVESTMENTS, CONTINUED:
the Company advanced USMX $4.5 million in the form of a four-year term loan
bearing interest at 8.75 percent and collateralized by the royalty interest.
In May 1996, the Company accepted a $1.0 million, non-interest bearing note
convertible into 500,000 common shares of Goldbelt Resources in exchange for its
12.5 percent interest in the Leninogorsk Tailings Project. The note is due in
three years and convertible upon the occurrence of certain events.
At December 31, 1996, the fair value of notes receivable approximates carrying
value.
INTERMIN RESOURCE CORPORATION LIMITED
In August 1996, the Company acquired 19.9 percent of Intermin Resource
Corporation Limited, an Australian gold exploration company, for approximately
$4.3 million (A$5.4 million). The Company has an option to acquire up to 51
percent for an additional $27.6 million (A$34.7 million) within two years from
the date of the acquisition. At December 31, 1996, the fair value of the
Company's investment in Intermin was $4,143,000.
7. LONG-TERM DEBT
1996 1995
-------- --------
(In Thousands)
Convertible subordinated notes due 2002. . . . . . . . . . $115,000 $115,000
Revolving credit facility. . . . . . . . . . . . . . . . . 100,086 ---
Bank term loan and overdraft (PGA) . . . . . . . . . . . . --- 18,818
-------- --------
215,086 133,818
Less current portion . . . . . . . . . . . . . . . . . . . --- (12,719)
-------- --------
$215,086 $121,099
-------- --------
-------- --------
In April 1995, the Company completed a public offering of $115 million principal
amount of 6.25 percent Convertible Subordinated Notes (the "Notes") due April
30, 2002. Interest on the Notes is payable semiannually on April 30 and October
31 of each year, commencing on October 31, 1995. The Notes are convertible into
7,709,067 common shares of the company at a conversion price of $14.92 per
common share at any time after June 18, 1995. There is no sinking fund
requirement on the Notes, and they may not be redeemed until April 30, 1998.
After such date, the Notes are redeemable at 100 percent plus accrued interest
to the redemption date. The proceeds were used to finance the cost of the
acquisition of the minority interest in PGA (see Note 5).
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 and currency of the borrowing) plus a spread
tied to certain financial ratios. The annual 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, by the
following amounts:
(In Thousands)
1999 . . . . . . . . . . . . . . . . . . . . . . $20,000
2000 . . . . . . . . . . . . . . . . . . . . . . 35,000
2001 . . . . . . . . . . . . . . . . . . . . . . 45,000
2002 . . . . . . . . . . . . . . . . . . . . . . 50,000
--------
$150,000
--------
--------
49
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT, CONTINUED:
Indebtedness under the facility is collateralized by a pledge of the shares of
the Company's significant subsidiaries. This collateral is released upon the
completion of certain events. The Company's revolving credit facility includes
restrictive covenants with respect to leverage ratios, interest coverage,
tangible net worth, ore reserve adequacy, and gold hedging. Funds available
under the facility have been and will be used for letters of credit, to finance
capital expenditures and for general corporate purposes.
The Company has a $5,000,000 uncommitted, short-term bank credit line available.
At December 31, 1996, no borrowings were outstanding under this Facility.
In 1993, PGA entered into a five-year term loan with an original face value of
A$36,000,000. During 1995, PGA entered into an Overdraft Agreement with the
same institution under the terms of which an additional A$8,000,000
(US$5,950,000) was borrowed to fund working capital requirements. During the
first quarter of 1996, 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.
The weighted average interest rate on long-term debt was 6.5 percent, 7.0
percent, and 5.7 percent, in 1996, 1995, and 1994, respectively.
Maturities of long-term debt are as follows:
(In Thousands)
2000 . . . . . . . . . . . . . . . . . . . . . . $5,086
2001 . . . . . . . . . . . . . . . . . . . . . . 45,000
2002 . . . . . . . . . . . . . . . . . . . . . . 165,000
--------
$215,086
--------
--------
8. COMMITMENTS UNDER LONG-TERM LEASES
CAPITAL LEASES
The Company has entered into capital leases for certain equipment. Leased
equipment included in plant and equipment at December 31, 1996 and 1995, totaled
$29,339,000 and $25,914,000, respectively. Accumulated amortization of assets
under capital leases was $4,074,000 and $0 at December 31, 1996, and 1995,
respectively.
OPERATING LEASES
The Company leases office space, certain vehicles, and machinery and equipment
under operating leases which expire over the next seven years. All of the
Company's equipment lease agreements contain provisions which provide the
Company with the option, after the initial lease term, either to purchase the
property at fair value or to renew the lease at fair rental value. The Company
is required to pay all taxes, insurance and maintenance on leased equipment.
50
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS UNDER LONG-TERM LEASES, CONTINUED:
Future minimum payments, by year and in the aggregate, under capital and
operating leases with initial or remaining terms of one year or more, consist of
the following at December 31, 1996:
(In Thousands) Capitalized Operating
Year Ending December 31, Leases Leases
----------- ---------
1997 . . . . . . . . . . . . . . . . . . . . . . . $5,287 $7,253
1998 . . . . . . . . . . . . . . . . . . . . . . . 5,287 6,009
1999 . . . . . . . . . . . . . . . . . . . . . . . 5,287 2,866
2000 . . . . . . . . . . . . . . . . . . . . . . . 5,287 2,728
2001 . . . . . . . . . . . . . . . . . . . . . . . 5,287 501
Thereafter . . . . . . . . . . . . . . . . . . . . 5,597 725
----------- ---------
Total minimum lease payments . . . . . . . . . . . $32,032 $20,082
---------
---------
Less amount representing interest. . . . . . . . . (5,940)
-----------
Total present value of minimum payments. . . . . . 26,092
Less current portion . . . . . . . . . . . . . . . (3,626)
-----------
Long-term capital lease obligations. . . . . . . . $22,466
-----------
-----------
Total rent expense under operating leases amounted to $7,727,000, $7,334,000,
and $4,659,000 in 1996, 1995, and 1994, respectively.
9. INCOME TAXES
The income tax provision (benefit) consists of the following:
(In Thousands) 1996 1995 1994
---- ---- ----
Current
United States . . . . . . . . . . . . . . . . ($1,065) ($400) $695
Foreign . . . . . . . . . . . . . . . . . . . 44 --- (280)
------- ------ -------
(1,021) (400) 415
------- ------ -------
Deferred
United States . . . . . . . . . . . . . . . . 1,491 (1,431) (3,168)
Foreign . . . . . . . . . . . . . . . . . . . (280) 1,252 170
------- ------ -------
1,211 (179) (2,998)
------- ------ -------
$190 ($579) ($2,583)
------- ------ -------
------- ------ -------
51
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES, CONTINUED:
The components of the net deferred tax liability as of December 31, 1996 and
1995, were as follows:
(In Thousands) 1996 1995
---- ----
Deferred tax assets:
Net operating loss carryforwards. . . . . . . . . . . . $48,327 $37,247
Net capital loss carryforwards. . . . . . . . . . . . . 5,406 5,709
Exploration expenditures. . . . . . . . . . . . . . . . 3,645 5,373
Miscellaneous foreign deductions. . . . . . . . . . . . 2,067 568
Deferred reclamation. . . . . . . . . . . . . . . . . . 16,967 12,560
Other . . . . . . . . . . . . . . . . . . . . . . . . . 3,691 3,150
Valuation allowance . . . . . . . . . . . . . . . . . . (70,552) (58,901)
-------- --------
$9,551 $5,706
Deferred tax liabilities:
Property, plant, and equipment. . . . . . . . . . . . . (9,551) (3,688)
Excess purchase price allocation. . . . . . . . . . . . (44,602) (46,919)
-------- --------
($44,602) ($44,901)
-------- --------
-------- --------
As of December 31, 1996, and 1995, valuation allowances of $70,552,000 and
$58,901,000, respectively, had been recognized to offset certain related
deferred tax assets due to management's uncertainty of realizing the benefits of
these items. The net change of $11,651,000 for the year relates primarily to
increased net operating loss carryforwards, changes in temporary differences,
and reduction of net deferred tax assets.
Income (loss) before income taxes consists of the following:
(In Thousands) . . . . . . . . . . . . . . . . . 1996 1995 1994
---- ---- ----
United States. . . . . . . . . . . . . . . . . . ($23,659) $3,107 ($63,524)
Foreign. . . . . . . . . . . . . . . . . . . . . 2,246 (6,639) 2,206
-------- ------- --------
($21,413) ($3,532) ($61,318)
-------- ------- --------
-------- ------- --------
The consolidated income tax provision (benefit) differs from the amount computed
using the United States statutory income tax rate of 34 percent, for the reasons
set forth below:
(In Thousands) 1996 1995 1994
---- ---- ----
Expected benefit . . . . . . . . . . . . . . . . ($7,280) ($1,200) ($20,864)
Foreign tax rate differential. . . . . . . . . . 120 (915) (1,840)
Non-deductible items . . . . . . . . . . . . . . (1,868) (3,643) 12,963
Net operating loss carryforward not utilized . . 10,628 5,257 5,062
Net operating loss utilized. . . . . . . . . . . (1,599) --- ---
Reduction of deferred tax asset. . . . . . . . . 1,491 --- ---
Income taxes refundable. . . . . . . . . . . . . (1,065) --- ---
Other, net . . . . . . . . . . . . . . . . . . . (237) (78) (1,694)
Effect of alternative minimum tax. . . . . . . . --- --- 3,790
------- ------- --------
$190 ($579) ($2,583)
------- ------- --------
------- ------- --------
52
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES, CONTINUED:
As of December 31, 1996, the Company's U.S. subsidiaries have regular tax basis
net operating loss carryforwards totaling $107,016,000, and alternative minimum
tax net operating loss carryforwards of $36,667,000 that expire in 1999 and
later years. The regular tax loss carryforwards of the U.S. subsidiaries are
not available to offset future alternative minimum taxable income. PGA has net
operating loss carryforwards totaling $16,983,000 which may be carried forward
indefinitely. PGA has an additional $6,500,000 of tax benefits available,
consisting primarily of exploration deductions incurred prior to the Company's
acquisition of a majority ownership interest. The Company has Canadian net
operating loss carryforwards of $12,995,000 that will expire in 2002 and later
years and capital loss carryforwards of $21,574,000 which may be carried forward
indefinitely.
10. STOCK OPTIONS
The Company has two stock-based compensation plans, which are described below.
SFAS No. 123 requires that companies either recognize compensation expense for
grants of stock, stock options, and other equity instruments based on fair
value, or provide pro forma disclosure of net income and earnings per share in
the notes to the financial statements. The Company adopted the disclosure
provisions of SFAS No. 123 in 1996 and has applied APB Opinion 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its stock option plans. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair value
at the grant dates, as calculated in accordance with SFAS No. 123, the Company's
net loss and loss per share for the years ended December 31, 1996 and 1995 would
have been increased to the pro forma amounts indicated below:
1996 1995
-------- -------
Net loss As reported ($21,603) ($2,953)
Pro forma ($26,683) ($5,990)
Net loss per share As reported ($0.53) ($0.08)
Pro forma ($0.65) ($0.17)
Under the Company's 1987 Stock Option Plan ("1987 Plan") for officers and
employees, options to purchase 4,775,000 common shares of the Company may be
granted for terms up to seven years. On April 24, 1996, the number of shares
authorized under the 1987 Plan was increased from 4,275,000 to 4,775,000. The
exercise price of incentive stock options must equal the market value of the
stock on the date of grant, or at least 90 percent of the market value of the
stock for non-qualified stock options. Options granted generally become
exercisable over the four-year period beginning on the date of grant. At
December 31, 1996 and 1995, options to purchase 45,683 and 425,683 common
shares, respectively, were available for future grants.
The 1989 Non-Employee Directors' Stock Option Plan ("1989 Plan") provides that
options to purchase up to 297,000 common shares of the Company may be granted to
members of the Board of Directors who are not full-time employees of the
Company, at an exercise price equal to the market value of the stock on the date
of grant. On April 24, 1996, the number of shares authorized under the 1989
Plan was increased form 225,000 to 297,000. The options are exercisable
immediately and generally expire ten years after the date of grant. At
December 31, 1996 and 1995, options to purchase 85,100 and 5,433 shares,
respectively, were available for future grants.
53
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS, CONTINUED:
Information regarding the Company's two stock option plans as of December 31,
1996, 1995, and 1994 is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------- --------- ---------
WEIGHTED-
AVERAGE
EXERCISE
OPTIONS SHARES PRICE SHARES SHARES
------ --------- ------ ------
<S> <C> <C> <C> <C>
Outstanding at beginning of year . . . . . . . . . 2,721,917 $13.31 1,405,534 804,568
Granted. . . . . . . . . . . . . . . . . . . . . . 1,176,333 $12.42 1,607,133 704,500
Exercised. . . . . . . . . . . . . . . . . . . . . (234,217) $11.18 (157,925) (53,034)
Canceled . . . . . . . . . . . . . . . . . . . . . (304,000) $14.06 (132,825) (50,500)
--------- ---------- ---------
Outstanding at end of year . . . . . . . . . . . . 3,360,033 $13.08 2,721,917 1,405,534
--------- ---------- ---------
--------- ---------- ---------
Options exercisable at year-end. . . . . . . . . . 2,144,804 1,322,267
Weighted-average fair value of
options granted during the year. . . . . . . . . $3.64 $3.52
</TABLE>
The fair value of each stock option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: risk-free interest rate of 6.3 percent, expected life of 2.6 years,
expected volatility of 40 percent, and no dividend yield.
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ------------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
----------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$7.56 - $10.63 1,175,975 5.8 yrs. $9.40 755,975 $8.75
$10.88 - $12.75 672,076 5.2 yrs. $11.34 444,476 $11.55
$12.88 - $16.00 757,032 5.9 yrs. $15.62 306,853 $15.15
$16.13 - $22.00 675,075 4.3 yrs. $17.26 557,625 $17.40
$22.25 - $22.88 79,875 4.0 yrs. $22.52 79,875 $22.52
--------- ---------
3,360,033 5.4 yrs. $13.08 2,144,804 $13.01
--------- ---------
--------- ---------
</TABLE>
11. EMPLOYEE BENEFIT PLANS
The Company has a savings plan (which qualifies under Section 401(K) of the U.S.
Internal Revenue Code) covering all full-time U.S. employees. Under the plan,
employees may elect to contribute up to 12 percent of their cash compensation,
subject to ERISA limitations. The Company is required to make a matching cash
contribution equal to 50 percent of the employee's contribution up to 3 percent
of the employee's compensation. The Company's contributions vest over a three-
year period. Employees have the option of investing all or a portion of the
total amounts contributed in shares of the Company's common stock. The Company
may, at its discretion, make additional contributions to the plan. During the
years ended December 31, 1996, 1995, and 1994, the Company contributed $924,000,
$875,000, and $857,000, respectively, to the plan.
54
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLANS, CONTINUED:
The Company had a defined contribution pension plan covering all of its
employees who have completed one year of service. The contribution was based
upon a percentage of average annual compensation multiplied by the years of
service with the Company. Contributions were 100 percent vested after five
years of service, and prior service with the Company was considered for vesting
purposes. Contributions to the plan totaled $218,000, $342,000, and $315,000,
in 1996, 1995, and 1994, respectively.
On December 31, 1996, the defined contribution pension plan was terminated and
combined with the Company's savings plan. Effective January 1, 1997, the
Company's required matching contribution to the savings plan increased from 50
percent to 75 percent of the employee's contribution up to 4.5 percent of the
employee's compensation. In addition, the maximum contribution by employees has
been increased from 12 percent to 15 percent of their cash compensation.
PGA has a superannuation fund which, under Australian law, requires that the
Company contribute 5 percent of every employee's base salary. PGA does not
guarantee any of the returns or benefits under the fund. Total contributions to
the fund were $513,000, $314,000, and $366,000, in 1996, 1995, and 1994,
respectively.
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
RISK MANAGEMENT
The Company reduces its exposure to fluctuations in interest rates, commodity
prices, and foreign exchange rates by creating offsetting positions through the
use of derivative financial instruments and has established a control
environment which includes policies and procedures for risk assessment and the
approval, reporting, and monitoring of derivative instrument activities. The
Company does not use derivative financial instruments for trading or speculative
purposes.
COMMODITY HEDGING CONTRACTS
Commodity hedging contracts include forward sales, swaps, and put and call
option contracts which hedge the effect of price changes on the underlying value
of the Company's reserves. At December 31, 1996, the hedging program consisted
of the following:
AVERAGE
PRICE DELIVERY
PER UNIT PERIOD
-------- -----------
GOLD
Forward sales. . . . . . . . . . 750,000 ounces $450 1997 - 2003
Contingent forward sales . . . . 185,000 ounces $437 1999 - 2003
Call options sold. . . . . . . . 444,200 ounces $484 1997 - 2003
Put options purchased. . . . . . 400,000 ounces $411 1997 - 2001
SILVER
Forward sales. . . . . . . . . . 2,187,400 ounces $5.08 1997 - 2001
ZINC
Forward sales. . . . . . . . . . 13,889,000 pounds $0.49 1997 - 1998
Call options sold. . . . . . . . 10,582,100 pounds $0.50 1997 - 1998
Put options purchased. . . . . . 10,582,100 pounds $0.48 1997 - 1998
Gold hedging commitments include contracts for which the price per ounce is
estimated based on expected delivery dates and estimated interest rates.
Delivery under contingent forward sales contracts is dependent on the spot price
of gold at various measurement dates over the term of the related contracts.
55
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT, CONTINUED:
FOREIGN CURRENCIES
The Company enters into foreign exchange contracts to hedge transactions related
to firm commitments and contractual obligations denominated in foreign
currencies, including debt. The Company regularly monitors its foreign currency
exposures and ensures that hedge contract amounts do not exceed the amounts of
underlying exposures.
At December 31, 1996, no foreign currency contracts were outstanding. At
December 31, 1995, the Company held foreign currency forward contracts with
notional amounts totaling $7,800,000 and option contracts with notional amounts
totaling $28,000,000, all of which matured in 1996.
CREDIT AND MARKET RISK
The Company is exposed to certain losses, generally the amount by which the
contract price exceeds the spot price of a commodity, in the event of
nonperformance by the counterparties to these agreements. The Company attempts
to minimize its credit exposure by limiting its counterparties to major
financial institutions which meet the Company's credit rating standards,
limiting the maximum exposure to any one counterparty, and spreading exposure
among a minimum number of counterparties. The Company does not require
collateral from its counterparties. Management believes that the risk of
incurring losses is remote.
Due to the nature of the precious metals market, the Company is not dependent on
its significant customers to provide a market for its refined gold and silver.
However, if the Company had to replace the smelters to which zinc, lead, and
pyrite concentrates are shipped, the additional transportation costs could be
considerable. Although it is possible that the Company could be directly
affected by weakness in the metals processing business, the Company monitors the
financial condition of its customers and considers the risk of loss to be
remote.
The Company is exposed to market risk on interest rate, commodity, and foreign
exchange contracts as a result of changes in interest rates, commodity prices,
and foreign exchange rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosure of the estimated fair value of financial instruments is required
under SFAS No. 107, "Disclosure About Fair Value of Financial Instruments." The
fair value estimates are made at discrete points in time based on relevant
market information and information about the financial instruments. These
estimates may be subjective in nature and involve uncertainties and significant
judgment and therefore cannot be determined with precision.
Cash and cash equivalents are valued at cost plus accrued interest, which
approximates market value. Short-term investments are valued based on quoted
market prices for the same or similar instruments with similar maturities. Fair
value of long-term debt is estimated based on quoted market prices for the same
or similar issues with similar maturities. Fair value of the Company's foreign
exchange contracts is estimated based on the quoted market prices of comparable
contracts.
56
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT, CONTINUED:
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 December 31, 1995
CARRYING FAIR Carrying Fair
(In Thousands) VALUE VALUE Value Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Assets:
Short-term investments. . . . . . . . . . . . . . . . . . . . --- --- 20,083 20,083
Liabilities:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . $215,086 $202,436 $133,818 148,768
Off-Balance Sheet Financial Instruments:
Foreign currency contracts. . . . . . . . . . . . . . . . . . --- --- --- 2,341
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
COMMON SHARES ISSUABLE
At December 31, 1996, a total of 11,274,750 authorized common shares were
reserved for the following:
Convertible Notes. . . . . . . . . . . . . . 7,709,067
Stock Option Plans . . . . . . . . . . . . . 3,490,816
Employee Savings Plan. . . . . . . . . . . . 74,867
----------
11,274,750
----------
----------
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 ("the
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. On September 27, 1996, 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, 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.
GENERAL
In addition to the above, various lawsuits, claims, and proceedings have been or
may be instituted or asserted against the Company. Management believes the
disposition of 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.
57
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES, CONTINUED:
RECLAMATION, SITE CLOSURE AND REMEDIATION COSTS
All of the Company's operations are subject to reclamation and closure
requirements. The Company monitors these requirements and evaluates its
accruals for reclamation and closure regularly.
Although the ultimate amount of reclamation and closure costs to be incurred in
the future is uncertain, the Company has estimated the aggregate amount of these
future costs to be $110,439,000 of which $51,928,000 had been accrued at
December 31, 1996. The accrued liability is included in deferred site closure
and reclamation on the consolidated balance sheet. The remaining $58,511,000
will be charged to operations over the remaining lives of its mines, on a units
of production basis.
During 1996, the Company increased its estimates of the future costs to close
and reclaim the Zortman, Beal Mountain, and Florida Canyon mines. The increase
in estimated costs results primarily from changes to mine plans and periodic
updates to final reclamation estimates at the Company's operations. At Zortman,
the increase is also attributable to changes in reclamation and closure
requirements associated with the Final Environmental Impact Statement and the
inclusion of costs related to additional disturbance which will occur during
mining and processing from the Zortman Extension Project, as well as
requirements for improvement of water quality.
In September 1995, outstanding litigation between the Company and LAC Minerals
USA, Inc. ("LAC"), was settled. Under the settlement, the Company paid LAC
$3,750,000 to be used for reclamation of the Ortiz Project and agreed to equally
share all reclamation costs to the extent the total costs exceed $12,000,000.
In February 1997, the Company determined that the total reclamation costs are
likely to exceed $12,000,000. Accordingly, the Company has recorded an
additional accrual of $3,000,000 at December 31, 1996, which reflects
management's estimate of the Company's share of future costs required to close
and reclaim the project. It is reasonably possible that the ultimate financial
liability for this matter could exceed management's current estimate.
The Company is required to provide security for its reclamation program, which
is primarily done through a bonding program collateralized by letters of credit.
At December 31, 1996, the Company, under its revolving credit facility, may
issue up to $50,000,000 of letters of credit. At December 31, 1995, the Company
had available $16,000,000 under separate letter of credit facilities which were
terminated under the terms of the revolving credit agreement. As of December
31, 1996 and 1995, the Company had outstanding letters of credit under these
facilities, which are renewable annually, totaling $16,625,000 and $12,700,000,
respectively.
Several of the Company's operating mines and exploration projects are located in
historic mining districts in the United States, and the Company controls land in
many areas where previous mining has taken place. Although no systematic
inventory has been performed, mining products (such as tailings) located at
these sites may present a future material liability to the Company as state and
federal regulatory agencies search for ways to enforce the cleanup of pollutants
left by previous operators. As of December 31, 1996, the Company was not aware
of any material remedial liabilities which have not been fully accrued.
Based on current environmental regulations and known reclamation requirements,
management has included the best estimate of these obligations in its
reclamation accruals. However, it is reasonably possible that the Company's
estimate of its ultimate reclamation liability could increase in the near term
as a result of prospective changes in laws and regulations and changes in cost
estimates.
58
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES, CONTINUED:
ZORTMAN EXTENSION PROJECT
A plan of operation for the Zortman Extension Project was submitted to the
regulatory agencies in May 1992. The Final Environmental Impact Statement
("FEIS") was issued in March 1996 and a favorable Record of Decision and
operating permits were granted on October 25, 1996. Mining operations at
Zortman ceased in the first quarter of 1996 and will not commence again until a
twelve-month construction period on the Zortman Extension Project is
substantially completed; major construction is not scheduled until 1998. Gold
production will continue from leaching ore previously mined and loaded on the
pads, but at a significantly reduced rate. Although the Company does not expect
further challenges to the project to be successful, issuance of the permit has
been appealed by third parties. In addition, it is possible further lawsuits may
be filed.
PURCHASE COMMITMENTS
At December 31,1996, the Company had capital expenditure purchase commitments
relating to the construction at Mt. Todd and Pullalli of approximately
$5,220,000 and $6,150,000, respectively.
14. SHAREHOLDERS' EQUITY
SHARE OFFERING
In January 1996, the Company completed a public offering in the United States
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
$88,175,000. 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.
SHELF REGISTRATION
Pursuant to a Shelf Registration Statement filed with the SEC on December 8,
1993, the Company may offer from time to time (1) debt securities, (2)
guarantees of debt securities issued by Pegasus Gold Finance Corporation, an
indirect wholly-owned subsidiary of the Company, (3) common shares, or (4)
warrants to purchase debt securities or common shares, at an aggregate initial
offering price not to exceed US$150,000,000. The amount available under the
shelf registration was reduced to $57,686,000 as a result of the sales under the
public offering discussed above.
SHAREHOLDER PROTECTION RIGHTS PLAN
On December 1, 1988, the Board of Directors adopted a Shareholder Protection
Rights Plan ("Plan") and declared a dividend of one preferred share purchase
right ("Right") for each outstanding common share. The Rights only become
exercisable, or transferable apart from the common shares, on the eighth trading
day after a person or group ("Acquiring Person") acquires beneficial ownership
of, or commences a tender or exchange offer for, 10 percent or more of the
Company's common shares, other than pursuant to a permitted bid, as defined in
the Plan.
Among other provisions, each Right entitles the holder to purchase one-hundredth
of a Class A preferred share, Series 1, at an exercise price of $55, subject to
adjustment. Thereafter, upon the occurrence of certain events (for example, if
the Company is the surviving corporation of a merger with an Acquiring Person),
each Right will entitle its holder to purchase common shares with a market value
of twice the Right's exercise price. Alternatively, upon the occurrence of
certain other events (for example, if the Company is acquired in a merger in
which the Company is not the surviving corporation), each Right will entitle its
holder to purchase common stock of the Acquiring Person with a market value of
twice the Right's exercise price. The Rights are subject to redemption by the
Board of Directors for $0.01 per Right at any time prior to becoming
exercisable. The Rights will expire in December 1998.
59
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information for the years ended
December 31, 1996, 1995, and 1994, is as follows:
(In Thousands) 1996 1995 1994
---- ---- ----
Cash paid during the year for:
Interest (net of amounts capitalized). . . . . $593 $4,293 $3,872
Income taxes, net of refunds . . . . . . . . . (143) (999) 4,220
Non-cash financing activities:
Equipment capital leases . . . . . . . . . . . 3,424 25,914 ---
The consolidated statement of cash flows for December 31, 1995, and 1994
excludes the effects of certain non-cash investing activities relating to the
acquisition of a majority interest in PGA (see Note 5). The following is a
summary of the non-cash effects of this transaction:
(In Thousands) 1995 1994
---- ----
Increase in:
Property, plant, and equipment . . . . . . . . $126,985 $7,685
--------- -------
--------- -------
(Increase) decrease in:
Deferred income taxes. . . . . . . . . . . . . ($45,060) ---
Minority interest. . . . . . . . . . . . . . . 23,384 $1,287
--------- -------
(21,676) 1,287
--------- -------
Net decrease in cash and
cash equivalents . . . . . . . . . . . . . . . ($105,309) ($8,972)
--------- -------
--------- -------
16. GEOGRAPHIC INFORMATION
The following is a summary of the Company's operations by geographic area for
the years ended December 31, 1996, 1995, and 1994.
<TABLE>
<CAPTION>
United Canada
States Australia and Other Total
------ --------- --------- -----
<S> <C> <C> <C> <C>
1996
IDENTIFIABLE ASSETS. . . . . . . . . . . . . . . . . . . . . . . $241,748 $441,905 $70,555 $754,208
REVENUE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206,522 32,181 1,017 239,720
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . . . . . . (21,028) (2,931) 2,356 (21,603)
1995
Identifiable assets. . . . . . . . . . . . . . . . . . . . . . . $224,635 $259,758 $95,848 $580,241
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224,911 29,261 1,407 255,579
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . 4,936 (4,846) (3,043) (2,953)
1994
Identifiable assets. . . . . . . . . . . . . . . . . . . . . . . $284,688 $92,701 $75,890 $453,279
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195,540 35,697 2,411 233,648
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . (58,162) (209) (364) (58,735)
</TABLE>
60
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. DIFFERENCES BETWEEN U.S. AND CANADIAN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The Company prepares its consolidated financial statements in accordance with
Generally Accepted Accounting Principles ("GAAP") in the United States.
Significant differences between U.S. GAAP and Canadian GAAP and their effects on
net income (loss) and per share amounts are described below:
Under Canadian GAAP, the Company would not have recorded the deferred tax
consequences associated with the acquisition of the minority interest in PGA
(see Note 5). Under Canadian GAAP, property, plant, and equipment would have
been $574,338,000 and deferred income taxes $0 as of December 31, 1996.
Under Canadian GAAP, the non-cash financing and investing activities discussed
in Note 15 would be included in the consolidated statement of cash flows.
Accordingly, under Canadian GAAP, net cash used in investing activities would be
$214,051,000 and $199,792,000 and net cash provided by financing activities
would be $169,280,000 and $100,744,000 in the 1996 and 1995 consolidated
statement of cash flows.
Under Canadian GAAP, the provision for income taxes in 1994 would be increased
by $498,000 to reverse the recognition of deferred tax assets not meeting
virtual certainty recognition criteria under the deferral method. As a result,
the reported loss per share would have been increased by $0.01 in 1994.
Under Canadian GAAP, the 1994 property write-downs at Black Pine and Beal
Mountain would be lower by $2,236,000 and $1,392,000, respectively, to recognize
the effect of using future discounted net cash flows to reduce the carrying
value of the mine, for U.S. GAAP purposes. Canadian GAAP requires that
reductions in the carrying value be recorded on the basis of future undiscounted
net cash flows. As a result, the reported loss per share would have been
reduced by $0.10 in 1994.
18. QUARTERLY DATA (UNAUDITED)
Selected unaudited quarterly data for the years ended December 31, 1996 and
1995, are as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
(In Thousands, except per share amounts) Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
SALE OF GOLD AND OTHER METALS $48,790 $56,958 $66,441 $67,531 $239,720
======= ======= ======= ======= ========
GROSS PROFIT $5,004 $5,668 $3,713 ($878) $13,507
======= ======= ======= ======= ========
LOSS FROM OPERATIONS ($1,485) ($1,830) ($10,026) ($11,915) ($25,256)
======= ======= ======= ======= ========
NET INCOME (LOSS) $13 ($1,713) ($7,792) ($12,111) ($21,603)
======= ======= ======= ======= ========
NET INCOME (LOSS) PER SHARE $0.00 ($0.04) ($0.19) ($0.30) ($0.53)
======= ======= ======= ======= ========
Year ended December 31, 1995:
Sales of gold and other metals $55,360 $62,314 $69,493 $68,412 $255,579
======= ======= ======= ======= ========
Gross profit $8,501 $9,554 $9,863 $9,309 $37,227
======= ======= ======= ======= ========
Income (loss) from operations ($1,916) ($1,667) $1,138 $410 ($2,035)
======= ======= ======= ======= ========
Net income (loss) ($1,810) ($1,203) $106 ($46) ($2,953)
======= ======= ======= ======= ========
Net income (loss) per share ($0.05) ($0.03) $0.00 $0.00 ($0.08)
======= ======= ======= ======= ========
</TABLE>
Results for the fourth quarter of 1996 include a $5.0 million charge for a
change in the estimated useful lives of certain assets at Mt. Todd, a $3.0
million provision for closure and reclamation cost related to the Ortiz Project,
and a $1.0 million impairment loss related to certain Phase I assets at Mt. Todd
(see Notes 3 and 4).
Results for the third quarter of 1996 include a $6.5 million provision for
closure and reclamation costs at Beal Mountain (see Note 4).
61
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing under the captions "Nominated Directors" and
"Incumbent Directors" set forth under "Election of Directors" in the Company's
definitive 1997 Proxy Statement and Information Circular ("1997 Proxy
Statement") for its annual meeting of shareholders to be held, as filed within
120 days of December 31, 1996, pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended, is incorporated herein by reference. See also
"Executive Officers" appearing in Part I of this Annual Report on Form 10-K.
EXECUTIVE COMPENSATION
The information appearing under the captions "Compensation of Executive
Officers", and "Directors' Fees and Options" in the Company's 1997 Proxy
Statement is incorporated herein by reference.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under the caption "Principal Holders of Voting
Securities" in the Company's 1997 Proxy Statement is incorporated herein by
reference.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing under the caption "Remuneration of Directors and
Senior Officers" in the Company's 1997 Proxy Statement is incorporated herein by
reference.
62
<PAGE>
PART IV
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements and Supplementary Data. Consolidated financial
statements of the Company and its subsidiaries are incorporated under
Item 8 of this Form 10-K.
(a)(2) No financial statement schedules are required
(a)(3) Exhibits
The exhibit numbers in the following list correspond to the numbers assigned to
such exhibits in Item 601 of Regulation S-K. The exhibit numbers noted by an
asterisk (*) indicate exhibits actually filed with this Annual Report on Form
10-K. All other exhibits are incorporated by reference into this Annual Report
on Form 10-K.
3.1 Memorandum of Registrant as Amended May 31, 1985, and May 22, 1987,
(incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement No. 33-14910).
3.2 Articles of Registrant as Amended May 31, 1985, and May 22, 1987,
(incorporated by reference to Exhibit 3.2 to the Registrant's
Registration Statement No. 33-14910).
3.3 Amendment to the Company Memorandum dated December 1, 1988, regarding
terms and conditions of preferred shares, Series 1 (incorporated by
reference to Exhibit 3.3 to the Registrant's Form 10-K for the year
ended December 31, 1988).
4.1 Amended and Restated Shareholder Protection Rights Plan Agreement
dated as of December 5, 1988, including Amendment No. 1 dated as of
February 5, 1989, between Pegasus Gold Inc. and Central Guaranty Trust
Company as Rights Agent (incorporated by reference to Exhibit 4.1 to
the Registrant's Form 10-K for the year ended December 31, 1988).
4.2 Amendment to the Shareholder Protection Rights Plan Agreement dated
December 28, 1990, between Pegasus Gold Inc. and Central Guaranty
Trust Company as Rights Agent (incorporated by reference to Exhibit
4.2 to the Registrant's Form 10-K for the year ended December 31,
1990).
4.3 Indenture dated as of April 15, 1995, between Pegasus Gold Inc. And
the Bank of New York respecting U.S. $115,000,000 6.25% Convertible
Subordinated Notes Due 2002.
10.0 Multi-currency Reducing Revolving Credit Facility dated April 19, 1996
(incorporated by reference to Exhibit 10.0 of the Registrant's Form
10-Q for the quarterly period ended March 31, 1996).
10.1 Description of Employee Savings Plan of Registrant Effective July 1,
1984, as amended May 22, 1987,
63
<PAGE>
(incorporated by reference to Exhibit 10.10 to the Registrant's
Registration Statement No. 33-00290).
10.2 Amended and Restated Employee Savings Plan of Pegasus Gold Corporation
as amended October 1, 1988, (incorporated by reference to Exhibit
10.25 of the Registrant's Form 10-K for the year ended December 31,
1988).
10.3 1987 Incentive Stock Option Plan dated May 22, 1987, as amended June
16, 1989, and May 29, 1992, and April 27, 1995 (incorporated by
reference to Exhibit 10.0 to the Registrant's Form 10-Q for the
quarterly period ended March 31, 1995).
10.4 1989 Non-Employee Directors' Stock Option Plan, dated June 16, 1989
(incorporated by reference to Exhibit 10.22 of the Registrant's Form
10-K for the year ended December 31, 1989).
10.5 Employment Agreement dated January 24, 1994, between Phillips S.
Baker, Jr., Pegasus Gold Inc. and Pegasus Gold Corporation
(incorporated by reference to Exhibit 10.10 to the Registrant's Form
10-K for the year ended December 31, 1993).
10.6 Employment Agreement dated May 27, 1994, between Terry D. Bauer,
Pegasus Gold Inc. and Pegasus Gold Corporation (incorporated by
reference to Exhibit 10.10 to the Registrant's Form 10-K for the year
ended December 31, 1994).
10.7 Employment Agreement dated September 14, 1994, between Eric B. Ovlen,
Pegasus Gold Inc. and Pegasus Gold Corporation (incorporated by
reference to Exhibit 10.11 to the Registrant's Form 10-K for the year
ended December 31, 1994).
10.8 Employment Agreement dated June 30, 1995, between Robert A. Lonergan,
Pegasus Gold Inc, and Pegasus Gold Corporation (incorporated by
reference to Exhibit 10.10 to the Registrant's Form 10-K for the year
ended December 31, 1995).
10.9 Employment Agreement dated September 29, 1995, between James G. Geyer,
Pegasus Gold Inc., and Pegasus Gold Corporation (incorporated by
reference to Exhibit 10.12 to the Registrant's Form 10-K for the year
ended December 31, 1995).
10.10* Employment Agreement dated July 29, 1996, between Werner G. Nennecker,
Pegasus Gold Inc. and Pegasus Gold Corporation.
10.11 Lease Agreement between Caterpillar Financial Services Corporation and
Pegasus Gold Corporation, dated June 15, 1991; Lease Supplement No. 1
between Caterpillar Financial Services Corporation and Pegasus Gold
Corporation, dated June 19, 1991; Bill of Sale from Pegasus Gold
Corporation; Tax
64
<PAGE>
Indemnity Agreement between Caterpillar Financial Services Corporation
and Pegasus Gold Corporation, dated June 15, 1991; Guaranty Agreement
of Pegasus Gold Inc., dated June 15, 1991; Letter Agreement between
Caterpillar Financial Services Corporation and Pegasus Gold
Corporation, dated July 17, 1991; First Amendment and Agreement
between Caterpillar Financial Services Corporation and Pegasus Gold
Corporation, dated July 17, 1991; Lease Supplement No. 4 between
Caterpillar Financial Services Corporation and Pegasus Gold
Corporation, dated October 31, 1991; Bill of Sale from Pegasus Gold
Corporation, dated October 31, 1991 (incorporated by reference to
Exhibit 10.16 of the year ended December 31, 1991); Lease Supplement
No. 5 between Caterpillar Financial Services Corporation and Pegasus
Gold Corporation, dated December 28, 1995; and Bill of Sale from
Pegasus Gold Corporation, dated December 28, 1995 (incorporated by
reference to Exhibit 10.13 of the year ended December 31, 1991).
11.1* A Statement of Computation of Earnings Per Share.
21.1* Subsidiaries of Registrant.
23.1* Consent of Independent Auditors of Registrant.
28.1 Form 11-K - Annual Report of the Pegasus Gold Employee Savings Plan.
(1)
(1) To be filed by amendment.
(b) Reports on Form 8-K: None
65
<PAGE>
PEGASUS GOLD INC.
FORM 10-K
DECEMBER 31, 1996
PART IV
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) and the Securities Exchange
Act of 1934, the Registrant has duly caused this annual report to be signed on
its behalf by the undersigned thereunto duly authorized.
PEGASUS GOLD INC.
Date: March 14, 1997 By: /s/ Werner G. Nennecker
-------------- ----------------------------------
Werner G. Nennecker, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Date: March 14, 1997 By: /s/ Phillips S. Baker, Jr.
-------------- ----------------------------------
Phillips S. Baker, Jr., Vice President,
Finance and Chief Financial Officer
Date: March 14, 1997 By: /s/ James B. Hannan
-------------- ----------------------------------
James B. Hannan, Controller
66
<PAGE>
PEGASUS GOLD INC.
FORM 10-K
DECEMBER 31, 1996
PART IV
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: March 14, 1997 By: /s/ Lawrence I. Bell
-------------- -------------------------
Lawrence I. Bell
Date: March 14, 1997 By: /s/ Peter M.D. Bradshaw
-------------- -------------------------
Peter M.D. Bradshaw
Date: March 14, 1997 By: /s/ Douglas R. Cook
-------------- -------------------------
Douglas R. Cook
Date: March 14, 1997 By: /s/ Michael A. Grandin
-------------- -------------------------
Michael A. Grandin
Date: March 14, 1997 By: /s/ Peter R. Kutney
-------------- -------------------------
Peter R. Kutney
Date: March 14, 1997 By: /s/ Werner G. Nennecker
-------------- -------------------------
Werner G. Nennecker
Date: March 14, 1997 By: /s/ Dr. Lindsay D. Norman
-------------- -------------------------
Dr. Lindsay D. Norman
Date: March 14, 1997 By: /s/ Anthony J. Petrina
-------------- -------------------------
Anthony J. Petrina
Date: March 14, 1997 By: /s/ Fred C. Schulte
-------------- -------------------------
Fred C. Schulte
67
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT is dated as of July 29, 1996, ("Effective Date"). The parties to
this Agreement ("Parties") are PEGASUS GOLD INC., a British Columbia company
with its principal office in Spokane, Washington ("Pegasus"), PEGASUS GOLD
CORPORATION, a Nevada corporation with its principal office in Spokane,
Washington (the "Corporation") (collectively "Company"), and WERNER G. NENNECKER
of Spokane, Washington ("Executive").
RECITALS
A. Executive is presently the President and Chief Executive Officer of
Pegasus and the Corporation. The Parties desire to define and set
forth the current duties and responsibilities of Executive in all his
capacities with Company.
B. In consideration of Executive's agreement to remain in the employ of
Company, Company desires to further induce Executive to continue
active participation in the business of Company.
In consideration of the mutual promises, covenants, agreements and undertakings
contained in this Agreement, the Parties hereby contract and agree as follows:
AGREEMENT
SECTION 1. EMPLOYMENT
1.1 SPECIFIC SERVICES. Company employs Executive as its President and
Chief Executive Officer and Executive hereby accepts such employment
and agrees to devote all of his efforts for the benefit of Company and
to faithfully, industriously and, to the best of his ability,
experience and talents, perform all of his required and assigned
duties. Executive shall perform the duties of President and Chief
Executive Officer subject to the general supervision of and pursuant
to the orders, advice and direction of Pegasus' Board of Directors
(the "Board").
1.2 ADDITIONAL SERVICES. Executive shall also render such other
reasonable and unrelated services and duties as may be assigned to him
from time to time by the Board and accepted by Executive.
SECTION 2. TERM OF EMPLOYMENT
The term of employment of Executive commenced December 1, 1992 pursuant to an
Employment Agreement dated as of January 29, 1993 and will continue under the
provisions of this Agreement as of the Effective Date until terminated as
provided in SECTION 5.
- -------------------------------------------------------------------------------
- 1 -
<PAGE>
SECTION 3. COMPENSATION
3.1. SALARY. Unless and until Executive's employment with Company is
terminated pursuant to SECTION 5, Company will pay Executive, and
Executive will accept from Company, compensation at a minimum annual
base salary, before all customary and proper payroll deductions, of
(currently) US$350,000.00, prorated and payable semi-monthly or on
such other basis as Parties may hereafter agree. Such minimum
compensation may be adjusted for merit or other reasons as determined
by the Board, or any Committee thereof having such authority.
3.2 VACATION. Executive will be entitled to vacation periods in line with
the policies of Company applicable to exempt employees; PROVIDED,
HOWEVER, that Executive shall be entitled to a minimum paid vacation
of five (5) weeks in any calendar year. If Executive does not use all
vacation days in any calendar year, Executive will be permitted to
carry over those vacation days into subsequent years, consistent with
Company policy.
3.3 DEFINITION OF ANNUAL SALARY. For purposes of this Agreement, the term
Annual Salary for any year means Executive's annual base salary,
before all customary and proper payroll deductions, plus 100 percent
of his target bonus for such year, as such amounts are established by
resolution of the Board, or any Committee thereof having such
authority.
SECTION 4. OTHER BENEFITS
4.1 GENERAL. In addition to the compensation as provided in SECTION 3
hereof and unless and until Executive's employment with Company is
terminated pursuant to SECTION 5, Company will at its expense provide
Executive with the following additional benefits:
(i) Availability and use of a Company automobile of a value of
approximately US$30,000.00;
(ii) Disability Insurance sufficient to provide disability benefits in
an amount commensurate with Executive's salary and position, and
not materially inconsistent with other Company disability plans,
premiums for which are paid by the Company. For purposes of this
Agreement, "disability" means a condition of physical or mental
illness or impairment that renders Executive to be totally
incapable of performing full-time duties, which condition, as
diagnosed by a licensed medical doctor, is expected to continue
rendering Executive so incapable for the reasonably foreseeable
future.
- -------------------------------------------------------------------------------
- 2 -
<PAGE>
(iii) Participation in all other of Company's benefit plans, including
medical, dental, vision, 401(k), pension, bonuses and any and all
other plans that may be made available to employees;
(iv) Parking in the building where Company's offices are located or, if
such parking is not available, near Company's offices;
(v) Assistance in annual tax preparation and estate planning;
(vi) Payment of dues in professional associations as may be required to
maintain Executive's membership in those associations and the
privilege of attending appropriate seminars, conferences and
educational programs as may be necessary;
(vii) Membership in one (1) country club and one (1) athletic club and
payment of dues for such memberships;
(viii) Reimbursement for all expenses incurred in connection with the
performance of services to Company, including entertainment and
travel and other expenses incidental to the duties undertaken
hereunder; PROVIDED, HOWEVER, that such expenses will be
reasonable and necessary and that Executive shall submit bills
and vouchers supporting requests for reimbursements in accordance
with Company's policies;
(ix) Appropriate office and staff assistance in Spokane, Washington,
which it is agreed shall be the place of principal employment
during the term of this Agreement;
(x) Such directors and officers liability insurance as may be
available to adequately provide both insurance coverage and
reimbursement of legal cost for any actions brought against
Executive for any of his activities for and on behalf of and
while in the employment of, Company; and
(xi) An option to acquire 40,000 shares of Pegasus' common stock
(which option has already been granted) and any additional
options which from time to time may be granted.
4.2 LIFE INSURANCE. The Company shall purchase an insurance policy on the
life of Executive in an amount not less than three (3) times his
Annual Salary (as this term is defined in Section 3.3), with the
beneficiary to be designated by Executive. In the event Employee
terminates his employment with the Company for any reason other than
death, the policy (along with all obligations for subsequent premium
payments, notifications and the like) shall be assigned to Executive
at the time of his termination at no cost to Executive, but with no
further obligation on the Company with respect to the policy. To the
extent such policy premium payments are considered compensation to
Executive, his salary
- -------------------------------------------------------------------------------
- 3 -
<PAGE>
shall be "grossed up" to reimburse him for such personal income taxes
as may be due on the value of such premium payments.
SECTION 5. TERMINATION
Executive's employment with Company may be terminated as follows:
(i) By mutual agreement of the Parties;
(ii) Voluntarily by Executive (including retirement and including Good
Reason outside of a Change of Control, but other than for Good
Reason pursuant to a Change of Control, as those terms are
defined in SECTION 6.4), subject to the provisions of SECTION 6.1
and upon at least three (3) months prior written notice of
termination by Executive to Company;
(iii) By Company without cause, subject to the provisions of SECTIONS
6.2 and 6.4 and upon at least three (3) months prior written
notice of termination by Company to Executive;
(iv) By Company for cause as that term is defined in SECTION 10, subject
to the provisions of SECTION 6.1;
(v) Immediately upon the death or disability of Executive, subject to
the provisions of SECTION 6.3; or
(vi) Immediately for Good Reason upon a Change of Control, subject to
the provisions of SECTION 6.4.
SECTION 6. SEVERANCE COMPENSATION
6.1. TERMINATION OF EXECUTIVE OR BY COMPANY FOR CAUSE. If Executive shall
voluntarily terminate his employment under this Agreement pursuant to
clause (i) of SECTION 5.1, or if the employment of Executive is
terminated by Company for cause (as defined in SECTION 10), then all
compensation and benefits as heretofore provided in SECTIONS 3 AND 4
will terminate immediately upon the effective date of such termination
and Executive will not be entitled to, and will not receive, any
special severance compensation from Company.
6.2. TERMINATION BY COMPANY WITHOUT CAUSE. If Company shall terminate
Executive's employment for any reason except cause (as defined in
SECTION 10) then, on the effective date for such termination, Company
will pay Executive, in one lump sum cash payment, an amount equal to
three (3) times Executive's Annual Salary (as defined in SECTION 3.3).
Additionally, Company will continue to provide Executive with the same
level of employee benefits, as if Executive were still an employee of
Company, for a period of two (2) years from the effective date of
Executive's employment termination or until better benefits are
- -------------------------------------------------------------------------------
- 4 -
<PAGE>
provided to Executive by a new employer, whichever occurs first. All
outstanding stock options respecting Company stock held by Executive
at the effective date of termination will become immediately
exercisable at such time, regardless of any other vesting provision,
and may continue to be held and exercised by Executive in accordance
with the remaining terms of such options. Company also will provide
Executive with employment search assistance, by a firm mutually
acceptable to Company and the Executive, to secure comparable
employment, and will pay the cost of such assistance in an amount not
to exceed US$25,000.00.
6.3 TERMINATION BY DEATH OR DISABILITY. If Executive dies or becomes
disabled before his employment is otherwise terminated, in addition to
payments otherwise provided through insurances under Section 4.1 (ii)
and 4.2, Company will immediately pay an amount of compensation equal
to six (6) months' Annual Salary (as defined in SECTION 3.3) as if
Executive had been terminated without cause and all employee benefits
theretofore provided to Executive will be continued for a period of
one (1) year from the date of death or disability as if Executive was
still an employee of Company. If such termination is due to
Executive's death, payment will be made in one lump sum to his
beneficiary, to be named in writing by Executive upon signing this
Agreement, which designation may be changed at any time by written
notice signed by Executive and delivered to the Secretary of Company;
if no named beneficiary survives Executive, the entire amount will be
paid to his estate. If such termination is due to Executive's
disability, payment will be made in one lump sum to Executive.
6.3.1. CONSTRUCTIVE TERMINATION BY THIRD PARTIES In the event Executive is
taken hostage or otherwise wrongfully imprisoned or restrained,
against his will and beyond his control, by a third party, all salary
and benefits under this Agreement shall continue until such time as
Company may reasonably make the determination that Executive is
unlikely to return to his position. At that time, Company may elect
to make payment to Executive's designated beneficiary in accordance
with SECTION 6.3 hereof.
6.4 TERMINATION FOLLOWING CHANGE OF CONTROL.
6.4.1. "CHANGE OF CONTROL." For purposes of this Agreement, a Change in
Control will be deemed to have occurred if either:
(i) any individual, partnership, firm, corporation, association,
trust, unincorporated organization or other entity, or any
syndicate or group deemed to be a person under Section 14(d)(2)
of the Exchange Act of 1934 (the "Exchange Act"), other than
Pegasus is or becomes the "beneficial owner" (as defined in Rule
13d-3 of the General Rules and Regulations under the Exchange
Act), directly or indirectly, of securities of the Pegasus, or of
the Corporation, representing 25 percent or more of the combined
voting power of the then outstanding securities entitled to
- -------------------------------------------------------------------------------
- 5 -
<PAGE>
vote in the election of directors of Pegasus, or of the
Corporation, as the case may be; or
(ii) during any period of two (2) consecutive years (not including any
period prior to the Effective Date of this Agreement),
individuals who at the beginning of such period constituted the
Board and any new directors, whose election by the Board or
nomination for election by the shareholders of Pegasus, or of the
Corporation, as the case may be, was approved by a vote of at
least three quarters (3/4) of the directors then still in office
who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved,
cease for any reason to constitute a majority thereof.
6.4.2. SEVERANCE PAYMENT. Irrespective of any other provisions in this
Agreement regarding termination, if either of the events described above
constituting a Change in Control shall have occurred, upon the subsequent
termination of Executive's employment (unless such termination is because of
Executive's death or disability, by the Company for cause or by Executive other
than for Good Reason (as that term is defined in SECTION 6.4.3 below)) Executive
will be entitled to and will receive no later than the fifth (5th) day following
the date of termination a lump sum severance payment equal to three (3) times
Executive's then current Annual Salary (as defined in SECTION 3.3). In
addition, all benefits then applicable to Executive shall be continued for a
period of thirty-six (36) months.
6.4.3. "GOOD REASON." For purposes of this Agreement, the term "Good Reason"
means, without Executive's express written consent, any of the following:
(i) the assignment to Executive of any duties inconsistent with
Executive's status as President and Chief Executive Officer of
Company, or Executive's removal from such position, or a
substantial alteration in the nature or status of Executive's
responsibilities from those in effect immediately prior to the
Change in Control;
(ii) a reduction by Company in Executive's Annual Salary as in effect
on the date hereof or as the same may have been increased from
time to time or a failure by Company to increase Executive's
salary at a rate commensurate with that of other key executives
of Company;
(iii) the relocation of the office of Company where Executive is
employed at the time of the Change in Control (the "CIC
Location") to a location more than fifty (50) miles away from the
CIC Location or the Company's requiring Executive to be based
more than fifty (50) miles away from the CIC Location (except for
required travel on the Company's business to an extent
substantially consistent with Executive's business travel
obligations just prior to the Change in Control);
- -------------------------------------------------------------------------------
- 6 -
<PAGE>
(iv) the failure by Company to continue to provide Executive with
benefits at least as favorable as those enjoyed by Executive
under any of Company's life insurance, medical, health and
accident, disability, deferred compensation, pension, or savings
plans in which Executive was participating at the time of the
Change in Control, the taking of any action by Company which
would directly or indirectly materially reduce any of such
benefits or deprive Executive of any material fringe benefit
enjoyed by Executive at the time of the Change in Control, or the
failure by Company to provide Executive with the number of paid
vacation days to which Executive has been entitled at the time of
the Change in Control; or
(v) the failure of Company to obtain a satisfactory agreement from
any successor to assume and agree to perform this Agreement or,
if the business of Company for which Executive's services are
principally performed is sold at any time after a Change in
Control, the purchaser of such business shall fail to agree to
provide Executive with the same or a comparable position, duties,
salary and benefits as provided to Executive by Company
immediately prior to the Change in Control.
6.4.4. ADDITIONAL BENEFITS. In the event of termination of Executive's
employment upon a Change in Control (as defined in SECTION 6.4.1), either by
Company without cause or by Executive for Good Reason (as defined in SECTION
6.4.3), and in addition to the severance payment provided in SECTION 6.4.2.,
Executive shall be entitled to the following:
(i) Employment search assistance to secure other comparable
employment, for a period not to exceed one (1) year or until such
comparable employment is found, whichever is the sooner, with the
fees for such assistance paid by the Corporation;
(ii) Protection for the sale of Executive's residence in an amount
equal to the difference between (A) the sales price net of all
selling expenses and (B) the sum of the original purchase price,
plus major improvements; and
(iii) Payment of the cost of a one time move to a new location in the
event such a move becomes necessary in order for Executive to
accept new employment.
6.4.5. ADDITIONAL PAYMENTS. If as a result of the payment to Executive of
any benefit under SECTION 6.4, Executive shall be obligated to pay any excise
tax under Section 4999 of the Internal Revenue Code, or any successor provision
or similar provision of federal, state or local tax law relating to changes in
control, Company will pay to Executive within ten (10) days after a written
demand therefor, the amount of such excise tax, plus the amount of all federal,
state and local income taxes payable on such excise tax and on such income tax,
applying Executive's marginal income tax rates. If Company has made such
payments and subsequently Executive shall become entitled
- -------------------------------------------------------------------------------
- 7 -
<PAGE>
to a refund of any excise tax, or income tax payable with respect to such excise
tax (or income tax on such income tax), Executive will pay, within ten (10) days
after receipt of such refund, the amount of such refund to Company, together
with interest at six percent (6%) per annum from the date of receipt of such
refund.
SECTION 7. NON-TRANSFERABILITY
This is a personal agreement. None of Executive's rights, benefits or interests
hereunder may be subject to sale, anticipation, alienation, assignment,
encumbrance, charge, pledge, hypothecation, transfer, or set-off in respect of
any claim, debt or obligation or to execution, attachment, levy or similar
process, or to assignment by operation of law. Any attempt, voluntary or
involuntary, to effect any such action shall be null, void and of no effect.
SECTION 8. CHOICE OF LAW
It is the intention of the parties hereto that this Agreement and the
performance hereunder and all suits and special proceedings hereunder be
construed in accordance with and under and pursuant to the laws of the State of
Washington and that in any action, special proceeding or other proceeding that
may be brought arising out of, in connection with, or by reason of this
Agreement, the laws of the State of Washington shall be applicable and shall
govern, to the exclusion of the law of any other forum, without regard to the
jurisdiction in which any action or special proceeding may be instituted.
SECTION 9. BINDING EFFECT
This Agreement shall be binding upon and shall inure to the benefit of Company,
its successors or assigns, and to Executive, and his personal representatives,
heirs, executors and administrators.
SECTION 10. DEFINITION OF CAUSE.
10.1. DEFINITION OF CAUSE. For purposes of this Agreement, the term
"cause," when used as a basis for Company to terminate the Executive's
employment means (i) the willful and continued failure by Executive to
substantially perform his duties, after demand for substantial
performance is delivered by Company that specifically identifies the
manner in which the Company believes Executive has not substantially
performed his duties, (ii) the willful engagement by Executive in
misconduct that is materially injurious to Company, monetarily or
otherwise, or (iii) the willful violation by Executive of the
provisions of this Agreement.
10.2 NOTICE OF TERMINATION. Notwithstanding the foregoing, Executive will
not be deemed to have been terminated for cause unless there shall
have been delivered to Executive a copy of a notice of termination
from Company and, after reasonable written notice, Executive and his
counsel have been given
- -------------------------------------------------------------------------------
- 8 -
<PAGE>
an opportunity to be heard by the Board and thereafter a resolution is
duly adopted by the directors of Pegasus then in office to the effect
that, in the good faith opinion of such directors, the Executive was
guilty of conduct set forth above, which resolution shall set forth in
detail the facts and circumstances claimed to provide a basis for
termination of employment under the provisions so indicated.
SECTION 11. DIRECTORSHIPS
Executive shall be entitled to accept positions as director of other
corporations, whether such corporations are engaged in the mining industry or
not, provided Executive's proposed service as such director is first approved by
Company, which approval shall not be unreasonably withheld.
SECTION 12. REPRESENTATIONS
Pegasus and the Corporation jointly and severally represent and warrant to the
Executive, with the intent that Executive shall rely on such representations and
warranties in entering into this Agreement, as follows:
(i) The common shares of Pegasus are listed for trading on the
Toronto Stock Exchange, Montreal Exchange and American Stock
Exchange; and
(ii) The financial statements, reports, and other information provided
by Company and their respective officers and employees, both
orally and in writing, constitute fair and accurate disclosures
of the status of the affairs of Company, and Company do not know
of any other information which, if disclosed to the Executive,
might reasonably be expected to cause Executive to refrain from
accepting employment with Company or affect the value of Pegasus'
shares.
SECTION 13. CONFIDENTIALITY
Executive agrees that, except as required for the performance of his duties,
obligations and responsibilities hereunder, he will not at any time during the
term of this Agreement or thereafter divulge to any person, firm or corporation
any Confidential Information received by him during the course of his employment
and all such Confidential Information shall be kept confidential and deemed to
be the property of Company. For the purpose of this provision, the term
"Confidential Information" means information known to Executive as a consequence
of his employment by Company and not generally known in the industry in which
Company is engaged or not otherwise available to third parties from sources
unrelated to or controlled by Company.
- -------------------------------------------------------------------------------
- 9 -
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement at Spokane,
Washington as of the day and year first above written.
PEGASUS GOLD INC.
By /S/ Lindsay D. Norman
----------------------------------------------
Lindsay D. Norman, Chairman of the Board
By /S/ Robert A. Lonergan
----------------------------------------------
Robert A. Lonergan, Vice President,
General Counsel and Secretary
PEGASUS GOLD CORPORATION
By /S/ Robert A. Lonergan
----------------------------------------------
Robert A. Lonergan, Vice President,
General Counsel and Secretary
EXECUTIVE:
By /S/ Werner G. Nennecker
---------------------------------------------
Name: Werner G. Nennecker
-------------------------------------------
Address: 601 West First Avenue, Suite 1500
----------------------------------------
City, State: Spokane, Washington 99204
----------------------------
Telephone Number: 509/625-3521
-------------------------------
SS#: ###-##-####
--------------------------------------------
DESIGNATION OF BENEFICIARY
On this 9th day of August, 1996, Executive hereby designates Karen Nennecker,
his wife, as his beneficiary for purposes of receiving, upon his death,
compensation and benefits under SECTION 6.3, hereof.
By /S/ WERNER G. NENNECKER
-----------------------------------------
Werner G. Nennecker
- -------------------------------------------------------------------------------
- 10 -
<PAGE>
EXHIBIT 11.1
PEGASUS GOLD INC.
COMPUTATION OF EARNINGS PER SHARE
(In Thousands, except for share amounts)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
PRIMARY:
Earnings:
Net loss applicable to primary earnings calculation........ ($21,603) ($2,953) ($58,735)
========== ========== ==========
Weighted-average number of shares outstanding:
Common shares and equivalents............................. 40,567 34,702 34,592
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.................................. 190 115 110
---------- ---------- ----------
Weighted-average number of shares outstanding, as
adjusted.................................................... 40,757 34,817 34,702
========== ========== ==========
Net loss per share - primary................................ ($0.53) ($0.08) ($1.69)
========== ========== ==========
FULLY DILUTED:
Earnings:
Net loss applicable to primary earnings per share
calculation............................................... ($21,603) ($2,953) ($58,735)
---------- ---------- ----------
Add:
Interest relating to 6.25% convertible subordinated notes,
net of amount capitalized................................. 241 2,686 ---
Amortization of issuance costs relating to 6.25%
convertible subordinated notes, net of amounts
capitalized............................................... --- 362 ---
---------- ---------- ----------
Net income (loss) applicable to fully diluted earnings per
share calculation........................................... ($21,362) $95 ($58,735)
========== ========== ==========
Weighted-average number of shares outstanding:
Common shares and equivalents.............................. 40,567 34,702 34,592
Additional shares outstanding assuming exercise of stock
options reduced by the number of shares which could
have been purchased with the proceeds...................... 194 269 109
Additional average shares outstanding assuming
conversion of 6.25% convertible subordinated notes......... 7,709 5,782 ---
---------- ---------- ----------
Weighted-average number of shares outstanding, as
adjusted.................................................... 48,470 40,753 34,701
========== ========== ==========
Net income (loss) per share - fully diluted (a)............. ($0.44) $0.00 ($1.70)
========== ========== ==========
</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.
<PAGE>
EXHIBIT 21.1
PEGASUS GOLD INC.
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
Place of Percent
Subsidiary Incorporation/Formation Owned
- ---------- ----------------------- -------
<S> <C> <C>
Pegasus Gold Corporation........................... Nevada................................. 100%
Zortman Mining, Inc................................ Montana................................ 100%
Florida Canyon Mining, Inc......................... Washington............................. 100%
Montana Tunnels Mining, Inc........................ Nevada................................. 100%
Pegasus Aviation Services, Inc..................... Nevada................................. 100%
Pegasus Gold International, Inc.................... Washington............................. 100%
Pegasus Gold Finance Corporation................... Nevada................................. 100%
Pegasus Gold Montana Mining, Inc................... Arizona................................ 100%
Beal Mountain Mining, Inc.......................... Montana................................ 100%
Black Pine Mining, Inc............................. Nevada................................. 100%
Pangea International Holdings Corporation.......... Nevada................................. 100%
Pangea Explorations, Inc........................... Arizona................................ 100%
Pangea Minerals, Inc............................... Nevada................................. 100%
Pangea Resource Explorations, Inc.................. Nevada................................. 100%
Pangea Gold Corporation............................ Nevada................................. 100%
Hippocrene Holdings NV............................. The Netherlands Antilles............... 100%
Pegasus Gold Australia Pty Ltd..................... Northern Territory, Australia.......... 100%
Pegasus Gold Australia Holdings Ltd................ Victoria, Australia.................... 100%
Pegasus Gold Financing, L.L.C...................... Delaware............................... 100%
POV Corporation.................................... Delaware............................... 100%
Pegasus Minera de Chile Ltda....................... Chile.................................. 100%
Diamond Hill Mining, Inc........................... Montana................................ 100%
Pegasus do Brasil Mineraco Ltda.................... Brazil................................. 100%
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement on
Form S-8 (Amended and Restated Employee Savings Plan of Pegasus Gold
Corporation, File #33-98968) and Form S-3 ($150,000,000 Shelf Registration,
File #33-72460) of our report dated February 14, 1997, on our audits of the
consolidated financial statements and financial statement schedules of Pegasus
Gold Inc. as at December 31, 1996 and 1995, and for the years ended December 31,
1996, 1995, and 1994, which report is included in this Annual Report on
Form 10-K.
/s/ Coopers & Lybrand
- --------------------------
Coopers & Lybrand
Chartered Accountants
Vancouver, B.C., Canada
March 24, 1997
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