<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
----------------
COMMISSION FILE NUMBER 0-12207
PEGASUS GOLD INC.
(Exact name of registrant as specified in its charter)
PROVINCE OF BRITISH COLUMBIA NONE
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
601 W. FIRST AVE., SUITE 1500, SPOKANE, WASHINGTON 99201-3832
(Address of principal executive offices) (Zip Code)
(509) 624-4653
(Registrant's telephone number, including area code)
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
41,676,119
--------------
Common Shares, without par value, outstanding at October 31, 1997
<PAGE>
PEGASUS GOLD INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
PART I. FINANCIAL INFORMATION
Item #1 Page
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997, AND DECEMBER 31, 1996 3
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1997, AND 1996 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997,
AND 1996 5
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (DEFICIT)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
YEAR ENDED DECEMBER 31, 1996 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
Item #2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16
PART II. OTHER INFORMATION
Item #1
LEGAL PROCEEDINGS 26
Item #3
DEFAULTS UPON SENIOR SECURITIES 26
Item #6
EXHIBITS AND REPORTS ON FORM 8-K 26
SIGNATURES 27
In this Report, unless otherwise indicated, all dollar amounts are expressed in
U.S. Dollars.
<PAGE>
PEGASUS GOLD INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and December 31, 1996
(In Thousands)
ASSETS
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $15,948 $8,566
Due from sales of products 24,436 36,748
Inventories 46,818 51,997
Other current assets 6,702 10,164
------- -------
Total current assets 93,904 107,475
Investments 4,677 20,987
Property, plant, and equipment, net 182,965 618,940
Other assets 6,123 6,806
------- -------
Total assets $287,669 $754,208
------- -------
------- -------
LIABILITIES
Current liabilities:
Accounts payable and other current liabilities $24,794 $23,641
Accrued salaries, wages, and benefits 7,089 10,350
Mining taxes payable 5,018 4,610
Current portion of long-term debt 122,133 ---
Current portion of obligations under capital lease 3,770 3,626
------- -------
Total current liabilities 162,804 42,227
Long-term debt 115,000 215,086
Capital lease obligations 20,300 22,466
Deferred income taxes --- 44,602
Deferred site closure and reclamation 57,677 50,878
Foreign exchange contracts 6,212 ---
Other deferred liabilities 8,416 7,598
Deferred revenue 5,510 8,074
------- -------
Total liabilities 375,919 390,931
------- -------
------- -------
Commitments and contingencies (Note 8)
SHAREHOLDERS' EQUITY (DEFICIT)
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, 1997 - 41,585,756 shares
and 1996 - 41,092,342 shares 427,607 425,382
Accumulated deficit (506,685) (70,734)
Net unrealized holding loss on available-for-sale
investments (226) ---
Foreign currency translation adjustment (8,946) 8,629
------- -------
Total shareholders' equity (deficit) (88,250) 363,277
------- -------
Total liabilities and shareholders' equity (deficit) $287,669 $754,208
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE>
PEGASUS GOLD INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended September 30, 1997 and 1996
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 77,941 $66,441 $177,147 $172,189
Cost of sales 59,781 49,557 130,929 127,627
Depreciation and amortization 20,717 14,531 39,519 33,793
-------- ------- -------- --------
80,498 64,088 170,448 161,420
-------- ------- -------- --------
Gross profit (loss) (2,557) 2,353 6,699 10,769
-------- ------- -------- --------
Operating expenses:
General and administrative 2,288 3,254 7,263 9,919
Exploration and evaluation 1,369 1,492 3,756 5,100
Care and maintenance 1,675 385 5,170 843
Property write-downs 396,809 --- 396,809 ---
Restructuring charges 2,186 --- 2,186 ---
Closure, reclamation and related cost s 9,000 6,742 9,500 7,742
Attempted business combination costs --- 506 --- 506
-------- ------- -------- --------
413,327 12,379 424,684 24,110
Loss from operations (415,884) (10,026) (417,985) (13,341)
-------- ------- -------- --------
Other income (expense):
Interest and other income 868 795 1,880 3,123
Interest expense, net of amounts
capitalized (4,660) (672) (5,524) (2,506)
Loss on disposition of assets and other (13,333) --- (16,681) (156)
Equity in net income of affiliates --- 3,091 2,012 3,589
-------- ------- -------- --------
(17,125) 3,214 (18,313) 4,050
-------- ------- -------- --------
Loss before income taxes (433,009) (6,812) (436,298) (9,291)
Income tax provision (benefit) (223) 980 (347) 201
-------- ------- -------- --------
Net loss ($432,786) ($7,792) ($435,951) ($9,492)
-------- ------- -------- --------
-------- ------- -------- --------
Net loss per share ($10.47) ($0.19) ($10.57) ($0.23)
-------- ------- -------- --------
-------- ------- -------- --------
Weighted average common shares
outstanding 41,338 41,135 41,246 40,679
-------- ------- -------- --------
-------- ------- -------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
PEGASUS GOLD INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1997 and 1996
(In Thousands)
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Operating activities:
Net loss ($435,951) ($9,492)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 40,397 34,209
Property write-downs 396,809 ---
Non-cash restructuring charges 1,610 ---
Payments for closure, reclamation and related costs (7,456) (5,698)
Provision for closure, reclamation and related costs 9,500 7,742
Loss on investments 17,524 ---
Other, net 2,528 1,153
Change in working capital accounts 12,016 (12,925)
--------- -------
Net cash provided by operating activities 36,977 14,989
--------- -------
Investing activities:
Additions to property, plant, and equipment, net (58,963) (180,741)
Proceeds from investments 1,460 ---
Sale of property, plant and equipment --- 3,881
Sale of short-term investments --- 20,083
Purchase of investments --- (8,585)
--------- -------
Net cash used in investing activities (57,503) (165,362)
--------- -------
Financing activities:
Proceeds from issuance of long-term debt 29,476 57,957
Proceeds from issuance of common shares 782 90,994
Payments of obligations under capital lease (2,023) (1,732)
Payments of long-term debt --- (19,189)
Debt issuance costs --- (1,811)
--------- -------
Net cash provided by financing activities 28,235 126,219
--------- -------
Effect of exchange rate changes on cash and cash
equivalents (327) (905)
--------- -------
Net increase (decrease) in cash and cash equivalents 7,382 (25,059)
Cash and cash equivalents, beginning of period 8,566 32,907
--------- -------
Cash and cash equivalents, end of period $15,948 $7,848
--------- -------
--------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
PEGASUS GOLD INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Nine Months Ended September 30, 1997 and the Year Ended December 31, 1996
(In Thousands)
Common Shares Foreign
----------------------- Unrealized Currency
Number Accumulated Loss on Translation
of Shares Amount Deficit Investments Adjustment
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
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
Net loss (435,951)
Common shares issued for:
Employee severance 381,381 1,443
Stock option plan 41,100 311
Employee savings plan and other 70,933 471
Net unrealized holding loss on
available-for-sale investments ($226)
Foreign currency translation adjustment (17,575)
---------- --------- --------- --------- --------
Balance, September 30, 1997 41,585,756 $427,607 ($506,685) ($226) ($8,946)
---------- --------- --------- --------- --------
---------- --------- --------- --------- --------
</TABLE>
The accompanying notes are an integral part of the Consolidated financial
statements.
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The Company, which is organized in British Columbia, presents all financial
statements in United States dollars and under generally accepted accounting
principles as practiced in the United States.
2. SIGNIFICANT ACCOUNTING POLICIES
These unaudited consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's
Annual Report on Form 10-K. In the opinion of management, the financial
information set forth in the accompanying unaudited interim consolidated
financial statements reflects all adjustments necessary for a fair statement of
the periods reported, and all such adjustments were of a normal and recurring
nature unless otherwise indicated.
Certain prior year balances have been reclassified to conform with the current
year presentation with no effect on net loss or accumulated deficit as
previously reported.
GOING CONCERN AND LIQUIDITY
The Consolidated Financial Statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 6, the Company is in
default with respect to certain restrictive covenants under its Multicurrency
Reducing Revolving Credit Agreement (the "Facility") as of September 30, 1997.
The lenders under the Facility could declare an event of default, declare the
loans due and payable, and foreclose on the Facility's collateral, which
consists of the shares of Pegasus Gold Inc.'s significant subsidiaries. Based
on the Company's current projected cash flows, management believes the Company
has the financial resources to maintain its current level of operations through
1998. Such projected cash flows envision continuation of current trade terms
with significant vendors. The Company will be able to continue to operate as a
going concern unless precluded by actions of the lenders. As a result, the
Company has retained legal counsel and financial advisors specializing in
restructuring to assist in negotiations with the lenders and to render advice
regarding the various alternatives available to the Company.
The Company has commenced discussions with the lenders regarding various
waivers and amendments and considering alternatives to refinance the
Facility. If the Company is unsuccessful in obtaining necessary waivers or
amendments, or cannot refinance the Facility, it may be unable to continue
planned operations, except as permitted by the lenders.
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 less
than a 20 percent interest are accounted for as available-for-sale and are
stated at fair market value at each balance sheet date, with unrealized holding
gains and losses, net of tax, reported as a component of shareholders' equity.
Realized gains and losses from investments classified as available-for-sale are
included in the results of operations and are determined using the specific
identification method for ascertaining the cost of investments sold.
Permanent impairments in investment value are recognized in the results of
operations.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS 130 establishes standards for the
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses). The purpose of reporting comprehensive income is
to present a measure of all changes in shareholders' equity that result from
recognized transactions and other economic events of the period, other than
transactions with owners in their capacity as owners. SFAS 130 is effective
for financial statements issued for periods ending after December 15, 1997.
Adoption of SFAS 130 will result in additional disclosures in the Company's
financial statements but will not impact the Company's reported net income or
net income per share.
SEGMENT INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS 131 specifies revised guidelines for
determining an entity's operating segments and the type and level of financial
information to be disclosed. SFAS 131 is effective for fiscal years beginning
after December 15, 1997. Adoption of SFAS 131 will not have material impact on
the Company's current geographic and segment disclosures.
3. INVENTORIES
Inventories consist of the following:
Sept. 30, Dec. 31,
(In Thousands) 1997 1996
---- ----
Deferred mining costs $26,848 $34,134
Materials and supplies 12,191 11,294
Stockpile ore 7,731 6,317
Processed metals 48 252
------- -------
$46,818 $51,997
------- -------
------- -------
See Note 5 for a discussion of write-downs to deferred mining costs recorded
in the third quarter.
4. INVESTMENTS
Gross Gross
Unrealized Unrealized
Holding Holding Carrying
Cost Gains Losses Value
-------- ----------- ---------- --------
(In Thousands)
September 30, 1997
Available-for-sale:
Equity securities $4,811 --- ($226) $4,585
Other investments:
Notes receivable 92
--------
$4,677
--------
--------
December 31, 1996
Available-for-sale:
Equity securities $4,323 --- --- $4,323
Equity investments:
USMX, Inc. (30%) 8,349
The Emerging Markets
Gold Fund (21%) 3,026
--------
Other investments:
Notes receivable 5,289
--------
$20,987
--------
--------
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
USMX, INC.
On May 30, 1997, USMX, Inc. ("USMX") and Dakota Mining Corporation ("Dakota")
completed a merger whereby the Company received one common share of Dakota
stock for each 1.1 common shares of USMX it owned. The Company recorded the
exchange, in which it received 4,387,273 Dakota shares, at the then fair
value of $1 per Dakota share, resulting in a loss of $3,642,000. The loss is
included in the loss on disposition of assets and other in the Consolidated
Statements of Operations. As a result of ongoing difficulties with Dakota's
various debt agreements, and subsequent debt restructuring, the Company
considers the sharp decline in the market value of Dakota's shares during the
third quarter to be other than temporary. Accordingly, the Company has
written down the value of its investment in Dakota by $2,694,000 during the
third quarter. The write-down is included in the loss on disposition of
assets and other in the Consolidated Statements of Operations. The remaining
investment in Dakota is classified as available-for-sale.
THE EMERGING MARKETS GOLD FUND
In June 1997, the shareholders of The Emerging Markets Gold Fund ("EMGF")
agreed to liquidate EMGF. Upon liquidation, the Company received $1,460,000 in
cash and a distribution of certain securities owned by EMGF with an aggregate
fair market value of $1,931,000 at the time of distribution. The transaction
resulted in a loss of $1,320,000 which is included in the loss on disposition
of assets and other in the Consolidated Statements of Operations. The
securities received have been classified as available-for-sale and are included
in equity securities above.
INTERMIN
The Company owns 12,266,994 common shares of Intermin Resources, Ltd., an
Australian exploration company. Due to a significant decrease in the market
value of the shares of Intermin which the Company believes to be other than
temporary, it is doubtful that the original carrying value of the investment
will be recovered. Accordingly, the Company has written the carrying value of
its investment in Intermin to the market value as of September 30, 1997 and
recorded a loss of $2,697,000 in the loss on disposition of assets and other
in the Consolidated Statements of Operations during the third quarter of
1997. The Intermin common shares are classified as available-for-sale.
NOTES RECEIVABLE
USMX
In June 1996, the Company entered into an agreement with USMX to purchase its
net profits royalty in the Montana Tunnels Mine for $4,500,000 and advanced
USMX that amount in the form of a term loan pending USMX shareholder approval
of the transaction. On May 30, 1997, the USMX shareholders approved the
royalty sale. The unamortized balance of the loan of $4,144,000 has been
recorded in property and mineral rights (included in property, plant, and
equipment) of the Montana Tunnels Mine and will be amortized over the remaining
life of the mine on a unit of production basis.
GOLDBELT
The Company has a $1,000,000 convertible note from Goldbelt Resources Ltd. The
note is convertible into 920,000 common shares of Goldbelt with a market value
of approximately $92,000 as of September 30, 1997. The Company has elected to
write the carrying value of the loan down to the estimated market value
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
of the shares, and has recorded a loss of $908,000 during the third quarter. At
the same time, the Company wrote down the carrying value of 2,102,874 common
shares of Goldbelt to market value, resulting in a loss of $50,000. Both the
write-downs of the loan and the Goldbelt shares were recorded because the
Company believes the decline is other than temporary. The write-downs are
included in the loss on disposition of assets and other in the Consolidated
Statements of Operations. The Goldbelt common shares are classified as
available-for-sale.
5. PROPERTY WRITE-DOWNS
The Company, in accordance with its accounting policy, reviews the carrying
value of its investment in each operating mine and development property
periodically or as circumstances change indicating a potential impairment may
exist. Recoverability of the carrying value of the Company's investments is
evaluated based on estimated future net cash flows derived from estimates of
current and future production, future prices, operating and capital costs, and
reclamation costs. In practice, this review has been performed at least
annually during the fourth quarter as part of the Company's budget and
long-range planning process. Operating and exploration results from Mt. Todd,
together with significant declines in the spot price of gold and initial
information from the 1998 planning process, which commenced in September
1997, indicated the potential impairment of certain of the Company's
properties and led to acceleration of the impairment reviews for these
properties.
The Company assessed the recoverability of the carrying value of these
investments based on current and long-term views of the gold price, historic
and estimated future operating performance and the potential for significant
exploration success in the future. The Company has used a long-term realized
gold price of $385 per ounce, based on its current hedge position
and policy. Reductions in the carrying value of certain of the Company's
investments have been recorded to the extent the net book value of the
investment exceeds the estimate of future discounted net cash flows.
Upon completion of this review, the Company recorded after-tax, non-cash
property write-downs totaling $396,809,000 including $353,338,000 at Mt.
Todd, $26,836,000 at Zortman, $13,925,000 at Pullalli and $2,710,000 at Beal
Mountain. At Mt. Todd, the review resulted in a decision to suspend
operations and place the mine in care and maintenance in the fourth quarter
of 1997.
MOUNT TODD
The first sustained period of steady state operations was achieved during the
third quarter when the mill achieved 84 percent of the designed capacity
throughput. For the third quarter all revenues and operating expenses are
reflected in the Consolidated Statements of Operation. During this period,
gold production and operating costs continued to fall significantly short of
feasibility study expectations. Production was reduced by lower gold
recovery, crusher throughput and ore grade. Operating costs in steady state
production have exceeded feasibility levels due to higher costs for power,
cyanide and contract mining.
In order to mitigate operating problems identified above, the Company
commissioned the engineering, procurement and construction management
contractor to evaluate opportunities in the plant configuration to improve
design criteria for gold recovery, to manage copper/cyanide levels, and to
reduce processing costs. In August, a feasibility level design was
completed, with engineering evaluations and cost estimates for three
recommended process improvements: production of a copper concentrate;
construction of screen before quaternary crushing, and implementation of a
coarse ore reject system. However, based on the Company's evaluation of these
process improvements in October, it is unlikely that costs will be reduced to
an economic level.
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY WRITE-DOWNS, CONTINUED:
The cumulative effect of these factors are reflected in an estimated 14
percent increase in unit costs per tonne compared to the feasibility, a
decrease of 30,000 ounces in average annual gold production, and an increase
in the total cash costs of more than $65 per ounce produced, all of which
result in a smaller economic ore reserve and shorter mine life. In addition,
cash flow in the first two years is minimal or negative because of waste
stripping requirements. Substantially all of the cash flow is generated in
the last several years of the mine life. While the Company expected to
achieve slightly better recovery and to realize further cost reductions,
actual results have been determined to be indicative of the cost and
production profile going forward.
In addition, the Company received negative exploration results on a number of
the most prospective exploration targets in the Mt. Todd mine vicinity in
October. Interpretation of these results has significantly reduced the
Company's expectations of identifying further large scale gold deposits in
close proximity to the mine, particularly given current operating costs and
low gold prices.
Based on the information gathered and current and estimated future metal
prices, and after an internal review of the project, the Company determined
in November, that mining the reserve is uneconomic at current metal prices
and operating costs. As a result, the Company has decided to suspend
operations. The mine will be placed on care and maintenance status unless
an independent engineering review to be completed in mid-December identifies
substantial improvements in the mine's economics. In connection with this
decision, the Company has recorded an after-tax, non-cash charge of $353.3
million, comprised of property acquisition costs of $122.6 million, deferred
pre-production and development costs of $49.4 million and property and
equipment of $181.3 million, to reduce the carrying value of the mine to its
estimated fair value. The write-down has been recorded net of the reversal
of a deferred tax liability of $44.3 million established for the deferred tax
consequences of the difference between the assigned value of the assets
acquired and the tax basis of those assets when the Company acquired Pegasus
Gold Australia Pty. Ltd. ("PGA" formerly Zapopan N.L.) in 1995. In addition,
the Company has recorded a provision of $9.0 million to accrue for future
closure and reclamation costs.
PULLALLI
During the third quarter, the Company decided not to develop the Pullalli
Project in Chile and reduced the carrying value of its investment to
$6,073,000. The decision was precipitated by lower gold prices and limited
exploration success. The write-down is comprised primarily of costs deferred
in connection with development of the reserves, permitting and property and
mineral rights.
ZORTMAN
During 1997, the Company has been preparing a new feasibility study designed
to reduce the costs of construction of the Zortman Extension Project and is
drilling to confirm the economics of mining certain material. Although the
final results of the study will not be completed until early 1998, work
completed in the third quarter has identified certain changes to the original
feasibility study. Specifically, metallurgical test work indicates gold
recovery from the sulfide and transitional portions of the ore reserve will
be lower than previously estimated and that recovery is not as sensitive to
product crush size as previously believed. In addition, development and
confirmation drilling has identified additional oxide resources which will be
added to reserves. Based on these initial results, the Company estimates
that a reduction in total recoverable gold will be only partially offset by
any additional oxide reserves identified, and lower capital and operating costs
required for the crushing circuit. Estimated net cash flows will be
inadequate to recover the remaining carrying value of the property and pay
for reclamation and closure of the mine. Accordingly, the Company has
recorded a third quarter write-down of $22,380,000.
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY WRITE-DOWNS, CONTINUED:
The cost of residual gold production from existing heap leach pads at Zortman
has been steadily increasing in 1997 and the Company now estimates production
from the heaps after 1997 will no longer be economically feasible. As a
result, the Company has reduced deferred mining inventory, accelerated
depreciation on certain related assets, and recorded an additional write-down
of $4,456,000. Residual leaching will continue, with all revenue offsetting
the cost of care and maintenance. See Note 8 for further discussion about the
Zortman Extension.
BEAL MOUNTAIN
At Beal Mountain, the Company's current cost estimates indicate that residual
gold recovery will be uneconomic beyond 1997 and as a result, a write-down of
$2,710,000 has been recorded to reduce deferred mining costs and the carrying
value of certain equipment. Beal will be in closure effective January 1, 1998.
6. LONG-TERM DEBT
In April 1996, the Company entered into a $150,000,000 Multi-currency Reducing
Revolving Credit Facility (the "Facility") with a syndicate of banks. The
Facility includes restrictive covenants with respect to leverage ratios,
interest coverage, tangible net worth, ore reserve adequacy, and gold hedging.
As of September 30, 1997, the Company had outstanding borrowings of
$122,133,000 and letters of credit of $11,778,000 under the Facility.
As a result of significant property write-downs and other losses recorded as of
September 30, 1997, the Company is in default under the minimum net worth,
interest and funded debt to interest coverage covenants of the Facility. As a
result, all indebtedness under the Facility has been classified as current as
of September 30, 1997. As of November 14, 1997, the Company remained in
default under the Facility. See discussion of Going Concern and Liquidity
included in Note 2.
7. RESTRUCTURING COSTS
Restructuring charges include the cost of involuntary employee termination
benefits, asset dispositions and related costs associated with restructuring
activities. Employee termination benefits include severance and out-placement
assistance. Asset dispositions include lease termination and sales costs.
During August 1997, the Company adopted a restructuring plan and recorded a
charge of $2,186,000. The restructuring plan resulted in the termination of
approximately 90 employees company-wide, including 35 percent of corporate
staff and approximately 7 percent of mine site personnel. Termination
benefits totaling $1,610,000 have been included in restructuring charges.
Termination benefits for mine site personnel had been previously accrued in
the sites' estimates for final closure and resulted in no current impact on
the Company's net loss for the third quarter of 1997. Most termination
benefits have been, or will be paid in the form of Company stock. As of
September 30, 1997, termination benefits of $1,443,000 have been paid. The
restructuring charge also includes $576,000 for lease termination costs and
commissions related to the sale of the Company's plane. Total restructuring
charges are not expected to differ materially from amounts recorded.
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
HEDGED PRODUCTION
As of September 30, 1997, the Company's hedging program consists of the
following:
AVERAGE
PRICE DELIVERY
PER UNIT PERIOD
-------- ---------
GOLD
Forward sales 768,000 ounces $421 1997-2002
Contingent forward sales 1,068,000 ounces $414 1998-2007
Call options sold 391,000 ounces $473 1997-2002
Put options purchased 300,000 ounces $423 1997-2001
SILVER
Forward sales 1,499,000 ounces $5.02 1997-2001
ZINC
Forward sales 3,527,000 pounds $0.50 1997
Call options sold 1,764,000 pounds $0.50 1997
Put options purchased 2,646,000 pounds $0.48 1997
Certain of the Company's gold hedging contracts contain provisions which
provide for cross-default upon the occurrence of a default in certain other of
the Company's financing agreements. By virtue of cross-default clauses, a
substantial number of the Company's gold hedging contracts are susceptible to
termination as a result of the defaults under the Facility. The result of such
termination would be gains or losses on the contract depending on the spot
price of gold at termination.
Gold hedging contracts include contracts for which the price per ounce is
estimated based on expected delivery dates and estimated interest rates.
Deliveries under contingent forward sales contracts are dependent on the spot
price of gold at various measurement dates over the term of the related
contracts. If the spot price of gold is below $340 per ounce on March 31,
1998, contracts for a total of 720,000 ounces will be canceled. A certain
portion of the remaining ounces will be deliverable if the spot price is
between $375 and $435 per ounce at certain measurement dates after March 31,
1998.
FOREIGN CURRENCY
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.
As of September 30, 1997, the Company held foreign currency option contracts
with notional amounts totaling $142,198,000 which mature during 1997 and 1998.
The option contracts allow the Company to convert $100,456,000 to Australian
dollars at an average rate of US$0.7606, while providing the counterparty the
option to require the Company to convert $142,198,000 to Australian dollars at
an average rate of US$0.7593. Performance under put option contracts with
notional amounts totaling $41,742,000 is dependent on the spot exchange rate
over the term of the related contracts. In conjunction with the decision to
suspend operations at the Mt. Todd mine (see Note 5), the Company has marked
these contracts to market and recorded a loss of $6,212,000, which is
included in the disposition of assets and other line in the Consolidated
Statements of Operations.
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES, CONTINUED:
COMMON SHARES ISSUABLE
At September 30, 1997, a total of 14,818,243 Common Shares of authorized common
stock were reserved for the following:
Convertible Notes 7,709,067
Stock Options 6,745,242
Employee Savings Plan 363,934
----------
14,818,243
----------
----------
ZORTMAN EXTENSION
A plan of operation for the Zortman Extension Project was submitted to
regulatory agencies in May 1992. The Final Environmental Impact Statement was
issued in March 1996 and a favorable Record of Decision, ("ROD") and operating
permits were granted on October 25, 1996. The ROD was subsequently appealed by
local Indian tribal groups and the National Wildlife Federation to both the
Interior Board of Land Appeals ("IBLA") and the Montana State Court. In June
1997, the IBLA granted a stay pending its review and decision regarding the
appeal. As a result of the stay, construction of the Zortman Extension could
be delayed past 1998. The IBLA has granted the Company's request for an
expedited hearing. In the state court action, the Company was not named as a
party, and the Montana Supreme Court, on an interlocutory appeal, is reviewing
whether the action can proceed without the Company.
Mining operations at Zortman ceased early in 1996 and will not commence again
until a twelve-month construction period on the Zortman Extension is
substantially completed. The Company is currently recovering gold from
residual leaching of existing heap leach pads. Although the Company expects a
favorable decision upon completion of the appeal process, it is possible that
an unfavorable decision could be issued, creating further delays or causing the
Extension Project to be abandoned. In addition, the Company is preparing a new
feasibility study designed to reduce the costs of construction and is drilling
to confirm the economics of mining certain material. If an unfavorable
decision on the appeal is received, or the feasibility study does not
significantly reduce the capital required, and the drilling does not confirm
the economics of processing certain material, the Company would be required to
write-off some or all of the deferred development costs associated with the
project, which amounted to $7,800,000 as of September 30, 1997. In addition,
the Company would be required to accrue a liability of at least $31,900,000 for
reclamation and construction of environmental facilities. Gold production will
continue from leaching ore previously mined and loaded on the pads, but at a
significantly reduced rate.
LEGAL PROCEEDINGS
QUI TAM LITIGATION
An organization calling itself the North Santiam Watershed Council has
instituted a lawsuit in Federal District Court in San Francisco against foreign
companies with United States operations. The lawsuit alleges that these
companies, including Pegasus, had failed to register as foreign agents under
the Foreign Agent Registration Act, and that all mining claims and rights
received from the federal government by these companies are therefore in
violation of the False Claims Act and invalid. The lawsuit will be vigorously
contested by the Company and other defendants. At this point, it is impossible
to assess the outcome of the lawsuit, although the claims made are
unprecedented, and the Company believes they are without merit.
<PAGE>
PEGASUS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES, CONTINUED:
GENERAL
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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCING, CAPITAL INVESTMENT, AND LIQUIDITY
OVERVIEW
Pegasus Gold Inc. ("the Company" or "PGI") has suspended operations and, in
the third quarter, written down the carrying value of the Mt Todd Mine. This
mine represents almost half the Company's proven and probable reserves and a
third of the expected 1997 production. With the suspension of operations,
expected cash flow from operations in future periods will be materially
impacted. As a result of the write-downs recorded in the third quarter, PGI
is in default under certain restrictive covenants of the $150 million
Multi-currency Reducing Revolving Credit Facility (the "Facility"). The
lenders under the Facility could declare an event of default, declare the
loans due and payable, and foreclose on the Facility's collateral, which
consists of the shares of PGI's significant subsidiaries. Should PGI be
unable to negotiate waivers and amendments, or refinance the Facility, then
the Company is at risk of not being able to continue as a going concern.
The Company has sources of liquidity to continue planned operations through
1998 unless precluded by actions of the lenders. As of September 30, 1997,
cash and cash equivalents totaled $15.9 million and other current assets
amounted to $78.0 million. The market value of the Company's hedge portfolio
is approximately $70.0 million to $80.0 million.
The Company is implementing a cash conservation plan to mitigate lower gold
prices, higher cash costs and meet its operating needs. As part of that
plan, the Company is considering deferral of capital expenditures, further
reductions in general and administrative costs, scale down of exploration
programs, and the monetization of all or a portion of its hedge portfolio.
OPERATING ACTIVITIES
Cash flow provided by operating activities was $37.0 million through the third
quarter of 1997, compared to $15.0 million during the same period in 1996.
Increased cash flow from operations primarily reflects changes in working
capital accounts, particularly accounts receivable. Before working capital
changes, cash flow from operations for the first nine months of 1997 decreased
$3.0 million compared to the same period in 1996.
INVESTING ACTIVITIES
During the first nine months of 1997, the Company invested $59.0 million in
property, plant and equipment, including $27.2 million for Phase II at Mt.
Todd, (including capitalized start-up costs), $5.7 million for refinery
expansion and dust control at Florida Canyon, $5.5 million on Compliance Plan
and Consent Decree construction at Zortman, and $7.7 million of capitalized
interest, and received proceeds of $1.5 million from liquidation of EMGF.
During the same period in 1996, the Company invested $180.7 million in
property, plant and equipment, $8.6 million on investments, and received $20.1
million from the sale of short-term investments and $3.9 million from the sale
of exploration tenements in Australia. The decrease in capital spending
reflects completion of major expansion projects at Mt. Todd and Florida Canyon.
FINANCING ACTIVITIES
Cash flow from financing activities for the year to date includes borrowings
under the Company's Multi-currency Reducing Revolving Credit Facility of $29.5
million and $0.8 million raised from the issuance of common stock to the
employee savings plan and through stock option exercises. In the first nine
months of 1996, the Company raised $88.2 million, net of expenses, from the
issuance of six million common shares in Canada and the United States and an
additional $3.0 million from issuance of common stock to the employee savings
plan and through stock option exercises. In addition, the Company borrowed
$58.0 million under the Revolving Credit Facility and made payments on
outstanding long-term debt amounting to $19.2 million.
<PAGE>
CONCLUSION
As discussed in Note 6 to the Consolidated Financial Statements, the Company
is in default with respect to certain restrictive covenants under the
Facility as of September 30, 1997. Although the Company believes that the
$15.9 million in cash and cash equivalents on hand, together with cash flow
from operations, will be adequate to meet its cash requirements through 1998,
the ability to continue planned operations is subject to negotiation of an
amendment or refinancing of the Facility. Cash flow from operations is
subject to certain risks that could materially impact available cash.
RESULTS OF OPERATIONS
OVERVIEW
The Company incurred a net loss of $432.8 million ($10.47 per share) and
$436.0 million ($10.57 per share) for the quarter and nine months ended
September 30, 1997, respectively. This compares with a net loss of $7.8
million ($0.19 per share) and $9.5 million ($0.23 per share) during the same
periods in 1996. Net losses for the quarter and year to date include
after-tax non-recurring charges totaling $421.3 million ($10.19 per share)
and $425.1 million ($10.31 per share), respectively. During the quarter, the
Company recorded total after-tax property write-downs of $396.8 million
related to its Mt. Todd, Zortman and Beal Mountain mines and the Pullalli
Project, a provision for future closure and reclamation at Mt. Todd of $9.0
million, restructuring charges of $2.2 million and net losses on the
disposition of certain assets and other of $13.3 million.
For the year to date, these charges include net losses from asset dispositions
and other of $16.7 million and additional accruals for mine reclamation and
closure of $9.5 million. In 1996, the net loss for the quarter and year to
date included non-recurring charges of $6.5 million ($0.16 per share) in 1996
and $7.5 million ($0.18 per share), respectively.
Excluding the effects of these charges, the net loss would have been $11.5
million ($0.28 per share) and $10.8 million ($0.26 per share) for the third
quarter and year to date in 1997, respectively, compared to $1.3 million ($0.03
per share) and $2.0 million ($0.05 per share) in 1996. Increased net losses
are attributable to increased depreciation and amortization charges, care and
maintenance of idle facilities, and interest expense, offset only partially by
increased by-product revenue and decreased exploration and evaluation and
general and administrative expenses.
OPERATIONS
The following chart details gold production, cash production costs, and
non-cash operating costs per ounce by location.
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
FLORIDA CANYON MINE:
Ounces of gold 42,513 53,669 128,124 118,663
Average cost per ounce:(1)
Cash operating cost $320 $265 $29 $258
Total cash cost $335 $276 $308 $271
Total production cost $437 $334 $410 $337
MONTANA TUNNELS MINE:(2)
Ounces of gold 41,601 18,827 84,465 56,709
Average cost per ounce:(1)
Cash operating cost $212 $283 $205 $240
Total cash cost $232 $330 $236 $282
Total production cost $350 $507 $372 $446
<PAGE>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
MT. TODD
Ounces of gold 63,947 19,239 74,985 50,484
Average cost per ounce:(1)
Cash operating cost $330 $313 $343 $386
Total cash cost $330 $316 $344 $387
Total production cost $481 $419 $487 $488
ZORTMAN MINE:
Ounces of gold produced 4,332 8,952 9,779 29,223
Average cost per ounce:(1)
Cash operating cost $383 $357 $334 $311
Total cash cost $399 $384 $349 $323
Total production cost $543 $510 $509 $442
BEAL MOUNTAIN MINE:
Ounces of gold 10,512 15,336 21,285 31,910
Average cost per ounce :(1)
Cash operating cost $221 $389 $270 $333
Total cash cost $252 $414 $300 $358
Total production cost $332 $681 $388 $540
BLACK PINE MINE:
Ounces of gold 9,886 21,590 34,412 64,244
Average cost per ounce :(1)
Cash operating cost $216 $248 $268 $261
Total cash cost $231 $274 $290 $288
Total production cost $238 $313 $302 $323
CONSOLIDATED TOTALS
Ounces of gold 172,791 137,613 353,050 351,233
Average cost per ounce :(1)
Cash operating cost $287 $286 $281 $280
Total cash cost $299 $306 $297 $300
Total production cost $417 $412 $408 $396
Average price per ounce sold $404 $429 $428 $427
___________
(1) Effective January 1, 1997, the Company adopted the gold
production cost standard developed by the Gold Institute in order to
facilitate comparisons among companies in the gold industry. Cash
production costs reported in prior periods have been restated as cash
operating costs and total cash costs in accordance with the new standard.
Cash operating costs calculated under the new standard include all
operating costs (including overhead) at the mine sites, but exclude
royalties, production taxes and reclamation and are reported net of
by-product credits. Total cash costs include royalties and production
taxes, but exclude reclamation. Total production costs remain unchanged
and include reclamation in addition to depreciation, depletion and
amortization.
(2) Includes Diamond Hill.
Gold production for the third quarter of 1997 increased 26 percent to 172,800
ounces, up from 137,600 during the same period in 1996. Increased production
resulted from commencement of steady state production from milling operations
at Mt. Todd and batch processing Diamond Hill ore at Montana Tunnels, which
added 44,700 ounces and 22,800 ounces, respectively, and was offset partially
by declines in production from the Company's other operations. Revenue from
the sale of gold increased 18 percent to $69.8 million during the third
quarter of
<PAGE>
1997. Average realized gold prices for the third quarter of 1997 and 1996 were
$404 and $429 per ounce, respectively, compared to average third quarter COMEX
gold prices of $324 and $385 during the same periods. Sales of other metals
increased $0.7 million to $8.1 million in the third quarter of 1997 as higher
realized zinc prices offset lower production of all other metals and lower
realized prices for silver and lead. Lower production of other metals, which
are produced primarily at Montana Tunnels, resulted from using the mill to
batch process Diamond Hill ore for eight days during the quarter. Realized
prices were $4.47 per ounce, $0.61 per pound, and $0.30 per pound for silver,
zinc, and lead, respectively, compared to $5.37, $0.47, and $0.31,
respectively, in the third quarter of 1996.
At Florida Canyon, production declined 11,200 ounces to 42,500 ounces during
the third quarter of 1997 compared to the same period in 1996 due to lower ore
grade and volume resulting from mining lower grade areas in the pit with
harder, more abrasive ore. Total cash costs increased to $335 per ounce for
the quarter compared to $276 per ounce in 1996 as a result of the same factors.
In August, Florida Canyon received a letter from the Mine Safety and Health
Administration ("MSHA") demanding that a dust abatement agreement be executed
that would require the mine to comply immediately and fully with certain dust
exposure standards or face an order that could effectively shut down the mine.
Negotiations with MSHA began immediately upon receipt of the letter, and an
agreement was reached with MSHA on October 17, 1997. The agreement accurately
reflects the Company's ongoing efforts on dust abatement at Florida Canyon, as
well as proposed additional expenditures, monitoring requirements and health
and safety measures now in place. Costs associated with additional health and
safety programs are estimated at $100,000 per annum.
At Montana Tunnels, batch processing of ore from the Diamond Hill underground
mine, a satellite operation, resulted in a 22,800 ounce increase in
production for the third quarter of 1997. Total cash costs of $232 per ounce
were $98 per ounce lower than in the same quarter of 1996 because of
increased gold production and by-product credits and lower royalty payments.
The Company is evaluating a possible switch from batch processing to
continuous feed blending of Diamond Hill ore with Montana Tunnels ore. If
successful, blending will reduce costs further by eliminating contract
crushing costs for the Diamond Hill ore and will result in cash flow being
generated ratably throughout the year from the Diamond Hill operations.
During the third quarter of 1997, milling operations at Mt. Todd achieved
steady state production. Gold production was 63,900 ounces, including 60,700
ounces produced from the milling facilities, compared to 19,200 during the
same period in 1996, all of which was from heap leach operations. Total cash
costs of $330 per ounce for the third quarter compared to $316 per ounce in
the prior year quarter. Although total cash costs improved continuously
during the quarter and were better than the Company had forecast, production
levels and unit costs continue to fall short of feasibility expectations. The
Company has decided to suspend operations and place the mine on care and
maintenance. Additional discussion about the write-down is included below.
Zortman produced 4,300 ounces at a total cash cost of $399 per ounce in the
third quarter of 1997, compared to 9,000 ounces with total cash cost of $384
per ounce for the same period in 1996. At Beal Mountain, gold production for
the third quarter was 10,500 ounces, down from 15,300 in 1996 as result of
lower ore tonnage during waste stripping of the South Beal Pit and backfill the
Main Beal Pit. Total cash costs of $252 per ounce were considerably lower than
the $414 per ounce in 1996 due to increased grade and lower unit costs per
tonne. Black Pine produced 9,900 ounces at an average total cash cost of $231
for the third quarter compared to 21,600 ounces at an average total cash cost
of $274 per ounce in the third quarter of 1996. Lower production reflects
lower ore tonnage while reduced total cash costs are attributable to lower
residual heap leach costs and improved recovery. In 1998, Zortman will
continue in care and maintenance and Beal and Black Pine will operate in
closure.
Consolidated total cash costs decreased $7 per ounce to $299 per ounce during
the third quarter of 1997 due to higher production and by-product credits per
ounce, offset partially by higher mining and off-site treatment costs.
Gold production for the first nine months of 1997 increased 1,800 ounces to
353,100 ounces compared to the same period in 1996. Production increases at
Mt. Todd, Montana Tunnels, and Florida Canyon were offset by production
declines at Zortman, Beal Mountain and Black Pine. Year-to-date revenue from
the sale of gold
<PAGE>
increased slightly to $151.2 million from $149.9 million in 1996 as realized
prices and production were essentially unchanged. For the first nine months of
1997 and 1996 average realized gold prices were $428 and $427 per ounce,
respectively, compared to average COMEX gold prices of $340 and $392 over the
same periods. Increased realized prices reflect the benefits from the
Company's hedging program. Year-to-date revenue from the sale of other metals
increased 17 percent to $25.9 million as a result of higher production for zinc
and lead and higher realized prices for zinc. Realized prices were $4.55 per
ounce, $0.57 per pound and $0.28 per pound for silver, zinc, and lead
respectively, compared to $5.32, $0.49 and $0.28 respectively, in the first
nine months of 1996. Total cash costs per ounce decreased to $297 per ounce in
1997, from $300 per ounce during the first nine months of 1996 as a result of
the same factors that impacted the third quarter.
Total production costs for the quarter and year to date reflect depreciation
and amortization charges of $118 per ounce and $111 per ounce in 1997, compared
to $106 per ounce and $96 per ounce in 1996. Increased non-cash charges reflect
the commencement of steady state production at Mt. Todd, increased property,
plant, and equipment balances, and amortization of reclamation and closure
costs that increased in the second half of 1996.
Significant portions of the Company's operating expense are incurred in
Australian dollars. The Company's operating results are impacted by
fluctuations in the exchange rate of the Australian dollar to the United
States dollar. Under its foreign currency protection program, the Company
has entered into a series of foreign currency option contracts which
establish trading ranges within which the United States dollar may be
exchanged for Australian dollars. As a result of the decision to suspend
operations at the Mt. Todd Mine, these contracts have been marked to market.
OPERATING EXPENSES
General and administrative expenses decreased 30 percent to $2.3 million in the
third quarter and 27 percent to $7.3 million for the first nine months of 1997
compared to the same periods in 1996. Lower costs reflect fewer employees,
reduced travel costs, primarily associated with the Company's foreign
operations, and the impact of a cost savings program undertaken by the Company.
General and administrative expenses are expected to remain below 1996 levels
for the balance of 1997.
Exploration and evaluation expenses for the third quarter of 1997 and year to
date were 8 percent and 26 percent lower than the same periods in 1996 due to
lower overall program expenditures. In April, the Company agreed to acquire up
to 60 percent of Capira Dorada, a private Panamanian company. Capira Dorada
holds an approximate 100 square kilometer exploration concession, located about
50 kilometers southwest of Panama City, Panama. The Capira Dorada prospect is
an early-stage exploration opportunity with potential for the discovery of bulk
minable gold and silver deposits.
Care and maintenance costs increased to $1.7 million and $5.2 million in the
third quarter and year to date in 1997, from $0.4 million and $0.8 million
during the same periods in 1996. Increased costs reflect the care and
maintenance classification of additional non-production related costs at
Zortman for the year to date and carrying costs associated with Pullalli for
the third quarter. Classification of the Pullalli carrying costs as care and
maintenance during the quarter reflects the Company's August decision to place
the project on an indefinite hold and write-down the carrying value as
discussed below.
PROPERTY WRITE-DOWNS
The Company, in accordance with its accounting policy, reviews the carrying
value of its investment in each operating mine and development property
periodically or as circumstances indicate a potential impairment exists.
Recoverability of the carrying value of the Company's investments is
evaluated based on estimated future net cash flows derived from estimates of
current and future production, future prices, operating and capital costs,
and reclamation costs. In practice, this review has been performed at least
annually during the fourth quarter as part of the Company's budget and
long-range planning process. Operating and exploration results from Mt. Todd
during the third quarter, together with significant declines in the spot
price of gold and initial information from the 1998 planning process, which
commenced in September 1997, indicated the
<PAGE>
potential impairment of certain of the Company's properties and led to
acceleration of the impairment reviews for these properties.
The Company assessed the recoverability of the carrying value of these
investments based on current and long-term views of the gold price, historic
and estimated future operating performance and the potential for significant
exploration success in the future. The Company used a long-term realized
gold price of $385 per ounce, based on its current hedge position and policy.
Operating plans are prepared by each mine, together with an estimate of
likely exploration success. Reductions in the carrying value of the
Company's investments have been recorded to the extent the net book value of
the investment exceeds the estimate of future discounted net cash flows.
Upon completion of this review, the Company recorded after-tax, non-cash
property write-downs totaling $396.8 million, including $353.3 million at Mt.
Todd, $26.8 million at Zortman, $13.9 million at Pullalli and $2.7 million at
Beal Mountain.
If the Company determines reserves should be calculated at a significantly
lower price than that used at December 31, 1996, there would be a material
reduction in gold ore reserves and material write-downs of the Company's
investments and/or increased depreciation and amortization charges could be
required.
MOUNT TODD
Upon completion of a feasibility study in August 1995, the Company announced
its intention to construct a milling facility at Mt. Todd. The total
construction cost was estimated to be $155 million and production start-up was
expected to commence in early 1997. The project was projected to have a
minimum eight year mine life, with annual gold production of 260,000 ounces, at
an estimated cash cost of $265 per ounce (using a U.S.$ to A$ exchange rate of
.72:1), generating more than $35 million in annual cash flow.
Site preparation commenced in late 1995, with construction occurring in 1996.
As a condition precedent to the closing of the Revolving Credit Facility used
to finance the construction of the project, an independent review of the
feasibility study was completed in early 1996.
In April 1996, the Company received the definitive capital cost estimate of
$169 million from the engineering, procurement and construction management
(EPCM) contractor. The major variances to the original feasibility capital
cost estimate included additional capital to replace the existing secondary
crushing circuit, and other permanent facilities.
Commissioning of the facility began in late November 1996, and the first gold
pour was announced January 6, 1997. During the second quarter, commissioning
and start-up activities were hampered by the failure of the gas turbine in
the power station, poor performance of the crushing circuit and lower
recoveries because of copper dissolution in the flotation circuit. Crushing
circuit throughput was identified as a concern. Crushing costs significantly
exceeded feasibility as a result of lower throughput, increased maintenance
costs and higher power costs and consumption. The EPCM contractor and the
crushing equipment manufacturer attempted to optimize the circuit to achieve
design throughput and operating costs. The commissioning of the flotation
circuit commenced in late May. Copper loading in the circuit resulted in
higher consumption of cyanide and reduced gold recovery. As a result, the
Company shut down the flotation circuit in mid-June.
In order to mitigate operating problems identified above, the Company
commissioned the EPCM contractor to evaluate opportunities in the plant
configuration to improve design criteria for gold recovery, to manage
copper/cyanide levels, and to reduce processing costs. In August, a
feasibility level design was completed, with engineering evaluations and cost
estimates for three recommended process improvements: production of a copper
concentrate; construction of screen before quaternary crushing, and
implementation of a coarse ore reject system.
The first sustained period of steady state operations was achieved during the
third quarter when the mill achieved 84 percent of the designed capacity
throughout. During this period, gold production and operating costs
continued to fall short of feasibility study expectations. Production was
reduced by lower gold recovery, crusher throughput and ore grade. Because
the flotation circuit, which was
<PAGE>
expected to contribute eight percent of the total gold recovery, has not
operated due to copper loading in the circuit, gold recovery has averaged 74
percent versus the feasibility study estimate of 84 percent.
Gold recovery has also been negatively impacted by delivery of a larger than
design product from the crushing circuit (3.1 millimeters (mm) vs.
feasibility of 2.6 mm). Crusher throughput has averaged 1,065 tonnes per
hour (tph) compared to the design level of 1,220 tph. Although a portion of
the crushing throughput shortfall has been made-up by higher crusher
utilization (80 percent vs. feasibility of 75 percent), the incremental
equipment usage resulted in higher costs, primarily for power and wear parts,
to achieve daily design throughput. These factors resulted in actual
crushing costs of A$2.49 per tonne for the quarter, compared to the design of
A$1.36 per tonne.
Operating costs have exceeded feasibility levels due to increased costs for
power, cyanide and contract mining. Higher power costs reflect the
combination of higher consumption, primarily in the crushing circuit, and
increased gas supply costs for interruptible supply. Power costs have
averaged over A$0.075 per kilowatt hour (kWhr) compared to the feasibility of
A$0.058 per kWhr with consumption averaging 39 kWhr per ore tonne compared to
the feasibility estimate of 34 kWhr per ore tonne. Cyanide costs have been
higher because consumption has averaged 0.86 Kg per ore tonne versus 0.68 Kg
per ore tonne in the feasibility. Contract mining costs of over A$1.15 per
tonne have exceeded the feasibility cost of approximately A$1.00 per tonne as
a result of lower required volume to feed the crushing circuit, increased
drill and blast costs associated with excess water in the ore and other cost
increases. In addition, the mining contractor has requested a further
increase in the rate per tonne in the future.
In October, the Company completed an evaluation of the three process circuit
improvements recommended by the EPCM contractor. The production of a copper
concentrate was designed to increase recovery and reduce cyanide costs.
However, reduced cyanide prices have offset the expected decline in
consumption. The Company began construction of the screen before quaternary
crushing project. While this project was expected to improve throughput and
lower costs, the net effect would not offset the cost increases described
above. With the significant decline in the price of gold, the coarse ore
reject system was not implemented.
Finally, an updated ore reserve model, completed during the quarter,
indicated a reduction of seven to ten percent in the average grade compared
to the original feasibility reserve model. This variance is within the
confidence level of feasibility studies.
The cumulative effect of these factors is reflected in estimated life of mine
unit costs of A$13.53 per ore tonne processed compared to the feasibility
estimate of A$11.86 per ore tonne, a decrease of 30,000 ounces in average
annual gold production and an increase in the total cash costs of more than
US$65 per ounce produced, all of which result in a smaller economic ore
reserve and shorter mine life. In addition, cash flow in the first two years
is minimal or negative because of waste stripping requirements. Substantially
all of the cash flow is generated in the last several years of the mine life.
While the Company expected to achieve slightly better recovery and to realize
further cost reductions, actual results have been determined to be indicative
of the cost and production profile going forward.
In addition, the Company received negative exploration results on a
number of the most prospective exploration targets in the Mt. Todd mine
vicinity during the third quarter. Interpretation of these results has
significantly reduced the Company's expectations of identifying further large
scale gold deposits in close proximity to the mine.
Based on available cost and reserve data, current and estimated future metal
prices, and an internal review of the project, the Company determined in
November that the mining reserve is uneconomic at current metal prices and
operating costs. As a result, the Company has decided to suspend operations
at the Mt. Todd Mine. The mine will be placed on care and maintenance status
unless an independent engineering review, to be completed in mid-December,
identifies substantial improvements in the mine's economics. In connection
with this decision, the Company has recorded an after-tax, non-cash charge of
$353.3 million, comprised of property acquisition costs of $122.6 million,
deferred pre-production and development costs of $49.4 million and property
and equipment of $181.3 million, to reduce the carrying value of the mine to
its estimated fair value. The write-down has been recorded net of the
reversal of a deferred tax liability of $44.3 million established for the
deferred tax consequences of the difference between the assigned value of the
assets acquired and the tax basis of those assets when the Company acquired
Pegasus Gold Australia Pty. Ltd. ("PGA" formerly Zapopan N.L.) in 1995. The
Company has also recorded a provision of $9.0 million to accrue for future
closure and reclamation costs.
<PAGE>
PULLALLI
During the third quarter, the Company decided not to develop the Pullalli
Project in Chile and reduced the carrying value of its investment to its
estimated fair value of $6.1 million. The decision was precipitated by lower
gold prices and limited exploration success. The write-down is comprised
primarily of costs deferred in connection with development of the reserves,
permitting and property and mineral rights.
ZORTMAN
During 1997, the Company has been preparing a new feasibility study designed
to reduce the costs of construction of the Zortman Extension Project and is
drilling to confirm the economics of mining certain material. Although the
final results of the study will not be competed until early 1998, work
completed to date has identified certain changes to the original feasibility
study. Specifically, metallurgical test work indicates gold recovery from
the sulfide and transitional portions of the ore reserve will be lower than
previously estimated and that recovery is not as sensitive to product crush
size as previously believed. In addition, development and confirmatory
drilling has identified additional oxide resources which will be added to
reserves. Based on these initial results, the Company estimates that a
reduction in total recoverable gold will be only partially offset by any
additional oxide reserves identified, and lower capital and operating costs
required for the crushing circuit. Estimated net cash flows will be
inadequate to recover the remaining carrying value of the property and pay
for reclamation and closure of the mine. Accordingly, the Company has
recorded a third quarter write-down of $22.4 million.
The cost of residual gold production from existing heap leach pads at Zortman
has been steadily increasing in 1997 and the Company now estimates production
from the heaps will not be economically feasible after 1997. As a result,
the Company has reduced deferred mining inventory, accelerated depreciation
on certain related assets, and recorded an additional write-down of
$4.5 million.
BEAL MOUNTAIN
At Beal Mountain, the Company's current cost estimates indicate that residual
gold recovery beyond 1997 will be uneconomic and as a result, the Company has
recorded a write-down of $2.7 million to reduce deferred mining costs and the
carrying value of certain equipment. Beal will be in closure effective
January 1, 1998.
RESTRUCTURING COSTS
Restructuring and charges include the cost of involuntary employee termination
benefits, facility closures, asset dispositions and related costs associated
with restructuring activities. Employee termination benefits include severance
and outplacement assistance. Asset dispositions include leave terminations and
sales costs. Facility closures and related costs include write-downs of
property and equipment.
During August, the Company adopted a restructuring plan and recorded a charge
of $2.2 million. The restructuring plan resulted in the termination of
approximately 90 employees Company-wide, including 35 percent of corporate
staff and approximately 7 percent of mine site personnel. Termination benefits
totaling $1.6 million have been included in restructuring charges. Termination
benefits for mine site personnel had been previously accrued in the sites'
estimates for final closure and resulted in no current impact on the Company's
net loss for the third quarter of 1997. Most termination benefits have been,
or will be, paid in the form of Company common stock. As of September 30,
1997, termination benefits of $1.4 million have been paid. The restructuring
charge also includes $0.6 million for lease termination costs, sales tax, and
commissions related to the sale of the Company's plane. The sale was completed
in October 1997. Total restructuring charges are not expected to differ
materially from amounts recorded.
<PAGE>
OTHER INCOME (EXPENSE) AND TAXES
Interest and other income increased $0.1 million during the third quarter of
1997 due to the receipt of interest on an income tax refund received during the
quarter. For the year to date, interest and other income has decreased $1.2
million as a result of lower average cash and cash equivalent balances. During
a portion of 1996, cash and cash equivalents included proceeds from the
Company's public offering of six million common shares in January.
Interest expense increased $4.0 million in the third quarter of 1997 and $3.0
million for the year-to-date compared to the same periods in 1996. During the
quarter, the Company did not capitalize any interest as steady state production
commenced at Mt. Todd, and the Zortman Extension and Pullalli projects were
placed on hold. Increased total interest costs associated with higher debt
balances have been partially offset by the capitalization of $7.7 million of
interest for the year to date, compared to $2.3 million during the third
quarter of 1996 and $5.7 million during the first nine months of 1996.
Equity in net income of affiliates is comprised of the Company's proportionate
share of earnings from the Emerging Markets Gold Fund ("EMGF") prior to its
liquidation in June, and USMX, Inc. ("USMX"), prior to their merger with Dakota
Mining Corporation ("Dakota") in May. The Company had no equity investments
during the third quarter of 1997.
The net loss on disposition of assets and other for the third quarter
represents losses of $6.3 million to write-down impaired investments in
Intermin Resources ($2.7 million), Dakota Mining ($2.6 million) and Goldbelt
Resources ($1.0 million) to their estimated market values, a $6.2 million loss
to mark certain foreign currency contracts to market, and a $0.8 million loss
on the sale of equipment at Mt. Todd. For the year-to-date, the loss includes
$1.3 million and $3.6 million on the exchange of investments in EMGF and USMX,
respectively, offset by a $1.5 million gain on the sale of royalty credits in
the Northern Territory of Australia.
In June, the shareholders of EMGF agreed to liquidate the fund. The Company's
share of the distribution comprised $1.5 million in cash together with shares
of certain investees of EMGF, primarily junior mining companies, with a fair
market value of $1.9 million at the time of liquidation. The transaction
resulted in a loss of $1.3 million (see Note 4).
In May, USMX and Dakota completed a merger under the terms of which the Company
received one share of Dakota stock for each 1.1 shares of USMX. The exchange
resulted in a loss of $3.6 million based on the fair market value of the Dakota
shares received (see Note 4).
The increase in the income tax benefit results from the reversal of deferred
taxes associated with the write-down of a portion of the acquisition cost of
PGA as described above together with amortization of the deferred tax liability
associated with the acquisition of Mt. Todd.
ZORTMAN EXTENSION
A favorable Record of Decision ("ROD") and operating permits for the Zortman
Extension were granted by the Bureau of Land Management and the Montana
Department of Environmental Quality in October 1996. Local Indian tribes and
the National Wildlife Federation have appealed the governments' actions to the
Interior Board of Land Appeals ("IBLA") and Montana State Court. In June 1997,
the IBLA granted a stay of the ROD pending review and decision regarding the
appeal. The Company asked for, and has been granted, an expedited review. In
the state court action, the Company was not named as a party, and the Montana
Supreme Court, on an interlocutory appeal, is reviewing whether the action can
proceed without the Company. Although the Company expects a favorable decision
upon completion of the appeal process, it is possible that unfavorable
decisions could be issued, creating further delays or causing the project to be
abandoned. In addition, the Company is preparing a new feasibility study
designed to reduce the cost of construction and is performing additional
drilling to confirm the economics of mining certain material. If an
unfavorable decision on the appeal is received, or the new feasibility study
does not reduce the capital spending required, and drilling does not confirm
the economic viability of certain material, the Company would be required to
write-off
<PAGE>
some or all of the deferred development costs associated with the project
amounting to $7.8 million and accrue a liability of $31.9 million for
reclamation and construction of environmental facilities.
QUI TAM LITIGATION
An organization calling itself the North Santiam Watershed Council has
instituted a lawsuit in Federal District Court in San Francisco against foreign
mining companies with United States operations. The lawsuit alleges that these
companies, including Pegasus, had failed to register as foreign agents under
the Foreign Agent Registration Act, and that all mining claims and rights
received from the federal government by these companies are therefore in
violation of the False Claims Act and invalid. The lawsuit will be vigorously
contested by the Company and other defendants. At this point, it is impossible
to assess the outcome of the lawsuit, although the claims made are
unprecedented, and the Company believes they are without merit.
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.
GOLD PRICE
Gold prices have eroded significantly during the first nine months of 1997,
reaching thirteen-year lows in October. 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.
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 over the remainder of 1997 and into
the next few years. In addition, the Company will continue to manage its
hedging program by entering into new contracts as opportunities arise. The
Company could also close out its hedging contracts to realize the cash value
currently.
The price used in estimating the Company's ore reserves at December 31, 1996
was $400 per ounce of gold, except at Mt. Todd which used A$545 per ounce and
at Montana Tunnels which used $390 per ounce and certain assumptions
regarding other metal prices. Although the Company has realized prices in
excess of those used to calculate reserves, current market prices are well
below these levels. If the Company determines reserves should be calculated
at a significantly lower price than that used at December 31, 1996, there
would be a material reduction in gold ore reserves and material write-downs
of the Company's investments and/or increased depreciation and amortization
charges could be required in the fourth quarter.
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.
<PAGE>
PART II. OTHER INFORMATION
PEGASUS GOLD INC.
Items 2, 4, and 5 of Part II are omitted from this report as inapplicable.
Item 1. Legal Proceedings
See Part 1 - Item 1 - "Notes to Consolidated Financial Statements."
Note 8, Paragraph 5 entitled "Legal Proceedings", which information is
incorporated herein by reference.
Item 3. Defaults Upon Senior Securities
As a result of write-downs recorded in the third quarter of 1997,
the Company is in default under the terms of the minimum net worth,
interest and funded debt to interest coverage covenants of its $150
million Multi-Currency Reducing Revolving Credit Facility with a
syndicate of banks. See discussions in their report under Part
1 - Item 1 - Note 6 & Notes to Consolidated Financial Statements and
Part 1 - Item 2 - "Management's Discussion and Analysis of Financial
Conditions and Results of Operations."
Item 6. Exhibits and Reports on From 8-K
(a) Exhibits
11.0 Computation of Earnings Per Share
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
None
<PAGE>
PEGASUS GOLD INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEGASUS GOLD INC.
(Registrant)
Date: November 14, 1997 By: /s/ Phillips S. Baker, Jr.
---------------------------
Phillips S. Baker, Jr.
Vice President, Finance ,
Chief Financial Officer, and
Principal Accounting Officer
<PAGE>
EXHIBIT 11.0
PEGASUS GOLD INC.
COMPUTATION OF EARNINGS PER SHARE
(In Thousands, except for share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY:
Earnings:
Net loss applicable to primary
earnings per share calculation . . . . . . . ($432,786) ($7,792) ($435,951) ($9,492)
--------- ------- --------- -------
--------- ------- --------- -------
Weighted average number of shares
outstanding:
Common shares and equivalents . . . . . . . . . 41,305 41,070 41,216 40,411
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 . . . . . . . . . . . 33 65 30 268
--------- ------- --------- -------
Weighted average number of shares
outstanding, as adjusted . . . . . . . . . . . 41,338 41,135 41,246 40,679
--------- ------- --------- -------
--------- ------- --------- -------
Net income (loss) per share - primary. . . . . . ($10.47) ($0.19) ($10.57) ($0.23)
--------- ------- --------- -------
--------- ------- --------- -------
FULLY DILUTED:
Earnings:
Net loss. . . . . . . . . . . . . . . . . . . ($432,786) ($7,792) ($435,951) ($9,492)
Add:
Interest relating to 6.25% convertible
subordinated notes, net of tax . . . . . . . . 1,797 (17) 1,797 240
Amortization of issuance costs relating to
6.25% convertible subordinated notes,
net of tax . . . . . . . . . . . . . . . . . . 130 130 130 390
--------- ------- --------- -------
Net loss applicable to fully diluted
earnings per share calculation . . . . . . . . ($430,859) ($7,679) ($434,024) ($8,862)
--------- ------- --------- -------
--------- ------- --------- -------
Weighted average number of shares
outstanding:
Common shares and equivalents. . . . . . . . . 41,305 41,070 41,216 40,411
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 . . . . . . . . . . 60 65 31 272
Additional average shares outstanding
assuming conversion of 6.25%
convertible subordinated notes . . . . . . . 7,709 7,709 7,709 7,709
--------- ------- --------- -------
Weighted average number of shares
outstanding, as adjusted . . . . . . . . . . 49,074 48,844 48,956 48,392
--------- ------- --------- -------
--------- ------- --------- -------
Net loss per share - fully diluted (a) . . . . . ($8.78) ($0.16) ($8.87) ($0.18)
--------- ------- --------- -------
--------- ------- --------- -------
</TABLE>
(a) This calculation is submitted in accordance with Regulation S-K item
601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15
because it produces an anti-dilutive result.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
ART.5 FOR 3RD QUARTER 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 15,948
<SECURITIES> 0
<RECEIVABLES> 24,436
<ALLOWANCES> 0
<INVENTORY> 46,818
<CURRENT-ASSETS> 93,904
<PP&E> 182,965
<DEPRECIATION> 0
<TOTAL-ASSETS> 287,669
<CURRENT-LIABILITIES> 162,804
<BONDS> 0
0
0
<COMMON> 427,607
<OTHER-SE> (515,857)
<TOTAL-LIABILITY-AND-EQUITY> 287,669
<SALES> 177,147
<TOTAL-REVENUES> 177,147
<CGS> 130,929
<TOTAL-COSTS> 170,448
<OTHER-EXPENSES> 417,421
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,524
<INCOME-PRETAX> (436,298)
<INCOME-TAX> (347)
<INCOME-CONTINUING> (435,951)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (435,951)
<EPS-PRIMARY> (10.57)
<EPS-DILUTED> (8.87)
</TABLE>
