<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number: 0-23022
HANOVER GOLD COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2740461
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
1000 Northwest Boulevard, Suite 100
Coeur d'Alene, Idaho 83814
(Address of principal executive offices)
Registrant's telephone number, including area code: (208) 664-4653
Securities registered pursuant to Section 12 (b) of the Act:
Common Stock The NasdaqSmallCap Market
Title of each class Name of each exchange on which registered
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 as 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
other information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant at March 1, 1998 was $14,276,537. The number of shares of
common stock outstanding at such date was 29,868,019 shares. An additional
2,532,970 were deemed outstanding at such date pursuant to presently
exercisable options.
HANOVER GOLD COMPANY, INC.
ANNUAL REPORT
ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
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Page
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SAFE HARBOR STATEMENT (ii)
GLOSSARY OF SIGNIFICANT MINING TERMS (iii)
PART I
Item 1: Business 1
Item 2: Properties 3
Map of Property 9
Item 3: Legal Proceedings 10
Item 4: Submission of Matters to a Vote of Security Holders 10
PART II
Item 5: Market for Registrant's Common Equity and Related
Stockholder Matters 11
Item 6: Selected Financial Data 11
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 8: Financial Statements and Supplementary Data 15
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 15
PART III
Item 10: Directors and Executive Officers of the Registrant 15
Item 11: Executive Compensation 18
Item 12: Security Ownership of Certain Beneficial Owners and
Management 19
Item 13: Certain Relationships and Related Transactions 21
PART IV
Item 14: Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 21
Index to Financials 23
Signatures F/S - 16
</TABLE>
(i)
Safe Harbor Statement
This report contains both historical and prospective statements
concerning the Company and its operations. Historical statements are based
on events that have already happened; examples include the reported
financial and operating results, descriptions of pending and completed
transactions, and management and compensation matters. Prospective
statements, on the other hand, are based on events that are reasonably
expected to happen in the future; examples include the timing of projected
operations, the likely effect or resolution of known contingencies or other
foreseeable events, and projected operating results.
Prospective statements (which are known as "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995) may or may not
prove true with the passage of time because of future risks and
uncertainties. The Company cannot predict what factors might cause actual
results to differ materially from those indicated by prospective
statements. The risks and uncertainties associated with prospective
statements contained in this report include, among others, the following:
THE LIKELIHOOD OF CONTINUED LOSSES FROM OPERATIONS. The Company has no
significant revenue from mining operations, has incurred losses from
operations in each of the last six years, and at December 31, 1997 had
negative working capital. This trend is expected to continue for at least
the next three years and will reverse itself only if, as and when gold is
produced from the Company's mining properties.
NO PROVEN OR PROBABLE RESERVES. The Company must undertake significant
additional exploration and evaluation of its mining properties before
proven or probable reserves can be delineated, and no assurance can be
given that any reserves will be delineated. The engineering and geological
studies which have been completed, and which lead the Company to believe
that significant reserves exist, are insufficient to establish reserves
under accepted mining practices.
THE NEED FOR SIGNIFICANT ADDITIONAL FINANCING. The Company needs
additional financing to hold its mining properties, explore and evaluate
them further, and, if warranted, put them into production. The Company
believes this financing will come from additional sales of common stock,
from bank or other borrowings or, alternatively, as the result of joint
development with another mining company. The Company has no commitment for
bank financing or for the underwriting of additional stock, however, and it
is not a party to any agreement or arrangement providing for joint
development. Whether and to what extent financing can be obtained will
depend on a number of factors, not the least of which is the price of gold.
Gold prices fluctuate widely and are affected by numerous factors beyond
the Company's control, such as inflation, the strength of the United States
dollar and foreign currencies, global and regional demand, the political
and economic conditions of major gold producing countries throughout the
world, and the policies of various Central Banks regarding the purchase,
sale, or lease of gold. As of March 1, 1998, world gold prices were
approximately $298.85 per ounce, a reduction of approximately 18% from
prices a year ago.
RISKS AND CONTINGENCIES ASSOCIATED WITH THE MINING INDUSTRY GENERALLY.
The Company is subject to all of the risks inherent in the mining industry,
including environmental risks, fluctuating metals prices, industrial
accidents, labor disputes, unusual or unexpected geologic formations, cave-
ins, flooding and periodic interruptions due to inclement weather. These
risks could result in damage to, or destruction of, mineral properties and
production facilities, personal injury, environmental damage, delays,
monetary losses and legal liability. Although the Company maintains or can
be expected to maintain insurance within ranges of coverage consistent with
industry practice, no assurance can be given that such insurance will be
available at economically feasible premiums. Insurance against
environmental risks (including pollution or other hazards resulting from
the disposal of waste products generated from exploration and production
activities) is not generally available to the Company or other companies in
the mining industry. Were the Company subjected to environmental
liabilities, the payment of such liabilities would reduce the funds
available to the Company. Were the Company unable to fund fully the cost
of remedying an environmental problem, it might be required to suspend
operations or enter into interim compliance measures pending completion of
remedial activities.
(ii)
Glossary of Significant Mining Terms
Certain terms used throughout this report are defined below.
Ag. Silver.
Au. Gold.
AuEq. Gold equivalent, being a measurement of gold and
silver on a combined basis calculated to reflect the price
and recovery differentials between the two metals.
alluvial. Adjectivally used to identify minerals deposited
over time by moving water.
Archean. An era in geological time 3.4 billion years ago.
basement or bedrock.. Solid rock underlying an alluvial deposit.
deposit. A mineral deposit or mineralized material is a
mineralized underground body which has been intersected by
sufficient closely-spaced drill holes or underground sampling
to support sufficient tonnage and average grade(s) of
metal(s) to warrant further exploration or development
activities. A deposit does not qualify as a commercial
minable ore body (reserves) under standards promulgated by
the Securities and Exchange Commission until a final,
comprehensive economic, technical and legal feasibility study
based upon test results has been concluded.
development stage. Activities related to the preparation of
a commercially minable deposit for extraction.
exploration stage. Activities such as drilling, bulk
sampling, assaying, and surveying related to the search for
minable deposits.
fault or faulting. A fracture in the earth's crust
accompanied by a displacement of one side of the fracture
with respect to the other and in a direction parallel to the
fracture.
grade. A term used to assign value to reserves, such as
ounces per ton or carats per ton.
intrusive. Rock which while molten penetrated into or
between other rocks but solidified before reaching the
surface.
lode mining. The extraction of ore from a deposit occurring
in place within definite boundaries separating it from the
adjoining rocks.
mineralization. The presence of minerals in a specific area or
geological formation.
ore. A natural aggregate of one or more minerals which, at a
specific time and place, may be mined and sold at a profit or
from which some part may be profitably separated.
overburden. Waste rock and other materials which must be
removed from the surface in order to mine underlying
mineralization.
placer mining. The extraction of ore from sediment rich in
concentrated mineralization due to the high specific gravity
of the mineralization.
production stage. Activities related to the actual
exploitation or extraction of mineral deposit.
reserves. That part of a mineral deposit which could be
economically and legally extracted or produced at the time of
determination. Reserves are subcategorized as either proven
(measured) reserves, for which (a) quantity is computed from
dimensions revealed in outcrops, trenches, workings, or drill
holes, and 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 geologic
character is so well defined that size, shape, depth, and
mineral content are well-established; or probable (indicated)
reserves, for which quantity and grade and/or quality are
computed from information similar to that used for proven
(measured) reserves, yet the sites for inspection, sampling
and measurement are farther apart.
shear zone. A tabular zone of rock which has been crushed
and fragmented by parallel fractures due to "shearing" along
a fault or zone of weakness. Shear zones can be mineralized
with ore-forming solutions.
schists. A strongly foliated crystalline rock which readily
splits into sheets or slabs as a result of the planar
alignment of the constituent crystals.
trend. The directional line of a rock bed or formation.
(iii)
PART I
Item 1. Business.
GENERAL DEVELOPMENT OF BUSINESS. The Company is an exploration stage
mining company organized under Delaware law in 1984. The Company holds
significant mining properties in the historic Virginia City Mining District
of southwestern Montana. These properties presently comprise 790 claims
and three state mining leases; 686 of these claims are contiguous claims
located in the Virginia City district, and the balance of which are located
at Norris and Pony, Montana, some 35 miles away. The Company acquired
these claims and leases beginning in 1990 through a series of subleasing
and option agreements with affiliated and non-affiliated parties, and
through the merger of affiliated and non-affiliated companies in exchange
for stock.
The Company has been engaged in exploration and limited development
activities in the Alder Gulch area more or less continuously since 1992.
These activities have consisted of some underground development, diamond
drilling, mapping and sampling, lithologic logging of the drill holes,
metallurgical testing, assaying, and most recently in 1997 aerial
surveying. No mining or milling activities have occurred since 1995.
Since 1995 the Company has pursued a strategy of acquiring additional
mining claims in the Virginia City district and renegotiating the terms
under which certain of the claims were previously acquired, all in an
effort to consolidate its land position in order to facilitate continued
exploration and development and make its holdings more attractive to
potential development partners. A significant component of this strategy
was the 1997 merger of Easton-Pacific and Riverside Mining Company ("Easton
Pacific") into the Company, pursuant to which the Company acquired two
state leases, 40 patented claims and 149 unpatented claims in the district,
and an additional 39 patented claims and 65 unpatented claims located near
Norris and Pony, Montana. The Company's consolidation efforts in the
district were largely concluded by the merger.
The Company has no established proven or probable reserves, although
exploration activities on the properties conducted by it and others support
the existence of a potential, significant mineralized gold deposit or
deposits. (A mineralized deposit is a mineralized body which has been
delineated by appropriate drilling or underground sampling to support
estimates of tonnage and average mineral grade. A mineralized deposit does
not qualify as a reserve until a comprehensive evaluation has been
completed and the economic feasibility of exploiting the deposit has been
determined.) The Company has not yet undertaken a comprehensive evaluation
of its mining properties and probably will not do so until it has obtained
the financial assistance of a development partner or conducted additional
exploration.
The Company's principal executive offices are located at 1000 Northwest
Boulevard, Suite 100, Coeur d'Alene, Idaho 83814, and its telephone number
is (208) 664-4653. The Company also maintains a web site at
http://wwp.hanovergold.com where additional information can be obtained.
As of December 31, 1997, the Company had expended $2,395,986 to conduct
exploration and limited development activities on the Alder Gulch and
Easton-Pacific properties and $14,803,488 in payments to the landowner-
lessors of its mining properties. These expenditures, which aggregate
$17,199,474, have been capitalized and will be depleted using the estimated
recoverable units method at such time as the properties are placed into
production. See the section of this report entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and the Summary of Accounting Policies and Note 3 to the Company's
Financial Statements for the year ended December 31, 1997.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS. Currently, the Company is
solely engaged in the exploration of mineral properties, which is a single
industry segment.
NARRATIVE DESCRIPTION OF BUSINESS. The Company is an exploration stage
mining company. It does not own an operating mine and has no other revenue-
producing mining activities. Moreover, it is not expected to commence
mining activities, at least with respect to its properties in the Virginia
City Mining District, until the following events have occurred: significant
additional exploration activities on the company's Alder Gulch mining
properties have been completed; a determination has been made that the
properties contain a commercially minable ore body; all required mining and
environmental permitting applications have been approved; a comprehensive
feasibility study of proposed mining operations has been prepared; and
financing of the mine has been obtained.
1
BUSINESS STRATEGY. The Company's efforts, at least since 1995, have been
primarily directed toward acquiring mining claims and interests in the
Alder Gulch area of the district in an effort to consolidate its land
position, facilitate continued exploration and development, and make the
area more attractive to potential development partners. During 1995 and
1996, Hanover added approximately 353 mining claims to its holdings in the
Alder Gulch area, including those claims it acquired through the 1996
merger of two affiliated corporations. In 1997, it added approximately 189
additional claims in the Browns Gulch, Hungry Hollow and Barton Gulch areas
of the district (and another 104 claims located outside the district)
through the merger of Easton Pacific; these properties form a contiguous
claim block adjacent to the west side of the Company's properties in the
Alder Gulch area of the district.
The Company believes its efforts to consolidate and control what now
constitutes a significant portion of the Virginia City Mining District will
make it easier to attract the interest of a major mining partner having the
resources to finance additional exploration activities and, if commercial
development is warranted, the costs and expenses associated with building
and operating a large scale mine. Management had been hopeful that a
development partner would have been identified in 1997, and that a joint
venture or other arrangement covering these activities would have been
fully negotiated. This did not occur, however, largely because of a
dramatic decline in world gold prices and a commensurate decline in
exploration and development activities. Management is hopeful that the
Company will identify a development partner and conclude a joint venture or
other agreement in 1998.
MANAGEMENT AND FINANCING MATTERS. Until 1996, the Company's activities
were conducted from offices located in Roslyn, New York, near New York
City. In early 1996, the Company moved its offices to Coeur d'Alene, Idaho
and restructured its management, all in conjunction with an investment by a
group of Spokane, Washington investors, led by Neal A. Degerstrom, that
enabled the company to meet its rental and royalty obligations to the
landowner-lessors of its mining claims. These investments were made
pursuant to the terms of a securities purchase agreement between the
company and Mr. Degerstrom dated June 1, 1995, as amended, pursuant to
which the company issued and sold 6,000,000 shares of common stock to Mr.
Degerstrom and associated persons over a seventeen-month period, at prices
ranging from $0.35 per share to $1.00 per share.
The securities purchase agreement also gave Mr. Degerstrom the
conditional right to nominate three members for election to the Company's
board of directors and to appoint a new president. Mr. Degerstrom
exercised his director nomination rights at meetings of the board of
directors of the Company held in August and September of 1995, and the
presidential appointment rights were exercised at a meeting of the board of
directors held in March of 1996. The nomination and appointment rights
granted to Mr. Degerstrom will continue to be exercised so long as he and
his associated purchasers collectively own at least fifteen percent (15%)
of the Company's outstanding common stock. The Company and its board of
directors have agreed to take such action as is appropriate and consistent
with their powers to ensure that such rights can be exercised.
Mr. Degerstrom and these other individuals held approximately 29.1% of
the outstanding shares of common stock as of March 1, 1998, and also held
stock options, which, if exercised, would increase their combined ownership
of the company to approximately 33.8%. Among these are options granted to
Mr. Degerstrom in March of 1997 in connection with the then pending Easton
Pacific merger transaction, as consideration for his guarantee of certain
of the Company's obligations to the landowner-lessors of its mining claims.
Mr. Degerstrom's guarantee was initially limited to $2,891,210, which
amount approximated the Company's obligations to these landowner-lessors
during the period of the guaranty, for which he received three-year options
to purchase 2,312,970 shares of common stock at the price of $1.25 per
share. Payments made by Mr. Degerstrom pursuant to the guaranty will be
credited toward the exercise of such options. Effective April 29, 1997,
Mr. Degerstrom assigned two-thirds of these options equally to two
nonaffiliated individuals, each of whom undertook to guarantee the payment
to Mr. Degerstrom of one-third of the amount Mr. Degerstrom is required to
pay the Company during the term of his guaranty.
THE EASTON PACIFIC MERGER. The merger of Easton Pacific with and into
the Company was concluded in late September of 1997, following approval by
the shareholders of each company. The Company issued 7,000,000 shares of
its common stock, then valued at approximately $6.16 million, in the
merger, upon the conversion of and in exchange for the outstanding capital
stock of Easton Pacific. Each Easton Pacific shareholder received 6.721656
shares of common stock for each share of Easton-Pacific capital stock
registered in such shareholder's name. No fractional shares were issued in
the transaction and no payment was made for fractional shares; rather,
fractional shares were rounded to the nearest whole share of common stock
into which the Easton Pacific capital stock was converted.
2
The Company has accounted for the merger as a purchase of assets, as
opposed to a pooling of interests. Under purchase accounting, Easton
Pacific's assets and liabilities were recorded at the current fair values.
The increased value assigned to Easton Pacific's assets will be depleted
over assigned periods of estimated future benefit. This depletion will
have the effect of depressing any future earnings the Company may have
during such periods.
HISTORICAL EXPLORATION AND DEVELOPMENT ACTIVITIES. The Company has been
engaged in exploration and limited development activities in the Alder
Gulch area more or less continuously since 1992. During 1992, interests in
certain claims then held by affiliated corporations were contributed to a
joint venture that, in turn, entered into a mining venture agreement with
Kennecott. Under the terms of this mining venture, Kennecott was to have
received an interest in the claims and certain options and other rights, in
exchange for which it was to have conducted a multi-year work program and
paid interim rentals and royalty obligations to the landowner-lessors of
Hanover's claims. Kennecott withdrew from the mining venture in March of
1995, when it was unable to acquire additional claims in the Alder Gulch
area believed necessary to support large scale development.
The Company's exploration and development activities in the Alder Gulch
area have consisted of some underground development, diamond drilling,
mapping and sampling, lithologic logging of the drill holes, metallurgical
testing and assaying. During 1997 the Company conducted additional mapping
and sampling of the area and the contiguous area acquired from Easton
Pacific, and conducted an airborne geophysical survey encompassing some 41
square miles of the district and surrounding areas.
No mining or milling activities have occurred since Kennecott's
withdrawal from the mining venture. All subsequent exploration activities
have been funded by the Company from sales of its common stock. During
1997 the Company sold 1,639,000 shares of common stock pursuant to an
effective registration statement under the Securities Act, and received
proceeds of $1,674,000. In 1998, the Company sold the remaining 361,000
registered shares for $169,000.
CURRENT WORK PLAN. The Company expects to conduct exploration drilling
on its Alder Gulch and adjoining Easton-Pacific claims during 1998, but has
not yet established an exploration budget. The amount expended in 1998
will depend, among other things, on the Company's ability to negotiate a
joint development or other arrangement with another mining company during
the year, and on the Company's cash position during the year.
The Company continues to receive expressions of interest from North
American mining companies regarding a joint venture or other economic
arrangement to develop the Company's properties in the Virginia City Mining
District. While the Company has had numerous discussions with
representatives of these companies and their interest in the Virginia City
Mining District properties remains high, the decline in the price for gold
has led many of the companies to cut exploration budgets and focus on
properties with proven reserves or producing mines.
ITEM 2. PROPERTIES.
THE ALDER GULCH AND EASTON-PACIFIC PROPERTIES.
OVERVIEW. The Company's Alder Gulch properties are located in the historic
Alder Gulch area of the Virginia City Mining District in southwestern
Montana, approximately 50 miles southeast of Butte, Montana. Gold was
first discovered in the area in 1863. An estimated 2.5 million to 10
million ounces of gold have been produced from placer operations in Alder
Gulch that extended from the town site of Summit 15 miles downstream to the
town of Alder, Montana. The Company's Alder Gulch claims consist of 72
patented, 425 unpatented, and one state lease. The Company's Easton-Pacific
properties within the Virginia City Mining District consist of 40 patented
and 149 unpatented mining claims and two state leases. Another 39 patented
and 65 unpatented claims are located near Pony and Norris, Montana. The
claims were acquired September 1997 through the merger of Easton Pacific
into the Company. In addition to the significant placer production that
came from Alder Gulch, Gold has been produced from lode mines located on
the Alder Gulch and Easton-Pacific properties since the late nineteenth
century, although reliable production records are not available. The
Company believes the historical mining activities and the geology of the
District are indicative of large gold-bearing mineral systems, and that the
district has a very high potential for additional discovery.
3
With the acquisition of the Easton-Pacific claims in the Virginia City
Mining District, by year-end, the Company's properties in the Virginia City
Mining District consisted of 686 somewhat contiguous mining claims and
three state mining leases covering an area approximately 21 square miles.
The topography is mountainous, although the properties are seasonally
accessible by road.
The Company's properties in the Virginia City Mining District are more
particularly identified on the map which appears at page 9 of this report.
THE NATURE OF HANOVER'S INTEREST IN THE PROPERTIES. Hanover owns
approximately one half of its 790 mining claims outright and pays rentals
and royalties to the underlying landowner-lessors for the right to conduct
mining activities on those claims it does not own. These payments in most
cases are credited toward the purchase price of the claims under the
purchase option provision of the leases.
If such payments are made, as is expected, Hanover will acquire ownership
of the mining claims, and in some instances the entire real property
interest of the landowner-lessor. Conversely, if such payments are not
made, Hanover's interest in the claims will revert to the respective
landowners.
The Company's obligations pursuant to these leases and purchase options
were $7,407,000 at December 31, 1997, of which $1,468,000 is payable in
1998, $1,819,000 is payable in 1999, $2,878,000 is payable in 2000,
$603,000 is payable in 2001, $603,000 is payable in 2002, and $36,000 is
payable thereafter. Production royalty obligations with respect to these
claims, which become payable once minerals are produced from the claims,
range from 0.5% to 5% of net smelter returns. As previously noted, Neal A.
Degerstrom, who is an affiliate of the Company, has guaranteed the payment
of the Company's obligations to these landowner-lessors through September
7, 1998. The guaranty was given in connection with the Company's
acquisition of Easton-Pacific.
The costs of maintaining the Company's mining properties has been borne
exclusively by the Company since March of 1995, when Kennecott terminated
its mining venture agreement with the Company. This cost has been
substantial; during the three-year period ended December 31,1997, the
Company has expended approximately $3,740,755 just to meet its rental and
royalty obligations to the landowner-lessors of the properties. In
addition, the Company has spent another $4,227,125 during these three years
to support its operations and conduct limited exploration work, apart from
the amounts required to maintain its properties. If the company is not
able to secure a major mining partner for the properties, it will have to
consider other development alternatives. These alternatives have not yet
been identified.
MINERALIZATION OF THE COMPANY'S ALDER GULCH CLAIMS. Mineralization on the
Company's Alder Gulch claims is hosted by Archean metamorphic rocks. These
rocks have been subjected to one or more metamorphic events and subsequent
orogenic folding and faulting. The Kearsarge-Apex mineralization occurs
within a major shear zone cutting carbonate facies iron formation. Data
compiled by the Company indicate that this mineralization is disseminated
in the iron formation and irregularly distributed as high-grade gold zones
within the shear. Gold is associated with quartz, iron carbonate, green
mica, biotite, garnet, graphite, and pyrite. Post-metamorphic hydrothermal
alteration indicates the possibility of additional types of mineralization
in the area. Mineralization is disrupted by high and low angle post-
mineral faulting.
A different kind of gold mineralization has been observed on certain
claims in the Hungry Hollow area. Gold occurs in rock composed primarily
of medium-to course grained potassium feldspar with layered and
disseminated iron oxide. Assays commissioned by Hanover of this type of
rock range from 0.111 to 0.299 ounces per ton. The extent of this rock
type is uncertain, due to a general lack of outcropping rock in the area.
The gold-bearing rock has been variously interpreted to be a primary
sedimentary bed, a widespread potassic alteration of pre-existing gneiss,
or an alteration of selvage along an undiscovered vein or shear. This area
has not been tested by drilling.
Another different kind of gold mineralization has been observed at the
Bartlett mine. Here, the mineralized rock is located along the hanging
wall of a large silicified dolomite outcrop. According to historical
records, production from the mine was small but high grade. Although the
old mine workings are now inaccessible, samples collected from the mine
dump area carry gold in concordant quartz-ankerite veins within the
dolomite, and in graphitic-ankeritic shear zones along the contacts of the
dolomitic marble. This kind of mineralization also occurs at the General
Shafter and Pearl mines.
4
Exploration drilling has intercepted mineralization in other targets as
well. At the Lucas, Atlas, and South Bachelor targets, gold occurs in
quartz-ankerite-pyrite breccias and stockwork vein zones with Kspar
alteration selvages hosted by quartz-feldspar gneiss.
EXPLORATION AND DEVELOPMENT ACTIVITIES ON THE ALDER GULCH CLAIMS. During
1993 and 1994 Kennecott conducted a surface drilling program on the
Company's Alder Gulch claims. Eight core holes were drilled to test the
Big Vein and the Kearsarge Vein. These holes encountered significant
mineralization. During 1994 and 1995 the Company drove approximately 3,000
feet of lateral and cross cut workings in the Kearsarge and Apex mines. 23
core holes were drilled along and between the Big Vein and the Kearsarge
Vein to evaluate and extend the mineralization encountered by Kennecott's
drilling. This was supplemented by the drilling of four additional core
holes along the Kearsarge-Apex shear zone in October of 1996.
Information compiled by the Company during 1996 included the results of
mapping and sampling of the workings, lithologic logging of all underground
drill holes, and splitting and assaying previously unassayed intervals of
the holes. The drill holes intercept mineralization over a strike length of
1,000 feet with a thickness that varies from 100 to 200 feet and a vertical
extent of at least 480 feet. The deepest hole ends in mineralization.
Mineralization is open in all directions, particularly to depth. The
following table sets forth information concerning drill holes
representative of the grades and thickness encountered at the Kearsarge-
Apex Shear Zone and the Atlas, Lucas, and South Bachelor Targets.
<TABLE>
<CAPTION>
DRILL HOLE FROM TO LENGTH AU OPT
----------- ----- ---- ------ ------
<S> <C> <C> <C> <C>
Kearsarge-Apex
UGKS 1 95.0 135.0 40.0 0.061
UGKS 4 85.0 109.9 24.9 0.020
145.0 213.0 68.0 0.118
UGKS 5 55.0 75.8 20.8 0.076
114.7 191.0 76.3 0.115
UGKS 9 20.0 80.0 60.0 0.186
155.0 230.0 75.0 0.160
UGKS 11 0.0 51.0 51.0 0.257
UGKS 12 5.0 61.0 56.0 0.205
7000-1 5.0 98.0 93.0 0.254
7000-3 13.0 110.0 97.0 0.379
7000-6 5.0 84.0 78.0 0.100
KS 1 305.0 495.0 190.0 0.201
KS 2 313.0 383.0 70.0 0.051
428.0 453.0 25.0 0.135
KS 4 311.0 371.0 60.0 0.031
KS 5 409.0 474.0 65.0 0.106
KS 8 295.0 480.0 185.0 0.094
Atlas Target
KSR-16 110.0 180.0 70.0 0.085
Lucas Target
KS 11 430.0 480.0 50.0 0.136
KS 14 380.0 470.0 90.0 0.049
South Bachelor Target
KSR-3 0.0 80.0 80.0 0.035
KSR-11 145.0 240.0 95.0 0.031
</TABLE>
Based on the Company's examination of the drill core, the underground
workings, and the geology maps and cross sections, management believes that
the mineral system is more extensive than two parallel vein systems. The
Big Vein and Kearsarge Vein and the interval between these structures are
mineralized. The mineralization occurs in lenticular shaped bodies that
vary in thickness along strike and dip. Additional drilling, however, will
be required to detail the configuration of the mineralization and to define
its limits in three dimensions. For this reason, this mineralization is
not considered a reserve. The size of the mineralized deposit to an
average depth of 500 feet below the surface was estimated by Kennecott to
be 6,000,000 tons with an average grade of 0.083 ounces of gold per ton.
The thickness and grade of mineralization, combined with metallurgical
studies indicate that open pit mining and a gravity processing system
followed by carbon-in-leach milling would be effective and efficient
methods for extracting the resource.
5
During 1997 the Company hired five independent consulting geologists to
map the surface geology of 21 square miles of property and collect over 800
new rock samples assayed by Bondar Clegg. The Company also contracted
Geoterrex Dighem to fly an airborne geophysical survey over 41 square miles
of the Virginia City Mining District and the surrounding areas. Maps of the
magnetic and electromagnetic character of the rocks were produced from the
survey and identify previously unknown beds of iron formation, ultramafic
intrusions and magnetite bearing felsic gneiss. Conductivity anomalies at
the Kearsarge mine and the Pacific mine indicate that mineralization may
extend beyond areas drilled. New targets are indicated where strong
conductors correspond with structural intersections. The Company expects to
conduct exploration drilling in 1998.
EASTON-PACIFIC MINING PROPERTIES.
OVERVIEW. The Easton Pacific properties in the Virginia City Mining
District cover the upper part of Brown's Gulch, Hungry Hollow and Barton
Gulch. In addition to these claims the Company acquired an additional 39
patented and 65 unpatented claims near Pony and Norris, Montana, as a
result of the Company's acquisition and merger of Easton-Pacific. Pony and
Norris are some 35 miles northwest of Virginia City. Most of the claims are
owned outright, while some require payment of rents or royalties to
landowner-lessors under various lease and option agreements. Land payments
and related claim fees payable by Easton-Pacific during 1998 are
approximately $15,000, and future payments are approximately $278,000 over
the next two years.
Where there are production royalty obligations with respect to these
claims, the royalties become payable once minerals are produced, and range
from 5% to 7%.
HISTORICAL MINING ACTIVITIES. Historic mines on the Easton Pacific mining
properties include the Easton, Pacific, High Up, Irene, Marietta, Metallic,
and Little Lode mines. The Easton mine was at one time the largest historic
lode producer in the Virginia City Mining District, with recorded
production of approximately 50,000 ounces of gold and over one million
ounces of silver.
The Easton mine was discovered in 1873 and operated until 1914. Ore was
mined from multiple high-angle quartz veins carrying auriferous pyrite,
galena, sphalerite, and chalcophyrite, with minor tetrahedrite, argenite,
gold tellurides, and stibnite. The ore was processed by a ten stamp mill
with a cyanide circuit. The mine closed in 1914 due to litigation over
ownership, not lack of ore.
The US Grant mining company entered into an agreement with the original
Easton mine owners in 1947, and for two years thereafter drove a new 4,200-
foot tunnel at the 600-foot level. No significant ore was produced as a
result of these efforts. The Pacific mine was discovered in 1871 and was
originally mined in the early years of the district. Ore was mined from a
small open pit at the mine site from 1960 to 1976. The little exploration
work that has been done on the Easton Pacific properties since then has
been concentrated in the Pacific pit area.
The High Up and Irene mines were worked periodically from the 1870s to
1941. The mine workings are now inaccessible; as a consequence,
assessments of mineral potential have been based on historic records and
maps. These records indicate that the mines produced between 10,000 and
15,000 ounces of gold, at an average grade of nearly 0.5 ounces per ton.
Silver was also produced from the mines, at a ratio eight times that of
gold production. A 1913 mine report describes the ore body of the High Up
mine as a shear zone with good gold grades in quartz veins and in adjacent
fault clay and breccia. According to a 1941 report, the High-Up vein is
3.5 ft wide. It was sampled every 5 feet for 900 feet of strike and
returned an average grade of 0.677 opt. Au.
In November of 1988, Easton Pacific and Riverside Mining Company entered
into a joint operation agreement with BHP-Utah International, Inc. ("BHP
Utah") providing for the exploration and, if warranted, development of the
Easton-Pacific claims in the Virginia City Mining District. Under the
agreement, BHP Utah was to have expended approximately $1.6 million over a
four-year period to conduct exploration work, and was to have made annual
payments to the company totaling approximately $340,000, increasing to
$350,000 per year at the end of the period. In return for these
expenditures, BHP Utah was to have received interests in Easton Pacific's
properties ranging from 40% to 60%, plus the option to increase its
interests by an additional 20% by paying the company an additional $3
million.
The joint operation agreement was terminated by BHP Utah in November of
1989, following the completion of its obligations to Easton Pacific for the
prior year. Beginning in mid-1994, the company entered into discussions
with Kennecott regarding a mining venture agreement for the exploration and
possible development of the company's properties. No agreement was
reached. As a consequence, Kennecott later terminated its 1994 mining
venture agreement with the Company covering its Alder Gulch properties.
6
GEOLOGY OF THE EASTON-PACIFIC PROPERTIES. Pacific mine mineralization is
hosted by a breccia body at the intersection of two regional faults. The
breccia is silicified, pyritic, and strongly argillized. Higher grade Au-
Ag mineralization occurs in quartz-sulfide veins. Hanover geologists
relogged all core and chips from the Pacific drilling and trenched across
500 feet of strike to better define the extent and continuity of
mineralization. The mineralization is open in all directions.
The following table sets forth information concerning drill holes
representative of the grades and thickness encountered at the Pacific mine.
<TABLE>
<CAPTION>
Drill Hole From To Length Au opt
---------- ------ ----- ------- -------
<S> <C> <C> <C> <C>
Pacific Mine
EP-2 95.0 155.0 60.0 0.153
91-3 120.0 205.0 85.0 0.133
92-6 55.0 175.0 120.0 0.071
93-2 185.0 245.0 60.0 0.198
93-10 65.0 150.0 85.0 0.079
includes 65.0 115.0 50.0 0.123
93-11 30.0 240.0 210.0 0.037
93-12 10.0 400.0 390.0 0.052
93-13 40.0 95.0 55.0 0.117
93-14 25.0 315.0 290.0 0.135
includes 25.0 180.0 155.0 0.223
93-15 15.0 145.0 130.0 0.050
94-14e 25.0 135.0 110.0 0.051
94-14f 30.0 175.0 145.0 0.045
Trench 97-2 110.0 0.076
Trench 97-3 80.0 0.083
</TABLE>
Prior to the merger of Easton-Pacific, Dr. Roger Steininger, an
independent consultant geologist, familiar with the history and geology of
the Virginia City district, was commissioned by the Company in early 1997
to conduct an independent evaluation of the Alder Gulch area, and by Easton-
Pacific & Riverside Mining Company to conduct a similar evaluation of the
Easton-Pacific properties. His report is an evaluation of the exploration
potential of the Alder Gulch and Easton-Pacific properties based primarily
upon the known geology of the properties (which is itself predicated on the
results of assaying, drilling, sampling and other exploratory activities
conducted by the Company, Easton-Pacific and others). Dr. Steininger has
consulted for major mining companies including Royal Gold, Inc., Glamis
Gold, Inc., Echo Bay Mines, Phelps Dodge and Amax Gold, and has over 30
years of exploration and mining experience. Also in 1997, the Company
commissioned Dr. Tom Henricksen, an independent consulting geologist, to
write a report based upon his knowledge of the Virginia City district. Dr.
Henricksen was North-West Regional Manager and Regional Geologist for
Kennecott Exploration from 1990-1996 and was actively involved with
Kennecott's exploration of Alder Gulch from August 1992 to March 1995 when
Kennecott terminated its joint venture with the Company. He has more than
25 years experience in exploration and mining. Dr. Steininger's and Dr.
Henricksen's reports are filed with the Securities and Exchange Commission
as exhibits to this report.
MINING, ENVIRONMENTAL AND OTHER MATTERS PERTAINING TO PROPERTIES.
OVERVIEW. The Company, like other mining companies doing business in the
United States, is subject to a variety of federal, state and local
statutes, rules and regulations designed to protect the quality of the air
and water in the vicinity of its mining operations. These include
"permitting" or pre-operating approval requirements designed to ensure the
environmental integrity of a proposed mining facility, operating
requirements designed to mitigate the effects of discharges into the
environment during mining operations, and reclamation or post-operation
requirements designed to remediate the lands effected by a mining facility
once commercial mining operations have ceased.
Federal legislation and implementing regulations adopted and administered
by the Environmental Protection Agency, the Forest Service, the Bureau of
Land Management, the Fish and Wildlife Service, the Army Corps of Engineers
and other agencies--in particular, legislation such as the federal Clean
Water Act, the Clean Air Act, the National Environmental Policy Act and the
Comprehensive Environmental Response, Compensation and Liability Act--have
a direct bearing on domestic mining operations. These federal initiatives
are often administered and enforced through state agencies operating under
parallel state statutes and regulations. Hanover's Alder Gulch properties
are located in Montana, which, despite its history as a major mining area,
has in the last decade gradually limited mine development as tourism and
environmental concerns have assumed greater economic and political
importance.
7
Although mines continue to be approved for development in the state, the
cost and uncertainty associated with the permitting process have resulted
in fewer mining applications and higher operating costs for those mining
companies seeking to do business in the state. These laws are briefly
discussed below.
THE CLEAN WATER ACT. The federal Clean Water Act is the principal
federal environmental protection law regulating mining operations. The Act
imposes limitations on waste water discharges into waters of the United
States, including discharges from point sources such as mine facilities.
In order to comply with the Clean Water Act, the Company will be required
to obtain one or more permits which will control the level of effluent
discharges from its proposed mining and processing operations.
THE CLEAN AIR ACT. The federal Clean Air Act limits the ambient air
discharge of certain materials deemed to be hazardous and establishes a
federal air quality permitting program for such discharges. Hazardous
materials are defined in enabling regulations adopted under the Act to
include various metals and cyanide, the latter of which is used in heap
leach recovery processes. The Act also imposes limitations on the level of
particulate matter generated from mining operations, and the Company may be
required to adopt dust control techniques in all phases of mining in order
to comply with these limitations.
THE NATIONAL ENVIRONMENTAL POLICY ACT. The National Environmental Policy
Act ("NEPA") requires all governmental agencies to consider the impact on
the human environment of major federal actions as therein defined. Because
the Company's mining properties are located on federal lands, mining
operations on those lands will likely be conditioned on the preparation,
review and approval of an environmental impact statement outlining in
detail the environmental effects of such operations and the Company's
efforts to ameliorate such effects.
THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT.
The federal Comprehensive Environmental, Response, Compensation and
Liability Act ("CERCLA") imposes clean-up and reclamation responsibilities
with respect to unlawful discharges into the environment, and establishes
significant criminal and civil penalties against those persons who are
primarily responsible for such discharges.
MONTANA ENVIRONMENTAL LAWS AND REGULATIONS. Montana has adopted
counterparts to NEPA and CERCLA, being the Environmental Policy Act and the
Metal Mine Reclamation Act, both of which are administered by the
Department of Lands. The state has also adopted the Air Quality Act and
Water Quality Act, which parallel to a large extent the provisions of the
Clean Air Act and Clean Water Act; these statutes are administered through
various bureaus of the Department of Environmental Quality.
THE COMPANY'S PERMITTING STATUS. Gold was first discovered in the Alder
Gulch area in 1863, and extensive mining activities in the area continued
until the 1940s, when production from conventional mining processes
dwindled. As a consequence of these activities, the Company believes it
will experience less difficulty in obtaining permits for large scale mining
development than would be the case were it seeking to develop an area that
had no history of mining operations. The Company has obtained certain
permits and approvals in conjunction with the limited exploration and minor
development activities conducted on the Alder Gulch properties from 1993 to
1996, and believes that it will meet existing criteria for additional
permits and approvals necessary to large-scale development.
Nonetheless, substantial planning will be required if the Company is to
meet the requirements of existing laws and regulations, and no assurance
can be given that any proposed plans to conduct large scale development of
the Alder Gulch properties will be timely realized. Data regarding the
effect of any such development on the air water quality of the area is
being collected and analyzed at significant cost to the company, and will
be presented to the various regulatory agencies in the future, in the form
of a mine development and reclamation plan. These agencies will then
review and evaluate the plan, and are free to reject it or impose
additional requirements which could increase the cost of development to a
level beyond that deemed economically feasible. Hanover may encounter
opposition from local environmental groups and organizations once its
development plans are presented to the regulatory authorities and made
available for public comment.
[The balance of this page has been intentionally left blank.]
8
MAP OF THE COMPANY'S PROPERTIES IN THE VIRGINIA CITY MINING DISTRICT.
Location map showing where within the Virginia City Mining District,
Madison County, Montana, the Hanover Gold controlled claim block of
properties is located as of December 31, 1997, including townships and
sections, streams, and selected mine locations.
[The balance of this page has been intentionally left blank.]
9
ITEM 3. LEGAL PROCEEDINGS.
Effective March 25, 1996, the Company entered into an asset purchase
agreement with Tabor Resources Corporation, a Minnesota corporation, for
the purchase of ten patented mining claims, 120 unpatented mining claims
and one state mining lease covering properties located in the Alder Gulch
area. The Company issued Tabor 525,000 shares of common stock in the
transaction and also agreed that, if, during the two year period commencing
with the effective date of the agreement, the average bid price of the
common stock did not exceed $2.00 per share for a consecutive 30-day period
prior to April 19 of 1998, it would issue Tabor such number of additional
shares as was necessary to raise the aggregate market value of the shares
then owned by Tabor to $2.00.
As part of the transaction, the Company also agreed to prepare and file a
registration statement under the Securities Act covering the shares issued
to Tabor, cause such registration statement to be declared effective within
six months of the effective date of the agreement, and thereafter maintain
the registration statement in effect for a period of eighteen months to
enable Tabor to resell the shares (and to enable other selling stockholders
to sell additional shares of common stock also covered by the registration
statement) should it so choose. In addition, the Company granted Tabor
certain piggy-back registration rights under the Securities Act, the effect
of which is to enable Tabor to include any shares remaining unsold
following the termination of effectiveness of the registration statement
described above in any registration statement subsequently filed by the
Company relating to securities to be sold for the account of the Company or
for the accounts of any of its affiliates.
The agreement between the Company and Tabor further provided that,
pending effectiveness of the registration statement, conveyancing documents
covering the claims sold to the Company and certificates evidencing 400,000
of the 525,000 shares issued to Tabor were to be held in escrow. The
agreement further provided that, in the event the registration statement
was not declared effective within six months of closing, such documents and
certificates, at Tabor's election, would be returned to the respective
parties and the transaction would be deemed to have been rescinded.
The registration statement required to be filed by the Company was
declared effective by the SEC on September 3, 1996. Shortly following the
effective date, and despite the Company's compliance with all of the terms
and conditions of its agreement with Tabor, Tabor informed the Company that
it was withholding authorization to release the conveyancing documents and
the share certificates from escrow. As a consequence, the Company
initiated an action against Tabor in United States District Court for the
Eastern District of Washington (Case No. CS-96-663-FVS) on October 4, 1996
for breach of contract and injunctive relief. Subsequently, Tabor filed
counterclaims against the Company alleging violations of the registration
and antifraud provisions of federal securities law.
The Company deposed the principal witnesses in this matter in mid-1997
and expected to file motions thereafter seeking summary judgment in its
favor on its breach of contract claims against Tabor, specific performance
of Tabor's obligations, and dismissal of Tabor's counterclaims. Subsequent
to these depositions, however, and in the wake of declining world gold
prices--and a commensurate decrease in the market price of the Company's
common stock which would have required the Company to issue Tabor
significantly more shares of common stock under the agreement had it not
been breached--Tabor has now recanted its position and is seeking to compel
the Company to proceed with the transaction according to the original terms
of the agreement. The Company, in turn, has filed a motion seeking to
rescind the agreement in its entirety.
The Company cannot predict at this time whether its motion seeking
rescission of the agreement with Tabor will be granted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of 1997.
[The balance of this page has been intentionally left blank.]
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION. The common stock of the Company is traded on the
Nasdaq SmallCap Market under the symbol "HVGO". The following table sets
out the high and low prices per share for the common stock for 1997 and
1996, as reported by Nasdaq. The prices reported reflect inter-dealer
prices, without regard to retail mark-ups, markdowns, or commissions, and
do not necessarily reflect actual transactions. High and low sales prices
are shown for all quarters.
<TABLE>
<CAPTION>
1997 1996
High Low High Low
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
First Quarter $ 1 - 5/8 $ 1 - 1/16 $ 2 - 3/8 $ 1 - 5/16
Second Quarter $ 1 - 1/2 $ $ 25/32 $ 2 - 7/8 $ 1 - 3/8
Third Quarter $ 1 - 1/8 $ 11/16 $ 1 - 11/16 $ 1
Forth Quarter $ 1 $ 5/16 $ 1 - 11/16 $ 1 - 1/8
</TABLE>
HOLDERS. The number of stockholders of record on March 1, 1998 was
approximately 400. Based on mailings made in connection with the 1997
annual meeting of the Company's stockholders, the Company believes the
shares held of record by the Company's stockholders are beneficially owned
by approximately 1,600 persons.
DIVIDENDS. The Company has declared no cash or stock dividends on its
common stock since inception and does not
anticipate declaring or paying cash or stock dividends in the future.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below has been derived from, and
should be read in conjunction with the Company's financial statements and
the notes thereto, and Item 7 of this report entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The selected financial data for the year ended December 31, 1997 has been
derived from the Company's financial statements appearing elsewhere in this
report, which have been audited by BDO Seidman, LLP, Spokane, Washington.
The selected financial data for the four years ended December 31, 1996 have
been derived from the Company's consolidated financial statements appearing
elsewhere in this report, which have been audited by BDO Seidman, LLP for
1996 and Zeller Weiss & Kahn, Mountainside, New Jersey, for the preceding
years.
The selected financial data should be read in conjunction with and is
qualified by such financial statements and the notes thereto.
<TABLE>
<CAPTION>
Summary of Balance Sheets:
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Working capital
(deficit) $ (289,024) $ (49,331)$ 428,469 $ 31,422 $ 1,815,006
Current assets 282,782 203,722 894,229 1,029,081 3,052,439
Total assets 17,626,089 10,806,150 8,441,690 8,646,755 7,962,755
Current
liabilities 571,806 253,053 465,760 997,659 1,237,433
Long-term
obligation 148,515 194,065 0 0 0
Total liabilities 720,321 447,118 465,760 1,267,789 1,487,433
Stockholder's
equity 16,905,768 10,359,032 7,975,930 7,378,966 6,475,322
Summary of Statements of Operations:
Revenues <F1> 0 3,510 499,299 216,418 0
Net loss <F2> (1,788,249) (1,328,327)(2,329,190)(1,362,954) (256,769)
Net loss per share (0.08) (0.08) (0.20) (0.14) (0.03)
- ------------------------------------------------------------------------
<FN>
<F1> Cumulative revenues for the period from inception (May 2, 1990)
through December 31, 1997 were $1,151,958.
<F2> Cumulative losses for the period from inception (May 2, 1990) through
December 31, 1997 were $7,701,347.
</FN>
</TABLE>
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW. Of significance during 1997 was the Company's merger of Easton
Pacific, resulting in the acquisition of 40 patented mining claims and 149
unpatented mining claims and two state leases in the Virginia City Mining
District. This acquisition substantially completed the Company's
consolidation of 15,000 acres of mining properties in the district. During
1996, the Company had made substantial progress in its consolidation
efforts, both by acquiring additional claims and interests from
nonaffiliated parties and by completing the merger of its affiliates
Hanover Resources and Group S into the Company. In furtherance of its
commitment to explore the Alder Gulch area, the Company hired five
experienced geologists in 1997 to gather rock samples and map the surface
geology of the Alder Gulch and Browns' Gulch areas. In all, over 800
samples were collected and assayed by Bondar Clegg and 21 square miles were
mapped. The mapping provided further understanding of the structure and
alteration associated with gold mineralization in the area.
The Company gained additional insight into the potential for gold
mineralization throughout the district by conducting an airborne
geophysical survey covering over 41 square miles. Previously unknown beds
of iron formation, ultramafic intrusives and magnetic-bearing felsic gneiss
were identified by mapping the magnetic and electromagnetic character of
the rocks within the survey area. Although management continues to believe
the properties lend themselves to large-scale development, the Company does
not as of the date of this report have the cash resources necessary for
development, nor does it have an agreement with any major mining company
for such development.
As was previously reported Neal A. Degerstrom, an affiliate of the
Company, agreed, as a condition to Easton Pacific merging with the
Company, to guarantee the Company's land payments to its landowner-lessors
up to $2,891,210 through August 1998. At December 31, 1997 $1,125,000 had
been paid pursuant to the guaranty. In addition to this money, the Company
also received $1,673,750 from the public sale of 1,139,000 shares of its
common stock at $1.25 per share, and 500,000 shares of its common stock at
$0.50 per share. 361,000 additional shares were sold after February 17,
1998 which completed the Company's 2,000,000-share offer. These shares were
sold between $0.40 and $0.50 per share and netted the Company $169,000. The
Company intends to issue additional shares in private placements during
1998 in order to meet its ongoing obligations to the landowner-lessors of
the various mining claims it leases, and to provide working capital for
continued exploration of its properties in the Virginia City Mining
District. The number of shares to be issued in any private offerings and
the price at which they will be offered have not been determined as of the
date of this report.
The Company continues to receive expressions of interest from a number of
North American mining companies concerning a joint venture or other
economic arrangement to explore and develop the properties. However, due to
the depressed price for gold and the fact that mining companies have
curtailed exploration activities in favor of pursuing properties with known
reserves or production, the Company has been unable to negotiate an
agreement to meet landowner - lessor payments and fund exploration and, if
warranted, development of its properties. The Company believes that a
significant increase in the price for gold would allow the Company to
successfully negotiate a workable arrangement. The Company also believes
that it would be more successful in concluding an arrangement if it was
able to further reduce or extend its landowner - lessor payments or if it
was able to further define the mineral potential of the properties through
additional drilling.
RESULTS OF OPERATIONS.
1997 COMPARED TO 1996. During the year ended December 31, 1997, the
Company realized no revenues. During the year ended December 31, 1996, the
Company realized revenues of approximately $3,500 resulting from the sale
of carbon product stockpiled at the Company's inactive mine.
Operating expenses decreased to $989,000 for the year ended December 31,
1997 from $1,312,000 for the year ended December 31, 1996 (25%). The
overall decrease was primarily due to a $109,000 reduction in consulting
fees and a $66,000 reduction in legal fees. Other expense items decreased
to a lesser degree as a result of completing the relocation of corporate
headquarters and change in management. In addition to the decrease in
operating expenses, there was an offsetting charge to interest expense of
$768,585 for amortization of the deferred guaranty fees representing the
cost of a shareholder's guaranty of the Company's payments of mineral
property obligations. Primarily as a result of the foregoing factors, the
Company recognized a net loss of $1,788,000 in 1997 versus a net loss of
$1,328,000 in 1996.
12
1996 COMPARED TO 1995. During the year ended December 31, 1996, the
Company realized revenues of approximately $3,500 resulting from the sale
of carbon product stockpiled at the Company's inactive mine. During the
year ended December 31, 1995, the Company had revenues of approximately
$499,000 comprised of $249,000 from the sale of refined gold and $250,000
from an option payment under the Kennecott mining venture. The Company's
mining operations were suspended in March 1995 due to a lack of funds
following Kennecott's withdrawal from the mining venture. Milling
operations were suspended in April 1995.
Operating expenses decreased to $1,312,000 for the year ended December
31, 1996 from $2,826,000 for the year ended December 31, 1995 (54%). The
overall decrease was primarily due to the suspension of mining and milling
activities in 1995. As a result, there were no costs of goods mined in 1996
as compared to $1,077,000 in 1995. Additionally, in 1995 the Company wrote
down the carrying value of its note receivable due from the related party
mill operator by $780,000 to reflect the receivables estimated net
realizable value. General and administrative expenses increased to
$1,285,000 in 1996 from $931,000 in 1995. The increase in general and
administrative expenses was primarily due to a $100,000 increase in
salaries and payroll costs associated with officers and personnel hired
during 1996, professional fees incurred in 1996 in connection with the
Company's acquisition of Hanover Resources and Group S of approximately
$80,000, and an increase in facility related expenses of approximately
$50,000 due to the Company's establishment of its Coeur d'Alene
headquarters. Primarily as a result of the foregoing factors, the Company
recognized a net loss of $1,328,000 in 1996 versus a net loss of $2,329,000
in 1995.
LIQUIDITY AND CAPITAL RESOURCES. The Company is an exploration stage mining
company and for financial reporting purposes has been categorized as a
development stage company since its inception. At December 31, 1997, it
had no recurring sources of revenue and negative working capital. The
Company has incurred losses and experienced negative cash flows from
operations in every year since its inception. Additionally, as a
consequence of Kennecott's withdrawal from the mining venture in March of
1995, the Company assumed full responsibility for certain landowner rental
and royalty obligations pertaining to its Alder Gulch mining claims. At
December 31, 1997, those rental and royalty obligations payable in 1998 and
1999 were approximately $1,468,000 and $1,819,000.
On April 30, 1997 the Company entered into a reorganization agreement
with Easton-Pacific to acquire all of the issued and outstanding shares of
the capital stock of Easton Pacific in exchange for 7,000,000 shares of the
Company's common stock. On September 30, 1997 Easton Pacific was
effectively merged into the Company pursuant to the shareholders of both
companies approving the merger and the filing of articles of merger with
the secretaries of state of Delaware and Montana. Allowing for lock-up
periods and absence of sufficient trading volume, the fair market value of
the Company's shares issued to acquire Easton Pacific, including direct
acquisition costs of $60,612, was determined to be $4,787,000. Easton
Pacific's annual rental obligations for 1998 and 1999 total approximately
$30,000.
Due to the foregoing conditions, the Company's independent certified
public accountants have included a paragraph in the Company's 1997
financial statements relative to a going concern uncertainty. To raise
additional funds to help meet its 1997 obligations, the Company filed a
registration statement with the Securities and Exchange Commission ("SEC")
to, in part, register 2,000,000 of its common shares for sale to the
public. The registration statement was declared effective August 15, 1997
and 1,139,000 new shares of the Company's common stock were thereafter
issued against an advance of $1,424,000 for the shares. An additional
500,000 shares were sold December 1997 at $0.50 per share and the remaining
361,000 shares were sold after February 17, 1998 at between $0.40 and $0.50
per share. The declining prices received for these shares reflects a
corresponding decline in the market value of the Company's common stock as
reported on the Nasdaq SmallCap Market during the period. Market prices
declined from $1.25 per share at May 6, 1997 to $0.625 per share at
February 17, 1998, largely as a consequence of the significant drop in
world gold prices.
In August 1997, the SEC approved Nasdaq's proposed maintenance standards
for companies wishing to remain listed on the SmallCap Market. Under the
new criteria, which has been implemented by the Nasdaq Stock Market, all
Nasdaq SmallCap Market-listed stocks must maintain a bid price of at least
$1.00 without exception. If the Company is to maintain its listing it must
be in compliance with the bid price requirement by February 23, 1998. The
Company may regain compliance if at any time within 90 days from February
23, 1998 the Company's stock trades at $1.00 or more per share for 10
consecutive days. Should the Company be delisted it will be extremely
difficult for it to achieve the requirements necessary for readmittance
onto the Nasdaq SmallCap market and the Company may lose the support of
many of its broker-dealers. A delisting could have a significant impact on
the Company's ability to raise funds for working capital and to meet
landowner-lessor payments.
13
The Company expects to meet its 1998 obligations using existing funds,
funds from the sale of shares of common stock and funds available under the
guaranty given by Neal A. Degerstrom. At December 31, 1997 $1,125,000 had
been paid under the guaranty to satisfy landowner-lessor obligations,
entitling Mr. Degerstrom and the nonaffiliates to exercise 900,000 of the
2,312,970 share options, given as consideration for the guaranty. All
900,000 options were exercised in 1997. Because the Company has not been
financially able to explore and develop its properties to the extent
necessary to commence a commercial mining operation, it has incurred
aggregate losses of $7,701,347 from its inception through December 31,
1997. Unless the Company is able to negotiate a joint venture or other
agreement with a major mining company for the combined exploration and
development of the Virginia City Mining District properties, it may
continue to experience a shortage of working capital.
The Company's inability to advance its properties to the commercial
production stage is attributable to a number of factors, including
Kennecott's unexpected withdrawal from the mining venture in 1995 and the
Company's lack of success through 1995 in consolidating the various claims
and interests in the area. Although the Company has been able to conduct
exploration and limited development activities on the properties, primarily
as the result of its former arrangement with Kennecott and, to a lesser
extent, as the result of exploration and evaluation work it performed
itself in 1995, 1996, and 1997, significant additional work must be
undertaken to determine whether the properties will support commercial
mining operations.
At December 31, 1997, Hanover had a net deferred tax asset of
approximately $732,000. A valuation allowance equal to this amount has been
established. Management cannot determine that more likely than not the
Company will realize the benefits from these deferred tax assets.
Although the Company's operations are subject to general inflationary
pressures, these pressures have not had a significant effect on operations,
particularly since early 1995 when mining and processing operations were
suspended for lack of funds. If the Company resumes extensive exploration
and development activities, which can be expected to occur if it is
successful in negotiating a joint venture or other agreement with a major
mining company, inflation could result in an increase in the cost of goods
and services necessary to its mining operations.
As was previously reported, the Company entered into an agreement in
November 1995 with a non affiliate to acquire a 0.5% gross overriding
royalty interest burdening certain of the Company's claims. Pursuant to
terms of that agreement, if the market price of the Company's common stock
did not equal or exceed $4.00 per share prior to November 1, 1997, the
Company would issue additional shares of common stock to raise the
aggregate market value of the shares held by the seller to $20,000.
Utilizing the highest market price of $2.53 per share for its stock, from
the date of the agreement to November 1, 1997, the Company issued 2,905
additional new shares to supplement up to $20,000, the value of the shares
held by the seller.
Cash flows for the Company for each of the years in the three-year period
ended December 31, 1997 were as follows:
YEAR ENDED DECEMBER 31, 1997. Operating activities of the Company used
$920,000, primarily as a result of the 1997 net loss of $1,788,000, offset
by amortization of $768,585 of deferred guaranty fee. $1,785,519 was used
in investing activities, primarily as a result of payments of $1,725,000
made in relation to the Company's mineral properties. The Company
generated $2,790,000 from financing activities primarily as a result of
funds received through the sale of common stock. As a result of the
foregoing, the Company's cash position increased by $84,000 to $180,000 at
December 31, 1997.
YEAR ENDED DECEMBER 31, 1996. Operating activities of the Company used
$1,513,000, primarily as a result of the 1996 net loss of $1,328,000 and a
decrease in accounts payable of $215,000. $1,354,000 was used in investing
activities, primarily as a result of payments made in relation to the
Company's mineral properties. The Company generated $2,229,000 from
financing activities, primarily as a result of funds received through the
sale of common stock. As a result of the foregoing, the Company's cash
position decreased by $638,000 to $96,000 at December 31, 1996.
YEAR ENDED DECEMBER 31, 1995. Operating activities of the Company used
$1,628,000, primarily as a result of the 1995 net loss of $2,329,000,
adjusted for noncash expenses of $200,000 in marketing fees received in
exchange for common stock and a $780,000 write down in the carrying value
of a note receivable, and a decrease of $423,000 in accrued expenses.
$822,000 was used in investing activities, primarily as a result of
payments made in relation to the Company's mineral properties. The Company
generated $2,463,000 from financing activities, primarily as a result of
funds received through the sale of common stock. As a result of the
foregoing, the Company's cash position increased by $11,000 to $734,000 at
December 31, 1995.
14
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches. The
"year 2000" problem is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two digit
year value to 00. The issue is whether computer systems will properly
recognize date sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. As the Company's hardware and
software consist of recently purchased year 2000 compliant products, the
year 2000 problem is not anticipated to have a significant impact on the
Company's operations.
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE
INCOME, and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION. SFAS No. 130 requires that an enterprise report, by
major components and as a single total, the change in its net assets during
the period from nonowner sources; and SFAS No. 131 establishes annual and
interim reporting standards for an enterprise's operating segments and
related disclosures about its products, services, geographic areas and
major customers. Adoption of these statements will not impact the
Company's financial position, results of operations or cash flows and any
effect will be limited to the form and content of its disclosures. Both
statements are effective for fiscal years beginning after December 15,
1997, with earlier application permitted.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company for the year ended December 31,
1997 included elsewhere in this report have been audited by BDO Seidman,
LLP, Spokane, Washington. An index to such financial statements appears at
Page 23 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Effective January 14, 1997, the Company replaced Zeller Weiss & Kahn with
BDO Seidman LLP as the Company's independent public accountants. This
change was made in conjunction with the restructuring of the Company's
management and the relocation of its executive offices to Coeur d'Alene,
Idaho, which is near Spokane, in early 1996. The change was formally
approved by the board of directors, upon the recommendation of the audit
committee of the board, in June of 1996, and such approval was ratified by
the stockholders of the Company at a special meeting held on July 31, 1996.
During the years ended December 31, 1995, 1994, and 1993, Zeller Weiss &
Kahn's reports on the financial statements of the Company contained no
adverse opinion or disclaimer of opinion, or were qualified or modified as
to uncertainty, audit scope or accounting principles. During such periods,
there were no disagreements with Zeller Weiss & Kahn on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which, if not resolved to the satisfaction of
such firm, would have caused them to make reference to the subject matter
of such disagreement in their reports on such financial statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS AND EXECUTIVE OFFICERS; OTHER KEY INDIVIDUALS. The names, ages,
business experience (for at least the past five years) and positions of the
directors, executive officers and other key individuals of the Company as
of March 1, 1998 are set out below. The Company's board of directors
consists of six members. All directors serve until the next annual meeting
of the Company's stockholders or until their successors are elected and
qualified. Executive Officers of the Company are appointed by the board of
directors. Mr. Degerstrom and Mr. Fish were each appointed to the board of
directors in September of 1995 and Mr. Fish was elected president of the
Company in March of 1996, all pursuant to the terms of a securities
purchase agreement between the Company and Mr. Degerstrom. Mr. Fish was
subsequently elected chairman of the board of directors in May of 1996.
15
<TABLE>
<CAPTION>
Name Age Position
--------------------- ---- --------------------------
<S> <C> <C>
James A. Fish 67 Chairman, President, and
CEO
Neal A. Degerstrom 73 Director
Tim Babcock 78 Director
Karl E. Elers 59 Director
Laurence Steinbaum 74 Director
Robinson Bosworth III 56 Director
Frank D. Duval <F1> 62 Chief Operating Officer (de
facto)
Wayne Schoonmaker <F2> 61 Secretary, Treasurer
William S. Neal <F2> 45 Exploration Manager, Senior
Geologist
- -------------------------------------------------------------------------
<FN>
<F1> Mr. Duval has not been elected an executive officer of the Company,
but may be deemed to be an executive officer by virtue of his activities on
behalf of the Company.
<F2> Neither Mr. Schoonmaker nor Mr. Neal is an executive officer of the
Company.
</FN>
</TABLE>
BIOGRAPHIES OF DIRECTORS, EXECUTIVE OFFICERS, AND KEY INDIVIDUALS.
JAMES A. FISH. Mr. Fish was appointed a director of the Company in
September of 1995, President in March of 1996, and Chairman and Chief
Executive Officer in May of 1996. He is also Vice President and General
Counsel for N. A. Degerstrom, Inc., positions he has held since September
of 1987. Prior to that, he was in private law practice with the firm of
Winston & Cashatt in Spokane from 1980 through 1987, and at the firm of
Fish, Schultz & Tombari from 1962 through 1980. Mr. Fish was employed as
superintendent at S&F Construction from 1955 through 1962 and served in the
Navy from 1952 to 1955. He received a Bachelor of Arts degree in geology
from Berea College in Kentucky in 1952 and a law degree from Gonzaga
University School of Law in 1962.
NEAL A. DEGERSTROM. Mr. Degerstrom was appointed a director of the Company
in September of 1995. He is President of N. A. Degerstrom, Inc., Spokane,
Washington, a privately-held company which has been engaged in railroad,
heavy highway, bridge and dam construction, large open pit mining, and
worldwide mineral exploration since 1904, and prior to that was the
managing partner of N. A. Degerstrom Company, the predecessor in interest
to N. A. Degerstrom, Inc. Mr. Degerstrom has been a member of the Advisory
Board of the College of Engineering at Washington State University,
president of the Spokane Chapter of Associated General Contractors, a
member of the Society of Explosives Engineers and the Society of Mining
Engineers, and a trustee of the Northwest Mining Association. He received
a Civil Engineering degree from Washington State University in 1949.
ROBINSON BOSWORTH III. Mr. Bosworth has been a director of the Company
since September 1997. He is also Managing Director and Advisory Director
of Robert W Baird & Company, Inc. and has been the Head of the IMS
Department for the same since 1971. Robert W. Baird & Co., Inc., (Baird)
is registered as an investment adviser under the Investment Advisers Act of
1940. Established in 1971, Baird Investment Management Services (Baird
IMS) is a separate department of Baird providing portfolio management
services on a fee basis to clients with substantial assets. Baird is an
80%-owned, indirect subsidiary of Northwestern Mutual Life Insurance
Company (NML). Prior to 1971 Mr. Bosworth worked as a security analyst
for Standard & Poor's Corporation and for Stein Roe & Farnham. He
graduated cum laude with a Bachelors of Arts degree in Economics from
Amhurst College in 1963 and with highest honors and an MBA from Amos Tuck
School of Business Administration at Darthmouth in 1967.
KARL E. ELERS. Mr. Elers was appointed a director of the Company in
September 1997. He is also a director of Niugini Mining Ltd. and Chairman
of Crown Butte Resources Ltd. In 1987 he joined Battle Mountain Gold as
Executive Vice President, a position he held until he was appointed
President in 1988. Mr. Elers served as President of Battle Mountain Gold
from 1988 until 1997, CEO from 1990 until 1992, and Chairman from 1990 to
present. From 1985 to 1988 he worked for Western Ag-Minerals as Managing
Director. He worked for Pennzoil Sulphor Co. as Senior Vice President of
Operations in 1985 and for Duval Corporation from 1962 to 1985. Mr. Elers
is a director of the National Mining Association, the International
Committee on Metals and the Environment, and the SME Foundation of A.I.M.E.
He previously served on the board of directors of the Fertilizer Institute,
the Northwest Mining Association, and was Chairman of the Western
Governor's Mining Advisory Council, and President of the New Mexico Mining
Association. He currently serves on a number of international relations
and civic boards; and is a member of the American Institute of Mining,
Metallurgical and Petroleum Engineers, and the Canadian Institute of
Mining. He was awarded the Order of Simon Bolivar by the President of the
Republic of Bolivia for services to that nation.
16
TIM BABCOCK. Mr. Babcock was appointed a director of the company in
September 1997. Since 1986 he has owned and operated a consulting firm
providing consulting services to the mining industry. From 1970 to 1980 he
owned Capital City Television, Mineral Resources Development, and January
Mining Company. In 1969 he was appointed a member of the Committee on
Oceans and Atmosphere by President Nixon. He served as Senior Executive
Vice President of Occidental International Corporation from 1970 to 1974.
Mr. Babcock served as Governor of the State of Montana from 1960 to 1969.
He was awarded the Bronze Star for Valor in action during WWII and three
Battle Stars.
LAURENCE STEINBAUM. Mr. Steinbaum has been a director of the Company since
December of 1994. From October 1990 through December 1994, he was co-
chairman of the Company's Board of Advisors. Since 1986 he has been a
private financier and owner/investor of several businesses, including
restaurants, real estate, and oil and gas producing companies. Between
1960 and 1985, he was Executive Director of the Sommerset Hills School, a
private school located in New Jersey for handicapped children, which he
owns. From 1975 to 1980, he owned a major dredging company in Florida. He
graduated from New York University in 1951 receiving a bachelor of science
degree and completed courses toward a Masters Degree at New York
University's School of Social Sciences.
FRANK D. DUVAL. Mr. Duval presently serves in an ex officio capacity as
acting chief operating officer of the Company and exercises responsibility
with respect to the Company's day-to-day operations. He is also presently
the president and a director of Midnite Mines, Inc., based in Spokane,
Washington. From 1974 until his resignation in 1987, Mr. Duval served in
various capacities as a director or executive officer of Pegasus Gold Inc.,
a major North American mining company, which he founded. He is also a co-
founder and principal shareholder of Montana Reserves Company, a privately-
held mining company which, until operations were curtailed in 1995, was a
joint venture partner with Noranda Minerals Corp. in a large copper and
silver project located in Sanders and Lincoln counties, Montana. Mr. Duval
has been engaged in the mining business in various capacities for over 30
years.
In 1991, Star Phoenix Mining Company, an Idaho corporation with which Mr.
Duval was affiliated as its president, a director and a significant
shareholder, filed for protection from creditors under federal bankruptcy
law following the termination by Hecla Mining Company of a lease and option
agreement between Star Phoenix and Hecla covering mining properties in the
Coeur d'Alene Mining District that Star Phoenix was then operating. Star
Phoenix subsequently brought suit against Hecla in Shoshone County, Idaho
District Court for breach of the lease and option agreement, and in 1994
obtained a $20 million judgement against Hecla. Hecla appealed the decision
to the Idaho Supreme Court and in May 1996 the Supreme Court overturned the
lower courts ruling. Mr. Duval was one of several guarantors of Star
Phoenix's indebtedness. The Supreme Court's reversal of the District
Court's award of damages lead Mr. Duval to seek protection under chapter 7
of the federal bankruptcy law in October 1997.
WAYNE SCHOONMAKER. Mr. Schoonmaker was appointed Secretary, Treasurer, and
Principal Accounting Officer of the Company effective as of January of
1996, succeeding Stephen J. Schmid. From 1981 until 1993, he was Financial
Manager of the Northwest Mining Department of ASARCO, and from 1978 until
1981 was Chief Accountant at ASARCO's Troy Unit in Montana, where he was
responsible for the installation and implementation of the accounting
system for the start-up Troy mine. From July of 1978 through December of
1978, Mr. Schoonmaker was Assistant Treasurer of the Bunker Hill Company,
and from 1964 to 1978, was Assistant Corporate Secretary of Hecla Mining
Company. Mr. Schoonmaker received a Bachelor of Science degree in
Accounting from the University of Montana in 1962 and MBA from the
University of Idaho in 1987. He is a Certified Public Accountant in Idaho
and Montana.
WILLIAM S. NEAL. Mr. Neal has been associated with the Company as its
Senior Exploration Manager since November of 1996. From 1987 until joining
the Company, he served as a senior geologist with Battle Mountain Gold
Company in its domestic exploration group. Prior to that, he worked as a
geologist for Chevron Resources and as a consultant to FirstMiss Gold Inc.
Mr. Neal has over eighteen years' experience in mineral exploration,
primarily in the western United States. He received a Bachelor of Science
degree in geology from Colorado State University in 1977 and a Master of
Science degree in geology from Washington State University in 1987.
SECTION 16(A) REPORTING OBLIGATIONS. Section 16(a) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") requires the
Company's directors and executive officers, and persons who own more than
10% of a registered class of the Company's equity securities, to file
initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission (the "Commission"). Such persons are
required by Commission regulations to furnish the Company with copies of
all Section 16(a) forms they file.
Based solely on its review of copies of reports made pursuant to Section
16(a) of the Exchange Act and related regulations, the Company believes
that during the year ended December 31, 1997, Mr. Degerstrom and Mr. Elers
were each delinquent in filing a report on Form 4.
17
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE. The following table discloses compensation
received by the Company's current and former president and chief executive
officer for the years ended December 31, 1997, 1996, and 1995. No other
executive officer's salary and bonus exceeded $100,000 in any of these
years.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------- -------------------------
Other Dollar Value Securities All Other
Executive Annual of Restricted Underlying LTIP Compen-
Officer Year Salary Bonus Compensation Stock Awards Options/SARS Payouts sation
- ------------- ----- ------ ----- ----------- ----------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JAMES A. FISH 1997 $90,000<F1>$ -0- $ -0- $ - 0 - $ - 0 - $ - 0 - $ - 0 -
President and 1996 90,000 $ -0- $ -0- $ - 0 - $ - 0 - $ - 0 - $ - 0 -
Chief Executive 1995 - 0 - $ -0- $ -0- $ - 0 - $ - 0 - $ - 0 - $ - 0 -
Officer
FRED R. SCHMID 1997 $ - 0 - $ -0- $ -0- $ - 0 - $ - 0 - $ - 0 - $ - 0 -
Former President1996 - 0 - 90,000<F2>$ -0- $ - 0 - $ - 0 - $ - 0 - $ - 0 -
and Chief Execu-1995 137,435 $ -0- $ -0- $ - 0 - $ - 0 - $ - 0 - $ - 0 -
tive Officer
- ----------------------------------------------------------------
<FN>
<F1> Mr. Fish succeeded Mr. Fred R. Schmid as president and chief executive
officer of the Company effective March of 1996. Mr. Fish's annual salary is
payable each month in the form of $3,750 in cash and $3,750 in restricted shares
of common stock based on 60% of the average of the "closing" market prices of
the common stock as reported on the NASDAQ SmallCap Market during the preceding
calendar month.
<F2> Consists of compensation paid to Mr. Schmid pursuant to the terms of a
consulting agreement entered into in March of 1996. Such agreement terminated
effective December 31, 1996.
</FN>
</TABLE>
OVERALL COMPENSATION POLICY. Salary compensation of the Company's
executive officers is determined by the board of directors and by a
compensation committee of the board, which is responsible for
considering specific information and making recommendations to the full
board. The compensation committee is comprised of two outside
directors appointed annually by the Company's board of directors and
presently comprises Mr. Babcock and Mr. Steinbaum. In considering and
recommending executive compensation, the compensation committee reviews
factors such as individual executive compensation, corporate
performance, stock price appreciation and the total return to
stockholders. The committee also takes into consideration, executive
compensation levels within a peer group of publicly-held North American
gold-mining companies and, at least historically, the views of the
Company's chief executive officer. Where appropriate, the compensation
committee also considers other performance measures, such as increase
in market share, safety, environmental awareness, and improvements in
relations with the Company's stockholders, employees, the public, and
government regulators.
The objectives of the Company's total executive compensation package
are to attract and retain the best possible executive talent, to
provide an economic framework to motivate the Company's executives to
achieve goals consistent with the Company's business strategy, to
provide an identity between executive and stockholder interests through
stock option plans, and to provide a compensation package that
recognizes an executive's individual results and contributions to the
Company's overall business objectives.
SALARY. The key elements of the Company's executive compensation
consists of salary and incentive stock options. The compensation
committee of the board recommends salary levels of officers and
employee stock option awards.
Salaries for executive officers are determined by evaluating the
responsibilities of the position held and the experience of the
individual, and by reference to the market for executive talent, the
latter of which provides a comparison of salaries for comparable
positions at other gold mining companies. The salary levels of the
chief executive officer and other executive officers of the Company for
the following calendar year are generally set by the board of directors
at its annual meeting or at a later special meeting. Specific
individual performance and overall corporate or business segment
performance are reviewed in determining the compensation level of each
individual officer. In evaluating the performance and setting the
compensation of the chief executive officer and the other executive
officers of the Company, the compensation committee and board of
directors have traditionally maintained salary compensation at levels
below those of other companies within the Company's peer group; in
order to compensate for these lower salaries, the chief executive
officer and other executive officers of the Company have historically
been granted performance incentives in the form of incentive stock
options.
18
CASH BONUSES. From time to time, the board of directors and the
compensation committee may approve cash bonuses to executives and key
employees, based on outstanding achievement in the performance of their
respective duties. During 1994 the compensation committee recommended
to the board, and the board authorized and approved, the payment to
Fred R. Schmid of a cash bonus of $150,000 for his services in raising
the initial working capital and completing the 1993 public financing
for the Company. No cash bonuses were awarded in 1997.
STOCK OPTIONS. The Company currently maintains one stock option plan,
the 1995 Stock Option Plan. The plan provides for the issuance of
incentive stock options intended to qualify under Section 422A of the
Internal Revenue Code of 1986, as amended ("the Code"), and non-
qualified options under the Code. Key individuals of the Company,
including officers and directors, are eligible to receive grants of
options under the plan. All options are exercisable at prices
equivalent to the mean of the high and low sales prices of the common
stock, as reported by the Nasdaq SmallCap Market as of the date of
grant. As of the date of this report, options for 920,000 shares of
common stock had been granted, and options for 3,080,000 additional
shares were available for grant, under the 1995 Stock Option Plan.
250,000 of such options had been issued to Fred R. Schmid; these
options are exercisable by Mr. Schmid at the price of $1.60 per share
through the end of the year 2000. No other named executive officer has
been granted an option pursuant to the 1995 Stock Option Plan as of the
date of this report.
The Company's 1995 Stock Option Plan is jointly administered by the
compensation committee and the board. The primary function of the
compensation committee is to review and evaluate the fairness of the
recommendations of management concerning proposed grants of options to
directors and executive officers of the Company. The primary function
of the board in such matters is to consider the recommendations of the
compensation committee and to authorize proposed grants of options to
such persons.
Stockholder approval of the 1995 Stock Option Plan was obtained at
the 1996 special meeting of shareholders for the purposes of qualifying
the plan pursuant to Rule 16b-3 promulgated under the Securities
Exchange Act of 1934 (the "Exchange Act").
OPTIONS GRANTED IN 1997. Options totaling 120,000 shares of common
stock were granted to three key employees during the year ended
December 31, 1997. The options are exercisable at $0.37 per share
through 2008.
OPTIONS EXERCISES AND OPTION VALUES. No options were exercised during
the year ended December 31, 1997 by any named executive officer of the
Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
BENEFICIAL OWNERSHIP TABLE. The following table sets forth as of March
1, 1998 the names of, and number of shares beneficially owned by,
persons known to the Company to own more than five percent (5%) of the
Company's common stock; the names of, and number of shares beneficially
owned by each director and executive officer of the Company; and the
number of shares beneficially owned by all directors and executive
officers as a group. At such date, the number of shares of common
stock of the Company outstanding were 29,868,019 shares and an
additional 2,532,970 shares were deemed outstanding.
<TABLE>
<CAPTION>
Amount and Nature of Beneficial
Name of Owner (Class) Ownership (all direct
unless otherwise noted) Percent of
--------------------- -------------------------------- ----------
<S> <C> <C>
James A. Fish <F1>, <F2> 236,814 0.7%
Neal A. Degerstrom <F1>, <F3> 7,335,609 22.6%
Karl E. Elers <F1> 0 0.0%
Fred R. Schmid <F4> 3,372,092 10.4%
Laurence Steinbaum <F1>, <F5> 447,856 1.4%
Robinson Bosworth III <F1>, <F6> 534,351 1.6%
Tim Babcock <F1> 0 0.0%
Frank Duval <F7> 100 0.0%
Hobart Teneff <F8> 2,297,989 7.0%
Hanson Industries <F9> 1,670,989 5.2%
All directors and executive officers
as a group (7 persons) <F10> 8,554,730 26.3%
- -------------------------------------------------------------------------
<FN>
<F1> Director of the Company.
<F2> Mr. Fish is Chairman, President, and Chief Executive Officer of
the Company. The shares attributed to Mr. Fish include 103,000 shares
acquired pursuant to the securities purchase agreement described in
footnote 3, below. Such shares are also attributed to Neal A.
Degerstrom in the foregoing table.
19
<F3> The forgoing table attributes to Mr. Degerstrom all of the shares
of the Company purchased by Mr. Degerstrom and his permitted assigns
pursuant to the securities purchase agreement between the Company and
Mr. Degerstrom dated as of June 1, 1995, as amended. Although all
shares purchased by Mr. Degerstrom and his assigns are shown in the
table above as beneficially owned by Mr. Degerstrom, a Schedule 13D
dated June 20, 1995, as amended through the date of the report, filed
by Mr. Degerstrom and others states that 2,663,200 such shares were
registered in Mr. Degerstrom's or his company's own name as of the date
of the report, representing approximately 12.8% of the common stock
deemed outstanding at such date. The Schedule 13D filed by Mr.
Degerstrom and his permitted assigns also states that none of the
persons identified as reporting persons in the Schedule 13D controls
the voting or disposition of any shares of common stock of the Company
other than those owned by each such person, and on this basis Mr.
Degerstrom disclaims beneficial ownership of the shares owned by his
assigns. On March 17, 1997, the board of directors granted Mr.
Degerstrom three-year options to purchase up to 2,312,970 shares of
common stock as consideration for his guaranty of certain obligations
in connection with the Company's agreement to acquire Easton-Pacific
(See Item 1 of this report and, in particular, the subsection entitled
"Management and Financing Matters"). Mr. Degerstrom subsequently
assigned 1,541,978 of the options to two non-affiliates of the Company,
each of whom agreed to severally guaranty one third of the amount Mr.
Degerstrom pays pursuant to his guaranty with the Company. The options
are exercisable by Mr. Degerstrom and the non-affiliate co-guarantors
at the price of $1.25 per share. After giving effect to Mr.
Degerstrom's 470,990 remaining options for shares of common stock, the
300,000 shares he acquired by partially exercising the option and the
564,620 shares he and his company acquired in exchange for Easton
Pacific shares, the number of shares of common stock of the Company
beneficially owned by Mr. Degerstrom at March 1, 1998 was 3,998,810
shares, or approximately 12.3% of the common stock deemed outstanding.
<F4> Includes 425,000 shares issuable to Mr. Schmid and his son,
Stephen, pursuant to the Company's 1995 Stock Option Plan. In
addition, members of Mr. Schmid's family beneficially owns an
additional 2,489,136 shares issued upon the merger of Hanover Resources
and Group S into the Company, which, when combined with Mr. Schmid's
shareholdings, represent approximately 10.4% of the outstanding common
stock as of March 1, 1998. Mr. Schmid disclaims beneficial ownership
of the shares owned by members of his family.
<F5> Includes 125,000 shares issuable pursuant to presently exercisable
options granted under the Company's 1995 Stock Option Plan and 5,000
shares owned beneficially and of record by Mr. Steinbaum's spouse.
<F6> Includes 73,938 shares owned by Mr. Bosworth's spouse and 134,433
shares owned by the Bosworth Jr. Family Trust.
<F7> Frank D. Duval has not been elected to office as an executive
officer or director of the Company, but by virtue of his activities in
the name and on behalf of the Company may be deemed to be an affiliate
of the Company. According to the Schedule 13D filed by Mr. Degerstrom
(see footnote 3, above) on behalf of Mr. Duval and others, Mr.
Degerstrom and Mr. Duval had an understanding pursuant to which Mr.
Duval could have purchased up to one-half of the shares acquired by Mr.
Degerstrom and N. A. Degerstrom, Inc., under the securities purchase
agreement between the Company and Mr. Degerstrom, at a price equal to
that paid by Mr. Degerstrom or N. A. Degerstrom, Inc. for such shares.
The understanding was terminated in April 1997.
<F8> Includes options to acquire 470,990 shares of common stock
pursuant to an assignment by Mr. Degerstrom to Mr. Teneff of one third
of the option that was granted to Mr. Degerstrom by the Company's board
of directors as consideration in connection with the Easton-Pacific
transaction. Also includes 671,000 shares acquired pursuant to the
securities purchase agreement between the Company and Mr. Degerstrom.
See footnote 3 above.
<F9> Includes options to acquire 470,990 shares of common stock
pursuant to an assignment by Mr. Degerstrom to Hanson Industries, Inc.
of one third of the option that was granted to Mr. Degerstrom by the
Company's board of directors as consideration in connection with the
Easton-Pacific transaction. Also includes 671,000 shares acquired
pursuant to the securities purchase agreement between the Company and
Mr. Degerstrom. See footnote 3 above.
<F10> See foot notes 2,3, 5, and 6 above.
</FN>
</TABLE>
20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
As is previously discussed in this report, on March 17, 1997, Neal A.
Degerstrom, who is affiliated with Hanover, guaranteed the payment of
Hanover's obligations to the landowner - lessors of its mining claims
and leases through September 7, 1998, up to the aggregate amount of
$2,891,210, which amount approximates Hanover's obligations to its
landowner - lessors during the period of the guaranty. As consideration
for the guaranty, Hanover granted Mr. Degerstrom three - year options
to purchase up to 2,312,968 shares of Hanover's common stock at an
exercise price of $1.25 per share. Payments made by Mr. Degerstrom
pursuant to the guaranty will be credited toward the exercise of such
options. Effective April 29, 1997, Mr. Degerstrom assigned two-thirds
of these options equally to Mr. Hobart Teneff and Hanson Industries,
Inc., two nonaffiliates; each of whom beneficially owns more than 5% of
the Company's deemed outstanding shares of common stock. Each of Mr.
Teneff and Hanson Industries, Inc. undertook to severally guaranty
payment to Mr. Degerstrom of one-third of the amount Mr. Degerstrom
pays at any time during the term of his guaranty. The guaranty was
given by Mr. Degerstrom, in connection with the reorganization
agreement, dated as of April 30, 1997, between Hanover and Easton
Pacific. As of December 31, 1997, $1,125,000 had been paid pursuant to
this guaranty (entitling Mr. Degerstrom and the co-guarantors to
exercise up to 900,000 of the options given as consideration for the
guaranty.) All of the 900,000 options were exercised by Mr. Degerstrom
and the co-guarantors in 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
EXHIBITS. The following exhibits are filed as part of this report.
Exhibits previously filed are incorporated by reference, as noted.
EXHIBIT NO. EXHIBIT
3.1 Articles of Incorporation of the registrant. Filed as an exhibit
to the registrant's registration statement on Form S-1(Commission File
No. 33-38745) and incorporated by reference herein.
3.2 Bylaws of registrant. Filed as an exhibit to the registrant's
registration statement on Form S-1 (Commission File No. 33-38745) and
incorporated by reference herein.
5.1 Opinion of Randall & Danskin, P.S. regarding legality of
securities offered. Filed as Exhibit 5.1 to the registration
statement on Form S-1 (Commission File No. 33-29361) and
incorporated by reference herein.
10.1 Claim Option Agreement dated December 20, 1990 between the
registrant and Hanover Resources, Inc. Filed as an exhibit to the
registrant's registration statement on Form S-1(Commission File No.33-
38745) and incorporated by reference herein.
10.2 Mineral Sublease Agreement dated August 31, 1993 between the
registrant and Group S Limited. Filed as an exhibit to the
registrant's annual report on Form10-K for the year ended December 31,
1993, and incorporated by reference herein.
10.3 Assignment of Lease and Option to Purchase dated November 15, 1993
between the registrant and John Magnus. Filed as an exhibit to the
registrant's annual report on Form10-K for the year ended December 31,
1993, and incorporated by reference herein.
10.4 Amendment No.1, dated December 3, 1993, to Claim Option Agreement
dated December 20, 1990 between the registrant and Hanover Resources,
Inc. Filed as an exhibit to the registrant's annual report on Form 10-
K for the year ended December 31, 1993, and incorporated by reference
herein.
10.5 Amendment No.1, dated December 3, 1993, to Assignment and Mineral
Sublease Agreement dated February 20, 1992 between the registrant and
Hanover Resources, Inc. Filed as an exhibit to the registrant's annual
report on Form 10-K for the year ended December 31, 1993, and
incorporated by reference herein.
10.6 Assignment Agreement between the registrant and Hanover Resources,
Inc. Filed as an exhibit to the registrant's registration statement on
Form S-1 (Commission File No. 33-38745) and incorporated by reference
herein.
21
10.7 Securities Purchase Agreement dated June 1, 1995, as amended,
between the registrant and Neal A. Degerstrom. Filed as Exhibit 10.7
to the registrant's annual report on Form 10-K for the year ended
December 31, 1995 and incorporated by reference herein.
10.8 Consulting Agreement dated as of January 29, 1996 between the
registrant and Fred R. Schmid. Filed as Exhibit 10.8 to the
registrant's annual report on Form10-K for the year ended December 31,
1995 and incorporated by reference herein.
10.9 Consulting Agreement dated as of January 29, 1996 between the
registrant and Stephen J. Schmid. Filed as Exhibit 10.9 to the
registrant's annual report on Form10-K for the year ended December 31,
1995 and incorporated by reference herein.
10.10 Asset Purchase Agreement dated March 25, 1996 between the
registrant and Tabor Resources Corporation. Filed as Exhibit 10.10 to
the registrant's annual report on Form10-K for the year ended December
31, 1995 and incorporated by reference herein.
10.11 Agreement and Amendment to Mining Lease and Option to
Purchase dated March 26, 1996 between the registrant and Roy A. and
Marlene Moen and Moen Builders, Inc. Filed as Exhibit 10.11 to the
registrant's annual report on Form 10-K for the year ended December31,
1995 and incorporated by reference herein.
10.12 Amendment to Asset Purchase Agreement dated April 19, 1996
between the registrant and Tabor Resources Corporation. Filed as
Exhibit10.12 to the registrant's quarterly report on Form 10-Q for the
three month period ended March 31, 1996 and incorporated by reference
herein.
10.13 Form of Lock-Up Agreement between the registrant and certain
Selling Stockholders. Previously filed as and Exhibit 10.13 to the
registrant's statement on Form S-1 (Commission File No. 33-3882) and
incorporated by reference herein.
10.14 Form of Lock-Up Agreement between the registrant and certain
shareholders of Easton-Pacific and Riverside Mining Company. Filed as
Exhibit C to the Agreement and Plan of Reorganization included in the
registrant's registration statement on Form S-1(Commission File No.33-
29361) and incorporated by reference herein.
10.15 Steininger Report on Evaluation of the Virginia City
Properties dated July 6, 1997. Filed herewith.
10.16 Henricksen Report on Virginia City Mining District dated May
1997. Filed herewith.
23.8 Consent of Tom Henricksen. Filed herewith.
23.9 Consent of Roger Steininger. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
99.1 Opinion of Zeller Weiss & Kahn dated March 29, 1996 concerning the
financial statements of the registrant for the years ended December31,
1995 and 1994, and for the period from inception (May 2, 1990) through
December 31, 1995. Filed as part of the financial statements of the
registrant included in the registrant's registration statement on Form
S-1 (Commission File No.33-3882) and incorporated by reference herein.
99.2 Opinion of Grossman Tuchman & Shah, LLP dated May 16, 1996
concerning the financial statements of Hanover Resources, Inc. and
Group S Limited for the years ended December 31, 1995 and 1994. Filed
as part of the financial statements of the registrant included in the
registrant's registration statement on Form S-1 (Commission
File No. 33-3882) and incorporated by reference herein.
FINANCIAL STATEMENTS. An index to the financial statements included in
this report appears at page 23. The financial statements and
supplementary data appears at page F/S-2 through F/S-15 of this report.
REPORTS ON FORM 8-K. No current reports on Form 8-K were filed by the
Company during the fourth quarter of 1997.
22
HANOVER GOLD COMPANY, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-------
<S> <C>
Report of Independent Certified Public Accountants F/S-1
Financial Statements:
Balance Sheets as of December 31, 1997
and December 31, 1996 F/S-2
Statements of Loss for the Year Ended December 31, 1997,
1996, 1995, and for the period from inception (May 2, 1990)
to December 31, 1997 F/S-3
Statements of Changes in Stockholders' Equity
for the period from inception (May 2, 1990)
to December 31, 1997 F/S-4
Statements of Cash Flow for the Year Ended December 31, 1997,
1996, 1995, and for the period from inception (May 2, 1990)
to December 31, 1997 F/S-6
Summary of Accounting Policies F/S-7
Notes to Financial Statements F/S-8
Signatures F/S-16
</TABLE>
[The balance of this page has been intentionally left blank.]
23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Hanover Gold Company, Inc.
Spokane, Washington
We have audited the accompanying balance sheets of Hanover Gold
Company, Inc. as of December 31, 1997 and 1996, and the related
statements of loss, change in stockholders' equity and cash flows for
the years then ended. We have also audited the statements of loss,
stockholders' equity and cash flows for the period from inception (May
2, 1990) through December 31, 1997, except that we did not audit these
financial statements for the period from inception (May 2, 1990)
through December 31, 1995; those statements were audited by other
auditors whose report dated March 29, 1996, expressed an unqualified
opinion on those statements. 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.
The financial statements give retroactive effect to the mergers of
Hanover Gold Company, Inc., Hanover Resources, Inc. and Group S Limited
which have been accounted for as a combination of entities under common
control as described in Note 2 to the financial statements. We did not
audit the statements of loss, changes in stockholder's equity and cash
flows of Hanover Resources, Inc. and Group S Limited for the year ended
December 31, 1995 and for the period from inception (May 2, 1990)
through December 31, 1995, which statements reflect total revenues of
$0 and $432,730 for the year ended December 31, 1995 and for the period
from inception (May 2, 1990) through December 31, 1995. Those
statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to the amounts
included for Hanover Gold Company, Inc., Hanover Resources, Inc., and
Group S Limited for the period from date of inception (May 2, 1990)
through December 31, 1995, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about 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. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all
material respects, the financial position of Hanover Gold Company, Inc.
as of December 31, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December
31, 1997 and the period from inception (May 2, 1990) through December
31, 1997, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1
to the financial statements the Company has no recurring source of
revenue, has incurred losses since inception and, at December 31, 1997,
has negative working capital. These conditions raise substantial doubt
about its ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
January 30, 1998
/s/ BDO Seidman
BDO Seidman, LLP
F/S-1
HANOVER GOLD COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS (NOTE 1)
December 31, 1997 1996
- ------------------------------- --------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 180,083 $ 96,353
Supplies Inventory - 10,000
Prepaid expenses and other current assets 102,699 97,369
- ---------------------------------------------------------------------------------
Total current assets 282,782 203,722
FIXED ASSETS:
Furniture and equipment, net of accumulated
Depreciation of $110,358 and $63,076 134,069 88,182
Mineral properties, net (Note 3) 17,185,244 10,490,822
OTHER ASSETS:
Other assets 23,994 23,424
- ---------------------------------------------------------------------------------
Total Assets $17,626,089 $ 10,806,150
=================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (Note 1)
Current liabilities:
Accounts payable $ 40,887 $ 70,136
Notes payable to shareholder (Note 7) 320,405 73,405
Accrued payroll and payroll taxes 58,803 85,859
Other accrued expenses 74,008 -
Current portion of long-term debt (Note 5) 77,703 23,653
- ----------------------------------------------------------------------------------
Total current liabilities 571,806 253,053
LONG-TERM DEBT, LESS CURRENT PORTION (Note 5) 148,515 194,065
- ---------------------------------------------------------------------------------
Total liabilities 720,321 447,118
- ---------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 3, 8, 9, and 11)
STOCKHOLDERS' EQUITY: (Notes 7, 9, and 10)
Preferred stock, $0.001 par value; shares authorized
2,000,000, no shares outstanding - -
Common Stock, $0.0001 par value, authorized
48,000,000 shares; issued and outstanding
29,428,348 and 19,843,022 shares respectively 2,943 1,984
Additional paid-in capital 24,604,172 16,270,146
Deficit accumulated during the development stage (7,701,347) (5,913,098)
- ---------------------------------------------------------------------------------
Total Stockholders equity 16,905,768 10,359,032
- ---------------------------------------------------------------------------------
17,626,089 10,806,150
</TABLE>
--------------------------------------------------------------------
See accompanying summary of accounting policies and notes to financial
statements.
F/S-2
HANOVER GOLD COMPANY, INC.
STATEMENTS OF LOSS
<TABLE>
<CAPTION>
Cumulative Amounts
From Date of Inception
(May 2, 1990) through Year Ended December 31,
December 31, 1997 1997 1996 1995
<S> <C> <C> <C> <C>
REVENUES (Note 2) $ 1,151,958 $ - $ 3,510 $ 499,299
- --------------------------------------------------------------------------
OPERATING EXPENSES:
Cost of goods mined 1,987,483 - - 1,076,688
Depreciation and
amortization 126,764 28,483 26,722 38,229
Provision for bad debt
(Note 7) 779,921 - - 779,921
General and administrative
expenses (Note 7) 5,187,413 960,619 1,284,915 930,982
- --------------------------------------------------------------------------
Total operating expenses 8,081,581 989,102 1,311,637 2,825,800
- --------------------------------------------------------------------------
OPERATING LOSS (6,929,623) (989,102) (1,308,127)(2,326,501)
OTHER INCOME (EXPENSE):
Amortization of Guaranty
Fee (Note 9) (768,585) (768,585) - -
Interest income
(expense) net 32,145 (26,566) (20,200) 29,820
Gain (Loss) on disposition
of assets (35,284) (3,996) - (32,509)
- --------------------------------------------------------------------------
Total other income
(expense) (771,724) (799,147) (20,200) (2,689)
- ---------------------------------------------------------------------------
Net loss (Note 2) $(7,701,347) $(1,788,249) $(1,328,327)$(2,329,190)
===========================================================================
Net loss per share ($0.08) ($0.08) ($0.20)
Weighted average common
shares outstanding 22,158,440 17,418,318 11,931,835
</TABLE>
-------------------------------------------------------
See accompanying summary of accounting policies and notes to
financial statements.
[The balance of this page has been intentionally left blank.]
F/S-3
HANOVER GOLD COMPANY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FROM THE DATE OF INCEPTION (MAY 2, 1990) THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Stock Paid in Subscription Development
------------------
Shares Amount Capital Receivable Stage Total
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock
for cash ($0.53 per share) 752,562$ 75$ 402,425 $ - $ -$ 402,500
Issuance of common stock
for cash ($0.07 per share) 86,250 9 6,009 - - 6,018
Cash contributed to capital - - 5,000 - - 5,000
Net loss - - - - (141,114)(141,114)
- -------------------------------------------------------------------------------------------
Balance, December 31, 1990 838,812 84 413,434 - (141,114) 272,404
Issuance of common stock to
directors ($0.0001/share) 200,000 20 - - - 20
Issuance of common stock for
claims and Engineering costs
($2.50 per share) 229,007 23 572,496 - - 572,519
Issuance of common stock for
cash ($0.06 per share) 2,957,506 296 166,374 - - 166,670
Issuance of common stock for
cash ($0.42 per share) 268,586 27 113,723 - - 113,750
Exercise of stock purchase
warrants ($0.60 per share) 74,400 7 44,633 - - 44,640
Exercise of stock purchase
warrants ($1.25 per share) 111,500 11 139,363 - - 139,374
Cash contributed to capital - - 73,850 - - 73,850
Net loss - - - - (179,866)(179,866)
- -------------------------------------------------------------------------------------------
Balance, December 31, 1991 4,679,811 468 1,523,873 - (320,980)1,203,361
Issuance of common stock for
cash ($2.00 per share) 712,500 71 1,424,929 - -1,425,000
Issuance of common stock for
cash ($0.18 per share) 218,537 22 39,978 - - 40,000
Exercise of stock purchase
warrants ($1.25 per share) 41,600 4 51,996 - - 52,000
Net loss - - - - (314,878)(314,878)
- -------------------------------------------------------------------------------------------
Balance, December 31, 1992 5,652,448 565 3,040,776 - (635,858)2,405,483
</TABLE>
<TABLE>
<CAPTION> Continued
Deficit
Accumulated
Additional During the
Common Stock Paid in Subscription Development
---------------
Shares Amount Capital Receivable Stage Total
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 5,652,448 565 3,040,776 - (635,858)2,405,483
Issuance of common stock for interest
in mineralProperty ($1.50
per share) 150,000 15 224,985 - - 225,000
Issuance of common stock to
officer ($0.01 per share) 127,165 13 737 - - 750
Exercise of stock purchase
warrants ($1.60 per share) 3,061,703 306 4,749,912 (649,360) -4,100,858
Net loss - - - - (256,769)(256,769)
- -------------------------------------------------------------------------------------------
Balance, December 31, 1993 8,991,316 899 8,016,410 (649,360) (892,627)6,475,322
Exercise of stock purchase
warrants ($1.60/share) 1,328,897 133 2,126,102 - -2,126,235
Cancellation of subscribed shares
($1.60 per share) (250,000) (25) (399,975) 400,000 - -
Cash contributed to capital - - 98,393 - - 98,393
Net loss - - - -(1,362,954)(1,362,954)
- --------------------------------------------------------------------------------------------
Balance, December 31, 1994
(Restated) 10,070,213 1,007 9,840,930 (249,360)(2,255,581) 7,336,996
Issuance of common stock for cash
($0.35 per share) 2,142,856 214 749,786 - - 750,000
Issuance of common stock for cash
($0.35 per share) 714,286 71 249,929 - - 250,000
Issuance of common stock for cash
($1.00 per share) 200,000 20 199,980 - - 200,000
Issuance of common stock in
Satisfaction of vendor
obligations ($1.06 per share) 69,679 7 74,089 - - 74,096
Issuance of common stock in
Satisfaction of vendor
obligations ($1.00 per share) 200,000 20 199,980 - - 200,000
Issuance of common stock for
cash ($1.00 per share) 1,000,000 100 999,900 - -1,000,000
Issuance of common stock
to officer 197,835 20 - - - 20
Issuance of common stock pursuant to
Convertible debt 1,348,295 135 281,313 - - 281,448
Cash received for
subscribed shares - - - 249,360 - 249,360
Repurchase of previously issued
shares ($1.60 per share) (23,000) (2) (36,798) - - (36,800)
Net loss - - - -(2,329,190)(2,329,190)
- -------------------------------------------------------------------------------------------
Balance, December 31, 1995 15,920,164 $1,592 $12,559,109 $ -$(4,584,771)$7,975,930
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F/S-4
HANOVER GOLD COMPANY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FROM THE DATE OF INCEPTION (MAY 2, 1990) THROUGH DECEMBER 31, 1997
(CONTINUED)
<TABLE>
<CAPTION> Continued
Deficit
Accumulated
Additional During the
Common Stock Paid in Subscription Development
----------------
Shares Amount Capital Receivable Stage Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 15,920,164 $1,592 $12,559,109 $ - $(4,584,771) $7,975,930
Issuance of common stock for
mineral property rights
($4.00 per share) 5,000 1 19,999 - - 20,000
Issuance of common stock for mineral
property rights ($2.00 per share) 525,000 52 1,049,948 - - 1,050,000
Issuance of common stock for mineral
property rights ($1.56 per share) 250,000 25 389,975 - - 390,000
Issuance of common stock for cash
($0.50 per share) 2,142,858 214 1,071,215 - - 1,071,429
Issuance of common stock for cash
net of issuance costs of
$70,000 ($1.25 per share) 1,000,000 100 1,179,900 - - 1,180,000
Net loss - - - - (1,328,327) (1,328,327)
- -----------------------------------------------------------------------------------------------------
Balance, December 31, 1996 19,843,022 1,984 16,270,146 - (5,913,098) 10,359,032
Issuance of common stock for services
rendered ($0.95 per share) 43,421 5 41,245 - - 41,250
Grant of option to director as compensation
for loan guaranty (Note 9) - - 1,457,170 - - 1,457,170
Deferred guaranty Fee, subject to grant
exercise (Note 9) - - (688,585) - - (688,585)
Issuance of common stock
for cash ($1.25 per share) 1,139,000 114 1,423,636 - - 1,423,750
Issuance of common stock
For an acquisition of Easton-Pacific
(Note 2) 7,000,000 700 4,725,700 - - 4,726,400
Issuance of common stock for cash
($0.50 per share) 500,000 50 249,950 - - 250,000
Issuance of common stock for cash
($1.25 per share) (Note 9) 900,000 90 1,124,910 - - 1,125,000
Issuance of common stock for mineral
property rights ($2.53 per share) 2,905 - - - - -
Net loss - - - - (1,788,249) (1,788,249)
- -----------------------------------------------------------------------------------------------------
Balance, December 31, 1997 29,428,348 $2,943 $24,604,172 - $(7,701,347) $16,905,768
-------------------------------------------------------------------------
</TABLE> See accompanying summary of accounting policies and notes to financial
statements.
F/S-5
HANOVER GOLD COMPANY, INC.
STATEMENTS OF CASH FLOW
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
From Date of Inception (May 2, 1990) Year Ended December 31,
----------------------------------
through December 31, 1997 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities:
Net loss $ (7,701,347)$ (1,788,249) $ (1,328,327)($ 2,329,190)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on sale of equipment 36,505 3,996 - 32,509
Depreciation and depletion 126,764 28,483 26,722 38,229
Common stock issued for
public relations fees 200,000 - - 200,000
Amortization of deferred guaranty fee768,585 768,585 - -
Common stock issued to officers
and directors 41,290 41,250 - 20
Write-off of note receivable 779,921 - - 779,921
Changes in operating assets and liabilities:
(Increase) decrease in supplies
inventory - 10,000 19,494 151,744
(Increase) decrease in prepaid
expenses (75,114) 22,255 32,384 (5,057)
(Increase) decrease in other assets (23,994) (570) (3,500) (269)
Increase (decrease) in accounts
payable 112,268 (31,964) (214,738) (73,090)
Increase (decrease) in accrued
expenses 177,898 25,761 (45,027) (423,395)
- ---------------------------------------------------------------------------------------
Net cash used in operating
activities (5,557,224) (920,453) (1,512,992) (1,628,578)
- ---------------------------------------------------------------------------------------
Investing activities:
Proceeds from sale of equipment 27,576 12,300 - 13,871
Net repayment (advances)
under shareholder advances - - 70,715 1,085
Repayments (advances) under
notes receivable (1,089,219) - - 38,021
Purchase of furniture and equipment(359,313) (73,118) (78,262) (40,614)
Additions to mineral properties (9,332,814) (1,724,701) (1,346,696) (834,510)
- ---------------------------------------------------------------------------------------
Net cash used in investing
activities (10,753,770) (1,785,519) (1,354,243) (822,147)
- ----------------------------------------------------------------------------------------
Financing activities:
Borrowings under note payable
to shareholder 73,405 - 23,405 50,000
Proceeds from sale of common
stock 15,867,975 2,798,750 2,251,429 2,200,000
Proceeds from issuance of
convertible debt 215,170 - - -
Proceeds from issuance of long
term debt 45,000 45,000 - -
Repayment of long-term debt (100,276) (54,048) (46,228) -
Collection of subscription
receivable 249,360 - - 249,360
Repurchase and retirement of common
stock (36,800) - - (36,800)
Capital contributions 177,243 - - -
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE> Continued
<CAPTION>
From Date of Inception (May 2, 1990) Year Ended December 31,
----------------------------------
through December 31, 1997 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash provided by financing
activities 16,491,077 2,789,702 2,228,606 2,462,560
- ---------------------------------------------------------------------------------------
Net increase (decrease) in cash 180,083 83,730 (638,629) 11,835
Cash and cash equivalent,
beginning of period - 96,353 734,982 723,147
- ---------------------------------------------------------------------------------------
Cash and cash equivalent,
end of period $ 180,083 $ 180,083 $ 96,353 $ 734,982
=======================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 59,113 $ 35,068 $ 23,181 $ 864
Income taxes $ - $ - $ - $ -
Supplemental schedule of non-cash investing and financing activities (Note 10)
</TABLE>
<TABLE> -------------------------------------------------------
See accompanying summary of accounting policies and notes to
financial statements.
F/S-6
HANOVER GOLD COMPANY, INC.
SUMMARY OF ACCOUNTING POLICIES
NATURE OF BUSINESS Hanover Gold Company, Inc. ("Hanover" or the
"Company") is a development stage enterprise
principally engaged in acquiring and maintaining
gold mining properties in southwestern Montana for
exploration and future development. The Company,
which is the successor company to an entity
incorporated in the state of Delaware in 1984,
commenced its operations in May 1990.
CASH EQUIVALENTS For the purpose of the balance sheets and
statements of cash flows, the Company considers
all highly liquid investments purchased with an
original maturity of three months or less to be a
cash equivalent. Financial instruments which
potentially subject the Company to a concentration
or credit risk consist of cash and cash
equivalents. Cash and cash equivalents consist of
funds deposited with various high credit quality
financial institutions.
FURNITURE AND
EQUIPMENT Furniture and equipment are carried at cost.
Depreciation is computed by the straight-line over
the estimated useful lives of the related assets
which range from five to seven years.
MINERAL PROPERTIES Mineral properties include the cost of
advance minimum royalty payments, the cost of
capitalized property leases and the cost of
property acquired. Expenditures for exploration
and development on specific proven properties are
also capitalized. These costs will be amortized
against subsequent revenues, or charged to
operations at the time the related property is
determined to have an impairment of value.
In accordance with the provisions of Statements of
Financial Accounting Standards ("SFAS") 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
carrying value of its mineral properties on a
regular basis. Estimated undiscounted future cash
flow from the mineral properties are compared with
the current carrying value. Reductions to the
carrying value are recorded to the extent the net
book value of the property exceeds the estimate of
future discounted cash flow.
NET LOSS PER SHARE In February 1997, The Financial Accounting
Standards Board ("FASB") issued SFAS No. 128,
Earnings Per Share ("EPS") SFAS No. 128 requires
dual presentation of basic EPS and diluted EPS on
the face of all income statements issued after
December 15, 1997 for all entities with complex
capital structures. The Adoption of SFAS No. 128
had no effect on the Company's Financial
Statements. Basic EPS is computed as net income
divided by the weighted average number of common
shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur
from common shares issuable through stock options,
warrants, and other convertible securities. As
the Company's stock options and warrants are
antidilutive for all periods presented only basic
EPS is presented. At December 31, 1997,
outstanding options and warrants to purchase
2,532,970 shares of the Company's common stock
were not included in the computation of diluted
EPS as their effect would be antidilutive.
INCOME TAXES Income taxes are provided based on the liability
method of accounting pursuant to SFAS No. 109,
"Accounting for Income Taxes." Under this
approach, deferred income taxes are recorded to
reflect the tax consequences on future years of
differences between the tax basis of assets and
liabilities and their financial reporting amounts
at each year end. A valuation allowance is
recorded against deferred tax assets whose
realization is not more likely than not.
MANAGEMENT'S
ESTIMATES The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates
and assumptions that affect the reported assets
and liabilities and disclosures of contingent
assets and liabilities at the date of the
financial statements and the reported amount of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F/S-7
FAIR VALUE OF FINANCIAL
INSTRUMENTS The carrying amounts reported in the balance
sheets as of December 31, 1997 and 1996 for cash
equivalents, accounts payable and accrued expenses
approximate fair value because of the immediate or
short-term maturity of these financial
instruments. The fair value of long-term debt
approximates its carrying value as the stated or
discounted rates of the debt reflect recent market
conditions. The fair value of notes payable to
stockholders cannot be determined.
STOCK BASED
COMPENSATION SFAS No. 123, "Accounting for Stock-Based
Compensation," 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 to account for
stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations and to
furnish the pro forma disclosures required under
SFAS No. 123, if material. 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 the grant over
the amount an employee must pay to acquire the
stock.
NEW ACCOUNTING
PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130,
REPORTING COMPREHENSIVE INCOME and SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION. SFAS No. 130 requires that
an enterprise report, by major components and as a
single total, the change in its net assets during
the period from non-owner sources, and SFAS No.131
establishes annual and interim reporting standards
for an enterprise's operating segments and related
disclosures about its products, services,
geographic areas and major customers. Adoption of
these statements will not impact the Company's
financial position, results of operations or cash
flows and any effect will be limited to the form
and content of its disclosures. Both statements
are effective for fiscal years beginning December
15, 1997, with earlier application permitted.
HANOVER GOLD COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1.DEVELOPMENT STAGE The Company has been in the development
stage since its inception. The Company has
OPERATIONS AND no recurring source of revenue, has incurred
operating losses since inception and, at
GOING CONCERN December 31, 1997 has negative working
capital. These conditions raise substantial doubt
as to the Company's ability to continue as a going
concern. Management of the Company has undertaken
certain actions to address these conditions. These
actions include negotiating amendments to
obligations on the Company's mineral properties
and searching for a joint venture partner to
provide the funding necessary to bring the mineral
properties into production. The Company's land
payment obligations due through September 1998,
which total approximately $1,200,000, have been
guaranteed by certain significant shareholders
(see Note 9). To the extent additional funds are
required, the Company will attempt to raise these
funds through future sales of shares of its common
stock. The financial statements do not contain
any adjustments which might be necessary if the
Company is unable to continue as a going concern.
2.BUSINESS In September 1996, the Company acquired
all of the issued and outstanding shares of
COMBINATION common stock of Group S Limited ("Group S") and
Hanover Resources, Inc. ("Resources") in exchange
for 2,957,506 and 2,937,971 shares of the
Company's common stock. In connection with the
acquisitions, 3,625,000 shares of the Company's
common stock held by Resources were canceled.
Group S and Resources both held mining claims and
interests contiguous to those of the Company. As
certain of the Company's shareholders, officers,
and directors controlled Group S and Resources,
the acquisitions were accounted for as a
combination of entities under common control
F/S - 8
similar to a pooling of interests. Accordingly,
the financial statements give retroactive effect
to these acquisitions, as if the companies had
always operated as a single entity. Separate
results of operations for the combining entities
for the years ended December 31, 1996 and 1995 and
for the period from inception (May 2, 1990)
through December 31, 1996 were as follows:
PERIOD FROM DATE OF
INCEPTION (MAY 2, 1990) YEAR ENDED DECEMBER 31,
THROUGH DECEMBER 31, 1996 1996 1995
------------------------- -------------- ---------------
REVENUES:
Hanover $ 719,228 $ 3,510 $ 499,299
Resources 432,730 - -
Group S - - -
----------------------------------------------------------
$ 1,151,958 $ 3,510 $ 499,299
==========================================================
PERIOD FROM DATE OF
INCEPTION (MAY 2, 1990) YEAR ENDED DECEMBER 31,
THROUGH DECEMBER 31, 1996 1996 1995
-----------------------------------------------------------
NET LOSS:
Hanover $(5,325,590) $(1,324,309) $(2,193,569)
Resources (563,924) (1,970) (125,178)
Group S (23,584) (2,048) (10,443)
-------------------------------------------------------------
$ (5,913,098) $ (1,328,327) $ (2,329,190)
=============================================================
On September 30, 1997, the Company
acquired all of the outstanding shares of Easton-
Pacific and Riverside Mining Company ("Easton"),
an inactive mining company holding mineral claims
contiguous to those of the Company, in exchange
for 7,000,000 shares of the Company's common
stock. The acquisition of Easton has been
accounted for using the purchase method of
accounting, and accordingly, the accounts of
Easton have been reflected in the consolidated
financial statements from the date of acquisition.
The purchase price of $4,787,000 (which includes
transaction costs of approximately $60,000) has
been allocated to the assets purchased and the
liabilities assumed based upon their estimated
fair value at the date of acquisition.
The following table presents
summarized unaudited pro forma results of
operations for 1997 and 1996 as if the Easton
acquisition had occurred at the beginning of each
year. These pro forma results are provided for
comparative purposes only and do not purport to be
indicative of the results which would have been
obtained if the acquisition had been effected on
those dates or of future results of operations.
YEAR ENDED DECEMBER 31, 1997 1996
<S> <C> <C>
Revenues $ - $ 54,275
Net loss $ (1,869,563) $ (1,408,960)
Net loss per share $ (0.07) $ (0.06)
=======================================================
3. MINERAL PROPERTIES Mineral property represents amounts paid to
acquire property rights and for services
rendered in the exploration, drilling, sampling,
engineering and other related technical services
toward the evaluation and development of the Alder
Gulch group of claims in Montana's Virginia City
Mining District.
F/S - 9
The Company's investment in mineral properties
consisted of the following:
DECEMBER 31, 1997 1996
-----------------------------------------------
Mining properties $ 14,803,488 $ 8,210,816
Deferred exploration
Expenditures 2,395,986 2,294,236
Accumulated depreciation (14,230) (14,230)
-----------------------------------------------
$ 17,185,244 $ 10,490,822
===============================================
In 1990, the Company entered into an agreement
(the "Kearsarge Agreement") pursuant to which the
Company acquired the rights to lease certain
patented and unpatented mineral claims in the
Alder Gulch area. In accordance with the terms of
the Kearsarge Agreement, the Company is required
to make minimum annual lease payments to the
lessor and the sublessor and has granted the
lessor a 5% net smelter return royalty in future
production. The Company also granted the lessor
the right to purchase 171,000 shares of the
Company's common stock at $3.00 per share through
May 1995 and an additional 500,000 shares at
$10.00 per share through May 1997. The Company
may terminate the Kearsarge Agreement at any time
prior to its expiration in 2001. The Kearsarge
Agreement also contains a purchase option which
grants the Company the right to acquire the leased
property. The optional price, which is equal to
$7,000,000 less a credit for annual payments made
was $3,310,000 at December 31, 1997.
In 1991, the Company entered into a lease
agreement (the "Moen Agreement") pursuant to which
the Company obtained the right to lease certain
patented and unpatented claims in the Alder Gulch
area. The Moen Agreement, which was amended in
March 1996, expires in 2002, requires annual lease
payments, may be terminated by the Company at any
time upon written notice, and provides for a net
smelter return royalty of up to 2.5% for periods
in which the price of gold exceeds $425 per ounce
and 1% for all other periods. The Moen Agreement
contains a purchase option, which grants the
Company the right to acquire the leased property.
The option price, which is equal to $3,400,000
less a credit for annual rental payments made, at
December 31, 1997 was $2,650,000. In
consideration for amending the Moen Agreement, the
lessor received 250,000 shares of the Company's
common stock, an option to purchase an additional
200,000 shares of the Company's common stock at a
price of $2.00 per share through March 1999,
forgiveness of $89,000 owed to the Company by the
seller, equipment with a fair value of
approximately $62,000 and the transfer of certain
milling assets and land held by a related party
which was previously encumbered by a note payable
to the Company.
In 1993, the Company entered into an agreement
with a third party (the "Magnus Agreement")
pursuant to which the Company was assigned the
mining rights to certain patented claims. The
Magnus Agreement, which the Company may terminate
at any time requires annual lease payments through
1999 and contains an option granting the Company
the right to acquire the leased properties. The
option price, which is equal to $1,650,000 less a
credit for the amount by which the annual lease
payment exceeds $25,000, was $975,000 at December
31, 1997. The Magnus Agreement also provides for
the grant of a 5% net smelter return royalty on
future production.
In November1995, the Company entered into an
agreement (the "Goodridge Agreement") to acquire a
0.5% gross overriding royalty interest burdening
certain of the Company's claims. Pursuant to
terms of the Goodridge Agreement, the Company
issued to the seller 5,000 shares of its common
stock and granted the seller an option to acquire
up to an additional 5,000 shares of the Company's
common stock at $2.50 per share prior to November
1, 1997. The unexercised option expired on
November 1, 1997. The Goodridge Agreement
provided that, should fair value of the Company's
common stock
F/S - 10
not exceed $4.00 per share prior to November 1,
1997, the Company would issue to the seller
additional shares of common stock to raise the
aggregate market value of the shares held by the
seller to $20,000. Utilizing the highest market
price of $2.53 per share for its stock, from the
date of the agreement to November 1, 1997, the
Company issued 2,905 additional shares of common
stock to the seller.
In November 1995, the Company entered into an
agreement (the "Gustafson Agreement") whereby the
Company obtained the right to lease a patented
claim in the Alder Gulch area. The Gustafson
Agreement requires annual lease payments of $2,500
through 2015, may be terminated by the Company at
any time upon 30 days written notice, and provides
for a 3% net smelter return royalty to the lessor.
In February 1996, the Company entered into an
agreement (the "Carver Agreement") to acquire
certain patented and unpatented claims in the
Alder Gulch area. Pursuant to terms of the Carver
Agreement, the Company paid the seller $20,000 at
closing and will pay the remaining $70,000 in
annual installments of $20,000 through 1999 and
$10,000 in 2000. See Note 5.
In March 1996, the Company entered into an
agreement (the "Tabor Agreement") to purchase
certain patented and unpatented mining claims in
the Alder Gulch area in exchange for 525,000
shares of the Company's common stock. The Tabor
Agreement requires that, should the fair value of
the Company's common stock fail to achieve a $2.00
per share price for a thirty consecutive day
period prior to April 1998, the Company will issue
additional shares of its common stock to the
seller to raise the aggregate market value of the
shares held by the seller to $2.00. The Tabor
Agreement is currently in dispute as the Company
has sued the seller for failure to convey the
property documents and the seller has countersued
the Company. The Company has been advised by its
counsel that it is probable that the Company will
prevail in the action and obtain title to the
purchased mining claims.
In August 1996, the Company entered into an
agreement (the "Collins Agreement") to purchase a
patented claim covering certain property in the
Alder Gulch area for $210,000. Pursuant to terms
of the Collins Agreement, the Company paid $25,000
to the seller at
closing and will pay the remaining $185,000 in
quarterly installments, together with interest at
8%, through 2001.
At December 31, 1997, future annual land payments
required pursuant to the Company's various
property agreements were as follows:
YEAR ENDING DECEMBER 31, Amount
----------------------------------------
1998 $ 1,468,000
1999 1,819,000
2000 2,878,000
2001 603,000
2002 603,000
Thereafter 36,000
----------------------------------------
$ 7,407,000
========================================
4. NOTES RECEIVABLE In 1993, the Company advanced $100,000 to a
third party entity pursuant to terms of a
promissory note. The note was to be repaid from
proceeds of milling activities to be undertaken by
the party. After receiving principal repayments
of approximately $3,000 in 1995 and $8,000 in
1994, the remaining unpaid balance of
approximately $89,000 was forgiven in 1996 as part
of the Company's consideration for amending the
Moen Agreement. (See Note 3.)
F/S - 11
5. LONG-TERM DEBTLong-term debt consists of the following:
DECEMBER 31, 1997 1996
---------------------------------------------------
8% Note payable to an
individual, due in quarterly
installments of $9,250 plus
interest, maturing
October 2001 $ 148,000 $ 174,336
No interest bearing note payable
to an Individual, due in
annual installments of
$20,000 through 1999 and
$10,000 in 2000, discounted
at 8% 43,382 43,382
Other 34,836 -
----------------------------------------------------
226,218 217,718
Less current portion 77,703 23,653
----------------------------------------------------
Long-term debt, less
current portion $ 148,515 $ 194,065
====================================================
Scheduled long-term maturities at December 31,
1997 are as follows:
Year Ending December 31, Amount
---------------------------------------------
1998 $ 77,703
1999 65,282
2000 46,233
2001 37,000
---------------------------------------------
$ 226,218
=============================================
6. INCOME TAXES At December 31, 1997 and 1996, the Company had
deferred tax assets of approximately
$2,523,000 and $2,070,000 principally arising from
net operating loss carryforwards for income tax
purposes. At December 31, 1997 the Company had a
deferred tax liability of $1,791,000 arising from
the tax treatment in reporting the carrying value
of the Company's mineral property acquired from
Easton. As management of the Company cannot
determine if it is more likely than not that the
Company will realize the benefit of the net
deferred tax asset, a valuation allowance equal to
the net deferred tax asset of $732,000 and
$2,070,000 has been established at both December
31, 1997 and 1996.
At December 31, 1997, the Company has net
operating loss carryforwards totaling
approximately $6,600,000 which expire in the years
2005 through 2021. The use of approximately
$200,000 of these carryforwards is subject to
limitations imposed by the Internal Revenue Code.
7. RELATED PARTY In 1994 and 1995, the Company advanced
$1,222,000 and
TRANSACTIONS
$373,000 pursuant to terms of a note receivable to
an entity partially owned by a shareholder for
purposes of refurbishing and operating milling
facilities located near the Company's mineral
properties. The related party entity was to repay
the advances based on the flow of ore processed at
the mill. The Company recovered approximately
$595,000 of the advances through 1995, at which
time milling operations ceased. In 1995, the
Company wrote down the carrying value of the note
receivable by approximately $780,000. In 1996, as
part of the Company's negotiations on the Moen
Agreement (See Note 3), the milling facilities
were transferred together with the Company's
secured interest therein, to a third party.
In 1995, the Company entered into an agreement, as
amended, (collectively, the "Stock Purchase
Agreement") with a group of individuals whereby
the Company granted the group the right to
purchase up to 6,000,000 shares of the Company's
common stock and
F/S - 12
the right to appoint certain officers and
directors of the Company. Shares subject to terms
of the Stock Purchase Agreement, of which
3,857,142 and 2,142,858 were purchased in 1995 and
1996, were as follows:
Per Share Total
Shares Purchase Price Consideration
----------------------------------------------
2,857,142 $ 0.35 $ 1,000,000
2,142,858 0.50 1,071,050
1,000,000 1.00 1,000,000
----------------------------------------------
6,000,000 $ 3,071,050
==============================================
In December 1996 and 1995, the Company received
advances from certain shareholders of $298,405 and
$50,000, respectively, and made repayments on
those advances of $275,000 in 1996 plus interest
at 9%. At December 31, 1997 and 1996, the Company
owed these shareholders $73,405.
From 1990 through 1995, the Company paid $2,400
for annual rent of office space leased from
significant shareholder.
During 1996, the Company paid $65,438 for sampling
and assaying services to a company controlled by a
stockholder and purchased equipment for $30,000
from this same entity. During 1997, the Company
paid $3,067 to the same company for surveying
services.
During 1996, the Company paid $90,000 and $49,500
in consulting fees to two stockholders.
During 1991, the Company borrowed $215,170 from
certain shareholders pursuant to the terms of a
10% convertible promissory note. During 1995, the
shareholders elected to convert the amount owed
them, including accrued interest of $66,278, into
1,348,295 shares of the Company's common stock.
As part of its acquisition of Easton in 1997 (Note
2), the Company assumed a $247,000 note payable to
a stockholder. The note has a stated interest
rate of 12% and is due on demand.
8.COMMITMENT AND The Company leases its corporate office space
on a month-to-
CONTINGENCIES month basis. Rent expense for the years
ended December 31, 1997,
1996, and 1995 was approximately $28,000, $28,000,
and $20,000.
The Company received consulting services from an
individual for no cost during portion of 1996 and
1997. This individual had an agreement which was
not memorialized in writing, with a significant
shareholder of the Company pursuant to which the
consultant was entitled to acquire one half of the
shares of the Company's common stock held by the
shareholder at the same price the shareholder,
paid to acquired the shares. The agreement was
terminated in April 1997.
9. STOCK OPTIONS COMMON STOCK WARRANTS
In 1990, the Company issued common stock warrants
granting rights to purchase up to 150,000 shares
of the Company's common stock at $0.60 per share
through September 1991. Warrants to purchase
74,400 shares of common stock were exercised in
1991. In 1991, the Company issued common stock
warrants granting rights to purchase up to
4,572,500 shares of the Company's common stock at
$1.25 per share through August 1992 and at $1.60
per share from September 1992 through March 1994.
Warrants to purchase 111,500 and 41,600 shares of
the Company's common stock at $1.25 per share were
exercised in 1991 and 1992. Warrants to purchase
3,061,703 and 1,328,897 shares of the Company's
common stock at $1.60 per share were exercised in
1993 and 1994.
F/S - 13
In March 1997, the Company issued a three-year
option to purchase 2,312,970 shares of the
Company's common stock at $1.25 per share to a
shareholder in exchange for a shareholder's
guaranty of the Company's mineral property
obligations for an eighteen months period ending
in September 1998. The fair value of these
options, as determined using the Black Scholes
option pricing model, was $1,450,000 and is being
amortized to expense over the guaranty period.
During 1997, 900,000 shares of common stock were
issued pursuant to the option.
STOCK OPTION PLAN
The Company has a stock plan ("the 1995 Plan")
under which eligible employees and directors of
the Company may be granted stock options, stock
appreciation rights or restricted stock. Pursuant
to terms of the 1995 Plan, the total number of
shares of stock subject to issuance may not exceed
4,000,000. Grants of options, appreciation
rights and restricted stock are based solely on
the discretion of the Board of Directors at
exercise prices at least equal to the fair value
of the stock on the date of grant. Options
granted under the 1995 plan vest immediately.
Stock option activity under the 1995 Plan is
summarized as follows:
</TABLE>
<TABLE>
<CAPTION>
Weighted Average
Options Share Price
-------------------------------------------------
<S> <C> <C>
Outstanding at
January 1, 1995 - $ -
Granted 800,000 1.60
Exercised - -
Expired - -
------------------------------------------------
Outstanding at
December 31, 1995 800,000 1.60
Granted - -
Exercised - -
Expired - -
------------------------------------------------
Outstanding at
December 31, 1996 800,000 1.60
Granted 120,000 0.38
Exercised - -
Expired - -
------------------------------------------------
Outstanding at
December 31, 1997 920,000 $ 1.44
================================================
</TABLE>
SFAS No. 123 requires the Company to provide pro
forma information regarding net loss and loss per
share as if compensation cost for the Company's
stock option plan had been determined in
accordance with the fair value based method
prescribed by SFAS No. 123. The Company estimates
the fair value of each stock option at the grant
date by using the Black-Scholes option-pricing
model with the following weighted-average
assumptions used: dividend yield of zero percent;
expected volatility of 35 percent; risk-free
interest rate of 6 percent; and expected lives of
five years. The weighted average fair value at
date of grant for options granted in 1997 and 1995
was $.23 and $.06 per option. Under the accounting
provisions of SFAS No. 123, the Company's net loss
and loss per share for each of the three years in
the period ended December 31, 1997 would have been
adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C>
Net loss
As reported $(1,788,249) $(1,328,327) $(2,329,190)
Pro forma (1,815,249) (1,328,327) (2,377,190)
Loss per share
As reported $ (0.08) $ (0.08) $ (0.20)
Pro forma (0.08) (0.08) (0.20)
========================================================
</TABLE>
F/S - 14
The following table summarizes information about
stock options and warrants outstanding at December
31, 1997:
<TABLE>
<CAPTION>
Options and
Weighted Warrants Out standing
Average Number Outstanding and Exercisable Weighted
Exercise and Exercisable Average Remaining
Prices at 12/31/97 Contractual Life (years)
-------------------------------------------------------
<S> <C> <C>
$0.38 120,000 10.0
$1.25 1,412,970 2.2
$1.60 800,000 3.0
$2.00 200,000 1.3
-------------------------------------------------------
$0.38-$2.00 2,532,970 2.8
=======================================================
</TABLE>
10.SUPPLEMENTAL Supplemental schedule of non cash investing and
financing
DISCLOSURES activities.
OF CASH-
FLOW INFORMATION
<TABLE>
<CAPTION>
Cumulative Amounts From
Date of Inception (May 2, 1990)
Through December 31, December 31,
----------------------
1997 1997 1996 1995
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mineral property rights
Acquired in exchange for:
Issuance of
common stock $2,257,518 $ - $1,460,000 $ -
Iissuance of long-
term debt 263,946 - 263,946 -
Note receivable 309,298 - 309,298 -
Fixed Assets 66,177 - 66,177 281,448
Issuance of shares of
common stock in
satisfaction of vendor
obligations 74,096 - - 74,096
Conversion of notes
payable under accrued
interest to common stock 281,448 - - 281,448
Equipment acquired through
issuance of long-term debt 17,548 17,548 - -
Common stock issued to
acquire net assets of Easton-
Pacific, including:
Prepaid expenses 27,585 27,585 - -
Mineral properties 4,969,721 4,969,721 - -
Notes payable 247,000 247,000 - -
Accounts payable 2,715 2,715 - -
Accrued expenses 21,191 21,191 - -
==========================================================================
</TABLE>
[The balance of this page has been intentionally left blank.]
F/S - 15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
HANOVER GOLD COMPANY, INC.
By: /s/ James A. Fish
----------------------------
James A. Fish, its President
and Chief Executive Officer
Date: March 7, 1998
By: /s/ Wayne Schoonmaker
----------------------------
Wayne Schoonmaker, its
Principal Accounting Officer
Date: March 7, 1998
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.
By: /s/ Neal A. Degerstrom By: /s/ Wayne Schoonmaker
----------------------- ---------------------
Neal A. Degerstrom Wayne Schoonmaker
Director Secretary and Treasurer
Date: March 7, 1998 Date: March 7, 1998
By: /s/ Tim Babcock By: /s/ Robinson BosworthIII
----------------------- ------------------------
Tim Babcock Robinson Bosworth III
Director Director
Date: March 7, 1998 Date: March 7, 1998
By: /s/ Karl E. Elers By: /s/ Larry Steinbaum
---------------------- ------------------------
Karl E. Elers Larry Steinbaum
Director Director
Date: March 7, 1998 Date: March 7, 1998
By: /s/ James A. Fish
-----------------------
James A. Fish
Director
Date: March 7, 1998
F/S-16
<PAGE>
Exhibit 10.15
AN EVALUATION OF
HANOVER GOLD'S
VIRGINIA CITY MINING DISTRICT PROPERTY
MADISON COUNTY, MONTANA
BY ROGER STEININGER, PH.D.
CONSULTING GEOLOGIST
JULY, 1997
Introduction
Frank Duval requested this independent evaluation of Hanover Gold's
Virginia City Mining District gold property (also referred to as the
Kearsarge Project or Alder Gulch), which is based on a data review and site
visit conducted on June 16-17, 1997. The evaluation is restricted to
technical aspects of the geology, exploration potential, and gold
resources. No attempt is made to validate the various land holdings,
mineability of the known deposits, processing approach, and environmental
issues. All of the analytical results are accepted as presented, and no
effort is made to verify sample collection, preparation, and assaying
techniques.
The following comments assume that the Easton-Pacific merger will be
consummated by the shareholders of the two companies.
LAND
Hanover Gold controls most of the ground in the district that has important
gold exploration potential. The few parcels that are not under Hanover's
control are actively being pursued. In these days of segmented land
interests it is rare that one company can control an entire district,
adding to the attractiveness of the Hanover Gold story.
The Wilderness Study Area along the eastern margin of the holdings is a
bother. Although the BLM has classified this as non-wilderness in character
the area will continue to be treated as wilderness until such time as
legislation removes it from consideration. Surface mapping and sampling is
not restricted in a WSA, but drilling is difficult to permit. Until such
time as the land's status is changed the Atlas prospect is effectively
removed from consideration for development as a gold deposit. Lucas and Oro
Cache may also be difficult to permit for development since they are
sufficiently close to the WSA that ground disturbance may extending into
the hollowed lands.
Hanover Gold has done an effective job of reducing production royalties to
reasonable levels on both the patented and unpatented claims. If a Federal
royalty is imposed on unpatented claims, the total royalty on the Hanover
holdings still will be at reasonable levels. More importantly, except for
Atlas, all of the important areas of known gold mineralization are on
patented claims, which will most likely remove them from Federal royalties,
if any mandated. What is having an important negative impact on the
property are the yearly land payments. These have an aggregate outlay of
about $1.5 million per year to a maximum of $7 million. This is money that
could be more usefully devoted to the exploration program. Any approach to
reducing these payments should be considered.
PROPERTY GEOLOGY
Gold mineralization is hosted in a sequence of Archean rocks that are
dominated by gneisses. Several learned discussions have been carried out as
to whether the mineralization is Precambrian and typical of greenstone-type
gold deposits, or Tertiary mineralization along shear zones superimposed on
the older rocks. The geology is not typical of greenstone type terrain, but
still there are a few features that are similar
to that type of gold deposit. The presence of large areas of Tertiary age
gold mineralization in the region causes one to consider that Alder Gulch
might also be of similar age. For the present exploration program the
specific age of mineralization has little direct importance, but in the
longer term the age of mineralization will be important to determine and at
some point mineralization should be dated.
Whatever the origin of the gold, it is fairly obvious that the economically
attractive mineralization occurs along shear and fault zones. These
structural zones vary in width from a single fault only a few feet wide, to
zones that are a few hundred feet across, with definable strike length of
several hundred feet to several thousand feet. Drilling and underground
workings have followed the zones down dip a few hundred feet, but it is
likely that mineralization extends much deeper. While economic gold grades
are not everywhere present in these structures, or in every structure, they
are good hosts and all of the gold mineralization known in the district are
within shear and fault zones. Gold is closely associated with quartz, some
of which has characteristic vein structures, while in other areas quartz is
present in irregular masses. Carbon rich intervals also have a close
association with gold, whereas base metals are not always present. The most
abundant sulfide is pyrite and below the zone of oxidization it is almost
always present with gold. The extent of oxidization throughout the district
is unknown, but any processing scenario will have to consider that much of
the mineralization contains sulfides. The presence of carbon and iron
sulfides should make electrical geophysical surveys effective in locating
buried mineralization.
There seem to be two mineralized structural trends on the property. In the
eastern portion the important shear and fault direction is to the
northeast, while to the west the trend is to the northwest. On at least one
geological map these two trends were shown to merge, and if this is true
representation of what actually occurs this area could be an excellent
exploration target. The convergence of structural trends is in the High-Up
and Marietta area. The importance of these structural zones and their exact
location can not be overstated. If the airborne geophysical survey does not
accurately locate the shears, and even if it does, serious consideration
should be given to ground geophysics and trenching to pin down the
structure's precise locations.
Much of the alteration associated with gold mineralization has a strong
carbonate component, but beyond that little is known about the assemblage
of secondary minerals. During an inspection of selected core intervals it
became obvious that secondary pink alkali feldspar is widespread and may
have a close correlation with gold mineralization. One very interesting
piece of core contains a zone of pink feldspar that was clearly replacing
the host gneiss and was in-turn cut by a quartz vein. Reportedly, there are
other areas of widespread pink feldspar replacement that may contain gold,
in places appearing to be more disseminated than in veins (based on hand
sample inspection). The relationship of pink feldspar to gold
mineralization could be important to understand. If the feldspar has a
wider distribution than gold it could be a good pathfinder assemblage.
Obviously, characterizing the alteration assemblages associated with gold
mineralization could be very important as an exploration tool.
This season's program of mapping and sampling is extremely important. A
much better understanding of the area's geology and geochemistry, and its
relationship to gold mineralization is a must for identifying gold
deposits. Given the abundance of soil cover consideration should be given
to trenching many of the areas of interest to assist in determining the
extent of mineralization.
Also considering the lack of outcrop a district wide tight stream sediment
sampling programs in the secondary and tertiary drainages, away from the
areas of past placer mining, would also be useful in identifying areas of
unexposed mineralization.
ASSAYING
Collecting representative samples and how they are treated after collection
is always a concern, but with recent events in the industry it is even of
greater concern. This evaluation included time spent discussing sampling
and assaying at Alder Gulch with Bill Neal.
Much of the drilling is core, which should reduce down-hole contamination,
which may be possible since many of the intercepts are high grade, in
fractured ground, and/or below the water table. From the descriptions given
by Neal it seems that a fairly typical approach was taken to drill hole
sampling. Material was collected from the reverse circulation holes at the
rig, bagged and shipped to an assay lab. Drill core was boxed at the rig
and then transported to a site for sawing, with one half of the cut core
used for assaying and the other half retained for reference. Apparently,
all of the non-Hanover drill core samples were prepared off site, while
some, or all, of the Hanover core was prepared on site. While there is no
suggestion of improprieties, future sample preparation should only be by a
third party.
Recently Neal has compiled all of the check assay data in an effort to
determine the reliability of past analyses. While this was a good effort
there are several comments that must be made about this study.
Any gold deposit, particularly one of this type, will have erratic gold
distribution, and needs to be tested with as large a drill hole sample as
possible and closely spaced drilling. Some of the drill core from past
programs was small diameter and one would question the representative
nature of the samples. These holes should be used only as guidelines for
the location of mineralization. Large diameter core (NQ or larger) is a
must for future drilling. A few of the drill holes were prepared and
analyzed in the NA Degerstrom lab. While the lab may be totally reliable,
the close association between Degerstrom and Hanover will always be a
concern to outside groups and investors. As long as Degerstrom has an
interest in the company that lab should not be used for analyses. The one
aspect of the sampling and assaying procedures that was not checked during
past programs was sample preparation. Samples of varying size were not
prepared to determine what is the optimum sample size to collect from the
drill hole. These samples could also be used to determine how much
reduction should take place in the lab and what size analytical sample is
needed for a reliable assay. the scatter diagram for the gravity assay vs.
fire assay, in Neal's study, indicates that there is a nugget problem that
should be addressed. The nugget effect might be reduced as simply as
reducing a larger sample before an analytical split is taken, or metallic
screen analyses may be required. Obviously more test work is needed. Neal's
data shows a comparison between "twinned" holes, which is not good. Does
the lack of correlation between the locations of mineralized intervals and
grade within the intervals represent the natural variation between holes,
or a sampling problem? A better study of the gold distribution by twinning
more holes is needed, and consideration should be given to conducting this
work during the current field season so that a good drill hole sampling
protocol can be developed before next year's intense drilling program
starts. Obviously, drilling at this point is so wide spaced that comments
about continuity of mineralization are inappropriate, but close attention
is needed to determine proper drill hole spacing for reverse definition.
DEPOSITS
Drilling is so wide spaced and/or incompletely evaluated that it is
impossible to establish reserves, and except for Kearsarge, geologic
resource estimates are not realistic. Core and rotary chips are just in the
process of being re-logged and until completed the geologic knowledge of
the various deposits is in its infancy. Having said that there are several
observations about the mineralized areas (deposits) that are worth
offering.
The limited drilling has not closed off any area of mineralization,
therefore resource estimates presented here, or in other reports, should be
considered minimums. Drilling has been restricted to testing near surface
mineralization with most holes less than 500 feet deep, with the deepest
about 850 feet. Essentially nothing is known of the deep gold potential on
the property.
KEARSARGE / BIG VEIN
The most intensely drilled portion of the property is at Kearsarge, more
specifically the Kearsarge/Big Vein system. Several companies have drilled
the area, with the most reliable data from the Hanover and Kennecott
programs. It is important to note that most of the drilling is along the
Big Vein Zone, with very little along the nearby and subparallel Kearsarge
vein. Based on limited drilling at Kearsarge two resource estimates have
been produced, one by Kennecott and the other by Battle Mountain Gold (they
did not drill any holes, just re-evaluated previous drilling). The two
resource estimates are as follows.
<TABLE>
<CAPTION>
COMPANY CUT OFF TONNAGE GRADE OUNCES
<S> <C> <C> <C> <C>
Kennecott 0.01 opt AU 6,000,000 0.083 498,000
Battle Mountain 0.02 opt AU 2,062,400 0.233 480,539
</TABLE>
The principal difference between the two estimates is that Kennecott
incorporated more low-grade material, while the Battle Mountain estimate
was more restrictive in what was considered for inclusion in the resource.
A cursory inspection of the data suggests that the Battle Mountain estimate
may be closer to what is accurately in the ground. It should be noted that
none of the assays in the Battle Mountain estimate were cut. To cut, or not
to cut, assays is always an argument and one that needs to be addressed
here before resource/reserve estimates are constructed. There are enough
very high-grade intervals, and they seem to have some consistency, that a
strong case could be made for not cutting assays, or only cutting the
extremely high assays.
Late in 1996 Hanover Gold drilled four holes in the area, the first two of
which encountered the up-dip extension of the Big Vein zone and confirmed
that reasonable thicknesses and grades extend up-dip from previous
drilling. Holes 3 and 4 encountered a previously unknown vein in the
hanging wall that also contains wide intervals of potentially mineable
grades (see Hanover Gold news release number 96-10). This drilling strongly
indicates that more mineralization exists in the area than previously
known. Obviously, an intensive drill program is required to completely
define the geologic resource, and ultimately the mineable reserves.
In addition to the open pit potential, several of the drill hole intercepts
have grades and thicknesses suggesting that a portion of the mineralization
has potential to support underground mining.
Four holes have been drilled to the northeast of the resource area, two of
which encountered significant mineralization (KSR-18 25 feet of 0.046 opt
Au and KSR-10 90 feet of 0.056 opt Au). These holes may represent an
extension of the Kearsarge/Big Vein zone,and if that interpretation is
correct it suggests that the resource could be considerably larger.
SOUTH BACHELOR - LUCAS-ATLAS, ET. AL.
Several holes have been drilled into northeast trending structures to the
east and northeast of Kearsarge/Big Vein, resulting in the identification
of gold intercepts that require fillip drilling. These areas include Atlas,
Lucas, and South Bachelor. Surface sampling along these zones, and
Roughrider and Oro Cache support the conclusion that they are all good gold
targets. Since Atlas is within a Wilderness Study Area and Oro Cache is
just outside of it, they are probably not worth pursuing until legislation
is enacted that returns the area to multiple use.
Drilling in the Lucas and South Bachelor areas has identified several
intercepts that vary from 20 to 95 feet wide, with grades in the 0.030 to
0.136 opt Au range. These mineralized drill hole intervals are spread over
a strike length of at least 1,000 feet and a width of 500 feet. While the
drilling is too widespread to develop even a geologic resource estimate
there is every indication that a sizable gold deposit occurs in the area.
Surface geochemistry suggests that the zone may have a strike length of
several hundreds of feet to the northeast and southwest of the drilled
area.
EASTON-PACIFIC
Mineralization here may have somewhat of a different style compared to that
found elsewhere in the district. Gold occurs along steeply dipping veins
and structures, but there may also be substantial mineralization in the
wall rock either in strockwork veining and/or disseminations. Beyond that
comment little is known about the geology of the mineralization. Gold has
been mined at both the Easton and Pacific portions of the property. The
6,000 feet between the two mines contains a gold in soil anomaly that is up
to 500 feet wide and is continuous over the entire separation between the
Pacific and Easton. The only drilling on the Easton-Pacific ground is at
the Pacific mine. The averaged mineralized intercept for all of the drill
holes is 50 feet thick and the grade is 0.066 opt Au. Beyond that a
resource estimate has not been developed for the Pacific drilling.
A major exploration program is needed along the Easton-Pacific trend,
including basic geology supported by more geochemistry and possibly
geophysics. A resource estimate of the Pacific mine area is justified given
the amount of drilling. Two holes were drilled in the central portion of
the geochemical anomaly, but seem to have missed the major structure and
therefore it is not surprising that they do not contain significant
mineralization. Several trenches across the anomaly would be very useful in
identifying the controlling features for gold mineralization and in
developing a successful drilling program.
The Easton-Pacific ground has the potential to contain a sizable area of
gold mineralization that might be developed into a large mineable reserve.
EXPLORATION POTENTIAL
Since the geological program is just underway it is somewhat premature to
speculate on the ultimate gold potential for the district. Early
indications suggest that several gold deposits are yet to be discovered on
the property. To the north of Kearsarge/Big Vein in the Tabor area several
areas have been identified that contain strongly anomalous rock chip gold
samples. Little is known of the area's geology and no drilling has
occurred, but the widespread nature of the surface mineralization suggests
that there may be at least one deposit in this portion of the property.
Previous work from the Hungry Hollow - High-Up mine area presents an
extremely attractive exploration opportunity. Several relatively wide zones
of mineralization have been identified in the Irene workings and need to be
followed up. Since there is little known of the geology and no drilling,
this is essentially a raw prospect.
Reconnaissance work that has just been started is turning up other areas of
gold mineralization that were not previously known. This coupled with the
extensive soil cover in the area suggest that other areas of gold
mineralization are yet to be found.
CONCLUSION
Hanover Gold's Alder Gulch property is a district play where several high
quality gold targets have been identified and several more are likely to be
discovered. While it is always risky to speculate on the total number of
ounces of gold to be discovered in any one deposit, or the district, some
reasonable projections can be offered. Initial drilling the Kearsarge area
indicates a resource of about 500,000 ounces of gold. Indications are that
the zone is wider than originally projected and may be traceable over at
least twice the strike length than presently defined. Depth potential can
only be guessed at, but it could be substantial. If these projections hold
true with additional drilling, a resource in the 2-4 million ounces of gold
could exist. Previous drilling at Pacific suggests 1 to 2 million tons with
an average grade of 0.066 opt Au, or approximately 100,000 ounces of gold.
Additional drilling may expand this to 250,000 to 500,000 ounces of gold,
without drilling the geochemical anomaly to the northwest (toward the
Easton mine). These two deposits give an estimate of the larger and smaller
size deposits that might be discovered. Given what is known of the rest of
the district several deposits could be found which might place the total
gold resource for the district above 5 million ounces. It must be strongly
underscored that this is based entirely on geological inference, and the
proof will be in drilling.
A comment about gold grades is also in order. The data reviewed strongly
indicates that numerous areas of substantially greater than 0.10 opt Au
exists and some of the gold may be coarse grained and not easily captured
for assay. The high-grade intervals are most likely small and discontinuous
between drill holes. It is likely that the economics of drilling and
assaying will prevent identifying all of the high-grade material, and
therefore whatever grade is placed on a resource is likely to be lower than
what might be ultimately mined.
Hanover Gold's Virginia City Mining District holdings represents one of the
better under-explored gold areas known in North America.
<PAGE>
Exhibit No: 10.16
VIRGINIA CITY MINING DISTRICT
MADISON COUNTY, MONTANA
By Tom Henricksen
Consultant Geologist
May, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Summary and Conclusion 1
Introduction 2
History of Recent Kennecott Involvement 3
Current Land Status 4
District Geology 4
Stratigraphy 4
Pegmatites and Dikes 5
Structure 5
Mineralization 6
Kearsarge/Upper Alder Gulch Prospects 6
Kearsarge Prospect 6
South Bachelor Prospect 7
Atlas-Lucas Prospect 7
Garrison Prospect 8
Tabor Prospect 8
Easton-Pacific/Brown's Gulch Prospects 8
Easton-Pacific Prospect 9
Pacific Pit Prospect 10
Skid-Row/South Easton Ridge Prospects 10
High-Up 10
Mapleton-Prospect 11
Metallurgy 11
Environmental Considerations 12
Exploration Proposal 14
Disclaimer 15
Addendum 15
</TABLE>
SUMMARY AND CONCLUSIONS
The Virginia City Mining District, a past producer of 2.5 - 10 million
ounces of placer gold and nearly 200,000 ounces of lode gold, is characterized
by complexly deformed and metamorphosed Archean rocks which are composed of
numerous different lithologies, the majority of which are thought to have a
sedimentary origin. Abundant Proterozoic pegmatite and rare diabase dikes cut
the Archaen rocks. Locally, Paleozoic rocks rest unconformably and/or in fault
contact with the Archean and Proterozoic rocks. No Laramide intrusions are
known in this District.
The District is localized within a major northeast-trending
gravity/magnetic lineament in southwest Montana known as the Malta Low. This
lineament may represent a deep crustal break in the Archean basement. The Butte
District and Placer's Golden Sunlight Mine lie within the lineament.
Lode gold mineralization in the District is principally associated with N30
E and 60W structural trends. The mineralization consists of sulfide-bearing
quartz veins, or successions of veins, and/or broad (locally 150' + in width)
silicified to carbonaceous shear zones. The lodes, in general, appear to
slightly to severely crosscut the penetrative foliation and may themselves be
isoclinally folded. The lode gold production in the District has been minimal
in part due to the bad underground mining conditions as evidenced from old
reports and by the number of caved adits. Because of poor exposures, continuous
outcropping mineralization is rare, but regional soil sampling has been very
useful in delineating drill targets. Leaching of some gold from surface samples
(and secondary enrichment) is suspected from evidence gained in drilling in the
Kearsarge area.
In 1992 and 1993, Kennecott completed sixteen core holes and nineteen
reverse circulation holes for a total of 16,685' of drilling in the
Kearsarge/Upper Alder Gulch area under a 1992 agreement with Hanover Gold. The
geologic resource, from limited Kennecott drilling in Upper Alder Gulch is
estimated to be 6 m.t. of 0.083 opt at the Kearsarge prospect, 1.9 m.t. of 0.028
opt Au at the South Bachelor prospect, and 18 m.t. of 0.055 opt on the Atlas-
Lucas prospects. In 1994, Kennecott conducted surface studies including
regional geologic mapping plus rock and soil sampling in the Easton-
Pacific/Brown's Gulch area to the west of the Alder Gulch area. By combining
previous drilling by other companies with rock and soil sampling, four large
bulk-tonnage gold-silver targets have been identified on the Easton-
Pacific/Brown's Gulch side. Based on surface soil and rock sampling, limited
drilling, and cross section construction, the four principal targets and their
upside potential include the Easton-Pacific Mine (40+ m.t. of 0.025-0.08 opt
Au), the Skid Row/South Easton prospect (10-20 m.t. of 0.05-0.1 opt Au), the
Pacific Pit (10+ m.t. of 0.05-0.06 opt Au), and the High-Up Marietta prospect
(20 m.t. of 0.05-0.1 opt Au equivalent). Silver/gold ratios are in the 10:1
range in the Easton-Pacific/Brown's Gulch area, thus silver represents a
significant credit. TOTAL LODE POTENTIAL FOR THE UNITIZED DISTRICT EXCEEDS
THREE MILLION OUNCES OF GOLD.
Cyanide-leach tests were run on twenty pulp samples selected from the South
Bachelor, Atlas, and Lucas Zones in the Upper Alder Gulch by Rocky Mountain
Geochemical in Salt Lake City. These tests were performed in order to determine
if these ores would be amenable to recoveries by cyanide-leach methods. The
samples from these three zones included oxide, sulfide, and mixed oxide/sulfide
ores, ranging in grade from 0.013 opt Au up to 0.271 opt Au. Recoveries from
these sample tests ranged from 57% to 150% with an overall average of 96%.
There did not appear to be a significant difference between average recoveries
from oxide and sulfide ores. Only two samples contained mixed oxide and sulfide
ore and these have an average recovery of only 63%.
These results suggest that these ores are not refractory and will likely be
amenable to cyanide-leach extraction process. Hanover also conducted its own
preliminary metallurgical tests on five tons of various mixtures of
oxide/sulfide ore. Milling and gravity separation followed by agitated cyanide
showed very acceptable (85%) recoveries for all mixtures when ground to 100+
mesh.
In March of 1995, because of the failure to negotiate an acceptable
business arrangement with the Easton-Pacific and Riverside Mining Company
(EPRMC) combined with the high holding costs and work commitments on Hanover
lands, Kennecott withdrew from its agreement with Hanover.
Hanover Gold, under new management since June 1995, has offices in Coeur
d'Alene, Idaho and Helena, Montana and now controls more than 750 patented and
unpatented mining claims with the recent completion of the March 1997 merger
between Hanover and EPRMC. The Tabor ground, in the lower Alder Gulch,
containing 10 patented claims and 120 unpatented claims, has also been acquired
by Hanover. The biggest burden on Hanover is the underlying royalty payments to
John Magnus and Roy Moen, which collectively exceed $1,000,000 annually.
A phased 2.0 million dollar field and drill program could be justified in
the evaluation of the unitized Virginia City Mining District. The unitized
Virginia City district represents the top, relatively unexplored, gold prospect
in the United States. Others of similar magnitude would be Donlin Creek, Alaska
and the Yellowpine District of central Idaho.
INTRODUCTION
The Virginia City Mining District is located in Madison County, Montana,
just south of the historic town of Virginia City (Figure1). The district
encompasses Alder Gulch and its tributaries, the richest and most famous placer
gold producing drainage system in the state. Estimates of placer gold
production range from 2.5 to 10 million ounces from the time of discovery in
1863 until the last dredging operation ended in1933. Underground lode gold
production began a few months after the first placer discovery, but amounted to
a minimum of 170,000 ounces district-wide from 1863 to 1976. More than 2.7
million ounces of silver (mostly lode) have also been produced from the
District.
Several major mining companies, including Anaconda in the 1930's, and Bear
Creek Mining Company, Noranda, Cyprus, BHP-Utah International, Billiton,
Chevron, Goldfields, Newmont, and Independence Mining in the mid to late 1980's,
have made various levels of evaluation of the District. Although some of these
companies actually held parts of the District for short periods of time in the
80's, none were able to unitize the District and develop a bulk-tonnage
resource.
For discussion and land purposes, the district can be divided into two
areas (Plate 1) the Kearsarge/Upper Alder Gulch area, including Garrison and
Tabor prospects, and the Easton-Pacific/Brown's Gulch area, including the
Mapleton prospect (not shown on map). Prior to the Kennecott evaluation that
began in 1991, most exploration had been geared toward narrow veins in the
District and little systematic exploration, with the exception of BHP and
Canadian junior, United Reef Petroleum, for bulk-tonnage metals had been carried
out.
United Reef Petroleum, Ltd. obtained control of the majority of the
unpatented claims in the Upper Alder Gulch/Kearsarge area in 1987. They
initiated an exploration program including soil sampling, geologic mapping, VLF-
EM-mag survey, trenching, and core drilling. They dropped the property,
but retained a significant interest, after drilling 4 core holes with poor
recovery during the 1989 season. In 1988, Bearcat Exploration obtained an
interest in 8 patented claims in the Kearsarge area and drilled 23 vertical
percussion holes. The drill program was plagued by water problems and inability
to intersect mineralized vertical zones with vertical drill holes.
At the Easton-Pacific prospect on the west side of the district, BHP
optioned the property from the Easton-Pacific and Riverside Mining Company
(EPRMC) in late 1988 and drilled 4 inconclusive RC holes, followed by 9 core
holes and 7 RC holes drilled in 1989. Most drill holes were in the weakly
mineralized footwall of the Pacific Pit structure. The original BHP/EPRMC deal
included a 40% free-carried interest to EPRMC. THE PRINCIPAL REASON FOR BHP
DROPPING THE PROSPECT IN 1989 (WITH NO RETAINED INTEREST) WAS THE INABILITY TO
CHANGE THE DEAL.
HISTORY OF RECENT KENNECOTT INVOLVEMENT
Following the withdrawal of the Canadian juniors United Reef and Bearcat
Exploration in the late 1980's, New York based Hanover Gold (and its associate
companies, Group S and Hanover Resources) began its play for the upper Alder
Gulch-Kearsarge area in late 1990. The underlying principal owners of this area
are local claim holders, John Magnus, Roy Moen, and Lewis Larsen. At the same
time Hanover Gold (President Fred Schmid) was acquiring the principal interest
in the upper Alder Gulch area, Hanover Gold was also looking for a major company
partner to help explore the district, while putting the Kearsarge Mine into
production themselves.
In 1991, an ex-Kennecott employee, Nick Young, a board member of Hanover
Gold, inquired to Kennecott's then-president, Frank Joklik, if upper Alder Gulch
might be of interest to Kennecott as an exploration play for bulk-tonnage gold.
Spokane office geologist, Jim Ashleman, was dispatched to examine the prospect
in June of 1991. Jim reported "concordant mineralization adjacent to a dolomite
marble marker within the (Archaen) gneiss, and slightly discordant
mineralization related to NNE to NE-trending (wide) high-angle shear zones."
His early surface rock sampling revealed numerous gold-in-rock anomalies and one
zone 45' in width containing 0.23 opt Au in a road cut on the Big Vein, part of
the original Kearsarge claim group. The decision was made in mid-1991 to acquire
the Kearsarge and associate properties in upper Alder Gulch. Without much
additional fieldwork, negotiations continued throughout the winter all the way
to May of 1992, when the Alder Gulch Mining Venture Agreement was signed between
the Hanover JV and Kennecott Exploration. The initial agreement called for
Kennecott to earn 51% in the properties by spending a total of $9.37 million. A
total expenditure of $13.5 million would earn a 60% interest. In 1992 and 1993,
under the direction of project manager, Russ Franklin, Kennecott drilled sixteen
core holes and 19 reverse circulation holes, excavated 14 trenches, and
collected approximately 5000 rock and soil samples in addition to geologic
mapping. A partially drilled open-pittable geologic resource of 6 m.t. of 0.083
opt Au at the Kearsarge/Big Vein and 20.1 m.t. of 0.055 opt Au at the South
Bachelor/Atlas/Lucas had been delineated on Hanover lands. In June of 1993 the
decision was made to begin examining properties immediately adjacent to the
Hanover holdings in order to increase the size potential of the district. These
lands include those held by Tabor Resources (to the north), The Garrison Mining
Company (to the south), and the Easton-Pacific and Riverside Mining Company
(EPRMC) (to the west). By July of 1993, Russ Franklin reported that "the
(Easton-Pacific and Riverside) target appears to be as good as any that I have
seen elsewhere in the District." In August, detailed fieldwork was initiated by
Ben Porterfield, and negotiations began to acquire the EPRMC lands in order to
unitize the district. Because of a prior area-of-interest agreement signed with
Hanover Gold, direct negotiations with EPRMC were precluded and an attempt to
set up a three-way business arrangement was made during the next 18 months.
During late 1993 and 1994, four large targets (Easton, Skid Row/South Easton,
Pacific, and High-Up) and several smaller targets were delineated on EPRMC lands
through geologic mapping and rock and soil geochemistry. Drilling was not
possible because of the lack of an agreement. TOTAL COMBINED POTENTIAL FOR ALL
THE TARGETS ON EPRMC LANDS IS ESTIMATED TO EXCEED 100 M.T. WITH A POSSIBLE GRADE
OF 0.025-0.08 OPT AU.
On March 15, 1995, because of the failure to negotiate an acceptable
business arrangement with EPRMC combined with the high holding costs and work
commitments on Hanover lands, Kennecott voluntarily withdrew form the Alder
Gulch Mining Venture. After an expenditure of approximately 3.25 million
dollars over nearly 4 years, the unitization of the Virginia City District under
Kennecott no longer seemed possible. Shortly thereafter, Hanover stopped its
small scale mining at the Kearsarge, which from 1993 to 1995 recovered
approximately 1,500 ounces of gold from 15,000 tons of ore.
CURRENT LAND STATUS
Following the withdrawal of Kennecott from the Hanover agreement and
breakdown of talks between Kennecott and EPRMC in March of 1995, N. A.
Degerstrom and his associates (Degerstrom group) began in earnest a stock
takeover attempt of EPRMC and at the same time negotiations with Hanover were
initiated. Hanover announced on June 14, 1995, that they agreed to sell N. A.
Degerstrom and his associates 2,857,142 shares of its common stock and an option
to buy 2,142,858 shares no later than April 15, 1996. This stock option was
completed in the fall of 1995. The stock purchase bailed out Hanover from
underlying debts and also gave essential new control of Hanover Gold to N. A.
Degerstrom and Associates through control of the board.
After failing to take over the EPRMC through stock purchases in June and
July, the Degerstrom group filed suit in Federal Court in August against EPRMC.
Among other things, the Degerstrom group claimed that the management of EPRMC
did not disclose potential conflicts of interest to the shareholders. However,
late in September, the EPRMC and the Degerstrom group signed a "standstill
agreement" to temporarily (60 days) halt the lawsuit. The lawsuit and
subsequent "standstill agreement" served their purpose - to get EPRMC to the
bargaining table with Hanover Gold.
On February 26, 1996, Hanover and EPRMC announced that their companies had
signed a letter of intent contemplating the possible merger of the two companies
and the consolidation of their respective mineral resources in the Virginia City
Mining District in Madison County, Montana. However, during the 60-day due
diligence period, negotiations failed and the agreement lapsed.
In March 1996, Tabor Resources agreed in principal to sell its 10 patented
claims and 120 unpatented claims to Hanover for 400,000 shares of Hanover stock
plus an additional stock option in the future.
Negotiations throughout 1996 resulted in an agreement with EPRMC in March
1997 to consolidate the EPRMC claims with Hanover's holdings at Virginia City,
Montana. Subject to shareholder approval the addition of the EPRMC claims will
increase Hanover's holdings to approximately 780 claims.
The combining of these three companies' precious metal holdings (Figure 2)
brings together the three largest land positions in the Virginia City Mining
District which, in the past, was the desire of many gold mining companies who
believe that the combined properties have gold properties of world class
potential. Management for Hanover and EPRMC believe that the merger will
attract major gold companies for possible joint-venture discussions.
DISTRICT GEOLOGY
The Virginia City Mining District is one of five gold mining districts
which flank a large northwest-plunging domal uplift cored by the Laramide
Tobacco Root Batholith (Figure 3). A sixth gold mining district is situated
near the core of the uplift, along the northern margin of the batholith.
Complexly deformed and metamorphosed Archean rocks which are composed of
numerous different lithologies, the majority of which are thought to have a
sedimentary origin, dominate the uplift. Abundant Proterozoic pegmatite and
rare diabase dikes cut the Archean rocks. Locally, Paleozoic sediments overlie
both Archean and Proterozoic rocks along the flanks of the uplift.
STRATIGRAPHY
Bedrock exposures in the Virginia City District (Plate 1) range in age from
Archean up through Teritiary. The vast majority of the property is composed of
Archean metamorphic rocks. These rocks have been locally cross-cut by numerous
thin N20-60W trending, post-metamorphic, Proterozoic-aged pegmatite dikes. More
rare are Tertiary diabase dikes that also cross-cut the Archean rocks along
roughly the same trend. To the south, along the lower slopes of Baldy Mountain,
both Archean and Proterozoic rocks are unconformably overlain by a sequence of
inclined lower Paleozoic rocks ranging from the basal Cambrian Flathead
Quartzite upward to nearly the top of the Mississippian Mission Canyon Member of
the Madison Group.
The most common lithologies in the Archean metamorphic rocks are quartzo-
feldspathic gneiss, garnet-biotite and hornblende gneiss, amphibolite, biotite
schist, graphitic schist, and dolomitic marble. These lithologies can be
grouped into two mappable units: 1) a pelitic unit composed of garnetiferous
gneisses and schists, graphitic schists, aluminous schists, and local dolomitic
marble units, and 2) a coarse clastic unit composed of quartzo-feldspathic
gneisses rich in magnetite and locally hornblende and magnetite. At least two
successions of the coarse clastic unit and the pelitic unit are recognized which
suggests either repetition by folding or, conversely, a normal stratigraphic
succession consisting of four separate units (Plate1). In the area of the
Kearsarge Mine and southwestward, the contact appears to be marked by the
Kearsarge/Big Vein shear zone. To the northeast, the contact may occur in part
along the Roughrider and/or other shear zones. On the Easton-Pacific property,
a metavolcanic unit consisting of amphibolite and greenstone is present.
To the south, along the lower slopes of Baldy Mountain, both Archean and
Proterozoic rocks are unconformably overlain by an inclined sequence of lower
Paleozoic strata. The only known exposure of this contact is near the Garrison
Mine where a small outcrop of quartzite and interbedded conglomerate are in
contact with a deeply maroon-weathered quartzo-feldspathic gneiss. The basal
Paleozoic unit is the Cambrian-aged Flathead Quartzite which ranges up to 120'
in thickness and is composed of orthoquartzites and pebble conglomerates with
local thin interbedded shales. The Flathead Quartzite is conformably overlain
by the Cambrian-aged Wolsey shale, which consists of approximately 60' of
greenish-gray thin bedded shale with local thin quartzite interbeds. The Wolsey
Shale is conformably overlain by a Cambrian-aged marine succession consisting of
limestones, dolomites, and shales, which belong the Meagher Limestone (650'
thick). The Red Lion Formation and Bighorn Dolomite, assigned to the Upper
Cambrian-Ordovician, have a combined thickness of 102', and consist of red
hematitic limestone, limestone karst breccia, and minor red mudstone. This unit
represents an unconformity between Cambrian-Ordovician strata and overlying
Devonian strata. The Devonian strata consists of the Jefferson Dolomite and
Three Forks Shale, which combine for a total thickness of approximately 1,200'
and are conformably overlain by the Mississippian Lodgepole and Mission Canyon
Limestone of the Madison Group.
PEGMATITES AND DIKES
Thin non-foliated tabular pegmatites, ranging from several inches to tens
or hundreds of feet in thickness, are widespread within the Archean metamorphic
rocks. They generally have sharp discordant boundaries and have strikes ranging
from N20-60W. The pegmatites usually contain microline, quartz, biotite or
muscovite, and rarely magnetite. K-Ar radiometric age date on biotite from a
pegmatite within the U.S. Grant Mine gives an age m.y.b.p. ! 1600 m.y.
The youngest rocks present at Kearsarge are Tertiary-aged diabase dikes.
These dikes are near vertical with strikes averaging about N60W and they occur
locally along the northern edge of the property.
STRUCTURE
The dominant structural fabric at Kearsarge/Upper Alder Gulch is northeast
trending. This is reflected by the planar foliation within the metamorphic
rocks and by a series of northeast trending economically important shear zones.
A more subtle secondary structural fabric trends northwest and is reflected by
local small faults or shears within the Kearsarge Mine area and by the alignment
of both Proterozoic pegmatite dikes and Tertiary diabase dikes.
The planar foliation within the metamorphic rocks is parallel to the
compositional layering and is axial planar to isoclinal and subisoclinal folds.
These folds have amplitudes ranging from several inches to several hundred feet.
At least two large amplitude isoclinal folds have been interpreted from the
outcrop pattern of the dolomite marble unit (Plate1). These folds appear to be
south verging synforms with a possible north verging antiform between them.
To the west in the Easton-Pacific/Brown's Gulch area, the structural fabric
of the rock units is less known due to the relative scarcity of outcrop and of
marker beds, such as marbles and graphite. More detailed mapping, particularly
underground at the Easton-Pacific Mine, could resolve the problem.
The dominant mineralized shear zones in the western part of the district
trend approximately N60W and several mineralized shear zones appear to bend into
the Brown's Gulch Fault.
A major structural feature in the district is the NNW-trending Brown's
Gulch Fault that appears to significantly offset the Archean section (Plate 1),
but not offset the Paleozoic section. More fieldwork is necessary to more
accurately determine the movement on this fault.
Understanding the structure, particularly the isocline folding, could be
important in future exploration, particularly if there is a folded stratigraphic
component to the control of the gold-silver mineralization.
MINERALIZATION
Although the Virginia City District is in the final stages of being
unitized by Hanover Gold, for discussion the District has been divided into 2
different prospective areas (Plate 1), based primarily on different styles of
mineralization and/or different original ownerships. These prospective areas
include the Kearsarge/Upper Alder Gulch area including the Garrison and Tabor
prospects, and the Easton-Pacific/Brown's Gulch area, including the Mapleton
prospect, north of the mapped area. Lode gold mineralization is principally
associated with N30E and 60W structural trends. The mineralization consists of
sulfide-bearing quartz veins, or successions of veins, and/or broad (locally
150' in widths) silicified shear zones. The lodes, in general, appear to
slightly cross-cut the penetrative foliation of the metamorphic rocks, as well
as the younger Proterozoic pegmatite dikes. Continuous outcropping
mineralization is rare, but regional soil sampling (Plate 1A) has been very
useful in delineating drill targets. Rock sampling has also been useful, but
surface leaching of gold is suspected in the District. This is evidenced by the
favorable drilling results beneath lower grade surface exposures in the
Kearsarge area.
KEARSARGE/UPPER ALDER GULCH PROSPECTS
In 1992 and 1993 Kennecott completed sixteen core holes and nineteen
reverse circulation holes for a total or 16,865' of drilling. Fourteen trenches
were also excavated, and approximately 5,000 rock and soil samples were
collected for geochemical analyses. Three potentially surface mineable
mineralized zones have been identified (Figure 2) - the Kearsarge, South
Bachelor, and Atlas-Lucas.
KEARSARGE PROJECT
The principal target on the Kearsarge Zone consists of a pair of shear
zones, the Kearsarge and Big Vein shears, which converge upon one another to the
southwest, and merge into a broad shear zone in the vicinity of the Kearsarge
Mine (Plate 1 and Figures 4-6) to become one large shear. Mineralization
decreases, as the shear zone becomes wider to the northeast. The convergence of
these mineralized zones to the southwest could be a result of isoclinal folding,
but more work would be needed to confirm this. Over a strike length of
approximately 1,200', the two combined shears average 150' in width and exhibit
low-grade (0.02+ opt Au) gold mineralization over most of this width. Within
this shear are two relatively narrow high-grade intervals, one occurs along the
footwall and the other either at or near the hangingwall.
Myonitic gneisses, schists, local impure marbles, and pegmatites
characterize the shear zone. Much of the shear consists of clay gouge
surrounding highly strained clasts of country rock and locally quartz vein
material. There appears to be at least three stages of alteration within the
shear zone, including an early propylitic alteration, a quartz-adularia-
carbonate-auriferous pyrite alteration and a late-stage carbonate veining. The
propylitic alteration is most widespread and is characterized by the replacement
of plagioclase by albite, sericite and carbonate, and the alteration of mafic
minerals to chlorite, pyrite, Ti oxide, and carbonate. This assemblage has been
locally overprinted by a quartz-adularia-carbonate-auriferous pyrite alteration
assemblage in which adularia replaces albite and in some instances mica.
Replacement of primary minerals by quartz and adularia is most strongly
developed near veins and in brecciated rocks. The quartz-adularia-carbonate
alteration is accompanied by strongly
disseminated fine-grained auriferous pyrite, pyrite along hairline veinlets, and
pyrite selectively replacing chlorite pseudomorphs after biotite along cleavage
planes. Visible native gold, although rare, occurs locally within the most
intensely quartz-adularia altered zones. Gold mineralization appears to be
absent within rocks affected only by the early stage propylitic alteration. The
late stage carbonate veins, which cut the other alteration assemblages, is also
devoid of gold. The strongest gold mineralization occurs within zones where
several generations of quartz-adularia-carbonate-pyrite veinlets are present
(e.g. the Big Vein and Kearsarge Vein).
Much of the shear contains abundant graphite, which occurs as crystalline
blades aligned with the shear fabric, and is observed predominantly within the
alteration assemblage. Based on the drilling of the 10 core holes, the
Kearsarge Vein averages 0.262 opt Au over an average thickness of 29' and the
Big Vein averages 0.112 opt Au over an average thickness of 25'. THE ENTIRE
SHEAR ZONE, INCLUDING BOTH "VEINS", AVERAGES 0.083 OPTS AU OVER AN AVERAGE WIDTH
OF 150'. THE GEOLOGIC RESOURCE IS ESTIMATED AT 6 M.T., GRADING 0.083 OPT AU.
This estimate is projected to an average depth of 500' where a strip ratio of
4:1 is estimated.
SOUTH BACHELOR PROSPECT
The South Bachelor target, originally identified by soil and rock
geochemistry, consists of at least three low-grade zones which appear to
converge upon one another to the southwest in a similar fashion as the Kearsarge
zone (Figure 7 and 8). These zones may be the southwest extensions of the Lucas
and Atlas "veins" exposed along the north side of Bachelor Gulch. The
westernmost zone has been tentatively correlated with the Lucas Vein, the middle
zone has been correlated with the Atlas Vein, and the easternmost zone does not
correlate with any of the historically known "veins" and will hereafter be
referred to as the Bachelor Vein.
The mineralization at South Bachelor is in stark contrast to that of the
Kearsarge zone. Mylonites, clay gouge, and graphite are notably absent as is
strong widespread propylitic alteration. In addition, the presence of hematite,
which occurs mainly as a dust in altered plagioclase throughout the South
Bachelor target area, suggests that the oxidation state of the hydrothermal
fluid was much higher than that of the Kearsarge zone fluid. The mineralization
consists of quartz-adularia-auriferous pyrite ! carbonate veins, veinlets, and
stockworks within a quartzo-feldspathic-magnetite ! hornblende gneiss and/or
pegmatite. These veins and veinlets generally occupy tension fractures and
display features resulting from deposition with open spaces, such as local vugs
and comb quartz. As at the Kearsarge zone, an early stage of propylitic
alteration is present although it is much less widespread and is poorly
developed. This is overprinted by the gold-bearing quartz-adularia-pyrite !
carbonate alteration stage, which is in turn cut by barren carbonate veins.
The South Bachelor Zone defined by 2 core and 10 RC holes consists of three
low-grade mineralized zones. The three zones have an aggregate average width of
approximately 400' over a strike length of 1,600' and a vertical span of 700'.
The average grade of these zones, including the very low-grade interburden, is
0.014 opt Au. The amount of material containing this grade is estimated to be
nearly 40 m.t., including both oxide and sulfide. However, at a cut-off of
0.020 opt Au. A POTENTIAL OF 1.9 M.T. OF OXIDE MINERALIZATION GRADING 0.028 OPT
AT A STRIP RATIO OF 1.6:1, HAS BEEN ESTIMATED. Because most of the South
Bachelor resource has been defined by RC drilling, more core drilling is
recommended to substantiate the grade of the mineralization.
ATLAS-LUCAS PROSPECT
The Atlas-Lucas Zone (Figures 7, 9, and 10) appears to be the northeast
extension of the South Bachelor Zone. The geologic setting is identical to the
South Bachelor Zone.
The Atlas-Lucas Zone, defined by surface exposures along with 4 core and 2
RC holes, consists of 2 to 3 mineralized zones which span a strike length of
approximately 4,500'. VERY WIDELY SPACED DRILLING SUGGESTS POTENTIAL AT THE
ATLAS-LUCAS, COMBINED WITH THE 1.9 M.T. AT SOUTH BACHELOR, TO BE APPROXIMATELY
20 M.T. THAT IS LIKELY TO AVERAGE 0.055 OPT. This is based on variable pit
depths ranging from 250'-500' which yields an estimated strip ratio of 6.4:1.
GARRISON PROSPECT
The Garrison prospect (Plate 1), in Upper Alder Gulch, represents in part
an extension of the Kearsarge and South Bachelor vein systems. Thick
Pleistocene glacial sediments cover most of the Precambrian rocks, thus
conclusions for most geologic relationships are tenuous and based on drilling
and several old mine workings. The vein systems are generally hosted in
Precambrian quartz-feldspar gneiss, although some interlaminated quartz-biotite
schists are recognized as bounding parts of the veins. The veins trend parallel
to sub-parallel to the northeast foliation and to each other, as seen in sparse
outcrop. As determined from reverse circulation drilling by Billiton Minerals
in 1989-90, the average dip of the veins is from 60 to the northwest to near
vertical. The principal vein type on the Garrison exhibits lenses and pods of
quartz and sulfides (pyrite) in gouge-filled fissures, which when closely spaced
produced wide zones (100'+) such as the Big Vein. The second type is that of
quartz-filled narrow, tensional features as seen in the Lucas Vein. During 1989-
90, Billiton drilling 24 reverse circulation holes for a total of 8,300'. The
best hole drilled by Billiton may have been a southwest extension of the Big
Vein and they intersected 50' of 0.108 opt Au. No other significant
intersections were noted in the Archean rocks.
However, Billiton believed that the best target on the Garrison project was
the unconformity/fault contact between the Cambrian Flathead quartzite and the
underlying gneisses (Plate 1). This is the prospect known in the old literature
as the Snow Cap property. Only two holes, 7A and 16, penetrated this horizon.
Hole 7A contained 30' of 0.063 opt Au and hole15 exhibited 115' of 0.02 opt Au
in silicified, pyritic quartzite. More drill holes would be required to
adequately determine the nature of this target.
No resource has been drilled to date on the Garrison although recently
Royal Star Resources (November 1995) reported their first hole (along a Big Vein
extension?) returned an intercept of 35' (237'-272') containing 0.272 opt Au
with an unreported thickness of lower grade values below this intercept. More
drilling was carried out by Royal Star in 1996 but the results are unknown to
me.
TABOR PROSPECT
The Tabor Resources prospect, now held by Hanover, is in the lower part of
Alder Gulch, north of the Kearsarge property (Plate 1, Figure 11). Noranda and
Blue Ribbon Resources have held this prospect and conducted limited exploration,
including some drilling. However, the St. John-Winnetka-Nellie Bly area has not
enough testing to date. There are six major quartz-bearing veins that form a
complex intersecting structural area that exhibits good soil anomalies (Plate 1
A and Figure 11) and locally excellent gold values on surface and in drill holes
(6 core holes, 7 rotary holes). For example, a trench on the Keyhole vein gave
50' of 0.066 opt Au and 0.18 opt Ag, open at both ends. A single core drill
hole that intersected both the Nellie Bly and Winnetka veins cut 92' of 0.051
opt Au and 0.12 opt Ag.
The best potential in this area could be beneath the thin cap of thrusted
(?) Madison limestone to the east. A GOOD POTENTIAL FOR 10+ M.T. OF 0.04 OPT AU
EXISTS IN THIS AREA.
EASTON-PACIFIC/BROWN'S GULCH PROSPECTS
The Easton-Pacific/Brown's Gulch prospects are characterized geologically
by Archean granitic gneisses of the Cherry Creek Formation, similar to much of
the adjacent Kearsarge/Upper Alder Gulch prospects (Plate 1). The principal
post-Archean rock within the mineralized area may be a NNW-trending pegmatite
(mapped as part of the gneiss) in the upper part of Brown's Gulch. This
pegmatite (?) may be as much as 8,000' long and 2,500' wide and is the principal
host for the vein mineralization at the Easton-Pacific Mine. Kennecott never
carried out much detailed mapping on the Easton-Pacific prospects; thus, the
actual presence of this pegmatite is in question. The NE-SW trending vein
structures on the prospects (High-Up/Marietta, etc) appear to sub-parallel the
foliation whereas the NW-SE trending may cross-cut foliation and may represent
younger mineralization. The NNW-trending Brown's Gulch Fault is locally
mineralized and appears to offset (?) the NW-SE trending veins in the Pacific
Pit area. Some of the NW-SE trending veins appear to bend into the Brown's
Gulch Fault.
Four large bulk tonnage gold-silver targets and several smaller targets
have been identified through geologic mapping, rock and soil geochemistry, and
drilling by BHP and EPRMC. These four targets (Figure12) include the Easton-
Pacific Mine, the Pacific Pit, the Skid Row/South Easton prospects,and the High-
Up/Marietta prospect. Northwest of Virginia City, along the north extension of
the Brown's Gulch Fault, is the Mapleton prospect, an EPRMC holding.
Easton-Pacific Prospect
The Easton-Pacific target consists of at least four north dipping veins
known historically as the South, Center, Main, and North Veins which occur over
a 4,000' strike length between the Easton-Pacific Mine and Pacific Pit (Plates
1, 1A, 2, 3 and Figures 13, 14). In general, these veins are subparallel to one
another but begin to diverge to the northwest near the main Easton Mine
workings. The distance between the South and North Veins range from 250"-850'
(Plate 2) with much of the exposed interveining rock altered and locally
mineralized. Because of the poor exposure it is not apparent how much of the
country rock will be mineralized, but based on limited sampling there COULD BE
SUBSTANTIAL WIDTHS. A series of channel samples taken along 40' of exposed
hangingwall at Trench A (Plate 2) along the South Vein yielded an average grade
of 0.044 opt Au and 0.72 opt Ag over 40'. The last samples at both ends of the
trench were mineralized, suggesting that the South Vein has a minimum
mineralized width of 60'+ in that area. At Trench B on the South Vein, the
southern part of the trench exhibits 28' (open to the south) of 0.033 opt Au and
0.053 opt Ag. As can be seen on Plate 2, the South Vein can be traced east of
these trenches for at least 1,500' with additional potential existing on the
Bullion claim.
The Center Vein is exposed over a strike length of 900' and is on average
300' north of the South Vein. Limited exposures along the old prospect pits and
mine workings suggest that the footwall of the Center Vein is mineralized over a
width of at least 85' with samples to date averaging 0.016 opt Au and 0.64 opt
Ag. Near the southern part of the prospect (Plate 2) access was gained into a
pair of short adits (the Bear adits) cutting veins from a possible extension of
the Center Easton ore shoot. Mapping and sampling has been completed in one of
these adits. Approximately 105' of cross-cut and drift was mapped. The entire
cross-cut, which was variable, altered and iron-stained, was sampled and
averaged 0.038 opt Au and 0.66 opt Ag, good values on each end.
The Main Vein is exposed sporadically over a strike length of 3,000'+
(Plate 2). Within the Easton Mine area it has a strike length of 1,500' and
ranges from 250'-750' north of the South Vein. A minimum width of
mineralization could not be determined, but wall rock near vein exposures
averaged 0.026 opt Au and 0.74 opt Ag. At Roadcut A, a channel sample 50' in
length on the hangingwall averaged 0.09 opt Au.
The North Vein has been traced over a strike length of only 700' within the
Easton Mine area. It is, on average, 850' north of the South Vein. Local
exposures within the Easton Mine area suggest a width of at least 50' which
averages 0.020 opt Au and 0.28 opt Ag.
Surface rock and soil geochemistry (Plates 1, 1A, and 2) suggest that,
within the Easton-Pacific Mine area, a minimum aggregate width of mineralization
of 360' exists. Underground sampling in the Easton workings has not been
completed to date and would help immensely at better estimating grade.
Potential for ore mineralization of this width exists over a strike length of
approximately 1,500'. A second possible ore shoot occurs approximately 1,000 to
the southeast along this trend in the Bear Adits area (Figure 14). Surface
geochemistry along this segment suggests that potential ore grade widths up to
250' can be expected over a strike length of 1,200'. Recent geological
interpretation by Hanover Geologist Bill Neal suggests that the Easton-Pacific
mineralization may overall be dipping more gently to the south then previously
thought. Because of the dip direction and topographic position along the entire
trend, these zones, if continuous, could possibly be mineable to an average
depth of at least 1,000' below the surface. Preliminary rough estimates suggest
stripping ratios of 3:1 or less with a pit floor at 1,000'. UPSIDE POTENTIAL
FOR THE TWO COMBINED SHOOTS ALONG THE EASTON TREND RANGES UP TO 60 M.T. WITH
EXPECTED GRADES RANGING FROM 0.025-0.08 OPT AU(1.5-4.8 MILLION OUNCES) AND 0.70-
1.25 OPT AG (53-94 MILLION OUNCES). Although the potential is there, the top
end numbers are highly speculative.
PACIFIC PIT PROSPECT
The Pacific Pit area contains three northerly trending veins known east to
west, as the Emery, Eureka, and Pacific Veins (Plate 1 and 3). The Emery and
Eureka Veins are separated from the Pacific Vein by the Brown's Gulch Fault
which is near vertical and appears to post-date the mineralizing event.
Mineralization is nearly continuous between the three veins with an average
width of 180' within the southern portion of the Pacific Pit. Approximately 40
holes have been drilled in the Pacific Pit area since 1989, 19 by BHP, the
remaining by EPRMC. The vast majority of these holes were not oriented properly
as to be of much use. BHP drilled one panel of holes, which suggest the Pacific
Pit zone to be 160' wide with an average grade of 0.055 opt Au and 0.83 opt Ag.
Recently EPRMC drilled a westerly directed hole a short distance to the north of
BHP's panel and encountered 180' averaging 0.043 opt Au and 0.43 opt Ag, this
collaring within the zone and missing the Emery Vein (Figures 15 and 16).
The Pacific Pit zone appears to have a minimum strike length of 1,200' from
the south end of the pit northward. Additional potential may exists northward,
but this area has been unexplored to date and is mantled by thick colluvial
cover (i.e. soil geochem is useless).
Additionally, the Pacific Vein has also been traced on the surface to
1,200' south of the Pacific Pit, a total strike length of about 2,400'+. Only
one previous drill hole has tested this zone, hole EPC-8 (Plate 3) drilled by
BHP, which encountered 83' averaging 0.058 opt Au along the south end of the
Pacific Pit. Because of the unfavorable dip direction and topographic setting,
potential along much of this zone will be limited to 400'-500' below the
surface. Preliminary estimates indicate stripping ratios of approximately 6:1
to a depth of 500' and 4:1 to a depth of 400'. POTENTIAL FOR THIS ZONE,
EXCLUDING THE UNEXPLORED NORTHERN EXTENSION, IS IN THE 10-13 M.T. RANGE WITH
GRADES AROUND 0.05-0.06 OPT AU(0.5-0.75 MILLION OUNCES) AND 0.50-0.60 OPT AG (5-
7.5 MILLION OUNCES).
SKID ROW/SOUTH EASTON RIDGE PROSPECTS
The Skid Row and South Easton Ridge targets are located approximately
1,000' south of the Easton target and about 2,500' apart along the same
northwest trend. These targets are reflected by isolated elliptical soil
geochem anomalies measuring roughly 1,000' in length. Rock geochem values range
up to 0.980 opts Au at Skid Row and 0.201 opt Au at South Easton Ridge. A total
of 18 rock samples over an apparent width of 400' at Skid Row averaged 0.135 opt
Au (Figure 15 and 17). Seven rock samples along a similar apparent width at
South Easton Ridge average 0.082 opt Au.
It is possible that these two anomalies are part of the same structure, a
northwest trending shear parallel to the Easton by thick colluvium rendering
soil geochemistry useless. POTENTIAL FOR THESE ZONES IS DIFFICULT TO ESTIMATE
WITH THE AVAILABLE DATA (NO OUTCROPS) BUT COULD BE IN THE RANGE OF 5-10+ M.T. OF
0.06-0.1 OPT AU. The relative location of these anomalies to the Easton trend
is a very positive aspect because of the possibility of all of these zones being
mined from a single pit at a low strip.
HIGH-UP
The High-Up Mine (Plates 1, 3, and Figure 18) is located in Hungry Hollow
approximately 2,200' due east of the Pacific Pit. It was developed by two main
workings that extend along a northeast trending strike length of 3,000'. Slopes
ranged between 4' and 50' wide with a cut-off grade of 0.15 opt Au and unknown
Ag. Soil geochemistry (Plate1A) along this trend suggests a possible strike
length of about one mile. There are no exposures of the structure and there has
not been any modern exploration along the trend. As a result, we do not have a
good feel for potential width along the zone. Parallel veins do occur along
this trend; notably the Irene Vein located approximately 570' to the east. This
vein was mined from the High-Up workings via a cross-cut. The ore was
reportedly direct shipping, averaging 0.266 opt Au and 0.83 opt Ag over 5 foot
widths. Samples from the dumps average 0.214 opt Au. IF SUBSTANTIAL WIDTHS CAN
BE OBTAINED FROM THE HIGH-UP AND IRENE, SURFACE MINEABLE POTENTIAL COULD BE
QUITE LARGE. AT THIS TIME THE TRUE POTENTIAL IS HIGHLY SPECULATIVE, BUT COULD
PERHAPS BE 20 M.T. OF 0.05-0.1 OPT AU.
MAPLETON PROSPECT
The Mapleton Prospect, northwest of Virginia City, Montana, is part of the
original EPRMC holdings. The prospect consists of a silicified structural zone
within Archean metasediments that trends northwest and is at least 3,000' long
and 200'+ wide. The eastern extension is covered by Tertiary Volcanics and
could be longer. The main structural zone is high angle, but also includes low
angle horsetails within the footwall, which extends out a few thousand feet.
Grades within these horsetail veins exceed 0.10 opt Au over narrow intervals.
Wallrock alteration appears to broaden to the southeast where it appears to be
cut off by the northern extension of the north-northwest trending Brown's Gulch
Fault and Tertiary mafic volcanic rocks.
Approximately 1,500' of underground workings are present, most of which are
caved. Preliminary sampling from a waste dump along a cross-cut adit suggests
that hangingwall material up to 150' wide may contain approximately 0.045 opt
Au.
GEOLOGIC MAPPING IS NEEDED ON THIS PROSPECT AND A POTENTIAL FOR 200,000_
OUNCES OF OPEN PITTABLE GOLD IS POSSIBLE.
METALLURGY
Cyanide leach tests were run on twenty pulp samples selected by Kennecott
from the South Bachelor, Atlas, and Lucas zones in Upper Alder Gulch. The tests
were performed by Rocky Mountain Geochemical in Salt Lake City. The tests were
performed in order to determine if these ores would be amenable to recoveries by
cyanide-leach methods. The samples from these zones included oxide, sulfide,
and mixed oxide/sulfide ores, ranging in grade from 0.013 opt Au up to 0.271 opt
Au. Recoveries from these sample tests ranged from 57% to 150% with an overall
average recovery of 96%. There did appear to be a significant difference
between average recoveries from oxide and sulfide ores. Only two samples
contained mixed oxide and sulfide ore and these have an average recovery of only
63%.
The following is a report from Hanover concerning metallurgy at the
Kearsarge Mine:
"Over five tons of ore samples were shipped to N. A. Degerstrom's lab in
Spokane, Washington for metallurgical testing. These samples encompass the
range o ore types from the Kearsarge vein system. The oxide sample came
from a stockpile at the mine site, the sulfide sample came from the 7000
level of the mine, another sulfide sample (LRVS) came from a stockpile at
the minesite. Two mixed oxide/sulfide samples from the stockpile at the
Geneva Mill at Radersburg, Montana were also obtained. The mill once
processed these ores by milling and agitated cyanide leaching.
Metallurgical testing focused on how each ore type would respond to the
standard industrial processing techniques such as gravity separation,
sulfide floating and cyanide leaching. Other testwork, such as rock
characterization, crushing impact, grinding impact abrasion and acid
generation potential is also being done. This testwork can define any
other potential problems in processing these ores.
Testing of the ore types has shown that they have average crushing and
grinding characteristics so a conventional mill design would be quite
appropriate. The abrasion, however, was found to be higher than normal due
to the silica content of the ore.
One of the most favorable aspects found with these ore types is their lack
of acid generating potential. Acid generating potential is a serious
concern today because acid mine drainage problems have severely impacted
permitting and operations at other mining operations in Montana and
elsewhere. The high calcium contents of the Kearsarge ores give it the
ability to be very neutralizing with respect to acid generation.
Historically, the mining district has had no history of acid mine drainage
due to the fortunate occurrence of these calcium rich ores.
During testwork on gravity separation it was quickly found that this
technique would be a very important process to use on Kearsarge ores. It
was found that 43% of the gold from the oxide sample could be recovered by
gravity separation and an 18% gold recovery was found on the sulfide
sample. Although gravity separation could be quite variable, depending on
ore type, recovering this coarse gold will benefit the overall gold
recovery by removing coarse gold that neither would be leached nor floated.
Microscopic examination of this gold found it was generally associated with
quartz. The fineness of this gold was 918, which is an unusually high gold
content from hard rock type deposits.
Flotation testwork was done to assess gold recovery using conventional
pyrite/gold flotation techniques. These tests following gravity separation
of the coarse free gold. Results from this flotation testwork also showed
acceptable gold recoveries, particularly for the sulfide samples. Samples
ground to 100 mesh showed the following gold recovery:
Oxide = 77.5%
Sulfide = 95.9%
Mixed Oxide/Sulfide = 83.4%
LRVS Sulfide = 97%
The major problems found with using flotation is the voluminous low-grade
sulfide concentrate produced from these ores. Up to 15% of the ore can
report to the sulfide concentrate. Marketing this low-grade concentrate to
a smelter would be almost economically prohibitive and shipping such a
product would be logistically difficult and expensive.
Cyanide leaching testwork was done to assess gold recovery by either,
coarse crushing and heap leaching, or milling and agitated leaching. Heap
leaching testing showed overall poor gold recovery so would not be the
choice for processing this ore. However, it may find application for
treating low-grade waste oxide material at some time. Milling and gravity
separation followed by agitated cyanide leaching showed very acceptable
gold recoveries. Samples ground to 100 mesh showed the following gold
recovery:
Oxide = 96.6%
Sulfid e = 85.7%
Mixed Oxide/Sulfide = 88.4 %
LRVS Sulfide = 85.4 %
Other positive attributes found during cyanide leaching testing was a
normal 24 hour leach time and low cyanide and lime consumptions.
Work is continuing to optimize the gravity separation, cyanide leaching and
floatation testwork."
ENVIRONMENTAL CONSIDERATIONS
In April of 1992, Kennecott authorized Schafer and Associates of Bozeman,
Montana, to conduct an environmental due diligence survey in the Upper Alder
Gulch area of Madison County, Montana. Mining activity in this area has
included extensive placer mining in most of Alder Gulch and underground workings
in the upper reaches of Alder Gulch. Several days of field investigations were
carried out in May of 1992, and the report was sent to us in mid-June 1992, at a
cost of $5,400. No due diligence was carried out in the Brown's Gulch drainage,
which is the locale for the Easton-Pacific holdings which are now of prime
interest. The following is a copy of their "Summary of Findings:"
"The environmental due diligence survey of claims in the Alder Gulch area
currently being considered for acquisition, exploration and possible
development by Kennecott, has produced no obvious indication of current
environmental liabilities. The surface water quality in area streams is
very good. Some claims produce drainage from adits and mine waste rock
dumps which show some degradation to water quality. However, all of the
locations we sampled showed this impact to be small and there was no
indication of acid mine drainage or heavy metal contamination anywhere.
Mining impacts in the area are surprisingly limited considering the
historical importance of this mining district. There are only a handful of
underground mines which have produced significant disturbances. With the
exception of the Kearsarge Mine even these seem to be quite small. Many
adits appear to be nothing more than prospects which were developed some
short distance and then abandoned. Waste rock samples appear to be
characterized by relatively low levels of base metal constituents. Stream
sediment sampling done some years ago by the Water Quality Bureau as well
as that obtained by EDXRF analysis in the current study does not indicate
high concentrations of base metals.
We looked at several samples and specifically at one sample from the
General Shafter Mine, which appeared to be a mill tailing, for the
possibility of mercury contamination. Mercury was not detected at
concentrations measurable by EDXRF analysis in any of these samples. We
should note, however, that mercury can pool below the surface and be
present in very localized areas at high concentrations.
We were able to clarify some of the issues related to the wilderness study
areas. The Elkhorn Wilderness Study Area does not exist in this area as
initially believed. An error in a BLM map incorrectly located the Elkhorn
WSA in this area. The true location is in T7N R3W, nearly 80 miles to the
north. The Axolotl Lakes WSA does exist to the east and south of the study
area and actually includes several of the claims being investigated. The
existence of the WSA places restriction on development but does not
preclude the possibility of doing exploration work as long as impacts are
properly mitigated upon completion of the work. However, it is our feeling
that permitting for exploration in the Axolotl Lakes WSA would be a
difficult and lengthy process based on the comments we heard from people in
the BLM Dillon Resources Area Office.
The removal of the Axolotl Lakes WSA from wilderness protection is
currently part of Senate Bill 1696, the Montana Wilderness Act. This bill
has been passed by the Senate and is currently in committee in the House
where its chance of passage during this legislature has been described as
50/50. The passage of this bill would immediately remove the restrictions
on mineral property development on claims within the current WSA
boundaries.
The order of magnitude cost (plus or minus 50 percent) for the reclamation
of areas disturbed by historic mining activities is $500,000.00. This
figure provides for the closure of all mine openings and other safety
hazards, debris removal, regrading of waste rock piles and exploration
trenches to reduce erosion potential and reseeding of disturbed area.
However, under Montana law, KENNECOTT WOULD NOT BE LIABLE FOR ANY
RECLAMATION COSTS RELATED TO EXISTING DISTURBANCES on the claims in the
study area because it has had no prior history of ownership in the area.
While we are reasonably confident that there are no significant
environmental hazards on these claims, we wish to emphasize that the study
area was a large one with many areas of minor disturbances which we could
not examine in detail. We concentrated on the more significant historical
mines to get an indication of potential problems. Also, the survey did not
identify any existing groundwater data nor was groundwater sampling
attempted. As a consequence, this environmental assessment cannot address
the potential for groundwater contamination at this site. Should
exploration drilling be done and intercept groundwater it may be advisable
to collect and analyze water samples from these sources."
<PAGE>
EXPLORATION PROPOSAL
FIRST PHASE (MID-1997)
<TABLE>
<CAPTION>
$
<S> <C>
Trenching on soil anomalies with excavator:
(5000 feet of trenching and assaying, 10-12 days on job)
Easton (2 trenches)
Skid Row/South Easton (2 trenches)
High-up/Marietta (4 trenches)
Copper Bell (1 trench)
Mapleton (2 trenches)
Lucas/Atlas (3 trenches)
Nellie Bay (2 trenches)
Eagle Black (2 trenches)
- 5000 feet of trenching at $2/foot $10,000.00
- samples assayed at 20' intervals (250 samples) $7,500.00
Geologically map and sample underground workings at
Easton (if possible) (Enter down Easton shaft)
(2 geologists, 10-12 days, 300 samples) $10,000.00
Geologically map at 1" approximately 500' on the
Easton-Pacific Prospect (1 geologist, 60 days,
500 samples, $30/sample) $30,000.00
Core Drilling - 1 drill
(4-6 holes on Kearsarge zone, total 4000 feet,
2-4 holes in
Pacific Pit, total 2000 feet)
($30/ft plus 600 assays at $30/assay) $198,000.00
SECOND PHASE (late 1997)
Core Drilling - 2 drills
On various trenched targets for 3 months
(one drill in Alder Gulch on Eagle Black,
Nellie Bay, and/or Lucas/Atlas targets, one drill
in Brown's Gulch on Easton, Skid Row, South Easton,
High-up/Marietta, Copper Bell, and/or Mapleton
targets)($30/ft, 15,000' of drilling, $30/assay,
1500 assays) $495,000.00
RVC Drilling - 1 drill
On fracture zone targets such as Lucas/Atlas
and Easton; not to be used on graphite shear zone
targets such as Kearsarge and
High-up/Marietta (25 days at 400 feet/day,
10,000 feet, $10/ft, $30/assay, 1000 assays) $130,000.00
Other 1997 costs for First and Second Phases of Project:
Project Manager (6 months)
Salary and overhead $40,000.00
Expenses $10,000.00
2 Assistant geologists (4 months)
Salary ($3,000 each/month) $35,000.00
Expenses $15,000.00
2 Field assistants (4 months)
Salary ($2,500 each/month) $30,000.00
Expenses $15,000.00
--------------------------------------------------------------------------
Total 1997 Expenditures $1,025,500.00
THIRD PHASE (1998)
VII. Follow-up on 1997 work $1,000,000.00
</TABLE>
<PAGE>
Disclaimer
Mr. Henricksen was contracted by Hanover Gold to provide a summary of the
exploration potential on Hanover Gold's Virginia City holdings based on his
independent opinion developed during his tenure as manager of Kennecott's
Northwest District office (1990-1996). Kennecott was a joint venture partner
with Hanover on the Alder Gulch property from 1992 to 1995 and did an extensive
evaluation of the Easton Pacific property in 1994. Mr. Henricksen left
Kennecott in July of 1996 and has not been involved in recent work by Hanover
Gold. He has more than 25 years of corporate experience as a geologist and
exploration manager with Kennecott, U.S.Borax, ASARCO, and Bear Creek Mining
(see attached resume).
The opinions expressed on the size potential for the different targets and
for the property overall are those of Mr. Henricksen and are not being
represented as such by the management of Hanover Gold. The purpose of this
report is to provide interested parties with an independent overview of the
Virginia City properties from an outside source. The delivery of this report is
not to be construed as a recommendation by Hanover to buy or sell any securities
nor is it to be construed as indicating Hanover's agreement or disagreement with
any information contained therein.
<PAGE>
ADDENDUM
<TABLE>
<CAPTION> TABLE OF CONTENTS
<S> <C>
Virginia City Location Map Figure 1
Virginia City Land Status and Reserves Figure 2
Generalized Geologic Map of the Tobacco
Root Mountains and Mining District Figure 3
Kearsarge Project - Kearsarge Zone Figure 4
Map of Kearsarge Target Figure 5
Cross Section 4 - Kearsarge Project Figure 6
Kearsarge Project -Atlas-Lucas Zone Figure 7
South Bachelor Section Figure 8
Sections AT 1-2 w/Pit Boundaries Figure 9
Sections AT-3 w/Pit Boundaries Figure 10
Eagle Black - Nellie Bly Area Figure 11
Easton-Pacific / Brown's Gulch Area Figure 12
Easton-Pacific Project -Cross Section C1 Figure 13
Cross Section C2 Figure 14
Cross Section C3 Figure 15
Pacific Pit - Section P7.1 Figure 16
Skid Row Target Figure 17
High Up / Irene Cross Section Figure 18
Generalized Geologic Map - Virginia City Mining
District (in part) Plate 1
Kearsarge Project - Soil Geochem Map Plate 1A
Easton-Pacific Project -
Easton Mine Area (Geology & Geochem) Plate 2
Pacific Mine Area (Au & Ag Geochem)
in Oz./Ton Plate 3
Credentials
</TABLE>
<PAGE>
Figure 1
Location map showing where the Virginia City District is located in southwest
Montana. Approximately 25 miles southeast of Twin Bridges south of Montana
Highway 287.
Figure 2
Map showing land status in the Virginia City District as of late 1995 and also
showing potential gold resources in different areas of the property. At the
time of the map printing three principal landholders existed at Virginia City -
Hanover Gold Company, Inc, Tabor Resources, and Garrison Mining. Also shown on
the map are the +20 pph gold-in-soil anomalies with strong anomalies in the
Kearsarge area (northeast trending) and the Easton-Pacific area (northwest
trending).
Figure 3
Generalized geologic map of the Tobacco Root Mountains and mining districts -
rock types divided (from oldest to youngest) into Precambrian metamorphic rocks,
Paleozoic - Mesozoic, Cretaceous - Tortiary intrusives (the Boulder and Tobacco
Root Batholiths), Cretaceous-Tertiary Volcanics, and Tertiary-Quaternory
alluvium. The Kearsarge mine is hosted almost entirely within Precambrian
metamorphic rocks near the head of Alder Gulch.
Figure 4
Generalized geologic map of the Kearsarge zone, showing drill intercepts and
gold assay values. The length of the Kearsarge zone, including the Big Vein and
Kearsarge shears, exceeds 4000 feet, with the Kearsarge resource area
approximately 1000 feet in length.
Figure 5
Detailed map (1 inch = 500 feet) of the Kearsarge resource area, showing drill
sites, roads, and Kennecott prospect pits / trenches. Gold resource zone is up
to 200 feet wide on the surface and approximately 1000 feet in length.
Figure 6
Cross section 4 - Kearsarge project looking northeast as noted on Figure 5.
Cross section shows the Big Vein / Kearsarge shear zone dipping steeply
northwest with KS-1 drill intercept exhibiting a true width of 150 feet
containing 0.091 oz / ton gold. Figure also shows hypothetical open pit mine
boundaries.
Figure 7
Generalized geologic map of the Atlas-Lucas zones showing drill-indicated
resource areas as well as potential resource areas. Both zones are sub-parallel
to each other, approximately 4000 feet in length, northeast-trending, as much as
100 feet in width.
Figure 8
Kearsarge Project, South Bachelor cross-sections SB-1 through SB-6. Six cross-
sections showing the Atlas and Lucas shear zones along with drill intercepts and
potential resources.
Figure 9
Kearsarge Project, sections AT-1 and AT-2 with drill holes KS-13, KS-14,and KSR-
15 on the sections along with gold resource estimates for the Atlas and Lucas
zones. Best drill intercept is 73 feet (true thickness) of 0.047 oz / ton gold
in KS-14.
Figure 10
Kearsarge project section AT-3 showing Lucas and Atlas veins and drill hole KSR-
16, 60 feet (true thickness) of 0.085 oz / ton gold.
Figure 11
Kearsarge project, Eagle Black - Nellie Bly area. Map shows geologic units and
gold-in-soil anomalies and portrays a potential of 5 - 30 million tons of
unknown grade at Eagle Black and 10 - 60 million tons of 0.025 - 0.06 opt gold
at the Nellie Bly / Winnetka target.
Figure 12
Map with gold-in-soil anomalies in Easton-Pacific total potential estimated to
60 - 100 million tons of 0.05 - 0.1 opt gold. Soil anomaly is north to
northwest-trending, more than 1 mile long, and locally more than 1000 feet in
width. Map also shows selected rock samples and selected drill intercepts along
with cross-section locations.
Figure 13
Easton-Pacific project cross section C-1 depicting the near vertical south vein,
n-c vein, and north vein, along with the different mine levels.
Figure 14
Easton-Pacific project cross section C-2; abundant rock sample data plotted on
section showing Easton mid-shoot target.
Figure 15
Easton-Pacific project cross section C-3. Cross section shows Skid Row and
Easton Southeast targets along with rock samples taken on the surface.
Figure 16
Easton-Pacific Pacific pit section P7.1. Section looking north shows east
dipping zone and drill holes 94-14E and 94-14F.
Figure 17
Detailed float sample map at the Skid Row target. Gold zone may be 1000 feet in
width at Skid Row.
Figure 18
Easton-Pacific project, the High-Up and Irene Cross section, looking S27W. Map
shows Irene tunnels (three levels).
Plate 1
Generalized geologic map of part of the Virginia City Mining District at a scale
of one inch equals 2000 feet. Major rock types are Archean metavolcanic,
marble, pelitic gneisses, and granitic gneisses plus cambrian quartzite,
paleozoic shales, limestones and dolomits plus tertiary mafic volcanics.
Plate 1 A
Kearsarge project, soil geochem map. Anomalies are divided into 20+ ppb gold
and +100 ppb gold.
Plate 2
Easton-Pacific project, Easton Mine area geology and geochem at a scale of 1
inch equals 200 feet, numerous rock and trench gold values plotted on the map.
Plate 3
Easton-Pacific, Pacific mine area geology and geochem at a scale of 1 inch
equals 200 feet. Numerous rock and trench values as well as previous drill
holes plotted on the map.
<PAGE>
Thomas A. Henricksen
5812 E. 25th Ave.
Spokane, WA 99223
509-535-8170
SUMMARY
A geologist and metals exploration manager with more than 25 years of corporate
experience. Major strengths are in generating and carrying out successful
regional programs and property evaluations. An opportunistic, persistent, and
positive explorationist with an entrepreneurial attitude and communication
skills.
EMPLOYMENT HISTORY
1990 - 1996 KENNECOTT EXPLORATION, Spokane, Washington
Northwest Regional Manager, Regional Geologist
1977 -1990 U.S. BORAX AND CHEMICAL CORPORATION, Spokane, Washington
Senior Geologist
1974 - 1977 ASARCO, INC. Spokane, Washington
Geologist
1968 - 1973 BEAR CREEK MINING COMPANY, Subsidiary to Kennecott Copper
Corporation
5 Summers in Midwest and Pacific Northwest
MAJOR ACCOMPLISHMENTS
Member of the initial Bear Creek Mining Company exploration program that
discovered the Flambeau copper-gold massive sulfide deposit at Ladysmith,
Wisconsin, in 1968; property became a mine in 1993.
Participated with ASARCO in the initial evaluation of the Troy, Montana (Spar
Lake), sediment-hosted copper-silver deposit in 1974-75 immediately after the
property purchase from Kennecott; property became a mine in 1981.
Co-discovered and managed the Rock Lake, Montana, sediment-hosted copper-silver
project in 1983-87 for U.S. Borax; interest in property was sold to Noranda in
1987 for $54,000,000 cash.
Managed the Northwest District office of Kennecott from 1991-96 with annual
budgets exceeding 4 million dollars.
OTHER SIGNIFICANT ACTIVITIES
Managed and carried out reconnaissance program for U.S. Borax in 1979-80 in
Northwest British Columbia that resulted in discovery of the Stikine gold-silver
prospect; U.S. Borax drilled property for several seasons without success, but
the prospect eventually became the famous Eskay Creek deposit, currently being
mined by Homestake.
Managed a 3-month evaluation at Fairbanks, Alaska, of Fairbanks Gold's raw Fort
Knox prospect for U.S. Borax in 1989; U.S. Borax positive recommendation for
acquisition was turned down by Kennecott during the RTZ acquisition; Fort Knox
is currently being put into production by AMAX Gold.
Regional Manager for Kennecott Exploration during which time the
Kearsarge/Easton-Pacific, Montana, gold prospect was submitted and explored
(1991-95); a 3+ million ounce gold potential was established, but land problems
forced Kennecott's withdrawal from the project.
Proposed in 1995 that Kennecott re-enter the Ambler district in northern Alaska
and re-acquire the Bornite, carbonate-hosted, high-grade copper deposit from the
NANA Native Corporation; project currently in progress.
AWARDS
While Regional Manager in 1991, Kennecott received the Outstanding Achievement
for Reclamation Award for mineral exploration in the state of Idaho for our
Moore Creek Project.
Received the AIME/Columbia Section Engineer of the Year Award in 1991 for
professional accomplishments and service to the Spokane mining community.
EDUCATION
B.S. Geology - University of Wisconsin, Oshkosh
Graduated Cum Laude
Received B.E. Karges Award - Outstanding Graduating Senior in Geology
Ph.D. Economic Geology - Oregon State University
Dissertation Title: Geology and Mineralization in the Mineral Iron Mountain
District, Washington County, Idaho, and of a Metallized Zone in western Idaho
and eastern Oregon.
PROFESSIONAL ASSOCIATIONS
AIME
Alaska Miners Association
Idaho Mining Association
Montana Mining Association
Northwest Mining Association
Society of Economic Geologists
<PAGE>
Exhibit 23.8
Consent of Tom Henricksen
I consent to the inclusion in this 10-K of my Report on
Virginia City Mining District dated May,1997.
/s/Tom Henricksen
- -------------------
Tom Henricksen
Spokane, Washington
02/26/98
Date
<PAGE>
Exhibit 23.9
Consent of Roger C. Steininger
I consent to the inclusion in this 10-K of my Report on
Evaluation of the Virginia City Properties dated July 6,
1997.
/s/Roger C. Steininger
- ----------------------
Roger C. Steininger
Reno, Nevada
02/27/98
Date
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 180,083
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 282,782
<PP&E> 17,429,671<F1>
<DEPRECIATION> 110,358
<TOTAL-ASSETS> 17,626,089
<CURRENT-LIABILITIES> 571,806
<BONDS> 0
0
0
<COMMON> 2,943
<OTHER-SE> 16,902,825<F2>
<TOTAL-LIABILITY-AND-EQUITY> 17,626,089
<SALES> 0
<TOTAL-REVENUES> 8,502<F3>
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 993,098
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 803,653
<INCOME-PRETAX> (1,788,249)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,788,249)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,788,249)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
<FN>
<F1>Consists of $17,185,244 in resource properties and claims, and $244,427 in
property and equipment, at cost.
<F2>Consists of $24,604,172 in additional paid-in capital, less a deficit of
$7,701,347 accumulated during development stage.
<F3>Consists of $8,502 in interest income.
</FN>
</TABLE>
