PRESIDENT'S MESSAGE
Nineteen ninety-six was a year of significant activity,
expansion, and evolution for Consolidated Nevada
Goldfields Corporation (CNGC) - your Company. A major
undertaking culminated in October with the acquisition of
the Grupo Real del Monte, S.A. de C.V. Subsidiaries (GRDM
Subsidiaries), which included four mining properties in
several mineral-rich areas of Mexico.
Subsequent to this
major acquisition CNGC's fiscal year was
changed to coincide with the calendar year. This report,
therefore, covers the six-month period ending December 31,
1996.
Shortly after the acquisition, CNGC's organizational
structure was
reconfigured and the management team greatly strengthened.
Several key executive personnel were appointed including
Chaun Cadwell as Senior Vice President and Chief Operating
Officer, Julian Chavira as Director General of Mexican
Operations, and Paul Blair as Vice President of U.S.
Operations. These mining professionals have proven track
records and decades of successful operating experience.
In concert with CNGC's family of more than 1,300
employees, they form a team dedicated to growing
Consolidated Nevada Goldfields into a much larger and
profitable mining company.
MEXICAN OPERATIONS
Four mining operations were included with the
acquisition of GRDM Subsidiaries: the Pachuca silver and
gold mine, the El Baztan copper mine, the Magistral del Oro
gold tailings-reprocessing operation, and the Barita de
Sonora barite mine. Total production at these operations
during the period included 311,966 ounces of silver, 4,048
ounces of gold, 1,146,402 pounds of copper and 17,829
tonnes of barite.
Pachuca, located in the south-central part of the state of
Hidalgo, has been in continuous operation since Mexican
colonial times. Over its life, the mine has produced 1.2
billion ounces of silver and over six million ounces of
gold. Ore production is steadily increasing and plans call
for achieving annual production rates of six million
ounces of silver and 30,000 ounces of gold by mid-to-late
1998. Pachuca is at the heart of one of the world's most
well-known mining districts, which CNGC now owns in its
entirety. The Pachuca District has enormous potential for
new discoveries and increased production.
El Baztan, in the state of Michocan southeast of Mexico
City, is a 450tonne-per-day copper mine. Veins and
scarns are mined underground at grades averaging 1.8
percent copper with gold credits. There is excellent
potential on our 44,122-hectares land position to expand
operations and to increase the reserve life of Baztan
beyond its current level of eight years.
Magistral del Oro is a gold-tailings reprocessing operation
in the state of Durango.
The operation
has recently experienced metallurgical problems
with its tailings reprocessing and has been shut down
pending results of ongoing metallurgical testing. CNGC
controls the majority of the district at Magistral del Oro
and has identified a number of gold-bearing veins and
breccia pipes which the Company plans to explore.
Barita de Sonora, located near Hermosillo in the state of
Sonora, mines and sells high-quality barite to the petroleum
drilling industry. The mine has more than 4 million
tonnes of reserve and increased activity in the
petroleum sector may allow this operation to
substantially increase production. Recent drilling has
identified new near-surface, high-quality reserves.
U.S. OPERATIONS
Gold production during the six months ending December 31,
1996, was 13,265 ounces at Nixon Fork and 5,348 ounces at
Aurora for a total of 18,613 ounces.
Nixon Fork experienced problems with equipment failures
which slowed development of the access ramp at the
Crystal/Garnet mine and prevented the operation from
achieving full production by year end. These problems have
been corrected and the mine is expected to reach full
production of 145 tonnes of high-grade gold ore per day
in June 1997. In-mine exploration during 1996 extended the
Nixon Fork reserves by approximately 85,000 ounces of gold.
Further in-mine exploration as well as district
exploration
programs will be carried out during the summer of 1997.
The Company believes these programs have a high probability
of adding significantly to the district's reserves.
The Aurora management team completed a pre-feasibility
study early in 1997 for the development of the Martinez
orebody. The study concluded that project reserves could
be significantly increased by mining the Martinez. The
Company announced plans to acquire the neighboring West
Humboldt orebody from Electra Gold, Ltd., subject to
completion of due diligence and regulatory approval. The
potential addition of these orebodies would allow the Aurora
operation to continue through at least the year 2002.
FINANCIAL
The Company reported a net loss for the six months ended
December 31, 1996 of $10,991,000 on revenues of
$11,423,000. Included in the net loss are non-cash items
including the write-off of $242,000 for a gold hedging
program which had been terminated in the previous year and
$3,756,000 in depreciation, depletion and amortization
from mining operations. Additionally, an impairment
charge of $113,000 is reflected from the write down of the
remaining net book value of plant and equipment at the
Barite Hill mine. The Company incurred increased production
costs as a result of the acquisition of the subsidiaries
of Grupo Real del Monte, S.A. de C.V., which was an
instrumental acquisition in increasing revenue $4,454,000
for the six month period.
On October 10, 1996, the Company strengthened its
financial position through the completion of a financing
directly related to the Mexican acquisition, in the
process issuing 22,493,570 special warrants for gross
proceeds of $19,963,000. The special warrants are comprised
of one common share and one-half common share purchase
warrant. Each whole purchase warrant entitled the holder
to purchase one common share at Cdn$1.30 up to the first
anniversary of the closing of the offering. The Company
also issued 52,290,091 common shares to the mines' former
owners, Grupo Real del Monte, S.A. de C.V. and certain of
its shareholders. On March 24, 1997 the Company entered
into loan agreements with two shareholders of the Company,
Caithness Resources, Inc. and Grupo Acerero del Norte, S.A.
de C.V. to lend the Company $585,000 and $3,000,000,
respectively. The proceeds from the financings have been,
and are, to be used for operational improvements to the
various mines and for general working capital purposes.
On May 5, 1997, the Company received a commitment from
Standard New York,
Inc. and Standard Bank London Limited (Standard) to
make available $45,000,000 in credit facilities for the
restructuring of the Company's existing bank debt and the
provision of a comprehensive hedging facility. The
commitment is subject to satisfactory completion of
legal and engineering due diligence reviews of the
Company's six operating mines and negotiation of
definitive documentation. The commitment would provide
$30,000,000 in term debt to be repaid over five years and
bear interest at LIBOR plus 2.25 percent. The credit
facility would provide a $15,000,000 credit facility to
underpin a 400,000 gold equivalent ounce hedging
facility. The proceeds from the term debt are to be used to
refinance the Company's existing high-interest Mexican
bank debt and the Company's remaining balance on its
gold loan and for general working capital purposes.
In April 1997, Geoffrey Hoyl resigned as President and
Chief Executive Officer of CNGC. During Mr. Hoyl's tenure
with the Company, the Nixon Fork property in Alaska as
well as the four operating mines in Mexico were acquired.
His contributions to the Company's success will long
be remembered and his skills and enthusiasm will be
missed. He will be involved with the Company for an
indefinite period as Special Consultant to the President.
Management anticipates that 1997 will be a positive year for
the Company's operations and continuing development.
Our prestigious international portfolio of mining
properties provides a solid foundation for potential
growth, both short-term and long-term. On behalf of the
entire management team, I extend our sincere thanks you and
all of our shareholders for your continued support as we
strive to reach our corporate goals.
Sincerely,
Alex Bissett
President and Chief
Executive Officer
FORM 20-F/A REGISTRATION OF SECURITIES OF FOREIGN PRIVATE
ISSUERS PURSUANT TO SECTION 12(b) OR (g) AND ANNUAL AND
TRANSITION REPORTS PURSUANT TO
SECTION 13 AND 15(d)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 20-F/A
(Mark One)
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(g) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE
REQUIRED]
OR
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended .......
OR
X TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ...July 1, 1996
.....to.....December 31, 1996...
Commission file number O-15577
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
(Exact name of Registrant as specified in
its charter)
(Not Applicable)
(Translation of Registrant's name
into English)
CANADA (Federal
Corporation) (Jurisdiction of
incorporation or organization)
1801 BROADWAY, SUITE 1620, DENVER,
COLORADO 80202 (Address of
principal executive offices)
Securities registered or to be registered pursuant to Section
12(b) of the Act: (Not Applicable)
Securities registered or to be registered pursuant to Section
12(g) of the Act: COMMON SHARES
Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act: (Not Applicable)
As of December 31, 1996, there were 129,837,400 common shares
outstanding.
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes ..X.. No .....
Indicate by check mark which financial statement item the
registrant has elected to follow:
Item 17 ..X.. Item 18 .....
TABLE OF CONTENTS
ITEM OF FORM 20-F/A December 31,
1996
Page
PART I:
Item 1. Description of
Business 1
Item 2. Description of
Property 6
Item 3. Legal
Proceedings 42
Item 4. Control of
Registrant 42
Item 5. Nature of
Trading Market 44
Item
6.
Exchange Controls and Other Limitations Affecting
Security Holders 45
Item 7.
Taxation 45
Item 8. Selected Financial
Data 46
Item 9.
Management's Discussion and Analysis of Financial
Condition and Results of
Operations........................................47
Item
10.
Directors and Officers of Registrant
63
Item
11.
Compensation of Directors and Officers
67
Item 12.
Options to Purchase Securities from Registrant or
Subsidiaries 67
Item 13.
Interest of Management in Certain Transactions
69
PART II:
Item 14.
Description of Securities to be Registered
71
PART III:
Item 15.
Defaults Upon Senior Securities
71
Item 16.
Changes in Securities and Changes in Security for
Registered Securities
71
PART IV:
Item 17.
Financial Statements
72
Item 18.
Financial Statements
72
Item 19.
Financial Statements and Exhibits
74
The following discussion of Consolidated Nevada
Goldfields Corporation's business and properties includes
"forward looking statements" within the meaning of Section
21E of the Securities
Exchange Act of 1934, as amended, and is subject
to the safe harbor created by that section.
Factors that realistically could cause results to
differ materially from those projected in the
forward looking statements are set forth here in
"Description of Properties" and "Future
Operations" and "Environmental Matters and
Governmental Regulations" as found in Item 9 of this
Form 20F/A.
All monetary amounts stated herein are in U.S.
Dollars unless otherwise indicated.
PART I:
Item 1: DESCRIPTION OF BUSINESS
Consolidated Nevada Goldfields Corporation (the
Company) was incorporated in May 1984 in
British Columbia, Canada, and continued under
the Canada Business Corporations Act as a
Canadian federal corporation in April 1989.
The Company's charter is perpetual. Since its
inception, the Company has been in the business of
exploring for, acquiring, developing, mining and
processing precious metals and other mineral
products. The
Company's primary source of revenue prior to the
acquisition of certain subsidiaries of Grupo Real
del Monte, S.A. de C.V. (GRDM Subsidiaries), as
described below, has been from the sale of gold
produced and sold in the United States.
Subsequent to the acquisition of the GRDM
Subsidiaries, the Company's primary source of
revenue is from the sale of precious metals and
mineral products produced and sold in the United
States and Mexico.
The Company has operated through wholly owned
subsidiaries and
joint ventures with other entities. The
Company's principal wholly owned operating
subsidiary in the United States is Nevada Goldfields,
Inc. (Nevada Goldfields), a Nevada corporation.
Nevada Goldfields wholly owns Aurora Consolidated
Mines, Inc. (Aurora), which holds the Company's
interests in the Aurora mine and nearby claims in
Nevada; Nixon Fork Mining, Inc. (Nixon Fork),
which holds the Company's interest in the Nixon Fork
mine in Alaska; Gwalia (USA) Ltd. (Barite Hill),
which holds the Company's interest in the Barite
Hill mine in South Carolina; Empire Consolidated
Mines, Inc. (Empire), which holds the
Company's interest in the Empire Project;
and Kingston Consolidated Mines Inc. (Kingston),
which held the Company's interest in the Kingston
mine. The Barite Hill mine is presently undergoing
reclamation. Nevada Goldfields also holds the
Company's interest in certain additional
exploration-stage properties. All of the Company's
properties in the United States are operated by
Nevada Goldfields.
On June 28, 1996, a Share Purchase Agreement
(Agreement) was signed with Grupo Real del Monte,
S.A. de C.V. (GRDM) and Grupo Acerero del Norte,
S.A. de C.V. (GAN) to acquire the GRDM
Subsidiaries. The Agreement was placed into escrow,
the release of which was subject to the Company
entering an underwriting agreement for the sale of
common shares with gross proceeds of at least $20
million. On October 10, 1996, the Company completed
an equity offering meeting the minimum equity
requirements specified in the Agreement. Closing of
the offering occurred concurrently with the closing
of the acquisition of the GRDM Subsidiaries. The
GRDM Subsidiaries own and operate four mines
located in Mexico. The operating mines include:
Compania de Real del Monte y Pachuca, S.A. de C.V.
(Pachuca), an underground silver and gold mine;
Compania Minera El Baztan, S.A. de C.V. (El
Baztan), an underground copper mine; Barita de
Sonora, S.A de C.V. (Barita), an open-pit barite
mine; and Compania Minera Magistral del Oro, S.A. de
C.V. (Magistral), a gold-tailings reprocessing
operation.
Pursuant to the acquisition as set forth in the
Agreement, the Company acquired 100 percent of all
the issued and outstanding shares of each of the
GRDM Subsidiaries except for Sonobar S.A. de C.V.
(Sonobar), Barita and Baroid, S.A. de C.V.
(Baroid), which are partially owned. The
following is a summary of corporate information
relating to the GRDM Subsidiaries.
Pachuca was incorporated on April 27, 1852, in
Pachuca, Hidalgo. Pachuca is engaged in the
exploration for and exploitation of gold and silver
mineral deposits. El Baztan was incorporated on
August 24, 1956, in Mexico City, Federal District.
El Baztan is engaged in the exploration for and
exploitation of copper ore deposits. Grupo Barita
was incorporated on September 3, 1990, in Mexico
City, Federal District. Grupo Barita is a holding
company which controls and holds equity interests
in mining companies engaged in the exploitation and
commercialization of barite.
Barita was incorporated on August 14, 1979, in
Mexico City, Federal District. Barita, a
subsidiary of Grupo Barita, is primarily engaged
in the exploration for and exploitation of barite
ore deposits. Sonobar was incorporated on March
22, 1993, in Mexico City, Federal District. Sonobar
is a subsidiary of Grupo Barita and is dedicated
to the construction and operation of facilities
for the grinding and processing of barite and
bentonite, the provision of perforation and
extraction services in the oil and gas industries,
and the commercialization of related products.
Baroid S.A. de C.V. (Baroid) was
incorporated on March 22, 1993, in Mexico City,
Federal District. Baroid is 49-percent owned by Grupo
Barita and is engaged in the manufacture and
commercialization of muds for the perforation,
exploration and exploitation of oil wells. Grupo
Nova Hispania S.A. de C.V. (Nova Hispania) was
incorporated on August 8, 1990, in Mexico City,
Federal District. Nova Hispania is a holding
company which controls Magistral, which is engaged
primarily in the exploitation and treatment of
gold-bearing tailings.
Magistral was incorporated on August 14, 1979, in
Mexico City, Federal District. Magistral is a
subsidiary of Nova Hispania and is primarily
engaged in the exploitation and treatment of
gold-bearing tailings as noted above. Real del
Monte Orfebres, S.A. de C.V. (Orfebres) was
incorporated on June 9, 1992, in Mexico City,
Federal District, Mexico. Orfebres is engaged in
the manufacture and commercialization of all types
of silver and silver plated goods. Loreto Plateado
Fino, S.A. de C.V. (Loreto) was incorporated on
January 27, 1993, in Pachuca, Hidalgo, Mexico.
Loreto is mostly engaged in the manufacture
and commercialization of metallurgical products
containing silver and silver plate. Servicios
Corporativos was incorporated on August 8, 1990,
in Pachuca, Hidalgo. Servicios Corporativos is
a subsidiary of Pachuca and provides
administrative and
organizational services to various companies and
labor, material, technical and financial services
to affiliated companies. Servicios Corporativos
renders administrative services to the other GRDM
Subsidiaries.
The following chart sets forth names of the
subsidiaries and significant associated companies of
the Company, their respective jurisdictions of
incorporation, and the Company's percentage voting
equity interest therein. Unless otherwise
indicated
herein, the term "the Company" means collectively
Consolidated Nevada Goldfields Corporation and its
subsidiaries and their respective predecessors.
Consolidated Nevada Goldfields
Corporation (Canadian
Federal)
|
100%
Nevada Goldfields Inc.
(USA-Nevada)
|
_________________________________________________________________
______ ________________________________
| | | | |
100% 100% 100%
100%
100%
Aurora Consolidated Nixon Fork Mining, Inc.
Gwalia (USA)
Ltd. Empire Consolidated Kingston Consolidated
Mines
Inc. Nixon Fork
Barite Hill
Mines Inc. 3% NSR Mines Inc. Closed
Aurora (USA-Delaware)
Mined-out
(USA-Delaware) (USA-Nevada)
(USA-Nevada) (USA-Delaware)
United States Operations
The Company has operated four mines in the United
States since 1987 and has produced over 296,600
ounces of gold and 557,800 ounces of silver.
The Company purchased the Nixon Fork mine on June
30, 1993. Development of the underground mine and
gravity/flotation mill was completed and
production began in October 1995. The mine
produced 47,408 ounces of gold and milled over
40,362 tonnes of ore from October 1995 to December
31, 1996. As of December 31, 1996, Nixon Fork had
proven and probable ore reserves of 155,756 ounces
of gold in 121,375 tonnes at a grade of 39.91 grams
of gold per tonne.
The Aurora mine began production in December 1987
and has milled over 817,100 tonnes of ore. Aurora
has produced 112,418 ounces of gold and 228,600
ounces of silver from December 1987 to December
31, 1996. As of December 31, 1996, Aurora had
proven and probable ore reserves of 26,089 ounces
of gold in 191,228 tonnes at a grade of 4.24 grams
of gold per tonne.
The Company acquired the Barite Hill mine in April
1991 and the property commenced production in July
1991. During 1994, mining ceased at Barite Hill
and the Company discontinued stacking ore on the
heap leach pads. The Company began reclamation
activities at Barite Hill in the second quarter of
fiscal 1995 and plans to substantially complete
reclamation during 1997.
The Company discontinued operations at the Kingston
mine in 1989 and completed all reclamation as of June
30, 1995.
Mexico Operations
Pursuant to the acquisition of GRDM Subsidiaries,
the Company obtained, among other things, three
operating mines, a tailings reprocessing operation,
and certain exploration stage properties, all of
which are located in Mexico.
The Company's main interests in Mexico are in the
Pachuca-Real del Monte district. Silver and gold
have been produced from the district for over
465 years, with total production of
approximately 1.3 billion ounces of silver and 6.2
million ounces of gold. The mines in the district
were originally acquired by GRDM in 1990. These
mineral properties are held by Pachuca and its
subsidiaries. As of December 31, 1996, the mines
in the district had proven and probable ore
reserves of 51,408,822 ounces of silver in
5,510,317 tonnes at a grade of 290.18 grams of
silver per tonne, and 239,760 ounces of gold in
5,510,317 tonnes at a grade of 1.35 grams of gold per
tonne.
Magistral reprocesses tailings from old workings by
heap leaching for gold recovery in a two-stage
feasibility study. These mineral properties are
held by Nova Hispania and its wholly owned direct
subsidiary Magistral. As of December 31, 1996,
Magistral had proven and probable reserves of
137,943 ounces of gold in 1,670,112 tonnes at a
grade of 2.57 grams of gold per tonne contained
in tailings.
El Baztan operates two underground mines, the Vista
Hermosa and the El Arroyo. Ore is mined underground
and processed from skarn and vein deposits and
is processed to produce a copper concentrate
containing by-product gold. As of December 31, 1996,
El Baztan had proven and probable reserves of
38,346,881 pounds of copper in 924,109 tonnes at a
grade of 1.88 percent of copper per tonne.
Barita operates several small open-pit mines, a
crushing plant, and two separate processing circuits
producing barite for sale to the petroleum industry
for use in drilling fluids. As of December 31,
1996, Barita had proven and probable reserves of
4,703,295 tonnes of barite with 51,440 tonnes at
a specific gravity of >4.22 and 4,651,855 tonnes
of barite at a specific gravity of <4.22.
Recent Developments
In March 1996, the Company entered into a detailed
letter of intent with GRDM and GAN to acquire the
GRDM Subsidiaries. The
letter of intent has been superseded by a Agreement
signed on June 28, 1996. The Agreement was placed
into escrow, the release of which subject to the
Company entering an underwriting agreement for the
sale of common shares with gross proceeds of at least
$20 million.
Under the terms of the Agreement, the Company
issued 52,290,091 common shares to GRDM and
certain of its shareholders in exchange for all
of the outstanding shares of the GRDM
Subsidiaries. In addition, the Company granted GAN a
12-percent royalty interest in the net profits from
the GRDM Subsidiaries, with a minimum amount of
$500,000 being payable annually and credited
towards the amounts payable under the royalty. The
maximum amount payable under the royalty is
$5,000,000. GRDM has the right to nominate, but not
appoint, one-half of the number of members of the
Board of Directors of the Company so long as it
holds more than 30 percent of the Company's common
shares. The
Company has accounted for the transaction under
the purchase method of accounting.
On October 10, 1996, the Company completed an equity
offering and received gross proceeds of
Cdn$26,992,284 ($19,963,493) from the issuance of
22,493,570 special warrants at a price of Cdn$1.20
per special warrant. The special warrants were
exercised into separate units, each unit consisting
of one common share and onehalf common share
purchase warrant. Each whole purchase warrant
entitles the holder to purchase one common share at
Cdn$1.30 up to the first anniversary of the
closing of the offering. The
Company also issued 500,000 non-assignable
underwriters' warrants in connection with the
offering, each of which entitles the holder
thereof upon payment of Cdn$1.25 to acquire one
common share and one-half of one common share
purchase warrant on or before October 10, 1998.
Closing of the offering occurred concurrently
with the closing of the acquisition of the GRDM
Subsidiaries.
In November and December 1995, the Company issued an
aggregate of 7,920,000 units at Cdn$1.20 per unit
for total proceeds of Cdn$9,504,000 ($6,982,000).
Each unit was comprised of one common share
and one-half common share purchase warrant. Each
common share purchase warrant entitled the holder to
acquire one common share at Cdn$1.50 per share
before February 28, 1997. No
common share purchase warrants were exercised
prior to their expiration.
In connection with the issuance of the units in
December 1995, the terms of the Company's 3-
percent convertible subordinated debentures were
amended to extend the maturity two years to March
1999, in exchange for reducing the conversion price
to Cdn$1.20. As of December 31, 1996, Cdn$5,400,000
($3,821,000) of 3-percent convertible subordinated
debentures have been converted into 4,500,000
common shares.
On July 6, 1995, the Company issued 2,100,000
cumulative preferential convertible 7-percent
Preference Shares, Series 2 (Series 2 Preference
Shares). The issue price was Cdn$1.00 and resulted
in proceeds to the Company of $1.6 million. The
shares earned a cumulative preferential 7-percent
cash dividend payable semi-annually beginning
December 31, 1995, were redeemable at the issue
price on December 31, 1996, and were convertible at
the option of the holders to 0.532 fully paid and
non-assessable common shares for each Series 2
Preference Share, without further consideration from
the holder. On December 31, 1996, the Company
redeemed the preference shares for Cdn$2,100,000
($1,532,000).
Item 2: DESCRIPTION OF PROPERTY
The following are descriptions of the
Company's principal
operating and exploration properties held
through its
subsidiaries.
United States Operations
(i) The Nixon Fork Mine
General
The Nixon Fork mine is a high-grade underground
deposit in a gold mining district 28 miles east of
McGrath, Alaska. Over 60,000 feet of core drilling
had been completed on the property when it was
acquired by the Company. The Company completed an
additional 25,000 feet of diamond drilling
during fiscal 1995. Mine
development and mill construction was completed in
October 1995 and the mine has been in production
since that time. Since production began in October
1995, 42,126 tonnes of ore have been mined with
47,408 ounces of gold produced through December 31,
1996. As of December 31, 1996, the remaining proven
and probable reserves were 121,375 tonnes at a grade
of 39.91 grams per tonne containing 155,756 ounces
of gold.
The property consists of 110 unpatented federal lode
and placer claims and 48 unpatented state claims,
which are all leased. The Company owns 58
unpatented state claims. Production from these
claims is subject to a 5-percent net smelter
return royalty. The project site includes land
administered by the U.S. Bureau of Land Management,
the State of Alaska, and by Doyon Limited, a
native corporation which obtained title to the land
under the Alaska Native Claims Settlement Act. In
addition, if the Company produces more than 200,000
ounces of gold from the property, Nixon Fork Joint
Venture, the original owner of the property and
from whom the Company acquired the property, is to
receive a 3-percent net smelter royalty. As
part of the acquisition, the Company must pay a
maximum $500,000 payment to Battle Mountain
Exploration in the form of 1 percent of the gross
value of the product removed from the property. As
part of the bank financing completed during fiscal
1995, the Company also granted a 1.5-percent net
smelter royalty to Internationale Nederlanden
(U.S.) Capital Corporation (ING).
In November 1995, the Company completed a long-term
mining and exploration lease on 46,000 acres of land
adjacent to its Nixon Fork mine (Doyon Leasehold)
in the Kuskokwin gold trend which contains the
Company's Nixon Fork mine. The lease has an initial
term of 25 years and can be extended thereafter if
production from the property continues. Doyon
Limited will receive a 1percent net smelter
royalty from the entire property until such time as
500,000 ounces of gold have been produced from the
Doyon Leasehold, at which time the production from
the Doyon Leasehold will carry a 5-percent net
smelter royalty. Doyon Limited will
receive $4,000,000 payable one-third in the
Company's common shares and two-thirds in cash.
The payments are made in three annual
installments, each comprised of 536,684 common shares
of the Company and $888,889 in cash. The first
payment was made in November 1995 upon completion of
the transaction and the Company made the second
payment in December 1996. The Company has
fulfilled its obligation to make exploration
expenditures on the Doyon Leasehold of $500,000
during the first year of the lease and is obligated
to spend $150,000 per year thereafter.
Access
Access to the property is by DC-6 and Hercules-size
aircraft to a 4,300-foot airstrip or via a winter
road from McGrath or Medfra. Barges operate on the
Kuskokwim River to Medfra which is 10 miles from the
property by winter road. Daily commercial flights
to McGrath are available from Anchorage located 220
miles southeast.
Geology
The Nixon Fork deposits are high-grade gold-copper
bearing skarns occurring along the contact between
Paleozoic limestones and a Tertiary quartz
monzonite intrusion. To date, five areas of
mineralization have been drilled in detail; the
High Grade Recreation, Mystery, Crystal/Garnet,
Southern Cross and J5-A. These areas are located
generally adjacent to each other over a 1,500-foot
interval and each contains several ore shoots in
proximity to the contact between quartz monzonite
and carbonate rocks.
Individual ore shoots vary up to 300 feet in strike
length, 200 feet in dip length, and are up to 25
feet thick. Ore shoots generally strike
northeasterly and dip steeply to the southeast,
paralleling the contact between quartz monzonite
and carbonate rocks.
Ore Reserves
The Company calculates proven and probable ore
reserves using standard cross-sectional methods
developed by Derry, Michener, Booth & Wahl, Inc.
(DMBW) in October 1993. Tonnage factors vary from
12.7 cubic feet per ton for oxidized ore to 10.9
cubic feet per ton for sulfide ore. All drill
holes and trench sample assays are examined to
determine ore thickness. Resources are calculated
at a cutoff grade of 9.94 grams of gold per tonne
across a minimum true thickness of four feet. Based on
statistics developed by DMBW, to reduce the effect of
very high grade material, the Company cuts assays in
the calculation of the Nixon Fork proven and
probable reserves to 41.14 grams of gold per tonne.
The Company also further restricts the influence of
high grade areas by specifically delimiting high
grade zones. The grades of these contiguous zones,
averaging greater than 68.57 grams of gold per
tonne, are calculated separately.
The following table shows the estimated in place
proven and probable ore reserves at Nixon Fork as of
December 31, 1996:
Grams
Contained
Ore Zone Tonnes Per Tonne Gold
Ounces
Crystal/Garnet Zone 45,169
44.06 63,987
Mystery Zone 44,159 47.10
66,870
Southern Cross 2,610 31.00
2,601
J5A
14,956 18.90
9,087
High Grade / Recreation 2,481
23.40
1,868
Other
12,000 29.40
11,343
Total Nixon Fork 121,375
39.91
155,756 Mining Method
Three mining scenarios are considered in the mine
plan: shrinkage stoping between five and eight feet
wide, shrinkage stoping over eight feet wide, and
drift and fill mining, depending upon the attitude
(steepness) of the individual orebodies.
Although the ore/waste contact is evident by visual
observation, grade control during mining is enhanced
by channel sampling of the face and ribs. An
ongoing diamond drilling program, as well as diamond
drill test holes during stoping, is also used for
grade control.
Ore from shrinkage stope draw points and from drift
and fill stopes is loaded by 2- and 3-cubic yard
LHD's (load, haul dump units) into eight-ton trucks.
The trucks haul ore to the Crystal Garnet portal
area where they dump directly into the hopper
feeding the crusher or dump at the ore stockpile
area. While mining at the Mystery zone, haul
trucks will travel from the Mystery portal to the
Crystal/Garnet portal area via a haul road.
Processing Facility
Ore is delivered to a year-round 136-tonne-per-day
processing facility located adjacent to the
Crystal/Garnet decline entry. Ore is first crushed
by an 18-by-36 inch jaw crusher followed by a 36-inch
cone crusher. Ore is then ground in a 5-1/2-by-10-
foot ball mill followed by a 6-1/2- by-10 foot ball
mill in closed circuit with two 10-inch cyclones.
The resulting ground ore is pumped to a series of
spirals and a cleaning table, then for onsite
smelting in an oil-fired crucible smelter for
dore production. Cyclone overflow is directed to
the flotation circuit consisting of 14 50-cubic-foot
flotation cells and six 50cubic-foot cleaner cells.
This concentrate flows to a bank of four
thickeners. Material is then directly bagged in
one-ton concentrate bags or sent through a drying
circuit prior to bagging. The concentrate bags
are back hauled to Anchorage on fuel and supply
planes for shipment to a smelter in Japan. All
power is generated on site by four 375 KV generators
housed in the mill which is under a 50-by-70-foot
Sprung structure. The
facility is designed to process both oxide ore and
sulfide ore and obtain average recoveries of 86
percent over the life of the mine. The processing
facility is designed to annually produce 60,000
ounces of gold, 29,000 ounces of silver and 500,000
pounds of copper.
Tailings are impounded in a dam set in a small valley
adjoining the mill site. The impoundment is a
plastic-lined facility and all process solution
will be recycled. There is no planned discharge
to the environment. Toxicity testing of the tailings
shows it has no acid-generating potential because of
the abundant limestone in the deposit.
The infrastructure at Nixon Fork consists
principally of a service building, camp,
airstrip, and the auxiliary services necessary to
support the overall operation. All equipment is
directly or indirectly powered by diesel-driven
engines. Water
is pumped from a nearby creek. Flights from
Anchorage several times a week bring personnel,
fuel and supplies in and fly out
the concentrate.
Production
Following completion of construction in October
1995, the Nixon Fork mine experienced a lower-than-
anticipated startup because of equipment run-in
difficulties, adverse weather and breakdowns of
key pieces of equipment. The mechanical
failures led to
temporary shutdowns in January and February of
1996 which prevented the mine from meeting
production and operational expectations. To
address these problems, the Company undertook a major
overhaul and maintenance program to improve
equipment availability and performance. For the six
months ended December 31, 1996, mill throughput
averaged 86 tonnes per day, which was
below the design capacity of 136 tonnes per
day, and mill recoveries were 4.35 percent below
design specification of 86
percent. Subsequent to year end, the Company
purchased two haul trucks and two loaders to
increase production rates and maintain an
availability rate of 90 percent. The Nixon Fork mine
produced 47,408 ounces of gold from inception in
October 1995 through December 31, 1996.
Exploration
During the six months ended December 31, 1996 and the
year ended June 30, 1996, the Company conducted
an extensive exploration program around the Nixon
Fork mine. The ongoing program has two
major components: (1) reserve and resource
definition drilling around the active mining
operation; and (2) regional exploration.
The Company completed 23,567 feet of a planned
36,000 feet of
diamond core reserve definition drilling program
for calendar 1996 along a 4,000-foot segment of
intrusive/carbonate contact containing the skarn-
hosted, high-grade gold-copper
mineralization currently being mined. Development
drilling has
focused on step-out drilling in the immediate
vicinity of the
active mining area. The Company estimates that net
reserves have increased by 57,468 tonnes at an
average grade of 38.76 grams of
gold per tonne for a total of 71,611 ounces. A major
portion of
this drilling is in the C-3000 orebody of the
Crystal/Garnet mine which, originally projected to
have 177 feet of vertical extent, is now believed by
the Company to extend for more than 577 feet and to
still be open down-dip. In addition, four other
areas have one or more intersections of ore
grade and mineable thickness and/or gold
geochemical anomalies at the surface.
The Company has also undertaken exploration of
the regions surrounding the mine, including the
46,000 acres of prospective ground leased in late
1995 from Doyon Limited, comprising the
Doyon Leasehold. District-wide exploration at
Nixon Fork has
identified several important areas for
further work.
Additionally, an aeromagnetic survey of the entire
56,000-acre land holding at Nixon Fork has
identified several major magnetic anomalies. This aeromagnetic
work, in conjunction with gold
anomalous mapping, has confirmed the presence of
skarn-type gold mineralization at nearby Eagle
Creek over a strike length of
6,000 feet that appears to be similar to the
Nixon Fork mineralization currently being mined.
The Company is focusing its exploration
activities on three types of deposits in the
region: (1) additional high-grade skarn bodies
associated with
the intrusion at Nixon Fork and an unexplored
intrusion, the Eagle Creek stock, six miles to the
southwest of the Nixon Fork mine; (2) bulk-
mineable disseminated gold deposits in two
intrusions located near Fairbanks,
Alaska; and
(3) sediment-hosted disseminated gold deposits in
the carbonate rocks surrounding the intrusions.
The regional exploration program consists of an
airborne magnetic and electromagnetic geophysical
survey, plus surface geochemical sampling and
mapping, all of which should define target areas,
followed by approximately 1,500 feet of exploration
drilling. The Company has initiated both the
reserve definition drilling and regional exploration
programs and expects initial results during 1997.
Capital Cost to Date
A summary of capitalized costs for Nixon Fork is
as follows (amounts in thousands) as of:
December 31,
1996June 30, 1996
Mineral property $ 18,051
$ 17,140
Less accumulated depletion (3,424)
(2,579)
Total 14,627
14,561
Plants, buildings and equipment 14,948
14,900 Less accumulated depreciation and
amortization (3,627) (2,575)
Total 11,321
12,325
Grand Total $ 25,948
$ 26,886
(ii) The Aurora Mine
General
The mine is located 23 miles southwest of Hawthorne,
Nevada, in Mineral County in the Aurora mining
district. The property is accessed by a dirt road
maintained by the county. The mine and milling
facilities have operated since 1987 and have
produced 112,418 ounces of gold. Mining is
accomplished utilizing both open-pit and underground
methods, and the ore is processed in a carbon-in-
leach mill. A total of 62,037 tonnes of ore have
been mined and milled during the six months ended
December 31, 1996, producing 5,348 ounces of gold
and 14,772 ounces of silver. The
Aurora land package includes 54 patented lode
claims, 321 unpatented lode claims, 2 unpatented
mill sites, 1 placer claim and 320 acres of fee
title land for a total land holding of
approximately 6,572 acres. The Company holds 100
percent of this land package, except for a 1.25-
percent net smelter royalty payable to a third
party.
Geology
Bonanza-type precious metal mineralization occurs in
epithermal veins in six known areas comprising the
Aurora Mining District: Silver Hill, Middle/Summit
Hill, Last Chance Hill, the Juniata mine, the
Prospectus vein area and Humboldt Hill. The Company
controls Last Chance Hill, Middle Hill, the Juniata
mine and the Prospectus vein area. The smaller New
Esmeralda Area, including other additional veins,
located 2.5 miles northeast of the Juniata mine,
is geologically similar to the Aurora district and
is also controlled by the Company.
Veins in the district range up to 40 feet in width
and pinch and swell along their strike and dip.
Splits and horsetails in the veins are common.
Gold-to-silver ratios both between vein systems
and within individual veins range from about 1:3 gold-
tosilver in the Prospectus vein to less than 1:6 in
the Juniata vein.
Mapping and reinterpretation of the Juniata vein
after early 1995 drilling led to the discovery of the
Martinez deposit to the east of the Chesco pit.
The majority of the exploration drilling during the
year ended June 30, 1996 targeted the Martinez
deposit. An extensive drilling and development
program during the six months ended December
31, 1996, and fiscal 1996 delineated a resource
of over 63,000 ounces contained in 744,700 tonnes
at a grade of 2.64 grams per tonne. A plan of
operation for expansion of operations into the
Martinez Hill area has been submitted to the United
States Forestry Service. The plan of operation
has not been approved to date pending the submittal
of the Martinez deposit feasibility study which is
currently being completed.
The Martinez deposit has the potential, assuming
the necessary permits are received, to extend the
life of the Aurora mine. A new geologic model
instrumental in the discovery of the Martinez deposit
provides new insight for future exploration in the
Aurora district. The Summit and Silver Hills areas,
which are located in the southern part of the
district, have similar geologic features to the
Martinez deposit and may be further explored by the
Company.
The Company plans a district exploration program
during 1997 with the intent of discovering another
deposit and expanding on known reserves. The program
consists of detailed mapping to define target areas
followed by up to 35,000 feet of exploration
drilling.
Ore Reserves
The estimated in-place proven and probable ore
reserves at the Aurora mine, calculated by the
Company's geological staff, as of December 31, 1996,
are as follows:
Grams
Contained Tonnes
Per Tonne Gold
Ounces
Open-pit
159,164 3.30
16,903
Underground
32,064 8.91
9,186
Total
Aurora 191,228 4.24
26,089
Fully diluted proven and probable ore reserves are
calculated at a cutoff grade of 1.51 grams of
gold per tonne for open-pit reserves and 2.85 grams
per tonne for underground reserves. The
mill recovers an average of 94 percent of the gold
and 60 percent of the silver. These reserves do
not include any resources attributable to the newly
discovered Martinez deposit.
Operations
All operations in the open-pit and underground mines
and in ore processing are performed by the
Company's personnel. Aurora currently has 42
employees. The mill was built in 1987 with an
expansion completed in 1993. The mining fleet was
replaced in 1993. Electrical power is
supplied by Sierra Pacific Power.
Approximately 85 percent of all production is derived
from openpits at Aurora. A fleet of three 35-ton
trucks, an
8.5-yard
front-end loader and one blasthole drill operate on
one shift, four days a week. The conventional
truck and loader mining operation mines ore on
15-foot benches and waste on 20-foot benches.
The Company has mined from a number of open-pits
during the life of the project, including the
Prospectus, Juniata, Ann and Chesco. The
Company commenced mining the Chesco pit in May
1993. This pit will mine six veins of the Chesco
and Juniata
vein group.
Development of the underground operation began in
August 1987. To date, underground operations have
been utilized to exploit high-grade veins
adjacent to and beneath the open-pits.
Underground mining using shrinkage stoping methods
is currently utilized to mine veins below the Chesco
pit.
The Aurora mill is a 318-tonne-per-day conventional
carbon-inleach mill. The mill was
expanded from 227 tpd to 318 tpd in
1993 additional grinding and leaching capacity. Run-
of-mine ore is reclaimed from a blended stockpile
with a front-end loader. The ore is crushed to a
minus three-inch product and fed to a semi-
autogenous grinding mill. From there the oversize
ore feed is split to two ball mills for grinding to
80 percent finer than minus 200 mesh and then pumped
to the agitated leach tanks in the carbon-in-leach
circuit. Gold and silver are dissolved in the
cyanide solution and are then absorbed onto
activated carbon. The loaded carbon is then
processed at the carbon stripping and gold recovery
facility stripping the precious metals which are
then poured into dore bars. The carbon is
regenerated for reuse. The dore bars are
shipped to a commercial refinery. Tailings from
the mill are disposed in an approved impoundment.
The Aurora mill processed 62,037 tonnes of ore
during the six months ended December 31, 1996, at
an average cost of $12.89 per tonne.
The mill operates at a capacity of approximately
119,750 tonnes per year. The Aurora mine began
production in late 1988. Production statistics for
the last five years are as follows:
Six Months Ended Years Ended June
30,
December 31, 1996 1996 1995 1994
1993 1992 Ore Milled
(tonnes)62,037125,447119,573112,03785,09479,56
0 Average Grade
(grams/tonne)2.81 3.43 4.11 3.43
3.43 5.14 Gold Recovery (%)95.2 94.8
93.7 92.6 90.3 94.0
Gold Production (oz)5,34813,35914,949 11,030
8,536 12,284
Aurora enjoyed a good safety record during the six
months ended December 31, 1996, with no lost-
time accidents experienced. During fiscal 1996,
Aurora was awarded a U.S. Department of Labor Mine
Safety and Health Administration Achievement in
Safety award and was given the highest safety
awards for both open-pit and underground mines by
the Nevada Mining Association.
The Company does concurrent reclamation at the
Aurora mine; however, there are certain costs
that will be incurred at
closure. The Company estimates these costs will be
approximately $300,000. As of December 31, 1996,
the Company had accrued $236,000 for Aurora
closure and reclamation costs.
Capital Cost to Date
A summary of capitalized costs for Aurora is as
follows (amounts in thousands) as of:
December 31,
1996June 30, 1996
Mineral property $ 9,640
$ 9,376
Less accumulated depletion and allowance for impairment
(7,802) (7,621)
Total 1,838 1,755
Plants, buildings and equipment 10,617 10,437
Less accumulated depreciation and amortization (8,268)
(7,849) Total 2,349 2,588
Grand Total $ 4,187
$ 4,343
(iii) The Barite Hill Mine
General
The Barite Hill mine was mined-out in fiscal 1995.
Crushing of stockpiled ore was completed by mid-
November 1994. Recovery of leachable gold was
completed in February 1996. The Company is in the
process of reclamation which is scheduled for
completion in 1997. The Barite Hill mine is
located near the town of McCormick, South
Carolina, approximately 40 miles northwest of
Augusta, Georgia. Approximately 75 percent of
the total disturbed acreage has been reclaimed.
Barite Hill currently has six employees.
Operations
Barite Hill recovered 60,665 ounces of gold
from inception through December 31, 1996. Mining
was performed utilizing a mining contractor while
the Company's personnel oversaw all technical
aspects. Ore processing was carried out by the
Company personnel until crushing and stacking
operations were discontinued. During fiscal 1996,
process solution was applied to the ore heaps
through February 1996 in order to control the
solution inventory, through evaporation, and to
recover the remaining leachable gold.
The Barite Hill mine began production in July 1991.
Production statistics for the last five fiscal years
are as follows:
Fiscal Year 1996 1995 1994
1993 1992
Ore Stacked (tonnes) Mining 206,614 724,297
676,244 416,035 Average Grade Operations
(grams/tonne) Ceased 1.78 1.20
1.17
1.51
Gold Recovery (%)* 46.7 68.2
78.8
80.1
Gold Production (oz) 5,499 18,793
20,044
16,129
*As the proportion of sulfide ore increased, recovery
decreased.
During the six months ended December 31, 1996, and fiscal
1996,
in accordance with industry practice, gold sales
resulting from
200 and 333 ounces recovered during the reclamation
process, net of related costs, respectively, have
been offset against ongoing reclamation costs which
had been accrued in prior years.
Reclamation
Barite Hill has made progress toward its goal of
fully reclaiming the mining complex. Through
December 31, 1996, the Company has reclaimed the
Rainsford pit, waste dump, reusable leach pad area,
the crusher area and the main heap on the permanent
pad. The
Company currently is reclaiming the Main pit through
treatment of solution inventory and anticipates
reclamation to be
substantially completed during 1997.
Construction of a waste water treatment plant
was completed during the second quarter of
fiscal 1995. The effluent discharged from the
plant meets or exceeds the requirements for
discharging to South Carolina surface waters.
Barite Hill had a good safety record during the six
months ended December 31, 1996, with no lost-time
accidents experienced.
Capital Cost to Date
A summary of capitalized costs for Barite Hill is
as follows (amounts in thousands) as of:
December 31,
1996June 30, 1996
Mineral property $ 6,756
$6,756
Less accumulated depletion and allowance for
impairment (6,669) (6,669)
Total 87
87
Plants, buildings and equipment 4,080 4,080
Less accumulated depreciation, amortization, and
allowance for impairment (4,080) (3,967)
Total -
113
Grand Total $
87$ 200
(iv) The Kingston Mine and Associated Properties
The former Kingston mine was located in Lander
County, Nevada, approximately 150 miles east of
Reno, Nevada. The Company has disposed of the
plant, reclaimed the site and relinquished the 4,000-
acre land position. On August 25, 1994, the Bureau of
Land Management (BLM) and the Nevada State Department
of Environmental Protection (NDEP) signed off on
the final reclamation of the Kingston mine site.
Post-closure monitoring of the site will be carried
out through 1999.
(v) The Empire Project
The Empire Project is located approximately 40
miles west of Denver, Colorado, immediately north
of the town of Empire in Clear Creek County.
The property is comprised of approximately 520
patented and unpatented mining claims and mill sites
in the Upper Union mining district situated at
elevations varying from 8,000 to 10,000 feet above
sea level. The Company owns a 3percent net
smelter return royalty in this property. The Company
does not include any value for the Empire
Project in its consolidated financial statements.
Mexican Operations
(i) The Real del Monte y Pachuca Mine
General
The Pachuca operations consist of the San Juan
Pachuca, La Purisima and La Rica underground
mines. Ore is mined and processed from vein
deposits and old tailings. Silver with
significant gold and by-product lead and zinc are
recovered. Two additional underground mines, Alamo-
Paricutin and Dos Carlos, are being reopened with
production scheduled to begin in 1997. Extensive
exploration terrain exists around and adjacent to
the operating mines. Pachuca is formulating a plan
for the systematic evaluation of these prospects.
Location and Access
The Pachuca mines are located within the Pachuca-
Real del Monte mining district which itself is
located in the south-central part of the state of
Hidalgo, approximately 100 kilometers
north-northeast of Mexico City. The city of Pachuca
is situated in the southwest part of the district.
The mining town of Real del Monte is located six
kilometers east of the city of Pachuca and
approximately 100 kilometers from Mexico City.
Access to the property is by paved highway from
Mexico City. A highway and other paved and dirt
roads provide access throughout the district.
Land Status and Ownership
All of the areas currently being mined by Pachuca
are located within concessions which cover
approximately 46,900 hectares, of which 45,234
hectares are exploration concessions and 1,666
hectares are exploitation concessions. The
concessions encompass all of the district. Pachuca
also mines and processes ore from four exploration
concessions covering a total of 104 hectares that
are held by Pachuca all of which expire in September
2042. A net smelter royalty of 5.75 percent on
production from these latter claims is paid by
Pachuca to the claim owners. Production subject to
royalties has been about 14.6 percent of the total
production of Pachuca for the three months ended
December 31, 1996.
The exploration concessions held by Pachuca expire
in December 1999 and the exploitation concessions
held by Pachuca expire in December 2043.
Property History
Total historical production from the Pachuca-Real
del Monte district is estimated to be approximately
1.3 billion ounces of silver over 465 years of
almost continuous mining operation. The mines have
also produced an estimated 6.2 million ounces of
gold during that period. The Spaniards began mining
in the district by 1530. As the
mines were deepened, operations became
handicapped by inadequate methods of handling
water. A 2,400-meter-long drainage tunnel was
started in 1749 and
completed 10 years later, leading to increased
production. A second, lower 4,800-meter-long
drainage tunnel was completed in 1857, again
leading to increased production in the district.
Ownership of the main mines in the district passed
from Spanish to English to Mexican and to American
investors between 1824 and 1947. The mines were
purchased and operated by the Mexican government
from 1947 until the sale to GRDM in 1990.
Regional Geology
The rocks in the district consist of gently
tilted volcanic rocks, ranging in age from early
Oligocene to late Pliocene, which overlie strongly
folded and deeply eroded Mesozoic marine rocks.
The tertiary volcanic pile is divided into 10
formations which range in composition from rhyolite
to basalt, with dacite and andesite greatly
predominating. The maximum original thickness of
the volcanic pile is approximately 4,000 meters.
The tertiary rocks have been deformed by mild to
strong tilting accompanied by the development of
numerous high-angle faults, most of which trend in
a west-northwest direction. Many dacite and quartz
porphyry dikes intruded parallel to these faults. A
series of north-trending faults is located in the
eastern part of the district.
Deposit Geology
Most of the mineralization in the district is
associated with two vein systems. One
system trends west-northwest, extending
through the Pachuca area in the western part of the
district and the Real del Monte area to the east. A
second vein system trends north-south and intersects
the westerly system in the Real del Monte area.
Quartz is the dominant mineral in the veins, though
calcite is locally abundant, and rhodonite is common
in the north-south vein system. Commonly the veins
are composed of wall rock breccias in which the
fragments are silicified and cemented by quartz.
Sulfides are typically subordinate, occurring
as blebs,
disseminations and stringers. Galena, sphalerite,
chalcopyrite and pyrite are locally abundant, though
total sulfide content is commonly less than a few
percent. The principal silver minerals are acanthite
and argentite, with small quantities of polybasite,
miargyrite, pyrargyrite, proustite, stephanite,
native silver and stembergite. The ratio of silver-
to-gold in the ores is 200:1 in most veins.
Approximately 70 veins have been mined in the
district. The veins generally dip steeply, and
are 0.3 to 2.0 meters wide, though wider zones
of mineralization are found at some vein
intersections. Some precious metal values also occur
in veinlets in the wall rock adjacent to the main
veins.
Open spaces along fractures are the main deposition
sites for silver minerals. The deformation that
produced the fractures is believed related to
sinking of the central part of the volcanic pile at
the end of dike intrusion in early Pliocene time.
The tops of some of the orebodies are as much as 600
meters below surface and as a result, despite the
fact that there has been extensive mining for over
465 years, the potential still exists for the
discovery of new veins and deposits on extensions
of known veins, especially in the area covered by
later deposited material south of the City of
Pachuca.
Ore Reserves
Factors for mining dilution and recovery have
been estimated based on the general application of
shrinkage stoping in narrow veins (approximately
one meter wide). Mining dilution is estimated
to be 20 percent to 40 percent whereas the
mining recovery is estimated to be 89 percent.
The estimated in-place proven and probable ore
reserves for
Pachuca are summarized in the following table:
Ag Grams Au Grams Contained
Contained Location TonnesPer Tonne
Per TonneAg Ounces Au Ounces
San Juan Pachuca1,753,616268.11 0.995 15,118,040
56,380
La Rica 1,252,152 366.09
0.99514,736
,261 40,258
Purisma 332,219 297.97
0.9953,182,898
10,681
El Alamo 1,455,389 263.45 2.022
12,321,019 94,728
Dos Carlos 716,941 262.51 1.648 6,050,604
37,713
Total Pachuca Mine5,510,317 290.18 1.353
51,408,822 239,760
During the three months ended December 31, 1996,
66,506 tonnes at a grade of 179.16 Ag grams per tonne
and 0.871 Au grams per tonne were mined.
Mining
For the three months ended December 31, 1996, the
three combined underground units (San Juan Pachuca,
La Purisma and La Rica) produced over 22,169
tonnes per month (approximately 739 tonnes per
day). Average feed grades to the mill are
approximately 179.16 grams of silver per tonne and
0.871 grams of gold per tonne.
In general, the veins in the San Juan unit strike
east-west and dip 60 to 80 degrees to the south.
At the La Purisima and La Rica mines, the veins
generally strike north-south and dip to the east.
The veins in all units are enclosed in a very
strong andesite which allows the stopes to be
developed and mined without additional support such
as timber, steel or rockbolts.
Almost all of the units are working at or below the
water table which varies throughout the mines due
to local pumping. About 5,000 gallons per minute
are being pumped through the San Juan Pachuca shaft
and is used in the on-site mill.
All ventilation is natural and, in general, air
conditions underground are good.
All mining is performed using hand held drills in
conjunction with small mucking and tramming
equipment. Broken ore from all units is hauled
by train on the 2200 Level to the San Juan
Pachuca shaft for hoisting 270 meters to the surface
and on to the mill.
The mill also processes ore from other operators
which accounts for approximately 10 percent of
processed ore.
The average total unit operating costs for the three
months ended December 31, 1996, were approximately
$45.00 per tonne of which the mining cost was $21.76
per tonne.
Processing
Processing of ore at Pachuca consists of the
following three
separate systems: (1) standard underground ore
processing; (2) Purisima Rincon underground ore
processing; and (3) Coscotitlan tailings
processing. The ore processing facilities at
Pachuca consist of a
flotation/cyanidation mill with a processing
capacity of about 2,400 tonnes per day currently
processing about 1,179 tonnes of ore per day.
Standard Underground Ore Processing
All of the ore is crushed in a three-stage crushing
plant using a 30-by-42-inch primary jaw crusher, a
5-1/2-foot standard cone crusher, and a 5-1/2-foot
shorthead cone crusher closed with a screen. Ore is crushed to
minus 1/2-inch and placed in a
fine-ore stockpile.
The ore is milled in a two-stage grinding circuit
consisting of two 9-by-13-mills with the first
operated in open circuit followed by the second
in closed circuit with 20-inch cyclones. There are
three grinding circuits, only one of which is
currently used for underground ore.
Milled ore flows to a flotation circuit consisting
of a 10-by10-foot conditioning tank followed by
a single-line 10-cell flotation bank. The cells
produce a rougher concentrate which is pumped to a
thickener ahead of the cyanide leaching circuit.
Flotation tails are final tails which gravitate in a
sluice to the tailings containment. Flotation
concentrates are leached in a series of air-
sparged agitated tanks and the leached
concentrates are washed in a nine-stage train of
counter-current thickeners. Final counter-current
thickener underflow flows to a bulk lead/zinc
flotation circuit to produce a bulk concentrate and
the tailings join that from the initial flotation
tailings and flows to the tailings containment.
The bulk lead/zinc concentrate is shipped to
smelters in Europe for processing of the
concentrate. Pregnant solution is clarified in
thickener-type clarifier followed by filtration
in Butter's filters. The filtered solution is
then processed in a Merrill-Crowe plant to produce
silver/gold precipitate. The precipitate is smelted
in oil-fired reverberatory furnaces to reproduce
anodes which are passed to the refinery where they
are electrolytically processed to produce high-
purity silver and gold for direct sale. The
smelter and refinery are operating below capacity.
The facility toll processes limited quantities of
dore from Magistral.
As a consequence of processing a slurry rather than
solids in the cyanide leach circuit and because of
the fresh water added in the counter-current
decantation circuit, excess water is added to the
cyanide leach system and must be removed. Rather
than discharge this excess solution directly to
the tailings and lose the contained cyanide,
excess barren solution is processed in a cyanide recovery circuit
which recovers the cyanide by
acidification of the solution, volatilization of the
cyanide, and recovery of the cyanide in an alkali
solution. The solution from which the cyanide has
been removed then joins the other tailings streams.
Purisima Rincon Underground Ore Processing
The crushing and milling of Purisima ore is identical
to that of the other underground ore previously
described. The ore is campaign crushed.
Instead of passing to the silver/gold
flotation circuit, the ground slurry flows to
a lead/zinc differential circuit to remove
separate lead and zinc concentrates prior to
silver/gold flotation.
The lead and zinc flotation circuits are
conventional using rougher and rougher/scavengers
with two-stage cleaning of the
lead concentrate and three-stage cleaning of
the zinc concentrate. Lead is floated first and
the concentrate passed to sedimentation cells for
dewatering. The zinc concentrate is cyanide
leached in a single agitated tank, then batch washed
in a thickener, and the solids passed to
sedimentation cells for dewatering. Leach solution
is combined with that from the other ores for clarification,
filtration and Merrill-Crowe
precipitation.
The zinc flotation tails are collected in an
agitation tank and then combined with the ground
slurry from milling of underground ore from other
mines for silver/gold flotation and subsequent
leaching of the flotation concentrate. The
lead and zinc concentrates are shipped to local
Mexican smelters.
Coscotitlan Tailings Processing
The reclaimed tailings from the Coscotitlan tailings
containment are of higher grade than the tailings in
general. This material is reclaimed by a contractor
using a front-end loader and trucked to the mill.
From the bin, the material flows into a sluice
which directs the slurried tailings to the feed
chute of a mill processing this material.
In milling this ore, only one of the two-stage mills
in one of the three grinding circuits is used. The
mill uses one-inch balls and operates in closed
circuit with a 20-inch cyclone. The
milling serves primarily to clean the particle
surfaces rather than to grind the ore.
The ground slurry is leached in a series of three
agitated tanks and is then washed in a two-stage
counter-current thickener washing circuit. Primary
thickener overflow constitutes pregnant solution and
joins that from the processing of the underground
ore. Under flow from the second thickener
discharges to the tailings containment in a
separate pipeline to that of the other tailings.
There has not been any processing of the
Coscotitlan tailings since February 1996 pending
receipt of local government permits. The permits
were received in September 1996 and tailings
processing recommenced.
Infrastructure and Administration
With the centuries of operation of these mines,
all of the infrastructure components are well
established. Since the mines are in an established
community there are paved roads throughout providing
access to all of the facilities. There is a
small airport in Pachuca that services the
government, corporate and private clients.
Electric power is provided by the government
utility and process water is obtained from
mine drainage. Telephone service is provided
through connection with the
national network. Offices, shops, warehouses and
laboratories are principally concentrated close to
the ore processing plant with satellite facilities
at the mines. Pachuca is a city of approximately
300,000 people with all urban services available.
Mine employees provide their own housing and
transportation. All normal administration
requirements, including accounting,
payroll, purchasing, warehousing, maintenance,
assaying, security and management are provided for
the operation.
Personnel
As of December 31, 1996, there were approximately
860 people employed at the mine in the areas
of mining, milling and
administration. Employees involved in the mining
operations are unionized.
Production and Costs
For the three months ended December 31, 1996, the
production, including low grade and purchased ore
production, was 79,264 tonnes milled. Metal
production for the three months ended December 31,
1996, was 311,966 ounces of silver and 2,954 ounces
of gold.
Operating Costs
Total operating costs were $3,550,000 for the three
months ended December 31, 1996. The current mine
plan contemplates several productivity
improvements such as improved haulage, more
effective work hours per shift, higher equipment
availabilities and some mining of wider veins.
The fixed portion of the operating costs would be
expected to decrease as the improvements are
implemented and production rises. Some operating
costs such as pumping and ventilation will increase
as the mine gets deeper. Mine management continues
to look for ways to improve its high fixed costs
and equipment availability and is investigating
additional methods for improving productivity in the
future.
Capital Cost to Date
A summary of capitalized costs for Pachuca is as
follows (amounts in thousands) as of:
December 31, 1996
Mineral property $ 21,318
Less accumulated depletion (230)
Total 21,088
Plants, buildings and equipment 35,827
Less accumulated depreciation and amortization
(415) Total 35,412
Grand Total $56,500
Environmental Issues
There are currently no legal or administrative
proceedings pending against the Pachuca mine
with respect to any
environmental matter. Pachuca's use of cyanide is
subject to normal regulatory review. An operating
license for has been applied for and the
processing of the application is still within the
regulatory review period. It is expected that
certain operational requirements will attach to the
operating license which are expected to include
the following: (1) The mine must implement a
comprehensive contingency plan applicable to the use
of cyanide and an overall hazardous waste management
program; (2) Air quality limits and
monitoring/reporting standards will likely be
included in the operating license; and (3) The
projects being evaluated for cyanide regeneration and
tailings reprocessing may require the submittal
of an Environmental Impact Study and potentially
a Risk Analysis, since these operations were not
contemplated in the operating license application.
There currently is no concession title for
underground water extraction as all process water
is derived from dewatering of underground mine
workings. Mine dewatering water is currently not
covered by a Residual Water Discharge Permit
under the argument that the water is technically
not a process discharge. The tailings impoundment
also does not operate under a Residual
Water Discharge Permit as water is recycled to the
process plant.
A hazardous waste management system has recently been
implemented at Pachuca. This system is required
by the Regulations of General Law of
Environmental Equilibrium and Protection of the
Environment on Hazardous Wastes.
Tailings impoundments also present an
environmental issue in respect of which Pachuca
may have only limited responsibility, given that
the impoundments largely pre-date the 1988 General
law; however, continued utilization of the entire
facility may eliminate this limitation in
responsibility. Currently, the tailings
impoundments provide a source of dust and
have
contributed to some surface water impacts due to
erosion from sideslopes. The proximity of the
tailings area may have impacted the groundwater
quality below the impoundments. The impoundments are
constructed in an upstream fashion with the
tailings dike crest being moved into the
impoundment as the embankment is raised. This
construction method results in the embankment for
the tailings dam containing zones of soft,
compressible tailings slimes that can reduce
the stability of the embankment, particularly
under earthquake loading. As a result, the upstream
method of tailings dam construction has been largely
abandoned in most regulated countries. The
tailings impoundments
are
currently not covered by environmental regulations,
but Normas Oficiales Mexicanas (NOM), a new
Mexican governmental organization, is under
development to address the design and operation
of tailings impoundments. Topics which are likely
to be addressed by the NOM are acceptable methods
of tailings dam construction, technical
specifications for development,
and
diversion or other control of surface waters.
Dust control at the existing tailings impoundments
presents the most immediate environmental
management issue.
The existing
tailings operation uses a large impoundment area,
with very slow raises of the impoundment surface
because of the small volume of tailings disposed
over the large surface area. New tailings are
placed in a manner which tends to prevent
revegetation. In
addition, there is insufficient water to maintain
the entire tailings surface in a moist state.
As the area of active tailings deposition is
reduced, much of the tailings impoundments can be
permanently closed through revegetation and dust
control will be achieved. Deposition of the
tailings in a more limited area will result in a
greater rate of rise of the embankment and will
likely require modifying the method of
construction to either downstream or centerline
methods, possibly requiring use of borrowed fill to
construct the containment berms as opposed to the
current use of spiggoted tailings.
Conditions relating to the cyanide content of the
tailings stream will likely attach to the operating
license. Tailings discharged to the impoundment had
a 30-to-40-parts-per-million (ppm) total cyanide
content in early 1996 as compared to a water
quality discharge standard of 0.02 ppm. After
initiation of the cyanide recovery plant, the
cyanide content of the process plant tailings is
expected to be reduced to 9-to-10 ppm which would
still be in excess of limits for discharge to
surface water requiring recycling of water to the
plant.
The amount of volunteer vegetation that has
established on inactive areas of the tailings
impoundment and the lack of significant evidence
of sulfide mineral oxidation indicates
revegetation of the tailings can be achieved
with a high potential for success. Some level of
vegetation growth media development through
topsoil placement or amendment of
the
tailings will likely be required. A land
application of sewage
effluent flowing down the adjacent stream in order
to aid in developing sufficient organic matter in
the tailings to allow direct revegetation may be
feasible.
Additional environmental management issues
relating to the
Pachuca processing plant include: dust emissions
from the
crushing and grinding circuits, cyanide recovery
system, storm water management and spill
containment. As part of the
stipulation for the operating license, it is
expected that air emission limits similar to the
United States standards will be established. As
the city of Pachuca continues to develop around the
mining and mineral processing facilities, noise
emissions from the operation may become an issue in
the future.
Pachuca has submitted an environmental self-audit to
PROFEPA as described in Note 11 to the financial
statements. As of December 31, 1996, the Company
has accrued $658,000 for estimated reclamation
costs in accordance with the PROFEPA agreement.
(ii) The El Baztan Mine
General
The El Baztan operations consist of two underground
mines, Vista Hermosa and El Arroyo. The operations
mine and process ore from skarn and vein
deposits, and produce a copper concentrate
containing by-product gold.
Location and Access
The El Baztan operations are located approximately
115 kilometers south of the city of Morelia, in the
municipality of Huetamo de Nunies, in the state of
Michoacan, Mexico.
Access to the property is from the town of Tierra
Blanca on the Zitacuaro-Huetamo highway for 140
kilometers and on a gravel road for 30 kilometers.
Access by vehicle during the rainy season may be
interrupted by flooding on the Rio Chiquito river
which is adjacent to the property. The mine is
accessible by crossing the Rio Chiquito about 30
meters wide running alongside the mine. In addition
to the road and river access, the mine has a 750-
meterlong gravel-surfaced airstrip in the Rio
Chiquito valley, between the river and the mine
located one kilometer from the plant site.
Land Status and Ownership
El Baztan holds exploration and exploitation
concessions which cover approximately 44,122
hectares of which 40,598 hectares are exploration
concessions and 3,524 hectares are exploitation
concessions.
Exploitation concessions relating to approximately
3,300 hectares expire between July 2018 and
December 2045. Exploitation concessions relating
to approximately 200 hectares expire between May
2000 and July 2000. Exploration concessions
relating to approximately 500 hectares expire in
October 2001. Exploration concessions relating to
approximately 40,098 hectares expire between May
2046 and July 2046.
Property History
The El Baztan mine area has been mined sporadically
on a limited basis since the 1940's. Starting in
1950, the El Arroyo vein was put into production
and in the late 1950's and early 1960's the
flotation plant was built to treat the copper
sulfide ores from this vein. In the late 1960's
the Vista Hermosa orebody was
explored on one level but little mining was carried
out on this ore zone. Mining continued on the El
Arroyo vein during the 1970's and 1980's and the
flotation plant was expanded. In the early 1990's,
the Vista Hermosa orebody was put into production
and the plant was brought up to its current
capacity. In the
early 1990's, aerial geophysics and geology were
undertaken to explore the additional mineral targets
on the El Baztan property. An evaluation of the
exploration results is underway in order to determine
whether to proceed with a comprehensive
development program.
Regional Geology
The El Baztan district consists of a sequence
of volcanic andesitic rocks which include tuffs,
flows, agglomerates and breccias. These rocks are
intruded by intermediate composition stocks and
dikes. The volcanic rocks commonly are metamorphosed
along the contact with the intrusions.
The most prominent structural features are
lineaments or faults that are oriented in a
northwest-southeast direction in a zone that is
approximately 15 kilometers wide. Intrusions
commonly are also aligned in this direction. A
perpendicular system of fractures oriented in a
northeast-southwest direction controls the location
of some vein deposits.
Mineralization occurs principally as copper-gold
veins and skarn deposits.
Deposit Geology
The El Arroyo vein strikes north 35 degrees east and
dips steeply to the northeast. The strike length as
seen in outcrops is 1,800 meters, 800 meters of
which have been explored by underground workings.
The width of the vein is 0.2 to 1.5 meters, but
in places the vein occurs as a system of veinlets,
producing a zone more than four meters wide. The
mineralogy of the vein consists of quartz, calcite,
chalcopyrite and pyrite, with locally
abundant bornite and subordinate magnetite and
molybdenite. The
wall rock for the vein is andesite.
The Vista Hermosa skarn deposit is cut into two
parts by a dike that is eight to ten meters wide.
The part to the north, the Vista Hermosa I
orebody, is a diffuse zone of veinlets and
disseminations that is up to 20 meters wide. The
part to the south, the Vista Hermosa II orebody,
is a well-defined structure averaging nine meters in
width. The known strike length of the whole
deposit is 400 meters. The deposit strikes north-
northwest and dips steeply to the west. The
mineralogy of the deposit consists of
pyroxene, amphibole, magnetite, hematite,
chalcopyrite, pyrrhotite, and molybdenite. The host
rock to the deposit is andesite.
Three other less well explored veins, the Canalejas,
El Volador and El Risco veins, occur in northeast-
trending structures which dip steeply to the
northwest. These veins occur on the upper, steep
slopes of Cerro Canalejas. Due to the difficult
access to this area, there has been limited
exploration on these veins. The veins appear to
be 0.6 to 4.0 meters wide and have strike lengths
of approximately 250 meters.
Mineable Reserves
Mineable reserves are based on the economically
viable portion of the geologic resources that can be
recovered and include a factor for mining dilution
consistent with the underground rock
conditions and the stoping methods. Basic economic
viability is determined through the use of a
breakeven cutoff grade analysis that is calculated
considering the current metal prices, process
recoveries and total operating costs. Where there
are precious metal credits (such as at Vista
Hermosa), the breakeven cutoff grade would be
expressed as a copper equivalent.
The estimated in-place proven and probable ore
reserves for the operations at the El Baztan
operations are listed in the following table:
Grade
Contained
Location Tonnes % Copper Copper
Pounds
Vista Hermosa I 213,495
1.74%
8,199,108
Vista Hermosa II 521,755
1.66%
19,145,834
El Arroyo 114,327 3.23%
8,152,097
Risco, Carnalegas Section
74,532 1.73%
2,849,842
Total El Baztan Mine924,109 1.88%
38,346,881
During the three months ended December 31, 1996,
31,508 tonnes at a grade of 1.98 percent copper
have been milled which produced 2,058 tonnes of
copper concentrate containing 25.27 percent
copper.
Mining
The El Baztan mining unit consists of two operating
mines (Vista Hermosa and El Arroyo). Total
production from the mines averaged approximately
11,761 tonnes per month during the three months
ended December 31, 1996, with Vista Hermosa
accounting for approximately 10,099 tonnes per
month and El Arroyo producing approximately 1,662
tonnes per month.
The El Arroyo mine operates on narrow veins of
approximately one meter widths, where shrinkage
stoping is the primary mining method. The mine is
accessed on the 0 Level through an adit and is
developed to the 140 Level where current mining is
taking place. A new shaft has just been started to
connect the 70 Level with the 0 Level. This will
be extended to the 140 Level and below. An
Alimak raise-climber is being used to construct the
shaft above the 140 Level. Below this level, it will
have to be sunk conventionally. Mining is
performed with hand-held drills and small rail
equipment. All ventilation is natural.
The Vista Hermosa ore zone is about 20 meters wide,
and is being mined with trackless equipment (4-
cubic-yard scooptrams and 10-ton trucks).
Drilling is currently being performed with hand-
held drills but mechanized drilling is planned
for the future. Stoping then would be converted to
a mechanized sublevel stoping (blasthole or
longhole stoping). Development headings are
approximately 4-by-5-meters in cross section. All
ventilation is natural and conditions in the stopes
are very hot and humid.
The Vista Hermosa mine is located about six
kilometers east of the El Arroyo mine.
Processing
The ore processing facilities at the El Baztan
operations consist of a copper flotation plant with
a capacity of about 450 tonnes per day. The current
processing rate is about 380 tonnes per
day.
The grade of the Vista Hermosa ore, accounting for
approximately 86 percent of the ore processed in
these operations, is about 1.9 percent copper while
that from El Arroyo is about 2.3 percent
copper. In addition to copper, the Vista Hermosa
ore contains about 0.5 Au grams per tonne,
traces of molybdenite, and a substantial quantity
of magnetite. The ores from each mine are campaign
processed separately.
The processing plant is a classic simple flotation
mill with conventional crushing, milling,
flotation and concentrate
dewatering circuits. The crushing plant
incorporates four crushing stages -- two stages
of jaw crushing followed by two stages of cone
crushing. The first jaw crushing stage has just
been constructed and was built to handle the high
proportion of coarse, harder rock produced by the
Vista Hermosa mine. The new primary jaw crusher
is a 36-by 43-inch, 150-horse power unit. Primary
crusher product passes to the dump pocket covered
with a 12-inch opening grizzly ahead of a 20-by-36-
inch secondary jaw crusher.
Discharge of the secondary jaw crusher is conveyed
directly to a 4-1/4-foot standard cone crusher.
The product of the standard cone crusher is
conveyed to a 6-by-12-foot vibrating screen which
also operates in closed circuit with a 4-1/4-foot
shorthead cone crusher. The screen undersize,
which is minus 1/2-inch, is conveyed to two
fine-ore bins serving the mills. The crushing plant
operates two shifts per day, seven days per week.
The milling plant consists of four single-stage
ball mills operated in closed circuit with 10-inch
cyclones. Three of the mills are 6-by-10-foot
units and the fourth is a 6-by-6-foot machine.
The ground slurry is floated in a single-line
flotation circuit in a straightforward arrangement
of roughers, scavengers and two stages of cleaners.
One exception to the usual circuit is that the
product of the first rougher cell is final
concentrate. The flotation circuit has been
upgraded in recent months replacing some of the
older Denver cells with Wemo units.
The concentrate passes to a 30-foot-diameter concentrate
thickener and then to an 8-by-8-foot drum
filter. Filter product, the moisture content of
which is about 8 percent, is trucked to a smelter.
Flotation tailings pass to a magnetic
separation circuit
consisting of a single rougher and a single
cleaner drum separator. The concentrate flows to a
sedimentation basin and the tailings are pumped to
a tailings dam in a small draw about one-half mile
away.
None of the stockpiled magnetic concentrate has
been sold or shipped thus far. The Company is
investigating whether or not the magnetite can be sold for
use in heavy-media separators,
primarily for coal processing.
Production and Costs
During the three months ended December 31, 1996,
2,058 tonnes of
copper concentrate were produced at a grade of
25.27 percent copper. The total mine production
from Vista Hermosa and El Arroyo was 38,890
tonnes during the three months ended December 31,
1996. Operating costs during the three months ended
December 31, 1996, were approximately $21 per tonne.
Capital Cost to Date
A summary of capitalized costs for El Baztan is
as follows (amounts in thousands) as of:
December 31, 1996
Mineral property $ 2,319
Less accumulated depletion (96)
Total 2,223
Plants, buildings and equipment 6,035
Less accumulated depreciation and amortization
(176) Total 5,859
Grand Total
$8,082
Infrastructure and Administration
Due to the remote location of the El Baztan
operations, all of the requisite infrastructure is
provided on site. Electric power is provided
by the government utility over a 35-kilometer line
from the nearest major substation. The line can
supply up to three megawatts
of power but is subject to frequent
interruption and substantial downtime. El Baztan
has recently installed two new diesel-electric
one-megawatt generators to avoid reliance on
the government utility. One of these
generators alone has sufficient capacity to operate
the entire ore processing plant. Water is pumped
from the river to a concrete storage cistern
above the ore processing plant.
The mine has an office building, mechanical and
electrical workshops, a warehouse, truck weigh-scale,
sample preparation and a simple assay
laboratory. The assaying consists of
perchloric/nitric acid digestion followed by
colorimetric analysis for copper only. Single-status
housing is provided for senior staff employees
together with a canteen. Hourly paid employees
provide their own housing.
All the usual administrative services are
provided, including accounting, purchasing, security
and management.
The concentrate is transported in a two-stage
process. It is first transported 30 kilometers in
10-tonne-capacity trucks to a storage area at Tierra
Blanca and then loaded into large-capacity highway
haulers for transport to the smelter at San Louis
Potosi.
Exploration Potential
Prior to 1991, exploration on the property was done
primarily by driving underground workings on zones
of mineralization that were exposed on the surface.
However, a more systematic approach to exploration
has been used in the past three years. This includes
aeromagnetic surveys to identify magnetic
anomalies, as the copper-gold mineralization on the
El Baztan property is closely associated with
magnetite. Geochemical surveys are used to
locate targets for core drilling within the magnetic
anomalies.
Exploration to date has focused on the study of
high volume bodies, such as copper dissemination
and contact metamorphic bodies (such as in the
Vista Hermosa Mine). Another important
exploration zone is the Ojo de Agua zone, located
south of the El Arroyo vein, where a series of
stockworks with anomalous copper and gold values
have been found. Additionally the El Arroyo vein is
being explored along its 1,200-meter-length.
Within the boundaries of the El Baztan
concessions, a series of 21
aeromagnetic anomalies exist covering approximately
25,000 acres. These anomalies are highly
prospective due to the presence of sulfide minerals
already observed in several of the anomalies.
Environmental Issues
There are currently no material legal or
administrative
proceedings pending against El Baztan with
respect to any environmental matter.
An environmental impact study must be
integrated with the Company's expansion plans for
this operation. Such a study will largely define
modifications to the operation as conditions for
approval. Sanitary effluent discharge and the
provision of
domestic water supply are areas of potential
responsibility for the Company which arise from the
provision of on-site housing for certain of its
employees.
El Baztan has submitted an environmental self-audit
to PROFEPA as described in Note 11 to the financial
statements. As of December 31, 1996, the Company
has accrued $175,000 for estimated reclamation
costs in accordance with the PROFEPA agreement.
(iii) The Barita de Sonora Mine
General
Barita's operations consist of several small open-
pit mines, a crushing plant and two separate
processing circuits producing a minus 0.5-inch bulk
product that is sold to Baroid for the
production of drilling mud and a fine milled
product that is bagged and sold to PEMEX,
Barita's principal purchaser, as a component of
drilling mud.
Location and Access
Barita's operations are located in the south-central
part of the state of Sonora, in the municipality
of Villa Pesqueira 100 kilometers east of the
state capital of Hermosillo and 20 kilometers
east of the town of Mazatan. Access to the property
is via a paved highway from Hermosillo.
Land Status and Ownership
Exploitation concessions relating to approximately
5,000 hectares expire in May 2040 and
exploitation concessions relating to 10,000
hectares expire in September 2046. Barita only
holds exploitation concessions in respect to its
properties.
Property History
Barita was formed in 1979 as a state-owned company
to supply barite requirements to the petroleum
industry and was privatized in 1988. After
ceasing operations for a short period, it was
sold in 1991 to GRDM.
Geology
Barite deposits occur in a sequence of
Ordovician- to
Pennsylvanian-age sedimentary rocks which
include shales, mudstones, sandstones and cherts.
These rocks have been intensely
folded and faulted. As the barite occurs in
stratiform deposits within the sedimentary
sequence, the barite horizon also is intensely
folded and faulted. The barite beds range in
thickness between 2 and 17 meters.
Ore Reserves
The ore grade is based on the density of the
material which must be greater than 4.22 to be
marketable. Any mineral produced at a lower density
must be discarded or upgraded to the acceptable
density in order to be sold. About 30 percent of the
newly mined material has a density above 4.22. This
can be milled (ground) and sacked for direct
shipment to PEMEX. The remaining 70 percent of
mined mineral contains a mixture of densities having
an average density less than 4.22 and therefore must
be upgraded to the acceptable density in jigs.
About 60 percent of the barite mineral fed to the
jigs has a density of 4.22 or greater and this is
recovered. The other 40 percent is discarded as
waste.
Therefore, the mineral resource typically contains
the following mix of product:
Direct Shipping (> 4.22)
30%
Jig Product (60% > 4.22)
42% Waste (40%<4.22)
28%
Total
100%
The recovered, marketable portion of the mineable
reserve is approximately 72 percent of the in-place
resource.
The mineable reserves for the Barita property as at
December 31, 1996, contain proven and probable
reserves of 51,440 tonnes at a specific gravity
greater than 4.22 and 4,651,855 tonnes at a
specific gravity less than 4.22.
Mining
The mining area consists of several square
kilometers of outcropping barite (BaSO4) beds.
Numerous open-pits have been exploited in the
past and many outcrops exist for future
exploration and exploitation. The major open-pits
include Los Chinos, Placidos 1 & 2, Mercedes,
Virgenes, Sahuaro, El Papas, and Las Torres.
Another deposit, El Refugio, is also planned for
production in the future. The mine is currently
producing about 160,000 tonnes per year from the
Placido 1 and El Papas openpits. The nearby
Virgenes pit is being prepared for production in the
near future. The Sahuaro pit has been a major
producer in the past but is now full of water and
needs additional stripping to expose ore. The main
barite bed dips underground, away from the pit, at
about 40 degrees. The Company regards this resource
as a good opportunity to delineate additional
reserves, possibly being mined from underground with
mechanized equipment operating through ramps or a
shaft. Additional diamond drilling is required
before decisions and plans can be effected.
In the past, old waste dumps (terreros) were
reloaded and hauled to the jigs where some
fraction was recovered at a density greater than
4.22. This practice has now been stopped and all
material is newly mined and either ground and sacked
as direct shipping or fed to the jigs for upgrading.
Most of the mining is done with dozers and rippers.
The "ripped" material is loaded with a front-end
loader into off-highway trucks for transport to the
processing plant. A small portion of the mining
requires drilling and blasting with wagon drills
using three-inch bits. Bench heights in the pits are
7.5 meters. The
blasted material averages minus 20 inches in size.
About 130 employees are at the site. Of this total
about 30 are employed in the mine.
Most of the known orebodies where mining is occurring
are located at a considerable distance from the
processing facilities.
Exploration Potential
The exploration concessions at Barita cover an area
of 10,000 hectares of which 13,000 acres have been
evaluated by Barita. Six new bodies with
potential economic density have been discovered
in the course of 1995. Most of the prospective zone
remains to be explored.
Barita also is investigating a potential gold
area about 16 kilometers northeast of the barite
operations. Sampling in the area has shown random
grades of plus 10 grams of gold per tonne.
Geochemical investigations are planned to continue
into next year.
As its barite production costs are heavily
dependent on freight and transportation costs,
Barita is also investigating the effects of
exploring for barite closer to transportation routes
along Mexico's Gulf Coast and to the existing
processing facilities.
Mine Future Potential
The property has sufficient reserves for a mine
life of over twelve years at the current
production rate and there is potential for
additional reserves at depth. The future of the
mine rests with increasing production and
decreasing operating costs as the product is very
sensitive to freight costs and competition.
Processing
The ore processing facilities at Barita consist of
a crushing plant followed by a gravity
separation processing circuit incorporating jigging
and spirals producing a minus one half-inch bulk product.
Most of gravity plant product is shipped directly
in bulk. The remainder is dry milled and bagged
prior to shipping. During the last three months of
1996 production was approximately 17,829 tonnes.
The separate processing systems are described below:
Crushing Plant
The crushing plant is a simple three-stage plant
consisting of a 24-by-36-inch primary jaw
crusher, a Symons secondary cone crusher of 4-
1/4-foot short-head and an Allis-Chalmers tertiary
cone crusher. The circuit is closed with a
vibrating screen fitted with 1/2-inch opening
screen cloth. Screen undersize is conveyed to a
bin feeding the gravity separation circuit. The
crushing plant has capacity of crushing 2,500 tonnes
per day with a 3/8-inch-opening outlet. Historical
production slowdowns are expected to be solved
by the recent installation of a new crusher.
Gravity Separation Plant
The gravity separation plant will shortly have a
capacity of 1,000 tonnes of final product per day,
equivalent to about 2,500 tonnes per day of new
feed. Crushed ore from the bin is fed to four
rougher jigs that operate in parallel. Three of
these jigs are 5-by-16-foot units and the other is
a 5-by-11-foot unit. Rougher concentrates from the
rougher jigs are combined and pass to a cleaner
stage consisting of two 5-by-16-foot jigs which
operate in parallel. Concentrates flow to a spiral
classifier where they are partially dewatered and
then conveyed to a conical stockpile. Tailings from
both the rougher and cleaner jigs flow to another
spiral classifier, the coarse fraction of which
constitutes final tails. The fine-fraction of the
classifier is pumped to a bank of spirals. Spiral
concentrate flows to the concentrate classifier,
joining that from the cleaner jigs. Spiral tails
join the coarse-fraction final tails from the tails
classifier and the combined tails are pumped to
a tailings containment. The concentrates, which
have a specific gravity of 4.22, dry naturally in
the hot, arid climate. Part of the concentrates
are taken to the dry milling plant, the remainder
are transported in bulk to the port of Guaymas,
about 150 kilometers southwest of the mine.
Most of the bulk concentrates are purchased FOB
Guaymas by Baroid. Thus, the mine pays
for the product transportation to
Guaymas.
Dry Milling and Bagging Plant
The dry milling plant consists of three
independent 52-inch Raymond milling circuits which
process part of the gravity-plant concentrate. One of the three
mills is currently being
dismantled and will be shipped to the state of
Tabasco. Milled product is delivered to a fine-ore
bin. Milled product is bagged using a pneumatic
bagging machine and the bags are placed on wooden
pallets. The bags and pallets are enveloped in
plastic and shipped to PEMEX's operations in the
Gulf of Mexico. Plant capacity of the two-mill-unit
plant is 140 tonnes per shift, well in excess of
current or projected production. Covered storage
with capacity for 20,000 tonnes of product is
provided at the site.
Production and Costs
During the three months ended December 31, 1996,
production was over 17,829 tonnes of ore.
Recovery was 30.1 percent and operating costs
were $643,000.
The value of the products are approximately as
follows:
Bulk: $30 per
tonne, FOB Guaymas
Milled and bagged: $100 per
tonne, FOB Tabasco
Barita is required to make a payment of 0.1 percent
of the value of its production to Consejo de
Recursos Minerales.
The direct milled product is purchased and then
delivered to Tabasco in the southeastern part of
Mexico. The Company pays all freight costs, which
are considerable, amounting to almost half the
total selling price. Costs are heavily affected by
freight and transportation costs over which
Barita has no control. Efforts are being made
to find sources of barite closer to existing
production facilities and transportation routes
although
no conclusive results have been achieved to date.
Production and costs are also heavily dependent
upon PEMEX's purchasing commitments which vary from
time-to-time. PEMEX has not in the past agreed to
long-term purchase commitments.
Capital Cost to Date
A summary of capitalized costs for Barita is as
follows (amounts in thousands) as of:
December 31, 1996
Mineral property $ 1,968
Less accumulated depletion (202)
Total 1,766
Plants, buildings and equipment 5,016
Less accumulated depreciation and amortization
(70) Total 4,946
Grand Total
$6,712
Infrastructure and Administration
Infrastructure requirements for the deposit are
modest since it is easily accessible with a main
road running right through the deposit and with the
town of Mazatan and the city of Hermosillo, just 20
and 100 kilometers, respectively, from the site.
Electric power is provided by the government utility
and water is obtained from wells. Though the surface
in the area is very dry, there is ample subterranean
water available and the water table is relatively
high.
Administrative buildings include offices, shops, a
warehouse and a laboratory. The Company also has
offices at Hermosillo, Mexico City and at
Villahermosa in the Tabasco province where the oil
industry is concentrated.
Environmental Issues
There are currently no legal or administrative
proceedings pending against Barita with respect to
any environmental matter.
Barita submitted an Environmental Impact Study
in 1992 and recently submitted an environmental
self-audit to PROFEPA. As of December 31, 1996, the
Company has accrued $159,000 for estimated
reclamation costs in accordance with the PROFEPA
agreement. An additional Environmental Impact Study
might be requested by the authorities to address
the proposed expansion described above. Barita has
ongoing exploration projects, including some base
level exploration of a potential gold target.
These projects must be regularized to comply
with their environmental obligations. If the
gold project proceeds to development, this will be
a significant change in the operation which must
be addressed through a modification of the operating
license.
While the area is quite arid, there are also
limited provisions for stormwater runoff control.
Sediment loading of adjacent drainages can be
reduced through additional stormwater routing and
sediment ponds.
Water used in processing barite is discharged to an
impoundment in an old mine pit. The solids settle
out and the water is recycled to the plant.
(iv) The Magistral del Oro Mine
General
The Magistral operation currently reprocesses
tailings from old workings by heap leaching for
gold recovery in a two-stage feasibility study.
Location and Access
The Magistral project is located near the Santa
Maria del Oro village, in the municipality of Santa
Maria del Oro in the state of Durango, Mexico.
The project is located approximately 120 kilometers
due south of the city of Parral and 190 kilometers
northwest of the city of Durango.
Access to the property by road from the city of
Durango is by paved highway traveling north for
294 kilometers to Entronque Villa Hidalgo, then
southwest for 50 kilometers by paved road. An
airstrip for small airplanes is located two
kilometers to the south of Santa Maria del Oro.
Land Status and Ownership
Approximately 5,300 hectares are held under
exploration concessions acquired in September, 1993
and October 1995. One
exploration concession relating to approximately
5,900 hectares expires in September 1999. All
other concessions expire in October 2001.
Property History
Mining activity commenced at Magistral in 1890
and continued until 1962 with some interruptions in
production prior to 1942. The Magistral underground
mine became uneconomic and was closed in 1962.
Heap leaching of tailings from those historical
mining and processing operations to recover gold
commenced in December 1992, but stopped in August
1994 due to high operating costs related to the high
copper content of the ore. The processing of
tailings started again in June 1995. Extensive
experimental work has been conducted to develop a
method of extracting the dissolved copper and
minimizing cyanide consumption.
General Proposed Mining Description
The tailings area to be mined is first
plowed with an agricultural tractor and disc plow.
The plowed material is then bulldozed to a loading
point. At the loading point, a front-end loader
loads the plowed tailings into 10-tonne-capacity
trucks which transport the tailings about two
kilometers to pads for leaching.
Ore Reserves
As at December 31, 1996, Magistral contains proven
and probable reserves of 1,670,112 tonnes at an
average grade of 2.57 grams per tonne containing
137,943 ounces of gold.
Basic economic viability for the tailings has been
determined through the use of a breakeven cutoff
grade analysis calculated considering the current
metals prices, process recoveries and total
operating costs. Since revenues from the sale of
metals must be equal to or greater than the total
operating costs to assure breakeven or
profitability, breakeven cutoff grades have been
estimated at 1.24 grams of gold per tonne with
total
operating costs of $12 per tonne at a gold price
of $400 per ounce and recoveries of 75 percent. As
the average grade of the tailings is greater than
the cutoff grade, so determined, the processing of
these is considered economical.
Exploration Potential
The mineralized zone in the Magistral operations
covers three main vein-type structures, Cocinera,
Los Tiros and Las Marias), as well as two
breccia type-bodies (El Preson and Gavilana).
Collectively these structures have substantial
potential for the discovery of additional
geologic resources. Mineralization suggests that
there is merit in additional exploration to add to
the existing geological resource.
Processing
The ore processing facilities at Magistral
consist of heap leaching about 1,000 tonnes per day
of old tailings generated by a high-grade
copper/gold flotation mill that operated for about
20 years up until the early 1960's. The tailings
are recovered from a stockpile with a front-end
loader and dumped in a hopper ahead of an
agglomerating drum. Lime, cement and cyanide
solution are added to agglomerate the tailings
and the
agglomerated product is conveyed to a wheeled
radial stacker conveyor. Stacking height is eight
meters. Barren solution is sprayed on the heaps
and is collected in the pregnant solution pond. Pregnant solution
is processed through an
adsorption/desorption/refinery (ADR) plant and then
passes to the barren solution pond. Loaded
cathodes are shipped to the refinery at Pachuca
for final processing.
The plant was initially placed in operation in
December 1992. Ore placement on the heap was
stopped in August 1994 after less than two years of
operation because of excessively high operating
costs, relating primarily to the high copper content
of the ore. The ADR plant continued to operate
until November 1994. The
facility restarted operations in 1995, prior to
acquisition by the Company, and is not yet operating
at full production.
Extensive experimental work has been conducted to
develop a method of extracting the dissolved copper
and minimizing cyanide consumption. The culmination
of the test work has been to develop a resin
extraction method that will remove copper in the
barren solution and recover it as electrowon metal.
The order for the copper extraction plant is also
under review. Currently, very low-strength cyanide
leach solution is being used so as to minimize
copper leaching and the attendant problems with
high costs that result from high cyanide
consumption. The cyanide strength currently used
is 0.01 percent to 0.02 percent and is keeping the
copper solution strength to about 200 ppm, below the
300 ppm threshold above which cyanide
consumption becomes problematic.
Production and Costs
During the three months ended December 31, 1996,
approximately 25,727 tonnes of ore were stacked at a
grade of 74.06 grams per tonne with 1,094 ounces of
gold recovered. Operating costs were $651,000 for the three
months ended December 31, 1996.
Production is below the forecasts in an independent
engineering study primarily due to a leaching
problem, associated with the ore. The Company is
investigating means of solving this problem including
reducing heap heights. Production, however, will
not meet forecasts and costs will remain high until
this problem is rectified.
Capital Cost to Date
A summary of capitalized costs for Magistral is
as follows (amounts in thousands) as of:
December 31, 1996
Mineral property $ 2,049
Less accumulated depletion
- -
Total 2,049
Plants, buildings and equipment 2,320
Less accumulated depreciation and amortization (49)
Total 2,271
Grand Total $4,320
Infrastructure and Administration
The project is located near the established
village of Santa Maria del Oro and is close to a
main highway and infrastructure requirements are
minimal. The facility is accessed by a gravel road
of about two kilometers from a paved highway.
Electric power is provided by the government utility
and process water is obtained from one of the
adjoining abandoned underground mines. Principal
infrastructure buildings include an office and
a maintenance shop. Personnel live primarily in
Santa Maria del Oro.
Environmental Issues
The Magistral facilities use of cyanide is subject
to normal regulatory review. Magistral was granted
an operating license on March 25, 1993, a
condition of which is the submittal of an
Environmental Impact Study. While the study
has not been completed to date, Magistral has
recently undertaken a voluntary environmental self-
audit under Mexican environmental guidelines which
will define the applicable measures and procedures
that must be followed to resolve the use of cyanide
as well as all other environmental management
issues. Any expansions of present operations being
contemplated would require a modification of the
operating license. Presently the mining operation
is providing drinking water to the adjacent village.
Approval by the Comision Nacional del Agua may be
required as well. The Company is reviewing all
of these matters as part of its intention to
continue and increase production from the Magistral
operations.
The Company believes that the heap leach pad
and solution containment ponds used in leaching the
tailings follow generally accepted design concepts
used in the United States. A more detailed
review than that conducted by a third-party
engineering firm would be necessary to confirm the
suitability of the leach pad lining materials for
the site conditions and planned heap heights, the
acceptibility of the construction standards, the
suitability of the leach application rate, and the
adequacy of the solution containment pond's sizes
to contain the normal solution inventories as
well as a reasonable stormwater runoff volume and
a loss of pumping capacity drain down of the heap.
The Company is currently undertaking such a review.
According to external third-party review,
environmental degradation at the site which predates
the 1988 General Law would not pose a liability to
the Company. All aspects of the new operation
would, however, need to be in compliance with
current environmental regulations. This includes
reagent handling and
storage, surface water discharges, air emissions,
and hazardous
materials storage, transport and disposal.
Magistral has submitted an environmental self-audit
to PROFEPA as described in Note 11 to the financial
statements. As of December 31, 1996, the Company
has accrued $124,000 for estimated reclamation
costs in accordance with the PROFEPA agreement.
Other Mexican Operations
(i) Baroid S.A. de C.V.
Baroid S.A. de C.V. (Baromex) is a corporation
formed in March 1993 through a joint venture
between Baroid International, a U.S. corporation in
the drilling fluids industry, and Barita de
Sonora. The corporation is owned 51% by Baroid
International and has two locations, one in
Villahermosa, Tabasco and one in Ciudad del Carmen,
Campeche. Petroleos Mexicanos (PEMEX), the Mexican
state owned oil company, is essentially the sole
customer of Baromex.
Subsequent to year
end, Baroid International and Barita
de Sonora agreed that a deadlock existed, as
defined in the corporate by-laws, which requires
one of the following: (1) resolution among the
shareholders, (2) tendering for the shares held by
one of the shareholders by the other shareholder at
fair market value, as defined, or (3) a sale to
a third party. Baromex continued to be operated in
the same manner as prior to the declaration of the
deadlock and there is no limit on the length of
time it may be operated under the deadlock.
However, as a result of the deadlock, the Company
hired Anderson and Schwab, Inc., an independent
management consulting firm, to provide a
valuation of Baromex for a potential sale to either
Baroid International or a third party. The Company
is currently evaluating its options regarding
Baromex.
(ii) Real del Monte Orfebres
Orfebres is in the business of manufacturing and
commercializing
all types of ornamental objects and articles using
fine silver, such as
jewelry and silver-
plated goods. Orfebres purchases
silver directly from the refinery at Loreto, which
depends on Pachuca for silver concentrate, and
transforms the silver into ornamental objects
after several processes which include the melting
of the fine metal, rolling, cutting and making the
pieces or craft products. The creation of the
ornaments is carried out in accordance with a
sketch and after creating the sketch, a draft is
made in brass and a first sample is made in pure
silver. Once the silver standard is created, mass
production of the ornaments begins. Average
production is 50 to 60 pieces per day.
Orfebres has two exhibit halls, one in the city of
Pachuca (in
front of its production area) and the other in Mexico
City. The
silver-plated products are displayed on exhibit at
trade fairs in Mexico and abroad.
Currently, Orfebres sells its products in Mexico and
also exports them to Central and South
America, the United States, and, in
small quantities, to some European countries.
(iii) Loreto Plateado Fino
Loreto is in the business of manufacturing and
commercializing several types of ornamental objects
elaborated on fine silver plate, with a body of
craft objects elaborated in all types of metals,
particularly copper, brass, nickel and steel.
Loreto purchases silver directly from the refinery
at the Loreto plant as well and uses the purchased
silver to plate objects or figures
through several stages including immersion of the
objects or figures in electrolytic deposits
containing the necessary agents and
proceeding to attain the desired plate and
thickness
stipulated, polished and finished.
Currently, Loreto
manufactures products on a demand only basis.
Item 3: LEGAL PROCEEDINGS
The Company is not currently involved in any legal
proceedings which would
have a material adverse effect on its operations or
financial condition and to the best of the Company's
knowledge, no legal proceedings of a material nature
are contemplated by any individuals, entities or
governmental authorities, except as described
below.
In 1977, Mocatta Metals filed a lawsuit alleging
Compania Real del Monte y Pachuca, S.A. de C.V.
defaulted under terms of a purchase and sale
agreement. The total amount claimed is
approximately $1,000,000. The Company believes it
will prevail in any further future court
proceedings, should they occur, based on government
dispositions in 1987. However, an adverse judgment
could include additional amounts for interest and
damages. The
Company has recorded a reserve of $1,000,000
as long-term liability for any further litigation.
Item 4: CONTROL OF REGISTRANT
On August 2, 1996, the Shareholders authorized an
increase in its capital from 100,000,000 shares, of
which 80,000,000 shares may be issued as common
shares with no par value and 20,000,000 shares may
be issued as preferred shares, to an unlimited number
of common shares and 20,000,000 preferred shares.
At March 31, 1997,
129,954,745 common shares were issued and
outstanding.
The following table sets forth, at that date, the
only persons or groups known to the Company to own
more than 10 percent of the Company's outstanding
common shares and the total number of common
shares owned by the Company's directors and officers
as a group at March 31, 1997:
Identity of Persons or Group
Shares Owned
Percentage of Class
Grupo Acerero del Norte, S.A. de C.V.
56,051,091 43.1%(1)
Gwalia Consolidated Ltd. and
Sons of Gwalia Ltd. (combined)
17,212,114 13.2%(2)
Nixon
Fork
Joint
Venture
10,483,870
8.1%(3) Caithness Alaska
Gold Ltd.
2,357,047 1.8%(4)
Discovery Nominees & Co.
2,012,745
1.6%(5)
Directors and Officers as a group
48,041 (6)
(1) X.D. Autrey and A. Ancira are directors of Grupo
Acerero del Norte, S.A. de C.V.
(2) P.K. Lalor and C.J. Lalor are directors of
both Gwalia
Consolidated Ltd. and Sons of Gwalia Ltd.
(3) J.D. Bishop and G. Hoyl have an interest in
Nixon Fork Joint Venture.
(4) J.D. Bishop is the Chairman and CEO of
Caithness Resources,
an affiliate of Caithness Alaska Gold.
(5) W.W. Robinson is Manager of Discovery Nominees &
Co.
(6) Less than 1%.
The Company is not aware of any shareholder, other
than the foregoing shareholders, who own directly or
indirectly more than 10 percent of the common
shares of the Company other than; Caithness Alaska
Gold Limited which is a limited partnership having
an indirect 49-percent interest in Nixon Fork
Joint Venture and which directly owns 2,357,047
common shares and Discovery Funds I-90 Limited
Partnership and Discovery Funds II90 Limited
Partnership which are limited partnerships holding a
20-percent limited partnership interest in Caithness
Alaska Gold Limited which directly owns 2,012,745
common shares.
On October 10, 1996, the Company completed an equity
offering and received gross proceeds of Cdn$26,992,284
($19,963,493) from the issuance of 22,493,570
special warrants at a price of Cdn$1.20 per special
warrant. The special warrants were exercised into
separate units, each consisting of one common
share and one common share purchase warrant. Each
whole purchase warrant will entitle the holder to
purchase one common share at Cdn$1.30 up to the first
anniversary of the closing of the offering. The
Company also issued 500,000 non-assignable
underwriters' warrants under the offering, each of
which entitles the holder thereof upon payment of
Cdn$1.25 to acquire one common share and one-half
common share purchase warrant on or before October
10, 1998. Closing of the offering occurred
concurrently with the closing of the acquisition of
the GRDM Subsidiaries.
In November and December 1995, the Company issued an
aggregate of 7,920,000 units at Cdn$1.20 per unit
for total proceeds of Cdn$9,504,000 ($6,982,000).
Each unit was comprised of one common share and
one-half common share purchase warrant. Each
common share purchase warrant entitled the holder to
acquire one common share at Cdn$1.50 per share before
February 28, 1997. No common share purchase
warrants were exercised prior to expiration. Of the 7,920,000
units, Gwalia Consolidated Ltd.
purchased 1,125,000 units; Discovery Nominees & Co.
purchased 562,500 units; and Caithness Alaska
Gold Limited purchased 562,500 units. The related
party transactions were on the same terms and
conditions as arm's length purchasers.
On July 6, 1995, the Company issued 2,100,000
cumulative
preferential convertible 7-percent Preference Shares,
Series 2 (Series 2 Preference Shares). The issue
price was Cdn$1.00 and resulted in proceeds to the
Company of $1.6 million. The shares earned a
cumulative preferential 7-percent cash dividend
payable semi-annually beginning December 31, 1995,
were redeemable at the issue price on December 31,
1996, and were convertible at the option of the
holders to 0.532 fully paid and non-assessable
common shares for each Series 2 Preference Share,
without further consideration from the holder. On
December 31, 1996, the Company redeemed the
preference shares for Cdn$2,100,000 ($1,532,000). The
obligation of the Company to pay the redemption price
and any dividend was guaranteed by Gwalia
Consolidated Ltd. (Gwalia). The Company paid
Gwalia a guarantee fee of 1.5 percent of the
proceeds from the issuance of the Series 2 Preference
Shares.
Item 5: NATURE OF THE TRADING MARKET
The Company's common shares are listed on The
Toronto Stock Exchange (symbol KNV), were quoted on
the NASDAQ National Market System from March 25,
1988 until December 1990 and are presently traded on
the NASDAQ Small Cap Market (symbol KNVCF), have been
traded on the Stuttgart Exchange since April 25, 1989
(symbol CNV-
SG), and on Frankfurt and Berlin Exchanges since
December 19, 1996 (symbol CNV). At December 31,
1996, 294 holders of record in the United States
held 21,458,273 of the Company's common shares or
17 percent of the outstanding common shares as of
that date.
The following table sets out the reported high and
low sales or closing prices on The Toronto Stock
Exchange, the NASDAQ Stock Market and the Stuttgart
Exchange for the periods indicated:
NASDAQ Toronto
Small Cap MarketStock ExchangeStuttgart
ExchangeFrankfurt ExchangeStuttgart Exchange
(U.S. Dollars)(Canadian
Dollars)(Duetchmarks)(Duetchmarks) (Duetchmarks)
High Low High Low High LowHigh Low
High Low
Fiscal Year ending June 30, 1995
1st Qtr. $1.50$1.00$2.05$ 1.42$2.15$1.80N/A N/A
N/A N/A
2nd Qtr. 1.310.68 1.000.85 2.001.30 N/A N/A
N/A N/A
3rd Qtr. 0.940.69 1.300.93 1.581.10 N/A N/A
N/A N/A
4th Qtr. 1.310.88 2.001.14 1.731.30 N/A N/A
N/A N/A
Fiscal Year ending June 30, 1996
1st Qtr. $1.32$0.74$1.40$1.00$1.45$1.17N/A N/A
N/A N/A
2nd Qtr. 1.410.75 1.401.02 1.44 1.16
N/A N/A N/A
N/A
3rd Qtr. 1.410.91 1.90 1.20 2.06
1.30 N/A N/A
N/A N/A
4th Qtr. 1.381.13 1.851.65 2.04
1.73 N/A N/A
N/A N/A
Six Months Ending December 31, 1996
1st Qtr. $1.28 $0.84 $1.70 $1.10 $1.89
$1.31 N/A N/A N/AN/A
2nd Qtr. 1.18 0.69 1.50 1.00
1.56 1.26 (1) (1) (1)
(1)
(1) No trading activity occurred until January 1997.
Item 6:EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING
SECURITY HOLDERS
There are no governmental laws, decrees or regulations
in Canada relating to restrictions on the export or
import of capital. However, the remittance of interest
dividends or other payments
to nonresident holders of the Company's shares are
subject to withholding tax.
There are no limitations under the laws of Canada
or in the charter or any other constituent
documents of the Company on the right of
foreigners to hold or vote the shares of the
Company. However, under the provisions of the
Investment Canada Act, when control of a Canadian
business is acquired by a non-Canadian, the
transaction may be reviewable in certain
circumstances by Investment Canada, an agency of
the federal government of Canada. Reviewable
transactions are those in which a non-Canadian
acquires the assets of a Canadian business or the
voting shares of a Canadian corporation in respect
to which the value of the assets or shares
exceeds Cdn$5,000,000. In addition, certain
transactions are specifically exempted from review.
Item 7: TAXATION
Withholding
Generally, cash dividends paid by Canadian
corporations to nonCanadian resident
shareholders are subject to a Canadian
withholding tax of 25 percent. However, pursuant to
Article X(2) of the Canada-United States tax
treaty, dividends paid to a resident of the
United States are only subject to a 15-percent
Canadian withholding tax. Further, if the United
States resident owns 10 percent or
more of the voting shares of the Canadian
company paying the dividends, the Canadian
withholding tax is reduced to 10 percent. In
addition to dividend withholding, interest paid
to United States residents is subject to a 15
percent Canadian withholding tax pursuant to Article
XI(2) of the Canada-United States tax treaty.
Capital Gains
A non-Canadian resident purchaser who holds shares of
the Company as capital property will not be subject
to a Canadian tax on capital gains realized on
the disposition of such shares unless such shares
are "taxable Canadian property" within the meaning of
the Income Tax Act (Canada) and no relief is
afforded under any applicable tax treaty. The
shares of the Company would be taxable Canadian
property of a non-resident purchaser if the non
resident purchaser used the shares in carrying on a
business in Canada or if at any time during the
five-year period immediately preceding the
disposition not less than 25 percent of the issued
shares of any class of the Company belonged to the
particular purchaser, persons with whom the purchaser
did not deal at arm's length, or any combination
thereof.
Item 8: SELECTED FINANCIAL DATA
The following tables present selected financial data
relating to the financial condition and result of
operations of the Company, based on accounting
principles generally accepted in Canada, which for
the Company, are not materially different from those
in the United States. Amounts are stated in
thousands of U.S. dollars, except per share
amounts.
As at December 31, As at June 30,
1996 1996 1995
1994 1993 1992
Balance Sheet Data
Total Assets $123,625(1) $38,827 $38,508
$27,177$31,547$19,876 Long Term Debt and Convertible
Subordinated Debentures
(excluding current portions
of long-term debt) 30,644 16,677 28,755
17,806 6,904 9,626
Shareholders' Equity (Deficit)52,872(1)2,169(2,627)
2,87211,800 2,896
For the Six Months EndedFor the Year ended June
30,
December 31, 1996 1996 1995 1994
19931992
Statements of Operations Data
Net Sales $11,456 $15,550$8,603
$14,881$10,429
$12,695
Net Loss (10,991) (6,666)(5,763)(11,638)
(2)(7,325)
(1,690)
Loss Per Share (0.14) (0.14)(0.14) (0.29)
(0.64) (
0.16)
Cash Dividends Per
Common Share Nil Nil Nil Nil
Nil Nil
1)Increase is due to the acquisition of the GRDM
Subsidiaries in exchange for 52,290,091 common
shares.
2)The net loss in 1994 includes impairment losses of
$5,227,000 for the Aurora and Barite Hill mines.
Exchange Rates
The following table sets forth the exchange
rates for one Canadian dollar expressed in terms of
one U.S. dollar for the past five years.
Calendar Average Annual Range
Period
Year Rate Low High
Ending Rate
1996 .7305 .7234 .7520
.7297
1995 .7399 .7097 .7702
.7407
1994 .7366 .7028
.7705
.7129
1993 .7758 .7436 .8047
.7554
1992 .8280 .7768
.8757
.7865
The exchange rates are based on monthly averages
published by the Federal Reserve for the noon buying
rate in New York City for cable transfers in
foreign currencies as certified for custom purposes
by the Federal Reserve Bank of New York.
At May 21, 1997, the New York City rate of
exchange for one Canadian dollar and one Mexican
Peso, as quoted by the First Interstate Bank of
Denver at 11:00 a.m. Mountain Standard Time, was 0.7312 and 0.1272,
respectively, in U.S. dollars.
The following table sets forth the exchange rates for
one Mexican Peso expressed in terms of the U.S.
dollar for the three months ended December 31, 1996.
Average Annual Range
Period
Rate Low High
Ending
Rate
Three Months Ended
December 31, 1996 0.1278 0.1258 0.1330
0.1267
To date, the Company has paid no dividends and
there are no current plans to pay dividends on
common shares in the future.
Item 9: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
The following discussion should be read in
conjunction with the Company's consolidated
financial statements included in this
report.
Corporate Overview
On June 28, 1996, a Share Purchase Agreement
(Agreement) was signed with Grupo Real del Monte,
S.A. de C.V. (GRDM) and Grupo Acerero del Norte,
S.A. de C.V. (GAN) to acquire certain of GRDM's
Subsidiaries. The GRDM Subsidiaries own and operate
four mines located throughout Mexico. The
operating mines include Compania de Real del Monte
y Pachuca, S.A. de C.V. (Pachuca), an underground
silver and gold mine; Compania Minera El Baztan, S.A.
de C.V. (El Baztan) an underground copper mine;
Barita de Sonora, S.A. de C.V. (Barita), an open-
pit barite mine; and Compania Minera Magistral
del Oro, S.A. de C.V. (Magistral), a goldtailings
reprocessing operation.
Under the terms of the agreement, on October 10,
1996, the Company issued 52,290,091 common shares
to GRDM and certain of its shareholders in exchange
for all of the outstanding shares of the GRDM
Subsidiaries. The Company assumed approximately
$39,000,000 of consolidated debt of the GRDM
Subsidiaries and agreed to grant GAN a 12 percent
royalty interest in the net profits from the
GRDM Subsidiaries, with a minimum amount of
$500,000 being payable annually and credited towards
the amounts payable under the royalty. The maximum
amount payable under the royalty is $5,000,000.
GRDM has the right to nominate, but not appoint,
one-half of the number of the members of the Board
of Directors of the Company so long as it holds more
than 30 percent of the Company's common shares.
On October 10, 1996, the Company completed an equity
offering and received gross proceeds of
Cdn$26,992,284 ($19,963,493) from the issuance of
22,493,570 special warrants at a price of Cdn$1.20
per special warrant. The special warrants were
exercised into separate units, each unit consisting
of one common share and onehalf common share
purchase warrant. Each whole purchase warrant will
entitle the holder to purchase one common share at
Cdn$1.30 up to the anniversary of the closing of
the offering. The
Company also issued 500,000 non-assignable
underwriters' warrants in connection with the
offering, each of which entitles the holder
thereof upon payment of Cdn$1.25 to acquire one
common share and one-half common share purchase
warrant at Cdn$1.25 on or before October 10,
1998. Closing of the offering occurred concurrently
with the closing of the acquisition on October 10,
1996.
During the six months ended December 31, 1996,
the Board of Directors voted to change the
Company's fiscal year end from June 30 to December
31. The new year end coincides with the reporting
requirements of the newly acquired Mexican
subsidiaries and is effective December 31, 1996.
Prior to the acquisition of the outstanding shares
of the GRDM Subsidiaries, Pachuca signed a debt
refinancing agreement with Banpais S.A. on
February 19, 1996, (Banpais Restructuring
Agreement) for principal and interest payments owed
to the bank, totaling $8.5 million. The new loan is
payable in 16 semi-annual installments beginning
August 23, 1998 and bears interest at a rate of
LIBOR plus 10 percent. On June 20, 1996, El Baztan
and Magistral each signed a restructuring agreement
with Banca Cremi, S.A. (Cremi Restructuring
Agreements), in the approximate amounts of $3
million and $4 million respectively. The amounts
are payable in 48-monthly installments of
$62,000 and $84,000 respectively beginning July 20,
1997, and bear interest at a rate of LIBOR plus 7.8
percent. The loan agreements with Banpais and Banca
Cremi are guaranteed by GAN.
Barita entered into a loan agreement with Banco
Invex, S.A. dated December 22, 1995, (Invex Credit
Agreement) in the amount of $1,500,000 for a term
of 360 days. The interest rate on this loan is
LIBOR plus 7 percent. In December of 1996, Barita
agreed to extend the term of the loan in the amount
of $1,250,000 for a period of 90 days, which was
extended for an additional 90 day term, subsequent
to December 31, 1996. The loan is guaranteed by GAN.
On March 24, 1997, the Company entered into loan
agreements with two shareholders of the Company.
GAN and Caithness Resources agreed to loan the
Company $3,000,000 and $585,000, respectively. In
November and December of 1995, the Company issued an
aggregate of 7,920,000 units at Cdn$1.20 per unit
for total proceeds of Cdn$9,504,000 ($6,982,000).
Each unit was comprised of one common share
and one-half common share purchase warrant. Each
common share purchase warrant entitled the holder to
acquire one common share at Cdn$1.50 per share
before February 28, 1997. No
common share purchase warrants were exercised
prior to their expiration.
During December 1995, the terms of the
Company's 3-percent convertible subordinated
debentures were amended to extend the maturity two
years, to March 1999, in exchange for reducing the
conversion price to Cdn$1.20.
On July 6, 1995, the Company issued 2,100,000
cumulative preferential convertible 7-percent
Preference Shares, Series 2 (Series 2 Preference
Shares). The issue price was Cdn$1.00 and resulted
in net proceeds to the Company of $1.6 million. The
shares earned a cumulative preferential 7-percent
cash dividend payable semi-annually beginning
December 31, 1995, were redeemable at the
issue price on December 31, 1996, and were
convertible at the option of the holders to 0.532
fully paid and non-assessable common shares for each
Series 2 Preference Share, without further
consideration from the holder. On December 31,
1996, the Company redeemed the preference
shares for
Cdn$2,100,000 ($1,532,000).
As of December 31, 1996, the Company has a
remaining commitment of 23,865 ounces of gold for
repayment of its outstanding Nixon Fork gold loan
and has 13,871 ounces of gold in forward contracts
remaining to be delivered at an average price of $417
per ounce. On March 31, 1997, the Company
terminated its outstanding hedge which resulted in
a deferred gain of $735,000 which will be
recognized under the original delivery terms
during 1997. Pachuca entered into a Mineral Sale
Agreement with Prime Metals dated December 12,
1995, to sell between four and six tonnes of fine
grain silver with a grade of 99.98 percent at COMEX
plus $0.10 per ounce from January 2, 1996, through
December 31, 1996. The Company renewed the contract
through December 1997.
Overview of Producing Mines
United States Operations
Nixon Fork
The Nixon Fork mine produced 13,264 ounces of gold
from 17,665 tonnes of ore for the six months
ended December 31, 1996. Continuing mechanical
problems and development delays have prevented
the mine from reaching annual design production
levels of 60,000 ounces of gold from 50,000 tonnes
of ore. The Company undertook an extensive
maintenance program during the period in an effort
to increase equipment availability and performance.
In
addition, the Company has replaced mine-site
management and corporate operations personnel to
improve production.
Development drilling since inception of the mine has
been focused on step-out drilling in the immediate
area of the proven and probable reserve. This
drilling has resulted in a net increase in reserves
during the six months ended December 31, 1996, of
31,240 tonnes with a grade of 25.50 grams per tonne
for a total of 25,539 ounces of gold.
District-wide exploration at Nixon Fork has
identified several important areas for further
work. During the period ended December 31, 1996,
the Company completed an aero-magnetic survey of
the entire 56,000-acre land holding at Nixon
Fork which identified several magnetic anomalies.
This work, in conjunction with anomalous surface
sampling, has confirmed the presence of skarn-type
gold mineralization at near by Eagle Creek over a
strike length of 6,000 feet that appears to be
similar to the Nixon Fork mineralization currently
being mined. The Company is planning on continuing
to explore the Eagle Creek area with 1,200 meters of
drilling, 1,000 meters of trenching, geophysical
interpretation, sampling and mapping during 1997.
Aurora
The Aurora mine produced 5,348 ounces of gold from
62,802 tonnes of ore for the six months ended
December 31, 1996. A delay in reaching full
production during July and August as a result of a
high-wall failure in March 1996 contributed to the
shortfall in ounce production for the six-month
period.
During the six months ended December 1996, the
Company completed its planned drilling program to
define and delineate the Martinez deposit discovered
during 1995. The Company completed a total of 38,277
feet in this drilling program. The Company has
completed an internal feasibility study related to
the Martinez deposit which shows a positive net
present value and an extension of the mine life at
Aurora. The Company is evaluating its options
relative to necessary expansion of its tailings
impoundment, its milling and mining capacity
relative to the Martinez deposit.
Barite Hill Mine
The Company exhausted the reserves at Barite Hill,
ceased mining of ore and began reclamation during
fiscal 1995. The reclamation plan provides for
closure of the heap through a permanent clay cap
which was completed in 1996 and back-fill of the
main pit area to allow free drainage. The Company
has spent $434,000 and $1,231,000 on reclamation
for the six months ended December 31, 1996, and
for the year ended June 30, 1996, respectively. The
Company has a remaining accrued balance of $1,326,000
for future reclamation which is estimated to be
sufficient to cover reclamation costs which
are expected to be substantially completed
during 1997. For accounting purposes, gold sales
at Barite Hill during fiscal 1996, net of related
costs, are offset against ongoing reclamation costs
which had been accrued in prior years. During the
six months ended December 31, 1996 and the years
ended June 30, 1995 and 1994, the Company
took an impairment charge of $113,000, $400,000
and $1.9 million respectively, against the Barite
Hill property and equipment.
Mexican Operations
Real del Monte y Pachuca
The Pachuca operations consist of the San Juan
Pachuca, La
Purisima and La Rica underground mines. Ore is
mined and processed from vein deposits and old
tailings. During calendar 1996,
Pachuca continued to work to open two
additional
underground mines, Dos Carlos and Alamo-Paricutin.
The Pachuca
mining district has been in continuous production
for over 465 years and is currently being
mined by the Company within concessions covering
approximately 46,900 hectares of which
45,234 are exploration concessions and 1,666
hectares are
exploitation concessions. The exploration
concessions held by Pachuca expire in December
1999 and are renewable at the option of the
Company and the exploitation concessions expire
in December 2043.
Subsequent to the acquisition of the GRDM
Subsidiaries, during the three months ended
December 31, 1996, Pachuca produced 311,966
ounces of silver and 2,954 ounces of gold from
79,264 tonnes of ore milled. Of this, 4,464
tonnes of ore were processed from the Company's
Coscotitlan tailings and
the
remainder from its underground mines. Production
was below forecast for the period due to labor
turnover related to the Company's renegotiation
of its Section 2 union agreement, ore grade being
below the plan due to higher mining dilution and
delays in the purchase, delivery and installation
of planned
capital expenditures.
The Company is planning to expand its production
levels during 1997 by increasing daily tonnage
with the installation of new equipment, better
grade control and planned improvements at its
Loreto ore processing facility located in Pachuca.
In addition to exploration related to normal mine
development, during the three months ended
December 31, 1996, the Company
continued to work in the Dos Carlos mine to
rehabilitate the shaft to dewater levels 100 meters
below the current water level. The Company also
carried out review and analysis of the
information available regarding the Geminis, Alamo-
Paricutin and El Chico areas. However, in order to
convert these resources to mineable reserves, it will
be necessary to clear and resample old mine
workings, as well as design and implement a
systematic exploration program including sampling
and/or drilling sufficient to confirm the resource.
El Baztan
The El Baztan operations consist of two underground
mines, the Vista Hermosa and El Arroyo mines. The
operations process ore from skarn and vein deposits
and produce a copper concentrate
containing by-product gold. The Company holds
concessions
covering approximately 44,122 hectares of which
40,598 hectares are exploration concessions and
3,524 hectares are exploitation concessions.
Approximately 40,098 of the exploration concessions
expire in 2046 and approximately 3,300 of the
exploitation concessions expire between 2018 and
2045.
Subsequent to the acquisition of the GRDM
Subsidiaries, during the three months ended
December 31, 1996, El Baztan produced 2,058 tonnes
of copper concentrate for shipment containing
25.27
percent copper from 31,508 tonnes of ore milled. Production
during the period was below plan due to
interruptions in
electrical supply from CFE, the government
electric utility. Shipments of the Company's
concentrates were limited by the smelter at San
Luis Potosi. The Company is looking to expand its
marketing efforts to either find additional
markets for its concentrates or to increase
shipments to San Luis Potosi.
Exploration during the three months ended December
31, 1996,
consisted of review of aero-magnetic surveys to
identify future exploration targets, driving
underground workings and geochemical surface
surveys. The Company plans to follow up on the
exploration targets in the El Arroyo and Vista
Hermosa mines as well as the Ojo de Agua zone
located south of the El Arroyo vein where a series
of stockworks with anomalous copper and gold
values have been found.
Barita de Sonora
Barita's operations consist of several small open-
pit mines, a crushing plant, and two separate
processing circuits producing bulk and ground
barite material for use in the drilling fluids
industry. The majority of Barita's production has
been sold to PEMEX as a component of drilling
mud. The Company holds exploitation concessions
covering 5,000 hectares which expire in 2040 and
10,000 hectares of exploitation concessions which
expire in 2046.
Subsequent to the acquisition of the GRDM
Subsidiaries, during the three months ended
December 31, 1996, Barita produced 17,520 tonnes of
bulk barite and 309 tonnes of milled barite. The
Company was processing low-grade material during the
period which resulted in lower than planned
production levels. In addition, equipment
availability, staff turnover and maintenance
difficulties have resulted in quality shortfalls.
Subsequent to December 31, 1996, the Company has
instituted a new maintenance program, replaced its
managerial staff and reorganized the operations
to address these problems.
Subsequent to the period ended December 31, 1996,
the Company began the first phase of a drilling
program to develop new reserves in the vicinity of
its processing facility. The Company commissioned a
review of Barita's operations by an independent
engineering firm, Anderson and Schwab, Inc. which
recommends a 5,000-meter drilling program to
increase its proven and probable reserves. The
drilling for this exploration program is planned to
be carried out during 1997.
Magistral del Oro
Magistral operations consist of heap leaching
tailings from an underground mining operation which
was closed in 1962. The heap leaching was
started in December 1992 and has operated
intermittently. The Company holds approximately
5,300 hectares under exploration concessions which
expire between September 1999 and October 2001.
Subsequent to the acquisition of the GRDM
Subsidiaries, during the three months ended
December 31, 1996, the Company added 25,727
tonnes of ore grading 67.18 grams per tonne to
its existing heap and produced 1,094 ounces of gold.
The production of ounces has been less than plan due
to excessive copper loading in the process solution.
The Company stopped adding new tailings to the heap
leaching operation subsequent to year end and has
begun a series of tests to determine the proper
heap heights, solution parameters and recovery
methods. The results of the tests are expected
during the second and third quarters of 1997.
Restarting the reprocessing of tailings will be
dependent upon the results of the tests. The
Company has reduced its personnel and renegotiated
its tailings purchase agreements with the Ejido El
Magistral subsequent to December 31, 1996, to
reduce costs during the test period.
The Company believes Magistral concessions have good
exploration potential. The property has three
main vein-type structures
(Cocinera, Los Tiros, and Las Marias), as well as
two brecciatype bodies (El Preson and
Gavilana). Collectively, these structures have
substantial potential for the discovery
of
additional geologic resources. Mineralization
suggests that there is merit in additional
exploration to add to the existing geologic resource.
Results of Operations
Gold Production and Sales
Production and sales from the Company's mines for the
six months ended December 31, 1996 and each of the
years in the three year period ended June 30, 1996
are as follows:
Six Months Ended Year Ended
June 30,
December 31, 1996 1996 1995
1994
Gold equivalent production (oz):
Nixon Fork mine 13,968 34,144 - -
Aurora mine 5,537 13,359 14,949
11,030
Barite Hill mine - - 5,499
18,793
Total production 19,505 47,503 20,448
29,823 Decrease (increase) in inventory 1,098
(3,607) 1,508 1,198
Gold equivalent sold 20,603 43,896 21,956
31,021
Silver equivalent production (oz):
Pachuca mine 542,415 - - -
Decrease (increase) in inventory 55,682
- - -
- -
Silver equivalent sold 598,097 - - -
Contained copper production (lb):
El Baztan mine 1,146,527 - - -
Decrease (increase) in inventory474,099 - - -
Copper sold 1,620,626 - - -
The above table uses the following metals prices when
calculating equivalent units: gold, $369.00 per
ounce; silver, $4.73 per ounce; and copper, $1.03 per
pound.
Revenue
Net sales increased $8.2 million in the six months
ended December 31, 1996, compared to the same
period of the prior year as a result of the
Nixon Fork mine being in production for the full six
months and the addition of $4.4 million in revenue
from the GRDM Subsidiaries which were purchased in
October 1996. The average price of gold received,
including the effect of hedging losses during the
six months ended December 31, 1996, was $340
compared to $395 in the prior year. The average
price of silver received from the Company's
operations in Mexico was $4.99 per ounce during
the three months ended December 31, 1996. The
average price of copper concentrate received from
the Company's operations in Mexico was $520 per
tonne during the three months ended December 31,
1996.
Net sales of precious metals and mineral products
during fiscal 1996 were $7.9 million higher than
fiscal 1995 as a result of the commencement of
production at the Nixon Fork mine. During fiscal
1996, the Company sold 21,940 ounces of gold more
than were sold during fiscal 1995. The average price
received per ounce of gold was $371, including the
recognition of deferred hedging losses and before
royalties. The Company had deferred $1.3 million of
losses from the early termination of a hedge
position in fiscal
1995 and has recognized $1.1 million of these
losses in fiscal 1996.
Net sales of precious metals and mineral products
decreased from 1994 to 1995 by $3.2 million. This was
primarily attributable to a decrease of 9,065
ounces of gold sold and a reduction in the average
realized price of gold per ounce from $395 in fiscal
1995 compared to $411 in fiscal 1994 (including
recognition of deferred hedging activities). The
forward and futures contract gain, net decreased by
$3.1 million from 1994 to 1995. During 1995, the
Company recognized amortization of deferred gains
of $0.3 million, which were realized in prior
periods, compared to a $3.1 million gain recognized
in 1994. These deferred gains were offset by a
$0.1 million loss on early termination of a hedge
position during 1995.
Operating Costs and Expenses
Production costs during the six months ended December
31, 1996, increased $9.8 million as a result of
$4.4 million of additional production costs at Nixon
Fork which was in production for twoand-one-half
months in the same period of 1995 and due to the
addition of the Mexican operations which had
production costs of $5.3 million in the three months
ended December 31, 1996.
Production costs during fiscal 1996 increased by
$1.8 million over fiscal 1995 due to the startup
at Nixon Fork. Production increased 200 percent
from fiscal 1995 to fiscal 1996 with 47,503 ounces
produced compared to 20,448 ounces of gold during
1995. Production costs at Aurora were impacted by a
high-wall failure which reduced available high-grade
ore and therefore reduced gold production during the
fourth quarter of fiscal 1996. Costs at Nixon
Fork were impacted by the mechanical failures in
January and February 1996.
Production costs decreased by $2.7 million from
fiscal 1994 to fiscal 1995 due to the cessation
of mining at Barite Hill in October 1994 coupled
with cost controls and better ore grade at Aurora.
The stripping ratio at Aurora was reduced from 35:1
to 17:1 and the tonnes milled increased from 112,049
to 119,573 from 1994 to 1995.
Operating cash cost of production for the Company's
two primary gold producing mines for the six months
ended December 31, 1996 were $520 per gold ounce
compared to costs for the gold producing mines in
the year ended June 30, 1996 of $257 per ounce of
gold. This compares with $387 per ounce in 1995 and
$442 per ounce in 1994. The increase for the six
month period ending December 31, 1996 is
attributable to a combination of lower tonnage and
grade at Nixon Fork coupled with a high fixed cost
component at the Nixon Fork mine. Additionally,
during the same period Aurora processed low-grade
ore during July and August of 1996 as a result of
a high wall failure in March of 1996. During the
three months ended December 31, 1996, the cash
operating cost at the Company's Pachuca mine was
$6.54 per equivalent ounce of silver. The high
production costs are attributable to under
utilization of productive capacity as a result of
turnover and training issues after the
implementation of a new labor agreement and delays
in putting new capital equipment in place. Cash
costs at the Company's El Baztan copper mine were
$0.63 per pound of copper produced during the
three months ended December 31, 1996. A low
production rate of barite at Barita compared to plan
caused the cash cost of Barita to be $36 per tonne
before freight for the three months ended December
31, 1996. In order to improve the cash cost for
1997, the Company has changed management at Nixon
Fork, Pachuca and Barita, has ordered new capital
equipment
at Nixon Fork and Pachuca, has implemented grade
control and bonus programs at Nixon Fork and
Pachuca, has temporarily halted tailings stacking
operations and reduced staff at Magistral del Oro
and has implemented a reserve development program to
provide higher ore grades at Barita. Production from
the Nixon Fork mine contributed to the reduction from
1995 to 1996, while the major reasons for the
decrease in fiscal 1995 over 1994 were higher grade
and lower stripping ratio at Aurora and lower
costs at Barite Hill.
Depreciation, depletion and amortization (DD&A), was
$3.7 million for the six months ended December 31,
1996, and $6.2 million for fiscal 1996, almost five
times the DD&A for the same periods in 1995, as a
result of the new production coming onstream from
the Nixon Fork mine and the acquisition of the
Mexican subsidiaries which added $1.3 million in
DD&A in the three months ended December 31,
1996. DD&A was $3.9 million less in fiscal 1995
than fiscal 1994 as a result of the impairments
recorded at Barite Hill and Aurora in 1994. No
DD&A was incurred on Barite Hill during 1995
compared to $3.5 million in 1994.
During the six months ended December 31, 1996, and
fiscal 1995, the Company reduced the net book
value of the Barite Hill property by $113,000
and $400,000, respectively, through a
charge to operations based upon an independent
estimate of recoverable value. The Company wrote-
down Aurora by $3.3 million and Barite Hill by $1.9
million during fiscal 1994.
General and administrative expenses were $1.5
million higher during the six months ended
December 31, 1996, than for the comparable prior
period. Additional administrative personnel and the
GRDM Subsidiaries contributed $1.1 million in
additional costs during the six months ended December
31, 1996, compared to the six month period ended
December 31, 1995. Additional costs related to
Nixon Fork combined with mergers and acquisition due
diligence as well as finance and legal costs also
contributed to these increases. General and
administrative costs increased $0.3 million in
fiscal 1996 compared to fiscal 1995 as a result of
general and administrative costs related to bringing
the Nixon Fork mine into production. General and
administrative costs decreased by $0.4 million in
1995 due to reductions in salary expenses of $0.1
million and reductions in administrative charges of
$0.2 million from the prior year as a result of the
closure of Kingston in 1994.
Exploration costs were relatively constant during the
equivalent periods with a less than $0.1 million
increase in costs during the six months ended
December 31, 1996. Exploration costs were $0.1
million lower during fiscal 1996 compared to fiscal
1995. Exploration costs increased $0.1 million in
fiscal 1995 from fiscal 1994.
Other Income (Expense)
Interest expense for the six months ended December
31, 1996 was $2.0 million higher compared to the
same period for the prior year primarily as a
result of the increased debt associated with the
acquisition of the GRDM Subsidiaries in October
1996. Interest expense on Mexican debt was $2.2
million for the three months ended December 31,
1996. Interest expense was $1.0 million higher in
fiscal 1996 compared to fiscal 1995 as a result of
the interest on the ING gold loan for the Nixon Fork
mine and interest on the debentures and dividends
on the preference shares. Interest expense, net of
capitalized interest, increased during fiscal 1995
by $0.1 million as the result of the Cdn$19 million
3-percent convertible debentures issued in March of
1994 and the completion of the $18.8 million gold
loan in April 1995.
During 1995, the Company capitalized $0.5 million
of finance charges related to debt incurred to
finance development of Nixon Fork.
There were no significant sales or dispositions
during the six months ended December 31, 1996 or
fiscal 1996. During fiscal 1995 the Company
realized a $0.3 million gain on the sale of
equipment at Barite Hill and in fiscal 1994 the
Company realized a $0.3 million loss on the sale of
Kingston equipment.
Net Loss
During the six months ended December 31, 1996,
the Company reported a net loss of $11.0
million ($0.14 per share) on
revenue of $11.5 million compared to a net loss of
$1.5 million ($0.03 per share) on revenue of $4.9
million for the comparable period of 1995. The loss
is primarily attributable to the low production at
Nixon Fork, Pachuca and Barita coupled with high
fixed costs at Nixon Fork and Pachuca. Included in
the net loss reported for the six months ended
December 31, 1996 is a non-cash write-off of $242,000
for a gold hedging program which had been
terminated during fiscal 1995, depreciation,
depletion and
amortization from mining operations of $3.7
million, and $0.5 million of amortization of
deferred finance charges related to
Nixon Fork.
In fiscal 1996, the Company reported a net loss of
$6.7 million ($0.14 per share) on revenue of $15.6
million, compared to a net loss of $5.8 million
($0.14 per share) on revenues of $8.6 million
for fiscal 1995. The loss in fiscal 1996 is
primarily attributable to start up costs and
equipment breakdowns which delayed achieving full
design production rates and economics at
the Nixon Fork mine. Included in the net loss
reported for fiscal 1996 is a non-cash write off
of $1,088,000 for a gold hedging program which had
been terminated in the previous fiscal year and
$865,000 of amortization of deferred finance
charges related to the Nixon Fork project gold loan.
In fiscal 1995, the Company reported a net loss of
$5.8 million ($0.14 per share) on revenue of $8.6
million compared to a net loss of $11.6 million
($0.29 per share) on revenues of $14.9 million in
fiscal 1994. The major difference is due to the
write-down of assets at Aurora and Barite Hill in
fiscal 1994 and reduced operating costs in fiscal
1995. The loss in fiscal 1995 includes a $1.5
million additional accrual for reclamation at
Barite Hill.
Capital Resources and Liquidity
Capital Expenditures
During the six months ended December 31, 1996, the
Company spent $3.26 million on capital and
exploration projects including $0.25 million on
Pachuca, $0.04 million on El Baztan, $0.17 million on
Barita de Sonora, $0.4 million on Barite Hill
reclamation, $0.9 million on costs related to
the acquisition of the GRDM
Subsidiaries, $0.2 million for sustaining capital at
Aurora, and $0.1 million on sustaining capital
expenditures at Nixon Fork. Capitalized exploration
costs included $0.9 million at Nixon Fork and $0.3
million at the Martinez deposit at Aurora.
During fiscal 1996, the Company spent $5.0 million
on completing the development at the Nixon Fork
mine, $3.8 million on mineral properties for the
acquisition of the Doyon Leasehold, $0.6 million
at Aurora for capital and $1.3 million at Barite Hill on
reclamation, and $0.4 million on costs related to
the business
combination with GRDM. The development at Nixon
Fork included $3.8 million for construction of
infrastructure and
the
processing facility and $0.4 million for mine
development. Capital expenditures at Aurora included
expansion of the tailings impoundment and mine
equipment refurbishment, and exploration and
development of the Martinez deposit. Capital
expenditures at Barite Hill were for reclamation
of the Rainsford pit and construction of the
permanent clay cap.
In fiscal 1995, the Company spent $12.9
million on the
development of Nixon Fork, $1.3 million at
Aurora, and $0.7 million at Barite Hill. The
development at Nixon Fork included $9.1 million
for construction of infrastructure and
the
processing facility, $1.8 million for mine
development, $0.8 million for exploration, $0.5
million of capitalized interest, and $0.4 million
of capitalized costs related to the gold loan
completed in April 1995. Capital expenditures at
Aurora included expansion of
the tailings impoundment and mine
equipment
refurbishment. Capital spent at Barite Hill was for
reclamation of the Rainsford pit, waste dump,
reusable leach pad area, and crusher area.
In fiscal 1994, the Company spent $3.4 million on the
development of Nixon Fork, $0.9 million on capital
improvements at
Aurora,
and $0.3 million at Barite Hill. The development at
Nixon Fork included the feasibility study completed
in December 1993, the purchase of the balance
of the property, and the
initial
development of the underground mine in the spring of
1994. The
improvements at Aurora included expansion of the
tailings pond, one new mining truck, and
completion of the expansion
of the
mill. Most of the capital spent at Barite Hill
during fiscal 1994 was for a new permanent pad and
water treatment facilities.
Preference Shares
On July 6, 1995, the Company issued 2,100,000
cumulative
preferential convertible 7-percent Preference
Shares, Series 2 (Series 2 Preference Shares).
The issue price was Cdn$1.00 per share and
resulted in proceeds to the Company of $1.6 million.
The shares earned a cumulative preferential 7-
percent dividend payable semi-annually beginning
December 31,
1995, were
redeemable at the issue price on December 31,
1996, and were convertible at the option of the
holders to 0.532 fully paid and non-assessable
common shares for each Series 2 Preference Share,
without further consideration from the holder. On
December 31, 1996, the Company redeemed the
preference shares for
Cdn$2,100,000 ($1,532,000). The obligation of the
Company to pay the redemption price and any dividend
was guaranteed by
Gwalia.
The Company paid Gwalia a one-time guarantee fee of
1.5 percent
of the proceeds. The shares were redeemed by the
Company on December 31, 1996.
Common Shares and Convertible Subordinated Debentures
In March 1996, the Company entered into a detailed
letter of intent to enter into a business
combination with GRDM and GAN to acquire all of the
shares in the GRDM Subsidiaries, which letter of
intent was superseded by the Share Purchase
Agreement. The
GRDM Subsidiaries own and operate four mines located
in Mexico.
Under the terms of the Share Purchase Agreement,
the Company
issued 52,290,091 common shares to GRDM and
certain of its
shareholders in exchange for all of the shares of
the Mexican
operations. In addition, the Company granted GAN a
12-percent interest in the net profits from the
GRDM Subsidiaries for a maximum of $5,000,000 over
a term not to exceed 10 years.
On October 10, 1996, the Company completed an equity
offering and received gross proceeds of
Cdn$26,992,284 ($19,963,493) from the issuance of
22,493,570 special warrants at a price of Cdn$1.20
per special warrant. The special warrants were
exercised into separate units, each unit consisting
of one common share and onehalf common share
purchase warrant. Each whole purchase warrant
entitles the holder to purchase one common share at
Cdn$1.30 up to the first anniversary of the
closing of the offering. The
Company also issued 500,000 non-assignable
underwriters' warrants in connection with the
offering, each of which entitles the holder
thereof upon payment of Cdn$1.25 to acquire one
common share and one-half of one common share
purchase warrant on or before October 10, 1998.
Closing of the offering occurred concurrently
with the closing of the acquisition of the GRDM
Subsidiaries.
The Company received $6.5 million in cash in
November and December 1995 from the issuance of
7,920,000 units at Cdn$1.20 per unit resulting in
gross proceeds of Cdn$9,504,000. Each of the
7,920,000 units issued November and December
1995 was comprised of one common share and one-half
common share purchase warrant. Each common share
purchase warrant entitled the holder to acquire one
common share at Cdn.$1.50 per share at any time
prior to February 28, 1997. No common share
purchase warrants were exercised prior to their
expiration.
A total of 1,610,052 common shares valued at $1.3
million were subscribed to as partial
consideration for a mining and
exploration lease with Doyon Limited, an Alaskan
native regional corporation, which covers 46,000
acres along the Kuskokwim gold trend in Alaska.
Of these, 536,684 common shares have been issued
and 1,073,386 common shares will be issued to
Doyon Limited during 1997 and 1998.
The Company sold $12.7 million, net of issuance
costs, of convertible subordinated debentures in
April of 1994.
Hedging Activities
As of December 31, 1996, the Company had 13,871
ounces of gold hedged under the contract with
monthly deliveries scheduled through September 1997
at an average price of $417 per ounce. On March 31,
1997, the Company terminated its outstanding hedge
with ING, which resulted in a deferred gain of
$735,000. The deferred gain will be recognized over
the original delivery period of the contract during
1997.
Pachuca entered into a Mineral Sale Agreement with
Prime Metals, dated December 12, 1995, to sell
monthly between four and six tonnes of fine grain
silver, with grade of 99.98 percent at COMEX plus
$0.10 per ounce, from January 2, 1996, through
December 31, 1996. Pachuca renewed the agreement
through December 31, 1997.
Liquidity
The Company's investment in exploration, development
of mineral properties and mine construction during
the six months ended December 31, 1996, and the
years ended June 30, 1996 and 1995, and losses
from mining operations are primarily responsible for
the current working capital deficit. The Company's
investments and losses over the same period have
been financed by a portion of the proceeds from
equity and debt issuances and working capital.
The Company has received a commitment from Standard
New York, Inc. and Standard Bank London Limited
(Standard) to make available $45,000,000 in credit
facilities for the restructuring
of the Company's existing bank debt and the
provision of a comprehensive hedging facility.
The commitment by Standard is subject to certain
conditions; primarily satisfactory completion of
legal and engineering due-diligence reviews of the
Company's six operating mines and negotiation of
definitive documentation, including the specific
terms of certain coverage ratios and covenants.
During the six months ended December 31, 1996,
the Company completed the acquisition of the GRDM
Subsidiaries through the issuance of 52,290,091
common shares of the Company. In
addition, the Company raised gross proceeds of
Cdn$26,992,284 ($19,963,493) through the issuance
of 22,493,570 special
warrants. The Company's ability to fund continued
growth and expansion is dependent upon achieving
cash flow from its operations, obtaining project
financing or issuing equity or debt securities. The
Company plans to use existing cash resources for
capital expenditures and exploration at its
existing mines as directed by management of the
Company and approved by the Board of Directors.
The Company anticipates that the completion of
proposed exploration and capital expenditures
programs will require additional funding. There can
be no assurance that funds or arrangements will be
available at terms acceptable to the Company or
at all. If the Company is unable to fund the current
working capital deficit, proposed capital
expenditures will be curtailed.
Future Operations
The success of the Company will depend upon a number
of factors, such as the marketability, and prices of
gold, silver and copper, competition with companies
having greater resources, and the operational and
production risks involved in mineral exploration and
development. The business of exploration for
minerals and mining involves a high degree of risk.
Few properties that are explored are ultimately
developed into producing mines.
Unusual
or unexpected formations, formation pressures,
fires, power outages, labor disruptions, flooding,
explosions, cave-ins, land slides
and the inability to obtain suitable or
adequate
machinery, equipment or labor are risks involved in
the operation of mines and the conduct of
exploration programs. The Company has relied and
may continue to rely upon consultants and others for
construction and operating expertise. The
economics of developing gold and other mineral
properties is affected by many factors including the
cost of operations, variations of the grade of ore
mined, fluctuating mineral markets and cost of
processing equipment. The Company anticipates
that the completion of existing exploration and
development projects will
require
additional funding. There can be no assurance that
such funds will be available at terms acceptable to
the Company or at all.
Any future decision to commence or expand operations
at current properties or to finance, acquire or
develop new mineral
properties, will depend not only upon the quantity
and quality of mineral reserves resulting from
exploration activities and related feasibility
studies and recommendations of qualified engineers
and/or geologists, but also on the consideration
and evaluation of other significant factors. These
include, but are not limited to: (1) cost of
bringing a property into production, including such
costs as exploration and development work,
preparation of feasibility studies and construction
of production facilities; (2) availability and
cost of financing; (3) availability of and
success in structuring agreements with joint venture
and project development partners; (4) ongoing costs
of production; (5) market prices for the minerals to
be produced; (6) environmental compliance
regulations and restraints; and (7)
governmental regulation and control.
The Company's growth and future financial
performance will also continue to be dependent
upon many other unpredictable and cyclical
factors beyond the Company's control,
including fluctuations in the market prices of and
changes in world markets for metals and minerals.
While inflation presently is at modest levels,
inflation rates may rise in the future which
would adversely affect operating costs.
Environmental Matters and Governmental Regulation
Current proposals to modify United States and Mexican
mining laws may significantly increase the costs
of exploring for and developing mineral resources
on government lands in the United States and
Mexico where the Company operates. These proposals
are likely to continue to receive attention from
lawmakers and there can be no assurance that such
proposals will not eventually be enacted.
Government regulations, including regulations
relating to royalties, allowable production,
importing and
exporting of minerals, and environmental protections
may affect the Company's ability to economically
develop gold and other mineral properties.
The Company's mining interests outside the United
States host economic reserves of silver, gold and
other minerals but factors such as political
instability, expropriation of property,
opposition and harassment from local miners, as
well as governmental regulation, may prevent or
restrict mining of any such deposits or
repatriation of profits.
The Mexican operations are subject to Mexican
federal and state laws and regulations relating
to the protection of the
environment, including regulations concerning water
pollution, air pollution, noise pollution and
hazardous substance discharge. The principal
legislation is the Ley General del Equilibrio
Ecologico y Proteccion al Ambiente. The Mexican
federal agency in charge of monitoring compliance
and enforcing law is PROFEPA. The Mexican
environmental regulating authority is the Secretari
del Medio Ambiente, Recursos Naturales y Pesca (the
Ministry of the Environment and Natural Resources
and Fishing). Under the Ecological Law, rules
have been promulgated concerning water pollution,
air pollution, noise pollution and hazardous
substances. PROFEPA can bring administrative
and criminal proceedings against companies that
violate environmental laws and it also has the power
to close noncomplying facilities.
Mexican environmental regulations have become
increasingly stringent over the last decade. This
trend is likely to continue and may be influenced by
the environmental agreement entered into by Mexico,
the United States and Canada in connection with
NAFTA. Accordingly, there can be no assurance
that the Mexican operations will not be subject
to stricter Mexican federal or state environmental
laws or regulations, or their interpretation or
enforcement in the future.
The Company's United States operations are
subject to comprehensive regulation with respect
to environmental, safety and similar matters by
the United States Department of the Interior, (Bureau of Land
Management); the United States
Department of Agriculture (United States Forest
Service); the United States Environmental
Protection Agency (EPA); the United States Mine
Safety and Health Administration (MSHA); and similar
state and local agencies. Failure to comply with
applicable laws, regulations and permits can result
in injunctive actions, damages and civil and
criminal penalties. If the Company expands
or changes its existing operations or proposes
any new
operations, it may be required to obtain additional
or amended permits or authorizations.
Like all mining operations in the United States, the
Company is subject to a multitude of environmental
laws and regulations promulgated by federal, state,
and local governments including, but not limited to
the National Environmental Policy Act (NEPA); the Comprehensive
Environmental, Response, Compensation and
Liability Act (CERCLA); the Clean Air Act (CAA); the
Clean Water Act (CWA); the Hazardous Materials
Transportation Act, (HMTA); and, the Toxic
Substances Control Act, (TSCA). The environmental laws
and regulations to which the Company is subject
provide strict permitting and operating requirements
and noncompliance can result in the imposition of
material fines and other costs. In particular,
CERCLA, commonly called the "Superfund Act",
contains stringent reporting requirements for the
release or disposal of hazardous substances, with
substantial fines for noncompliance. In addition,
under CERCLA, any party responsible for the release
or threatened release of a hazardous substance into
the environment is liable for all cleanup costs.
Responsible parties under CERCLA include the owner or
operator of the site where the release occurs or
anyone who owned or operated the site when a
disposal was made, regardless of culpability.
Mining wastes are subject to CERCLA regulation if they
contain hazardous substances, and EPA has included
several mining sites on its list of high-priority
sites for clean up under CERCLA, none of which
belongs to the Company. These regulations apply
throughout the U.S. mining industry and generally
should not have a material adverse effect on the
Company's competitive position.
Although management expects that compliance with
federal, state and local environmental regulations
will continue to require significant future
outlays, it is not possible to say with any
certainty what impact such compliance may have on the
Company's future capital expenditures or earnings.
The Company's operations continue to be subject to
significant federal, state and local laws relating to
the adherence to health and safety standards
applicable to mining methods and equipment and to the protection
of the environment, including laws
regulating the removal of natural resources from the
ground and the discharge of
materials into the environment. Ongoing
reclamation costs are charged to operations in the
period they are incurred. Closure and reclamation
costs are estimated and charged to operations on
a units-of-production basis. As of December 31,
1996, the Company has accrued $3,142,000 toward post
closing reclamation costs. The Company estimates it
will have a cash requirement for reclamation
costs at Barite Hill of $1,326,000
to accomplish substantial completion of
the
reclamation during 1997.
No assurance can be given that environmental standards
imposed by United States or Mexican federal, state or
local authorities will not be changed with material
adverse effect on the activities of the Company.
Moreover, compliance with such laws may cause
substantial delays and require outlays in excess
of those anticipated, thus causing an adverse effect
on the Company.
Item 10: DIRECTORS AND OFFICERS OF THE REGISTRANT
Voting Securities And Principal Holders Thereof
As of December 31, 1996, Grupo Acerero del Norte,
S.A. de C.V. together with its related Mexican
shareholders (collectively GAN) own 43.17 percent
of the outstanding shares of the Company.
Gwalia Consolidated Ltd. (together with its
affiliate Sons of Gwalia Ltd.) owns 13.25
percent of the common shares of the Company. The
Nixon Fork Joint Venture, being an Alaska joint
venture between Central Alaska Gold Company, an
Alaska general partnership, and Caithness Gold
Mining Partnership, owns 8.07
percent of the common shares of the Company.
The following table sets forth, at that date, the
only persons or groups known to the Company to own
more than 10 percent of the Company's outstanding
common shares and the total number of common
shares owned by the Company's directors and officers
as a group at December 31, 1996:
SharesPercentage Identity of Persons or Group Owned of Class
GAN 56,051,091
43.2%(1)
Gwalia Consolidated Ltd. and Sons of Gwalia Ltd.
(combined)17,2 07,269 13.3%(2)
Nixon Fork Joint Venture 10,483,870
8.1%(3)
Caithness Alaska Gold Ltd. 2,357,047
1.8%(4)
Discovery Nominees & Co. 2,012,745
1.6%(5)
Directors and Officers as a group 48,041 (6)
(1) X.D. Autrey and A. Ancira are directors of Grupo
Acerero del Norte, S.A. de C.V.
(2) P.K. Lalor and C.J. Lalor are directors of
both Gwalia Consolidated Ltd. and Sons of
Gwalia Ltd.
(3) J.D. Bishop and G. Hoyl have an interest in
Nixon Fork Joint Venture.
(4) J.D. Bishop is the Chairman and CEO of
Caithness Resources, an affiliate of Caithness
Alaska Gold.
(5) W.W. Robinson is Manager of Discovery Nominees &
Co.
(6) Less than 1 percent.
The Company is not aware of any shareholder
other than the foregoing shareholders who owns
directly or indirectly more than 10 percent of
the common shares of the Company other than:
Caithness Alaska Gold Limited which is a limited
partnership having an indirect 49-percent interest
in Nixon Fork Joint Venture and which directly
owns 2,357,047 common shares; and Discovery Funds I-
90 Limited Partnership and Discovery Funds II90
Limited Partnership which are limited partnerships
holding a 20-percent limited partnership interest in
Caithness Alaska Gold Limited which directly owns
2,012,745 common shares.
Directors and Officers
The current directors and officers of the Company are
as follows: Name Office or Position
Principal Occupation Richard C. Atkinson Director(1) Chief
Executive
Officer of Les Entreprises
de Richard
Atkinson Ltee Alonso Ancira Director(2)
Vice Chairman of GAN
Manuel Ancira Director Director of
Operations of
GAN
Adolfo Autrey Director(2) Chairman of
Grupo Casa
Autrey
Xavier D. Autrey Director(1) Chairman of
GAN, GRDM and
Grupo
Fianciero
Inverlat
James D. Bishop Director(2) Chairman and Chief
Executive Officer of
Caithness Alaska
Gold
Corporation
William J. Braithwaite Director Partner,
Stikeman,
Elliot (law firm)
Chaun Cadwell Chief Operating Officer Chief
Operating
Officer of the Company
Geoffrey Hoyl Director, President and
President and Chief
Executive Officer of
Chief Executive Officer the
Company
Christopher J. Lalor Director (1)
Executive
Director of Gwalia Consolidated
Ltd. and Sons of
Gwalia Ltd. Richard N. Lawler Director
President of
Hoogovens Technical Services
(Technological
and Operational
Assistance, Inc.)
James R. Maronick Vice President
Finance, Vice
President Finance and Chief Financial Secretary
and Treasurer Officer of the Company
Peter Marrone Director Partner, Cassels
Brock &
Blackwell
(law firm)
Christopher Puchner Vice President,
Vice
President Exploration of Nevada
Exploration Goldfields Inc.
Wendell W. Robinson Director, Non-
Investment
Manager, Rockefeller & Executive
Chairman
Company
(1) Member of Audit Committee
(2) Member of Compensation Committee.
Each of the foregoing individuals has held
the principal occupation set forth opposite his
name (or other management functions within the
same organization) for the past five years unless
otherwise specified below.
Mr. Atkinson was appointed a Director on June 16,
1990. Mr. Lalor was appointed a Director in April
1991 as part of the April 1991 agreement. Mr. Hoyl
was appointed Director, President and Chief
Executive Officer on July 19, 1993. Mr. Robinson
was appointed on August 26, 1993. Mr. Bishop
was appointed December 6, 1993. Mr. Marrone was
appointed on August 30, 1994. The terms of all
Directors will continue until the next Annual
General Meeting or until they shall earlier
resign. Messrs. Autrey, Ancira, Braithwaite and
Lawler were appointed on completion of the
Acquisition on October 10, 1996.
Mr. Atkinson is a professional engineer with a
baccalaureate degree in Mining Engineering from
the University of British Columbia. Mr. Atkinson
is the Chief Executive Officer of Les Entreprises
de Richard Atkinson Ltee., a private investment
company and also serves as director of Major
General Resources Ltd. and South Pacific Resources
Inc.
Mr. James D. Bishop is Chairman and CEO of
Caithness Resources which is a partner of Caithness
Alaska Gold Limited which itself is a limited
partnership having an indirect 49-percent interest in
Nixon Fork Joint Venture and which directly owns
2,357,047 common shares.
Mr. Hoyl was appointed President and Chief Executive
Officer of the Company in July, 1993. Until joining
Nevada Goldfields, Mr. Hoyl was the President of
Central Alaska Gold Company, the operator of the
Nixon Fork project. Mr. Hoyl has 28 years of
experience in the mining business including, as
the head of various mining companies, an extensive
background in securities marketing, finance,
strategic planning, new business development and
operations. Mr. Hoyl has a derivative interest in
the Nixon Fork Joint Venture. See "Interest of
Management and Others in Material Transactions".
On April 11, 1997, Mr. Hoyl resigned as a Director,
President and Chief Executive Officer of the Company.
Mr. C. J. Lalor, a former mining lawyer in the
jurisdiction of Western Australia,
is the Executive Director of Gwalia
Consolidated Ltd. and Sons of Gwalia Ltd. He is
responsible for all the legal and commercial
aspects of the Gwalia group of companies. He is
also an alternate director of the World Gold
Council.
Mr. Marrone is a partner with Cassels Brock &
Blackwell (law firm) of Toronto, Ontario, Canada and
has served as the Company's Canadian counsel for
over three years. Since August 1994 and prior to
January 1996, Mr. Marrone was a consulting partner
with Cassels Brock & Blackwell and prior thereto,
a partner with another law firm in Toronto,
Ontario, Canada.
Mr. Robinson is an investment manager with
Rockefeller & Company of New York. He has spent 16
years in investment research and corporate finance
in the investment banking industry and six years
as President and Chief Financial Officer of an
independent oil and gas company. He has been
associated with Rockefeller & Company, Inc. since
1984. Mr. Robinson is also a director of each of
Garnet Resources, 3P of Belgium, Gwalia and KMR
Power Corporation.
Mr. Cadwell is Senior Vice President and Chief
Operating Officer of the Company. Prior to such
appointment, Mr. Caldwell was the Vice President and
General Manager of Amax Gold of Chile, and prior
to that time was the Vice President and General
Manager of Kinross Delamar Mining Company.
Mr. Maronick has been Vice President Finance and
Chief Financial Officer of the Company since
November 1994. He has spent 18 years in finance
and accounting including the prior six years as CFO
with Analytica Inc., an environmental services firm.
Mr. Puchner joined Consolidated Nevada Goldfields in
July 1993 and has been Vice President
Exploration of Nevada Goldfields since that date.
He formerly was Vice President Exploration of
Central Alaska Gold Company, the operator of the
Nixon Fork project. He brings to the Company
over 18 years of mining industry experience.
Mr. Xavier D. Autrey is Chairman of the Board of
GAN, a Mexican industrial conglomerate which has
holdings including a steel mill, petrochemical
facilities and mining operations. He is also the
Chairman of GRDM. Mr. Autrey was recently appointed
Chairman of the Board of Grupo Fianciero Inverlat,
which is one of the largest financial groups in
Mexico.
Mr. Adolfo Autrey is Chairman of the Board of Grupo
Casa Autrey, which is a Mexican public company
engaged in the distribution of pharmaceutical
products.
Mr. Alonso Ancira is Vice Chairman of the Board of
GAN. He is also the Director General of Altos
Hornos de Mexico, which is one of Mexico's largest
steel mills.
Mr. Manuel Ancira is the Director of Operations of
GAN. He is also the Director of Operations of
Altos Hornos de Mexico.
Mr. Braithwaite is a partner with Stikeman, Elliott
(law firm) of Toronto, Ontario, Canada, where he
heads the firm's corporate group.
Mr. Lawler is an executive with broad international
experience in promoting and selling state-of-the-art
technology assistance and training services. He
is the President of Hoogovens Technical Services
Canada (Technological and Operational Assistance,
Inc.), and has held other important positions in
the past within the Hoogovens organization.
Item 11. COMPENSATION OF DIRECTORS AND OFFICERS
For the six months ended December 31, 1996,
the Company's executive officers, as a group,
received aggregate cash compensation totaling
$370,600. Included in this amount were
contributions to a 401(k) plan on behalf of those
officers, as a group, totaling $6,900. The
Company had two executives who received
severance benefits aggregating $33,400 in cash
compensation. In addition, the Company pays its
non-executive directors $2,000 per board meeting.
Item 12: OPTIONS TO PURCHASE SECURITIES FROM
REGISTRANT OR SUBSIDIARIES
On October 10, 1996, the Company completed an equity
offering and received gross proceeds of
Cdn$26,992,284 ($19,963,493) from the issuance of
22,493,570 special warrants at a price of Cdn$1.20
per special warrant. The special warrants were
exercised into separate units, each unit consisting
of one common share and onehalf common share
purchase warrant. Each whole purchase warrant will
entitle the holder to purchase one common share at
Cdn$1.30 up to the first anniversary of the closing
of the offering. The Company also issued 500,000 non-
assignable underwriters' warrants in connection
with the offering, each of which entitles the
holder thereof upon payment of Cdn$1.25 to acquire
one common share and one-half of one common share
purchase warrant on or before October 10, 1998.
Closing of the offering occurred concurrently
with the closing of the acquisition of the GRDM
Subsidiaries.
In April 1989, the Company completed an offering,
exclusively in Canada, of Cdn$11.5
million ($9.6 million) of 10-percent
convertible subordinated debentures due in April
1999. The
debentures are convertible at the holder's
option into the Company's common stock at a
conversion price of Cdn$9.90 per share. As of
December 31, 1996, the outstanding debenture
balance was Cdn$3,041,000 million ($2,219,000
million). If the remaining debentures were
converted, the Company would be required to
issue 307,172 shares of the Company's common stock.
No debentures are held by the Company's directors or
officers.
The 3-percent Canadian debentures are convertible
into common shares at the option of the holders.
Of the Cdn$19,017,000 ($13,749,000) of debentures,
Cdn$1,117,000 ($807,000) (which were sold to related
parties) were convertible at Cdn$1.80 per share and
the balance were convertible at Cdn$1.75 per
share. In December 1995, the holders approved an
amendment to extend the maturity date of the
debentures to March 21, 1999, change the conversion
prices to Cdn$1.20 per share, and change the
automatic conversion feature to provide that the
principal will be converted into common shares if
the market price of the common shares equals or
exceeds 150 percent of the amended conversion price
of Cdn$1.20 per common share. During the six months
ended December 31, 1996, holders converted
Cdn$4,500,000 ($3,284,000)
of debentures. At the time of the issuance, the
bondholders
selected whether future interest payments would be
paid in cash or in common shares (at a price of
Cdn$1.75 per share). As of December 31, 1996
holders of Cdn$4,161,000
($3,036,000) of
debentures elected to have interest paid in
cash and the remainder of the interest payments
will be paid in common shares.
The Company may redeem the 3-percent Canadian
debentures, subsequent to April 1996, at 115
percent of the face value, subject to the
conversion rights of the debenture holders.
In July 1990, the Company instituted an incentive
stock option plan for directors, officers and
employees, which was modified in December of 1994.
The modified plan reserves up to 5,000,000 common
shares for issuance thereunder. Terms of the
plan generally provide for options to: (1) be
granted at a price not less than the closing market
price of the common shares on the day immediately
proceeding the day on which the option is
granted; (2) be immediately exercisable upon grant,
and (3) be exercisable not longer than ten years
from the date of grant or up to maximum of twelve
months after a participant's employment is
terminated.
The following represents information relating to
the incentive share option plan:
Shares
Outstanding at June 30, 1993
840,000
Granted at US$0.62 per share
400,000
Granted at Cdn$1.26 per share 100,000
Granted at Cdn$1.81 per share 350,000
Exercised
(572,634)
Outstanding at June 30, 1994 1,117,366
Granted at Cdn$1.53 per share 110,000
Granted at Cdn$1.54 per share 50,000
Granted at Cdn$1.57 per share 100,000
Exercised (39,500)
Canceled (50,000)
Outstanding at June 30, 1995 1,287,866
Granted
at
Cdn$1.31
per
share
100,000
Granted at Cdn$1.35 per share
40,000
Granted at Cdn$1.68 per share 35,000
Granted at Cdn$1.75 per share 150,000
Exercised (174,533)
Canceled
(50,000)
Outstanding at June 30, 1996 1,388,333
Granted at Cdn$1.31 per share 100,000
Canceled (100,000)
Outstanding at December 31, 1996 1,388,333
Exercise Price Per Share Expiration
Date Shares
Cdn$1.68 May 15, 2001 35,000
Cdn$1.75 June 10, 2001 150,000
Cdn$0.83 September 6,
2001 53,333
U.S.$0.62 July 19, 2002 400,000
Cdn$1.25
August 1, 2003 100,000
Cdn$1.81
December 6, 2003
200,000
Cdn$1.53
August 26, 2004
60,000
Cdn$1.54
August 26, 2004
50,000
Cdn$1.57
November 1, 2004
100,000
Cdn$1.31
August 1, 2005
100,000
Cdn$1.31
November 13, 2006
100,000
Cdn$1.35
December 11, 2005
40,000
Outstanding at December 31, 1996
1,388,333
Item 13: INTEREST OF MANAGEMENT IN CERTAIN
TRANSACTIONS
Since July 1, 1995, none of the officers,
directors, or 10percent shareholders of the
Company, nor any relatives, spouses, associates or
affiliates of said persons, has had any material
interest, direct or indirect, in any transaction
which has materially affected or would materially
affect the Company or any of its subsidiaries,
other than as herein disclosed and other than as
follows:
1.On June 28, 1996, a Share Purchase Agreement
(Agreement) was signed with Grupo Real del
Monte, S.A. de C.V. (GRDM) and Grupo Acerero
del Norte, S.A. de C.V. (GAN) to acquire certain of
GRDM's subsidiaries. The Agreement was placed into
escrow, which release was subject to
the Company entering an
underwriting agreement for the sale of common
shares with gross proceeds of at least $20
million. The GRDM Subsidiaries own and operate
four mines located in Mexico. The operating mines include Real del
Monte y Pachuca, S.A. de C.V.
(Pachuca), an underground silver and gold
mine; Compania Minera El Baztan, S.A. de C.V.
(El Baztan), an underground copper mine; Barita
de Sonora, S.A de C.V. (Barita), an openpit
barite mine: and Compania Minera Magistral del
Oro, S.A. de C.V. (Magistral), a gold-tailings
reprocessing operation.
Under the terms of the Agreement, the
Company issued
52,290,091 common shares to GRDM and
certain of its
shareholders in exchange for the GRDM
Subsidiaries. In
addition, the Company granted GAN a 12-
percent royalty interest in the net profits from
the GRDM Subsidiaries with a minimum amount of
$500,000 being payable annually and credited
towards the amounts payable under the royalty.
The maximum amount payable under the royalty is
$5,000,000. GRDM has the right to nominate, but
not appoint, one-half of the number of the
members of the Board of Directors of the Company
so long as it holds more than 30 percent of
the Company's common shares.
On October 10, 1996, the Company completed an
equity offering and received gross proceeds of
Cdn$26,992,284 ($19,963,493) from the issuance of
22,493,570 special warrants at a price of Cdn$1.20
per special warrant. The special warrants
were exercised into separate units, each unit
consisting of one common share and one-half
common share purchase warrant. Each
whole purchase warrant will entitle the holder to
purchase one common share at Cdn$1.30 up to the
first anniversary of the closing of the offering.
The Company also issued 500,000 nonassignable
underwriters' warrants in connection with the
offering, each of which entitles the holder
thereof upon payment of Cdn$1.25 to acquire one
common share and one-half of one common share
purchase warrant on or before October 10, 1998.
Closing of the offering occurred concurrently with
the closing of the acquisition of the GRDM
Subsidiaries.
2. Under terms of the acquisition of the GRDM
Subsidiaries,
GRDM and GAN were required to refinance certain
indebtedness of the GRDM Subsidiaries at the time of
closing. As at December 31, 1996, the outstanding
balance under the loan agreement is $7,522,774,
bearing interest at 12 percent and due on January
31, 1998.
3. Subsequent to year end, on March 24, 1997,
the Company
entered into loan agreements with two
shareholders of the Company.
Caithness Resources, Inc., an affiliate of Caithness
Alaska Gold Limited, and Grupo Acerero del Norte,
S.A. de C.V. agreed to loan the Company $585,000 and
$3,000,000 respectively, bearing interest at 11
percent with principal due on March 24, 1998.
4. In October 1996, two GRDM Subsidiaries,
Magistral and El
Baztan, refinanced two separate loan agreements,
consisting of principal and interest balances of
$4,049,749 and $3,002,170 respectively. Under the
new agreements, the refinanced amounts are payable
monthly, beginning July 20, 1997 through July 20,
2001, bearing interest at LIBOR plus 7.8 percent.
The loan agreements are guaranteed by GAN. El
Baztan has an outstanding loan agreement with Banca
Cremi, S.A. in the amount of $4,222,218 at December
31, 1996. The loan provides for monthly principal
payments of $74,074 plus interest at LIBOR plus
7.8 percent through September 10, 2001. The loan
agreement is guaranteed by GAN. In October 1996,
Pachuca refinanced a loan agreement, including
principal and accrued interest, in the amount of
$8,533,000. Under the new agreement, the refinanced
amount is payable in semi-annual installments of
$533,000 beginning August 1998 through February
2006. The outstanding balance bears interest at
LIBOR plus 10 percent, payable in semi-annual
installments, beginning February 23, 1997, through
August 23, 2006. The loan agreement is guaranteed
by GAN. On December 31, 1996, Barita restructured
an outstanding loan in the original amount of
$1,500,000 into a $1,250,000 revolving line of credit
with a one-year term. Barita was required to make a
scheduled principal payment of $250,000 on
December 31, 1996.
The
revolving credit agreement bears interest at LIBOR
plus 7 percent and a commission fee of 1.5 percent
payable quarterly.
The
revolving credit agreement is guaranteed by GAN.
5. On July 6, 1995, the Company issued 2,100,000
cumulative
preferential convertible 7-percent Preference Shares,
Series 2. The issue price was Cdn$1.00 and resulted
in proceeds to the Company of $1.6 million.
The shares earned a cumulative preferential 7-
percent cash dividend payable semi-annually
beginning December 31, 1995, were redeemable at the
issue price on December 31, 1996, and were
convertible at the option of the holders into 0.532
fully paid non-assessable common shares for each
Series 2 Preference Share without further
consideration to the holder. The obligations of the
Company to pay the redemption price and any dividend
were guaranteed by Gwalia. The Company paid Gwalia a
guarantee fee of 1.5 percent of the proceeds. On
December 31, 1996, the Company redeemed the
preference shares for Cdn$2,100,000 ($1,532,000).
6. In November and December 1995, the Company
issued an
aggregate of 7,920,000 units at Cdn$1.20 per unit
for total
proceeds of Cdn$9,504,000 ($6,982,000). Each unit
was comprised of one common share and one-half common
share purchase warrant. Each common share purchase
warrant entitles the holder to acquire one common
share at Cdn$1.50 per share before February 28, 1997.
No common share purchase warrants were exercised
prior to their expiration. Of the 7,920,000 units,
Gwalia Consolidated Ltd. purchased 1,125,000 units;
Discovery Nominees & Co. purchased 562,500 units;
and, Caithness Alaska Gold Limited purchased
562,500 units. These related party transactions were
on the same terms and conditions as arm's length
purchasers.
PART II
Item 14: DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable.
PART III
Item 15: DEFAULTS UPON SENIOR SECURITIES
There is no material default of the Company or
any of its subsidiaries with respect to any
present indebtedness which exceeds 5 percent of the
Company's assets. There has never been any material
arrears or delinquency in the payment of dividends or
otherwise with respect to the Company's common or
preferred stock.
Item 16: CHANGES IN SECURITIES AND CHANGES IN
SECURITY FOR REGISTERED SECURITIES
Not applicable.
PART IV
Item 17: FINANCIAL STATEMENTS
The consolidated financial statements have been
prepared in accordance with accounting principles
generally accepted in Canada (Canadian GAAP) which
differ in some respects from principles applicable
in the United States (U.S. GAAP). These differences
are described in note 15 to the financial statements,
which are included in this report. The financial
statements are expressed in United States dollars.
Item 18: FINANCIAL STATEMENTS
Not applicable.
Item 19: FINANCIAL STATEMENTS AND EXHIBITS
(1) The following financial statements are included
herein in response to Item 17:
(a) Independent Auditors' Report
(b) Consolidated Balance Sheets - December
31, 1996 and June 30, 1996
(c) Consolidated Statements of Operations
- Six Months Ended December 31, 1996 and
the Years Ended June 30, 1996, 1995, and
1994
(d) Consolidated Statements of Cash Flows
- Six Months Ended December 31, 1996 and
the Years Ended June 30, 1996, 1995, and
1994
(e) Consolidated Statements of
Shareholders' Equity (Deficit) - Six Months
Ended December 31, 1996 and the Years Ended
June 30, 1996, 1995, and 1994
(f) Notes to Consolidated Financial
Statements December 31, 1996 and June 30,
1996
SIGNATURES
Pursuant to the requirements of Section 12 of the
Securities Exchange Act of 1934, the Registrant
certifies that it meets all of the requirements for
filing on Form 20-F/A and has duly caused this annual
report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CONSOLIDATED NEVADA GOLDFIELDS
CORPORATION Registrant
Dated: June 12, 1997
By: James R.
Maronick
Title: Vice President -
Finance
Auditor's Report to the Shareholders
To the Board of Directors and Shareholders
Consolidated Nevada Goldfields Corporation:
We have audited the accompanying consolidated
balance sheets of Consolidated Nevada Goldfields
Corporation and subsidiaries as of December 31, 1996
and June 30, 1996, and the related consolidated
statements of operations, shareholders' equity
(deficit), and cash flows for the six months ended
December 31, 1996 and for each of the years in the
three-year period ended June 30, 1996. These
consolidated financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these
consolidated financial statements based on our
audits.
We have conducted our audits in accordance
with generally accepted auditing standards in
the United States. Those standards require that
we plan and perform the audit 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, the consolidated financial statements
referred to above present fairly, in all material
respects, the financial position of Consolidated
Nevada Goldfields Corporation and
subsidiaries as of December 31, 1996 and June 30,
1996, and the results of their operations and
their cash flows for the six months ended
December 31, 1996 and for each of the years in the
three-year period ended June 30, 1996, in
conformity with generally accepted accounting
principles in Canada.
KPMG Peat Marwick LLP
Denver, Colorado
April 15, 1997, except as to
Note 4(a) which is as of
May 21, 1997
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION AND
SUBSIDIARIES (Amounts Stated in Thousands of U.S. Dollars
and Shares)
ASSETS
December 31, 1996
June 30, 1996
Cash and cash equivalents $ 6,960 $
1,551
Accounts receivable:
Production (note 1) 1,060 2,178
Value added taxes 1,230 -
Other 203 83
Affiliated companies and related parties 345 -
Inventories:
Ore in stockpiles and ore in process 3,317 936
Supplies and materials 2,589 257
Prepaid expenses and other 551 100
Total current assets 16,255 5,105
Restricted cash (note 4a) 805 853
Mineral properties at cost, net of accumulated
depletion and allowance for impairment (note 3) 43,678 16,404
Plants, buildings and equipment at cost, net of accumulated
depreciation, amortization and allowance for impairment
(note 3)62,30715,139
Deferred loan costs and other assets at cost, net of
amortization 580 1,084
Deferred loss on early termination of hedge positions, net of
amortization (note 5a) -
242
$123,625
$38,827 LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable:
Suppliers and contractors $ 4,071 $
1,815
Other
2,475 -
Related parties 790
- -
Accrued interest payable 825
222
Accrued liabilities 3,011
1,166
Current portion of accrued mine reclamation costs (note 3)
1,326 1,251 Current portion of long-term debt (note 4a and
5)13,497 13,393
Redeemable preference shares, without par value, 20,000
shares authorized, 2,100 shares outstanding at June 30, 1996
(note 7)- 1,551
Total current liabilities 25,995
19,398
Long-term debt, less current portion (note 4) 18,489 3,802
Accrued mine reclamation costs (note 3) 1,517 351
Accrued interest payable 111 24
Convertible subordinated debentures (note 6) 12,155
12,875 Due to related party (note 12) 11,176 103
Deferred foreign exchange gain 161 105
Other (note 11a) 1,149 -
Total liabilities 70,753
36,658
Shareholders' equity (notes 1a and c, 6, and 9):
Common shares, without par value, unlimited shares
authorized and 129,837 issued, at December 31, 1996
and 80,000 shares
authorized and 54,185 shares issued at June 30, 1996,
respectively
99,163 37,469
Accumulated deficit from April 1, 1991 (46,291)
(35,300)
Total shareholders' equity 52,872 2,169
Commitments and contingencies (notes 3, 5 and 11)
$123,625
$ 38,827 See accompanying notes to consolidated
financial statements Approved on behalf of the Board:
Richard C. Atkinson, Director Wendell W.
Robinson,
Director
CONSOLIDATED STATEMENTS OF
OPERATIONS CONSOLIDATED NEVADA GOLDFIELDS
CORPORATION AND SUBSIDIARIES
(Amounts Stated in Thousands of U.S. Dollars and Shares Except
Per Share
Amounts)
Six Months Ended Years Ended
December 31, 1996June 30, 1996June 30,
1995June 30, 1994
Revenue (notes 1m and 5):
Net sales of precious metals and mineral products$ 11,423$
16,327 $
8,383 $ 11,574
Forward and futures contract gains (losses), net33 (777)
220 3,307
11,456 15,550 8,603
14,881 Operating costs and expenses:
Production costs 13,228 12,241 10,408
13,106
Depreciation, depletion, and amortization 3,756 6,216
1,196 5,089 Impairment of mineral properties, plants,
buildings and
equipment, and supplies and materials inventory (note 3)
113 -
400 5,227
General and administrative 2,339 1,789 1,521
1,926
Exploration costs 126 178 275
137
19,562 20,424
13,800 25,485
Operating loss (8,106) (4,874)
(5,197)(10,604)
Other income (expense):
Interest expense, net (2,651) (1,745)
(789) (740)
Gain (loss) on sale or disposition of mining claims,
equipment, and inventory - (6)
254 (294)
Foreign currency translation gain (note 1k) 261
- - Other, net (428) (41)
(31) -
(2,818) (1,792)
(566) (1,034)
Loss before income tax expense (10,924) (6,666)
(5,763)(11,638) Income tax expense
(67) - - -
Net loss $ (10,991) $(6,666)$
(5,763)$ (11,638)
Loss per common share $ (0.14) $ (0.14)$
(0.14)$ (0.29)
Weighted average number of common shares outstanding
79,614 47,730 41,437 39,482
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION AND
SUBSIDIARIES (Amounts Stated in Thousands of
U.S. Dollars)
Six Months Ended Years
Ended
December 31, 1996June 30, 1996June 30, 1995June
30, 1994
Cash flows from operating activities:
Net loss $ (10,991)$ (6,666)$
(5,763)$ (11,638)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Amortization of deferred gain or loss on hedged sales
and gold loan conversion, net 52 948 (326)
(3,061) Depreciation, depletion, and amortization 3,756
6,435 1,196
5,089
Impairment of mineral properties, plants, buildings and
equipment, and supplies and materials inventories 113
400 5,227
Mine reclamation costs accrued, net 125 (357) 887
644 Amortization of deferred loan costs, net297 535
521 184 Loss (gain) on sale or disposition of mining
claims, equipment,
and inventory - 6
(254) 294
Decrease (increase) in amounts due from affiliated companies
and related parties 265 -
- - -
Increase (decrease) in amounts due to related
companies1,124 10 31 (179)
Decrease (increase) in current assets, net 1,881 (2,311)
1,544
447
Increase (decrease) in current liabilities, net(382) (207)
607
(1,495)
Changed in accrued interest payable 621 439
(31) (83) Other
651 9
12 (42)
Net cash used in operating activities (2,488) (1,159)
(1,176) (4,613) Cash flows from investing activities:
Cash and cash equivalents from acquisition986 -
- - -
Capital expended for mineral properties and plants,
buildings,
and equipment (2,317) (8,556)
(13,265) (5,199)
Proceeds from sales of mining claims, equipment, and inventory- -
324 208
Increase in other assets - (353)
- - -
Net cash used in investing activities (1,331) (8,909)
(12,941) (4,991) Cash flows from financing activities:
Borrowings - -
20,083 5,092
Repayments of debt (8,922) (3,464)
(4,911) (10,785)
Repayments of debt to affiliated companies(249) -
- - -
Cancellation of forward contracts - -
(1,511) -
Proceeds from issuance of preferred shares - 1,551
- - -
Proceeds from issuance of common shares, net 18,350
6,574 24 10,710
Proceeds from issuance of convertible subordinated
debentures -
- - - 11,903
Proceeds from issuance of convertible subordinated
debentures
to a related party - -
- - 810
Net cash provided by financing activities9,179 4,661
13,685 17,730 Net increase (decrease) in cash and cash
equivalents5,360(5,407) (432) 8,126
Cash and cash equivalents at beginning of year 2,404*
7,811* 8,243 117
Cash and cash equivalents at end of year$ 7,764*$2,404*
$7,811* $8,243 *Includes restricted cash of $805,$853,and
$6,609 at December 31, 1996 and June 30, 1996 and 1995,
respectively.
Continued on next page
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION AND
SUBSIDIARIES (Amounts Stated in
Thousands of U.S. Dollars)
Six Months Ended
Years Ended
December 31, 1996June 30, 1996June
30, 1995June 30, 1994
Supplemental disclosure of cash flow information:
Cash paid during the year for interest$ 567$ 1,691 $
- -$
1,341
Supplemental schedule of non-cash investing and financing
activities: Issuance of common shares for acquisition of GRDM
Subsidiaries 42,576
- - - -
Issuance of common shares as payment of interest on 3%
convertible subordinated debentures 104
259 240 -
Issuance of common shares upon conversion of 3%
convertible subordinated debentures 664
3,259 - -
Issuance of common shares for acquisition of mining lease - 445
- - -
Common shares subscribed for acquisition of mining lease - 889
- - -
See accompanying notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DEFICIT)
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION AND SUBSIDIARIES
(Amounts Stated in Thousands of U.S. Dollars)
CommonNumber of
Total
Number ofSharesCommon Common
Shareholders'
Common WithoutShares
SharesAccumulatedEquity
SharesPar ValueSubscribedSubscribedDeficit(Deficit)
Balances at June 30, 1993 21,921 $13,30314,976$ 9,730$ (11,233)
$ 11,800
Common shares subscribed for:
Cash 12,903 8,000(12,903) (8,000)
- -
-
Conversion of preferred shares 546 300 (546) (300)
- -
-
Conversion of convertible subordinated debentures 833
1,000 (833)
(1,000) - -
Conversion of amounts due to a related party 694 430
(694)(430) - -
Issuance of common shares for cash 4,435 2,710 - -
- -
2,710
Net loss - - - -(11,638)
(11,638)
Balances at June 30, 1994 41,332$ 25,743 -$ -$ (22,871)$
2,872
Issuance of common shares for cash 39 24 - -
- -
24
Issuance of common shares as payment of interest on
3% convertible subordinated debentures 188 240 - -
- -
240
Net loss - - - - (5,763)
(5,763)
Balances at June 30, 1995 41,559 $26,007 -$ -$ (28,634)$
(2,627)
Issuance of common shares for cash 8,095 6,574 -
- -
-
6,574
Issuance of common shares as payment of interest on
3% convertible subordinated debentures 244 259 -
- -
-
259
Issuance of common shares upon conversion of
3% convertible subordinated debentures 3,750 3,295 -
- -
-
3,295
Issuance of common shares for a mining lease 537 445 1,07
3
889 -
1,334
Net loss - - - - (6,666)
(6,666)
Balances at June 30, 1996 54,185 $36,580 1,073 $889$ (35,300)
$ 2,169
Issuance of common shares for cash 22,493 18,350 -
- -
-
18,350
Issuance of common shares as payment of interest of
3% convertible subordinated debentures 119 104 -
- -
-
104
Issuance of common shares upon conversion of
3% convertible subordinated debentures 750 664 -
- -
-
664
Issuance of common shares in exchange for acquisition
of subsidiaries 52,290 42,576 - - -
42,576
Net loss - - - -
(10,991) (10,991)
Balances at December 31, 1996 129,837$ 98,274 1,073 $889$
(46,291)$ 52,872
1) General Matters and Summary of Accounting Policies
a) Nature and Ownership of the Business
Consolidated Nevada Goldfields Corporation (CNGC or the
Company) is an international mining company
engaged in the mining and extraction of
precious metals and mineral products and
the exploration for and acquisition and
development of precious metals and
mineral product properties in the United
States and Mexico. The Company was
incorporated in the Province of British
Columbia, Canada, in 1984. In April 1989, the
Company was continued under the Canada
Business Corporations Act as a Canadian
federal corporation.
As of December 31, 1996, Grupo Acerero del
Norte, S.A. de C.V., together with its
related Mexican shareholders (collectively
GAN) own 43.17 percent of the outstanding
shares of the Company. GAN received the
shares in connection with the Company's
acquisition of the Grupo Real del Monte, S.A.
de C.V. Subsidiaries (GRDM Subsidiaries)
described in Note 2. Gwalia Consolidated Ltd.
and Sons of Gwalia Ltd. (collectively Gwalia)
own 13.25 percent of the
outstanding common shares of the Company. The Nixon Fork
Joint Venture, an Alaska joint venture between Central
Alaska Gold Company, an Alaska general partnership, and
Caithness Gold Mining Partnership (collectively NFJV) owns
8.07 percent of the outstanding common shares of the
Company.
b) Change in Fiscal Year End
As a result of the acquisition of the GRDM Subsidiaries, the
Company's Board of Directors voted to change the fiscal year
end from June 30 to December 31. The new year end coincides
with the statutory reporting period for the newly acquired
subsidiaries in Mexico and is effective December 31, 1996.
Accordingly, the Company's results of operations have been
reported in the consolidated financial statements for the
six months ended December 31, 1996. As the acquisition of
the GRDM Subsidiaries effectively occurred on October 1,
1996, the Company's results of operations include the three
months ended December 31, 1996 of the Mexican operations.
c) Liquidity
The Company's investment in exploration, development of
mineral properties and mine construction during the six
months ended December 31, 1996, and the years ended June 30,
1996 and 1995, and losses from mining operations are
primarily responsible for the current working capital
deficit. The Company's investment and losses over the same
period have been financed by a portion of the proceeds from
equity and debt issuances and working capital. The Company
has received a commitment from Standard New York, Inc. and
Standard Bank London Limited (Standard) to make available
$45,000,000 in credit facilities for the restructuring of
the Company's existing bank debt and the provision of a
comprehensive hedging facility. The commitment by Standard
is subject to certain conditions; primarily satisfactory
completion of legal and engineering due-diligence reviews of
the Company's six operating mines and negotiation of
definitive documentation, including the specific terms of
certain coverage ratios and convenants. In addition, the
Company raised gross proceeds of Cdn$26,992,284
($19,963,493) through the issuance of 22,493,570 special
warrants. The Company's ability to fund continued growth
and expansion is dependent upon achieving cash flow from
operations, obtaining project financing or issuing equity or
debt securities. The Company plans to use existing cash
resources for capital expenditures and exploration at its
existing mines as directed by management of the Company and
approved by the Board of Directors. The Company anticipates
that the completion of proposed exploration and capital
expenditures will require additional funding. There can be
no assurance that funds will be available at terms
acceptable to the Company or at all. If the Company is
unable to fund the current working capital deficit proposed
capital expenditures will be curtailed.
d) Use of Estimates in the Preparation of Financial
Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ significantly from those estimates.
e) Accounting Policies
These consolidated financial statements have been prepared
in accordance with accounting principles generally accepted
in Canada (Canadian GAAP). As described in Note 15, those
principles differ in certain material respects from those
principles that the Company would have followed had its
consolidated financial statements been prepared in
accordance with generally accepted accounting principles in
the United States (U.S. GAAP).
f) Principles of Consolidation
The consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated
on consolidation.
g) Cash Equivalents
For the purposes of the statements of cash flows, the
Company considers all investments in commercial paper and
other highly liquid investments with original maturities of
three months or less to be cash equivalents.
h) Inventories
Ore in stockpiles is stated at the lower of average cost or
net realizable value. Ore in process related to precious
metals is stated at market value, less a provision for
estimated refining and delivery charges. Concentrate
containing precious metals is stated at market value, less a
provision for estimated refining and delivery charges, and
is included in inventory until shipment for smelting.
Expenditures capitalized as ore in stockpiles and ore in
mill circuit include labor, material and other production
costs.
Mining and milling supplies and materials are stated at the
lower of average costs or net realizable value.
i) Mineral Properties
All costs related to the acquisition of mineral properties
are capitalized as incurred, including minimum advance
royalty payments and certain option payments. Mineral
development drilling and related costs on specified projects
are deferred and capitalized until commercial feasibility of
the project can be determined or when an impairment in value
has been determined. Mine development costs incurred prior
to commercial production are capitalized. These deferred
costs, together with property acquisition costs, are
depleted over proven and probable reserves on the units-of
production method as calculated on a mine-by-mine basis,
commencing with commercial production of ore. General
exploration expenditures that are not associated with
specific projects are expensed as incurred. Capitalized
costs are charged to operations when the properties are
abandoned or when an impairment in value has been
determined. Ongoing development expenditures are generally
expensed as incurred.
Capitalized costs for mineral properties are reviewed for
impairment whenever events or changes in circumstances
indicate that the carrying amount of these assets may not be
recoverable. If estimated future net cash flows expected to
result from the use of the mineral property and its eventual
disposition are less than the carrying amount of the mineral
property, an impairment is recognized based upon the
estimated future net cash flows for each mineral property
calculated using estimates of mineral reserves and
resources, estimated future prices of mineral resources,
operating costs, capital requirements, and reclamation
costs.
j) Plants, Buildings and Equipment
Plants, buildings and equipment are stated at cost. Mining
and milling equipment is depreciated using useful lives of
five to seven years or over the remaining life of the mine,
whichever is less. Plants and buildings are depleted on the
units-of-production method as calculated on a mine-by-mine
basis. Depreciation is computed on a straight-line basis
using estimated useful lives of five to seven years for
office equipment and five years for vehicles.
Capitalized costs for plants, buildings and equipment are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of these
assets may not be recoverable. If estimated future net cash
flows expected to result from the use of the plants,
building and equipment and its eventual disposition are less
than the carrying amount of the underlying assets, an
impairment is recognized based upon the estimated future net
cash flows for each underlying asset calculated using
estimates of mineral reserves and resources, estimated
future prices of mineral resources, operating costs, capital
requirements, and reclamation costs.
k) Foreign Currency Translation
The accompanying consolidated financial statements have been
presented in U.S. dollars. The U.S. dollar is the
functional currency for the Company's operations in the
United States. The Company enters into other transactions
which are denominated in Mexican pesos or Canadian dollars.
Assets and liabilities of the GRDM Subsidiaries are
translated in U.S. dollars under the temporal method since
the GRDM Subsidiaries are considered integrated foreign
subsidiaries. Under this method, monetary assets and
liabilities in foreign currencies are translated into U.S.
dollars at exchange rates in effect at the balance sheet
date, whereas other non-monetary assets and liabilities in
foreign currencies are translated at the exchange rate in
effect at the transaction date. Revenues and expenses in
foreign currencies are translated at the average rate in
effect during the year, with the exception of depreciation,
depletion and amortization which are translated at the
historical rate. Exchange gains and losses are included in
income.
Foreign currency exchange gains and losses related to
certain debentures denominated in Canadian dollars (see Note
6) are recorded as a deferred credit or charge and are
amortized over the remaining life of such debentures.
l) Revenue Recognition
Gains and losses resulting from the sale of forward and spot
deferred futures contracts designated and effective as
hedges of future production are reflected in revenue at the
time the hedged production is sold. Payments received under
contracts for the future delivery of mineral products to be
mined are recorded as long-term debt with deliveries due
within a year recorded as a current liability. Upon
delivery of the mineral products, revenue is recorded based
on the price previously received by the Company. Gains and
losses resulting from the sale or conversion of hedged
instruments prior to maturity are deferred and amortized to
operations based on their original terms. Losses resulting
from forward sales agreements, which occur when the cost of
production exceeds the sale price, are recorded in the
period they become known and determinable.
Revenue from mineral production resulting in dore and
concentrate is recognized upon shipment. Revenue is subject
to adjustment on final settlement to reflect changes in
metal prices, weights and assays, which is recorded as an
adjustment to revenue.
m) Deferred Loan Costs
Deferred loan costs are amortized on a straight-line basis
over the life of the loan. Such amortization is included in
interest expense in the accompanying consolidated financial
statements. Amortization of deferred loan costs was
$297,000 for the six months ended December 31, 1996, and
$567,000, $521,000 and $202,000 for the years ended June 30,
1996, 1995, and 1994, respectively.
n) Reclamation Costs
Current expenditures relating to ongoing environmental
regulatory requirements and reclamation programs are charged
against operations as incurred. Estimated future
reclamation costs, including site restoration, are charged
against operations using the units-of-production method over
the estimated mineral reserves of the mine. Accrued
reclamation costs are subject to a review by management on a
regular basis and are revised when appropriate for changes
in estimated future costs and/or regulatory requirements.
As of December 31, 1996, the Company estimates total
reclamation costs for all mines will approximate $3,142,000.
o) Pensions and Other Employee Benefits
The GRDM Subsidiaries provide pension benefits for all of
their employees, referred to as seniority premiums. These
benefit obligations are not funded. The GRDM Subsidiaries
are liable for severance payments to employees discharged
under certain conditions. The GRDM Subsidiaries record a
charge for severance payments in the period in which the
payments are made. In addition, the GRDM Subsidiaries
accrue a liability for the payment of vested seniority
premiums to employees with 15 or more years of service,
based on actuarial calculations.
p) Loss Per Common Share
Loss per common share is computed by dividing the net loss
by the weighted average number of common shares outstanding
during the year.
2) Acquisition of GRDM Subsidiaries
On June 28, 1996, the Company entered into a Share Purchase
Agreement (Agreement) with GRDM and GAN to acquire certain
of GRDM's Subsidiaries. The Agreement was placed into
escrow, which release was subject to the Company entering an
underwriting agreement for the sale of common shares with
gross proceeds of at least $20 million. The GRDM
Subsidiaries own and operate four mine located in Mexico.
The operating mines include: Compania de Real del Monte y
Pachuca, S.A. de C.V. (Pachuca), an underground silver and
gold mine; Compania Minera El Baztan, S.A. de C.V. (El
Baztan), an underground copper mine; Barita de Sonora, S.A
de C.V. (Barita), an open-pit barite mine; and Compania
Minera Magistral del Oro, S.A. de C.V. (Magistral), a gold
tailings reprocessing operation.
Under the terms of the Agreement, the Company issued
52,290,091 common shares to GRDM in exchange for the GRDM
Subsidiaries. In addition, the Company granted GAN a 12
percent royalty interest in the net profits of the GRDM
Subsidiaries limited to a maximum of $5.0 million over a
term not to exceed 10 years, with a minimum royalty of
$500,000 due annually. GRDM has the right to nominate, but
not appoint, one-half of the number of the members of the
Board of Directors of the Company so long as it holds more
than 30 percent of the Company's common shares.
On October 10, 1996, the Company completed an equity
offering and received gross proceeds of Cdn$26,992,284
($19,963,493) from the issuance of 22,493,570 special
warrants at a price of Cdn$1.20 per special warrant. The
special warrants were exchanged for separate units, each
unit consisting of one common share and one-half common
share purchase warrant. Each whole purchase warrant
entitles the holder to purchase one common share at Cdn$1.30
up to the first anniversary of the closing of the offering.
The Company also issued 500,000 non-assignable underwriters'
warrants in connection with the offering, each of which
entitles the holder thereof upon payment of Cdn$1.25 to
acquire one common share and one-half of one common share
purchase warrant on or before October 10, 1998. Closing of
the offering occurred concurrently with the closing of the
acquisition of the GRDM Subsidiaries.
The Company has accounted for the transaction under purchase
method of accounting and, accordingly, the results of
operations of the GRDM Subsidiaries have been included in
the Company's consolidated financial statements from October
1, 1996. The CNGC common shares issued to GRDM and GAN have
been valued at a price of Cdn$1.10 per common share. The
share value is based upon the average market price
immediately preceding and following the release of the
Agreement, discounted to reflect the voluntary transfer
restrictions on the common shares for an aggregate period of
24-months following the effective date of the transaction.
The total purchase price of $46,865,000 (including
acquisition costs of $1,217,000 and the discounted value of
the 12-percent net profits royalty of $3,072,000) exceeds
the net book value of the GRDM Subsidiaries by $25,489,000
at October 10, 1996. The excess purchase price has been
attributed to the excess of the estimated fair value of the
mineral properties acquired over the recorded book values.
The excess amounts allocated to mineral properties is being
amortized to operations on a units-of-production method.
As a result of the transaction, Section 382 of the U.S.
Internal Revenue Code will limit the use of the Company's
net operating losses generated from April 1, 1991 through
October 10, 1996.
The following unaudited pro forma financial information
presents the combined results of operations of the Company
and the GRDM Subsidiaries as if the acquisition had occurred
at the beginning of the periods presented, after giving
effect to certain adjustments, including additional
depletion expense, severance costs, and eliminations. The
following unaudited pro forma financial information is not
necessarily indicative of the results of operations that
would have occurred had the Company and the GRDM
Subsidiaries constituted a single business entity during
those periods, nor are they necessarily indicative of future
operating results of the combined companies.
For the Six Months EndedFor the Year
Ended
December 31, 1996 June 30,
1996
Statement of Operations (amounts in thousands):
Revenue $ 15,513 $ 37,005
Net Loss (12,900) (21,968)
Loss per Share (0.10)
(0.18)
3) Mineral Properties and Plants, Buildings and Equipment
A summary of mineral properties and plants, buildings and
equipment follows (amounts
in thousands):
December 31, 1996 June 30, 1996
Mineral Properties:
U.S. Operations
Aurora mine $ 9,640 $ 9,376
Barite Hill mine 6,756 6,756
Nixon Fork mine 18,051 17,140
Less accumulated depletion and
allowance for impairment (17,895) (16,868)
16,552 16,404
Mexican Operations
Barita mine 1,968 -
El Baztan mine 2,319 -
Magistral mine 2,049 -
Pachuca mine 21,318 -
Less accumulated depletion (528)
- -
27,126 $
43,678 $ 16,404
Plants, Buildings and Equipment:
U.S. Operations
Mining plants, buildings, equipment
and vehicles 30,305 $ 30,026
Less accumulated depreciation,
amortization and allowance
for impairment (16,486) (14,887)
13,819 15,139
Mexican Operations
Land 13,342
- -
Mining plants, buildings, equipment
and vehicles 34,954 -
Construction in progress 902 -
Less accumulated depreciation and
amortization (710) -
48,488 -
$ 62,307 $ 15,139
The Company capitalized interest related to the construction
of the Nixon Fork mine of $340,000 in fiscal 1996 and
$516,000 in fiscal 1995. There was no interest capitalized
during the six months ended December 31, 1996.
a) U.S. Operations
(i) Aurora Mine
The Aurora mine is located near Hawthorne, Nevada. Aurora's
mineral holdings include 54 patented lode claims, 321
unpatented lode claims, 10 unpatented mill sites, 1 placer
claim and 320 acres of fee title land for a total of
approximately 8,000 acres. The Company owns and operates a
318-tonne-per-day conventional carbon-in-leach mill. The
Aurora mine commenced production in December 1987. The
Company's interest in the property is subject to a 1.25
percent net smelter royalty, as defined.
The Company does concurrent reclamation at the Aurora mine;
however, there are certain costs that will be incurred at
closure. The Company estimates these costs will be
approximately $300,000. As of December 31, 1996, the
Company has accrued $236,000 for Aurora closure and
reclamation costs.
(ii) Barite Hill Mine
The Barite Hill mine, located near McCormick, South
Carolina, suspended mining in the second quarter of fiscal
1995 due to the depletion of the ore reserves. During the
six months ended December 31, 1996, the Company reduced the
remaining net book value of property, plant and equipment by
$113,000 through a charge to operations. During fiscal
1995, the Company reduced the net book value of the Barite
Hill property by $400,000 through a charge to operations
based upon an independent evaluation of recoverable value.
The Company was obligated to pay Gwalia a 1.5-percent net
smelter return royalty, as defined, on all production
($38,000 and $116,000 in fiscal 1995 and 1994,
respectively).
As of December 31, 1996, the Company estimates that future
reclamation costs for Barite Hill will approximate
$1,326,000, which has been accrued as of December 31, 1996.
The Company commenced reclamation activities at Barite Hill
in the second quarter of fiscal 1995 and plans to
substantially complete reclamation during 1997.
(iii) Nixon Fork Mine
The Company owns 100 percent of a lease comprising the Nixon
Fork mine. The lease includes 216 unpatented lode and
placer claims located near McGrath, Alaska. Production from
these claims is subject to a 5-percent net smelter return.
When the Company acquired the lease it was obligated to pay
up to $500,000 to an unrelated mining company in the form of
1 percent of the gross value of the product removed from the
property. As of December 31, 1996, approximately $349,000
remained to be paid. After the Company produces more than
200,000 ounces of gold from the property, Nixon Fork Joint
Venture is to receive a 3-percent net smelter royalty, as
defined. As part of a financing completed during 1995, the
Company granted a 1.5-percent net smelter royalty, as
defined, to Internationale Nederlanden (U.S.) Capital
Corporation (ING).
In November 1995, the Company entered into a mining and
exploration lease on 46,000 acres of land adjacent to its
Nixon Fork mine (Doyon Leasehold). The lease has an initial
term of 25 years and can be extended thereafter if
production from the property continues. The lessor will
receive a 1 percent net smelter royalty from the entire
property until such time as 500,000 ounces of gold have been
produced from the Doyon Leasehold, at which time the
production from the Doyon Leasehold will carry a 5 percent
net smelter royalty. The lessor will receive $4,000,000,
payable one-third in the Company's common shares and two
thirds in cash. The payments are made in three annual
installments each comprised of 536,684 common shares of the
Company and $888,889 in cash. The first payment was made in
November 1995 upon completion of the transaction and the
Company made the second payment in December 1996. The
Company fulfilled its obligation to make exploration
expenditures on the Doyon Leasehold of $500,000 during the
first year of the lease and is obligated to spend $150,000
per year thereafter.
The Company commenced construction at Nixon Fork during
fiscal 1995 and completed development of the mine and mill
during the second quarter of fiscal 1996 with the first gold
pour in October 1995. Total construction and development
costs were $5.0 million and $12.9 million in fiscal 1996 and
1995, respectively. The Company estimates costs for
reclamation to be incurred at closure will be $400,000. As
of December 31, 1996, the Company has accrued $165,000 for
Nixon Fork closure and reclamation costs.
b) Mexican Operations
(i) Barita de Sonora Mine
Barita is located in the south-central area of the state of
Sonora, 100 kilometers east of the state capital of
Hermosillo. Access to the property is via a paved highway
from Hermosillo. Barita holds exploitation concessions of
which 5,000 hectares expire in May 2040 and 10,000 hectares
expire in September 2046. Barita was formed in 1979 as a
state-owned company to supply barite requirements to the
petroleum industry and was privatized in 1988, prior to the
acquisition by the Company as described in Note 2. Barita's
operations consist of several small open-pit mines, a
crushing plant and two separate processing circuits. The
operations produce two barite products, bulk and fine
milled, which are sold to the petroleum industry and used as
drilling products.
Barita submitted an Environmental Impact Study in 1992 and
an environmental self-audit which have been provided to
Procuraduria Federal de Proteccion al Ambiente (PROFEPA or
Federal Bureau of Environmental Protection) as described in
Note 11 to the financial statements. As of December 31,
1996, the Company has accrued $159,000 for estimated
reclamation costs in accordance with the PROFEPA agreement.
(ii) El Baztan Mine
Compania Minera El Baztan, S.A. de C.V. (El Baztan), is
located south of the city of Morelia, in the municipality of
Huetamo de Nunies, in the state of Michoacan, Mexico. Access
to the property is from the town of Tierra Blanca on the
Zitacuaro-Huestamo highway and a gravel road. Additionally,
access can be gained via a 750-meter-long gravel surfaced
airstrip in the Rio Chiquito Valley, located one mile from
the mine.
El Baztan holds exploration and exploitation concessions
which cover approximately 44,122 hectares; 40,598 hectares
relate to exploration concessions of which 40,098 hectares
expire between May and July 2046. The remaining exploration
concessions expire in October 2001; 3,524 hectares relate to
exploitation concessions, of which 3,300 hectares expire
between July 2018 and December 2045. The remaining
exploitation concessions expire between May and July 2000.
The El Baztan mine consists of two operating mines, Vista
Hermosa and El Arroyo, located approximately six kilometers
apart, which produce a copper concentrate and containing by
product gold. The ore processing facilities consist of a
copper flotation plant with a capacity of 450 tonnes of ore
per day. After the ore has been processed, the final
product, (concentrate), is shipped to a smelter for further
processing.
El Baztan has submitted an environmental self-audit to
PROFEPA as described in Note 11 to the financial statements.
As of December 31, 1996, the Company has accrued $175,000
for estimated reclamation costs in accordance with the
PROFEPA agreement.
(iii) Magistral Mine
Compania Minera Magistral del Oro, S.A. de C.V. (Magistral)
is located near the Santa Maria del Oro village, in the
state of Durango, Mexico. The property can be accessed by a
paved highway from the city of Durango or by an airstrip for
small airplanes two kilometers south of Santa Maria del Oro.
Approximately 5,300 hectares are held under exploration
concessions. One exploration concession of 4,548 hectares
expires in September 1999. All other concessions expire in
October 2001. The operations consist of reprocessing gold
tailings that were generated by a high-grade copper/gold
flotation mill which ceased operations in 1962.
Magistral has submitted an environmental self-audit to
PROFEPA as described in Note 11 to the financial statements.
As of December 31, 1996, the Company has accrued $124,000
for estimated reclamation costs in accordance with the
PROFEPA agreement.
(iv) Pachuca Mine
Real del Monte y Pachuca, S.A. de C.V. (Pachuca) is located
within the Pachuca-Real del Monte mining district, in the
south central area of the state of Hidalgo, approximately
100 kilometers northeast of Mexico City. Access to the
property is by highway from Mexico City, with a highway and
paved and dirt roads providing access throughout the mining
district. Pachuca holds concessions for 46,900 hectares
which encompass the entire district; 45,234 hectares and
1,666 hectares represent exploration and exploitation
concessions, respectively. The exploration concessions and
exploitation concessions expire in December 1999 and
December 2043, respectively. A net smelter royalty of 5.75
percent on production related to four exploration
concessions covering 104 hectares is paid by Pachuca.
Pachuca paid $11,000 during the period from October 1, 1996
through December 31, 1996, under the net smelter royalty.
The Pachuca operations of the San Juan Pachuca, La Purisma
and La Rica underground mines. The operations mine and
process ore from vein deposits and old tailings which
produce silver and gold with significant by product lead and
zinc concentrates. Ore is crushed in a three-stage crushing
plant and milled in a two-stage grinding circuit. Milled
ore flows to a flotation circuit yielding a pregnant cyanide
solution and a bulk zinc/lead concentrate. The pregnant
solution is clarified and filtered to produce a silver/gold
precipitate. The silver/gold precipitate is smelted in
reverberatory furnaces to produce anodes which are refined
on site to produce high-purity silver and gold for direct
sale. The bulk zinc/lead concentrate is shipped to smelters
in Europe for further processing.
Pachuca has submitted an environmental self-audit to PROFEPA
as described in Note 11 to the financial statements. As of
December 31, 1996, the Company has accrued $658,000 for
estimated reclamation costs in accordance with the PROFEPA
agreement.
4) Long-Term Debt
Long-term debt consists of the following (amounts in
thousands):
December 31, 1996 June 30, 1996
ING gold loan (a) $ 9,363 $ 15,604
Banca Cremi, S.A. (b) 11,274 -
Banpais, S.A. (c) 8,533 -
Banco Invex, S.A. (d) 1,250 -
Other long term debt 1,566 1,591
31,986 17,195
Current portion of long term debt13,497 13,393
Long-term debt, excluding
current portion $ 18,489 $3,802
(a) Internationale Nederlanden (U.S.) Capital Corporation
On April 5, 1995, the Company's wholly owned subsidiary,
Nixon Fork Mining Inc., borrowed 47,731 ounces of gold from
ING. The gold loan was monetized at $392 per ounce for
proceeds of $18,725,000 and bears interest at the gold
lending rate plus 3.5 percent per annum (5.075 percent at
December 31, 1996). On March 29, 1996, the Company and ING
amended the original gold loan agreement, to adjust the
repayment schedule to commence on June 30, 1996, consisting
of six equal quarterly payments of 7,955 ounces of gold.
The loan is secured by the assets of the Nixon Fork mine.
ING also receives a 1.50-percent net smelter royalty through
the life of the Nixon Fork mine. The Company has accounted
for the gold loan as a hedge with the loan marked to market
and gains or losses deferred and recognized as revenue in
the periods repayments are scheduled to occur. The gold
loan deferred gain at December 31, 1996, and June 30, 1996,
was $568,000 and $410,000, respectively.
The proceeds were used for retirement of term and bridge
loans of $5.4 million with the balance of the funds being
placed in a restricted cash account to be used for scheduled
construction costs of the Nixon Fork mine and processing
facilities, Nixon Fork working capital requirements,
financing costs, and certain exploration and development
costs subject to prior approval by ING. The restricted cash
account balance was $805,000 and $853,000 as of December 31,
1996 and June 30, 1996, respectively.
As part of the financing, ING has also provided a 42,269
ounce gold hedging facility with deliveries scheduled from
September 1995 through June 1997 (see Note 5).
The Company guarantees the performance of the obligations of
its wholly owned subsidiary, Nixon Fork Mining Inc., under
the ING gold loan. The guarantee contains certain
restrictive covenants which include financial covenants
regarding the maintenance of a positive net worth, as
defined, and minimum working capital, as defined. The
Company failed to meet the working capital requirement at
December 31, 1996. Subsequent, to year end, ING agreed to a
retroactive modification of the covenant. As of December
31, 1996, the Company is in compliance with the modified
covenant.
(b) Banca Cremi, S.A.
In October 1996, two GRDM Subsidiaries, Magistral and El
Baztan, refinanced loans under two separate agreements,
consisting of principal and interest balances of $4,049,749
and $3,002,170, respectively. Under the new agreements, the
refinanced amounts are payable monthly, beginning July 20,
1997 through July 20, 2001, bearing interest at LIBOR plus
7.8 percent. The loan is guaranteed by GAN.
El Baztan has an outstanding loan with Banca Cremi, S.A., in
the amount of $4,222,218 at December 31, 1996. The loan
provides for monthly principal payments of $74,074 plus
interest at LIBOR plus 7.8 percent through September 10,
2001. The loan is guaranteed by GAN.
(c) Banpais, S.A.
In October 1996, Pachuca refinanced a loan, including
principal and accrued interest, in the amount of $8,533,000.
Under the new agreement, the refinanced amount is payable in
semi-annual installments of $533,000 beginning August 1998
through February 2006. The outstanding balance bears
interest at LIBOR plus 10 percent, payable in semi-annual
installments, beginning February 23, 1997, through August
23, 2006. The loan is guaranteed by GAN.
(d) Banco Invex, S.A.
On December 31, 1996, Barita restructured an outstanding
loan in the amount of $1,250,000 into a revolving line of
credit with a 90-day term. The revolving credit agreement
bears interest at LIBOR plus 7 percent and a commission fee
of 1.5 percent payable quarterly. The revolving credit
agreement is guaranteed by GAN.
5) Hedging Activities and Forward Sales
a) U.S. Operations
The Company uses fixed forward and spot deferred contracts
to hedge against the effects of fluctuations in the market
price of gold. The Company recorded a net gain on gold
deliveries made under forward contracts of $127,000 and
$311,000 during the six months ended December 31, 1996, and
the year ended June 30, 1996, respectively, compared to a
net loss from such activities of $105,000 during the year
ended June 30, 1995 and a net gain of $3,307,000 from such
activities during the year ended June 30, 1994.
Gains and losses resulting from the sale or conversion of
hedging instruments prior to maturity have been deferred and
are recognized over the original delivery term of the
contract. On April 5, 1995, the Company terminated
outstanding hedge positions which resulted in a deferred
loss of $1,511,000. During the years ended June 30, 1996
and 1995, $1,086,000 and $181,000, respectively, of the
deferred loss was recognized. During the six months ended
December 31, 1996, the remaining deferred loss of $242,000
was recognized.
As part of the financing with ING, the Company entered into
a spot deferred contract of 42,269 ounces of gold which
calls for monthly deliveries of between 1,100 ounces and
4,000 ounces of gold from September 1995 through September
1997. The Company has the option, subject to certain
conditions regarding estimated gold production and costs at
the Nixon Fork mine, to deliver less than the scheduled
monthly deliveries to a minimum of 1,100 ounces or to
deliver more than the scheduled number of ounces up to a
maximum of 4,000 ounces of gold. The price to be received
is adjusted monthly based upon an agreed upon differential
between the gold borrowing rate in effect for that month
plus 1 percent and the commercial paper rate for the same
period. Using the December 31, 1996, differential of 3.71
percent per annum, the expected delivery price to be
received in January 1997 is $414 per ounce of gold with the
future price to escalate monthly. Scheduled deliveries
based upon the December 31, 1996, interest rate differential
are as follows:
Year Ending Ounces Revenue
December 31, 1997 13,871 $ 5,780,000
On March 31, 1997, the Company terminated its outstanding
hedge with ING, which resulted in a deferred gain of
$735,000. The deferred gain will be recognized over the
original delivery period of the contract during 1997.
b) Mexican Operations
Pachuca entered into a Mineral Sale Agreement with Prime
Metals, dated December 12, 1995, to sell monthly between
four and six tonnes of fine grain silver, with a grade of
99.98 percent at COMEX plus $0.10 per ounce, from January 2,
1996 through December 31, 1996. Pachuca subsequently
renewed the agreement through December 31, 1997.
6) Convertible Subordinated Debentures
(a) 10% Canadian Convertible Subordinated Debentures
The 10% Canadian convertible subordinated debentures (10
percent Canadian debentures) are convertible at the option
of the holder into common shares at a conversion price of
Cdn$9.90 per share and are due April 1999. The 10-percent
Canadian debentures are redeemable, at the option of the
Company, if the Company's common shares trade at not less
than 125 percent of the conversion price for at least 20
consecutive trading days.
Interest is payable semiannually on June 15 and December 15
at a rate of 10 percent per annum. The Company is accruing
interest on the 10-percent Canadian Debentures at an
effective interest rate of 7.86 percent for purposes of
giving effect to an interest moratorium for two years,
approved by the debenture holders, which began on December
15, 1989. As of December 31, 1996, and June 30, 1996, there
were Cdn$3,041,000 ($2,219,000 and $2,230,000, respectively)
of these debentures outstanding.
(b) 3% Canadian Convertible Subordinated Debentures
In April 1994, the Company issued Cdn$19,017,000
($13,749,000) of 3-percent Canadian convertible subordinated
debentures (3-percent Canadian debentures) which were
originally due March 1997.
The 3-percent Canadian debentures are convertible into
common shares at the option of the holders. Of the
Cdn$19,017,000 of debentures, Cdn$1,117,000 (which were sold
to related parties) were convertible at Cdn$1.80 per share
and the balance were convertible at Cdn$1.75 per share. In
December 1995, the holders approved an amendment to extend
the maturity date of the debentures to March 21, 1999,
change the conversion prices to Cdn$1.20 per share, and
change the automatic conversion feature to provide that the
principal will be converted into common shares if the market
price of the common shares equals or exceeds 150 percent of
the amended conversion price of Cdn$1.20 per common share
for twenty consecutive trading days. During the six months
ended December 31, 1996, and the year ended June 30, 1996,
debenture holders converted Cdn$900,000 and Cdn$4,500,000,
respectively, of debentures into common shares. As of
December 31, 1996 and June 30, 1996, there were
Cdn$13,617,000 ($9,936,000) and Cdn$14,517,000
($10,645,000), respectively, of these debentures
outstanding.
At the time of the issuance, the debenture holders selected
whether future interest payments would be paid in cash or in
common shares (at a price of Cdn$1.75 per share). As of
December 31, 1996, holders of Cdn$4,161,000 of debentures
have elected to have interest paid in cash and the remainder
of the interest payments will be paid in common shares.
Interest payable in common shares is calculated using a
price of Cdn$1.20.
The Company may redeem the 3-percent Canadian debentures at
115 percent of the face value, subject to the conversion
rights of the debenture holders.
7) Redeemable Preference Shares
On July 6, 1995, the Company issued 2,100,000 cumulative
preferential convertible 7-percent Preference Shares, Series
2 (Series 2 Preference Shares). The issue price was
Cdn$1.00 and resulted in proceeds to the Company of $1.6
million. The shares earned a cumulative preferential 7
percent cash dividend payable semi-annually beginning
December 31, 1995, were redeemable at the issue price on
December 31, 1996, and were convertible at the option of the
holders to 0.532 fully paid and non-assessable common shares
for each Series 2 Preference Share, without further
consideration from the holder. The obligation of the
Company to pay the redemption price and any dividend was
guaranteed by Gwalia. The Company paid Gwalia a guarantee
fee of 1.5 percent of the proceeds from the issuance of the
Series 2 Preference Shares.
On December 31, 1996, the Company redeemed the preference
shares for Cdn$2,100,000 ($1,532,000). Cash dividends paid
during the six months ended December 31, 1996 and year ended
June 30, 1996, totaled Cdn$73,500 ($54,000) and Cdn$147,000
($105,000), respectively.
8) 1995 Unit Offering
In November and December 1995, the Company issued an
aggregate of 7,920,000 units at Cdn$1.20 per unit for total
proceeds of Cdn$9,504,000 ($6,982,000). Each unit was
comprised of one share of the Company's common shares and
one-half common share purchase warrant. Each common share
purchase warrant entitles the holder to purchase one common
share of the Company at Cdn$1.50 before February 28, 1997.
No common share purchase warrants were exercised before the
aforementioned expiration date. Of the 7,920,000 total
units subscribed, related parties subscribed for 2,250,000
units on the same terms and conditions.
9) Income Taxes
The Company's operations are conducted primarily in the
United States and in Mexico. No tax benefits have been
recognized in the statements of operations for net operating
loss carry-forwards due to the uncertainty of their
realization.
At December 31, 1996, the Company had net operating loss
carry-forwards for U.S. income tax purposes aggregating
approximately $48,800,000 which, if not utilized to reduce
U.S. taxable income in future periods, expire through 2012.
Of this amount, approximately $5,300,000 can only be
utilized against certain subsidiaries' future taxable
income. As a result of changes in control of the Company,
the United States Internal Revenue Code limits the amount of
carry-forwards which can be utilized to approximately
$512,000 per year for those carry-forwards generated prior
to March 31, 1991, (which total approximately $14,000,000)
and $1,822,000 per year for those carry-forwards generated
between March 31, 1991, and December 31, 1995 (which total
approximately $34,800,000). Of these amounts, $6,750,000 of
the pre-1991 losses and $2,000,000 of the 1991 through 1995
losses are now available to offset current taxable income.
For financial statement purposes, the Company had net
operating loss carry-forwards of approximately $61,500,000
as of December 31, 1996. Net operating losses for financial
reporting purposes differ from net operating losses for
income tax purposes primarily due to differences between
methods of accounting for mine exploration and development
costs.
In addition, for Canadian income tax purposes as of December
31, 1996, the Company had net operating loss carry-forwards
of approximately $3,200,000 which, if not utilized to reduce
Canadian taxable income in future periods, will expire
during calendar years 1997 through 2003. For financial
statement purposes, the Company had Canadian net operating
loss carry-forwards of approximately $3,100,000 as of
December 31, 1996.
The Company's subsidiaries operating in Mexico are subject
to income and asset taxes. Income tax is computed by taking
into consideration the taxable and deductible effects of
inflation, such as depreciation calculated on values in
constant pesos and permit the deduction of current costs.
Taxable income is increased or reduced by the effects of
inflation on the tax basis of certain monetary assets or
liabilities through the inflationary component which is
similar to the gain or loss from the change in monetary
position calculated for accounting purposes.
The statutory rate of income tax in Mexico is 34 percent.
The asset tax is computed at an annual rate of 1.8 percent
of the average of the majority of restated assets less
certain liabilities. The tax is paid only to the extent
that it exceeds the income tax of the year. Any required
payment of asset tax is creditable against the excess of
income taxes over asset taxes for the following ten years.
Determination of income tax is based on each subsidiary's
individual results and not on a consolidated basis.
At December 31, 1996, the GRDM Subsidiaries' combined tax
loss carry-forwards and recoverable asset tax carry
forwards, both of which are indexed for inflation to the
year they are used, are as follows (amounts in thousands):
Recoverable
Tax Loss Asset Tax
Expiration Carry-forwards Carry-forwards
1999 $ 38 $ 6
2000 3,938 315
2001 6,950 588
2002 4,735 708
2003 7,719 1,403
2004 17,497 625
2005 12,938 441
2006 7,143 105
$ 60,958 $ 4,191
10) Pension Plan
Under Mexican labor laws, the GRDM Subsidiaries provide
seniority premiums for all employees terminated with more
than 15 years of service. In addition, the GRDM
Subsidiaries provide other severance benefits based on
certain conditions, as well as defined pension benefits to
all administrative personnel and production workers.
The assumptions used in the actuarial studies for the
December 31, 1996, determination of the pension liability
are as follows:
Discount Rate 3.67%
Salary Increase Rate 0.92%
Return on Assets 5.51%
The GRDM Subsidiaries record the liability for retirement,
pension plans, and seniority premiums based on actuarial
calculations using the projected unit credit method in
accordance with Canadian GAAP. The GRDM Subsidiaries
provide for the pension liability, at present value, which
corresponds to the projected benefit obligation at the
estimated date of retirement of the employees. The
liability as of December 31, 1996, is
comprised of the following (amounts in thousands):
Actuarial present value of accrued pension benefit
obligation (PBO) $ 180
Unamortized net pension obligation
(25)
Unamortized experience loss (15)
Accrued pension liability $ 140
Pension expense for the six months ended December 31, 1996,
is as follows (amounts in thousands):
Current service costs $ 81
Interest on accrued benefits 16
Additional liability on settlement
849
Amortization of net pension obligation
141
Amortization of experience gain (388)
Net periodic pension expense $ 699
Severance payments to involuntarily terminated employees and
workers are charged to expense when the liability is
incurred. When an agreement exists with the union for a
future reduction of personnel as a consequence of economic
slowdowns or production cutbacks, a charge to expense is
made at the time such an agreement is reached.
11) Commitments and Contingencies
a) Legal Contingencies
The Company is from time to time involved in various legal
proceedings of a character normally incidental to its
business. The Company does not believe adverse decisions in
any pending or threatened proceedings, or any amounts which
it may be required to pay by reason thereof, will have a
material adverse effect on the financial condition, results
of operations or liquidity of the Company.
In 1977, Mocatta Metals filed a lawsuit alleging Compania
Real del Monte y Pachuca, S.A. de C.V. defaulted under terms
of a purchase and sale agreement. The total amount claimed
is approximately $1,000,000. The Company believes it will
prevail in any further future court proceedings, should they
occur, based on government dispositions in 1987. However,
an adverse judgment could include additional amounts for
interest and damages. The Company has recorded a reserve of
$1,000,000 as long-term liability for any further
litigation.
b) Lease Commitments
The Company leases certain facilities and equipment under
operating lease arrangements. Minimum rental expense under
such arrangements amounted to approximately $322,000,
$70,000, $104,000 and $254,000, for the six months ended
December 31, 1996, and the years ended June 30, 1996, 1995
and 1994. Future minimum lease commitments under such
arrangements are approximately $270,000 and $228,000 for
years 1997 and 1998, respectively. The Company has no
minimum lease commitments beyond 1998.
c) Environmental Contingencies
The Company's mining and exploration activities are subject
to various federal and state laws and regulations governing
the protection of the environment in the United States and
Mexico. These laws and regulations are continually changing
and generally becoming more restrictive. The Company has
made, and expects to make in the future, expenditures to
comply with such laws and regulations, as may be required by
governing agencies.
Under the "Self-Review Program" and in accordance with
agreements entered into between the GRDM Subsidiaries and
PROFEPA signed in November 1994, the mining companies were
required to perform a review of substance discharge
generated and its environmental impact. In April 1996, the
GRDM Subsidiaries performed a self-review program concerning
water, air, and noise pollution and hazardous substance
discharge, in accordance with Federal General Law of
Ecological Balance and Environmental Protection (The
Ecological Law). The Company submitted environmental action
plans to PROFEPA and has accrued environmental contingencies
in accordance with agreements between the GRDM Subsidiaries
and PROFEPA.
Mexican environmental regulations have become increasingly
stringent over the last decade. This trend is likely to
continue and may be influenced by the environmental
agreement entered into between Mexico, the United States and
Canada in connection with the North American Free Trade
Agreement.
12) Certain Related Party Transactions
Under terms of the Share Purchase Agreement, as described in
Note 2, GRDM and GAN were required to refinance certain
indebtedness of the GRDM Subsidiaries at the time of
closing. As at December 31, 1996, the outstanding balance
due to the related parties is $7,522,774, bearing interest
at 12 percent and due on January 31, 1998.
Subsequent to year end, on March 24, 1997, the Company
entered into loan agreements with two shareholders of the
Company; Caithness Resources, Inc. and Grupo Acerero del
Norte, S.A. de C.V. to loan the Company $585,000 and
$3,000,000, respectively, bearing interest at 11 percent
with principal due on March 24, 1998.
Certain related parties performed legal and advisory
services relating to corporate activities. No charges were
incurred during the six months ended December 31, 1996.
Charges for such activities were $70,000, $34,000, and
$291,000 in the years ended June 30, 1996, 1995, and 1994,
respectively, including reimbursable travel expenses. Such
amounts are included in general and administrative expenses.
13) Employee Benefit Plan and Incentive Share Option Plan for
Directors and Employees
The Company has a savings plan which covers all full-time
employees with six or more months of service. Participants
may contribute from 1 percent to 9 percent of pre-tax
compensation and receive a 100 percent matching employer
contribution up to a maximum of 6 percent of their
compensation. Vesting in the employer's contribution begins
after one year of service at the rate of 25 percent per year
until full vesting occurs. The Company's savings plan
contribution expense was approximately $54,000, $115,000,
and $96,000 for the six months ended December 31, 1996, and
the years ended June 30, 1996 and 1995 respectively.
The Company has an incentive share option plan for certain
directors, officers and employees, and has reserved
5,000,000 common shares for issuance thereunder. Terms of
the plan generally provide for options to: (1) be granted at
a price not less than the closing market price of the common
shares on the day immediately proceeding the day on which
the option is granted; (2) be immediately exercisable upon
grant; and (3) be exercisable not longer than 10 years from
the date of grant or up to a maximum of 12 months after a
participant's employment is terminated.
The following represents information relating to the
incentive share option plan:
Shares
Outstanding at June 30, 1993 840,000
Granted at U.S.$0.62 per share 400,000
Granted at Cdn$1.26 per share 100,000
Granted at Cdn$1.81 per share 350,000
Exercised (572,634)
Outstanding at June 30, 1994 1,117,366
Granted at Cdn$1.53 per share 110,000
Granted at Cdn$1.54 per share 50,000
Granted at Cdn$1.57 per share 100,000
Exercised (39,500)
Canceled (50,000)
Outstanding at June 30, 1995 1,287,866
Granted at Cdn$1.31
per share
100,000
Granted at Cdn$1.35 per share 40,000
Granted at Cdn$1.68 per share 35,000
Granted at Cdn$1.75 per share 150,000
Exercised (174,533)
Canceled
(50,000)
Outstanding at June 30, 1996 1,388,333
Granted at Cdn$1.31 per share 100,000
Canceled (100,000)
Outstanding at December 31, 1996 1,388,333
Exercise Price Per Share Expiration Date Shares
Cdn$1.68 May 15, 2001 35,000
Cdn$1.75 June 10, 2001 150,000
Cdn$0.83 September 6, 2001 53,333
U.S.$0.62 July 19, 2002 400,000
Cdn$1.25
August 1, 2003 100,000 Cdn$1.81
December 6, 2003 200,000 Cdn$1.53
August 26, 2004 60,000 Cdn$1.54
August 26, 2004 50,000 Cdn$1.57
November 1, 2004 100,000 Cdn$1.31
August 1, 2005 100,000 Cdn$1.31
November 13, 2006 100,000 Cdn$1.35
December 11, 2005 40,000
Outstanding at December 31, 1996
1,388,333
14) Segmented Information
(a) Substantially all of the Company's operations are within
the mining industry. Major products include gold, silver,
copper and barite.
(b) Prior to June 30, 1996, all of the Company's operations were
in the United States. Geographic information for the six months
ended December 31, 1996 is as follows (amounts in thousands):
Six Months
December 31,1996
Revenues
U.S. Operations $ 7,002
Mexican Operations 4,454
Depreciation, Depletion, and Amortization
U.S. Operations $ 2,496
Mexican Operations $ 1,237
Corporate $ 23
Loss from Operations
U.S. Operations $ (6,500)
Mexican Operations $ (4,491)
Identifiable Assets
U.S. Operations $ 29,780
Mexican Operations $ 83,636
Corporate $ 10,209
Earnings (Loss) from operations includes revenues and
expenses from mining operations, charges for depreciation,
depletion and amortization, royalties, exploration
expenses, administrative costs, financing charges and
impairment of mining assets.
15 ) Generally Accepted Accounting Principles in Canada and the
United States
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles
(GAAP) in Canada, which differ in certain material respects
from those principles that the Company would have followed
had its consolidated financial statements been prepared in
accordance with GAAP in the United States.
Reconciliation of Net Loss and Shareholders' Equity:
Net loss and total stockholders' equity, adjusted for the
material differences between U.S. GAAP and Canadian GAAP,
are as follows (amounts in thousands):
December 31, 1996
Net loss under Canadian GAAP $ (10,991)
U.S. GAAP adjustments:
Deferred employee profit sharing 476
Pension plan costs 242
Total adjustments 718
Net loss under U.S. GAAP $ (10,273)
Total shareholders' equity under Canadian GAAP$ 52,872 U.S.
GAAP adjustments:
Deferred employee profit sharing (2,281)
Pension plan costs (8)
Total adjustments (2,290)
Total shareholders' equity under U.S. GAAP$ 50,582
Differences between Canadian GAAP and U.S. GAAP are
explained below:
(a) Under Canadian GAAP, basic earnings per share data are
computed using only the weighted average number of common shares
actually outstanding for the period. Under U.S. GAAP, the
earnings-per-share data are computed based on net earnings (loss)
for the period, divided by the weighted average number of common
and common equivalent shares outstanding during the period. Common
share equivalent shares include, when applicable, employee stock
options and warrants, and the 3-percent Canadian convertible
subordinated debentures. The securities were not included in
earnings-per-share calculation under U.S. GAAP as their effect was
anti-dilutive. Accordingly, there was no difference between
Canadian GAAP and U.S. GAAP for earnings-pershare data.
(b) Under Canadian GAAP, gains and losses arising on translation of
long-term foreign currency denominated monetary liabilities are
deferred and amortized over the remaining lives of such
liabilities, whereas for U.S. GAAP, such gains and losses are
included in earnings as they arise. This difference between
Canadian GAAP and U.S. GAAP is not material in any of the years
presented.
(c) For purposes of U.S. GAAP, the Company adopted Statement of
Financial Accounting Standards No. 109, Accounting for Income
Taxes, effective July 1, 1993. Deferred income taxes under FASB
109 reflect the net tax effect of temporary differences between
the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Net deferred tax assets are offset by a valuation allowance at
December 31, 1996, and June 30, 1996.
(d) Under Canadian GAAP, dividends on redeemable preference
shares are included in interest expense. Under U.S. GAAP,
dividends are deducted from the net loss for the period in
determining the net loss attributable to common shareholders. The
difference between Canadian GAAP and U.S. GAAP is not material in
any of the years presented.
(e) For pension plan benefits, under Canadian GAAP, the entire
unrecognized net gain (loss) is amortized over the average future
years of service of the entire employee group. Under U.S. GAAP,
only the portion of the unrecognized net gain (loss) that exceeds
10 percent of the projected benefit obligation is amortized.
(f) Under Mexican tax and labor laws, companies are required to pay
profit sharing to their employees, which is calculated at a rate
of 10 percent on taxable income in Mexico, after certain
adjustments, such as the elimination of price-level adjusted
depreciation, inflationary components, and unrealized exchange
losses, on a basis similar to income tax. To the extent items of
income and expense are recognized in different periods for
financial reporting purposes, a deferred profit sharing provision
and the related liability have been calculated for U.S. GAAP
purposes.
(g) For purposes of U.S. GAAP, the Company adopted
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" effective July
1, 1996. The provisions of this standard did not have a
material effect on the Company's results of operations
reported under U.S. GAAP since the Company elected to
retain the measurement principles of Accounting
Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" as provided for in the standard.
CORPORATE INFORMATION
DIRECTORS
Alonso Ancira Elizondo
Mexico City, Mexico
Vice Chairman, Grupo Acerero del Norte, S.A. de C.V.
Manuel A. Ancira Elizondo
Mexico City, Mexico
Director of Operations, Grupo Acerero del Norte, S.A. de C.V.
Richard C. Atkinson
Vancouver, British Columbia
President, Les Enterprises de Richard Atkinson Ltee
Adolfo Autrey Maza
Mexico City, Mexico
President, Grupo Acerero del Norte, S.A. de C.V.
Xavier Desiderio Autrey Maza
Mexico City, Mexico
Chairman, Grupo Acerero del Norte, S.A. de C.V.
James D. Bishop
New York, New York
Chairman and Chief Executive Officer, Caithness Resources Inc.
William J. Braithwaite
Toronto, Ontario
Counsel, Stikeman, Elliott
Christopher J. Lalor Perth, Western Australia
Executive Director, Gwalia Consolidated Ltd.
Richard N. Lawler
Burlington, Ontario
President, Hoogovens Technical Services
Peter Marrone
Toronto, Ontario
Counsel, Cassels Brock & Blackwell
Wendell W. Robinson
Westlake, Ohio
Investment Advisor, Rockefeller & Company, Inc.
OFFICERS
Alex Bissett
President and Chief Executive Officer
Paul L. Blair
Vice President, U.S. Operations and Engineering
G. Chaun Cadwell
Senior Vice President and Chief Operating Officer
James R. Maronick
Vice President Finance, Secretary and Treasurer
MINING OPERATIONS
Mexican Operations
Barita de Sonora
Sonora, Mexico
El Baztan Mine
Michoacan, Mexico
Magistral del Oro
Durango, Mexico
Pachuca Mine
Hidalgo, Mexico
US Operations
Aurora Mine
Nevada, U.S.A.
Barite Hill Mine
South Carolina, U.S.A.
Nixon Fork Mine Alaska,
U.S.A.
STOCK EXCHANGE LISTINGS
Toronto Stock Exchange, Canada - Symbol : KNV
NASDAQ, United States - Symbol : KNVCF
Frankfurt, Berlin and Stuttgart Exchange, Germany - Symbol : CNVSG
SHARE TRANSFER AGENT & REGISTRAR
Montreal Trust Company
510 Burrard Street
Vancouver, British Columbia V6B 3B9
Canada
CAPITALIZATION
Common Shares Issued as of December 31, 1996: 129,837,400
AUDITORS
KPMG Peat Marwick Thorne
2300 Arco Tower
707 Seventeenth Street
Denver, Colorado 80202
ANNUAL MEETING OF SHAREHOLDERS
Tuesday, July 15, 1997
10:00 am EDT
At the offices of
Cassels Brock & Blackwell
Scotia Plaza
Suite 2100
40 King Street West
Toronto, Ontario M5H 3C2
Canada
A copy of the December 1996 annual report or Form 20-F for
Consolidated Nevada Goldfields Corporation as filed with the U.S.
Securities and Exchange Commission is available to shareholders
without charge on written request.
