<PAGE>
FORM 6-K
SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
REPORT OF FOREIGN ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
COMMISSION FILE NUMBER 0-15577
FOR THE MONTH OF MAY 1998
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
------------------------------------------
(Translation of registrant's name into English)
1801 Broadway, Suite 1620
-------------------------
Denver, Colorado 80202
----------------------
(Address of Principal Executive Office)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F
------ ------
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
------- -------
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-______.
ENCLOSED IS THE DECEMBER 31, 1997 ANNUAL REPORT, INCLUDING MD&A, AND FINANCIAL
STATEMENTS, FOR CONSOLIDATED NEVADA GOLDFIELDS CORPORATION.
Pursuant to the Requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
------------------------------------------
(Registrant)
Date: May 20, 1998 /s/ K.M. Kolin
--------------------------------------------------
By: K.M. Kolin, Vice President and Chief Operating
Officer
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
1997 Annual Report to Shareholders for the year ended December 31, 1997
CHAIRMAN'S MESSAGE
Nineteen ninety-seven was a difficult year for the mining industry as gold
prices declined to levels not seen since 1979, and copper prices plummeted more
than 25 percent in six months. On the positive side, silver prices improved
significantly toward year-end, closing above $6 per ounce for the first time in
nine years. Consequently, Consolidated Nevada Goldfields Corporation (CNGC, the
Company) is currently planning to invest substantial human and financial
resources to increase production at its Pachuca silver mine in Mexico. In 1998,
the Company will work closely with its major shareholder, Grupo Acerero del
Norte S.A. de C.V. (GAN), in order to restructure CNGC's financial position.
The first step toward this restructuring is to curtail those operations which no
longer produce positive cash flow, while remaining focused on the potential of
CNGC's more prospective properties.
OPERATIONS
The Company achieved record production in 1997 consisting of 65,000 ounces of
gold, 1.95 million ounces of silver, 4.74 million pounds of copper, and 29,800
tonnes of barite.
PACHUCA
The Pachuca silver-gold mine in the State of Hidalgo, Mexico, has been in
continuous operation since Mexican colonial times. During its almost 500-year
history, Pachuca has produced about 1.3 billion ounces of silver and 6.2 million
ounces of gold. In 1997, Pachuca produced 1.88 million ounces of silver and
7,428 ounces of gold. The Company is currently planning a proactive program to
increase production by acquiring new trackless equipment, deepening several
shafts, driving new development drifts, and fine tuning operations. A new
7-kilometer, 10-inch-diameter tailings line has been engineered to replace the
old, partially plugged line that hampered 1997 production. Installation of the
new line is scheduled to begin as soon as permitting is complete (expected in
the second quarter of 1998). With these improvements, plans are to produce 2.5
million ounces of silver and 12,700 ounces of gold at Pachuca in 1998,
increasing to more than 4 million ounces of silver and 20,000 ounces of gold in
1999.
NIXON FORK
The Nixon Fork gold mine in western Alaska produced 39,666 ounces of gold in
1997. Early in the year, production suffered because the underground mining
fleet was nearing the end of its useful life. This equipment was replaced in the
second quarter, and production improved steadily through the end of the year. In
the month of December, Nixon Fork had production of 4,912 ounces of gold. An
expansion of the tailings facility will be required later in the year if
operations are to continue after the third quarter.
AURORA
The Aurora gold mining operation in western Nevada produced 13,210 ounces of
gold during 1997. In October, the Company completed the purchase of the
adjacent Humboldt property from Electra Gold Ltd., with an open-pit-mineable
reserve of approximately 180,000 ounces of gold. A prefeasibility study was
completed showing that this reserve, combined with the remaining Aurora reserve,
would justify expansion of the Aurora processing facility to 700
<PAGE>
tonnes per day. This expansion would allow the Aurora operation to produce
25,000 to 30,000 ounces of gold per year for at least seven years. However,
rapidly declining gold prices have negatively affected cash flow from this
operation, and as of March 1998, the Company has placed the Aurora operation on
a care and maintenance.
EL BAZTAN
The El Baztan copper operation in the State of Michoacan, Mexico, produced 3.9
million pounds of copper and 2,249 ounces of gold during the year. Ore averaging
about 2 percent copper is mined underground from veins and is processed in a
450-tonne-per-day flotation plant which produces copper concentrate with gold
credits. Because of recent capacity limitations at Industrial Minera Mexico S.A.
de C.V. (IMMSA), the Company has found alternative smelters to purchase
concentrate from El Baztan.
FINANCIAL SUMMARY
The Company reported a net loss for 1997 of $58,792,000 on net revenues of
$34,228,000. Included in the net loss are non-cash items including $14,484,000
in depreciation, depletion and amortization from mining operations, as well as
$32,112,000 for the impairment of mineral properties, plants, buildings, and
equipment.
On March 6, 1998, the Company issued a convertible debenture to GAN which was
simultaneously converted into 208,000,000 common shares. The Company received
$4,000,000 in cash from GAN and applied $16,000,000 of amounts due to GAN and a
$6,000,000 debenture held by GAN, toward the purchase of the new debenture. GAN
currently holds 264,026,559, or approximately 73 percent of the outstanding
shares of the Company, as well as 26,998,400 warrants exercisable at $0.125 per
share.
Since late 1997, the Company has been working with several international
financial institutions to refinance existing credit facilities and provide
additional capital for Pachuca mine development and for general working-capital
requirements. The Company is optimistic that, with GAN's support, it will be
able to successfully complete the financings required to implement its
restructuring plan.
SUMMARY
Overall, despite difficulties in the gold and copper markets, 1997 provided for
the solid integration of the Real del Monte properties into CNGC's portfolio.
Nineteen ninety-eight will be a year of positive change for the Company. In the
hands of new management and with the active participation of GAN, the Company
will invest in those operations with the most potential for growth and
profitability. With silver prices exceeding $6 per ounce, Pachuca will continue
to receive emphasis with investments planned to increase production and ore
grades. In conclusion, the staff and management at CNGC are confident 1998 will
be a year of growth and increased shareholder value for the Company.
/s/ Xavier D. Autrey
Chairman of the Board
<PAGE>
OPERATIONS REVIEW
PACHUCA
Nineteen ninety-seven production from the Company's Real del Monte y Pachuca
operations was 1,876,600 ounces of silver and 7,428 ounces of gold. Most of
Pachuca's production was obtained from newly mined ore from the Company's
operations, although some production was obtained from re-treatment of old
tailings during the first quarter of the year, and also from a small amount of
purchased ore.
The total ore processed in Pachuca's Loreto plant for the year was 384,000
tonnes. Average mill head grade was 182 grams (5.851 ounces) of silver and 0.83
grams (0.027 ounces) of gold per tonne. Mill recoveries averaged 83.2 percent
for silver and 72.1 percent for gold. Included in the milled tonnage were
13,000 tonnes of purchased ore, averaging 908 grams (29.193 ounces) of silver
and 0.73 grams (0.023 ounces) of gold per tonne and 4,000 tonnes of Coscotitlan
tailings, averaging 58 grams (1.865 ounces) of silver and 0.59 grams (0.019
ounces) of gold per tonne.
Mining operations included development and stoping in three areas of the mine.
Approximately 48 percent of the 367,000 tonnes extracted was obtained from the
San Juan Pachuca area, 28 percent from the La Rica section, and the remaining 24
percent from the La Purisima Concepcion mine. Mining operations consisted
largely of shrinkage stoping of the narrow vein-like orebodies. Exploration and
development were also pursued during the year, with 7,228 meters (23,202 feet)
driven in exploration headings and 3,380 meters (10,850 feet) in development
work.
The introduction of diesel-powered, rubber-tired, front-end load and haul (LHD)
equipment into the mine contributed to increased development, as well as
increased flexibility in stoping in several areas of multiple veins. A total of
nine LHDs was purchased during 1997. Major development programs, such as shaft
and winze deepening projects, were deferred awaiting financing.
NIXON FORK
Production from Nixon Fork in 1997 was obtained primarily from the
Crystal/Garnet area, mainly because high-grade ore continued at depth and also
because manpower was not available to staff the Mystery area for most of the
year.
Gold production for 1997 was 39,666 ounces. The average head grade to the mill
was 38.64 grams (1.242 ounces) of gold per tonne. The total ore milled for the
year was 37,000 tonnes. The average mill recovery of gold was 86.3 percent.
Total silver production for the year was 20,029 ounces, while copper production
was 870,658 pounds.
High turnover of personnel throughout the year and a shortage of skilled
underground miners in Alaska were the chief causes of production shortfalls.
The mines operated with an average of approximately ten fewer people than
budgeted; therefore, the scheduled production from the Mystery mine could not be
realized. Furthermore, frequent mine equipment breakdowns during the first two
quarters resulted in production losses. The problem, however, was corrected
through the addition of two underground trucks and two LHD units to the mine
fleet.
<PAGE>
Stoping and development activities focused on the Crystal/Garnet ore zone.
During the year, most of the ore mined was obtained from exploitation of the
C-3000 orebody. The C-3000 stoping was performed on seven 50-foot levels. The
mine has been deepened to 690 feet below the surface with ore indicated in
diamond drill holes at least 230 feet below the lowest active stope.
Gold sales for the year were 36,871 ounces, and total gross revenue from gold,
silver, and copper in concentrates was about $12.7 million.
EXPLORATION AT NIXON FORK
Drilling at the C-3000 orebody of the Crystal/Garnet mine was successful in
significantly extending the known depth of that orebody. The C-3000 orebody was
originally projected to have 177 feet of vertical extent, but with the drilling
carried out in 1997, the orebody now extends to a depth of more than 900 feet
and remains open downdip.
AURORA
Production from the Aurora mine during 1997 was 13,210 ounces of gold. A total
of 128,000 tonnes was milled at an average head grade of 3.44 grams (0.111
ounces) per tonne. Gold recovery in the plant was 93.9 percent.
Production from the Chesco pit during the year was 80,000 tonnes, averaging 3.26
grams (0.105 ounces) of gold per tonne. The waste-to-ore ratio in this pit was
14.1 to 1. Production from the Ann pit was 41,000 tonnes, which averaged 3.03
grams (0.097 ounces) of gold per tonne. The waste-to-ore ratio in the Ann pit
was 12.3 to 1. Underground operations continued throughout the year in the
system of veins northwest of the Juniata/Chesco area. Approximately 11,000
tonnes with an average grade of 5.92 grams (0.190 ounces) of gold per tonne was
extracted from the underground workings.
At mid-year, a highwall failure in the Chesco pit resulted in shifting much of
the mine production effort to the Ann pit, located at the northern boundary of
the property. The Chesco slump of roughly 300,000 tonnes did not cause any
injuries or equipment damage. The slump was cleaned up early in the third
quarter, wherein Chesco production resumed; however, additional slope movements
noted in the latter part of the year prompted temporary abandonment of the pit.
During the third quarter, the 2,800-acre property package of Electra Gold
Limited was purchased by the Company. This acquisition resulted in CNGC having
sole ownership of the Aurora mining district, including the Humboldt pit, which
may be reactivated in the future to extract remaining gold reserves. In
addition, the Company purchased the Siskon Mining Company's royalty on certain
CNGC properties.
The purchase of the Electra properties opened many possibilities for new
development and production scenarios, including an expansion which would at
least double the size of the existing mill. Construction of a 10-foot lift on
the tailings impoundment was also commenced in the fourth quarter, and has since
been suspended.
For the second consecutive year, the Aurora operation won first place safety
awards from the Nevada Mining Association for both open-pit and underground
mining.
<PAGE>
As of March 1998, the Aurora operation was placed on care and maintenance
because of the low gold price and lack of available capital.
EL BAZTAN
Production from the remote El Baztan copper-gold mine was 7,292 tonnes of
concentrate, containing 2,249 ounces of gold, 18,660 ounces of silver, and
3,872,000 pounds of copper. The total ore milled at El Baztan during the year
was 111,000 tonnes at an average mill head grade of 2.03 percent copper. The
average recovery of copper for the year was 86.3 percent.
The milling rate at El Baztan was impacted during the year as major repairs to
three of the four primary ball mills were necessary. In addition, significant
plant downtime was incurred because of crusher breakdowns and power outages.
The two mines at El Baztan operated normally throughout the year. The wide,
tabular Vista Hermosa orebody is mined using a mechanized open stoping method.
Operations in the narrow veins of the El Arroyo mine consisted largely of
shrinkage stoping. Production from Vista Hermosa was 114,000 tonnes at an
average grade of 1.92 percent copper, while that from El Arroyo was 23,000
tonnes at an average grade of 2.55 percent copper.
Power outages continued to be one of the primary causes of lost production at El
Baztan. The mine is the last customer served by a rural electric line of the
Mexican Federal Power Commission (CFE), and the power demands of preceding
communities along the line often exceed line capacity. Future investment in El
Baztan would ideally include a high-voltage, single-user power line. The
viability of a significant expansion of El Baztan is under consideration. This
expansion would likely entail at least tripling the current 450-tonne-per-day
milling capacity.
MAGISTRAL DEL ORO
Heap-leach operations at Magistral del Oro in Durango, Mexico, were sporadic
throughout 1997. In January, production was suspended for test work to
determine how copper fouling of the leach solutions could be overcome. This
test work lasted through May, with gold recovery from existing heaps
accomplished through rinsing of heaps with water only. Addition of cyanide to
solutions, as well as an increase in flow rates of solutions sprinkled on the
ore, resulted in significantly increased gold recoveries starting in June.
No additional ore was stacked during the year, thus all production was obtained
from existing heaps. Magistral's production for 1997 was 2,447 ounces of gold.
Prompted by low gold prices and the need to invest substantial capital in leach
pad expansions and plant improvements, the Company decided in the fourth quarter
to temporarily close the operation. It was placed on a care-and-maintenance
basis but with continued rinsing of heaps to continue gold recovery and reduce
the residual cyanide levels.
BARITA DE SONORA
Total production in 1997 from the Barita de Sonora operation was 30,000 tonnes,
with fine-milled barite accounting for 1,000 tonnes. Sales of bulk barite
totaled 19,869 tonnes, while sales of fine-milled product totaled 1,324 tonnes.
Bulk barite was sold primarily to the Mexican oil
<PAGE>
drilling industry, mainly the state-owned company Petroleos Mexicanos (PEMEX).
Ground product is sold to northern Mexican firms for brake shoe manufacturing
and other applications.
During the year, the operation was plagued by frequent plant equipment
breakdowns, as well as low availability of mine equipment. During the fourth
quarter, some mine equipment was transferred from the Magistral del Oro mine to
Barita de Sonora. However, lack of funding for capital investment, needed
repairs, and maintenance continued to limit operations. In addition, the
privatization of the Mexican railroad system during 1997 resulted in intense
competition for gondola cars among owners of various sections of the system.
Consequently, cars for shipping barite by rail were scarce throughout the year.
During the fourth quarter, a decision was made to divest the barite business
from CNGC's portfolio. Several prospective buyers were invited to examine the
assets of Barita de Sonora, and the operation was sold during the second quarter
of 1998.
1997 PRODUCTION SUMMARY -- MAIN PROPERTIES
<TABLE>
<S> <C>
NIXON FORK
Gold 39,666 oz
Silver 20,029 oz
Copper 870,658 lbs
Ore Milled 37,000 tonnes
Gold Grade 38.64 grams/tonne
Recovery 86.3%
PACHUCA
Silver 1,876,600 oz
Gold 7,428 oz
Ore Milled 384,000 tonnes
Silver Grade 182 grams/tonne
Gold Grade 0.83 grams/tonne
Recovery - Silver 83.2%
Recovery - Gold 72.1%
AURORA
Gold 13,210 oz
Silver 37,257 oz
Ore Milled 128,000 tonnes
Gold Grade 3.44 grams/tonne
Recovery 93.9%
EL BAZTAN
Copper 3,872,000 lbs
Gold 2,249 oz
Silver 18,660 oz
Ore Milled 111,000 tonnes
Copper Grade 2.03%
Recovery - Copper 86.3%
MAGISTRAL
Gold 2,447 oz
</TABLE>
<PAGE>
RESERVE SUMMARY - MAIN PROPERTIES (DECEMBER 31, 1997)
<TABLE>
<S> <C>
NIXON FORK
Contained Gold (ounces) 38,000
PACHUCA
Contained Silver (ounces) 66,177,000
Contained Gold (ounces) 351,000
EL BAZTAN
Contained Copper (tonnes) 25,000
AURORA
Contained Gold (ounces) 205,000
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
The matters discussed in this report, when not historical matters, are
forward-looking statements that involve a number of risks and uncertainties that
could cause actual results to differ materially from projected results. Such
factors include, among others, the speculative nature of mineral exploration,
commodity prices, production and reserve estimates, environmental and
governmental regulations, availability of financing, force major events, and
other risk factors as described from time to time in the Company's filings with
the Securities and Exchange Commission. Many of these factors are beyond the
Company's ability to control or predict. The Company disclaims any intent or
obligation to update its forward-looking statements, whether as a result of
receiving new information, the occurrence of future events, or otherwise.
The following discussion should be read in conjunction with the Company's
consolidated financial statements included in this report.
RESULTS OF OPERATIONS
SUMMARY
The Company reported a net loss of $58.8 million ($0.44 per share) for the year
ended December 31, 1997, compared to a net loss of $11.0 million ($0.14 per
share) for the six months ended December 31, 1996, a net loss of $6.7 million
($0.14 per share) for the year ended June 30, 1996 (fiscal 1996) and a net loss
of $5.8 million ($0.14 per share) for the year ended June 30, 1995 (fiscal
1995). The increase in the 1997 loss compared to 1996 reflects impairment
provisions relating to the carrying value of mineral properties and mining plant
and equipment totaling $32.1 million, increased operating costs and lower
realized gold prices.
COMPARATIVE INFORMATION
The following selected statement of operations data includes data for the year
ended December 31, 1997, the six months ended December 31, 1996 and the years
ended June 30, 1996 and 1995, which has been derived from the financial
statements of the Company. Because the Company changed its fiscal year end from
June 30 to December 31 in 1996, unaudited consolidated statement of operations
data for the twelve months ended December 31, 1996 and for the six months ended
December 31, 1995 has been included for comparability.
For the year ended December 31, 1997, the data includes the results of the
Company's operations in the United States and in Mexico. For the six months
ended December 31, 1996 the data includes the results of the operations of the
Mexican Subsidiaries for the period from October 1, 1996 (the effective date of
the acquisition of the Mexican Subsidiaries for accounting purposes) to
December 31, 1996. For the purposes of the following analysis, the period from
the acquisition date of the Mexican Subsidiaries to December 31, 1996 will be
referred to as the "Acquisition Period."
<PAGE>
<TABLE>
<CAPTION>
Twelve Six
Year months months
ended ended ended Years
December 31, December 31, ended June 30,
------------ ------------ --------------
Revenue: 1997 1996 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales of precious metals and mineral
products $33,387 23,546 11,423 5,075 16,327 8,383
Forward and futures contract gains
(losses), net 841 (1,447) 33 (168) (777) 220
------- ------- ------- ------ ------- ------
34,228 22,099 11,456 4,907 15,550 8,603
------- ------- ------- ------ ------- ------
Operating costs and expenses:
Production costs 33,963 22,141 13,228 3,430 12,241 10,408
Depreciation, depletion and amortization 14,484 8,203 3,756 1,360 6,216 1,196
Impairment of mineral properties, plants,
buildings and equipment 32,112 113 113 - - 400
General and administrative 5,201 3,290 2,339 838 1,789 1,521
Exploration costs 94 230 126 74 178 275
------- ------- ------- ------ ------- ------
85,854 33,977 19,562 5,702 20,424 13,800
------- ------- ------- ------ ------- ------
Operating loss $(51,626) (11,878) (8,106) (795) (4,874) (5,197)
------- ------- ------- ------ ------- ------
------- ------- ------- ------ ------- ------
</TABLE>
GOLD PRODUCTION AND SALES
Revenue derived from the sale of gold and silver bullion is directly affected by
the market prices of gold and silver and the volume of production. The price of
gold and silver is affected by many factors which are beyond the Company's
control.
Production and sales from the Company's mines are as follows:
<TABLE>
<CAPTION>
Twelve Six
Year months months
ended ended ended Years
December 31, December 31, ended June 30,
------------ ------------ --------------
1997 1996 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Gold production (oz):
Nixon Fork mine 42,682 43,592 13,968 9,649 34,144 -
Aurora mine 13,758 10,760 5,537 8,552 13,359 14,949
Barite Hill mine - - - 296 - 5,499
--------- ------- ------- ------ ------ ------
Total production 56,440 54,352 19,505 18,497 47,503 20,448
Decrease (increase) in inventory (2,720) (2,757) 1,098 (2,955) (3,607) 1,508
--------- ------- ------- ------ ------ ------
Gold sold 53,720 51,595 20,603 15,542 43,896 21,956
--------- ------- ------- ------ ------ ------
--------- ------- ------- ------ ------ ------
Silver production (oz):
Pachuca mine 2,679,911 542,415 542,415 -
Decrease (increase) in inventory (218,930) 55,682 55,682 -
--------- ------- ------- ------ ------ ------
Silver sold 2,460,981 598,097 598,097 -
--------- ------- ------- ------ ------ ------
--------- ------- ------- ------ ------ ------
<PAGE>
Copper production (lb):
El Baztan mine 3,871,832 1,146,527 1,146,527 -
Decrease (increase) in inventory (109,368) 474,099 474,099 -
--------- --------- --------- ------ ------ ------
Copper sold 3,762,464 1,620,626 1,620,626 -
--------- --------- --------- ------ ------ ------
--------- --------- --------- ------ ------ ------
</TABLE>
Net sales increased $12.1 million for the year ended December 31, 1997 compared
to the twelve months ended December 31, 1996 as a result of a full year of
revenue totaling $17.2 from the Mexican Subsidiaries compared to $4.4 million of
revenue from the Mexican Subsidiaries in the Acquisition Period. Sales at Nixon
Fork decreased $2.9 million for the year ended December 31, 1997 compared to the
comparable period in 1996 as a result of decreased production. Gold sold in the
year ended December 31, 1997 was approximately 53,720 ounces versus 51,595 in
the twelve months ended December 31, 1996. The average price of gold received,
including the effect of net hedging gains during the year ended December 31,
1997 was $344 per ounce compared to $380 per ounce for the twelve months ended
December 31, 1996. The average price of silver received from the Company's
operations in Mexico was $4.98 per ounce for the year ended December 31, 1997
versus $4.99 in the Acquisition Period. The average price for copper
concentrate received from the Company's operations in Mexico was $424 per tonne
during the year ended December 31, 1997 versus $520 in the Acquisition Period.
Net sales increased $6.5 million for the six months ended December 31, 1996
compared to the six months ended December 31, 1995. The Nixon Fork mine was in
production for the full six months ended December 31, 1996 compared to two and
one half months in the six months ended December 31, 1995, which contributed
approximately $1.5 million to the increase in net sales. In addition, $4.4
million of net sales in the six months ended December 31, 1996 were a result of
the inclusion of sales from the Mexican Subsidiaries which were acquired 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 per ounce
compared to $395 per ounce in the comparable prior period. The average price of
silver received from the Company's operations in Mexico was $4.99 per ounce
during the Acquisition Period. The average price of copper concentrate received
from the Company's operations in Mexico was $520 per tonne during the
Acquisition Period.
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 effect of the recognition of deferred hedging
losses. The Company had deferred $1.3 million of losses from the early
termination of a hedge position in fiscal 1995 and recognized $1.1 million of
these losses in fiscal 1996 as the hedged production was sold.
The Company's profitability is effected by changes in gold and silver prices,
exchange rates, interest rates and certain other commodity prices. To reduce
the impact of such changes, the Company attempts to lock in the future value of
a portion of its anticipated production through the use of derivative financial
instruments, the value of which is derived from movements in the underlying
prices or rates. The financial instruments used to hedge future gold and silver
production include gold loans, forward sales and spot-deferred contracts. Gains
and losses resulting from hedging activities are recognized in earnings when the
hedged production is sold.
<PAGE>
Gains and losses on early termination of hedging contracts are deferred until
the hedged items are recognized in earnings.
OPERATING COSTS AND EXPENSES
Production costs during the year ended December 31, 1997 increased $11.8 million
as compared to the twelve months ended December 31, 1996. Approximately $10.3
million of the increase is attributable to production costs relating the
operations in Mexico for the year ended December 31, 1997. Production costs for
the Mexican Subsidiaries for the year ended December 31, 1997 and the
Acquisition Period were $15.6 million and $5.3 million, respectively.
Production costs during the six months ended December 31, 1996, increased $9.8
million as compared to the six months ended December 31, 1995 as a result of
$4.4 million of additional production costs at Nixon Fork which was in
production for two-and-one-half months in the six months ended December 31, 1995
and due to the acquisition of the Mexican Subsidiaries which had production
costs of $5.3 million in the Acquisition Period.
Production costs during fiscal 1996 increased by $1.8 million over fiscal 1995
due to the startup of Nixon Fork. Production of gold increased significantly
from fiscal 1995 to fiscal 1996 with 47,503 ounces produced in fiscal 1996
compared to 20,448 ounces during fiscal 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 mechanical failures in January and February
1996.
Cash cost per ounce of production for the Company's two primary gold producing
mines for the year ended December 31, 1997 was $315 compared to the cash cost
per ounce for the gold producing mines for the six months ended December 31,
1996 of $520. The decrease in the cash cost per ounce of gold is attributable
to production at the Nixon Fork mine, increased average daily tonnage resulting
from additions to the mining fleet, higher grade ore milled and an increase in
the recovery rate from 81.7% to 87.3%.
Cash cost per ounce 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 cash cost per ounce for the gold producing mines in fiscal 1996 of
$257 and $387 per ounce in fiscal 1995. The increase for the six-month period
ended 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. 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 1996.
During the year ended December 31, 1997, the cash cost of production at the
Pachuca mine was $5.41 per equivalent ounce of silver, as compared to the
Acquisition Period of $6.54 per equivalent ounce of silver. The decrease is
attributable to the positive effects of new labor agreements with the labor
force, and capital expenditures related to the introduction of nine
diesel-powered, rubber-tired, front-end load and haul equipment. The high
production costs in the Acquisition Period are attributable to utilization of
facilities below their productive capacity as a result of turnover and training
issues following the implementation of a new labor agreement and delays in
placing new equipment in service.
<PAGE>
The Company made certain changes in 1997 intended to improve cash costs of
production. Such changes included management changes at Nixon Fork, Pachuca and
Barita, new equipment at Nixon Fork and Pachuca, and the implementation of grade
control and bonus programs at Nixon Fork and Pachuca.
Depreciation, depletion and amortization (DD&A) for the year ended December 31,
1997 was $14.5 million as compared to $8.2 million for the twelve months ended
December 31, 1996. The increase of $6.3 million is due in part to an additional
$3.5 million of DD&A in 1997 related to the Mexican Subsidiaries as compared to
the Acquisition Period. The remaining increase in DD&A in 1997 is due to an
increase in the production rates and a reduction in the amount of estimated ore
reserves remaining at the Nixon Fork mine. DD&A was $3.8 million for the six
months ended December 31, 1996 compared to $1.4 million for the six months ended
December 31, 1995. The increase is primarily attributable to the acquisition of
the Mexican Subsidiaries which added $1.3 million in DD&A in the Acquisition
Period. DD&A was $6.2 million for fiscal 1996, almost five times DD&A for
fiscal 1995, as a result of the commencement of commercial production from the
Nixon Fork mine in fiscal 1996.
During the year ended December 31, 1997, the Company reduced the carrying value
of certain of its mineral properties and associated plants, buildings and
equipment by recording impairment charges totaling $32.1 million. During the
fourth quarter of 1997, the Company recorded an impairment charge of $17.6
million relating to the Nixon Fork mine. Of this amount, approximately $12.6
million is related to mineral properties and approximately $5 million is related
to plants, buildings and equipment. The impairment charge recorded was the
result of several factors, including the decrease in the market price of gold,
the substantial capital expenditures required for a tailings dam expansion
necessary to continue operations beyond the third quarter of 1998, and the
remaining proved and probable reserves of gold at December 31, 1997. In
addition, the Company recorded a $1.3 million provision for the impairment of
the Aurora mine consisting of approximately $0.4 million relating to the mineral
properties and $0.9 million relating to plants, buildings and equipment.
In Mexico, the Company recorded provisions for impairment of the carrying value
of mining assets totaling $13.2 million during the year ended December 31, 1997.
The Company recorded an impairment charge of $6.3 million related to the El
Baztan operations. The impairment charge was recorded due to low market prices
of copper as compared to historical cash costs of production at the mine. During
the third quarter of 1997, the Company placed the Magistral mine on care and
maintenance, with continued rinsing of heaps to reduce residual cyanide levels.
In conjunction with the suspension of operations at the Magistral mine, the
Company recorded an impairment charge of approximately $4.5 million, including
$2.2 million to reduce the carrying value of plants, building and equipment and
$2.3 million to reduce the carrying value of mineral properties. In the fourth
quarter of 1997, the Company made a decision to divest of its barite operations.
The Company recorded an impairment provision of approximately $2.4 million
relating to its Barita mine based on the estimated net realizable value of the
assets held for sale. During December 1997, the Company entered into an option
and sale agreement with a third party for the sale of Barita. Subsequent to
year end, the Company completed the sale of Barita to an unrelated Mexican
mining company for $4.5 million, which approximated its remaining carrying
value.
<PAGE>
The Company reduced the carry costs relating to its Barite Hill property by
$113,000 during the six months ended December 31, 1996, and by $400,000 in
fiscal 1995 through a charge to operations. The impairments were based upon an
independent evaluation of recoverable value.
General and administrative expenses were $5.2 million for the year ended
December 31, 1997 as compared to $3.3 million for the comparable period of the
prior year. The $1.9 million increase is attributable to a $2.2 million
increase in general and administrative expenses related to the Mexican
Subsidiaries for 1997 as compared to the Acquisition Period.
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 added as a result of the acquisition of the
Mexican Subsidiaries contributed $1.1 million in additional costs during the six
months ended December 31, 1996, compared to the six months 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.
OTHER INCOME (EXPENSE)
Interest expense for the year ended December 31, 1997 was $5.5 million, an
increase of $1.8 compared to the twelve months ended December 31, 1996. The
increase was the result of a higher level of indebtedness in 1997 versus the
1996 period. Interest expense for the six months ended December 31, 1996 was
$2.0 million higher compared to the same period in the prior year primarily as a
result of the increased debt associated with the acquisition of the Mexican
Subsidiaries in October 1996. Interest expense on Mexican debt was $2.2 million
during the Acquisition Period. 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
preference shares.
The Company discontinued the application of hedge accounting for gold due under
the ING gold loan in 1997. As a result of the default on the scheduled loan
repayments, the Company no longer considers the instrument to be effective in
reducing its cash flow risk and, accordingly, hedge accounting is no longer
appropriate. The gold loan has therefore been marked to market resulting in the
recognition of a $1.6 million gain in 1997, which has been reported as a gain on
commodity transactions in the statement of operations.
During 1997 the Company also entered into forward sales contracts with Standard
Bank London for 1997 delivery of 20,000 ounces of gold and 3.5 million ounces of
silver. Contract prices were $329 per ounce of gold and $5.25 to $5.85 per
ounce of silver. Later in the year, the Company terminated the contract for
delivery of 20,000 ounces of gold, recognizing a gain of $0.5 million. The
Company also terminated a contract for 1.5 million ounces of silver at a
contract price of $5.85 per ounce, recognizing a loss of $0.2 million. These
amounts are classified as gains or losses on commodity transactions as the
Company did not have the production capacity to deliver the quantities specified
under the contracts. At December 31, 1997, the Company held forward sales
contracts for delivery in January 1998 of 2.0 million ounces of silver, at
prices ranging from $5.25 to $5.85 per ounce. These contracts have been
<PAGE>
recorded in the Company's consolidated financial statements at their market
value of $0.9 million which amount has been included in accrued liabilities and
a corresponding amount recorded as a loss on commodity transactions. Subsequent
to year end, the Company terminated contracts for delivery of 1.3 million ounces
of silver. The remaining 700,000 ounces are scheduled for delivery on May 8,
1998.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced recurring losses from its operations and is
currently in default on certain of its debt agreements and other contractual
commitments. As of December 31, 1997, the Company's current liabilities exceed
its current assets by approximately $30.8 million.
GAN has agreed to provide additional capital, loans or advances, or direct or
indirect guarantees of loans made by unaffiliated parties to allow the Company
to meet its existing financial obligations as of December 31, 1997 as they
become due, at least through January 1, 1999.
The Company is currently in discussions with certain of its lenders to extend
the terms of past due principal and interest payments. The Company is also
attempting to obtain new financing to refinance other debt that is in default
and renegotiate its other contractual commitments.
The Company has received a proposal from a syndicate of international financial
institutions, led by Standard Bank London Limited (Standard), as agent, to make
available an $18,000,000 credit facility. The proposal by Standard is subject
to certain conditions, primarily the satisfactory completion of legal and
engineering due-diligence reviews of the Pachuca mine and the negotiation of a
definitive agreement, including the specific terms of certain coverage ratios
and covenants. The proposal is also subject to GAN agreeing to guarantee the
repayment of all principal and interest under the facility. There can be no
assurance that this financing arrangement will be concluded.
The Company is also attempting to restructure its operations to improve its
operating results. Existing cash resources will be used to fund operations and
make necessary capital expenditures at its existing mines as directed by Company
management and approved by the Board of Directors. The Company has placed its
Aurora mine and Magistral del Oro mine on care and maintenance. Subsequent to
year end, the Company sold its Barita de Sonora mine and its interest in the
Baroid joint venture as described in note 3 to the consolidated financial
statements. The Company is also evaluating the sale of other mines or assets
and the curtailment of operations at one or more of its three remaining mines,
as well as the consolidation of its administrative functions.
The ability of the Company to continue as a going concern after January 1, 1999,
is contingent upon the willingness of GAN to continue its financial support or
the ability of the Company to refinance it's existing debt, satisfy or
renegotiate its contractual obligations that are in default, obtain adequate
capital to conduct its activities and achieve profitability, of which there can
be no assurance.
For the year ended December 31, 1997 cash used to meet the Company's operating
needs, to finance capital expenditures and to fund current obligations was
provided by existing cash reserves and additional financing activities. At
December 31, 1997, cash and cash equivalents, including restricted cash of
$123,000, totaled $1.8 million, a decrease of $6.0 million from
December 31, 1996.
Net cash flows used in operating activities amounted to $9.6 million in the year
ended December 31, 1997 compared to $2.5 million the six months ended December
31, 1996 and $1.2 million in fiscal 1996 and 1995. The decrease in the cash
flow in 1997 is related to lower
<PAGE>
realized gold prices and higher operating costs which were offset in part by
higher production. Operating costs in excess of revenues generated at certain
of the Company's mines in Mexico were also factors in the increase in cash used
in operations in the year ended December 31, 1997 and in the six months ended
December 31, 1996.
Capital expenditures increased $2.1 million in the year ended December 31, 1997
compared to the six months ended December 31, 1996. The increase resulted
principally from additional expenditures on mining equipment at Nixon Fork and
Pachuca in addition to continued infrastructure development at Pachuca. Also in
1997, in two separate transactions the Company issued stock with a total value
of $0.9 million in exchange for mineral leases and properties and also issued
stock valued at $0.5 million for services related to acquisition of the Mexican
Subsidiaries.
During the six months ended December 31, 1996, the Company's capital
expenditures were $2.3 million which included approximately $1.2 million of
exploration and development costs at Nixon Fork and Aurora. Other capital
expenditures included mining equipment at Pachuca and El Baztan.
To continue production at Nixon Fork beyond the fall of 1998, the Company will
be required to spend approximately $750,000 to raise the tailings dam. The
Company will also be required in 1998 to continue its capital expenditures for
the development of the infrastructure at the Pachuca mine, including the
construction of new tailings facilities. The availability of funds for capital
expenditures in 1998 will be contingent on the results of the Company's efforts
to improve its liquidity.
<PAGE>
FINANCING ACTIVITIES
On November 21, 1997, the terms of the 3% Convertible Subordinated Debentures
("3% Debentures") Trust Indenture were amended reducing the conversion price
from Cdn $1.20 to Cdn $0.72 per share and requiring the conversion of the
debentures into common shares at the reduced conversion price. As a result, Cdn
$13.6 million of 3% debentures were converted into 18,912,500 common shares.
Also in 1997, the Company issued a $7.5 million 10% Convertible Unsecured
Debenture (10% Unsecured Debentures) to four of its major shareholders. The 10%
Unsecured Debentures are convertible at a conversion price of Cdn $0.77 per
share. The 10% Unsecured Debenture automatically convert into common shares if
the weighted average price at which the common shares trade on The Toronto Stock
Exchange, during 20 consecutive trading days, is not less than Cdn $1.50.
Interest is payable semi-annually, commencing on March 12, 1998 with principal
maturing on September 12, 2002. The Company has not paid the $75,000 scheduled
interest payment, due March 12, 1998, as of April 17, 1998.
In 1997, the Company borrowed $4.4 million from GAN under several separate loan
agreements. As of April 17, 1998, the Company has not paid the interest on
certain of these notes which was due on March 31, 1998. The Company also
borrowed $0.6 million, bearing interest at 11% per annum, from a shareholder.
The amount is due and payable with interest on March 24, 1998. As of April 17,
1998, the Company has not made the scheduled principal and interest payment and
is in default under the terms of the loan agreement.
The Company's gold loan with Internationale Nederlanden (U.S.) Capital
Corporation 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 is in default of the working
capital and other covenants and as such the loan balance of $4.6 million at
December 31, 1997 is due on demand.
The Company has certain mining and exploration leases on land adjacent to its
Nixon Fork mine. The Company did not make the final cash payment due on the
lease acquisition of $0.9 million due on October 31, 1997. On February 2, 1998,
the lessor and the Company agreed to amend the original agreement to specify
that the remaining $0.9 million is due in three annual installments of $0.3
million, including interest at the rate of 10% per annum, commencing on March 1,
1998. The Company has made the first scheduled payment, including accrued
interest. The final payment of 536,684 common shares is due in May 1998.
On March 6, 1998, the Company issued a $26.0 million convertible debenture to
GAN. The Company received $4,000,000 in cash from GAN and applied $16.0 of
demand loans and other amounts payable to GAN and approximately $6.0 of 10%
Unsecured Debentures held by GAN, toward the purchase of the $26.0 million
convertible debenture. The debenture was simultaneously converted into
208,000,000 common shares and 26,998,400 common shares purchase warrants of the
Company. The debenture bears interest at 10% per annum and was convertible at
$0.125 per share. GAN also received 0.1298 common share purchase warrant of
the Company for each share issued. The common share purchase warrants are
exercisable until February 24, 2003 at $0.125 per common share. Immediately
following conversion, GAN held
<PAGE>
264,026,559 shares of common stock or approximately 73% of the outstanding
common shares of the Company.
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.
<PAGE>
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 non-complying
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
<PAGE>
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, 1997, the Company has accrued
approximately $3.8 million toward post-closing reclamation costs. The Company
estimates it will have a cash requirement for reclamation costs at Barite Hill
of $2.0 million to accomplish substantial completion of the reclamation by
mid-year 1999.
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.
YEAR 2000 ISSUE
Computer programs written in the past utilize a two digit format to identify the
applicable year. Any date sensitive software beyond December 31, 1999 could
fail, if not modified, as the date would be reset to the year 1900. The result
could be, among other possibilities, disruptions to operations and the inability
to process financial transactions. The Company is currently assessing the
impact of the year 2000 issue and is in the process of converting its'
accounting and operating systems. The Company expects to complete its'
assessment of current hardware and software needs in 1998. Currently, the
Company does not anticipate the costs to become year 2000 compliant to be
significant.
<PAGE>
MANAGEMENT REPORT
Management is responsible for the preparation of the information contained in
this annual report and for the consistency between the consolidated financial
statements and other financial operating data contained elsewhere in the report.
The accompanying consolidated financial statements have been prepared by
management in accordance with accounting principles generally accepted in Canada
and necessarily include amounts based on estimates and judgments.
Management has established and maintains a system of internal control, designed
to provide reasonable assurance that assets are safeguarded from loss or
unauthorized use and that financial information is reliable and accurate.
The Audit Committee of the Board of Directors, comprised of non-management
directors, has reviewed in detail the consolidated financial statements with
management and external auditors. The consolidated financial statements have
been approved by the Board of Directors on the recommendation of the Audit
Committee.
The consolidated financial statements have been examined by external auditors.
The examination provides an independent view as to management's discharge of its
responsibilities insofar as they relate to the fairness of reported operating
results and financial conditions. The auditors have full and free access to the
Audit Committee.
/s/ Jorge E. Ordonez C. /s/ Xavier D. Autrey Maza
Jorge E. Ordonez C. Xavier D. Autrey Maza
Acting President and Chairman of the Board
Chief Executive Officer
Denver, Colorado
May 7, 1998
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION:
We have audited the accompanying consolidated balance sheets of Consolidated
Nevada Goldfields Corporation and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for the year ended December 31, 1997, the six months
ended December 31, 1996 and the years ended June 30, 1996 and 1995. 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 conducted our audits in accordance with auditing standards generally accepted
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, 1997 and 1996 and for
the year ended December 31, 1997, the six months ended December 31, 1996 and the
years ended June 30, 1996 and 1995, in conformity with generally accepted
accounting principles in Canada.
Accounting principles generally accepted in Canada vary in certain significant
respects from accounting principles generally accepted in the United States.
Application of accounting principles generally accepted in the United States
would have affected results of operations for the year ended December 31, 1997,
the six months ended December 31, 1996 and the years ended June 30, 1996 and
1995 and shareholders' equity as of December 31, 1997 and 1996, to the extent
summarized in Note 16 to the consolidated financial statements.
/s/ KPMG Peat Marwick LLP
Denver, Colorado
April 17, 1998
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(AMOUNTS STATED IN THOUSANDS OF U.S. DOLLARS AND SHARES)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ---- ----
<S> <C> <C>
Cash and cash equivalents $ 1,639 6,960
Accounts receivable:
Production 2,767 1,060
Other 1,347 1,433
Affiliated companies and related parties 696 345
Inventories:
Ore in stockpiles and ore in process 3,511 3,317
Supplies and materials 2,163 2,589
Prepaid expenses and other current assets 584 551
------- -------
Total current assets 12,707 16,255
Restricted cash (note 4) 123 805
Mineral properties at cost, net of accumulated depletion and
allowance for impairment (note 3) 26,118 43,678
Plants, buildings and equipment at cost, net of accumulated
depreciation, amortization and allowance for impairment (note 3) 38,776 62,307
Deferred loan costs and other assets at cost, net of amortization 189 580
------ -------
Total assets $ 77,913 123,625
------ -------
------ -------
</TABLE>
(continued)
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(AMOUNTS STATED IN THOUSANDS OF U.S. DOLLARS AND SHARES)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
- ------------------------------------ ---- ----
<S> <C> <C>
Long-term debt in default (note 4) $ 4,606 -
Current portion of long-term debt (note 4) 10,157 13,497
Accounts payable:
Suppliers and contractors 5,267 4,071
Other 3,749 2,475
Accrued interest payable 1,364 825
Accrued liabilities 3,473 3,011
Current portion of amounts due to related parties (note 13) 13,291 790
Current portion of accrued mine reclamation costs (note 3) 1,600 1,326
------- -------
Total current liabilities 43,507 25,995
Long-term debt, less current portion (note 4) 15,828 18,489
Accrued mine reclamation costs (note 3) 2,164 1,517
Accrued interest payable, non-current 61 111
Convertible subordinated debentures (note 6) 2,123 12,155
Convertible unsecured debentures (note 7) 7,500 -
Amounts due to related party (note 13) 60 11,176
Deferred foreign exchange gain 590 161
Other (note 12) 1,241 1,149
------- -------
Total liabilities 73,074 70,753
Shareholders' equity (notes 6 and 9):
Common shares, without par value, unlimited shares authorized;
issued 152,957 shares in 1997 and 129,837 shares in 1996 109,922 99,163
Accumulated deficit from April 1, 1991 (105,083) (46,291)
------- -------
Total shareholders' equity 4,839 52,872
------- -------
Commitments and contingencies (notes 3, 5 and 12)
Total liabilities and shareholders' equity $ 77,913 123,625
------- -------
------- -------
</TABLE>
See accompanying notes to consolidated financial statements
Approved on behalf of the Board:
Donald Worth, Director Xavier D. Autrey, Director
/s/ Donald Worth /s/ Xavier D. Autrey
- -------------------- --------------------
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS STATED IN THOUSANDS OF U.S. DOLLARS AND SHARES)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months
Year ended ended Year ended Year ended
December 31, December 31, June 30, June 30,
1997 1996 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue (note 5):
Net sales of precious metals and mineral products $ 33,387 11,423 16,327 8,383
Forward and futures contract gains (losses), net 841 33 (777) 220
------- -------- ------- -------
34,228 11,456 15,550 8,603
------- -------- ------- -------
Operating costs and expenses:
Production costs 33,963 13,228 12,241 10,408
Depreciation, depletion and amortization 14,484 3,756 6,216 1,196
Impairment of mineral properties, plants, buildings
and equipment (note 3) 32,112 113 - 400
General and administrative 5,201 2,339 1,789 1,521
Exploration costs 94 126 178 275
------- -------- ------- -------
85,854 19,562 20,424 13,800
------- -------- ------- -------
Operating loss (51,626) (8,106) (4,874) (5,197)
Other income (expense):
Interest expense, net (5,518) (1,350) (1,745) (789)
Foreign currency translation loss (note 1) (817) (1,040) - -
Gains on commodity transactions, net 1,007 - - -
Other, net (1,532) (428) (47) 223
------- -------- ------- -------
(6,860) (2,818) (1,792) (566)
------- -------- ------- -------
Loss before income tax expense (58,486) (10,924) (6,666) (5,763)
Income tax expense (306) (67) - -
------- -------- ------- -------
Net loss $(58,792) (10,991) (6,666) (5,763)
------- -------- ------- -------
------- -------- ------- -------
Loss per common share $ (0.44) (0.14) (0.14) (0.14)
------- -------- ------- -------
------- -------- ------- -------
Weighted average number of common share outstanding 133,546 79,614 47,730 41,437
------- -------- ------- -------
------- -------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(Amounts Stated in Thousands of U.S. Dollars and Shares)
<TABLE>
<CAPTION>
Common Number
Number shares of Total
of without common Common shareholders'
common par shares shares Accumulated equity
shares value subscribed subscribed deficit (deficit)
------ ----- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
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 and common shares
subscribed for a mining lease 537 445 1,073 889 - 1,334
Net loss - - - - (6,666) (6,666)
------- ------- ----- ----- -------- -------
BALANCE 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 on 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 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
Issuance of common shares for cash 53 30 - - - 30
Issuance of common shares as payment of
interest of 3% convertible subordinated
debentures 273 236 - - - 236
Issuance of common shares upon conversion of
3% subordinated debentures 18,913 9,544 - - - 9,544
Issuance of common shares subscribed for
acquisition of a mining lease 537 445 (537) (445) - -
Issuance of common shares for acquisition of
mineral properties 2,788 445 - - - 445
Issuance of common shares in exchange for
services related to acquisition of
subsidiaries 556 504 - - - 504
Net loss - - - - (58,792) (58,792)
------- ------- ----- ----- -------- -------
BALANCES AT DECEMBER 31, 1997 152,957 $ 109,478 536 444 (105,083) 4,839
------- ------- ----- ----- -------- -------
------- ------- ----- ----- -------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS STATED IN THOUSANDS OF U.S. DOLLARS AND SHARES)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months
Year ended ended Year ended Year ended
December 31, December 31, June 30, June 30,
1997 1996 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(58,792) (10,991) (6,666) (5,763)
Adjustments to reconcile net loss to net cash used in
operations:
Amortization of deferred hedging losses (gains) (1,924) 52 948 (326)
Depreciation, depletion and amortization 14,484 3,756 6,216 1,196
Impairment of mineral properties, plants, building
and equipment, 32,112 113 - 400
Mine reclamation costs accrued (incurred), net 979 125 (357) 887
Amortization of deferred loan costs, net 285 297 535 521
Loss (gain) on sale or disposition of mining claims,
equipment and inventory 607 - 6 (254)
Decrease (increase) in amounts due from affiliated
companies and related parties (351) 265 - -
Increase in amounts due to affiliates 885 1,124 10 31
Change in accrued interest payable, non-current 725 621 439 (31)
Other (168) 651 228 12
Changes in non-cash working capital accounts:
Decrease (increase) in current assets, net (1,422) 1,881 (2,311) 1,544
Increase (decrease) in current liabilities, net 2,932 (382) (207) 607
------ ------ ------ ------
Net cash used in operating activities (9,648) (2,488) (1,159) (1,176)
------ ------ ------ ------
Cash flows from investing activities:
Net cash from acquisition - 986 - -
Capital expended for mineral properties and plants,
building and equipment (4,414) (2,317) (8,556) (13,265)
Proceeds from sales of mining claims and equipment - - - 324
Increase in other assets - - (353) -
------ ------ ------ ------
Net cash used in investing activities (4,414) (1,331) (8,909) (12,941)
------ ------ ------ ------
</TABLE>
(continued)
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(AMOUNTS STATED IN THOUSANDS OF U.S. DOLLARS AND SHARES)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months
Year ended ended Year ended Year ended
December 31, December 31, June 30, June 30,
1997 1996 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Borrowings $ 456 - - 20,083
Repayment of debt (4,012) (8,922) (3,464) (4,911)
Borrowings from related parties 4,985 - - -
Repayments of debt to related parties (900) (249) - -
Proceeds from issuance of convertible subordinated
debentures to a related party 7,500 - - -
Cancellation of forward contracts - - - (1,511)
Proceeds from issuance of preferred shares - - 1,551 -
Proceeds from issuance of common shares, net 30 18,350 6,574 24
------ ------ ------ ------
Net cash provided by financing activities 8,059 9,179 4,661 13,685
------ ------ ------ ------
Net increase (decrease) in cash and cash
equivalents (6,003) 5,360 (5,407) (432)
Cash and cash equivalents at beginning of year 7,765* 2,404* 7,811* 8,243*
------ ------ ------ ------
Cash and cash equivalents at end of year $1,762* 7,764* 2,404* 7,811*
------ ------ ------ ------
------ ------ ------ ------
Supplement disclosure of cash flow information -
cash paid during the year for interest $4,793 567 1,691 -
Supplemental schedule of non-cash investing and financing
and 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 236 104 259 240
Issuance of common shares upon conversion of 3%
convertible subordinated debentures 9,544 664 3,259 -
Issuance of common shares for acquisition of mining
leases and properties 445 - 445 -
Issuance of common shares for acquisition of mineral
properties 445 - - -
Issuance of common shares in exchange for services
related to acquisition of subsidiaries 504 - - -
Common shares subscribed for acquisition of mining lease - - 889 -
</TABLE>
* Includes restricted cash of $123, $805, $853 and $6,609 at December 31,
1997 and 1996, and June 30, 1996 and 1995, respectively.
See accompanying notes to consolidated financial statements
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
(1) GENERAL MATTERS AND SUMMARY OF ACCOUNTING POLICIES
(a) NATURE AND OWNERSHIP OF THE BUSINESS
Consolidated Nevada Goldfields Corporation (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, 1997, Grupo Acerero del Norte, S.A. de C.V.
(GAN), owns 36.63% of the outstanding shares of the Company. GAN
received the shares in connection with the Company's acquisition
of certain of GAN's subsidiaries (the Mexican Subsidiaries)
described in note 2.
On March 6, 1998, the Company issued a $26,000,000 convertible
debenture to GAN. The Company received $4,000,000 in cash from
GAN and applied $16,000,000 of demand loans and other amounts
payable to GAN and approximately $6,000,000 of 10% Unsecured
Debentures held by GAN, toward the purchase of the $26,000,000
convertible debenture. The debenture was simultaneously converted
into 208,000,000 common shares and 26,998,400 common share
purchase warrants of the Company. The debenture bears interest at
10% per annum and was convertible at $0.125 per share. GAN also
received 0.1298 common share purchase warrant of the Company for
each share received in the debenture conversion. The common share
purchase warrants are exercisable until February 24, 2003 at
$0.125 per common share. Immediately following conversion, GAN
held 264,026,559 shares of common stock or approximately 73% of
the outstanding common shares of the Company.
(b) ECONOMIC DEPENDENCY
The Company has experienced recurring losses from its operations
and as of April 17, 1998 is in default on certain of its debt
agreements and other contractual commitments. See notes 4, 7 and
13. As of December 31, 1997, the Company's current liabilities
exceed its current assets by approximately $30,800,000.
GAN has agreed to provide additional capital, loans or advances,
or direct or indirect guarantees of loans made by unaffiliated
parties to allow the Company to meet its existing financial
obligations as of December 31, 1997 as they become due at least
through January 1, 1999.
The Company is currently in discussions with certain of its
lenders to extend the terms of past due principal and interest
payments. The Company is also attempting to obtain new financing
to refinance other debt that is in default and renegotiate its
other contractual commitments.
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(1) GENERAL MATTERS AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
The Company has received a proposal from a syndicate of
international financial institutions, led by Standard Bank London
Limited (Standard), as agent, to make available an $18,000,000
credit facility. The proposal by Standard is subject to certain
conditions, primarily the satisfactory completion of legal and
engineering due-diligence reviews of the Pachuca mine and the
negotiation of a definitive agreement, including the specific
terms of certain coverage ratios and covenants. The proposal is
also subject to GAN agreeing to guarantee the repayment of all
principal and interest under the facility. There can be no
assurance that this financing arrangement will be concluded.
The Company is also attempting to restructure its operations to
improve its operating results. The Company has placed its Aurora
mine and Magistral del Oro mine on care and maintenance.
Subsequent to year end, the Company sold its Barita de Sonora mine
and its interest in the Baroid joint venture. See note 3. The
Company is also evaluating the sale of other mines or assets and
the curtailment of operations at one or more of its three
remaining mines, as well as the consolidation of its
administrative functions.
The ability of the Company to continue as a going concern after
January 1, 1999, is contingent upon the willingness of GAN to
continue its financial support or the ability of the Company to
refinance it's existing debt, satisfy or renegotiate its
contractual obligations that are in default, obtain adequate
capital to conduct its activities and achieve profitability, of
which there can be no assurance.
(c) BASIS OF PRESENTATION
These consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Canada
(Canadian GAAP). As described in note 16, 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).
(d) CHANGE IN FISCAL YEAR END
As a result of the acquisition of the Mexican 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 subsidiaries in Mexico and was
effective December 31, 1996. As a result, the Company has
separately reported its results of operations for the six months
ended December 31, 1996. As the acquisition of the Mexican
Subsidiaries occurred effective October 10, 1996, the Company's
results of operations for that period include the operations of
the Mexican Subsidiaries for the three months ended December 31,
1996.
(e) 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
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(1) GENERAL MATTERS AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ significantly from those
estimates.
(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 consolidated 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 cost 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 from the mineral property and
its eventual disposition are less than the carrying amount of the
mineral property, an
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(1) GENERAL MATTERS AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
impairment is recognized based upon the estimated future net cash
flows for each mineral property calculated using estimates of
mineral reserves and resources, and estimated future prices of
minerals, operating costs, capital requirements and reclamation
costs.
(j) PLANTS, BUILDING 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 depreciated 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 in connection with the mineral properties.
(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 all of the Company's operations, although the Company
does enter into transactions which are denominated in Mexican
pesos or Canadian dollars.
Assets and liabilities of the Mexican Subsidiaries are translated
in U.S. dollars under the temporal method since the Mexican
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. Revenue 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 operating
results.
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 term of such debentures.
(l) REVENUE RECOGNITION
Gains and losses resulting from forward sales 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
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(1) GENERAL MATTERS AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
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.
Forward sales, spot deferred futures contracts and option
contracts that are not designated as hedges or effective as hedges
are recorded at market, with any resulting gains or losses
reflected in operating results currently.
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 $285,000 for the year
ended December 31, 1997, $297,000 for the six months ended
December 31, 1996 and $535,000 and $521,000 for the years ended
June 30, 1996 and 1995, 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 proven and
probable 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, 1997, the
Company estimates total reclamation costs for all mines will
approximate $3,992,000, of which $3,764,000 has been accrued.
(o) PENSIONS AND OTHER EMPLOYEE BENEFITS
The Mexican Subsidiaries provide pension benefits for all of their
employees, referred to as seniority premiums. These benefit
obligations are not funded. The Mexican Subsidiaries are liable
for severance payments to employees discharged under certain
conditions. The Mexican Subsidiaries record a charge for
severance payments in the period in which the payments are made.
In addition, the Mexican 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.
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(q) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to
the current year presentation.
(2) ACQUISITION OF MEXICAN SUBSIDIARIES
On June 28, 1996, the Company entered into a Share Purchase Agreement
(Agreement) with GAN to acquire certain of its subsidiaries. The Mexican
Subsidiaries owned and operated four mines located in Mexico. The
subsidiaries acquired and the related 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. The
agreement was placed into escrow, to be released upon the Company
entering into an underwriting agreement for the sale of the common shares
with gross proceeds of at least $20,000,000.
Under the terms of the Agreement, the Company issued 52,290,091 common
shares to GAN in exchange for the Mexican Subsidiaries. In addition, the
Company granted GAN a 12% royalty interest in the net profits of the
Mexican Subsidiaries limited to a maximum of $5,000,000 over a term not
to exceed 10 years, with a minimum royalty of $500,000 due annually. GAN
has the right to nominate one-half of the number of the members of the
Board of Directors of the Company so long as it holds more than 30% of
the Company's common shares.
On October 10, 1996, the Company completed an equity offering and
received gross proceeds of approximately Cdn $27,000,000 ($20,000,000)
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 entitled the holder to
purchase one common share at Cdn $1.30 up to the first anniversary of the
closing of the offering. No common share purchase warrants were
exercised prior to their expiration. 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 Mexican
Subsidiaries.
The Company has accounted for the transaction under the purchase method
of accounting. For accounting purposes, the results of operations of the
Mexican Subsidiaries have been included in the Company's consolidated
financial statements from October 1, 1996. The CNGC common shares issued
to 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
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
$1,217,000 and the discounted value of the 12% net profits royalty of
$3,072,000) exceeded the net book value of the Mexican Subsidiaries by
$25,489,000. The excess purchase price has been allocated to the mineral
properties acquired and is being amortized using the units-of-production
method.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and the Mexican
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 Mexican Subsidiaries constituted a single business entity
during those periods, nor are they necessarily indicative of future
operating results of the combined companies (amounts in thousands).
<TABLE>
<CAPTION>
Six months ended Year ended
December 31, 1996 June 30, 1996
----------------- --------------
<S> <C> <C>
Revenue $ 15,513 37,005
Net loss (12,900) (21,968)
Loss per share (0.10) (0.18)
</TABLE>
(3) MINERAL PROPERTIES AND PLANTS, BUILDINGS AND EQUIPMENT
A summary of mineral properties and plants, buildings and equipment
follows (amounts in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
---- ----
<S> <C> <C>
Minerals Properties:
U.S. Operations:
Aurora mine $ 11,112 9,640
Barite Hill land 87 87
Nixon Fork mine 18,589 18,051
Less accumulated depletion and
allowance for impairment (26,136) (11,226)
------ ------
3,652 16,552
------ ------
</TABLE>
(continued)
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(3) MINERAL PROPERTIES AND PLANTS, BUILDINGS AND EQUIPMENT (CONTINUED)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
---- ----
<S> <C> <C>
Mexican Operations:
Barita mine $ 2,214 2,214
El Baztan mine 2,611 2,611
Magistral mine 2,307 2,307
Pachuca mine 21,197 20,522
Less accumulated depletion and
allowance for impairment (5,865) (528)
------ ------
22,466 27,126
------ ------
$ 26,118 43,678
------ ------
------ ------
Plants, building and equipment:
U.S. Operations:
Mining plants, building,
equipment and vehicles $ 31,796 30,305
Less accumulated depreciation,
amortization and allowance
for impairment (30,116) (16,486)
------ ------
1,680 13,819
------ ------
Mexican Operations:
Land 13,230 13,342
Mining plants, buildings,
equipment and vehicles 36,443 34,954
Construction in progress 503 902
Less accumulated depreciation
and amortization (13,080) (710)
------ ------
37,096 48,488
------ ------
$ 38,776 62,307
------ ------
------ ------
</TABLE>
The Company capitalized interest costs 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 year ended December 31, 1997
or during the six months ended December 31, 1996.
(a) U.S. OPERATIONS
(i) AURORA MINE
The Aurora mine is located near Hawthorne, Nevada. The
Company owns 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% net smelter royalty, as defined.
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(3) MINERAL PROPERTIES AND PLANTS, BUILDINGS AND EQUIPMENT (CONTINUED)
During the third quarter of 1997, the Company completed the
acquisition of a 2,800-acre property from Electra Gold
Limited (EGL) and its subsidiaries, consisting of patented
and unpatented mineral claims in and around the existing
Aurora mine. The property was acquired for $500,000 in
cash and 2,787,600 shares of common stock of the Company.
The common shares issued to EGL were valued at a price of
Cdn $0.20 per common share, representing the average market
price preceding and following the closing of the
transaction, discounted to reflect the resale restrictions
on the common shares.
During the fourth quarter, the Company purchased certain
net smelter royalties from Siskon Corporation related to
certain fee lands and claims of the Aurora property for
$100,000. The net smelter returns royalties (NSR) acquired
by the Company included a 1.25% NSR on certain fee lands,
patented mining claims, and unpatented mining claims
comprising a portion of the Aurora mine and a 1.0% NSR on
the EGL property. In addition, the Company acquired 600
acres of fee title land in connection with the transaction.
Subsequent to year end, the Company placed the Aurora mine
on a care and maintenance basis due to the depressed market
price of gold and the significant capital investment
required to continue to operate the mine, including the
expansion of the tailings impoundment. During the fourth
quarter of 1997, the Company recorded a provision for
impairment of the Aurora mine consisting of approximately
$375,000 relating to the mineral properties and $950,000
relating to plants, buildings and equipment.
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 $400,000. As of December 31, 1997, the
Company has accrued $263,000 for Aurora closure and
reclamation costs.
(ii) BARITE HILL MINE
The Barite Hill mine, located near McCormick, South
Carolina, is being reclaimed. Mining operations were
suspended 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.
As of December 31, 1997, the Company estimates that future
reclamation costs for Barite Hill will approximate
$2,000,000, which is accrued for in the Company's financial
statements. The Company commenced reclamation activities
at Barite Hill in the second quarter of fiscal 1995 and
plans to substantially complete reclamation in 1999.
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(3) MINERAL PROPERTIES AND PLANTS, BUILDINGS AND EQUIPMENT (CONTINUED)
(iii) NIXON FORK MINE
The Company commenced construction at Nixon Fork during
fiscal 1995 and completed development of the underground
mine and flotation gravity mill during the second quarter
of fiscal 1996 with the first gold pour in October 1995.
The Company leases the properties 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% net smelter return royalty.
Under the terms of the lease, the Company is obligated to
pay up to $500,000 to an unrelated mining company in the
form of 1% of the gross value of the product removed from
the property. As of December 31, 1997, approximately
$205,000 remains to be paid from future production. After
the Company produces more than 200,000 ounces of gold from
the property, the Company is obligated to pay a 3% net
smelter royalty as defined. As part of a financing
completed during 1995, the Company granted 1.5% net smelter
royalty, as defined, to Internationale Nederlanden (U.S.)
Capital Corporation (ING). As of December 31, 1997, the
Company had not made the scheduled royalty payments to the
two lessors totaling $199,000. Subsequent to year end, the
Company paid $142,000 of the amount due to the lessors. As
of December 31, 1997 royalties of $99,000 are due to ING,
which amounts have not been paid as of April 17, 1998.
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 Lease). The lease has an initial
term of 25 years and can be extended thereafter if
production from the property continues. The lessor will
receive 1% net smelter royalty from the property until such
time as 500,000 ounces of gold have been produced from the
Doyon Lease, at which time the production from the Doyon
Lease will carry a 5% net smelter royalty. As of December
31, 1997, the Company had not made scheduled royalty
payments when due totaling approximately $34,000.
Subsequent to year end, the Company paid these past due
royalty payments. In exchange for the Doyon Lease, the
lessor is to 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 of common
shares comprised of 536,684 common shares of the Company
and three annual payments of $888,889 in cash. The first
two annual payments of common shares and cash have been
made. The Company did not make the third annual payment of
$888,889 in cash due on October 31, 1997. On February 2,
1998, the lessor and the Company agreed to amend the
original agreement to specify that the remaining $888,889
is due in three annual installments of $296,296, including
interest at the rate of 10% per annum commencing on March
1, 1998. The Company made the scheduled payment of
$296,296, including accrued interest. The third annual
payment of common shares is due in May 1998. The Company
fulfilled its obligation to make exploration expenditures
on the Doyon Lease of $500,000 during the first year of the
lease and is obligated to spend $150,000 per year
thereafter.
During the fourth quarter of 1997, the Company recorded an
impairment charge totaling $17,600,000 relating to the
Nixon Fork mine. Of this amount, approximately $12,600,000
is related to mineral properties and approximately
$5,000,000 is related to plants, buildings and equipment.
The impairment charge
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(3) MINERAL PROPERTIES AND PLANTS, BUILDINGS AND EQUIPMENT (CONTINUED)
recorded was the result of several factors, including the
decrease in the market price of gold, the substantial
capital expenditures required for a tailings dam expansion
necessary to continue operations beyond the third quarter
of 1998, and the remaining reserves proven and probable of
gold at December 31, 1997.
The Company estimates costs for reclamation to be incurred
at closure will be $400,000. As of December 31, 1997, the
Company has accrued $309,000 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. 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 in drilling fluids.
During the fourth quarter of 1997, the Company made the
decision to divest the barite operations. In conjunction
with this decision, the Company recorded an impairment
provision of approximately $2,400,000 based on the
estimated net realizable value of the assets held for sale.
During December 1997, the Company entered into an option
and sale agreement with a third party for the sale of
Barita. Subsequent to year end, the Company completed the
sale of Barita to an unrelated Mexican mining company for
$4,500,000, which approximated its remaining carrying
value.
(ii) EL BAZTAN MINE
The El Baztan mine is located south of the city of Morelia,
in the municipality of Huetamo de Nunies, in the state of
Michoacan, Mexico. The El Baztan mine consists of two
operating mines, Vista Hermosa and El Arroyo, located
approximately six kilometers apart, which produce a copper
concentrate, containing by-product gold.
During the fourth quarter of 1997, the Company recorded an
impairment charge of $6,300,000 related to the El Baztan
operations. The impairment charge was recorded due to low
market prices of copper as compared to historical cash
costs of production at the mine.
El Baztan has submitted an environmental self-audit to
PROFEPA as described in note 12 to the financial
statements. As of December 31, 1997, the Company has
accrued $175,000 for estimated reclamation costs determined
in accordance with an agreement with PROFEPA.
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(3) MINERAL PROPERTIES AND PLANTS, BUILDINGS AND EQUIPMENT (CONTINUED)
(iii) MAGISTRAL MINE
The Magistral mine is located in the state of Durango,
Mexico. The operations consist of reprocessing
gold-tailings that were generated by historical mining
operations which ceased in 1962.
During the third quarter of 1997, the Company placed the
Magistral del Oro operations on care and maintenance, with
continued rinsing of heaps to reduce residual cyanide
levels. In conjunction with the suspension of operations,
the Company recorded an impairment charge of approximately
$4,490,000, including $2,215,000 to reduce the carrying
value of plants, building and equipment and $2,275,000 to
reduce the carrying value of mineral properties.
Magistral has submitted an environmental self-audit to
PROFEPA as described in note 12 to the financial
statements. As of December 31, 1997, the Company has
accrued $200,000 for estimated reclamation costs determine
in accordance with an agreement with PROFEPA.
(iv) PACHUCA MINE
Compania de Real del Monte y Pachuca, S.A. de C.V.
(Pachuca) is located in the south central area of the state
of Hidalgo, approximately 100 kilometers northeast of
Mexico City. The operations consist of an underground mine
and mill processing ore from vein deposits and old
tailings, which produces primarily silver, with gold, lead
and zinc by-products.
A net smelter royalty of 5.75% is payable on production
related to four exploration concessions covering a portion
of the Pachuca mine. The Company paid $34,500 during the
year ended December 31, 1997 and $11,000 for the period
from October 1, 1996 through December 31, 1996 for the net
smelter royalty.
Pachuca has submitted an environmental self-audit to
PROFEPA as described in note 12 to the financial
statements. As of December 31, 1997, the Company has
accrued $658,000 for estimated reclamation costs determined
in accordance with an agreement with PROFEPA.
(v) SALE OF BAROID, S.A. DE C.V.
On February 6, 1998, the Company sold its 49% interest in
Baroid, S.A. de C.V., which supplies drilling fluids to
customers operating in the states of Tabasco and Campeche,
Mexico. The Company received $1,500,000 from the sale to
the 51% majority partner in the joint venture. The sale
included the settlement of any and all existing claims and
potential claims between the parties.
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(4) LONG-TERM DEBT
Long-term debt consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
---- ----
<S> <C> <C>
ING gold loan (a) $ 4,606 9,363
Banco Bilbao Vizcay a S.A. (b) 10,676 11,274
Banpais, S.A. (c) 8,533 8,533
Banco Invex, S.A. (d) 1,250 1,250
Notes payable to related parties (e) 4,085 -
Other long term debt 1,441 1,566
------ ------
30,591 31,986
Less:
Long-term debt in default (4,606) -
Current portion of long term debt (10,157) (13,497)
------ ------
Long-term debt, excluding current
portion $ 15,828 18,489
------ ------
------ ------
</TABLE>
(a) ING
The Company has a gold loan with ING which is monetized at $392
per ounce and bears interest at the gold lending rate plus 3.5%
per annum (5.35% at December 31, 1997). The loan is secured by the
assets of the Nixon Fork mine. ING also receives a 1.50% net
smelter royalty on production from the mine through the life of
the Nixon Fork mine.
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 Company did not make scheduled payments of
15,911 ounces of gold, and on December 19, 1997 the Company and
ING again amended the repayment schedule for the 15,911 ounces of
gold then past due. The repayment schedule was to commence on
December 31, 1997, with a payment of 2,611 ounces of gold and five
consecutive monthly payments of 2,660 ounces of gold thereafter.
The Company was unable to make the 2,611 gold ounce payment due
December 31, 1997 until March 3, 1998.
On March 31, 1998, the Company and ING further amended the gold
loan agreement, adjusting the repayment schedule for the remaining
13,300 ounces of gold. The loan agreement, as amended, requires
the repayment of 3,300 ounces of gold on April 10, 1998, with
monthly repayments of 2,500 ounces of gold commencing on May 31,
1998 through August 31, 1998. The Company made the required
initial payment of 3,300 ounces of gold on April 10, 1998 and is
in compliance with the terms of the repayment schedule, as
amended.
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(4) LONG-TERM DEBT (CONTINUED)
The Company discontinued the application of hedge accounting for
gold due under the ING gold loan in 1997. As a result of the
default on the scheduled loan repayments, the Company no longer
considers the instrument to be effective in reducing its cash flow
risk, and accordingly, hedge accounting is no longer appropriate.
The gold loan has therefore been marked to market resulting in the
recognition of a $1,636,000 gain in 1997.
A portion of the proceeds from the gold loan are restricted for
Nixon Fork working capital requirements and certain exploration
and development costs, the release of which is subject to prior
approval by ING. The restricted cash account balance was $123,000
and $805,000 at December 31, 1997 and 1996, respectively.
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 is in default of the working capital and
other covenants and as such the loan is due on demand.
(b) BANCO BILBAO VIZCAYA, S.A. (FORMERLY BANCA CREMI, S.A.)
In August 1997, two Mexican Subsidiaries, El Baztan and Magistral,
refinanced loans under two separate agreements, consisting of
combined principal and interest balances of $6,651,000 and
$4,024,000, respectively. Under the new agreements, the
refinanced amounts are payable monthly, beginning January 29, 1998
through May 29, 2001, bearing interest at LIBOR plus 4.75%. The
loan is guaranteed by GAN and collateralized with an industrial
and real estate mortgage.
(c) BANPAIS, S.A.
In October 1996, Pachuca refinanced its Banpais 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%, payable in semi-annual installments, beginning February
23, 1997, through February 23, 2006. The Company did not pay the
scheduled interest payment due on February 22, 1998 and the loan
is in default. The loan agreement is guaranteed by the major
shareholders of GAN and a pledge of certain of their shares in
GAN.
(d) BANCO INVEX, S.A.
On December 31, 1997, 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% and a fee of 1.5% payable quarterly. The revolving
credit agreement is guaranteed by GAN. On February 6, 1998, this
loan was repaid.
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(e) RELATED PARTY NOTES
During 1997, the Company borrowed $4,400,000 and $585,000 in notes
payable from GAN and Caithness Resources, Inc., respectively. The
notes bear interest at 11% and are due in March 1998. During
1997, the Company repaid $900,000 of the GAN notes. On March 6,
1998, the amounts outstanding under the GAN note was applied to
the purchase of a convertible debenture. As of April 17, 1998,
the Company has not made the required principal and interest
payments due under the Caithness note.
(5) HEDGING ACTIVITIES AND COMMODITY TRANSACTIONS
(a) U.S. OPERATIONS
The Company uses forward sales 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 sales contracts of $106,000 in the year ended
December 31, 1997, $127,000 during the six months ended
December 31, 1996, $311,000 during the year ended June 30, 1996
and a net loss of $105,000 during the year ended June 30, 1995.
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 spot
deferred contracts covering 42,269 ounces of gold with monthly
deliveries of between 1,100 ounces and 4,000 ounces of gold from
September 1995 through September 1997. On March 31, 1997, the
Company terminated its remaining hedge positions with ING covering
11,269 ounces of gold resulting in a gain of $735,000, which was
recognized in 1997 over the original delivery schedule.
During 1997, the Company entered into forward sales contracts with
Standard Bank London Limited for delivery of 20,000 ounces of gold
and 3.5 million ounces of silver. Contract prices were $329 per
ounce of gold and $5.25 to $5.85 per ounce of silver. In 1997,
the Company terminated the contracts for delivery of 20,000 ounces
of gold, recognizing a gain of $495,600. The Company also
terminated a contract for 1.5 million ounces of silver at a
contract price of $5.85 per ounce, recognizing a loss of $232,500.
These amounts are classified as gains (losses) on commodity
transactions as the Company did not have the production capacity
to deliver the quantities specified under the contracts. At
December 31, 1997, the Company held forward sales contracts for
January 1998 delivery of 2.0 million ounces of silver, at prices
ranging from $5.25 to $5.85 per ounce. These contracts have been
recorded in the Company's financial statements at their market
value of $890,000, which amount has been included in
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
accrued liabilities, and a corresponding amount recorded as a loss
on commodity transactions. Subsequent to year end, the Company
terminated contracts for delivery of 1.3 million ounces of silver.
The remaining 700,000 ounces are scheduled for delivery on May 8,
1998.
(b) MEXICAN OPERATIONS
Pachuca entered into a mineral sale agreement with Prime Metals,
dated December 12, 1996, to sell between four and six tonnes of
fine grain silver on a monthly basis, with a grade of 99.98%, at
COMEX plus $0.10 per ounce, from January 2, 1997 through December
31, 1997. Pachuca subsequently renewed the agreement through
December 31, 1998.
(6) CONVERTIBLE SUBORDINATED DEBENTURES
(a) 10% CANADIAN CONVERTIBLE SUBORDINATED DEBENTURES
The 10% Canadian convertible subordinated debentures (10%
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% Debentures are redeemable, at the option
of the Company, if the Company's common shares trade at not less
than 125% 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% per annum. The Company is accruing interest on the
10% Debentures at an effective interest rate of 7.86% 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, 1997 and 1996, there were Cdn $3,041,000 ($2,123,000
and $2,219,000, 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% Canadian convertible subordinated debentures (3% Debentures)
which were originally due March 1997.
The 3% 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 was convertible at Cdn
$1.75 per share. In December 1995, the holders approved an
amendment to extend the maturity date of the 3% Debentures to
March 21, 1999 and change the conversion prices to Cdn $1.20 per
share and 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% of the amended
conversion price of Cdn $1.20 per common share for twenty
consecutive trading days. On November 21, 1997, the Company
received approval from the requisite number of holders of the 3%
Debentures to amend the terms of the Trust Indenture. The
amendment included the reduction of the conversion price of the
3% Debentures from Cdn $1.20 to Cdn $0.72 per share and the
automatic conversion of the 3% Debentures at the reduced
conversion
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
price to be effective November 21, 1997. The principal amount of
the debentures outstanding at that date was Cdn $13,617,000, which
resulted in the issuance upon conversion of 18,912,500 common
shares of the Company. 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 3%
Debentures into common shares.
At the time of the issuance, the debenture holders selected
whether future interest payments would be paid in cash or in
common shares. During the year ended December 31, 1997 and prior
to conversion, holders of Cdn $4,161,000 of debentures elected to
have interest paid in cash and the remainder of the interest
payments were paid in common shares. Interest paid in common
shares was calculated using a price of Cdn $1.20.
(7) 10% CONVERTIBLE UNSECURED DEBENTURES
On September 22, 1997, the Company completed the placement of a $7.5
million 10% Convertible Unsecured Debenture ("10% Unsecured Debentures")
with four of its major shareholder groups. The 10% Unsecured Debentures
are convertible at a conversion price of Cdn $0.77 per share, into
13,593,510 common shares of the Company, subject to adjustment in
accordance with the 10% Unsecured Debentures. The 10% Unsecured
Debentures automatically convert into common shares if the weighted
average price at which the common shares trade on The Toronto Stock
Exchange, during 20 consecutive trading days, is not less than Cdn $1.50.
Interest is payable semi-annually, commencing on March 12, 1998 with
principal maturing on September 12, 2002. On March 6, 1998, the Company
completed a financing transaction with GAN whereby $6,000,000 of the 10%
Unsecured Debentures was applied towards the purchase of a $26,000,000
debenture, as explained in note 1. The Company did not pay the scheduled
interest payment to the other three major shareholder groups on March 12,
1998, which is an event of default under the debenture agreement. The
total interest due and payable as of March 12, 1998 is approximately
$75,000.
(8) REDEEMABLE PREFERENCE SHARES
On July 6, 1995, the Company issued 2,100,000 cumulative preferential
convertible 7% Preference Shares, Series 2 (Series 2 Preference Shares).
The issue price was Cdn $1.00 and resulted in proceeds to the Company of
$1,600,000. Cumulative preferential 7% cash dividends are 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. The obligation of the Company to pay the
redemption price and any dividend was guaranteed by a shareholder. The
Company paid the shareholder a guarantee fee of 1.5% 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.
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(9) STOCKHOLDERS' EQUITY
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 entitled 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 they expired. Of the
7,920,000 units issued, related parties purchased 2,250,000 units on the
same terms and conditions.
On October 10, 1996, the Company issued 22,493,570 special warrants at a
price of Cdn $1.20 per special warrant. Closing of the offering occurred
concurrently with the closing of the acquisition of the Mexican
Subsidiaries. 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. No common share purchase warrants were
exercised prior to their expiration. 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.
On November 21, 1997, the Company issued 18,912,500 shares of common
stock upon the conversion its 3% Convertible Subordinated Debentures.
See note 6.
As described in note 1, subsequent to December 31, 1997, the Company
issued convertible debentures to GAN which were simultaneously converted
into 208,000,000 common shares and 26,998,400 common share purchase
warrants.
(10) 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 carryforwards due to the uncertainty of
their realization.
At December 31, 1997, the Company had net operating loss carryforwards
for U.S. income tax purposes aggregating approximately $54,500,000 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 carryforwards which can be utilized to
approximately $512,000 per year for those carryforwards generated prior
to March 31, 1991, (which total approximately $14,000,000) and $1,822,000
per year for those carryforwards generated between March 31, 1991 and
December 31, 1995 (which total approximately $34,800,000). Of these
amounts, $7,260,000 of the pre-1991 losses and $3,300,000 of the 1991
through 1995 losses are now available to offset current taxable income.
For financial statement purposes, the Company had net operating loss
carryforwards of approximately $92,500,000 as of December 31, 1997. 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
and the provisions for impairment of properties.
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
In addition, for Canadian income tax purposes, the Company had net
operating loss carryforwards of approximately $3,800,000 as of December
31, 1997 which, if not utilized to reduce Canadian taxable income in
future periods, will expire during 1998 through 2003. For financial
statement purposes, the Company had Canadian net operating loss
carryforwards of approximately $4,100,000 as of December 31, 1997.
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.
The statutory rate of income tax in Mexico is 34%. The asset tax is
computed at an annual rate of 1.8% of the average of the restated assets
less certain liabilities. The tax is paid only to the extent that it
exceeds the income tax for 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, 1997, the Mexican Subsidiaries' combined tax loss
carryforwards and recoverable asset tax carryforwards, both of which are
indexed for inflation to the year they are utilized, are as follows
(amounts in thousands):
<TABLE>
<CAPTION>
Tax loss Recoverable asset tax
Expiration carryforwards carryforwards
---------- ------------- -------------
<S> <C> <C>
1999 $ - 7
2000 - 369
2001 8,354 600
2002 5,354 912
2003 9,059 1,648
2004 20,178 734
2005 12,851 489
2006 7,556 93
2007 5,590 72
------- -----
$ 68,942 4,924
------- -----
------- -----
</TABLE>
(11) PENSION PLAN
Under Mexican labor laws, the Mexican Subsidiaries provide seniority
premiums for all employees terminated with more than 15 years of service.
In addition, the Mexican Subsidiaries provide other severance benefits
based on certain conditions, as well as defined pension benefits to all
administrative personnel and production workers.
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
The assumptions used in the actuarial studies for the December 31, 1997
determination of the pension liability are as follows:
<TABLE>
<S> <C>
Discount rate 3.67%
Salary increase rate 0.92%
Return on assets 5.51%
</TABLE>
The Mexican 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
Mexican Subsidiaries provide for the pension liability, at present value,
which corresponds to the projected benefit obligation at the estimated
date of retirement of the employee (amounts in thousands).
<TABLE>
<S> <C>
Actuarial present value of accrued pension benefit
obligation (PBO) $ 173
Unamortized net pension obligation (19)
Unamortized experience loss (15)
-----
Accrued pension liability $ 139
-----
-----
</TABLE>
Pension expense for the year ended December 31, 1997 is as follows
(amounts in thousands):
<TABLE>
<S> <C>
Current service costs $ 47
Interest on accrued benefits 7
Additional liability on settlement 959
Amortization of net pension obligation 2
Amortization of experience gain (10)
-----
Net periodic pension expense $ 1,005
-----
-----
</TABLE>
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.
(12) 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
$1,058,000. The Company believes it will prevail in
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
any further future court proceedings, should they occur, based on
government dispositions taken in 1987. However, an adverse
judgment could include additional amounts for interest and
damages. The Company has recorded a reserve of $1,058,000 as a
long-term liability for this litigation.
(b) LEASE COMMITMENTS
The Company leases certain facilities and equipment under
operating lease arrangements. Minimum rental expense under such
arrangements amounted to approximately $263,000, $322,000, $70,000
and $104,000, for the year ended December 31, 1997, the six months
ended December 31, 1996 and the years ended June 30, 1996 and
1995, respectively. Future minimum lease commitments under such
arrangements are approximately $288,000 for year 1998 and $342,000
for years 1999 through 2002.
(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 Mexican Subsidiaries and PROFEPA in
November 1994, the mining companies were required to perform a
review of substance discharge generated and its environmental
impact. In April 1996, the Mexican 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 obligations in accordance
with agreements between the Mexican 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.
(13) CERTAIN RELATED PARTY TRANSACTIONS
Under terms of the Share Purchase Agreement, as described in note 2, GAN
was required to refinance certain indebtedness of the Mexican
Subsidiaries at the time of closing. As of December 31, 1996, the
outstanding balance due to GAN under the terms of this agreement was
$7,523,000. At December 31, 1997, the balance, including accrued
interest at 12%, is approximately $8,986,000.
As discussed in note 2, the Company granted GAN a 12% royalty interest in
the net profits of the Mexican Subsidiaries. The amount of these
royalties due to GAN at December 31, 1997 was approximately $3,544,000.
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
On January 1, 1997, GAN entered into an agreement to guarantee the loans
of the Mexican Subsidiaries for a fee equal to 2.5% of the balance of the
loans. At December 31, 1997, the accrued fee for the loan guarantees
during 1997 was approximately $419,000.
On March 26, 1997, the Company entered into a loan agreement with GAN to
lend the Company $3,000,000, bearing interest at 11% per annum, due and
payable quarterly, with principal maturing on March 26, 1998. Interest
totaling $82,500 was paid on June 26, 1997. The company has not paid
subsequent interest payments and is in default under terms of the loan
agreement. In addition, the Company entered into two other loan
agreements with GAN dated December 29, 1997 and January 30, 1998 with
principal amounts of $500,000 and $600,000, respectively. The unpaid
principal and interest is due and payable on March 31, 1998. On March 6,
1998, the total principal amount of $4,100,000 was applied toward the
purchase of the $26,000,000 debenture as described in note 1. The Company
has not paid the interest due March 31, 1998.
On July 18, 1997 and August 20, 1997, the Company entered into two
separate loan agreements with GAN. GAN agreed to lend the Company
$400,000 and $500,000, respectively, bearing interest at 11% per annum,
with principal and interest due and payable on August 31, 1997 and
September 20, 1997. On September 12, 1997, the total principal amount of
$900,000 was applied toward the purchase of the 10% Convertible Unsecured
Debenture described in note 7. The Company has not paid the interest due
on the loans.
On March 24, 1997, the Company entered into a loan agreement with a major
shareholder of the Company, Caithness Resources, Inc. (Caithness).
Caithness agreed to lend the Company $585,000, bearing interest at 11%
per annum, due and payable with interest on March 24, 1998. As of April
17, 1998, the Company has not made the scheduled principal and interest
payment and is in default under terms of the loan agreement.
Certain related parties performed legal and advisory services relating to
corporate activities. No charges were incurred during the year ended
December 31, 1997 or for the six months ended December 31, 1996. Charges
for such activities were $70,000 and $34,000 in the years ended June 30,
1996 and 1995, respectively, including reimbursable travel expenses.
Such amounts are included in general and administrative expenses.
(14) 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% to 9%
of pre-tax compensation and receive a 100% matching employer contribution
up to a maximum of 6% of their compensation. Vesting in the employer's
contribution begins after one year of service at the rate of 25% per year
until full vesting occurs. The Company's savings plan contribution
expense was approximately $63,000, $54,000, $115,000 and $96,000 for the
year ended December 31, 1997, 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
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(14) EMPLOYEE BENEFIT PLAN AND INCENTIVE SHARE OPTION PLAN FOR DIRECTORS AND
EMPLOYEES (CONTINUED)
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:
<TABLE>
<CAPTION>
SHARES
------
<S> <C>
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
Granted at Cdn $0.81 per share 595,000
Granted at Cdn $0.82 per share 75,000
Exercised (53,333)
Canceled (405,000)
---------
OUTSTANDING AT DECEMBER 31, 1997 1,600,000
---------
---------
</TABLE>
<TABLE>
<CAPTION>
Exercise price per share Expiration Date Shares
------------------------ --------------- ------
<S> <C> <C>
U.S. $0.62 July 19, 2002 400,000
Cdn $1.25 August 1, 2003 100,000
Cdn $1.81 December 6, 2003 150,000
Cdn $1.53 August 26, 2004 10,000
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 $0.81 July 28, 2007 515,000
Cdn $0.82 October 11, 2007 75,000
---------
OUTSTANDING AT DECEMBER 31, 1997 1,600,000
---------
---------
</TABLE>
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(15) SEGMENTED INFORMATION
Substantially all of the Company's operations are within the mining
industry. Major products include gold, silver, copper and barite.
Geographic information for the year ended December 31, 1997 and for the
six months ended December 31, 1996 is as follows (amounts in thousands):
<TABLE>
<CAPTION>
Six months
Year ended ended
December 31, December 31,
1997 1996
---- ----
<S> <C> <C>
Revenue:
U.S. Operations $ 16,986 7,002
Mexican Operations 17,242 4,454
Depreciation, depletion and
amortization:
U.S. Operations 9,626 2,496
Mexican Operations 4,820 1,237
Corporate 38 23
Loss from operations:
U.S. Operations (31,991) (6,500)
Mexican Operations (26,801) (4,491)
Identifiable assets:
U.S. Operations 7,847 29,780
Mexican Operations 66,250 83,636
Corporate 3,816 10,209
</TABLE>
Loss from operations includes revenue and expenses from mining
operations, charges for depreciation, depletion and amortization,
royalties, exploration expenses, administrative costs, financing charges
and impairments of mining properties.
(16) 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.
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(16) GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
(CONTINUED)
RECONCILIATION OF NET LOSS AND SHAREHOLDERS' EQUITY
Net loss and total shareholders' equity, adjusted for the material
differences between Canadian GAAP, and U.S. GAAP, are as follows (amounts
in thousands):
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31,
1997 1996
---- ----
<S> <C> <C>
Net loss under Canadian GAAP $(58,792) (10,991)
U.S. GAAP Adjustments:
Deferred employee profit sharing 1,889 476
Debt conversion expense (2,029) -
Pension plan costs (7) 242
Deferred foreign exchange gains
(losses) (429) (56)
------ ------
Total adjustments (576) 662
------ ------
Net loss under U.S. GAAP $(59,368) (10,329)
------ ------
------ ------
Shareholders' equity under Canadian GAAP $ 4,839 52,872
U.S. GAAP adjustments:
Deferred employee profit sharing (392) (2,281)
Pension plan costs (15) (8)
Deferred foreign exchange gain 590 161
------ ------
Total adjustments 183 (2,128)
------ ------
Total shareholders' equity
under U.S. GAAP $ 5,022 50,744
------ ------
------ ------
</TABLE>
Differences between Canadian GAAP and U.S. GAAP are explained below:
(a) 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.
(b) For purposes of U.S. GAAP, the Company applies the provisions of
Statement of Financial Accounting Standards No. 109, ACCOUNTING
FOR INCOME TAXES. 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, 1997
and 1996.
<PAGE>
CONSOLIDATED NEVADA GOLDFIELDS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(16) GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES
(CONTINUED)
(c) 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.
(d) 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% of the projected benefit obligation is amortized.
(e) Under Mexican tax and labor laws, companies are required to pay
profit sharing to their employees, which is calculated at a rate
of 10% 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 are calculated for U.S. GAAP purposes.
(f) 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 an 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.
(g) Under Canadian GAAP, changing the terms of convertible debt
instruments to "induce" conversion does not result in the
recognition of any expense. Under U.S. GAAP, an expense is
recognized equal to the additional fair value of the securities
issued upon conversion.
<PAGE>
CORPORATE INFORMATION
DIRECTORS (APRIL 1, 1998)
Alonso Ancira Elizondo
Monclova, Coahuila, Mexico
Executive Vice Chairman and Chief Executive
Officer of Altos Hornos de Mexico, S.A. de C.V.
and of Grupo Acerero del Norte, S.A. de C.V.
Manuel Ancira Elizondo
Monclova, Coahuila, Mexico
Chief Operating Officer of Altos Hornos de
Mexico, S.A. de C.V. and Grupo Acerero del Norte,
S.A. de C.V.
Xavier D. Autrey Maza
Mexico City, Mexico
Chairman of Altos Hornos de Mexico, S.A. de C.V.
and Grupo Acerero del Norte, S.A. de C.V., Grupo
Real del Monte S.A. de C.V., and Grupo Financiero
Inverlat
James Bishop
New York, New York, USA
Chairman and CEO of Caithness Alaska Gold Inc.
William Braithwaite,
Toronto, Ontario, Canada
Partner of Stikeman, Elliott law firm
Donald Worth
Willowdale, Ontario, Canada
Past President of Canadian Institute of Mining,
Metallurgy and Petroleum
OFFICERS (APRIL 1, 1998)
William Braithwaite
Corporate Secretary
Mike Clarke
Vice President Exploration
Karl M. Kolin
Vice President,
Chief Operating Officer
Jorge E. Ordonez C.
Acting President and Chief Executive Officer
<PAGE>
OPERATIONS (APRIL 1, 1998)
Pachuca Mine
Hidalgo, Mexico
Nixon Fork Mine
Alaska, USA
Aurora Mine
Nevada, USA
El Baztan Mine
Michoacan, Mexico
Magistral del Oro
Durango, Mexico
STOCK EXCHANGE LISTINGS
Toronto Stock Exchange, Canada: KNV
NASDAQ, USA: KNVCF
Frankfurt, Berlin, and Stuttgart Exchanges, Germany: CNV
SHARE TRANSFER AGENT
Montreal Trust Company
510 Burrard Street
Vancouver, British Columbia V6C 3B9
Canada
CAPITALIZATION
Common Shares Issued as of December 31, 1997: 152,957,254;
as of March 31, 1998: 360,957,254
AUDITORS
KPMG Peat Marwick
2300 Arco Tower
707 Seventeenth Street
Denver, Colorado 80202
ANNUAL MEETING OF SHAREHOLDERS
June 22, 1998 at 9:00 a.m.
Offices of:
Stikeman, Elliott - Barristers & Solicitors
Commerce Court West
53rd Floor, PO Box 85
Toronto, Ontario M5L 1B9
Canada
A copy of the December 1997 Form 20-F for Consolidated Nevada Goldfields
Corporation as filed with the U.S. Securities and Exchange Commission is
available to shareholders without charge upon written request.
