<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
------------------------
FORM 10-Q
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarter Ended September 30, 1995
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from
to
Commission File Number: 0-16484
FIRSTMISS GOLD INC.
(Exact name of registrant as specified in its charter)
NEVADA 64-0748908
(State or other jurisdiction of (IRS Employer ID No.)
incorporation or organization)
5460 SOUTH QUEBEC ST., SUITE 240, 80111
ENGLEWOOD, COLORADO (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including Area Code: 303/771-9000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes 'X' No
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT OCTOBER 31, 1995
- ------------------------------ -------------------------------
<S> <C> <C>
Common Stock, $.01 Par Value.................... 18,182,600
</TABLE>
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<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRSTMISS GOLD INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30 JUNE 30
1995 1995
------------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ -- $ 595
Trade accounts receivable.......................................... 2,158 1,709
Inventories:
Ore and in process.............................................. 2,329 2,459
Materials and supplies.......................................... 7,723 7,095
------- --------
Total inventories.......................................... 10,052 9,554
------- --------
Prepaid expenses and other current assets.......................... 722 728
Deferred hedging gains............................................. 748 --
Deferred income taxes due from First Mississippi................... 2,581 2,581
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Total current assets....................................... 16,261 15,167
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Property, plant and equipment, net................................... 69,179 67,689
------- --------
Deferred income taxes due from First Mississippi..................... 2,264 2,264
------- --------
Total assets............................................... $87,704 $ 85,120
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 3,743 $ 6,595
Payable to First Mississippi....................................... 2,945 1,943
Income taxes payable to First Mississippi.......................... -- 402
Other accrued expenses............................................. 696 505
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Total current liabilities.................................. 7,384 9,445
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Notes payable to First Mississippi................................... 46,750 40,900
Other long-term liabilities.......................................... 3,061 3,031
Stockholders' equity:
Common stock....................................................... 182 182
Contributed and paid-in capital.................................... 34,285 34,285
Accumulated deficit................................................ (3,916) (2,681)
Unearned compensation.............................................. (42) (42)
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Total stockholders' equity................................. 30,509 31,744
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Total liabilities and stockholders' equity................. $87,704 $ 85,120
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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FIRSTMISS GOLD INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
-------------------
1995 1994
------- -------
<S> <C> <C>
Net sales................................................................ $17,605 $21,509
Cost of sales............................................................ 16,939 17,893
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Gross profit................................................... 666 3,616
Exploration expenses..................................................... 366 1,712
Selling, general and administrative expenses............................. 1,078 658
------- -------
Earnings (loss) from operations................................ (778) 1,246
Interest expense, net.................................................... (961) (416)
Other income............................................................. 80 52
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Earnings (loss) before income taxes............................ (1,659) 882
Income tax expense (benefit) payable to (due from) First Mississippi..... (425) 375
------- -------
Net earnings (loss)............................................ $(1,234) $ 507
======= =======
Net earnings (loss) per common share..................................... $ (0.07) $ 0.03
======= =======
Average shares and equivalents outstanding............................... 18,183 18,146
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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FIRSTMISS GOLD INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
-------------------
1995 1994
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss).................................................... $(1,234) $ 507
Adjustments to reconcile net earnings (loss) to net cash provided
(used) by operating activities:
Depreciation and depletion and amortization......................... 1,939 4,958
Loss (gain) on sale of property, plant and equipment................ (1) 1
Net change in operating assets and liabilities, net of noncash
activities:
Trade accounts receivable......................................... (449) 422
Inventories....................................................... (498) (286)
Deferred income taxes............................................. -- 518
Prepaid expenses and other current assets......................... 6 (644)
Accounts payable.................................................. (2,852) 790
Payable to First Mississippi...................................... 1,002 796
Other accrued expenses............................................ 191 (197)
Income taxes payable to First Mississippi......................... (402) (143)
Deferred hedge gains.............................................. (748) --
Other long-term liabilities....................................... 30 29
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Cash provided (used) by operating activities................... (3,016) 6,751
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Cash flows from investing activities:
Capital expenditures................................................... (3,429) (4,588)
Deferred stripping costs............................................... -- (38)
Proceeds from sale of property, plant and equipment.................... -- 1
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Cash used by investing activities.............................. (3,429) (4,625)
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Cash flows from financing activities:
Proceeds from notes payable to First Mississippi....................... 5,850 --
Repayment of notes payable to First Mississippi........................ -- (1,469)
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Cash provided (used) by financing activities................... 5,850 (1,469)
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Net increase (decrease) in cash and cash equivalents........... (595) 657
Cash and cash equivalents at beginning of period......................... 595 1,979
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Cash and cash equivalents at end of period............................... $ -- $ 2,636
======= =======
Supplemental disclosures:
Interest paid during the quarter, net of amounts capitalized........... $ 129 $ 47
======= =======
Income taxes paid to First Mississippi................................. $ 100 $ --
======= =======
</TABLE>
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
For the three months ended September 30, 1995 and 1994, nil and $322,
respectively, of interest expense payable to First Mississippi was added to the
principal balance of notes payable to First Mississippi.
The accompanying notes are an integral part of these financial statements.
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FIRSTMISS GOLD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 -- GENERAL
The financial statements included herein are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission regulations. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the financial statements reflect all adjustments (of a normal and
recurring nature) which are necessary to present fairly the financial position,
results of operations and cash flows for the interim periods. These financial
statements should be read in conjunction with the Annual Report of the Company
on Form 10-K for the fiscal year ended June 30, 1995.
NOTE 2 -- FORWARD SALES AGREEMENTS
At September 30, 1995, the Company had commitments for 127,100 ounces under
spot deferred sales contracts for the delivery of gold as follows:
<TABLE>
<CAPTION>
PRICE RANGE
DELIVERY DATE PER OUNCE OUNCES
- ------------------ ------------ ------
<S> <C> <C>
10/01/95-12/31/95 $391 - $397 59,000
01/01/96-03/31/96 $403 - $408 46,000
04/01/96-05/31/96 $409 - $421 22,100
</TABLE>
Based on the market price of gold on September 30, 1995, the unrealized
gain on these contracts approximates $1.7 million. During the quarter, the
Company recognized hedging gains of $0.8 million on spot deferred contracts
covering 33,000 ounces. These gains have been included as a component of net
sales. A deferred asset of $0.7 million has been established on contracts for
which delivery has been deferred into future periods.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
In February 1995, the Company hired Mineral Resources Development, Inc.
("MRDI") to prepare a pre-feasibility study (the "MRDI Study") with respect to a
geological resource along the Turquoise Ridge Fault. In September 1995, MRDI
issued an executive summary of its pre-feasibility study. The pre-feasibility
study concludes that the Turquoise Ridge area contains probable reserves of
1.254 million contained ounces of gold.
On October 20, 1995, the Company's former parent, First Mississippi
Corporation ("First Mississippi"), distributed its 81% interest in the Company
to First Mississippi shareholders. In connection with this spin-off, the Company
entered into several agreements with First Mississippi including a loan
agreement covering the Company's $52.5 million of outstanding borrowings from
First Mississippi at October 20, 1995, an agreement to undertake a public
offering of the Company's common stock with gross proceeds of at least $50
million prior to April 28, 1996, and an agreement to settle certain tax sharing
arrangements. The Company also entered into a $20 million credit facility with
The Toronto-Dominion Bank. See "Liquidity and Capital Resources."
RESULTS OF OPERATIONS
Three months ended September 30, 1995, compared to three months ended
September 30, 1994.
Overview
The Company incurred a loss of $1.2 million ($0.07 per share) for the three
months ended September 30, 1995 compared to earnings of $0.5 million ($0.03 per
share) for the three months ended September 30, 1994. Lower sales revenues,
which resulted from reduced grades at the mill and lower output from the heap
leach operation, were primarily responsible for the lower earnings.
The following table highlights certain sales and production information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------
9/30/95 9/30/94
------- -------
<S> <C> <C>
Ounces sold....................................................... 43,845 55,724 *
Average Realized Price per Ounce.................................. $ 402 $ 386
Average Market Price per Ounce.................................... $ 383 $ 386
Ounces Produced:
Mill......................................................... 42,262 50,402 *
Heap Leach................................................... 1,583 5,322
Cash Cost per Ounce:
Mill......................................................... $ 348 $ 275
Heap Leach................................................... $ 137 $ 241
Combined..................................................... $ 341 $ 272
Total Cost per Ounce:
Mill......................................................... $ 395 $ 328
Heap Leach................................................... $ 149 $ 254
Combined..................................................... $ 386 $ 321
</TABLE>
- ---------------
* Excludes 1,120 development ounces from the Getchell Main Underground Mine.
Net Sales
Net sales of $17.6 million for the three months ended September 30, 1995
(which includes $0.8 million of hedging gains), decreased from $21.5 million for
the three months ended September 30, 1994 as sales volume fell to 43,845 ounces
from 55,724 ounces. Mill feed grades for the three months ended September 30,
1995 dropped to 0.165 ounces per ton from 0.214 ounces per ton in the same
period in the prior year, primarily due to increased milling of lower grade
stockpile ores to replace Main Pit ores. Underground ore grades were
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lower than expected due to mining in lower grade stope areas while the higher
grade stopes await backfill to continue mining. The production backfill
shortfalls are due primarily to a backfill plant which does not provide the
needed flexibility to mine sequentially and efficiently in higher grade stope
production areas. A new 2,000 ton per day backfill plant is under construction
and is expected to be operational in the first quarter of calendar year 1996.
Realized gold prices which averaged $402 per ounce (which included $18 per ounce
of hedging gains) were significantly higher than the $386 per ounce realized in
the same period in the prior year. There were no material hedging gains or
losses in the three months ended September 30, 1994.
Heap leach gold output was significantly lower during the three months
ended September 30, 1995 at 1,583 ounces compared to 5,322 ounces in the three
months ended September 30, 1994. No ore has been added to the leach pads since
June 1995 when the Turquoise Ridge Oxide Pit came to the end of its scheduled
productive life. Leaching of existing pads will continue as long as residual
gold can be economically extracted. Leach pad gold output will be substantially
lower than in the past and will likely decrease over time.
As of September 30, 1995, 127,100 ounces of gold had been sold for delivery
over the next eight months using spot deferred contracts at prices ranging
between $391 and $421 per ounce.
Cost of Sales
Total cost of sales for the three months ended September 30, 1995 were
$16.9 million, down $1 million from the same period in the prior year, primarily
due to lower costs at the heap leach operation following cessation of oxide
mining. Depreciation expense for the mill decreased in the three months ended
September 30, 1995 by $0.7 million due to an increase in millable reserves at
Turquoise Ridge based on the MRDI Study. This decrease was off-set by higher
operating costs. As a result, cost of sales at the mill was unchanged from the
same period in the prior year. Significantly lower gold output due to lower
grade ore during the three months ended September 30, 1995 yielded a cash cost
of $341 per ounce, versus $272 per ounce for the same period last year, but cash
cost per ton milled was essentially unchanged. Mill output averaged 3,194 tons
per day for the quarter, up from 3,076 tons per day in the three months ended
September 30, 1994.
Exploration Expenses
Exploration expenses in the three months ended September 30, 1995 of $0.4
million were down from $1.7 million in the three months ended September 30,
1994. Commencing October 1, 1994, the Company determined that Turquoise Ridge
was a development project rather than an exploration site and capitalized
subsequent expenditures at Turquoise Ridge, including $0.5 million of drilling
costs in the quarter ended September 30, 1995. The remainder of the decrease in
exploration expenses was due to the Company's decision temporarily to scale back
drilling activity pending review of exploration targets.
Selling, General and Administrative Expenses
Selling, General & Administrative expenses during the three months ended
September 30, 1995 were up $0.4 million from the same period in the prior year
due to corporate office relocation costs, increased personnel, and legal and
accounting costs related to the spin-off and financing activities.
Interest Expense, Net
Interest expense was up $0.5 million in the three months ended September
30, 1995 from the same period of the prior year due to increases in the
principal balances on the First Mississippi note needed to cover shortfalls in
operating cash flow and capital spending. See "Liquidity and Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES
Cash used by operating activities was $3.0 million during the three months
ended September 30, 1995 compared to cash flows provided by operations of $6.8
million in the same period of the prior year. This shift
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was primarily due to lower sales revenues, reduction of amounts owed vendors and
use of cash to increase supplies and materials inventories required to support
the increase in underground mining operations.
Capital investing activities required $3.4 million of cash during the three
months ended September 30, 1995. These investment activities were primarily
related to the costs of the MRDI Study and associated drilling at Turquoise
Ridge.
During the three months ended September 30, 1995, $5.9 million of cash was
borrowed from First Mississippi to fund operations and investment activities,
bringing the total note due to First Mississippi to $46.8 million.
In connection with the spin-off by First Mississippi of its shares of the
Company on October 20, 1995, all loan amounts due First Mississippi were
consolidated into a new loan agreement covering the Company's $52.5 million of
borrowings from First Mississippi at that date. Amounts borrowed under the new
loan agreement are payable in September 2000. Interest accrues at a LIBOR-based
rate and is payable based on the LIBOR period selected by the Company (one
month, three month, six month or one year). The loan agreement permits
prepayments at any time at the Company's option and requires $15.0 million in
principal of the loan to be repaid following the consummation of any public
offering of the Company's securities after the date of the loan agreement as
well as full prepayment upon a change in control of the Company.
The Company also signed a loan agreement with The Toronto-Dominion Bank for
an interim credit facility of up to $20 million to provide financing for the
development of the Company's mining properties and for general working capital
purposes. Borrowings under the credit facility bear interest at 3% over the
LIBOR rate for each one month period during which advances are outstanding. In
addition, the Company will pay Toronto Dominion a drawdown fee of 1% of the
amount of each advance of funds to the Company under the credit facility . All
advances of funds under the credit facility must be repaid by the Company on
October 31, 1996. The Company is obligated to prepay amounts advanced under the
credit facility from the net proceeds of any financing or issuance of securities
of the Company. The Company has also granted Toronto Dominion an equity
participation right which provides that the Company will pay Toronto Dominion,
either in cash or shares of common stock, an amount not to exceed (i) $1,000,000
if all advances under the credit facility are paid in full within six months of
the date of the facility and (ii) $1,500,000 if such advances are paid in full
after such six month period but before the Due Date (as defined therein). At any
time prior to November 30, 1995, the Company may satisfy the participation right
in full by paying $500,000 (in cash or securities of equivalent value). On
October 23, 1995 the Company drew $5.5 million against this credit facility.
First Mississippi has agreed to pay the Company approximately $14 million
in settlement of amounts owed under terms of a Tax Sharing Agreement in force
while the Company was a subsidiary of First Mississippi. The amounts owed by
First Mississippi represent the tax benefit received by the affiliated group of
which First Mississippi is the common parent corporation from its use of the
Company's losses, deductions, credits and allowances in pre-spin off periods.
The settlement provides that these funds will first be provided to the Company
as a standby line of credit available to the Company in the event the Toronto
Dominion credit facility is fully drawn. At such time as the Company secures
permanent capital, the settlement amount will be credited against the debt owed
by the Company to First Mississippi. The Company has accounted for this
settlement by reclassifying certain deferred tax assets, totaling approximately
$14 million, to a receivable from First Mississippi, and reflecting
approximately $9 million as deferred tax liabilities.
Capital expenditures for the 12 months ending June 30, 1996 are estimated
to be $22.7 million, primarily due to the anticipated development of Turquoise
Ridge. The MRDI Study estimates that the capital required to bring the initial
phase of the Turquoise Ridge underground mine into commercial production will be
approximately $85 million. Operating cash flow is not anticipated to be
sufficient to meet these capital requirements. In order to undertake planned
development activities, the Company will need additional financing. Under terms
of the Tax Ruling Agreement entered into with First Mississippi in connection
with the spin-off, the Company has agreed to undertake a public offering of
common stock with gross proceeds of at least $50 million prior to April 28,
1996. There can be no assurance that the Company will be able to obtain
financing on satisfactory terms, if at all.
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RISK FACTORS
GOLD PRICE VOLATILITY
The Company's profitability is significantly affected by changes in the
market price of gold. Gold prices fluctuate widely and are affected by numerous
industry factors, such as demand for precious metals, forward selling by
producers, central bank sales and purchases of gold, and production and cost
levels in major gold-producing regions such as South Africa and the former
Soviet Union. Moreover, gold prices are also affected by macro-economic factors
such as expectations for inflation, interest rates, currency exchange rates, and
global or regional political and economic situations. The current demand for,
and supply of, gold affect gold prices, but not necessarily in the same manner
as current demand and supply affect the prices of other commodities. The
potential supply of gold consists of new mine production plus existing stocks of
bullion and fabricated gold held by governments, financial institutions,
industrial organizations and individuals. Since mine production in any single
year constitutes a very small portion of the total potential supply of gold,
normal variations in current production do not necessarily have a significant
effect on the supply of gold or on its price. If gold prices should decline
below the Company's cash costs of production and remain at such levels for any
sustained period, the Company could determine that it is not economically
feasible to continue commercial production.
The volatility of gold prices is illustrated in the following table of the
annual high, low and average London P.M. Fix:
<TABLE>
<CAPTION>
PRICE PER OUNCE
---------------------------
CALENDAR YEAR HIGH LOW AVERAGE
------------- ----- ----- -------
<S> <C> <C> <C>
1984................................................... $406 $308 $ 360
1985................................................... 341 294 317
1986................................................... 438 326 368
1987................................................... 500 390 446
1988................................................... 495 395 437
1989................................................... 416 356 381
1990................................................... 474 346 383
1991................................................... 403 344 362
1992................................................... 374 330 344
1993................................................... 406 326 360
1994................................................... 396 370 384
1995 (through November 7, 1995)........................ 396 372 384
</TABLE>
The London P.M. Fix on November 7, 1995, was $384.80 per ounce.
LOSSES
The Company reported a net loss of $1.2 million for the quarter ended
September 30, 1995. The Company also reported a net loss of $18.4 million for
the fiscal year ended June 30, 1995. The Company expects to continue to
experience losses until its low grade stockpiled ore is replaced by higher grade
ore from new sources, which new sources could include sources presently being
explored or developed by the Company. There can be no assurance that any such
replacement higher grade ore will be obtained by the Company.
RESERVES
The Company's ore reserves are, in large part, estimates made by the
Company and confirmed by independent mining consultants. No assurance can be
given that the indicated level of recovery of gold will be realized or that the
assumed gold price of $400 per ounce will be obtained. Reserve estimates may
require revision based on actual production experience. Market price
fluctuations of gold, as well as increased production costs or reduced recovery
rates, may render ore reserves containing relatively lower grades of
mineralization uneconomic and may ultimately result in a restatement of
reserves. Moreover, short-term operating factors relating to the ore reserves,
such as the need for sequential development of ore bodies and the
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processing of new or different ore grades, may adversely affect the Company's
profitability in any particular accounting period.
Declines in the market price of gold may also render ore reserves
containing relatively lower grades of gold mineralization uneconomic to exploit
unless the utilization of forward sales contracts or other hedging techniques is
sufficient to offset the effects of a drop in the market price of the gold
expected to be mined from such reserves. If the Company's realized price per
ounce of gold, including hedging benefits, were to decline substantially below
the levels set for calculation of reserves for an extended period, there could
be material delays in the development of new projects, increased net losses,
reduced cash flow, reductions in reserves and asset impairments.
CERTAIN TURQUOISE RIDGE PROJECT RISKS
The Turquoise Ridge Project involves numerous risks. These include the
following:
There can be no assurances that the probable reserves set forth in the MRDI
pre-feasibility study will actually be able to be mined and milled on an
economical basis, if at all. The MRDI study is based upon many assumptions, any,
some or all of which may not prove to be accurate. The failure of any such
assumptions to prove accurate may alter the conclusions of the MRDI study and
may have a material adverse effect on the Company.
The Turquoise Ridge project is at the pre-feasibility study level of
project development. The expenditure required to advance the project to the
point of a production test is large, particularly since the Company has decided
to proceed with shaft systems capable of being used in full-scale production to
save time and money, should trial mining be confirmed as viable. Thus to a large
extent expenditures which would usually be supported by a feasibility study will
depend on the data in-hand and assumptions made in this pre-feasibility study
with attendant higher level of uncertainty.
RESERVES
The resource and reserve estimates were prepared using geological and
engineering judgment based on available data. In the absence of underground
development, such estimates must be regarded as imprecise and some of the
assumptions made may later prove to be incorrect or unreliable.
The grade distribution at Turquoise Ridge is fairly narrow, with most
stopping blocks having grades between 0.2 to 0.4 ounces per ton. This means that
small changes in cutoff grade can cause large shifts in the reserves. If
dilution and/or mining costs related to bad ground are higher than expected, the
reserves could be substantially reduced, resulting in a shortening of mine life
and a reduced or negative cash flow.
MINING
Dilution. The tonnage and grade of the mill feed material was estimated by
applying dilution factors to certain resource data. The dilution agents are
backfill, waste from the back of overcut crosscuts and drifts, and from the
walls. In the case of the latter two, MRDI assumed that there would be an
average of one foot of back and wall dilution. If this dilution increases, there
will be corresponding negative effects on the tonnage and grade to mill. This
risk is related to the irregular configuration of the ore body which, even with
the tight cut-and-fill stopping method used, could make achievement of a
dilution thickness of one foot impossible to achieve in practice.
No. 1 Shaft Completion. MRDI believes a two-year assumed construction
period for No. 1 Shaft, which will become the main production shaft, is an
aggressive schedule. Delay in construction would necessitate removing ore
through the No. 2 Shaft, which is basically designed for waste and the limited
ore from early production. Additionally, the availability of the final
ventilation circuit required for mining depends upon the completion of No. 1
Shaft.
Mining Cost. As part of the project risk assessment, sensitivities were run
on various mining costs. Due to uncertainties about actual ground conditions and
productivities, these costs are only predictable within a broad
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range and the predictions may not be valid. Therefore, actual mining costs may
have a material adverse effect on the viability of the Turquoise Ridge project
and on the Company.
HYDROLOGY
Drainage of the ore body and country rocks will be critical to the
achievement of the mining efficiencies and costs estimated for the study. If the
deposit is not drained and water remains in this clay-rich environment, mining
conditions could worsen, and support costs will increase. If, due to the
presence of fine clays, the deposit drains slowly, the start of production may
be delayed, and the build-up to full production may be of longer duration.
Additionally, depending upon the quantity and quality of water encountered, the
water treatment/disposal options presently available to the Company may be
insufficient to meet estimated amounts needed to treat water pumped from
Turquoise Ridge during de-watering.
GEOTECHNICAL CONSIDERATIONS
The Turquoise Ridge ore zones contain areas of poor ground conditions due
to a high percentage of the ground being comprised of low rock mass rating rock
and clay. As a result, additional ground support may be required.
PROJECT DEVELOPMENT RISKS
The Company from time to time engages in the development of new ore bodies.
The Company's ability to sustain or increase its present level of gold
production is dependent in part on the successful development of such new ore
bodies and/or expansion of existing mining operations. The economic feasibility
of any such development project, and all such projects collectively, is based
upon, among other things, estimates of reserves, metallurgic recoveries, capital
and operating costs of such projects and future gold prices. Development
projects are also subject to the successful completion of feasibility studies,
issuance of necessary permits and receipt of adequate financing.
Development projects have no operating history upon which to base estimates
of future cash operating costs and capital requirements. In particular,
estimates of reserves, metal recoveries and cash operating costs are to a large
extent based upon the interpretation of geologic data obtained from drill holes
and other sampling techniques and feasibility studies which derive estimates of
cash operating costs based upon anticipated tonnage and grades of ore to be
mined and processed, the configuration of the ore body, expected recovery rates
of metals from the ore, comparable facility and equipment costs, anticipated
climate conditions and other factors. As a result, it is possible that actual
cash operating costs and economic returns of any and all development projects
may materially differ from the costs and returns initially estimated.
DEPENDENCE ON A SINGLE MINE
All of the Company's revenues are currently derived from its mining and
milling operations at the Getchell Property. If the operations at the Getchell
Main Underground Mine or at any of the Company's processing facilities were to
be reduced, interrupted or curtailed, the Company's ability to generate revenues
and profits in the future would be materially adversely affected.
EXPLORATION
Mineral exploration, particularly for gold, is highly speculative in
nature, involves many risks and frequently is unsuccessful. The Company is
seeking to expand its reserves only through exploration and development at the
Getchell Property. There can be no assurance that the Company's exploration
efforts will result in the discovery of gold mineralization or that any
mineralization discovered will result in an increase of the Company's reserves.
If reserves are developed, it may take a number of years and substantial
expenditures from the initial phases of drilling until production is possible,
during which time the economic feasibility of production may change. No
assurance can be given that the Company's exploration programs will result in
the replacement of current production with new reserves or that the Company's
development program will be able to extend the life of the Company's existing
mines.
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UNCERTAINTY OF FUTURE FINANCING
The Company has historically been largely dependent upon First Mississippi
for the continued financing of its operations. The Company's operating cash flow
is not anticipated to be sufficient to meet the Company's capital requirements.
In order to undertake planned development activities, the Company will need
additional financing. There can be no assurance that the Company's cash flow and
available financings will be sufficient to cover the Company's capital
requirements, including the estimated $85 million needed to bring the initial
phase of the Turquoise Ridge underground mine into commercial production of
2,000 tons of ore per day.
HEDGING ACTIVITIES
The Company currently uses spot deferred contracts in its hedging program
to protect earnings and cash flows from the impact of gold price fluctuations.
These transactions have been designated as hedges of the price of future
production and are accounted for as such. Spot deferred contracts are agreements
between a seller and a counterparty whereby the seller commits to deliver a set
quantity of gold, at an established date in the future and at agreed to prices.
The established price is equal to the spot price for gold plus "contango."
Contango is equal to the difference between the prevailing market rate for cash
borrowings less the gold lease rate, for comparable periods, and represents
compensation to the seller for holding gold until a future date. Contango rates
ranged from approximately 4 1/2% to 6 1/2% during fiscal 1995.
At the scheduled future delivery date, the seller may, at the option of the
counterparty, deliver into the contract or defer the delivery to a future date.
This option allows the seller to maximize the price realized by selling at the
spot market price if such price at that time were to be higher than the forward
contract price. Each time a seller defers delivery, the forward sales price is
increased by the then prevailing contango for the next period. Generally, the
counterparty will allow the seller to continue to defer contract deliveries
providing that there is sufficient scheduled production from proven and probable
reserves to fulfill the commitment. During fiscal 1995 and 1994, the Company
deferred delivery on contracts representing 70,100 and 244,000 ounces,
respectively.
At September 30, 1995, the Company had spot deferred contracts on 127,100
gold ounces which are scheduled to be delivered through May 1996 at prices
ranging from $391 to $421 per gold ounce. The Company intends to continue to
defer delivery into future periods when the spot market price is higher than the
spot deferred contract price. Based on the market price of gold at September 30,
1995, the unrealized gain on the contracts was approximately $1.7 million. The
Company's accounting treatment for spot deferred contracts is outlined in Notes
1 and 6 to the Consolidated Financial Statements to the Company's Form 10-K for
the fiscal year ended June 30, 1995.
Risk of loss with these spot deferred contracts arises from the possible
inability of a counterparty to honor contracts and from changes in the Company's
anticipated production of gold. However, nonperformance by any party to the
financial instruments in not anticipated.
The Company is required by the counterparty to maintain a $12 million
margin account which is guaranteed by First Mississippi. Should the cumulative
liquidation cost of the Company's spot deferred positions exceed the cumulative
value of such positions by an amount in excess of the margin account, the
Company could be subject to a margin call. The liquidation cost is what the
Company would have to pay on the liquidation date to purchase fixed forward
delivery contracts to meet its spot deferred deliveries. The cost of fixed
forward delivery contracts is based upon the spot price on the liquidation date
plus contango through the deliver date.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the services of certain key officers and
employees, including its Chief Executive Officer, its Chief Financial Officer
and its Chief Operating Officer. Competition in the mining industry for
qualified individuals is intense, and the loss of any of these key officers or
employees if not replaced could have a material adverse effect on the Company's
business and its operations. The Company currently does not have key person
insurance. The Company has entered into Termination Agreements with
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<PAGE> 13
its Chief Executive Officer, Chief Financial Officer and Chief Operating Officer
which provide for certain payments upon termination or resignation resulting
from a change of control (as defined in such agreements).
REGULATION OF MINING ACTIVITY
The mining operations of the Company are subject to inspection and
regulation by the Mine Safety and Health Administration of the Department of
Labor ("MSHA") under provisions of the Federal Mine Safety and Health Act of
1977. The Occupation and Safety Health Administration ("OSHA") also has
jurisdiction over safety and health standards not covered by MSHA.
All of the Company's exploration, development and production activities are
subject to regulation under one or more of the various environmental laws. These
laws address emissions to the air, discharges to water, management of wastes,
management of hazardous substances, protection of natural resources, protection
of antiquities and reclamation of lands which are disturbed. Many of the
regulations also require permits to be obtained for the Company's activities;
these permits normally are subject to public review processes resulting in
public approval of the activity. It is possible that future changes in these
laws or regulations could have a significant impact on some portion of the
Company's business, causing those activities to be economically reevaluated at
that time.
During the past three years, the United States Congress considered a number
of proposed amendments to the General Mining Law of 1872, as amended (the
"General Mining Law"), which governs mining claims and related activities on
federal lands. In 1992, a holding fee of $100 per claim was imposed upon
unpatented mining claims located on federal lands. In October 1994, a one-year
moratorium on processing of new patent applications was approved. In addition, a
variety of legislation is now pending before the United States Congress to amend
further the General Mining Law. The proposed legislation would, among other
things, change the current patenting procedures, impose royalties, and enact new
reclamation, environmental controls and restoration requirements. The royalty
proposals range from a 2% royalty on "net profits" from mining claims to an 8%
royalty on modified gross income/net smelter returns. The extent of any such
changes is not presently known and the potential impact on the Company as a
result of future congressional action is difficult to predict. Although a
majority of the Company's existing mining operations occur on private or
patented property, the proposed changes to the General Mining Law could
adversely affect the Company's ability to economically develop mineral resources
on federal lands.
ENVIRONMENTAL REGULATIONS
Mining is subject to potential risks and liabilities associated with
pollution of the environment and the disposal of waste products occurring as a
result of mineral exploration and production. Environmental liability may result
from mining activities conducted by others prior to the Company's ownership of a
property. Insurance for environmental risks (including potential liability for
pollution or other hazards as a result of the disposal of waste products
occurring from exploration and production) is not generally available at a
reasonable price to the Company or to other companies within the industry. To
the extent the Company is subject to environmental liabilities, the payment of
such liabilities would reduce funds otherwise available to the Company and could
have a material adverse effect on the Company.
In the context of environmental permitting, including the approval of
reclamation plans, the Company must comply with standards, laws and regulations
which may entail greater or lesser costs and delays depending on the nature of
the activity to be permitted and how stringently the regulations are
implementing by the permitting authority. It is possible that the costs and
delays associated with compliance with such laws, regulations and permits could
become such that the Company would not proceed with the development of a project
or the operation or further development of a mine. Laws and regulations
involving the protection and remediation of the environment are constantly
changing and are generally becoming more restrictive. The Company has made, and
expects to make in the future, significant expenditures to comply with such laws
and regulations.
Pending bills which affect environmental laws applicable to mining include
versions which may substantially alter the Clean Water Act, Safe Drinking Water
Act, Endangered Species Act and a bill which
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<PAGE> 14
will introduce additional protection of wetlands (Wetlands Protection and
Management Act). Adverse
developments and operating requirements in these acts could impair the ability
of the Company as well as others to develop mineral resources. Revisions to
current versions of these bills could occur prior to passage.
The Environmental Protection Agency ("EPA") continues the development of a
solid waste regulatory program specific to mining operations under the Resource
Conservation and Recovery Act ("RCRA"). Of particular concern to the mining
industry is a proposal by the EPA titled "Recommendation for a Regulatory
Program for Mining Waste and Materials Under Subtitle D of the Resource
Conservation and Recovery Act" ("Strawman II") which, if implemented, would
create a system of comprehensive federal regulation of the entire mine site.
Many of these requirements would be duplicative of existing state regulations.
Strawman II as currently proposed would regulate not only mine and mill wastes
but also numerous production facilities and processes which could limit internal
flexibility in operating a mine. To implement Strawman II as proposed, the EPA
must seek additional statutory authority, which is expected to be requested in
connection with Congress' reauthorization of RCRA.
The Company is also subject to regulations under (i) the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA" or
"Superfund") which regulates and establishes liability for the release of
hazardous substances and (ii) the Endangered Species Act ("ESA") which
identifies endangered species of plants and animals and regulates activities to
protect these species and their habitats. Revisions to CERCLA and ESA are being
considered by Congress; the impact on the Company of these revisions is not
clear at this time.
Environmental laws and regulations may also have an indirect impact on the
Company, such as increased cost for electricity due to acid rain provisions of
the Clean Air Act Amendments of 1990. Charges by refiners to which the Company
sells its metallic concentrates and products have substantially increased over
the past several years because of requirements that refiners meet revised
environmental quality standards. The Company has no control over the refiners'
operations or their compliance with environmental laws and regulations. If the
refining capacity of the United States is significantly further reduced because
of environmental requirements, it is possible that the Company's operations
could be adversely affected.
MINING RISKS AND INSURANCE
The gold ore located on the Getchell Property and the existing tailings
ponds and waste dumps located on the Getchell Property contain relatively high
levels of arsenic, and the milling of such ore involves the use of other toxic
substances, including sodium cyanide, sodium hydroxide, sulfuric acid and nitric
acid. In addition, the business of gold mining is generally subject to a number
of risks and hazards, including environmental hazards, industrial accidents,
labor disputes, the encounter of unusual or unexpected geological conditions,
slope failures, changes in the regulatory environment and natural phenomena such
as inclement weather conditions, floods, blizzards and earthquakes. Such
occurrences could result in damage to, or destruction of, mineral properties or
production facilities, personal injury or death, environmental damage, delays in
mining, monetary losses and possible legal liability. The Company maintains
insurance against risks that are typical in the gold mining industry and in
amounts that the Company believes to be reasonable, but which may not provide
adequate coverage in certain unforeseen circumstances. However, insurance
against certain risks (including certain liabilities for environmental pollution
or other hazards as a result of exploration and production) is not generally
available to the Company or to other companies within the industry.
TITLE TO PROPERTIES
Certain of the Company's mineral rights consist of unpatented mining
claims. Unpatented mining claims are unique property interests that are
generally considered to be subject to greater title risk than other real
property interests. The greater title risk results from unpatented mining claims
being dependent on strict compliance with a complex body of federal and state
statutory and decisional law, much of which compliance involves physical
activities on the land, and from the lack of public records which definitively
control the issues of validity and ownership.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
Registrant filed a current report on Form 8-K, dated September 24, 1995 as
amended by Form 8-K/A and Form 8-K/A-2. Reported were the results of the
pre-feasibility study on the Turquoise Ridge project, including establishment of
gold reserves, and an announcement that First Mississippi's board of directors
approved the spin-off of First Mississippi's stock in the Company to First
Mississippi's shareholders on October 20, 1995.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRSTMISS GOLD INC.
11/7/95 /s/ G. W. THOMPSON
- ----------------------------------- ------------------------------------------
Date G. W. Thompson
President and Chief Executive Officer
11/7/95 /s/ DONALD S. ROBSON
- ----------------------------------- ------------------------------------------
Date Donald S. Robson
Vice President and Chief Financial Officer
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
- --------- ------------------------------------------------------- ------------
<S> <C> <C>
27 -- Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-1-1995
<PERIOD-END> SEP-30-1995
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,158
<ALLOWANCES> 0
<INVENTORY> 10,052
<CURRENT-ASSETS> 16,261
<PP&E> 140,279
<DEPRECIATION> 71,100
<TOTAL-ASSETS> 87,704
<CURRENT-LIABILITIES> 7,384
<BONDS> 0
<COMMON> 182
0
0
<OTHER-SE> 30,327
<TOTAL-LIABILITY-AND-EQUITY> 87,704
<SALES> 17,605
<TOTAL-REVENUES> 17,605
<CGS> 16,939
<TOTAL-COSTS> 16,939
<OTHER-EXPENSES> 1,444
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 961
<INCOME-PRETAX> (1,659)
<INCOME-TAX> (425)
<INCOME-CONTINUING> (1,234)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,234)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
