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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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
Getchell Gold Corporation
(Exact name of Registrant as specified in its charter)
Delaware 64-0748908
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5460 South Quebec Street
Suite 240
Englewood, Colorado 80111
(Address of principal executive offices) (Zip code)
(303) 771-9000
(Registrant's telephone number including area code)
Not applicable
(Former name,former address,and former fiscal year,if changed since last report)
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 ____
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
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Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ____ No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
Common Stock, par value $0.0001 25,763,812 on November 11, 1996
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GETCHELL GOLD CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands of Dollars)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---------- ----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................... $ 81,212 $ 114,633
Trade accounts receivable ........................... 3,176 3,812
Inventories:
Ore and ore in process ......................... 2,528 2,088
Materials and supplies ......................... 7,152 7,662
--------- ---------
Total inventories ......................... 9,680 9,750
--------- ---------
Prepaid expenses and other current assets ........... 789 1,408
Deferred hedging gains, net ......................... 280 1,046
--------- ---------
Total current assets ...................... 95,137 130,649
Property, plant and equipment, net ....................... 117,647 79,844
--------- ---------
Total assets .............................. $ 212,784 $ 210,493
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 7,245 $ 4,953
Current portion of capital lease obligation ......... 1,928 844
Other accrued expenses .............................. 614 702
--------- ---------
Total current liabilities ................. 9,787 6,499
Long-term interest payable ............................... 1,381 --
Long-term debt ........................................... 23,814 23,783
Capital lease obligations, less current installments ..... 9,259 4,387
Deferred income taxes .................................... 7,742 8,611
Other long-term liabilities .............................. 3,616 2,949
--------- ---------
Total liabilities ......................... 55,599 46,229
--------- ---------
Stockholders' equity :
Common stock ........................................ 3 257
Contributed and paid-in capital ..................... 172,862 171,722
Accumulated deficit ................................. (15,680) (7,708)
Unearned compensation ............................... -- (7)
--------- ---------
Total stockholders' equity ................ 157,185 164,264
--------- ---------
Total liabilities and stockholders' equity $ 212,784 $ 210,493
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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GETCHELL GOLD CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands of Dollars, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ......................................................... $ 17,020 $ 17,605 $ 48,868 $ 51,064
Cost of sales ..................................................... 20,592 16,939 55,606 50,955
-------- -------- -------- --------
Gross loss (profit) .......................................... 3,572 (666) 6,738 (109)
Selling, general and administrative expenses ...................... 870 1,078 3,310 2,555
Exploration expenses .............................................. 606 366 2,189 1,844
Abandonment and impairment of mineral properties .................. -- -- -- 11,531
-------- -------- -------- --------
Loss from operations ......................................... 5,048 778 12,237 15,821
Interest expense, net of capitalized interest ..................... 436 961 970 2,007
Interest and other income ......................................... (1,266) (80) (4,365) (125)
-------- -------- -------- --------
Loss before income taxes .................................... 4,218 1,659 8,842 17,703
Income tax expense (benefit) ...................................... -- (425) (870) 568
-------- -------- -------- --------
Net loss ..................................................... $ 4,218 $ 1,234 $ 7,972 $ 18,271
======== ======== ======== ========
Loss per common share ........................................ $ 0.16 $ 0.07 $ 0.31 $ 1.01
======== ======== ======== ========
Average number of shares outstanding ......................... 25,743 18,183 25,718 18,167
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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GETCHELL GOLD CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ........................................................... $ (7,972) $ (18,271)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and depletion .................................... 6,729 7,620
Deferred income taxes ......................................... (870) 1,334
Loss on disposal or abandonment and impairment ................ 5 11,553
Deferred compensation ......................................... 7 18
Deferred hedging gain, net .................................... 767 (748)
Net change in operating assets and liabilities:
Trade accounts receivable ................................ 636 (392)
Inventories .............................................. 70 980
Prepaid expenses and other current assets ................ 620 416
Accounts payable ......................................... 932 (677)
Other accrued expenses ................................... (98) 599
Interest payable ......................................... 1,381 1,488
Income taxes payable ..................................... -- (842)
Other long-term liabilities .............................. 666 16
--------- ---------
Cash provided by operating activities ............... 2,873 3,094
--------- ---------
Cash flows from investing activities:
Capital expenditures ............................................... (36,076) (17,020)
Proceeds from sale of property ..................................... 9 202
Deferred stripping costs ........................................... -- (96)
--------- ---------
Cash used by investing activities ................... (36,067) (16,914)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock ............................. 893 285
Proceeds from long-term debt ....................................... 31 12,900
Principal payments under capital lease obligation .................. (1,151) --
--------- ---------
Cash provided by (used in) financing activities ..... (227) 13,185
--------- ---------
Net decrease in cash and cash equivalents ............................... (33,421) (635)
Cash and cash equivalents at beginning of period ........................ 114,633 635
--------- ---------
Cash and cash equivalents at end of period .............................. $ 81,212 $ --
========= =========
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Supplemental disclosures:
Interest paid, net of amounts capitalized ............................... $ 732 $ 129
========= =========
Income taxes paid ....................................................... $ -- $ 100
========= =========
</TABLE>
Supplemental noncash financing activities (in thousands):
In the nine months ended September 30, 1996 and 1995, $0 and $1,329
respectively, of interest payable to First Mississippi Corporation was
transferred to the principal balance of notes payable to First Mississippi
Corporation.
Capital lease obligations of $7,107 were incurred to acquire equipment during
the nine month period ended September 30, 1996.
See accompanying notes to consolidated financial statements.
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GETCHELL GOLD CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Report of FirstMiss Gold Inc. on Form 10-K for the six month period ended
December 31, 1995.
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Note 2 - Change in Par Value of Common Stock
Effective June 25, 1996, FirstMiss Gold Inc. changed its name to
Getchell Gold Corporation (the "Company") and changed its state of incorporation
from Nevada to Delaware. The primary purpose of this reincorporation was to
allow the Company to benefit from Delaware's well-developed corporate law. In
conjunction with the change in state of incorporation, the par value of the
Company's 50,000,000 authorized shares of common stock is $0.0001, a change from
FirstMiss Gold Inc.'s par value of $0.01 for its 50,000,000 authorized shares of
common stock.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The information set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" includes "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the "Securities Exchange Act"), and is subject to the safe
harbor created by that section. Factors that realistically could cause results
to differ materially from those projected in the forward-looking statements are
set forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Risk Factors."
Effective June 25, 1996, FirstMiss Gold Inc. changed its name to
Getchell Gold Corporation (the "Company") and changed its state of incorporation
from Nevada to Delaware. The primary purpose of this reincorporation was to
allow the Company to benefit from Delaware's well-developed corporate law.
RESULTS OF OPERATIONS
Results for the quarter ended September 30, 1996 were a loss of $4.2
million, or $0.16 per share, versus a loss of $1.2 million, or $0.07 per share,
for the same period in 1995. Results for the nine months ended September 30,
1996, were a loss of $8.0 million, or $0.31 per share, compared with a loss of
$18.3 million, or $1.01 per share, in the nine months of 1995. The 1995 results
for the nine month period include $11.5 million of non-cash impairment and
abandonment charges, consisting of a $2.4 million write-off of an inactive
silver exploration property and a $9.1 million write-down of assets associated
with termination of mining in the Main Pit at the Getchell property. Continued
use of lower grade stockpile ores to meet mill feed requirements was responsible
for less favorable gross results for the third quarter of 1996 as compared with
the third quarter of 1995. In addition to the continued use of lower grade
stockpile ores, increased costs associated with the conversion from open-pit
mining to underground mining were responsible for less favorable gross results
for the nine months of 1996 as compared with the same period of 1995. Results in
both the quarter and nine month periods of 1996 benefited from higher interest
income in comparison to the corresponding 1995 periods. The following table
highlights sales and production information for the three and nine month periods
ended September 30, 1996 and 1995:
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Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Ounces sold ........................ 42,423 43,845 123,442 129,412
Average realized price $ / ounce ... $ 401 $ 402 $ 396 $ 395
Average market price $ / ounce ..... $ 385 $ 383 $ 391 $ 384
Ounces Produced:
Mill ...................... 39,993 42,262 117,903 120,367
Heap leach ................ 2,430 1,583 5,539 9,045
Cash cost $ / ounce
Mill ...................... $ 437 $ 349 $ 402 $ 344
Heap leach ................ $ 263 $ 137 $ 239 $ 362
Combined .................. $ 427 $ 341 $ 395 $ 345
Total cost $ / ounce
Mill ...................... $ 498 $ 395 $ 460 $ 395
Heap leach ................ $ 272 $ 149 $ 251 $ 372
Combined .................. $ 485 $ 386 $ 450 $ 394
SALES. Sales in the 1996 periods were adversely affected by lower mill
throughput due primarily to mechanical problems at the mill, which have been
resolved, resulting in a loss of nine days of production in the third quarter.
Sales in the third quarter of 1996 of $17.0 million were down 3 percent from
$17.6 million in the same period of 1995. Gold output totaled 42,423 ounces and
43,845 ounces in the 1996 and 1995 third quarters, respectively. Sales in the
first nine months of 1996 were $48.9 million compared with $51.1 million in the
same period of 1995, reflecting production of 123,442 ounces and 129,412 ounces
for the respective periods, a 5 percent decrease for the 1996 period. In
addition to the lower mill throughput, the decrease in production in the 1996
nine months compared with the 1995 nine months was due to lower heap leach
output resulting from lower ore grades and slower recovery rates. Mill feed in
the 1996 periods came from the Getchell Underground Mine and stockpiled ores,
whereas production in the 1995 periods came primarily from the Getchell Main Pit
and stockpiled ore.
Market gold prices averaged $385 and $391 per ounce in the quarter and
nine months ended September 30, 1996, respectively, compared with $383 and $384
in the same periods of 1995, respectively. Hedging contributed $16 and $5 per
ounce to the realized price in the quarter and nine months ended September 30,
1996, compared with $19 and $11 per ounce in the same periods a year ago,
respectively.
At September 30, 1996, the Company had spot deferred contracts on
100,000 ounces of gold of which 40,000 are scheduled to be delivered during the
fourth quarter of 1996 at prices ranging between $405 and $407 per ounce and
60,000 ounces scheduled for delivery in the first six months of 1997 at prices
currently ranging between $391 and $418 per ounce. Based on the market price of
gold at September 30, 1996, the unrealized gain on the contracts is $2.2
million. The Company's accounting treatment for spot deferred contracts is
outlined in Notes 1 and 7 to the Consolidated Financial Statements as found in
the Company's Report on Form 10-K for the six-month period ended December 31,
1995.
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COST OF SALES. Cost of sales for the 1996 third quarter of $20.6 million were
$3.7 million higher than the 1995 period due to higher mining, mine site
administrative and depreciation costs. Cost of sales of $55.6 million for the
nine months ended September 30, 1996 reflect a $4.7 million increase from the
same period a year earlier primarily due to higher mining and mine site
administrative costs. With the increase in cost of sales and the lower
production in the 1996 periods compared with the 1995 periods, cash costs per
ounce rose to $427 from $341 in the third quarter and to $395 from $345 in the
nine months.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative costs
were $0.9 million and $3.3 million in the 1996 third quarter and first nine
months, respectively, compared with $1.1 million and $2.6 million in the same
respective periods of a year ago. These costs were higher in the 1996 nine month
period due to increased corporate activity following the spin off from First
Mississippi Corporation in October 1995. Various corporate administrative costs,
including stockholder communications, investor relations, professional services,
salaries, travel and insurance costs have risen for the 1996 nine month period
compared with the same period in 1995.
EXPLORATION. Exploration expenses for the quarter and nine months ended
September 30, 1996 of $0.6 million and $2.2 million, respectively, were higher
than the same periods in the prior year, reflecting increased drilling activity.
Capitalized drilling expenditures were $0.8 million and $2.1 million for the
quarter and nine months ended September 30, 1996, respectively, and are expected
to increase during the remainder of the year as discussed in "Planned
Activities."
INTEREST EXPENSE. Interest expense was lower by $0.5 million and $1.0 million
in the third quarter and first nine months of 1996, respectively, compared with
the same periods of 1995 due to lower debt balances owed to First Mississippi
Corporation and increased amounts of capitalized interest in the current periods
related to the Company's current development projects.
INTEREST AND OTHER INCOME. The increase in 1996 interest and other income over
1995 of $1.2 million for the third quarter and $4.2 million for the nine months
reflects higher interest earnings on higher cash balances following the equity
offering in late 1995 as discussed in "Liquidity and Capital Resources."
INCOME TAXES. A $0.9 million tax benefit was recognized on the pretax loss in
the first quarter of 1996 with no additional benefits being recognized in
subsequent quarters. In the second quarter of 1995, the Company recognized a
valuation allowance relating to an Amended Tax Sharing Agreement with First
Mississippi Corporation. This valuation allowance, offset by tax benefits
relating to pretax losses for the period, resulted in income tax expense of $0.6
million for the nine months ended September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company is presently financing its operations and capital
development projects from internally generated cash and from cash proceeds of an
equity offering completed in late 1995, which provided a net $137.5 million. At
September 30, 1996, the Company's cash and cash equivalents totaled $81.2
million. This cash, along with cash generated by operations, will be used for
the development of the Turquoise Ridge Mine and to meet other capital and
operating needs over the next two years (see discussion in "Risk Factors"). If
such funds are not sufficient to meet these needs, the Company may raise
additional funds through borrowings or additional equity offerings.
During the nine month period ended September 30, 1996, the Company
spent cash of $36.1 million on capital expenditures. Of these capital
expenditures, the Company spent $19.1 million on the development of the
Turquoise Ridge ore body, $8.4 million for equipment and underground development
costs at the Getchell Underground Mine, $4.9 million for mill facility
improvements, $2.1 million for development drilling and $1.6 million on other
capital items.
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PLANNED ACTIVITIES
The major focus of the Company during the next twelve months will be
the sinking of two shafts at the Turquoise Ridge deposit. Initial production of
development ore at Turquoise Ridge is not expected before the end of 1997.
Through the nine months ended September 30, 1996, twenty-three core
holes have been drilled in the "shaft zone," contiguous and to the southeast of
the existing reserves at Turquoise Ridge. The purpose of this drilling is to
assist in mine planning and to convert previously declared mineralizations to
reserves. In addition, a program to delineate the size and orientation of the
Turquoise Ridge deposit is underway with three core drill rigs engaged in
step-out drilling on the deposit. The Company expanded its 1996 exploration
drilling program by approximately $2.5 million to allow for these two programs.
Drilling continues on other targets on the Getchell Property located outside the
known mineralization areas.
The Company plans to continue processing sulfide ores from the Getchell
Underground ore body, supplemented by stockpiled ores as needed to keep the mill
operating at full capacity. There can be no assurance that any of the foregoing
plans or goals will be achieved.
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 the Company's cash costs of production
exceeds gold prices for any sustained period or 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.
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The volatility of gold prices is illustrated in the following table of the
annual high, low and average London P.M. Fix:
Calendar Year Price Per Ounce
High Low Average
1984 ........................... $406 $308 $360
1985 ........................... 341 294 317
1986 ........................... 438 326 368
1987 ........................... 500 390 446
1988 ........................... 484 395 437
1989 ........................... 416 356 381
1990 ........................... 424 346 383
1991 ........................... 403 344 362
1992 ........................... 360 330 344
1993 ........................... 406 326 360
1994 ........................... 395 378 384
1995 ........................... 396 372 384
The London P.M. Fix on November 11, 1996, was $381 per ounce.
LOSSES
The Company reported net losses of $8.0 million for the nine months
ended September 30, 1996, $5.0 million for the six months ended December 31,
1995 and $18.4 million for the fiscal year ended June 30, 1995. The Company
expects to continue to experience losses until its low grade stockpile ores are
replaced by higher grade ore from new sources, which could include sources
presently being explored or developed by the Company. There can be no assurance
that such higher grade replacement ores will be obtained by the Company.
DEPENDENCE ON A SINGLE MINE
All of the Company's revenues are derived from its mining and milling
operations at the Getchell Property. If the operations at the Getchell
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. (See "Results
of Operations-Sales" above.)
RESERVES
The ore reserves reported by the Company are, in large part, estimates
made by the Company and confirmed by independent mining consultants. The
reserves confirmed by Mine Development Associates, a consulting firm which
reviewed the Company's reserve estimates, are subject to certain risks and
assumptions, including those discussed in "Certain Turquoise Ridge Mine Risks"
below. Additionally, 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 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
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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 MINE RISKS
The Turquoise Ridge Mine involves numerous risks. These include the
following:
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.
There can be no assurance that the probable reserves set forth in the
September 1995 pre- feasibility study conducted by Mineral Resources Development
Inc. (MRDI) will actually be mined and milled on an economic basis, if at all.
The MRDI Study is based upon many assumptions, 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 has transitioned from the pre-feasibility
study level of project development to the construction phase of development. The
expenditures 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,
if trial mining is 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 the MRDI Study with an attendant higher level of
uncertainty.
DILUTION. The tonnage and grade of the mill feed material were estimated by
applying dilution factors to certain resource data. The dilution agents are
backfill, waste from the back of over-cut 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. As of September
30, 1996, sinking of the ventilation shaft progressed to a depth of 400 feet and
the first station had been installed. The production shaft surface plant is
nearing completion and shaft sinking in the production shaft is planned to begin
in the fourth quarter of 1996. The project continues to be on schedule.
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 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.
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HYDROLOGY. Drainage of the ore body and surrounding rock 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, estimate 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.
EXPLORATION
Mineral exploration, particularly for gold, is highly speculative in
nature, involves many risks and frequently is unsuccessful. The Company
currently 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 any additional
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.
HEDGING ACTIVITIES
The Company currently uses spot deferred contracts in its hedging
program to protect earnings and cash flows from the impact of short-term drops
in gold price. 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 counter party whereby the seller commits to
deliver a set quantity of gold, at an established date in the future and at an
agreed upon price. The established forward price is equal to the current spot
gold price on the day the agreement is signed plus "contango." Contango is equal
to the difference between the prevailing market rate for cash deposits less the
gold lease rate, for
14
<PAGE>
comparable periods. The contango rate ranged from 3.4% to 3.55% for 1 month
to 12 month periods at September 30, 1996.
At the scheduled future delivery date, the seller may deliver gold and
thereby fulfill the contract or defer delivery to a future date. In practice
this generally allows the seller to maximize the price realized. If the spot
price on the delivery date is greater than the contract price, delivery on the
contract may be deferred to a new forward date and the gold is sold at the
higher spot price. If the spot price is lower than the contract price, the
delivery may be made against the contract and the higher contract price is
realized.
Each time a seller defers delivery, the forward sales price is
increased by the then prevailing contango (assuming it is positive) for the next
period out to the newly established forward delivery date. Generally, the
counter party 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 both the third quarter and first nine
months ended September 30, 1996, the Company deferred delivery on contracts
representing 100,000 ounces.
At September 30, 1996, the Company had spot deferred contracts on
100,000 ounces of gold of which 40,000 are scheduled to be delivered during 1996
at prices ranging between $405 and $407 per ounce and 60,000 ounces scheduled
for delivery in 1997 at prices currently ranging between $391 and $418 per
ounce. Based on the market price of gold at September 30, 1996, the unrealized
gain on the contracts is $2.2 million. The Company's accounting treatment for
spot deferred contracts is outlined in Notes 1 and 7 to the Consolidated
Financial Statements as found in the Company's Report on Form 10-K for the
six-month period ended December 31, 1995.
Risk of loss from these forward sales and purchases agreements arises
from the possible inability of a counter party to honor contracts and from
changes in the Company's potential ability to deliver gold, although
nonperformance by any party to the financial instruments is not anticipated.
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.
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
15
<PAGE>
imposed upon unpatented mining claims located on federal lands. In October 1994,
a one-year moratorium on processing of new patent applications was approved.
This moratorium subsequently was renewed and now has been extended through
September 30, 1997. In addition, over the past several years a variety of
legislation has been proposed 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 compliance and permitting, including
the approval of reclamation plans, the Company must comply with federal, state
and local standards, laws and regulations which may entail greater or lesser
costs and delays depending on the nature of the activity to be permitted,
constructed and operated 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, regulations and regulatory policies
involving the protection and remediation of the environment are constantly
changing at all levels of government and are generally becoming more
restrictive, and the costs imposed on the development and operation of mineral
properties are increasing as a result of such changes. 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 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.
16
<PAGE>
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 RISK 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. Additionally, 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. The Company's unpatented mining
claims also could be adversely affected by the imposition of federal royalties
or other burdens or restriction if certain forms of proposed legislation to
amend the General Mining Law of 1872 are passed by the United States Congress.
See the Discussion above in "Regulation of Mining Activity".
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
27. - Financial Data Schedule.
18
<PAGE>
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.
Getchell Gold Corporation
November 13, 1996 By:/s/ G. W. Thompson
------------------------------------------
Date G. W. Thompson, President, Chief Executive Officer
and Director
November 13, 1996 By:/s/ D. S. Robson
------------------------------------------
Date Donald S. Robson, Vice President and Chief Financial
Officer (Principal Financial Officer)
19
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