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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NO. 1-10012
SUNSHINE MINING AND REFINING COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 75-2618333
(State or other jurisdiction (IRS Employer Identification
of incorporation or organization) Number)
877 W. MAIN STREET, SUITE 600 83702
BOISE, IDAHO (Zip Code)
(Address of principal
executive offices)
Registrant's telephone number, including area code:
(208) 345-0660
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
<S> <C>
Common Stock, $0.01 par value New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Warrants, expiring May 22, 2001, for the purchase of one share of Common Stock
Warrants, expiring March 9, 1999, for the purchase of one share of Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
(Continued on next page)
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(Continued from previous page)
The aggregate market value of the shares of common stock held by
non-affiliates of the registrant at March 2, 1998 was $320,290,791. For
purposes of this computation, all officers, directors and beneficial owners of
10% or more of the common stock of the registrant are deemed to be affiliates.
Such determination should not be deemed an admission that such officers,
directors and beneficial owners are affiliates.
Indicate the number of shares outstanding of the registrant's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NUMBER OF SHARES OUTSTANDING
OF COMMON STOCK AT MARCH 2, 1998
--------------- ----------------
<S> <C>
Common Stock, $0.01 par value 256,232,633
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
Sunshine Mining and Refining Company's Definitive Proxy Statement for
its Annual Meeting to be held in May, 1998 (Part III).
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PART I
1. BUSINESS.
GENERAL
Sunshine Mining and Refining Company ("Sunshine" or the "Company") is
primarily engaged in mining silver. The Company owns the Sunshine Mine located
in the Coeur d'Alene Mining District near Kellogg, Idaho, the Pirquitas Mine in
the Jujuy Province of northwest Argentina, and the Revenue-Virginius Mine in
the Ouray District of southwest Colorado. The Sunshine Mine is currently at
full production; Pirquitas and Revenue-Virginius are undergoing active
exploration, evaluation and development programs. Total proven and probable
silver reserves at those three properties are 119 million ounces (113 million
ounces @ $5 silver) at December 31, 1997.
The Sunshine Mine began operations in 1884 and has produced in excess
of 349 million ounces of silver since that time. The mine also produces
significant amounts of copper, lead and antimony as by-products. The Sunshine
Mine has substantially increased production in recent years, achieving full
production in the fourth quarter of 1997 for the first time since 1990. This
has resulted in a substantial reduction in unit costs as fixed costs have been
spread over a larger production figure. Production in 1997 totaled 4.25 million
ounces of silver at a net cash cost of production of $4.50 per ounce compared
to 2.58 million ounces of production in 1996 at a net cash cost of production
of $6.12 per ounce.
Sunshine's share of silver reserves at the Sunshine Mine as of
December 31, 1997 totaled 1.8 million tons of ore containing 22.2 ounces of
silver per ton (after adjustment for mining dilution), totaling 39.8 million
ounces of silver. Metallurgical recoveries at the Sunshine Mine typically
approximate 97% of the contained silver. In addition to proven and probable
reserves, there is a realistic probability to significantly expand the reserves
and assure continuous mining for many years. Studies have delineated several
areas of favorable geologic conditions that may host significant deposits.
These areas are contiguous to delineated mineralization, and the ore-bearing
structures project into favorable lithologic units. Further exploration is
necessary to quantify the contained ore, but the magnitude of the contained ore
could equal the production from the major veins.
The mine plan at the Sunshine Mine for 1998 calls for production of 6
million ounces of silver. Exploration activity will focus on levels above the
existing reserve block in the newly-developed West Chance vein, and on the
eastward extensions of the Chester and Yankee Girl veins into the
newly-acquired ConSil property.
The Company acquired the Pirquitas Mine in November, 1995, and since
that time has conducted an active exploration drilling and sampling program on
the site. The Company has developed a mine plan to produce the reserves using
low-cost open-pit mining methods. Based on the mine plan, the Company has
estimated the property can be developed for approximately $100 million, and
will produce annually more than 9 million ounces of silver and over 8.4 million
pounds of tin. The estimated net cash cost of production of an ounce of silver
is $2.65, assuming a $5.00 silver price and a tin price of $2.54 per pound.
Reserves defined thus far within the currently envisioned mine plan at
$5.00 and $7.00 per ounce silver prices are as follows, after adjustment for
expected mining dilution:
<TABLE>
<S> <C> <C>
Silver Price/oz $5.00 $7.00
----- -----
Tin Price/lb $2.54 $2.54
Tons (MM) 12.5 15.9
Average silver grade (oz/ton) 5.4 4.6
Average tin grade (%) .31 .26
Contained silver (MM ozs) 66.9 72.8
Contained tin (M tons) 39.0 41.6
</TABLE>
Work at the Pirquitas Mine in 1998 will be directed toward completing
the final feasibility and environmental impact studies, to finance the
development of the mine, as well as continued drilling to expand the reserve.
Drilling and other work will be directed at converting additional mineralized
inventory, totaling 3.8 million tons at 4.6 ounces per ton, into proven and
probable reserves.
The Revenue-Virginius Mine carries a reserve of 260 thousand tons of
ore containing 6.2 million ounces of silver at a grade of 23.9 ounces per ton.
The ore also contains .06 ounces per ton gold and 5.89% combined lead, zinc and
copper.
Based on evaluation work completed, the Company believes that the
property can be reopened at a production rate of approximately 2.5-3 million
ounces per year following a $12-15 million capital investment. Net cash costs
were estimated at approximately $4 per ounce. As a result, the Company will
undertake in 1998 to drill out sufficient reserves to justify the capital
investment. Several veins carry the mineralized values, and many of the veins
have been traced for long distances onto other properties. Therefore, the
Company believes it reasonable to assume that a significant mineralized
inventory in addition to the above values can be inferred.
As more than 80% of the Company's operating revenues is derived from
the sale of silver, the Company's earnings are directly related to the price of
silver, which has been depressed since 1985. As a result, the Company has
reported operating losses and negative cash flow from operations since that
time. The Company's strategy is to add sufficient low cost silver production to
be profitable at prices for silver which have prevailed in recent years, while
also positioning the Company to benefit from an improvement in silver prices.
Should the Company not succeed in adding such low cost production, and there is
no substantial improvement in the silver price, the Company will continue to
report operating losses and negative cash flow.
The accuracy of these forward looking statements and other similar
statements contained herein regarding production, reserves, mineralized
materials and cash costs at the Pirquitas Mine, the Sunshine Mine and the
Company's other exploration projects will depend upon the actual grade,
quantity and other qualities of recoverable resources, which may differ from
current estimates. Actual results in each case could differ materially
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from those currently anticipated in such statements, by reason of factors
including without limitation, actual results of exploration, silver prices,
imprecision of reserve estimates, future economic conditions, regulations,
competition, and other circumstances affecting anticipated revenue and costs.
Any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update any
forward-looking statement.
For information regarding Sunshine's business, certain classes of
products or services and sales to certain significant customers, see Notes 11
and 12 of Notes to Consolidated Financial Statements included elsewhere herein.
Sunshine is incorporated under the laws of the state of Delaware and
maintains its principal executive offices at 877 West Main Street, Suite 600,
Boise, Idaho 83702.
SILVER SUPPLY, DEMAND, AND PRICES
According to studies published by the Silver Institute in its World
Silver Survey and/or by CPM Group (precious metal industry consultants), new
silver production since 1990 has been far below total demand for silver. This
gap between new supply and demand has been bridged by the availability of a
large surplus of silver inventories generated in the aftermath of the major
increase in silver prices in 1979-1983. The availability of these inventories
has kept silver prices inordinately low. According to these same studies, the
worldwide silver inventories have now been greatly diminished. In January and
February of 1998, according to industry sources and press accounts, silver
prices increased to their highest levels in over 10 years in response to
concerns about supply availability.
OPERATIONS
THE SUNSHINE MINE AND REFINERY COMPLEX
The Sunshine Mine and Refinery Complex, located in the Coeur d'Alene
Mining District near Kellogg, Idaho, is comprised of the Sunshine Mine, a
1,000-ton-per-day concentrator, an antimony refinery, a silver refinery and
associated facilities. The facility is an integrated operation which can
produce refined silver with 99.99% purity. The silver refinery has a capacity
to recover up to 8 million ounces of silver and 4 million pounds of copper
annually.
The Company's wholly owned subsidiary, Sunshine Precious Metals, Inc.
("SPMI") owns substantially all of the mining claims comprising the Sunshine
Mine. Electrical power is supplied by the Washington Water Power Company from
two sources, the facilities are in good and operable condition, and access to
the property is by paved roads maintained by the county.
The Sunshine Mine is a primary silver-producing underground mine
which began operations in 1884 and has produced over 349 million ounces of
silver since that time. The underground workings consist of multiple levels
developed off the Jewell shaft, the main production shaft. It extends from the
surface to a depth of over 4,000 feet and is complemented by other interior
shafts which develop levels as deep as 5600 feet. Mining and exploration
operations are currently focused in the western area of the mine, in a vein
called the West Chance, at depths from 1,700 feet to 3,700 feet. In addition,
in 1998, exploration will begin from the newly-acquired ConSil shaft in the
eastern area of the mine.
The ore extracted from the Sunshine Mine is introduced to the
1,000-ton-per-day flotation concentrator, which produces two concentrates, a
high-grade silver concentrate which is transferred to the antimony refinery for
antimony removal, and a lead concentrate which is shipped directly to a smelter
for further processing.
After antimony removal, the silver concentrate can be either
transferred to the Company's silver refinery for recovery of silver and copper,
or sold to a commercial smelter. Factors which influence Sunshine's decision to
refine its products internally or sell them to a smelter include levels of
production, costs of reagents and available smelter contract terms. The
refinery was designed and built to recover up to 8.0 million ounces of silver
from concentrates annually. Sunshine suspended operations at the silver
refinery in 1995 pending higher levels of available feed. Until a decision is
made to reopen the refinery, Sunshine will continue to sell the silver-copper
concentrates to a nearby smelter for processing. The Company's sales to the
third party smelters are under long-term contracts, generally for a period of
at least one year, cancelable by either party after one year upon thirty days
notice. The Company employs no sales force. Suspension of refinery operations
has not had a material impact on Sunshine's results of operations or cash
flows.
Ore and metals produced during 1997, 1996 and 1995, respectively,
were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Tons of Ore . . . . . . . . . . . . . . . . . . . . . 183,404 120,910 101,240
Metals Recovered:
Ounces of Silver . . . . . . . . . . . . . . . . 4,253,315 2,577,895 1,731,714
Pounds of Copper . . . . . . . . . . . . . . . . 884,124 671,701 731,312
Pounds of Antimony . . . . . . . . . . . . . . . 785,897 534,013 578,062
Pounds of Lead . . . . . . . . . . . . . . . . . 9,203,907 2,546,852 986,503
</TABLE>
These metals were recovered from ore containing an average of 23.95,
22.04, and 17.66 ounces of silver per ton, in 1997, 1996 and 1995,
respectively. Metallurgical recoveries were 97% of the contained silver, 97%
of the contained copper, and 92.5% of the contained lead.
Production increased substantially in 1997 as the Company completed
development of the West Chance ore body. By the end of the year, the mine was
operating at its rated capacity of 1,000 tons of ore per day. It is expected
that all of the Company's production during at least the next three years will
be from this ore body. West Chance production in 1997 was from the 2700, 3100
and 3700 levels. Exploration and development activity on the 2300 and 1700
levels is currently underway anticipating that the ore body may continue updip
from the present workings.
The Sunshine Mine's proven and probable ore reserves, which include
the West Chance reserves, were estimated by the Company's technical personnel
at January 1, 1998, to be 1.8 million tons of ore containing 40.6
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million ounces of silver, 14.9 million pounds of copper, and 34.4 million
pounds of lead. The weighted average ore grades, adjusted for mining dilution,
but not adjusted for metallurgical recoveries, are 22.3 ounces per ton silver,
.41% copper, and 2.54% lead. The Company owns 98% of the proven and probable
reserves of the Sunshine Mine.
Reserves increased by 4.4 million ounces of silver from the prior year
(net of production) due to the exploration and development of the West Chance
in 1997. West Chance proven and probable reserves total 17.4 million ounces of
silver. In addition to proven and probable reserves, there is a realistic
probability to significantly expand the reserves and assure continuous mining
for many years. Studies have delineated several areas of favorable geologic
conditions that may host significant deposits. These areas are contiguous to
delineated mineralization, and the ore- bearing structures project into
favorable lithologic units. Further exploration is necessary to quantify the
contained ore, but the magnitude of the contained ore could equal the
production from the major veins.
During the three years ended December 31, 1997, the Sunshine Mine
accounted for all of the Company's silver production, and approximately 35% of
the Company's silver reserves at January 1, 1998. See Note 12 of Notes to
Consolidated Financial Statements included elsewhere herein.
In addition to the West Chance, the Sunshine Mine has a number of
other systems which have yet to be fully evaluated. The Company's geologists
believe many of these systems could have significant mineralization. Some of
these favorable structures continue to the east. The 1995 acquisition of the
ConSil property, on the eastern flank of the workings of the Sunshine Mine,
permits evaluation of these veins and expands the Company's resource base. The
ConSil property, comprised of 99 mining claims (1,233 acres), contains a shaft
(500 tons per day capacity) from the surface to a depth of 5400 feet and
connects to the Sunshine's eastern workings on the 3100 level. In 1998, the
Company will begin rehab work on the ConSil shaft and start exploration
drilling to test the potential for extensions of the Chester and Yankee Girl
veins in the eastern part of the Sunshine Mine, including the former ConSil
property.
The hourly employees at the Sunshine Mine are represented by the
United Steelworkers of America (which represents the majority of the employees)
and the International Brotherhood of Electrical Workers Union (the "Unions").
Effective May 1, 1994, the Unions and SPMI entered into new six-year labor
agreements. The salient features of the agreements are (1) continuation of the
flexible wage scale making wages variable with silver prices, with some
increase in direct hourly wages; (2) the ability of either party to reopen
negotiations on wages and benefits at the end of the third year, subject to
mandatory interest arbitration if agreement is not reached; and (3) an increase
in pension benefits in exchange for the elimination of Company provided retiree
medical benefits for the current work force. In February, 1997, the Unions
notified SPMI that they were exercising their option to reopen negotiations on
wages and benefits. The Company and the Unions have exchanged final offers and
are scheduled for an arbitration on March 30, 1998.
PIRQUITAS
The Pirquitas property was acquired by the Company in November, 1995
for $1.7 million. Pirquitas is located in the Puna de Atacama of northwestern
Argentina in the province of Jujuy at an elevation of over 14,000 feet. The
nearest major city is the provincial capital, San Salvador de Jujuy, which is
about 355 km southeast of Pirquitas. The Chilean and Bolivian borders lie 50 km
west and 60 km to the north, respectively.
The Company feels that recent political and economic changes in
Argentina, designed to incentivize foreign investment, particularly in the
mining industry, have made the country an extremely attractive target for
mining investment. The country has privatized many state-owned enterprises, and
has implemented reforms to many previously state-controlled activities,
including mineral exploration and development. A program of fiscal stability
has brought down inflation. Guarantees to foreign investors include parity of
treatment with Argentine nationals, a freely exchangeable currency,
tax-stabilization programs, and complete freedom to expatriate profits.
Pirquitas is Argentina's largest historic producer of silver and tin,
with 27 million ounces of silver production and 20 thousand tonnes (metric
tons) of tin production from its underground workings between 1936 and 1990.
Historic production was confined to a system of closely-spaced sheeted veins.
The property has been inactive since 1990. The Company is developing the
property to be a large, low-cost, open-pit silver and tin producer.
Pirquitas represents the southernmost known economic deposit
associated with the Bolivian tin belt which extends in an arc from Peru to
Argentina. The southernmost Bolivian tin deposits show an increase in silver
content, whereas silver is negligible in the tin occurrences of northern
Bolivia. Tin belt mineralization occurs in veins, stockworks, breccias,
disseminations, and mantos. The majority of deposits are associated with small
stocks 1-2 km in diameter, exhibiting many characteristics of porphyry copper
systems.
Reserves defined thus far within the currently envisioned mine plan at
$5.00 and $7.00 per ounce silver prices are as follows:
<TABLE>
<S> <C> <C>
Silver Price/oz $5.00 $7.00
----- -----
Tin Price/lb $2.54 $2.54
Tons of ore (MM) 12.5 15.9
Average silver grade (oz/ton) 5.4 4.6
Average tin grade (%) .31 .26
Contained silver (MM ozs) 66.9 72.8
Contained tin (M tons) 39.0 41.6
</TABLE>
The reserves have been adjusted for anticipated mine dilution.
Metallurgical recoveries from the above material are assumed to be 85% for
silver and 69% for tin. The estimated net cash cost of production as a result
is estimated at approximately $2.65/oz. Metallurgical testwork is continuing
and has indicated good potential to improve processing economics appreciably,
which would further lower operating costs.
The total cost of the work at the property in 1997 and 1996 was over
$4 million and $6 million, respectively, all of which was charged to
exploration expense. The property is now considered in the development stage
and most future expenditures, budgeted at approximately $4 million in 1998, are
expected to be capitalized.
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At the present time, the Company envisions a mining rate of 5500 tons
per day. The estimated capital cost for the processing facilities, pre-strip,
haulage fleet, infrastructure and other capital items at that rate of
production is $100 million. At that production rate, annual production over the
mine life of the deposit to be developed amounts to approximately 9.1 million
ounces of silver and 8.49 million pounds of tin. The net cash cost of
producing an ounce of silver is projected to average approximately $2.65 per
ounce.
The Pirquitas ore body (reserves) as presently defined is contained
within an area of about 980 feet in length, about 980 feet across and 590 feet
in depth. The current mine plan for extracting the ore body as currently
modeled will result in a pit with dimensions of 1970 x 2620 x 590 feet.
In addition to material expected to be added to reserves within the
existing pit design, the strike length of the ore body both east and west of
the main reserve area is expected to be lengthened considerably. In addition,
the Potosi vein on the north wall of the pit contains remnants of high-grade
silver from prior mining activity. It will be an immediate target for drilling
in 1998, as adding reserves in this area has the added benefit of converting
material currently anticipated to be mined as waste into ore. Several other
zones of mineralization will be targets for future drilling. Additional
mineralized material in addition to proven and probable reserves totals 17.3
million tons at a grade of 4.95 ounces per ton silver and 0.326% tin.
Mineralized material is considered to be in situ and is estimated without a
comprehensive evaluation based upon unit cost, grade, recoveries, and other
material factors. All mineralized material is based on appropriately spaced
drilling and/or underground sampling to support a reasonable estimate of
tonnage and average grade for the respective metals. This material is located
adjacent to, along strike of, and within the current pit as presently designed.
In 1998, the Company plans to complete the final feasibility and
environmental impact studies, retain an independent consultant to provide a
third-party review of the total project, and begin the process of obtaining
financing for the development of the mine. Extensive drilling targeted at
expanding proved and probable reserves is planned in the areas containing the
mineralized material discussed above.
The availability of professional and skilled labor is limited in the
regional market surrounding Pirquitas. It will be necessary to recruit these
workers on a national and, in some cases, an international basis. The Company
anticipates that it can fill much of its other labor requirements from the
local workforce although a significant effort in training will be needed.
Argentina requires all mine labor (non-professional) to be represented by the
Argentine Mine Workers Association - a national union. Local labor agreements
must meet minimum guidelines established via negotiation between the union and
mine owners as represented by the Argentine Association of Mine Entrepreneurs
and Argentine Chamber of Mining and Metallurgy.
There is good access to the Pirquitas mine site despite its relatively
isolated location. The project is reached via an 80 mile improved gravel road
from the town of Abra Pampa. This road is suitable for current activities but
will require some upgrading during the construction and operation phases.
Currently a gas pipeline, which will pass 45 miles south of Pirquitas,
is being constructed by a private consortium. The Company has had preliminary
discussions with members of the consortium regarding a long-term gas supply
contract. The Company has also had conversations with a U.S. based power
company interested in installing electrical generating capacity, using natural
gas, to supply Pirquitas and other industrial sites in the area. Either of
these options should provide better economic results than the current plan for
power generation, which is to haul diesel by truck into the property to fire
generators on-site.
REVENUE-VIRGINIUS MINE
The Revenue-Virginius mine is located eight miles southwest of the
town of Ouray in southwestern Colorado. Access to the Revenue-Virginius mine
is via a well maintained county road. Primarily an underground narrow-vein
silver property, it also contains significant gold, base metals and antimony
values. The mine has been largely inactive since a mill fire in 1912 resulted
in the closure of the operation. Most production records on the property are
missing, however records which remain indicate production between 1895 and 1906
totaling 14.5 million ounces of silver, 123 thousand ounces of gold, and 63
million pounds of lead from one series of veins. Sunshine controls the property
under a mining lease calling for minimal property payments and work
commitments. The property currently contains reserves of over 6.2 million
ounces of silver.
Several veins carry the mineralized values, and many of the veins have
been traced for long distances onto other properties. Therefore, the Company
believes it reasonable to assume that a significant mineralized inventory in
addition to the above values can be inferred. As a result of recently completed
studies indicating the mine can be reopened profitably, the Company will repair
certain underground facilities, including the Revenue Tunnel Portal, and begin
a drilling program designed to increase the proven and probable reserves in
1998.
LA JOYA DEL SOL
The La Joya del Sol property is located near Esquel in the Chubut
Province of southern Argentina. Gold mineralization is contained within quartz
veins hosted by a volcanic rock sequence. Veins are generally steeply dipping
with the exception of the Sirena vein which is flat lying. Vein widths vary
from approximately 1 to over 20 meters. Over 16 veins have been identified and
are in various stages of evaluation. A total of 40 drill holes have been
completed, to date, and drilling continues to delineate the mineral potential
of the numerous veins identified on the La Joya del Sol property.
OTHER EXPLORATION
The Company controls approximately 94.5 thousand acres in Argentina in
addition to the above properties and also controls a potential massive sulfide
deposit (containing primarily silver and zinc) in the state of Washington
consisting of over 800 acres. As budgets and personnel availability allow, the
Company intends to do reconnaissance work on them in 1998.
EXPLORATION IN PERU
The Company established an office in Lima, Peru in 1994. Since that
time it has actively reviewed and bid for a number of properties. However, as
no significant properties or prospects were obtained, the office was closed
during 1997.
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REFINING TECHNOLOGY
Numerous ore bodies worldwide contain antimony and arsenic which, due
to environmental concerns, often must be removed before shipment to a smelter
for processing or the ore will be subject to significantly increased processing
costs. The Company possesses patented technology to safely remove these
materials, and in the case of antimony, to produce a marketable product. The
Company uses this technology to remove antimony from its own concentrates at
the Sunshine Mine. The process will also be amenable to removing antimony from
any production from the Revenue-Virginius Mine.
MARKETING
The Company's primary product can be either refined silver which is
sold to industrial customers or precious metals dealers, or silver-copper and
lead-silver concentrates which are sold to smelters. Prices received for
refined silver are based on market prices at the time of shipment. Prices
received for the silver-copper concentrate are based on average prices for
silver and copper during a quotational period shortly after shipment. The
Company bases its decisions on whether to refine its silver-copper concentrates
internally or sell them to a smelter based on internal production costs versus
available smelter contract terms. All lead-silver concentrates are sold to
smelters, with prices for contained lead and silver based on a quotational
period shortly after shipment. The Company's refined silver, antimony and
copper products are generally marketed directly to metals dealers or industrial
customers. See Note 11 of Notes to Consolidated Financial Statements included
elsewhere herein.
OTHER BUSINESS AND REGULATORY FACTORS
The Company's precious metals operations are intensely competitive and
subject to risks and regulations inherent in and applicable to mining generally
and the precious metals industry specifically. Competition in the precious
metals mining industry, and particularly the silver mining industry, is very
volatile. The market for gold and silver is international and there is no
significant marketing advantage in domestic production versus international
production. No single source of silver is significant to the world market, and
many of the principal sources of silver as a primary metal have been forced to
close as a result of continued low silver prices over the past several years.
As a result, the largest sources of silver at the present time are gold,
copper, lead and zinc mines which produce silver as a by-product, and whose
economics are not significantly related to the price of silver.
Competition among mining companies is primarily for mineral rich
properties which can be developed and produced economically; the technical
expertise to find, develop and produce such properties; labor to operate the
properties; and capital for the purpose of funding such operations. As the
principal product sold is a commodity with its price dictated by world markets
upon which any individual operator has very little influence, the competitive
factors cited above give the competitive advantage to the low cost operator.
With its recent history of exploration success in the West Chance area of the
Sunshine Mine and its Pirquitas discovery in Argentina, the Company is in an
excellent competitive position relative to other primary silver producers in
North America.
ENVIRONMENTAL AND SAFETY MATTERS
In connection with its operations and properties, the Company is
subject to extensive and changing federal, state and local laws, regulations
and ordinances governing health and safety and the protection of the
environment, including, without limitation, laws and regulations relating to
air and water quality, mine reclamation, waste handling and disposal, the
protection of certain species and the preservation of certain lands. These
environmental laws and regulations may require the acquisition of permits or
other authorizations for certain activities. These laws and regulations may
also limit or prohibit activities on certain lands lying within a wilderness
area, wetland area, area providing habitat for certain species or other
protected area. The recent trend in environmental legislation and regulation
generally is toward stricter standards, and this trend will likely continue in
the future. The operations and activities of the Company require compliance
with such laws, regulations and ordinances.
The Company cannot predict what environmental legislation or
regulations will be enacted or adopted in the future or how future laws and
regulations will be administered or interpreted. Compliance with more stringent
laws and regulations, as well as potentially more vigorous enforcement policies
of regulatory agencies or stricter interpretation of existing laws, may
necessitate significant capital outlays, may materially affect the Company's
operations, or may cause material changes or delays in the Company's intended
activities. Currently, the Company does not expect to incur any material
capital expenditures associated with environmental regulations (such as
expenditures for relevant control facilities) during the fiscal year 1998. See
Note 10 of Notes to Consolidated Financial Statements included elsewhere
herein; and "LEGAL PROCEEDINGS - ENVIRONMENTAL MATTERS." The Company also does
not anticipate any material effect from compliance with environmental, health,
and safety laws, regulations and ordinances.
EMPLOYEES
At December 31, 1997, Sunshine and its subsidiaries, including SPMI,
employed approximately 315 persons; 290 of whom are located at the Kellogg
facilities. SEE "ITEM 1. BUSINESS. THE SUNSHINE MINE AND REFINERY COMPLEX."
5
<PAGE> 8
GLOSSARY OF CERTAIN MINING TERMS
ASSAY - To analyze the proportions of metals in ore, to test an ore or mineral
for composition, purity, weight, or other properties of commercial interest.
The word "assay" also refers the test or analysis itself.
CONCENTRATE - a product containing the valuable metal and from which most of
the waste material in the ore has been eliminated.
DILUTION - An estimate of the amount of waste or low-grade mineralized rock
which will be mined with the ore as part of normal mining practices in
extracting an ore body.
DRIFT - An underground horizontal passage which provides access to a
mineralized area.
DRILL INTERCEPT - The distance, measured in feet, from the initial contact by a
diamond drill of a vein of ore to the diamond drill's exit from that vein.
EXPLORATION - Work involved in searching for ore, usually by drilling or
driving a drift.
FAULT - A fracture or a zone of fractures along which there has been
displacement of the sides relative to one another parallel to the fracture.
FOOTWALL - The underlying side of a fault, ore body, or mine working; esp. the
wall rock beneath an inclined vein or fault.
GRADE - The metal content of ore and drill samples. With precious metals, grade
is expressed as troy ounces per ton of rock.
MILL - A processing plant that produces a concentrate of the valuable minerals
or metals contained in an ore. The concentrate must then be treated in some
other type of plant, such as a smelter, to effect recovery of the pure metal.
MINERALIZED MATERIAL/INVENTORY - A mineralized body which has been delineated
by appropriately spaced drilling and/or underground sampling to support
reasonable estimate of tonnage and average grade of metal(s). Such a deposit
does not qualify as a reserve until a comprehensive evaluation based upon unit
cost, grade, recoveries and other material factors conclude legal and economic
feasibility.
ORE BODY - An economically recoverable deposit of minerals, the extent and grade
of which has been defined through exploration and development work.
ORE RESERVE - That part of a mineral deposit which at the time of the reserve
determination could be economically and legally extracted or produced.
PROBABLE RESERVES - Resources for which tonnage and grade are computed
primarily from specific measurements, samples or production data, and partly
from projection for a reasonable distance on geologic evidence. The sites
available for inspection, measurement and sampling are too widely or otherwise
inappropriately spaced to permit the mineral bodies to be outlined completely,
or the grade established throughout.
PROVEN RESERVES - Resources for which tonnage is computed from dimensions
revealed in workings and drill holes and for which the grade is computed from
the results of detailed sampling. The sites for inspection, sampling and
measurement are spaced so closely and the geologic character is so well defined
that size, shape and mineral content are all established. The computed tonnage
and grade are judged to be accurate, within limits which are stated, and no
such limit is judged to be different from the computed tonnage or grade by more
than 20%.
STOPE - An excavation from which ore has been excavated in a series of steps.
To excavate ore in a vein by drilling horizontally upon it a series of
workings, one immediately over the other, or vice versa. Each horizontal
working is called a stope because when a number of them are in progress, each
working face under attack assumes the shape of a flight of stairs.
TON - A short ton of 2,000 pounds, dry weight basis.
TONNE - Metric ton, equal to 2,204.62 pounds.
TROY OUNCE - Unit of weight measurement used for all precious metals. The
familiar 16-ounce avoirdupois pound equals 14.583 troy ounces.
VEIN - An epigenetic mineral filling of a fault or other fracture in a host
rock, in tabular or sheetlike form, often with associated replacement of the
host rock; a mineral deposit of this form and origin.
2. PROPERTIES
The information regarding the properties of Sunshine is set forth
under ITEM 1. BUSINESS, above, and in the Notes to Consolidated Financial
Statements included in Part II hereof.
3. LEGAL PROCEEDINGS
ENVIRONMENTAL MATTERS
The EPA has identified the Company and SPMI as Potentially Responsible
Parties ("PRPs") at one site and SPMI as a PRP at another site under the
federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA" or "Superfund"), alleging that the Company and SPMI
at one site and SPMI at the other site arranged for the disposal of hazardous
substances. One of the sites is located in Kellogg, Idaho (the "Bunker Hill
Superfund Site") and the other site is located in Spokane, Washington.
At the Bunker Hill Superfund Site, the EPA, the State of Idaho and
several of the PRPs, including the Company and SPMI, have agreed to a site-wide
clean-up plan, separating the site into two distinct areas for remediation: the
Bunker Hill Smelter Complex (the "Smelter Area") and the residential and
certain commercial areas primarily in the cities of Kellogg, Smelterville and
Pinehurst, Idaho encompassed by the Site (the "Residential Areas"). Without
admitting liability, the Company and several PRPs have agreed to do the
remediation work in the Residential Areas pursuant to an EPA and State of Idaho
approved work plan. In exchange therefor, EPA and the State of Idaho released
the settling PRPs from all liability for cleanup of the Smelter Area, reduced
the EPA's claim for reimbursement of past costs from $17 million to $1 million
plus a
6
<PAGE> 9
percentage of proceeds received by the PRPs from insurance companies, if any,
and agreed that the work orders from 1990 through 1993 were deemed satisfied
and discharged. The remediation undertaken by the Company and the PRPs is
expected to take approximately seven years and the Company accrued $3.4 million
for its (including SPMI's) share (12.4%) of the estimated remediation costs, of
which approximately $500 thousand remains accrued at December 31, 1997.
On November 17, 1994, the United States District Court for the
District of Idaho entered a Consent Decree containing the terms of this
agreement. The liability for remediation costs under the consent decree is
joint and several. Thus, if any other settling party or parties does not comply
with the consent decree, the exposure for the Company and SPMI could increase
proportionately. The parties have reserved their claims and defenses with
respect to natural resource damages, except for the State of Idaho which has
agreed that its claim has been settled.
On July 31, 1991, the Coeur d'Alene Indian Tribe (the "Tribe") filed
an action in the United States District Court, District of Idaho against the
Company and seven other Bunker Hill Superfund Site PRPs seeking a declaratory
judgment that the Tribe has five years in which to file a natural resource
damage claim under CERCLA against the PRPs and others or, alternatively, for
damages in an unspecified amount resulting from the loss, destruction or injury
to natural resources allegedly caused by the defendants. The Company believes
that a settlement by SPMI of all natural resources claims with the State of
Idaho in May 1986 bars the Tribe's action.
On March 22, 1996, a complaint was filed in the United States District
Court for the District of Idaho on behalf of the United States Department of
the Interior, United States Department of Agriculture and the Environmental
Protection Agency against Sunshine, SPMI and other identified PRPs for alleged
natural resource damages in the Coeur d'Alene Basin. The complaint seeks to
recover natural resource damages and response costs under CERCLA and the Clean
Water Act, and does not identify the amount of damages sought to be recovered.
The Company believes that the settlement by SPMI of all natural resource claims
with the State of Idaho in May, 1986, bars these claims, and that the complaint
is without merit.
On September 5, 1996, the United States District Court for the
District of Idaho granted the motion of the Tribe to reopen the Tribe's
lawsuit, and to consolidate the discovery and motions practice of the Tribe's
lawsuit with the United States government's natural resource damage claims
currently pending against Sunshine and other defendants in that court.
The second site where EPA has identified SPMI as a PRP under CERCLA is
the Spokane Junkyard Site near Spokane, Washington. In November 1988, the EPA
notified SPMI that it is a PRP at that site. The EPA has documented the
threatened release of hazardous substances at the site and has initiated
response actions under CERCLA.
The Company does not believe that the designation of SPMI as a PRP at
the Spokane Junkyard Site will have a material impact on the Company's results
of operations and financial condition or on its liquidity or capital resources.
SPMI does not believe it will be required to pay any clean-up costs at the
Spokane Junkyard Site. No records of SPMI have been discovered by it or the EPA
showing SPMI ever sent any material to the site. To date, the EPA has not filed
any action against SPMI or the Company in relation to the Spokane Junkyard
Site.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of Sunshine's fiscal year ended December 31, 1997.
PART II
5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Sunshine's Common Stock is listed for trading on the New York Stock
Exchange (symbol "SSC"). Sunshine currently does not pay cash dividends on its
Common Stock and has not paid any since the third quarter of 1981. At March 2,
1998, Sunshine had approximately 32,000 holders of record of its Common Stock.
On March 2, 1998, the closing price of the Common Stock price as reported on
the New York Stock Exchange, Inc. composite transactions was $1.25.
The following table sets forth the range of high and low sales prices
for the Common Stock as reported on the New York Stock Exchange, Inc.,
composite tape for the periods indicated. Such quotations represent
inter-dealer prices without retail markup, markdown or commission, and may not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
1997 QUARTERS 1996 QUARTERS
---------------------------------------------
HIGH LOW HIGH LOW
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
1st Quarter 1 1/4 3/4 2 1 5/32
---------------------------------------------------------------------
2nd Quarter 15/16 5/8 1 3/4 1 1/4
---------------------------------------------------------------------
3rd Quarter 1 1/8 5/8 1 1/2 1 1/8
---------------------------------------------------------------------
4th Quarter 1 1/8 49/64 1 1/4 7/8
---------------------------------------------------------------------
</TABLE>
The Company's March 9, 1999 and May 22, 2001 common stock purchase
warrants are traded on the NASDAQ National Market System (symbols "SILVW"and
'SILVZ") with high and low sales prices as reported by NASDAQ during 1997 of
$0.489 and $0.156; and $0.625 and $0.25, respectively.
The Indenture governing Sunshine's outstanding Convertible
Subordinated Reset Debentures due July 15, 2008, impose certain restrictions on
Sunshine's ability to declare or pay cash dividends and make certain
distribution on its capital stock (including Sunshine's Common Stock). Pursuant
to these restrictions, at December 31, 1997, the Company was prohibited from
paying cash dividends on shares of its Common Stock.
In November, 1997, the Company completed a private placement of
convertible promissory notes and warrants to purchase Sunshine's common stock
to Stonehill Partners, L.P., GRS Partners, Aurora Limited Partnership and
Stonehill Offshore Partners. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL
RESOURCES."
7
<PAGE> 10
6. SELECTED FINANCIAL DATA.
The following table sets forth summary historical financial
information of Sunshine as of the dates and the periods set forth in the table
below. All amounts are in thousands, except price and production statistics and
per share amounts.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1997 1996(4) 1995 1994(3) 1993(2)
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenues ................................. $ 26,476 $ 15,315 $ 15,623 $ 17,732 $ 14,306
Mark to market gains (losses) ...................... 1,859 (1,101) 911 (320) 3,275
----------- ----------- ----------- ----------- -----------
Total revenues ................................. 28,335 14,214 16,534 17,412 17,581
Loss before extraordinary item ..................... (19,308) (25,902) (15,483) (4,923) (28,611)
Net loss ........................................... (19,308) (25,902) (15,483) (4,923) (42,257)
Income (loss) applicable to common shares .......... (19,308) 11,600 (25,572) (15,383) (53,077)
Basic and diluted income (loss) per common share:
Continuing operations .......................... (.08) .05 (.13) (.08) (.25)
Extraordinary item ............................. -- -- -- -- (.09)
Net income (loss) .............................. (.08) .05 (.13) (.08) (.34)
Weighted average common shares ..................... 255,137 222,584 193,044 185,634 155,383
PRICE AND PRODUCTION STATISTICS:
Average Silver prices received ..................... $ 5.02 $ 5.11 $ 5.20 $ 5.29 $ 4.34
Tons ........................................... 183,404 120,910 101,240 107,056 100,441
Silver grade (ounces per ton) ...................... 23.95 22.04 17.66 20.08 23.49
Silver ounces .................................. 4,253,315 2,577,895 1,731,714 2,079,290 2,298,155
Cash cost per ounce(1) ............................. $ 4.50 $ 6.12 $ 6.61 $ 5.83 $ 5.10
BALANCE SHEET DATA:
Cash and cash investments .......................... $ 15,985 $ 16,317 $ 12,837 $ 26,581 $ 4,304
Working capital .................................... 26,959 25,559 23,550 38,537 15,651
Total assets ....................................... 101,601 105,486 101,134 116,657 100,360
Long-term debt and capital lease obligations ....... 42,265 25,780 1,519 1,519 9,493
Stockholders' equity:
Preferred Stock ................................ -- -- 82,268 80,707 78,774
Other........................................... 44,496 63,598 2,814 19,701 (11,531)
Book value per common share ........................ .17 .25 (.22) (.10) (.26)
Common shares outstanding .......................... 255,232 254,981 193,096 192,995 168,559
</TABLE>
________________
(1) Cash cost per ounce includes all expenditures (other than exploration
costs and capital expenditures) related to the operation of the
Sunshine Mine and Refinery Complex, less any by-product revenues.
Such costs include non-capital development costs, production and
maintenance costs, ad valorem taxes, insurance, and postemployment
benefit costs incurred on site.
(2) In 1993, the Company recorded a charge of $12.5 million resulting from
an induced conversion of the 8% Silver Indexed Bonds, and
extraordinary losses aggregating $13.6 million resulting from
redemptions of the 8% Silver Indexed Bonds.
(3) In 1994, the Company recorded gains totaling $6.9 million due to the
curtailment of postretirement medical benefits for certain of its
employees and retirees.
(4) During 1996 the Company recorded a gain applicable to common shares of
$40 million due to the retirement of all of the Company's outstanding
Preferred Stock. See Note 7 of Notes to Consolidated Financial
Statements.
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal product at this time is silver produced from
its Sunshine Mine in Kellogg, Idaho. Due to low silver prices, the Company's
operations have not generated positive cash flow, and the costs of exploration,
general and administrative expense, and interest charges have been funded from
cash raised in various financings in recent years.
In November, 1997, the Company completed a private placement of
convertible promissory notes for $15 million ("10% Notes"). The 10% Notes are
convertible into 15.8 million shares of common stock at $.95 per share, and
bear a 10% coupon. No underwriter was involved in the transaction. The funds
will be used principally to continue the Company's exploration and development
program at the Pirquitas Mine in northwest Argentina and its evaluation program
at La Joya del Sol in southern Argentina, and other general corporate purposes.
The 10% Notes have a five year life, with principal and interest
payable either in cash or common stock of Sunshine at the option of the
Company. In certain events, the conversion price of the 10% Notes can be reset
to a lower level. The purchaser of the 10% Notes has also been issued 1.5
million warrants to purchase common stock of Sunshine at
8
<PAGE> 11
110% of the conversion price of the Notes. The securities issued are exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933.
In March, 1996, SPMI issued $30 million aggregate principal amount of
Senior Exchangeable Notes due 2000 (the "Eurobonds"), which were offered in
Europe only to non-U.S. persons pursuant to Regulation S of the Securities Act
of 1933, as amended. The net proceeds, approximately $27 million, were used to
fund development and exploration opportunities and to fund general,
administrative and other costs.
The Eurobonds bear interest at 8% per annum and mature March 21, 2000.
The Eurobonds are exchangeable into an aggregate of 30,000,000 common shares at
an exercise price of $1.00 per share. The Eurobonds are guaranteed by Sunshine.
If during the period May 1, 1996 to May 1, 1999 the Company's common stock does
not trade at $1.33 or more (average of high and low prices) for 45 consecutive
stock exchange trading days, the Company will be required to make a payment in
cash or stock equal to 22.5% of the then outstanding principal amount. The
Eurobonds are callable if the Company's average common stock high and low sales
prices exceed $1.50 over 30 consecutive stock exchange trading days.
FUNDING OF EXPLORATION AND DEVELOPMENT ACTIVITIES
The Company's strategy to return to profitability is focused on
finding additional low-cost silver reserves which can be economically developed
and operated. The first such ore body found, the West Chance, is in the
previously undeveloped western section of the Sunshine Mine. The Company has
completed initial development of the West Chance and has begun full-scale
mining operations in the ore body. A significant reduction in the Company's
cash production cost per ounce occurred in the second half of 1997 as a result
of production increases. The improvements did not restore the Company to
profitability at silver prices which prevailed in 1997, as the cash operating
margin from the Sunshine Mine does not exceed other expenses (depreciation,
depletion, exploration, general and administrative and interest expenses).
However, the Company has identified other properties which are being developed,
and which, when in production (expected by approximately mid-2000) are
anticipated to add sufficient operating margin to make the Company profitable
at silver prices of around $5.00 per ounce.
The most important of these is the Pirquitas Mine in Argentina. During
1997, the Company completed a pre-feasibility study of the property. The
pre-feasibility study envisions developing it as a 5,500 ton per day open pit
operation. Development as currently planned will require a capital investment
of approximately $100 million, with resultant production of about 9.1 million
ounces of silver annually at a net cash cost of approximately $2.65 per ounce.
In 1998, the Company plans to complete third party feasibility studies to be
used to obtain financing for the development of the Pirquitas Mine.
The Company is in the early stages of discussing the availability of
financing for the development of the property. Although the Company believes it
will be successful in receiving adequate financing for the development of the
mine, no assurance can be given as to the availability of adequate financing.
The Company has performed certain evaluation work on the
Revenue-Virginius property which indicates it can be placed into production
with a capital investment of approximately $12-15 million. The Company believes
that the property could produce approximately 2.5 to 3 million ounces of silver
annually at a net cash cost of approximately $4.00 per ounce. In 1998, the
Company plans to implement a drill program to add sufficient proven and
probable reserves to justify financing for the development of the
Revenue-Virginius Mine. No assurance can be given that adequate financing will
be available to fund the development of the mine.
In the second quarter of 1997, the Company acquired the rights to a
property in the Chubut province of Argentina, which it has named "La Joya del
Sol." Surface sampling has identified up to 16 epithermal quartz veins on the
property containing high-grade gold mineralization. Based on the veins' width,
strike length and the consistency of the mineralization, the Company believes
La Joya del Sol could contain sufficient gold mineralization to warrant
development. Insufficient drilling has been done to make any characterization
of the vein's potential at depth. The Company began a drilling program in
November designed to better delineate the potential of the veins below the
surface. The Company has not yet begun to estimate capital and operating
costs. Should development of the property be warranted, the Company will have
to obtain capital from outside sources, which it has not as yet identified. As
the property is primarily gold, which is not central to the Company's strategy
as opposed to silver, the Company may consider a sale or joint venture of the
property to raise capital for its other projects.
The Company considers the addition of new producing properties through
its exploration and development program vital to its return to profitability,
and has projected approximately $3.8 million for general exploration and $4.4
million for Pirquitas development in 1998 (prior to obtaining financing for
mine construction), compared to total exploration expenditures of $7.4 and
$10.2 million in 1997 and 1996, respectively. Future spending on exploration
projects is contingent on future cash flow from the Sunshine Mine and the
Company's ability to raise new funding. The Company believes its past success
in finding and developing new properties will assist it in raising the funds
required to continue its exploration program as well as in funding the
development of the properties it has already identified. However, no assurance
can be given that the necessary exploration and development funds can be
obtained.
At the end of 1997, the Company's working capital was $27.0 million,
which is considered adequate for the foreseeable future.
Certain matters discussed in this report are "forward-looking
statements" intended to qualify for the safe harbor from liability established
by the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are all statements other than statements of historical fact,
including without limitation those that are identified by the use of the words
"anticipates," "believes," "estimates," "expects," "intends," "plans,"
"predicts," and similar expressions. Such statements address future plans,
objectives, expectations, and events or conditions concerning various matters
such as mining exploration, capital expenditures, earnings, litigation,
liquidity and capital resources, and accounting matters. Actual results in
each case could differ materially from those currently anticipated in such
statements, by reason of factors including without limitation, actual results
of exploration, silver prices, imprecision of reserve estimates, future
economic conditions, regulations, competition, and other circumstances
affecting anticipated revenue and costs. Any forward-looking statement speaks
only as of the date on which such statement is made, and the Company undertakes
no obligation to update any forward-looking statement.
9
<PAGE> 12
EVALUATION OF RECOVERABILITY OF INVESTMENT IN SUNSHINE MINE
Whenever circumstances or events indicate, and at least annually, the
Company evaluates its mining properties for impairment, based on undiscounted
expected future cash flows. Such estimates are based on assumptions as to
future silver prices, mining costs, recoverable reserves and estimates of
future reserve potential which management believes are reasonable, based on
historical silver prices and production. If the sum of such cash flows was less
than the carrying amount of the asset, the Company would record an impairment
loss measured as the amount by which the carrying amount of the asset exceeds
the fair value of the asset. The Company believes that the price of silver has
been inordinately low for many years due to the availability of surplus silver
inventories generated in 1980-1989. Industry data and press accounts have
recently documented a growing tightness in the silver supply, and silver prices
in early 1998 have risen as a result. In addition, the Sunshine Mine is
experiencing significantly lower unit costs as a result of its return to full
production. Management believes sufficient proven and probable reserves and
additional mineralized inventory and resources exist within the mine to allow
full production for many years. Based on management's estimates of undiscounted
future cash flows, the Company's investment in the Sunshine Mine is not
impaired at December 31, 1997.
Future increases in the price of silver and the presence of additional
mineralized material and resources are forward-looking statements regarding
matters over which the Company has no control. Actual future silver prices and
the results of current exploration may differ from anticipated values. Unless
the price of silver continues at higher levels than experienced in recent years
or the cost of production per ounce continues to be at the lower levels
currently being experienced, the Company will not be able to recover its
investment in the Sunshine Mine.
OTHER
The Company and SPMI have been identified by the EPA as a PRP at the
Bunker Hill Superfund Site and SPMI has been identified as a PRP at the Spokane
Junkyard Site. The Company believes that its status as a PRP will not have a
material adverse effect on its consolidated financial position or results of
operations. See "LEGAL PROCEEDINGS - ENVIRONMENTAL MATTERS" and Note 10 of
Notes to Consolidated Financial Statements.
OPERATING, INVESTING AND FINANCING ACTIVITIES
Cash used in operating activities was $15.1 million in 1997 compared
with $22.2 million in 1996 and $13.0 million in 1995. The 1997 decrease
(compared to 1996) was due to the $8.7 million decrease in cash operating loss,
partially offset by other changes in working capital items. The cash operating
loss decreased in 1997 compared to 1996 primarily due to a $4.8 million
improvement in cash operating income (loss) at the Sunshine Mine (from a ($3.2)
million loss in 1996 to $1.6 million income in 1997). In addition, the Company
recorded a mark-to-market gain on investment silver of $1.9 million in 1997
versus a $1.1 million loss in 1996, a $2.9 million reduction in exploration
expense and a $0.4 million decrease in general and administrative expense
compared to 1996, partially offset by a $0.7 million increase in cash interest
expense, a $0.7 million decrease in interest income and a $0.8 million
reduction in other, net.
In 1997, $2.2 million of proceeds from investments was partially
offset by $2.0 million of additions to property, plant and equipment resulting
in $0.2 million of cash provided by investing activities. One million of cash
was used by investing activities during 1996, including $2.7 million for
additions to property, plant and equipment, partially offset by proceeds from
investments of $1.7 million. Cash used by investing activities during 1995 was
$0.9 million, including $2.5 million for the acquisition of the Pirquitas
property in Argentina and the ConSil property adjacent to the Sunshine Mine,
offset by $2.2 million of cash proceeds from the sale of certain marketable
securities.
Cash provided by financing activities was $14.6 million in 1997
resulting from the Company's issuance of the 10% Notes. Cash provided by
financing activities was $26.7 million in 1996 resulting from the Company's
Notes Offering, partially offset by the cost associated with the exchange of
common stock for preferred stock.
IMPACT OF YEAR 2000
The Company has identified only one computer program that it currently
uses that would recognize a date using "00" as the year 2000, but "01" as the
year 1901 rather than 2001. The Company has reviewed its options to remedy this
problem and believes this can be accomplished timely and at a cost that is not
material.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
The Company's net loss decreased $6.6 million in 1997 to $19.3 million
compared to $25.9 million in 1996. This decreased loss resulted primarily from
a $4.8 million improvement in operating margin, a $2.9 million decrease in
exploration expense, a $3 million improvement in mark-to-market gain (loss) and
a $0.4 million decrease in general and administrative expense partially offset
by a $1.5 million increase in depreciation, depletion and amortization, a $1.3
million increase in interest expense, a $0.7 million reduction in interest
income and a $0.8 million reduction in other, net.
Consolidated operating revenues increased approximately $11.2 million
(72.9%) for 1997 compared to 1996 primarily due to an increase in sales volume
(4.1 million ounces of silver in 1997 compared to 2.7 million ounces of silver
in 1996) and the associated $2.4 million increase in by-product revenue,
partially offset by lower average silver prices received ($5.02 in 1997
compared to $5.11 in 1996). The increase in sales volumes primarily resulted
from a 1.7 million ounce (65%) increase in production in 1997 compared to 1996,
and a 65 thousand ounce increase in sales volume of finished silver. Mark to
market gains on work-in-process silver inventories and silver bullion held for
investment amounted to $1.9 million in 1997 compared to a loss of $1.1 million
in 1996. The gains in 1997 were due to increases in the per ounce silver price
during the period, from $4.74 to $5.95 between December 31, 1996 and December
31, 1997
Cost of revenues increased $6.4 million (36%) (from $18.1 million in
1996 to $24.5 million in 1997) primarily due to the 65% increase in production
in 1997, partially offset by lower unit production costs. Unit production
costs decreased $1.62 (26%) to $4.50 per ounce of silver primarily due to the
65% increase in silver production (4.3 million ounces produced from 183,404
tons at 23.95 ounces per ton in 1997 versus 2.6 million ounces from 120,910
tons at 22.04 ounces per ton in 1996).
10
<PAGE> 13
Depreciation, depletion and amortization increased by approximately
$1.5 million (35%) as a result of increased production figures in the 1997
period.
Exploration expenditures declined $2.9 million primarily due to the
completion of the required drilling for the pre-feasibility analysis at the
Pirquitas mine in the second quarter of this year.
Interest income decreased by $719 thousand due to lower average
invested cash balances.
Interest and debt expense increased $1.3 million due to the Company's
Notes Offering completed in March, 1996.
1996 COMPARED TO 1995
The Company's net loss increased $10.4 million in 1996 to $25.9
million compared with the net loss of $15.5 million in 1995. This increase
resulted primarily from the $4.2 million increase in exploration expenditures
as a result of the Company's increased exploration program, particularly at
Pirquitas; the $3.5 million increase in interest expense resulting from the
Notes Offering; the $.7 million increase in depreciation, depletion and
amortization; and a $1.1 million mark-to-market loss in 1996 versus a $.9
million gain in 1995.
Consolidated operating revenues decreased approximately $300 thousand
(2%) for 1996 compared to 1995 due primarily to a 9c. reduction in average
silver prices received in 1996 and a $277 thousand reduction in premiums
received from the sale of covered calls. Sales volumes in the two periods were
similar, despite production in 1996 being much higher, due to the closure of
the Company's silver refinery in 1995. This closure, and the resultant sale of
concentrate to a third-party smelter, resulted in shorter processing time
before sales recognition and therefore a significant inventory drawdown.
The mark-to-market loss of $1.1 million on silver inventories and
silver bullion held for investment during 1996 was due to the decrease in
silver prices from the beginning of the year. The mark-to-market gain of $.9
million in 1995 was due to the increase in silver prices from the beginning of
that year.
Cost of revenues increased $408 thousand (2%) (from $17.6 million in
1995 to $18.0 million in 1996) due to increased development costs and
associated waste haulage partially offset by lower unit production costs and
the drawdown in inventories in 1995 discussed above. Unit production costs
decreased primarily due to the 49% increase in silver production and a 25%
increase in average grades from 1995 to 1996 (2.6 million ounces produced from
120,910 tons at 22.04 ounces per ton in 1996 versus 1.7 million ounces from
101,240 tons at 17.66 ounces per ton in 1995). Unit production costs include a
$2 million increase in development costs primarily devoted to ramping in the
West Chance area of the Sunshine Mine from which the main production benefit
were realized in 1997. Such ramping provides access to the West Chance area
for the Company's newly acquired rubber-tired loaders, which is the basis for
the Company's plan to return the Mine to full production.
Exploration expense increased $4.2 million (69%) in 1996 compared to
1995 as a result of the Company's increased exploration program, primarily at
Pirquitas. (See "Liquidity and Capital Resources.")
Depreciation, depletion, and amortization increased approximately $713
thousand primarily as a result of the 49% increase in production in 1996.
General and administrative expense decreased $460 thousand primarily
due to reduced legal and staffing costs.
Interest expense increased $3.5 million due to the outstanding
Eurobonds.
Other, net increased $293 thousand due to a $700 thousand gain from a
litigation settlement in 1996, partially offset by a $400 thousand reduction in
gains from sale of marketable securities and investments.
THE EFFECTS OF CHANGING PRICES
Substantially all of the Company's revenues are from sales of silver.
Volatility in the price of silver causes substantial fluctuations in the
Company's revenues and financial condition. There are many factors which
influence the volatility of silver prices. Changes in supply and demand,
worldwide economic and political conditions, expectations as to inflation and
speculative activity in the market all cause fluctuations in prices received.
As previously discussed, the price of silver in recent years has been
depressed.
The Company maintains an investment inventory of silver bullion
totaling approximately 1.3 million ounces. To earn current income on this
investment the Company from time to time will sell covered calls against this
inventory. Total premiums earned for the sale of covered calls aggregated
$116,000, $165,000 and $442,000 in 1997, 1996 and 1995, respectively. At
December 31, 1997, the Company had covered call options outstanding for 1.2
million ounces of silver with strike prices ranging from $5.75 to $7.00 and
expiration dates of February 26, 1998 (200,000 ounces), March 27, 1998 (900,000
ounces), and December 27, 1998 (100,000 ounces). The fair value of the sold
call options at December 31, 1997 would not materially exceed the $202,000 of
premiums received when they were sold. The Company's policy is not to sell any
uncovered calls.
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements filed herewith begin on page F-1 hereof.
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to the Company's directors and nominees for
election as directors and information relating to the executive officers of the
Company is incorporated herein by reference from the Company's Proxy Statement
for its 1998 Annual Meeting of Stockholders (the "Proxy Statement").
11. EXECUTIVE COMPENSATION.
The discussion under "Management Remuneration and Transactions" in the
Company's Proxy Statement for its Annual Meeting of Stockholders is
incorporated herein by reference.
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The discussion under "Security Ownership of Certain Beneficial Owners
and Management" in the Company's Proxy Statement for its Annual Meeting of
Stockholders is incorporated herein by reference.
11
<PAGE> 14
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The discussion under "Management Remuneration and Transactions -
Employment Contracts" in the Company's Proxy Statement for its Annual Meeting
of Stockholders is incorporated herein by reference.
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
The following documents are filed as a part of this Annual Report on
Form 10-K:
1. Consolidated Financial Statements. See Index to Financial
Statements and Financial Statements Schedules on page F-1
hereof.
2. Consolidated Financial Statement Schedules.
All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or
are inapplicable and therefore have been omitted.
3. Exhibits.
12
<PAGE> 15
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<S> <C>
3.1 Certificate of Incorporation of Sunshine to the Company's Registration Statement on Form S-4, Registration
No. 33-98876, which exhibit is incorporated herein by reference.
3.2 Amendment to Certificate of Incorporation filed as Exhibit 4.1 to the Company's current report on Form 8-K
dated May 22, 1996 (File No. 33-908876), which exhibit is incorporated herein by reference.
3.3 Bylaws of Sunshine filed as Exhibit 3.2 to the Company's Registration Statement on Form S-4, Registration No.
33-98876, which exhibit is incorporated herein by reference.
4.1 Warrant Agreement dated as of February 1, 1996, between Sunshine Merger Company and American Stock Transfer &
Trust Company, as Warrant Agent, filed as Exhibit 4.1 to the Company's Registration Statement on Form S-4,
Registration No. 33-98876, which exhibit is incorporated herein by reference.
4.2 Warrant Agreement, dated as of February 3, 1994, between Sunshine and American Stock Transfer & Trust
Company, as Warrant Agent, filed as Exhibit 4.3 to Sunshine's Registration Statement on Form S-1
(Registration No. 33-73608), as amended, which exhibit is incorporated herein by reference.
4.3 Form of Supplemental Warrant Agreement dated as of February 1, 1996 between Sunshine Merger Company and
American Stock Transfer & Trust Company, as Warrant Agent, filed as Exhibit 4.10 to the Company's
Registration Statement on Form S-4 (Registration No. 33-98876), which exhibit is incorporated herein by
reference.
4.4 Warrant Certificate filed as Exhibit 4.3 to the Company's Registration Statement on Form S-4, Registration
No. 33-98876, which exhibit is incorporated herein by reference.
4.5 Form of Warrant Certificate, filed as Exhibit 4.4 to Sunshine's Registration Statement on Form S-1
(Registration No. 33-73608), as amended, which exhibit is incorporated herein by reference.
4.6 Specimen Stock Certificate of the Common Stock, $0.01 par value, of Sunshine, filed as Exhibit 4.2 to
Sunshine's Registration Statement on Form S-1 (Registration No. 33-63446) as amended, which exhibit is
incorporated herein by reference.
4.7 Form of Indenture dated as of July 15, 1988, between Sunshine and MTrust Corp., National Association, with
respect to Sunshine's Convertible Subordinated Debentures due July 15, 2008, filed as Exhibit 4.25 to
Sunshine's Registration Statement on Form S-3 (Registration No. 33-21159), which exhibit is incorporated
herein by reference.
4.8 First Supplemental Indenture, dated as of August 8, 1988, Second Supplemental Indenture dated as of November
10, 1988, and Third Supplemental Indenture, dated as of April 10, 1991, by and between the Company and
Ameritrust Texas, N.A., the successor to MTrust Corp., National Association relating to the issuance of
the Debentures, filed as Exhibit 4.3 to Sunshine's Annual Report on Form 10-K for the fiscal year ended
December 31, 1990, which exhibit is incorporated herein by reference.
4.9 Form of Fourth Supplemental Indenture, by and between the Company and Texas Commerce Bank National
Association, as successor to Ameritrust Texas National Association formerly known as MTrust Corp.,
National Association, filed as Exhibit 4.10 to the Company's Registration Statement on Form S-4,
Registration No. 33-98876, which exhibit is incorporated herein by reference.
4.10 Trust Deed dated March 21, 1996, between Sunshine, Sunshine Precious Metals, Inc. and Marine Midland Bank and
Form of Note filed as Exhibits 4.5 and 4.6 to Sunshine's Registration Statement on Form S-3 (Registration
No. 333-06537), which exhibits are incorporated herein by reference.
4.11 Warrant Agreement dated as of June 21, 1996, between Sunshine, Rauscher, Pierce & Clark and HSBC Investment
Banking Limited and Form of Warrant Certificate filed as Exhibits 4.7 and 4.8 to Sunshine's Registration
Statement on Form S-3 (Registration No. 333-06537), which exhibits are incorporated herein by reference.
4.12 Specimen form of Warrant to Purchase Common Stock issued on November 24, 1997, to affiliates of Stonehill
Investment Corp., filed as Exhibit 10.12 to Sunshine's Registration Statement on Form S-3 (Registration
No. 333-41641), which exhibit is incorporated herein by reference.
4.13 Specimen form of Senior Convertible Promissory Note issued on November 24, 1997, to affiliates of Stonehill
Investment Corp., filed as Exhibit 10.13 to Sunshine's Registration Statement on Form S-3 (Registration
No. 333-41641), which exhibit is incorporated herein by reference.
</TABLE>
13
<PAGE> 16
<TABLE>
<S> <C>
o 10.1 1987 Employee Nonqualified Stock Option Plan of Sunshine, filed as Exhibit 10.9 to Sunshine's Annual Report
on Form 10-K for the fiscal year ended December 31, 1986, which exhibit is incorporated herein by
reference.
o 10.2 Amendment No. 1 to the 1987 Employee Nonqualified Stock Option Plan of Sunshine, filed as Exhibit 10.8 to
Sunshine's Registration Statement on Form S-1 (Registration No. 33-63446), as amended, which exhibit is
incorporated herein by reference.
o 10.3 Amendment No. 2 to the 1987 Employee Nonqualified Stock Option Plan of Sunshine, filed as Exhibit 10.1 to
Sunshine's Quarterly Report on Form 10-Q for the period ended June 30, 1994, which exhibit is incorporated
herein by reference.
o 10.4 1993 Incentive Stock Option Plan of Sunshine, filed as Exhibit 10.18 to Sunshine's Registration Statement on
Form S-1 (Registration No. 33-63446), as amended, which exhibit is incorporated herein by reference.
o 10.5 1995 Employee Nonqualified Stock Option Plan of Sunshine, filed as Exhibit 10.5 to Sunshine's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998, which exhibit is incorporated herein by
reference.
0 10.6 Form of Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and John S.
Simko, filed as Exhibit 10.8 to Sunshine's Registration Statement on Form S-1 (Registration No. 33-73608),
as amended, which exhibit is incorporated herein by reference.
o 10.7 Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and William W. Davis,
filed as Exhibit 10.9 to Sunshine's Registration Statement on Form S-1 (Registration No. 33-73608), as
amended, which exhibit is incorporated herein by reference.
O 10.8 Form of Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and Harry F.
Cougher, filed as Exhibit No. 10.10 to Sunshine's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993, which exhibit is incorporated herein by reference.
10.9 Mining Lease, dated March 15, 1994, by and between Revenue-Virginius Mines Corporation, a Colorado
corporation, as lessor, and Sunshine, as lessee, filed as Exhibit No. 10.1 to Sunshine's Quarterly Report
on Form 10-Q for the period ended March 31, 1994, which exhibit is incorporated herein by reference.
10.10 Registration Rights Agreement dated November 24, 1997, between the Company and Stonehill Partners, L.P., GRS
Partners, Aurora Limited Partnership and Stonehill Offshore Partners Limited, filed as Exhibit 10.11 to
Sunshine's Registration Statement on Form S-3 (Registration No. 333-41641), which exhibit is incorporated
herein by reference.
22.1 Subsidiaries of Sunshine, filed as Exhibit 22.1 to Sunshine's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992, which exhibit is incorporated herein by reference.
*23.1 Consent of Ernst & Young LLP.
*24.1 Power of attorney of the officers and directors of the Company, included on the signature page hereof.
*27.1 Financial Data Schedules
</TABLE>
___________
* Filed herewith
o Management contract or compensatory plan or arrangement.
Schedules other than those included in the Consolidated Financial
Statements, if any, are omitted for the reason that they are either not
required, not applicable or the required information is included in the
Consolidated Financial Statements or Notes thereto.
(a) Reports on Form 8-K:
NONE
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Sunshine Mining and Refining Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DATED this 4th day of March, 1998.
SUNSHINE MINING AND REFINING COMPANY
By /s/ WILLIAM W. DAVIS
--------------------------------
William W. Davis, Executive Vice
President and Chief Financial
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers
and directors of Sunshine Mining and Refining Company (the "Company") hereby
constitutes and appoints John S. Simko, William W. Davis, and Robert H.
Peterson, or any of them (with full power to each of them to act alone), his
true and lawful attorney-in-fact and agent, with full power of substitution,
for him and on his behalf and in his name, place and stead, in any and all
capacities, to sign, execute and file any and all documents relating to the
Company's Form 10-K for the year ended December 31, 1997, including and all
amendments and supplements hereto, with any regulatory authority granting said
attorneys, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises in order to effectuate the same, as fully to all intents and purposes
as he himself might or could do if personally present, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
substitute or substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of the 4th day of March, 1998.
<TABLE>
<CAPTION>
NAME CAPACITIES
- ---- ----------
<S> <C>
/s/ JOHN S. SIMKO Director, Chairman of the Board, and
- ------------------------------------------- Chief Executive Officer
John S. Simko
/s/ G. CHRIS ANDERSEN Director
- -------------------------------------------
G. Chris Andersen
/s/ DANIEL D. JACKSON Director
- -------------------------------------------
Daniel D. Jackson
/s/ V. DALE BABBITT Director
- -------------------------------------------
V. Dale Babbitt
/s/ WILLIAM W. DAVIS Executive Vice President
- ------------------------------------------- and Chief Financial Officer
William W. Davis
/s/ ROBERT B. SMITH, JR. Director
- -------------------------------------------
Robert B. Smith, Jr.
/s/ OREN G. SHAFFER Director
- -------------------------------------------
Oren G. Shaffer
/s/ GEORGE M. ELVIN Director
- -------------------------------------------
George M. Elvin
</TABLE>
<PAGE> 18
Consolidated Financial Statements
Sunshine Mining and Refining Company
Years ended December 31, 1997 and 1996
with Report of Independent Auditors
<PAGE> 19
Sunshine Mining and Refining Company
Consolidated Financial Statements
CONTENTS
Report of Independent Auditors.............................................. F-1
Consolidated Financial Statements
Consolidated Balance Sheets-December 31, 1997 and 1996.......................F-2
Consolidated Statements of Operations-Years Ended
December 31, 1997, 1996 and 1995...................................F-3
Consolidated Statements of Stockholders' Equity-Years Ended
December 31, 1997, 1996 and 1995....................................F-4
Consolidated Statements of Cash Flows-Years Ended
December 31, 1997, 1996 and 1995....................................F-5
Notes to Consolidated Financial Statements...................................F-6
<PAGE> 20
Report of Independent Auditors
The Board of Directors and Stockholders
Sunshine Mining and Refining Company
We have audited the accompanying consolidated balance sheets of Sunshine Mining
and Refining Company (the Company) as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Sunshine Mining and Refining Company at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
February 20, 1998
F-1
<PAGE> 21
Sunshine Mining and Refining Company
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
-------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash investments $ 15,985 $
16,317
Silver bullion (Note 2) 7,739 7,989
Accounts receivable 2,801 2,624
Inventories (Note 2) 3,627 2,523
Other current assets 1,739 1,108
--------- ----------
Total current assets 31,891 30,561
Property, plant, and equipment, at cost (Note 3) 143,192 141,409
Less accumulated depreciation, depletion, and amortization (77,727) (72,124)
--------- ----------
65,465 69,285
Investments and other assets 4,245 5,640
--------- ----------
Total assets $ 101,601 $ 105,486
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,351 $ 987
Accrued expenses (Note 4) 3,581 4,015
--------- ----------
Total current liabilities 4,932 5,002
Long term debt (Note 5) 42,265 25,780
Accrued pension and other postretirement benefits (Note 9) 5,672 6,074
Other long-term liabilities and deferred credits (Note 6) 4,236 5,032
Commitments and contingencies (Notes 2, 3, 6, and 10) -- --
Stockholders' equity (Notes 5 and 7):
Common stock, $0.01 par value:
Authorized shares - 600,000
Issued shares - 259,818 in 1997; 259,652 in 1996 2,598 2,597
Paid-in capital 711,192 711,093
Deficit (668,155) (648,847)
--------- ---------
45,635 64,843
Less treasury stock: 4,586 in 1997; 4,671 shares
in 1996, at cost (1,139) (1,245)
--------- ---------
44,496 63,598
--------- ----------
Total liabilities and stockholders' equity $ 101,601 $ 105,486
========= ==========
See accompanying notes.
</TABLE>
F-2
<PAGE> 22
Sunshine Mining and Refining Company
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
-----------------------------------------------
(In Thousands, except per share amounts)
<S> <C> <C> <C>
Operating revenues (Note 11) $ 26,476 $ 15,315 $ 15,623
Mark to market gain (loss) 1,859 (1,101) 911
-----------------------------------------------
28,335 14,214 16,534
Costs and expenses:
Cost of revenues 24,472 18,041 17,633
Depreciation, depletion, and amortization
(Note 3) 5,817 4,325 3,612
Exploration 7,352 10,240 6,048
Selling, general, and administrative
expense 5,072 5,452 5,912
-----------------------------------------------
42,713 38,058 33,205
-----------------------------------------------
Operating loss (14,378) (23,844) (16,671)
Other income (expense):
Interest income 594 1,313 1,336
Interest and debt expense (5,628) (4,328) (813)
Other, net 104 957 665
-----------------------------------------------
(4,930) (2,058) 1,188
-----------------------------------------------
Net loss (19,308) (25,902) (15,483)
Gain on retirement and exchange of preferred stock
(Note 7) - 40,124 -
Preferred dividend requirements (Note 7) - (2,622) (10,089)
-----------------------------------------------
Income (loss) applicable to common shares $ (19,308) $ 11,600 $ (25,572)
===============================================
Basic and diluted income (loss) per common share
(Note 8) $ (0.08) $ 0.05 $ (0.13)
===============================================
</TABLE>
See accompanying notes.
F-3
<PAGE> 23
Sunshine Mining and Refining Company
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
CUMULATIVE REDEEMABLE
PREFERRED STOCK COMMON STOCK
-------------------------------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
-----------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 7,166 $ 80,707 196,659 $ 1,967 $ 623,181 $(605,410)
Net loss - - - - - (15,483)
Amortization of difference between carrying amount
and redemption value of preferred stock - 1,561 - - - (1,561)
Issuance of common stock upon exercise of stock
options and warrants - - 101 1 156 -
------------------------------------------------------------------------
Balance at December 31, 1995 7,166 82,268 196,760 1,968 623,337 (622,454)
Net loss - - - - - (25,903)
Amortization of difference between carrying amount
and redemption value of preferred stock - 490 - - - (490)
Additional capital resulting from issuance of
Senior Exchangeable Notes (Note 5) - - - - 6,750 -
Reversion of Old Silver Index Bond ("SIB") shares - - - - - -
Preferred Stock exchange (7,166) (82,758) 62,847 628 80,790 -
Issuance of warrants - - - - 209 -
Other, net - - 45 1 7 -
------------------------------------------------------------------------
Balance at December 31, 1996 - - 259,652 2,597 711,093 (648,847)
Net loss - - - - - (19,308)
Issuance of warrants (Note 5) - - - - 100 -
Other, net - - 166 1 (1) -
------------------------------------------------------------------------
Balance at December 31, 1997 - $ - 259,818 $ 2,598 $ 711,192 $(668,155)
========================================================================
<CAPTION>
TREASURY STOCK
-----------------------
SHARES AMOUNT TOTAL
-----------------------------------
(In Thousands)
<S> <C> <C> <C>
Balance at December 31, 1994 3,664 $ (37) $ 100,408
Net loss - - (15,483)
Amortization of difference between carrying amount
and redemption value of preferred stock - - -
Issuance of common stock upon exercise of stock
options and warrants - - 157
----- ------- ---------
Balance at December 31, 1995 3,664 (37) 85,082
Net loss - - (25,903)
Amortization of difference between carrying amount
and redemption value of preferred stock - - -
Additional capital resulting from issuance of
Senior Exchangeable Notes (Note 5) - - 6,750
Reversion of Old Silver Index Bond ("SIB") shares 1,007 (1,208) (1,208)
Preferred Stock exchange - - (1,340)
Issuance of warrants - - 209
Other, net - - 8
----- ------- ---------
Balance at December 31, 1996 4,671 (1,245) 63,598
Net loss - - (19,308)
Issuance of warrants (Note 5) - - 100
Other, net (85) 106 106
----- ------- ---------
Balance at December 31, 1997 4,586 $(1,139) $ 44,496
===== ======= =========
See accompanying notes.
</TABLE>
F-4
<PAGE> 24
Sunshine Mining and Refining Company
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
----------------------------------------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (19,308) $ (25,902) $ (15,483)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation, depletion, and amortization 5,817 4,325 3,612
Amortization of debt issuance costs and accretion of
debt discount 2,300 1,692 -
Gains on sale of investments - (60) (574)
Net (increase) decrease in:
Silver bullion (1,625) 987 (568)
Accounts receivable (177) (1,041) (1,167)
Inventories (1,104) (1,046) 1,674
Other assets (173) (835) (310)
Net increase (decrease) in:
Accounts payable and accrued expenses 260 1,505 445
Accrued pension and other postretirement benefits
(401) (313) (424)
Other liabilities and deferred credits (691) (1,486) (218)
----------------------------------------------
Net cash used in operating activities (15,102) (22,174) (13,013)
----------------------------------------------
INVESTING ACTIVITIES
Additions to property, plant, and equipment (1,997) (2,690) (3,122)
Other, principally sale of investments 2,154 1,670 2,234
----------------------------------------------
Net cash provided (used) in investing activities 157 (1,020) (888)
----------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of long term debt, net of issuance
costs (Note 5) $ 14,613 $ 27,537 $ -
Costs associated with conversion of preferred stock into
common stock (Note 7) - (864) -
Proceeds from issuance of common stock upon exercise of
stock options and warrants - 1 157
----------------------------------------------
Net cash provided by financing activities 14,613 26,674 157
----------------------------------------------
Increase (decrease) in cash and cash investments
(332) 3,480 (13,744)
Cash and cash investments at beginning of year 16,317 12,837 26,581
----------------------------------------------
Cash and cash investments at end of year $ 15,985 $ 16,317 $ 12,837
==============================================
Supplemental cash flow information:
Interest paid in cash $ 2,817 $ 2,283 $ 143
==============================================
</TABLE>
See accompanying notes
F-5
<PAGE> 25
Sunshine Mining and Refining Company
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND STATEMENT PRESENTATION
Sunshine Mining and Refining Company (Sunshine or the Company) is a holding
company whose principal subsidiaries are Sunshine Precious Metals, Inc.
(SPMI) and Sunshine Argentina, Inc. (SAI). SPMI mines, refines, and markets
silver and certain by-product metals to commercial customers. SAI has a
major mine in the development stage and is engaged in exploration for other
mining properties. The consolidated financial statements include the
accounts of Sunshine and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assessments that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
Certain previously reported amounts have been reclassified to conform to
the 1997 presentation.
CASH AND CASH INVESTMENTS
Cash and cash investments include certificates of deposit and other highly
liquid investments with maturities of three months or less when purchased.
INVENTORIES AND SILVER BULLION
Precious metals inventories and silver bullion are stated at estimated net
realizable prices. Materials and supplies are carried at the lower of cost
(principally average cost) or market.
CONCENTRATION OF CREDIT RISK
The Company currently markets its concentrates to a commercial smelter in
the United States. Ninety percent of the estimated sales proceeds are due
by the 15th of the month following shipment of the concentrates. Final
payments are received by the 10th business day of the fourth month
following shipment. The Company does not require collateral. Management
periodically performs reviews as to the creditworthiness of its
customer(s). The Company has not sustained any significant credit losses on
sales of its products.
SILVER FINANCIAL INSTRUMENTS
The Company sells covered call options on silver bullion held for
investment. The strike price of these agreements exceeds current market
prices at the time they are entered into. Option premiums received are
deferred. If the applicable market price exceeds the strike price and
option premium, the differential is accrued and recognized as a reduction
of revenues. Any remaining deferred option premiums are recognized as a
component of revenues at the end of the option period.
The fair values of the sold call options are not included in the financial
statements.
<PAGE> 26
REVENUE RECOGNITION
Sales of refined metals and concentrates are recognized as revenue at the
time of shipment to the customer. Adjustments to the carrying value of
inventories held for sale or investment are included in revenues.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Depreciation on
buildings, leasehold improvements, and equipment is provided by
straight-line or declining-balance methods at rates based on the estimated
lives of the respective assets. The principal lives range from 12 to 30
years for buildings and from 3 to 10 years for equipment (see Note 3).
Depletion of precious metal mineral interests is computed using the
unit-of-production method based on estimated ore reserves. Mine exploration
costs are charged to expense as incurred. Costs of major mine improvements,
including interest, are capitalized and amortized in relation to the
production of estimated ore reserves.
MINERAL EXPLORATION AND MINE DEVELOPMENT
Exploration costs and development costs for projects not yet determined by
management to be commercially feasible are charged to expense as incurred.
Expenditures for new mine development are capitalized when the properties
are determined to have development potential but are not yet producing.
Development costs incurred to access reserves on existing producing mines
are expensed as incurred.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes, whereby, a deferred tax asset or liability is recognized for
estimated future tax effects attributable to temporary differences and
carryforwards. The measurement of deferred income tax assets is adjusted by
a valuation allowance, if necessary, to recognize a future tax benefit only
to the extent, based on available evidence, it is more likely than not it
will be realized. The effect on deferred taxes of a change in income tax
rates is recognized in the period that includes the enactment date.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that relate to current operations are either
expensed or capitalized depending on the nature of the expenditure.
Expenditures that relate to an existing condition caused by past
operations, and which do not contribute to current or future revenue
generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable, and the costs can be
reasonably estimated. Generally, the timing of these accruals will coincide
with completion of a feasibility study or the Company's commitment to a
formal plan of action.
EARNINGS (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes the
effect of any dilutive options, warrants, or convertible securities.
Diluted earnings per share is calculated similarly to fully diluted
earnings per share. All earnings per share amounts for all periods have
been presented, and where applicable, restated to conform to the Statement
128 requirements.
<PAGE> 27
2. INVENTORIES, SILVER BULLION, AND SILVER CALL OPTIONS
Inventories consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
(In Thousands)
<S> <C> <C>
Precious metals inventories:
Work in process $ 2,171 $
1,144
Finished goods 264 405
Materials and supplies inventories 1,192 974
----------- ---------
$ 3,627 $ 2,523
=========== =========
</TABLE>
The Company held as an investment, $7.7 million and $8.0 million of silver
bullion, in excess of normal operating requirements at December 31, 1997
and 1996, respectively.
The Company sells covered call options on silver bullion held for
investment. Total premiums earned from the sale of covered calls aggregated
$116,000, $165,000 and $442,000 in 1997, 1996 and 1995, respectively. At
December 31, 1997, the Company had covered call options outstanding for 1.2
million ounces of silver with strike prices ranging from $5.75 to $7.00 and
expiration dates of February 26, 1998 (200,000 ounces), March 27, 1998
(900,000 ounces), and December 27, 1998 (100,000 ounces). The fair value of
the sold call options at December 31, 1997 would not materially exceed the
$202,000 of premiums received when they were sold. The Company had no sold
covered call options outstanding at December 31, 1996. At December 31,
1995, the Company had sold a covered call option on 100,000 ounces of the
silver bullion held for investment. The option had a strike price of $6.00
per ounce and expired unexercised on February 27, 1996. The fair value of
the sold call option was not significant at December 31, 1995.
3. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
(In Thousands)
<S> <C> <C>
Precious metals mineral interests $ 83,041 $ 82,586
Mine improvements 17,701 17,599
Buildings, leasehold improvements, and equipment 41,390 40,164
Land 1,060 1,060
---------- ---------
143,192 141,409
Less accumulated depreciation, depletion, and
amortization (77,727) (72,124)
---------- ---------
$ 65,465 $ 69,285
========== =========
</TABLE>
Whenever circumstances or events indicate, and at least annually, the
Company evaluates its mining properties for impairment, based on
undiscounted expected future cash flows. Such estimates are based on
assumptions as to future silver prices, mining costs, recoverable reserves
and estimates of future reserve potential which management believes are
reasonable, based on historical silver prices and production. If the sum of
such cash flows was less than the carrying amount of the asset, the Company
would record an impairment loss measured as the amount by which the
carrying amount of the asset exceeds the fair value of the asset. The
Company believes that the price of silver has been inordinately low for
many years due to the availability of surplus silver inventories generated
in 1980-1989. Industry data and press accounts have recently documented a
growing tightness in the silver supply, and silver prices in early 1998
have risen as a result. In addition, the Sunshine Mine is experiencing
significantly lower unit costs as a result of its return to full
production. Management believes sufficient proven and probable reserves,
additional mineralized inventory and resources exist within the mine to
allow full production for many years. Based on management's estimates of
undiscounted future cash flows, the Company's investment in the Sunshine
Mine is not impaired at December 31, 1997.
<PAGE> 28
4. ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(In Thousands)
<S> <C> <C>
Compensation, vacation, and severance $ 1,404 $ 1,171
Interest 873 727
Taxes, other than income taxes 2 43
Environmental remediation (Note 10) 496 800
Insurance premiums 401 395
Other 405 879
----------- -----------
$ 3,581 $ 4,015
=========== ===========
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
(In Thousands)
<S> <C> <C>
8% Senior Exchangeable Notes due March 21, 2000 $25,750 $24,265
10% Senior Convertible Notes due November 24, 2002 15,000 -
9% Convertible Subordinated Debentures due July 15, 2008 1,515 1,515
------- -------
$42,265 $25,780
======= =======
</TABLE>
In March 1996, SPMI issued $30 million aggregate principal amount of Senior
Exchangeable Notes due 2000 (the "Eurobonds"), which are all outstanding as
of December 31, 1997 and 1996.
The Eurobonds bear interest at 8% per annum and mature March 21, 2000. The
Eurobonds are exchangeable into a specified number of shares of Common
Stock of the Company at an exchange price of $1.00 per share, subject to
reset and adjustment in certain events. The Eurobonds may be exchanged at
the option of the holder at any time prior to maturity, unless previously
redeemed SPMI may force the exchange of the Eurobonds, in whole or in part,
if the average high and low sales prices of the Company's common stock
equal or exceed 150% of the exchange price (currently $1.00) for 30
consecutive trading days.
SPMI may redeem the Eurobonds at any time at the principal amount if United
States withholding taxes are imposed on payments in respect of the
Eurobonds. The Eurobonds are guaranteed by Sunshine and the guarantee ranks
senior to all of its unsecured and subordinated obligations.
If during the period between May 1, 1996 and May 1, 1999 the Company's
common stock does not trade at 133% of the exchange price (currently $1.00)
or more for 45 consecutive stock exchange trading days, the Company shall,
at its option:
(i) pay each Eurobond holder a one time additional payment equal to
22.5% (the "Additional Amount") of the principal amount of the
Eurobonds held by such Eurobond holder; or
(ii) Issue to such Eurobond holder a number of Shares at the average
market price per share for the previous ten stock exchange days
equal to the Additional Amount.
At December 31, 1997, the carrying value of the Eurobonds approximates
$25.7 million and the fair value approximates the $30 million principal
amount. Debt issuance costs are being amortized over the life of the
Eurobonds. Unamortized debt issuance costs of $1.8 and $2.5 million are
included in Investments and other assets at December 31, 1997 and 1996,
respectively.
<PAGE> 29
The Additional Amount has been reflected as a discount on the notes and
additional paid in capital resulting in an effective interest rate of the
Eurobonds of approximately 16%.
In November, 1997, the Company completed a private placement of Senior
Convertible Promissory Notes totaling $15 million aggregate principal
amount due November 24, 2002 ("Notes"). The Notes are convertible into 15.8
million shares of Common Stock of the Company at $.95 per share, subject to
adjustment in certain events, and bear interest at 10% per annum. Principal
and interest are payable either in cash or common stock of Sunshine. The
purchaser of the Notes was issued 1.5 million warrants to purchase common
stock of Sunshine at 110% of the conversion price of the Notes. The Notes
are unsecured and subordinated in right of payment to senior indebtedness.
The fair value of the Notes approximates the carrying value.
The 9% Convertible Subordinated Reset Debentures due July 15, 2008 (the
Debentures) are convertible at any time prior to maturity or redemption
into shares of common stock of the Company (Common Stock) at a conversion
price of $1.66 per share, subject to adjustment.
The Debentures are currently redeemable, at the option of the Company, in
whole or in part, at 101% or at 100% of the principal amount on or after
July 15, 1998, together with accrued and unpaid interest. The Debentures
are unsecured and subordinated in right of payment to senior indebtedness
(as defined).
The indenture governing the Debentures contains certain covenants
restricting the ability of the Company to declare or pay cash dividends and
make certain distributions on its capital stock. Pursuant to these
covenants, the Company is prohibited from paying cash dividends on shares
of its common stock. The fair value of the Debentures approximates their
carrying value.
6. INCOME TAXES
Revenue Canada has examined the tax returns of a former subsidiary of the
Company for various prior years and has proposed certain adjustments for
additional taxes. The proposed adjustments are being contested by the
Company; therefore, no payments have been made for the proposed additional
taxes. Based on an analysis of the proposed adjustments, the Company has
accrued its estimate of additional income taxes, plus interest at December
31, 1997. Management believes that such provision is adequate to over the
additional income taxes that may ultimately result from the resolution of
these matters.
The Company has incurred losses during each of the three years in the
period ended December 31, 1997, and accordingly, provisions for income
taxes were not required.
The computation of the net deferred tax asset (liability) at December 31 is
as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ----------
(In Thousands)
<S> <C> <C>
Deferred tax liabilities:
Property, plant, and equipment $ (17,260) $ (18,660)
Deferred tax assets:
Accrued pension and other postretirement benefits 1,985 2,126
Net operating loss carryforward 98,000 96,250
--------- ---------
$ 82,725 $ 79,716
Less valuation allowance (82,725) (79,716)
--------- ---------
$ -- $ --
========= =========
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $280 million. The loss
carryforwards expire principally in the years 2000 through 2012.
<PAGE> 30
7. STOCKHOLDER'S EQUITY
The Company has authorized 20.0 million shares of preferred stock, of which
no shares were issued and outstanding at December 31, 1997 or 1996.
Effective May 22, 1996, Common and Preferred stockholders of Sunshine
approved the merger (the "Merger") of Sunshine with and into its
wholly-owned subsidiary, Sunshine Merger Company, pursuant to which
Sunshine Merger Company was the surviving entity and was renamed Sunshine
Mining and Refining Company, resulting in the retirement of all of
Sunshine's outstanding Preferred Stock in exchange for approximately 63
million shares of Common Stock and 7.6 million warrants to purchase one
share of Common Stock at $1.38. As a result, the Company recognized a $40
million gain applicable to Common Shares representing the excess of the
aggregate redemption value of the Preferred Stock (approximately $130
million including cumulative dividends in arrears of $44.8 million) over
the sum of the value of securities issued and related transaction costs.
The difference between the carrying amount and the stated value of the
Preferred Stock was being accrued ratably over the period the Preferred
Stock was expected to be outstanding under the provisions of the mandatory
redemption requirements. Accordingly, $0.5 and $1.6 million was charged to
the deficit for the year ended December 31, 1996 and 1995, respectively,
and added to the carrying amount of the Preferred Stock.
The Company has 10.1 million warrants outstanding which were issued in a
rights offering to stockholders in July 1994. The exercise price of the
warrants is $2.12 per share subject to antidilution adjustments. The
warrants expire on March 9, 1999 and may be redeemed at the option of the
Company, in whole or in part, at any time on or after March 9, 1996, at a
redemption price of $0.50 per warrant.
The Company has three stock option plans under which options may be granted
to members of management. The stock option plans cover a total of 13.0
million shares with 7.1 million options being available for grant at
December 31, 1997. The option price may not be less than the market price
of the common stock on the date granted. Payment of the exercise price may
be made in cash or by delivery of shares of common stock, having a market
value equal to the exercise price.
In December 1995, the Company's Board of Directors approved the 1995
Employee Nonqualified Stock Option Plan (the 1995 Plan), subject to
shareholder approval, and awarded 3,160,000 options to key employees and
directors. The 1995 Plan provides for the granting of options to key
employees or potential key employees and, on December 7 each year,
automatic grants of 25,000 options to each non-employee director. The total
number of shares available for issuance under the 1995 Plan is 10,000,000.
When the 1995 Plan was approved by shareholders, 750,000 options granted in
1995 under the Company's 1987 Plan with an exercise price of $1.50 per
share were canceled. The options under the 1995 Plan were granted with an
exercise price of $1.50 per share, which exceeded the fair market value of
the Common Stock on that date.
Under both the 1995 and 1987 Plans, vesting of options is determined by the
directors when granted. Options under the 1993 Incentive Stock Option Plan
vest one year following date of grant. All options expire 10 years
following date of grant.
The Company has elected to follow APB 25, and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires use
of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals or exceeds the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
that Statement. The fair value for these options
<PAGE> 31
was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1997, 1996 and
1995, respectively; risk-free interest rates of 5.79%, 6.43% and 5.47%;;
volatility factors of the expected market price of the Company's common
stock of .438, .366 and .422. In each of the three years ended December 31,
1997, the assumed dividend yield was 0% and the weighted average expected
life of the options was three years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands except for earnings
per share information) for the year ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ --------------
<S> <C> <C> <C>
Pro forma net income (loss) applicable to common
shares $(19,412) $10,667 $(26,005)
Pro forma basic and diluted earnings (loss) per
share $ (0.08) $ 0.05 $ (0.13)
</TABLE>
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- --------------------------- ---------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
(000) PRICE (000) PRICE (000) PRICE
------------ ------------- ------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year 4,972 $ 1.52 2,445 $ 1.58 1,340 $ 1.67
Granted 442 1.13 3,390 1.47 1,262 1.97
Exercised - - - - (97) 1.54
Forfeited (560) 1.50 (863) 1.51 (60) 1.51
============ ============= ============= ============= ============ ==============
Outstanding,
end of year 4,854 $ 1.49 4,972 $ 1.52 2,445 $ 1.58
============ ============= ============= ============= ============ ==============
Exercisable at end of
year 4,697 $ 1.50 4,892 $ 1.52 2,396 $ 1.58
Weighted-average fair
value of options
granted during the
year $ 0.28 $ 0.28 $ 0.52
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged from
$0.8125 to $2.875. The weighted-average remaining contractual life of those
options is approximately eight years.
<PAGE> 32
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- --------------- --------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Numerator:
Net loss $ (19,308) $ (25,902) $ (15,483)
Gain on retirement & exchange of preferred stock -- 40,124 --
Preferred stock dividends -- (2,622) (10,089)
--------- --------- ----------
Numerator for basic earnings per share-income (loss)
available to common shareholders $ (19,308) $ 11,600 $ (25,572)
========= =========== ==========
Denominator:
Denominator for basic and diluted earnings per
share-weighted-average shares 255,137 222,584 193,044
Basic and diluted earnings (loss) per share $ (0.08) $ 0.05 $ (0.13)
========== ========== ==========
</TABLE>
A computation of diluted earnings per share is not presented because the
results would be antidilutive.
9. EMPLOYEE BENEFIT PLANS
The pension plan for hourly employees at the Sunshine Mine covered by a
collective bargaining agreement (the "Negotiated Plan") is a trusteed
defined benefit plan. Benefits under the plan are based on years of service
and includes provisions that would apply in the event of the permanent
shutdown of the Sunshine Mine for present employees who were also covered
by a predecessor plan terminated in 1986. The Company's trusteed defined
benefit pension plan for employees not covered by a collective bargaining
agreement was amended to freeze all participant's benefits as of December
31, 1993.
Net periodic pension costs relating to continuing operations for the
Company's defined benefit plans consist of the following for the year ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost $ 236 $ 214 $ 182
Interest cost 358 334 286
Actual return on plan assets (807) (427) (545)
Net amortization and deferrals 515 274 388
--------------------------------
Net periodic pension cost $ 302 $ 395 $ 311
================================
</TABLE>
The following table sets forth the funded status of the Company's trusteed
defined benefit plans and the related amounts included in other long-term
liabilities and deferred credits at December 31:
<TABLE>
<CAPTION>
1997 1996
--------------------------------
(In Thousands)
<S> <C> <C>
Plan assets at fair value $ 4 ,945 $ 3,710
Actuarial present value of projected benefit obligation:
Vested 4,437 4,780
Nonvested 961 181
--------------------------------
Projected benefit obligation 5,398 4,961
--------------------------------
Plan assets less than projected benefit obligation (453) (1,251)
Unrecognized prior service cost 660 792
Unrecognized net gain (402) (62)
Unrecognized transition net asset (85) (114)
Additional minimum liability (367) (270)
--------------------------------
Accrued pension liability recognized in the consolidated balance sheets
$ (647) $ (905)
================================
</TABLE>
<PAGE> 33
The following significant assumptions were used in computing pension costs
for the Company's trusteed defined benefit plans for the year ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
Discount rate 7.50% 7.00% 8.25%
Rate increase in compensation 0% 0% 0%
Expected long-term rate of return on assets 9.00% 9.00% 9.00%
</TABLE>
The Company's funding policy, with respect to trusteed defined benefit
plans, is to make contributions annually equal to, or in excess of, the
minimum funding requirements of the Employee Retirement Income Security Act
of 1974. Assets of the plans consist of pooled fixed income securities,
pooled equity securities, and cash or cash equivalents.
The Company also has a defined contribution plan for employees not covered
by a collective bargaining agreement. The Company's Board of Directors
determines annually if a contribution will be made, and if so, in what
amount. Contributions charged to operations during 1997, 1996, and 1995
were $176,000, $183,000, and $199,000, respectively.
The Company also sponsors a plan under the provision of Section 401(k) of
the Internal Revenue Code (the 401(k) Plan) for all employees not covered
by a collective bargaining agreement who have completed a specified term of
service. Company contributions may range from 0% to 100% of employee
contributions, up to a maximum 6% of eligible employee compensation, as
defined. Employees may elect to contribute up to 10% of their eligible
compensation on a pretax basis. Benefits under the 401(k) Plan are limited
to the assets of the 401(k) Plan. Company contributions charged to
operations during 1997, 1996, and 1995 were $90,000, $84,000, and $72,000,
respectively.
Postretirement medical and dental benefits are currently provided only to
certain employees who retired before 1987. The Company's policy is to fund
the cost of these plans as claims are incurred.
Interest costs on the projected benefit obligations and the actual returns
on plan assets of the postretirement benefit plans are included in interest
expense and other income, respectively, in the accompanying consolidated
statements of operations.
The following table sets forth the computation of the accrued liability for
postretirement medical, dental, and life insurance benefits at December 31:
<TABLE>
<CAPTION>
1997 1996
------------------------
(In Thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 4,438 $ 4,450
Fully eligible active participants 79 71
Other active plan participants 109 89
------- -------
4,626 4,610
Unrecognized net gain 335 559
------- -------
Accrued postretirement benefit cost $ 4,961 $ 5,169
======= =======
</TABLE>
Net periodic postretirement benefit cost for these plans includes the
following components for the year ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Service cost $ 7 $ 7 $ 6
Interest cost 294 340 427
------- ----- -------
Net period cost $ 301 $ 347 $ 433
======== ===== =======
</TABLE>
<PAGE> 34
The weighted-average annual assumed rate of increase in the per capita cost
of covered medical and dental benefits is 7.25% for 1998 (7.75% for 1997)
and is assumed to decrease gradually to 5% for 2003 and remain at that
level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example, changing the
assumed health care cost trend rates by one percentage point each year
would change the accumulated postretirement benefit obligation as of
December 31, 1997, by $249,000 and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for
1997 by $19,000. The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 7.25% at December 31,
1997 and 7.5% at December 31, 1996.
10. COMMITMENTS AND CONTINGENCIES
The EPA has identified the Company and SPMI as Potentially Responsible
Parties ("PRPs") at one site and SPMI as a PRP at another site under the
federal Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended ("CERCLA" or "Superfund"), alleging that the
Company and SPMI at one site and SPMI at the other site arranged for the
disposal of hazardous substances. One of the sites is located in Kellogg,
Idaho and the other site is located in Spokane, Washington.
At the first site, the EPA, the State of Idaho and several of the PRPs,
including the Company and SPMI, have agreed to a site-wide clean-up plan,
separating the site into two distinct areas for remediation: the Bunker
Hill Smelter Complex (the "Smelter Area") and the residential and certain
commercial areas primarily in the cities of Kellogg, Smelterville and
Pinehurst, Idaho encompassed by the Site (the "Residential Areas"). Without
admitting liability, the Company and several PRPs have agreed to do the
remediation work in the Residential Areas pursuant to an EPA and State of
Idaho approved work plan. In exchange therefor, EPA and the State of Idaho
released the settling PRPs from all liability for cleanup of the Smelter
Area, reduced the EPA's claim for reimbursement of past costs from $17
million to $1 million plus a percentage of proceeds received by the PRPs
from insurance companies, if any, and agreed that the work orders from 1990
through 1993 were deemed satisfied and discharged. The remediation
undertaken by the Company and the PRPs is expected to take approximately
seven years and the Company accrued $3.4 million for its (including SPMI's)
share (12.4%) of the estimated remediation costs, of which approximately
$500 thousand remains accrued at December 31, 1997.
On November 17, 1994, the United States District Court for the District of
Idaho entered a Consent Decree containing the terms of this agreement. The
liability for remediation costs under the consent decree is joint and
several. Thus, if any other settling party or parties does not comply with
the consent decree, the exposure for the Company and SPMI could increase
proportionately. The parties have reserved their claims and defenses with
respect to natural resource damages, except for the State of Idaho which
has agreed that its claim has been settled.
On July 31, 1991, the Coeur d'Alene Indian Tribe (the "Tribe") filed an
action in the United States District Court, District of Idaho against the
Company and seven other Bunker Hill Superfund Site PRPs seeking a
declaratory judgment that the Tribe has five years in which to file a
natural resource damage claim under CERCLA against the PRPs and others or,
alternatively, for damages in an unspecified amount resulting from the
loss, destruction or injury to natural resources allegedly caused by the
defendants. The Company believes that a settlement by SPMI of all natural
resources claims with the State of Idaho in May 1986 bars the Tribe's
action.
On March 22, 1996, a complaint was filed in the United States District
Court for the District of Idaho on behalf of the United States Department
of the Interior, United States Department of Agriculture and the
Environmental Protection Agency against Sunshine, SPMI and other identified
PRPs for alleged natural resource damages in the Coeur d'Alene Basin. The
complaint seeks to recover natural resource damages and response costs
under CERCLA and the Clean Water Act, and does not identify the amount of
damages sought to be recovered. The Company believes that the settlement by
SPMI of all natural resource claims with the State of Idaho in May, 1986,
bars these claims, and that the complaint is without merit. The Tribe's
action was consolidated with this proceeding. The Company
<PAGE> 35
believes that the settlement by SPMI of all natural resource claims with
the State of Idaho in May, 1986, bars these claims, and that the complaints
are without merit.
The second site where EPA has identified SPMI as a PRP under CERCLA is the
Spokane Junkyard Site near Spokane, Washington. No records of SPMI have
been discovered by it or the EPA showing SPMI ever sent any material to the
site. SPMI does not believe it will be required to pay any clean-up costs
at the Spokane Junkyard Site. The Company does not believe that the
designation of SPMI as a PRP at the Spokane Junkyard Site will have a
material impact on the Company's results of operations, financial condition
or on its liquidity or capital resources.
The Company is subject to certain other legal proceedings and claims that
arise in the conduct of its business. Although it is not possible to
predict the outcome of such matters, in the opinion of management, the
ultimate outcomes of these matters will not have a material adverse effect
on the Company's consolidated financial position or consolidated results of
operations.
11. OPERATIONS
The Company's principal operating property is the Sunshine Mine, located
near Kellogg, Idaho. The Sunshine Mine accounted for all of the Company's
operating revenues during 1997 and approximately 35% of proven and probable
reserves at December 31, 1997. The Company is also engaged in exploration
in Argentina and other parts of the United States.
In 1997 and 1996, one customer accounted for sales of concentrate
aggregating approximately $24.2 million and $13.8 million, respectively. In
1995, two customers accounted for sales of concentrate and refined silver
aggregating approximately $12.9 million. Management believes that the loss
of these customers would not have a material impact on the Company's
consolidated financial condition or consolidated results of operations
because there are other customers who would purchase the Company's
concentrates.
The Company's operations in foreign countries during 1997, 1996 and 1995
consist of the acquisition and exploration of mining properties in
Argentina and Peru. Exploration costs are expensed as incurred.
Identifiable assets in Argentina and Peru approximate $3.6 million and
$125,000, respectively, at December 31, 1997.
<PAGE> 36
12. PRECIOUS METALS RESERVES (UNAUDITED)
The table below presents data on proved and probable ore reserves,
production and average prices for each of the years in the five-year period
ended December 31, 1997 (in thousands, except average prices):
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
SUNSHINE MINE
Reserves at December 31:
Ounces of silver 39,808 36,241 30,810 27,908 29,961
Production:
Tons of ore 183 121 101 107 100
Ounces of silver 4,253 2,578 1,731 2,079 2,298
PIRQUITAS MINE
Reserves at December 31 72,800 -- -- -- --
REVENUE - VIRGINIUS MINE
Reserves at December 31:
Ounces of silver 6,208 6,208 5,098 5,098 --
AVERAGE PRICES:
Ounce of silver $ 5.02 $5.11 $5.20 $5.29 $4.34
</TABLE>
The ore reserve estimates presented in the table are estimates of proven
and probable reserves by the Company's geologic personnel. No assurance can
be given that the indicated quantity of in situ silver will be realized.
Reserve estimates are expressions of judgment based largely on data from
diamond drill holes and underground openings, such as drifts or raises,
which expose the mineralization on one, two or three sides, sampling and
similar examinations. Reserve estimates may change as ore bodies are mined
and additional data is derived.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
<S> <C> <C> <C> <C>
1997:
Revenues $ 6,740 $ 4,386 $ 8,814 $ 8,395
Operating loss (4,819) (5,793) (2,053) (1,713)
Loss applicable to common shares (5,933) (6,980) (3,328) (3,067)
Basic loss per common share $ (.02) $ (.03) $ (.01) $ (.01)
Diluted loss per common and common $ (.02) $ (.03) $ (.01) $ (.01)
equivalent share
1996:
Revenues $ 3,797 $ 2,951 $ 3,678 $ 3,787
Operating loss (4,564) (6,007) (6,506) (6,767)
Net loss (4,655) (6,861) (7,309) (7,077)
Income (loss) applicable to common shares (7,125) 33,112 (7,309) (7,077)
Basic income (loss) per common share $ (.04) $ .16 $ (.03) $ (.03)
Diluted income (loss) per common and common
equivalent share $ (.04) $ .12 $ (.03) $ (.03)
</TABLE>
Income applicable to common shares for the three months ended June 30, 1996
includes a gain of $40 million representing the excess of the aggregate
redemption value of the Preferred stock over the sum of the value of
securities issued and related transaction costs.
The 1996 second quarter earnings per share amount has been restated to
comply with Statement of Financial Accounting Standards No. 128, "Earnings
per Share", (SFAS 128). Earnings per share amounts computed in accordance
with SFAS 128 did not differ from previously reported amounts for other
periods presented.
<PAGE> 37
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
------- -------
<S> <C>
3.1 Certificate of Incorporation of Sunshine to the Company's Registration Statement on Form S-4, Registration
No. 33-98876, which exhibit is incorporated herein by reference.
3.2 Amendment to Certificate of Incorporation filed as Exhibit 4.1 to the Company's current report on Form 8-K
dated May 22, 1996 (File No. 33-908876), which exhibit is incorporated herein by reference.
3.3 Bylaws of Sunshine filed as Exhibit 3.2 to the Company's Registration Statement on Form S-4, Registration No.
33-98876, which exhibit is incorporated herein by reference.
4.1 Warrant Agreement dated as of February 1, 1996, between Sunshine Merger Company and American Stock Transfer &
Trust Company, as Warrant Agent, filed as Exhibit 4.1 to the Company's Registration Statement on Form S-4,
Registration No. 33-98876, which exhibit is incorporated herein by reference.
4.2 Warrant Agreement, dated as of February 3, 1994, between Sunshine and American Stock Transfer & Trust
Company, as Warrant Agent, filed as Exhibit 4.3 to Sunshine's Registration Statement on Form S-1
(Registration No. 33-73608), as amended, which exhibit is incorporated herein by reference.
4.3 Form of Supplemental Warrant Agreement dated as of February 1, 1996 between Sunshine Merger Company and
American Stock Transfer & Trust Company, as Warrant Agent, filed as Exhibit 4.10 to the Company's
Registration Statement on Form S-4 (Registration No. 33-98876), which exhibit is incorporated herein by
reference.
4.4 Warrant Certificate filed as Exhibit 4.3 to the Company's Registration Statement on Form S-4, Registration
No. 33-98876, which exhibit is incorporated herein by reference.
4.5 Form of Warrant Certificate, filed as Exhibit 4.4 to Sunshine's Registration Statement on Form S-1
(Registration No. 33-73608), as amended, which exhibit is incorporated herein by reference.
4.6 Specimen Stock Certificate of the Common Stock, $0.01 par value, of Sunshine, filed as Exhibit 4.2 to
Sunshine's Registration Statement on Form S-1 (Registration No. 33-63446) as amended, which exhibit is
incorporated herein by reference.
4.7 Form of Indenture dated as of July 15, 1988, between Sunshine and MTrust Corp., National Association, with
respect to Sunshine's Convertible Subordinated Debentures due July 15, 2008, filed as Exhibit 4.25 to
Sunshine's Registration Statement on Form S-3 (Registration No. 33-21159), which exhibit is incorporated
herein by reference.
4.8 First Supplemental Indenture, dated as of August 8, 1988, Second Supplemental Indenture dated as of November
10, 1988, and Third Supplemental Indenture, dated as of April 10, 1991, by and between the Company and
Ameritrust Texas, N.A., the successor to MTrust Corp., National Association relating to the issuance of
the Debentures, filed as Exhibit 4.3 to Sunshine's Annual Report on Form 10-K for the fiscal year ended
December 31, 1990, which exhibit is incorporated herein by reference.
4.9 Form of Fourth Supplemental Indenture, by and between the Company and Texas Commerce Bank National
Association, as successor to Ameritrust Texas National Association formerly known as MTrust Corp.,
National Association, filed as Exhibit 4.10 to the Company's Registration Statement on Form S-4,
Registration No. 33-98876, which exhibit is incorporated herein by reference.
4.10 Trust Deed dated March 21, 1996, between Sunshine, Sunshine Precious Metals, Inc. and Marine Midland Bank and
Form of Note filed as Exhibits 4.5 and 4.6 to Sunshine's Registration Statement on Form S-3 (Registration
No. 333-06537), which exhibits are incorporated herein by reference.
4.11 Warrant Agreement dated as of June 21, 1996, between Sunshine, Rauscher, Pierce & Clark and HSBC Investment
Banking Limited and Form of Warrant Certificate filed as Exhibits 4.7 and 4.8 to Sunshine's Registration
Statement on Form S-3 (Registration No. 333-06537), which exhibits are incorporated herein by reference.
4.12 Specimen form of Warrant to Purchase Common Stock issued on November 24, 1997, to affiliates of Stonehill
Investment Corp., filed as Exhibit 10.12 to Sunshine's Registration Statement on Form S-3 (Registration
No. 333-41641), which exhibit is incorporated herein by reference.
</TABLE>
<PAGE> 38
<TABLE>
<S> <C>
4.13 Specimen form of Senior Convertible Promissory Note issued on November 24, 1997, to affiliates of Stonehill
Investment Corp., filed as Exhibit 10.13 to Sunshine's Registration Statement on Form S-3 (Registration
No. 333-41641), which exhibit is incorporated herein by reference.
o 10.1 1987 Employee Nonqualified Stock Option Plan of Sunshine, filed as Exhibit 10.9 to Sunshine's Annual Report
on Form 10-K for the fiscal year ended December 31, 1986, which exhibit is incorporated herein by
reference.
o 10.2 Amendment No. 1 to the 1987 Employee Nonqualified Stock Option Plan of Sunshine, filed as Exhibit 10.8 to
Sunshine's Registration Statement on Form S-1 (Registration No. 33-63446), as amended, which exhibit is
incorporated herein by reference.
o 10.3 Amendment No. 2 to the 1987 Employee Nonqualified Stock Option Plan of Sunshine, filed as Exhibit 10.1 to
Sunshine's Quarterly Report on Form 10-Q for the period ended June 30, 1994, which exhibit is incorporated
herein by reference.
o 10.4 1993 Incentive Stock Option Plan of Sunshine, filed as Exhibit 10.18 to Sunshine's Registration Statement on
Form S-1 (Registration No. 33-63446), as amended, which exhibit is incorporated herein by reference.
o 10.5 1995 Employee Nonqualified Stock Option Plan of Sunshine, filed as Exhibit 10.5 to Sunshine's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998, which exhibit is incorporated herein by
reference.
0 10.6 Form of Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and John S.
Simko, filed as Exhibit 10.8 to Sunshine's Registration Statement on Form S-1 (Registration No. 33-73608),
as amended, which exhibit is incorporated herein by reference.
o 10.7 Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and William W. Davis,
filed as Exhibit 10.9 to Sunshine's Registration Statement on Form S-1 (Registration No. 33-73608), as
amended, which exhibit is incorporated herein by reference.
O 10.8 Form of Executive Employment Agreement entered into as of January 1, 1994, between Sunshine and Harry F.
Cougher, filed as Exhibit No. 10.10 to Sunshine's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993, which exhibit is incorporated herein by reference.
10.9 Mining Lease, dated March 15, 1994, by and between Revenue-Virginius Mines Corporation, a Colorado
corporation, as lessor, and Sunshine, as lessee, filed as Exhibit No. 10.1 to Sunshine's Quarterly Report
on Form 10-Q for the period ended March 31, 1994, which exhibit is incorporated herein by reference.
10.10 Registration Rights Agreement dated November 24, 1997, between the Company and Stonehill Partners, L.P., GRS
Partners, Aurora Limited Partnership and Stonehill Offshore Partners Limited, filed as Exhibit 10.11 to
Sunshine's Registration Statement on Form S-3 (Registration No. 333-41641), which exhibit is incorporated
herein by reference.
22.1 Subsidiaries of Sunshine, filed as Exhibit 22.1 to Sunshine's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992, which exhibit is incorporated herein by reference.
*23.1 Consent of Ernst & Young LLP.
*24.1 Power of attorney of the officers and directors of the Company, included on the signature page hereof.
*27.1 Financial Data Schedules
</TABLE>
___________
* Filed herewith
o Management contract or compensatory plan or arrangement.
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-16342 and 33-18435; Form S-3 Nos. 2-90723, 2-97601, 33-2268,
33-06537, 33-13432, 33-25050, 33-09875, 33-184535, 33-32244, 33-98876, and
333-41641; Form S-4 No. 33-22250; and Form S-1 Nos. 33-09612, 33-63446, and
33-73608) of Sunshine Mining and Refining Company and in the related
Prospectuses of our report dated February 20, 1998 with respect to the
consolidated financial statements of Sunshine Mining and Refining Company,
included in the Annual Report (Form 10-K) for the year ended December 31, 1997.
/s/ ERNST & YOUNG LLP
Dallas, Texas
February 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DEC. 31, 1997 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DEC. 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,985
<SECURITIES> 0
<RECEIVABLES> 2,801
<ALLOWANCES> 0
<INVENTORY> 3,627
<CURRENT-ASSETS> 31,891
<PP&E> 143,192
<DEPRECIATION> 77,727
<TOTAL-ASSETS> 65,465
<CURRENT-LIABILITIES> 4,932
<BONDS> 42,265
0
0
<COMMON> 2,598
<OTHER-SE> 41,898
<TOTAL-LIABILITY-AND-EQUITY> 101,601
<SALES> 26,476
<TOTAL-REVENUES> 28,335
<CGS> 24,472
<TOTAL-COSTS> 30,289
<OTHER-EXPENSES> 7,352
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,628
<INCOME-PRETAX> (19,308)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,308)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,308)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
