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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required) for the fiscal year ended
DECEMBER 31, 1996
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) for the transition period from
_____________ to_____________
Commission file number 0-17480
CROWN RESOURCES CORPORATION
(Exact name of registrant as specified in charter)
WASHINGTON 84-1097086
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1675 BROADWAY, SUITE 2400, DENVER, COLORADO 80202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303)534-1030
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(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. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was approximately $90,953,863 based upon the closing price on
March 20, 1997.
There were 13,253,879 shares of common stock, $0.01 par value, outstanding on
March 20, 1997.
This Form 10-K consists of pages
Exhibit Index Begins on Page
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business................................... 3
Item 2. Properties................................. 12
Item 3. Legal Proceedings.......................... 28
Item 4. Submission of Matters to a Vote of
Security Holders.......................... 28
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters........... 29
Item 6. Selected Financial Data.................... 30
Item 7. Management's Discussion and Analysis of
Financial Condition and Results
of Operations............................. 31
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure...................... 38
PART III
Item 10. Directors and Executive Officers of the
Registrant................................ 38
Item 11. Executive Compensation..................... 38
Item 12. Security Ownership of Certain Beneficial
Owners and Management..................... 38
Item 13. Certain Relationships and Related
Transactions.............................. 38
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K................... 39
Signatures............................................ 43
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PART I
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The information set forth in BUSINESS, PROPERTIES and MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-
LIQUIDITY AND CAPITAL RESOURCES includes "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, and is subject to the safe harbor created by
those sections. Factors that realistically could cause results to differ
materially from those projected in the forward looking statements are set forth
in BUSINESS, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS-LIQUIDITY AND CAPITAL RESOURCES and CONSIDERATIONS RELATED
TO CROWN'S BUSINESS below.
ITEM 1. BUSINESS
(a) Overview
Crown Resources Corporation ("Crown" or the "Company") is a precious
metals exploration company operating in the western United States, Peru and
Argentina. Its properties in Peru and Argentina are held through Solitario
Resources Corporation ("Solitario"), a 60.4%-owned subsidiary as of December 31,
1996. The Company's principal expertise is in identifying properties with
promising mineral potential, acquiring these properties and exploring them to an
advanced stage. Crown's goal is to advance its properties to the feasibility
study stage, at which time Crown intends to pursue development of the properties
typically through a joint venture with a partner that has expertise in mining
operations. The Company has in the past recognized, and expects in the future
to recognize, revenues from the option and sale of property interests to joint
venture partners and from the sale of its share of gold produced on its
properties.
Crown was incorporated under the laws of the State of Washington in August
1988. Unless otherwise indicated by the context, all references to Crown or the
Company in this report shall be read to refer to Crown Resources Corporation and
its subsidiaries taken together.
(b) Recent Developments
In February 1997, the Final Environmental Impact Statement ("FEIS") for the
Crown Jewel Mine was filed by the United States Forest Service ("USFS") and the
Washington Department of Ecology ("DOE"). The FEIS describes the environmental
effects of the plan to construct and operate the Crown Jewel mine, and
alternatives to that plan. Also in February 1997, the Record of Decision for
the FEIS was filed by the USFS and the United States Bureau of Land Management
("BLM"). The Record of Decision documents the decision by the USFS and BLM to
select the mining alternative as presented in the FEIS. The decision to allow
development of the Crown Jewel mine is subject to appeal within various
jurisdictions for up to 45
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days from the date of publication of the decision. See PROPERTIES - CROWN JEWEL
PROJECT, and LEGAL PROCEEDINGS.
In December 1996, Solitario signed an agreement with a subsidiary of
Cominco Ltd. ("Cominco") regarding the Bongara property in northern Peru,
presently covering approximately 240,000 acres (the "Bongara project"). Cominco
has the right to earn up to a 60% interest in the Bongara project by spending a
minimum of $27,500,000 on exploration and development and by making cash
payments of $1,800,000 to Solitario over a four-year period, as well as fully
funding the project through a bankable feasibility study. An initial cash
payment of $250,000 was paid by Cominco in January 1997. In addition to the
cash payments and work commitments, Cominco has agreed to finance Solitario's
share of project development costs, subject to repayment, after a production
decision is made, should Solitario not secure third-party financing. See
PROPERTIES - BONGARA ZINC PROJECT.
In February 1997, the Company sold 1,500,000 of its shares in Solitario,
receiving net proceeds of $4,448,000 from the market transaction. The Company
reinvested the proceeds by acquiring, through a private placement into
Solitario, 1,500,000 new shares of Solitario plus 1,500,000 warrants,
exercisable into shares of Solitario at Cdn$4.83 per share until February 27,
1999. Upon completion of the private placement, the Company's interest in
Solitario was approximately 54.5%.
(c) Considerations Related to Crown's Business
EXPLORATION AND DEVELOPMENT. Crown's domestic mineral properties, which
consist of a variety of interests including unpatented and patented claims held
under lease or in fee, are located in Nevada, Washington and Utah. Crown's
South American properties, located in Peru and Argentina, consist of exploration
concessions or mining claims held under application or option or purchase
agreements. Crown acts as operator on all of its properties that are not held
in joint ventures. The operator generally provides all labor, equipment,
supplies and management on a cost plus fee basis and generally must perform
specific tasks over a specified time period. Separate fees are generally
charged to the joint venturers by the operator and the joint venturers pay the
costs in proportion to their interests in the property. The success of projects
held under joint ventures that are not operated by Crown is substantially
dependent on the other joint venturer. In particular, the operating success of
the Crown Jewel Project is largely dependent on Battle Mountain Gold Company
("Battle Mountain"), its joint venture partner. See PROPERTIES - CROWN JEWEL
PROJECT.
After selecting a possible exploration area through its own efforts or with
others, the operator compiles reports, past production records and geologic
surveys concerning the area. The operator then undertakes a field exploration
program to determine whether the area merits work. Initial field exploration on
a property normally consists of geologic mapping and geochemical
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and/or geophysical surveys, together with selected sampling to identify host
environments that may contain specific mineral occurrences. If an area shows
promise, the operator will generally conduct geologic drilling programs in an
effort to locate the existence of economic mineralization. If such
mineralization is delineated, further work will be undertaken to estimate ore
reserves, evaluate the feasibility for the development of the mining project,
obtain permits for commercial development, and, if the project appears to be
economically viable, proceed to place the ore deposit into commercial
production.
FOREIGN OPERATIONS. The Company presently has interests in properties
located in Peru and Argentina. These countries are emerging from periods of
political and economic instability. While current indications are that such
instability is diminishing, there are no guarantees that this will continue.
Foreign properties, operations and investments may be adversely affected by
local political and economic developments, including nationalization, exchange
controls, currency fluctuations, taxation and laws or policies as well as by
laws and policies of the United States affecting foreign trade, investment and
taxation. Furthermore, it is particularly important that the Company maintain
good relationships with the governments in the countries in which it operates.
The Company may not be able to maintain such relationships if the governments of
these countries change. Certain regions in which the Company may conduct
operations have been subject to political and economic instability, creating
uncertainty and the potential for a loss of resources dedicated to these
regions.
The Company's property interests in Peru and Argentina are held through its
subsidiary, Solitario. Management and technical services are provided to
Solitario by Crown pursuant to a management agreement for which Crown receives
management fees. Certain directors and officers of Crown are also directors and
officers of Solitario. As such, certain of these officers devote a portion of
their time to Solitario matters from which Crown, as a majority shareholder, may
not receive the full benefit. Additionally, the fact that these officers
receive cash compensation from Crown and not from Solitario may give rise to
certain conflicts of interest between these officers' duties to Crown and to
Solitario.
SOURCES OF FINANCING. The capital required for exploration and development
of properties is substantial. The Company has financed operations through the
issuance of convertible debentures, utilization of joint venture arrangements
with third parties (generally providing that the third party will obtain a
specified percentage of the Company's interest in a certain property in exchange
for the expenditure of a specified amount), the sale by the Company of interests
in properties or other assets, and by the issuance of common stock. See
PROPERTIES - CROWN JEWEL PROJECT-FINANCING, PROPERTIES - BONGARA ZINC PROJECT
and MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES.
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COMPETITION AND MARKETS. A large number of companies are engaged in the
exploration and development of mineral properties, many of which have
substantially greater technical and financial resources than the Company.
Therefore, the Company may be at a disadvantage with respect to many of its
competitors in the acquisition, exploration and development of mining
properties.
The marketing of minerals is affected by numerous factors, many of which
are beyond the control of the Company. Among factors beyond the control of the
Company are the price of the raw or refined minerals in the marketplace, imports
of raw materials from other countries, the availability of adequate milling and
smelting facilities, the price of fuel, and the market price of competitive
minerals.
TITLE. U.S. PROPERTIES. The Company's domestic properties consist, to a
large extent, of unpatented mining claims on unappropriated federal land
pursuant to procedures established by the Mining Law of 1872 and other federal
and state laws. These acts generally provide that a citizen of the United
States (including corporations) may acquire a possessory right to develop and
mine valuable mineral deposits discovered upon unappropriated federal lands,
provided that such lands have not been withdrawn from mineral location, e.g.,
national parks, military reservations and lands designated as part of the
National Wilderness Preservation System. The validity of all unpatented mining
claims is dependent upon inherent uncertainties and conditions. These
uncertainties relate to such non-record facts as the sufficiency of the
discovery of minerals, proper posting and marking of boundaries, and possible
conflicts with other claims not determinable from descriptions of record. Prior
to discovery of a locatable mineral thereon, a mining claim may be open to
location by others unless the owner is in possession of the claim. In the event
that the discovery of a valuable mineral deposit is made on unpatented mining
claims in the exploratory stage, the Company cannot assure clear title.
The Budget Reconciliation Act of 1993 (the "1993 Act"), requires the holder
of each unpatented mining claim to pay a "claim maintenance fee" of $100 per
claim on or before August 31 of each year through 1998. To locate new
unpatented claims, the Company must pay the $100 per claim maintenance fee for
the initial assessment year and a $25 per claim location fee. If the Company
fails to pay a claim maintenance fee or a location fee as required by the 1993
Act, it conclusively forfeits the related unpatented claim.
In connection with the acquisition of the Company's properties, the Company
conducts limited reviews of title and related matters, and obtains certain
representations regarding ownership. Although the Company believes it has
conducted reasonable investigations (in accordance with standard mining
practice) of the validity of ownership, there can be no assurance that it holds
good and marketable title to all of its properties.
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TITLE. SOUTH AMERICAN PROPERTIES.
Peru
Under Peruvian law, private parties may obtain authorization to exploit
precious and base metals and certain other minerals by applying for concessions
granted by the Peru Public Mining Registry.
Applications for concessions may cover a variety of activities including
the exploration and exploitation of metallic or non-metallic minerals,
concentration or refining of minerals, transportation through non-conventional
methods and auxiliary services to be provided to two or more mineral
concessions.
The filing of an application for concession grants the holder the exclusive
right to obtain the concession conditioned on the outcome of the approval
process. The approval process is an administrative procedure under the
authority of the Peru Public Mining Registry. The process includes a public
notice procedure allowing third parties to give notice of opposition or prior
claim, if any, before the title to the concession is granted. The approval
process may take six months to several years, depending upon the volume of
applications being filed and whether conflicting claims or objections are noted.
Although the Company believes that it has taken all necessary steps with respect
to the application and approval process for its Peru property concessions, there
is no assurance that all applications will result in issued concessions. As of
March 20, 1997, the Company has obtained titles on 149 mining concessions,
covering approximately 320,000 acres. Applications for an additional 33
concessions totalling approximately 61,000 acres have been submitted for
approval.
To apply for a concession, an applicant must register with and pay to the
Peru Public Mining Registry a fee equivalent to $2 per hectare ($0.80 per acre)
for a metallic mineral concession at the time of application. The applicant
must also pay a one-time fee of approximately $80 for each application.
Concession holders must conduct their exploration efforts in compliance with all
applicable mining laws and regulations. The concession holder must file annual
reports with the Ministry of Energy and Mines and pay a fee (the "Peruvian
Annual Rental Fee") of $2 per year per hectare until the property is in
production.
Mining concessions in Peru are granted for an indefinite period, and
require only that the holder pay the applicable Peruvian Annual Rental Fee and
operate and manage the properties as described in order to keep the concessions
in good standing. If after eight years the concession holder has not produced
minerals from the property having a value of at least $100 per year per hectare,
the applicable Peruvian Annual Rental Fee is increased by $2 per year per
hectare. No royalty payments to the Peru government are due from the sale of
minerals produced.
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Concessions and applications for concessions are transferrable. A
government consent is required for a transfer only if the concession covers
properties located within 50 kilometers of the border. A transfer is effective
from the date of the contract of transfer, although to be enforceable against
the government and third parties, the contract of transfer must be registered in
the Peru Public Mining Registry.
Argentina
Under Argentine law, private parties may obtain authorization to explore
and exploit precious and base metals by applications made to the government of
the province where the property is located. The right to explore a property is
granted by a concession (known as a "cateo"). The right to exploit or mine a
property is granted by a mining claim (known as a "mina"). Depending upon the
law of the particular province, the concessions and mining claims are either
granted by a judicial authority or an administrative authority. Argentine and
provincial laws permit foreign owners to apply for and hold concessions and
mining claims.
To apply for a concession, an applicant must pay the provincial mining
agency a fee of $0.80 per hectare ($0.32 per acre). However, when the Company
made its concession applications in 1993 and 1994, application fees were
substantially less and resulted in nominal application costs. Applications must
contain a clear and accurate indication of the land that is to be explored, and
state the objective of the exploration. The applicant also must provide a work
plan detailing the minimum schedule of work to be carried out. A single company
or enterprise is allowed to obtain concessions covering no more than an
aggregate of 200,000 hectares in each province. As of March 20, 1997, the
Company had received or applied for concessions totalling approximately 650,000
acres in six provinces.
The filing of an application for concession grants the holder the exclusive
right to obtain the concession conditioned on the outcome of the approval
process. The approval process is an administrative procedure under the
authority of the province in which the property is located. The process
includes a public notice procedure allowing third parties to give notice of
opposition or prior claim, if any, before the title to the concession is
granted. The approval process may take up to several years, depending upon the
province, the volume of applications being filed, and whether conflicting claims
or objections are noted. Although the Company believes that it has taken all
necessary steps with respect to the application and approval process for its
Argentina property concessions, there is no assurance that any or all
applications will result in issued concessions.
A fee of the equivalent of $400 is due when the concession is granted.
Concessions are typically granted for terms ranging from 150 to 1,100 days,
which period begins to run 30 days after the date of the grant. Concession
holders must conduct their
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exploration efforts in compliance with the applicable mining laws and
regulations, and any additional requirements negotiated between the provincial
agency and the holder. Concession holders also are obligated to keep the
provincial agency informed about compliance with the work plan according to the
conditions agreed to upon the grant of the concession and pay an annual fee
equivalent to $0.80 per hectare ($0.32 per acre) per year. However, because the
Company's concession applications were made under a significantly reduced annual
fee schedule, and are grandfathered, annual fee costs are expected to be less
than $50,000 per year.
The right to mine a property requires further approval by the provincial
agency from whom the concession covering the property was obtained. To acquire
a mining claim, the holder must submit a written statement to the appropriate
authorities making known the discovery and attaching a sample of the ore and
accurate details of the area where the discovery is located. Mining claims are
granted in units that vary in size from five hectares to 3,500 hectares,
depending on the geologic type of deposit. Holders of mining claims must pay a
fee (the "Argentine Annual Rental Fee") of the equivalent of $80 per year for
each mining claim. Mining claims grant the holder the right to exploit the
property for an indefinite period of time, subject to the obligation to pay the
Argentine Annual Rental Fee and to exploit the property in accordance with the
submitted work plan.
Royalties (the "Royalties") from production may be required to be paid to
the provincial government of the province in which the mine is located. The
Royalties differ from province to province, but do not exceed a maximum ceiling
of 3% of the higher of the mineral's market price or the mineral's sale price at
the mine site.
Concessions and mining claims are freely transferable. A transfer is
effective upon registration in the Provincial Register where title to the
concession or mining claim was first registered.
REGULATION. The development, production and sale of minerals is subject to
federal, state, provincial and local regulation in a variety of ways, including
environmental regulation and taxation. Federal, state, and local environmental
regulations generally have a significant effect on all companies, including the
Company, engaged in mining or other extractive activities, particularly with
respect to the permitting requirements imposed on such companies, the
possibilities of project delays, and the increased expense required to comply
with such regulations. The Company believes it is in substantial compliance
with all such regulations in all the jurisdictions in which it operates. The
Company's management does not believe the Company's ability to proceed with its
plans in a timely and commercially reasonable manner has been affected in a
materially adverse way or in a significantly different manner from other such
companies in the industry.
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The Company is subject to income taxes, state and local franchise taxes,
personal property taxes, and state severance taxes levied by various
governmental units in the countries in which the Company operates. State
severance taxes vary between the states and, within a single state, the amount
of tax, based on a percentage of the value of the mineral being extracted,
varies from mineral to mineral. The Company's operations are also subject to
taxation by each locality in which it owns mineral properties or does business.
The domestic exploration programs conducted by the Company are subject to
federal, state and local environmental regulations. A substantial portion of
the Company's mining claims are on U.S. public lands. The USFS and BLM
extensively regulate mining operations conducted on public lands. Most
operations involving the exploration for minerals are subject to existing laws
and regulations relating to exploration procedures, safety precautions, employee
health and safety, air quality standards, pollution of stream and fresh water
sources, odor, noise, dust, and other environmental protection controls adopted
by federal, state, and local governmental authorities as well as the rights of
adjoining property owners. The Company may be required to prepare and present
to federal, state, or local authorities data pertaining to the effect or impact
that any proposed exploration or production of minerals may have upon the
environment. All requirements imposed by any such authorities may be costly and
time-consuming, and may delay commencement or continuation of exploration or
production operations.
Future legislation and regulations are expected to continue to emphasize
the protection of the environment, and, as a consequence, the activities of the
Company may be more closely regulated to further the cause of environmental
protection. Such legislation and regulations, as well as future interpretation
of existing laws, may require substantial increases in capital and operating
costs to the Company and delays, interruptions, or a termination of operations,
the extent of which cannot be predicted.
Bills proposing major changes to the mining laws of the United States have
been considered by Congress. If these bills, which include royalty fees, were
enacted in their proposed form, they could have a significant effect on the
ownership and operation of unpatented mining claims in the United States,
including claims owned or held by the Company. Although it is not possible to
predict whether or in what form Congress might enact changes to the mining laws,
amendments to current laws and regulations governing operations and activities
of mining companies or more stringent implementation thereof could have a
material adverse impact on the Company.
Applicable laws and regulations require the Company to make certain capital
and operating expenditures to maintain current operations and initiate new
operations. The Company's estimate of expenditures required to comply with
applicable regulations are included in all of its budgets for its projects.
Although these
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costs are difficult to determine, the Company is not currently aware of any
expenditures that are required in excess of budgeted amounts. The Company incurs
expenditures for land reclamation undertaken in the normal course of operations
in compliance with federal and state land restoration laws and regulations.
Under certain circumstances, it may be required to close an operation until a
particular problem is remedied or to undertake other remedial actions. However,
the Company is not aware of the existence of any such circumstances at this
time.
GOLD PRICE. The future profitability of the Company's operations is
significantly dependent on the price of gold. The gold price has fluctuated
widely over time due to factors beyond the Company's control. These factors
included interest rates, rate of inflation, the strength of the U.S. dollar in
relation to other currencies, supply and demand, economic conditions, and
political turmoil. The Company cannot predict whether the gold price will
remain at a level at which its reserves can be mined at a profit.
INSURANCE. The gold mining industry is subject to risks of human injury,
environmental liability and loss of assets. The Company maintains insurance
coverage consistent with industry practice but can give no assurance that this
level of insurance can cover all risks of harm to the Company associated with
being involved in the mining business.
EMPLOYEES. As of March 20, 1997, the Company employed 32 persons on a
full-time basis, including ten U.S.-based employees and 22 employees in South
America. The Company considers its relations with employees to be excellent.
All employees are eligible to participate in the Company's stock option plans.
None of the Company's employees is covered by a collective bargaining agreement.
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ITEM 2. PROPERTIES
RESERVES AND MINERAL DEPOSITS
The following table shows gold reserves net to the Company at December 31,
1996:
Mineable Proven and Probable Reserves (1)
Ore Gold Grade Contained Gold
(Millions of tons) (oz/ton) (000 ozs)
------------------ ---------- --------------
Crown Jewel Project (2)(3) 3.915 0.182 712
- --------------
(1) The information was provided by Battle Mountain, the Company's joint
venture partner. The Company's proven and probable reserves are
reported as mineable (extractable) ore reserves. Reserves do not
reflect recovery losses in the milling process, but do include
allowance for dilution of ore in the mining process. Reserves have
been calculated based on a gold price of $375 per ounce.
Metallurgical recovery of 88% was estimated.
(2) While Crown has 100% ownership of the Crown Jewel Project, 54% is
subject to Battle Mountain's right to acquire an interest in the
property under the terms of the Crown Jewel Venture Agreement
("Venture Agreement") and, therefore, these ounces have not been
included above.
(3) In addition to the Company's 46% interest in the Crown Jewel Proven
and Probable Reserves, shown above, are mineral deposits of 277,000
tons at a grade of 0.182 ounces of gold per ton.
In addition to the above, Crown has identified mineral deposits on the Cord
Ranch, Kings Canyon, Manhattan, South Penn and Bongara properties.
The following discussion summarizes the primary mining properties in which
the Company has interests. Company management believes the properties described
below are favorable for mineral development, although there is no assurance that
any of the properties in which the Company has or may acquire an interest will
be economically viable.
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United States
The following map shows the location of the primary properties in which
Crown has interests in the western United States.
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CROWN JEWEL PROJECT
GENERAL. The Crown Jewel Project is a joint venture between the Company
and Battle Mountain, located on an approximate 8,000 acre property 24 miles
east of Oroville, Washington. The joint venture agreement provides for Battle
Mountain to fully fund exploration and development costs through the
commencement of commercial production to acquire its interest. No monies are
repayable by Crown to Battle Mountain for the costs Battle Mountain incurs prior
to commercial production. Battle Mountain is required to construct a facility
to treat a minimum of 3,000 tons of ore per day.
Crown discovered the Crown Jewel gold deposit in 1988, and has expended
approximately $3.4 million in land, acquisition and exploration costs. In March
1990, the Company signed an option letter agreement with Battle Mountain to form
a joint venture. Upon grant of the option the Company received $5.0 million
from Battle Mountain and an additional $5.0 million in January 1991 when the
option was exercised. Shortly thereafter, the Company and Battle Mountain
entered into a definitive joint venture agreement, which replaced the option
letter agreement, giving Battle Mountain the right to earn 51% in the Crown
Jewel deposit.
In May 1994, Crown and Battle Mountain reached an agreement resolving
certain contractual issues related to the Crown Jewel Venture Agreement. Under
the terms of the agreement, Battle Mountain paid to Crown $4,250,000 in cash
plus 435,897 shares of Battle Mountain common stock (valued at $4,250,000) in
exchange for (1) the right to earn an additional 3% (to 54%) in the first 1.6
million ounces of gold recovered from the Crown Jewel property and (2) release
of Battle Mountain from its obligation to make any of the quarterly $1.0 million
payments to Crown which might otherwise have become due because of startup
delays on the project. Production after 1.6 million ounces of gold are
recovered will be shared 51% by Battle Mountain and 49 percent by Crown. The
Company does not anticipate receiving additional mineral property proceeds from
Battle Mountain under the joint venture agreement.
GEOLOGY AND LAND. The Crown Jewel deposit occurs within a large skarn
system formed at the southern contact of the Buckhorn Mountain Cretaceous-aged
diorite-granodiorite pluton with Triassic-aged limestones and andesites. Both
the skarn system and ore body are relatively tabular and flat-lying in geometry.
The skarn system is compositionally zoned in relation to the intrusive pluton
with gold mineralization both concordant and crosscutting to the various skarn
assemblages.
The property is held by a combination of fee ownership, private mining
leases with options to purchase, state mining leases, with the balance being
unpatented mining claims. Royalties vary from 4%-5% net smelter return ("NSR")
royalties on certain private parcels, however, the ore body as currently defined
is not subject to royalties payable to any third party.
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RESERVES. The following table summarizes the Crown Jewel reserves as of
December 31, 1996, as provided by Battle Mountain:
Proven and Probable Reserves (100% basis) Contained
- --------------------------------------------- Ounces
Grade Contained Crown's
Tons (oz/ton) Ounces 46% Share
--------- -------- --------- ---------
Crown Jewel 8,510,000 0.182 1,549,000 712,000
All reserves are considered to be open pit mineable. The proven/probable
reserve was based on results from 765 drill holes totalling 307,038 feet. The
trial pit design utilized a 0.042 ounce per ton ("opt") gold cut off grade, a
waste to ore ratio of 10.7:1 and a metallurgical recovery factor of 88% for
gold. The assumed economic parameters applied to the design included mining
costs of $0.85 per ton of waste and ore. Processing costs were estimated at
$10.91 per ton based on a 3,000 ton per day facility. A $375 gold price was
used.
Based on the same cutoff grade and gold price, Battle Mountain has estimated
that other mineral deposits of 602,000 tons at 0.182 opt gold (100% basis) also
occur within the currently designed pit limits at Crown Jewel.
EXPLORATION. The Company began an exploration program at Crown Jewel in
mid-1988 and by the end of 1989 had drilled approximately 200 holes on the
property. Between March 1990 and December 1992, Battle Mountain drilled over
550 holes designed to both confirm and expand the known reserve. To date, only
500 acres of the approximate 2,000 acres of prospective skarn geology have been
drill-tested.
FEASIBILITY STUDY. In March 1992, the results of an independent
feasibility study commissioned by Battle Mountain were received by the Company.
Based on these results, Battle Mountain announced its decision to proceed with
development of the Crown Jewel gold deposit. The feasibility study confirmed
Battle Mountain's previous reserve estimate. The feasibility study also
estimated that approximately $40 million in capital would be required to fund
the project through to commercial production. The study estimated direct cash
production costs at $160 per ounce of gold produced. Based on current reserves,
the study indicated an approximate eight-year mine life with production
averaging 175,000 ounces (100% basis) of gold per year.
Further engineering and reserve studies by Battle Mountain since the
feasibility study was completed have generally confirmed the overall operating
cost estimates and mineable reserves of the original 1992 feasibility study.
However, capital costs are now estimated at approximately $65 million to achieve
commercial production. Battle Mountain will be responsible for funding these
additional capital costs.
15
<PAGE>
PERMITTING AND DEVELOPMENT. Battle Mountain submitted its original Plan of
Operations to the Washington State DOE and the USFS in January 1992. Several
supplemental plans that further clarified or refined the proposed operational
plans have been subsequently filed. The Draft Environmental Impact Statement
was released in June 1995.
In February 1997, the FEIS was filed by the USFS and the DOE. The FEIS
describes the environmental effects of the plan to construct and operate the
Crown Jewel mine, and alternatives to that plan. Also, in February 1997, the
Record of Decision for the FEIS was filed by the USFS and the BLM. The Record
of Decision documents the decision by the USFS and BLM to select the mining
alternative as presented in the FEIS. The alternative chosen by the USFS and the
BLM was the Proponent's (Battle Mountain) Alternative as described in the FEIS
and as modified by the Record of Decision. The decision to allow development of
the Crown Jewel mine is subject to appeal within the various jurisdictions for
up to 45 days from the date of publication of the decision.
Several appeals contesting the FEIS were filed with the USFS in March 1997.
The USFS has 45 days to either accept the appeals and revise the FEIS or deny
the appeals and affirm the FEIS. Most substantive permit applications necessary
to begin construction have been filed with the various local, state and federal
agencies and are undergoing review. This review process is expected to be
completed in July. Pending successful completion of the permit applications,
and the absence of an injunction, construction of the Crown Jewel project could
begin in the fall of 1997 and is forecast to take approximately 14 months.
Potential delays due to the appeals process, permit process or litigation are
difficult to quantify. See LEGAL PROCEEDINGS.
FINANCING. In order to acquire its 54% interest in the project, Battle
Mountain is currently funding all general property, exploration and development
costs through the start of commercial production, including the construction of
a mill facility capable of processing a minimum of 3,000 tons of ore per day.
No monies are repayable by Crown to Battle Mountain for the costs incurred
through the pre-commercial production stage. Upon the start of commercial
production Crown will be required to fund its 46% share of production costs. In
the event that Battle Mountain is unable to proceed with the project and must
relinquish its right to acquire a 54% interest, the Company would then make a
decision to either proceed with the project alone or seek a similar joint
venture situation with another major mining company. There is no assurance that
the Company could successfully pursue either strategy.
CORD RANCH PROJECT
GENERAL. In 1989, the Company entered into an exploration and mining
agreement with the surface and mineral rights owners of the
16
<PAGE>
34,000 acre Cord Ranch located in Elko County, Nevada. The lease agreement was
originally for a term of five years from August 31, 1989 and renewable
thereafter.
Following several amendments, the lease now requires a work commitment of
$300,000 in 1997. In addition, the agreement calls for non-recoupable minimum
annual payments of $150,000 in each of 1997 through 1999 and recoupable annual
advance royalty payments of $200,000 in 2000 and thereafter. Pursuant to the
amended agreement, the Company may terminate the lease agreement at any time and
avoid any future obligation or commitment, except reclamation.
Two property acquisitions immediately adjacent to the Cord Ranch were made
in 1990. The Dixie Creek project, consisting of 1,240 acres, was acquired under
agreements entered into in October 1990. At approximately the same time, the
Pinon Range property, consisting of 640 acres of unpatented claims, was
acquired.
In September 1994, Crown signed an agreement with a subsidiary of Cyprus
Amax Minerals Company ("Cyprus") giving Cyprus the right to earn a 70% interest
in Crown's Cord Ranch and adjacent gold properties. In June 1996, Cyprus
assigned its rights under the agreement to a subsidiary of Royal Standard
Minerals Inc. ("Royal Standard"). In order to vest in any of the Crown
properties, Royal Standard must fulfill the terms of the Cord lease agreement,
as amended, including the work commitment and property payments as specified.
In addition, should Royal Standard vest in the properties, it must provide
Crown's share of expenditures through the completion of a favorable feasibility
study, with such expenditures to be repaid from Crown's share of production from
the properties.
GEOLOGY. The Cord Ranch properties lie on the east side of the Pinon Range
and are situated on the Carlin gold trend, where nearly 4 million ounces of gold
are produced annually. Paleozoic strata underlying the western parts of the
property are the same formations hosting major deposits in other sections of the
trend. The area has sustained multiple periods of deformation and structural
preparation of the rocks is very good. Gold mineralization is generally
associated with jasperoid rocks.
MINERAL DEPOSITS. To date, over 400 drill holes have been completed on the
Cord Ranch project. In early 1994, the Company estimated the size of two gold
deposits, the Pinon Range and Dark Star deposits. Based on the results of 150
drill holes, the Pinon Range mineral deposit is estimated at 7.2 million tons
containing 0.025 opt of gold at a cutoff grade of 0.013 opt of gold.
At Dark Star, 61 drill holes completed by the Company during 1991-92 define
a mineral deposit totalling 7.5 million tons grading 0.020 opt of gold at a
cutoff grade of 0.013 opt of gold. Crown holds 50% of the mineral rights and
100% of the surface rights at Dark Star.
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<PAGE>
SNOWSTORM PROJECT
GENERAL. The 5,400 acre Snowstorm property lies at the northwestern
extension of the Carlin trend and the northeastern extension of the Getchell
trend in northern Nevada. The property consists of approximately 2,400 acres of
100%-owned unpatented mining claims and 3,000 acres of leased fee property. The
leased property carries a NSR royalty ranging from 3% to 5% depending upon the
price of gold. In February 1997, Crown signed a Letter of Intent allowing
Romarco Minerals, Inc. ("Romarco") to earn a 60% interest in the project.
Romarco must spend $2 million on exploration and make $275,000 in cash payments
to Crown over a four-year period to earn its interest. The agreement is subject
to a 45-day due diligence period.
GEOLOGY AND EXPLORATION. The geology of the project area consists of
Tertiary volcanic rocks that have undergone various degrees of hydrothermal
alteration. In 1996, Crown carried out a significant soil sampling and geologic
mapping program to define drill targets. Five drill holes totalling 4,400 feet
were completed. No economic gold mineralization was discovered, however, strong
alteration was observed in four of the drill holes.
OTHER PROPERTY INTERESTS
KENDALL MINE ROYALTY. In September 1991, Crown acquired Judith Gold
Corporation ("Judith"), whose primary asset is the Kendall property located near
Lewiston, Montana. Crown issued approximately 306,000 shares of common stock in
the transaction, representing 2.5% of Crown common stock then outstanding.
Canyon Resources Corporation ("Canyon") leases the Kendall property. Under
an agreement entered into by Judith and Canyon in 1987, Crown is entitled to
receive a 5% NSR royalty on production at the Kendall gold mine.
Mining of ore at the Kendall mine ceased at the end of 1994, with residual
heap leach gold production continuing through 1996. The mine produced
approximately 300,000 ounces of gold over its life, with Judith receiving the
equivalent of approximately 15,000 ounces over that period. The Kendall mine is
presently in reclamation.
LAMEFOOT MINE ROYALTY. In 1992, Crown acquired from various underlying
lease holders a 0.75% NSR royalty interest in the Lamefoot deposit for an
aggregate total of $306,000. This property lies approximately three miles from
the Kettle River Project ("KRP") mill, operated by Echo Bay Mines Ltd. ("Echo
Bay") in northeastern Washington state. Lamefoot ores represent the primary ore
feed source to the KRP mill through 1999, according to Echo Bay. Crown received
approximately $156,000 in royalties from Lamefoot during 1996. Crown expects to
receive approximately $200,000 in royalties from Lamefoot during 1997.
18
<PAGE>
KINGS CANYON. The Kings Canyon property in Utah consists of 9,870 acres
of unpatented mining claims and state leases. Crown holds a 100% interest in
the property, subject to a 1-4% NSR royalty to third parties.
The Company estimates the Kings Canyon property hosts a mineral deposit that
contains 6.8 million tons of material grading 0.030 opt of gold at a cutoff
grade of 0.013 opt gold. The gold occurs as sediment-hosted disseminated
mineralization in Paleozoic carbonate rocks.
In March 1995, Crown signed an Option Agreement with Sway Resources Ltd.
("Sway") on the property granting Sway the right to earn a 51% interest. Sway
later changed its name to Orion International Minerals Corporation ("Orion").
To earn its interest, Orion must spend $3.0 million on exploration over a five
year period and issue to Crown 200,000 shares of Orion common stock. Orion has
thus far issued 100,000 of these shares to Crown.
MANHATTAN. A 100% interest in the 540-acre Manhattan property in central
Nevada was acquired in 1989. In November 1994, the Company signed a purchase
option agreement with New Concept Mining, Inc. ("New Concept"), that allows New
Concept to purchase 100% of the property by making a series of payments, over a
four and one-half year period, totalling $500,000. Of that amount, $440,000
remains to be paid.
SOUTH PENN. The South Penn property, a 50/50 joint venture with Sutton
Resources Ltd., is located in northeastern Washington. The property consists of
approximately 320 acres of leased patented and unpatented claims and fee land.
Seventy drill holes define a mineral deposit of 278,000 tons grading 0.078
ounces of gold per ton using a cutoff grade of 0.040 opt of gold. In November
1995, Santa Fe Pacific Gold Company ("Santa Fe") optioned a 100% interest in the
property from the joint venture for a total consideration of $250,000 payable
over a three-year period, including $20,000 paid on signing of the agreement.
In August 1996, Santa Fe terminated its option and has no further rights in the
property.
19
<PAGE>
Peru and Argentina
The following map shows the location of the primary properties in which
Crown has interests in South America.
20
<PAGE>
BONGARA ZINC PROJECT, AMAZONAS DEPARTMENT, PERU
GENERAL. Pursuant to option agreements dated November 3, 1993 (the
"Bongara option") between the Company and a private Peruvian party, the Company
obtained the right to acquire up to a thirty-year leasehold interest in the
Bongara zinc properties situated in northern Peru. The Bongara option area
covers approximately 25,000 acres. The Company has acquired an additional
215,000 acres by staking. Most of this additional acreage is not subject to the
underlying Bongara option.
Aggregate option payments of $70,000 were made and required work
commitments of $750,000 were satisfied through 1996 in order to vest a 100%
interest in the Bongara option. The Company has exercised its option for the
conveyance of the property to the Company. The Bongara option also requires
semiannual advance minimum royalty payments, beginning with a $20,000 payment on
signing of the conveyance, increasing to a maximum of $50,000 three years
thereafter and until commercial production is achieved. These payments are
recoupable out of net sales value ("NSV") royalty payments made from commercial
production, should such production be achieved. The NSV royalty, which is
payable to the lessor, ranges from a minimum of 3%, subject to certain
deductions for treatment and transportation costs, at zinc prices below $0.75
per pound, to a maximum of 5% at prices above $1.00 per pound.
In December 1996, the Company signed an agreement with a subsidiary of
Cominco regarding the Bongara property, presently covering approximately 240,000
acres, which could, at Cominco's option, include the Bongara option property
upon its conveyance. Cominco has the right to earn a 60% interest in the
Bongara project by spending a minimum of $27,500,000 on exploration and
development and by making cash payments of $1,800,000 to Solitario over a four-
year period, as well as fully funding the project through a bankable feasibility
study. An initial cash payment of $250,000 was paid by Cominco in January 1997.
In addition to the cash payments and work commitments, Cominco has agreed to
finance Solitario's share of project development costs, subject to repayment,
after a production decision is made, should Solitario not secure third-party
financing.
LOCATION. The Bongara property is situated approximately 350 kilometers by
paved and gravel roads from the port city of Chiclayo to the southwest, in
northern Peru. Most of the property lies within 10 miles of an improved gravel
road with accesses to the coast. Travel within the project area is accomplished
by foot or horseback along a log-skidding trail. The property falls on the east
slope of the Andes at an average elevation of 2,000 meters.
GEOLOGY AND EXPLORATION. The property is underlain by northwest-trending
Jurrassic-Cretaceous-age carbonates, fine to coarse clastic sediments, and
shales. Mapping conducted by the Company indicates that zinc mineralization
occurs within carbonate rock units in which limestone has been significantly
altered to dolomite.
21
<PAGE>
Regional exploration has consisted of satellite imagery interpretation,
stream sediment geochemistry, geologic mapping and stratigraphic analysis,
detailed rock and soil geochemistry, and hand digging shallow prospect pits.
Based on the results of this work, several new areas of zinc mineralization were
identified in 1996.
In the fall of 1996, several significant outcroppings of zinc sulfide
mineralization were located in Florida Canyon in the south central portion of
the main Bongara claim block. Mineralization consists of at least four
stratigraphically stacked rock horizons, each approximately 20 feet thick and
containing zinc concentrations ranging from 7% to 16%. Within these high grade
zinc zones, lead values generally average 1.0% and silver approximately 1.0
ounce per ton. No estimates of the potential size of Florida Canyon
mineralization can be made until drilling commences.
MINERAL DEPOSITS. The main high-grade oxide zone consists of secondary
zinc and lead carbonates which occur as a lateritic capping on the limestone
surface. The maximum depth of the secondary zinc, as found in test pits, is 30
meters. To date, over 300 pits have been excavated over a length of 1,500
meters and a width of 300 meters on the Mina Grande and Mina Chica deposits.
The pits range in depth from 1 to 33 meters and are spaced at 25 and 50 meter
centers throughout the deposit.
Based on the assay results from these pits, a polygonal computer generated
deposit estimate was made for the Mina Grande and Mina Chica areas. Combined,
these deposits are estimated to contain 1.91 million metric tons grading 19.3%
zinc and 2.2% lead. A cutoff grade of 7.5% combined lead plus zinc and a
tonnage factor of approximately 16 cubic feet per ton were utilized.
YANACOCHA GOLD PROPERTY, CAJAMARCA DEPARTMENT, PERU
GENERAL. The Yanacocha property, located in northern Peru, is comprised of
one contiguous block of approximately 155,000 acres located in the center of the
Yanacocha district. A second smaller block of 10,000 acres is situated five
miles to the northwest.
In May 1995, the Company signed an agreement with Barrick Gold Corporation
("Barrick"), giving Barrick the right to earn a 60% interest in the property by
spending $6.25 million on exploration and making cash payments to the Company of
$1.0 million over a four- year period. Upon signing, Barrick paid the Company
$100,000 and completed a $1.0 million work commitment during the first year. In
June 1996, Barrick elected to terminate the agreement, thereby relinquishing its
interest in the property.
22
<PAGE>
LOCATION. The Yanacocha Gold District lies in northern Peru's Cajamarca
Department, 25 kilometers north of the historic provincial capital city of
Cajamarca (population: 100,000). The Yanacocha district is a 1.5 hour drive
north of Cajamarca on improved gravel roads. Elevations range from 2,800 meters
at Cajamarca to 4,200 meters at the highest points in and around Yanacocha.
GEOLOGY AND EXPLORATION. The property is located one mile north of South
America's largest gold mine (1996 production of 811,000 ounces of gold), Newmont
Mining Company's ("Newmont") 51%-owned and operated Yanacocha heap leach gold
mine. Total proven and probable reserves at the Yanacocha mine have been
reported by Newmont to be more than six million ounces of gold at the end of
1996. The Corona gold-copper porphyry deposit (three million ounces of gold and
one billion pounds of copper) lies one mile north of the Company's property
position.
Geologically, the Yanacocha district is situated in Tertiary-age volcanic
terrain which extends from Cajamarca to the Ecuadorian border, 350 kilometers to
the north-northwest. The volcanic rocks are underlain by Cretaceous basement
consisting of carbonate and quartzite sedimentary rocks intruded by Cretaceous
or Tertiary-age porphyritic intrusives. The gold mineralization present at
Newmont's Yanacocha mine occurs within zones of silicified volcanic rocks. The
gold and copper mineralization at the Corona deposit occurs in a typical Andean-
style gold-copper porphyry setting within an altered intrusive body.
Work conducted by the Company and Barrick has consisted of geological
mapping, rock and stream sediment geochemical sampling, helicopter-borne
geophysical surveying, ground induced-polarization surveying and core drilling.
This geological, geochemical and geophysical work indicates at least 14 areas
(size as yet undetermined) of alteration and mineralization in both volcanic and
sedimentary rocks.
Twenty-one drill holes totalling approximately 10,000 feet have been
completed by the Company and Barrick during the past 18 months. Only three
areas have been drill tested thus far. These are the Los Negritos, Shuito and
Chalhuaquero gold prospects, all situated in the south-central portion of the
claim block. Drilling has thus far intersected anomalous gold values and strong
alteration.
EL TIGRE GOLD PROPERTY, LAMBAYEQUE DEPARTMENT, PERU
GENERAL. Solitario acquired an option to earn a 60% interest in the 18,000
acre El Tigre gold property in northern Peru from Britannia Gold Corp.
("Britannia") in April 1996. To earn its interest, Solitario must spend
$900,000 on exploration and make $115,000 in cash payments to Britannia over a
four-year period. Solitario has already completed its first and second year
work commitments.
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<PAGE>
GEOLOGY AND EXPLORATION. The property is underlain by Jurassic volcanic
rocks that are intensely silicified in several locations. Surface work
indicates the silicified rocks contain anomalous gold values that extend under a
gravel pediment cover. Twenty-one drill holes were completed in 1996. Most of
the drill holes contained significant thicknesses of anomalous gold with the
best values being 113 feet grading 0.021 ounces of gold per ton. Additional
drilling is planned for 1997.
LAS CARACHAS, SAN JUAN PROVINCE, ARGENTINA
The 22,000 acre Las Carachas property was initially acquired in 1993 and
currently consists of three 100%-owned exploration cateos. One of the cateos
was acquired in early 1996 from Minas Argentinas, S.A., through an option grant
to earn a 100% interest, subject to a 2% NSR royalty, by spending $1,000,000
over a four-year period.
The property displays several intensely altered zones with anomalous gold
within Tertiary volcanic rocks. Areas of high base metal and silver values
occur peripheral to these structural zones. The Company drilled nine reverse
circulation holes totalling approximately 3,000 feet in 1995. Five of the holes
intersected sub-economic anomalous gold values.
In 1996, three core holes were completed on the Santa Rosa alteration zone.
Two of the three holes intersected strongly altered rocks over widths ranging
from 25 to 238 feet. These altered zones contained anomalous values of lead,
zinc, silver and gold.
CANADA ONDA, SAN LUIS PROVINCE, ARGENTINA
GENERAL. In August 1996, Solitario signed an agreement with a private
Argentine party to earn a 75% interest in the 5,000 acre Canada Onda property in
the Province of San Luis, Argentina. To earn its interest, Solitario must spend
$1,000,000 in exploration and make $250,000 in payments over a five-year period.
Solitario has already competed its first two years of work commitments.
GEOLOGY AND EXPLORATION. The property is underlain by Precambrian
metamorphic rocks intruded by Tertiary alkalic rocks. During the fall of 1996,
initial exploration work consisted of surface geologic mapping and geochemical
sampling, followed by reverse circulation drilling. Five holes totalling over
2,000 feet were completed. Two of the holes intersected 6.6 feet of high grade
gold mineralization in excess of 1.2 ounces of gold per ton.
GUALILAN PROPERTY, SAN JUAN PROVINCE, ARGENTINA
In 1993, the Company acquired rights to the 25,000 acre Gualilan property
from a private Argentine party. In 1994, the Company entered into an agreement
with Monarch Resources Investments Limited ("Monarch") entitling Monarch to earn
a 51% interest in the property by making cash payments of $275,000 to the
24
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Company and by spending $2,000,000 in exploration over a four-year period,
including an October 1, 1996 payment of $300,000 to the underlying owner. In
1996, Monarch terminated the agreement, whereby the Company also elected to
relinquish its interest in the properties.
CERRO NEGRO, SAN JUAN PROVINCE, ARGENTINA
The Cerro Negro property consists of two concessions totalling approximately
12,500 acres in the province of San Juan, northwestern Argentina. One
concession was leased from a private Argentine party in July 1994 and the other
was directly applied for by the Company. The primary geologic target on the
Cerro Negro property is a gold-copper bearing tourmaline breccia. An intensive
sampling program was carried out in late 1994 and drilling in 1995. Two of the
five drill holes encountered significant copper mineralization with 170 feet
grading 0.15% copper in one hole and 145 feet grading 0.22% copper in the other
hole.
EXPLORATION EXPENDITURE OVERVIEW
During 1996, the Company conducted exploration activities on various of its
properties incurring approximately $3.5 million in exploration expenditures,
including $2.7 million in South America.
Several of the Company's properties are subject to leases and/or options to
purchase. The Company's share of 1997 annual lease and rental obligations and
option payments, for properties it currently holds, totals $336,000 as
determined at December 31, 1996. Certain other mining claims and properties not
subject to leases were acquired by the Company either by deed or were located by
the Company. With respect to the claims and other properties acquired by deed
or located by the Company, the obligation required to hold the claims is to pay
ad valorem property taxes in the case of the patented mining claims and fee
land, and annual rental fees in the case of the unpatented mining claims and
concessions. See BUSINESS-TITLE.
1997 WORK COMMITMENTS
The Company's work commitments remaining to be fulfilled in 1997 is
$375,000, all of which is expected to be fulfilled by its joint venture
partners.
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<PAGE>
ANNUAL RENTALS
--------------
Annual Rentals
Rental on and Option Payments
Unpatented for Property Crown's Share
Claims and Subject to of Costs
Property Concessions Lease in 1997 in 1997(1)
- ---------- ----------- ------------------- -------------
U.S.
Crown Jewel $ 56,000 $ 45,000 $ -
Cord Ranch 12,000 154,000 -
Other 56,000 145,000 87,000
PERU
Yanacocha 126,000 - 126,000
Bongara 194,000 60,000 -
Other 28,000 25,000 53,000
ARGENTINA
Canada Onda - 20,000 20,000
Cerro Negro - 50,000 50,000
-------- -------- --------
TOTAL: $472,000 $499,000 $336,000
(1) Represents the Company's estimated share of rentals and option payments in
1997, based upon existing joint venture or leasing arrangements. (This estimate
does not include costs to be borne by other joint venturers.)
GLOSSARY OF MINING TERMS
COMMERCIAL PRODUCTION. Commercial production is defined in various ways in
mineral joint ventures and mineral leases. The term generally refers to the
first continuous production from a mining operation at or near the designed
capacity of the facilities, for a period of one or more months, signifying the
end of the development phase and the beginning of the mining phase of the
operations.
PATENTED MINING CLAIM. Patented mining claim means a lode or placer mining
claim for which the United States has conveyed fee title to the claim holder
pursuant to the Mining Law of 1872. To obtain fee title, the claimant must
prove the existence of a valuable mineral deposit within the boundaries of the
claim and meet certain other conditions.
UNPATENTED MINING CLAIM. Unpatented mining claim means a claim to a valuable
mineral deposit established by a company or individual on land owned by the
United States, under the Mining Law of 1872, giving the owner the possessory
right to develop and mine the mineral deposit. The term also includes non-
mineral millsites located pursuant to the Mining Law of 1872. Paramount title
to the land is owned by the United States.
LODE CLAIM. Lode claims have a maximum size of 1,500 feet by 600 feet and may
be established on veins or other mineralization in
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<PAGE>
solid rock. The holder of each unpatented mining claim must pay a "claim
maintenance fee" of $100 per claim on or before August 31 of each year through
1998. To locate new unpatented claims, the locator must pay a $100 per claim
maintenance fee for the initial assessment year and a $25 per claim location
fee. Until a valuable mineral deposit has been demonstrated to exist within an
unpatented mining claim, the claim may be subject to challenge by third parties
or by the United States.
PROVEN ORE RESERVES. That part of a mineral deposit that can be economically
and legally extracted or produced at the time of the reserve estimation. Proven
ore reserves are reserves for which (a) quantity is computed from dimensions
revealed in outcrops, trenches, workings or drill holes; grade and/or quality
are computed from the results of detailed sampling and (b) the sites for
inspection, sampling and measurements are spaced so closely and the geologic
character is so well defined that size, shape, depth and mineral content of
reserves are well established.
PROBABLE ORE RESERVES. That part of a mineral deposit that can be economically
and legally extracted or produced at the time of the reserve estimation.
Probable ore reserves are reserves for which quantity and grade and/or quality
are computed from information similar to that used for proven reserves, but the
sites for inspection, sampling and measurement are farther apart or are
otherwise less adequately spaced.
The degree of assurance, although lower than that for proven reserves, is
high enough to assume continuity between points of observation.
MINERAL DEPOSIT. Mineral deposit means a mineralized body which has been
physically delineated by drilling, underground tunneling, surface trenching and
other workings and has been found to contain mineralized material with
sufficient tonnage and grade to warrant further evaluation. Such a mineralized
body is not known to contain proven or probable ore reserves because sampling is
not yet sufficiently detailed to reliably predict that the mineralized rock can
be economically and legally mined. Any statement of the quantity of gold or
other mineral believed to be present in any mineral deposit should be regarded
as a preliminary estimate of the total quantity of the mineral present in the
mineralized body, subject to change after further exploration and development
work, and does not indicate that such quantity of mineral can be economically
extracted.
FEASIBILITY STUDY. A definitive engineering estimate or calculation of all
costs, revenues, equipment needs and production likely to be achieved when a
mine is developed. The study is used to define the economic viability of a
project and to support the search for project financing.
NET SMELTER RETURN ROYALTY. Net smelter return royalty is a royalty, payable in
cash or in kind, based on the actual gold sales price received or gold produced
less the cost of refining at an off-site refinery.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In March 1997, appeals of the Record of Decision for the Final
Environmental Impact Statement for the Crown Jewel Mine were filed with the USFS
by the following parties: (i) a joint appeal by the Okanogan Highlands
Alliance, Washington Environmental Council, Colville Indian Environmental
Protection Alliance, Washington Wilderness Coalition, Rivers Council of
Washington, and Sierra Club, Cascade Chapter; (ii) Confederated Tribes of the
Colville Reservation; (iii) Columbia River Bioregional Education Project; and
(iv) Kettle Range Conservation Group. The Regional Forester (the Appeals
Deciding Officer) has up to 45 days to either accept or deny the appeals. See
PROPERTIES - CROWN JEWEL PROJECT - PERMITTING AND DEVELOPMENT.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1996.
EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name and municipality Position with the Company and business
of residence Age experience within the last five years
- ---------------------- ----- ---------------------------------------
<S> <C> <C>
MARK E. JONES, III 57 Chairman of the Company since 1987,
Denver, Colorado Chief Executive Officer from 1987 to
1993 and President from September 1989
to November 1990; Chairman and Chief
Executive Officer of Solitario since
August 1993.
CHRISTOPHER E. HERALD 43 President of the Company since November
Golden, Colorado 1990; Executive Vice President from
January 1990 to November 1990; Presi-
dent of Solitario since August 1993.
JOHN A. LABATE 48 Chief Financial Officer since June
Englewood, Colorado 1995; Vice President - Finance and
Secretary/Treasurer of the Company
since January 1992; Vice President and
Secretary of Solitario since August
1993; Chief Financial Officer of
Solitario since April 1994.
DEBBIE W. MINO 44 Vice President - Investor Relations
Sugar Land, Texas of the Company since 1989.
WALTER H. HUNT 45 Vice President - Peru Operations of the
Cajamarca, Peru Company and Solitario since July 1994;
Superintendent, Technical Services,
from 1990 through July 1994 and Chief
Geologist from 1988 through 1990, Echo
Bay Minerals, Kettle River Operations.
</TABLE>
Officers of the Company are appointed by the Board of Directors.
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PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The common stock of the Company was approved for quotation on the NASDAQ
system and trading commenced on February 17, 1989 under the symbol CRRS. Since
August 1, 1989 the Company's common stock has been traded on the NASDAQ National
Market System. The Company's stock has been listed and traded in Canada on the
Toronto Stock Exchange since December 10, 1991, under the symbol CRO.
The following table sets forth the high and low sales prices on the NASDAQ
National Market System for the Company's common stock for the quarterly periods
from January 1, 1995 to December 31, 1996.
Prices (US$)
------------
High Low
----- -----
1995:
- -----
First Quarter $4.88 $3.38
Second Quarter 5.38 3.50
Third Quarter 5.63 4.38
Fourth Quarter 5.50 4.13
1996:
- -----
First Quarter 6.88 4.75
Second Quarter 6.50 5.13
Third Quarter 7.00 5.00
Fourth Quarter 6.75 5.38
Holders of common stock are entitled to receive such dividends as may be
declared by the Board of Directors. The Company has not paid any dividends on
its common stock and does not anticipate paying any dividends in the foreseeable
future.
At March 20, 1997, there were 1,226 record holders of the Company's common
stock.
29
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below for each of the
five years in the period ended December 31, 1996 and as of the years then ended
has been derived from the audited consolidated financial statements of the
Company (not all of which financial statements are presented herein). The
selected consolidated financial data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the audited consolidated financial statements and related notes
thereto included elsewhere in this report.
As of December 31,
Balance sheet data: ----------------------------------------------
(in thousands) 1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Total Assets $37,113 $36,664 $39,441 $28,882 $30,904
Long Term Debt 15,000 15,000 15,000 15,000 15,000
Working Capital 5,384 7,632 11,981 2,822 4,758
Stockholders' Equity 17,197 18,430 20,077 12,442 12,982
Years ended December 31,
Income statement ----------------------------------------------
data: (in thousands, 1996 1995 1994 1993 1992
except per share ------ ------ ------ ------ ------
amounts)
Revenues $ 803 $ 1,030 $10,603(2) $ 2,407 $10,204
Net Income (Loss) (1,571) (1,717) 3,505 (1,724) (8,647)(1)
Net Income (Loss)
per Share (0.12) (0.13) 0.27 (0.14) (0.69)
(1) The Company took a net $1.9 million after-tax charge related to its
withdrawal from the Kettle River Joint Venture.
(2) Crown received $8.5 million in 1994 from Battle Mountain.
30
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements for the years ended December 31, 1996, 1995
and 1994, included elsewhere in this report. The Company's financial condition
and results of operations are not necessarily indicative of what may be expected
in future years. The Company's assets in South America are held through
Solitario Resources Corporation ("Solitario"), a 60.4%-owned subsidiary as of
December 31, 1996.
Results of Operations
The Company has historically derived its revenues from the option and sale
of property interests, from royalty interests and from the sale of its share of
gold produced on its properties. Revenues from the option and sale of property
interests have consisted of a small number of relatively large transactions.
Such transactions have occurred and in the future are likely to occur, if at
all, at irregular intervals and have a significant impact on operating results
in the periods in which they occur.
The Company had a net loss of $1.6 million ($0.12 per share) in 1996
compared with a net loss of $1.7 million ($0.13 per share) in 1995 and net
income of $3.5 million ($0.27 per share) in 1994. Included in the 1994 results
was $8.5 million of mineral property option proceeds related to the Crown Jewel
Project.
Total revenues were $0.8 million in 1996 compared with $1.0 million in 1995
and $10.6 million in 1994. Non-recurring revenue items included in 1994 were
the $8.5 million of option proceeds and a $0.9 million gain on the sale of
marketable equity securities. In May 1994, Crown and Battle Mountain, its joint
venture partner in the Crown Jewel Project, reached an agreement resolving
certain contractual issues related to the Crown Jewel Venture Agreement, which
had been the subject of arbitration proceedings. Under the terms of the
agreement, Battle Mountain paid to Crown $4.25 million in cash plus 435,897
Battle Mountain shares (valued at $4.25 million) in exchange for (1) the right
to earn an additional 3% (to 54%) in the first 1.6 million ounces of gold
recovered from the Crown Jewel property and (2) release of Battle Mountain from
its obligation to make any of the quarterly $1.0 million payments to Crown which
might otherwise have become due because of startup delays on the project. There
were no such mineral option payments by Battle Mountain in 1996 or 1995, and the
Company does not anticipate receipt of other such payments from Battle Mountain
in the future. See PROPERTIES - CROWN JEWEL.
The Company's recurring revenues have been primarily derived from its
royalty interests and from interest income. Royalty income was $0.2 million in
1996, $0.5 million in 1995 and $0.9 million in 1994. Royalty income has
decreased due to the completion of mining at the Kendall mine in Montana, in
which the Company has a 5% royalty interest. The mine is now in reclamation.
31
<PAGE>
The Company's remaining royalty interest relates to the Lamefoot deposit at the
Kettle River mine in Washington. The Lamefoot deposit represents the primary
ore source at Kettle River for the next three years. Approximately $0.2 million
is expected to be received from this royalty interest in 1997.
Interest income was $0.4 million in 1996 compared with $0.6 million in 1995
and $0.3 million in 1994. Fluctuations are due to changes in the Company's
average invested cash balances, which have been impacted primarily by the option
proceeds received from Battle Mountain and by proceeds received from the sales
of stock of the Company's subsidiary, Solitario. See LIQUIDITY AND CAPITAL
RESOURCES.
General and administrative expenses in 1996 were $1.7 million compared with
$2.0 million in 1995 and $1.8 million in 1994. The lower expenses in 1996 are
the result of cost reduction efforts as well as one-time costs in 1995
associated with a merger proposal received and later rejected by the Company.
In early 1994, the Company incurred $0.6 million of legal and other costs
in connection with the arbitration proceedings with Battle Mountain related to
the Crown Jewel Project. There were no such costs in 1996 and 1995.
Interest expense was $1.0 million in each of 1996, 1995 and 1994 and
related entirely to the Company's convertible debentures. Included in interest
expense is amortization of deferred offering costs of $0.1 million in each of
1996, 1995 and 1994.
The Company regularly performs evaluations of its assets to assess the
recoverability of its investments in these assets. Writedowns relating to
exploration properties amounted to $0.5 million in each of 1996 and 1995, and
$1.7 million in 1994.
Minority interest in loss of subsidiary increased to $0.4 million in 1996
from $0.3 million in 1995 and $0.1 million in 1994. This variance occurred as
the result of higher losses in Solitario as well as higher minority
shareholdings of Solitario in 1996 and 1995.
In March 1995, the Financial Accounting Standards Board ("FASB"') issued
Statement of Financial Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 121 requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable, and establishes guidelines for determining
recoverability based on future net cash flows from the use of the asset and for
the measurement of the impairment loss. The Company adopted SFAS No. 121 in
1996. The adoption of SFAS No. 121 did not have a material effect on the
Company's results of operations or financial position.
32
<PAGE>
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation." The Company adopted this standard in 1996 by electing to
continue to account for such compensation consistent with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and disclosing
the pro forma effect on net income and earnings per share as if the new
accounting standard been applied. Had the Company accounted for its stock
options under SFAS No. 123, it would have recorded net losses of $2.1 million
($0.16 per share) in each of 1996 and 1995.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS
No. 128 establishes standards for computing and presenting earnings per share.
The statement is effective for financial statements issued in periods ending
after December 15, 1997, including interim periods; early application is not
permitted. The Company will adopt SFAS No. 128 in the fourth quarter of 1997
and will restate all prior period earnings per share data presented as required.
The Company has not yet determined the impact of adopting this statement on its
reported net income per share.
Liquidity and Capital Resources
Due to the nature of the mining business, the acquisition, exploration and
development of mineral properties requires significant expenditures prior to the
commencement of production. The Company has in the past financed its activities
through the sale of gold, the sale of securities, joint venture arrangements
(including project financing) and the sale of interests in its properties. To
the extent necessary, the Company expects to continue to use similar financing
techniques.
The Company's exploration and development activities and funding
opportunities, as well as those of its joint venture partners, may be materially
affected by gold price levels and changes in those levels. The market price of
gold is determined in world markets and is affected by numerous factors which
are beyond the Company's control.
Net cash used in operating activities was $1.6 million in 1996 compared
with uses of $2.0 million in 1995 and cash provided by operating activities of
$2.2 million in 1994. The primary differences from 1994 related to $4.3 million
of cash option payments received from Battle Mountain. The Company does not
expect to receive any further such payments from Battle Mountain.
Net cash used in investing activities in 1996 was $3.3 million, compared
with $2.7 million in 1995. Net cash provided by investing activities during
1994 amounted to $1.8 million. During 1994, the Company received $5.2 million
of proceeds on sales of marketable equity securities, including $4.9 million
from the sale of Battle Mountain common stock. There were no such receipts in
1996 and 1995. Cash uses in 1996 included mineral property additions for the
year of $3.5 million, including $2.7 million spent on properties in South
America through Solitario.
33
<PAGE>
The Company has budgeted $2.9 million for exploration in 1997, $2.0 million
of which is planned for South America. The Company's acquisition and
exploration programs in 1996, 1995 and 1994 have primarily been devoted to
properties in South America. As such, total foreign assets, as reported in the
consolidated balance sheet as of December 31, 1996, amounted to $8.1 million.
The Company is exposed to risks normally associated with foreign investments,
including political, economic and social instabilities, as well as foreign
exchange controls and currency fluctuations. Foreign investments may also be
subject to laws and policies of the United States affecting foreign trade,
investment and taxation which could affect the conduct or profitability of
future operations.
In January 1996, the Company sold 1,570,000 of its shares in Solitario,
receiving net proceeds of $2.6 million from the transaction. The Company
reinvested these proceeds by acquiring, through a private placement into
Solitario, 1,570,000 new shares of Solitario plus 1,570,000 warrants,
exercisable into shares of Solitario at Cdn$2.66 per share until February 1,
1998. There were no significant financing activities in 1995. Cash provided by
financing activities during 1994 amounted to $5.2 million. During 1994, $1.2
million was received from the exercise of stock options. However, the Company
does not anticipate significant exercises of stock options in the foreseeable
future. In July 1994, the Company's then 86%-owned subsidiary, Solitario,
completed an initial public offering of its common shares, receiving net
proceeds of $4.0 million.
Cash and cash equivalents amounted to $5.4 million at December 31, 1996,
compared to $7.6 million as of December 31, 1995. These funds are generally
invested in short-term interest-bearing deposits and securities, pending
investment in current and future projects. Included in cash and cash
equivalents at December 31, 1996 was $1.5 million which was held in Solitario.
Working capital at December 31, 1996 was $5.4 million compared with $7.6 million
at the end of 1995.
In February 1997, Crown sold 1,500,000 of its shares of Solitario in a
market transaction, generating net proceeds of approximately $4.4 million.
Later that month, Crown reinvested the proceeds into Solitario by acquiring
1,500,000 Solitario shares through a private placement into Solitario. Upon
completion of the private placement, Crown's interest in Solitario was
approximately 54.5%.
A significant part of Crown's business involves the review of potential
property acquisitions and continuing review and analysis of properties in which
it has an interest, to determine the exploration and development potential of
the properties. In analyzing expected levels of expenditures for work
commitments and lease obligations, Crown considers the fact that its obligations
to make such payments fluctuate greatly depending on whether, among other
things, Crown makes a decision to sell a property interest,
34
<PAGE>
convey a property interest to a joint venture, or allow its interest in a
property to lapse by not making the work commitment or payment required.
In 1994, the Company signed an agreement with Cyprus Amax Minerals Company
("Cyprus") giving Cyprus the right to earn a 70% interest in the Cord Ranch
property. In 1996, Cyprus assigned its rights under the agreement to Royal
Standard Minerals Inc. ("Royal Standard"). Pursuant to the agreement, Royal
Standard must, among other things, fulfill the work commitment requirement of
$300,000 in 1997 and make certain cash payments to the underlying property
owners. In addition, should Royal Standard earn its interest in the property,
it must provide Crown's share of expenditures until the completion of a
favorable feasibility study, with such expenditures to be repaid from Crown's
share of production from the property. If Royal Standard should elect to not
proceed with the project, the Company may either choose to or may be required to
abandon certain of these properties, which could have a material adverse impact
on the Company's results of operations and funding capabilities in future
periods. In particular, abandonment of the Cord Ranch property would result in
a property writedown of approximately $3.1 million.
The Company estimates its 1997 work commitments remaining to be fulfilled
on its existing properties will be approximately $0.4 million. All of these
work commitments are expected to be fulfilled by the Company's joint venture
partners. The Company's share of rental obligations and other property payments
for 1997 is estimated to be $0.3 million.
In December 1996, Solitario signed an agreement with a subsidiary of
Cominco Ltd. ("Cominco") on the Bongara project. Cominco has the right to earn
a 60% interest in the Bongara project by spending a minimum of $27.5 million on
exploration and development and by making cash payments of $1.8 million to
Solitario over a four-year period, as well as fully funding the project through
a bankable feasibility study. An initial cash payment of $250,000 was paid by
Cominco in January 1997. In addition to the cash payments and work commitments,
Cominco has agreed to finance Solitario's share of project development costs,
subject to repayment, after a production decision is made, should Solitario not
secure third-party financing.
The Company believes that its existing funds and projected sources of funds
will be sufficient to finance its currently planned exploration and other
operating activities, and mandatory debt repayments for the foreseeable future.
The Company's long-term funding opportunities and operating results are highly
dependent on the successful commencement of commercial production at the Crown
Jewel Project. Moreover, the Company believes that its ability to raise capital
in the future will be tied largely to successful permitting and development of
the Crown Jewel deposit. See PROPERTIES - CROWN JEWEL PROJECT - PERMITTING AND
DEVELOPMENT.
35
<PAGE>
The FEIS on the Crown Jewel project was issued to the public in February
1997. Several appeals of the FEIS were filed with the USFS in March 1997. The
USFS has up to 45 days to either accept the appeals and revise the FEIS or deny
the appeals and affirm the FEIS. Most substantive permit applications necessary
to begin construction have been filed with the various local, state and federal
agencies and are undergoing review. This review process is expected to be
completed in July. Pending successful completion of the permit applications,
and the absence of an injunction, construction could begin in the fall of 1997
and is forecast to take approximately 14 months to complete. There are no
assurances, however, that permits will be issued in a timely fashion or that
conditions contained in permits issued by the agencies will not be so onerous as
to preclude construction or operation of the project. See PROPERTIES - CROWN
JEWEL.
Uncertainties which exist with respect to timing of commercial production
at Crown Jewel, and the potential fluctuation in gold prices, could have a
material effect upon the Company's ability to fund its operating activities in
the long term. There is no assurance that such funding will or can be secured
on terms favorable to the Company.
36
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CROWN RESOURCES CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report.............................. F-1
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31,
1996 and 1995........................................... F-2
Consolidated Statements of Operations for the years
ended December 31, 1996, 1995 and 1994.................. F-3
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994............ F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994.................. F-5
Notes to Consolidated Financial Statements................. F-6
All schedules are omitted as the required information is included in the
financial statements or notes thereto or is not applicable. Financial
information on 50% or less owned entities is omitted, as the entities do not
meet the tests for inclusion.
The Company is not required to provide the selected quarterly financial
data specified in Item 302 of Regulation S-K because it does not meet the tests
outlined in Item 302(a)(5).
37
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Stockholders
of Crown Resources Corporation
Denver, Colorado
We have audited the consolidated balance sheets of Crown Resources Corporation
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Crown Resources Corporation and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, on January 1,
1994 the Company changed its method of accounting for investments in debt and
equity securities to conform with Statement of Financial Accounting Standards
No. 115.
DELOITTE & TOUCHE LLP
Denver, Colorado
March 18, 1997
F-1
<PAGE>
CROWN RESOURCES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------
1996 1995
------ ------
(in thousands)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,447 $ 7,623
Short-term investments 89 135
Bullion inventories 106 43
Prepaid expenses and other 377 424
-------- -------
TOTAL CURRENT ASSETS 6,019 8,225
MINERAL PROPERTIES, NET 30,229 27,267
OTHER ASSETS:
Debt issuance costs, net 477 579
Marketable equity securities 18 25
Other 370 568
-------- -------
865 1,172
-------- -------
$ 37,113 $36,664
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 345 $ 304
Other 290 289
-------- -------
TOTAL CURRENT LIABILITIES 635 593
LONG TERM LIABILITIES:
Convertible debentures 15,000 15,000
Deferred income taxes 1,140 857
Other - 47
-------- -------
16,140 15,904
MINORITY INTEREST IN CONSOLIDATED
SUBSIDIARY 3,141 1,737
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value;
authorized 20,000,000 shares;
none outstanding - -
Common stock, $0.01 par value;
authorized 50,000,000 shares;
issued and outstanding 13,211,484
and 13,171,659 shares 132 132
Additional paid-in capital 27,886 27,549
Accumulated deficit (10,813) (9,242)
Unrealized loss on marketable
equity securities (8) (9)
-------- -------
17,197 18,430
-------- -------
$ 37,113 $36,664
======== =======
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
CROWN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(in thousands, except per Years Ended December 31,
share amounts) ------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
REVENUES:
Mineral property option
proceeds $ 151 $ - $ 8,500
Royalty income 245 458 944
Interest income 407 572 291
Gain on sale of equity securities - - 868
------- ------- -------
803 1,030 10,603
------- ------- -------
COSTS AND EXPENSES:
Depreciation, depletion and
amortization 174 264 192
General and administrative 1,676 1,999 1,769
Interest expense 971 971 970
Asset writedowns 476 494 1,677
Arbitration costs - - 591
Other, net 33 (50) 65
------- ------- -------
3,330 3,678 5,264
------- ------- -------
INCOME (LOSS) BEFORE INCOME
TAXES AND MINORITY INTEREST (2,527) (2,648) 5,339
Income tax expense (benefit) (580) (661) 1,958
------- ------- -------
INCOME (LOSS) BEFORE MINORITY INTEREST (1,947) (1,987) 3,381
Minority interest in loss of subsidiary (376) (270) (124)
------- ------- -------
NET INCOME (LOSS) $(1,571) $(1,717) $ 3,505
======= ======= =======
INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE $ (0.12) $ (0.13) $ 0.27
======= ======= =======
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 13,193 13,160 13,161
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
CROWN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Gain/Loss
on
Common Stock Additional Narketable
(in thousands, except share ------------------ Paid-in Accumulated Equity
amounts) Shares Amount Capital Deficit Securities Total
------ ------ ---------- ----------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 12,741,555 $ 127 $ 23,345 $(11,030) $ - $ 12,442
Cumulative effect of change in
accounting principle - - - - 190 190
Sale of marketable equity securities - - - - (190) (190)
Issuance of shares:
Exercise of stock options 388,476 4 1,578 - - 1,582
For services 11,753 - 50 - - 50
In mineral property transactions 14,000 1 82 - - 83
Public offering of shares
of subsidiary - - 2,420 - - 2,420
Net income - - - 3,505 - 3,505
Net unrealized loss on
marketable equity securities - - - - (5) (5)
---------- ----- -------- -------- ----- --------
BALANCE, DECEMBER 31, 1994 13,155,784 132 27,475 (7,525) (5) 20,077
Issuance of shares:
Exercise of stock options 15,875 - 74 - - 74
Net loss - - - (1,717) - (1,717)
Net unrealized loss on
marketable equity securities - - - - (4) (4)
---------- ----- -------- -------- ----- --------
BALANCE, DECEMBER 31, 1995 13,171,659 132 27,549 (9,242) (9) 18,430
Issuance of shares:
Exercise of stock options 39,825 - 190 - - 190
Sale of shares of subsidiary,
net of tax of $924 - - 147 - - 147
Net loss - - - (1,571) - (1,571)
Net unrealized gain on
marketable equity securities - - - - 1 1
---------- ----- -------- -------- ----- --------
BALANCE, DECEMBER 31, 1996 13,211,484 $ 132 $ 27,886 $(10,813) $ (8) $ 17,197
========== ===== ======== ======== ===== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
CROWN RESOURCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
(in thousands) 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(1,571) $(1,717) $ 3,505
Adjustments:
Depreciation, depletion and amortization 276 366 294
Deferred income taxes (580) (661) 1,868
Asset writedowns 476 494 1,677
Securities received for mineral
property option proceeds - - (4,250)
Common stock issued for services - - 50
Gain on sale of marketable equity securities - - (868)
Minority interest (376) (270) (124)
Changes in operating assets and liabilities:
Bullion inventories (63) 64 62
Prepaid expenses and other 209 (104) (5)
Accounts payable and
other current liabilities 42 (168) (10)
------- ------- -------
Net cash provided by (used in)
operating activities (1,587) (1,996) 2,199
------- ------- -------
INVESTING ACTIVITIES:
Additions to mineral properties (3,467) (2,837) (3,187)
Receipts on mineral property transactions 101 125 -
Sale of short-term investments, net 46 14 24
Sale of marketable equity securities - - 5,178
Decrease in other liabilities - - (16)
Decrease (increase) in other assets (8) 16 (176)
------- ------- -------
Net cash provided by (used in)
investing activities (3,328) (2,682) 1,823
------- ------- -------
FINANCING ACTIVITIES:
Sale of common stock of subsidiary, net 2,610 - 4,003
Common stock issued under options
and warrants 129 48 1,205
------- ------- -------
Net cash provided by financing
activities 2,739 48 5,208
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (2,176) (4,630) 9,230
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,623 12,253 3,023
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,447 $ 7,623 $12,253
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Non-cash transactions:
Securities received for mineral
property transactions $ - $ 30 $ 4,250
Common stock issued in mineral
property transactions - - 83
Deferred tax benefit of non-qualified
stock option exercises 61 26 377
Cash paid (received) during the year for:
Income taxes - - 90
Interest 868 868 868
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
1. Business and Summary of Significant Accounting Policies:
Business
Crown Resources Corporation (the "Company" or "Crown") engages
principally in the acquisition, exploration and development of mineral
properties, which presently exist in the western United States and in
South America. Its properties in Peru and Argentina are held through
Solitario Resources Corporation ("Solitario"), a 60.4%-owned
subsidiary as of December 31, 1996.
Crown has historically derived its revenues from the option and sale
of property interests, from royalty interests and from the sale of its
share of gold produced from its properties.
Financial reporting
The consolidated financial statements include the accounts of Crown
and its wholly- and majority-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in
consolidation. Undivided interests in mineral properties are accounted
for by the proportionate consolidation method in accordance with
standard practice in the mining industry.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions 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 those estimates.
Cash equivalents
Cash equivalents include investments in highly liquid debt securities
with maturities of three months or less when purchased. Investments
with longer maturities at the date of purchase are classified as
short-term investments.
F-6
<PAGE>
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
1. Business and Summary of Significant Accounting Policies (Continued):
Inventories
Gold bullion received as in-kind royalties is recorded at market.
Inventories of $106,000 and $43,000 at December 31, 1996 and 1995,
respectively, consisted entirely of gold bullion.
Mineral properties
Leasehold costs are capitalized in cost centers and are depleted on
the basis of the cost centers' economic reserves (estimated
recoverable, proven and probable reserves) using the units-of-
production method. If there are insufficient economic reserves to use
as a basis for depleting such costs, they are expensed as a mineral
property write-off in the period in which the determination is made.
Economic reserves and related leasehold costs attributable to
properties under option to be acquired by third-parties are not
included in the depletion calculation.
Exploration costs are capitalized initially and are charged to
operations if an area is abandoned or deemed impaired. Exploration
costs on successful projects will be amortized by the units-of-
production method based on estimated economic reserves.
Marketable equity securities
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The Company's equity
securities are classified as available-for-sale. As a result of
implementing SFAS No. 115, the Company recognized a $190,000 increase
in stockholders' equity as of January 1, 1994. During the year ended
December 31, 1994, the Company realized a gain of $868,000 from the
disposition of securities. The cost of marketable equity securities
sold is determined by the specific identification method.
F-7
<PAGE>
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
1. Business and Summary of Significant Accounting Policies (Continued):
Foreign exchange
The United States dollar is the functional currency for all the Company's
foreign subsidiaries. Foreign currency gains and losses are included in the
results of operations in the periods in which they occur.
Revenue recognition
Royalty revenue is recognized when product is delivered in-kind or cash payments
are received.
Income taxes
The Company reports income taxes pursuant to SFAS No. 109, Accounting for Income
Taxes. Under SFAS No. 109, income taxes are provided for the tax effects of
transactions reported in the financial statements and consist of taxes currently
due plus deferred taxes related to certain income and expenses recognized in
different periods for financial and income tax reporting purposes. Deferred tax
assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred taxes also are recognized for
operating losses and tax credits that are available to offset future taxable
income and income taxes, respectively. A valuation allowance is provided if it
is more likely than not that some portion or all of the deferred tax assets will
not be realized.
Income (loss) per share
Net loss per share for the years ended December 31, 1996 and 1995 is based on
the weighted average number of common shares outstanding for the year; the
effect of stock options is not included in the computation of per share amounts
in 1996 and 1995 because it is anti-dilutive.
The calculation of income per share for the year ended December 31, 1994 is
based on the weighted average number of common shares outstanding, including
107,109 shares assumed to be outstanding related to common stock equivalents.
F-8
<PAGE>
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
1. Business and Summary of Significant Accounting Policies (Continued):
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 establishes
standards for computing and presenting earnings per share. The
statement is effective for financial statements issued in periods
ending after December 15, 1997, including interim periods; early
application is not permitted. The Company will adopt SFAS No. 128 in
the fourth quarter of 1997 and will restate all prior period earnings
per share data presented as required. The Company has not yet
determined the impact of adopting this statement on its reported net
income per share.
Employee stock compensation plans
The Company follows Accounting Principles Board Opinion ("APBO") No.
25, "Accounting for Stock Issued to Employees." The exercise price of
stock options issued to employees equals the market price of the stock
on the measurement date and, therefore, the Company does not record
compensation expense on stock options granted to employees.
Minority interest
Minority interest represents the minority stockholders' proportionate
interest in Solitario. The Company owned 60.4% and 66.8% of Solitario
at December 31, 1996 and 1995, respectively. See Note 9.
2. Mineral Properties:
United States
Crown Jewel Project
In March 1990, the Company entered into an agreement with Battle
Mountain Gold Company ("Battle Mountain") providing Battle Mountain an
option to enter into a joint venture to develop the Company's Crown
Jewel gold deposit in northeastern Washington. Battle Mountain paid
$5,000,000 on the grant of the option and since March 14, 1990 has
funded all exploration on Crown Jewel. On January 4, 1991, Battle
Mountain exercised its option by payment of an additional $5,000,000.
In order to acquire a 51% interest in the project, Battle Mountain is
required to fund all development and capital costs to com-mencement of
commercial production. Crown is not required to fund or repay any
costs related to the development and capital costs of the project
incurred prior to commercial production.
F-9
<PAGE>
2. Mineral Properties (Continued):
In May 1994, Crown and Battle Mountain reached an agreement resolving
certain contractual issues related to the Crown Jewel Venture
Agreement, which had been the subject of arbitration proceedings.
Under the terms of the agreement, Battle Mountain paid to Crown
$4,250,000 in cash plus 435,897 shares of Battle Mountain common stock
(market value $4,250,000) in exchange for (1) the right to earn an
additional 3% (to 54%) in the first 1,600,000 ounces of gold
recovered from the Crown Jewel property and (2) release of Battle
Mountain from its obligation to make any of the quarterly $1,000,000
payments to Crown which might otherwise have become due because of
startup delays on the project. The Company incurred costs of $591,000
in 1994 in connection with the arbitration proceedings related to
these quarterly payments.
Cord Ranch
The Company holds a lease for the right to explore and develop the
Cord Ranch prospect, a 34,000 acre ranch in the southern portion of
the Carlin Gold Trend of Nevada. By amendment, the lease now requires
a work commitment of $300,000 in 1997. In addition, the agreement
calls for non-recoupable minimum annual payments of $150,000 in each
of 1997 through 1999 and recoupable annual advance royalty payments of
$200,000 in 2000 and thereafter. See Note 6.
In September 1994, Crown signed an agreement with a subsidiary of
Cyprus Amax Minerals Company ("Cyprus") giving Cyprus the right to
earn a 70% interest in Crown's Cord Ranch and adjacent gold
properties. In June 1996, Cyprus assigned its rights under the
agreement to a subsidiary of Royal Standard Minerals Inc. ("Royal
Standard"). In order to vest in any of the Crown properties, Royal
Standard must fulfill the terms of the Cord lease agreement, as
amended, including the work commitment and property payments as
specified. In addition, should Royal Standard vest in the properties,
it must provide Crown's share of expenditures through the completion
of a favorable feasibility study, with such expenditures to be repaid
from Crown's share of production from the properties.
Peru
The Company holds exploration concessions or has filed applications
for concessions covering approximately 430,000 acres in Peru. These
applications are subject to normal administrative approvals and the
properties are subject to an annual rental of $2.00 per hectare
(approximately 2.47 acres per hectare) in June of each year.
F-10
<PAGE>
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
2. Minerals Properties (Continued):
In November 1993, the Company entered into option agreements (the
"Bongara option") covering a 25,000-acre zinc prospect in northern
Peru. Aggregate option payments of $70,000 were made and required
work commitments of $750,000 were satisfied through 1996 in order to
vest in the property. The Company has exercised its option for the
conveyance of the property to the Company.
The Bongara option also requires semiannual advance minimum royalty
payments, beginning with a $20,000 payment on signing of the
conveyance, increasing to a maximum of $50,000 three years thereafter
and until commercial production is achieved. These payments are
recoupable out of net sales value ("NSV") royalty payments made from
commercial production, should such production be achieved. The NSV
royalty, which is payable to the lessor, ranges from a minimum of 3%,
subject to certain deductions for treatment and transportation costs,
at zinc prices below $0.75 per pound, to a maximum of 5% at prices
above $1.00 per pound.
In December 1996, the Company signed an agreement with a subsidiary of
Cominco Ltd. ("Cominco") regarding the Bongara property, presently
covering approximately 240,000 acres (the "Bongara project"), which
could, at Cominco's option, include the Bongara option property upon
its conveyance. Cominco has the right to earn up to a 60% interest in
the Bongara project by spending a minimum of $27,500,000 on
exploration and development and by making cash payments of $1,800,000
to Solitario over a four-year period, as well as fully funding the
project through a bankable feasibility study. An initial cash payment
of $250,000 was paid by Cominco in January 1997. In addition to the
cash payments and work commitments, Cominco has agreed to finance
Solitario's share of project development costs, subject to repayment,
after a production decision is made, should Solitario not secure
third-party financing.
In May 1995, the Company signed an agreement with Barrick Gold
Corporation ("Barrick") on its 155,000 acre Yanacocha gold property in
northern Peru. The agreement gave Barrick the right to earn a 60%
interest in the property by spending $6,250,000 in exploration and
making cash payments of $1,000,000 to the Company over a four-year
period. In June 1996, Barrick elected to terminate the agreement,
thereby relinquishing its interest in the property.
F-11
<PAGE>
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
2. Minerals Properties (Continued):
Argentina
The Company holds exploration rights or has filed applications for
rights covering approximately 650,000 acres primarily in six provinces
of Argentina. These exploration rights are granted by the provincial
governments, which have the right to impose up to a maximum 3% gross
royalty on production. Additionally, certain of these properties may
be subject to a royalty to a private company which, when combined with
provincial royalties, could increase the applicable aggregate royalty
to a maximum of 4%.
In 1994, the Company entered into an agreement with Monarch Resources
Investments Limited ("Monarch") entitling Monarch to earn a 51%
interest in the Company's Gualilan properties by spending $2,000,000
in exploration and making cash payments of $275,000 to the Company
over a four-year period. In 1996, Monarch terminated the agreement,
whereby the Company elected to relinquish its interest in the
properties.
Asset Writedowns
The Company regularly performs evaluations of its assets to assess the
recoverability of its investments in these assets. Upon determining
that certain properties did not have sufficient potential for economic
mineralization, the Company recorded writedowns relating to
exploration properties of $476,000, $494,000 and $1,677,000 in 1996,
1995 and 1994, respectively.
Mineral property costs for all the Company's properties are comprised
of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
(in thousands)
Land and leasehold costs $15,293 $14,989
Exploration costs 15,760 13,102
------- -------
31,053 28,091
Less accumulated depreciation,
depletion and amortization 824 824
------- -------
$30,229 $27,267
======= =======
</TABLE>
F-12
<PAGE>
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
2. Minerals Properties (Continued):
Land, leasehold and exploration costs related to mineral properties
for which exploration activities had not yet identified the presence
of economic reserves totaled $16,736,000 and $13,879,000 at December
31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, the carrying value of the Crown Jewel
Project amounted to $13,493,000 and $13,388,000 respectively. The
Crown Jewel Project represents the Company's total proven and probable
gold reserves and its only property in development.
Included in the consolidated balance sheet at December 31, 1996 and
1995 are net assets of the Company's foreign operations, located in
Argentina and Peru, in the amount of $8,102,000 and $6,241,000,
respectively.
In March 1995, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable, and establishes guidelines for
determining recoverability based on future net cash flows from the use
of the asset and for the measurement of the impairment loss. The
Company adopted SFAS No. 121 in 1996. The adoption of SFAS No. 121
did not have a material effect on the Company's results of operations
or financial position.
3. Convertible Debentures:
On August 27, 1991 the Company completed a European offering for $15
million of 5 3/4% Convertible Subordinated Debentures due 2001
("Debentures"). The Debentures are convertible into approximately
1,523,000 shares of Crown common stock at $9.85 per share, and are
redeemable at the option of the Company on certain terms and
conditions. Interest on the Debentures is payable semiannually in
arrears, each February and August. Neither the Debentures nor the
common stock issuable upon conversion of the Debentures is registered
under the Securities Act of 1933. Debt offering costs are being
amortized over the life of the Debentures.
F-13
<PAGE>
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
4. Income Taxes:
The Company's income tax expense (benefit) from continuing operations
consists of the following:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
------- ------- -----
<S> <C> <C> <C>
Deferred:
U.S. $ 336 $ 213 $ 79
Foreign 46 54 270
Current - U.S. - - 90
Operating loss and credit
carryovers:
U.S. (900) (899) 1,655
Foreign (62) (29) (136)
----- ----- ------
Income tax expense (benefit) $(580) $(661) $1,958
===== ===== ======
</TABLE>
Consolidated income (loss) before income taxes includes losses from
foreign operations of $618,000, $486,000, and $75,000 in 1996, 1995
and 1994, respectively.
Deferred income taxes result from temporary differences in the timing
of income and expenses for financial and income tax reporting
purposes. The primary components of deferred income taxes result from
exploration and development costs, depreciation, depletion and
amortization expenses, the recognition of in-kind royalty payments,
and property abandonments.
During 1996, 1995 and 1994 the Company recognized income tax
deductions of $180,000, $77,000, and $1,108,000, respectively, from
the exercise of non-qualified stock options. Stockholders' equity has
been credited in the amounts of $61,000, $26,000, and $377,000,
respectively, for the income tax benefits of these income tax
deductions. Also during 1996, the Company purchased and sold shares of
Solitario. Stockholders' equity has been charged in the amount of
$924,000 for the income tax expense associated with the purchase and
sale transactions.
F-14
<PAGE>
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
4. Income Taxes (Continued):
The net deferred tax liabilities in the accompanying December 31, 1996
and 1995 balance sheets include the following components:
<TABLE>
<CAPTION>
(in thousands) 1996 1995
-------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss (NOL)
carryovers................... $ 6,391 $5,727
Alternative minimum tax (AMT)
credit carryovers............ 325 325
Other 108 183
Valuation allowance (1,049) (606)
------- ------
Deferred tax assets 5,775 5,629
------- ------
Deferred tax liabilities:
Exploration and development
costs 6,420 6,099
Depreciation, depletion and
amortization 448 373
Other 47 14
------- ------
Deferred tax liabilities 6,915 6,486
------- ------
Net deferred tax liabilities $ 1,140 $ 857
======= ======
</TABLE>
A reconciliation of expected federal income taxes on income from
continuing operations at statutory rates with the expense (benefit)
for income taxes is as follows:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Income tax at statutory
rates $(859) $(900) $1,815
Nondeductible foreign
expenditures 67 75 270
Excess percentage depletion - (20) (50)
Foreign mining incentives (202) (324) (196)
Change in valuation allowance 443 523 83
Other (29) (15) 36
----- ----- ------
Income tax expense (benefit) $(580) $(661) $1,958
===== ===== ======
</TABLE>
At December 31, 1996, the Company has unused U.S. NOL carryovers of
approximately $15,580,000 which begin to expire in 2004. In addition,
the Company has approximately $325,000 of U.S. AMT credit carryovers
which can be carried forward indefinitely. The Company also has
Argentina and Peru NOL
F-15
<PAGE>
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
4. Income Taxes (Continued):
carryovers at December 31, 1996 of approximately $3,171,000 and
$271,000, respectively, which begin to expire in 1999 and 2000,
respectively.
At December 31, 1996, the Company has an unrecognized deferred tax
liability of $77,000 related to the investment in a domestic
subsidiary which is not consolidated for U.S. income tax purposes, for
which the carrying amount exceeds tax basis. The Company expects to
recover its investment through tax-free means.
5. Fair Value of Financial Instruments:
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires the determination of fair value for certain of the Company's
financial assets and liabilities. It defines the fair value of a
financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale.
For certain of the Company's financial instruments, including cash and
cash equivalents, short-term investments, accounts payable and other
accrued liabilities, the carrying amounts approximate fair value due
to their short maturities. The Company's marketable equity securities
are carried at their estimated fair value, based on quoted market
prices. At December 31, 1996, the estimated fair value of the
Company's Debentures was $12,750,000, based on quoted market prices.
6. Commitments and Contingencies:
In acquiring its interests in minerals claims and leases, the Company
has entered into lease agreements which generally may be canceled at
its option. The Company is required to make work commitments and
minimum rental payments in order to maintain its interests in certain
claims and leases. The Company estimates its 1997 mineral property
rentals and option payments to be approximately $971,000. Based upon
existing joint venture or leasing arrangements, the Company's share of
these costs is approximately $336,000.
The Company has a defined-contribution retirement plan covering all
full-time U.S. employees. The plan provides for Company matching, at
the rate of 75%, of employee savings contributions of up to 9% of
compensation, subject to ERISA limitations. The cost of Company
contributions in 1996, 1995 and 1994 was $48,000, $49,000 and $50,000,
respectively.
F-16
<PAGE>
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
6. Commitments and Contingencies (Continued):
The Company leases office space under non-cancelable operating leases
providing for minimum annual rent payments as follows: $64,000 in
1997, $73,000 in 1998, $75,000 in 1999, $77,000 in 2000, and $39,000
in 2001. Rent expense for all leases was $60,300, $122,000 and
$135,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
7. Stock Option Plans:
Under the Company's 1988 Stock Benefit Plan ("1988 Plan"), the Board
of Directors may (a) grant incentive stock options, as defined in
Section 422A of the Internal Revenue Code of 1986, as amended, to any
employee of the Company or to any employee of any parent or subsidiary
of the Company; (b) grant options other than incentive stock options
(non-qualified stock options); (c) grant stock appreciation rights or
cash bonus rights; (d) award stock bonuses; and (e) grant stock
purchase rights and sell stock subject to certain restrictions.
Up to 1,500,000 shares of the Company's common stock may be issued
under the 1988 Plan. As of December 31, 1996, 608,121 shares were
reserved for future issuance under the 1988 Plan. All stock options
that have been granted under the 1988 Plan have been issued at the
market price of the common stock at the date of the grant.
On June 27, 1991, the Company's shareholders approved the Crown
Resources Corporation 1991 Stock Incentive Plan ("1991 Plan"). The
Board of Directors has reserved 1,500,000 shares of Crown common stock
for grants under the 1991 Plan.
Generally, the terms and conditions of the 1991 Plan are similar to
those of the 1988 Plan described above, except that members of the
Board of Directors are eligible only to receive formula grants of non-
qualified stock options. Each member of the Board of Directors who is
also an employee of Crown or any parent or subsidiary of Crown will be
entitled to receive, automatically, an award of non-qualified stock
options on grant dates defined in the 1991 Plan. Each option will
cover a number of shares determined by dividing the employee-
director's annual base compensation rate on the grant date by three.
Each director who is not an employee will receive an award of non-
qualified stock options covering 10,000 shares of Crown common stock.
F-17
<PAGE>
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
7. Stock Option Plans (Continued):
Options granted under the 1991 Plan are granted at the market price of
the common stock at the date of grant, except for non-qualified
options granted to non-directors, which price cannot be less than the
average price for the five business days immediately preceding the
date of grant.
In addition to shares issued pursuant to stock option exercises,
11,753 shares were issued in 1994 under the 1991 Plan to employees in
lieu of cash compensation. As of December 31, 1996, 1,384,924 shares
were reserved for future issuance under the 1991 Plan.
The activity in the 1988 Plan for the three years ended December 31,
1996 is as follows:
1996 1995 1994
------------------- --------------- ------------------
Weighted Weighted Weighted
Average Average Average
Options Price Options Price Options Price
------------------- --------------- ------------------
Outstanding,
beginning
of year...... 280,600 9.25 607,017 8.20 971,993 6.29
Granted........ 60,000 5.63 - -
Exercised...... - - (364,976) 3.10
Forfeited - - -
Expired........ (280,600) 9.25 (326,417) 7.31 -
-------- -------- --------
Outstanding,
end of year 60,000 5.63 280,600 9.25 607,017 8.20
======== ======== ========
Exercisable,
end of year 15,000 5.63 280,600 9.25 607,017 8.20
======== ======== ========
The options outstanding under the 1988 Plan have an exercise price of $5.63 and
weighted average remaining contractual life of 4.1 years.
F-18
<PAGE>
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
7. Stock Option Plans (Continued):
The activity in the 1991 Plan for the three years ended December 31,
1996 is as follows:
1996 1995 1994
------------------ --------------- --------------
Weighted Weighted Weighted
Average Average Average
Options Price Options Price Options Price
------------------ --------------- --------------
Outstanding,
beginning
of year 1,145,548 5.17 859,748 5.63 576,082 5.31
Granted 241,575 5.70 301,675 3.75 307,166 6.33
Exercised (39,825) 3.24 (15,875) 3.02 (23,500) 3.09
Forfeited - - -
Expired - - -
--------- --------- -------
Outstanding,
end of year 1,347,298 5.32 1,145,548 5.17 859,748 5.63
========= ========= =======
Exercisable,
end of year 1,202,048 5.36 947,473 5.35 682,998 5.72
========= ========= =======
Range of Weighted Average Weighted
Exercise Amount Remaining Average
Prices Outstanding Contractual Life Exercise Price
- -------- ----------- ---------------- --------------
$2.99-4.63 531,891 2.1 $ 3.45
$5.63-7.25 815,407 1.9 $ 6.52
Options granted under both plans generally expire five years from the
date of grant.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock
Based Compensation." The Company elected to continue to account for
such compensation consistent with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and to disclose the
pro forma effect on net income and earnings per share as if the new
accounting standard been applied.
Pro forma information has been computed as if the Company had
accounted for its stock options under the fair value method of SFAS
No. 123. The fair values of these options were estimated at the date
of grant using a Black-Scholes option pricing model with the following
assumptions for 1996 and 1995, respectively: risk-free interest rates
of 5.69% and 7.06%; dividend yields of 0%; volatility factors of the
F-19
<PAGE>
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
7. Stock Option Plans (Continued):
expected market price of the Company's common stock of 53% and 55%;
and a weighted average expected life of the options of 4 years. The
weighted average fair values of the options granted are estimated at
$2.71 and $1.92 per share in 1996 and 1995, respectively.
Had the Company accounted for its stock options under the fair value
method of SFAS No. 123, the following results would have been
reported:
<TABLE>
<CAPTION>
(In thousands, except
per share amounts) 1996 1995
-------- --------
<S> <C> <C>
Net loss
As reported $(1,571) $(1,717)
Pro forma (2,161) (2,125)
Net loss per share
As reported $ (0.12) $ (0.13)
Pro forma (0.16) (0.16)
</TABLE>
8. Stockholders' Equity:
Crown is authorized to issue 20,000,000 shares of $0.01 par value
preferred stock and has issued, to a subsidiary, 1,000,000 shares of
nonconvertible preferred stock which is eliminated in consolidation.
On July 25, 1995, the Company adopted a shareholder rights plan
pursuant to which rights ("Rights") to acquire shares of Series B
Preferred Stock were distributed to shareholders of the Company, with
the right to buy 1/100 share of Series B Preferred Stock for each
common share held, at an initial exercise price of $25.00. The Company
also designated 500,000 shares of preferred stock as Series B
Preferred Stock with each 1/100 share having economic terms
substantially equivalent to one common share.
Generally, the Rights will become exercisable if a shareholder or
group of shareholders becomes the beneficial owner of or announces the
intention to acquire common shares of 15 percent or more of the
outstanding common shares of the Company. If the Rights become
exercisable, each Right (other than Rights held by the acquiring
person or group) will entitle the holder to purchase, at the exercise
price, common stock having a market value equal to twice the exercise
price.
F-20
<PAGE>
CROWN RESOURCES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995 and 1994
8. Stockholders' Equity (Continued):
In July 1994, Solitario completed an initial public offering of its
common shares. Net proceeds of the public offering amounted to
$4,003,000. The gain related to the sale of shares of Solitario,
$2,420,000, has been recorded in additional paid-in capital.
In January 1996, the Company sold 1,570,000 of its shares in
Solitario, receiving net proceeds of $2,566,000 from the market
transaction. The Company reinvested the proceeds by acquiring,
through a private placement into Solitario, 1,570,000 new shares of
Solitario plus 1,570,000 warrants, exercisable into shares of
Solitario at Cdn$2.66 per share until February 1, 1998. The gain on
the sale of shares of Solitario, $1,071,000 has been recorded in
additional paid-in capital, net of taxes of $924,000. For purposes of
the statement of cash flows, the sale and subsequent repurchase of
shares of Solitario have been treated as a single financing activity.
During 1996, previously issued warrants to purchase 553,686 Solitario
shares at Cdn$2.50 (approximately $1.82) per share were exercised,
including 529,000 warrants exercised by the Company. Net proceeds to
Solitario from third party exercises were approximately $44,000.
In August 1995, the Company advanced funds to Solitario pursuant to a
convertible note in the principal amount of $1,500,000. The 7.5% note
is due in full by August 25, 1997 and provides for convertibility of
the principal amount into shares of Solitario at a conversion price of
$1.196 per share at any time until August 25, 1997.
9. Subsequent Event:
In February 1997, the Company sold 1,500,000 of its shares in
Solitario, receiving net proceeds of $4,448,000 from the market
transaction. The Company reinvested the proceeds by acquiring,
through a private placement into Solitario, 1,500,000 new shares of
Solitario plus 1,500,000 warrants, exercisable into shares of
Solitario at Cdn$4.83 per share until February 27, 1999. Upon
completion of the private placement, the Company's interest in
Solitario was approximately 54.5%.
F-21
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors.
The information with respect to directors required under this item is
incorporated herein by reference to the table set forth under the section
captioned ELECTION OF DIRECTORS in the Company's Proxy Statement in connection
with the annual meeting of shareholders to be held on June 19, 1997, filed with
the Securities and Exchange Commission pursuant to Section 14(a) of the
Securities Exchange Act of 1934.
(b) Executive Officers.
The information with respect to executive officers required under this item
is incorporated herein by reference to Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required under Item 11, Item 12 and Item 13 is incorporated
herein by reference to the sections entitled EXECUTIVE COMPENSATION, SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT and EXECUTIVE
COMPENSATION, respectively, in the Company's Proxy Statement in connection with
the annual meeting of shareholders to be held June 19, 1997, filed with the
Securities and Exchange Commission pursuant to Section 14(a) of the Securities
Exchange Act of 1934.
38
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. Consolidated Financial Statements: Index on page 37 of
this Report.
2. Exhibits. The exhibits as indexed on pages 44 through 47 of this
Report are included as a part of this Form 10-K.
(b) Reports on Form 8-K:
None.
Exhibit
Number Description
- ------- -----------
3.1 The Company's Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to Registration Statement on Form S-4, Commission File
No. 33-25033 (the "1989 S-4 Registration Statement")).
3.2 The Company's Bylaws (incorporated by reference to Exhibit 3.2 to the
1989 S-4 Registration Statement).
3.3 Statement of Rights and Preferences of Series A Nonconvertible
Preferred Stock (issued to a subsidiary) as filed with the
Secretary of State, State of Washington, which forms part of the
Company's Articles of Incorporation (incorporated by reference to
Exhibit 3.3 to the Company's Form 10-K for the year ended December
31, 1989).
4.1 Form of Rights Agreement, dated as of July 25, 1995, between the
Company and American Stock Transfer & Trust Company (incorporated
by reference to Exhibit 4.1 to the Company's Form 8-K dated July
25, 1995).
10.1 1988 Stock Benefit Plan of the Company (incor-porated by reference to
Exhibit 10.11 to Amendment No. 2 to the Registration Statement).
10.2 1991 Stock Incentive Plan of the Company (incorporated by reference
to Exhibit 10.13 to Crown Resources Corporation's Registration
Statement on Form S-4 dated May 17, 1991, Commission file no. 33-
40642 (the "1991 S-4 Registration Statement")).
39
<PAGE>
10.3 Crown Jewel Venture Agreement, dated effective January 4, 1991,
between Crown Resources Corporation, Crown Resource Corp. of
Colorado, Gold Texas Resources U.S., Inc., and Battle Mountain Gold
Company (incorporated by reference to Exhibit 10.10 to the 1991 S-4
Registration Statement).
10.4 Agreement and Plan of Merger, dated April 16, 1991, between Crown
Resources Corporation, Crown Resources Property Corporation and
Judith Gold Corporation (incorporated by reference to Exhibit 2.1
to Crown Resources Corporation's Form 8-K dated April 16, 1991).
10.5 Mining Lease, dated September 1, 1987, between Judith Gold
Corporation and Canyon Resources Corporation (incorporated by
reference to Exhibit 10.14 to the 1991 S-4 Registration Statement).
10.6 Settlement Agreement, dated September 29, 1992, between Battle
Mountain Gold Company, Crown Resource Corp. of Colorado, Keystone
Surveys, Inc., and Spenst M. Hansen (incorporated by reference to
Exhibit 10.18 to Crown Resources Corporation's Form 10-K for the
year ended December 31, 1992).
10.7 Mutual General Release and Settlement Agreement, dated September 29,
1992, between Crown Resources Corporation and its subsidiary, Crown
Resource Corp. of Colorado, Centurion Mines Corp., and Royal
Minerals, Inc. (incorporated by reference to Exhibit 10.19 to Crown
Resources Corporation's Form 10-K for the year ended December 31,
1992).
10.8 First Amendment to Mining Agreement, dated October 25, 1993, between
Crown Resource Corp. of Colorado and United States National Bank of
Oregon, as Trustee for William Cord Pereira, Virginia Lee Pereira,
Philip Kirk Pereira, Patrick Clay Pereira and Susan Michele Pereira
(incorporated by reference to Exhibit 10.20 to Crown Resources
Corporation's Form 10-K for the year ended December 31, 1993).
10.9 Option Contract for Conveyance between Crown Resource Corp. of
Colorado and Compania Minera del Amazonas S.A. (Bongara-Even)
(incorporated by reference to Exhibit 10.21 to Crown Resources
Corporation's Form 10-K for the year ended December 31, 1993).
10.10 Agreement dated as of May 17, 1993, between Sovereign Gold Company
(Argentine), Ltd. and Crown Resources Corporation (incorporated by
reference to Exhibit 10.23 to Crown Resources Corporation's Form
10-K for the year ended December 31, 1993).
40
<PAGE>
10.11 Second Amendment to Mining Agreement, dated April 28, 1994, between Crown
Resource Corp. of Colorado and United States National Bank of
Oregon, as Trustee for William Cord Pereira, Virginia Lee Pereira,
Philip Kirk Pereira, Patrick Clay Pereira and Susan Michele Pereira
(incorporated by reference to Exhibit 10.1 to Crown Resources
Corporation's Form 10-Q for the quarter ended March 31, 1994).
10.12 Settlement Agreement, dated May 6, 1994, between Crown Resources
Corporation, Crown Resource Corp. of Colorado, Gold Texas Resources
U.S., Inc. and Battle Mountain Gold Company (incorporated by
reference to Exhibit 10.2 to Crown Resources Corporation's Form 10-
Q for the quarter ended March 31, 1994).
10.13 Second Amendment to Crown Jewel Venture Agreement, dated April 27, 1994,
between Crown Resources Corporation, Crown Resource Corp. of
Colorado, Gold Texas Resources U.S., Inc. and Battle Mountain Gold
Company (incorporated by reference to Exhibit 10.1 to Crown
Resources Corporation's Form 10-Q for the quarter ended June 30,
1994).
10.14 Agreement, dated September 8, 1994, between Crown Resource Corp. of
Colorado and Pinon Exploration Corporation (incorporated by reference
to Exhibit 10.1 to Crown Resources Corporation's Form 10-Q for the
quarter ended September 30, 1994).
10.15 Stock Purchase Agreement, dated September 9, 1994, between Cyprus Gold
Exploration Corporation and Crown Resource Corp. of Colorado,
relating to the Shares of Capital Stock of Pinon Exploration
Corporation (incorporated by reference to Exhibit 10.2 to Crown
Resources Corporation's Form 10-Q for the quarter ended September
30, 1994).
10.16 First Amendment to Agreement between Crown Resource Corp. of Colorado and
Pinon Exploration Corporation (incorporated by reference to Exhibit
10.18 to Crown Resources Corporation's Form 10-K for the year ended
December 31, 1995).
10.17 Third Amendment to Mining Agreement between United States National Bank
of Oregon, as Trustee for William Cord Pereira, Virginia Lee
Pereira, Philip Kirk Pereira, Patrick Clay Pereira and Susan
Michael Pereira, as Beneficiaries of the Pereira Children's Trust
and Crown Resource Corp. of Colorado (incorporated by reference to
Exhibit 10.19 to Crown Resources Corporation's Form 10-K for the
year ended December 31, 1995).
41
<PAGE>
10.18 Letter Agreement, dated December 24, 1996, between Cominco Peru s.r.l.
and Mineral Los Tapados S.A.
11 Statement regarding computation of per share earnings.
22 Subsidiaries of the registrant.
24.1 Consent of Deloitte & Touche LLP.
25 Powers of attorney.
27 Financial data schedule.
For the purpose of complying with the amendments to the rules governing Form
S-8 (effective July 13, 1990) under the Securities Act of 1933, as amended
("Act"), the registrant hereby undertakes as follows, which undertaking shall be
incorporated by reference into the registrant's Registration Statement on Form
S-8, Nos. 33-31754 (filed October 24, 1989) and 33-57306 (filed January 22,
1993).
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CROWN RESOURCES CORPORATION
By: /s/ John A. Labate
-----------------------------
John A. Labate
Vice President and
Chief Financial Officer
Date: March 28, 1997
---------------------------
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 and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Mark E. Jones, III * Principal Executive March 28, 1997
- --------------------------- Officer and Director --------------
Mark E. Jones, III
Chairman
/s/ John A. Labate Principal Financial March 28, 1997
- --------------------------- and Accounting Officer --------------
John A. Labate
Vice President and
Chief Financial Officer
/s/ Christopher E. Herald
- ---------------------------
Christopher E. Herald
President
/s/ J. Michael Kenyon *
- ----------------------------
J. Michael Kenyon
A majority of
/s/ Rodney D. Knutson * the Board of March 28, 1997
- ---------------------------- Directors --------------
Rodney D. Knutson
/s/ Linder G. Mundy *
- ----------------------------
Linder G. Mundy
/s/ Steven A. Webster *
- ----------------------------
Steven A. Webster
/s/ David R. Williamson *
- ----------------------------
David R. Williamson
* By:/s/ John A. Labate
------------------------
John A. Labate, Attorney-in-fact
43
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- ------- ----------- ----
<C> <S> <C>
3.1 The Company's Articles of Incorporation (incorporated by reference
to Exhibit 3.1 to Registration Statement on Form S-4, Commission
File No. 33-25033 (the "1989 S-4 Registration Statement")).
3.2 The Company's Bylaws (incorporated by reference to Exhibit 3.2 to
the 1989 S-4 Registration Statement).
3.3 Statement of Rights and Preferences of Series A Nonconvertible
Preferred Stock (issued to a subsidiary) as filed with the
Secretary of State, State of Washington, which forms part of the
Company's Articles of Incorporation (incorporated by reference to
Exhibit 3.3 to the Company's Form 10-K for the year ended December
31, 1989).
4.1 Form of Rights Agreement, dated as of July 25, 1995, between the
Company and American Stock Transfer & Trust Company (incorporated
by reference to Exhibit 4.1 to the Company's Form 8-K dated July
25, 1995).
10.1 1988 Stock Benefit Plan of the Company (incor-porated by reference
to Exhibit 10.11 to Amendment No. 2 to the Registration Statement).
10.2 1991 Stock Incentive Plan of the Company (incorporated by reference
to Exhibit 10.13 to Crown Resources Corporation's Registration
Statement on Form S-4 dated May 17, 1991, Commission file no. 33-
40642 (the "1991 S-4 Registration Statement")).
10.3 Crown Jewel Venture Agreement, dated effective January 4, 1991,
between Crown Resources Corporation, Crown Resource Corp. of
Colorado, Gold Texas Resources U.S., Inc., and Battle Mountain Gold
Company (incorporated by reference to Exhibit 10.10 to the 1991 S-4
Registration Statement).
10.4 Agreement and Plan of Merger, dated April 16, 1991, between Crown
Resources Corporation, Crown Resources Property Corporation and
Judith Gold Corporation (incorporated by reference to Exhibit 2.1
to Crown Resources Corporation's Form 8-K dated April 16, 1991).
</TABLE>
44
<PAGE>
10.5 Mining Lease, dated September 1, 1987, between Judith Gold
Corporation and Canyon Resources Corporation (incorporated by
reference to Exhibit 10.14 to the 1991 S-4 Registration Statement).
10.6 Settlement Agreement, dated September 29, 1992, between Battle
Mountain Gold Company, Crown Resource Corp. of Colorado, Keystone
Surveys, Inc., and Spenst M. Hansen (incorporated by reference to
Exhibit 10.18 to Crown Resources Corporation's Form 10-K for the
year ended December 31, 1992).
10.7 Mutual General Release and Settlement Agreement, dated September
29, 1992, between Crown Resources Corporation and its subsidiary,
Crown Resource Corp. of Colorado, Centurion Mines Corp., and Royal
Minerals, Inc. (incorporated by reference to Exhibit 10.19 to Crown
Resources Corporation's Form 10-K for the year ended December 31,
1992).
10.8 First Amendment to Mining Agreement, dated October 25, 1993,
between Crown Resource Corp. of Colorado and United States National
Bank of Oregon, as Trustee for William Cord Pereira, Virginia Lee
Pereira, Philip Kirk Pereira, Patrick Clay Pereira and Susan
Michele Pereira (incorporated by reference to Exhibit 10.20 to
Crown Resources Corporation's Form 10-K for the year ended December
31, 1993).
10.9 Option Contract for Conveyance between Crown Resource Corp. of
Colorado and Compania Minera del Amazonas S.A. (Bongara-Even)
(incorporated by reference to Exhibit 10.21 to Crown Resources
Corporation's Form 10-K for the year ended December 31, 1993).
10.10 Agreement dated as of May 17, 1993, between Sovereign Gold Company
(Argentine), Ltd. and Crown Resources Corporation (incorporated by
reference to Exhibit 10.23 to Crown Resources Corporation's Form
10-K for the year ended December 31, 1993).
10.11 Second Amendment to Mining Agreement, dated April 28, 1994, between
Crown Resource Corp. of Colorado and United States National Bank of
Oregon, as Trustee for William Cord Pereira, Virginia Lee Pereira,
Philip Kirk Pereira, Patrick Clay Pereira
45
<PAGE>
and Susan Michele Pereira (incorporated by reference to Exhibit
10.1 to Crown Resources Corporation's Form 10-Q for the quarter
ended March 31, 1994).
10.12 Settlement Agreement, dated May 6, 1994, between Crown Resources
Corporation, Crown Resource Corp. of Colorado, Gold Texas Resources
U.S., Inc. and Battle Mountain Gold Company (incorporated by
reference to Exhibit 10.2 to Crown Resources Corporation's Form 10-
Q for the quarter ended March 31, 1994).
10.13 Second Amendment to Crown Jewel Venture Agreement, dated April 27,
1994, between Crown Resources Corporation, Crown Resource Corp. of
Colorado, Gold Texas Resources U.S., Inc. and Battle Mountain Gold
Company (incorporated by reference to Exhibit 10.1 to Crown
Resources Corporation's Form 10-Q for the quarter ended June 30,
1994).
10.14 Agreement, dated September 8, 1994, between Crown Resource Corp. of
Colorado and Pinon Exploration Corporation (incorporated by
reference to Exhibit 10.1 to Crown Resources Corporation's Form 10-
Q for the quarter ended September 30, 1994).
10.15 Stock Purchase Agreement, dated September 9, 1994, between Cyprus
Gold Exploration Corporation and Crown Resource Corp. of Colorado,
relating to the Shares of Capital Stock of Pinon Exploration
Corporation (incorporated by reference to Exhibit 10.18 to Crown
Resources Corporation's Form 10-K for the year ended December 31,
1995).
10.16 First Amendment to Agreement between Crown Resource Corp. Of
Colorado and Pinon Exploration Corporation (incorporated by
reference to Exhibit 10.18 to Crown Resources Corporation's Form
10-K for the year ended December 13, 1995).
10.17 Third Amendment to Mining Agreement between United States National
Bank of Oregon, as Trustee for William Cord Pereira, Virginia Lee
Pereira, Philip Kirk Pereira, Patrick Clay Pereira and Susan
Michael Pereira, as Beneficiaries of the Pereira Children's Trust
and Crown Resource Corp. of Colorado (incorporated by reference to
Exhibit 10.19 to Crown Resources Corporation's Form 10-K for the
year ended December 31, 1995).
10.18 Letter Agreement, dated December 24, 1996, between Cominco Peru
s.r.l. and Mineral Los Tapados S.A.
46
<PAGE>
11 Statement regarding computation of per share earnings.
22 Subsidiaries of the registrant.
24.1 Consent of Deloitte & Touche LLP.
25 Powers of attorney.
27 Financial data schedule.
47
<PAGE>
Exhibit 10.18
December 23, 1996
[LOGO OF COMINCO APPEARS HERE]
Minera Los Tapados S.A.
c/o Solitario Resources Corporation
World Trade Center
1675 Broadway, Ste. 2400
Denver, Colorado
80202
Attention: Mr. C.E. Herald
President
---------------
Dear Sirs:
Bongara Property, Northern Peru
Letter Agreement
This letter ("Letter Agreement") will follow up our recent discussions regarding
the desire of Cominco Peru s.r.l. ("Cominco Peru") to secure an option to
acquire an interest in those mineral properties held by Minera Los Tapados S. A.
("Los Tapados") designated as the Bongara Property which is located in Bongara
Province, Amazonas Department, northern Peru and is more particularly descibed
in Exhibit A (the "Property"). A portion of the Property is held subject to two
option agreements, (collectively the "Underlying Option") with Compania Minera
Del Amazonas S.A. and Compania Minera Pilar Del Amazonas S.A..
Our proposal calls for Cominco Peru to have the option to acquire an interest in
the Property. Following the option, Cominco Peru and Los Tapados would
participate as joint venture partners, with their respective rights and
obligations governed by the terms set out below. This assumes that Peru's new
joint venture law is in effect at the date the option is exercised. If it is
not we have an additional structure which we can propose which is very similar
to the following terms.
Our proposal is as follows:
Option Terms
- ------------
1. Los Tapados Warranties, Representations and Covenants. Los Tapados
warrants, represents and covenants that:
<PAGE>
-2-
(a) it owns the claims descibed in Part I of Exhibit A (the "Titled
Properties"), the government of Peru has granted it title to such
claims, and there are no underlying leases relating to such claims;
(b) it owns the claims descirbed in Part II of Exhibit A (the "Title
Pending Properties"), and application for title to such claims is
pending with the government of Peru, and there are no underlying
leases to such claims;
(c) it has leasehold interests covering the mineral rights to the
Properties descibed in Part III of Exhibit A (the "Leased
Properties"); provided however, that said leasehold interests are
subject to:
(i) the terms of the leases (the "Leases") descibed in Part III of
Exhibit A, and
(ii) the exceptions described in Part III of Exhibit A;
(d) except as required by agreements with landowners or by the government
of Peru, it has not conveyed, assigned, or otherwise transferred any
of its interests in the Leased Properties;
(e) it has received no notices of defaults under the Leases and to the
best of its knowledge and belief it has complied in all material
respects with all obligations imposed by the Leases and the same are
in good standing;
(f) it has maintained the mineral estate underlying the Properties in
good standing subsequent to the time it acquired them; and to the
best of its knowledge and belief the mineral estate underlying the
Leased Properties were maintained in good standing prior to the time
it entered into the Leases;
(g) its interests in the Properties are free and clear of all liens,
encumbrances, and other third party rights arising by, through, or
under it, and to the best of its knowledge and belief are free of all
other third party rights or defects, except those created by the
Leases or descibed in Exhibit A;
(h) it is a corporation duly incorporated and in good standing in Peru,
and is qualified to do business and is in good standing in any
jurisdiction where necessary in order to carry out the purposes of
this Letter Agreement;
(i) it is a wholly-owned subsidiary of Solitario Resources Corporation;
(j) it has the capacity to enter into and perform this Letter Agreement
and all transactions contemplated herein, and that all corporate and
other actions required to authorize it to enter into and perform this
Letter Agreement have been properly taken;
(k) it will not breach any other agreement or arrangement to which it is
a party or by which it is bound by entering into or performing this
Letter Agreement;
(l) this Letter Agreement has been duly executed and delivered by it and
is valid and binding upon it in accordance with its terms;
<PAGE>
-3-
(m) to the best of its knowledge and belief, it has done nothing that
could give rise to a reasonable cause of action that materially
affects its right, title and interest in the Properties;
(n) it will not encumber its interests in the Properties during the
Option Term;
(o) it will protect, indemnify and hold Cominco Peru and its affiliates
harmless from and against any and all Claims and Damages (hereinafter
defined) arising out of or otherwise related to operations conducted
prior to the date of this Letter Agreement; provided further, that
Los Tapados shall also pay reasonable attorneys fees and court costs
incurred by Cominco Peru with respect to such Claims or Damages
unless Los Tapados agrees to and diligently defends, using counsel
agreed to in advance by Cominco Peru, against any such Claims or
Damages asserted against or imposed on Cominco Peru;
(p) for purposes hereof, "Claims" means: (A) claims, demands and legal,
administrative, or arbitration proceedings of any nature, that are
threatened, asserted or instituted against a party, regardless of
whether arising from injury, death, tort, breach of contract,
violations of laws, or otherwise, and regardless of whether a party
believes such claim, demand, or proceeding is justified, and (B) the
incident or event that resulted, or that a party should reasonably
believe could result, in such claim, demand, or proceeding; and
(q) for purposes hereof, "Damages" means damages or other obligations of
any nature, except loss of profits or consequential or special
damages, resulting from any Claim, including, without limitation
liabilities, losses, costs, penalties (civil or criminal), expenses,
judgments, fines, settlements, reasonable attorneys' fees, and other
related expenses of any nature.
2. Representations by Cominco Peru. Cominco Peru warrants, represents and
covenants that:
(a) it is a limited liability partnership duly incorporated and in good
standing in Peru, and is qualified to do business and is in good
standing (or promptly after execution of this Agreement will become
qualified and in good standing) in any jurisdiction where necessary
in order to carry out the purposes of this Letter Agreement;
(b) it has the capacity to enter into and perform this Letter Agreement
and all transactions contemplated herein, and that all corporate and
other actions required to authorize it to enter into and perform this
Letter Agreement have been properly taken;
(c) it will not breach any other agreement or arrangement to which it is
a party or by which it is bound by entering into or performing this
Letter Agreement;
(d) this Letter Agreement has been duly executed and delivered by it and
is valid and binding upon it in accordance with its terms;
<PAGE>
-4-
(e) it will not encumber its contingent interests in the Properties
during the Option Term; and
(f) it will protect, indemnify and hold Los Tapados and its affiliates
harmless from and against any and all Claims and Damages arising out
of or otherwise related to operations conducted by Cominco Peru under
this Letter Agreement; provided further, that Cominco Peru shall also
pay attorneys fees and court costs incurred by Los Tapados with
respect to such Claims and Damages unless Cominco Peru agrees to and
diligently defends against any such Claims or Damages asserted
against or imposed on Los Tapados.
3. Option. Los Tapados grants Cominco Peru the option to earn up to a 60%
interest in the Property by:
(a) making a cash payment to Los Tapados of US$250,000 forthwith upon
receipt of notice from Los Tapados under paragraph 36 that
Solitario's Board of Directors has approved this Agreement; but
immediately refundable if TSE approval is not obtained and
communicated to Cominco Peru by January 31, 1997;
(b) incurring the following non-cumulative cash payments and cumulative
expenditures, as defined in paragraph 12, expressed in U.S. dollars
on or before the following dates:
<TABLE>
<CAPTION>
NON-CUMULATIVE CUMULATIVE
ON OR BEFORE PAYMENTS EXPENDITURES
<S> <C> <C>
January 31, 1998 $ 300,000 (optional); $ 2.5 million (firm)
January 31, 1999 $ 350,000 (optional); $ 7.5 million (optional)
January 31, 2000 $ 400,000 (optional);and $ 17.5 million (optional)
January 31, 2001 $ 500,000 (optional) $ 27.5 million (optional)
</TABLE>
provided that, of the expenditures to be incurred on or before
January 31, 1998, Cominco Peru will complete at least 4,000 meters of
drilling;
(c) making an optional cash payment to Los Tapados of US$500,000 on or
before January 31, every year after 2001 until a production decision.
If Cominco Peru fails to pay this amount prior to having earned a 49%
interest, this Letter Agreement will terminate. If Cominco Peru fails
to pay this amount following its having earned a 49% interest but
before making a production decision, the balance of the option shall
terminate and the joint venture will be formed with Los Tapados
having a 51% interest and Cominco Peru a 49% interest; and
(d) making a decision to place the Property into commercial production by
building a mine in accordance with the feasibility study referred to
in paragraph 8.
<PAGE>
-5-
Cominco Peru will have earned a 49% interest in the Property upon incurring
expenditures of $20 million plus any Reduction Expenditures referred to
below and making the cash payments due to the date it has incurred those
expenditures. Cominco Peru will have earned an additional 11% interest in
the Property by incurring the Final Vesting Amount or such lesser amount as
contemplated in paragraph 6, completing a feasibility study and making the
production decision, thereby acquiring a total 60% interest.
4. Expenditures Commitments. Cominco Peru will be committed to incur the
expenditures set out above to be completed on or before January 31, 1998.
The balance of the expenditures are optional, except that, by January 31 in
each year Cominco Peru will deliver notice to Los Tapados committing to
incur the expenditures set out to be incurred for that year. Subject as
follows, if Cominco Peru fails to deliver that commitment notice the option
shall terminate. Notwithstanding the foregoing, after the first year of the
option Cominco Peru may, three times during the option term, upon notice to
Los Tapados, reduce its expenditure commitment for any year to a lesser
amount, but no less than $US2.5 million (the "Reduction Expenditures"). For
any year for which Cominco Peru has reduced its commitment below $5 million
it will also be committed to incur 3,000 meters of drilling within its
expenditure commitment. Reduction Expenditures incurred in any year shall
be added to the $27.5 million total to vest a 60% interest. The $27.5
million or increased amount is hereinafter called the "Final Vesting
Amount".
5. Cash in Lieu of Expenditure Shortfall. If Cominco Peru fails to incur the
expenditures contemplated in the table in paragraph 3 or in its commitment
notice in paragraph 4 (and has not reduced its commitment as contemplated
in paragraph 4) or Reduction Expenditures to which it is committed by the
due dates listed it shall pay an amount equal to the shortfall in
expenditures to Los Tapados within 30 days of the listed due date. Any
payment so made shall be deemed to be Expenditures duly properly incurred
and the option shall remain in good standing.
6. Carry Forward of Vesting Expenditures. If Cominco Peru has completed a
feasibility study as contemplated in paragraph 8 prior to having incurred
the Final Vesting Amount, it will fund the balance of those expenditures as
the first mine construction costs (which balance shall not be subject to
recovery by Cominco Peru). If, prior to completing the Final Vesting
Amount, Cominco Peru notifies Los Tapados that it proposes promptly to
commence carrying out a feasibility study, the time limit established above
for Cominco Peru to complete those expenditures shall be extended to permit
Cominco Peru to complete the study and consider a production decision.
<PAGE>
-6-
7. Place of Payment to Los Tapados. All payments payable hereunder to Los
Tapados shall be paid by Cominco Peru to Los Tapados for credit to Los
Tapados' account as follows:
Norwest Bank Denver
1740 Broadway
Denver, CO 80274
ABA #102000076
Solitario Resources Corporation
Account 1018025012 for benefit of Los Tapados
or such other bank, branch and account number as Los Tapados may give
notice to Cominco Peru.
8. Feasibility Study. In order to fully exercise the option at 60%, Cominco
Peru will carry out such exploration programs and fund 100% of the costs of
these programs so as to complete a feasibility study and make a production
decision. Upon completion of the feasibility study Cominco Peru shall
deliver a copy to Los Tapados.
For purposes of this Agreement, "feasibility study" means a written report
on work performed on the Property, which report shall include but is not
necessarily limited to an analysis of the economic and commercial viability
of removing mineral products from the Property, transforming such products
into marketable products and marketing such products. The report shall
examine the following matters in such form and to such detail as Cominco
Peru, acting reasonably, considers suitable to present to third party
lending institutions if it decided to seek debt financing for a mine:
(a) the estimated indicated and inferred mineral reserves contained
within a mineral deposit on the Property, including the tonnage,
quality and description of the manner in which such reserves were
calculated and estimated;
(b) a description of the procedures to be followed for developing and
mining the deposit and a detailed timetable for the construction,
start-up and production on a commercial basis of the project;
(c) a metallurgical report based upon, at a minimum, laboratory tests of
ore samples which report sets forth and demonstrates the
metallurgical feasibility of producing a salable product;
(d) detailed estimates of the costs of pre-production development and
construction of production facilities;
(e) the estimated annual capital and operating budgets (in constant
currency amounts) covering the anticipated expenditures to perform
the construction, start-up and production on a commercial basis of
the project;
<PAGE>
-7-
(f) projected discounted cash flow based rates of return on the
investment for the entire project estimated to be earned from the
commercial production contemplated by the report; and
(g) the estimated total investment which, in addition to the costs
described in d) above, shall also include the funds required for
start-up costs and working capital, and the return shall be based on
the receipt of operating cash flow before the payment of taxes on
income or any allowances for such taxes.
Cominco Peru may exercise the option by delivering a notice to Los Tapados
that Cominco Peru has decided to place the Property into commercial
production by constructing a mine in accordance with a feasibility study
delivered by Cominco Peru.
9. Technical Committee. During the option term, there shall be a Technical
Committee established, comprised of two nominees from each of Cominco Peru
and Los Tapados, for the purpose of reviewing programs proposed by Cominco
Peru and receiving the results of completed programs. It is intended that
the management committee shall consult frequently and meet in formal
session at least once in each year on call by the operator. However, either
party shall have the right to call a meeting on at least 10 days notice;
provided however, that meetings to discuss matters of an emergency nature
may be called on 24 hours notice, but the parties shall use their best
efforts to meet, either in person or by phone, as promptly as possible
regarding emergency matters.
10. Exploration Programs During Option Term. During the option term, Cominco
Peru will design and fund work programs to be carried out on the Property.
Prior to commencing a program, Cominco Peru shall present the program's
work plan and budget to the technical committee. Cominco Peru shall have
the sole right to approve programs during the option term but it shall give
due consideration to comments made by Los Tapados.
11. Possession, Reporting and Access. During the option term, Cominco Peru
will:
(a) have the sole and exclusive possession of the Property and right to
do work and explore the Property and to fund Expenditures;
(b) perform its obligations and conduct all operations in a workmanlike
and commercially reasonable manner, in accordance with sound mining,
engineering and processing methods and practices;
(c) keep the Property free and clear from any liens or encumbrances
relating to its work on the Property and keep the title to the
Property in good standing;
(d) provide Los Tapados with regular progress reports during periods of
active exploration and with an annual summary of the work performed
and the results obtained. Cominco Peru shall make available to Los
Tapados, upon request, all available back-up data
<PAGE>
-8-
including any drill records, assays, maps, plans and all other
relevant factual information and materials not previously delivered;
(e) maintain accounts of its Expenditures in accordance with accounting
principles generally accepted in the mining industry and in a manner
consistent with the accounts it maintains for its other joint venture
projects; and
(f) for purposes of calculating expenditures, convert to US dollars any
amounts incurred in non-US dollar currency on a basis consistent with
the basis it uses for its other projects, using officially recognized
exchange rates.
Los Tapados will have access to the Property, at its sole cost and risk, at
all reasonable times.
12. Expenditures Defined. For purposes of the Agreement, "expenditures"
incurred during the option shall mean:
(a) all costs, expenses, charges and outlays, direct and indirect, made
or incurred by Cominco Peru on or in respect of the Property from the
date of this agreement, including, without limiting generality, the
costs of exploring a Property; metallurgical testing; metallurgical
and economic studies; feasibility studies; engineering; permitting,
mine development costs and reclamation;
(b) an operator's fee for administrative services, head office overhead,
use of the corporate infrastructure, and other general services
provided by Cominco Peru and its affiliated corporations including
but not limited to costs for officers and their expenses, secretarial
work, legal, accounting, human resources, insurance, taxes, payroll,
data processing, employee benefit administration, office rents,
office supplies, and other expenditures made for the benefit of the
exploration work, and not recovered directly in (a) above, which
charge shall be that percentage of the costs set out in (a) above as
follows:
(i) 10% of costs incurred between the date of this Agreement and
the date a production decision is made, except
(ii) where there is a third party contract having a contract price
in excess of $100,000, the operator's fee shall be reduced to
5% on that portion of the contract price in excess of
$100,000.
13. Termination of Option. Cominco Peru may, on notice to Los Tapados, at any
time after incurring the $2.5 million on or before January 31, 1998
contemplated in paragraph 2, terminate this Agreement. Thereupon, Cominco
Peru shall have no further obligations, financial or otherwise except that
it shall:
(a) leave the Property in the same general condition as at the
commencement of this Agreement;
<PAGE>
-9-
(b) deliver to Los Tapados, all information and data obtained from the
Property, including information files, maps, drawings and analytical
reports;
(c) have paid all its contractors and suppliers so that no liens attach
to the Property; and
(d) pay Los Tapados any and all amounts that became due and payable to
Los Tapados, or otherwise accrued in favour of Los Tapados, prior to
the effective date of the termination.
14. Area of Interest. The area of interest shall be described in Part VI of
Exhibit A and shall remain in effect during the option term.
(a) If Cominco Peru for any reason fails to exercise the option, then:
(i) all property interests theretofore acquired under this
paragraph shall belong solely to Los Tapados; and
(ii) the area of interest shall remain binding on Cominco Peru for
12 months after the option terminates. During said 12 months,
Cominco Peru shall promptly notify Los Tapados of any
acquisitions it makes in the area of interest; and if within
30 days following such notice Los Tapados elects to acquire
such interest, then Cominco Peru shall assign all of its
right, title and interest in such acquisition to Los Tapados
in consideration for Los Tapados reimbursing Cominco Peru its
actual out-of-pocket acquisition costs. If Cominco Peru
exercises the option and the parties enter into a joint
venture, then the area of interest shall be governed by the
terms of the hereinafter described Venture Agreement;
(b) (i) either party stakes or acquires any surface, mineral or water
rights partially or entirely within the area of interest
during the option term, it shall notify the other party, which
shall have 30 days following its receipt of such notice within
which to elect whether to have all such rights (i.e. those
within and those outside of the area of interest) made subject
to this Letter Agreement. If the other party declines to have
such rights made subject to this Letter Agreement, the
acquiring party shall own such interests free and clear of
this Agreement. If the other party elects to have such rights
made subject to this Letter Agreement, then: (A) if Los
Tapados is the acquiring party, Cominco Peru shall promptly
reimburse Los Tapados for all reasonable acquisition costs,
and may credit such costs against the Costs, and (B) if
Cominco Peru is this acquiring party, its reasonable
acquisition costs may be credited against the Costs;
(ii) properties acquired by Los Tapados prior to the Effective Date
but after the date the map of the Properties was heretofore
provided to Cominco Peru shall be deemed to have been acquired
by Los Tapados on the Effective Date;
<PAGE>
-10-
(c) except as provided in subsection (b), this Letter Agreement shall
not restrict the rights of either party to acquire for its own
account, free and clear of this Letter Agreement, property or water
rights outside the area of interest. Area of interest acquisitions
that are made subject to this Letter Agreement shall not expand the
area of interest.
Joint Venture Terms
- -------------------
15. Formation of JV. Upon Cominco Peru exercising the option a joint venture
will be formed. The joint venture shall be governed by the following terms.
16. Management Committee. Upon the joint venture formation, a management
committee will be formed to take the place of the technical committee. The
management committee will be comprised of three representatives of the
party with or earnings majority interest and two representatives of the
other party. Each representative shall have an alternate who can act in the
absence of the appointed representative. From the formation of the joint
venture the management committee shall have full power and authority to
make all decisions respecting the development and exploitation of the
Property. It is intended that the management committee shall meet in formal
session at least once in each year on call by the operator, though the non-
operator shall be entitled to request a meeting, in which case the operator
shall call one promptly. Management committee decisions will be made by
simple majority.
17. Initial JV Operator. Cominco Peru will be the operator of the joint
venture. If Cominco Peru stops increasing its interest at 49%, Los Tapados
shall have the right to become operator. The operator will be responsible
for the daily direction of exploration, development and mining activities
which it carries out on behalf of the joint venture.
The operator will draft exploration programs for management committee
approval and carry out any programs which have been approved. Each of the
parties shall elect within 30 days of receipt of the approved program
whether it will contribute its proportionate share of the costs of carrying
out that exploration program. If a party does not elect to contribute its
share of costs, its interest will be diluted, with that party being
entitled to elect to contribute to subsequent programs at its diluted
interest level. A diluting party's interest will be calculated by dividing
its contribution to costs by the total costs incurred by the parties. Los
Tapados will be deemed to have contributed to costs prorata, its interest,
to Cominco Peru's expenditures at the time that Cominco Peru exercises the
option either at 49% or 60%. If a party's interest is diluted to 10%, it
will be converted to a 10% net profits interest.
18. Election to Contribute to Production Decision. The management committee
shall meet promptly upon formation of the joint venture to review Cominco
Peru's production decision contemplated in paragraph 8. Each party is
entitled to elect, upon notice to the operator within
<PAGE>
-11-
60 days after the date of that management committee meeting, to participate
at its then percentage interest in the construction and operating costs
required to construct and operate the mine. A party electing not to
participate will receive a 10% net profits interest.
19. Funding of Mine Construction Costs. Each party shall separately fund its
share of the mine construction cost which it has elected to contribute.
Except as for mine financing or with the consent of all parties, no party
shall pledge, charge or otherwise encumber its interest in the Property. If
Cominco Peru arranges Los Tapados' share of debt financing as contemplated
in paragraph 20, Los Tapados shall pledge its interest in the Property to
secure that debt. Unless otherwise agreed by the parties, all mine
construction costs will be financed through as high a proportion of third
party debt as may be obtained on reasonable commercial terms and the
balance by way of equity. The parties acknowledge that in order to secure
debt financing the lender may require a guaranty of mechanical completion
of the mine and processing facilities ("Technical Guaranty") and a
political risk insurance or sponsor guaranty ("Political Risk Insurance").
20. Financing Los Tapados' Interest. If within the 60-day period following that
initial 60-day period contemplated in paragraph 18, Los Tapados is unable
to obtain third party financing for its entire share of costs on terms that
it considers commercially reasonable, then at Los Tapados' request made
within that 60-day period, Cominco Peru shall provide funding for Los
Tapados' entire share of the program and budget. Said funding must be
provided either by Cominco Peru or an affiliate, or by third party
financing arranged by Cominco Peru in the same proportions as between
equity and debt as Cominco Peru is financing its own share of mine
construction costs and, as to the debt portion, on the same terms as
Cominco Peru obtains for its debt portion. If required by the lenders of
the debt portion, any Technical Guaranty and Political Risk Guaranty will
be provided by Cominco Peru or an affiliate (as required by the lender).
If Cominco Peru provides Los Tapados' share of equity financing it shall be
entitled to recover, under paragraph 23, the amount advanced plus interest
at an annual rate of LIBOR plus four percent, compounded monthly.
If Cominco Peru arranges a Technical Guaranty, then Los Tapados shall pay
Cominco Peru (or the affiliate) a fee of one percent per annum calculated
on a monthly basis for the past year on the average debt outstanding during
the month and accumulated for the year.
If Cominco Peru arranges or provides Political Risk Insurance, then Los
Tapados shall pay as follows:
(a) if Cominco Peru arranges political risk insurance through a third
party insurer and is permitted to capitalize the premiums under the
loan facility for the debt portion of the
<PAGE>
-12-
project, the premiums will be recovered under paragraph 23 as if they
were debt financing;
(b) if Cominco Peru either arranges political risk insurance through a
third party insurer but is not able to capitalize the premiums as
contemplated in paragraph 20(a), Los Tapados shall pay to Cominco
Peru Los Tapados' prorata share of the third party insurance premiums
paid by Cominco Peru; and
(c) if Cominco Peru determines, in its sole discretion, to provide a
sponsor guaranty in lieu of third party political risk insurance,
Cominco Peru shall be entitled to establish a reasonable fee, based
upon a representative survey to be conducted on behalf of Cominco
Peru by Marsh and McLennan of fees charged to comparable projects by
third party insurers, to be calculated on the same basis as the fee
for the Technical Guaranty.
Fees payable to Cominco Peru under this paragraph shall be paid within 30
days after Cominco Peru's invoice therefor.
21. Mine Plans. A mine shall be operated on the basis of a long term mining
plan, to be reviewed annually, and annual operating budgets approved by the
management committee.
22. Marketing of Production. Each party which is contributing to mine
construction costs shall be entitled to take in kind and market a share of
the minerals produced from the mine which is proportionate to its
contribution level. If Cominco Peru has arranged financing for Los Tapados
as contemplated in paragraph 16, Cominco Peru shall be entitled to take and
market all of the minerals produced from the mine and to pay the costs and
distribute the net proceeds all as contemplated in paragraph 23 below, and
following the Recovery Date, Los Tapados would then be entitled to take in
kind and market its proportionate share of production. Any non-arms length
transaction may be consummated only if it is at a price and on terms,
including payment terms, substantially equivalent to those which would
apply to a arm's length transaction involving comparable quantity, quality
and terms of sale. Cominco Peru and Los Tapados agree to consider, in good
faith, arrangements whereby Cominco Peru may become the sales agent for Los
Tapados.
23. Recovery of Cominco Peru Costs - Recovery Date Defined. If Cominco Peru
arranges any portion of Los Tapados' share of financing as contemplated in
paragraph 20, the cash flows from the sale of minerals produced from the
Property will generally be used to pay the costs of operating the mine,
marketing production and services, the project debt and any balance
remaining will be divided as follows to permit Cominco Peru to recover the
equity financing provided on behalf of Los Tapados while providing some
early returns to Los Tapados. Initial cash flows from sales of product from
the mine will be used to pay
<PAGE>
-13-
operating, marketing and distribution costs; taxes (other than income
taxes) and royalties; any debt financing which has been arranged for mine
construction; any advances Cominco Peru has made to cover sustaining
capital requirements or operating losses during the "cost recovery" period;
and the administrative charge contemplated on costs incurred. Until the
date (called the "Recovery Date") by which Cominco Peru has recovered the
costs set out in paragraph (a) below, any net proceeds which remain after
paying the costs referred to in the preceding sentence shall be divided as
follows:
(a) 80% of net proceeds otherwise payable to Los Tapados (80% of 40% of
total net proceeds) shall be paid to Cominco Peru so that it may
recover those expenditures (excluding the cash payments to Los
Tapados or its designee) which are in excess of the Final Vesting
Amount; the administrative charges contemplated and any equity
financing of mine construction costs which Cominco Peru has provided
for Los Tapados' account as contemplated in paragraph 20, together
with the interest contemplated in paragraph 20. Cominco Peru shall
provide an accounting, no less than quarterly, of amounts financed
for Los Tapados;
(b) 20% of net proceeds otherwise payable to Los Tapados (20% of 40% of
total net proceeds) shall be paid to Los Tapados.
24. Costs Defined. For purposes of this Agreement, "costs" incurred from joint
venture formation include:
(a) all costs, expenses, charges and outlays, direct and indirect, made
or incurred by the operator on or in respect of the Property from
the date the joint venture is formed, including, without limiting
generality, the costs of engineering; permitting; construction and
purchase of plant and infrastructure; operating the mine, mining;
milling; transportation; and reclamation; and
(b) an operator's fee of 3% of costs incurred after the production
decision date for administrative services, head office overhead, use
of the corporate infrastructure, and other general services provided
by the operator and its affiliated corporations including but not
limited to costs for officers and their expenses, secretarial work,
legal, accounting, human resources, insurance, taxes, payroll, data
processing, employee benefit administration, office rents, office
supplies, and other expenditures made for the benefit of mine
construction and operation, and not recovered directly in (a) above.
The operator's fee is intended to allow the operator to recover its
costs, not to permit the operator to make a profit.
25. Payment of Operating Costs. If following the Recovery Date the operator
anticipates that operating losses will occur or sustaining capital
contributions will be necessary, it will advise the parties. Following the
Recovery Date, the operator shall be entitled to invoice
<PAGE>
-14-
each party for its share of any operating losses or sustaining capital
requirements. If a party does not pay the amount invoiced within 30 days,
the amount will then commence to accrue interest at prime plus two percent.
26. Indemnification of Operator. Each party, in proportion to its interest at
the date the indemnification occurred, shall indemnify and save the
operator harmless from and against any loss, liability, claim, demand,
damage, expense, injury and death (including, without limiting the
generality of the foregoing, legal fees) (collectively the "Claims")
resulting from any acts or omissions of the operator or its officers,
employees or agents. However, the operator shall not be indemnified for
Claims resulting from the negligence or wilful misconduct of the operator
or its officers, employees or agents. An act or omission of the operator or
its officers, employees or agents done or omitted to be done:
(a) at the direction, or within the scope of the direction, or with the
concurrence of the Management Committee; or
(b) unilaterally and in good faith by the operator to protect life or
Property; shall be deemed not to be negligence or wilful misconduct
provided that the operator has otherwise performed its duties and
obligations as contemplated in paragraph 11(b). The operator shall not be
liable to any other party nor shall any party be liable to the operator in
contract, tort or otherwise for special or consequential damages,
including, without limiting the generality of the foregoing, loss of
profits or revenues.
Terms Applicable to Both the Option and Joint Venture
The following terms apply to both the option and joint venture phases:
27. Right of First Offer. During the option term, neither party shall encumber
its interest in the Property. A party may sell or dispose of its interest
in the Property or this Agreement but subject to a right of first offer in
favour of the other party. That is: a party wishing to dispose of its
interest will offer to sell it to the other party for a price and on terms
which the disposing party establishes. If the other party does not accept
within 30 days the disposing party shall thereafter have 180 days to
dispose of those interest for the same or greater price and on the same
terms or terms no more favourable to the third party. The right of first
offer shall not apply to transfers to affiliated corporations.
28. No Partnership. The rights and obligations of the parties shall be several
and the parties shall hold their interest in the Property as tenants in
common. No party shall institute any proceedings to partition the Property.
Nothing contained in the agreement shall be construed as creating a legal
partnership or in imposing any fiduciary duty on any party.
<PAGE>
-15-
29. Tax Benefits. Costs incurred under the joint venture shall be for the
account of the party incurring the same and it shall be entitled to all tax
benefits with respect thereto.
30. Force Majeure. A party shall be entitled to claim force majeure if it is
delayed or prevented form performing any obligation by reason of any cause,
excluding lack of finances, beyond its reasonable control. A cause beyond a
party's reasonable control includes but is not limited to acts of god,
insurrection and terrorism. Cominco Peru may not assert force majeure as a
means of avoiding its payment obligations to Los Tapados.
31. Press Releases. A party proposing a press release relating to the Property
shall provide a copy to the other party for its information prior to
release.
32. Further Assurances. Each of the parties shall do all such further acts and
execute and deliver such further deeds and documents as shall be reasonably
required in order fully to perform the terms of this Agreement.
33. Entire Agreement. This is the entire agreement between the parties relating
to the Property and supersedes all previous negotiations and
communications. Without limiting generality, this Agreement supersedes the
confidentiality agreement between the parties or their affiliates dated
November 8, 1996 provided that if this Agreement terminates the
confidentiality agreement shall continue to apply with respect to any
unexpired terms.
34. Captions. The captions in this Agreement have been provided for ease of
reference and shall be disregarded in interpreting this Agreement.
35. Governing Law. The Agreement shall be interpreted in accordance with and
governed by the laws of British Columbia, provided that all procedural
matters regarding the property and carrying out of work programs will be
governed by the laws of Peru.
36. Condition Precedent. Upon this Letter Agreement being signed by both
parties this Letter Agreement shall become a binding and enforceable
agreement, subject only to Solitario obtaining approval of its Board of
Directors to this agreement which it will obtain and communicate to Cominco
Peru by the close of business on December 27, 1996.
37. Subject to Regulatory approval. This Letter Agreement is subject to the
approval of the Toronto Stock Exchange to be obtained and communicated to
Cominco Peru by the close of business on January 31, 1997.
If the terms set out above are satisfactory please sign both copies of this
Letter Agreement and return one copy to me. Upon receipt of the signed copy
this Letter Agreement shall become binding and
<PAGE>
-16-
enforceable as aforesaid and will continue in effect until such time as it is
replaced by a more formal and comprehensive agreement to be prepared by Cominco.
We anticipate having a first draft of that agreement available to you in late
January, 1997.
Yours truly,
/s/ Jon A. Collins
- ------------------------------------------
Jon A. Collins
General Manager, International Exploration
Cominco Ltd. on behalf of
Cominco Peru s.r.l.
Agreed this 24 day of December, 1996
By: /s/ Christopher E. Herald
---------------------------------------
Christopher E. Herald
President, Solitario Resources Corporation
on behalf of
Minera Los Tapados S.A.
<PAGE>
EXHIBIT A
---------
Part I - Titled Properties
Claims 100% owned by Los Tapados, no underlying leases, title granted by
government of Peru.
<TABLE>
<S> <C>
Bongara 14 01-03060-95
Bongara 15 01-03059-95
Bongara 16 01-07520-95
Bongara 18 01-07522-95
Bongara 19 01-07523-95
Bongara 20 01-07524-95
Bongara 21 01-07829-95
Bongara 22 01-07830-95
Bongara 24 01-07832-95
Bongara 25 01-07833-95
Bongara 26 01-07834-95
Bongara 27 01-07835-95
Bongara 28 01-07828-95
Bongara 31 01-07816-95
Bongara 32 01-07817-95
Bongara 33 01-07818-95
Bongara 34 01-07819-95
Bongara 35 01-07820-95
Bongara 36 01-07821-95
Bongara 37 01-07822-95
Bongara 38 01-07823-95
Bongara 39 01-07824-95
Bongara 40 01-07825-95
Bongara 54 01-02332-96
Bongara 55 01-02333-96
Bongara 57 01-02490-96
Bongara 62 01-02581-96
<CAPTION>
Part II - Title Pending Properties
Claims 100% owned by Los Tapados, no underlying lease, title approval pending.
<S> <C>
Bongara 17 01-07521-95
Bongara 23 01-07831-95
Bongara 29 01-07827-95
Bongara 30 01-07826-95
</TABLE>
A-1
<PAGE>
<TABLE>
<S> <C>
Bongara 41 01-08264-95
Bongara 42-A 01-09488-95
Bongara 50 01-00643-96
Bongara 52 01-01024-96
Bongara 53 01-01048-96
Bongara 56 01-02489-96
Bongara 60 01-02579-96
Bongara 61 01-02580-96
Bongara 63 01-03264-96
Bongara 64 01-03265-96
Bongara 65 01-03266-96
Bongara 66 01-03267-96
Bongara 67 01-03268-96
Bongara 68 01-03269-96
Bongara 69
Bongara 70
Bongara 71
Bongara 72
Bongara 73
Bongara 74
<CAPTION>
Part III - Leased Properties
Claims leased by Los Tapados from Compania Minera Pilar del Amazonas, S.A.
<S> <C>
Bongara 1 26
Bongara 3 28
Bongara 5 30
Bongara 7 32
Bongara 9 34
<CAPTION>
Claims leased by Los Tapados from Compania Minera Del Amazonas, S.A.
<S> <C>
Bongara 2 27
Bongara 4 29
Bongara 6 31
Bongara 8 33
Bongara 10 35
</TABLE>
Los Tapados has done everything in order to exercise the option but for
formalizing the conveyance contract called for in the Leases. The Leases
indicate that during the period of the option Los Tapados may not sell, transfer
or extend option rights to third parties without the written consent of the
Lessor, said consent not to be unreasonably withheld. Los Tapados shall proceed
in an expeditious manner to obtain executed conveyance contract in accordance
with the
A-2
<PAGE>
terms stipulated in the Leases. At that time, Los Tapados shall notify Cominco
Peru and Cominco Peru shall be entitled to have the Leased Properties added to
the Agreement without any further consideration being payable to Cominco Peru.
Until such time as a conveyance contract is executed, Los Tapados shall maintain
the Leased Properties and the Leases in good standing according to the terms of
the Leases and Peruvian law and shall not sell, transfer, assign, mortgage
pledge, encumber or otherwise dispose of or encumber its interest under the
Leases or the Leased Properties.
Claims acquired by Los Tapapdos within a five kilometer radius of the Leased
Properties are subject to clause 3.9 of the Leases.
Part IV -- Applications Submitted and Rejected
Claims 100% owned by Los Tapados, no underlying lease, application rejected for
technical filing reasons, Los Tapados is appealing.
Bongara 11-A 01-08442-95
Bongara 43 01-08266-95
Bongara 44 01-09259-95
Bongara 45 01-00491-96
Bongara 47 01-00493-96
Bongara 48 01-00492-96
Bongara 49 01-00642-96
Bongara 46 01-00494-96
Part V -- Other Minor Holdings
Claims 100% owned by Los Tapados, no underlying lease, two claims cover same
land area due to two different government map datums, government will select
which claim is valid.
Bongara 58 01-02550-96
Bongara 59 01-02551-96
Part VI -- Area of Interest
See map on page A-4
A-3
<PAGE>
[MAP APPEARS HERE]
<PAGE>
Exhibit 11
CROWN RESOURCES CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Outstanding at
beginning of year 13,172 13,156 12,742
Issued during the year 39 16 414
------ ------ ------
Outstanding at end of year 13,211 13,172 13,156
====== ====== ======
Weighted average number
of shares and share
equivalents outstanding
during the year for
purposes of primary earnings
per share calculation 13,193 13,160 13,161
====== ====== ======
Earnings (loss) for year $(1,571) $(1,717) $ 3,505
===== ====== ======
Primary earnings (loss)
per common share $ (0.12) $ (0.13) $ 0.27
====== ====== ======
</TABLE>
<PAGE>
Exhibit 22
CROWN RESOURCES CORPORATION
SCHEDULE OF SUBSIDIARIES
December 31, 1996
. Crown Resource Corp. of Colorado (100%, incorporated in Colorado)
. Solitario Resources Corporation (formerly Crown Minerals Corp.)
(60.4%-owned subsidiary of Crown Resource Corp. of Colorado,
incorporated in Colorado)
. Compania Minera Solitario Argentina S.A. (100%-
owned subsidiary of Solitario Resources Corporation,
incorporated in Argentina)
. Minera Los Tapados S.A. (100%-owned subsidiary of
Solitario Resources Corporation, incorporated in Peru)
. Crown Minerals Corporation (100%-owned subsidiary of Crown
Resource Corp. of Colorado, incorporated in Colorado)
. Gold Texas Resources U.S., Inc. (100%, incorporated in Texas)
. Crownex Resources (Canada) Ltd. (100%, incorporated in British
Columbia, Canada)
. Gold Capital Corporation (100%, incorporated in the state of Washington)
. Gold Texas Resources Ltd. (100%-owned subsidiary of Gold
Capital Corporation, incorporated in British Columbia, Canada)
. Judith Gold Corporation (100%, incorporated in Montana)
<PAGE>
Exhibit 24.1
------------
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-31754 and 33-57306 of Crown Resources Corporation on Form S-8 of our report
dated March 18, 1997, appearing in this Annual Report on Form 10-K of Crown
Resources Corporation for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Denver, Colorado
March 27, 1997
<PAGE>
Exhibit 25
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John A. Labate, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign the
Annual Report on Form 10-K for the fiscal year ended December 31, 1996, of Crown
Resources Corporation and any and all amendments thereto, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, and every act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
NAME DATE
- ----------------------------- -------------------
Mark E. Jones, III
- ----------------------------- -------------------
Christopher E. Herald
- ----------------------------- -------------------
J. Michael Kenyon
- ----------------------------- -------------------
Rodney D. Knutson
- ----------------------------- -------------------
Linder G. Mundy
- ----------------------------- -------------------
Steven A. Webster
- ----------------------------- -------------------
David R. Williamson
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,447,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 106,000
<CURRENT-ASSETS> 6,019,000
<PP&E> 31,892,000
<DEPRECIATION> 1,433,000
<TOTAL-ASSETS> 37,113,000
<CURRENT-LIABILITIES> 635,000
<BONDS> 15,000,000
0
0
<COMMON> 28,018,000
<OTHER-SE> (10,821,000)
<TOTAL-LIABILITY-AND-EQUITY> 37,113,000
<SALES> 396,000
<TOTAL-REVENUES> 803,000
<CGS> 0
<TOTAL-COSTS> 2,326,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 971,000
<INCOME-PRETAX> (2,527,000)
<INCOME-TAX> (580,000)
<INCOME-CONTINUING> (1,571,000)
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> (1,571,000)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
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