SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________
Commission file Number 000-19182
Nord Pacific Limited
(Exact name of registrant as specified in its charter)
New Brunswick Not Applicable
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
40 Wellington Row, Suite 2100, Scotia Plaza
Saint John, New Brunswick E2L 4S3
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (506) 633-3800
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock No 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. ( X)
Aggregate market value of voting stock held by non-affiliates based on
the average of NASDAQ bid and asked quotations of $.625 on March 23,
1999, was $5,473,838.
The number of common shares outstanding as of March 23, 1999 was
12,960,803.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement to be dated on or about April 30, 1999.
<PAGE>
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
General
Nord Pacific Limited (the "Company"), is engaged in the
production of copper and in the exploration for gold, copper, nickel,
cobalt and other minerals in Australia, Papua New Guinea ("PNG"),
North America and Mexico. As used herein the term "Company", unless
the context indicates otherwise, includes all subsidiaries.
The Company was organized in Bermuda in 1988 for the purpose of
acquiring all of the assets, subject to the liabilities, of two
limited partnerships (the "Partnerships"). The Partnerships and Nord
Resources Corporation ("Resources") owned the venture interests in
Nord-Highlands Mineral Venture-I, a California joint venture ("Nord-
Highlands"). On April 2, 1990, the Partnerships transferred all of
their assets, subject to their liabilities, to the Company in exchange
for common shares of the Company and Resources relinquished all rights
it had in Nord-Highlands. The Partnerships then immediately dissolved
and liquidated and distributed the shares of the Company to their
respective limited partners. The Company, and its wholly-owned
Bermuda subsidiary, Nord Gold Company Limited, own 100% of the
interests in Nord-Highlands, which is the exploration and development
arm of the Company in Australia, PNG and other areas of the South
Pacific. All activities of the Company in the United States are
carried out by Hicor Corporation, a wholly owned Delaware subsidiary.
Exploration activities in Mexico are carried out by Compania Minera
Nord Pacific de Mexico S.A. de C.V., a controlled Mexican subsidiary.
In June 1998, the Company's shareholders approved the
discontinuance of the Company from Bermuda and approved its
continuance into the Province of New Brunswick, Canada. The effective
date of the continuance was September 30, 1998.
The Company is currently owned approximately 28.5% by Resources,
a Delaware corporation organized in 1971 and listed on the New York
Stock Exchange.
The Company's principal offices are located at 40 Wellington
Row, Suite 2100, Scotia Plaza, Saint John, New Brunswick, Canada, E2L
4S3, telephone number (506) 633-3800. The US subsidiary of the
Company, Hicor Corporation, maintains offices at 201 Third Street, NW,
Suite 1750, Albuquerque, New Mexico 87102, telephone number (505) 241-
5820.
The Company currently owns a 40% interest in the Girilambone
Copper Mine which has been in production since May 1993 and a 50%
interest in the Girilambone North Copper Mines which have been in
production since July 1996. The Company also owns a 50% interest in
the Tritton Copper Project ("Tritton"), a 100% interest in the Tabar
Islands Gold Project ("Tabar"), a 35% interest in the Ramu Nickel-
Cobalt Project ("Ramu"), all of which are considered to be in the
development stage, and various interests in certain exploration
properties.
An independent technical review of the Company's mining and
exploration properties, dated February 24, 1997, was prepared by
Watts, Griffis and McOuat Consulting Geologists and Engineers, of
Toronto, Canada, in connection with a public equity issue in Canada
completed in July 1997. A feasibility study on Tritton, conducted by
Ausenco of Brisbane, Australia, was completed in October, 1998. A
feasibility study on Ramu, conducted by Fluor Daniel Pty Ltd of
Brisbane, Australia and HA Simons Limited of Vancouver, B.C., Canada,
was also completed in October, 1998. Certain information contained in
this report has been derived from these sources. Unless indicated
otherwise, all amounts in this report are presented in US dollars.
2
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Girilambone and Girilambone North Copper Mines, New South Wales,
Australia
The Girilambone project consists of three separate joint
ventures with Straits Mining Pty Limited ("Straits"). The Company has
40% and 50% interests in two mining joint ventures and a 50% interest
in an exploration joint venture.
The Girilambone and Girilambone North Copper mines are located
approximately 625km (390 miles) northwest of Sydney, New South Wales
("NSW"), Australia. The project area consists of mining leases,
exploration licenses and surface rights owned by the Company and
Straits. The mining leases are for terms of twenty-one years and
expire on August 5, 2013 at Girilambone and on January 13, 2017 at
Girilambone North. The exploration licenses are generally for terms
ranging from two to five years and are renewable based upon compliance
with certain conditions. The properties are accessed by paved highway
from the town of Nyngan, NSW. Power is supplied by a private NSW
power agency on commercial terms.
The Girilambone area lies toward the northern end of the Lachlan
Fold Belt, a large region of Paleozoic rocks which can be traced from
eastern Victoria to northern NSW. A substantial proportion of metal
production by those states has been derived from this belt which hosts
a number of significant base metal mines. In the mine area, the
dominant rock types include quartzite and chlorite schists. Copper
mineralization occurs within a quartzite horizon and in enclosing
schists of the Ordovician Girilambone Beds. A leached oxidized ore
zone lies over secondarily enriched chalcocite-dominated ore. This
grades into a primary sulfide zone at depth.
Mineralogy consists of malachite and copper oxide minerals in the
oxidized upper part of the orebodies, malachite/chalcocite in the
middle of the orebodies and chalcopyrite in the underlying primary
sulfide zones. Native copper occurs in both the oxide and chalcocite
zones.
The mines produce high purity cathode copper from open pits
using heap leaching and the solvent extraction-electrowinning ("SX-
EW") process. Mine operations are managed by the Girilambone Copper
Company, a joint venture company owned by the Company and Straits.
Construction of the Girilambone Copper Mine was completed in May
1993. Total capital costs including working capital were
approximately $26,000,000. The mine was originally designed to
produce approximately 14,000 metric tonnes ("tonnes" = 2,204.60 pounds
to a tonne) or approximately 31 million pounds of high purity copper
each year for six years from inception. Subsequently, additional
orebodies were discovered at Girilambone North and the reserves re-
calculated, projecting a total estimated project life of eight years
at higher production rates, as described below. The Girilambone
Copper Mine involves open pit mining of oxide and chalcocite ores
followed by crushing and stacking on leach pads and SX-EW processing.
In 1994, a Stage 1 plant upgrade was undertaken by the Company,
which allowed the processing of greater volumes of heap leach
solutions to provide more flexibility in achieving production goals.
In 1995, the Company undertook a Stage 2 plant expansion. The
expansion increased electrowinning capacity by 15% and included the
construction of a third leach pad which allowed the Company to take
advantage of seasonally higher-grade leach solutions. The water
supply was also expanded.
In June 1996, following successful field tests, forced aeration
of heaps containing chalcocite, the main copper sulfide ore, was
introduced resulting in a significant increase in the rate of copper
leaching. Largely as a consequence of heap aeration, copper
production at Girilambone has increased significantly and since mid-
1996 the plant has operated at a capacity in excess of 17,000 tonnes
per annum (37.5 million pounds) of copper.
3
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Mining activities ceased at Girilambone's Murrawombie pit in July
1997, due to the exhaustion of ore reserves. Ore mined from
Murrawombie has been stacked on heaps for leaching. Copper will
continue to be derived from these heaps over the next year.
Mining activities by the Girilambone North Mining Joint Venture
commenced at the northern pits in May 1996. Mining of oxide copper
ore has been conducted from the North East and Hartmans Pits. Pre-
stripping began at the Larsens Pit in August 1998, and it is
anticipated that ore will be accessed in April 1999.
Copper production from both Girilambone and Girilambone North in
1998, at 17,565 tonnes (39 million pounds), was essentially the same
as in 1997 (17,702 tonnes), and 7.9% greater than in 1996. In 1999,
copper production is forecast to be approximately 15,100 tonnes. This
forecast reduction is due to the gradual depletion of the ore bodies.
Total copper production from both projects through December 31, 1998
was 82,425 tonnes.
Estimated life-of-mine open-pittable, mineable copper ore
reserves at Girilambone North at December 31, 1998 are shown in the
following table. The combined proven/probable reserves were
determined by Girilambone Copper Company. No metallurgical recovery
factors have been applied.
GIRILAMBONE NORTH RESERVES
Proven/Probable Reserves
Contained
Copper Copper
Tonnes Grade (thousand
(million) % tonnes)
North East Pit 0.453 1.02 4.618
Hartmans Pit 0.332 0.73 2.425
Larsens East Pit 1.193 1.26 14.997
----- ---- ------
Total Ore Reserves 1.978 1.11 22.041
Ore from Girilambone North (North East, Hartmans, and Larsens
East pits) are expected to be mined at a 0.4% copper cut-off. Heaps
are expected to be leached to a residual and non-recoverable fixed
copper grade of 0.15%. As a result, recoverable copper from the
proven/probable reserves will be less than the contained copper
amounts disclosed above.
The heaps are estimated to contain 7,189,310 tonnes of ore under
leach, containing an estimated 27,832 tonnes of copper. Stockpiles
are estimated to contain an additional 3,568 tonnes of copper metal.
The total copper contained in ore, heaps, stockpiles and in solution
at December 31, 1998 is estimated to be 55,381 tonnes (123 million
pounds), supporting operations for an estimated two and one-half
years.
In addition to copper ores, material containing low-grade gold
mineralization has been mined and is being stockpiled separately for
possible processing at a later date. At current gold prices,
processing of this material is not economic.
4
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Girilambone Financing Agreement
The Company had $3,000,000 of debt outstanding at December 31,
1998 under a financing agreement with the Bank of Western Australia
Ltd. ("BankWest") which originally provided a $10,000,000 facility to
fund the Company's share of the development costs of the Girilambone
Copper mine. The financing agreement allows an additional $600,000
drawdown after December 31, 1998. The loan bears interest at
Singapore InterBank Offered Rate ("SIBOR") plus 1.5% (6.9% at December
31, 1998). This facility is required to be repaid quarterly beginning
September 30, 1999, in installments being the greater of the amount
required to reduce the outstanding amount in accordance with a
schedule of maximum outstanding amounts at each repayment date or 50%
of available cash flow. The facility terminates on June 30, 2000.
Under the agreement, all cash proceeds generated from
Girilambone operations are required to be deposited with the lender to
be used to pay any costs and expenses related to the project, bank
fees, interest and principal and to fund a reserve account with the
lender. Any remaining proceeds are available, at the lender's
discretion, for use by the Company. As collateral on the loan, Bank
West holds a security interest in the Australian assets of the Company
including the Company's share of the assets of and production from the
Girilambone and Girilambone North mines.
Copper Sales
The Company sells its copper production under contract through a
marketing agent. In 1998 sales of $13,807,000 were made under
contract, primarily to two Australian consumers, Metal Manufactures
Limited and Crane Enfield Metals Pty Ltd, at a price which is at a set
premium to the prevailing London Metals Exchange price at the time the
copper is delivered. The contracts are intended to be evergreen
contracts that are rolled over annually and for 1999 are for a minimum
of 99% of budgeted production. The loss of either or both of these
consumers should not have any material adverse effect on the Company
because of the ongoing demand for the copper produced at Girilambone.
Copper Hedging Agreements
The Company has entered into swap agreements covering a total of
11,905,000 pounds of copper at a fixed cost of $.75 per pound,
representing approximately 75% of the Company's share of budgeted
production through December 31, 1999. Contracts totaling 992,000
pounds of copper are settled monthly. Upon settlement, the Company
receives the difference between the fixed price and the current price
of copper if the current price is lower, or the Company pays the
difference if the current price is higher. As a result, the Company
is assured of receiving a price of $.75 per pound for this hedged
production.
Sales for the years ended December 31, 1998, 1997 and 1996
include $1,616,000 of gains, $54,000 of losses and $1,058,000 of
gains, respectively, that were realized in settlement of copper
hedging contracts.
Foreign Currency Forward Exchange Contracts
The Company has entered into forward exchange contracts to
protect against Australian currency fluctuations related to payment of
a portion of the expected operating costs of Girilambone. Realized
and unrealized gains and losses on these contracts are included
currently in the results of operations. For the year ended December
31, 1998, the Company recognized a loss of $606,000 compared to a loss
of $2,399,000 in 1997 and a gain of $497,000 in 1996 on these
contracts. Outstanding contracts at December 31, 1998, total
$15,750,000 and mature in monthly installments of $750,000 at an
average exchange rate of A$1.00 = US$.742.
5
<PAGE>
Girilambone Exploration
The Company and Straits each own a 50% interest in exploration
licenses covering approximately 4,105 square kilometers surrounding
the Girilambone and Girilambone North mines and beneath the
Girilambone open pit. The Company is managing an exploration effort
to identify additional reserves at Girilambone for treatment through
the existing SX-EW treatment plant at Girilambone.
Tritton Copper Project
The Tritton Copper Project ("Tritton") is located twelve miles
southwest of the Girilambone mine in north central rural New South
Wales, Australia. The Tritton deposit is a sulphide copper deposit
consisting mainly of massive pyrite and chalcopyrite. The deposit
also includes minor amounts of gold and silver.
Tritton is owned 50% by the Company and 50% by Straits Mining Pty
Ltd ("Straits") (collectively "the Venturers") as part of the Company
managed Girilambone Exploration Joint Venture ("GEJV"). The Company
and Straits propose forming a mining joint venture for the development
of Tritton.
Geology
The geology at Tritton comprises a moderately folded sequence of
lower greenschist facies pelitic schists, mafic schists, shales,
greywackes and quartzites. The ore body consists of two approximately
tabular bodies of massive sulfide mineralization emplaced along a
shear and in a brittle fracture within quartzite. Four higher grade
thickened lenses of mineralization containing the majority of the ore
resources in the two uppermost lenses, have been intersected in
exploration drill holes.
Mineralogy
Tritton is a structurally controlled, sediment hosted, copper
deposit. Two distinct and separate zones of mineralization, termed
the "Upper Zone" and the "Lower Zone," are evident within the ore
body. The principal minerals throughout the Tritton orebody are
pyrite, chalcopyrite and quartz.
The Upper Zone mineralization almost entirely hosted by the main
quartzite unit. The sulphide is generally massive pyrite and
chalcopyrite. A 30 metre thick, high-grade lens in the center of the
Upper Zone contains banded and massive chalcopyrite with minor banded
bornite and comprises the uppermost high-grade thickened lens. The
massive sulphide in the Upper Zone has a weakly banded appearance with
alternating pyrite and chalcopyrite rich layers.
The Lower Zone contains the remaining three higher-grade
thickened lenses. It occurs structurally below the main quartzite
unit and is generally hosted in a green crenulated chlorite sericite
schist with moderate quartz veining. The Lower Zone mineralization
differs from the Upper Zone, as it is generally not hosted by
"quartzite". In general, the Lower Zone consists of massive sulphide
at the top of the mineralization, banded sulfides centrally within the
mineralization, and stringery chalcopyrite near the base of the
mineralization.
Based on the ore mineralogy, there are no obvious variations
within the Tritton orebody, that indicate that different ore types
exist, other than the presence of bornite in the Upper Zone. The only
obvious characteristic of the orebody is a gradual decrease in the
copper head grade with depth, which is accompanied by an increase in
the sulfur/copper ratio in the ore as the amount of copper
mineralization decreases relative to pyrite.
6
<PAGE>
Three exploration drilling programs were conducted on the Tritton
deposit from 1995 through 1997. At the conclusion of these programs,
a total of 40,549 metres of open-hole and reverse circulation pre-collar
holes, 32,854 metres of NQ diamond drilling and 619 metres of NAVI
drilling had been completed.
Mineral Resources
Total resources have been defined by Snowden Associates Pty, Ltd
("Snowden"), independent mining industry and resource estimation
consultants, to a depth of 1,030 metres below the surface as follows:
Resource Tonnes Cu Au Ag Density
Classification (million) % g/t g/t t/m3
Measured 2.82 3.89 0.25 11.60 3.44
Indicated 3.07 2.90 0.24 10.50 3.35
Inferred 4.99 2.28 0.18 10.50 3.36
Shortly after commencement of exploratory and resource drilling,
evaluation of the deposit began. This evaluation included, among
other activities, characterization of the ore, mineralogy, ore
microscopy, metallurgical characteristics and testwork, environmental
permitting and preliminary mining studies.
Feasibility Study
As a consequence of favorable results obtained during the
preliminary work, a feasibility study was commissioned by the
Venturers and was completed in 1998. This feasibility study was
prepared by independent, third party consulting firms. Ausenco Ltd of
Brisbane, Queensland, was responsible for the overall preparation and
coordination of the study.
The Tritton mine is proposed to be developed by underground
mining methods using ramp access to develop the Upper Zone of the
deposit. Ore would be mined at a rate of 660,000 tonnes per annum
("tpa") by retreat uphole benching and room and pillar methods. Ore
would be trucked to the surface, crushed, milled in a grinding circuit
and processed in flotation cells for the recovery of a marketable
concentrate. Concentrates would be shipped to a smelter for sale. As
an alternative to shipment to a smelter, the Venturers are
investigating the processing of copper sulphide concentrates on site
in order to produce cathode metal at the GCC SX-EW facility.
Economic results are based upon mineable reserves from the upper
zones of the deposit. Additional resources below 1,030 metres are not
included in these reserves, but were studied as part of a larger
project (the "Extended Case"), which assumes that the Lower Zone
resources will be converted to mineable reserves with additional
drilling. The Extended Case anticipates that a shaft would be
installed in the fourth year of production and that production at the
mine would be increased to slightly more than one million tpa.
7
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Reserves
The following reserves were estimated by Gemmel Mining Engineers,
independent mining consultants. After applying dilution and mining
recovery factors to the provided resource, along with estimated
economic costs, the reserves have been estimated as follows:
Proven reserves: 2,498,000 tonnes at 3.51% Cu, 0.23 g/t Au, 10.4 g/t Ag
Probable reserves: 2,112,000 tonnes at 2.69% Cu, 0.24 g/t Au, 9.7 g/t Ag
Total reserves: 4,610,000 tonnes at 3.14% Cu, 0.23 g/t Au, 10.1 g/t Ag
Permitting and Approvals
Various approvals, including development consent, mining lease,
pollution control, pipeline road crossing and water licenses, will be
required before any activities can commence at Tritton. The Company
does not anticipate that it will encounter any major problems in
obtaining the necessary operation permits and approvals.
Development and Mining Lease Applications
On June 29, 1998, the Company submitted a Development Application
to the New South Wales Department of Urban Affairs and Planning. On
August 8, 1998, a mining lease application (the "MLA") was submitted.
The MLA covers an area of 14km2. This is sufficient to contain any
likely extensions to the Tritton resource to 2,000 m below the
surface. Advertisements for Native Title purposes and public
objections were run on September 10, 1997. No Native Title claims or
objections were lodged within the compulsory 60-day waiting period.
The granting of the mining lease is dependent upon the success of the
Development Application. The Company anticipates that the mining
lease and development consents will be issued in the first half of
1999.
The Tabar Islands Gold Project
The Tabar Islands, which include the islands of Simberi, Tabar,
Tatau and Mapua, are located in PNG approximately 150 km north of
Rabaul and 80 km northwest of Lihir Island, the site of a major gold
deposit operated by Rio Tinto Ltd.
The Company holds an exploration license over these islands and a
mining lease was granted in December 1996, over the eastern part of
Simberi Island. The mining lease is for a twelve-year period expiring
December 3, 2008 and the renewable exploration license is for a two-
year period expiring June 5, 1999.
Over the past 15 years, approximately $34,000,000 has been spent
by the Company and its former co-venturers on exploration of the
islands. Twenty-one prospects have been identified, of which five,
all located on Simberi Island, have been substantilly drill tested.
In 1993, the Company acquired the interests of Kennecott and
Niugini Mining for cash payments totaling A$1,000,000 (US$728,000).
An additional A$1,000,000 (US$612,000 at the December 31, 1998
exchange rate) will be payable to them within two years after the
issuance of a "Special Mining Lease" to the Company by the PNG
government. A Special Mining Lease is issued on large projects of
national importance. Further, Kennecott and Niugini Mining have the
option to re-acquire 50% of the project if feasibility studies
indicate that the production from the mine could total 150,000 ounces
or more of gold annually. Exercise of the option would require
payment to the Company of 250% of the Company's expenditures on the
mine area from July 1994 to the date the option is exercised.
Expenditures from July 1994 through December 31, 1998 totaled
approximately $12,100,000.
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Geology
The Tabar Islands lie at the northwestern extremity of a belt of
islands some 300 kilometers long, which include the Lihir, Tanga and
Feni Island groups. They are comprised largely of alkaline and
undersaturated volcanics, lavas, and intrusives. The chain becomes
younger towards the south-east, with the oldest volcanics of Miocene
age occurring on Simberi, the northern-most island and the youngest of
Holocene age on Feni, the southern-most island in the chain. In the
Tabar Islands, raised Quaternary coral reef platforms surround steep
sided volcanic plateaus, particularly on Simberi and Tatau Islands.
These plateaus are generally 120 to 300 metres above sea level and are
often fringed by Miocene to Pliocene raised limestone reefs.
The epithermal gold prospects are developed in altered
volcanoclastics and lavas, where the distribution of gold is
structurally controlled. Gold occurs in both the oxide zone, which is
generally in the order of 15 to 45 metres thick, and in the sulfide
zone. The gold mineralization on Simberi Island is associated with
irregularly distributed breccia zones while on Tatau and Tabar
Islands, gold is associated with structurally controlled quartz
veining and is often accompanied by anomalous base metals.
A major exploration and drilling program was completed in 1997
aimed primarily at oxide and sulfide gold deposits on Simberi, and
gold/copper targets on Tatau and Tabar Islands. Exploration in 1998
was minimal with resource evaluation being the main priority.
In 1997 an exploration program consisting of geophysics, 15,800
metres of reverse circulation drilling and 5,500 metres of diamond
core drilling was carried out.
Mineral Resources
In May 1998, revised resource estimates for Simberi resulting
from this drilling program were released as follows:
Total Simberi Oxide and Sulfide Resources
Million Gold Grade
Mineralization Resource Category Tonnes (Grams/Tonne)
Measured and
Oxide indicated 10.7 1.25
Oxide Inferred 9.0 1.1
Sulfide Inferred 9.3 2.5
Total 29.0 1.6
Based on these revised resource estimates, the Company engaged
Snowden to identify new economic pit shells using Whittle pit
optimization software and current economic parameters. The new
mineable oxide material contained within these pit shells is shown in
the table below.
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<TABLE>
Simberi Oxide Reserves and Resources Inside Optimized Pit Shells
<CAPTION>
Total
Proven/Probable Reserves Inferred Resources Waste Resources
Pit Name Tonnes Gold Gold Tonnes Gold Tonnes Tonnes
000t g/t Ounces 000t g/t 000t 000t
<S> <C> <C> <C> <C> <C> <C> <C>
South Samat 142 5.23 23,879 3 145
North Samat 141 3.66 16,642 0.6 142
East Samat 156 1.96 9,847 2 158
Pigiput 479 1.43 22,020 21 500
Botlu 888 1.46 41,760 30 917
Pigibo 1,156 1.11 90 1,247
Sorowar 2,970 1.43 136,508 154 3,124
----- ---- ------- ------ ---- --- -----
Totals 4,776 1.63 250,656 1,156 1.11 300 6,232
===== ==== ======= ====== ==== ==== =====
</TABLE>
For all deposits except Pigibo, the resources are in the
proven/provable category. It has been assumed for mine planning
purposes that if the Pigibo resource is converted to a reserve it will
be mined last, after financing for the project has been repaid.
A feasibility study (the "Simberi Feasibility Study") on the
development of the oxide reserves and resources was completed in 1996
by Lycopodium Pty. Ltd. of Perth, Western Australia, and identified
mineable oxide reserves of 217,800 ounces. On the basis of additional
exploration in 1997, revised reserve estimates completed in 1998 have
increased the reserves to amounts shown in the table above.
The Company has relied on the Simberi Feasibility Study but has
updated it by incorporating the new resources and by making relatively
small changes to the development plan. This evaluation of the Simberi
oxides projects a mine life in excess of six years producing
approximately 40,000 ounces of gold per year at an average estimated
cost of $173/ounce. Estimated recovery from these reserves and
resources is expected to be 91%. Capital costs to achieve production
are estimated to be $16.8 million and firm quotes for construction are
being obtained. A review of the updated feasibility results is being
completed by independent engineers. It is anticipated that this
review will be completed during the first half of 1999.
During 1998, exploration programs within the mining lease on
Simberi Island were reduced and no drilling was undertaken. No
exploration was undertaken in 1998 within the Exploration License
areas on Simberi, Tabar, Tatau and Mapua Islands.
Ramu Nickel-Cobalt Project
The Ramu Nickel-Cobalt Project ("Ramu") is located 75 km south-
southwest of Madang in the Madang Province of PNG. Ramu is owned in
joint venture 65% by Ramu Nickel Limited ("RNL"), a wholly owned
subsidiary of Highlands Pacific Limited ("HPL") and 35% by the
Company. The State of PNG has issued four exploration licenses
covering the Ramu exploration area. These exploration licenses are
held by RNL in trust 65% for the benefit of HPL and 35% for the
benefit of the Company.
The government of PNG has the right to acquire an interest of up
to 30% in Ramu for an amount equal to the pro-rata accumulated
exploration expenditures at the time a development decision is made.
If it exercises this right, the government is required to contribute
to further exploration and development expenditures in proportion to
its interest in the project. Eastern Pacific Mines, Ltd. may elect
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within 180 days of receiving details of any proposed commercial
development of Ramu to participate in such development up to a 10%
interest by paying its share of those development costs. Each current
joint venture partner's interest in Ramu would be reduced
proportionately if either party exercises its right to participate in
the development.
In June 1997, Fluor Daniel Pty Ltd and HA Simons Limited ("Fluor-
Simons"), independent mining engineers, were commissioned to prepare a
feasibility study for the development of the Ramu deposit. This study
was completed in November 1998.
Feasibility Study Results
The feasibility study projects that nickel metal will be produced
at a cash cost of approximately US $1.38/lb before cobalt credits.
Net of cobalt credits (at cobalt price of $10/lb), nickel is projected
to be produced for a cash cost of approximately $0.41/lb. These cash
costs are projected to place production from Ramu in the lowest decile
of the world nickel cost curve. Based on a 20 year mine life, the
full cost, excluding financing charges, is approximately US $0.99/lb
of nickel, net of cobalt credits.
Ramu is designed to produce an average of 32,800 tonnes of London
Metal Exchange Grade 1 cathode nickel and 3,200 tonnes of cobalt in
the form of a pure cobalt salt annually. The ore reserves used in the
feasibility study are estimated to support a mine life of 20 years.
Ramu's development is estimated to cost $838 million, including
mining and processing facilities projected to cost approximately
$616.5 million and supporting infrastructure costs projected to cost
approximately $221.5 million.
Mining trials undertaken at the Kurumbukari mine site, process
pilot plant studies and related investigations have confirmed that
Ramu project design, proposed flowsheet and unit specifications are
consistent with precedent technologies. The studies have been
completed to a detail level which was designed to achieve an overall
cost estimation accuracy of +15% to -7.5%.
Location and Existing Infrastructure
The Ramu proposed mine site at Kurumbukari is located some 75-km
south-southwest of Madang in the Madang Province of Papua New Guinea.
The proposed mine site lies on the south-western side of the Ramu
Valley some six km south of the Ramu River. The site is undulating
and is at an average elevation of 700 metres above sea level. The
closest town is Usino on the north side of the Ramu Valley.
Currently, the proposed site can be accessed in dry weather by a track
connecting to the Madang to Lae Highway through Brahman, suitable for
all wheel drive vehicles. At any other time, the proposed site is
accessed by helicopter or by foot.
It is anticipated that the refinery site will be located at
Basamuk, approximately 52-km southeast of Madang and will be accessed
by sea through a well-protected natural harbor. A 95-km dry weather
track using all wheel drive vehicles will provide a road access to
Madang.
It is anticipated that the limestone quarry will be located some
2.5 km south east of the refinery site.
Geology
Basement rocks in the Ramu area consist of dunite and gabbro with
minor pyroxenites of the Miocene age, Marum Basic Belt. Periodic
uplift has occurred along major northwest, southeast trending
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structures related to the Ramu Markham Graben Fault. This has
resulted in an elevated plateau in the Ramu Project area, which has
promoted deep tropical weathering and surface laterization.
The laterite weathering profile averages 10-15 metres in
thickness and is enriched in nickel and cobalt. Thickness of the
laterite varies locally as a result of active erosion by streams and
gullies. The laterite is also deeper along major fractures in the
dunite, which promotes downward leaching by surface waters.
The Ramu deposit is a nickel laterite, which has been drilled
over an area of 25 square kilometres. The total resource as estimated
by Fluor-Simons is tabulated below:
Mineral Resources
Resource Area Resource Grade
Million % %
tonnes nickel cobalt
Kurumbukari 53.8 1.01 0.10
Ramu west 28.4 1.04 0.10
Greater Ramu 61.0 1.00 0.10
Total resource 143.0 1.01 0.10
Resource potential has been identified adjoining the resource
block, but additional testwork is necessary to define this resource.
Based on the above resources, proven and probable reserves have
been estimated by Fluor-Simons. Proven and probable reserves have been
estimated for areas with more detailed drill information after having
added internal rock material greater than two mm in diameter back into
the resource estimate, and after taking into account mining, dilution,
ore loss and the leaving of boulders greater than one meter in
diameter in the pit.
Proven and Probable Reserves
Category Million % nickel % cobalt
tonnes
Proved 39.7 0.88 0.10
Probable 36.0 0.94 0.09
Total 75.7 0.91 0.10
After removing rocks greater than two mm in diameter, 66,600,000
tonnes of the reserves grading 0.97% Ni and 0.11% Co will be fed to
the beneficiation plant.
Mining
Open cut mining methods will be used to mine 7.9 million wet
tonnes of run of mine material per annum, including rocks greater than
two mm in diameter. A total of 3.5 million dry tonnes of screened ore
will be fed to the beneficiation plant located near the mine for
gravity removal of chromite and other heavy minerals and particles
coarser than two mm. Following beneficiation, 3.2 million dry tonnes
of upgraded ore in wet slurry form containing 38% solids will be
delivered to the refinery via a 134-km slurry pipeline.
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Processing Overview
A four stage metallurgical process has been developed comprising:
- - - ore preparation at the Kurumbukari mine site, including ore
beneficiation to remove coarse oversize rock and chromite;
- - - transport of slurried ore 134 km by pipeline from the mine site
to the refinery located at Basamuk on the Rai Coast;
- - - acid pressure leaching to dissolve the nickel and cobalt from the
ore for subsequent precipitation as hydroxides, after having added
lime; and,
- - - re-leach of the hydroxides using ammonium sulphate, followed by
nickel and cobalt recovery to an enriched solution using solvent
extraction. Subsequently, LME grade 1-nickel cathode will be produced
by electrowinning and a pure cobalt sulphate will be precipitated.
Permitting and Approvals
The PNG Department of Mineral Resources will be the primary agent
during the permitting and approval process and will manage all mining
related issues and assist in obtaining the requisite permits from the
Department of Finance, the Department of Labour and the Department of
Environment.
In order to receive the necessary permits and approvals, the
Company and its partner will need to submit and receive approval of a
proposal for development, be granted a Special Mining Lease, be
granted other tenements and leases, execute the requisite agreements
and execute a Mining Development Contract. The leases to be acquired
include a Special Mining Lease for the Kurumbukari mine area, a mining
lease for the limestone quarry area, a lease for mining purposes for
the refinery and support facilities and a mining easement for the
roadways and pipeline corridor. Development approval is contingent
upon Department of Environment approval of the environmental plan,
Department of Finance approval of the financing plan and Department of
Labor approval of the training and localization plan. Development of
the project is subject to the negotiation and execution of a
satisfactory Mining and Development Contract with the State of Papua
New Guinea, the issuance of a Special Mining Lease by the State of
Papua New Guinea and obtaining financing at a cost on terms acceptable
to the Company and its partner. While the Company does not anticipate
any problems with obtaining the necessary permits and approvals, there
can be no assurance that it will do so. Further, there can be no
assurance that financing at terms acceptable to the Company and its
partner can be secured.
Status of Operating Committee
Pursuant to the Joint Venture Agreement with HPL, during the
exploration phase an Operating Committee consisting of one
representative of the Company and one representative of HPL had
authority to approve exploration activities and budgets. All votes of
the Operating Committee were weighted by the respective ownership
interest of each party and, accordingly, HPL controlled the Operating
Committee. In January 1999, the Operating Committee adopted a
resolution approving the feasibility of profitable commercial
development of the project and notified a third party which has an
option, exercisable within one hundred eighty (180) days after notice
of such approval, to acquire a 10% participation in the project.
It is the position of the Company and its counsel that the
functions and authority of the Operating Committee under the Joint
Venture Agreement terminated upon the aforementioned approval by the
Operating Committee and all further decisions must be made with the
approval of all participants in the project. HPL has disagreed with
the Company's position and has purported to have the Operating
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Committee adopt a budget for 1999. The Company has informed HPL that
such budget and actions taken pursuant thereto are unauthorized and
has refused to fund such unauthorized budget.
Other Exploration Properties - Canada and Mexico
Canada
In 1997, the Company entered into an agreement with Young-
Shannon Gold Mines to earn up to a 65% interest in the Chester Gold
Project, located north of Sudbury, Ontario. Due to the decline in
gold prices experienced in 1997, development of this project has been
delayed indefinitely and its carrying value was written off in 1997.
Mexico
The Company holds two exploration properties in Mexico and is
continuing to evaluate the possible acquisition of precious and base
metal properties.
Risk Factors
Risk factors which may have a significant impact on the future
performance of the Company or the value of its shares include:
Risk of Loss of Listed Status of Common Shares on The NASDAQ National
Market
The Company's common shares are currently traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ")
System National Market and on The Toronto Stock Exchange.
The National Association of Securities Dealers listing
requirements requires, among other things, that all issuers of
securities listed on the NASDAQ National Market maintain a continued
minimum bid price per share of such securities of $1.00. The per
share price of the Company's common shares of March 19, 1999, was
$.50. There can be no assurances that the per share price of the
Company's common shares will rise above $1.00, or that such price can
be maintained. A consequence of the failure to maintain a bid price
per share of $1.00 may be the de-listing of the common shares from the
NASDAQ National Market, which may have a material adverse effect on
the market value of the common shares and on the ability of the
Company to obtain additional financing.
The Company received a letter from the staff of the NASDAQ Stock
Market dated October 28, 1998, notifying the Company that its common
shares had failed to maintain a closing bid price greater than or
equal to $1.00 for the prior thirty (30) consecutive trade dates and
pursuant to NASDAQ Marketplace Rules, would be subject to de-listing
in January 1999 if the Company could not demonstrate compliance with
the $1.00 minimum bid price requirement for a minimum of ten (10)
consecutive trading days. In November 1998, the Company's common
shares traded on NASDAQ with a closing bid price of at least $1.00 per
share for at least ten (10) consecutive trading days, but declined to
below $1.00 thereafter.
On January 21, 1999, the Company requested an oral hearing with
NASDAQ in regard to this matter. On February 11, 1999, the Company
received a formal notice from NASDAQ that its request for continued
listing on the NASDAQ National Market will be considered at an oral
hearing to be held on March 26, 1999. There can be no assurance that
the Company will be able to avoid the de-listing of its common shares
from the NASDAQ National Market. However, the Company's common shares
will continue to be listed on The Toronto Stock Exchange.
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Risks of Low-Priced Stocks
The Securities and Exchange Commission (the "Commission") has
adopted regulations which define a "penny stock" to be any equity
security that has a market price (as therein defined) of less than
$5.00 per share, subject to certain exceptions. The following penny
stock restrictions will not apply to the Company's common shares if
such shares continue to be listed on the NASDAQ National Market, as to
which there can be no assurance, or have certain price and volume
information provided on a current and continuing basis or meet certain
minimum net tangible assets or average revenue criteria. The Company
meets both of the net tangible assets and average revenue exemptions
and would not be subject to the penny stock rules.
For any transaction involving a penny stock, unless exempt from
such restrictions, the rules require the delivery, prior to any
transaction in a penny stock, of a disclosure schedule prepared by the
Commission relating to the penny stock market. Disclosure is also
required to be made about commissions payable to both the broker-
dealer and the registered representative and current quotations for
the securities. Finally, monthly statements are required to be sent
disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks.
In any event, even if the Company's common shares continue to be
exempt from such restrictions, it will remain subject to Section
15(b)(6) of the Exchange Act, which gives the Commission the authority
to prohibit any person engaged in unlawful conduct while participating
in a distribution of penny stock from associating with a broker-dealer
or participating in a distribution of penny stock, if the Commission
finds that such a restriction would be in the public interest. If the
Company's common shares were to become subject to the existing rules
on penny stocks, the market liquidity for the Company's common shares
could be severely adversely affected.
Risk of Mineral Exploration and Development
As the primary business of the Company is the exploration for
and commercial development of base and precious metals and other
minerals, it is subject to the substantial risks inherent in such
activities.
Competition, Markets and Regulations
The mineral industry is extremely competitive. The ability of
the Company to develop its projects will depend on obtaining
additional financing and on other factors beyond its control.
World market prices for precious metals, base metals (including
nickel and copper), and strategic minerals are subject to many
variables and may fluctuate widely, depending upon world supply and
demand and on international economic and political factors. Revenues
that the Company may receive for the minerals from any existing
projects or from any future mineral discoveries are uncertain and no
assurance can be made that prices will be sufficient to warrant
commencement or continuation of commercial exploitation.
The Company has in place certain price protection agreements in
regards to its share of production from the Girilambone and
Girilambone North Copper Mines to reduce the impact of fluctuations in
copper prices through December 1999. However, if as a result of a
decline in copper prices the Company's realization on future copper
sales, after the expiration of the price protection agreements, were
to decrease significantly and remain at such level for any substantial
period, it might not be economically feasible to continue commercial
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production at Girilambone and Girilambone North and the Company might,
with the consent of its co-venturer, curtail or suspend some or all of
its mining activities at these locations.
As the Company has interests in Australia, PNG, Canada, Mexico
and the United States, its operations will be subject to regulations
in these countries and could be adversely affected by unfavorable
political developments in these countries. In some countries,
precious metals and strategic minerals are sometimes considered to be
national assets which may cause impediments to mining operations. It
is possible that the Company's assets could be expropriated by
governments and that the compensation received, if any, may not
reflect the true value of such assets. In addition, governmental
regulations often require local participation in mining ventures, and
the Company could be hindered in such countries if it is unable to
obtain local investors for its operations. Changes to applicable
environmental and safety regulations could restrict the Company's
operations.
Foreign Exchange Risks
The Company has mining and exploration operations in several
countries. As a consequence, the Company's revenue and costs will be
affected by fluctuations in currency rates. The Company has certain
forward currency exchange contracts in place in conjunction with its
Girilambone Copper Project borrowings intended to minimize the effect
of certain of these fluctuations. These contracts mature
progressively but any contracts not utilized can be rolled forward
until such time as the Company elects to utilize them.
Uninsured Risks
Exploration for and development of mineral deposits involve
hazards which could result in the Company incurring losses and
liabilities to third parties. The Company is not insured against all
losses or liabilities that could arise from its operations either
because insurance is unavailable or because the premium cost is
excessive. If the Company incurs uninsured losses or liabilities, the
funds available for exploration and development will be reduced and
the Company's assets may be jeopardized. However, the Company has
insured many of its operational risks.
Additional Financing Required
The Company will need additional financing to commercially
develop properties such as Tritton, Ramu and Tabar. There can be no
assurances that such additional financing will be available in the
amounts and at the time necessary to continue exploration on or
development of a specific property.
Borrowing Risks
Interest charges on borrowings incurred by the Company may
fluctuate because of many factors. High interest rates could have an
adverse effect on the Company's operations.
Employee Risks
The Company is generally non-unionized and the majority of its
employees are employed under contract or, in the case of seasonal
field activities, under short-term contract or as casual labor.
Approximately 35-40% of staff employed at the Company's Girilambone
operations is unionized, all under one union. There have been no
labor disputes since mining operations began in 1992, and a new two-
year labor agreement was finalized in early 1998 with a nominal
expiration date of July 16, 1999. The Company's history of labor
relations is excellent and management believes the risk of material
adverse effect due to labor unrest is minimal.
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Title to Properties
With respect to most properties, the Company must expend certain
amounts annually in exploration or development (which amounts are
subject to periodic re-negotiations) as a condition to retaining
title. Conditions imposed by licenses and mining legislation must
also be complied with. Consequently, the Company could lose title to
one or more properties or portions thereof if license conditions are
not complied with or if sufficient funds are not available to meet
annual expenditure requirements.
In PNG, proceedings were initiated in the National Court
regarding the constitutional validity of the Mining Act Chapter 195
which, inter alia, provided that minerals are the property of the
State. These proceedings have been discontinued. Should the PNG
Supreme Court consider the constitutional questions at some future
time it is possible that it could result in mining leases and other
tenements in PNG being invalid, such that challenges could be mounted
as to their existence. Management believes that such proceedings are
unlikely to be re-instituted.
The Mabo and Wik Decisions
The decisions of the High Court of Australia in Mabo v. The
State of Queensland (1992) 107 ALR 1 and Wik Peoples v The State of
Queensland (1997) 71 ALJR 173 may have an effect on the Australian
tenements and real property interests held by the Company. These
cases recognized that native title to land in Australia survived the
Crown's acquisition of sovereignty. However, the acquisition of
sovereignty exposing native title to extinguishment by valid exercise
of sovereign power is inconsistent with the continued right to enjoy
native title. Where the Crown has validly alienated land by granting
an interest that is wholly or partially inconsistent with a continuing
right to enjoy native title, native title is extinguished to the
extent of the inconsistency. The Wik decision found that on certain
pastoral leases not bestowing exclusive rights of occupancy, native
title was not extinguished but co-existed with the pastoral rights.
Thus native title has been extinguished by the grant of rights to mine
or by the conduct of mining operations pursuant to a right to do so.
The Company is not aware of any claim having been made nor does it
have any reason to believe that any claim will be made in respect of
any mining tenements or real property interests held by the Company in
Australia as a result of the Mabo or Wik decisions.
In the area surrounding the Company's Girilambone and
Girilambone North mines the State Department of Mineral Resources has
reached the view that native title has been extinguished and
accordingly the Company believes that there is no risk of successful
claims for native title to its mining and exploration tenements in
that area.
Miscellaneous
The local laws of the countries outside the United States in
which the Company is conducting activities generally prohibit direct
ownership of mining rights and properties by non-domestic entities,
but permit foreign entities to own such rights and properties through
domestic subsidiaries. To obviate or reduce the risks of title
complications, title is generally held on behalf of the Company in the
name of local nominees or local companies.
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Mining in Australia
Mineral commodities are a major Australian export industry and
mining is generally encouraged by both federal and state governments,
as long as environmental guidelines are followed. Ownership of
minerals is generally vested in the state. The individual states and
territories of Australia establish and administer their own mineral
policies. The states and territories have the right to impose mineral
royalties, being typically several percent of the salable value of the
mineral.
The various state and territorial governments administer
exploration and development through ministerial departments.
Exploration licenses (giving the licensees the right to explore but
not develop and mine minerals) are typically granted for two years,
with renewals requiring increased expenditure and partial
relinquishment of ground. A person or company can lodge an
application for an exploration license if the ground is not held by
others and if they have the technical and financial resources to meet
the proposed work program. Foreign ownership restrictions generally
do not apply to exploration activities.
Development and mining of minerals requires granting of a mining
lease. The procedures and time taken to gain a mining lease vary
considerably between the states and territories. In general however,
the basis for the granting of a mining lease is demonstration by the
applicant that the exploration resource can be economically mined and
that operations will comply with environmental guidelines. Foreign
investment guidelines must also be satisfied in the granting of mining
leases where certain capital threshold amounts are exceeded.
Currently the threshold for mining projects is A$50 million. The
foreign investment guidelines generally require 50% Australian
ownership, however this can be negotiated or waived. There are no
restrictions on repatriation of foreign company income and it is not
the policy of Australian governments to take an equity interest in
mining developments.
Australia taxes trading profits (including trust profits
distributed to corporate beneficiaries) and capital gains at the rate
of 36%. Sales of mining rights acquired by a prospector before August
20, 1996 can be exempt from tax up to the market value as at that
date, and sale or joint venture by the Company of particular
exploration licenses or mining leases may qualify for that exemption,
depending upon the circumstances. Australia also has a 10%
withholding tax upon the payment of interest and a withholding tax on
royalties or dividends paid out of untaxed profits to a non-resident
which varies from 10% to 30%, depending upon the country and the type
of payment.
Mining in Papua New Guinea
PNG is a constitutional democracy and has a comprehensive mining
law and tax code. The PNG Mining Act is based on the premise that
minerals in the ground are the property of the State. Exploration and
development of minerals requires approval of the PNG Government and
are administered by the Department of Mineral Resources. Prospecting
rights are obtained through application to the PNG Government for an
Exploration License which, if granted, is valid for two years and
obligates the holder to commit to a work plan and expenditure
schedule. For large projects, prior to development of a major
minerals project, a Mining Development Contract must be negotiated
with the PNG Government which sets forth details as to the
administration of the mining operation, specific proposals committing
the developer to construction of facilities and implementing the
operation. If the PNG Government subsequently approves a Proposal for
Development, a Special Mining Lease is granted and the Mining
Development Contract is signed, allowing the development to proceed
with the plans set forth in the proposal. A failure to meet the
stated commitments in the mining proposal can result in termination of
a Special Mining Lease and the forced sale to the PNG Government of
plant and equipment at its depreciated value. For smaller mining
projects a general Mining Lease may be granted for a term of up to 21
years. Under the Mining Act the government reserves the right to take
a participating interest up to 30% in such projects. Local landowner
participation is strongly encouraged by the government.
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PNG has consistently encouraged exploration for and development
of minerals. Development of major mineral projects is affected by two
major considerations, namely (1) taxation and royalties and (2) the
Government's entitlement to have an equity interest in mineral
projects. It is a long-standing PNG Government policy to acquire an
option to purchase an equity interest in new major mining ventures; in
practice this interest has not exceeded 30% in major mining ventures.
The maximum participation by the PNG Government in any particular
project, and the terms under which its interest may be obtained, are
negotiable and are usually negotiated prior to the issuance of the
Special Mining Lease. The PNG Government is not obligated to commit
to the exact extent of its participation until a Special Mining Lease
is granted. At the present time the PNG Government does not own an
interest in any project in which the Company has an interest.
Mining development projects in PNG may be undertaken by PNG
corporations, foreign corporations or by PNG or foreign corporations
participating in an unincorporated joint venture. The PNG income tax
rate for mining companies is currently 35% for PNG corporations
(operating on a Special Mining Lease) and 48% for foreign
corporations, but accelerated deductions for capital and exploration
expenditures are allowed and special tax relief may be granted during
the initial years of mining. The government also imposes on Special
Mining Leases an additional profits tax at the rate of 35% on after-
tax cash flow when the rate of return exceeds 20% or, at the
operator's one-time option, 12% plus the average US prime rate. The
rate of tax for resident companies on a general mining lease (which
applies to smaller mining projects) was reduced to 25% from January 1,
1996. The dividend withholding tax rate is 17% for resident
companies. PNG does not have a capital gains tax.
The Government has proposed a 10% value added tax effective July
1, 1999, and a turnover tax of up to 4% for the mining industry.
These taxes are intended to be revenue neutral for the mining industry
and will be offset by reductions in provincial taxes and import
duties.
Political and Other Risks (PNG)
The country of PNG comprises the eastern half of a large land
mass north of Australia in the South Pacific. PNG was administered as
a trust territory by Australia from the end of World War I until it
became independent in 1975. The economy of PNG is based largely on
minerals, petroleum, coffee, timber and Australian economic aid. PNG
has pro-western (particularly Australian) ties and democratic
elections. However, PNG is a third world country and any investment
is subject at any time to the potentially volatile effects of
political instability and economic uncertainty prevalent in such
countries, including civil strife and expropriation, excessive
taxation and other forms of government interference. PNG has
experienced episodes of civil unrest and breakdowns in law and order
in certain locations in the past few years. In the North Solomons
Province of PNG such activity led to the closure of the large Panguna
(Bougainville) copper-gold mine in 1990 which has not reopened. Other
projects on mainland PNG have experienced brief closures due to
violence. The Company, however, is not aware of any such problems in
areas where it is conducting exploration.
Environmental
At December 31, 1998, the Company had reserves of approximately
$115,000 for remediation of certain Australian and Papua New Guinea
sites and other environmental costs in accordance with its policy to
record liabilities for environmental expenditures when it is probable
that obligations have been incurred and the costs reasonably can be
estimated. The Company's estimates of these costs are based upon
currently available facts, existing technology, and presently enacted
laws and regulations. Where the available information is sufficient
to estimate the amount of liability, that estimate has been used;
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where the information is only sufficient to establish a range of
probable liability and no point within the range is more likely than
any other, the lower end of the range has been used.
The amounts of these liabilities are very difficult to estimate due to
such factors as the unknown extent of the remedial actions that may be
required and, in the case of sites not owned by the Company, the
unknown extent of the Company's probable liability in proportion to
the probable liability of other parties.
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Glossary of Technical Terms:
chalcocite - a copper sulfide mineral.
chalcopyrite - a copper iron sulfide mineral.
indicated
resource - the estimated quantity and grade of part of a
mineralized body for which the continuity of
grade, together with the extent and shape, is
so well established that a reliable grade
and tonnage estimate can be made for a deposit of
potential merit.
inferred
resource - the estimated quantity and grade of a mineralized
body, or a part thereof, that is determined on the
basis of limited sampling, but where there is sufficient
geological information and a reasonable distribution
of metal values to outline a deposit of potential
economic merit.
leaching - a dissolution of mineral components from
ore by appropriate chemicals.
laterite - a naturally leached iron and aluminum rich
rock, formed at the surface by weathering in
tropical conditions.
malachite - a green hydrated copper carbonate mineral.
measured
resource - resource intersected and tested by drill holes,
underground openings or other sampling
procedures at locations which are spaced
closely enough to confirm continuity and where
geoscientific data are reliably known.
Ordovician - a geological period within the Paleozoic Era.
ore - material which can be mined and/or treated at a profit.
oxidized zone - zone in which sulfides have been altered to
oxides by surface waters.
Paleozoic - an era of geological time, from 245- 570
million years ago.
probable reserve - 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,
information and a reasonable distribution of metal values
are farther apart or are otherwise less adequately spaced.
The degree of assurance, although lower than that of
proven reserves, is high enough to assume continuity
between points of observation.
proven/probable
reserve - used if the difference in degree of assurance
between proven and probable reserves cannot be reliably
defined.
proven reserve - reserves for which quantity is computed from
dimensions revealed in outcrops, trenches, workings
of drill holes; grade and/or quality are computed from
the results of detailed samplings; and the sites for
inspection, sampling and measurement are spaced so
closely and the geologic character is so well defined
that size, shape, depth and mineral content of reserves
are well established.
quartzite - a compact siliceous rock formed of silica of
sedimentary origin.
reserve - part of a mineral deposit which could be
economically and legally extracted or produced at the
time of the reserve determination.
resource - an identified in-situ mineral occurrence
from which minerals may be recovered.
schist - a medium to coarse grained metamorphic rock with
sub-parallel orientation of micaceous minerals.
sulfide - a mineral compound characterized by the linkage of
sulfur with a metal.
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ITEM 3. LEGAL PROCEEDINGS
On December 2, 1998 MIL Investments, S.A. ("MIL"), derivatively on
behalf of Resources brought a civil action in the District Court of
Dallas County, Texas, naming as Defendants, the Company, W. Pierce
Carson, Edgar F. Cruft, Terence H. Lang, and Hicor Corporation.
Counsel for Messrs. Carson, Cruft and Lang removed the case on
December 31, 1998 to the United States District Court for the Northern
District of Texas, Dallas Division. Together with its Notice of
Removal, Messrs. Carson, Cruft, and Lang filed a Motion to Realign
Resources as party defendant and, in addition, filed a Motion to
Dismiss the case for lack of personal jurisdiction and, alternatively,
to transfer venue of the case to the United States District Court for
the District of New Mexico at Albuquerque. The Company, Resources and
each individual defendant is being represented under a directors and
officers liability policy. On behalf of the Company, on January 13,
1999, a Motion to Dismiss the case was filed asserting that the Court
lacked personal jurisdiction over the Company and that the Plaintiff
had failed to state a claim upon which relief could be granted against
the Company. On January 13, 1999 the Plaintiff filed a Motion to
Remand the case to the 298th Judicial District Court of Dallas County,
Texas, a Motion for Leave to Amend the Complaint and a Response to the
Resources Motion to Realign the Parties. All of these Motions are
pending and have not been ruled upon by the Court.
The Plaintiff's Original Petition and Jury Demand sets forth a
number of alleged corporate events involving the Company's
relationship with Resources, all of which have been approved by MIL's
nominees to Resource's Board of Directors. Causes of action are
alleged against Messrs. Carson, Cruft, and Lang for breach of
fiduciary duties, negligence and gross negligence. The damages sought
in connection with those causes of action are stated to be "in excess
of the minimum jurisdictional limits of this Court of not more than
$50 million" No specific causes of action are alleged against the
Company. Nonetheless, a prayer for punitive damages against all
defendants is alleged in the amount of $50 million.
The Company expects to contest the claims vigorously if they are
not dismissed for lack of jurisdiction over them by the courts in
Texas. The cost of defense is being covered by a policy of insurance.
An action was instituted on behalf of the Company and Resources in
the Supreme Court, New York County on January 15, 1999 seeking a
determination that MIL is not entitled to demand representation on the
Board of Directors of the Company and that the failure to designate
such a representative does not constitute a violation or breach of any
of Resource's obligations to MIL. The time within which to respond to
that complaint has been extended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
22
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON SHARES AND RELATED
SHAREHOLDER MATTERS
Market Information
The Company's common shares are traded on the National
Association of Securities Dealers Automated Quotation ("NASDAQ")
system under the symbol "NORPF" and on The Toronto Stock Exchange
("TSE") under the symbol "NPF". The Company's common shares traded on
the Australian Stock Exchange ("ASX") from February 28, 1994, until,
at the Company's request, it was de-listed on March 5, 1997.
On February 17, 1997, the shareholders of the Company granted
approval for a reverse share split whereby one $.05 par value common
share was exchanged for every five $.01 par value common shares.
The following is the quarterly range of sales prices for the
Company's common shares as reported by NASDAQ for 1998 and 1997. The
quotations reflect interdealer prices, without retail mark up, mark
down or commission and may not necessarily represent actual
transactions. The prices have been adjusted to reflect the 1 for 5
reverse split effective March 10, 1997.
1998 (US$) High Low
1st Quarter 3 1/8 2
2nd Quarter 3 1/8 2 1/16
3rd Quarter 2 1/4 9/16
4th Quarter 1 5/16 9/16
1997 (US$) High Low
1st Quarter 7 5/8 4 1/2
2nd Quarter 6 3/4 4 7/8
3rd Quarter 5 3/8 3 3/4
4th Quarter 5 1/8 2 3/8
23
<PAGE>
Following is the quarterly range of stock prices for the
Company's common shares as reported by The Toronto Stock Exchange (the
"TSE") for July, 1997 (the period the Company was initially listed on
the TSE) to December 31, 1998. Per share amounts are reported in
Canadian dollars.
1998 (C$) High Low
1st Quarter 4.35 3.00
2nd Quarter 4.25 3.30
3rd Quarter 3.08 1.10
4th Quarter 1.75 .85
1997 (C$) High Low
3rd Quarter 6.75 5.00
4th Quarter 7.00 3.75
Following is the quarterly range of share prices for the
Company's common shares as reported by the Australian Stock Exchange
until March 5, 1997 when it was de-listed. Per share amounts are
reported in Australian dollars. The prices have been adjusted to
reflect the 1 for 5 reverse split effective March 10, 1997.
1997 (A$) High Low
1st Quarter 8.5 6.75
Dividends
There were no dividends declared or paid in 1998 or 1997 and
dividends are not anticipated in the near future. The Company intends
to retain earnings to support current operations, to fund exploration
and development projects and to repay bank loans.
Shareholders
As of March 23, 1999, the approximate number of shareholders of
record of the Company's common shares was 375.
24
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
<CAPTION>
Year Ended December 31
(In thousands, except per share amounts)
1998 1997 1996 1995 1994
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Sales $ 13,807 $ 16,328 $ 16,178 $ 14,074 $ 11,293
Costs and Expenses:
Cost of sales 10,251 8,696 8,969 7,664 7,289
Abandoned and impaired projects 96 14,293 191 352 35
General and administrative 2,941 3,827 3,615 3,022 2,735
---------- --------- ---------- ---------- ---------
Total costs and expenses 13,288 26,816 12,775 11,038 10,059
---------- --------- ---------- ---------- ---------
Operating Earnings (Loss) 519 (10,488) 3,403 3,036 1,234
Other Income (Expenses):
Interest and other income 233 357 161 448 697
Interest (272) (371) (406) (604) (992)
Copper contracts gain (loss) -- 372 (304) -- --
Forward currency exchange
contracts gain (loss) (606) (2,399) 497 (279) 2,535
Foreign currency transaction gain (loss) (589) 502 (114) (378) 515
---------- --------- ---------- ---------- ---------
Total other income (expense) (1,234) (1,539) (166) (813) 2,755
---------- --------- ---------- ---------- ---------
Earnings (Loss) Before Income Taxes (715) (12,027) 3,237 2,223 3,989
Income Tax Provision (740) 2,300 2,620 1,120 --
---------- --------- ---------- ---------- ---------
Net Earnings (Loss) $ 25 $ (14,327) $ 617 $ 1,103 $ 3,989
========== ========= ========== ========== ==========
Basic Earnings (Loss) Per Common
Share $ -- $ (1.31) $ .06 $ .12 $ .43
========== ========= ========== ========== ==========
Diluted Earnings (Loss) Per Common
Share $ -- $ (1.31) $ .06 $ .10 $ .39
========== ========= ========== ========== ==========
Dividends Paid Per Share $ -- $ -- $ -- $ .05 $ --
========== ========= ========== ========== ==========
Weighted Average Shares
Outstanding - Basic 12,961 10,935 10,053 9,559 9,492
========== ========= ========== ========== ==========
Weighted Average Shares
Outstanding - Diluted 12,961 10,935 11,687 10,705 10,800
========== ========= ========== ========== ==========
BALANCE SHEET DATA:
(at year end)
Working capital (deficiency) $ (1,303) $ (1,139) $ (3,088) $ (60) $ 4,017
Total assets 39,403 40,397 39,741 34,666 32,850
Indebtedness 3,000 2,861 5,981 5,430 7,133
Shareholders' equity 25,339 25,256 24,209 23,460 22,813
U.S. GAAP DATA:
Sales $ 13,807 $ 16,328 $ 16,178 -- --
Net loss (73) (3,304) (3,888) -- --
Net loss per share -- (.30) (.39) -- --
Shareholder's equity 25,339 18,334 -- -- --
</TABLE>
25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Safe Harbor Statement under the Private Securities Litigation Act
of 1995. The statements contained in this report which are not
historical fact are "forward looking statements" that involve various
important risks, uncertainties, and other factors which could cause
the Company's actual results for 1999 and beyond to differ materially
from those expressed in such forward looking statements. These
important factors include, without limitation, the risks and factors
set forth herein as well as other risks previously disclosed in the
Company's securities filings.
Results of Operations
December 31, 1998 compared to December 31, 1997
The Company recorded net earnings of $25,000 for the year ended
December 31, 1998 compared to a net loss of $14,327,000 in 1997.
Copper sold during 1998 totaled 15,922,000 pounds, a 2% increase over
15,600,000 pounds of copper sold in 1997. For the years ended
December 31, 1998 and 1997, the Company received an average price of
$.76 and $1.05 per pound of copper sold, respectively. The copper
hedging programs established by the Company resulted in an increase in
sales of $1,616,000 in 1998 compared to a decrease of $54,000 in 1997.
Including the impact of copper hedging programs, the Company realized
a net average selling price of $.87 for the year ended December 31,
1998 compared to $1.05 realized in 1997. Cost of sales per pound of
copper increased to $.65 for the year ended December 31, 1998 compared
to $.56 in 1997. The increase resulted primarily from increased
depreciation, depletion and amortization as the mine approaches the
end of its production life.
The provision for abandoned and impaired properties decreased to
$96,000 for the year ended December 31, 1998 from $14,293,000 in 1997.
Due to the precipitous decline in gold prices during the fourth quarter
of 1997, the Company's review of the Tabar Island Gold Project ("Tabar")
in PNG indicated that the full carrying value of Tabar was not recoverable
at projected gold prices. The Company wrote down the value of this project
by $13,381,000 to its estimated fair value of $4,275,000. The Company also
wrote off the costs associated with gold projects in Canada ($609,000) and
Mexico ($303,000). The Company wrote off exploration costs of $96,000 in
Mexico in 1998.
General and administrative expenses decreased for the year ended
December 31, 1998 to $2,941,000 from $3,827,000 primarily due to
decreases in salaries, public relations costs and overhead charges.
Interest and other income decreased for the year ended December
31, 1998 compared to 1997 due to reduced funds available for
investment. Interest expense and amortization of debt issuance costs
decreased as a portion of debt outstanding at the beginning of the
year was repaid during 1998. Fluctuations in gains and losses from
foreign currency forward exchange contracts and from foreign currency
transactions are primarily a result of changes in the relative
strength of the Australian dollar compared to the United States
dollar. During 1998 and 1997, the Australian dollar weakened compared
to the United States dollar. Other income included a gain of $372,000
in 1997 resulting from an increase in the market value of copper
contracts not designated as hedging instruments.
26
<PAGE>
The deferred tax benefit of $740,000 in 1998 includes an
adjustment of deferred taxes provided for in prior years in Australia
offset by a provision of $510,000 attributable to taxable income
generated in Australia. The deferred tax provision of $2,300,000 in
1997 is attributable to income generated in 1997 from the Girilambone
mining operations in Australia. Operating losses incurred in other
taxing jurisdictions cannot be used to offset taxable income
generated in Australia.
December 31, 1997 compared to December 31, 1996
Due primarily to a provision for impaired properties, the Company
recorded a net loss of $14,327,000 for the year ended December 31,
1997 compared to net earnings of $617,000 in 1996. Copper sold during
1997 totaled 15,600,000 pounds, an 8% increase over 14,400,000 pounds
of copper sold in 1996. For the years ended December 31, 1997 and
1996, the Company received an average of $1.05 per pound of copper
sold. The copper hedging programs established by the Company resulted
in a decrease in sales of $54,000 for the year ended December 31, 1997
compared to an increase of $1,058,000 in 1996. Including the impact
of copper hedging programs, the Company realized a net average selling
price of $1.05 in 1997 compared to $1.12 realized in 1996. Copper
production increased for the year ended December 31, 1997 over the
same period in 1996 due to continued improvement in the production
process. Cost of sales per pound of copper declined to $.56 for the
year ended December 31, 1997 compared to $.62 in 1996. The decrease
resulted from continued improvements in the heap leaching process
resulting from the implementation of forced heap aeration.
The provision for abandoned and impaired properties increased to
$14,293,000 for the year ended December 31, 1997 from $191,000 in
1996. Due to the precipitous decline in gold prices during the fourth
quarter 1997, the Company's review of the Tabar Island Gold Project
("Tabar") in PNG indicated that the full carrying value of Tabar was
not recoverable at projected gold prices. The Company therefore wrote
down the value of this project by $13,381,000 to its estimated fair
value of $4,275,000. The Company also wrote off the costs associated
with gold projects in Canada ($609,000) and Mexico ($303,000). The
Company wrote off costs totaling $191,000 in 1996.
General and administrative expense increased 6% for the year
ended December 31, 1997 as compared to 1996 due to an increase in
overall exploration activities and costs associated with regulatory
requirements.
Interest and other income increased for the year ended December
31, 1997 compared to 1996 due to additional funds available for
investment. Interest expense and amortization of debt issuance costs
decreased as the average amount of debt outstanding declined during
1997. Fluctuations in gains and losses in the foreign currency
forward exchange contracts and in foreign currency transactions are
primarily a result of changes in the relative strength of the
Australian dollar compared to the United States dollar. During 1997,
the Australian dollar weakened compared to the United States dollar,
while it strengthened during 1996, resulting in a loss from forward
currency exchange contracts of $2,399,000 in 1997 compared to a gain
in 1996 of $497,000. The Company recorded foreign currency
transaction gains for the year ended December 31, 1997 totaling
$502,000 compared to losses of $114,000 in 1996. Other income
included a gain of $372,000 in 1997 resulting from a change in the
market value of copper contracts which were not designated as hedging
instruments, compared to a loss of $304,000 for 1996.
A provision for deferred income taxes in Australia of $2,300,000
and $2,620,000 was recorded in 1997 and 1996, respectively,
attributable to income generated by the Girilambone mining operations.
Operating losses incurred in other taxing jurisdictions cannot be used
to offset taxable income generated in Australia.
27
<PAGE>
Liquidity and Capital Resources
Cash provided by operating activities was $7,175,000 in 1998
compared to $8,868,000 in 1997 and $9,184,000 in 1996. The decrease
in the current year was primarily the result of a decrease in the
price realized for the Company's copper production.
Cash used in investing activities included capital expenditures
for property and equipment and exploration and development costs.
Capital expenditures of $440,000 in 1998, $473,000 in 1997 and
$771,000 in 1996 primarily relate to additions to plant, mining and
milling equipment at Girilambone. Capitalized deferred exploration
and development costs in 1998 of $6,726,000 primarily relate to costs
incurred on the Company's Ramu property and costs incurred by the
Girilambone exploration joint venture. Capitalized costs in 1997 of
$10,720,000 include costs incurred at Ramu and by the Girilambone
joint venture, as well as costs incurred at Tabar. Costs of
$8,154,000 incurred in 1996 primarily consist of costs incurred at
Ramu and Tabar.
Cash provided by financing activities consists of borrowings
under long-term bank financing agreements and from Resources, offset
by repayments, and proceeds from the issuance of common shares.
In December 1998, the Company restructured its Girilambone
financing agreement. At December 31, 1998, the Company had borrowed a
total of $3,000,000 under the agreement. The agreement requires that
all cash proceeds generated from Girilambone mining operations be
deposited in a cash collateral account with the lender and to be used
to pay any operating costs and expenses, bank fees, interest and
principal, and to fund a reserve account with the lender. Any
remaining proceeds are then available at the lender's discretion for
use by the Company. The lender, as collateral for the loan, holds a
security interest in all of the Company's Australian assets including
the Company's share of assets at and production from the Girilambone
Mines.
On December 12, 1997, the Company completed the sale of 600,000
shares of Common Stock to MRDC, a corporation wholly owned by the
Government of Papua New Guinea. These shares were sold at a price of
US$4.50 (C$6.40) per share and gross proceeds totaled US$2,700,000
(C$3,840,000). After payment of legal and issuance costs, net
proceeds totaled US$2,677,000.
On July 3, 1997, the Company closed its public stock offering in
Canada for the sale of 2,460,000 units at 5.00 per unit. Each unit
consisted of one share of the Company's common stock and one-half of
one purchase warrant. Each whole purchase warrant entitled the holder
to purchase one share of common stock at C$9.00. In connection with
the offering, the Company issued 225,000 warrants to the underwriter.
Each of those warrants entitled the underwriter to purchase common
shares at C$6.90. Gross proceeds from the Canadian offering totaled
$12,300,000 (C$16,974,000). After payment of commissions, legal fees
and other associated costs, net proceeds totaled $10,684,000
(C$14,574,000).
In October 1996, Resources agreed to make available to the
Company, at Resources' discretion, an operating loan of up to
$2,000,000, which was increased to $4,000,000 in May 1997, payable
upon demand and bearing interest at prime plus 1%. Funds advanced
under the operating loan from October 1996 to June 1997, totaled
$3,748,000. Concurrent with the closing of the offering described
above, the Company repaid $2,000,000 to Resources and Resources agreed
to convert the remaining $1,748,000 balance due them to 349,549 Units
at $5.00 per unit.
The Company believes funds required for its ongoing overhead
expenses will be available from cash provided by Girilambone mining
operations. Should development proceed on the Tritton copper project,
the Ramu nickel/cobalt project, or the Simberi Island gold project,
28
<PAGE>
the Company will be required to seek funds for such development
through additional debt and/or equity financings. There can be no
assurance that the Company will be able to obtain sufficient financing
to develop these projects on terms acceptable to the Company. Should
financing not be available on acceptable terms, the Company may
attempt to sell a portion of its interest in these projects for cash
or seek additional partners to assist in the development efforts.
Year 2000
In January 1998, the Company initiated a Year 2000 project to
address the issue of computer programs and embedded computer chips
being unable to distinguish between the year 1900 and the year 2000.
The project involves converting to Year 2000 compliant accounting
software, testing existing software, hardware and operational systems
and communicating with third-party customers, suppliers and service
providers to ensure that they are taking appropriate action to remedy
their Year 2000 issues.
The Company has installed Year 2000 compliant accounting software
and is in the process of converting from its existing system. The
Company anticipates that the implementation of this software will be
completed by September 30, 1999. The Company's local area network and
PC hardware and non-accounting software, such as spreadsheets and word
processing, have been tested and, to the best of the Company's
knowledge, are Year 2000 compliant. Other non-information technology
systems, such as the telephone system and other office equipment, are
currently being assessed for Year 2000 readiness. Management expects
to have substantially all of the system and application changes,
except for the accounting software, completed by April 30, 1999 and
expects to complete testing of substantially all systems and
applications by June 30, 1999.
The Company believes that the computer systems and applications
it maintains would not have a material impact on the operations of the
Company or its revenues in the event that the systems fail to operate
in the Year 2000. A contingency plan to replace any non-compliant
systems has been developed. If the conversion to Year 2000 compliant
accounting software is not complete by December 31, 1999, the Company
may be able to use compliant spreadsheet software until the accounting
software is operational. A decision regarding the preparation of a
contingency plan will be made by June 30, 1999.
The computer systems at the Girilambone copper mine, which
provides substantially all of the Company's revenue, have been
reviewed for Year 2000 compliance. Based upon this review, a number
of hardware systems have been upgraded to achieve year 2000
compliance. Testing and upgrading of systems continues and final
results and recommendations are expected to be completed by June 30,
1999. The Company will continue to monitor the operation at
Girilambone to ascertain whether it has attained Year 2000 compliance.
The Company is communicating with third party customers and
suppliers and has received notification from its building manager, its
bank, the NASDAQ and The Toronto Stock exchanges and other service
providers indicating that they expect to be Year 2000 compliant. The
Company has prepared surveys for distribution to its customers, major
vendors and other service providers to ascertain their state of Year
2000 readiness. It is anticipated that these surveys will be
completed and distributed on or about March 31, 1999. Due to the
general uncertainty inherent in the Year 2000 problem, resulting in
part from the uncertainty of the Year 2000 readiness of third-party
customers, suppliers, and service providers, the Company is unable to
determine at this time whether the consequences of Year 2000 failures
will have a material impact on the Company's results of operations or
financial condition.
29
<PAGE>
The estimated total cost of Year 2000 testing and compliance is
expected to be approximately $50,000, which includes costs related to
the purchase and conversion to Year 2000 compliant accounting
software. No costs directly related to the Year 2000 issue have been
incurred as of December 31, 1998. The costs of the project and the
expected completion dates are based on management's best estimates.
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, including the effects of
adverse changes in commodity prices, foreign currency exchange rates
and interest rates as discussed below.
Commodity Price Risk
The Company sells copper produced from its Girilambone mine in
Australia. As a result, the Company's financial results are affected
when the price of copper fluctuates. In order to protect the selling
price of a portion of the production from the mine, the Company has
entered into swap agreements covering approximately 75% of the
Company's share of production from the mine for 1999. Under the terms
of the swap agreements, the Company receives the difference between a
fixed price of copper and the current market price of copper at the
date of settlement if the current market price is lower. If the
current market price is higher, the Company pays the difference. As
of December 31, 1998 the Company had entered into swap agreements
covering a total of 11,905,000 pounds of copper at a fixed price of
$.75 per pound. Swaps covering 992,000 pounds are scheduled to settle
each month during 1999. Since the swap agreements are designated as
hedges of anticipated copper sales, any gains or losses realized upon
settlement of the swaps are included in sales when the hedged
production is sold.
Foreign Currency Risk
A substantial portion of the operating costs of the Girilambone
mine are incurred in Australian dollars. Since the functional
currency of the Company's Australian operations is the US dollar, the
Company is exposed to changes in the exchange rate between the US
dollar and the Australian dollar. The Company has entered into
foreign currency forward exchange contracts which are designed to
protect against the effect of exchange rate fluctuations on a portion
of the operating costs of Girilambone. Outstanding contracts at
December 31, 1998 have a total notional amount of US$15,750,000 at an
average exchange rate of A$1.00 to US $.742. Notional amounts of
US$750,000 are scheduled to settle monthly. Since these contracts
relate to the foreign currency exchange risk of anticipated
transactions, under current accounting standards, realized and
unrealized gains or losses on these contracts are included currently
in the results of operation. As of December 31, 1998, cumulative
unrealized losses of $2,700,000 have been recognized in the income
statement and recorded as a liability.
Interest Rate Risk
The Company has long term debt outstanding of $3,000,000 at
December 31, 1998. Under the terms of the debt agreement, the maximum
available can be increased to $3,600,000 after January 1, 1999. The
loan bears interest at the Singapore Interbank Offered Rate (SIBOR)
plus 1 1/2%. Principal payments are payable quarterly beginning in
September, 1999 at the greater of 50% of available cash flow, as
defined, for the quarter ending on the relevant payment date or the
amount required to reduce the amount outstanding to $3,400,000 at
September 30, 1999, $2,400,000 at December 31, 1999, $1,100,000 at
March 31, 2000 and to zero on June 30, 2000. Since the interest rate
on the loan outstanding is variable and is reset periodically, the
Company is exposed interest rate risk.
30
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements as of December 31, 1998 and
1997 and for each of the years in the three-year period ended
December 31, 1998 follow.
31
<PAGE>
Independent Auditors' Report
The Board of Directors
Nord Pacific Limited:
We have audited the accompanying consolidated balance sheet of Nord
Pacific Limited and subsidiaries as of December 31, 1998, and the
related consolidated statements of operations, shareholders' equity,
and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Nord Pacific Limited and subsidiaries as of December 31, 1998, and
the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles in
Canada.
Accounting principles generally accepted in Canada vary in certain
significant respects from accounting principles generally accepted in
the United States. Application of accounting principles generally
accepted in the United States would have affected results of
operations for each of the years in the three-year period ended
December 31, 1998 and shareholders' equity as of December 31, 1998 and
1997, to the extent summarized in Note N to the consolidated financial
statements.
KPMG LLP
Denver, Colorado
March 24, 1999
32
<PAGE>
Independent Auditor's Report
Board of Directors and Shareholders
Nord Pacific Limited
We have audited the accompanying consolidated balance sheet of Nord
Pacific Limited and subsidiaries (the "Company") as of December 31,
1997 and 1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the two years in the period
ended December 31, 1997 (all expressed in U.S. dollars). These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
consolidated 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 the Company at
December 31, 1997 and the results of its operations and its cash flows
for each of the two years then ended in conformity with accounting
principles generally accepted in Canada
DELOITTE & TOUCHE
Chartered Accountants
Hamilton, Bermuda
March 20, 1998
33
<PAGE>
<TABLE>
NORD PACIFIC LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1998 AND 1997
(In thousands of U.S. Dollars)
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,416 $ 3,351
Accounts receivable
Trade 1,384 1,313
Subscriptions receivable (Note I) -- 2,700
Other, including joint venture partner 402 143
Inventories
Copper metal 191 137
Supplies 166 204
Premium on copper put option contracts (Note F) -- 760
Prepaid expenses 87 137
--------- ---------
TOTAL CURRENT ASSETS 3,646 8,745
DEFERRED COSTS ASSOCIATED WITH ORE UNDER LEACH, net of
accumulated amortization of $16,192 in 1998 and
$11,518 in 1997 (Note B) 9,413 8,970
PROPERTY, PLANT AND EQUIPMENT at cost
less accumulated depreciation (Note C) 3,605 4,737
DEFERRED EXPLORATION AND DEVELOPMENT COSTS
Girilambone, net of accumulated amortization
of $2,917 in 1998 and $1,883 in 1997 (Note B) 3,527 4,335
Exploration and development prospects (Note D) 19,141 13,492
OTHER ASSETS 71 118
--------- ----------
$ 39,403 $ 40,397
========= ==========
See notes to consolidated financial statements.
</TABLE>
34
<PAGE>
<TABLE>
NORD PACIFIC LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, DECEMBER 31, 1998 AND 1997
(In thousands of U.S. Dollars)
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable
Trade $ 1,715 $ 975
Affiliates 594 168
Accrued expenses 484 1,484
Payable on copper put option contracts (Note F) -- 760
Current maturities of long-term debt (Note E) 600 2,548
Payable on foreign currency contracts (Note F) 1,556 2,099
Obligation under purchase agreement (Note D) -- 650
----------- -------------
TOTAL CURRENT LIABILITIES 4,949 8,684
LONG-TERM LIABILITIES
Long-term debt (Note E) 2,400 313
Payable on foreign currency contracts (Note F) 1,144 --
Deferred income tax liability (Note K) 5,300 6,040
Retirement benefits (Note L) 271 104
----------- -------------
TOTAL LONG-TERM LIABILITIES 9,115 6,457
COMMITMENTS AND CONTINGENCIES
(Notes H, M and O)
SHAREHOLDERS' EQUITY (Notes G and I)
Common shares, no par value in 1998, $.05 per
share in 1997; unlimited authorized shares
in 1998, 20,000,000 authorized in 1997.
Issued and outstanding 12,960,803 shares in
1998 and 12,360,803 shares in 1997 47,375 618
Common shares subscribed (Note I) -- 2,700
Additional paid-in capital -- 43,999
Accumulated deficit (22,834) (22,859)
Foreign currency translation adjustment 798 798
----------- -------------
TOTAL SHAREHOLDERS' EQUITY 25,339 25,256
----------- -------------
$ 39,403 $ 40,397
=========== =============
See notes to consolidated financial statements.
</TABLE>
35
<PAGE>
<TABLE>
NORD PACIFIC LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands of U.S. Dollars, except per share amount)
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
SALES (Note J) $ 13,807 $ 16,328 $ 16,178
COSTS AND EXPENSES
Cost of sales (Note B) 10,251 8,696 8,969
Abandoned and impaired properties (Note D) 96 14,293 191
General and administrative
Nord Resources Corporation (Note G) -- 566 415
Other 2,941 3,261 3,200
--------- ----------- ----------
Total costs and expenses 13,288 26,816 12,775
--------- ----------- ----------
OPERATING EARNINGS (LOSS) 519 (10,488) 3,403
OTHER INCOME (EXPENSE)
Interest and other income 233 357 161
Interest and debt issuance costs (272) (371) (406)
Foreign currency forward exchange contract
gains (losses) (Note F) (606) (2,399) 497
Foreign currency transaction gains (losses) (589) 502 (114)
Copper contracts gains (losses) (Note F) -- 372 (304)
--------- ----------- ----------
TOTAL OTHER INCOME (EXPENSE) (1,234) (1,539) (166)
--------- ----------- ----------
EARNINGS (LOSS) BEFORE INCOME TAXES (715) (12,027) 3,237
INCOME TAXES (Note K) (740) 2,300 2,620
--------- ----------- ----------
NET EARNINGS (LOSS) $ 25 $ (14,327) $ 617
--------- ----------- ----------
EARNINGS (LOSS) PER COMMON SHARE
BASIC $ -- $ (1.31) $ .06
========== ============ ==========
DILUTED $ -- $ (1.31) $ .06
=========== ============ ==========
See notes to consolidated financial statements.
</TABLE>
36
<PAGE>
<TABLE>
NORD PACIFIC LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands of U.S. Dollars, except shares)
<CAPTION>
Common Additional
Common Stock Shares Paid-in Accumulated
Share Amount Subscribed Capital Deficit
<S> <C> <C> <C> <C> <C>
BALANCE - December 31, 1995 9,492,254 $ 475 $ -- $ 31,336 $ (9,149)
Net earnings -- -- -- -- 617
Compensation relating to options
issued to non-employees -- -- -- 45 --
Exercise of options 23,400 1 -- 86 --
--------- ----------- ---------- --------- ----------
BALANCE - December 31, 1996 9,515,654 476 -- 31,467 (8,532)
Net loss -- -- -- -- (14,327)
Exercise of options 35,600 2 -- 153 --
Common shares issued in
public offering, net of offering costs 2,460,000 123 -- 10,561 --
Compensation relating to options
issued to non-employees -- -- -- 110 --
Conversion of debt to common shares 349,549 17 -- 1,731 --
Common shares subscribed -- -- 2,700 -- --
Compensation relating to options issued -- -- -- (23) --
---------- ----------- ---------- --------- ----------
BALANCE - December 31, 1997 12,360,803 618 2,700 43,999 (22,859)
Net earnings -- -- -- -- 25
Issuance of common shares subscribed 600,000 30 (2,700) 2,670 --
Costs related to common shares subscribed -- -- -- (4) --
Compensation relating to options issued
to non-employees -- -- -- 62 --
Change in par value of common shares from
$.05 per share to no par value -- 46,727 -- (46,727) --
---------- ----------- ---------- --------- ----------
BALANCE - December 31, 1998 12,960,803 $ 47,375 $ -- $ -- $ (22,834)
========== =========== ========== ========= ==========
See notes to consolidated financial statements.
</TABLE>
37
<PAGE>
<TABLE>
NORD PACIFIC LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands of U.S Dollars)
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ 25 $ (14,327) $ 617
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation 1,573 1,148 1,278
Amortization 6,619 3,565 3,259
Abandoned and impaired properties 96 14,293 191
Compensation relating to stock options 62 110 45
Unrealized loss on foreign currency contracts 606 2,399 988
Foreign currency transaction (gain) loss -- (502) 114
Deferred income taxes (740) 2,300 2,620
Provision for retirement benefits 167 104 --
Derivative financial instruments -- (372) 304
Change in assets and liabilities:
Accounts receivable (330) 146 (764)
Inventories (16) (9) (45)
Prepaid expenses 50 (42) 80
Accounts payable 823 (319) 158
Accrued expenses and other liabilities (1,760) 374 339
----------- ----------- ----------
Net cash provided by operating activities 7,175 8,868 9,184
----------- ----------- ----------
INVESTING ACTIVITIES
Capital expenditures (440) (473) (771)
Deferred exploration and development costs (6,726) (10,720) (8,154)
Deferred costs associated with ore under leach (5,117) (4,023) (4,992)
----------- ----------- ----------
Net cash used in investing activities (12,283) (15,216) (13,917)
----------- ----------- ----------
FINANCING ACTIVITIES
Borrowing of long-term debt 1,521 2,981 789
Repayments of long-term debt (1,383) (5,153) (1,185)
Billings from Nord Resources Corporation, net 343 669 947
Restricted cash -- -- 1,080
Issuance of common shares for cash 2,700 12,300 --
Costs associated with issuance of common shares (4) (1,735) (265)
Stock options exercised -- 155 87
----------- ----------- ----------
Net cash provided by financing activities 3,177 9,217 1,453
----------- ----------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS (4) 43 63
----------- ----------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,935) 2,912 (3,217)
CASH AND CASH EQUIVALENTS - beginning of year 3,351 439 3,656
----------- ----------- ----------
CASH AND CASH EQUIVALENTS - end of year $ 1,416 $ 3,351 $ 439
=========== =========== ==========
CASH PAID FOR INTEREST $ 241 $ 371 $ 384
=========== =========== ==========
NON-CASH TRANSACTIONS
Purchase of derivative financial instruments $ -- $ -- $ 311
=========== =========== ==========
Conversion of long-term debt due to Nord Resources
Corporation into common stock (Note G) $ -- $ 1,748 $ --
=========== =========== ==========
Common stock subscribed $ -- $ 2,700 $ --
=========== =========== ==========
See notes to consolidated financial statements.
</TABLE>
38
<PAGE>
NORD PACIFIC LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31,1998, 1997 AND 1996
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company Description and Basis of Presentation
Nord Pacific Limited and its subsidiaries (collectively, the
"Company") are engaged in the production of copper and in the
exploration for gold, copper, nickel cobalt and other minerals in
Australia, Papua New Guinea (PNG"), North America and Mexico.
In June 1998, the Company's shareholders approved the
discontinuance of the Company from Bermuda and approved its
continuance into the Province of New Brunswick, Canada, effective
September 30, 1998. As a Canadian Company, the Company is required to
report its financial statements in accordance with generally accepted
accounting principles in Canada. These principles differ in certain
respects from those in the United States as described in Note N.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiaries, and its 40% interest in the
Girilambone copper property in Australia and its 50% interest in the
Girilambone North Project (collectively "Girilambone"). The financial
statements include the Company's proportionate share of the assets,
liabilities and operations of Girilambone. All significant
intercompany accounts and transactions are eliminated at
consolidation.
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 and Cash Equivalents
The Company considers all investments with an original maturity
of three months or less to be cash equivalents. The carrying amount
of cash and cash equivalents approximates fair value.
Inventories
Inventories are valued at the lower of cost (first-in, first-out
method) or market.
Deferred Costs Associated with Ore Under Leach
Costs at Girilambone incurred with respect to ore under leach are
deferred and amortized using the units of production method over the
remaining estimated reserves. The Company continually evaluates and
refines estimates used to determine the amortization and carrying
amount of deferred costs associated with ore under leach based upon
actual copper recoveries and mine operating plans.
39
<PAGE>
Property, Plant and Equipment
Plant, mining and milling equipment at Girilambone is depreciated
using the units-of-production method over the estimated remaining
reserves. Furniture and fixtures are depreciated using the straight-
line method over the estimated useful lives of the assets which range
from two to five years.
Deferred Exploration and Development Costs
All costs directly attributable to exploration and development
are deferred. Costs related to producing properties are amortized
using the units-of-production method over the estimated recoverable
reserves. Deferred costs are carried at cost, not in excess of
anticipated future recoverable value, and are expensed when a project
is no longer considered commercially viable.
Impairment of Mining Properties and Projects
Mining projects and properties are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of these assets may not be recoverable. Events or
circumstances that may indicate that the carrying amount may not be
recoverable include a significant decrease in current or forward
commodity prices, a significant reduction in estimates of proven and
probable reserves, and significant increases in operating costs,
capital requirements or reclamation costs. If estimated future cash
flows expected to result from the use of the mining project or
property and its eventual disposition are less than the carrying
amount of the mining project or property, an impairment is recorded to
reduce the carrying amount of the mining project or property to its
estimated net recoverable amount.
Impairments are generally assessed for each individual mining
project, except where it is not practical to separately identify the
net recoverable amount of related properties which are operated on a
combined basis.
Debt Issuance Costs
Professional fees and other costs relating to the issuance of
debt are capitalized and amortized over the term of the related
borrowings.
Foreign Currency Translation
The functional currency for operations conducted in Australia is
the U.S. dollar. Adjustments to monetary assets and liabilities
denominated in Australian dollars as a result of changes in the
exchange rate between U.S. dollars and Australian dollars are
recognized currently in the statement of operations as foreign
currency transaction gains and losses.
Financial Instruments
Gains and losses related to qualifying hedges of anticipated
copper sales are deferred and recognized in the statement of
operations as a component of sales at the settlement date. Option
premiums incurred are deferred until the date of settlement or
expiration of the option.
40
<PAGE>
Realized and unrealized gains and losses on foreign currency
forward exchange contracts and other derivative financial instruments
that do not qualify as hedges are recognized currently in the
statement of operations. Unrealized gains or losses are included as
assets or liabilities in the balance sheet.
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share is computed by dividing
net earnings (loss) by the weighted average number of common shares
outstanding during the year. Diluted earnings per share is calculated
based on the weighted average number of common shares outstanding
adjusted for the dilutive effect of stock options and warrants
outstanding.
The following sets forth the calculation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 (1) 1997 (2) 1996 (3)
(In thousands)
<S> <C> <C> <C>
Earnings (loss) available to common shareholders $ 25 $ (14,327) $ 617
=========== =========== ==========
Weighted average common shares outstanding
during the period 12,961 10,935 10,053
Add dilutive effect of stock options -- -- 1,634
----------- ----------- ----------
Weighted average common shares outstanding
during the period including the effects of
dilutive securities 12,961 10,935 11,687
=========== =========== ==========
Basic earnings (loss) per share $ -- $ (1.31) $ .06
=========== =========== ==========
Diluted earnings (loss) per share $ -- $ (1.31) $ .05
=========== =========== ==========
</TABLE>
(1) At December 31, 1998, options to purchase 2,299,998 common shares
at prices ranging from $2.41 to $5.69 per share were outstanding, but
were not included in the computation of diluted income per share for
the year ended December 31, 1998. The effect of the assumed exercise
of these options was antidilutive.
(2) At December 31, 1997, options to purchase 1,924,678 common shares
at prices ranging from $2.54 to $5.69 per share and warrants to
purchase 1,404,775 common shares at $6.50 per share were not included
in the computation of diluted loss per share at December 31, 1997.
The effect of the assumed exercise of these options and warrants was
antidilutive. The options expire at various dates from 1999 to 2008.
The warrants expired in 1998.
(3) At December 31, 1996, options to purchase 1,664,200 common shares
at prices ranging from $2.54 to $4.50 were included in the calculation
of diluted earnings per share at December 31, 1996. These options
expire at various dates from 1999 to 2004.
Reclassifications
Certain reclassifications have been made in the 1997 and 1996
consolidated financial statements to conform to the classifications
used in 1998.
41
<PAGE>
B. GIRILAMBONE
The Company is a 40% joint venturer in the Girilambone Copper
Property and a 50% joint venturer in the Girilambone North Copper
Property in Australia. In 1996, mining commenced in the Girilambone
North Project area and the ore from this property is being processed
through the existing Girilambone plant. Following is a condensed
balance sheet of Girilambone and the corresponding amounts included in
the Company's financial statements:
<TABLE>
<CAPTION>
Amounts Included
Total Girilambone In Accompanying
Joint Ventures Financial Statements
Balance Sheet Data December 31 December 31
(In thousands) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Current assets $ 3,132 $ 1,638 $ 1,290 $ 658
Deferred costs associated with ore under
leach, net 19,290 19,934 9,413 8,970
Property, plant and equipment, net 7,356 10,541 2,981 4,244
Deferred exploration and development
costs, net 19,685 16,602 3,527 4,335
----------- ----------- ------------ ---------
Total assets 49,463 48,715 17,211 18,207
Current liabilities (4,071) (2,230) (1,749) (948)
----------- ----------- ------------ ---------
Partners' equity $ 45,392 $ 46,485 $ 15,462 $ 17,259
=========== =========== ============ ==========
Company's share of equity $ 16,916 $ 18,846
Less elimination (1,454) (1,587)
--------- ----------
Net assets recorded by the Company $ 15,462 $ 17,259
========== ===========
</TABLE>
The difference between the net assets of Girilambone and the
Company's investment in Girilambone is being amortized using the units-
of-production method as a reduction of depletion expense.
42
<PAGE>
Debt incurred related to Girilambone is the separate responsibility of
each venturer and is not included in the joint venture's financial
statements. Copper production is distributed to each venturer based
on their respective ownership interest. The sale of copper produced
is the responsibility of each venturer. Cost and expense data related
to the operation of the mine is as follows:
<TABLE>
Year Ended December 31,
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Cost of copper sales:
Total Girilambone $24,563 $21,048 $21,993
Included in financial statements 10,251 8,696 8,969
General and administrative:
Total Girilambone $ 398 $ 538 $ 569
Included in financial statements 182 242 257
</TABLE>
C. PROPERTY, PLANT AND EQUIPMENT
December 31,
1998 1997
(In thousands)
Land $ 362 $ 302
Plant, mining and milling equipment 9,439 9,211
Furniture and fixtures 708 712
--------- -----------
10,508 10,225
Less accumulated depreciation (6,904) (5,488)
--------- -----------
$ 3,605 $ 4,737
========= ===========
D. DEFERRED EXPLORATION AND DEVELOPMENT COSTS
Deferred exploration and development costs by prospect
are as follows:
December 31,
1998 1997
(In thousands)
Ramu $ 9,519 $ 4,263
Tabar Islands 4,355 4,275
Girilambone exploration area (including Tritton) 5,006 3,978
Other 261 976
-------- --------
$19,141 $ 13,492
======== ==========
43
<PAGE>
Ramu
The Company has a 35% interest in the Ramu Joint Venture ("Ramu")
which was formed to explore for nickel and cobalt in PNG. A
feasibility study conducted in 1998 projects that commercial
production of nickel and cobalt is economically feasible at Ramu.
However, the Company does not have sufficient resources to fund its
share of the estimated $838,000,000 of development costs and is
seeking additional funding for these costs.
The government of PNG has the right to acquire an interest of up
to 30% in Ramu for an amount equal to its pro-rata share of the
accumulated exploration expenditures at the time a development
decision is made. If it exercises this right, the government is
required to contribute to further exploration and development
expenditures in proportion to its interest in the project. Each joint
venture partner's interest in Ramu would be reduced proportionately if
the government exercises this right.
Another party may elect within 180 days of receiving details of
any proposed commercial development of Ramu, to participate in such
development up to a 10% interest by paying its share of those
development costs. This party was provided these details in January
1999 and has until June 1999 to elect to participate. Each joint
venture partner's interest in Ramu would be reduced proportionately in
the event that this company elects to participate.
Tabar Islands
The Company owns a 100% interest in a gold exploration project in
the Tabar Islands ("Tabar"), north of PNG. On December 3, 1996, the
Company was granted a mining lease to develop and operate a gold mine
on Simberi Island. While the government of PNG will have no
participating interest, if production commences, a royalty of 2% of
sales will be payable to the government.
At December 31, 1997, the Company owed one of Tabar's former
owners $650,000 upon the issuance of a Special Mining Lease by the
Government of PNG. In 1998, it was determined that a Special Mining
Lease would not be issued. Accordingly, the Company eliminated the
note payable with a corresponding credit to deferred exploration and
development costs.
Tabar's former owners have an option to reacquire 50% of the
project if feasibility studies indicate that the project could produce
150,000 ounces or more of gold annually. If the option is exercised,
the former owners would be required to pay to the Company 250% of its
cumulative expenditures for mine development from July, 1994 to the
date the option is exercised. Expenditures from July, 1994 through
December 31, 1998, total approximately $12,057,000.
Due to the precipitous decline in gold prices during the fourth
quarter of 1997, the Company reviewed the carrying costs of and
anticipated cash flows from the project to determine if it was
impaired. The Company determined that future cash flows, based on
estimated resources, were insufficient at projected gold prices to
support the $17,656,000 carrying value of the project. The Company
therefore recorded a provision for impairment of $13,381,000 at
December 31, 1997 to reduce the carrying value of the project to its
estimated net recoverable amount of $4,275,000.
Girilambone Exploration Area
The Company has a 50% interest in an exploration joint venture
formed to explore areas adjacent to its Girilambone copper mine.
44
<PAGE>
Under the terms of the joint venture agreement the Company is required
to fund its 50% share of exploration costs. Exploration efforts are
continuing in the Girilambone exploration area to identify additional
mineable reserves.
The Company is seeking additional funding to develop its
properties. The Company cannot predict the availability of funds to
develop these properties and thus whether the deferred exploration and
development costs will ultimately be recovered.
E. LONG TERM DEBT
December 31,
1998 1997
(In thousands)
Girilambone financing agreement $ 3,000 $ 2,861
Less current maturities (600) (2,548)
Long-term debt $ 2,400 $ 313
The long-term debt matures as follows:
1999 $ 600
2000 2,400
$ 3,000
Girilambone Financing Agreement
In December 1998, the Company restructured its Girilambone
financing agreement with the lender. The borrowing limit was
increased to $3,000,000 at December 31, 1998 and will be increased to
a maximum of $3,600,000 in 1999. The loan bears interest at Singapore
Interbank Offered Rates ("SIBOR") plus 1-1/2%. Principal payments are
payable quarterly beginning September 30, 1999 at the greater of 50%
of available cash flow, as defined, for the quarter ending on the
relevant repayment date or the amount required to reduce the amount
outstanding to $3,400,000 on September 30, 1999, $2,400,000 on
December 31, 1999, $1,100,000 on March 31, 2000 and to zero on June
30, 2000. The agreement also contains certain debt coverage ratio
requirements. As collateral on the loan, the lender has a security
interest in the Australian assets of the Company including the
Company's share of assets of and production from Girilambone.
Under the agreement, all cash proceeds generated from Girilambone
operations are required to be deposited with the lender to be used to
pay any costs and expenses related to the project, bank fees, interest
and principal and to fund a reserve account with the lender. Any
remaining proceeds are available, at the lender's discretion, for use
by the Company.
The estimated fair value of the Company's outstanding debt at
December 31, 1998 and 1997 approximates its carrying amount.
45
<PAGE>
F. FINANCIAL INSTRUMENTS
The Company utilizes certain financial instruments, primarily
copper hedging agreements and foreign currency forward exchange
contracts, to reduce the risk associated with the volatility of
commodity prices and fluctuations in foreign currency exchange rates,
particularly the Australian dollar.
Copper Agreements
The Company's strategy has been to enter into put options and
swap agreements which are designated as hedges of future copper
production.
In November 1996, the Company purchased put options at a cost of
$.08 per pound of copper covering 4,000,000 pounds of copper. In
1997, the Company purchased put options for an additional 11,900,000
pounds of copper at a cost of $.05 per pound of copper. These put
options matured ratably each month from January 1998 through December
1998. This hedging program assured that the Company received a
minimum gross price of $.90 per pound of copper, and benefited from
any increases in the copper price above $.90 per pound.
The Company entered into swap and call option agreements with a
single counterparty covering a total of 13,200,000 pounds of copper
which settled each month during 1997. The swap agreements locked in a
fixed forward price as a floor, and the call options permitted the
Company to benefit from an increase in copper price above the call
price. Under this combination swap and call option arrangement, at
the settlement date for each copper contract during 1997, the Company
received $l.02 per pound plus the excess, if any, of the market price
of copper (as quoted on the London Metals Exchange) over $1.11 per
pound. The copper swap agreements equal to the anticipated level of
copper sales were designated as hedges, with gains and losses
reflected as the hedged copper was sold. The swap agreements in
excess of the anticipated copper sales and the call options did not
qualify as hedges and were marked to market with unrealized and
realized gains or losses included in operations.
Sales for the years ended December 3l, 1998, 1997 and 1996,
include gains of $1,616,000, losses of $54,000 and gains of
$1,058,000, respectively, that were realized in settlement of copper
hedging contracts.
The Company has entered into swap agreements covering a total of
11,905,000 pounds of copper at a fixed cost of $.75 per pound,
representing approximately 75% of the Company's share of budgeted
production for 1999. Contracts totaling 992,000 pounds of copper are
settled monthly. Upon settlement, the Company receives the difference
between the fixed price and the current price of copper if the current
price is lower, or the Company pays the difference if the current
price is higher. As a result, the Company is assured of receiving a
price of $.75 per pound for this hedged production.
The following table summarizes the market value of the copper
contracts determined based upon price quotes received from the
counterparty to the agreements.
Strike Price Fair Value -
Notional Amount Per Pound Asset
At December 31, 1998:
Swap contracts 11,905,000 pounds $.75 $ 737,200
At December 31, 1997:
Purchased put
options 15,873,000 pounds $.90 $1,524,600
46
<PAGE>
Foreign Currency Forward Exchange Contracts
The Company has entered into foreign currency forward exchange
contracts to protect against Australian currency fluctuations related
to payment of a portion of the expected operating costs of
Girilambone. Realized and unrealized gains and losses on these
contracts are included currently in the results of operations. For
the year ended December 31, 1998, the Company recognized a loss of
$606,000 compared to a loss of $2,399,000 in 1997 and a gain of
$497,000 in 1996 on these contracts. Outstanding contracts at
December 31, 1998, total $15,750,000 and mature in monthly
installments of $750,000 at an average exchange rate of A$1.00 = U.S.
$.742.
Counterparty Risk
The Company is exposed to credit risks in the event of
nonperformance by the counterparties to the various agreements
described above. The Company anticipates, however, that the
counterparties will be able to fully satisfy their obligations under
the agreements. The Company does not obtain collateral or other
security to support financial instruments subject to credit risk.
G. NORD RESOURCES CORPORATION
Nord Resources Corporation ("Resources") owned approximately
28.5% of the outstanding common stock of the Company as of December
31, 1998 and 1997.
In October 1996, the Board of Directors of Resources unanimously
agreed to make available to the Company, at Resources' discretion, an
operating loan payable on demand and bearing interest at the prime
rate plus 1%. In June 1997, advances made to the Company by
Resources, net of repayments, totaled $3,747,745. In July and August
1997, the Company repaid $2,000,000 of the amount outstanding.
Concurrent with the closing of the Company's Canadian offering on July
3, 1997, Resources converted the remaining amount outstanding into
349,549 Units at $5.00 per unit. Each Unit consisted of one share of
common stock and one-half of one purchase warrant. The purchase
warrants expired unexercised in 1998. Interest expense paid to
Resources totaled $114,000 for the year ended December 31, 1997.
In December 1997, the Company closed its office in Dayton, Ohio
and moved its administrative functions to Albuquerque, New Mexico. In
January 1998, under the terms of a cost sharing agreement, it began
sharing office space, administrative personnel and expenses with
Resources on a 50/50 basis.
In 1997 and 1996, Resources provided certain services to the
Company under a management agreement. Under the terms of the
management agreement, Resources was paid a monthly fee of $7,000 and
was reimbursed for all direct expenses incurred on behalf of the
Company. Management believes that the costs that would have been
incurred had the Company obtained such services on a stand-alone basis
would have approximated the amounts paid to Resources. Total amounts
paid to Resources were $566,000 and $415,000 for the years ended
December 31, 1997 and 1996, respectively.
47
<PAGE>
H. OPERATING LEASES
The Company leases its office space and certain equipment under
operating leases. Certain of the leases contain renewal options and
escalation clauses. Minimum annual lease payments under non-
cancelable operating leases for the years ended December 31 are as
follows:
1999 $ 132,100
2000 135,112
2001 135,953
2002 136,798
Thereafter 226,296
$ 766,259
Rent expense for operating leases was $112,433, $125,885 and
$206,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
I. SHAREHOLDERS' EQUITY
Canadian Offering
On July 3, 1997, the Company closed its public stock offering in
Canada. The offering consisted of the sale of 2,460,000 units,
consisting of one common share and one-half of one purchase warrant.
Each whole purchase warrant entitled the holder to purchase one share
of common stock at C$9.00. The Company also issued 225,000 warrants
to the underwriter. Each warrant entitled the underwriter to purchase
one share of common stock at C$6.90 prior to July 3, 1998. All of
these warrants expired unexercised on July 3, 1998. Gross proceeds
from the offering totaled US$12,300,000 (C$16,974,000). The Company
received net proceeds of US$10,684,000 (C$14,574,000) after payment of
commissions, certain legal fees, and other related costs.
Private Placement to Mineral Resources Development Company Pty,
Limited ("MRDC")
On December 12, 1997, the Company completed the sale of 600,000
common shares to MRDC, a corporation wholly owned by the Government of
Papua New Guinea. These shares were sold at a price of US$4.50
(C$6.40) per share and gross proceeds totaled US$2,700,000
(C$3,840,000). After payment of certain legal and issuance costs, net
proceeds were US$2,677,000.
Stock Option Plans and Other Option Grants
The Company has established three incentive stock option plans,
the 1989 Stock Option Plan, the 1991 Stock Option Plan and the 1995
Stock Option Plan (the "Plans") for the benefit of employees and
directors of the Company. During 1998, 1997 and 1996, options
outstanding not governed by the terms of the Plans (the "Non-Plan
Options") totaling 385,000, 150,000 and 224,000 shares, respectively,
have been granted to officers and directors of the Company. During
1998, 1997 and 1996, Non-Plan Options totaling 49,000, 53,000 and
33,600 shares, respectively, were issued to certain consultants to the
Company.
48
<PAGE>
Options are granted at an exercise price equal to or in excess of
the quoted market price on the date of the grant. Options are
generally exercisable beginning six months to three years from date of
grant and expire over a five to ten year period from date of grant.
At December 31, 1998, 104,080 shares are available for future option
grants under the terms of the Plans.
A summary of the status of the Company's outstanding stock
options as of December 31, 1998, 1997 and 1996 and changes during the
years then ended follows:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at Beginning of
Year 1,924,678 $ 4.26 1,664,200 $ 4.05 1,342,400 $3.95
Granted 499,000 2.68 296,078 5.47 347,200 4.50
Exercised -- -- (35,600) 4.34 (23,400) 3.75
Forfeited (123,680) 4.38 -- -- (2,000) 4.40
--------- --------- ----------
Outstanding at End of Year 2,299,998 3.92 1,924,678 4.26 1,664,200 4.05
========= ====== ========= ======= ==========
Options Exercisable at Year-End 1,923,998 $ 4.04 1,574,800 $ 4.10 1,161,600 $ 3.95
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
Weighted
Average
Exercise Prices Options Contract Life Options
Per Share Outstanding (Years) Exercisable
$2.41 100,000 4.42 --
2.54 216,000 3.00 216,000
2.75 383,000 5.94 198,000
3.91 36,000 3.25 36,000
4.00 362,000 1.12 362,000
4.26 272,800 4.95 272,800
4.38 84,000 5.26 84,000
4.45 264,000 .26 264,000
4.50 309,120 3.10 309,120
4.80 12,000 5.03 12,000
5.25 111,078 6.72 70,078
5.69 150,000 2.75 100,000
$2.41-5.69 2,299,998 4.04 1,923,998
Stock Bonus Plan
The 1990 Stock Bonus Plan provides for the issuance of up to
80,000 common shares as incentive bonuses. At December 31, 1998,
76,193 shares have been awarded and 3,807 shares are available for
future awards.
49
<PAGE>
J. SIGNIFICANT CUSTOMERS
Sales in 1998 included copper sales to two customers of
$8,026,000 and $3,051,000. Sales in 1997 included copper sales to
three customers of $8,277,000, $2,991,000 and $2,507,000. Sales in
1996 included copper sales to two customers of $11,309,000 and
$2,521,000. Management does not believe that the loss of any of these
customers would have a material adverse effect on the Company.
K. INCOME TAXES
Income tax expense consists entirely of future income taxes
payable in Australia. These amounts differ from the amounts computed
by applying the U.S. statutory income tax rate of 35% to consolidated
income before income tax expense as a result of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Income taxes at statutory rate $ (250) $ (4,060) $ 1,101
Foreign income taxes at effective rates in
excess of the statutory rate 14 (98) 121
Change in the valuation allowance for
deferred tax assets (176) 4,266 196
Non-deductible losses of subsidiaries 233 1,832 1,000
Adjustment of deferred taxes provided
for in prior years in Australia (1,250) -- --
Other 689 360 202
----------- ----------- ----------
Total $ (740) $ 2,300 $ 2,620
=========== =========== ==========
</TABLE>
50
<PAGE>
The tax effects of temporary differences that give rise to future
income tax assets and future income tax liabilities for Australia, the
United States, Papua New Guinea and Mexico are as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
(In thousands)
<S> <C> <C>
Australia:
Future income tax assets:
Development cost carryforwards $ -- $ 682
Other -- 867
------------- ------------
-- 1,549
Future income tax liabilities:
Deferred leach costs (3,389) (3,229)
Exploration and development costs (245) (3,004)
Plant, property and equipment (1,626) (648)
Other (40) (708)
------------- ------------
(5,300) (7,589)
------------- ------------
Total Australia $ (5,300) $ (6,040)
============= =============
United States:
Future income tax asset:
Net operating loss carryforwards $ 1,518 $ 1,466
Other -- 37
------------- ------------
1,518 1,503
Valuation allowance (1,518) (1,503)
------------- -------------
Total United States $ -- $ --
============= =============
Papua New Guinea:
Future income tax asset:
Exploration cost carryforwards $ 5,802 $ 5,995
Valuation allowance (5,802) (5,995)
------------- ------------
Total Papua New Guinea $ -- $ --
============= =============
Mexico:
Future income tax asset-net operating loss
carryforwards $ 725 $ 723
Valuation allowance (725) (723)
------------- ------------
Total Mexico $ -- $ --
============= =============
A valuation allowance has been provided for all of the Company's
net future income tax assets in the United States, Papua New Guinea
and Mexico based on the history of operating losses for the Company in
these countries and limitations on the use of the carryforwards. The
Company's operations in Canada in 1998 are insignificant.
51
<PAGE>
L. PENSION PLANS
The Company has a defined contribution pension plan covering
certain employees of its Australian operations. Under the terms of
the plan, the Company contributes an amount equal to 10% of the
employee's wages. Pension costs were $38,000, $48,000 and $47,000 for
the years ended December 31, 1998, 1997 and 1996 respectively.
The Company has an unfunded non-contributory defined benefit
program for two of its executive officers. Under the terms of the
program for one of the executive officers, the Company is obligated to
pay a lump sum benefit that matches the difference, if any, between
the present value of the executive's retirement benefit and the cash
surrender value of an insurance policy owned by the executive at age
62. At December 31, 1998 and 1997, the cash surrender value of the
policy of $275,265 and $223,016, respectively, has been offset against
the accrued retirement benefits liability.
The following tables set forth the changes in the projected
benefit obligation for the years ended December 31, 1998, 1997 and
1996 and the funded status of the plan and amounts recognized in the
Company's balance sheet at December 31, 1998 and 1997:
December 31,
1998 1997 1996
(In thousands)
Change in projected benefit obligation
Benefit obligation, beginning of period $ 350 $ 501 $ 413
Service cost 23 -- 42
Interest cost 15 -- --
Actuarial (gain) loss (117) (151) 46
Benefit obligation, end of period $ 271 $ 350 $ 501
December 31,
1998 1997
Funded status:
Projected benefit obligation unrecognized $ (271) $ (350)
Unrecognized net loss 9 246
Unrecognized prior service cost 103 --
Net amount recognized $ (159) $ (104)
Amounts recognized in the balance sheet:
Accrued benefit liability $ (271) $ (104)
Intangible asset 112 --
Net amount recognized $ (159) $ (104)
52
<PAGE>
The following tables set forth the components of net periodic
benefit costs for the years ended December 31, 1998, 1997 and 1996:
</TABLE>
<TABLE>
<CAPTION>
Year Ending December 31,
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 23 $ -- $ 42
Interest cost 15 -- --
Recognized net actuarial gain (14) -- --
Net periodic benefit cost $ 24 $ -- $ 42
Assumptions:
Discount rate 6.75% 7.25% 7.00%
Expected return on plan assets NA NA NA
Rate of compensation increase 0.00% 0.00% 5.00%
</TABLE>
M. EMPLOYMENT AGREEMENTS
The Company has agreements with two of its officers which contain
change in control provisions which would entitle one officer to
receive 50% of his salary and the other officer to receive 200% of his
salary in the event of a change in control of the Company and a change
in certain conditions of their employment. The maximum contingent
liability under these agreements is approximately $470,000 at December
31, 1998.
N. DIFFERENCE BETWEEN CANADIAN AND U.S. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Canada
("Canadian GAAP"), which differ in certain respects from those
principles and practices that the Company would have followed had its
consolidated financial statements been prepared in accordance with
accounting principles generally accepted in the United States ("U.S.
GAAP").
Canadian accounting principles provide for the deferral of
exploration expenditures until such time as the property is put into
production or the property is abandoned or disposed of through sale,
or when it is no longer considered to be commercially viable. For
U.S. GAAP purposes, the Company has elected to expense all exploration
costs until such time as the Company establishes, generally by
completing a detailed feasability study, that a commercially minable
deposit exists.
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, requires that a company classify items of other
comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in
the equity section of the balance sheet. Under U.S. GAAP, the
accumulated other comprehensive income at both December 31, 1998 and
1997, is $798,000, representing cumulative foreign currency
translation adjustments. Since there was no change in this amount in
1998, 1997 or 1996 comprehensive income under U.S. GAAP is equal to
the net loss under U.S. GAAP for those periods presented below.
53
<PAGE>
Other differences between Canadian GAAP and U.S. GAAP as they
relate to these financial statements are not significant.
The application of U.S. GAAP would have had the following effect
on the Company's balance sheets:
December 31,
1998 1997
(In thousands)
Canadian U.S. Canadian U.S.
GAAP GAAP GAAP GAAP
Deferred exploration and
development costs $ 19,141 $12,167 $ 13,492 $ 6,570
Deferred tax liability $ 5,300 $ 4,930 $ 6,040 $ 5,402
Shareholders' equity $ 25,339 $18,095 $ 25,256 $18,334
The application of U.S. GAAP would have had the following effect on
the Company's statements of operations:
Year ended December 31,
1998 1997 1996
(In thousands)
Net earnings (loss) - Canadian GAAP $ 25 $(14,327) $ 617
Accounting for exploration costs (322) 10,385 (4,351)
Income tax effect 370 638 (154)
Net loss - U.S. GAAP $ (73) $ (3,304) $ (3,888)
Loss per share - U.S. GAAP $ -- $ (.30) $ (.39)
54
<PAGE>
Additional Disclosures Required Under U.S. GAAP - Stock Compensation
For U.S. GAAP purposes, the Company has elected to measure
compensation cost for stock options issued to employees using the
intrinsic value based method under Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." Had
compensation cost for the Company's option grants in 1995 and
subsequent years been determined based on the fair value of the
options at the grant dates consistent with the provisions of SFAS No.
123, the Company's net loss and loss per share under U.S. GAAP would
have been reduced to the pro forma amounts indicated below:
Year Ended December 31,
1998 1997 1996
(In thousands)
Net loss - U.S. GAAP As reported $ (73) $ (3,304) $ (3,888)
Pro forma (614) (3,770) (4,504)
Loss per share - U.S.
GAAP As reported $ -- $ (.30) (.39)
Pro forma (.05) (.34) (.45)
The assumptions used in determining the fair value of options granted
during 1998, 1997 and 1996 are as follows:
1998 1997 1996
Expected volatility 73% 55% 55%
Expected life of grant 3 years 2.5 years 3 years
Risk-free interest rate 5.567% 6.05% 5.03%
Expected dividend rate None None None
The weighted average fair value of options granted during the
years ended December 31, 1998, 1997 and 1996 was $1.14, $2.06 and
$1.87, respectively.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 establishes standards for derivative instruments, including
certain derivative instruments imbedded in other contracts, and for
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in its balance sheet and
measure those instruments at fair value. This statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999.
The Company has not yet determined the effect of SFAS No. 133 on its
financial statements prepared under U.S. GAAP.
The Accounting Standards Executive Committee ("AcSEC") of the AICPA
has issued Statement of Position ("SOP") 98-5, "Reporting on the Costs
of Start-Up Activities" effective for financial statements for fiscal
years beginning after December 31, 1998. SOP 98-5 requires that the
costs of start-up activities, including organization costs, be
expensed as incurred. The Company does not believe that the adoption
of SOP 98-5 will have any effect on its current financial statements
prepared under U.S.GAAP.
55
<PAGE>
O. ENVIRONMENTAL CONTINGENCIES
At December 31, 1998, the Company had reserves of approximately
$115,000 for remediation of certain Australian and Papua New Guinea
sites and other environmental costs in accordance with its policy to
record liabilities for environmental expenditures when it is probable
that obligations have been incurred and the costs can reasonably be
estimated.
The amounts of these liabilities are very difficult to estimate
due to such factors as the unknown extent of the remedial actions that
may be required and, in the case of sites not owned by the Company,
the unknown extent of the Company's probable liability in proportion
to the probable liability of other parties.
56
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On April 27, 1998, with the approval of the audit committee, the
Company terminated its relationship with Deloitte & Touche ("D&T"),
independent certified public accountants.
The reports of D&T for the years ended December 31, 1997 and
1996, contained no adverse opinions, disclaimers of opinion or
qualified or modified opinions as to uncertainty, audit scope or
accounting principals.
During the two year period ended December 31, 1997, and the
interim period from that date to April 27, 1998, there were no
disagreements with D&T on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or
procedures, which disagreement, if not resolved to the satisfaction of
D&T, would have caused it to make reference in connection with its
report to the subject matter of the disagreement.
On May 8, 1998, the Company engaged KPMG LLP as its principal
accountant to audit the Company's financial statements.
PART III
ITEMS 10, 11, 12 and 13.
The information required by Part III will be incorporated by
reference to the Company's Proxy Statement to be filed with the
Securities and Exchange Commission on or before April 30, 1999.
PART IV
ITEM 14, EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The following consolidated financial statements of
Nord Pacific Limited as of December 31, 1998 and
1997 and for each of the three years in the period
ended December 31, 1998 are included in Part II,
Item 8 of this Form 10-K.
Nord Pacific Limited:
Independent Auditors Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a) 2. Financial Statement Schedules
None
57
<PAGE>
(a) 3. Exhibits
See "Exhibit Index" on Page 63
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the quarter ended December 31, 1998.
58
<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.
NORD PACIFIC LIMITED
By:/s/ Edgar F. Cruft
Edgar F. Cruft
Chairman of the Board
March 29, 1999
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 date indicated.
Signature Title Date
/s/ Edgar F. Cruft Chairman and Director March 29, 1998
Edgar F. Cruft
/s/ W. Pierce Carson President, CEO and Director March 29, 1999
W. Pierce Carson (principal executive officer)
/s/ Raymond W. Jenner Chief Financial Officer Director March 29, 1999
Raymond W. Jenner (principal financial and accounting officer)
/s/ Terence H. Lang Director March 29, 1999
Terence H. Lang
/s/ Leonard Lichter Director March 29, 1999
Leonard Lichter
Director March 29, 1999
Lucile Lansing
/s/ Michel J. Drew Director March 29, 1999
Michel J. Drew
Director March 29, 1999
John B. Roberts
59
<PAGE>
Exhibit Index
Sequentially
Exhibit Numbered
Number Exhibit Page
3.1 Registrant's Amended Memorandum of Association.
Reference is made to Exhibit 3.2 to
Registrant's 1993 Form 10-K.
3.2 Registrant's Amended By-Laws. Reference is made
to Exhibit 3.3 to Registrant's 1993 Form 10-K.
10.1 Amended Joint Venture Agreement of Nord-
Highlands Mineral Venture-I. Reference is made
to Exhibit 10.1 in Registrant's Registration
Statement on Form S-4 (33-25683).
10.2 Trust Deed dated December 28, 1978 between Nord
Australex Nominee Pty. Ltd. and Nord Australex
Limited Partnership. Reference is made to
Exhibit 10.4 in Registrant's Registration
Statement on Form S-4 (33-25683).
10.3 Memorandum of Association and Articles or
Association of Nord Australex Nominees Pty.
Ltd. Reference is made to Exhibit 10.5 in
Registrant's Registration Statement on Form S-4
(33-25683).
10.4 Deed of Acknowledgement dated February 6, 1981
of Nord Australex Nominees Pty. Ltd. Reference
is made to Exhibit 10.6 in Registrant's
Registration Statement on Form S-4 (33-25683).
10.5 Memorandum of Association and Articles of
Association of Nord Resources (Pacific) Pty.
Ltd. Reference is made to Exhibit 10.7 in
Registrant's Registration Statement on Form S-4
(33-25683).
10.6 Management Agreement dated December 29, 1978
between Nord Australex Nominees Pty. Ltd. and
Nord Resources (Pacific) Pty. Ltd. Reference is
made to Exhibit 10.8 in Registrant's
Registration Statement on Form S-4 (33-25683).
10.7 Trust Deed dated December 29, 1978 between Nord
Australex Nominees (PNG) Pty. Ltd. and Nord
Australex Limited Partnership. Reference is
made to Exhibit 10.9 in Registrant's
Registration Statement on Form S-4 (33-25683).
10.8 Memorandum of Association and Articles of
Association of Nord Australex Nominees (PNG)
Pty. Ltd. Reference is made to Exhibit 10.10 in
Registrant's Registration Statement on Form S-4
(33-25683).
10.9 Deed of Acknowledgment dated February 8, 1981
of Nord Australex Nominees (PNG) Pty. Ltd.
Reference is made to Exhibit 10.11 in
Registrant's Registration Statement on Form S-4
(33-25683).
60
<PAGE>
10.10 Memorandum of Association and Articles of
Association of Nord Exploration Company (Pty.)
Limited. Reference is made to Exhibit 10.12 in
Registrant's Registration Statement on Form S-4
(33-25683).
10.11 Management Agreement dated December 29, 1978
between Nord Australex Nominees (PNG) Pty. Ltd.
and Nord Exploration Company (Pty.) Ltd.
Reference is made to Exhibit 10. 13 in
Registrant's Registration Statement on Form S-4
(33-25683).
10.12 Joint Venture Agreement dated November 17, 1978
among Nord Exploration Company (Pty.) Limited,
Carpentaria Exploration Company Pty. Ltd. and
Eastern Pacific Mines Pty. Limited. Reference
is made to Exhibit 10.23 in Registrant's
Registration Statement on Form S-4 (33-25683).
10.13 Deed of Variation dated November 29, 1986 among
Nord Australex Nominees (PNG) Ltd., Nord
Exploration Company (PNG) Limited, Carpentaria
Exploration Company Pty. Ltd. and Eastern
Pacific Mines Pty. Limited. Reference is made
to Exhibit 10.24 in Registrant's Registration
Statement on Form S-4 (33-25683).
10.14 Deed of Assignment dated October 3, 1987 among
Carpentaria Exploration Company Pty. Ltd. ,
Nord Australex Nominees (PNG) Pty. Ltd.,
Eastern Pacific Mining Pty. Limited and
Highlands Gold Properties Pty. Limited.
Reference is made to Exhibit 10.25 in
Registrant's Registration Statement on Form S-4
(33-25683).
10. 15 Prospecting Authority No: 192 dated February
27, 1992 (Ramu River). Reference is made to
Exhibit 10.20 to Registrant's 1991 Form 10-K.
10.16 Extension of Prospecting Authority No. 609
dated July 29, 1993 (Tabar Islands). Reference
is made to Exhibit 10. 19 to Registrant's 1993
Form 10-K.
10.17 Management Agreement dated April 2, 1990
between Registrant and Nord Resources
Corporation. Reference is made to Exhibit 10.24
to Registrant's Form 10-K for 1990.
10.18 Registrant's 1989 Stock Option Plan. Reference
is made to Exhibit 10.25 to Registrant's Form
10-K for 1990.
10.19 Registrant's 1990 Stock Bonus Plan. Reference
is made to Exhibit 10.26 to Registrant's Form
10-K for 1990.
61
<PAGE>
10.20 Registrant's 1991 Stock Option Plan. Reference
is made to Exhibit 10.31 to Registrant's 1991
Form 10-K.
10.21 Assumption agreement of W. Pierce Carson. Split
Dollar Insurance and Supplemental Compensation
Plan. Reference is made to Exhibit 10.37 to
Registrant's 1991 Form 10-K.
10.22 Joint Venture Agreement between Registrant and
Straits Engineers Contracting Pte Ltd.
Reference is made to Exhibit 2.2 to
Registrant's Form 8-K filed on December 23,
1991.
10.23 Severance agreement. W. Pierce Carson dated
April 1, 1992. Reference is made to Exhibit
10.33 to Registrant's 1992 Form 10-K.
10.24 Severance agreement. Mark R. Welch dated April
2, 1992. Reference is made to Exhibit 10.34 to
Registrant's 1992 Form 10-K.
10.25 Amendment to Ramu Joint Venture Agreement the
Registrant and High lands Gold Ltd. dated May
13, 1992. Reference is made to Exhibit 10.36 to
Registrant's 1992 Form 10-K.
10.26 Girilambone Mining Joint Venture Agreement
between Registrant and Straits Resources Pty.
Ltd. dated August 26, 1992. Reference is made
to Exhibit 10.37 to Registrant's 1992 Form 10-K.
10.27 Girilambone Exploration Joint Venture Agreement
between Registrant and Straits Resources Pty.
Ltd. dated August 26, 1992. Reference is made
to Exhibit 10.28 to Registrant's 1992 Form 10-K.
10.28 Girilambone Project Co-Ordination Agreement
between Registrant and Straits Resources Pty.
Ltd. dated August 26, 1992. Reference is made
to Exhibit 10.39 to Registrant's 1992 Form 10-K.
10.29 Girilambone Variation Agreement between
Registrant and Straits Resources Pty. Ltd.
dated August 26, 1992. Reference is made to
Exhibit 10.40 to Registrant's 1992 Form 10-K.
10.30 Girilambone Facility Agreement between the
Registrant and the R&I Bank of Western
Australian Ltd. dated January 12, 1993.
Reference is made to Exhibit 10.41 to
Registrant's 1992 Form 10-K.
10.31 Girilambone Facility Agreement between
Registrant and Rothschild Australia Ltd. dated
February 5, 1993. Reference is made to Exhibit
10.42 to Registrant's 1992 Form 10-K.
62
<PAGE>
10.32 Commodity Swap Agreement between Registrant and
R&I Bank of Western Australia dated January 12,
1993. Reference is made to Exhibit 10.43 to
Registrant's 1992 Form 10-K.
10.33 Commodity Option Agreement between Registrant
and R&I Bank of Western Australia dated January
12, 1993. Reference is made to Exhibit 10.44 to
Registrant's 1992 Form 10-K.
10.34 Deed Polls regarding the Nord Australex
Exploration (Australian) Trust entered into by
Nord Gold Company, Registrant and Nord-
Highlands Mineral Venture-I dated January 12,
1993. Reference is made to Exhibit 10-45 to
Registrant's 1992 Form 10-K.
10.35 Underwriting Agreement between Registrant and
Prudential-Bache Securities (Australia) Limited
dated December 17, 1993. Reference is made to
Exhibit 10.50 to Registrant's 1993 Form 10-K.
10.36 Deed of Agreement between Registrant, Straits
Engineers Contracting PTE Ltd. and Straits
Resources Pty. Ltd. regarding Girilambone
Copper Project Joint Venture. Reference is made
to Exhibit 10.53 to Registrant's 1993 Form 10-K.
10.37 Purchase Agreement between Registrant and
Kennecott Explorations (Australia) Ltd. and
Niugini Mining Limited dated August 30, 1993.
Reference is made to Exhibit 10.58 to
Registrant's 1993 Form 10-K.
10.38 Nord Pacific Limited Stock Option effective
April 7, 1994. Reference is made to Exhibit
10.39 to Registrant's 1994 Form 10-K.
10.39 ADR Deposit Agreement with Bank of New York.
Reference is made to Exhibit 10.41 to
Registrant's 1995 Form 10-K.
10.40 Copper hedge executed December 5, 1996 with
Rothschild Australia Limited. Reference is
made to Exhibit 10.41 to Registrant's 1996 Form
10-K.
10.41 Amended and Restated Facility Agreement between
the Registrant and Bank of Western Australia
Ltd. dated February 28, 1997. Reference is
made to Exhibit 10.42 to Registrant's 1996 Form
10-K.
10.42 Promissory Note between the Registrant and Nord
Resources Corporation dated October 24, 1996.
Reference is made to Exhibit 10.43 to
Registrant's 1996 Form 10-K.
63
<PAGE>
10.43 Subscription Agreement dated July 3, 1997
between Registrant and Nord Resources
Corporation. Reference is made to Exhibit
10.43 to Registrant's 1997 Form 10-K.
10.44 Employment Agreement between Registrant and W.
Pierce Carson. Reference is made to Exhibit
10.44 to Registrant's 1997 Form 10-K.
10.45 Employment Agreement between the Registrant and
Edgar F. Cruft. Reference is made to Exhibit
10.45 to Registrant's 1997 Form 10-K.
10.46 Common Stock Purchase Agreement between the
Registrant and
Mineral Resources Development Company Pty.,
Limited dated
December 3, 1997. Reference is made to Exhibit
10.1 to Registrant's
Form 8-K filed on December 24, 1997
10.47 Letter from Deloitte & Touche to the Securities
and Exchange Commission dated April 28, 1998.
Reference is made to Exhibit 10.47 to
Registrant's Form 8-K filed on May 1, 1998.
10.48 Articles of Continuance dated August 13, 1998.
Reference is made to Exhibit 10.48 to
Registrant's Form 8-K filed on October 19, 1998.
10.49 Amended and Restated Facility Agreement between E-1
the Registrant and Bank of Western Australia
Ltd. dated December 29, 1998.
11.1 Computation of Earnings Per Share - 1994.
Reference is made to Exhibit 11.1 to
Registrant's 1994 From 10-K.
21.1 Subsidiaries of Registrant. Reference is made
to Exhibit 22.1 to Registrant's 1992 Form 10-K.
24.1 Consent of KPMG LLP.
24.2 Consent of Deloitte & Touche
27.1 Financial Data Schedule for fiscal year end 1998.
28.1 Assurance under The Exempted Undertaking Tax
Protection Act, 1966,issued by the Minister of
Finance of the Island of Bermuda. Reference is
made to Exhibit 28.3 in Registrant's
Registration Statement on Form S-4 (33-25683).
64
Second Supplemental Agreement
to Amended & Restated Facility Agreement
dated 28 February 1997
Date: 29th December 1998
Bank of Western Australia Ltd
ACN 050 494 454
("Bank")
and
Nord Australex Nominees Pty Ltd
ACN 001 657 272 in its capacity as trustee of the Trust
("Borrower")
and
Nord Gold Company Limited
Nord Pacific Limited
Nord Highlands Mineral Venture - 1
("Trust Beneficiaries")
CLAYTON UTZ
Level 38
BankWest Tower
108 St George's Terrace
PERTH WA 6000
ref: BEW:PJW:966911
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TABLE OF CONTENTS
Clause Page
1. INTERPRETATION 3
2. CONDITIONS PRECEDENT 3
3. RE-BORROWING 4
4. AMENDMENTS TO PRINCIPAL AGREEMENT 4
5. MISCELLANEOUS 10
6. CONFIRMATION AND RATIFICATION 11
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THIS SECOND SUPPLEMENTAL AGREEMENT is made 29th day of December, 1998
BETWEEN BANK OF WESTERN AUSTRALIA LTD ACN 050 494 454 of Level 7
Grosvenor Place, 225 George Street, Sydney, New South Wales,
Australia ("Bank")
AND NORD AUSTRALEX NOMINEES PTY LTD ACN 001 657 272 in its
capacity as trustee of the Trust of Level 15, 3 Spring
Street, Sydney, New South Wales, Australia ("Borrower")
AND NORD GOLD COMPANY LIMITED ("Nord Gold") incorporated in
Bermuda and NORD PACIFIC LIMITED ("Nord Pacific") registered
under the laws of Canada, both of Level 15, 3 Spring Street,
Sydney, New South Wales, Australia and NORD HIGHLANDS
MINERAL VENTURE - 1 ("Nord Highlands") a general partnership
formed under the laws of California, United States of
America (collectively the "Trust Beneficiaries" and each a
"Trust Beneficiary").
RECITAL
The parties have agreed to vary the Amended and Restated Facility
Agreement dated 28 February 1997 made between the Bank, the Borrower
and the Trust Beneficiaries as supplemented by the supplemental
agreement between those parties dated 13 May 1997 ("Principal
Agreement") in the manner set out in this Supplemental Agreement.
IT IS AGREED
1. INTERPRETATION
Terms and expressions defined in the Principal Agreement and used
in this Supplemental Agreement are, where the context requires or
admits, to be construed as bearing the same meaning as set out in
the Principal Agreement. Principles of interpretation set out in
the Principal Agreement shall also apply to this Supplemental
Agreement.
2. CONDITIONS PRECEDENT
This Supplemental Agreement is conditional upon the following:
(a) each of the Conditions Precedent set out in clause 3 of the
Principal Agreement having been satisfied;
(b) receipt by the Bank, in a form and substance satisfactory to the
Bank of:
(i) legal opinions of counsel to the Bank, covering such matters
as the Bank deems necessary or appropriate;
(ii) legal opinions in respect of each Security Provider from
counsel to the Borrower and/or other counsel acceptable to
the Bank;
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(c) receipt by the Bank, in form and substance satisfactory to
the Bank of a report prepared by the Borrower's auditors
forecasting all Taxation liabilities, payments and provisions
(in relation to all Project Taxes and all other Taxes) to be
incurred or made by the Borrower throughout the period from the
date of this Supplemental Agreement to the Final Reserve Date in
relation to the Projects; and
(d) receipt by the Bank, in form and substance satisfactory to the
Bank of the Financial Model in relation to the Projects, both
adjusted and updated to take account of the forecast Taxation
liabilities, payments and provisions set out in the report
provided in accordance with clause 2(c) above, which adjusted and
updated Financial Model must in the absence of anything else,
demonstrate that throughout the period from the date of this
Supplemental Agreement until the Termination Date the Borrower
will comply with its covenants in clause 19.7(a) of the Principal
Agreement.
3. RE-BORROWING
At the request of the Borrower and the Trust Beneficiaries, the
Bank has agreed to increase the Cash Facility Limit to a maximum
of US$3,000,000 for the period up to and including 31 December
1998 and thereafter to a maximum of US$3,600,000 and to amend the
Principal Agreement to permit the Borrower to repay and
subsequently redraw amounts under the Cash Advance Facility in
accordance with this Supplemental Agreement, subject to the
following conditions:
(a) each of the conditions precedent set out in clause 2 has
been satisfied;
(b) subject to satisfaction of the other conditions of the
Principal Agreement the initial Drawdown after the date of
this Supplemental Agreement of up to US$1,500,000 (available
under the increased Cash Facility Limit), which drawdown is
to be made prior to 31 December 1998, shall:
(i) be Drawndown as one Drawdown under the Principal
Agreement for an amount of up to the difference between
the increased Cash Facility Limit and the Cash Amount
Outstanding; and
(ii) be on-lent to Nord Pacific Limited for general working
capital purposes; and
(c) the Borrower pays to the Bank an establishment fee of US$10,500.
4. AMENDMENTS TO PRINCIPAL AGREEMENT
As from the date of this Supplemental Agreement, the Principal
Agreement is amended as follows:
(a) (clause 1.1): the definition of "Availability Period" in
clause 1.1 is deleted and the following definition is
inserted in its place:
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""Availability Period" means any period during
which the Facility Amount Outstanding is less
that the Facility Limit, provided such period
commences after the Availability Date and expires
on the first to occur of:
(a) the Termination Date; and
(b) the date on which the Commitment is cancelled, or
such later date as may be agreed by the Bank.";
(b) (clause 1.1): the definition of "Cash Facility Limit" appearing
in clause 1.1 is deleted and the following definition is inserted
in its place:
""Cash Facility Limit" means for the period to
and including 31 December 1998 US$3,000,000 and
thereafter US$3,600,000 (which amounts include
the principal amount of the Existing Cash
Advances, if any,) or such lesser amount to which
that amount may be reduced or cancelled pursuant
to this Agreement, including, without limitation,
pursuant to clause 10.2.";
(c) (clause 1.1): the definition of "Termination Date"
appearing in clause 1.1 is deleted and the following
definition is inserted in its place:
""Termination Date" means 30 June 2000.";
(d) (clause 1.1): the definition of "Treasury Facility Limit"
appearing in clause 1.1 is deleted and the following
definition is inserted in its place:
""Treasury Facility Limit" means the amount of
US$16,500,000 (which includes any exposure under
any existing Treasury Transactions).";
(e) (clause 4): clause 4(a) is deleted and the following clause
is inserted in its place:
"(a) (Cash Advance Facility): in relation to the
Cash Advance Facility, to pay Girilambone
North Development Costs, Project Operating
Costs in relation to the Projects and any
other purpose approved by the Bank in its
discretion;";
(f) (clause 5.6): clause 5.6 is deleted and the following clause
is inserted in its place:
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"5.6 Re-borrowings
Subject to clause 10.2, the Cash Advance
Facility is revolving in nature and subject
to clauses 3 and 4 and this clause 5, the
Borrower may redraw any amount Prepaid under
this Agreement provided that such redrawing
does not result in the Cash Amount
Outstanding exceeding the Cash Facility
Limit at the date of that redrawing.";
(g) (clause 5.8): the last sentence of clause 5.8 is deleted;
(h) (clause 9): clause 9 is amended by inserting the figures
"9.1" after the heading to that clause and inserting the
following new clause 9.2 after clause 9.1:
"9.2 Margin Requirements
(a) If at any time and from time to time
Contract Exposure exceeds the Margin
Free Limit, the Bank may by written
notice to the Borrower ("Margin Call")
require the Borrower, and the Borrower
agrees upon such Margin Call, to pay to
the Bank in US Dollars the amount by
which the Contract Exposure exceeds the
aggregate of the Margin Free Limit and
the Margin Call Balance, as specified
by the Bank in such Margin Call
("Margin Call Amount"). Margin Calls
shall only be made in respect of Margin
Call Amounts of not less than, and in
integral multiples of US$50,000 and
must be paid to the Bank within 3
Business Days of the Bank making the
Margin Call.
(b) If, at any time following a Margin Call
and the payment by the Borrower to the
Bank of the Margin Call Amount, the
difference between:
(i) the Contract Exposure; and
(ii) Margin Call Balance,
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is less than the Margin Free
Limit, then the Bank shall release
to the Borrower so much
of the Margin Call Balance then
held by it rounded downward (if
necessary) to the nearest integral
multiple of US$50,000, as will
cause the aforesaid difference to
equal the Margin Free Limit.
(c) Upon any default by the Borrower under
any Bank Risk Management Agreement or
this Agreement or upon the termination
of any of them, or upon the occurrence
and during the continuation of any
Event of Default the Bank is hereby
authorized at any time, and from time
to time without notice to the Borrower,
any Security Provider or any other
person, to set off and apply the Margin
Call Balance to meet any unsatisfied
obligations of the Borrower to the Bank
under the relevant Bank Risk Management
Agreement, all Bank Risk Management
Agreements, this Agreement, or any
other Transaction Document and any
balance of such Margin Call Amounts
remaining after satisfaction of all
obligations of the Borrower to the Bank
under all the Risk Management
Agreements this Agreement, and all
other Transaction Documents shall be
released by the Bank to the Borrower.
(d) Any Margin Call Amount paid to the Bank
in US Dollars shall bear interest at
the rate per annum which the Bank is
then paying on comparable deposits
lodged with it for a period of 30 days
or for such other term as may be agreed
by the Borrower and the Bank, and such
interest shall bear interest on and
from the date of payment to the Bank to
but excluding the date of -
(i) release to the Borrower pursuant
to paragraph (b);
(ii) or application by the Bank
pursuant to paragraph (c).
Such interest shall be calculated on
the basis of a 360 day year on the
actual number of days elapsed and shall
be credited to the relevant account on
the last day of each 30-day period.
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(e) Notwithstanding any provision in clause
9.2 to the contrary, the Borrower, as
an alternative to satisfying a Margin
Call in US Dollars and with the prior
consent of the Bank, may provide or
procure the provision of such other
security as is acceptable to the Bank
provided that any such security shall
not be released or discharged by the
Bank until the discharge in full by the
Borrower of all of its obligations to
the Bank under this Agreement and the
Transaction Documents.
(f) For the purposes of this clause 9.2 the following
expressions shall have the following meanings:
"Bank Risk Management Agreements" means
Risk Management Agreements made between
the Borrower and the Bank.
"Contract Exposure" means on any given
date, the amount, if any, that the Bank
determines would be payable by the
Borrower to the Bank in accordance with
the Bank Risk Management Agreements, if
all Bank Risk Management Agreements
were being terminated on that date.
"Margin Call" has the meaning given in
clause 9.2(a);
"Margin Call Amount" has the meaning
given in clause 9.2(a).
"Margin Call Balance" on any given date
means the aggregate of all Margin Call
Amounts paid to the Bank prior to that
date and still held by the Bank on that
date, after deducting all amounts
repaid to the Borrower under clause
9.2(b).
"Margin Free Limit" means
US$4,000,000.".
(i) (clause 10.2): clause 10.2 is deleted and replaced with the
following new clause:
"10.2 Repayment Installments
The Borrower will Repay the Loan by
Quarterly installments on each Repayment
Date by installments which shall be the
greater of:
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(a) 50% of Available Cash Flow for the
Quarter ending on the relevant
Repayment Date; and
(b) the amount required to reduce the Cash
Amount Outstanding to the Maximum
Outstanding Amount applicable on the
relevant Repayment Date:
MAXIMUM OUTSTANDING SCHEDULE
Repayment Date Maximum Outstanding Amount
31/12/98 US$3.0M
31/03/99 US$3.6M
30/06/99 US$3.6M
30/09/99 US$3.4M
31/12/99 US$2.4M
31/03/2000 US$1.1M
30/06/2000 Nil
Clause 10.2(a) does not apply to the Repayment
Dates of 31 December 1998, 31 March 1999, and
30 June 1999 so that the Borrower will only be
obliged under this clause 10.2 to make a
repayment of the Loan on those Repayment Dates
if required under clause 10.2(b) to reduce the
Cash Amount Outstanding to the Maximum
Outstanding Amount applicable on the Relevant
Repayment Date. Nothing in this clause 10.2
shall in any way limit the Borrowers
obligation to make a payment or repayment
under any other clause of this Agreement. On
each Repayment Date the Cash Facility Limit
shall automatically reduce to the Maximum
Outstanding Amount corresponding to that
Repayment Date.";
(j) (clause 11.1(g)): clause 11.1(g) is deleted;
(k) (clause 13): the following new clause 13(c) is inserted
after clause 13(b):
"(c) (non-utilization fee): a non-utilization fee
at the rate of 0.35 per cent per annum
calculated on a daily basis on the
difference between the Cash Facility Limit
and the Cash Amount Outstanding. This fee
is payable quarterly in arrears on each
Repayment Date.";
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(l) (clause 19.4(u)): the following new clause is inserted
immediately after clause 19.4(u):
"(ua) (FX Transaction): in relation to all
Risk Management Agreements the Borrower must
use proceeds payable to it pursuant to Sales
Contracts to make equal monthly deliveries
in such amount as is necessary from time to
time to ensure that the Borrower's
obligations and the amount outstanding or
due for delivery under the Risk Management
Agreements are fully performed and paid by
the Final Reserve Date subject to such
amount being adjusted by the Bank in its
discretion to take account of changes in the
Approved Budget."; and
(m) (clause 19.4(u)(iii)): the Bank's waiver of the
requirements in clause 19.4(u)(iii) set out in its letter
dated 4 February 1998 is hereby revoked such that the
Borrower must again comply with all of the provisions of
clause 19.4(u)(iii) as amended in accordance with this
Supplemental Agreement. Clause 19.4(u)(iii) is amended by
deleting the letters and figures "US$0.90" appearing on the
third line and inserting in their place the letters and
figures "US$0.75".
5. MISCELLANEOUS
5.1 Costs and Expenses
The Borrower shall on demand by the Bank reimburse the Bank for
all reasonable costs and expenses incurred by the Bank in
connection with the negotiation, preparation, execution, delivery
and completion of this Supplemental Agreement and shall pay all
stamp duty assessed on this Supplemental Agreement.
5.2 Counterparts
This Supplemental Agreement may be signed in one or more
counterparts and any counterpart or set of counterparts signed by
the parties to this Supplemental Agreement shall constitute an
original of this Supplemental Agreement for all purposes.
5.3 Governing Law
This Supplemental Agreement shall be governed by, and construed
in accordance with the laws from time to time in force in the
State of New South Wales and the parties hereby submit to the non-
exclusive jurisdiction of the courts of that State and the courts
which hear appeals therefrom.
5.4 Transaction Document
The parties acknowledge and agree that this Agreement is a
Transaction Document for the purposes of the Principal Agreement.
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6 CONFIRMATION AND RATIFICATION
(a) The Borrower and the Trust Beneficiaries covenant and agree
with the Bank that on and from the date of execution of this
Supplemental Agreement they are each bound by all of the
terms and provisions of the Principal Agreement as amended
by this Supplemental Agreement and acknowledge, covenant and
agree with the Bank that the amendments to the Principal
Agreement effected by this Supplemental Agreement do not
derogate from or in any way relieve them from all or any of
their obligations under the Principal Agreement or the
Securities.
(b) Without limiting paragraph (a) of this clause, the Trust
Beneficiaries confirm the Borrower's power to enter into
this Supplemental Agreement and consent to the terms of this
Supplemental Agreement.
EXECUTED as an agreement.
EXECUTED by ) BANK OF WESTERN AUSTRALIA LTD
BANK OF WESTERN AUSTRALIA LTD ) by it Attorneys
ACN 050 494 454 )
by its Attorney )
)
David Lennon ) Head of Structured Finance
Name ) Title
)
its duly constituted Attorney )
under Power of Attorney No. )
491 dated 4/11/96 who at the )
date hereof had no notice of )
revocation of such Power of
Attorney in the presence of:
/s/ Susan Lau
An Officer of the Bank
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THE COMMON SEAL of )
NORD AUSTRALEX NOMINEES PTY )
LTD was hereunto affixed by )
authority of the board of )
directors in the presence of : )
)
)
)
/s/ Ray W. Jenner /s/ John Syriatowicz
(Signature of Director) (Signature of
Director/Secretary)
Ray W. Jenner John Syriatowicz
(Name of Director) (Name of Director/Secretary)
THE COMMON SEAL of )
NORD GOLD COMPANY LIMITED was )
hereunto affixed by authority )
of the board of directors in )
the presence of : )
)
)
)
/s/ W. Pierce Carson /s/ Ray W. Jenner
(Signature of Director) (Signature of
Director/Secretary)
W. Pierce Carson Ray W. Jenner
(Name of Director) (Name of Director/Secretary)
12
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THE COMMON SEAL of )
NORD PACIFIC LIMITED was )
hereunto affixed by authority )
of the board of directors in )
the presence of : )
)
)
)
/s/ W. Pierce Carson /s/ Ray W. Jenner
(Signature of Director) (Signature of
Director/Secretary)
W. Pierce Carson Ray W. Jenner
(Name of Director) (Name of Director/Secretary)
THE COMMON SEAL of )
NORD GOLD COMPANY LIMITED in )
its capacity as a general )
partner of NORD HIGHLANDS )
MINERALS VENTURE - 1 was )
hereunto affixed by authority )
of the board of directors in )
the presence of : )
/s/ W. Pierce Carson /s/ Ray W. Jenner
(Signature of Director) (Signature of
Director/Secretary)
W. Pierce Carson Ray W. Jenner
(Name of Director) (Name of Director/Secretary)
13
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THE COMMON SEAL of )
NORD PACIFIC LIMITED in its )
capacity as a general partner )
of NORD HIGHLANDS MINERALS )
VENTURE - 1 was hereunto )
affixed by authority of the )
board of directors in the )
presence of : )
/s/ W. Pierce Carson /s/ Ray W. Jenner
(Signature of Director) (Signature of
Director/Secretary)
W. Pierce Carson Ray W. Jenner
(Name of Director) (Name of Director/Secretary)
14
Exhibit 23.1
Independent Auditors' Consent
We consent to the incorporation by reference in the registration
statements (Nos. 33-41147, 33-51752, 33-84654, 33-95514, 33-21159, 333-
50677 and 333-65167) on Form S-8 of Nord Pacific Limited and
subsidiaries as of December 31, 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for the
year then ended which report appears in the December 31, 1998, annual
report on Form 10-K of Nord Pacific Limited.
KPMG LLP
Denver, Colorado
March 26, 1999
Exhibit 23.2
Independent Auditors' Consent
We consent to the incorporation by reference in Registration Statement
Nos. 33-41147, 33-51752, 33-84654, 33-95514, 33-21159, 333-50677 and
333-65167 of Nord Pacific Limited on Form S-8 of our report dated
March 20, 1998, appearing in and incorporated by reference the Annual
Report on Form 10-K of Nord Pacific Limited for the year ended
December 31, 1998.
DELOITTE & TOUCHE
Hamilton, Bermuda
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Nord Pacific
Limited Form 10-K for the year ended December 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1416
<SECURITIES> 0
<RECEIVABLES> 1384
<ALLOWANCES> 0
<INVENTORY> 357
<CURRENT-ASSETS> 3646
<PP&E> 10508
<DEPRECIATION> 6904
<TOTAL-ASSETS> 39403
<CURRENT-LIABILITIES> 4949
<BONDS> 0
0
0
<COMMON> 47375
<OTHER-SE> (22036)
<TOTAL-LIABILITY-AND-EQUITY> 39403
<SALES> 13807
<TOTAL-REVENUES> 13807
<CGS> 10251
<TOTAL-COSTS> 10251
<OTHER-EXPENSES> 96
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 272
<INCOME-PRETAX> (715)
<INCOME-TAX> (740)
<INCOME-CONTINUING> 25
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
