<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended June 30, 1996
or
[ ] Transition Report Pursuant to Section 13 and 15(d) of The Securities
Exchange Act of 1934
DAKOTA MINING CORPORATION
--------------------------------------------
(Exact name of Registrant as specified in its charter)
CANADA 0-17583 84-1094683
- - ------------------------ ----------------------- ------------------
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation/organization) Identification No.)
EXECUTIVE OFFICES:
410 Seventeenth Street
Suite 2450
Denver, Colorado 80202
Telephone: (303) 573-0221
Fax: (303) 573-1012
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
Number of common shares outstanding on August 13, 1996: 35,476,742
<PAGE>
DAKOTA MINING CORPORATION
INDEX
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1 CONDENSED CONSOLIDATED BALANCE SHEETS. . . . . . . . . . . . . . . 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS . . . . . . . . . 4
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS . . . . . . . . . . 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . 9
PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 17
ITEM 1 - LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . 17
ITEM 2 - CHANGES IN SECURITIES. . . . . . . . . . . . . . . . . . . 17
ITEM 3 - DEFAULT UPON SENIOR SECURITIES . . . . . . . . . . . . . . 18
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY
HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 5 - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . 18
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
<PAGE>
DAKOTA MINING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN UNITED STATES DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $10,478,573 $2,260,025
Inventories 7,835,140 3,821,176
Deferred stripping costs 633,325 667,956
Other current assets 424,458 340,965
----------- -----------
19,371,496 7,090,122
PROPERTY, PLANT AND EQUIPMENT, NET 23,673,263 22,972,514
OTHER ASSETS
Reclamation bonds 4,701,230 3,577,475
Advance minimum royalties 2,099,285 2,007,260
Other 80,565 258,050
----------- -----------
$49,925,839 $35,905,421
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 4,612,145 $5,152,517
Accrued liabilities 2,019,018 1,864,790
Reclamation costs 675,577 576,500
Short-term borrowings 843,730 1,157,991
Current portion of long-term debt 3,700,057 565,546
----------- -----------
11,850,527 9,317,344
LONG-TERM LIABILITIES
Long-term debt 389,297 439,520
Royalties 267,600 -
Reclamation costs 5,089,580 3,558,304
----------- -----------
Total liabilities 17,597,004 13,315,168
----------- -----------
----------- -----------
SHAREHOLDERS' EQUITY
Warrants 87,500
Preference shares, without par value; 20,000,000
shares authorized, none issued or outstanding
Special Warrants 13,543,912
Common shares, without par value; unlimited
shares authorized; 35,476,742 issued and
outstanding in 1996; 26,534,742 in 1995 39,328,697 38,906,595
Accumulated deficit (20,216,916) (16,064,270)
Cumulative translation adjustment (326,858) (339,572)
----------- -----------
Total shareholders' equity 32,328,835 22,590,253
----------- -----------
$49,925,839 $35,905,421
----------- -----------
----------- -----------
</TABLE>
(SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
3
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DAKOTA MINING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(expressed in United States dollars)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 3,604,052 $ 1,480,343 $ 6,800,767 $ 3,447,788
----------- ----------- ----------- -----------
OPERATING COSTS
Mine, mill and administration 3,023,581 829,363 5,669,559 2,294,719
Depreciation and depletion 1,134,291 580,308 1,954,136 1,117,323
Holding and standby costs 1,330,026 1,249,933 1,330,026 1,925,182
Royalties and severance taxes 130,184 47,420 259,340 102,852
Exploration 35,190 - 64,394 -
Reclamation 848,231 101,873 956,379 175,201
Other 14,891 22,621 24,444 55,606
General corporate costs 466,852 372,724 838,823 670,977
----------- ----------- ----------- -----------
6,983,246 3,204,242 11,097,101 6,341,860
----------- ----------- ----------- -----------
OPERATING LOSS (3,379,194) (1,723,899) (4,296,334) (2,894,072)
----------- ----------- ----------- -----------
Other income (expense):
Investment income 254,306 78,008 308,424 69,470
Interest expense (103,778) (83,080) (162,714) (187,429)
Other 21,453 3,075 (2,022) 61,927
----------- ----------- ----------- -----------
171,981 (1,997) 143,688 (56,032)
NET LOSS $(3,207,213) $(1,725,896) $(4,152,646) $(2,950,104)
----------- ----------- ----------- -----------
Net loss per common share $ (0.11) $ (0.07) $ (0.15) $ (0.12)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of
shares outstanding 27,992,313 26,198,877 27,278,893 24,407,723
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
(SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS)
4
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DAKOTA MINING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(expressed in United States dollars)
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES
Net loss $(4,152,646) $(2,950,104)
Add (deduct) non-cash items:
Depreciation, depletion and amortization 1,954,136 1,131,098
Gain on sale of assets - -
Reclamation, holding and standby accrued 1,630,352 -
Other (39,502) (21,942)
----------- -----------
(607,660) (1,840,948)
Net change in non-cash working
capital items related to operations (4,142,188) (399,543)
(4,749,848) (2,240,491)
----------- -----------
INVESTMENT ACTIVITIES
Additions to property, plant and equipment (2,701,246) (1,903,668)
Proceeds from asset dispositions - -
Additions to reclamation bonds and other assets (1,063,712) (1,111,164)
----------- -----------
(3,764,958) (3,014,832)
----------- -----------
FINANCING ACTIVITIES
Proceeds from exercise of Common Share
Purchase Warrants 336,059 218
Proceeds from the sale of special warrants 14,507,250 6,000,000
Special warrant offering costs paid (964,793) (461,261)
New borrowings 3,236,837 82,478
Repayment of indebtedness (394,711) (897,000)
----------- -----------
16,720,642 4,724,435
----------- -----------
Effect of exchange rate on cash 12,712 -
----------- -----------
Net change in cash 8,218,548 (530,888)
Cash, beginning of period 2,260,025 3,097,441
----------- -----------
CASH, END OF PERIOD $10,478,573 $2,566,553
----------- -----------
----------- -----------
</TABLE>
(SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT)
5
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DAKOTA MINING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. GENERAL
Dakota Mining Corporation and its subsidiaries (the "Company") are engaged
in the business of investing in and operating precious metals mining
projects, producing gold and silver and exploring for, acquiring and
developing precious metals properties.
The consolidated financial statements of the Company are reported in United
States dollars in accordance with generally accepted accounting principles
in Canada. As described in Note 4, these principles may differ in certain
respects from those that the Company would have followed had its
consolidated financial statements been prepared in accordance with
generally accepted accounting principles and practices in the United
States.
The interim financial data is unaudited. However, in the opinion of
management, all adjustments that are normal and recurring in nature have
been made for a fair presentation of the financial position of the Company
at June 30, 1996 and the results of operations for the interim periods
presented. Results of operations for this period are not necessarily
indicative of results to be expected for the full year. For a more
thorough understanding of the Company's operations and financial position,
these statements should be read with the audited financial statements and
notes included with the Company's December 31, 1995 audited financial
statements.
2. INVENTORIES AND DEFERRED STRIPPING COSTS
On the dates indicated, inventories were comprised of the following:
June 30, December 31,
1996 1995
---- ----
Bullion $ 690,322 $1,290,231
Heap leach 6,848,258 2,244,420
Materials and Supplies 296,560 286,525
--------- ----------
$7,835,140 $3,821,176
---------- ----------
---------- ----------
In 1993, the mining activity at Stibnite Mine consisted primarily of the
removal of waste overburden. Accordingly, the costs of waste removal of
approximately $1.8 million were deferred. Of this amount, $1.12 million
was charged to operations in 1995 with the remainder to be charged to
operations in 1996 as the related gold resources are recovered.
3. BORROWING ARRANGEMENTS
On April 19, 1996, the Company completed an agreement to establish a
Revolving Loan Agreement with Gerald Metals, Inc. for a $4.0 million
seasonal line of credit. Interest will accrue at a rate of LIBOR plus
2.75% with the entire balance repayable within one year. The credit
facility is collateralized by all the underlying assets of the Gilt Edge
and Stibnite
6
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Mines and is guaranteed by the Company. At August 10, 1996, the Company
had drawn $3.2 million of the credit facility.
In April, 1996, the terms of a short-term borrowing arrangement with D.H.
Blattner & Sons ("Blattner") were redetermined. The Company has signed a
Secured Loan Note which provides for monthly payments, including accrued
interest, of $75,000 commencing May 1, 1996 and continuing until September
1, 1997. The loan bears interest at 8.5% per annum, is collateralized by
the assets of Stibnite Mine and is guaranteed by Dakota Mining Corporation.
This facility was subordinated by Blattner to Gerald under the Revolving
Credit Facility previously described. However, on May 21, 1996, Gerald
purchased the Secured Loan Note from Blattner in a transaction not
involving the Company.
4. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) IN CANADA AND THE UNITED
STATES
The Company follows Canadian accounting principles which are different in
some respects from accounting principles applicable in the United States.
There are no significant differences in 1996 and 1995 between Canadian
accounting principles and U.S. GAAP pertaining to the Company.
(a) Under Canadian accounting principles, the Arrangement completed on
September 15, 1993 (Note 6) was accounted for as a financial
reorganization resulting in a "fresh start." Consequently, results of
operations and cash flows for periods before the financial
reorganization are not reported. However, under U.S. GAAP, the
Arrangement would be accounted for as a quasi-reorganization and the
pre-Arrangement results of operations and cash flow activities would
have been combined with the post-Arrangement financial reorganization
activities. U.S. GAAP requires that the deficit accumulated after the
financial reorganization be dated as of September 15, 1993 to notify
financial statement readers of the reorganization.
(b) Under U.S. GAAP, the Company would calculate deferred income taxes
using an asset and liability method. Deferred income taxes reflect
the net tax effect of temporary differences between the carrying
amount of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
(c) Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123) was issued in October, 1995 by the
Financial Accounting Standards Board. SFAS 123 establishes financial
accounting and reporting standards for stock-based employee
compensation plans as well as transactions in which an entity issues
equity instruments to acquire goods or services from non-employees.
Under SFAS 123 an entity may continue to measure compensation cost for
those plans in accordance with APB Opinion No. 25, Accounting for
Stock Issued to Employees, which method is similar to that applied
under Canadian GAAP, providing that certain proforma disclosures are
provided. SFAS 123 is applicable to fiscal years beginning after
December 15, 1995. The Company does not expect to adopt the
accounting prescribed by SFAS 123; however, it will include the
proforma disclosures required by SFAS 123 beginning with its 1996
annual consolidated financial statements.
7
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5. OWNERSHIP INTEREST IN GOLDEN REWARD MINE
The Company owns a 40% interest in Golden Reward Mine, with the remaining
60% interest being owned by two subsidiaries of Wharf Resources Ltd.
("Wharf"). The Company's proportionate share of the partnership's balance
sheets as of June 30, 1996 and December 31, 1995 and statements of
operations for each of the years indicated are as follows:
June 30, December 31,
1996 1995
---- ----
BALANCE SHEETS:
Current assets $ 1,387,036 $ 1,313,421
Plant property and equipment 8,769,837 10,047,831
Other assets 897,900 464,193
----------- -----------
Total assets 11,054,773 11,825,445
----------- -----------
Accounts payable and other
current liabilities 1,097,407 428,777
Current portion of long-term debt 364,400 364,400
Long-term debt 179,200 358,400
Other long-term liabilities 2,023,249 370,701
----------- -----------
Total liabilities 3,664,256 1,522,278
----------- -----------
$ 7,390,517 $10,303,167
----------- -----------
----------- -----------
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues $ 1,541,172 $ 1,398,157 $ 2,960,563 $ 1,828,265
------------ ------------ ------------ ------------
Mine cash production costs 1,417,963 768,348 2,668,708 1,230,773
Royalties 45,589 30,020 96,867 30,509
Holding and standby costs 1,330,026 - 1,330,026 -
Exploration 27,586 22,621 53,516 25,704
Reclamation 531,348 37,137 639,496 21,869
Depreciation and depletion 659,360 466,901 1,271,740 447,633
------------ ------------ ------------ ------------
Total production costs 4,011,872 1,325,027 6,060,353 1,756,488
------------ ------------ ------------ ------------
Operating income (loss) (2,470,700) 73,130 (3,099,790) 71,777
Other income (expense) 48,455 (44,137) 39,848 (54,733)
------------ ------------ ------------ ------------
$( 2,422,245) $ 28,993 $(3,059,942) $ 17,044
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
Based upon uncertainties arising from the proximity of certain unpermitted
reserves to a ski hill, the operator of Golden Reward L.P. reflected in the
financial statements of the partnership at December 31, 1995 and at June
30, 1996, an impairment of its investment in mineral properties relating to
the Golden Reward Mine. The Company did not incorporate this write-down
into the June 30, 1996 or December 31, 1995 financial statements because
Golden Reward L.P. is actively pursuing the acquisition of certain property
interests from the ski hill not presently owned by Golden Reward L.P. If
Golden Reward, L.P. is successful in acquiring these certain property
rights, then its operating permits can be expanded to include certain ore
reserves which when processed will enable the Company to
8
<PAGE>
fully recover its remaining investment in Golden Reward, L.P. Therefore,
these amounts do not reflect the impairment recorded by Golden Reward L.P.
6. 1993 ARRANGEMENT
On September 13, 1993, the shareholders of the Company approved a
recapitalization of the Company's outstanding common shares as part of an
"arrangement" under applicable Canadian law (the "Arrangement"). Pursuant
to such Arrangement, all of the shares of common stock of the Company
issued and outstanding as of September 15, 1993 (the "Old Common Shares")
were exchanged for new Common Stock and Common Share Purchase Warrants (the
"Arrangement Warrants".) The basis for such exchange was one share of new
Common Stock and 1/2 of an Arrangement Warrant for every 12.43452 shares of
Old Common Shares. A whole Arrangement Warrant allowed the holder thereof
to acquire one share of Common Stock at an exercise price of $1.50 until
September 15, 1994 and thereafter at $1.75 until their expiry on September
15, 1995.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company has interests in three principal mining properties: a 100%
interest in Gilt Edge Mine; a 100% interest in Stibnite Mine; and a 40% interest
in Golden Reward Mine. The Company also has a 25% interest in Cactus Mine;
however, such mine is presently in the reclamation stage and future activities
will not be material to the Company.
The Company's operating activities at Gilt Edge Mine and Stibnite Mine have
been severely curtailed since 1993 pending receipt of various new operating
permits. The lack of operating activities at these two mines resulted in the
Company reporting significant net losses in each of 1993, 1994, 1995 and in the
first half of 1996. The Company received the necessary operating permits to
recommence operations at Stibnite Mine on July 7, 1995 and to recommence
operations at Gilt Edge Mine on January 19, 1996. Due to the seasonal nature of
activities at Stibnite Mine and the timing of the permit at Gilt Edge Mine the
full impact of a return to production at both mines is not reflected in these
financial statements.
For the past three years, the Company has funded, and it is anticipated
that it will continue to fund its operating losses, working capital requirements
and capital needs primarily through the private placement of equity securities.
On February 14, 1996, the Company issued and sold by way of private placement,
8.7 million Special Warrants at a price of Cdn$2.30 per Special Warrant
representing gross proceeds to the Company of Cdn$20,010,000 (US$14,507,250).
Subject to adjustment in certain circumstances, each Special Warrant is
exchangeable into one Common Share and one-half of a Purchase Warrant for no
additional consideration. Each whole Purchase Warrant entitles the holder
thereof to acquire one Common Share until December 14, 1997 at an exercise price
of Cdn$2.65.
At the closing of the offering, the Company received Cdn.$9,004,500 (U.S.
$6,528,000) or 50% of the sale proceeds less Underwriter commission, with the
remaining Cdn.$10,005,000
9
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(U.S. $7,254,000) or 50% of proceeds placed into escrow pending the clearance of
the Company's Canadian prospectus. The Company paid commissions to certain
underwriters in connection with the offering of Cdn.$1,000,500 (U.S. $725,400)
or Cdn$.115 per Special Warrant and issued to such underwriters a warrant to
purchase 200,000 Common Shares under the same terms and conditions as the
Purchase Warrants.
The proceeds from the private placement are being used and will continue to
be used to fund capital expenditures required to bring the Anchor Hill deposit
located at Gilt Edge Mine into production in lieu of previous financing
arrangements with Repadre International Corporation ("Repadre") described below;
to fund feasibility and permitting expenditures on sulfide reserves at Gilt Edge
Mine; to fund exploration, property development and acquisition; and to fund the
general working capital requirements of the Company. Included in plans for
exploration and property development are plans to commence reverse circulation
drilling at Stibnite Mine in an attempt to define additional reserves and extend
the present mine life.
On April 19, 1996, the Company completed an agreement to establish a
Revolving Loan Agreement with Gerald Metals, Inc. for a $4.0 million seasonal
line of credit. Interest will accrue at a rate of LIBOR plus 2.75% with the
entire balance repayable within one year. The credit facility is collateralized
by all the underlying assets of the Gilt Edge and Stibnite Mines and is
guaranteed by the Company. At August 10, 1996, the Company had drawn $3.2
million of the credit facility.
Effective March 8, 1995, the Company entered into an agreement (the
"Repadre Agreement") with Repadre International Corporation ("Repadre") whereby
Repadre agreed to provide the Company with a $4.0 million credit facility and
thereby receive a royalty interest in the Company's Gilt Edge Mine. After
completion of the private placement of Special Warrants in February 1996, the
Company terminated the credit facility. However, under the terms of the Repadre
Agreement, Repadre retains a 1-3/4% royalty interest in certain properties and a
3/4% royalty interest in certain other properties at Gilt Edge Mine for
providing the credit facility to the Company.
In order to minimize an adverse effect upon operations should gold prices
fall in the future, the Company from time-to-time, enters into gold price
protection agreements. At August 10, 1996, the Company had entered into various
option contracts with a bullion dealer to deliver 10,000 ounces of gold at a
minimum price of $395 per ounce and a maximum of $425 per ounce during the
period from August 1, 1996 through December 31, 1996, and has agreed to deliver
9,000 ounces of gold at $390 and 1,920 ounces of gold at $385.30 per ounce under
forward sales contracts which expire during the period from August 30, 1996
through January 31, 1997. Fluctuations in future gold prices could
significantly impact the Company's future revenues.
At June 30, 1996, the Company had working capital of $7.5 million primarily
due to an increase in cash and inventory of $12.2 million since December 31,
1995, offset by an increase in accrued royalties and accrued reclamation costs
of $1.8 million and an increase in the current portion of long-term debt of $3.1
million since December 31, 1995. The improvement in working capital from a
deficit of $2.2 million at December 31, 1995 is a result of the private
placement of Special Warrants.
Cash used in operations was $4.7 million during the first half of 1996
compared to cash used in operations of $2.2 million during the same period of
1995. The increase in cash used in
10
<PAGE>
the first half of 1996 as compared to 1995 is primarily due to the increase in
inventories and the decrease in accounts payable and accrued liabilities at June
30, 1996, when compared to balances at December 31, 1995.
Cash used in investment activities during the first half of 1996 pertains
to additions to plant, property and equipment, including development activities
at Gilt Edge Mine and Stibnite Mine.
Cash provided by financing activities during the first half of 1996
included approximately $13.5 million of proceeds, net of offering costs, from
the sale of Special Warrants. The Company also repaid approximately $180,000 of
its pro rata share of certain long-term debt obligations of Golden Reward L.P.
In total the Company repaid borrowings of $394,711 during the first half of
1996.
During the next three years, the Company anticipates that its aggregate
costs for land holding, expansion of existing mining facilities, exploration on
existing properties and obtaining new operating permits will approximate $9.6
million. The Company anticipates that these capital requirements will be funded
from the proceeds of the sale of the Special Warrants sold in February, 1996 and
from cash flows from operations. The Company also anticipates that it will meet
its repayment obligations under two short-term borrowing arrangements of $4.36
million and under various long-term debt agreements principally from cash flows
generated by operating activities.
GILT EDGE MINE
The Company recommenced operations at Gilt Edge Mine in the second quarter
of 1996 through the development of the Anchor Hill oxide deposit which at
December 31, 1995 consisted of 8.58 million tons of ore containing approximately
222,000 ounces of gold. Average gold recoveries are estimated to be 71.6% and
average cash operating costs per ounce are expected to approximate $250 per
ounce produced. Depreciation, including future development costs as noted
below, is estimated to be $60 per ounce. Anchor Hill is expected to generate an
operating profit over its four-year mine life.
The Company has all requisite state and county operating permits to allow
for the development of the Anchor Hill oxide deposit. The ultimate Anchor Hill
open pit design contemplates that approximately 37 acres of public lands will be
disturbed, principally for pit wall layback and waste removal. Accordingly, the
Company is required to complete an Environmental Impact Statement ("EIS"). The
EIS, which has been underway since January 1994, was delayed in 1995 pending
receipt of the state and county operating permits. Management now expects to
finalize the EIS by fall 1996. Mining activities from Anchor Hill can be
conducted for approximately two years prior to any disturbance of public lands.
Completion of the EIS is expected to cost approximately $165,000.
The Company has begun mining and processing activities at Anchor Hill. The
Company has hired a mining contractor to conduct all mining and earthwork
activities and is utilizing its existing heap leach production facilities to
process ores. Initially, capital costs have been limited to the enlargement of
the present heap leach pad, offloading previously leached and neutralized spent
ore and purchasing certain equipment.
11
<PAGE>
The South Dakota Department of Environment and Natural Resources ("DENR")
has conducted a Preliminary Assessment on behalf of the United States
Environmental Protection Agency ("EPA") of Gilt Edge Mine activities including
the approximately 406 acres permitted under the Company's South Dakota state
mining permit. At this time, EPA has not made a determination as to whether any
further study needs to be made of the site. Accordingly, the Company is not
able to determine what impact, if any, further action by DENR or EPA in
connection with the Preliminary Assessment may have on the site. The Company
does not know when the EPA may reach a decision on the Preliminary Assessment.
In April 1993, the DENR issued the DENR Order regarding remediation efforts
related to acid rock drainage at Gilt Edge Mine. The DENR Order remains in
effect and the Company is in full compliance. The DENR Order principally
requires that, unless discharge water meets certain permitted terms and
conditions, there shall be no discharge of acid mine drainage. On January 19,
1996, the Company received final approval of an updated and amended reclamation
plan from the State of South Dakota. Under the conditions of the revised
reclamation plan, the Company plans to reclaim waste depositories and other
areas by capping these areas with impervious materials available from the
overburden associated with the Anchor Hill oxide deposit. Such capping will
prevent any continued migration of acid mine drainage. The Company has
estimated that its future capping costs will approximate $3.2 million, which
costs were fully accrued at December 31, 1995. Funding of this obligation will
be made from operating cash flow derived from processing the Anchor Hill oxide
deposit.
The Company has provided the State of South Dakota with a form of financial
assurance in the amount of $7.9 million in connection with the reclamation and
remediation plan in the form of cash deposits of $2.4 million and a demand note
as proof of financial assurance in the amount of $5.5 million. The Company
expects its actual costs of completing the reclamation and remediation plan to
be substantially less than the financial assurance amount.
At a future date when the Company provides notice to the State of South
Dakota that the Gilt Edge Mine will close and that post closure care is to
begin, the Company will be obligated to convert a portion of its financial
assurance into a post-closure fund in a form acceptable to the State to ensure
long term treatment and maintenance of the site. The amount of the post-closure
financial assurance is not expected to be less than $3.0 million although no
final determination will be made until the mine actually closes.
As of June 30, 1996, the investment in property, plant and equipment at
Gilt Edge Mine approximated $8.2 million of which $1.7 million is attributed to
the sulfide development potential of the property which is not currently subject
to amortization. Based upon a $400 per ounce gold price, an independent
engineering study and past operating experiences, the Company believes that
mining and processing the Anchor Hill oxide deposit and the substantial sulfide
deposit will generate sufficient operating margins to ensure the recovery of the
Company's remaining investment in Gilt Edge Mine.
STIBNITE MINE
Operations at Stibnite Mine were suspended in 1993 and 1994 pending
resolution of various permitting matters. The Company obtained the necessary
permits to resume mining operations in July 1995 and to conduct mining
activities through 1996. Operations subsequent to 1996 are subject to the
completion of an EIS which is expected to be completed in May 1997.
12
<PAGE>
The Company has identified sufficient mineralized oxide materials at
Stibnite Mine to conduct operations at or above historic annual production rates
of approximately 40,000 ounces of gold during 1996 and has drill indicated
mineralized material which management believes will allow for several additional
years of operations. The drill indicated areas will require further development
drilling at a cost of approximately $300,000 per year. Drilling activities,
including reverse circulation drilling to further delineate the Cinnamid
prospect, will be financed from the proceeds of the sale of Special Warrants and
from mine generated cash flows.
As in the past, the Company has hired an outside contractor to conduct all
1996 mining activities. Stibnite Mine was in production from 1986 to 1992; as
such all production facilities necessary to conduct operations are in place and
only minimal refurbishment and maintenance is required to continue operations.
In response to a Preliminary Assessment/Site Investigation ("PA/SI")
conducted by United States Forest Service in 1993 relating to an historic
smelter tailings repository at Stibnite Mine (which existed prior to the
Company's activities), the Company has engaged an independent environmental
services organization to assist it in preparing a voluntary preventative action
plan to reclaim the tailings. The Company has concluded that continued mining
activities represent the most economic manner to stabilize and ultimately
reclaim these historic tailings.
On July 10, 1995, the Company entered into a voluntary Administrative Order
of Consent with EPA regarding the tailings area (the "Meadow Creek Plan").
Approximately 50% of the work under the Meadow Creek Plan was completed in 1995.
Management estimates that approximately $833,000 of costs will be incurred in
1996 in order to complete the Meadow Creek Plan. Such costs will be funded from
operating cash flows. The Company has apprised previous owners and operators of
the property of the Meadow Creek Plan and believes that a substantial portion of
such reclamation costs may be recoverable from these parties.
The Company's investment in mining assets at Stibnite Mine as of June 30,
1996 is approximately $6.6 million of which approximately $1.9 million has been
attributed to the sulfide ore potential of the property and is not currently
subject to amortization. Future depreciation will approximate $44 per ounce.
Based upon a $400 per ounce gold price and its past operating experience, the
Company believes Stibnite Mine's future operating margins should ensure the
recovery of its remaining investment in mining assets.
GOLDEN REWARD MINE
Golden Reward Mine, is a partnership in which the Company has a 40%
interest, with the remaining 60% interest being owned by two subsidiaries of
Wharf Resources Ltd. ("Wharf"). Golden Reward Mine ceased mining activities in
June 1996. The Company's share of estimated production in 1996 is expected to
be approximately 10,500 ounces of gold at an average cash cost of $370 per
ounce. Operations were ceased by Wharf earlier than originally expected due to
higher strip ratios and lower ore grades than had been forecasted previously.
In order to access additional reserves and mineralized materials, Golden
Reward Mine will be required to relocate its existing crusher facility and
reduce by approximately 25% its leach pad capacity or to acquire or otherwise
compensate third parties to acquire or remove their facilities.
13
<PAGE>
On December 18, 1995 Wharf announced a write-down of its investment in the
Golden Reward Mine due in part to "...increased uncertainties arising from the
proximity of Golden Reward's unpermitted reserves to a ski hill..." Discussions
have been ongoing for some time and have continued after the announcement by
Wharf regarding the possible acquisition of the interests in the ski hill not
currently owned by Golden Reward L.P. Based upon these and more recent
discussions in which the Company has been a participant, the Company believes
that a transaction to acquire certain property interests owned presently by the
ski hill can be completed on economic terms. However, terms of any such
transaction have not yet been agreed to with such owners, or between the Company
and Wharf. If Golden Reward, L.P. is successful in acquiring these certain
property rights, then its operating permits can be expanded to include certain
ore reserves which when processed will enable the Company to fully recover its
remaining investment in Golden Reward, L.P.
The Golden Reward L.P. is actively pursuing the removal of encumbrances,
including the aforementioned acquisition of certain property interests owned by
the ski hill, and permitting of its proven and probable reserves, and the
exploration and development of other mineable resources. The Company believes
that Golden Reward L.P. will ultimately be successful in removing these
encumbrances, obtaining permits to mine such reserves, and developing other
mineable resources. Based upon gold prices of approximately $400 per ounce and
past operating experience, the Company also believes that the Golden Reward
Mine's future operating margins will be sufficient to recover Dakota's remaining
investment in Golden Reward Mine of approximately $8.7 million at June 30, 1996.
However, there are significant uncertainties which could affect the
recoverability of the Company's investment in Golden Reward Mine, the outcome of
which is not presently determinable. No adjustments for the effect of these
uncertainties has been made to the Company's investment in mining assets at
Golden Reward Mine. No assurance can be given that the Golden Reward L.P. will
be successful in removing the encumbrances affecting the aforementioned
resources. In such circumstances, the Company would be required to reduce its
carrying value in Golden Reward Mine by approximately $7.1 million.
The Company estimates that its share of future costs related to removing
the encumbrances could be approximately $1 million, which costs may be paid out
of the proceeds from the sale of the Special Warrants or from future operating
cash flows if mining activities are permitted thereby extending the present mine
life. Golden Reward L.P. will also be required to obtain new operating permits
in order to mine certain of these encumbered reserves. The Company estimates
that it will take between 9 and 15 months from commencement of the application
process to obtain said permits. The Company's share of capital expenditures for
development drilling of approximately $120,000 annually together with its share
of project debt repayment obligations are expected to be paid from project cash
flows.
OTHER ENVIRONMENTAL MATTERS
In connection with its mining and milling activities, the Company is
required to comply with various federal, state and local laws and regulations
pertaining to the discharge of materials into the environment or otherwise
relating to the protection of the environment. The Company believes that it has
obtained, or is taking the steps necessary to obtain, such environmental
permits, licenses or approvals required for its operations. Management is not
aware of any material violations of environmental permits, licenses or approvals
issued with respect to the Company's operations other than the DENR Order issued
to the Company in respect of the Gilt Edge Mine by
14
<PAGE>
the South Dakota DENR regarding acid rock drainage emanating from the waste
depository. See "Liquidity and Capital Resources" above.
Environmental laws and regulations may be enacted and adopted in the future
which may have an impact upon the Company's operations. The Company cannot now
accurately predict or estimate the impact of any such future laws or regulations
on its operations.
RESULTS OF OPERATIONS - FOR THE PERIODS ENDED JUNE 30, 1996 AND 1995
GENERAL
Effective September 15, 1993, the Company completed a financial
reorganization pursuant to a plan of arrangement under the CANADA BUSINESS
CORPORATIONS ACT (the "Arrangement"). See Note 6 of Notes to Consolidated
Financial Statements. Under Canadian generally accepted accounting principles
("GAAP"), the Arrangement was accounted for as a financial reorganization
utilizing "fresh start" accounting. Accordingly, results of operations and cash
flow activities prior to September 15, 1993, the effective date of the
Arrangement, have not been included in the consolidated statements of operations
and cash flows; rather the consolidated financial statements are limited to the
post-Arrangement period commencing September 16, 1993.
The Arrangement would be accounted for as a quasi-reorganization under
U. S. GAAP and the pre-Arrangement results of operations and cash flow
activities would have been combined with the post-Arrangement financial
reorganization activities.
REVENUES AND DIRECT OPERATING COSTS
The Company recorded a consolidated net loss of $3.2 million, or $0.11 per
share, for the second quarter of 1996, compared to a consolidated net loss of
$1.7 million or $0.07 per share, during the second quarter of 1995. Year-to-
date, the Company recorded a consolidated net loss of $4.1 million or $0.15 per
share in 1996, compared to a loss of $2.95 million, or $0.12 per share in 1995.
Of this loss, $1.7 million is attributed to the accrual at June 30, 1996 of
future reclamation, mining, plant, services and royalty costs at Golden Reward
pertaining to the hiatus in production as discussed previously.
Shown below is the Company's share of metals sales (in ounces) for each
respective quarter:
Metal Sales Metal Sales
Three months ended Six months ended(1)
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
Ounces of gold sold:
Cactus Mine (25%) 271 215 355 591
Gilt Edge Mine 3,091 - 5,211 -
Golden Reward Mine (40%) 3,886 3,579 7,455 8,423
Stibnite Mine 1,950 - 4,184 -
----- ----- ----- -----
9,198 3,794 17,205 9,014
----- ----- ----- -----
----- ----- ----- -----
15
<PAGE>
(1) Precious metals production for each of the joint venture operations
includes the Company's pro rata share.
Operating results for the comparative periods ended June 30 are summarized
in the following table:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenue $3,604,052 $1,480,343 $6,800,767 $3,447,788
--------- --------- --------- ---------
--------- --------- --------- ---------
Average net price per ounce of gold
realized $ 392 $ 390 $ 395 $ 382
--------- --------- --------- ---------
--------- --------- --------- ---------
Average London PM fix per ounce of gold $ 382 $ 388 $ 382 $ 383
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
Three months ended Six months ended
Mine, Mill and Administration(1) June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gilt Edge Mine $ 901,253 $1,249,933 $1,499,290 $1,925,182
Golden Reward Mine 1,405,005 756,152 2,646,197 1,966,299
Stibnite Mine 594,021 671 1,376,807 143,416
Cactus Mine 123,302 72,540 147,265 185,004
---------- ---------- ---------- ----------
Subtotal 3,023,581 2,079,296 5,669,559 4,219,901
Reclassified to holding and standby - (1,249,933) - (1,925,182)
---------- ---------- ---------- ----------
Total mine, mill and administration $3,023,581 $ 829,363 $5,669,559 $2,294,719
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Average cash cost per ounce
of gold sold(2) $ 329 $ 219 $ 330 $ 255
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(1) Cash costs include mining, milling, project administration,
on-property exploration, and all holding and standby costs.
Overall, gold production and related operating revenues increased
principally due to the recommencement of operations at Stibnite Mine in August
1995 after the successful completion of various permit matters. Leaching
certain stockpiled ores at Gilt Edge Mine also contributed to higher production
and operating revenues than reported during the first half of 1995. This
increase was partially offset by a decrease in production at Golden Reward Mine
due to inclement weather during January and February.
Mine, mill and administrative costs increased 147% to $5,669,559 in the
first half of 1996 when compared to the same period of 1995 after
reclassification of all expenses at Gilt Edge Mine to holding and standby costs.
Actual costs at Gilt Edge Mine decreased from 1995 to 1996 but the periods are
not comparable because the mine was not operating during the first half of 1995.
Costs at Stibnite Mine increased $1,233,391 during the first half of 1996 as a
result of the recommencement of operating activities in July 1995. Increased
costs at Golden Reward in 1996 relate primarily to waste removal. During 1995,
based upon the estimated mine life, Golden Reward deferred excessive stripping
costs associated with excess waste removal. No such deferral took place in 1996
due to the cessation of mining activities in June. Additionally, sales at
Golden
16
<PAGE>
Reward were lower in the first half of 1996, causing the average cash cost per
ounce of gold sold to increase significantly. Costs at Cactus Mine are lower in
the first half of 1996 than in the same period of 1995 and relate to wind-up and
reclamation activities. Such costs will continue to decline in the future as
final reclamation activities continue.
The increase in depreciation, depletion and amortization in 1996 when
compared to 1995 is due to an increase in the depletion rate at Golden Reward
Mine resulting from a reduction in estimated recoverable reserves at December
31, 1995. Increases in depletion at Gilt Edge Mine and Stibnite Mine are
attributable to units of production amortization as each mine sold ounces during
the first half of 1996, while there were no sales for these mines during the
first half of 1995.
Royalties vary from mine-to-mine and within the specific area being mined
in accordance with various agreements with landowners. As a percentage of
revenues, royalty expenses have remained relatively flat. Effective in 1995,
the State of South Dakota adjusted its methods for calculating severance taxes,
the result of which was to significantly lower the effective rate. Overall,
royalties and severance taxes generally relate directly to revenues earned.
Therefore higher revenues in the first half of 1996 resulted in higher royalty
and severance taxes than during the same period of 1995.
Reclamation costs in the first half of 1996 pertain principally to the
accrual of approximately $400,000 at June 30 due to the early shutdown at Golden
Reward and the mining of Anchor Hill at Gilt Edge Mine, increasing by $781,178
to $956,379.
General corporate costs increased in 1996 when compared to 1995 due to
additions in staff, legal expenses, travel activities, and in the use of outside
professional services incurred in connection with potential mine acquisitions.
These increases are due, in part, to overall increases in corporate activity in
the first half of 1996 compared to the same period of 1995.
Investment income is higher in the first half of 1996 due principally to
interest earned on higher cash balances available for investment purposes.
Interest expense is slightly lower in 1996 due to lower vendor interest
because of lower outstanding payable balances during the first half of the year.
This is slightly offset by interest on the balance on the Revolving Loan
Agreement with Gerald Metals, Inc. during the second quarter.
The Company does not anticipate that its U.S. operations will be subject to
alternative minimum tax during 1996.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 2 - CHANGES IN SECURITIES
None
17
<PAGE>
ITEM 3 - DEFAULT UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11 Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
(b) The Company did not file a current report on Form 8-K during the
quarter ended June, 1996
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
DAKOTA MINING CORPORATION
c/s Alan R. Bell Date August 19, 1996
- - -------------------------------------- ------------------------
Alan R. Bell
President and Chief Executive Officer
c/s Robert R. Gilmore Date August 19, 1996
- - -------------------------------------- ------------------------
Robert R. Gilmore
Vice President Finance
and Chief Financial Officer
19
<PAGE>
DAKOTA MINING CORPORATION
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE
Three months ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Beginning shares outstanding 26,534,742 21,360,108 26,534,742 21,360,108
Exercise of common share purchase
warrants - 59 - 30
Exercise of special warrants 1,242,857 4,838,710 621,429 13,047,585
Average shares issued for options exercised 214,714 - 122,722 -
---------- ---------- ---------- -----------
Weighted average shares outstanding 27,992,313 26,198,877 27,278,893 24,407,723
---------- ---------- ---------- -----------
Net loss $(3,207,213) $(1,725,896) $(4,152,646) $( 2,950,104)
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Loss per common share $ (0.11) $ (0.07) $ (0.15) $ (0.12)
---------- ---------- ---------- -----------
</TABLE>
NOTE: All other issued and outstanding options and warrants are
antidilutive. Fully diluted calculation is not different and
therefore is not applicable.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANICAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 10,478,573
<SECURITIES> 0
<RECEIVABLES> 57,818
<ALLOWANCES> 0
<INVENTORY> 7,835,140
<CURRENT-ASSETS> 19,371,496
<PP&E> 33,113,190
<DEPRECIATION> (9,439,927)
<TOTAL-ASSETS> 49,925,839
<CURRENT-LIABILITIES> 11,850,527
<BONDS> 0
0
0
<COMMON> 52,872,609
<OTHER-SE> (20,543,774)
<TOTAL-LIABILITY-AND-EQUITY> 49,925,839
<SALES> 5,699,559
<TOTAL-REVENUES> 5,669,559
<CGS> 11,097,101
<TOTAL-COSTS> 11,097,101
<OTHER-EXPENSES> (143,688)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 162,714
<INCOME-PRETAX> (4,152,646)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,152,646)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
