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 March 31, 1997 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 May 9, 1997: 35,479,742
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DAKOTA MINING CORPORATION
INDEX
PAGE
PART I - FINANCIAL INFORMATION
<S> <C>
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..................................................................................... 18
ITEM 1 - LEGAL PROCEEDINGS........................................................................... 18
ITEM 2 - CHANGES IN SECURITIES....................................................................... 18
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
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DAKOTA MINING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(expressed in United States dollars)
(unaudited)
March 31, December 31,
1997 1996
ASSETS
<S> <C> <C>
Current assets
Cash $6,447,015 $5,092,150
Cash held in escrow 12,135,580 -
Inventories 2,969,668 2,643,701
Deferred stripping costs 550,015 886,086
Receivable from USMX, Inc. 1,849,678 -
Other current assets 1,147,967 739,064
---------- -----------
25,099,923 9,361,001
Property, plant and equipment, net 15,602,042 15,150,399
Other assets
Reclamation bonds 5,185,018 5,111,844
Advance minimum royalties 1,953,090 1,871,965
Other 536,058 74,141
---------- -----------
$48,376,131 $31,569,350
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $4,001,501 $4,915,525
Accrued liabilities 2,263,513 2,432,608
Short-term borrowings 410,556 623,623
Current portion of long-term debt 286,257 383,265
---------- ----------
6,961,827 8,355,021
Long-term liabilities
Special warrants 6,887,472 -
Long-term debt 4,384,269 3,240,053
Other long-term liabilities 922,000 952,000
Reclamation costs 5,863,021 5,562,881
----------- -----------
Total liabilities 25,018,589 18,109,955
---------- ----------
Shareholders' equity
Purchase warrants 63,134 63,134
Preference shares, without par value; 20,000,000
shares authorized, none issued or outstanding - -
Common shares, without par value; unlimited
shares authorized; 35,479,742 issued and
outstanding 52,809,980 52,809,980
Special warrants 10,460,580 -
Accumulated deficit (39,311,489) (39,133,909)
Cumulative translation adjustment ( 664,663) (279,810)
------------ -------------
Total shareholders' equity 23,357,542 13,459,395
---------- ----------
$48,376,131 $31,569,350
========== ==========
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(See accompanying notes to condensed consolidated financial statements)
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DAKOTA MINING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(expressed in United States dollars)
(unaudited)
Three months ended
March 31, 1997 March 31, 1996
-------------- --------------
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Operating revenues $4,493,106 $3,196,715
--------- ---------
Operating costs
Mine, mill and administration 3,184,485 2,645,978
Depreciation and depletion 530,627 819,845
Royalties and severance taxes 329,177 129,156
Exploration 1,324 29,204
Reclamation 205,214 108,148
Other - 9,553
General corporate costs 399,624 371,970
--------- ---------
4,650,451 4,113,854
--------- ---------
Operating loss ( 157,345) (917,139)
---------- --------
Other income (expense):
Investment income 87,127 105,478
Interest expense (125,949) (110,296)
Other 18,587 (23,476)
---------- --------
(20,235) (28,294)
---------- --------
Net loss $(177,580) $(945,433)
=========== =========
Net loss per common share $ (0.01) $ (0.04)
========== ===========
Weighted average number of
shares outstanding 35,479,742 26,582,506
========== ==========
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(See accompanying notes to condensed consolidated financial statements)
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DAKOTA MINING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(expressed in United States dollars)
(unaudited)
Three months ended
March 31, 1997 March 31, 1996
-------------- --------------
Cash provided by (used in):
Operating activities
<S> <C> <C>
Net loss $ (177,580) $ (945,433)
Add (deduct) non-cash items:
Depreciation, depletion and amortization 530,627 819,845
Reclamation accrued 205,214 70,089
Other - 16,726
----------- ----------
558,261 (38,773)
Net change in non-cash working
capital items related to operations (1,481,918) (4,485,342)
----------- ----------
(923,657) (4,524,115)
--------- ----------
Investment activities
Additions to property, plant and equipment (982,270) (742,488)
Additions to reclamation bonds and other (6,838) (226,675)
----------- ----------
(989,108) (969,163)
----------- ----------
Financing activities
Proceeds from the sale of special warrants 18,216,195 14,507,250
Special warrant offering costs paid (1,412,595) (759,759)
New borrowings 1,150,000 -
Repayment of indebtedness (315,859) (125,898)
Loans to USMX, Inc. (1,849,678) -
----------- ----------
15,788,063 13,621,593
----------- ----------
Effect of exchange rate on cash (384,853) 2,907
----------- ----------
Net change in cash 13,490,445 8,131,222
Cash, beginning of period 5,092,150 2,260,025
----------- ----------
Cash, end of period $18,582,595 $10,391,247
========== ==========
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(See accompanying notes to condensed consolidated financial statement)
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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 March
31, 1997 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, 1996 audited financial statements as filed in its Annual Report on
Form 10-K.
2. Merger, Convertible Debenture Offering and Loan to USMX, Inc.
On February 5, 1997, a definitive Merger Agreement with USMX, Inc.
(USMX) was signed. Under the terms of the Merger Agreement, shareholders of USMX
will receive one Dakota common share for every 1.1 common shares of USMX held
and USMX will become a wholly owned subsidiary of Dakota. In connection with the
transaction, the Company will issue approximately 15.6 million common shares in
order to complete the acquisition. The Company will account for the merger as a
purchase. Completion of the merger remains subject to shareholder approval,
review by regulatory authorities, and other customary conditions.
Management expects to complete the merger in May, 1997.
In order to provide financing for the proposed merger with USMX, on
February 5, 1997, the Company entered into an agency agreement with certain
Canadian investment dealers (collectively, the AAgents@) to sell by way of
private placement 25,000 Special Warrants at a price of Cdn$1,000 per Special
Warrant for aggregate gross proceeds to the Company of Cdn$25 million (US $18.22
million). The Special Warrants offering was completed on February 6, 1997 with
all proceeds, net of a 6% commission paid to the Agents, placed into an escrow
account.
Each Special Warrant entitles the holder, upon exercise thereof and without
payment of any additional consideration, to acquire one 7.5% unsecured
subordinated convertible debenture (the ADebentures@) of the Company in the
principal amount of Cdn$1,000. Each Debenture will be convertible into common
shares of the Company at a conversion price of Cdn$2.00 (US $1.56) per common
share up to and including the last business day immediately preceding February
5, 2004. The debentures will not be redeemable prior to January 29, 2001 but
thereafter will be redeemable by the Company if the weighted average trading
price of the Company=s common shares is 125% of the conversion price for a
defined period prior to such redemption. On maturity or redemption, the Company
will have the option to repay the principal amount of the Debentures in cash or
common shares of the Company at a price equal to 95% of the weighted average
trading price for a defined period prior to such maturity or redemption.
The issue amount for the Special Warrants (and subsequently for the
convertible debentures into which the Special Warrants are exercisable) has been
allocated between an equity component and a liability component. The liability
component has been calculated, effective the date of the issue, by discounting
the mandatory cash payments of principal and interest under the terms of the
debentures was determined by applying the discount rate to the outstanding
liability component.
If the Merger is not completed prior to May 31, 1997 or such later date
as the Agents may determine in its sole discretion, the number of Dakota Common
Shares issuable upon conversion of the Debentures will be such that each
Debenture will be convertible for 550 Dakota Common Shares (the APenalty@).
Proceeds from the Special Warrant offering, after deducting the 6%
commission paid to Agents and other expected costs, approximate US$16.9 million.
The offering proceeds will principally be used to complete construction and
commence start-up of the Illinois Creek Mine owned by USMX, Inc., developmental
drilling and for general working capital purposes.
Under the terms of the Merger Agreement, the Company agreed to provide
USMX with a $5 million loan facility from the proceeds of the Special Warrant
offering. On March 11, 1997, $5.0 million of the proceeds were released to
Dakota to fund the $5 million loan facility. The loan is bridge financing needed
by USMX to reduce its outstanding accounts payable and to commence start-up of
its Illinois Creek Mine. The loan is collateralized by various USMX assets. At
March 31, 1997, USMX had drawn $1.85 million under the $5 million loan facility.
3. Inventories and Deferred Stripping Costs
On the dates indicated, inventories were comprised of the following:
March 31, December 31,
1997 1996
---------- ----------
Bullion $ 254,443 $ 854,444
Heap leach 2,402,348 1,524,072
Materials and supplies 312,877 265,185
---------- ----------
$2,969,668 $2,643,701
========== ==========
In 1997 and as of December 31, 1996, the mining activity at Gilt Edge
Mine included the removal of waste overburden. All deferred stripping costs
reported on the consolidated balance sheets pertain to this activity. Mining
costs associated with the waste removal are deferred and recognized in
operations based on the average stripping costs for the related ore body. The
average stripping costs is calculated as the total tons of material to be mined
compared to the tons of ore estimated to contain economically recoverable
minerals.
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 1997 and 1996 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 Afresh 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) At March 31, 1997 and 1996, the Company had one stock-based
compensation plan. The Company applies the intrinsic value method in accounting
for its plan. Accordingly, no compensation cost has been recognized for its
fixed stock option plan. No options were granted during the three months ended
March 31, 1997 and only 10,000 options were granted during the same period in
1996; accordingly, no material compensation cost would be recognizable under the
method of Financial Accounting Standards Board Statement 123 - Accounting for
Stock-Based Compensation.
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.
(AWharf@). The Company's proportionate share of the partnership's balance sheets
as of March 31, 1997 and December 31, 1996 and statements of operations for each
of the years indicated are as follows:
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March 31, December 31,
1997 1996
--------- ---------
Balance sheets:
<S> <C> <C>
Current assets $ 98,632 $ 569,273
Plant property and equipment 1,263,971 1,264,336
Other assets 575,830 575,849
--------- ---------
Total assets 1,938,433 2,409,458
--------- ---------
Accounts payable and other
current liabilities 351,984 486,829
Current portion of long-term debt 268,800 358,400
Other long-term liabilities 1,813,659 1,843,911
--------- ---------
Total liabilities 2,434,443 2,689,140
--------- ---------
$ (496,010) $ (279,682)
=========== ===========
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Three months ended
March 31,
1997 1996
---- ----
Statement of operations:
<S> <C> <C>
Revenues $ - $ 1,419,391
---------- ----------
Mine cash production costs 64,529 1,250,745
Royalties - 51,278
Exploration - 25,930
Reclamation - 108,148
Depreciation and depletion - 612,380
--------- ---------
Total production costs 64,529 2,048,481
--------- ---------
Operating income (loss) (64,529) (629,090)
--------- ---------
Other income (expense) 13,466 ( 8,607)
--------- ---------
$ (51,063) $ (637,697)
=========== =========
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The owners have disagreed regarding certain operational and financial
matters for the Golden Reward Mine, including planned future operations and
related funding requirements. The resolution of this matter is not presently
determinable.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
USMX Merger. On February 5, 1997, Dakota entered into an agreement
(AMerger Agreement@) with USMX. Under the terms of the Merger Agreement, holders
of USMX Common Stock will receive one Dakota Common Share for every 1.1 share of
USMX Common Stock and USMX will become a wholly-owned subsidiary of Dakota. In
connection with the transaction, Dakota will issue approximately 15.6 million
Dakota Common Shares. The Dakota Common Shares had an approximate market value
of $23.2 million or $1.58 per share, based upon an average trading price for
Dakota=s Common Shares for a reasonable period before and after the Merger was
announced. Dakota will account for the Merger as a "purchase". Based upon the
opinion of a major independent accounting firm, Dakota anticipates that the
Merger will not be taxable to Dakota and should not be taxable to shareholders
of Dakota or USMX. Completion of the Merger remains subject to shareholder
approval, review by regulatory authorities, and other customary conditions.
Dakota expects to complete the Merger in May, 1997.
The principal asset of USMX is its Illinois Creek Project. The Illinois
Creek Project is expected to produce approximately 64,000 ounces of gold and
419,000 ounces of silver in 1997 at a cash cost of approximately $250 per ounce
of gold. The Illinois Creek Project has an estimated six year life and is
expected to be an important source of operating cash flow to Dakota throughout
its productive life.
Special Warrant Financing and Issue of Debentures. To provide financing
for Dakota and USMX in connection with the Merger, on February 5, 1997, Dakota
entered into an agency agreement with certain Canadian investment dealers (the
"Agents") to sell by way of private placement 25,000 Special Warrants at a price
of Cdn.$1,000 per Special Warrant for aggregate gross proceeds to Dakota of
Cdn.$25 million (U.S. $18.22 million). Proceeds from the Special Warrant
offering, after deducting the 6% commission paid to Agents and other expected
costs, approximate $16.8 million. The offering proceeds will principally be used
to complete construction and commence start-up of the Illinois Creek Project,
developmental drilling, repayment of $1.5 million of the Rothschild Credit
Agreements (defined below) and for general working capital purposes.
The Special Warrants are comprised of 16,119 Series A Special Warrants
and 8,881 Series B Special Warrants. The Special Warrants offering was completed
on February 6, 1997 with all proceeds, net of a 6% commission paid to Agents
placed in escrow. Each Special Warrant entitles the holder, upon exercise
thereof and without payment of any additional consideration, to acquire one
Debenture in the principal amount of Cdn$1,000.
Dakota has agreed to use its best efforts to file a prospectus in
British Columbia, Alberta, Ontario and Quebec to qualify for distribution the
Debentures issuable upon exercise of the Special Warrants and the Dakota Common
Shares issuable upon conversion of the Debentures. A prospectus has been filed.
If qualification is not obtained by June 5, 1997, or such later date as the
Agents may determine in their sole discretion, the number of Dakota Common
Shares issuable upon conversion of the Debentures will be such that each
Debenture will be convertible for 550 Dakota Common Shares (the "Penalty").
If the shareholders of Dakota do not approve the issuance of the Series
B Special Warrants prior to May 31, 1997, then all Series B Special Warrants
will automatically be retracted and the holders thereof will receive the
original purchase price paid therefor plus a pro rata portion of the interest
earned on the purchase price while it was held in escrow. If the Merger is not
completed prior to June 5, 1997, the holders of the Series B Special Warrants
may elect to retract the Series B Special Warrants.
On March 11, 1997, $5.0 million of the Special Warrant offering
proceeds was released to Dakota in connection with the terms of the Merger
Agreement and a $5,000,000 Loan Agreement. As part of the Merger transactions,
Dakota and USMX agreed that Dakota will provide a $5 million line of credit to
USMX (the A$5,000,000 Loan Agreement@) the proceeds of which will be used to
sustain USMX=s operations until the Merger is consummated. The line of credit
bears interest at the rate of one per cent above a quoted floating prime rate
and is due August 31, 1997 or earlier if the Merger Agreement is terminated
before such date. The proceeds from the line of credit will be used to pay
certain ongoing operating expenses of USMX, primarily in connection with
start-up activities associated with the Illinois Creek Mine and to partially pay
trade creditors of USMX and its subsidiaries. At May 9, 1997, USMX had drawn
$3.48 million under the $5,000,000 Loan Agreement. The loan is collateralized by
various USMX assets.
Remaining construction and start-up costs at the Illinois Creek Project
in 1997, including working capital of $4.5 million, are expected to approximate
an additional $7 million. These additional costs will be funded by Dakota from
proceeds of the Special Warrant offering.
The remaining proceeds of the Special Warrant offering will be released
upon completion of the Merger, the obtaining of receipts from various securities
commissions in Canada of the final prospectus qualifying the securities issuable
by Dakota in connection with the offering and upon approval of the issue of the
Dakota Common Shares ultimately underlying the Series B Special Warrants by
Dakota shareholders. Should the Merger not be consummated for any reason, Dakota
will be obligated to exchange a pro rata portion of the Special Warrants for
Debentures in an amount equal to the proceeds released from escrow prior to that
time. USMX will be obligated to repay all outstanding obligations under the
$5,000,000 Loan Agreement. The remaining escrowed proceeds will then be used to
retract from the holders of the Special Warrants a pro rata number of Special
Warrants for the original purchase price thereof together with a pro rata amount
of interest earned thereon while such proceeds were held in escrow.
Rothschild Credit Agreements. At May 9, 1997, USMX was obligated to
N.M. Rothschild and Sons (ARothschild@) under a $22 million financing facility
(ARothschild Credit Agreements@). Upon completion of the Merger, Dakota will be
obligated to repay these obligations. As of May 9, 1997, USMX has failed to
comply with various provisions of the Rothschild Credit Agreements and has
continued operations to date with the forbearance of Rothschild. However, Dakota
and Rothschild entered into an Intercreditor Agreement on March 12, 1997 which
among other things, contained Rothschild's consent to the Merger Agreement and
set forth certain changes to the Rothschild Credit Agreements, which changes
will become effective upon consummation of the Merger. In Dakota's view, the
prospective changes to the Rothschild Credit Agreements will avoid any existing
or immediate defaults thereunder after closing of the Merger.
The most significant changes to the Rothschild Credit Agreements
include: (i) $1.5 million of the proceeds from the Special Warrant offering will
be used to repay a portion of the Rothschild Credit Agreements, (ii) certain
minimum cash retention requirements will no longer be required; (iii) all
remaining and outstanding loan balances will be deemed to be project debt and no
portion thereof will be convertible into Dakota Common Shares; (iv) scheduled
loan repayment dates will be changed to better match projected Illinois Creek
Project cash flows; (v) minimum working capital cash balances will be retained
in the Illinois Creek Project; (vi) certain terms related to "commercial
completion" and various financial covenants will be amended; and (vii) Dakota
will guarantee the Rothschild Credit Agreements until "commercial completion" is
realized.
The adjusted project loan balance of $20.5 million will bear interest,
payable quarterly, at 2.25% above LIBOR until "commercial completion" of the
project has occurred. The requirements for commercial completion include the
construction of the Illinois Creek Mine facilities, which facilities and the
equipment thereon must be mechanically complete and electrically operable
("Mechanical Completion"), the achievement of production amounts and grades,
costs and reserves similar to the development plan, and the absence of any
default in the Rothschild Credit Agreement. Following commercial completion,
this note bears interest at 1.879% above LIBOR. Principal payments are to be
made in installments of $3 million each on November 30 and February 28, of each
year, commencing November 30, 1997.
Dakota expects to repay the outstanding amounts under the Rothschild
Credit Agreements and all related interest accrued thereon from the operating
cash flows from the Illinois Creek Project. No assurances can be given that the
Illinois Creek Project will provide sufficient cash flows to meet these
repayment obligations.
Sources and Uses of Cash. Effective March 20, 1997, Dakota and Gerald
Metals, Inc. ("Gerald") agreed to amend and restate Dakota's line of credit
facility with Gerald. Under the amended terms, Dakota's line of credit was
increased to $5.0 million. The loan is repayable at a rate of $1.0 million per
month commencing in June 1998, bears interest at LIBOR plus 2.25% and is
collateralized by Dakota's underlying assets at its Gilt Edge and Stibnite Mines
and a guarantee by Dakota. At May 9, 1997, this credit facility was fully drawn.
Gerald has also agreed to provide Dakota a $2.5 million standby credit
facility until July 31, 1997. The standby facility is intended to serve as a
bridge financing until completion of the Merger and the release from escrow of
the remaining proceeds from the Special Warrant offering. Dakota will be
obligated to pay a 2 of one percent commitment fee on any unused portion of the
standby credit facility. All outstanding balances thereunder bear interest at
LIBOR plus 2.25% and are collateralized by an assignment of ANote 2@ under the
$5,000,000 Loan Agreement as described previously. At May 9, 1997, Dakota had
drawn $600,000 under this facility.
In April, 1996, Dakota commenced construction of expanded heap leach
facilities at its Gilt Edge Mine. Remaining capital costs are estimated to be
$4.0 million over two years. The heap leach pad expansion is being constructed
in stages. In this manner, ores can be mined and processed, thereby generating
an operating cash flow, prior to the completion of the entire heap leach pad
expansion. The remaining capital costs are expected to be funded by cash flows,
cash on hand and proceeds from the borrowing arrangements with Gerald.
As of March 31, 1997, the investment in property, plant and equipment
at Gilt Edge Mine approximated $9.7 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 $380 per ounce gold price, an independent
engineering study and past operating experiences, Dakota 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 Dakota's
remaining investment in Gilt Edge Mine.
Dakota estimates that the salvage value of the Golden Reward Mine
assets is equal to or exceeds all remaining obligations of the partnership.
Accordingly, future holding costs are not expected to be material to Dakota.
Dakota has identified sufficient mineralized oxide materials at its
Stibnite Mine to conduct operations at annual production rates of approximately
24,000 ounces of gold during 1997 and has drill indicated mineralized material
which Dakota believes will allow for several additional years of operations. The
drill indicated areas will require further development drilling at a cost of
approximately $500,000 per year over the next two to three years. Drilling
activities will be financed from the proceeds of the Special Warrants and from
operating cash flows.
Dakota's investment in mining assets at Stibnite Mine as of March 31,
1997 is approximately $4.0 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 $34 per ounce
providing that 65% of the drill-indicated reserves convert to the proven and
probable category. Based upon a $380 per ounce gold price and its past operating
experience, Dakota believes Stibnite Mine's future operating margins should
ensure the recovery of its remaining investment in mining assets.
Once the Merger is completed, the principal focus of Dakota for the
remainder of 1997 will be: (i) to complete the successful start-up of operations
at Illinois Creek Project, including construction of expanded leach pad
facilities at a cost of $2.5 million; (ii) to continue operations at Gilt Edge
and Stibnite Mines, (iii) to complete construction of additional heap leach pads
at Gilt Edge Mine as previously discussed; (iv) to conduct development drilling
activities at Stibnite and Gilt Edge Mines at a cumulative cost of $1.1 million
in order to convert drill indicated mineral resources into proven and probable
mineable reserves; and (v) to continue exploration and evaluation of other
mining properties.
Over the next three years, the combined capital expenditures of Dakota
and USMX are expected to approximate $9.7 million in 1997, $5.9 million in 1998,
and $3.0 million in 1999, excluding any costs to develop USMX=s Thunder Mountain
Project. In 1997, capital expenditures at Gilt Edge Mine are expected to
approximate $5.0 million, $4.6 million for heap leach pad expansion and $400,000
for exploration. Capital expenditures at Stibnite Mine are expected to
approximate $1.16 million in 1997 consisting of $530,000 for exploration,
$450,000 for mine development and the remainder for equipment replacement.
Capital expenditures at Illinois Creek are estimated to be $2.5 million to
complete construction of heap leach facilities and an additional $1.0 million
will be spent on exploration at Illinois Creek Mine and Thunder Mountain Project
after the Merger is complete.
In 1998, capital expenditures relate primarily to heap leach pad
expansion at Gilt Edge Mine - $2.5 million and at Illinois Creek Mine - $2.2
million. The remaining $1.2 million of capital expenditures will be allocated
for exploration at Gilt Edge, Illinois Creek and Stibnite Mines depending upon
the results of 1997 drilling activities. In 1999, capital expenditures will
pertain primarily to heap leach pad expansion and exploration activities.
Management expects that the cash flows generated from mining
activities, together with the proceeds from the offering of Special Warrants and
under the Gerald credit facilities, discussed previously, will be adequate to
fund all required capital expenditures and operating activities. However, no
assurances can be given that Dakota=s operations will provide sufficient cash
flow to fund these capital expenditures.
At March 31, 1997, working capital was approximately $18.1 million,
compared to working capital of approximately $1.0 million at December 31, 1996.
The increase is due principally to higher cash balances and the receivable from
USMX, Inc., both of which resulted from the offering of Special Warrants
completed February 5, 1997 as previously discussed. Current liabilities were
also paid down subsequent to year-end as a result of improved operating cash
flows.
Cash used in operations was $923,657 during the first quarter of 1997
primarily due to the reduction in current liabilities. This compares to cash
used in operations of $4.5 million during the same period of 1996. Cash used in
the first quarter of 1996 is primarily due to the decrease in accounts payable
and accrued liabilities at March 31, 1996 as a result of selling down year-end
gold bullion inventories and utilizing a portion of proceeds from the sale of
special warrants completed in February 1996.
Cash used in investment activities during the first quarter of 1997 and
1996 pertains primarily to expansion of heap leach pads located at Gilt Edge
Mine in order to accommodate ores mined from the Anchor Hill oxide deposit.
During the first quarter of 1997, cash was provided in the amount of
$16.8 million, net of offering costs paid to date, from the sale of Special
Warrants previously discussed. As of March 31, 1997, Dakota had advanced $1.85
million to USMX in connection with the $5,000,000 Loan Agreement. New borrowings
of $1,150,000 were obtained from the amended and restated credit facility with
Gerald Metals, Inc. Cash provided by financing activities during the first three
months of 1996 included approximately $13.7 million of proceeds, net of offering
costs, from the sale of special warrants in February 1996.
Dakota has needs for cash to fund permitting, construction and
environmental compliance activities at its Gilt Edge, Stibnite and Golden Reward
projects.
Other. In the course of its normal business, Dakota uses forward sales
and commodity put and call option contracts to manage its exposure to
fluctuations in the price of gold which it produces. Contract positions are
designed to ensure that Dakota will receive a defined minimum price for a
portion of its gold production. Potential gains on gold price increases are also
eliminated under forward sales commitments if such commitments are not bought
back.
Dakota is exposed to credit risk to the extent of an inability of a
counterparty to honor contracts; however, management believes the risk of
incurring losses due to credit risk is remote. Market risk on financial
instruments results from fluctuations in the gold price during the periods in
which the contracts are outstanding. Dakota manages its exposure to market risk
by matching future physical gold delivery with contract maturities. Risk of loss
arises from the possible inability of Dakota to deliver gold.
As of May 9, 1997, Dakota had forward sale contracts remaining to
deliver approximately 11,087 ounces of gold throughout 1997 at an average price
of $377 per ounce, put options to deliver 27,000 ounces of gold in 1997 and 1998
at a minimum price $350 per ounce and has sold call options covering 40,250
ounces of gold in 1997 and 1997 at an average price of $389 per ounce.
Fluctuations in future gold prices could significantly impact Dakota=s future
revenues as only a portion of Dakota=s expected gold production in 1997 has been
hedged by these contracts.
Dakota intends to adopt the new Recommendations of the Canadian
Institute of Chartered Accountants relating to the presentation and disclosure
of financial instruments. In accordance with these recommendations the
Debentures will be segregated into their debt and equity components. The
financial liability component, representing the present value of future interest
payments, will be included in long-term debt. The remaining component,
representing the value ascribed to both the holders' option to convert the
principal balance into Dakota Common Shares and Dakota's right to pay the
principal amount of the instrument in Common Shares, will be classified in
shareholders' equity as the equity component of convertible instruments. These
components will be measured at their respective fair values at the date the
Debentures are exchanged for the Special Warrants.
Environmental Matters and Government Regulation. All of Dakota's
exploration, development and production activities are subject to regulation
under one or more of the various state, local and federal environmental laws and
regulations. These laws address emissions to the air, discharges to water,
management of wastes, management of hazardous substances, protection of
endangered species, protection of natural resources and others. Such laws and
regulations are generally becoming more restrictive. Dakota has made and expects
to continue to make in the future, significant expenditures to comply with such
laws and regulations.
Existing and possible future environmental legislation, regulations and
actions, could cause additional expense, capital expenditures, restrictions and
delays in the activities of Dakota, the extent of which cannot be predicted.
Regulatory requirements and environmental standards are subject to constant
evaluation and may be significantly increased, which significantly adversely
affect Dakota's business. The cost of compliance with changes in governmental
regulations has the potential to reduce the profitability of operations.
Several recent legislative developments have affected or may in the
future affect the cost of and the ability of mining claimants to use the Mining
Law of 1872, as amended, to acquire and use federal lands for mining operations.
Since October 1994, a moratorium has been imposed on processing new patent
applications for mining claims. Also, since 1993, a rental or maintenance annual
fee of $100 per claim has been imposed by the Federal government on unpatented
mining claims in lieu of the prior requirement for annual assessment work.
During the last several Congressional sessions, bills have been repeatedly
introduced in the U.S. Congress which would supplant or radically alter the
General Mining Law. As of May 9, 1997, no such bills had been passed. Such bills
have proposed, among other things, to permanently eliminate or greatly limit the
right to a mineral patent, impose royalties, and impose new federal reclamation,
environmental control and other restoration requirements. If enacted, such
legislation could impair the ability of Company to economically develop mineral
resources on federal lands. The extent of the changes, if any, which may be made
by Congress to the General Mining Law is not presently known and the potential
impact on Dakota as a result of future Congressional action is not presently
determinable.
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 Dakota'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, Dakota is not able to determine
what impact, if any, further action by the DENR or EPA in connection with the
Preliminary Assessment may have on the site. Dakota 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 Dakota 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, Dakota
received final approval of an updated and amended reclamation plan from the
State of South Dakota. Under the conditions of the revised reclamation plan,
Dakota 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.
Dakota 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. Dakota has
estimated that its actual capping costs will approximate $3.2 million, which
costs have been fully accrued at March 31, 1997. Funding of this obligation will
be made from operating cash flow derived from processing the Anchor Hill oxide
deposit.
At a future date when Dakota provides notice to the State of South
Dakota that the Gilt Edge Mine will close and that post closure care is to
begin, Dakota 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.
The State of South Dakota requires mines to provide the State with
financial assurance to cover mitigation costs in the event of an environmental
accident. In order to fulfil its obligation, Dakota has provided the State with
a form of demand note in the amount of $359,000.
Golden Reward L.P. is required by the State of South Dakota to provide
financial security to cover the estimated cost of reclamation. Reclamation bonds
totaling $1,175,759 have been posted as a guarantee that the land which is
disturbed by mining will be reclaimed. Golden Reward L.P. anticipates that total
costs of reclamation will not exceed the amount of these bonds.
In November 1993, Dakota filed an application for a U.S. Federal Clean
Water Act National Pollution Discharge Elimination System permit in respect of
Stibnite Mine. This permit is not necessary for Dakota's current mining
operations at Stibnite Mine. However, Dakota believes that obtaining this permit
would be of benefit as it would allow Stibnite Mine to discharge clean water
from the minesite in accordance with such permit standards in the future. Dakota
cannot anticipate when a draft permit will be issued.
On July 10, 1995, Dakota entered into a voluntary Administrative Order
on Consent with the EPA regarding the tailings area (the "Meadow Creek Plan").
Approximately 50% of the work under the Meadow Creek Plan was completed in 1995.
Through March 31, 1997, approximately $225,000 has been incurred in connection
with the Meadow Creek Plan. Management estimates that it will cost approximately
$667,000 in 1997 in order to complete the Meadow Creek Plan. Such costs will be
funded from operating cash flows although there is no assurance that sufficient
cash flow from operations will be generated to complete the Meadow Creek Plan.
Dakota has apprised previous owners and operators of the property of the Meadow
Creek Plan and believes that a portion of such costs may be recoverable from
these parties. However, there is no assurance that Dakota will be successful in
obtaining a recovery of any of the costs of the Meadow Creek Plan.
On September 11, 1996, Dakota received a Notice of Potential Liability
and Conduct of Removal Action from the United States Environmental Protection
Agency ("EPA") pertaining to certain remediation activities at an historic mine
sight, located on certain lands once leased by Dakota. Dakota never conducted
operations at this sight and no longer owns any interest in the leases
pertaining to this property. The EPA estimates a total cost of $940,000 for its
action. However, Dakota cannot presently determine the extent of its liability,
or whether any liability actually exists.
Reclamation bonds totaling $701,322 have been posted by Dakota in
accordance with State of Idaho and USFS requirements to ensure that land which
is disturbed by mining will be reclaimed. Dakota estimates that the total costs
of reclamation of other land which is disturbed by mining will not exceed the
amount of these reclamation bonds.
Results Of Operations - For the Periods Ended March 31, 1997 and 1996
Revenues and Direct Operating Costs
The Company recorded a consolidated net loss of $177,580, or $0.01 per
share, for the first quarter of 1997. This compares to a consolidated net loss
of $945,433, or $0.04 per share, for the first quarter of 1996.
Shown below is the Company's share of metals sales (in ounces) for each
respective quarter:
<PAGE>
Metal Sales
Three months ended (1)
March 31,
1997 1996
Ounces of gold sold:
Cactus Mine (25%) 50 84
Gilt Edge Mine 9,102 2,120
Golden Reward Mine (40%) - 3,569
Stibnite Mine 2,476 2,234
----- -----
11,628 8,007
====== =====
(1) Precious metals production for each of the joint venture operations
includes the Company's pro rata share.
Operating results for the first quarters of the last two years are
summarized in the following table:
<PAGE>
Three months ended
March 31,
1997 1996
Operating revenue $4,493,106 $3,196,715
========= =========
Average net price per ounce of
gold realized $383 $399
==== ====
Average London PM fix per ounce
of gold $351 $396
==== ====
Mine, Mill and Administration(1)
Gilt Edge Mine $2,452,262 $ 598,037
Golden Reward Mine 63,524 1,241,192
Stibnite Mine 612,274 782,786
Cactus Mine 56,431 23,963
----------- -----------
Total mine, mill and
administration $3,184,421 $2,645,978
========= =========
Average cash cost per ounce of
gold sold $274 $330
==== ====
(1) Cash costs include mining, milling, project administration, on-property
exploration, and all holding and standby costs.
Metal sales at both Gilt Edge Mine were higher in 1997 than 1996 due
primarily to an increase in ore tons processed. During 1997, Gilt Edge Mine
processed approximately 480,000 ore tons at an average grade of 0.025 ounces of
gold per ton from its Anchor Hill oxide deposit and in 1996 was recovering gold
from certain stockpiled sulfide gold ores.
The above increases in production were partially offset by lower metal
sales from Dakota's 40% interest in the Golden Reward Mine. Golden Reward Mine
ceased mining activities at the end of the second quarter of 1996. Based upon
uncertainties arising from the proximity of certain unpermitted reserves to a
ski hill, Dakota recorded an impairment of approximately $7.9 million in the
carrying value of its investment in its third quarter 1996 financial statements
after Golden Reward L.P. failed to reach an agreement regarding the acquisition
of certain surface rights owned by the ski hill. During the second quarter of
1996, Dakota also recorded an accrual of approximately $1.7 million for its
share of reclamation and other costs due to the cessation of mining operations.
Mine, mill and administrative expense increased in 1997 when compared
to 1996. The increase in costs relates primarily to the higher volumes of ore
tons mined at Gilt Edge Mine as discussed previously. The Golden Reward Mine
incurred $1.2 million less costs in 1997 than in 1996, due to the cessation of
mining activities in June 1996. Lower costs for winterizing facilities reduced
costs at Stibnite Mine in 1997 when compared to 1996. Costs at Cactus Mine were
relatively unchanged in 1997 compared to 1996 and relate to wind-up and
reclamation activities.
Depreciation and depletion is lower in 1997 as compared to 1996 as a result
of the cessation of mining activities in June 1996 at Golden Reward Mine and the
subsequent impairment recorded by Dakota in the third quarter of 1996. The
decrease was partially offset by higher depletion at Gilt Edge Mine due to the
increase in ounces of gold sold. Depletion is calculated using the units of
production method.
Royalties vary from mine-to-mine and within the specific area being
mined in accordance with various agreements with landowners. Overall, royalties
and severance taxes generally relate directly to revenues earned. Therefore
higher revenues in 1997 resulted in higher royalty and severance taxes than in
1996.
Reclamation costs in 1997 consist principally of accruals at Gilt Edge
Mine. The costs at Gilt Edge Mine pertain to the mining of ore and waste tons at
Anchor Hill. Reclamation costs in 1996 relate principally to Golden Reward Mine.
According to estimates provided by our partner in Golden Reward Mine, all future
reclamation costs should now be accrued as of March 31, 1997.
General corporate costs increased slightly in 1997 when compared to
1996 due to additions in staff, legal expenses, travel activities, and in the
use of outside professional services. These increases are due, in part, to
overall increases in corporate activity.
Investment income is lower in 1996 due principally to interest earned
on lower cash balances available for investment purposes.
Interest expense is slightly higher in 1997 than in 1996 due to
interest on the balance of the loan agreement with Gerald Metals, Inc. beginning
in the second quarter of 1996.
Dakota does not anticipate that its U.S. operations will be subject to
alternative minimum tax during 1997.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULT UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
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 March, 1997
<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 May 13, 1997
Alan R. Bell
President and Chief Executive Officer
c/s Robert R. Gilmore Date May 13 1997
Robert R. Gilmore
Vice President Finance
and Chief Financial Officer
<PAGE>
<TABLE>
<CAPTION>
DAKOTA MINING CORPORATION
Exhibit 11 - COMPUTATION OF EARNINGS PER SHARE
Three months ended March 31, 1997 and 1996
Three months ended
March 31,
1997 1996
----------- -----------
<S> <C> <C>
Beginning shares outstanding 35,479,742 26,534,742
Average shares issued for options exercised - 47,764
----------- -----------
Weighted average shares outstanding 35,479,742 26,582,506
========== ==========
Net loss $ (177,580) $ (945,433)
============ ===========
Loss per common share $ (0.01) $ (0.04)
=============== =============
</TABLE>
NOTE: All other issued and outstanding options and warrants are
antidilutive. Fully diluted calculation is not different and therefore is not
applicable.
<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
Date , 1997
Alan R. Bell
President and Chief Executive Officer
Date , 1997
Robert R. Gilmore
Vice President Finance
and Chief Financial Officer
<TABLE> <S> <C>
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<CIK> 0000848448
<NAME> Dakota Mining Corp.
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
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