<PAGE>
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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission file number 0-23042
MK GOLD COMPANY
(Exact name of registrant as specified in its charter)
Delaware 82-0487047
------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
60 East South Temple, Suite 2100, Salt Lake City, Utah 84111
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(801) 297-6900
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. On August 11, 2000, there were
37,320,000 outstanding shares of the Registrant's Common Stock, par value $.01
per share.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
As more fully described in the accompanying notes, the unaudited interim
consolidated financial statements contained in this report should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 (the "1999 10-K"). The 1999 10-K contains information relevant
to an analysis of the financial information contained in this report and for
purposes of comparing the Company's results of operations for the three and six
month periods ended June 30, 2000 with the same periods in the prior year.
2
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MK GOLD COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Thousands of dollars except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
(Unaudited) (Unaudited)
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
Product sales $ 3,463 $ 299 $ 6,028 $ 1,231
Mining services 1,256 2,802 3,474 5,561
Gain on sale of assets 7 73 15 79
----------- ----------- ----------- -----------
Total revenue 4,726 3,174 9,517 6,871
OPERATING EXPENSES:
Product sales 2,405 774 4,541 2,265
Mining services 1,104 2,185 2,997 4,480
----------- ----------- ----------- -----------
Total operating expenses 3,509 2,959 7,538 6,745
GROSS PROFIT 1,217 215 1,979 126
EXPLORATION COSTS (259) (516) (544) (1,012)
GENERAL AND ADMINISTRATIVE EXPENSES (431) (386) (788) (771)
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 527 (687) 647 (1,657)
Investment income 126 188 217 384
Interest expense - (19) - (38)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 653 (518) 864 (1,311)
Income tax provision (39) - (79) -
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 614 $ (518) $ 785 $ (1,311)
=========== =========== =========== ===========
Basic and diluted income (loss) per common share $0.02 $(0.03) $0.02 $(0.07)
Basic and diluted weighted average shares
used to compute income (loss) per common share 37,320,000 19,261,929 37,320,000 19,261,929
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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MK GOLD COMPANY
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars except per share data)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
June 30, December 31,
ASSETS 2000 1999
(Unaudited) (Audited)
---------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,085 $ 7,126
Investment securities - 425
Gold bullion held for sale 517 1,377
Receivables 1,355 2,012
Inventories
Ore and in process 1,319 1,019
Materials and supplies 611 627
Deferred income taxes 37 41
Other 264 208
------- -------
Total current assets 9,188 12,835
------- -------
Mining properties, plant and mine development, net 49,147 45,768
Deferred income taxes 153 229
Restricted investment securities 802 876
Restricted cash 323 233
------- -------
TOTAL ASSETS $59,613 $59,941
======= =======
</TABLE>
(continued)
4
<PAGE>
MK GOLD COMPANY
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars except per share data)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 2,648 $ 1,712
Current portion of mine closure and reclamation liabilities 240 352
Other accrued liabilities 297 426
-------- --------
Total current liabilities 3,185 2,490
-------- --------
Mine closure and reclamation liabilities 925 769
Deferred revenue 1,076 1,672
Deferred income tax liability 3,967 3,967
Line of credit - Leucadia National Corporation 20,000 20,000
-------- --------
Total liabilities 29,153 28,898
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; 37,320,000 shares issued and
outstanding at June 30, 2000 and December 31, 1999 373 373
Capital in excess of par value 82,773 82,773
Accumulated deficit (49,887) (50,672)
Accumulated other comprehensive loss - foreign currency translation loss (2,799) (1,431)
-------- --------
Total stockholders' equity 30,460 31,043
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 59,613 $ 59,941
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
(concluded)
5
<PAGE>
MK GOLD COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
2000 1999
(Unaudited) (Unaudited)
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 785 $(1,311)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Deferred income taxes 79 -
Depreciation, depletion and amortization 321 432
Gain on sale of assets (15) (79)
Changes in operating assets and liabilities:
Gold bullion held for sale 860 (1,952)
Receivables 657 468
Inventories (284) (84)
Other assets (56) 9
Restricted cash (90) 417
Accounts payable and other accrued liabilities 807 93
Deferred revenue (596) (596)
Mine closure and reclamation liabilities 44 (543)
------- -------
Total adjustments 1,727 (1,835)
------- -------
Net cash provided (used) by operating activities 2,512 (3,146)
------- -------
INVESTING ACTIVITIES:
Additions to mining properties, plant and mine development (5,096) (513)
Proceeds from disposition of mining properties, plant and mine development 51 86
Proceeds from sale of investment securities 499 -
------- -------
Net cash used by investing activities (4,546) (427)
------- -------
EFFECT OF EXCHANGE RATES ON CASH (7) -
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (2,041) (3,573)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,126 15,687
------- -------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 5,085 $12,114
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 907 $ 38
Income taxes paid (refunded), net $ - $ -
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
MK GOLD COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands)
--------------------------------------------------------------------------------
1. Unaudited Interim Consolidated Financial Statements
The financial information included herein is unaudited; however, the
information reflects all adjustments (consisting of normal recurring
adjustments) that are, in the opinion of management, necessary for the fair
presentation of the consolidated financial position, results of operations,
and cash flows for the interim periods. The consolidated financial
statements should be read in conjunction with the Notes to Consolidated
Financial Statements for the year ended December 31, 1999, which are
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 (the "1999 10-K"). The results of operations for the six
months ended June 30, 2000, are not necessarily indicative of the results
to be expected for the full year. The consolidated balance sheet at
December 31, 1999, was extracted from the audited consolidated financial
statements contained in the 1999 10-K and does not include all disclosures
required by generally accepted accounting principles for annual
consolidated financial statements.
2. Reclassification
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
3. Mining Joint Ventures
The Company owns a 25% undivided interest in the Castle Mountain Venture
(the "CMV"), which operates a gold mine in San Bernardino County,
California. The results for the CMV have been proportionally reflected in
the accompanying consolidated financial statements. Any differences between
the Company's share of reported sales and income and the amounts shown on
these schedules are due to differences in the timing of revenue and expense
recognition.
Castle Mountain Venture - Results of Operations
Total Venture MK Gold's Share
----------------- ----------------
Six Months Ended June 30,
----------------------------
2000 1999 2000 1999
------- ------- ------ -------
Product sales $16,555 $11,531 $4,139 $ 2,883
Income (loss) before taxes $ 507 $(4,344) $ 127 $(1,086)
The Company owns a 53% interest in the American Girl Mining Joint Venture
(the "AGMJV"), which, prior to September 1996, operated a gold mine in
Imperial County, California. After an extensive review of the operations at
the AGMJV, the Company determined that continued operation at the AGMJV
could not be economically justified. On September 5, 1996, the Company
announced the suspension of operations at the AGMJV and subsequently began
mine closure and reclamation operations. Mine closure and reclamation
activities were completed in February 2000.
7
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4. Acquisition
On September 1, 1999, the Company acquired the entire share capital and
subordinated debt of Riomin Exploraciones, S.A. from Rio Tinto plc ("Rio
Tinto"). Subsequent to the acquisition, the name of Riomin Exploraciones,
S.A. was changed to Cobre Las Cruces, S.A. ("Las Cruces"). The aggregate
purchase price for the acquisition of Las Cruces was $42,000 in cash. Las
Cruces holds the exploration and mineral rights to the Las Cruces copper
deposit in the Pyrite Belt of Spain (the "Las Cruces Project"). The method
of accounting for the acquisition was the purchase method. The acquisition
was funded through (i) borrowings of $20,000 pursuant to the Company's
existing credit agreement (the "Credit Facility") with Leucadia National
Corporation ("Leucadia"), (ii) the sale of 18,058,635 shares of the
Company's authorized but unissued shares of Common Stock to Leucadia for
$15,807 and (iii) $6,193 from the Company's working capital. Pending
regulatory approval of the acquisition of the Company's common stock by
Leucadia, Leucadia loaned to the Company $15,807 pursuant to a promissory
note. This promissory note was repaid October 8, 1999, at the time
regulatory approval was given and the sale of Company shares to Leucadia
was completed. In connection with the acquisition of Las Cruces, the
Company granted Straits Resources Ltd., Sydney, Australia, a one-year
option to purchase 35% of Las Cruces at the Company's cost, plus interest.
Of the $42,000 purchase price, $36,729 represents the purchase of the
subordinated debt of Las Cruces from Rio Tinto. At the acquisition date,
Las Cruces had a stockholder's deficit of $6,064. The excess purchase price
of approximately $11,335 was allocated to mining properties. As part of the
acquisition the Company has recorded a deferred tax liability of
approximately $3,967, which was also allocated to mining properties. The
operating results of Las Cruces are included in the Company's results of
operations from the date of acquisition, September 1, 1999, to June 30,
2000.
From the date of acquisition to June 30, 2000, all development costs for
the period, including costs for the bankable feasibility study, were
capitalized. The following table provides certain consolidated pro forma
results of continuing operations assuming the acquisition of Las Cruces had
occurred at the beginning of the earliest period presented.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
(000) (000)
(unaudited) (unaudited)
--------------------- -------------------
2000 1999 2000 1999
------ ------ ------ -------
<S> <C> <C> <C> <C>
Pro forma unaudited results
Revenue $4,726 $3,174 $9,517 $ 6,871
Income (loss) before income taxes 653 (646) 864 (2,444)
Net income (loss) 614 (646) 785 (2,444)
Basic and diluted income (loss) per share $ 0.02 $(0.02) $ 0.02 $ (0.07)
</TABLE>
There are no material pro forma adjustments other than the adjustments for
the issuance of 18,058,635 shares of common stock to Leucadia. No mining
rights were amortized because production at the Las Cruces Project has not
begun.
5. Related Party Transactions
For the three and six month periods ended June 30, 2000, approximately $468
and $907, respectively, in interest and commitment fees were paid to
Leucadia under the Credit Facility. For the three and six month periods
ended June 30, 2000, approximately $468 and $907, respectively, in interest
relating to the Las Cruces Project were capitalized.
8
<PAGE>
6. Accounting Standards
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137 "Accounting
for Derivative Instruments and Hedging Activities-Deferral of the Effective
Date of FASB Statement No. 133." SFAS No. 137 delays the effective date of
SFAS No. 133 to fiscal years beginning after June 15, 2000. The Company
will adopt the new statement beginning on January 1, 2001. The Company does
not believe that SFAS No. 137 will have a significant effect on the
earnings and financial position of the Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 establishes accounting and reporting standards for
the recognition of revenue. It states that revenue generally is realized or
realizable and earned when all of the following criteria are met: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred or
services have been rendered; (3) the seller's price to the buyer is fixed
or determinable; and (4) collectibility is reasonably assured. SAB No. 101
is effective for the Company's financial statements for the year ending
December 31, 2000. The Company does not believe that SAB No. 101 will have
a significant effect on the earnings and financial position of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this section is to discuss and analyze the Company's consolidated
financial condition, liquidity and capital resources and results of operations.
This analysis should be read in conjunction with the Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999 (the
"1999 10-K"). This section contains certain forward-looking statements that
involve risks and uncertainties, including statements regarding the Company's
plans, objectives, goals, strategies and financial performance. The Company's
actual results could differ materially from the results anticipated in these
forward-looking statements as a result of factors set forth under "Cautionary
Statement for Forward-Looking Information" below and elsewhere in this report.
General
On September 1, 1999, the Company acquired the entire share capital and
subordinated debt of Riomin Exploraciones, S.A. from Rio Tinto plc ("Rio
Tinto"). Subsequent to the acquisition, the name of Riomin Exploraciones, S.A.
was changed to Cobre Las Cruces, S.A. ("Las Cruces"). Las Cruces holds mineral
rights to the Las Cruces copper deposit (the "Las Cruces Project") in the
eastern end of the Iberian Pyrite Belt of southwestern Spain, a well-delineated
mineral province that has been mined for base and precious metals for centuries.
Las Cruces also holds the exploration rights to 272 square kilometers adjacent
to the deposit.
The Las Cruces Project has a resource estimated at 15.9 million metric tons
estimated to contain 5.9% copper. The resource calculation was based upon the
analysis of 279 drill holes totaling over 272,000 feet. Based on these
estimates, approximately 860,000 metric tons of copper could be extracted from
the deposit. A small zone of gold bearing gossan, which has not been evaluated,
and 150 meters of unconsolidated overburden overlie the deposit.
Based on current estimates, the Las Cruces Project could produce an estimated
65,000 metric tons per year of refined copper for the European market, which
currently imports nearly one million metric tons of copper per year. With the
advanced process of metallurgical treatment proposed to be employed by Las
Cruces, the copper would be produced completely onsite in a fully integrated
operation. This process would minimize the environmental impact outside the
project area as it would not be necessary to send the concentrates to copper
smelters.
9
<PAGE>
The Las Cruces Project is proceeding in several phases. The current phase
includes the preparation of a feasibility study and an environmental impact
study. A preliminary feasibility study, prepared by Rio Tinto in 1998, estimated
the capital cost would be approximately $300 million to bring the mine into
production. The current feasibility study is expected to be completed by the
fourth quarter of 2000 and will better define the future capital and operating
costs of the Las Cruces Project. Permit applications are being prepared and are
expected to be submitted during the third quarter of 2000.
Mining at the Las Cruces Project will be subject to permitting, significant
financing, engineering and construction. Although the Company believes necessary
permits for the Las Cruces Project will be obtained, the Company cannot
guarantee that such will be the case. Further, there may be other political and
economic circumstances that could prevent the Las Cruces Project from being
developed.
The aggregate purchase price for the acquisition of Las Cruces was $42 million
in cash. In addition, Rio Tinto will be entitled to receive a 1.5% royalty on
any copper sales from the Las Cruces Project at a price exceeding $0.80 per
pound. The Company obtained funding for the acquisition of Las Cruces through
(i) borrowings of $20 million pursuant to its existing credit agreement with
Leucadia, (ii) the sale of 18,058,635 shares of its authorized but unissued
shares of common stock to Leucadia for $15.8 million and (iii) $6.2 million from
the Company's working capital. Pending regulatory approval of the acquisition of
the Company's common stock by Leucadia, Leucadia loaned to the Company $15.8
million pursuant to a promissory note. This promissory note was repaid on
October 8, 1999, at the time regulatory approval was given and the sale of MK
Gold shares to Leucadia was completed. In connection with the acquisition of Las
Cruces, the Company granted Straits Resources Ltd., Sydney, Australia, a one-
year option to purchase 35% of Las Cruces at the Company's cost, plus interest.
Results of Operations
Gold Production. The Company's attributable share of gold production at the
Castle Mountain Venture (the "CMV") for the three and six month periods ended
June 30, 2000, was 7,659 ounces and 14,283 ounces, respectively, compared to
6,340 ounces and 10,424 ounces, respectively, for the three and six month
periods ended June 30, 1999. This represents an increase in production of 21%
for the three month period and 37% for the six month period, compared to the
same periods in 1999. The increase in production is attributable to higher ore
grades experienced in the Oro Belle Hart Tunnel and Jumbo pits.
Gold production at the American Girl Mining Joint Venture has ceased. Mine
closure and reclamation activities were completed in February 2000.
Product sales revenue for the three and six month periods ended June 30, 2000
was $3.5 million and $6.0 million, respectively, compared to $.3 million and
$1.2 million for the same periods in 1999. During the three and six month
periods ended June 30, 2000, 9,800 and 16,900 ounces of gold, respectively, were
sold under forward sales contracts, and no gold was sold on the spot market.
During the three and six month periods ended June 30, 1999, no gold was sold
under forward sales contracts, and no ounces and 2,000 ounces of gold,
respectively, were sold on the spot market. The low product sales revenues for
the 1999 periods was the result of management's decision not to sell all of its
available gold due to depressed gold prices. Product sales revenue for the three
and six month periods ended June 30, 2000, and for the three and six month
periods ended June 30, 1999, includes the recognition of $.3 million and $.6
million, respectively, of deferred revenue.
Revenue from mining services for the three and six month periods ended June 30,
2000 decreased $1.5 million and $2.1 million, respectively, compared to the
corresponding periods in 1999. This represents a decrease in revenue of 55% and
38% for the three and six month periods, respectively, compared to the same
periods in 1999. Revenues decreased due to fewer tons mined compared to the
corresponding periods in 1999. The reduction in tons mined is due to reduced
stripping ratios of 1.37 for the six months ended June 30, 2000 compared to 2.98
for the corresponding period in 1999. The CMV has reduced the mining rates for
the remainder of 2000.
Hedging Activity. For the six month period ended June 30, 2000, the average
price realized per ounce of gold was $321, compared to $294 per ounce for the
six months ended June 30, 1999. The average spot price for the six month
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<PAGE>
period ended June 30, 2000 was $285 per ounce. The Company has the ability to
extend forward positions into the future. The Company had 10,100 ounces of gold
sold under forward sales contracts as of June 30, 2000.
Gross Profit. Gross profit from product sales for the three and six month
periods ended June 30, 2000 was $1.1 million and $1.5 million, respectively,
compared to a loss from product sales of $.5 million and $1.0 million,
respectively, for the same periods in 1999. The improvement is due to greater
ounces sold and higher realized gold prices as a result of the Company's hedging
activity.
Gross profit from contract mining operations for the three and six month periods
ended June 30, 2000 decreased $.5 million and $.6 million, respectively,
compared to the same periods in 1999, as a result of the reduction in tons
mined.
Exploration Costs. Exploration costs for the three and six month periods ended
June 30, 2000 were $.3 million and $.5 million, respectively, compared to $.5
million and $1.0 million for the three and six month periods ended June 30,
1999. The decrease in expenditures is due to a reduced number of properties
evaluated during the first six months of 2000 in the Company's three exploration
programs.
The Company's first quarter 2000 activity in Brazil consisted primarily of
drilling at the Principe Project. A second drilling program at Principe is
underway.
The Company performed drilling on two properties in Mexico during the second
quarter of 2000. Drilling on the first property, Fresnillo West, did not justify
additional work. The Fresnillo West property was abandoned in the second quarter
of 2000. The drilling program at El Habal which began in 1999 continued during
the six months ended June 30, 2000. The results of drilling at El Habal did not
justify additional work. The property was abandoned in June.
During February 2000, the Company entered into a farm-in agreement with Rio
Tinto to explore ten properties, totaling approximately 1,800 square kilometers,
in the Pyrite Belt in southwestern Spain. Initial studies are underway to
evaluate these properties.
Although exploration expenses are down compared to 1999, the Company continues
its worldwide search for promising precious and base metals opportunities.
General and Administrative Expenses. General and administrative expenses
increased during the three and six month periods ended June 30, 2000, compared
to the same periods in 1999 due to greater professional fees and travel related
costs.
Liquidity and Capital Resources
The Company's principal sources of funds are its available resources of cash and
cash equivalents, cash generated from mining operations and contract mining
services, and its credit facility. At June 30, 2000, the Company had cash and
cash equivalents of $5.1 million and gold bullion of $.5 million, representing a
decrease in cash and cash equivalents and gold bullion of $2.9 million from
December 31, 1999.
In March 1998, the Company entered into a $20 million credit agreement (the
"Credit Facility") with Leucadia. The Credit Facility may be terminated on
December 15 of any year, provided Leucadia notifies the Company of such
termination prior to September 15 of such year. The original expiration of the
Credit Facility was December 15, 2000. The Credit Facility was amended,
effective March 1, 2000, to increase the credit limit to $30 million and extend
the expiration to December 15, 2001. At June 30, 2000, the Company had
outstanding borrowings under the Credit Facility of $20 million. Loans
outstanding under the Credit Facility bear interest equal to the prime rate, and
interest is payable quarterly.
Net cash provided by operating activities was $2.5 million for the six months
ended June 30, 2000 compared to net cash used of $3.1 million for the same
period in 1999. The Company's cash operating
11
<PAGE>
cost per ounce of gold produced exceeded the average gold price for 1999,
whereas gold prices exceeded the Company's cash operating cost per ounce of gold
during the first half of 2000. The Company expects this trend to continue for
the remaining mine life at the CMV. The Company expects that its cash and cash
equivalents and operating cash flows will be sufficient to cover operating
expenses for the near term. However, the Company's cash resources will not be
sufficient to cover all projected expenses necessary to commence mining at the
Las Cruces Project. A preliminary feasibility study, prepared by Rio Tinto in
1998, estimated the capital cost would be approximately $300 million to bring
the mine into production. The completion of a bankable feasibility study will
better define the future capital and operating costs of the Las Cruces Project.
The Company will require additional financing in order to complete construction
and pay other projected expenses at the Las Cruces Project. While the Company
believes that it will be able to obtain financing for the Las Cruces Project, no
assurances can be given that such financing will be available or that the
Company will be able to obtain such financing on favorable terms.
The Company's current sources of funds available to fund new mining projects are
limited. The Company utilized a significant portion of its existing sources of
funds to acquire the Las Cruces Project in September 1999. Accordingly, the
ability of the Company to commence new mining projects may be dependent upon the
Company's ability to obtain additional sources of funds to finance any such
mining projects. While the Company believes that it may be able to obtain
financing for new mining projects through project financing or otherwise, no
assurances can be given that such financing will be available or that the
Company will be able to obtain such financing on favorable terms.
Additions to mining properties, plant and mine development totaled $5.1 million
for the six months ended June 30, 2000, compared to $.5 million for the same
period in 1999. For all periods presented, additions to mining properties, plant
and mine development consisted of (i) mine development expenditures; (ii)
construction expenditures for buildings, machinery, plant and equipment; and
(iii) expenditures for mobile mining service equipment.
During February 2000, the Company entered into a farm-in agreement with Rio
Tinto plc to explore ten properties in the Pyrite Belt of southwestern Spain. As
part of its obligations under the farm-in agreement, the Company plans to spend
$.5 million over the next 12 months to evaluate these properties.
Upon completion of production at a mine, the Company must make expenditures for
reclamation and closure of the mine. The Company provides for future reclamation
and mine closure liabilities on a units-of-production basis. At June 30, 2000,
$1.2 million was accrued for such costs. In addition to the accruals, the
Company and its joint venture partner are depositing cash in a separate fund to
cover future reclamation costs at the CMV properties. The Company reviews the
adequacy of its reclamation and mine closure liabilities in light of current
laws and regulations and adjusts its liabilities as necessary.
In October 1998, the Company announced a share repurchase program. The Board of
Directors of the Company authorized the repurchase of up to 2 million shares. As
of June 30, 2000, 173,700 shares had been repurchased by the Company under the
repurchase program.
Cautionary Statement for Forward Looking Information
Certain information set forth in this report contains "forward-looking
statements" within the meaning of federal securities laws. Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
future events, future revenues or performance, capital expenditures, exploration
efforts, financing needs, plans or intentions relating to acquisitions by the
Company and other information that is not historical information. When used in
this report, the words "estimates," "expects," "anticipates," "forecasts,"
"plans," "intends," "believes" and variations of such words or similar
expressions are intended to identify forward-looking statements. Additional
forward-looking statements may be made by the Company from time to time. All
such subsequent forward-looking statements, whether written or oral and whether
made by or on behalf of the Company, are also expressly qualified by these
cautionary statements.
The Company's forward-looking statements are based upon the Company's current
expectations and various assumptions. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis, including without limitation, management's examination of
historical operating trends, data contained in the Company's records and other
data available from third parties, but there can
12
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be no assurance that management's expectations, beliefs and projections will
result or be achieved or accomplished. The Company's forward-looking statements
apply only as of the date made. The Company undertakes no obligation to publicly
update or revise forward-looking statements which may be made to reflect events
or circumstances after the date made or to reflect the occurrence of
unanticipated events.
There are a number of risks and uncertainties that could cause actual results to
differ materially from those set forth in, contemplated by or underlying the
forward-looking statements contained in this report. These risks include, but
are not limited to, the volatility of gold prices, imprecision of reserve
estimates, risks of exploration and development stage projects, political risks
of development in foreign countries, risks associated with environmental
regulation, mining risks and competition. Each of these risks and certain other
uncertainties are discussed in more detail in the 1999 10-K. There may also be
other factors, including those discussed elsewhere in this report, that may
cause the Company's actual results to differ materially from the forward-looking
statements. Any forward-looking statements made by or on behalf of the Company
should be considered in light of these factors.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See note 1 to the Company's Consolidated Financial Statements in the 1999 10-K
for additional information regarding the Company's precious metals hedging
program and future adoption of Statement of Financial Accounting Standard No.
133, "Accounting for Derivative Instruments and Hedging Activities."
Gold Risk
The results of the Company's operations are affected significantly by the market
price of gold. Gold prices are influenced by numerous factors over which the
Company has no control, including expectations with respect to the rate of
inflation, the relative strength of the United States dollar and certain other
currencies, interest rates, global or regional political or economic crises,
demand for gold for jewelry and industrial products and sales by holders and
producers of gold in response to these factors. The Company enters into option
contracts and forward sales contracts to establish a minimum selling price on
certain ounces of gold it produces. The Company does not enter into option or
sales contracts for the purpose of speculative trading. The Company's current
hedging policy provides for the use of forward sales contracts to hedge up to
80% of the remaining production at the CMV.
At June 30, 2000, the Company had forward sales contracts outstanding for
approximately 10,100 ounces of gold for delivery during 2000 at an average price
of $320 per ounce. This represents 55% of the Company's anticipated gold
production for the remainder of 2000. The fair value of these contracts at June
30, 2000, based on market quotations for similar financial instruments, was $.36
million.
Foreign Currency Risk
Portions of the Company's operations are located in Spain, Mexico and Brazil.
The Company's future profitability could be impacted by fluctuations in those
countries' currency exchange rates relative to the United States dollar. The
Company has not entered into any foreign currency contracts or other derivatives
to establish a foreign currency protection program.
Other Financial Instrument Risk
The Company has borrowed $20 million under the Credit Facility. The Credit
Facility carries a variable interest rate equal to the prime rate. The Credit
Facility will expire on December 15, 2001, unless terminated earlier. The Credit
Facility may be terminated by Leucadia on December 15 of any year, provided
Leucadia notifies the Company of such termination prior to September 15 of such
year. The Company has not undertaken any hedging activities with respect to the
Credit Facility.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously reported by the Company, the Company is a plaintiff in an
action styled MK Gold Company v. Morrison Knudsen Corporation, No. 2:96CV00935,
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instituted October 8, 1996 and pending in the United States District Court for
the District of Utah. In that case, MK Gold has sued Morrison Knudsen
Corporation ("MK") for breach of a noncompete agreement. The case has been set
for a three week trial to begin on April 2, 2001.
MK has asked the court to rule, as a matter of law, that even if MK
breached the noncompete agreement, MK Gold cannot show that such a breach
directly caused MK Gold any recoverable damages. MK Gold has responded to MK's
Motion, asserting that the existence of material facts precludes a summary
disposition of the issue. The court was scheduled to hear argument from counsel
for both parties on the merits of this Motion on June 13, 2000. This hearing has
been rescheduled for September 21, 2000.
As also previously reported by the Company, the Company is a defendant in
an action styled Morrison Knudsen Corporation v. MK Gold Company, No. CV 99-
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0064-SBLW, instituted February 11, 1999 and pending in the United States
District Court for the District of Idaho. In that case, MK has alleged that MK
Gold violated federal and state trademark statutes and breached a trademark
license agreement by using the "MK" mark in connection with nonprecious metals
projects. Upon motion by MK Gold, the court had ruled that the case should be
stayed pending the resolution of the Utah litigation. The court has now lifted
the stay, however, and scheduled a five-day trial to begin on November 27, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 7, 2000, the Company held its annual meeting of stockholders in Salt
Lake City, Utah. The first item of consideration was the election of two
directors, with the votes tabulated as follows: Robert V. Hansberger received
36,170,606 shares voting in favor and 53,293 shares were withheld; and Robert S.
Shriver received 36,170,806 shares voting in favor and 53,093 shares were
withheld. Five directors who were not up for re-election continue to serve as
directors of the Company: Ian M. Cumming, Joseph S. Steinberg, G. Frank Joklik,
Thomas E. Mara and James P. Miscoll. The second item of consideration was a
proposal to amend the Certificate of Incorporation of the Company to increase
the number of authorized shares of Common Stock of the Company from 40 million
to 80 million, with the votes tabulated as follows: 34,506,036 were cast for,
52,243 were cast against, and 1,665,620 abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this report.
27 Financial Data Schedule
(b) No report on Form 8-K was filed during the quarter for which this
report is filed.
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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.
MK GOLD COMPANY
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JOHN C. FARMER
Chief Financial Officer and Secretary
(Authorized Signatory and
Principal Financial and Accounting
Officer)
Date: August 14, 2000
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INDEX TO EXHIBITS
Exhibits
27 Financial Data Schedule.
17
