<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 September 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 November 1, 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 nine
month periods ended September 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 Nine Months Ended
September 30 September 30
(Unaudited) (Unaudited)
2000 1999 2000 1999
------------------------- -------------------------
<S> <C> <C> <C> <C>
REVENUE:
Product sales $ 2,882 $ 4,776 $ 8,910 $ 6,007
Mining services 1,235 2,763 4,709 8,324
Gain on sale of assets - 13 15 92
----------- ----------- ----------- -----------
Total revenue 4,117 7,552 13,634 14,423
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Product sales 1,474 4,759 6,015 7,024
Mining services 1,229 2,084 4,226 6,564
----------- ----------- ----------- -----------
Total operating expenses 2,703 6,843 10,241 13,588
----------- ----------- ----------- -----------
GROSS PROFIT (LOSS) 1,414 709 3,393 835
EXPLORATION COSTS (281) (705) (825) (1,717)
EQUITY IN (LOSS) OF
UNCONSOLIDATED AFFILIATE (139) - (139) -
GENERAL AND ADMINISTRATIVE EXPENSES (502) (498) (1,290) (1,269)
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 492 (494) 1,139 (2,151)
Investment income 62 129 279 513
Interest expense (22) (118) (22) (156)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 532 (483) 1,396 (1,794)
Income tax provision (40) - (119) -
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 492 $ (483) $ 1,277 $ (1,794)
=========== =========== =========== ===========
Basic and diluted income (loss) per common share $ 0.01 $ (0.03) $ 0.03 $ (0.09)
Basic and diluted weighted average shares used to
compute income (loss) per common share 37,320,000 19,261,365 37,320,000 19,261,365
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
MK GOLD COMPANY
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars except per share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
(Unaudited)
------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,463 $ 7,126
Investment securities - 425
Gold bullion held for sale 818 1,377
Receivables 1,743 2,012
Inventories:
Ore and in process 1,260 1,019
Materials and supplies 582 627
Deferred income taxes 17 41
Other 173 208
------- -------
Total current assets 7,056 12,835
Mining properties, plant and mine development, net 48,510 45,768
Investment in unconsolidated affiliate 111 -
Deferred income taxes 133 229
Restricted investment securities 860 876
Restricted cash 386 233
------- -------
TOTAL ASSETS $57,056 $59,941
======= =======
</TABLE>
(continued)
4
<PAGE>
MK GOLD COMPANY
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars except per share data)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
(Unaudited)
------------- ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 2,238 $ 1,712
Current portion of mine closure and reclamation liabilities 224 352
Deferred revenue 778 1,672
Other accrued liabilities 390 426
-------- --------
Total current liabilities 3,630 4,162
Mine closure and reclamation liabilities 1,006 769
Deferred income tax liability 3,967 3,967
Line of credit - Leucadia National Corporation 20,000 20,000
-------- --------
Total liabilities 28,603 28,898
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $.01; 37,320,000 shares issued and
outstanding at September 30, 2000 and December 31, 1999 373 373
Capital in excess of par value 82,773 82,773
Accumulated deficit (49,395) (50,672)
Accumulated other comprehensive loss - foreign currency translation (5,298) (1,431)
-------- --------
Total stockholders' equity 28,453 31,043
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 57,056 $ 59,941
======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
MK GOLD COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
--------------------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30
2000 1999
(Unaudited) (Unaudited)
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 1,277 $ (1,794)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Deferred income taxes 119 -
Depreciation, depletion and amortization 660 688
Equity in loss of unconsolidated affiliate 139 -
Gain on sale of assets (15) (92)
Changes in operating assets and liabilities:
Gold bullion held for sale 559 891
Receivables 269 1,354
Inventories (196) (323)
Other assets 35 49
Change in restricted cash (153) 373
Accounts payable and other accrued liabilities 490 (31)
Deferred revenue (894) (894)
Mine closure and reclamation liabilities 109 (574)
------- --------
Net cash provided (used) by operating activities 2,399 (353)
------- --------
INVESTING ACTIVITIES:
Additions to mining properties, plant and mine development (7,291) (822)
Acquisition of Riomin (net of cash acquired) - (41,314)
Proceeds from sale of assets 79 111
Purchase of investment securities (55) -
Proceeds from sale of investment securities 442 -
Investment in unconsolidated affiliate (250) -
------- --------
Net cash used by investing activities (7,075) (42,025)
------- --------
FINANCING ACTIVITIES:
Short-term note payable - Leucadia National Corporation - 15,807
Net borrowings under line-of-credit agreement - Leucadia National Corporation - 20,000
------- --------
Net cash provided by financing activities - 35,807
------- --------
EFFECT OF EXCHANGE RATES ON CASH 13 3
------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,663) (6,568)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,126 15,687
------- --------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 2,463 $ 9,119
======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 1,415 $ 188
Taxes paid 1 2
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
Fair value of assets acquired (net of cash acquired) $ - $ 46,359
Fair value of liabilities assumed - (5,045)
------- --------
NET CASH PAID $ - $ 41,314
======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
MK GOLD COMPANY
NOTES TO UNAUDITED INTERIM 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 to 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 such year (the
"1999 10-K"). The results of operations for the nine months ended
September 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. Reclassifications
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.
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. The results for the AGMJV have been
proportionately reflected in the accompanying consolidated financial
statements. 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.
4. Unconsolidated Affiliate
In July 2000, the Company became a limited partner in Peru Exploration
Venture LLLP. The general partner is Bear Creek Mining Company. The
principle objective of the partnership is to acquire gold and other mineral
properties in Peru. The Company accounts for this investment using the
equity method of accounting. The Company's commitment to the partnership is
$1,000 over a two-year period, $250 of which was funded as of September 30,
2000. The Company's share of loss from the partnership for the three months
ended September 30, 2000 was $139.
5. 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)
7
<PAGE>
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 ("Straits"), a one-year option to purchase 35% of Las
Cruces at the Company's cost, plus interest. Straits failed to exercise the
option prior to its expiration on September 1, 2000.
On August 17, 2000, the Company received notice that Straits had filed a
request for arbitration with the International Court of Arbitration of the
International Chamber of Commerce relating to the Company's Las Cruces
Project. For a further description, see Note 7.
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.
From the date of acquisition to September 30, 2000, all development costs,
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 each period presented.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1999 September 30, 1999
--------------------------- --------------------------
Pro forma unaudited results
<S> <C> <C>
Revenue $7,555 $14,421
Loss before income taxes (824) (3,437)
Net loss (824) (3,437)
Basic and diluted loss per share (.04) (.18)
</TABLE>
There are no material pro forma adjustments. No mining rights were
amortized because production at the Las Cruces Project has not begun.
6. Related Party Transactions
For the three and nine month periods ended September 30, 2000,
approximately $508 and $1,415, respectively, in interest and commitment
fees were paid to Leucadia under the Credit Facility compared to $151 and
$188, respectively, for the three and nine month periods ended September
30, 1999. For the three and nine month periods ended September 30, 2000,
approximately $486 and $1,393, respectively, in interest relating to the
Las Cruces Project were capitalized compared to $138 for the three and nine
month periods ended September 30, 1999.
7. Legal Contingencies
The Company is a plaintiff in an action styled MK Gold Company v. Morrison
---------------------------
Knudsen Corporation, No. 2:96CV00935, instituted October 8, 1996 and
-------------------
pending in the United States District Court for the District of
8
<PAGE>
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.
On October 2, 2000, the court denied MK's motion to dismiss the Company's
damages claims. The court ruled that MK Gold was entitled to present its
damages claims at trial to a jury, including but not limited to its claims
for loss of goodwill and disgorgement of MK's profits resulting from MK's
actions.
The Company is a defendant in an action styled Morrison Knudsen Corporation
----------------------------
v. MK Gold Company, No. CV 99-0064-SBLW, instituted February 11, 1999 and
------------------
pending in the United States District Court for the District of Idaho. In
that case, MK 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. On September 20, 2000, the
court dismissed all of MK's claims, including damages claims, except the
license agreement claim. The court also allowed MK Gold to assert a
counterclaim against MK based upon MK's allegedly false registration of its
"MK" mark with the U.S. Patent & Trademark Office.
On August 17, 2000, the Company received notice that Straits Resources
Ltd., Sydney, Australia ("Straits"), had filed a request for arbitration
with the International Court of Arbitration of the International Chamber of
Commerce relating to the Company's Las Cruces Project. The Company had
previously granted Straits a one-year option to purchase 35% of Las Cruces
at the Company's cost, plus interest. Straits failed to exercise the option
prior to its expiration on September 1, 2000.
In its request for arbitration, Straits alleged various claims, including
breach of contract. Straits has sought damages in an unspecified amount or,
in the alternative, has requested a ruling that the option has not expired.
The Company had filed an answer in the arbitration proceeding denying any
liability and seeking a ruling that the option has, in fact, expired. No
date has been set for a hearing on the matter.
8. 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 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. 133 will have a significant effect on the earnings or
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 or financial position of the Company.
9
<PAGE>
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 reserve estimated at 15.9 million metric tons
estimated to contain 5.9% copper. The reserve 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 areas as it would not be necessary to send the concentrates to copper
smelters.
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
first quarter of 2001 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 first quarter of 2001.
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 National Corporation ("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 ("Straits"), a one-year option to purchase 35%
of Las Cruces at the Company's cost, plus interest. Straits
10
<PAGE>
failed to exercise the option prior to its expiration on September 1, 2000. On
August 17, 2000, the Company received notice that Straits had filed a request
for arbitration with the International Court of Arbitration of the International
Chamber of Commerce relating to the Company's Las Cruces Project. For a further
description, see Item 1, "Legal Proceedings," contained in Part II of this
report.
Results of Operations
Gold Production. The Company's attributable share of gold production for the
three and nine month periods ended September 30, 2000 was 8,371 ounces and
22,654 ounces, respectively, compared to 5,304 ounces and 15,728 ounces for the
three and nine month periods ended September 30, 1999. This represents an
increase in production of 58% for the three month period and 44% for the nine
month period, compared to the same periods in 1999. The increase in production
is attributable to higher ore grades experienced in the Ore Belle Hart Tunnel
and Jumbo pits at the Castle Mountain Venture ("CMV").
Product sales revenue for the three and nine month periods ended September 30,
2000 was $2.9 million and $8.9 million, respectively, compared to $4.8 million
and $6.0 million for the same periods in 1999. During the three and nine month
periods ended September 30, 2000, 7,900 and 24,800 ounces of gold, respectively,
were sold under forward sales contracts, and no gold was sold on the spot
market. During the three and nine month periods ended September 30, 1999, no
gold was sold under forward sales contracts, and 16,000 and 18,000 ounces of
gold, respectively, were sold on the spot market. Product sales revenue for the
three months ended September 30, 2000 was lower than the corresponding period in
1999. Due to weak market conditions during the first six months of 1999, the
Company had sold only 2,000 ounces of gold. During the three months ended
September 30, 1999 the Company took advantage of an increase in gold prices and
sold all of its available gold inventory. The increase in product sales revenue
for the nine months ended September 30, 2000 over the corresponding period in
1999 is due to an increase in gold sales resulting from higher gold production
and an increase in price realized due to the Company's hedging program. Product
sales revenue for the three and nine month periods ended September 30, 2000, and
for the three and nine month periods ended September 30, 1999, includes the
recognition of $.3 million and $.9 million, respectively, of deferred revenue.
Revenue from mining services for the three and nine month periods ended
September 30, 2000 decreased $1.5 million and $3.6 million, respectively,
compared to the corresponding periods in 1999. This represents a decrease in
revenue of 55% and 43% for the three and nine 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 1.17 for the nine months ended September 30,
2000 compared to 2.89 for the corresponding period in 1999. The CMV has reduced
the mining rates for the remainder of 2000.
Hedging Activity. For the nine month period ended September 30, 2000, the
average price realized per ounce of gold was $321, compared to $280 per ounce
for the nine months ended September 30, 1999. The average spot price for the
nine month period ended September 30, 2000 was $282 per ounce. The Company has
the ability to extend forward positions into the future. The Company had 2,200
ounces of gold sold under forward sales contracts as of September 30, 2000.
Gross Profit. Gross profit from product sales for the three and nine month
periods ended September 30, 2000 was $1.4 million and $2.9 million,
respectively, compared to gross profit from product sales of $.02 million and a
loss from product sales of $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 and lower operating costs
at the CMV.
Gross profit from mining services, which represents contract mining operations,
for the three and nine month periods ended September 30, 2000 decreased $.7
million and $1.3 million, respectively, compared to the same periods in 1999, as
a result of the reduction in tons mined.
Exploration Costs. Exploration costs were $.3 million and $.8 million for the
three and nine month periods ended September 30, 2000, respectively, compared to
$.7 million and $1.7 million for the three and nine month periods ended
September 30, 1999. The decrease in expenditures is due to a reduction in the
amount of drilling and testing
11
<PAGE>
being done. During the three months ended September 30, 2000, over fifty
properties were examined. No new properties were acquired.
Unconsolidated Affiliate. In July 2000, the Company became a limited partner in
Peru Exploration Venture LLLP. The general partner is Bear Creek Mining Company.
The Company's commitment to the partnership is $1.0 million, $.25 million of
which has been funded as of September 30, 2000. The principal objective of the
partnership is to acquire gold and other mineral properties in Peru. The
Company's share of loss from its equity interest in the partnership was $.14
million for the three month period ended September 30, 2000.
General and Administrative Expenses. General and administrative expenses were
$.5 million and $1.3 million for the three and nine month periods ended
September 30, 2000, respectively. This represents an increase of 1% and 2% for
the three and nine month periods ended September 30, 2000, compared to the same
periods in 1999.
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 September 30, 2000, the Company had cash
and cash equivalents of $2.5 million and gold bullion of $.8 million,
representing a decrease in cash and cash equivalents and gold bullion of $5.2
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 September 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 $2.4 million for the nine months
ended September 30, 2000 compared to net cash used of $.4 million for the same
period in 1999. The Company's cash operating cost per ounce of gold produced
exceeded the average gold price during 1999, whereas gold prices exceeded the
Company's cash operating cost per ounce of gold during the first nine months 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
assurance 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 will 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 will be able to obtain
financing for new mining projects through project financing or otherwise, no
assurance 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 $7.3 million
for the nine months ended September 30, 2000, compared to $.8 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,
including costs associated with the Las Cruces feasibility study; (ii)
construction expenditures for buildings, machinery, plant and equipment; and
(iii) expenditures for mobile mining service equipment. The increase for the
nine months ended
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September 30, 2000 is due to the capitalization of mine development costs
associated with the feasibility study at the Las Cruces Project and the
capitalization of interest relating to the $20 million borrowed under the Credit
Facility.
During February 2000, the Company entered into a farm-in agreement with Rio
Tinto 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 September 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 has authorized the repurchase of up to 2 million
shares. No shares were purchased by the Company during the nine months ended
September 30, 2000.
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 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.
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."
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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 September 30, 2000, the Company had forward sales contracts outstanding for
approximately 2,200 ounces of gold for delivery during 2000 at an average price
of $322 per ounce. This represents 24% of the Company's anticipated gold
production for the remainder of 2000. The fair value of these contracts at
September 30, 2000, based on market quotations for similar financial
instruments, was $.09 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,
-----------------------------------------------
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.
On October 2, 2000, the court denied MK's motion to dismiss the Company's
damages claims. The court ruled that MK Gold was entitled to present its damages
claims at trial to a jury, including but not limited to its claims for loss of
goodwill and disgorgement of MK's profits resulting from MK's actions.
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 99-0064-
-----------------------------------------------
SBLW, instituted February 11, 1999 and pending in the United States District
Court for the District of Idaho. In that case, MK 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. On
September 20, 2000, the court dismissed all of MK's claims, including damages
claims, except the license agreement claim. The court also allowed MK Gold to
assert a counterclaim against MK based upon MK's allegedly false registration of
its "MK" mark with the U.S. Patent & Trademark Office.
On August 17, 2000, the Company received notice that Straits Resources Ltd.,
Sydney, Australia ("Straits"), had filed a request for arbitration with the
International Court of Arbitration of the International Chamber of Commerce
relating to the Company's Las Cruces Project. The Company had previously granted
Straits a one-year option to purchase 35% of Las Cruces at the Company's cost,
plus interest. Straits failed to exercise the option prior to its expiration on
September 1, 2000.
In its request for arbitration, Straits alleged various claims, including breach
of contract. Straits has sought damages in an unspecified amount or, in the
alternative, has requested a ruling that the option has not expired. The Company
had filed an answer in the arbitration proceeding denying any liability and
seeking a ruling that the option has, in fact, expired. No date has been set for
a hearing on the matter.
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
/s/ John C. Farmer
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JOHN C. FARMER
Chief Financial Officer
(Authorized Signatory and
Principal Financial and Accounting Officer)
Date: November 13, 2000
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INDEX TO EXHIBITS
Exhibits
27 Financial Data Schedule.
17
