-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VvzkP8jkom2/3mHqxah9TXM5Shvss1ckpmV+BtBBehgXQ6y9woHARFZSixpEsXp+ cJynf8ACQIreXMSoD8qXTA== 0000950133-99-001347.txt : 19990416 0000950133-99-001347.hdr.sgml : 19990416 ACCESSION NUMBER: 0000950133-99-001347 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COEUR D ALENE MINES CORP CENTRAL INDEX KEY: 0000215466 STANDARD INDUSTRIAL CLASSIFICATION: GOLD & SILVER ORES [1040] IRS NUMBER: 820109423 STATE OF INCORPORATION: ID FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-08641 FILM NUMBER: 99594467 BUSINESS ADDRESS: STREET 1: 400 COEUR D ALENE MINES BLDG STREET 2: 505 FRONT AVE CITY: COEUR D ALENE STATE: ID ZIP: 83814 BUSINESS PHONE: 2086673511 MAIL ADDRESS: STREET 1: 400 COEUR D ALENE MINES BLDG STREET 2: 505 FRONT AVE CITY: COEUR D'ALENE STATE: ID ZIP: 83814 10-K/A 1 COEUR D'ALENE FORM 10-K/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. FORM 10-K/A No. 1 Pursuant to Section 13 or 15 (d) of the Securities and Exchange Act of 1934 Amendment No. 1 to Annual Report on Form 10-K for the Year Ended December 31, 1998 COEUR D'ALENE MINES CORPORATION ------------------------------------------------------------ (Exact name of Registrant as specified in its charter) Idaho 1-8641 82-0109423 - ---------------------------- ------------ ------------- (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification Number) 505 Front Avenue., P.O. Box "I" Coeur d'Alene, Idaho 83814 ---------------------------------------- ---------- (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (208) 667-3511 The undersigned registrant hereby includes the following items, financial statements, exhibits or other portions of its Annual Report on Form 10-K for the year ended December 31, 1998, as set forth in the pages attached hereto: Part I. Item 1. Business Part II. Item 6. Selected Financial Data Item 7. Management's Discussion and Analyses of Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data Part III. Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions Part IV. Item 14(a). Financial Statements (c) Exhibits 23 and 27 (d) Auditors' Report Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. 2 COEUR D'ALENE MINES CORPORATION By: /s/ Dennis E. Wheeler ---------------------------- Dennis E. Wheeler Chairman, President and Chief Executive Officer Date: April 15, 1999 2 3 PART I ITEM 1. BUSINESS Coeur d'Alene Mines Corporation is engaged through its subsidiaries in the operation and/or ownership, development and exploration of silver and gold mining properties and companies located primarily within the United States (Nevada, Idaho and Alaska), Australasia (New Zealand and Western Australia) and South America (Chile). Coeur d'Alene Mines Corporation and its subsidiaries are hereinafter referred to collectively as "Coeur" or the "Company". OVERVIEW OF MINING PROPERTIES AND INTERESTS The Company's most significant mining properties and interests are: - the ROCHESTER MINE, a silver and gold surface mining operation located in northwestern Nevada, which is 100% owned and operated by Coeur and which is one of the largest and lowest cost of production primary silver mines in the United States; - ownership of 50% of the capital stock of SILVER VALLEY RESOURCES CORPORATION ("SILVER VALLEY"), which owns the GALENA underground silver mine that resumed production in May 1997; the COEUR underground silver mine that resumed production in June 1996 and terminated operations on July 2, 1998; the CALADAY property that adjoins the Galena Mine; and operating control of several contiguous properties in the Coeur d'Alene Mining District of Idaho; - the FACHINAL MINE, an open pit and underground gold and silver mining operation wholly-owned and operated by Coeur and located in southern Chile, South America, which Coeur acquired in 1990, at which initial production commenced in October 1995, which was classified as an operating property for financial reporting purposes on January 1, 1997, and with respect to which the Company recorded a $42.9 million impairment write-down at December 31, 1998; - the CDE Petorca (or CDE El Bronce) Mine (THE "PETORCA MINE"), an underground Chilean gold and silver mine in which the Company acquired a 51% operating interest in October 1994 and 100% ownership in September 1996, and with respect to which the Company recorded a $54.5 million impairment write-down in the first quarter of 1998; - ownership of 50% of the capital stock of GASGOYNE GOLD MINES NL, an Australian gold mining company ("Gasgoyne"), which owns 50% of THE YILGARN STAR MINE, a gold mine in Western Australia, and certain other exploration-stage properties; 3 4 - ownership of 100% of the KENSINGTON PROPERTY, located north of Juneau, Alaska, which is being developed as an underground gold mine by Coeur where the Company recently completed an independently prepared optimization study which reduced projected cash operating costs to US$190 per ounce of gold for proven and probable reserves and capital costs to develop the mine to $192 million, and at which the Company recorded an impairment write-down of $121.5 million at December 31, 1998; and - the GOLDEN CROSS MINE, an underground and surface gold mining operation located near Waihi, New Zealand at which mining and milling operations were discontinued on April 28, 1998, and at which reclamation activities were conducted throughout the balance of 1998. Coeur also has interests in other properties which are the subject of silver or gold exploration activities at which no mineable ore reserves have yet been delineated. BUSINESS STRATEGY The Company's business strategy is to capitalize on its ore reserve/mineralized material bases and the expertise of its management to become a leading precious metals company via long-term, profitable growth. The principal elements of the Company's business strategy are as follows: (i) increase the Company's silver production and reserves in order to remain the nation's largest primary silver producer and one of the world's larger primary silver producers; (ii) improve operating cost and production profiles at Coeur's existing silver and gold mining operations; (iii) increase the Company's silver and gold production and reserves in order to continue to provide its shareholders with an interest in both metals, while lowering its cost of gold and silver production; (iv) acquire operating mines, exploration and/or development properties with a view to reducing the Company's operating and production costs and expanding its production and reserves; (v) continue to explore for new silver and/or gold discoveries primarily in North and South America and Australia primarily near existing mine sites; (vi) focus on opportunities which provide strong immediate or near-term prospects for low-cost silver and/or gold production; and (vii) strengthen the Company's financial ability to weather the gold industry's lowest price level in nineteen years. SOURCES OF REVENUE The Rochester Mine, Fachinal Mine and Petorca Mine, which are operated by the Company; the Golden Cross Mine, which was operated by the Company; and the Company's interests in Silver Valley and Gasgoyne, constituted the Company's principal sources of mining revenues in 1998. The following table sets forth information regarding the percentage contribution to the Company's total revenues (i.e., revenues from the sale of concentrates and dore plus other income) by the sources of those revenues during the past four years: 4 5
Percentage of Percentage of Total Revenues Mine/Company Coeur Ownership in Year Ended December 31, - ------------ --------------- --------------------------------------------------- 1995 1996 1997 1998 ----- ----- ---- ---- Rochester Mine. . 100% 57.0% 59.3% 40.5% 56.2% Golden Cross Mine. 80 33.4 26.0 23.7 .2 Petorca Mine(1). . 100 0.3 2.8 11.3 8.5 Fachinal Mine(2) . 100 - - 9.8 14.6 Silver Valley (3). 50 - .5 .9 (.9) Gasgoyne(4). . . . 50 - 0.9 5.2 12.1 Other. . . . . . . - 9.3 10.5 8.6 9.3 ----- ----- ----- ----- 100% 100% 100% 100% ===== ==== ===== =====
- ------------------------------------ (1) The reported percentages of total revenues reflect the fact that Coeur's interest in the revenue of the mine was 51% until September 1996, when it acquired a 100% ownership interest. Prior to September 1996, the Company's share of net profits was reported as other income. (2) The Fachinal Mine commenced pre-production activities in late October 1995 and was accounted for as a development stage property until December 31, 1996 (i.e., operating costs were capitalized net of revenues from pre-commercial production). Commencing January 1, 1997, the mine was accounted for as an operating property for financial reporting purposes. (3) The Company's interest in Silver Valley accounted for approximately 3.0 % of total revenues for the approximately eight months subsequent to its start-up by the Silver Valley Resources in May 1996. The Company changed its method of accounting for Silver Valley Resources from the proportionate consolidation method to the Equity Method of Accounting and as such has included cost of production and working capital costs. (4) The Company's interest in Gasgoyne accounted for approximately 1.2% of total revenues for the approximately six months subsequent to its acquisition by the Company in May 1996. The reported percentages reflect the fact that Coeur's interest in Gasgoyne revenue was 35% from May 1996 to February 1997, 36% from March 1997 to May 1997 and 50% after May 1997. The Company's interest in Gasgoyne is reported in accordance with the equity method. DEFINITIONS The following sets forth definitions of certain important mining terms used in this report. "Dore" - A bullion produced by smelting, containing gold, silver and minor amounts of impurities. "Gold" - An alloy with minimum fineness of 999 parts per 1000 parts pure gold. "Heap Leaching Process" - Heap leaching is a process of extracting gold and silver by placing broken ore on an impermeable pad and applying a dilute cyanide solution that dissolves a portion of the contained gold and silver, which are then recovered in metallurgical processes. 5 6 "Mineralized Material" - A mineralized underground body which has been intersected by sufficient closely spaced drill holes and/or underground sampling to support sufficient tonnage and average grade of metal(s) to warrant further exploration-development work. Such material does not qualify as an "ore reserve" until a final and comprehensive economic, technical and legal feasibility study based upon evaluation of engineering, mineability and metallurgical testing is concluded. "Ore Reserve" - That part of a mineral deposit which can be economically and legally extracted or produced at the time of the reserve determination. "Probable Reserves" - Ore reserves for which quantity and grade and/or quality are computed from information similar to that used for proven reserves, but the sites for inspection, sampling and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation. "Proven Reserves" - Ore reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspections, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserve are well-established. "Ton" - References to a "ton" mean a short ton, which is 2,000 pounds. IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS This report contains numerous forward-looking statements relating to the Company's gold and silver mining business, including estimated production data, expected operating schedules and other operating data and permit and other regulatory approvals. Such forward-looking statements are identified by the use of words such as "believes," "intends," "expects," "hopes," "may," "should," "plan," "projected," "contemplates," "anticipates" or similar words. Actual production, operating schedules and results of operations could differ materially from those projected in the forward-looking statements. The factors that could cause actual results to differ materially from those projected in the forward-looking statements include (i) the risks and hazards inherent in the mining business (including environmental hazards, industrial accidents, weather or geologically related conditions), (ii) changes in the market prices of gold and silver, (iii) the uncertainties inherent in the Company's production, exploratory 6 7 and developmental activities, including risks relating to permitting and regulatory delays, (iv) the uncertainties inherent in the estimation of gold and silver ore reserves, (v) changes that could result from the Company's future acquisition of new mining properties or businesses, (vi) the effects of environmental and other governmental regulations, and (vii) the risks inherent in the ownership or operation of or investment in mining properties or businesses in foreign countries. ROCHESTER MINE The Rochester Mine is a silver and gold surface mine located in Pershing County, Nevada, approximately 25 road miles northeast of Lovelock. The mine utilizes the heap leaching process to extract both silver and gold from ore mined using open pit methods. The property consists of 16 patented and 541 unpatented contiguous mining claims and 54 mill-site claims totaling approximately 11,000 acres. The Company owns 100% of the Rochester Mine by virtue of its 100% ownership of its subsidiary, Coeur Rochester, Inc. ("Coeur Rochester"). Asarco, Inc., the prior lessee, has a net smelter royalty interest which is payable only when the market price of silver equals or exceeds $18.26 per ounce up to minimum rate of 5%. Based on the ore reserve review report, dated February 1999, of Independent Mining Consultants, Inc. ("IMC"), and accounting for production through December 31, 1998, mineable, proven/probable ore reserves at the Rochester Mine, as of January 1, 1999, totaled approximately 54.856 million tons averaging 1.08 ounces of silver per ton and 0.009 ounces of gold per ton. The reserve estimate is based on a 0.75 ounce per ton silver-equivalent cutoff grade and silver and gold prices of $5.80 and $300.00, respectively. The average grades do not reflect losses in the recovery process. The amount of estimated proven and probable reserves vary depending on the prices of silver and gold. In addition, 26.789 million tons of mineralized material averaging 0.91 ounces of silver per ton and 0.007 ounces of gold per ton have been identified by Coeur Rochester. The average strip ratio for the remaining life of the mine will vary based primarily on future gold and silver prices. Furthermore, the actual strip ratio may vary significantly from year-to-year during the remaining life of the mine, however, the average strip ratio is anticipated to be less than 1:1. The above ore reserve and mineralized material data does not include data relating to the Nevada Packard property located south of the Rochester Mine, which the Company has an option to purchase and which is discussed below. Based upon its actual operating experience and certain metallurgical testing, the Company estimates recovery rates of 59% for silver and 90% for gold. The leach cycle at the Rochester Mine requires approximately five years from the point ore is placed on the leach pad until all recoverable metal is recovered. However, a significant proportion of metal recovery occurs in the early years. The realization of the Company's production estimates is subject to actual rates of recovery, continuity of ore grades, mining rates, areas being mined, projected 7 8 operating costs, the levels of silver and gold prices, and other uncertainties inherent in any mining and processing operation. The following table sets forth information for the periods indicated relating to Rochester Mine production. Rochester had record silver production in 1998, 7,225,396 ounces, an 8% increase over 1997.
Year Ended December 31, --------------------------------------------------------------------- 1994 1995 1996 1997 1998 --------- --------- ---------- --------- --------- Ore processed (tons). . . . . . 7,759,637 8,243,609 8,127,691 8,738,471 8,529,263 Silver (ounces). . 5,937,770 6,481,825 6,251,180 6,690,704 7,225,396 Gold (ounces). . . 56,886 59,307 74,293 90,019 88,615
Rochester reduced total costs per ounce by $.36, a 7% reduction from 1997.The following table sets forth the costs of production per ounce of silver and gold on a silver equivalent basis during the periods indicated at the Rochester Mine. Cash costs include mining, processing and direct administration costs, financing costs, royalties and refining costs. Silver equivalent gold production for the year is calculated by multiplying actual gold ounces produced by the ratio of the yearly average gold price to the yearly average silver price. This total is then added to actual silver production for the year to determine total silver equivalent production.
Year Ended December 31, ---------------------------------------------------------- 1994 1995 1996 1997 1998 --------- --------- --------- --------- -------- Cash costs per ounce. . . $ 3.65 $ 3.79 $ 3.71 $ 4.36 $ 4.07 Depreciation, depletion and amortization per ounce. . . . . . . .59 .61 .54 .67 .60 -------- --------- --------- --------- -------- Total costs per ounce . . $ 4.24 $ 4.40 $ 4.25 $ 5.03 $ 4.67 ======== ========= ========= ========= ========
A total of three deep drill holes were completed during 1998 to test multiple feeder structures that could have added ore resources to the Rochester silver/gold deposit. Sulfide mineralization was encountered; however, only weak precious metals mineralization was intercepted. Geologic evaluation is continuing. The metallurgical test program was completed during 1998 and confirmed that finer crushing could enhance gold and silver recoveries. The Company completed a basic engineering study to determine the capital and operating requirements for fine crushing. However, the results of this study do not support installation of a fine crushing plant at this time given the current depressed metal prices. The Company will continue to investigate potential fine crushing alternatives and other remaining life-of-mine optimization opportunities. During the second quarter of 1998, the Company began the third consecutive year of drilling on the Nevada Packard property located south of the Rochester 8 9 Mine. The first two phases of exploratory drilling were directed to test mineralization from surface to depths of 900 feet. The second phase of drilling completed in August 1998 confirmed the near-surface mineralization, allowing for a mineable reserve estimate. At the conclusion of the third phase of drilling, the Company had completed 33,615 feet of drilling on the property. Preliminary economic evaluations support moving forward with mining the ore reserves at the Nevada Packard property based on the Company's ore reserve analysis. The Company estimates that mineable, proven and probable ore reserves at the Nevada Packard property at January 1, 1999 totaled approximately 3.919 million tons averaging 2.17 ounces of silver per ton and 0.004 ounces of gold per ton. The reserve estimate is based on a 1.05 ounce per ton silver-equivalent cutoff grade and silver and gold prices $5.00 and $300.00 per ounce, respectively. The amount of proven and probable reserves vary depending on the prices of silver and gold. In addition, 3.039 million tons of mineralized material averaging 0.95 ounces of silver per ton and 0.003 ounces of gold per ton have been identified by the Company. The Company has the option to purchase 100% of the Nevada Packard property and is negotiating with respective claim owners. No assurance can be given that the Company will exercise that option. Permitting will commence if and when the option is exercised. It is expected that any ore mined there would be processed at the Rochester facility. The Company's capital expenditures at the Rochester Mine totaled approximately $7.1 million in 1998, of which approximately $6.2 million was used to reacquire the existing processing facility which was subject to a sale-leaseback agreement entered into in 1986. The Company plans approximately $4.1 million of capital expenditures at the mine during 1999, most of which is for an expansion of the Stage IV leach pad. INTEREST IN SILVER VALLEY RESOURCES CORPORATION - THE COEUR D'ALENE MINING DISTRICT Silver Valley Resources Corporation ("Silver Valley") owns the Coeur and Galena Mines and the Caladay property situated in the Coeur d'Alene Mining District of Idaho. Effective January 1, 1995, Coeur, Callahan Mining Corporation ("Callahan"), a wholly-owned subsidiary of Coeur, and ASARCO Inc. ("ASARCO") transferred their interests in the Coeur and Galena Mines and Caladay property to Silver Valley, an entity created for that sole purpose, as a result of which Coeur and ASARCO each now own 50% of Silver Valley. During 1995, Silver Valley conducted a planned underground development program that increased ore reserves at the Galena Mine. As a result of this program and increased silver prices, a decision was made on February 8, 1996 by Silver Valley to reopen the mines. Underground development and exploration activities continued during 1997 and 1998. Silver Valley recommenced operations at the Coeur mine portion of its property in June 1996 and continued mining existing reserves there through July 2, 1998, when operations were terminated as planned. Silver Valley resumed production at the Galena Mine in May 1997 and operations continue. 9 10 Silver Valley silver reserves attributable to Coeur's 50% ownership interest in both the Galena and Coeur Mines have been expanded, increasing 32% in 1995, 22% in 1996 and 13% in 1997. In 1998, ore reserves at the Galena increased 15%. Silver Valley plans to continue exploratory and developmental activities at the Coeur, Galena and Caladay Mines as well as at several contiguous properties in the Coeur d'Alene Mining District with a view toward the development of new silver reserves and resources. During the second quarter of 1998, shipments of concentrate from the Galena and Coeur mines were suspended, resulting in a build-up of inventories pending negotiation of the placement of concentrates with three new suppliers of smelting services. The shipment of concentrates resumed in July, 1998. Concentrate inventories returned to normal levels prior to the end of 1998. The Board of Directors of Silver Valley consists of six directors, three of whom, including the Chairman of the Board, are appointed by Asarco and three of whom, including the President, are appointed by Coeur. Pursuant to a Shareholders' Agreement between the parties, certain specified corporate actions requires a majority vote. If the voting results in a tie at any Board Meeting, the Chairman of the Board of Silver Valley, who also is the Chairman of the Board of Asarco, will decide the issue. Certain other specified corporation actions require unanimous approval of the directors. The President of Coeur also is the President of Silver Valley and serves on its Executive Committee. Certain other officers of Silver Valley are officers of Coeur or Asarco, which companies may provide management and other services to Silver Valley upon the request of its Board of Directors. A summary of the properties owned by Silver Valley is set forth below. GALENA MINE The Galena Mine property consists of approximately 1,100 acres lying immediately west of the City of Wallace, Shoshone County, Idaho adjoining the Coeur Mine's eastern boundary. The property consists of 52 patented mining claims and 25 unpatented mining claims. The Galena Mine is primarily an underground silver-copper mine ,and is served by two vertical shafts. In July 1992 Asarco, which was the Galena Mine operator, suspended operations at the Galena Mine due to then prevailing silver prices ($4.31 per ounce average for the month of July 1992) and placed the property on a care and maintenance basis to conserve ore reserves. Silver Valley resumed production at the Galena Mine in May 1997. Based on the ore-reserve estimate of Silver Valley, dated January 1999, proven and probable ore reserves as of January 1, 1999 at the Galena Mine totaled 1.757 million tons averaging 18.54 ounces of silver per ton. Included in the previously quoted reserves are 348,000 tons of ore containing 12.34% lead and 1.569 million tons of ore containing 0.56% copper. The Silver Valley reserve estimate is based on a minimum mining width of 4 to 4.5 feet diluted to 5.0 feet minimum width for most silver-copper and silver-lead veins. Cutoff grade is based 10 11 on the cost of breaking and producing ore from a stope, but does not include development costs and administrative overhead. The cutoff grade varies from area-to-area within the mine due to changing silver-copper ratios of the ore. The reserve estimate has also identified an additional 782,000 tons of mineralized material which averages 8.26 ounces of silver per ton. Included in the mineralized material are 262,000 tons containing 0.43% copper and 541,000 tons containing 5.74% lead. The following table sets forth information relating to total Galena Mine production during the periods indicated.
Eight Months Year Ended Ended December 31, December 31, 1997 1998 --------------------------------- --------------------------------- Ore milled (tons)....... 80,012 176,304 Silver (ounces)......... 1,456,201 3,260,363 Copper (pounds)......... 1,070,954 2,234,374
The following table sets forth the costs of production per ounce of silver (net of credit for copper byproduct) at the Galena Mine during the periods indicated. Cash costs include mining, processing, direct administration costs and smelter charges, but do not include exploration costs. Coeur has a 50% interest in operating profits from Galena Mine operations by virtue of its 50% ownership of Silver Valley. Silver Valley reduced its full costs per ounce in 1998 by $.53, an 8.9% reduction from 1997.
Eight Months Year Ended Ended December 31, December 31, 1997 1998 --------------------------------- -------------------------------- Cash costs per ounce............. $4.74 $4.39 Depreciation, depletion and amortization per ounce......... 1.24 1.06 ---- ---- Total costs per ounce............ $5.98 $5.45 ===== =====
Total capital expenditures by Silver Valley at the Galena Mine in 1998 approximated $3.6 million. Such expenditures were used to provide additional mine development and miscellaneous equipment. Silver Valley plans approximately $2.7 million of mine development and equipment expenditures at the Galena Mine during 1999. Activities at the Galena Mine during 1998 were concentrated on shaft deepening and development activities, including exploration/development drilling that tested both internal vein targets and several exploration targets located on 11 12 leased properties contiguous to the Silver Valley holdings. Exploration results are being assessed and will require further follow up. COEUR MINE The Coeur Mine is an underground silver mine located adjacent to the Galena Mine in the Coeur d'Alene Mining District in Idaho, and consists of approximately 868 acres comprised of 38 patented mining claims and four unpatented mining claims. Effective December 31, 1991, Coeur increased its non-operating joint venture interest in the mine to 50% as a result of Coeur's acquisition of Callahan, which had acquired a 5% interest in the mine in March, 1968. Effective January 1, 1995, Coeur and Asarco transferred their interests in the Coeur Mine to Silver Valley. Asarco, the operator under the previous joint venture, suspended operations at the Coeur Mine on April 3, 1991 due to then prevailing silver prices ($3.90 per ounce average for April 1991) and placed the property on a care and maintenance basis to conserve ore reserves. Silver Valley resumed production activities at the Coeur Mine in June 1996 and, as planned, terminated operations there on July 2, 1998. The following table sets forth information, for the periods indicated, relating to total Coeur Mine production.
Six Months Year Ended Six Months Ended December 31, Ended December 31, 1996 1997 June 30, 1998 ----------------- ------------ ------------- Ore milled (tons). 78,067 110,579 21,968 Silver (ounces). . 1,666,534 1,978,513 261,266 Copper (pounds). . 1,407,771 1,621,345 174,414
The following table sets forth the costs of production per ounce of silver (net of credit for copper by-product) at the Coeur Mine during the periods indicated. Cash costs include mining, processing, direct administration costs and smelter charges but do not include exploration costs. The Company has a 50% interest in operating profits from Coeur Mine operations by virtue of its 50% ownership of Silver Valley.
Six Months Seven Months Ended Year Ended Ended December 31, December 31, July 31, 1996 1997 1998 ------------ ------------ ------------ Cash costs per ounce............ $3.18 $3.00 $5.34 Depreciation, depletion and amortization per ounce...................... .79 .95 1.03 ----- ----- ---- Total costs per ounce........... $3.97 $3.95 $6.37 ===== ===== =====
12 13 The increase in cash cost per ounce in the 1998 period was primarily due to the fact that, as planned, operations at the Coeur Mine were winding down and terminated on July 2, 1998. Based on a Silver Valley Resources ore reserve report dated January 1999, Coeur estimates the mineralized material as of January 1, 1999 at the Coeur Mine totaled 370,000 tons averaging 14.53 ounces of silver per ton and 0.69% copper. Approximately 2,288 feet of exploration drilling was completed at the Coeur in 1998, the results are undergoing interpretation. CALADAY PROPERTY The Caladay property adjoins the Galena Mine. Prior to its acquisition by the Company in 1991, approximately $32.5 million was expended on the property to construct surface facilities, a 5,101 ft. deep shaft and associated underground workings to explore the property. Based on Silver Valley's analysis of existing Galena Mine underground workings and drilling results on the Galena Property, the Company believes that similar geologic conditions which exist at the Galena extend into the Caladay below the level of the current Caladay workings. In addition, the Caladay facilities may be used to benefit the Galena Mine operations. FACHINAL MINE In January 1990, the Company acquired through its wholly-owned subsidiary, CDE Chilean Mining Corporation, ownership of the Fachinal gold and silver property. As discussed below, the Company completed the construction of the Fachinal Mine on schedule and under budget in October 1995 when initial mining operations commenced. The Fachinal property covers about 90 square miles and is located south of Coihaique, the capital of Region XI in southern Chile, and approximately 10 miles west of the town of Chile Chico. The project lies on the east side of the Andes at an elevation ranging from 600 to 4,500 feet and is serviced by a gravel road from Chile Chico. The Fachinal property is known to include multiple epithermal veins containing gold and silver. The Company has been granted exploitation concessions (the Chilean equivalent to an unpatented claim except that the owner does not have title to the surface which must be separately acquired from the surface owner) covering the mineralized areas of the Fachinal property as well as the necessary surface rights to permit mining there. During the first two years of commercial production (i.e. 1997 and 1998), the Fachinal Mine experienced operational ore reserve problems that resulted in significantly higher than expected cash operating costs of production. The Fachinal ore distribution is much more structurally controlled than originally interpreted. An effort to transition from open pit mining to profitable underground mining continued through 1997 and 1998. The remote and secluded location of the Fachinal Mine made it difficult to attract experienced miners and the Company decided to train local residents, supplemented with contract 13 14 underground miners. After two years of mining and development, the Company now has a group of experienced underground miners. Additionally, the Company has implemented significant improvements in the open pit mining techniques specifically designed to improve the results of mining the structurally controlled Fachinal deposits. The efforts over the last two years are beginning to provide positive results and will continue into 1999. In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Asset and Long-Lived Assets to be Disposed Of" ("SFAS 121"), the Company reviews the carrying value of its assets whenever events or changes in circumstances indicate that the carrying amount of its assets may not be recoverable. Generally, SFAS 121 provides that an asset impairment exists when the total amount of the estimated future undiscounted cash flows generated by the asset are less than the carrying value of the asset. If it is determined that impairment exists, the amount of the impairment loss that should be recorded, if any, is the amount by which the carrying value of the asset exceeds its fair value. An impairment loss is measured and recorded based on discounted estimated future cash flows. Future cash flows include estimates of recoverable ounces, gold prices (considering historical and current prices) and operating, capital and reclamation costs. At December 31,1998, due to the continuing low gold price environment, the Company reviewed the carrying value of the Fachinal mine using a $350 per ounce gold price assumption. Coeur's long-term price assumption of $350 an ounce is based upon historical gold prices and the Company's reasonable projections, as well as a survey of price assumptions used by other companies in the industry. Based on estimated future undiscounted cash flows, the Company does not expect to recover the full value of its remaining investment in the Mine. Based on discounted estimated future cash flows from Fachinal, an impairment write-down of $42.9 million was recorded at December 31, 1998 thereby reducing the carrying value to $24.8 million. The following table sets forth Fachinal Mine production data for the period from October 19, 1995, on which date initial production activities commenced, through December 31, 1995, and for the years ended December 31, 1996, 1997 and 1998.
October 19, 1995 through December 31, 1995 Year Ended December 31, ------------------------------ --------------------------------------------------------- 1996 1997 1998 ---- ---- ---- Ore milled (tons)....... 96,212 591,074 592,976 568,051 Gold (ounces)........... 3,586 25,064 30,601 28,358 Silver (ounces)......... 334,816 2,154,347 2,243,761 1,596,676
14 15 The gold production decline in 1998 was due to tons and grades being lower than planned. The silver shortfall was due to lower than model predicted grades at the Condor and Guanaco Mines. The Condor problem was one of model prediction error. Guanaco was at the end of its mine life and was not totally mined out because of the metal price decline of the last quarter. This resulted in a tonnage and grade shortfall for Guanaco. The following table sets forth the costs of production per ounce of gold during 1997 and 1998 at the Fachinal Mine. Cash costs include mining, processing and direct administration costs, royalties, smelting and refining. Because the Fachinal Mine had not yet reached commercial production levels prior to January 1, 1997, results of the mine's operations were accounted for as a development stage property (i.e., costs net of pre-production revenues were capitalized). The property was classified as an operating property for financial reporting purposes on January 1, 1997.
Year Ended December 31, ----------------------- 1997 1998 ---- ---- Cash costs per ounce....................... $339.46 $313.84 Depreciation, depletion and amortization per ounce.................... 172.86 205.96 ------ ------- Total costs per ounce...................... $512.32 $519.80 ======= =======
The decrease in cash cost of production in 1998 was primarily attributable to fourth quarter operating improvements. The mine plan emphasis changed from 50%-50% underground-open pit mining to 80%-20% underground-open pit mining. Personnel were reduced 40%. The cash costs for the fourth quarter were $279 per gold equivalent ounce. During this period, significant productivity enhancements were achieved; the mill operating schedule was reduced 30%; other cost savings included lowered diesel consumption and renegotiated transportation, explosives and diesel contracts. Other employee related costs reductions included transportation, food and lodging savings. Economic, precious metals ores at the Fachinal Mine occur in multiple epithermal, quartz-sulfide veins system hosted in Jurassic volcanic rocks. During the third quarter of 1998, the Company identified additional underground reserves. Based on an ore reserve review report dated February 1999, by Micon International Limited ("Micon"), the total remaining, mineable, open-pit and underground proven and probable reserves as of January 1, 1999 at the Fachinal Mine were approximately 1.475 million tons averaging 0.07 ounces of gold per ton and 2.70 ounces of silver per ton. The Fachinal Mine's open-pit reserve base totals 1.028 million tons averaging 0.06 ounces of gold per ton and 1.76 ounces of silver per ton. The estimate is based on an internal cutoff grade of 0.04 to 0.06 gold equivalent ounces per ton. The underground reserve, which totals 448,000 tons at 0.10 ounces of gold per ton and 4.86 ounces of silver per ton, is based on internal cutoff grades ranging from 0.12 to 0.18 ounces per ton equivalent gold. Both reserve estimates are based on gold and silver prices 15 16 ranging from $300 to $344 per ounce and $5.00 to $6.16 per ounce, respectively from 1999 to 2003. Average grades reflect extractive dilution, but not losses during the recovery process. The Company estimates, based upon metallurgical testing and operating experience, recovery rates between 88.7% for gold and 87.8% for silver. The open-pit reserve estimate has also identified 2.754 million tons of mineralized material, averaging 0.06 ounces of gold per ton and 1.23 ounces of silver per ton. The underground resource estimate has identified an additional 1.199 million tons of mineralized material averaging 0.11 ounces of gold per ton and 4.28 ounces of silver per ton. Numerous other exploration targets with known precious-metals mineralization remain to be evaluated. The above ore reserve and mineralized material data does not include data relating to the Furioso property near the Fachinal property, which the Company has an option to purchase and which is discussed below. Total capital expenditures by the Company at the Fachinal Mine in 1998 approximated $2.8 million. Such expenditures were used to expand mine development and purchase miscellaneous equipment. The Company plans approximately $.3 million of capital expenditures at the Fachinal Mine during 1999 on mine development and miscellaneous capital equipment. Drilling is underway at the Fachinal Mine's underground and open pit mines in an effort to increase the existing reserve base. In addition, developmental activities are being conducted at the Furioso property, located approximately 40 miles southwest of the Fachinal Mine, where the Company has estimated additional high grade gold reserves. An internal feasibility study has been conducted by the Company and determined that Furioso ore reserves can be economically processed at existing Fachinal Mine facilities. The Company has an option to purchase 100% of the Furioso property at a price of $500,000 on or prior to April 30, 1999. No assurance can be given that the Company will exercise that option. Emphasis is being directed at increasing underground higher grade reserves. The ore reserve review report of Micon, dated February 1999 estimated that mineable proven and probable ore reserves as of January 1, 1999 at the Furioso property were approximately 51,000 tons averaging 0.54 ounces of gold per ton and 15.36 ounces of silver per ton. Those estimates are based on an internal cutoff grade of 0.23 to 0.26 gold equivalent ounces per ton and gold and silver prices of $300 per ounce and $5.00 per ounce, respectively. Mineralized material at Furioso has been estimated at 54,000 tons with an average gold grade of 0.31 ounces per ton and 6.06 ounces per ton silver. Reference also is made to "Exploratory Mining Properties" below for additional information relating to exploratory activities in the Fachinal Mine area. Although the government and economy of Chile has been stable in recent years, the ownership of property in a foreign country is always subject to the risk of expropriation or nationalization with inadequate compensation. Any foreign operation or investment may also be adversely affected by exchange controls, currency fluctuations, taxation and laws or policies of particular countries as well as laws and policies of the United States affecting foreign trade, investment and taxation. 16 17 CDE PETORCA (CDE EL BRONCE) MINE The Petorca Mine (also previously referred to as the El Bronce Mine) is an underground, gold-silver mine located on approximately 34,000 acres in the Andean foothills approximately 90 miles north of Santiago, Chile. In July 1994, the Company entered into an agreement with Compania Minera El Bronce de Petorca, a Chilean corporation ("CMEB"), pursuant to which the Company acquired operating control and a 51% interest in any operating profits and an option exercisable through July 1997 to also purchase from CMEB a 51% equity interest in Compania Minera CDE El Bronce, a Chilean corporation ("CDE El Bronce") that owns the producing El Bronce Mine. On September 4, 1996, the Company exercised its option to purchase 51% of the shares of CDE El Bronce and also purchased the remaining 49% of the shares of CDE El Bronce from CMEB, as a result of which Coeur increased its ownership interest of CDE El Bronce to 100%. The property consists of 64 exploitation concessions and 10 exploration concessions. Surface rights to permit mining on the property have been granted by the private owners. Ore is produced from a complex system of precious-metals bearing, epithermal, quartz-veins hosted in Cretaceous volcanic rocks. Coeur expended a total of $30.6 million in connection with its original acquisition of operating control of the El Bronce Mine, exercise of the option to acquire 51% ownership of CDE El Bronce and acquisition of the remaining 49% of the shares of CDE El Bronce. In addition, Coeur's obligation to pay CMEB a 3% net smelter return royalty, payable quarterly, commenced on January 1, 1997. However, from July 1998 to June 1999, CMEB has agreed to a 2.4% net smelter return royalty. During the first quarter of 1998, the Petorca Mine continued to operate at a loss in spite of on-going efforts to improve ore grades and reduce operating costs. During April 1998, a SFAS 121 analysis of Petorca was completed to determine whether mine plans could be modified to improve operations. As a result of this evaluation, the Company determined that a write-down was required to properly reflect the estimated realizable value of Petorca's mining properties and assets in accordance with the standards set forth in SFAS 121. Consequently, the Company recorded a write-down in the first quarter of 1998 totaling $54.5 million relating to its investment in the Petorca Mine. The charge included approximately $8.3 million to satisfy the estimated remediation and reclamation liabilities at El Bronce and to provide for estimated termination costs. Subsequent to the write-down, sufficient exploration success was achieved to allow the mine to continue operations. During the third quarter of 1998, the Company commenced an improved mining program focused on an objective of positive cash flow. Petorca achieved this initiative with production during the third quarter totaling 7,060 and 10,087 gold and silver ounces respectively at a cash cost of $267 per gold ounce, and production in the fourth quarter totaling 9,045 and 17,018 gold and silver ounces, respectively, at a cash cost of $226 per gold ounce. The Company expects that 1999 will continue to achieve similar operating improvements. Based on proven and probable reserves, the Company estimates that operations should continue for twelve more months. 17 18 Based on an ore reserve report, dated February 1999, prepared by CDE Petorca, proven and probable ore reserves as of January 1, 1999 at the Petorca Mine totaled 424,000 tons averaging 0.22 ounces of gold per ton. The reserve estimate is based on a gold price of $300.00 per ounce. An additional 858,000 tons of mineralized material, averaging 0.33 ounces of gold per ton, has been identified. The reserve is based on an internal cutoff of 0.18 ounces of gold per ton. The Company estimates, based on past experience and metallurgical testing, mill recovery rates are 93% for gold and 84% for silver. Certain mineralized veins remain geologically open both vertically and horizontally. The following table sets forth Petorca Mine production data subsequent to its acquisition by Coeur on October 3, 1994. As stated above, prior to September 4, 1996, the Company had a 51% interest in any operating profits from the mine. The Company's 5l% interest in the mine's operating profits from October 3, 1994 through December 31, 1994 amounted to $1,023,537 and for the year ended December 31, 1995 amounted to $763,166. Subsequent to September 4, 1996, the Company has had a 100% interest in any operating profits or losses from the mine. Giving effect to the Company's 51% interest through September 4, 1996 and its 100% interest thereafter, the Company received operating profits from the mine of $522,151 in 1996 and recorded an operating loss of $5.6 million in 1997 and $58.1 million in 1998. The following data sets forth 100% of the mine's production during the periods indicated.
Three Months Ended December 31, Year Ended December 31, ------------------------------------------ 1994 1995 1996 1997 1998 ------------------------------- ------------------------------------------ Ore milled (tons). 56,761 286,512 339,509 343,296 236,016 Gold (ounces). . . 9,712 43,204 52,917 48,181 37,746 Silver (ounces). . 39,605 142,229 112,633 100,626 70,755
The following table sets forth the costs of production per ounce of gold during the periods set forth below at the Petorca Mine. Cash costs include mining, processing and direct administration costs, royalties, and smelting and refining.
Three Months Ended December 31, Year Ended December 31, ----------------------- 1994 1995 1996 1997 1998 ------------------- ---- ---- ---- ---- Cash costs per ounce.............. $205.65 $330.37 $296.05 $348.24 $336.26 Depreciation, depletion and amortization per ounce........... 20.40 20.51 41.01 53.69 43.99 ------- ------- ------- ------- ------- Total costs per ounce............... $226.05 $350.88 $337.06 $401.93 $380.25 ======= ======= ======= ======= =======
18 19 During the last five months of 1998, substantial operating improvements were achieved resulting in reduced cash costs. The cash costs for this period were $231 per gold equivalent ounce. These improvements are expected to continue in 1999. During the third quarter of 1998, the Company commenced a revised mining program and Petorca achieved positive cash flow with production during the third and fourth quarters totaling 16,105 ounces of gold and 27,105 ounces of silver at a cash cost of $245 per equivalent ounce of gold. The Company expects that the first quarter of 1999 will continue to achieve similar operating improvements. Based on proven and probable reserves, the Company estimates that operations should continue for an estimated twelve months with similar production and operating costs. Ongoing exploration efforts are being conducted to identify, and, if successful, develop wider veins in order to increase reserves as well as to lower costs of production. The Company expended approximately $.9 million for exploration and developmental activities in 1998 and plans to expend approximately $.5 million for explorations and developmental activities in 1999. KENSINGTON PROPERTY On July 7, 1995, Coeur, through its wholly-owned subsidiary, Coeur Alaska, Inc. ("Coeur Alaska"), acquired the 50% ownership interest of Echo Bay Exploration Inc. ("Echo Bay") in the Kensington property from Echo Bay and Echo Bay Alaska, Inc. (collectively the "Sellers"), giving Coeur 100% ownership of the Kensington property. The property is located on the east bank of Lynn Canal between Juneau and Haines, Alaska. As a result of that transaction, Coeur assumed full ownership and operating control of the project. Pursuant to the Venture Termination and Asset Purchase Agreement among Coeur Alaska and the Sellers, dated as of June 30, 1995, Coeur Alaska paid to the Sellers a total of $32.5 million and, pursuant to the Royalty Deed set forth as an exhibit to the Venture Termination and Asset Purchase Agreement, Coeur Alaska agreed to pay Echo Bay a scaled net smelter return royalty on 1 million ounces of future gold production after Coeur Alaska recoups the $32.5 million purchase price and its construction expenditures incurred after July 7, 1995 in connection with placing the property into commercial production. The royalty ranges from 1% at $400 gold prices to a maximum of 2 1/2% at gold prices above $475, with the royalty to be capped at 1 million ounces of production. The Kensington ore deposit consists of multiple, precious metals bearing, mesothermal, quartz, carbonate, pyrite vein swarms and discrete quartz-pyrite veins hosted in the Cretaceous Jualin diorite. The gold-telluride-mineral calaverite is associated with the pyrite mineralization. Based on an ore reserve endorsement dated February 1997 by Steffen, Robertson & Kirsten, independent mining consultants, Kensington's proven and probable ore reserves are estimated at 13.893 million tons at a grade of 0.136 ounces of gold per ton, containing 1.896 million ounces of gold. This reserve estimate was based on an average life-of-mine price of $410 per ounce of gold (see updated optimization study below). 19 20 The reserve estimate incorporates the effects of extractive dilution during the mining process. During 1998, six in-mine exploration targets were drill tested by 76 core holes totaling 57,033 feet. Company geologic evaluations of the drill results added a new estimated mineralized material inventory of 1.644 million tons with a gold grade of 0.143 ounce per ton. The tons and grades were estimated using a cut-off grade of 0.07 ounce of gold per ton. An additional 10.51 million tons of mineralized material averaging 0.130 ounces of gold per ton has been identified, including results from 1998 exploration. Not all Kensington ore zones have been fully delineated at depth and several peripheral zones and veins remain to be explored. The Company possesses the right to develop the Jualin property, an exploratory property located adjacent to the Kensington Property. The Jualin property consists of approximately 9,400 acres, of which approximately 345 acres are patented claims. Based upon metallurgical testing, gold recovery associated with producing a flotation concentrate is 97%, with 2.3% additional losses incurred during final treatment off-site. The Company intends during the second quarter of 1999 to complete an updated audit of its ore reserves and mineralized material that reflects a mine plan based on the recently completed optimization study and the Company's long-term view of the gold price. During 1998, the Company's efforts at Kensington continued to be directed toward the permitting process and project optimization study. The Company announced in April 1998 that it had obtained all significant permits required to proceed with development of the mine. However, in view of continuing low gold prices, the Company initiated an optimization study, utilizing independent third party consultants, which was intended to improve the economic viability of the project. In December 1998, the Company announced the completion of the independent optimization study which contains a new mine plan that requires extensive permit modifications. Based on the results of the optimization study, which utilizes a cutoff grade of $340 per ounce, the Company estimates that the project's cash operating costs should be reduced to approximately $190 per ounce and total capital costs to develop the mine should be reduced to approximately $192 million. The new plan calls for changes relating to the tailings management system, on-site gold recovery, facility relocation and increased mill throughput. The new tailings management system involves placing most of the Kensington tailings on the floor of the Lynn Canal via an engineered system called Underwater Tailings Placement ("UTP"). In the UTP process, only inert (non-reactive) tailings will be piped directly to the sea floor at a depth of approximately 750 feet. The new mine plan also calls for recovering gold on-site with sodium cyanide gold processing in a separate, fully contained system. The system will recycle and reuse process waters with no marine discharge and all the tailings produced will be treated, mixed with cement and placed underground in areas previously mined. Other changes in the new mine plan involve relocating surface facilities such as the ore grinding facilities to an underground location and increasing the mine production rate to an estimated 4,600 tons per day. 20 21 The proposed use of UTP will require the Company to obtain from the EPA a site specific exemption from its rules regulating gold mining. In addition, modification to the Environmental Protection Agency ("EPA") National Pollution Discharge Elimination System ("NPDES") permit will be required, which in turn will most likely require the EPA to prepare a Supplemental Environmental Impact Statement. Modifications also will be required to the US Forest Service approval of the Plan of Operations, the Army Corps of Engineers Section 404 permit for tailings facility construction, and the City and Borough of Juneau Large Mine Permit. Additional required authorizations of federal, state and local jurisdictions will be required to reflect the new mine plan changes, particularly the changes associated with UTP and on-site gold recovery. The Company hopes to secure the required rulemaking, permit modifications and other necessary regulatory approvals in the first quarter of 2000 so that a construction decision can then be made. The Company's capital expenditures at the Kensington Property totaled approximately $11.4 million (excluding capitalized interest) in 1998. Such expenditures were used to continue the permitting and optimization activities. The Company plans approximately $7.2 million (excluding capitalized interest) in project expenditures during 1999, which are planned for technical support and engineering studies required to complete the modified permitting activities. As of December 31, 1998, due to the continuing low gold price environment, pursuant to SFAS 121, the Company reviewed the carrying value of the Kensington property using a $350 per ounce gold price assumption. Based on discounted estimated future cash flows from Kensington, a non-cash impairment write-down of $121.5 million was recorded at December 31, 1998, thereby reducing the carrying value to $20.4 million. This write-down does not jeopardize Kensington's future operating plans. Coeur remains committed to completing the permitting process in order to prepare the property for a production decision should the gold price return to historical levels. However, no assurance can be given as to whether or when the required regulatory approvals will be obtained or as to whether the Company will place the Kensington project into commercial production. INTEREST IN GASGOYNE GOLD MINES NL In May 1996, Coeur acquired approximately 35% of the outstanding shares of capital stock of Gasgoyne, an Australian gold mining company, in exchange for a total of 1,419,832 shares of Coeur common stock and cash totaling approximately $15.4 million. Sons of Gwalia Limited, an Australian gold mining company, ("Sons of Gwalia") conducted a competing offer for outstanding Gasgoyne shares in connection with which it acquired approximately 61% of Gasgoyne's outstanding shares. As a result of a selective reduction of capital effected by Gasgoyne in February 1997 by purchasing its publicly held shares from the shareholders other than Coeur and Sons of Gwalia, Coeur's ownership interest increased to 36% of Gasgoyne's outstanding shares. In May 1997, Coeur acquired an additional 7,820,907 shares of Gasgoyne, constituting approximately 14% of the outstanding 21 22 shares of Gasgoyne, from Sons of Gwalia for US$14.9 million, as a result of which Coeur's ownership interest in Gasgoyne was increased to 50% of the outstanding shares. Coeur's interest in Gasgoyne is being accounted for under the equity method. Gasgoyne is principally engaged in the exploration, development and ownership of gold properties located in Western Australia. Headquartered in Perth, Australia, Gasgoyne's principal asset is its 50% interest in the Yilgarn Star Gold Mine in Marvel Loch, located approximately 220 miles east of Perth, which started production in 1991. Gasgoyne also had a 45% interest in the Awak Mas Gold Project ("Awak Mas") in Indonesia. Gasgoyne sold its interest in Awak Mas in January 1998 for consideration of US$14.9 million cash, 10 million shares of Lone Star Exploration NL and a royalty of $2 per ounce of gold after 2 million ounces have been produced. The following table sets forth information relating to total Yilgarn Star Gold Mine production during the period from May 1, 1996 to December 31, 1996, and during the years ended December 31, 1997 and 1998. Coeur had a 17.5% interest in such production (i.e., 35% of one-half) for the approximately seven months subsequent to the acquisition of its interest in Gasgoyne in May 1996, and a 25% interest (i.e., 50% of one-half) after May 1997:
Year Ended December 31, Eight Months Ended ----------------------- December 31, 1996 1997 1998 ------------------ ---- ---- Ore milled (tons).... 587,582 1,502,111 1,345,841 Gold (ounces)........ 85,591 174,848 157,526
The following table sets forth the costs of production per ounce of gold during the years ended December 31, 1996, 1997 and 1998. Cash costs include mining, processing and direct administration costs, and smelting and refining costs.
Year Ended December 31, ---------------------------------------------- 1996 1997 1998 ---- ---- ---- Cash costs per ounce....... $ 217.91 $ 255.11 $ 215.24 Depreciation, depletion and amortization per ounce.... 99.39 161.35 201.07 -------- -------- -------- Total costs per ounce...... $ 317.30 $ 416.46 $ 416.31 ======== ======== ========
The Yilgarn Star Gold Mine operated as an open pit surface mine from 1991 through September 1995 and an underground mine commenced operations there on a limited basis in October 1995. The increase in per ounce costs in 1997 compared to 1996 relate to the planned transition of mining at the Yilgarn Star Mine from an open-pit operation to an underground operation and mining of the uppermost portion of the underground mine which temporarily resulted in a lower grade of ore being delivered to the mill. The increase in depreciation, depletion and amortization per ounce in 1998 over 1997 is primarily due the fact that in May 1997, the Company increased its ownership of Gasgoyne to 50%. 22 23 Yilgarn Star proven and probable reserves as of December 27, 1998 estimated by Gasgoyne Gold Mines totaled 4.074 million tons averaging 0.17 ounces of gold per ton, or a total of 684,000 ounces of gold. The reserve estimate is based on a gold price of $300.00 per ounce. An additional 6.155 million tons of mineralized material has been identified at a grade of 0.14 ounces of gold per ton. The Nevoria Mill, which processed ore from the Yilgarn Star Mine's open pit, ceased operations in July 1998 and was placed on a care and maintenance basis following the depletion of reserves at the open pit. The Joint Venture is presently carrying out planned localized and regional exploration programs designed to increase reserves at the Yilgarn Star Mine. GOLDEN CROSS MINE Effective April 30, 1993, a wholly-owned subsidiary of the Company acquired from a wholly-owned subsidiary of Cyprus Minerals Company all of the outstanding capital stock of Cyprus Gold New Zealand Limited ("Cyprus NZ"), the name of which was changed by the Company to Coeur Gold New Zealand Limited ("Coeur NZ"). The principal asset of Coeur NZ is its undivided 80% participating joint venture interest in the Golden Cross Mine located near Waihi on the North Island of New Zealand, approximately 100 miles southeast of Auckland, and certain other exploration properties in New Zealand. The remaining undivided 20% joint venture interest is owned by a subsidiary of The Todd Company Limited, a New Zealand corporation. The Golden Cross Mining License covers an area of approximately 961 acres of which 274 acres are occupied by the current Golden Cross Mine operation. The mine property includes open-pit and underground mine facilities, process plant, tailings pond, water treatment plant and mine offices which are all accessible by road from the town of Waihi. Construction of the Golden Cross Mine began in April 1990, and commercial production commenced in December 1991. Open pit mining operations were discontinued in December 1997 and limited mining of underground ore continued until April 28, 1998, at which time all mining and milling operations were discontinued. Due to ground movement and instability which threatened the integrity of the mine site (see Item 3, Golden Cross Lawsuit), the Company effected a $53 million write-down during the second quarter of 1996 of its interest in the Golden Cross Mine and the nearby Waihi East property, which included accrual of the then estimated future closure and remediation costs and a write-down of the carrying value of the Company's 80% interest in the property. In the last quarter of 1996, it appeared that the interim slide remedial measures were successful in stabilizing the extent of the ground movement and the New Zealand Regulatory Authorities approved the Company's application to permit the raising of the Golden Cross Mine tailings impoundment crest. As a result of the completion of the crest raising in early 1997, the Company was able to implement a previously planned mill optimization and to continue to operate the mine through the end of 1997. Although the deep-seated ground movement below the Golden Cross Mine tailings impoundment that necessitated the Company's 1996 write-down appeared to 23 24 stabilize in late 1996 and during 1997, limited tailings disposal capacity required that open pit mining activities at the mine be discontinued in December 1997. As stated above, limited mining of underground ores continued until April 28, 1998, at which time all mining and milling operations were discontinued. In the second quarter of 1997, the Company received its 80% share of a $10 million insurance recovery relating to business interruption and property damage at the mine. Since the recovery was not assured at the time of the original write-down, it was not accrued as part of that write-down; therefore, the $8 million of insurance proceeds were recorded as other income in 1997. During 1998, the Company expended approximately $1.1 million in connection with remediation activities at the mine and expects that additional remediation costs at the mine during 1999 will approximate $.4 million. In addition, the Company estimates that the costs to be incurred in 1999 in connection with the closure of the mine will approximate $3.1 million. In December, the Company performed an analysis of the closure accrual for the Golden Cross Mine. As a result, the Company determined that there was a shortfall in the closure accrual, and recorded an additional write-down of $4.2 million in the fourth quarter of 1998. The shortfall was due to changes in estimates from the initial write-down related to the fair value of the remaining assets of $9.5 million, offset in part by the $5.3 million reduction in estimated closure and remediation costs. The following table sets forth for the periods indicated Golden Cross Mine production data attributable to Coeur's 80% interest in the mine:
Four Months Ended Year Ended December 31, April 30, ---------------------------------------------- --------- 1994 1995 1996 1997 1998 --------- --------- --------- --------- ----------- Ore milled (tons)......... 727,427 731,453 827,642 833,836 86,663 Gold (ounces)............. 67,400 83,058 64,365 83,110 15,858 Silver (ounces)........... 222,246 286,216 205,070 271,776 49,536
The following table sets forth the costs of production per ounce of gold during the periods indicated at the Golden Cross Mine. Cash costs include mining, processing and direct administration costs, royalties and exploration expenses, but do not include financing costs associated with the term loan owed by Coeur Gold NZ to the Company. The production costs per ounce of gold for any period is computed net of by-product credits. 24 25
Four Months Ended Year Ended December 31, April 30, ---------------------------------------------- --------- 1994 1995 1996 1997 1998 --------- --------- --------- --------- --------- Cash costs per ounce.................... $276.96 $232.74 $369.56 $245.34 $210.51 Depreciation, depletion and amortization per ounce................ 111.53 81.08 38.22 44.13 ------- ------- ------- ------- ------- Total costs per ounce.................... $388.49 $313.82 $407.78 $289.47 $210.51 ======= ======= ======= ======= =======
No depreciation, depletion and amortization costs were recorded in the four months ended April 30, 1998, in view of the cessation of mining activities on April 28, 1998. As discussed below under Item 3 ("Legal Proceedings"), Coeur has asserted legal claims against Cyprus Amax Minerals Company based on alleged misrepresentations by that company as well as its failure to make certain required disclosures relating to ground movement and instability when Coeur purchased the property in 1993. SILVER AND GOLD PRICES The Company's operating results are substantially dependent upon the world market prices of silver and gold. The Company has no control over silver and gold prices, which can fluctuate widely. The volatility of such prices is illustrated by the following table, which sets forth the high and low prices of silver (as reported by Handy and Harman) and gold (London Metal Exchange final quotation) per ounce during the periods indicated:
Year Ended December 31, ----------------------------------------------------------------------------- 1995 1996 1997 1998 ----------------- ------------------ ----------------- ---------------- High Low High Low High Low High Low -------- ------- -------- -------- -------- ------- ------- ------- Silver - $ 6.01 $ 4.36 $ 5.79 $ 4.67 $ 6.21 $ 4.21 $ 7.31 $ 4.72 Gold - $395.55 $372.40 $414.80 $367.40 $366.55 $283.00 $313.15 $273.40
MARKETING Coeur has historically sold the gold and silver from its mines both pursuant to forward contracts and at spot prices prevailing at the time of sale. Entering into forward sale contracts is a strategy which can be used to enhance revenues and/or mitigate some of the risks associated with fluctuating precious metals prices. The Company continually evaluates the potential benefits of engaging in these strategies based on the then current market conditions. At December 31, 1998, the Company had forward commitments of 135,000 ounces of gold at an average 25 26 price of A$606.27 (equivalent to US$371 per ounce). These commitments mature evenly over the next five years. EXPLORATORY AND DEVELOPMENTAL MINING PROPERTIES Coeur, either directly or through its wholly-owned subsidiaries, owns, leases and has interests in certain exploration-stage mining properties located in the United States, Chile, Australia and New Zealand. Exploration expenses of approximately $7.7 million, $8.0 million and $9.4 million were incurred by the Company in connection with exploration activities in 1996, 1997 and 1998, respectively. Coeur is conducting extensive exploration programs for silver and gold at or adjacent to its existing mining properties in the United States and Chile. In particular, the Company significantly expanded its exploration efforts at the Rochester mine and adjacent Nevada Packard property during 1998. Exploration activities also continue at the Fachinal and Petorca (El Bronce) mines and adjacent properties in Chile. An extensive developmental drilling program was completed during 1998 at the Company's Kensington gold project, located north of Juneau, Alaska. Approximately 1.644 million tons averaging 0.14 ounce per ton gold have been added to the mineralized-material inventory as a result of this program. Silver Valley Resources is engaged in continuing exploration projects on its extensive land holdings in the Coeur d'Alene Mining District in northern Idaho, which historically has been one of the largest silver producing regions in the world. On-going exploration for silver is being conducted at the Coeur and Galena mines, Caladay project and adjacent land leased from the Sterling Mining Company, Placer Creek Mining Company, Silver Buckle Mines, Inc. and American Silver Mining Company. Gasgoyne Gold Mines NL (50% owned by Coeur) is conducting exploration programs at the Yilgarn Star Gold Mine and several exploration properties in the Laverton region of Western Australia. Both the KM66 project in Mexico and the Groete Creek project in Guyana were terminated during 1998. Coeur has ceased all exploration activities in Guyana, but will continue to actively seek advanced-staged, precious-metals exploration properties elsewhere in South America and in North America. GOVERNMENT REGULATION General The Company's activities are subject to extensive federal, state and local laws governing the protection of the environment, prospecting, development, production, taxes, labor standards, occupational health, mine safety, toxic substances and other matters. Although such regulations have never required the 26 27 Company to close any mine and the Company is not presently subject to any material regulatory proceedings related to such matters, the costs associated with compliance with such regulatory requirements are substantial and possible future legislation and regulations could cause additional expense, capital expenditures, restrictions and delays in the development of the Company's properties, the extent of which cannot be predicted. In the context of environmental permitting, including the approval of reclamation plans, the Company must comply with known standards and regulations which may entail significant costs and delays. Although Coeur has been recognized for its commitment to environmental responsibility and believes it is in substantial compliance with applicable laws and regulations, amendments to current laws and regulations, the more stringent implementation thereof through judicial review or administrative action or the adoption of new laws, could have a materially adverse effect upon the Company. For the years ended December 31, 1997 and 1998, the Company expended $5.0 million and $8.0 million, respectively, in connection with routine environmental compliance activities at its operating properties and expects to expend approximately $5.3 million for that purpose in 1999. The Company expended approximately $4.5 million and $1.1 million in connection with its ground movement remediation activities at the Golden Cross Mine in 1997 and 1998, respectively. In addition, since the inception of the project through December 31, 1998, the Company expended approximately $16.0 million on environmental and permitting activities at the Kensington Property and expects to spend approximately $3.0 million there for that purpose in 1999. The expenditures at Kensington have been capitalized as part of its development cost. Future environmental expenditures will be determined by governmental regulations and the overall scope of the Company's operating and development activities. Federal Environmental Laws Mining wastes are currently exempt to a limited extent from the extensive set of Environmental Protection Agency ("EPA") regulations governing hazardous waste, although such wastes may be subject to regulation under state law as a solid or hazardous waste. The EPA plans to develop a program to regulate mining waste pursuant to its solid waste management authority under the Resource Conservation and Recovery Act ("RCRA"). Certain processing and other wastes are currently regulated as hazardous wastes by the EPA under RCRA. The EPA is studying how mine wastes from extraction and benefication should be managed and regulated. If the Company's mine wastes were treated as hazardous waste or such wastes resulted in operations being designated as a "Superfund" site under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund") for cleanup, material expenditures would be required for the construction of additional waste disposal facilities or for other remediation expenditures. Under CERCLA, any present owner or operator of a Superfund site or an owner or operator at the time of its contamination generally may be held liable and may be forced to undertake remedial cleanup action or to pay for the government's cleanup efforts. Additional regulations or requirements may also be imposed upon the Company's tailings and waste disposal in Idaho and Alaska under 27 28 the Federal Clean Water Act ("CWA") and state law counterparts, and in Nevada under the Nevada Water Pollution Control Law which implements the CWA. Air emissions are subject to controls under Nevada's, Idaho's and Alaska's air pollution statutes implementing the Clean Air Act. The Company's commitment to environmental responsibility has been recognized in 19 awards received since 1987, which included the Dupont/Conoco Environmental Leadership Award, awarded to the Company on October 1, 1991 by a judging panel that included representatives from environmental organizations and the federal government and the "Star" award granted on June 23, 1993 by the National Environmental Development Association, and the Environmental Waikato Regional Council award for Golden Cross environmental initiative granted on May 15, 1995. In 1994, the Company's Chairman and Chief Executive Officer, and in 1997, the Company's Vice President of Environmental and Governmental Affairs, were awarded the American Institute of Mining, Metallurgical and Petroleum Engineers' Environmental Conservation Distinguished Service Award. The receipt of such awards does not relieve the Company of its obligations to comply with all applicable environmental laws. Natural Resources Laws The Company is subject to federal and state laws designed to protect natural resources. In March 1996, as discussed under Item 3 below, the United States government commenced a lawsuit against various defendants, including the Company, asserting claims under CERCLA and the CWA for alleged damages to federal natural resources in the Coeur d'Alene River Basin of northern Idaho as a result of alleged releases of hazardous substances from mining activities conducted in the area since the late 1800s. Proposed Mining Legislation Legislation is presently being considered in the U.S. Congress to change the Mining Law of 1872 (the "Mining Act") under which the Company holds mining claims on public lands. It is possible that the Mining Act will be amended or be replaced by more onerous legislation in the future. The legislation under consideration, as well as regulations under development by the Bureau of Land Management, contain new environmental standards and conditions, additional reclamation requirements and extensive new procedural steps which would be likely to result in delays in permitting. During the last several Congressional sessions, bills have been introduced which would supplant or materially alter the Mining Act. If enacted, such legislation may materially impair the ability of the Company to develop or continue operations which derive ore from federal lands. No such bills have been passed and the extent of the changes, if any, which may be enacted by Congress is not presently known. A significant portion of Coeur's U.S. mining properties are on public lands. Any reform of the Mining Act or regulations thereunder based on these initiatives could increase the costs of mining activities on unpatented mining claims, and as a result could have an adverse effect on the Company and 28 29 its results of operations. Until such time, if any, as new reform legislation or regulations are enacted, the ultimate effects and costs of compliance on the Company cannot be estimated. Foreign Government Regulations The mining properties of the Company that are located in New Zealand and Chile are subject to various government laws and regulations pertaining to the protection of the air, surface water, ground water and the environment in general, as well as the health of the work force, labor standards and the socioeconomic impacts of mining facilities upon the communities. The Company believes it is in substantial compliance with all applicable laws and regulations to which it is subject in both Chile and New Zealand. MAINTENANCE OF CLAIMS At mining properties in the United States, including the Rochester, Kensington, Coeur, Galena and Caladay mines, operations are conducted in part upon unpatented mining claims, as well as patented mining claims. Pursuant to applicable federal law it is necessary, in order to maintain the unpatented claims, to pay to the Secretary of the Interior, on or before August 31 of each year, a claim maintenance fee of $100 per claim. This claim maintenance fee is in lieu of the assessment work requirement contained in the Mining Law of 1872. In addition, in Nevada, holders of unpatented mining claims are required to pay the county recorder of the county in which the claim is situated an annual fee of $3.50 per claim. No maintenance fees are payable for patented claims. Patented claims are similar to land held by an owner who is entitled to the entire interest in the property with unconditional power of disposition. In Chile, operations are conducted upon mineral concessions granted by the national government. For exploitation concessions (somewhat similar to a U.S. patented claim), to maintain the concession, an annual tax is payable to the government before March 31 of each year in the approximate amount of $1.14 per hectare. For exploration concessions, to maintain the right, the annual tax is approximately $.30 per hectare. An exploration concession is valid for a three year period. It may be renewed for new periods unless a third party claims the right to explore upon the property, in which event the exploration concession must be converted to an exploitation concession in order to maintain the rights to the concession. The total tax paid in 1998 in Chile was approximately $329,000. In New Zealand, prospecting licenses and mining licenses are issued by a national government agency. To maintain them the holder must comply with the detailed provisions of the licenses, which include provisions for work programs, health and safety, protection of the environment, reclamation, liability insurance and performance bonds. An annual fee is required to be paid for the prospecting and mining licenses associated with Golden Cross which, for the year 1998, amounted to $26,000. 29 30 EMPLOYEES At March 1, 1999, the Company employed a total of 831 full-time employees, of which 45 are located at the Company's executive offices in Coeur d'Alene, Idaho, 253 are employed at the Rochester Mine, 14 are employed at the Golden Cross Mine in New Zealand, 508 are employed at the Fachinal and Petorca Mines in Chile, and 11 are employed at the Kensington property in Alaska. The Company maintains labor agreements under country statutes in Chile at the Fachinal Mine. The Fachinal Mine labor agreement provides a base wage with bi-annual cost of living adjustments but no annual escalator, and have provisions for terms and conditions of work including vacations, holidays, education, and in the case of the Fachinal Mine, housing. The agreements also provide for health and pension benefits at the minimum country-mandated levels. The Fachinal Mine agreement also provides for hours of work and shifts to accommodate remote living conditions and provides a production bonus equal to 35% of base pay when production exceeds 1,500 tons per day. The agreement at the Fachinal Mine expires in August 1999. In the opinion of the Company, its labor relations have been satisfactory. The employees of Silver Valley Resources and Gasgoyne are employees of those companies. PART II ITEM 6. SELECTED FINANCIAL DATA The following table summarizes certain selected consolidated financial data with respect to the Company and its subsidiaries and should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this report. 30 31
Year Ended December 31, ----------------------------------------------------------------------- 1994 1995(4) 1996 1997(5) 1998 ---------- --------- ---------- ----------- -------- (Thousands Except Per Share Information) INCOME STATEMENT DATA: Income: Sale of concentrates and dore' $ 79,606 $ 89,239 $ 90,724 $131,161 $ 102,505 Less cost of mine operations 67,802 72,210 81,464 134,565 97,878 --------- --------- --------- --------- ---------- Gross profits 11,804 17,029 9,260 (3,404) 4,627 Other income 12,587 9,504 13,347 20,739 9,156 --------- --------- --------- --------- ---------- Total income 24,391 26,533 22,607 17,335 13,783 Other expenses 29,392 27,591 23,946 31,660 36,104 Write-down of mining properties 54,415(3) 223,172(6) --------- --------- --------- --------- ---------- Total expenses 29,392 27,591 78,361 31,660 259,276 --------- --------- --------- --------- ---------- Net loss from continuing operations before income taxes (5,001) (1,058) (55,754) (14,325) (245,493) Provision (benefit) for income taxes (265) 200 (1,184) (242) 919 --------- --------- --------- --------- ---------- Net loss from continuing operations (4,736) (1,258) (54,570) (14,083) (246,412) Income from discontinued operations(net of taxes)(1) 793 2,412 --------- --------- --------- --------- ---------- Income(loss) before extraordinary item - early retirement of debt (net of tax) (3,943) 1,154 (54,570) (14,083) (246,412) Extraordinary item - early retirement of debt (net of tax) 12,158(7) --------- --------- --------- --------- ---------- Net income (loss) $ (3,943) $ 1,154 $(54,570) $(14,083) $(234,254) ========= ========= ========= ========= ========== Net income(loss) attributable to Common Shareholders $ (3,943) $ 1,154 $(62,967) $(24,614) $(244,786) ========= ========= ========= ========= ========== Basic and diluted earnings per share data(2): Net loss from continuing operations $ (.31) $ (.08) $ (2.93) $ (1.12) $ (11.73) Income from discontinued operations (net of taxes) .05 .15 --------- --------- --------- --------- ---------- Income (loss) before extraordinary item - early retirement of debt (net of tax) (.26) .07 (2.93) (1.12) $ (11.73) Extraordinary item - early retirement of debt ( net of tax) .55 --------- --------- --------- --------- ---------- Net income (loss) attributable to Common Shareholders $ (.26) $ .07 $ (2.93) $ (1.12) $ (11.18) ========= ========= ========= ========= ========== Cash dividends paid per Common Share $ .15 $ .15 $ .15 ========= ========= ======== Weighted average number of shares of Common Stock 15,371 15,879 21,465 21,890 21,899 ========= ========= ========= ========= ========== BALANCE SHEET DATA: Total Assets $412,361 $445,646 $580,330 $658,702 $365,980 Working capital 170,087 105,597 179,626 221,610 153,837 Long-term liabilities 234,009 184,789 202,566 298,152 258,340 Shareholders' equity 160,292 239,832 346,198 322,089 77,067
(1) On May 2, 1995, the Company sold the assets of its flexible hose and tubing division, The Flexaust Company, and shares of a related subsidiary for approximately $10.0 million, of which approximately $4 million was paid at the time of closing and the balance is payable over the next five years. The results of operations and the gain on sale of Flexaust manufacturing segment are presented as "Discontinued Operations." The Company recorded a pre-tax gain on the sale of approximately $3.9 million ($2.2 million net of income taxes) during the second quarter of 1995. 31 32 (2) The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." For further discussion of earnings per share and the impact of Statement No. 128, see Notes to the consolidated financial statements. (3) During the second quarter of 1996, the Company determined that certain adjustments were required to properly reflect the estimated net realizable values of certain mining properties in accordance with FASB statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Golden Cross Mine and the nearby Waihi East property were written down by approximately $53 million due to increased expenditure requirements related to remediation of ground movement which impacts the tailings impoundment area and the ultimate viability of the mine. The write-down includes amounts necessary to increase the Company's recorded remediation and reclamation liabilities at Golden Cross to approximately $7.02 million as of December 31, 1996. In addition, the Faride property in Chile, was written down by $1.2 million due to management's decision not to exercise its final option payment on the project. (4) Included in the results of operations for the year ended December 31, 1995 are (I) a gain of $4.4 million (included in other income) from the sale of gold and silver purchased in the open market which was in turn delivered pursuant to fixed price forward contracts during the year; and (ii) $2.4 million of income from discontinued operations (including the $2.2 million after-tax gain from the related sale of certain non-mining assets in May 1995) during the year. (5) Included in the results of operations for 1997 are (I) the receipt of $8.0 million of insurance proceeds for business interruption and property damage at the Golden Cross Mine and (ii) a gain of $5.3 million arising from the sale of gold purchased in the open market which was delivered pursuant to fixed price forward contracts in the first quarter of 1997. (6) During the first quarter of 1998, the El Bronce mine continued to operate at a loss in spite of on-going efforts to improve ore grades and reduce operating costs. An evaluation of operations was completed and as a result of this evaluation, the Company determined that a write-down was required to properly reflect the estimated realizable value of El Bronce's mining properties and assets in accordance with the standards set forth in SFAS 121. Consequently, the Company recorded a non-cash write-down for impairment in the first quarter of 1998 of $54.5 million relating to its investment in the El Bronce mine. The charge included approximately $8.3 million to satisfy the estimated remediation and reclamation liabilities at El Bronce and to provide for estimated termination costs. Subsequent to the write-down, sufficient exploration success was achieved to allow the mine to continue operations. During the fourth quarter of 1998, due to the continuing low gold price environment, the Company evaluated the recoverability of investments in both the Fachinal Mine and Kensington property. Using a $350 per ounce gold price and based on estimated undiscounted future cash flows, in accordance with the standards set forth in SFAS 121, the Company determined that its investments in property, plant and equipment at the Fachinal Mine in Southern Chile and at the Kensington property in Alaska were impaired. The total amount of the impairment based on discounted cash flows was $42.9 million and $121.5 million for the Fachinal Mine and Kensington property, respectively, at December 31, 1998 and was recorded in the fourth quarter. In addition, in December the Company performed an analysis of the closure accrual for the Golden Cross Mine. As a result, the Company determined that there was a shortfall in the closure accrual, and recorded an additional write-down of $4.3 million in the fourth quarter of 1998. The shortfall was due to changes in estimates from the initial write-down related to the fair value of the remaining assets of $9.5 million, offset in part by a $5.3 million reduction to estimated closure and remediation costs. (7) During July, August and December 1998, the Company repurchased approximately $4.0 million principal amount of its outstanding 6% Convertible Subordinated Debentures due 2002, approximately $36.5 million principal amount of its 7 1/4% Convertible Subordinated Debentures due 2005, and approximately $1.6 million principal amount of its 6.375% Convertible Subordinated Debentures due 2004 for a total purchase price of approximately $28.5 million, excluding purchased interest of approximately $616,000. Associated with this transaction, the Company eliminated $1.4 million of capitalized bond issuance costs. The Company anticipates that as a result of the cancellation of the repurchased debentures, annual interest paid by the Company will be reduced by approximately $3.0 million. As a result of the buyback of these debentures, the Company has recorded an extraordinary gain of approximately $12.2 million, net of taxes, during 1998 on the reduction of its indebtedness. 32 33 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The results of the Company's operations are significantly affected by the market prices of gold and silver which may fluctuate widely and are affected by many factors beyond the Company's control, including interest rates, expectations regarding inflation, currency values, governmental decisions regarding the disposal of precious metals stockpiles, global and regional political and economic conditions, and other factors. Operating Mines The currently operating mines directly owned and operated by the Company are the Rochester Mine in Nevada, which it wholly owns and operates; the "Petorca Mine" (previously called the El Bronce Mine); a Chilean gold mine of which the Company acquired operating control in October 1994 and 100% ownership in September 1996; and the Fachinal Mine, a Chilean gold-silver mine wholly-owned by the Company at which initial production commenced in late October 1995 and which was classified as an operating property for financial reporting purposes on January 1, 1997. On April 28, 1998, the Company substantially discontinued mining operations at the Golden Cross Mine in New Zealand, in which the Company had an 80% operating interest. The Company also has significant interests in other companies that operate gold and silver mines. The Company owns 50% of Silver Valley Resources Corporation ("Silver Valley"), which owns and operates the Coeur Mine (where operations resumed in June 1996 and were terminated, as planned, on July 2, 1998) and the Galena Mine (where operations resumed in May 1997 and are continuing) in the Coeur d'Alene Mining District of Idaho. In May 1997, the Company increased to 50% its ownership of Gasgoyne Gold Mines NL, an Australian gold mining company ("Gasgoyne"), which owns 50% of the Yilgarn Star Gold Mine in Australia. Total Production and Reserves The Company's total production in 1998 was 10.7 million ounces of silver and 210,000 ounces of gold. Coeur estimates that 1999 silver and gold production will approximate 10.7 million ounces and 154,000 ounces, respectively. Total estimated reserves at December 31, 1998 amounted to approximately 79.8 million ounces of silver and 2.8 million ounces of gold, compared to estimated silver and gold reserves at December 31, 1997 of approximately 99.1 million ounces and 3.1 million ounces, respectively. SFAS 121 Impairment Reviews; Write-down of Mining Properties In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Asset and Long-Lived Assets to be 33 34 Disposed Of" ("SFAS 121"), the Company reviews the carrying value of its assets whenever events or changes in circumstances indicate that the carrying amount of its assets may not be fully recoverable. Generally, SFAS 121 provides that an asset impairment exists if the total amount of the estimated future undiscounted cash flows of the asset is less than the carrying value of the asset. If it is determined that impairment exists, the amount of the impairment loss that should be recorded, if any, is the amount by which the carrying value of the asset exceeds its fair value. As of December 31, 1998, due to the continuing low-gold price environment, the Company reviewed the carrying value of the Fachinal Mine in Chile and the Kensington property in Alaska using a $350 per ounce gold price. As a result of this review, which considered the impact of the Kensington optimization study referred to below, the Company determined that the undiscounted estimated future cash flows were insufficient to fully recover the carrying value of Fachinal or Kensington and the assets were impaired. Accordingly, the Company recorded write-downs of $42.9 million and $121.5 million for Fachinal and Kensington, respectively, thereby reducing the carrying values to $24.8 million and $20.4 million. In addition, a similar evaluation was completed for the Petorca Mine in the first quarter of 1998 in view of continued operating loses. As a result, the Company recorded a write-down of $54.5 million relating to its investment in the Petorca Mine as of March 31, 1998, which reduced the carrying value of the mine to zero. If changes in circumstances or events adversely affecting the projected recoverability of the carrying value of the Company's mining properties are identified in the future, the Company may be required under SFAS 121 to effect additional asset write-downs. Kensington Optimization Study In December 1998, the Company announced the completion of an optimization study relating to the Kensington property, a wholly-owned developmental gold property in Alaska, designed to improve the economic viability of the project. A new mine plan was formulated as a result of the optimization study, which will require extensive permit modifications. Based on the results of the study, the Company estimates that the project's cash operating costs per ounce should be reduced to approximately $190 and total capital costs to develop the mine should be reduced to approximately $192 million. The Company is unable to control the timing of the granting of the required permit modifications and regulatory authorizations, which the Company estimates are to be issued by the end of the first quarter of 2000. However, no assurance can be given as to whether or when such permit modifications and regulatory authorizations will be received, or as to whether the Company will decide to place the project into commercial production. 34 35 Acquisitions The Company's business plan is to continue to acquire competitive, low-cost mining properties and/or businesses that are operational or expected to become operational in the near future so that they can reasonably be expected to contribute to the Company's near-term cash flow and expand the Company's gold and/or silver production. RESULTS OF OPERATIONS Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Sales and Gross Profits Sales of concentrates and dore' decreased by $28,656,000, or 22%, for the year ended December 31, 1998 as compared to the same period of 1997 primarily attributable to the closure of the Golden Cross Mine in New Zealand. During 1998, the Company produced a total of 10,703,178 ounces of silver and 209,959 ounces of gold compared to 11,024,225 ounces of silver and 290,962 ounces of gold in 1997. Spot silver and gold prices averaged $5.53 and $294.16 per ounce, respectively, in 1998 compared to $4.89 and $331.10 per ounce, respectively, in 1997. During 1998, the Company realized average silver and gold prices of $5.37 and $312.36, respectively, compared with realized average market prices of $4.89 and $334.99, respectively, in 1997. The cost of mine operations in 1998 decreased by $36,687,000, or 27%, below 1997. The decrease is primarily attributable to the fact that the Company discontinued operations at the Golden Cross Mine in early 1998. In 1997, based upon operating experience and metallurgical testing at the Rochester property, the Company determined that the amount of silver and gold that will ultimately be extracted in the heap leach process was underestimated. Prior to the fourth quarter, the Company estimated it would recover 55% of the silver and 85% of the gold mined. Effective with the fourth quarter of 1997, the Company increased its estimated recovery rates to 59% of the silver and 90% of the gold. The Company has accounted for the effect of the change prospectively as a change in accounting estimate. The cash cost per ounce of silver on a silver equivalent basis at the Rochester Mine decreased to $4.07 in 1998 compared to $4.36 per ounce in 1997. The decrease is due to a lower mine strip ratio in 1997 which resulted in an amortization of deferred stripping costs. Cash costs at Silver Valley amounted to $4.46 per silver ounce in 1998 compared to $3.74 in 1997 and is the result of the shutdown in 1998 of the Coeur Mine. Cash costs at the El Bronce Mine in 1998 averaged $336.26 per ounce of gold produced versus $348.24 in 1997. The decrease was primarily the result of mine efficiencies recognized in the third and fourth quarters of 1998. 35 36 The gross profit from mining operations in 1998 amounted to $4.6 million compared to a gross loss from mining operations of $3.4 million in the same period of 1997. The $8.0 million increase in gross profits is due to the above mentioned decreases in the cost of mine operations coupled with substantially lower silver prices in the year ended December 31, 1997. Other Income Interest and other income decreased by $11.6 million, or 56%, in 1998 compared to 1997. The decrease is primarily the result of (i) the receipt of $8 million of insurance proceeds for business interruption and property damage at the Golden Cross Mine in the second quarter of 1997, and (ii) a gain of $5.3 million arising from the sale of gold purchased on the open market which was delivered pursuant to fixed-price forward contracts in the first quarter of 1997. The decrease is partially offset by a gain of $1.2 million arising from the sale of silver purchased on the open market which was delivered pursuant to fixed-price forward contracts in the second quarter of 1998. Expenses and Write-down of Mining Properties For the year ended December 31, 1998, total expenses increased by $227,616 million. The increase is primarily attributable to the combined $218.9 million write-downs of the Petorca and Fachinal Mines and the Kensington property, and an adjustment of $4.2 million to the closure accrual at Golden Cross in the fourth quarter of 1998. Mining exploration expense for 1998 increased by $1.4 million, or 18%, over 1997. Net Loss As a result of the above, the Company's loss before income taxes and extraordinary items amounted to $245,493,000 in 1998 compared to a loss of $14,325,000 in 1997. The Company reported an income tax provision of $919,000 for 1998, compared to an income tax benefit of $242,000 in 1997. In 1998, the Company recorded an extraordinary gain on early retirement of debt (net of taxes) of $12,158,000. As a result, the Company reported a net loss of $234,254,000 compared to a net loss of 14,083,000 in 1997. The net loss attributable to common shareholders of $244,786,000, or $11.18 per share, in 1998, compared to $24,615,000, or $1.12 per share, in 1997. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Sales and Gross Profits Sales of concentrates and dore' increased by $40,437,000, or 45%, for the year ended December 31, 1997 over the same period of 1996 and is primarily attributable to increased sales of metals produced at the Fachinal and El Bronce Mines. Those increases are primarily due to (i) the classification of the Fachinal Mine as an operating property for accounting purposes as of January 1, 1997, and (ii) the Company's increased ownership of the El Bronce Mine from 50% 36 37 to 100% commencing in the third quarter of 1996. During 1997, the Company produced a total of 11,024,225 ounces of silver and 290,962 ounces of gold compared to 9,520,009 ounces of silver and 214,130 ounces of gold in 1996. Silver and gold prices averaged $4.89 and $331.10 per ounce, respectively, in 1997 compared to $5.18 and $387.70 per ounce, respectively, in 1996. During 1997, the Company realized average silver and gold prices of $4.89 and $334.99, respectively, compared with realized average market prices of $5.18 and $397.80, respectively, in 1996. The cost of mine operations in 1997 increased by $53,101,000, or 65%, over 1996. The increase is primarily attributable to the fact that i) the Company increased its ownership in the El Bronce Mine from 50% to 100% commencing late in the third quarter of 1996, which resulted in a proportionate increase in the cost of mine operations during the year ended December 31, 1997; and ii) the Company classified the Fachinal Mine as an operating property for accounting purposes as of January 1, 1997, and began recording cost of mine operations at the Fachinal Mine on that date. Of the approximately $53.1 million increase in the cost of mine operations, $19.6 million were noncash expenses attributable to the increase in depreciation, depletion and amortization expense recorded in the year ended December 31, 1997 over the prior year. The increase in these noncash expenses primarily resulted from the Company's increased El Bronce ownership interest and the fact that no such expenses were being recorded by Fachinal during 1996. In 1997, based upon operating experience and metallurgical testing at the Rochester property, the Company determined that the amount of silver and gold that will ultimately be extracted in the heap leach process was underestimated. Prior to the fourth quarter, the Company estimated it would recover 55% of the silver and 85% of the gold mined. Effective with the fourth quarter of 1997, the Company revised its estimated recovery rates to 59% of the silver and 90% of the gold. The Company has accounted for the effect of the change prospectively as a change in accounting estimate. The impact of the estimate change resulted in a reduction of cost of goods sold in 1997 of $7.0 million. The cash cost per ounce of silver on a silver equivalent basis at the Rochester Mine amounted to $4.36 compared to $3.71 per ounce in 1996. The increase is due to a lower mine strip ratio in 1997 which resulted in an amortization of deferred stripping costs. Cash costs at Silver Valley amounted to $3.74 per silver ounce in 1997 compared to $3.18 in 1996 and is the result of the startup in 1997 of the Galena Mine. Cash costs at the Golden Cross Mine in 1997 averaged $245.34 per ounce of gold produced versus $369.56 in 1996. The higher cost in 1996 was primarily attributable to the land slide issue which delayed a planned expansion of the existing facilities. Cash costs at the El Bronce Mine averaged $348.24 per ounce of gold produced versus $296.05 in 1996. The increase was primarily caused by near drought conditions occurring in the first quarter of 1997, heavy rainfall occurring in the second quarter of 1997 and a two-week closure of the mine in August 1997 resulting from heavy rain and flooding. 37 38 The gross loss from mining operations in 1997 amounted to $3.4 million compared to a gross profit from mining operations of $9.3 million in the same period of 1996. The $12.7 million decrease in gross profits is due to the above mentioned increase in the cost of mine operations coupled with substantially lower gold and silver prices realized in the year ended December 31, 1997. Other Income Interest and other income increased by $7.4 million, or 55%, in 1997 compared to 1996. The increase is primarily the result of (i) the receipt of $8 million of insurance proceeds for business interruption and property damage at the Golden Cross Mine in the second quarter of 1997, and (ii) a gain of $5.3 million arising from the sale of gold purchased on the open market which was delivered pursuant to fixed-price forward contracts in the first quarter of 1997. The increase is partially offset by a loss of $1.5 million related to the sale of the common shares of an Australian mining company in the fourth quarter of 1997 and lower interest income related to lower average cash and short-term investment balances in 1997 compared to 1996. Expenses For the year ended December 31, 1997, total expenses decreased by $46.7 million. The decrease is primarily attributable to the $54.4 million write-down of mining properties recorded in the second quarter of 1996. In 1997, interest expense increased by $6.7 million, primarily as a result of the reclassification of the Fachinal Mine from a development-stage property to an operating property and the issuance of $143.7 million principal amount of 7 1/4% Convertible Subordinated Debentures due 2005 in the fourth quarter of 1997. Effective January 1, 1997, interest expense on the Fachinal construction loan, which was previously capitalized during the pre-production stage, was charged to operating expense. Mining exploration expense for 1997 increased by $1,027,000, or 13%, over 1996. Net Loss As a result of the above, the Company's loss before income taxes amounted to $14,325,000 in 1997 compared to a loss of $55,754,000 in 1996. The Company reported an income tax benefit of $242,000 for 1997, compared to an income tax benefit of $1,184,000 in 1996. As a result, the Company reported a net loss of $14,083,000, and a net loss attributable to common shareholders of $24,615,000, or $1.12 per share, in 1997, compared to a net loss of $54,570,000, and a net loss attributable to common shareholders of $62,967,000, or $2.93 per share, in 1996. 38 39 LIQUIDITY AND CAPITAL RESOURCES Working Capital; Cash and Cash Equivalents The Company's working capital at December 31, 1998 was approximately $153.1 million compared to $220.4 million at December 31, 1997. The ratio of current assets to current liabilities was 5.9 to one at December 31, 1998 compared to 6.8 to one at December 31, 1997. Net cash used in operating activities in 1998 was $13,693,000 compared with $15,370,000 provided by operating activities in 1997. The most important non-cash items offsetting the net loss from continuing operations in 1998 was $31,011,000 of depreciation, depletion and amortization of accrued reclamation expense. A total of $ 70,300,000 of cash was provided by investing activities in 1998 compared to $21,939,000 used in 1997. The most significant factors accounting for the cash provided by investing activities in 1998 were (i) $114,276,000 proceeds from short-term investments, offset by $17,886,000 used to purchase short-term investments, (ii) $17,558,000 of expenditures on developmental properties, and (iii) $9,619,000 of expenditures on operational mining properties. The Company's financing activities used $43,476,000 of cash during 1998 compared to $77,318,000 provided in 1997. The most significant factor accounting for the net cash used in financing activities in 1998 was the payment of $28,477,000 used to retire long-term debt. As a result of the above, the Company's net cash increase in 1998 was $13,131,000 compared with a net cash increase of $70,749,000 in 1997. For the years ended December 31, 1998 and 1997, the Company expended $8.0 million and $5.0 million, respectively, in connection with environmental compliance activities at its operating properties. In addition, since the inception of the Kensington project through December 31, 1998, the Company had expended a total of $16.0 million on environmental and permitting activities at that property. Federal Natural Resources Action On March 22, 1996, an action was filed in the United States District Court for the District of Idaho (Civ. No. 96-0122-N-EJL) by the United States against various defendants, including the Company, asserting claims under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 and the Clean Water Act for alleged damages to Federal natural resources in the Coeur d'Alene River Basin of northern Idaho as a result of releases of hazardous substances from mining activities conducted in the area since the late 1800s. No specific monetary damages are identified in the complaint. However, in July 1996, the government indicated damages may approximate $982 million. The United States asserts that the defendants are jointly and severally liable for costs and expenses incurred by the United States in investigation, removal and remedial action and the restoration or replacement of affected natural resources. In 1986 and 1992 the Company had settled similar issues with the State of Idaho and the Coeur d'Alene Indian Tribe, respectively, and believes 39 40 that those prior settlements exonerate it of further involvement with alleged natural resource damage in the Coeur d'Alene River Basin. Accordingly, the Company intends to vigorously defend this matter. In March 1997, the Company filed a motion for partial summary judgement relating to the issue of trusteeship, essentially arguing that the United States does not have authority to sue for damages to state natural resources and that the 1986 settlement with the state bars the federal claims. That motion remains pending. In September 1997, the Company filed an additional motion for partial summary judgement raising the statute of limitations as to natural resource damages. That motion was granted by the Court on September 30, 1998. The Court's granting of that motion limits the United States' natural resource damage claims to the 21 square mile Bunker Hill Superfund site area rather than the entire Coeur d'Alene Basin. Although that ruling limits the geographic coverage of the United States' action, the ruling does not prohibit the Environmental Protection Agency from attempting to utilize its hazard ranking system which could potentially broaden the scope of the United States' allegations. On March 31, 1998, the Court entered an order denying the plaintiffs' motion to allow the United States to prove a portion of its case pursuant to an administrative record, requiring the parties to submit further facts as to the issue of trusteeship. Furthermore, in March 1998, the Environmental Protection Agency announced its intent to perform a remedial investigation/feasibility study upon all or parts of the Coeur d'Alene Basin and, thereby, to apparently focus upon response costs rather than natural resource damages. In September 1998, the Company filed an additional motion for partial summary judgment asserting that CERCLA as applied to the Company in the action is not constitutional under the takings and due process provisions of the United States Constitution. At this stage of the proceeding, it is not possible to predict its ultimate outcome. Golden Cross Lawsuit On July 15, 1996, the Company filed a complaint against Cyprus Amax Minerals Company ("Cyprus") in the District Court of the State of Idaho, Kootenai County, alleging violations by Cyprus of the anti-fraud provisions of the Idaho and Colorado Securities Acts as well as common law fraud in connection with Cyprus' sale in April 1993 to the Company of Cyprus Exploration and Development Corporation, which owned all the shares of Cyprus Gold New Zealand Limited, which, in turn, owned an 80 percent interest in the Golden Cross Mine in New Zealand. The Company's lawsuit seeks recession and an unspecified amount of damages arising from alleged misrepresentations and failure to disclose material facts alleged to have been known by Cyprus officials regarding ground movement and instability, threatening the integrity of the mine site at the time of the Company's purchase of the property. In October 1997, Cyprus filed a counterclaim alleging libel by the Company in its press release announcing the write-off of the Golden Cross Mine and seeking an unspecified amount of damages. Trial has been scheduled for October 18, 1999 in Coeur d'Alene, Idaho. On February 3, 1999, the Company files a second amended complaint which specifies damages in the amount of approximately $54 million together with pre-judgement and post-judgement interest as well as the unspecified costs incurred resulting from the 40 41 violations of law alleged. Cyprus filed, on February 17, 1999, a motion to vacate the trial date and a motion to dismiss the second amended complaint. No assurances can be given at this stage of the action as to its ultimate outcome. Class Action Securities Lawsuit On July 2, 1997 a suit was filed by purchasers of the Company's common stock in Federal District Court for the District of Colorado naming the Company and certain of its officers and its independent auditors as defendants. Plaintiffs allege the Company violated the Securities Exchange Act of 1934 during the period January 1, 1995 to July 11, 1996, and seek certification of the lawsuit as a class action. The class members are alleged to be those persons who purchased publicly traded debt and equity securities of the Company during the time period stated. On September 22, 1997 an amended complaint was filed in the proceeding adding other purchasers as additional plaintiffs. The action seeks unspecified compensatory damages, pre-judgment and post-judgment interest, attorney's fees and costs of litigation. The complaint asserts that the defendants knew material adverse non-public information about the Company's financial results which was not disclosed, and which related to the Golden Cross and Fachinal Mines; and the defendants intentionally and fraudulently disseminated statements which were false and misleading and failed to disclose material facts. On April 16, 1998, the Court entered an order dismissing the auditors from the suit and denying the Company's and the individual defendants' motions to dismiss. On October 9, 1998, the Court heard arguments on the question on whether a class should be certified and on December 14, 1998, the Court entered an order certifying a class. In December 1998, the parties to the suit determined that the further conduct of the case would be protracted and expensive and commenced discussions with a view toward settlement of the action. Although the Company continued to deny each of the plaintiffs' claims and allegations, the Company determined it would be in the best interests of the Company to settle the suit and agreed to enter into a Stipulation of Settlement which was filed by the parties with the Court on March 1, 1999. The terms of the proposed settlement provide that (i) the Company's directors and officers liability insurance carrier will pay $7 million to a settlement fund for the benefit of the plaintiffs; and (ii) the plaintiffs will be entitled to 50% of the net proceeds, up to a maximum of $6 million, (after the Company has first recouped its costs and expenses incurred in litigating its above-described lawsuit against Cyprus relating to Golden Cross and after deducting an $8 million reserve against the asserted subrogation claim of the Company's flood insurance carrier) actually received by the Company from its Golden Cross lawsuit against Cyprus. The Stipulation of Settlement contains strong denials of liability by the defendants as well as acknowledgments by the plaintiffs that they were unable to identify significant evidence to support a large portion of their claims. Final consummation of the settlement is subject to Court approval and to dismissal with prejudice of the derivative action described below. 41 42 Derivative Action On or about August 17, 1998, a purported derivative action was filed on behalf of the Company against Dennis E. Wheeler, James A. Sabala, James J. Curran, Joseph C. Bennett, James A. McClure, Cecil D. Andrus and Duane B. Hagadone in Federal District Court for the District of Idaho. The complaint alleged that the defendant officers and directors breached their fiduciary duties by authorizing the Company to purchase the Golden Cross Mine in New Zealand in 1993 and by allegedly causing or permitting the Company to make statements that the plaintiffs in the class action securities lawsuit described above claim were false or misleading during the period from January 1, 1995 through July 11, 1996. The plaintiff sought unspecified damages on behalf of the Company. On September 9, 1998, the plaintiff voluntarily dismissed the lawsuit without prejudice in light of Idaho Code Sec. 30-1-742, which requires a demand to be served on a company at least 90 days prior to the filing of a derivative action. On September 25, 1998, the plaintiff sent a letter to the Company's Board of Directors demanding that the Company, among other things, commence all reasonable steps to settle the class action securities lawsuit described above, and pursue claims against any officers, directors or third-party professionals who may have known about the potential problems with the Golden Cross Mine before the Company purchased an interest in it. The Board appointed a Special Committee of directors to respond to that demand. On March 9, 1999, the Special Committee recommended that the demand be rejected. The Company anticipates, based on communication with counsel for the derivative plaintiff, that the action previously dismissed without prejudice will be dismissed with prejudice. Proposed Legislation Recent legislative developments may affect the cost of and ability of mining claimants to use the Mining Law of 1872, as amended, (the "General Mining Law") to acquire or use federal lands for mining operations. Since October 1994, a moratorium has been imposed on processing new patent applications for mining claims. Management believes that this moratorium will not affect the status of patent applications outstanding prior to the moratorium. During the last several Congressional sessions, bills have been introduced which would supplant or materially alter the General Mining Law. If enacted, such legislation may materially impair the ability of the Company to develop or continue operations which derive ore from federal lands. No such bills have been passed and the extent of the changes, if any, which may be enacted by Congress is not presently known. Euro Conversion Effective January 1, 1999, eleven of the 15 member countries of the European Union converted to common currency, the "Euro". The Company has considered the long-term implications of the conversion including potential modifications to computer systems, potentially increased exchange rate risk, heightened derivative risk and impact on enforceability of contracts and accounting practices and 42 43 procedures. The Company's operations have minimal exposure to the European economy and the Company expects that the conversion will not be material to the operations or financial condition of the Company. Year 2000 Compliance Management of the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. Actual costs associated with implementation of the Company's Year 2000 program are expected to be insignificant to the Company's operations and financial condition. As of December 31, 1998, the Company has incurred approximately $144,000 of costs related to the Y2K issue. The Company presently estimates that the remaining projected costs, primarily for professional consulting services, will be less than $150,000. The Company currently has a program underway to ensure that all significant computer systems are substantially Year 2000 compliant by the year ended December 31, 1999. The program is divided into three major components: (1) identification of all information technology systems ("IT Systems") and non-information technology systems ("Non-IT Systems") that are not Year 2000 compliant; (2) repair or replacement of the identified non-compliant systems; and (3) testing of the repaired or replaced systems. The Company has no "in house" developed or proprietary IT Systems. The Company uses commercially-developed software, the majority of which is regularly upgraded through existing maintenance contracts. Parts (1), (2) and (3) of the Year 2000 program are currently underway. Part (1), identification and review of non-compliant accounting and financial reporting systems is finished and the Company is continuing to review Non-IT Systems that have embedded microprocessors in various types of equipment. Part (2), repairing and replacing, currently continues. Software vendors have made Year 2000 compliant software revisions available, which the Company is installing under maintenance agreements. The Company estimates that approximately 65% of its IT systems and approximately 3% of its non-IT systems have completed Part (2). Parts (1) and (2) of the process are scheduled to be completed in the Company's third quarter ended September 31, 1999. Part (3), testing currently continues and is scheduled to finish in October 1999. The Company began contacting key suppliers and business partners about the Year 2000 issue during the third quarter of 1998 and continues to survey these parties during 1999. While no assurance can be given that key suppliers and business partners will remedy their own Year 2000 issues, the Company, to date, has not identified any material impact on its ability to continue normal business operations with suppliers or other third parties who fail to address the issue. The Company will continue to monitor and evaluate the impact of the Year 2000 issue on its operations. Until the Company is into the final testing stages of its program, the risks from potential Year 2000 failures cannot be fully assessed. Due to this situation, the Company cannot at this stage begin final contingency plans. These plans will be developed as potential Year 2000 failures are identified in the final testing stages. 43 44 As noted above, the Company has not yet completed all necessary phases of the Year 2000 program. In the event that the Company does not complete any additional phases, sales functions and other processes could be impacted. In addition, disruptions in the economy generally resulting from Year 2000 issues could also materially adversely affect the Company. The Company could be subject to litigation for computer systems' failure to properly date business records. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. Environmental Compliance Expenditures For the years ended December 31, 1996, 1997 and 1998, the Company expended $3.1 million, $5.0 million and $8.0 million, respectively, in connection with routine environmental compliance activities at its operating properties. Such activities at the Rochester, Golden Cross, Petorca and Fachinal Mines include monitoring, bonding, earth moving, water treatment and revegetation activities. In addition, since the inception of the project through December 31, 1998, the Company had expended a total of $16.0 million on environmental and permitting activities at the Kensington Property. The Company also expended $4.5 million in 1997 and $1.1 million in 1998 in connection with its ground movement remediation activities at the Golden Cross Mine in New Zealand, where mining activities were discontinued in April 1998. The Company estimates that costs, net of salvage revenues, to be incurred in 1999 in connection with the closure of the mine will approximate $3.1 million. The Company estimates that environmental compliance expenditures at its Kensington developmental property during 1999 will approximate $3.5 million related to activities associated with obtaining permit modifications and other regulatory authorizations. Future environmental expenditures will be determined by governmental regulations and the overall scope of the Company's operating and development activities. The Company places a very high priority on its compliance with environmental regulations. Exploration and Development Expenditures During 1998, the Company expended $10.6 million for engineering, optimization and permitting costs at the Kensington property, $6.3 million at the Rochester Mine, $3.3 million (excluding capitalized interest) for developmental costs at the Fachinal Mine and $.3 million at the Petorca Mine. During 1999, the Company presently plans to expend $7.1 million at the Kensington property, and $3.8 million for developmental and exploration activities at the Rochester Mine. If the Company were to decide to construct a Kensington mining facility, the Company currently estimates that it would be required to expend approximately $192 million over an eighteen-month period in connection with the construction of the Kensington mining facilities. 44 45 Realization of Net Operating Loss Carryforwards The Company has reviewed its net deferred tax asset, together with net operating loss carryforwards, and has not recognized potential tax benefits arising therefrom on the view that it is more likely than not that the deferred deductions and losses will not be realized in future years. In making this determination, the Company has considered the Company's history of tax losses incurred since 1989, the current level of gold and silver prices and the ability of the Company to use accelerated depletion and amortization methods in the determination of taxable income. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements required hereunder and contained herein are listed under Item 14(a) below. 45 46 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following sets forth information regarding the directors of the Company: DIRECTORS
DIRECTOR NOMINEE AGE SINCE ------- --- ----- DENNIS E. WHEELER 56 1978 Chairman of the Board of the Company since May 1992; President since December 1980; Chief Executive Officer since December 1986; Chief Administrative Officer from December 1980 to December 1986; Secretary from January 1980 to December 1980; Senior Vice President and General Counsel from 1978 to 1980. Chairman of the Finance and Planning Committee and a Director of Sierra Pacific Resources (a public utility holding company). JOSEPH C. BENNETT 66 1981 Mining Consultant. Director of Equity Oil Company. JAMES J. CURRAN 59 1989 Former Chairman of the Board and Chief Executive Officer, First Interstate Bank, Northwest Region (Alaska, Idaho, Montana, Oregon and Washington) from October 1991 to April 30, 1996; Chairman of the Board and Chief Executive Officer, First Interstate Bank of Oregon, N.A. from February 1991 to October 1991; Chairman, President and Chief Executive Officer of First Interstate Bank of Denver, N.A., from April 1990 to January 1991; Chairman, President and Chief Executive Officer of First Interstate Bank of Idaho, N.A., from July 1984 to March 1990. Director of Fred Meyer, Inc. (regional general merchandise retailer) JAMES A. MCCLURE 74 1991 Attorney with the Boise, Idaho law firm of Givens, Pursley & Huntley; Consultant to the Washington, D.C. consulting firm of McClure, Gerard & Neuenschwander, Inc.; United States Senator from Idaho from 1972 to 1990; former Chairman of the Senate Energy and Natural Resources Committee. Director of Boise Cascade Corporation (natural resources company) and The Williams Companies (petroleum and telecommunications company).
46 47
DIRECTOR NOMINEE AGE SINCE ------- --- ----- CECIL D. ANDRUS 67 1995 Governor of Idaho (1971-1977); Secretary of the Department of the Interior (1977-1981); Governor of Idaho (1987-1995). Director of Albertson's Inc. (a nation-wide grocery retail chain) and Key Corp. (commercial banking). Chairman of the Andrus Center for Public Policy at Boise State University; "of counsel" member of the Gallatin Group (a policy consulting firm). JOHN H. ROBINSON 48 1998 Vice Chairman of Black & Veatch, an international engineering and construction firm, since January 1999; Chief Development Officer of that company from 1997 - 1998 and Managing Partner from 1996-1998; and Chairman of Black and Veatch U.K., Ltd and President of Black & Veatch International since 1994; employed by Black & Veatch since 1972; director of Commerce Bancshares Inc. (a bank holding company) and Lab Holdings Inc. (insurance and health testing laboratories). ROBERT E. MELLOR 55 1998 Director, President and Chief Executive Officer of Building Materials Holding Corporation (distribution and sales of building materials) 1997 to present; Of Counsel, Gibson, Dunn & Crutcher, LLP, 1991-present; Held the positions of Executive President/Director and Chief Administrative Officer, Senior Vice President, General Counsel and Secretary of DiGiorgio Corporation (food wholesaler and distributor) from 1976 to 1990. TIMOTHY R. WINTERER 62 1998 President and Chief Executive Officer of BHP World Minerals Corporation (international resources company) from 1997 to 1998; Group General Manager and Executive Vice President, BHP World Minerals (1996-1997); Senior Vice President and Group General Manager, BHP World Minerals (1992-1996); Senior Vice President Operations International Minerals, BHP Minerals (1985-1992); Executive Vice President, Utah Development Company (1981-1985)
EXECUTIVE OFFICERS Information regarding the Company's executive officers is set forth under Item 4A of the Form 10-K. 47 48 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 as amended, requires the Company's officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, to file reports of securities ownership and changes in such ownership with the Securities and Exchange Commission. Initial Statements of Beneficial Ownership of Securities on Form 3 are required to be filed within ten days after the date on which the person became a reporting person. Statements of Changes of Beneficial Ownership of Securities are required to be filed by the tenth day of the month following the month during which the change in beneficial ownership of securities occurred. A Form 4 reporting the granting of an option to John H. Robinson on June 11, 1998, which should have been filed with the Commission by July 10, 1998, was actually filed on July 14, 1998. The Company believes that all other reports of securities ownership and changes in such ownership required to be filed during 1998 were timely filed. ITEM 11. EXECUTIVE COMPENSATION The following Summary Compensation Table sets forth the annual salary, annual bonus (including cash and stock) and long-term compensation (including stock awards, options granted and long-term incentive cash payments) earned by the Company's Chief Executive Officer and the other four highest paid executive officers of the Company employed at the end of the year for services rendered during each of the last three years. 48 49 SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS --------------------------------------------------------------------------- ------- COMMON SHARES OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER SALARY BONUS COMPENSATION AWARD(s) OPTIONS PAYOUTS COMPENSATION NAME AND PRINCIPAL YEAR ($) ($)(1)(2) ($) $(3) (#)(4) ($)(5) ($)(6) ------------------ ---- --- --------- --- ---- ------ ------ ------ POSITION -------- Dennis E. Wheeler....... 1998 $ 407,638 204,645 -- -- 42,569 -- 48,004 Chairman, President & 1997 394,417 $330,472 -- 3,852 119,984 $22,952 38,005 Chief Executive Officer 1996 378,710 145,304 -- -- 32,068 64,391 39,739 Robert Martinez(7) 1998 208,243 81,555 -- -- 16,735 -- 19,472 Senior Vice- 1997 155,433 85,913 -- 474 15,485 2,825 14,024 President - Chief Operating Officer 1996 132,823 23,730 -- -- 2,604 9,510 13,955 Robert T. Richins(8) 1998 143,179 40,996 -- -- 3,739 -- 13,123 Vice President - 1997 86,500 68,136 -- -- 1,755 -- 358 Environmental & Governmental 1996 -- -- -- -- -- -- -- Affairs James K. Duff(9) 1998 138,921 32,715 -- -- 3,268 -- 14,337 Vice President - 1997 130,000 53,243 -- -- 7,462 -- 11,893 Business 1996 111,600 19,491 -- -- 1,950 -- 10,674 Development Paul B. Valenti (10) 1998 127,725 44,967 -- -- 5,139 -- 11,446 Vice President - 1997 36,692 17,297 -- -- 2,169 -- -- Operations 1996 -- -- -- -- -- -- --
- -------------------------- (1) Annual incentive payments under the AIP are based upon target award levels established by the Compensation Committee of the Company's Board of Directors (the "Committee") at the beginning of each annual performance period and vary depending upon each participant's responsibilities and base salary. Awards under the AIP are paid after the annual performance period and vary from 0% to 200% of the targets based on actual performance. Commencing in 1996, 75% of the award value is based on overall Company financial performance and 25% is based on the participant's individual performance. Company financial objectives underlying the measurement of Company performance include both total asset growth and cash flow return on total assets. The amounts reported above for 1996, 1997 and 1998 were paid in March 1997, March 1998 and March 1999, respectively. (2) Does not report perquisites amounting to less than the lesser of $50,000 or 10% of total salary and bonus. (3) Shares of Common Stock awarded under the LTPSP are issued upon completion of a four-year performance period after the date of grant. Prior to 1993, the Program provided for annual awards of restricted stock that vested over a four-year period. Commencing in 1993, awards are paid in shares of Common Stock and cash in amounts that are not determinable until completion of a four-year award cycle. The aggregate number and market value (based on the $4.625 per share closing price of the shares on the New York Stock Exchange on December 31, 1998) of the restricted shares of Common Stock granted pursuant to the LTPSP 49 50 prior to 1993 and held by the above executive officers at December 31, 1998 were as follows: Dennis E. Wheeler - 15,445 shares ($71,433) and Robert Martinez - 2,011 shares ($9,301). Dividends on restricted shares are remitted to each executive as paid by the Company. (4) Reports the number of shares underlying nonqualified options and incentive stock options granted under the LTIP with respect to each of the respective years. The options granted with respect to 1998 performance were granted in March 1999. The options granted with respect to 1997 performance include (i) a grant of options in July 1997 in recognition of the fact that historical cash compensation had fallen below industry norms, (ii) the customary grant of options in March 1998 and (iii) a grant of options in September 1998. (5) Reports cash payouts (not awards) under the LTIP. Payments are made under the LTIP after the end of the four-year performance period after award. The above reported payments relate to awards made in 1995 and are based on the performance period ending December 31, 1998. See note 2 to the Long-Term Incentive Plan Awards Table below for additional information regarding the LTIP. (6) Includes the Company's contributions to its Defined Contribution and 401K Retirement Plan (the "Retirement Plan") and amounts credited to the Company's Supplemental Retirement Plan (the "Supplemental Retirement Plan"). All full-time employees participate in the Retirement Plan. The amount of the Company's annual contribution is determined annually by the Board of Directors and may not exceed 15% of the participants' aggregate compensation; however for the years 1996, 1997 and 1998, the contribution was 5%. In addition, the Retirement Plan provides for an Employee Savings Plan which allows each employee to contribute up to 10% of compensation, subject to a maximum contribution of $10,000. The Company contributes an amount equal to 50% of the first 6% of any such contributed amount. Accrued benefits under the Retirement Plan begin vesting after one year of employment and are fully vested after five years of employment. Retirement benefits under the Retirement Plan are based on a participant's investment fund account upon retirement, the participant's age and the form of benefit payment elected by the participant. The Company maintains the Supplemental Retirement Plan for its executive officers. Under the Supplemental Retirement Plan, an amount is accrued that equals the portion of the contribution to the Company's Retirement Plan that is restricted due to restrictions under ERISA. In 1998, Messrs. Wheeler, Martinez, Richins, Duff and Valenti were credited with Company contributions of $12,800, $12,800, $10,566, $12,800, and $11,446, respectively, under the Retirement Plan. In 1998, Messrs. Wheeler, Martinez, Richins and Duff were credited with $30,021, $6,562, $2,557 and $1,537, respectively, pursuant to the Supplemental Retirement Plan. The amounts of all other compensation reported in the above table also include "above-market" interest earnings on deferred compensation that is accrued under the Company's Supplemental Retirement Plan. "Above-market" interest earnings on deferred compensation is the excess of such interest over 120% of the applicable federal long-term rate, with compounding, as prescribed under the Internal Revenue Code. In 1998, the amounts of above-market interest earnings accrued for the benefit of Messrs. Wheeler and Martinez amounted to $5,183 and $110, respectively. (7) Prior to his appointment as Senior Vice President - Chief Operating Officer on May 15, 1998, Mr. Martinez served as Vice President - Operations from April 1 1997 to May 15, 1998, as Vice President - Engineering, Operational Services and South American Operations of the Company from January 1, 1997 to March 30, 1997, and as Vice President and General Manager of the Company's subsidiary, Rochester Coeur, Inc., from August 13, 1988 to December 31, 1996. 50 51 (8) Prior to rejoining Coeur d'Alene Mines Corporation as Vice President - Environmental Services and Governmental Affairs in April 1995, Mr. Richins was a consultant for the Company. He had previously held that position until 1994, when he formed his own consulting firm. He initially joined Coeur d'Alene Mines in 1986 and was the head of environmental services. (9) Prior to his appointment as Vice President - Business Development in 1996, Mr. Duff held the position of Director of New Business Development. He has been with the Company since March 1990. (10) Prior to his appointment as Vice President - Operations on May 29, 1998, Mr. Valenti served as Vice President - Engineering Services since September 1997. Prior to September 1997, Mr. Valenti was Vice President of Operations and Development for USMX, Inc. The following Option Grants Table sets forth, for each of the named executive officers, information regarding individual grants of options granted under the LTIP in March 1999 for services rendered in 1998 and their potential realizable values. Information regarding individual option grants includes the number of options granted, the percentage of total grants to employees represented by each grant, the per-share exercise price and the expiration date. The potential realizable value of the options are based on assumed annual 0%, 5% and 10% rates of stock price appreciation over the term of the option. Also set forth is the amount of the increases in the value of all of the Company's outstanding shares of Common Stock that would be realized in the event of such annual rates of stock price appreciation. OPTION GRANTS TABLE
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM(4) ----------------------------------------------- ----------------------------------------------- NUMBER OF % OF TOTAL SHARES OPTIONS GRANTED UNDERLYING TO EMPLOYEES OPTIONS IN FISCAL EXERCISE EXPIRATION GRANTED NAME (#)(1) YEAR(2) PRICE ($/SH)(3) DATE 0% 5% ($) 10% ($) ---- ------ -------------- --------------- ---------- ---- ------ ------- Dennis E. Wheeler........ 42,569 41.92 2.8683 03/09/09 $ 0 76,697 194,613 Robert Martinez.......... 16,735 16.48 2.8683 03/09/09 0 30,151 76,507 Robert T. Richins........ 3,739 3.68 2.8683 03/09/09 0 6,737 17,094 James K. Duff... 3,268 3.22 2.8683 03/09/09 0 5,888 14,940 Paul B. Valenti.......... 5,139 5.06 2.8683 03/09/09 0 2,259 23,494 All Shareholders (5) 0 39,454,751 100,113,939 Named Executive Officers' Gains as a % of All Shareholder Gains... 0 .33 .33
51 52 - --------------- (1) The options include nonqualified and incentive stock options that become exercisable cumulatively as to 25%, 50%, 75% and 100% after the first, second, third and fourth anniversaries, respectively, after the date of grant. (2) Based on options for a total of 101,554 shares granted to all employees. (3) The exercise price is equal to the fair market value on the date of grant of the option. (4) The potential realizable values shown in the columns are net of the option exercise price. These amounts assume annual compounded rates of stock price appreciation of 0%, 5%, and 10% from the date of grant to the option expiration date, a term of ten years. These rates have been set by the U.S. Securities and Exchange Commission and are not intended to forecast future appreciation, if any, of the Company's Common Stock. Actual gains, if any, on stock option exercises are dependent on several factors including the future performance of the Company's Common Stock, overall stock market conditions, and the optionee's continued employment through the vesting period. The amounts reflected in this table may not actually be realized. (5) Total dollar gains based on assumed annual rates of appreciation shown and the 21,898,624 shares of Common Stock outstanding on March 17, 1999. The following aggregate Option Exercises and Year-End Option Value Table sets forth, for each of the named executive officers, information regarding the number and value of unexercised options at December 31,1998. No options were exercised during 1998 by such persons. AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED IN-THE-MONEY SHARES OPTIONS AT FY-END OPTIONS AT FY-END ACQUIRED VALUE (#) ($)(1)) ON EXERCISE REALIZED EXERCISABLE/UNEXERCI EXERCISABLE/UNEXERCI NAME (#) ($) SABLE SABLE ---- -------------- ------------ -------------------- ------------------------- Dennis E. Wheeler........ -- -- 142,980/135,594 $ 0/0 Robert Martinez.......... -- -- 15,025/17,169 0/0 Robert T. Richins........ -- -- 0/1,755 0/0 James K. Duff............ -- -- 2,009/7,403 0/0 Paul B. Valenti.......... -- -- 0/2,169 0/0
- --------------------- (1) Market value of underlying securities at exercise or year-end, minus the exercise price. 52 53 The following Long-Term Incentive Plan Awards Table sets forth, for each of the named executive officers, long-term incentive plan awards (not payouts) made in March 1999 for services rendered in 1998 under the LTPSP. (Payouts for the completed four-year performance periods ending in 1996, 1997 and 1998 are reported above under the Long-Term Compensation Payouts column of the Summary Compensation Table.) LONG-TERM INCENTIVE PLAN AWARDS TABLE
PERFORMANCE OR NUMBER OF OTHER PERIOD ESTIMATED FUTURE-PAYOUTS UNDER SHARES, UNITS UNTIL MATURATION NON-STOCK PRICE BASED PLANS (2) OR OTHER OR PAYOUT ------------------------------- RIGHTS (#)(1) --------- THRESHOLD TARGET MAXIMUM NAME -------------- (#) (#) (#) ---- --- --- --- Dennis E. Wheeler.................... 45,669 01/01/99-12/31/02 22,835 45,669 68,504 Robert Martinez...................... 17,953 01/01/99-12/31/02 8,977 17,953 26,930 Robert T. Richins.................... 4,011 01/01/99-12/31/02 2,006 4,011 6,017 James K. Duff........................ 3,506 01/01/99-12/31/02 1,753 3,506 5,259 Paul B. Valenti...................... 5,513 01/01/99-12/31/02 2,757 5,513 8,270
- ---------- (1) Performance share awards under the LTPSP are based upon target award levels established by the Committee at the beginning of each four-year performance period and vary depending upon the participant's responsibilities and base salary. Awards under the LTPSP are paid after the end of a four-year performance period and may vary from 0% to 150% of the targets based on actual Company financial performance. Commencing with LTPSP awards made in 1993, 60% is paid in shares of Common Stock and 40% is paid in cash upon completion of the four-year performance period. (2) Company financial performance for LTPSP award determination purposes is based on the Company's total shareholder return ("TSR") relative to a group of other companies in the precious metals mining industry (the "Comparable Group"). TSR equals the market price of the Company's Common Stock at the end of the four-year period plus dividends paid during the period, divided by the market price of the Common Stock at the beginning of the period. Actual award levels are based on the relative performance of the Company's TSR relative to the TSRs of the Comparable Group companies. The threshold performance level (i.e., the minimum amount payable) is reached if the Company's TSR is at the 30th percentile, in which case the percent of the target award is 50%. The target performance level is reached if the Company's TSR is at the 50th percentile, in which case the percent of the target award is 100%. The maximum performance level is achieved if the Company's TSR is at or above the 75th percentile, in which case the percent of the target award is 150%. SUPPLEMENTAL RETIREMENT DEFERRED COMPENSATION PLAN Pursuant to the Company's Supplemental Retirement Deferred Compensation Plan, officers may defer up to 50% of their salary as well as 100% of the cash portion of awards under the AIP and LTPSP. Amounts deferred accrue interest at a prime lending rate not to exceed 10% and payout may be effected by a lump sum or an annuity. 53 54 DIRECTORS' FEES Pursuant to the Coeur d'Alene Mines Corporation Non-Employee Directors' Stock Option Plan, outside directors of the Company must receive at least $5,000 of their director fees in the form of stock options in lieu of $5,000 of cash compensation and are able to elect to receive stock options in lieu of cash fees for up to the $45,000 balance of their annual director fees. The Company was the first company in the precious metals mining industry that required the directors to receive a portion of their directors' fees in stock options in lieu of cash compensation. Information relating to options granted to outside directors on January 2, 1998, was set forth in last year's proxy statement relating to the 1998 Annual Meeting of Shareholders. The following table sets forth information regarding options that were granted under the Plan to non-employee directors on January 4, 1999:
NUMBER AMOUNT OF OPTION OF SHARES EXERCISE FOREGONE SUBJECT PRICE Director's TO PER NAME OF OUTSIDE DIRECTOR FEES OPTION* SHARE** - ------------------------ ---- ------- ------- Cecil D. Andrus................... $5,000 1,424 $4.8125 Joseph C. Bennett................. 11,000 3,133 4.8125 James J. Curran................... 50,000 14,240 4.8125 James A. McClure.................. 5,000 1,424 4.8125 Robert E. Mellor.................. 5,000 1,424 4.8125 John H. Robinson.................. 5,000 1,424 4.8125 Timothy R. Winterer............... 10,000 2,848 4.8125 ------- ------ ------ Total........................ $91,000 25,917 ======= ======
- ---------- * The number of shares is determined by dividing each outside director's foregone directors' fees by the per-share value of an option using the Black-Scholes option valuation method. ** The option exercise price is equal to the average of the high and low prices of the Common Stock reported by the New York Stock Exchange on January 4, 1999, which was the date of grant. Committee members receive no compensation for their services. DIRECTORS' RETIREMENT PLAN Pursuant to the Company's Directors' Retirement Plan, outside directors who have a minimum of five years of service are entitled to one year of retirement benefit for each year of service up to a maximum of ten years of retirement benefits. Each year's retirement benefit is equal to 40% of the outside director's annual compensation as a director of the Company at the time of retirement. 54 55 CHANGE IN CONTROL PROVISIONS In the event of a change in control of the Company, as defined below (a "Change in Control"), all awards under the Program fully vest as follows: (i) all unvested stock options become fully exercisable; (ii) any unvested shares of restricted stock become fully vested so that the restrictions on the sale of such stock lapse on the Change in Control date; and (iii) cash or Common Stock payments of performance awards made under the Program must be fully paid within 30 days following the date of the Change in Control. A Change in Control of the Company for purposes of the Program is deemed to occur in the event of (i) an organization, group or person acquires beneficial ownership of securities of the Company representing 35% or more of the combined voting power of the Company's then outstanding securities; (ii) a majority of the members of the Company's Board of Directors during any two-year period is replaced by directors who are not nominated and approved by the Board; (iii) a majority of the Board members is represented by, appointed by or affiliated with any organization, group or person whom the Board has determined is seeking to affect a Change in Control of the Company; or (iv) the Company is combined with or acquired by another company and the Board determines, either before or after such event, that a Change in Control will or has occurred. EMPLOYMENT AGREEMENTS The Company has an employment agreement with Dennis E. Wheeler, Chairman of the Board, President and Chief Executive Officer, which provides for a three-year term of employment through June 1, 2001, and which is automatically extended for one year on June 1 of each year unless terminated or modified by the Company by written notice. Mr. Wheeler's employment agreement includes the same Change in Control provisions as those included in the Executive Severance Agreements described below, and in the event of his death, his employment agreement provides for the lump sum payment to his estate of an amount equal to his annual base salary at the time of such death. During 1997, and continuing from year-to-year thereafter unless terminated by the Company by written notice, the Executive Severance Agreements with eight executive officers of the Company (the "Executives") provide that certain benefits will be payable to the Executives in the event of a Change in Control of the Company and the termination of the Executive's employment within two years after such Change in Control for any reason other than for cause, disability, death, normal retirement or early retirement. (The term "Change in Control" for purposes of the Executive Severance Agreements has the same meaning as that discussed above under "Change in Control Provisions.") The benefits payable to an Executive in the event of a Change in Control and such termination of employment are (i) the continued payment of the Executive's full base salary at the rate in effect immediately prior to his or her termination of employment, as well as the short-term and long-term bonuses at 100% of the target levels provided under the AIP and LTPSP for the two years following such termination of employment; (ii) the continued payment by the Company during that period of all medical, dental and long-term disability benefits under programs in 55 56 which the Executive was entitled to participate immediately prior to termination of employment; (iii) acceleration of the exercisability and vesting of all outstanding stock options, restricted stock, performance plan awards and performance shares granted by the Company to the Executive under the Program; and (iv) the granting to the Executive of continued credit through the two-year period following termination of employment for purposes of determining the Executive's retirement benefits under the Company's Retirement Plan. Each Executive Severance Agreement provides that if the severance payments provided thereunder would constitute a "parachute payment," as defined in Section 280G of the Internal Revenue Code, the payment will be reduced to the largest amount that would result in no portion being subject to the excise tax imposed by, or the disallowance of a deduction under, certain provisions of the Code. Accordingly, the present value of such payment will generally be required to be less than three times the Executive's average annual taxable compensation during the five-year period preceding the Change in Control. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information, as of March 17, 1999, concerning the beneficial ownership of the Company's Common Stock by shareholders known by the Company to be the beneficial owner of more than 5% of the Company's outstanding shares of Common Stock or MARCS, by each of the nominees for election as directors, and by all directors/nominees and executive officers of the Company as a group:
Common Stock MARCS Percent ------------------------------------ ------------------------------- Of Shares Shares Total Beneficially Percent of Beneficially Percent of Voting Owned Outstanding Owned Outstanding Power ------------ ----------- ------------ ----------- ----- Franklin Resources, Inc.(1).......... 1,622,108 7.41% 695,000 9.82 7.99% MacKay-Shields Financial Corporation (2) ..................... 1,155,970 5.28 1,203,716 17.00 8.14 Ryback Management Corp.(3) .......... 1,084,538 4.95 1,313,000 18.55 8.27 Mackenzie Financial Corporation (4)...................... 911,500 4.16 -- -- 3.15 Brookhaven Capital Management Co. .71 Ltd.(5)....... 946,800 4.30 -- -- * Dennis E. Wheeler.................... 205,460 (6)(7) .94 -- -- * Joseph C. Bennett.................... 5,851 (6)(7) * -- -- * James J. Curran...................... 20,350 (6)(7) .10 -- -- * James A. McClure..................... 3,201 (6)(7) * -- -- * Cecil D. Andrus...................... 2,954 (7) * -- -- * John H. Robinson..................... 1,049 (7) * * Robert E. Mellor..................... 100 * Timothy R. Winterer.................. 1,000 (6) * All executive officers and .91 nominees for director as a group (15 persons)................. 263,730 (7) 1.20
- ---------- 56 57 (*) Holding constitutes less than .10% of the outstanding shares. (1) Franklin Resources, Inc. is an investment advisory firm that serves as investment advisor to several investment companies that own the above-reported shares. Its address is 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. Of the above shares of Common Stock, 574,070 shares may be acquired upon the conversion of MARCS, 39,108 shares may be acquired upon the conversion of the Company's 6% Convertible Subordinated Debentures Due 2002 and 1,800,930 shares may be acquired upon conversion of the Company's 6 3/8% Convertible Subordinated Debentures Due 2004. (2) MacKay-Shields Financial Corporation is an investment advisory firm. Its address is 9 West 57th Street, New York, NY 10019. Of the above shares of Common Stock, 994,270 shares may be acquired upon the conversion of MARCS. (3) Ryback Management Corporation is an investment advisory firm. Its address is 7711 Carondelet Ave., Suite 700, St. Louis, MO 63105. All of the shares of Common Stock reported above may be acquired upon conversion of MARCS. (4) Mackenzie Financial Corporation is an investment advisory firm. Its address is 150 Bloor Street West, Suite M111, Toronto, Canada M55 385. (5) Brookhaven Capital Management Co. Ltd. is an investment advisory firm. Its address is 3000 Sandhill Road, Menlo Park, CA 94025. (6) Individual shares investment and voting powers over certain of his shares with his wife. The other directors have sole investment and voting power over their shares. (7) Holding includes the following shares which may be acquired upon the exercise of exercisable options outstanding under the Company's 1989 Long-Term Incentive Plan or its 1995 Non-Employee Directors' Stock Option Plan: Dennis E. Wheeler - 156,589 shares; Joseph C. Bennett - 2,851 shares; James J. Curran - 20,250 shares; James A. McClure - 2,851 shares; Cecil D. Andrus - 2,854 shares; John H. Robinson - 949 shares; and all executive officers and directors as a group - 205,462 shares. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. 57 58 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Financial Statements and Financial Statement Schedules: (1) The following consolidated financial statements of Coeur d'Alene Mines Corporation and subsidiaries are included in Item 8. Consolidated Balance Sheets-December 31, 1997 and 1998. Consolidated Statements of Operations--Years Ended December 31, 1996, 1997 and 1998. Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1996, 1997 and 1998. Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998. Notes to Consolidated Financial Statements. (c) Exhibits 23 - Consent of Ernst &Young LLP 27 - Financial Data Schedule (d) Independent auditors' reports are included herein as follows: Coeur d'Alene Mines Corporation Report of Ernst & Young LLP at December 31, 1997, and 1998, and for each of the three years in the period ended December 31, 1998. 58 59 ANNUAL REPORT ON FORM 10-K Item 8, Item 14(a), and Item 14(d) CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1998 COEUR D'ALENE MINES CORPORATION COEUR D'ALENE, IDAHO F-1 60 REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS Shareholders and Board of Directors Coeur d'Alene Mines Corporation We have audited the accompanying consolidated balance sheets of Coeur d'Alene Mines Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Coeur d'Alene Mines Corporation and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Seattle, Washington ERNST & YOUNG LLP April 14, 1999 F-2 61 CONSOLIDATED BALANCE SHEETS COEUR D'ALENE MINES CORPORATION AND SUBSIDIARIES
December 31, 1998 1997 --------- --------- (In Thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $127,335 $114,204 Funds held in escrow 400 Short-term investments 1,753 98,437 Receivables 11,647 11,103 Inventories 43,675 35,927 --------- -------- TOTAL CURRENT ASSETS 184,410 260,071 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment 79,173 119,808 Less accumulated depreciation 37,304 58,097 --------- -------- 41,869 61,711 MINING PROPERTIES Operational mining properties 82,018 168,305 Less accumulated depletion 46,149 52,332 --------- -------- 35,869 115,973 Developmental properties 25,898 129,752 --------- -------- 61,767 245,725 OTHER ASSETS Investments in unconsolidated affiliates 66,914 73,013 Notes receivable 1,627 8,498 Debt issuance costs, net of accumulated amortization 6,625 8,809 Other 2,768 875 --------- -------- 77,934 91,195 --------- -------- $365,980 $658,702 ========= ========
F-3 62 CONSOLIDATED BALANCE SHEETS COEUR D'ALENE MINES CORPORATION AND SUBSIDIARIES
December 31, 1998 1997 --------- ---------- (In Thousands) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 3,512 $ 5,983 Accrued liabilities 12,700 6,345 Accrued interest payable 5,412 6,631 Accrued salaries and wages 5,642 7,553 Bank loans 4,406 Current portion of remediation costs 3,052 7,300 Current portion of obligations under capital leases 255 243 ---------- -------- TOTAL CURRENT LIABILITIES 30,573 38,461 LONG-TERM LIABILITIES 6% subordinated convertible debentures due 2002 45,803 49,840 6 3/8% subordinated convertible debentures due 2004 93,372 95,000 7 1/4% subordinated convertible debentures due 2005 107,277 143,750 Long-term borrowings 1,159 Other long-term liabilities 11,888 8,403 ---------- -------- TOTAL LONG-TERM LIABILITIES 258,340 298,152 SHAREHOLDERS' EQUITY Mandatory Adjustable Redeemable Convertible Securities (MARCS), par value $1.00 per share,(a class of preferred stock) - authorized 7,500,000 shares, 7,077,833 issued and outstanding 7,078 7,078 Common Stock, par value $1.00 per share- authorized 60,000,000 shares, issued 22,957,835 and 22,949,779 shares in 1998 and 1997 (including 1,059,211 shares held in treasury) 22,958 22,950 Capital surplus 379,180 389,648 Accumulated deficit (318,796) (84,542) Repurchased and nonvested shares (13,190) (13,190) Accumulated other comprehensive income (loss): Unrealized gains (losses) on short-term investments (163) 145 -------- -------- 77,067 322,089 ---------- -------- $386,980 $658,702 ========== ========
See notes to consolidated financial statements. F-4 63 CONSOLIDATED STATEMENTS OF OPERATIONS COEUR D'ALENE MINES CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1998 1997 1996 --------- --------- -------- (In Thousands Except Per Share Data) INCOME Sale of concentrates and dore' $102,505 $131,161 $ 90,724 Less cost of mine operations 97,878 134,565 81,464 --------- --------- -------- GROSS PROFIT (LOSS) 4,627 (3,404) 9,260 OTHER INCOME Interest, dividends, and other 11,286 19,956 11,954 Earnings (loss) from unconsolidated subsidiaries (2,130) 783 1,393 ---------- -------- -------- TOTAL INCOME 13,783 17,335 22,607 EXPENSES Administration 3,966 4,430 3,716 Accounting and legal 2,521 2,230 1,753 General corporate 6,564 6,792 7,147 Mining exploration 9,391 7,955 7,695 Interest 13,662 10,253 3,635 Writedown of mining properties 223,172 54,415 --------- --------- --------- TOTAL EXPENSES 259,276 31,660 78,361 --------- --------- -------- NET LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (245,493) (14,325) (55,754) Provision (benefit) for income taxes 919 (242) (1,184) --------- --------- --------- NET LOSS BEFORE EXTRAORDINARY ITEM (246,412) (14,083) (54,570) Gain on early retirement of debt (net of tax effect of $0) 12,158 --------- --------- --------- NET LOSS (234,254) (14,083) (54,570) Unrealized holding gain (loss) on securities (308) 497 (713) --------- --------- --------- COMPREHENSIVE LOSS (234,562) (13,586) (55,283) ========= ========= ========= NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS Net loss (234,254) (14,083) (54,570) Preferred stock dividends (10,532) (10,532) (8,397) --------- --------- --------- NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $(244,786) $(24,615) $(62,967) ========== ========= ========= BASIC AND DILUTED EARNINGS PER SHARE DATA Weighted average number of shares of Common Stock (in thousands) 21,899 21,890 21,465 ========== ========= ========= Net loss attributable to Common Shareholders: Net loss before extraordinary item $ (11.73) $ (1.12) $ (2.93) Extraordinary item - Early retirement of debt (net of taxes) .55 --------- ---------- --------- Net loss per share attributable to common shareholders $ (11.18) $ (1.12) $ (2.93) ========= ========== ========= CASH DIVIDENDS PER COMMON SHARE $ .15 ========
See notes to consolidated financial statements. F-5 64 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For Years Ended December 31, 1998, 1997, and 1996 (In Thousands)
Preferred Stock (MARCS) Common Stock --------- ------------ Par Par Capital Shares Value Shares Value Surplus ------ ----- ------ ------- Balance at January 1, 1996 21,524 $21,524 $247,100 Comprehensive Loss: Net Loss Other Comprehensive Loss: Unrealized Holding Loss on Marketable Securities Comprehensive Loss Issuance of MARCS 7,078 $7,078 137,548 Cash Dividends (11,028) Issuance of Shares Under Stock Compensation Plan (net) Shares Issued on Acquisition of Unconsolidated Affiliate 1,420 1,420 26,467 Conversion of 6% Debentures 6 6 150 Other (50) ------- ------- ------- ------- ------- Balance at December 31, 1996 7,078 7,078 22,950 22,950 400,187 Comprehensive Loss: Net Loss Other Comprehensive Income: Unrealized Gains on Marketable Securities Comprehensive Loss Cash Dividends (10,532) Issuance of Shares Under Stock Compensation Plan (net) Other (7) ------- ------- ------- -------- ------- Balance at December 31, 1997 7,078 7,078 22,950 22,950 389,648 Comprehensive Loss: Net Loss
Accumulated Repurchased and Other Nonvested Shares Accumulated Comprehensive ---------------- Deficit Income (Loss) Shares Amount Total ------------ ------------- --------- ---------- ----------- Balance at January 1, 1996 $ (15,889) $ 361 (1,059) $ (13,264) $239,832 Comprehensive Loss: Net Loss (54,570) (54,570) Other Comprehensive Loss: Unrealized Holding Loss on Marketable Securities (713) (713) --------- Comprehensive Loss (55,283) --------- Issuance of MARCS 144,626 Cash Dividends (11,028) Issuance of Shares Under Stock Compensation Plan (net) 58 58 Shares Issued on Acquisition of Unconsolidated Affiliate 27,887 Conversion of 6% Debentures 156 Other (50) -------- ------ ------- ------- -------- Balance at December 31, 1996 (70,459) (352) (1,059) (13,206) 346,198 Comprehensive Loss: Net Loss (14,083) (14,083) Other Comprehensive Income: Unrealized Gains on Marketable Securities 497 497 -------- Comprehensive Loss (13,586) -------- Cash Dividends (10,532) Issuance of Shares Under Stock Compensation Plan (net) 16 16 Other (7) --------- ------- ------ ------- ------- Balance at December 31, 1997 (84,542) 145 (1,059) (13,190) 322,089 Comprehensive Loss: Net Loss (234,254) (234,254)
F-6 65 Other Comprehensive Loss: Unrealized Holding Loss on Marketable Securities Comprehensive Loss Cash Dividends (10,532) Issuance of Shares Under Stock Compensation Plan (net) 8 8 64 ------ ------- ------- ------- -------- Balance at December 31, 1998 7.078 $ 7,078 22,958 $22,958 $379,180 ===== ======= ====== ======= ========
Other Comprehensive Loss: Unrealized Holding Loss on Marketable Securities (308) (308) -------- Comprehensive Loss (234,562) -------- Cash Dividends (10,532) Issuance of Shares Under Stock Compensation Plan (net) 72 --------- -------- ------- --------- -------- Balance at December 31, 1998 $(318,796) $ (163) (1,059) $ (13,190) $ 77,067 ========= ======== ======= ========= ========
See notes to consolidated financial statements. F-7 66 CONSOLIDATED STATEMENTS OF CASH FLOWS COEUR D'ALENE MINES CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1998 1997 1996 ---------- ---------- ---------- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(234,254) $ (14,083) $(54,570) Add (deduct) noncash items: Depreciation, depletion, and amortization 31,011 34,775 12,159 Gain on early retirement of debt (12,158) Deferred income taxes (594) (1,402) (Gain) loss on disposition of property, plant and equipment 461 (102) (985) Loss on foreign currency transactions 482 985 155 (Gain) loss on disposition of marketable securities (7) 947 (1,262) Writedown of mining properties 223,172 54,415 Undistributed (earnings) loss of investment in unconsolidated subsidiary 2,130 (783) (1,393) Changes in Operating Assets and Liabilities: Receivables (2,946) 1,907 3,493 Inventories (10,176) (3,256) 1,824 Accounts payable and accrued liabilities (11,408) (4,426) (5,360) ---------- ---------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (13,693) 15,370 7,074 CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES Purchases of short-term investments (17,886) (180,511) (148,952) Proceeds from sales of short-term investments and marketable securities 114,276 204,981 92,167 Acquisition of Gasgoyne Gold Mines NL (14,643) (19,301) Investment in unconsolidated subsidiaries (4,868) (3,570) (3,416) Purchases of property, plant and equipment (3,209) (2,741) (4,799) Proceeds from sale of assets 7,944 505 2,372 Proceeds from collection of notes receivable 1,821 1,363 2,566 Expenditures on operational mining properties (9,619) (9,436) (40,306) Expenditures on developmental properties (17,558) (14,487) (13,066) Other (601) (3,400) 2,148 ---------- ---------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 70,300 (21,939) (130,587)
F-8 67 CONSOLIDATED STATEMENTS OF CASH FLOWS, COEUR D'ALENE MINES CORPORATION AND SUBSIDIARIES (continued)
Year Ended December 31, 1998 1997 1996 ---------- ---------- ---------- (In Thousands) CASH FLOWS FROM FINANCING ACTIVITIES Retirement of obligations under capital leases 31 (501) (2,041) Payment of cash dividends (10,532) (10,532) (11,028) Proceeds from MARCS issuance 144,626 Proceeds from 7 1/4% debentures issuance 138,090 Proceeds from (payment of) bank borrowings (3,610) 19,186 Payment of debenture costs (644) Retirement of long-term debt (28,477) (49,513) Retirement of other long-term liabilities (244) (226) (260) ---------- ---------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (43,476) 77,318 150,483 ---------- ---------- -------- INCREASE IN CASH AND CASH EQUIVALENTS 13,131 70,749 26,970 Cash and cash equivalents at beginning of year 114,204 43,455 16,485 --------- ---------- -------- Cash and cash equivalents at end of year $ 127,335 $ 114,204 $ 43,455 ========== ========== ========
See notes to consolidated financial statements. F-9 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, unless otherwise specified) NOTE A--BUSINESS OF COEUR D'ALENE MINES CORPORATION Coeur d'Alene Mines Corporation (Coeur or the Company) is principally engaged through its subsidiaries in the exploration, development, operation and/or ownership of silver and gold mining properties located in the United States (Nevada, Idaho and Alaska), Australasia (New Zealand and Australia), and South America (Chile). NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the wholly-owned subsidiaries of the Company, the most significant of which are Coeur Rochester Inc., Callahan Mining Corporation and its subsidiary Coeur New Zealand, Inc., Coeur Alaska, Inc., CDE Fachinal Ltd., Compania Minera CDE El Bronce and Coeur Australia (50% owner of Gasgoyne Gold Mines NL). The consolidated financial statements also include all entities in which voting control of more than 50% is held by the Company. Intercompany balances and transactions have been eliminated in consolidation. Investments in joint ventures, where the Company has ownership of 50% or less and funds its proportionate share of expenses, are accounted for under the equity method. The investment in the Golden Cross Mine is an 80% interest in an unincorporated joint venture and is accounted for on the proportionate consolidation basis. Revenue Recognition: Revenue is recognized when title to gold and silver passes at the shipment or delivery point. The effects of forward sales are reflected in revenue at the date the related precious metals are delivered or the contracts expire. Cash and Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. As of December 31, 1998 and 1997, cash and cash equivalents included $9.4 million and $15.6 million of cash, respectively. The balance of the reported amounts consists principally of investment grade commercial paper. Amounts reported represent cost which approximates fair value. Inventories: Inventories of ore on leach pads and in the milling process are valued based on actual costs incurred to place such ores into production, less costs allocated to minerals recovered through the leaching and milling processes. Inherent in this valuation is an estimate of the percentage of the minerals on leach pads and in process that will ultimately be recovered. Management evaluates this estimate on an ongoing basis. Adjustments to the recovery rate are accounted for prospectively. All other inventories are stated at the lower of cost or market, with cost being determined using the first-in, first-out and weighted average cost F-10 69 methods. Concentrate and dore' inventory includes product at the mine site and product held by refineries. Property, Plant, and Equipment: Property, plant, and equipment are recorded at cost. Depreciation, using the straight-line method, is provided over the estimated useful lives of the assets, which are 7 to 31 years for buildings and improvements, 3 to 13 years for machinery and equipment and 3 to 7 years for furniture and fixtures. Certain mining equipment is depreciated using the units-of-production method based upon estimated total reserves. Maintenance and repairs are charged to operations as incurred. Mining Properties: Values for mining properties represent acquisition costs and/or the fair value of consideration paid plus developmental costs. Cost depletion has been recorded based on the units-of-production method based on proven and probable reserves. Management evaluates the net carrying value of all operations, property by property, on a regular basis to reach a judgment concerning possible permanent impairment of value and the need for a write-down in asset value to net realizable value. The Company utilizes the methodology set forth pursuant to Financial Standards Board Statement No. 121 - Accounting for the Impairment of Long Lived Assets and Long Lived Assets to be Disposed Of ("SFAS 121") to evaluate the recoverability of capitalized mineral property costs. Since SFAS 121 requires the use of forward-looking projections, the Company must use estimates to generate a life-of-mine undiscounted cash flow forecast into the future. These estimates are based on projected mineable resources and mine life and/or reports of the Company's engineers and geologists, projected operating and capital costs necessary to process the estimated resources, each project's mine plan including the type, quantity and ore grade expected to be mined, estimated metallurgical recovery and other factors which may have an impact upon a project's cash flow. In addition, the Company is required to estimate the selling price of metal produced. The Company's estimate is based upon historical gold prices and the Company's reasonable projections, as well as a survey of price assumptions used by other companies in the industry. Reclamation Costs: Post-closure reclamation and site restoration costs are estimated based upon environmental regulatory requirements and are accrued ratably over the life of the mine using the units-of-production method. Current expenditures relating to ongoing environmental and reclamation programs are expensed as incurred. At December 31, 1998 and 1997, the Company has recorded accrued reclamation costs of $19.4 million and $12.4 million, net of salvage values, as of December 31, 1998 and 1997, respectively. Exploration and Development: The carrying value of exploration properties acquired is capitalized at the fair market value of the consideration paid. After it is determined that proven and probable reserves exist on a particular property, the property is classified as a development-stage property and all costs related to the further development of the property are capitalized. Prior to the establishment of proven and probable reserves, all costs relative to exploration and F-11 70 evaluation of a property are expensed as incurred. In order to classify a reserve as economic, the Company must complete an evaluation of an ore body to determine that it may be mined profitably. The determination is made based upon geologic and engineering studies which analyze the nature of the ore body, the appropriate mining and metallurgical process, estimates of operating costs, metallurgical recoveries and forecast metal prices over the estimated mine life. Mine development costs incurred to access reserves on producing mines are also capitalized. Interest costs are capitalized on development properties until the properties are placed into operation. In the event the Company determines that the value of any capitalized property cannot be recovered by either the mining of commercial reserves or by sale pursuant to prevailing market prices, an evaluation of whether an impairment of value under the provisions of SFAS 121 has occurred is undertaken. (See discussion under Mining Properties for SFAS impairment review.) Short-term Investments: The Company invests in debt and equity securities which are classified as available-for-sale, according to provisions of Financial Accounting Standard No. 115 "Accounting for Certain Investments in Debt and Equity Securities". Accordingly, securities are carried at fair value, determined by quoted prices. Unrealized holding gains and losses on such securities are excluded from earnings and are reported as other comprehensive income or loss. Foreign Currencies: Monetary assets and liabilities of the Company's foreign operations are translated into U.S. dollars at year-end exchange rates and revenue and expenses are translated at average exchange rates. The Company's foreign subsidiaries have the U.S. dollar as their functional currency, and therefore, translation gains and losses are reflected in income. Non-monetary assets and liabilities are converted at historical rates. Realized gains and losses from foreign currency transactions are reflected in operations. Foreign Currency Forward Exchange Contracts: As part of its program to manage foreign currency risk, the Company has entered into foreign currency forward exchange contracts. Contracts related to firm commitments are designated and effective as hedges. Gains and losses are deferred and recognized in the same period as the related transactions. Forward Delivery Contracts: The Company sells refined gold and silver from its mines to various precious metals refiners pursuant to forward contracts or at spot prices prevailing at the time of sale. Revenue from forward sales transactions is recognized as metal is delivered. Comprehensive Income: As of January 1, 1998, the Company adopted Statement 130, "Reporting Comprehensive Income." Statement 130 establishes new rules for the reporting and display of comprehensive income and its components, however, the adoption of the Statement had no impact on the Company's net income or shareholders' equity. Statement 130 requires unrealized gains or losses on the Company's available-for-sale securities, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Prior F-12 71 year financial statements have been reclassified to conform to the requirements of Statement 130. Recently Issued Accounting Standards: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments and hedging activity. SFAS No. 133 is effective for all periods in fiscal years beginning after June 15, 1999. SFAS No. 133 requires recognition of all derivative instruments on the balance sheet as either assets or liabilities and measurement at fair value. Changes in the derivatives fair value will be recognized currently in earnings unless specific hedge accounting criteria are met. Gains and losses on derivative hedging instruments must be recorded in either other comprehensive income or current earnings, depending on the nature of the instrument. The Company is currently assessing the effect of adopting SFAS No. 133 on its financial statements and plans to adopt the statement on January 1, 2000. In April 1998, the American Institute of Certified Public Accountant's issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5") which provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred. SOP 98-5 is effective for all fiscal years beginning after December 15, 1998 with initial adoption reported as the cumulative effect of a change in accounting principle. The Company is currently assessing the effect of adopting SOP 98-5 on its financial statements. Loss Per Share: Loss per share is computed be dividing the net loss attributable to common stock by the weighted average number of common shares outstanding during each period. The effect of potentially dilutive stock options outstanding was antidilutive in 1998, 1997 and 1996. Use of Estimates: The Company's management has made a number of estimates and assumptions relating to the reporting of assets, liabilities, and expenses to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. The more significant estimates and assumptions used in the preparation of the financial statements include those related to the collectibility of receivables, recoverability of inventories, accruals for remediation and reclamation, loss estimates for litigation, and recoverability of mining and developmental properties. (See also Notes H and N.) Reclassification: Certain reclassifications of prior year balances have been made to conform to current year presentation. F-13 72 NOTE C--INVESTMENT IN MINING COMPANIES Gasgoyne: In May 1996, Coeur acquired approximately 35% of the outstanding shares of Gasgoyne Gold Mines NL ("Gasgoyne"), an Australian gold mining company, by issuing a total of 1,419,832 shares of the Company's Common Stock and paying cash totaling approximately $15.4 million to Gasgoyne shareholders. As a result of a selective reduction of capital effected by Gasgoyne in February 1997 by purchasing its publicly held shares from the shareholders other than Coeur and Sons of Gwalia, Coeur's ownership interest increased to 36% of Gasgoyne's outstanding shares. In May 1997, the Company acquired, for approximately US$14.6 million in cash, an additional 14% interest in Gasgoyne, increasing its total ownership to 50%. The acquisition has been accounted for as a purchase. Concurrent with the increase in ownership in 1997, the Company entered into several agreements with the other 50% owner which entitled the Company to take a 50% share of Gasgoyne gold production in kind and which requires the Company to pay 50% of Gasgoyne's liabilities. The Company reports its share of earnings of Gasgoyne pursuant to the equity method. The following pro forma information reflects the Company's results of operations as if the acquisition of the additional 14% of Gasgoyne, increasing its total ownership interest to 50%, that occurred in May 1997, had occurred at the beginning of the periods presented.
For the Twelve Months Ended December 31,1997 December 31, 1996 ---------------- ----------------- Total income $ 17,994 $ 21,532 Net loss $(14,014) $(55,159) Basic and diluted net loss per share attributable to common $ (1.12) $ (2.96)
Silver Valley Resources: Silver Valley Resources Corporation ("Silver Valley") owns the Coeur and Galena Mines and the Caladay property situated in the Coeur d'Alene Mining District of Idaho. Effective January 1, 1995, Coeur, Callahan Mining Corporation ("Callahan"), a wholly-owned subsidiary of Coeur, and ASARCO Inc. ("ASARCO") transferred their interests in the Coeur and Galena Mines and Caladay property to Silver Valley, an entity created for that sole purpose, as a result of which Coeur and ASARCO each now own 50% of Silver Valley. Silver Valley recommenced operations at the Coeur mine portion of its property in June 1996 and continued mining existing reserves there through July 2, 1998, when operations were terminated as planned. Silver Valley resumed production at the Galena Mine in May 1997. The Company reports its share of earnings of Silver Valley Resources pursuant to the equity method. F-14 73 NOTE D--WRITE-DOWN OF MINING PROPERTIES Fachinal Mine and Kensington Property During the fourth quarter of 1998, due to the continuing low gold price environment, the Company evaluated the recoverability of investments in both the Fachinal Mine and Kensington property. Using a $350 per ounce gold price and based on estimated undiscounted future cash flows, in accordance with the standards set forth in SFAS 121, the Company determined that its investments in property, plant and equipment at the Fachinal Mine in Southern Chile and at the Kensington property in Alaska were impaired. The total amount of the impairment based on discounted cash flows was $42.9 million and $121.5 million for the Fachinal Mine and Kensington property, respectively, at December 31, 1998 and was recorded in the fourth quarter. Petorca (El Bronce) Mine During the first quarter of 1998, the El Bronce mine continued to operate at a loss in spite of on-going efforts to improve ore grades and reduce operating costs. As a result, a complete evaluation of operations at El Bronce was undertaken. From this evaluation, the Company determined that the asset was impaired and a write-down was required to properly reflect the estimated realizable value of the Company's interest in El Bronce in accordance with the standards set forth in SFAS 121. Consequently, the Company recorded an impairment write-down in the first quarter of 1998 of $54.5 million relating to the El Bronce Mine. The charge included approximately $8.3 million to satisfy the estimated remediation and reclamation liabilities at El Bronce and to provide for estimated termination costs. The Company has delayed its previously planned closure of the Petorca Mine (El Bronce) based upon operating improvements. During the third quarter of 1998, the Company commenced an improved mining program focused on an objective of positive cash flow. Petorca achieved this objective with production during the third quarter totaling 7,060 and 10,087 gold and silver ounces respectively at a cash cost of $267 per gold equivalent ounce, and production in the fourth quarter totaling 9,045 and 17,018 gold and silver ounces, respectively, at a cash cost of $226 per gold equivalent ounce. Golden Cross Mine On April 30, 1993, the Company acquired an 80% operating interest in the Golden Cross Mine and at which mining activities were substantially discontinued in April 1998. The mine is a gold and silver surface and underground mining operation located near Waihi, New Zealand. During the second quarter of 1996, the Company determined that certain adjustments were required to properly reflect the estimated net realizable value of this mining property in accordance with the standards set forth in SFAS 121. The impetus for this determination began in late July 1995 when F-15 74 physical evidence indicated that the land adjacent to the tailings impoundment appeared to have sustained some movement. An investigation to determine the significance of this movement was undertaken promptly. By September, 1995, consultants advised Coeur Gold New Zealand Ltd. that the adjacent land had moved and that it may have affected the tailings dam. However, they advised that certain data would have to be collected before they could confirm that assessment. That investigation included the drilling of holes in the land with measurement devices inserted in the holes (these devices are called "inclinometers"). Further additional measurement devices called "piezometers" were inserted in still different holes drilled in the land and the data collected from those and other sources was sufficient to lead the consultants to conclude by February, 1996 that significant remedial measures would have to be taken. Based on those recommendations Coeur Gold estimated the cost of implementation would be approximately $4 million. That estimate was made in February 1996 and presented to the Company's Board of Directors at its regular March 1996 meeting. Continuing evaluation after March 1996 revealed that the geographical extent of the land movement was larger, wider, longer and more complex than identified in the February 1996 estimate. By May 1996, as the planned remedial measures were implemented, the Company determined that the measures, upon which its previous cost estimates had been based, were not wholly effective. Additional data was needed, which required more hole drillings and more work on the ground. It was not until late May 1996 that the Golden Cross managers and the Company engineers concluded that the cost of remediation would exceed the initial February 1996 estimate. The estimate was revised to approximately $11 million in July to account for the more extensive remediation efforts. In addition, because of the significance of the ground movement, the Company determined that (i) production could be expected to significantly decrease as a result of the Company's inability to implement a previously planned mill optimization because the tailings dam had not been stabilized, and, consequently, it was believed the government would not likely consent to a raising of the tailings dam crest to obtain necessary tailings storage capacity to accommodate the increased mill throughput, and (ii) capital and operating costs could be expected to significantly increase due to the production shortfall and ground movement remediation program costs. As a result of the foregoing factors, there was an indication of potential impairment requiring assessment under SFAS 121. Consequently, the Company recorded a charge in the second quarter of 1996 totaling $53 million relating to its investment in the Golden Cross mine and in the nearby Waihi East property. The charge included amounts necessary to increase the Company's recorded remediation and reclamation liabilities at Golden Cross to approximately $7 million as of December 31, 1996. In December 1998, the Company performed an analysis of the closure accrual for the Golden Cross Mine. As a result, the Company determined that there was a shortfall in the closure accrual, and recorded an additional write-down of $4.3 million in the fourth quarter of 1998. The shortfall was due to a reduction in estimates from the initial write-down F-16 75 related to the fair value of the remaining assets of $9.5 million, offset in part by the $5.3 million reduction in the estimated closure and remediation costs. In 1997, the Faride property in Chile, was written-down by $1.2 million due to management's decision not to exercise its final option payment on the project. The Company's 80% interest in the Golden Cross Mine joint venture, accounted for by the proportionate consolidation method, is summarized as follows: Year Ended December 31,
Year Ended December 31, 1998 1997 1996 ---------- ---------- ---------- (In Thousands) Sales of dore' $ 28,525 $ 26,293 Cost of mine operations (25,585) (28,069) Insurance proceeds 8,000 Writedown of mining property $ (4,269) (52,036) ---------- --------- ---------- Net income (loss) before income taxes $ (4,269) $ 10,940 $(53,812) ========== ========= ==========
In 1997, $8 million of the reported income was related to the Golden Cross insurance recovery not measurable or anticipated at the time of the original writedown. The remaining $2.9 million is related to residual mining activities which benefited from lower depletion. In 1998, sales of dore' through residual mining activities were immaterial and were offset against operating and remediation costs. Assets $ 9,431 $ 6,152 $ 2,408 Liabilities (44,926) (37,933) (47,271) ---------- ---------- ---------- Shareholders' deficit $ (35,495) $ (31,781) $ (44,863) ========== ========== ==========
F-17 76 NOTE E--SHORT-TERM INVESTMENTS AND MARKETABLE SECURITIES The amortized cost of available-for-sale securities is adjusted for premium and discount amortization. Such amortization is included in Other Income. The following is a summary of available-for-sale securities as of December 31, 1998 and 1997.
Available-For-Sale Securities ------------------------------------------------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Fair 1998 Cost Losses Gains Value - ------------------------- U.S. Corporate $ 1,753 $ 1,753 U.S. Government -------------- ------------- ------------- -------------- Total Debt Securities 1,753 1,753 Equity Securities 195 $ 164 $ 1 32 -------------- ------------- ------------- -------------- $ 1,948 $ 164 $ 1 $ 1,785 ============== ============= ============= ============== 1997 - ------------------------- U.S. Corporate $ 49,127 $ 3 $ 49,124 U.S. Government 47,570 $ 273 47,843 -------------- ------------- ------------- -------------- Total Debt Securities 96,697 3 273 96,967 Equity Securities 2,373 135 10 2,248 -------------- ------------- ------------- -------------- $ 99,070 $ 138 $ 283 $ 99,215 ============== ============= ============= ==============
The gross realized gains on sales of available-for-sale securities totaled $7,000 and $0 during 1998 and 1997, respectively. The gross realized losses totaled $0 and $1.6 million during 1998 and 1997, respectively. The gross realized gains and losses are based on a carrying value (cost net of discount or premium) of $115.1 million and $206.5 million of short-term investments sold during 1998 and 1997, respectively. Short-term investments mature at various dates through December 1999. On January 26, 1996, for a total consideration of approximately US$10.7 million, the Company acquired 5.5 million shares and options to acquire an additional 5.0 million shares of Orion Resources NL, an Australian gold mining company (Orion). Prior to 1996, Coeur had acquired a total of 3.3 million shares of Orion for a total cost of US$3.8 million. On March 27, 1996, the Company exercised its option to acquire the additional 5.0 million shares of Orion. As a result of these transactions, Coeur then held approximately 19.2% of Orion's outstanding shares. On September 28, 1996, the Company sold its holdings of Orion of 13.8 million shares for A$1.80 per share or A$24,894,000, (US$ 19.6 million). As a result, the Company recorded a gain on the sale of approximately US$1.3 million during 1996. NOTE F--INVENTORIES Inventories consist of the following:
December 31, 1998 1997 ---------- ---------- In process and on leach pads $ 36,166 $ 24,617 Concentrate and dore' inventory 3,968 5,839 Supplies 3,541 5,471 ---------- ---------- $ 43,675 $ 35,927 ========== ==========
F-18 77 During the fourth quarter of 1997, based on detailed metallurgical evaluations, the Company changed its estimates of the percentage of minerals recovered through the leaching process at its Rochester Mine. The change resulted in increased recovery rates from 55% for silver and 85% for gold to 59% for silver and 90% for gold. Management evaluates this estimate on an ongoing basis. Adjustments to the recovery rates are accounted for prospectively. The effects of the change during the fourth quarter of 1997 and for the year ended December 31, 1998 decreased the cost of mine operations by approximately $7 million or $0.32 per basic and diluted share and $21.5 million or $0.98 per basic and diluted share, respectively. NOTE G--PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment consists of the following:
December 31, 1998 1997 ---------- ---------- Land $ 1,769 $ 1,814 Buildings and improvements 43,732 53,740 Machinery and equipment 40,388 55,159 Capital leases of buildings and equipment 558 9,095 --------- -------- $ 86,447 $119,808 ========= ========
F-19 78 Assets subject to capital leases consist of the following:
December 31, 1998 1997 ---------- ---------- Buildings $ 5,105 Equipment $ 558 3,990 -------- ------- TOTAL BUILDINGS AND EQUIPMENT 558 9,095 Rochester operational mining property 0 7,871 -------- ------- 558 16,966 Less allowance for accumulated amortization and depletion 52 10,648 -------- ------- NET ASSETS SUBJECT TO CAPITAL LEASES $ 506 $ 6,318 ======== =======
Lease amortization is included in depreciation and depletion expense. Upon expiration of the lease agreement for the Rochester mineral processing facilities in October 1998, the Company exercised its option to purchase the facilities for approximately $6.2 million. The Company has entered into various operating lease agreements which expire over a period of five to seven years. Total rent expense charged to operations under these agreements was $4.5 million, $4.5 million and $4.6 million for 1998, 1997, and 1996, respectively. Minimum lease payments under leases are as follows:
Year Ending December 31 Capital Operating ----------- ------- --------- 1999 $267 $ 3,509 2000 94 2,492 2001 2,207 2002 2,027 2003-thereafter 2,722 ----- ------- TOTAL MINIMUM PAYMENTS DUE 361 $12,957 ======= Less amount representing interest 14 ----- PRESENT VALUE OF NET MINIMUM LEASE PAYMENTS 347 Less current maturities 255 ----- $ 92 =====
F-20 79 NOTE H - MINING PROPERTIES
Capitalized costs for mining properties December 31, consist of the following: 1998 1997 ---------- ---------- Operational mining properties: Rochester Mine, less accumulated depletion of $46,124 and $41,727 $ 35,565 $ 34,585 Fachinal Mine, less accumulated depletion of $0 and $7,769 42,803 El Bronce Mine less accumulated depletion of $25 and $2,836 304 38,585 --------- -------- TOTAL OPERATIONAL MINING PROPERTIES 35,869 115,973 Developmental mining properties: Kensington 18,308 122,457 Other 7,590 7,295 --------- -------- TOTAL DEVELOPMENTAL MINING PROPERTIES 25,898 129,752 --------- -------- TOTAL MINING PROPERTIES $ 61,767 $245,725 ========= ========
OPERATIONAL MINING PROPERTIES The Rochester Mine: The Company owns and operates this silver and gold surface mining operation. The Company has conducted operations at the Rochester Mine since September 1986. The mine utilizes the heap-leaching process to extract both silver and gold from ore mined using open pit methods. Rochester is one of the largest primary silver mines in the United States and is a significant gold producer as well. A prior owner of the property has retained a royalty interest that varies up to 5% of the net smelter revenues of the Rochester property, provided the market price of silver is at least $18.26 per ounce. Fachinal Mine: The Fachinal Mine is a gold and silver open pit and underground mine located in southern Chile which operated in pre-production from October 1995 to December 31, 1996. During the fourth quarter of 1995 and for the year ended December 31, 1996, operating costs were capitalized as start up costs. Revenue generated during the pre-production period was credited against deferred start up costs. The property was classified as an operating property for financial reporting purposes on January 1, 1997. In early 1999, the Company determined that the carrying amount was impaired and accordingly wrote down its investment in Fachinal in accordance with SFAS 121. (See Note D). El Bronce Mine: The El Bronce Mine is a gold and silver underground mine located in central Chile approximately 90 miles north of Santiago. On September 4, 1996, the Company exercised its option to acquire 51%, and purchased the remaining 49%, of the shares of Compania Minera CDE El Bronce, resulting in an ownership interest of 100%. In April 1998, the Company determined that the mine was uneconomic and accordingly wrote down its investment in El Bronce in accordance with SFAS 121. (See Note D) F-21 80 DEVELOPMENTAL PROPERTIES Kensington: On July 7, 1995, the Company became the 100% owner and operator of the Kensington property near Juneau, Alaska, by acquiring the 50% interest held by its former joint venture partner. The interest was acquired for $32.5 million plus a scaled net returns royalty on future gold production after Coeur recoups the $32.5 million purchase price and its construction expenditures incurred after July 7, 1995 in connection with placing the property into commercial production. The royalty ranges from 1% at $400 gold prices to a maximum of 2 1/2% at gold prices above $475, with a royalty to be capped at 1 million ounces of production. In early 1999, the Company determined that the asset was impaired and accordingly wrote down its investment in Kensington in accordance with SFAS 121. (See Note D) NOTE I-LONG-TERM DEBT The $45.8 million principal amount of 6% Convertible Subordinated Debentures Due 2002 are convertible into shares of Common Stock prior to maturity, unless previously redeemed, at a conversion rate of approximately 38 shares of Common Stock for each one thousand dollars of principal (equivalent to a conversion price of $25.57 per share of Common Stock). The Company is required to make an annual interest payment. The debentures are redeemable at the option of the Company and mature on June 10, 2002. The $93.4 million principal amount of 6 3/8% Convertible Subordinated Debentures Due 2004 are convertible into shares of Common Stock on or before January 31, 2004, unless previously redeemed, at a conversion price of $25.77 per share. The Company is required to make semi-annual interest payments. The debentures are redeemable at the option of the Company on or after January 31, 1997. The debentures have no other funding requirements until maturity on January 31, 2004. The $107.3 million principal amount of 7.25% Convertible Subordinated Debentures due 2005 are convertible into shares of common stock on or before October 31, 2005, unless previously redeemed, at a conversion price of $17.45 per share, subject to adjustment in certain events. The Company is required to make semi-annual interest payments. The debentures are redeemable at the option of the Company on or after October 31, 2000, have no other funding requirements until maturity on October 31, 2005. During July, August and December 1998, the Company repurchased approximately $4.0 million principal amount of its outstanding 6% Convertible Subordinated Debentures due 2002, approximately $36.5 million principal amount of its 7 1/4% Convertible Subordinated Debentures due 2005, and approximately $1.6 million principal amount of its 6.375% Convertible Subordinated Debentures due 2004 for a total purchase price of approximately $28.5 million, excluding purchased interest of approximately $616,000. Associated with this transaction, the Company eliminated $1.4 million of capitalized bond issuance costs. The Company anticipates that as a result of the cancellation of the repurchased debentures, annual interest paid by the Company will be reduced by approximately $3.0 million. As a result of F-22 81 the buyback of these debentures, the Company has recorded an extraordinary gain of approximately $12.2 million, net of taxes, during 1998 on the reduction of its indebtedness. On October 31, 1997, the Company paid $24 million to retire the existing loan balance with a bank syndicate lead by N.M. Rothschild & Sons Ltd., which substituted a general corporate loan financing for the limited recourse project financing. The agreement provided for a borrowing of up to $24.0 million. The interest rate on the facility was equal to LIBOR plus 1.5%. The borrowing was repayable in sixteen equal quarterly installments commencing in the third quarter of 1997. On June 30, 1996, the Company secured a $50.0 million revolving line of credit with Rothschild Australia Ltd., in connection with the acquisition of the Company's investment in Gasgoyne Gold Mines NL. As of December 31, 1996, borrowings amounted to $18.9 million at an annual interest rate equal to LIBOR plus 1.5%. In late 1997, all outstanding amounts under the operating line were repaid in full and the line discontinued. The carrying amounts and fair values of long-term borrowings, as of December 31, 1998 and 1997, consisted of the following. The fair value of the long-term borrowing is determined by market transactions on or near December 31, 1998 and 1997, respectively.
December 31, 1998 December 31, 1997 --------------------------- --------------------------- Carrying Fair Carrying Fair Amount Value Value Value -------- -------- -------- -------- 6% Convertible Subordinated Debentures Due 2002 $ 45,803 $ 26,841 $ 49,840 $ 36,750 6.375% Convertible Subordinated Debentures Due 2004 $ 93,372 $ 54,156 $ 95,000 $ 74,338 7.25% Convertible Subordinated Debentures Due 2005 $107,277 $ 63,293 $143,750 $108,902
Total interest accrued in 1998, 1997, and 1996 was $20.4 million, $16.2 million, and $13.1 million, respectively, of which $6.8 million, $5.7 million, and $9.5 million, respectively, was capitalized as a cost of the mines under development. Interest paid was $20.3 million, $13.7 million, and $12.1 million in 1998, 1997, and 1996, respectively. F-23 82 NOTE J--INCOME TAXES The components of the provision (benefit) for income taxes in the consolidated statements of operations are as follows:
Year Ended December 31, ------------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Current $ 919 $ (242) $ 203 Deferred - - (1,387) -------- -------- -------- PROVISION (BENEFIT) FOR INCOME TAX $ 919 $ (242) $(1,184) ======== ======== ========
Deferred taxes arise due to temporary differences in deductions for tax purposes and for financial statement accounting purposes. The tax effect and sources of these differences are as follows:
Year Ended December 31, ------------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Reserve for loss on mine closure $ 2,205 $(1,175) $ (971) Net mine exploration and development costs (288) 1,671 (9,299) Net lease payments - 60 591 Regular tax expense(benefit) on utilization of net operating losses (988) (6,142) (32,967) Adjustments to net operating loss and credit carryforwards - (8,660) 1,046 Environmental costs (478) Provision for impairment (67,263) Change in valuation allowance 67,081 14,701 41,501 Other (747) (455) (810) -------- ------- -------- Deferred income tax expense (benefit) 0 0 (1,387) ======== ======= ========
F-24 83 As of December 31, 1998 the significant components of the Company's net deferred tax liability were as follows:
Year Ended December 31, --------------------------------- 1998 1997 --------- ---------- Deferred tax liabilities: PP&E, net $ 10,027 $ 8,527 --------- --------- Total deferred tax liabilities $ 10.027 $ 8,527 ========= ========= Deferred tax assets: Net operating loss carryforwards $ 91,307 $ 90,319 AMT credit carryforwards 1,734 1,404 Business credit carryforwards 542 542 --------- --------- Total deferred tax assets 93,583 92,265 Mineral properties impairment 67,263 Valuation allowance for deferred tax assets (150,819) (83,738) --------- --------- Net deferred tax assets $ 10,027 $ 8,527 ========= ========= Net deferred tax liabilities $ -0- $ -0- ========= =========
The valuation allowance represents the amount of deferred tax assets that more likely than not will not be realized in future years. Changes in the valuation allowance relate primarily to losses which are not currently recognized. The Company has reviewed its net deferred tax assets, together with net operating loss carryforwards, and has not recognized potential tax benefits arising therefrom because management believes it is more likely than not that the benefits will not be realized in future years. In making this determination, the Company has considered the Company's history of tax losses incurred since 1989, the current level of gold and silver prices and the ability of the Company to use accelerated depletion and amortization methods in the determination of taxable income. The Company intends to reinvest the unremitted earnings of its non-U.S. subsidiaries and postpone their remittance indefinitely. Accordingly, no provision for U.S. income taxes was required on such earnings during the three-year period ended December 31, 1998. It is not practicable to estimate the tax liabilities which would result upon such repatriation. F-25 84 A reconciliation of the Company's effective income tax rate with the federal statutory tax rate for the periods indicated is as follows:
Year Ended December 31, ------------------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Tax benefit on continuing operations computed at statutory rates (35.0%) (35.0%) (35.0%) Tax effect of foreign affiliates' statutory rates 7.6% 17.6% Percentage depletion (1.4%) (12.3%) (3.3%) Interest on foreign subsidiary debt 1.7% Equity in earnings of unconsolidated subsidiaries .6% Change in valuation allowance 27.1% 27.4% 38.1% Federal tax assessments and withholding - .2% Other (net) - (.2%) (1.9%) -------- -------- -------- EFFECTIVE TAX RATE -0- (1.7%) (2.1%) ======== ======== ========
For tax purposes, as of December 31, 1998, the Company has operating loss carryforwards as follows:
U.S. New Zealand Australia Chile Total -------- ----------- --------- -------- -------- Regular losses $113,823 $ 89,883 $ 3,810 $133,760 $341,276 AMT credits 1,734 1,734 General business credits 542 542
The operating loss carryforwards by year of expiration are as follows:
Year of Expiration Regular Tax - ---------- ----------- 2006 $ 6,125 2007 10,702 2008 10,417 2009 8,994 2010 2011 72,146 2012 5,439 ---------- Total $ 113,823 ==========
New Zealand, Australian and Chilean laws provide for indefinite carryforwards of net operating losses. Utilization of U.S. net operating losses may be subject to limitations due to potential changes in ownership. As of December 31, 1998, Callahan Mining Corporation, a subsidiary, has net operating loss carryforwards of approximately $17.4 million which expire through 2006. The utilization of Callahan Mining Corporation's net operating losses are subject to limitations. F-26 85 NOTE K--SHAREHOLDERS' EQUITY AND STOCK PLANS On March 8, 1996, the Company completed a public preferred stock offering of $140.0 million of Mandatory Adjustable Redeemable Convertible Securities (MARCS). The Company issued 6,588,235 shares of MARCS which were offered at a public offering price of $21.25 per share. Each share of MARCS is mandatorily convertible four years after issuance into 1.111 shares of Common Stock of the Company, subject to adjustment in certain events, unless converted earlier by the holder into Common Stock or redeemed for Common Stock by the Company. The annual dividend payable on the MARCS is $1.488 per share, payable quarterly. The dividends are deducted in computing net income attributable to Common Shareholders. On April 8, 1996, the Company sold an additional 489,598 shares of MARCS to the underwriters as a result of their exercise of an overallotment option granted to them in connection with the public offering. With the exercise of the overallotment option, the Company sold a total of 7,077,833 shares of MARCS for a total offering price of $150.4 million which resulted in net proceeds to the Company of $144.6 million. In June 1989, the shareholders adopted a shareholder rights plan which entitles each holder of the Company's Common Stock to one right. Each right entitles the holder to purchase one one-hundredth of a share of newly authorized junior preferred stock. The exercise price is $100, making the price per full preferred share ten thousand dollars. The rights will not be distributed and become exercisable unless and until ten days after a person acquires 20% of the outstanding common shares or commences an offer that would result in the ownership of 30% or more of the shares. Each right also carries the right to receive upon exercise that number of Coeur common shares which has a market value equal to two times the exercise price. Each preferred share issued is entitled to receive 100 times the dividend declared per share of Common Stock and 100 votes for each share of Common Stock and is entitled to 100 times the liquidation payment made per common share. The Board may elect to redeem the rights prior to their exercisability at a price of one cent ($.01) per right. Any preferred shares issued are not redeemable. At December 31, 1998 and 1997, there were a total of 21,898,624 and 21,890,568 outstanding rights which was equal to the number of outstanding shares of common stock. The Company has an Annual Incentive Plan (the "Annual Plan") and a Long-Term Incentive Plan (the "Long-Term Plan"). Under the Annual Plan in 1998, 1997 and 1996, benefits were payable in cash. Under the Long-Term Plan, benefits consist of (i) non-qualified and incentive stock options that are exercisable at prices equal to the fair market value of the shares on the date of grant and vest cumulatively at an annual rate of 25% during the four-year period following the date of grant, and (ii) performance units comprised of Common Stock and cash, the value of which is determined four years after the award. The first award performance units were granted in 1994. During 1998, options for 75,925 shares were issued under the plan. As of December 31, 1998 and December 31, 1997, nonqualified and incentive stock options to purchase F-27 86 441,842 shares and 612,447 shares, respectively, were outstanding under the Long-Term and Directors' Plans. The options are exercisable at prices ranging from $5.125 to $27.00 per share. The Company has a Non-Employee Directors' Stock Option Plan under which 200,000 shares of Common Stock are authorized for issuance and which was approved by the shareholders in May 1995. Under the Plan, options are granted only in lieu of an optionee's foregone annual directors' fees. As of December 31, 1998, December 31, 1997 and December 31, 1996, a total of 21,005, 16,600 and 12,210 options, respectively, had been granted in lieu of $.1 million, $.1 million and $.1 million, respectively, of foregone directors' fees. In 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" which establishes accounting and reporting standards for stock-based employee compensation plans. This statement defines a fair value based method of accounting for these equity instruments. The method measures compensation expense based on the estimated fair value of the award and recognizes that cost over the vesting period. The Company has adopted the disclosure - only provision of Statement No. 123 and therefore continues to account for stock options in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, because options are granted at fair market value, no compensation expense has been recognized for options issued under the Company's stock option plans. Had compensation cost been recognized based on the fair value at the date of the grant for the options awarded under the plans, pro-forma amounts of the Company's net loss and net loss per share would have been as follows:
Year Ended December 31, 1998 1997 1996 ---------- ---------- ---------- Net loss attributable to common shareholders $(244,786) $ (24,615) $(62,967) Net loss pro forma $(245,144) $(25,014) $(63,169) Basic and diluted net loss per share as reported $ (11.18) $ (1.12) $ (2.93) Basic and diluted net loss per share pro forma $ (11.20) $ (1.14) $ (2.94)
The fair value of each option grant was estimated using the Black Scholes option pricing model with the following weighted average assumptions: risk free interest rates of 4.40% to 7.95%; expected option life of 4 years for officers and directors; expected volatility of .385 to .472; and no expected dividends. The weighted average value of options granted during the years ended December 31, 1998, 1997 and 1996 were $2.61, $5.67 and $8.19, respectively. The effect of applying Statement No. 123 for providing pro forma disclosures for fiscal years 1998, 1997 and 1996 is not likely to be representative of the effects in future years because options vest over a 4-year period and additional awards generally are made each year. F-28 87 Total compensation expense charged to operations under the Plans was $1.4 million, $1.5 million, and $.9 million for 1998, 1997, and 1996, respectively. A summary of the Company's stock option activity and related information for the years ended December 31 follows:
Weighted Average Shares Exercise Price ------------ -------------- Stock options outstanding at January 1, 1997 314,727 $ 18.28 Issued 365,381 14.52 Canceled (67,661) 18.22 ----------- -------- Stock options outstanding at 12/31/97 612,447 $ 16.05 Issued 75,925 6.17 Canceled (246,530) 15.62 ----------- -------- Stock options outstanding at 12/31/98 441,842 $ 14.59 =========== ========
Stock options exercisable at December 31, 1998 and 1997 were 222,299 and 236,761, respectively. The following table summarizes information for options currently outstanding at December 31, 1998:
Options Outstanding Options Exercisable ----------------------------------------- ---------------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life (Yrs.) Price Exercisable Price - ------------------ ----------- ----------- -------- ----------- ------- $5.125 to $9.000 65,491 9.3 $ 6.34 21,005 $ 8.90 $13.125 to $14.99 154,111 8.9 $13.17 47,533 $13.28 $15.000 to $17.99 132,888 7.3 $16.50 89,943 $16.21 $18.000 to $27.00 89,352 6.2 $20.23 63,818 $20.29 -------- -------- 441,842 8.0 $14.59 222,299 $15.42 ======== ========
As of December 31, 1998 and 1997, 361,794 shares and 243,244 shares, respectively, were available for future grants under the Plans and 11,562,241 shares of Common Stock were reserved for potential conversion of Convertible Subordinated Debentures. NOTE L--EMPLOYEE BENEFIT PLANS The Company provides a noncontributory defined contribution retirement plan for all eligible U.S. employees. Total plan expense charged to operations was $.8 million, $.8 million, and $.6 million for 1998, 1997, and 1996, respectively, which is based on a percentage of salary of qualified employees. Effective January 1, 1995, the Company adopted a savings plan (which qualifies under Section 401(k) of the U.S. Internal Revenue code) covering all full-time U.S. employees. Under the plan, employees may elect to F-29 88 contribute up to 16% of their cash compensation, subject to ERISA limitations. The Company is required to make matching cash contributions equal to 50% of the employee's contribution or up to 3% of the employee's compensation. Employees have the option of investing in five different types of investment funds. Total plan expenses charged to operations were $.5 million, $.4 million and $.4 million in 1998, 1997 and 1996, respectively. NOTE M--FINANCIAL INSTRUMENTS Off-Balance Sheet Risks The Company enters into forward foreign exchange contracts denominated in foreign currencies to hedge certain firm commitments. The purpose of the Company's foreign exchange hedging program is to protect the Company from risk that the eventual dollar cash flows resulting from the firm commitments will be adversely affected by changes in exchange rates. At December 31, 1998, 1997, and 1996, the Company had forward foreign exchange contracts of $4.6 million, $1.8 million, and $15.8 million, respectively. The Company enters into forward metal sales contracts to manage a portion of its cash flows against fluctuating gold and silver prices. As of December 31, 1998, the Company had sold 135,000 ounces of gold for delivery on various dates through 2003 at an average price of $371.22. For metal delivery contracts, the realized price pursuant to the contract is recognized when physical gold or silver is delivered in satisfaction of the contract. The Company realized gains of $1.2 million and $5.3 million arising from the sale of silver and gold purchased on the open market which was then delivered pursuant to fixed-price forward contracts during 1998 and 1997, respectively. Further discussions of other financial instruments held by the Company are included in Note E and Note I. The table below summarizes, by contract, the contractual amounts of the Company's forward exchange and forward metals contracts at December 31, 1998, 1997 and 1996.
1998 1997 1996 --------------------------- ------------------------- -------------------------- Forward Unrealized Forward Unrealized Forward Unrealized Contracts Gain (Loss) Contracts Gain (Loss) Contracts Gain (Loss) ------------- ------------- ----------- ----------- ------------- ------------ Currency: New Zealand $ 4,595 $ 391 $ 1,766 $ (7) $ 15,845 $ (10) Forward Metal Sales $ 50,114 $ 11,261 $ 67,875 $ 7,404 $ 61,823 $ 3,702
Gains and losses related to contracts associated with firm commitments are deferred and will be recognized as the related commitments mature. For the years ended December 31, 1998, 1997, and 1996, the Company realized F-30 89 gains (losses) from its foreign exchange programs of $(.5) million, $(.9) million and $1.4 million, respectively. The credit risk exposure related to all hedging activities is limited to the unrealized gains on outstanding contracts based on current market prices. To reduce counter-party credit exposure, the Company deals only with a group of large credit-worthy financial institutions, and limits credit exposure to each. In addition, to allow for situations where positions may need to be reversed, the Company deals only in markets that it considers highly liquid. The Company does not anticipate nonperformance by any of these counter parties. NOTE N--LITIGATION Federal Natural Resources Action On March 22, 1996, an action was filed in the United States District for the District of Idaho by the United States against various defendants, including the Company, asserting claims under CERCLA and the Clean Water Act for alleged damages to federal natural resources in the Coeur d'Alene River Basin of Northern Idaho as a result of alleged releases of hazardous substances from mining activities conducted in the area since the late 1800s. No specific monetary damages were identified in the complaint. However, in July 1996, the government indicated that damages may approximate $982 million. The United States asserts that the defendants are jointly and severally liable for costs and expenses incurred by the United States in connection with the investigation, removal and remedial action and the restoration or replacement of affected natural resources. In 1986 and 1992, the Company had settled similar issues with the State of Idaho and the Coeur d'Alene Indian Tribe, respectively, and believes that those prior settlements exonerate it of further involvement with alleged natural resource damage in the Coeur d'Alene River Basin. Accordingly, the Company intends to vigorously defend this matter. In March 1997, the Company filed a motion for partial summary judgement relating to the issue of trusteeship, essentially arguing that the United States does not have authority to sue for damages to state natural resources and that the 1986 settlement with the state bars the federal claims. That motion remains pending. In September 1997, the Company filed an additional motion for partial summary judgement raising the statute of limitations as to natural resource damages. That motion was granted by the Court on September 30, 1998. The Court's granting of that motion limits the United States' natural resource damage claims to the 21 square mile Bunker Hill Superfund site area rather than the entire Coeur d'Alene Basin. Although that ruling limits the geographic coverage of the United States' action, the ruling does not prohibit the EPA from attempting to utilize its hazard ranking system which could potentially broaden the scope of the United States' allegations. On March 31, 1998, the Court entered an order denying the plaintiffs' motion to allow the United States to prove a portion of its case pursuant to an administrative record, requiring the parties to submit further facts as to the issue of trusteeship. Furthermore, in March 1998, the EPA announced its intent to F-31 90 perform a remedial investigation/feasibility study upon all or parts of the Coeur d'Alene Basin and, thereby, to apparently focus upon response costs rather than natural resource damages. In September 1998, the Company filed an additional motion for partial summary judgment asserting that CERCLA as applied to the Company in the action is not constitutional under the takings and due process provisions of the United States Constitution. At this stage of the proceeding, it is not possible to predict its ultimate outcome. Golden Cross Lawsuit On July 15, 1996, the Company filed a complaint against Cyprus Amax Minerals Company ("Cyprus") in the District Court of the State of Idaho, Kootenai County alleging violations by Cyprus of the anti-fraud provisions of the Idaho and Colorado Securities Acts as well as common law fraud in connection with Cyprus' sale in April 1993 to the Company of Cyprus Exploration and Development Corporation, which owned all the shares of Cyprus Gold New Zealand Limited, which, in turn, owned an 80% interest in the Golden Cross Mine in New Zealand. The Company's lawsuit seeks recession and an unspecified amount of damages arising from alleged misrepresentations and failure to disclose material facts alleged to have been known by Cyprus officials regarding ground movement and instability, threatening the integrity of the mine site at the time of Coeur's purchase of the property. In October 1997, Cyprus filed a counterclaim alleging libel by the Company in its press release announcing the write-off of the Golden Cross Mine and seeking an unspecified amount of damages. Trial has been scheduled for October 18, 1999 in Coeur d'Alene, Idaho. On February 3, 1999, the Company files a second amended complaint which specifies damages in the amount of approximately $54 million together with pre-judgement and post-judgement interest as well as the unspecified costs incurred resulting from the violations of law alleged. Cyprus filed, on February 17, 1999, a motion to vacate the trial date and a motion to dismiss the second amended complaint. No assurances can be given at this stage of the action as to its ultimate outcome. Class Action Securities Lawsuit On July 2, 1997 a suit was filed by purchasers of the Company's Common Stock in Federal District Court for the District of Colorado naming the Company and certain of its officers and its independent auditor as defendants. Plaintiff alleges that the Company violated the Securities Exchange Act of 1934 during the period January 1, 1995 to July 11, 1996, and seeks certification of the law suit as a class action. The class members are alleged to be those persons who purchased publicly traded debt and equity securities of the Company during the time period stated. On September 22, 1997, an amended complaint was filed in the proceeding adding other security holders as additional plaintiffs. The action seeks unspecified compensatory damages, pre-judgment and post-judgment interest, attorney's fees and costs of litigation. The complaint asserts that the defendants knew material adverse non-public information about the Company's financial results which was not disclosed, and which related to the Golden Cross and Fachinal Mines; and that the defendants intentionally F-32 91 and fraudulently disseminated false statements which were misleading and failed to disclose material facts. On April 16, 1998, the Court entered an order dismissing the auditors from the suit and denying the Company's and the individual defendants' motions to dismiss. On October 9, 1998, the Court heard arguments on the question on whether a class should be certified and on December 14, 1998, the Court entered an order certifying a class. In December 1998, the parties to the suit determined that the further conduct of the case would be protracted and expensive and commenced discussions with a view toward settlement of the action. Although the Company continued to deny each of the plaintiffs' claims and allegations, the Company determined it would be in the best interests of the Company to settle the suit and agreed to enter into a Stipulation of Settlement which was filed by the parties with the Court on March 1, 1999. The terms of the proposed settlement provide that (i) the Company's directors and officers liability insurance carrier will pay $7 million to a settlement fund for the benefit of the plaintiffs; and (ii) the plaintiffs will be entitled to 50% of the net proceeds, up to a maximum of $6 million, (after the Company has first recouped its costs and expenses incurred in litigating its above-described lawsuit against Cyprus relating to Golden Cross and after deducting an $8 million reserve against the asserted subrogation claim of the Company's flood insurance carrier) actually received by the Company from its Golden Cross lawsuit against Cyprus. The Stipulation of Settlement contains strong denials of liability by the defendants as well as acknowledgments by the plaintiffs that they were unable to identify significant evidence to support a large portion of their claims. Final consummation of the settlement is subject to Court approval and to dismissal with prejudice of the derivative action described below. Derivative Action On or about August 17, 1998, a purported derivative action was filed on behalf of the Company against Dennis E. Wheeler, James A. Sabala, James J. Curran, Joseph C. Bennett, James A. McClure, Cecil D. Andrus and Duane B. Hagadone in Federal District Court for the District of Idaho. The complaint alleged that the defendant officers and directors breached their fiduciary duties by authorizing the Company to purchase the Golden Cross Mine in New Zealand in 1993 and by allegedly causing or permitting the Company to make statements that the plaintiffs in the class action securities lawsuit described above claim were false or misleading during the period from January 1, 1995 through July 11, 1996. The plaintiff sought unspecified damages on behalf of the Company. On September 9, 1998, the plaintiff voluntarily dismissed the lawsuit without prejudice in light of Idaho Code Sec. 30-1-742, which requires a demand to be served on a company at least 90 days prior to the filing of a derivative action. On September 25, 1998, the plaintiff sent a letter to the Company's Board of Directors demanding that the Company, among other things, commence all reasonable steps to settle the class action securities lawsuit described above, and pursue claims against any officers, directors or third-party professionals who may have known about the potential problems with the Golden Cross Mine before the Company purchased an interest in it. The F-33 92 Board appointed a Special Committee of directors to respond to that demand. On March 9, 1999, the Special Committee recommended that the demand be rejected. The Company anticipates, based on communication with counsel for the derivative plaintiff, that the action previously dismissed without prejudice will be dismissed with prejudice. NOTE O--SEGMENT INFORMATION In 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," effective for fiscal year beginning after December 15, 1997. This statement replaces No. 14, "Financial Reporting for Segments of a Business Enterprise," and establishes new standards for defining and reporting the Company's operating segments and requires selected information in interim financial reports. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company's chief operating decision-making group is comprised of the Chief Executive Officer, Chief Financial Officer and the Chief Operating Officer. The operating segments are managed separately because each segment represents a distinct use of company resources and contribution to company cash flows in its respective geographic area. The Company's reportable operating segments include the Rochester, Golden Cross, Fachinal, and El Bronce mining properties, Coeur Australia (50% owner of Gasgoyne Gold Mines NL), the Kensington development property, and its exploration program. All operating segments are engaged in the discovery and/or mining of gold and silver and generate the majority of their revenues from the sale of these precious metals. Intersegment revenues consist of precious metals sales to the Company's metals marketing division and are transferred at the market value of the respective metal on the date of transfer. The Other segment includes the corporate headquarters, elimination of intersegment transactions and other items necessary to reconcile to consolidated amounts. Revenues in the Other segment are generated principally from interest received from the Company's cash and investments that are not allocated to the operating segments. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies above. The Company evaluates performance and allocates resources based on profit or loss before interest, income taxes, depreciation and amortization, unusual and infrequent items, and extraordinary items. Revenues from gold sales were $55,670,036, $89,770,221 and $57,291,751 in 1998, 1997 and 1996, respectively. Revenues from silver sales were $46,834,657, $41,390,291 and $33,431,965 in 1998, 1997 and 1996, respectively. F-34 93
Coeur d'Alene Mines Corporation (In Thousands) Segment Reporting Rochester Golden Cross Fachinal El Bronce ----------------------------------------------------------------------- December 31, 1998 Net sales and revenues to external customers $ (82) - $ 16,324 $ 9,436 Intersegment net sales and revenues 62,911 - - - ----------------------------------------------------------------------- Total net sales and revenues $ 62,829 - $ 16,324 $ 9,436 ======================================================================= Depreciation and amortization $ 7,910 - $ 12,028 $ 1,807 Interest income 17 - 91 31 Interest expense - - 65 218 Gain on forward sale contracts - - - - Writedown of Mine Property - (4,266) (42,900) (53,904) Income tax (credit) expense - - - - Earnings (losses) from non- consolidated affiliates - - - - Gain on early retirement of debt - - - - Profit (loss) 33,080 - (6,976) (2,158) Investments in non-consolidated affiliates - - - - Segment assets (A) 86,362 5,892 32,915 4,845 Expenditures for property 6,903 - 2,801 1,843 December 31, 1997 Net sales and revenues to external customers 232 7,513 14,949 17,082 Intersegment net sales and revenues 61,138 28,525 - - ----------------------------------------------------------------------- Total net sales and revenues $ 61,370 $36,038 $ 14,949 $ 17,082 ======================================================================= Depreciation and amortization $ 10,495 $ 4,040 $ 11,021 $ 2,523 Interest income 22 46 84 17 Interest expense - - 284 795 Income from insurance settlement - 8,000 - - Gain on forward sale contracts - - - - Income tax (credit) expense - - - - Earnings (losses) from non- consolidated affiliates - - - - Profit (loss) $ 22,953 $14,419 $ (3,827) $(2,255) Investments in non-consolidated affiliates - - - - Segment assets (A) $ 73,526 $ 6,863 $ 83,918 $ 47,653 Expenditures for property $ 1,179 $ 2,030 $ 4,041 $ 3,524 Coeur d'Alene Mines Corporation (In Thousands) Segment Reporting Coeur Australia Kensington Exploration Other -------------------------------------------------------------- December 31, 1998 Net sales and revenues to external customers $ 13,547 - $ (449) $ 72,885 Intersegment net sales and revenues - - - (62,911) -------------------------------------------------------------- Total net sales and revenues $ 13,547 - $ (449) $ 9,974 ============================================================== Depreciation and amortization $ 7,060 $ 334 $ 149 $ 1,723 Interest income 54 - 43 9,263 Interest expense - - - 13,379 Gain on forward sale contracts - - - 1,167 Writedown of Mine Property - (121,500) (602) - Income tax (credit) expense (53) - - 972 Earnings (losses) from non- consolidated affiliates (1,175) - - (955) Gain on early retirement of debt - - - 12,158 Profit (loss) 1,120 - (4,938) 1,890 Investments in non-consolidated affiliates 50,627 - - 16,287 Segment assets (A) 193 22,178 892 5,681 Expenditures for property - 18,194 460 185 December 31, 1997 Net sales and revenues to external customers 8,111 - (103) 104,116 Intersegment net sales and revenues - - - (89,663) -------------------------------------------------------------- Total net sales and revenues $ 8,111 - $ (103) $ 14,453 ============================================================== Depreciation and amortization $ 4,899 $ 171 $ 189 $ 1,437 Interest income 288 - 27 8,690 Interest expense 181 - - 8,993 Income from insurance settlement - - - - Gain on forward sale contracts - - - 5,280 Income tax (credit) expense 69 - - (311) Earnings (losses) from non- consolidated affiliates (329) - - 1,112 Profit (loss) $ (418) - $(6,121) $ 5,781 Investments in non-consolidated affiliates 56,393 - - 16,620 Segment assets (A) $ 487 $ 125,879 $ 1,809 $ 14,331 Expenditures for property - $ 14,940 $ 715 $ 14,876 Coeur d'Alene Mines Corporation (In Thousands) Segment Reporting Total ---------- December 31, 1998 Net sales and revenues to external customers $ 111,661 Intersegment net sales and revenues - ---------- Total net sales and revenues $ 111,661 ========== Depreciation and amortization $ 31,011 Interest income 9,499 Interest expense 13,662 Gain on forward sale contracts 1,167 Writedown of Mine Property (223,172) Income tax (credit) expense 919 Earnings (losses) from non- consolidated affiliates (2,130) Gain on early retirement of debt 12,158 Profit (loss) 22,018 Investments in non-consolidated affiliates 66,914 Segment assets (A) 158,958 Expenditures for property 30,386 December 31, 1997 Net sales and revenues to external customers 151,900 Intersegment net sales and revenues - ---------- Total net sales and revenues $ 151,900 ========== Depreciation and amortization $ 34,775 Interest income 9,174 Interest expense 10,253 Income from insurance settlement 8,000 Gain on forward sale contracts 5,280 Income tax (credit) expense (242) Earnings (losses) from non- consolidated affiliates 783 Profit (loss) $ 30,532 Investments in non-consolidated affiliates 73,013 Segment assets (A) $ 354,466 Expenditures for property $ 41,305
F-35 94
Coeur d'Alene Mines Corporation (In Thousands) Segment Reporting (continued) December 31, 1996 Rochester Golden Cross Fachinal El Bronce -------------------------------------------------------- Net sales and revenues to external customers $ 135 $ (129) - $ 2,146 Intersegment net sales and revenues 60,906 26,507 - - ======================================================== Total net sales and revenues $ 61,041 $ 26,378 - $ 2,146 ======================================================== Depreciation and amortization $ 6,413 $ 2,487 - $ 733 Interest income 107 16 - 5 Interest expense 66 - - 297 Writedown of mine property - 53,245 - - Income tax (credit) expense - 168 - - Earnings (losses) from non- consolidated affiliates - - - - Profit (loss) $ 15,959 $ (665) - $ 835 Investments in non-consolidated affiliates - - - - Segment assets (A) $ 77,687 $ 3,596 $ 91,985 $ 48,206 Expenditures for property $ 7,864 $ 7,121 $ 9,131 $ 20,226 Coeur d'Alene Mines Corporation (In Thousands) Segment Reporting (continued) December 31, 1996 Coeur Australia Kensington Exploration Other -------------------------------------------------------------- Net sales and revenues to external customers - - $ 1,101 $100,818 Intersegment net sales and revenues - - - (87,413) ============================================================== Total net sales and revenues - - $ 1,101 $ 13,405 ============================================================== Depreciation and amortization - $ 97 $ 604 $ 1,825 Interest income - - - 7,955 Interest expense - - - 3,272 Writedown of mine property - - 1,170 - Income tax (credit) expense - - - (1,352) Earnings (losses) from non- consolidated affiliates - - - 1,393 Profit (loss) - - $ (4,894) $ 3,124 Investments in non-consolidated affiliates - - - 61,439 Segment assets (A) - $ 111,126 $ 1,442 $ 8,803 Expenditures for property - $ 12,786 $ 497 $ 546 Coeur d'Alene Mines Corporation (In Thousands) Segment Reporting (continued) December 31, 1996 Total -------- Net sales and revenues to external customers $104,071 Intersegment net sales and revenues - ======== Total net sales and revenues $104,071 ======== Depreciation and amortization $ 12,159 Interest income 8,083 Interest expense 3,635 Writedown of mine property 54,415 Income tax (credit) expense (1,184) Earnings (losses) from non- consolidated affiliates 1,393 Profit (loss) $ 14,359 Investments in non-consolidated affiliates 61,439 Segment assets (A) $342,845 Expenditures for property $ 58,171
Notes: (A) Segment assets consist of receivables, prepaids, inventories, property, plant and equipment, and mining properties.
Coeur d'Alene Mines Corporation Segment Reporting 1998 1997 1996 ---------------------------------------------- Profit (loss) - --------------- Total profit or loss for reportable segments $ 22,018 $ 30,532 $ 14,359 Depreciation expense (30,677) (34,604) (12,062) Interest expense (13,662) (10,253) (3,635) Writedown of mining properties (223,172) - (54,416) ============================================== Loss before income taxes and and extraordinary item $(245,493) $(14,325) $(55,754) ============================================== Assets - -------- Total assets for reportable segments $158,958 $354,466 $342,845 Cash and cash equivalents 127,335 114,604 43,455 Short-term investments 1,753 98,437 124,172 Other assets 77,934 91,195 69,858 ============================================== Total consolidated assets $365,980 $658,702 $580,330 ==============================================
F-36 95
Coeur d'Alene Mines Corporation Segment Reporting (In Thousands) Geographic Information - ----------------------- Long-Lived 1998: Revenues Assets ------------------------------------------------ United States $ 72,326 $ 73,153 Chile 25,802 25,291 Australia 13,547 - New Zealand - 5,178 Other Foreign Countries (14) 14 ------------------------------------------------- Consolidated Total $111,661 $103,636 ================================================= Long-Lived 1997: Revenues Assets ------------------------------------------------- United States $ 75,892 $177,791 Chile 32,057 121,607 Australia 7,896 3,198 New Zealand 36,053 4,669 Other Foreign Countries 2 171 ------------------------------------------------- Consolidated Total $151,900 $307,436 ================================================= Long-Lived 1996: Revenues Assets ------------------------------------------------- United States $ 73,088 $172,280 Chile 2,974 126,595 Australia 908 - New Zealand 27,101 140 Other Foreign Countries 1 266 ------------------------------------------------- Consolidated Total $104,072 $299,281 =================================================
Revenues are geographically separated based upon the country in which operations and the underlying assets generating those revenues reside. F-37 96 NOTE P--SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth a summary of the quarterly results of operations for the years ended December 31, 1998 and 1997:
First Second Third Fourth Quarter Quarter Quarter Quarter --------- --------- --------- --------- (In Thousands - Except Per Share Data) 1998 ---- Net sales $ 21,166 $ 32,256 $ 23,890 $ 25,193 Gross profit $ 1,442 $ 2,306 $ 486 $ 393 Net loss before extraordinary gain $(57,961)(a) $ (5,166) $ (6,366) $(179,919)(a) Net loss $(57,961)(a) $ (5,166) $ (21)(b) $(171,106)(a,b) Net loss attributable to common shareholders $(60,594)(a) $ (7,799) $ (2,654)(b) $(173,739)(a,b) Basic and diluted net loss per share before extraordinary gain $ (2.77) $ (.36) $ (.41) $ (8.20) Basic and diluted net loss per share attributable to common shareholders $ (2.77) $ (.36) $ (.12) $ (7.93) 1997 ---- Net Sales(f) $ 22,762 $ 32,423 $ 36,035 $ 39,941 Gross profit (loss)(f) $ (2,933) $ (2,067) $ (2,240) $ 3,836(e) Net loss $ (1,721) $ (275)(d) $ (6,268) $ (5,819) Net loss attributable to common shareholders $ (4,353) $ (2,908)(d) $ (8,903) $ (8,451) Basic and diluted net loss per share attributable to common shareholders (c) $ (.20) $ (.13) $ (.41) $ (.39)
(a) Includes writedown of mining properties of approximately $54.5 million in the first quarter and approximately $168.7 million in the fourth quarter. (b) Includes extraordinary gain on early retirement of debt of approximately $6.3 million in the third quarter and approximately $5.8 million in the fourth quarter. (c) The first three quarters of 1997 earnings per share amounts have been restated to comply with Statement of Financial Accounting Standard No. 128, "Earnings Per Share." (d) Includes the receipt of $8 million of insurance proceeds for business interruption and property damage at the Golden Cross Mine. (e) Includes the effects of the change in recovery rates at the Rochester Mine, whereby costs of mine operations decreased by approximately $7 million. (f) Amounts have been restated to reflect the change in accounting to equity method for certain investees that were previously consolidated. F-38 EX-23 2 ACCOUNTANT'S CONSENT 1 Exhibit 23 Consent of Ernst & Young LLP, Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8) pertaining to the Long-Term Incentive Plan of Coeur d'Alene Mines Corporation of our report dated April 14, 1999 with respect to the consolidated financial statements of Coeur d'Alene Mines Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 1998. Seattle, Washington ERNST & YOUNG April 15, 1999 EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 YEAR YEAR YEAR DEC-31-1998 DEC-31-1997 DEC-31-1996 JAN-01-1998 JAN-01-1997 JAN-01-1996 DEC-31-1998 DEC-31-1997 DEC-31-1996 127,335 114,604 0 1,753 98,437 0 11,647 11,103 0 0 0 0 43,675 35,927 0 184,410 260,071 0 187,089 417,865 0 83,453 110,429 0 365,980 658,702 0 30,573 38,461 0 246,452 288,590 0 7,078 7,078 0 0 0 0 22,958 22,950 0 379,180 389,648 0 77,067 322,089 0 102,505 131,161 90,724 111,661 151,900 104,071 97,878 134,565 81,464 97,878 134,565 81,464 245,614 21,407 74,726 0 0 0 13,662 10,253 3,635 (245,493) (14,325) (55,754) 919 (242) (1,184) (246,412) (14,083) (54,570) 0 0 0 12,158 0 0 0 0 0 (234,254) (14,083) (54,570) (11.18) (1.12) (2.93) (11.18) (1.12) (2.93)
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