-----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, WH4cNojfrky1ydS5OK4O2FA/I8aGJ2D/aGs0igBfq6v0bELOVjW/NFy/gdiICCBq CVSGRrpBXisZ0Tx09DmAjQ== 0000041304-97-000041.txt : 19971117 0000041304-97-000041.hdr.sgml : 19971117 ACCESSION NUMBER: 0000041304-97-000041 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROYAL OAK MINES INC CENTRAL INDEX KEY: 0000041304 STANDARD INDUSTRIAL CLASSIFICATION: GOLD & SILVER ORES [1040] IRS NUMBER: 980160821 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04350 FILM NUMBER: 97720810 BUSINESS ADDRESS: STREET 1: 5501 LAKEVIEW DR CITY: KIRKLAND STATE: WA ZIP: 98033 BUSINESS PHONE: 4258228992 MAIL ADDRESS: STREET 1: 5501 LAKEVIEW DR CITY: KIRKLAND STATE: WA ZIP: 98033 10-Q 1 =========================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to _______ Commission File Number 1-4350 ROYAL OAK MINES INC. (Exact name of registrant as specified in its charter) ONTARIO, CANADA 98-0160821 - ------------------------------- ------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) c/o Royal Oak Mines (USA) Inc. 5501 Lakeview Drive Kirkland, Washington U.S.A. 98033 - ------------------------------- ----------------- (Address of principal executive (Postal/Zip Code) offices) (425) 822-8992 - ------------------------------ Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes X No _ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common shares outstanding as of November 10, 1997 was 140,865,079, including 1,924,816 shares which are owned by a wholly owned subsidiary of the Company and which may not be voted and are not considered outstanding for earnings per share calculations. =========================================================================== INDEX Page PART I - FINANCIAL INFORMATION...........................................3 Item 1. Consolidated Financial Statements of Royal Oak Mines Inc. and Subsidiaries (All statements are unaudited except for the December 31, 1996 Consolidated Balance Sheet, which has been audited.) Consolidated Balance Sheets - September 30, 1997 and December 31, 1996........................................................4 Consolidated Statements of Income - Three and Nine Months September 30, 1997 and 1996.....................................5 Consolidated Statements of Cash Flow - Three and Nine Months Ended September 30, 1997 and 1996...............................6 Notes to Consolidated Financial Statements(unaudited)...........8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................................14 PART II - OTHER INFORMATION..............................................21 Item 6. Exhibits and Reports on Form 8-K...............................21 Signatures...............................................................22 In this Report, unless otherwise indicated, all dollar amounts are expressed in Canadian dollars. PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements All tabular amounts are in thousands of Canadian dollars, except as indicated. (see Notes 1 and 7). Royal Oak Mines Inc. Consolidated Balance Sheets (unaudited - Cdn$ 000's) September 30 December 31 1997 1996 (audited) ======== ========= ASSETS Current Assets Cash and cash equivalents $ 36,862 $197,766 Marketable securities 590 590 Receivables 60,345 17,492 Inventories 34,540 61,844 Prepaid expenses 4,625 7,729 -------- -------- Total Current Assets 136,962 285,421 Property, Plant and Equipment, net 577,472 482,733 Long-Term Investments 58,989 44,255 Deferred Charges and Other Assets 9,952 9,221 -------- -------- TOTAL ASSETS $783,375 $821,630 ======== ======== LIABILITIES Current Liabilities Accounts payable $ 34,709 $ 21,094 Accrued payroll costs 2,616 3,514 Accrued reclamation costs 2,010 -- Capital leases 3,601 2,514 Deferred revenue 10,978 10,994 Income and other taxes payable 5,502 3,894 Senior subordinated notes interest payable 3,331 10,180 Other current liabilities 15,215 20,383 -------- -------- Total Current Liabilities 77,962 72,573 Deferred Revenue and Other Liabilities 33,358 32,757 Capital Leases 18,198 2,448 Deferred Reclamation Costs 22,236 17,622 Senior Subordinated Notes 241,728 239,680 Deferred Income Taxes 843 5,064 Minority Interest in Subsidiary Companies 72 120 -------- -------- TOTAL LIABILITIES 394,397 370,264 -------- -------- SHAREHOLDERS' EQUITY Capital Stock Common stock Authorized - unlimited Outstanding - 138,910,263 (Dec. 31, 1996 - 138,845,263) 378,989 378,813 Retained Earnings 9,989 72,553 -------- -------- TOTAL SHAREHOLDERS' EQUITY 388,978 451,366 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $783,375 $821,630 ======== ======== The accompanying notes are an integral part of the Consolidated Financial Statements.
Royal Oak Mines Inc. Consolidated Statements of Income (unaudited - Cdn$ 000's except share amounts) Three months ended Nine months ended September 30 September 30 --------------------- --------------------- 1997 1996 1997 1996 ======== ======== ======== ======== REVENUE $ 54,116 $ 77,323 $160,579 $183,169 -------- -------- -------- -------- EXPENSES Operating 40,595 49,587 134,653 130,926 Royalties and marketing 357 807 1,228 2,215 Administrative and corporate 2,361 2,517 8,557 7,360 Depreciation and amortization 4,615 7,371 16,565 18,401 Reclamation 1,247 216 3,623 552 Exploration and other 1,299 1,424 3,965 3,833 Provision for (Recovery of) loss on currency and commodity contracts 4,070 (621) 13,945 (1,597) -------- -------- -------- -------- Total operating expenses 54,544 61,301 182,536 161,690 -------- -------- -------- -------- OPERATING INCOME (LOSS) (428) 16,022 (21,957) 21,479 OTHER INCOME (EXPENSE) Interest and other income (expense), net (103) 1,663 2,396 4,166 Interest expense (140) (110) (327) (213) Senior subordinated notes interest (6,887) (3,590) (19,734) (3,590) Senior subordinated notes interest capitalized 5,568 1,926 15,532 1,926 Foreign currency translation on senior subordinated notes -- 1,596 (2,048) 1,596 Write-down of mine assets -- -- (39,700) -- -------- -------- -------- -------- NET INCOME (LOSS) BEFORE UNDERNOTED (1,990) 17,507 (65,838) 25,364 Income and mining taxes - current (313) (361) (952) (1,084) Income and mining taxes - deferred -- (6,814) 4,221 (8,820) Minority interest 17 6 48 36 Equity in income (loss) of associated companies (76) (122) (43) (175) -------- -------- -------- -------- NET INCOME (LOSS) (2,362) 10,216 (62,564) 15,321 RETAINED EARNINGS - BEGINNING OF PERIOD 12,351 83,643 72,553 78,538 -------- -------- -------- -------- RETAINED EARNINGS - END OF PERIOD $ 9,989 $ 93,859 $ 9,989 $ 93,859 ======== ======== ======== ======== EARNINGS (LOSS) PER SHARE $ (0.02) $ 0.07 $ (0.45) $ 0.11 ======== ======== ======== ======== Weighted average number of common shares outstanding (000's) 138,910 138,286 138,880 136,099 ======== ======== ======== ======== The accompanying notes are an integral part of the Consolidated Financial Statements.
Royal Oak Mines Inc. Consolidated Statements of Cash Flow (unaudited - Cdn$ 000's) Three months ended Nine months ended September 30 September 30 --------------------- ------------------- 1997 1996 1997 1996 ======== ======== ======== ======= CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Consolidated net income (loss) for the period $ (2,362) $10,216 $(62,564) $15,321 Items not affecting cash: Depreciation and amortization 4,615 7,371 16,565 18,401 Reclamation 1,248 216 3,624 552 Deferred income tax -- 6,814 (4,221) 8,820 Provision for (Recovery of) unrealized loss on currency and commodity contracts 506 (621) 10,381 (1,597) Foreign currency translation on senior subordinated notes -- (1,596) 2,048 (1,596) Deferred charges and other 201 115 292 284 Write-down of mine assets -- -- 39,700 -- -------- -------- -------- ------- CASH FLOW 4,208 22,515 5,825 40,185 Net change in other operating items 30,430 3,098 (43,046) 1,063 -------- -------- -------- ------- Net cash provided by (used in) operating activities 34,638 25,613 (37,221) 41,248 -------- -------- -------- ------- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES Issue of common shares -- 1,940 177 116,298 Capital lease obligation 16,277 (655) 15,750 284 Issuance of senior subordinated notes -- 239,981 -- 239,981 Cost of senior subordinated notes (111) (8,616) (129) (8,616) Deferred credits and other -- (1,146) -- 340 -------- -------- -------- ------- Net cash provided by financing activities 16,166 231,504 15,798 348,287 -------- -------- -------- ------- CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES Investment in Kemess capital assets through purchase of companies -- -- -- (201,976) (Increase) decrease in long-term investments 2,741 -- (15,105) 26,882 Investment in capital assets through purchase of Consolidated Professor Mines Limited -- (15) -- (15,858) Investment in other capital assets, net* (87,823) (41,972) (118,559) (74,188) Investment in exploration and non-producing properties, net (454) 657 (4,522) (5,035) Change in other assets (660) (1,648) (1,295) (7,919) -------- -------- -------- ------- Net cash used in investing activities (86,196) (42,978) (139,481) (278,094) -------- -------- -------- -------- INCREASE (DECREASE) IN CASH AND MARKETABLE SECURITIES DURING PERIOD (35,392) 214,139 (160,904) 111,441 CASH AND MARKETABLE SECURITIES AT BEGINNING OF PERIOD 72,844 39,683 198,356 142,381 -------- -------- -------- -------- CASH AND MARKETABLE SECURITIES AT END OF PERIOD $ 37,452 $253,822 $ 37,452 $253,822 ======== ======== ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 13,532 $ 126 $ 26,918 $ 213 Income taxes $ 25 $ 65 $ 90 $ 595 Cash consists of cash and short-term investments. * Investment in capital assets is net of B.C. Government assistance. The accompanying notes are an integral part of the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (tabular amounts in thousands of Canadian dollars unless otherwise stated) 1. Interim Financial Statements Accounting Policies The accompanying unaudited interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP") which, in the case of Royal Oak Mines Inc. (the "Company"), differ in certain material respects from United States generally accepted accounting principles ("U.S. GAAP"), as described in Note 7. Also, such statements do not include all of the disclosures required by generally accepted accounting principles for annual statements. In the opinion of management all adjustments considered necessary for fair presentation have been included in these statements. Operating results for the three and nine months ended September 30, 1997, are not necessarily indicative of the results that may be expected for the full year ending December 31, 1997. For further information, see the Company's Consolidated Financial Statements, including the accounting policies and notes thereto, included in the Annual Report to Shareholders and Annual Report on Form 10-K for the year ended December 31, 1996. The calculations of net earnings per share are based upon the weighted average number of common shares of the Company outstanding during each period (except as set forth in Note 11(b)). When outstanding convertible instruments materially dilute earnings per share, fully diluted earnings per share are disclosed. 2. Presentation Certain amounts for 1996 have been reclassified to conform with the current year's presentation. 3. Interest and Other Income (Expense), Net Three months ended Nine months ended September 30 September 30 ------------------- --------------------- 1997 1996 1997 1996 ------- ------- -------- -------- Interest income $ 768 $ 1,918 $ 3,986 $ 3,278 Gain (loss) on sale of securities (1,120) 1,430 (1,120) 4,161 Other, net 249 (1,685) (470) (3,273) ------- ------- -------- -------- Interest and other income (expense), net $ (103) $ 1,663 $ 2,396 $ 4,166 ======= ======= ======== ========
4. Inventories September 30 December 31 1997 1996 ------------ ----------- Bullion in process $12,290 $25,687 Stores and operating supplies 22,250 36,157 -------- ------- Inventories $34,540 $61,844 ======== =======
5. Net Change in Other Operating Items Three months ended Nine months ended September 30 September 30 ------------------ ----------------- 1997 1996 1997 1996 ------------------ ----------------- Cash provided by (used in): Receivables $ 5,999 $(9,073) $(43,453) $(9,439) Inventories 16,945 3,416 6,504 (23,277) Prepaid expenses 3,737 (935) 1,904 (3,840) Accounts payable, accrued payroll and other current liabilities 1,820 17,357 (5,665) 20,445 Capital leases 1,419 328 1,087 (329) Deferred revenue (176) (8,362) (3,021) 16,735 Income and other taxes payable 686 367 1,608 768 Long-term reclamation reclassified to current period -- -- (2,010) -- ------- ------- -------- ------- Net change in other operating items $30,430 $ 3,098 $(43,046) $ 1,063 ======= ======= ======== =======
6. Reclamation and Environmental Remediation The Company's current and proposed mining and exploration activities are subject to various laws and regulations governing the protection of the environment. These laws and regulations are continually changing and are generally becoming more restrictive. The Company conducts its operations so as to protect its employees, the general public and the environment and believes its operations are in compliance with all applicable laws and regulations, in all material respects. The Company believes it has complied, and expects in the future to comply, with such laws and regulations, including making all required expenditures. Where estimated reclamation and closure costs are reasonably determinable, the Company has recorded a provision for environmental liabilities, using the unit-of-production method, based on management's estimate of these costs. Such estimates are subject to adjustment based on changes in laws and regulations and as new information becomes available. 7. Reconciliation to United States Generally Accepted Accounting Principles Reconciliation of net income in accordance with Canadian GAAP to net income in accordance with U.S. GAAP is as follows: Three months ended Nine months ended September 30 September 30 -------------------- --------------------- 1997 1996 1997 1996 ------- ------- -------- ------- Net income (loss) in accordance with Canadian GAAP $(2,362) $10,216 $(62,564) $15,321 Adjustments: Depreciation and amortization 58 (1,309) 2,413 (3,542) Income taxes (845) 458 (845) 1,240 ------- ------- -------- ------- Net income in accordance with U.S. GAAP $(3,149) $ 9,365 $(60,996) $13,019 ======= ======= ======== ======= Earnings (loss) per share in accordance with U.S. GAAP $ (0.02) $ 0.07 $ (0.44) $ 0.10 ======= ======= ======== =======
The effects on the balance sheets of the Company at September 30, prepared in accordance with U.S. GAAP, are: September 30 ----------------------- 1997 1996 --------- --------- Increase (decrease): Property, plant and equipment $ 7,135 $ 74,959 Prepaid expenses (pension asset) $ (552) $ (359) Long-term investment in equity securities $(20,828) -- Deferred income taxes $ 18,532 $ 89,055 Provision for unrealized loss on long-term investments (contra- equity account) $(20,828) -- Retained earnings $(11,949) $(14,455)
Statement of Financial Accounting Standards No. 109 requires that a deferred tax liability be recognized for differences between the assigned values and the tax bases of the assets and liabilities recognized in a business combination involving a purchase of stock. Canadian GAAP does not require similar recognition. Accordingly, during the nine months ended September 30, 1997, a difference between U.S. GAAP and Canadian GAAP arose for the deferred tax liabilities associated with the excess of the assigned values and the tax bases of assets acquired in the acquisition of Geddes Resources Limited and Consolidated Professor Mines Limited. The effect of these differences is to increase property, plant and equipment and deferred income taxes by $21.0 million as of September 30, 1997. Statement of Financial Accounting Standards No. 115 (SFAS 115), Accounting for Certain Investments in Debt and Equity Securities, requires that marketable securities be put into one of two categories: trading securities (securities which are bought and held principally for the purpose of selling them in the near term) or available-for-sale securities (investments not classified as trading securities). SFAS 115 requires that unrealized gains and losses on available-for-sale securities should be excluded from earnings and reported as a net amount in a separate component of shareholders' equity until realized. Canadian GAAP requires no recognition or reporting of unrealized losses unless the loss is considered permanent. 8. Acquisition of Geddes Resources Limited, El Condor Resources Ltd. and St. Philips Resources Inc. On January 11, 1996, the Company acquired all of the outstanding shares of Geddes Resources Limited ("Geddes"), El Condor Resources Ltd. ("El Condor") and St. Philips Resources Inc. ("St. Philips") not already owned by the Company pursuant to an arrangement (the "Plan of Arrangement") on the following terms: Geddes: 0.30 shares of the Company for each share of Geddes. El Condor: 0.95 shares of the Company plus $2.00 cash for each share of El Condor. St. Philips: $3.40 cash for each share of St. Philips. As a result of these transactions, the Company issued 19,011,883 common shares of the Company and paid approximately $56 million in cash pursuant to the Plan of Arrangement. The January 11, 1996 closing price on The Toronto Stock Exchange for the Company's common shares was $6.00. This price was used to value the common shares of the Company issued under the Plan of Arrangement. At the time of acquisition, St. Philips, with its wholly owned subsidiary, and El Condor jointly owned the Kemess South property. El Condor owned 100% of the Kemess North property. The following table outlines the details of the purchase price and its allocation to the assets and liabilities acquired: El St. Geddes Condor Philips Total Purchase price: -------- -------- -------- -------- Cash paid, including open market purchases $ 3,220 $ 34,222 $ 38,562 $ 76,004 Issue of common shares 37,650 76,421 -- 114,071 -------- -------- -------- -------- 40,870 110,643 38,562 190,075 Initial carrying value of Geddes 9,192 -- -- 9,192 Transaction and other costs 2,290 680 679 3,649 -------- -------- -------- -------- 52,352 111,323 39,241 202,916 Cash and cash equivalents acquired (561) (1) (378) (940) from companies -------- -------- -------- -------- Total $ 51,791 $111,322 $ 38,863 $201,976 ======== ======== ======== ======== Allocated to: Property, plant and equipment $ 52,101 $112,087 $ 39,015 $203,203 Other assets 31 151 9 191 Total liabilities (341) (916) (161) (1,418) -------- -------- -------- -------- Total $ 51,791 $111,322 $ 38,863 $201,976 ======== ======== ======== ========
9. Acquisition of Consolidated Professor Mines Limited On February 5, 1996, the Company made a public offer to purchase all of the outstanding common shares of Consolidated Professor Mines Limited ("Consolidated Professor"), consisting of approximately 20 million common shares, at a cash price of $0.80 per share. By June 30, 1996, the Company had purchased all shares tendered and acquired all remaining shares in accordance with compulsory acquisition procedures, for a total purchase price of $16.3 million. The purchase price, net of cash acquired on the acquisition of $0.3 million, has been assigned as follows: Capital assets $15.9 million Miscellaneous net assets 0.1 million ------------- Purchase price, net of cash acquired $16.0 million =============
10. Credit Line The Company's $28 million unsecured, revolving line of credit with a Canadian bank expired on September 30, 1997. The Company is currently in the process of negotiating the terms of another credit facility to replace this revolving line of credit and anticipates that the negotiations will be concluded by the end of the fiscal year. 11. Capital Stock (a) Changes in capital Number of shares Amount ----------- ---------- Balance, December 31, 1995 121,043,530 $270,811 Issued to acquire Geddes and El Condor (See note 8) 19,011,883 114,071 Issued for share purchase options 549,666 2,227 ----------- ---------- Balance, September 30, 1996 issued and outstanding 140,605,079 387,109 Company shares held by Witteck Development Inc. (see note 11(b)) (1,924,816) (8,854) ----------- ---------- Balance, September 30, 1996 for financial reporting purposes 138,680,263 $378,255 =========== ========== Balance, December 31, 1996 140,770,079 $387,667 Issued for share purchase options 65,000 176 ----------- ---------- Balance, September 30, 1997 issued and outstanding 140,835,079 387,843 Company shares held by Witteck Development Inc. (see note 11(b)) (1,924,816) (8,854) ----------- ---------- Balance, September 30, 1997 for financial reporting purposes 138,910,263 $378,989 =========== ==========
(b) Company shares held by Witteck Development Inc. During 1995, the Board of Directors and the shareholders approved the acquisition of all of the shares of Witteck Development Inc. ("Witteck") whose sole asset is an investment in the Company of 1,924,816 common shares of the Company. This investment has been recorded as a reduction of capital stock on the balance sheet. Consequently, the common shares of the Company that are held by Witteck may not be voted and have been excluded in the calculation of earnings per share. 12. Long-Term Debt On August 12, 1996, the Company completed the sale of US$175 million principal amount of 11% Senior Subordinated Notes due 2006 (the "Notes"). The Notes were sold in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933 and to certain other accredited institutional buyers. On October 9, 1996, an exchange offer was made to exchange the Notes for Series B 11% Senior Subordinated Notes due 2006 (the "Series B Notes"), pursuant to a Registration Statement on Form S-4 filed under the Securities Act of 1933, as amended. This exchange offer expired on November 5, 1996, and all US$175 million principal amount of Notes were exchanged for Series B Notes. The Series B Notes are unsecured senior subordinated obligations of the Company and, as such, will be subordinated in right of payment to all existing and future senior indebtedness of the Company. The Series B Notes are guaranteed by Kemess Mines Inc., a wholly owned subsidiary of the Company. The Series B Notes and interest payments are denominated in U.S. dollars. 13. Write-down of Mine Assets As a result of the current weak gold price and the diminishing ore reserves at the Colomac Mine in the Northwest Territories, the Company made a pre-tax provision of $39.7 million for the write-down of the Colomac assets in the quarter ending June 30, 1997. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. REVENUE Consolidated revenues were $54,116,000 for the three months ended September 30, 1997 compared to $77,323,000 for the same period in 1996. The decrease of 30% in the third quarter this year resulted from the combined impact of a 24% lower realized gold price due to lower hedging gains, and a 9% decline in production resulting from the closure of the Hope Brook and Colomac mines. Consolidated revenues were $160,579,000 for the nine months ended September 30, 1997 compared to $183,169,000 for the year-to-date period in 1996, a decrease of 12%. Gold production was similar in the two periods but the realized gold price was 13% lower in the nine-month period of 1997 due to lower hedging gains. Three months ended Nine months ended September 30 September 30 ------------------ ----------------- 1997 1996 1997 1996 ========= ======== ======== ======== Gold production (ounces) Northwest Territories - Giant Mine 22,749 20,984 68,578 61,033 - Colomac Mine 27,993 28,002 90,260 88,554 Ontario Division - Pamour/Nighthawk 25,881 28,826 77,339 76,803 Newfoundland Division - Hope Brook Mine 17,882 26,200 48,253 57,265 --------- -------- -------- -------- Total gold ounces produced 94,505 104,012 284,430 283,655 ========= ======== ======== ======== Average spot price (US$/oz) $324 $385 $339 $392 Average realized price (US$/oz) $412 $543 $410 $472 Cash cost (US$/oz) $310 $348 $344 $337
EXPENSES Review of Mine Operations Average cash costs in the third quarter this year were US$310 per ounce, a decrease of 11% from US$348 per ounce reported in the third quarter of last year. Improved operating performance during 1997 has resulted in cash costs declining in successive quarters, from US$372 per ounce in the first quarter and from US$351 per ounce in the second quarter. In the year-to-date period, cash costs of US$344 per ounce were similar to the US$337 per ounce reported in the year-ago period. Northwest Territories Division Giant Mine In the third quarter of 1997, gold production at the Giant Mine was 22,749 ounces (1996 - 20,984 ounces), an increase of 8% from the year-ago period, largely due to the impact of increased tonnage of ore milled. Mill throughput of 101,353 tons (1996 - 90,066 tons) was 13% higher in the period this year. Mill head grade decreased by 5% to 0.254 opt gold (1996 - 0.266 opt). Gold recovery increased by 1% to 88.17% (1996 - 87.37%). The cash cost of US$296 per ounce (1996 - US$339 per ounce) decreased by 13% from the cost reported in the third quarter of 1996. In the year-to-date period ended September 30, 1997, the Giant Mine produced 68,578 ounces of gold (1996 - 61,033 ounces), an increase of 12% due to the higher tonnage of ore processed and improved grade and recovery. Mill throughput was 294,259 tons (1996 - 274,462 tons), an increase of 7%. Mill head grade improved by 3% to 0.265 opt gold (1996 - 0.257 opt). Gold recovery also increased by 3% to 87.72% (1996 - 85.51%). The cash cost of US$314 per ounce (1996 - US$348 per ounce) was 10% below the cost reported in the same period a year earlier. Colomac Mine Operating results in both reporting periods this year were impacted by permanent closure of the Colomac Mine. Gold production at the Colomac Mine in the third quarter of this year was 27,993 ounces (1996 - 28,002 ounces), similar to the same period last year. Mill throughput of 828,375 tons (1996 - 713,382 tons) was 16% above the throughput in the same period a year earlier. Mill head grade decreased by 17% to 0.040 opt gold (1996 - 0.048 opt) and reflected the declining ore grade in the open pit. Gold recovery of 85.19% (1996 - 82.37%) was 4% higher than in the third quarter of last year. The cash cost of US$329 per ounce (1996 - US$397 per ounce) was 17% lower than the cost reported in the period a year earlier. Costs decreased after mining operations ceased in August, although milling of the coarse ore stockpile will continue through November. In the nine-month period ended September 30, 1997, gold production at Colomac was 90,260 ounces (1996 - 88,554 ounces), an increase of 2% from the year-ago period. Mill throughput increased by 11% to 2,406,764 tons (1996 - 2,171,944 tons). Mill head grade decreased by 4% to 0.044 opt gold (1996 - 0.046 opt). Gold recovery declined by 3% to 85.27% (1996 - 87.99%). The cash cost in the nine-month period was US$378 per ounce (1996 - US$369 per ounce), an increase of 2%. In light of the current low gold price, declining ore reserves and grade, and the continuing high cash cost of the Colomac operation, mining operations were discontinued in early August. The Company will permanently close the Colomac Mine at the end of November after processing the remaining coarse ore stockpile. In the second quarter of this year, the Company took a write-down of $39.7 million on the carrying value of the Colomac assets. Ontario Division Pamour/Nighthawk Mines In the third quarter of this year, gold production from the Pamour and Nighthawk mines was 25,881 ounces (1996 - 28,826 ounces), a decrease of 10% from the same period of the prior year. Mill throughput of 344,580 tons (1996 - - 355,159 tons) was 3% lower than in the year-ago period. Mill head grade of 0.087 opt (1996 - 0.092 opt) was 5% lower. Gold recovery of 86.55% (1996 - 88.23%) was 2% below the recovery in the third quarter of 1996. The cash cost of US$301 per ounce (1996 - US$276 per ounce) was 9% above the level in the year-ago quarter. In the year-to-date period, gold production at Pamour was 77,339 ounces (1996 - - 76,803 ounces), an increase of 1%. Mill throughput of 1,022,469 tons (1996 - - 1,029,856 tons) was 1% lower than the amount of ore milled in the same period last year. Mill head grade of 0.087 opt gold (1996 - 0.085 opt) improved by 2%. Gold recovery of 86.50% (1996 - 87.80%) declined by 1%. Cash costs of US$317 per ounce (1996 - US$283 per ounce) increased by 12% in the nine-month period this year. In the nine-month period last year, costs were lower due to the temporary suspension of higher cost underground mining operations at the Hoyle deposit in the second quarter to advance development into areas of higher grade ore. Newfoundland Division Hope Brook Mine Operating results in the third quarter and year-to-date period were impacted by permanent closure of the Hope Brook Mine. In the third quarter this year, gold production at the Hope Brook Mine was 17,882 ounces (1996 - 26,200 ounces), a decrease of 32% due to permanent closure of the mine in August. As a result of cessation of mining operations, mill throughput was 50% lower at 169,432 tons (1996 - 341,678 tons). The mill head grade of 0.087 opt gold (1996 - 0.089 opt) declined by 2% from the level in the third quarter of 1996. Gold recovery of 84.33% (1996 - 85.98%) was also 2% lower than in the year-ago period. The cash cost was US$313 per ounce (1996 - US$381 per ounce), a decrease of 18% which reflected termination of operations. The mill was closed in September, 1997. In the year-to-date period, gold production was 48,253 ounces (1996 - 57,265 ounces), a decrease of 16% from the same period last year and reflected mine closure in the third quarter. Ore processed was 586,727 tons (1996 - 717,163 tons), a decrease of 18%. Mill head grade of 0.087 opt gold (1996 - 0.089 opt) was 2% lower than in the nine-month period last year. Gold recovery decreased by 7% to 84.10% (1996 - 89.99%). Cash costs increased by 4% to US$366 per ounce (1996 - US$351 per ounce). Production and cash costs in the nine-month period of both years were impacted by temporary suspension of milling operations (in January and February of 1997, and in March and April of 1996), for economic reasons. Mining costs incurred during the first two months of this year were deferred and charged to operating costs as the ore mined during the shut-down period was milled during the second and third quarters of 1997. Other Expenses Royalties and marketing expenses for the third quarter of 1997 declined 56% or $0.45 million from the 1996 second quarter amount of $0.8 million. Cost declines were attributed to the expiration of the Hope Brook royalty agreement at the end of 1996. The 45% or $0.987 million decline on a year-to-date basis was partially offset by increased royalties associated with increased production at the Nighthawk Mine. Administrative and corporate expenses for the third quarter remained consistent with those in the same period in 1996. Cost increases on a year-to-date basis were mainly attributed to increased manpower to manage the strategic growth of the Company. Depreciation and amortization costs for the third quarter of 1997 were $4.6 million, a decrease of 37% from the amount of $7.4 million reported for the comparable period in 1996. Decreased depreciation and amortization costs in the third quarter of 1997 were primarily associated with the closure of the Hope Brook Mine and lower production volumes. Depreciation and amortization costs for the nine months ended September 30, 1997 were lower than in 1996 due primarily to the elimination of Hope Brook depreciation costs due to the 1996 write-down of the assets to their net realizable value. Reclamation costs increased during the third quarter of 1997 to $1.2 million from $0.2 million in the same period of 1996. The Company applies the unit-of-production method based on estimated total mineral inventory in calculating the charge to income for reclamation. Increases in reclamation costs were mainly attributed to mill production volumes at the Colomac Mine and write-downs in Colomac gold ore reserve estimates at the end of 1996. Exploration expenditures are periodically reviewed and assessed as to their future economic value in light of strategic plans, gold price forecasts and potential ore reserves. Those reserves determined to be of little or no future economic value are written-down or written-off against income in the period of determination. Exploration costs for the third quarter of 1997 were $1.3 million compared to $1.4 million for the same period in the prior year. The Company intends to carefully manage and control exploration expenditures throughout the remainder of 1997 and make appropriate adjustments based upon its assessment of likely changes in the price of gold. The gold price used in estimating the Company's ore reserves at December 31, 1996 was Cdn $527 per ounce of gold. The market price for gold is currently below these levels. If the Company determines that ore reserves at the end of December 1997 should be calculated at a lower gold price than used at December 31, 1996, it is likely there may be adjustments in the amount of economic gold reserves and potential gold prospects. The Company enters into foreign currency and commodity contracts to minimize exposure to adverse fluctuations in foreign currency exchange rates associated with US dollar gold sales and commodity prices. A provision for loss on hedging activity of $4.1 million was recorded in the third quarter of 1997, as compared to a provision for a $0.6 million gain in the same period in 1996. The majority of the provision for loss was related to the close-out of certain future commodity contracts. The provision for loss recorded for the nine months ended September 30, 1997 was $13.9 million as compared to a provision for a gain of $1.6 million for the same period in 1996. Interest expense accrued on the Company's Series B 11% Senior Subordinated Notes for the three and nine month periods ended September 30, 1997 was $6.9 and $19.7 million, respectively. Interest expense was, however, partially offset by interest income earned on, and interest capitalized from, the proceeds of the Notes used to invest in marketable securities, or expended on long-term construction projects, primarily the Kemess project, respectively. The Company's Series B 11% Senior Subordinated Notes are denominated in United States dollars. Generally accepted accounting principles require the translation of these Notes at the exchange rate in effect at the balance sheet date. This resulted in the Company recognizing a loss on translation of $2.0 million for the nine month period ended September 30, 1997. A gain of $1.6 million was recorded during the three and nine months ended September 30, 1996 as the Senior Subordinated Notes were issued in August of 1996. Mining and income taxes for the three month period ended September 30, 1997 decreased $6.9 million compared to the same period of 1996. Mining and income taxes for the nine month period ended September 30, 1997 decreased $13.2 million compared to the same period in 1996. Decreases in tax expense were a direct result of net losses incurred. No deferred tax assets were recognized during the three month period ended September 30, 1997. Generally accepted accounting principles disallow recognition of deferred tax assets unless ultimate realization of the tax asset is virtually certain. The Company currently holds long-term investments in equity securities of other gold mining companies. Current market values for those securities are below original investment cost by approximately $20.8 million, due mainly to recent declines in spot gold prices. Generally accepted accounting principles (as referenced in Note 7 to the financial statements) do not require recognition of a provision for loss on long-term investments unless the Company determines the loss in value to be permanent in nature. Liquidity and Capital Resources At September 30, 1997 the Company had cash, cash equivalents and marketable securities of $37.5 million compared to $72.8 million at June 30, 1997 and $198.4 million at December 31, 1996. OPERATING ACTIVITIES Net cash provided by operating activities for the three month period ended September 30, 1997 was $34.6 million compared to $25.6 million in the same period of 1996. Net cash used by operating activities for the nine month period ended September 30, 1997 was $37.2 million compared to net cash provided by operating activities of $41.2 million for the same period of 1996. Increase in cash provided by operating activities for the three months ended September 30, 1997 as compared to the same period in 1996 was primarily attributable to a significant decline in accounts receivable and inventories as supplies used by both the Colomac and Hope Brook mines were not replaced due to the closure of these mines. Reduced cash flows from operations in the nine months ended September 30, 1997 compared to the same period in 1996 was primarily attributable to declining gold price, higher operating cost at Hope Brook and Colomac mines, reduced interest income from declining cash balances, and increased investment in accounts receivable, principally from the B.C. Government in conjunction with construction of the Kemess project. The Company expects to continue to reduce its investment in working capital through the balance of 1997 as it continues to receive money from the B.C. Government and as inventories decline as a result of the closure of both the Hope Brook and Colomac mines. FINANCING ACTIVITIES Net cash provided by financing activities for the three months ended September 30, 1997 was $16.2 million compared to $231.5 million in the same period in 1996. During the third quarter of 1997, the Company entered into capital leases for mining equipment for the Kemess project. During the same period in 1996, the Company issued the Senior Subordinated Notes, the proceeds of which were used to finance the Kemess and other development projects of the Company. For the nine months ended September 30, 1997, cash provided by financing activities declined from $348.3 million in the same period of 1996 to $15.8 million. The issuance of share capital to acquire the Kemess project and the sale of the Series B 11% Senior Subordinates Notes were the principal reasons for differences in financing activity in the two periods. INVESTMENT ACTIVITIES Net cash used in investing activities during the three month period ended September 30, 1997 was $86.2 million compared to $43.0 million for the same period in 1996 as a result of increased expenditures on the Kemess project. For the nine months ended September 30, 1997 the cash used in investing activities was $139.5 million compared to $278.1 million in 1996 as a result of strategic investments in equity securities of other companies and the expenditures on development projects, primarily the Kemess project. The higher cash usage in 1996 reflected the initial acquisition cost of the Kemess project. The Company continues to assess projected development and capital spending programs in the context of the continuing low gold price and its impact on cash flow. Based on estimates of cash flow from operations and the need to conserve cash to complete construction of the Kemess Mine, as well as to maintain sufficient working capital, the Company announced in May of this year its intent to delay the development and construction schedule on projects other than Kemess. In the second quarter, the Company announced that it was delaying capital expenditures on the Matachewan, Duport, Copperstone and Pamour expansion projects until it had concluded there would be adequate cash flow from operations (principally from the Kemess Mine starting in mid-1998). The Company plans in mid 1998 to update the past feasibility work on these development projects and to prioritize their development. The Company has recently revised its estimate of the total cost of the Kemess project to approximately $430 million from $390 million. The principal reasons for the increase are the additional stumpage fees payable to the B.C. Government related to the clearing of the power line corridor and additional costs associated with design modifications to the tailings line and the tailings dam. Construction of the Kemess Mine is proceeding on schedule and is estimated to be approximately 67% complete. The construction workforce comprises approximately 1,000 personnel. Approximately $410 million of the anticipated $430 million capital cost of the project had been committed in the form of purchase orders for equipment and construction contracts, with $295 million being spent at the end of October. The B.C. government had reimbursed the Company approximately $110 million out of an economic assistance package of up to $166 million at the same date. Major services have been installed, and cladding of the mill and service buildings is complete. The mills, flotation cells, piping and electrical services are being installed in the mill building. Clearing of the corridor for the power line and erection of the pylons as well as construction of the tailings pipeline and dam are proceeding on schedule. Preproduction stripping of the open pit commenced in July. The Company expects to fund the completion of the project from current cash and securities in treasury, investment and economic assistance from the B.C. government, as well as from permitted debt capacity and equipment lease financing. The Company's revolving line of credit expired on September 30, 1997. The Company is currently in the process of negotiating the terms of another credit facility to replace this revolving line of credit and anticipates that the negotiations will be concluded by the end of the fiscal year. OUTLOOK The spot gold price has continued to weaken throughout 1997, from a high of US$370 per ounce on January 1 to a low of US$307 per ounce in mid-November, with a year-to-date average (at the end of September) of US$339 per ounce. In 1995 and 1996, the spot price averaged US$384 and US$388 per ounce, respectively. The average quarterly spot gold price has decreased steadily throughout the year, from US$351 per ounce in the first quarter, to US$343 per ounce in the second quarter, and US$324 per ounce in the third quarter. The Company expects to receive an average realized price of approximately US$400 per ounce in 1997 as a result of its gold hedging program, but thereafter gold sales are not hedged. Management continues to review the Company's operating strategy at its mines and its capital development program in response to the low gold price, its present high cash cost structure until the Kemess Mine commences production, and its ability to generate cash flow from operations. In response to these factors, the Company closed its Hope Brook and Colomac mines in the third quarter and has deferred development and construction of other projects until the gold price recovers and cash flow is generated from the Kemess Mine. Kemess is scheduled to commence production in April of next year. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS With the exception of historical statements, the matters discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on numerous variables and assumptions that are inherently uncertain and could cause actual results to be materially more or less favorable than projected, including without limitation general economic and competitive conditions and other factors. Among such factors are those related to volatility in the price of gold, copper and other commodities, changes in interest and foreign exchange rates, government regulation and agency action, competing land claims, the accuracy of estimates of ore reserves and mineral inventory, environmental costs and risks, unanticipated processing, access, transportation of supplies, water availability or other problems, other factors relating to the Company's ability successfully to complete development projects within projected capital budgets or to carry on mining operations within projected operating budgets and the risk factors listed from time to time in the Company's filings with the Securities and Exchange Commission, including without limitation the Company's Annual Report on Form 10-K for the year ended December 31, 1996, Part I:, Item 7, Risks and Uncertainties. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27. Financial Data Schedule. (b) Reports on Form 8-K. A report on Form 8-K was filed on July 7, 1997, regarding a press release from Royal Oak Mines Inc., announcing the lifting of a road blockade set up by the Tsay Keh Dene Band. A report on Form 8-K was filed on August 6, 1997, regarding a press release from Royal Oak Mines Inc., announcing second quarter 1997 results of operations and the closure of Colomac Mine. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ROYAL OAK MINES INC. Date: November 14, 1997 By /s/ Margaret K. Witte ------------------------------ Margaret K. Witte President and Chief Executive Officer Date: November 14, 1997 By /s/ James H. Wood --------------------------- James H. Wood Chief Financial Officer EXHIBIT INDEX Exhibit Method of Filing - --------- -------------------- 27. Financial Data Schedule Filed herewith EX-27 2
5 THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND IN THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 CANADIAN 9-MOS DEC-31-1997 SEP-30-1997 1.3813 36,862 590 60,345 0 34,540 136,962 661,655 84,183 783,375 77,962 241,728 0 0 378,989 9,989 783,375 160,579 160,579 182,536 182,536 0 0 4,529 (65,833) (3,269) (62,564) 0 0 0 (62,564) (0.45) (0.45)
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