-----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, TyEbVDY2ibKqrTZEPSpOxYbaM/J0lXcn4FQqPhhrntfBUtTWq8FbyQ5dZQF63wqT DcKptFaMuM9SA6ICvD5sUA== 0001047469-98-020765.txt : 19980518 0001047469-98-020765.hdr.sgml : 19980518 ACCESSION NUMBER: 0001047469-98-020765 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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: 98625404 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 FORM 10-Q =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 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 incorporation or organization) Identification No.) c/o Royal Oak Mines (USA) Inc. 5501 Lakeview Drive Kirkland, Washington U.S.A. 98033 - ---------------------------------- ---------------------- (Address of principal executive offices) (Postal/Zip Code) (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 No X -- -- 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 April 30, 1998 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. =============================================================================== 1 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, 1997 Consolidated Balance Sheet, which has been audited.) Consolidated Balance Sheets -March 31, 1998 and 4 December 31, 1997 Consolidated Statements of Income - Three Months Ended 5 March 31, 1998 and 1997 Consolidated Statements of Cash Flow - Three Months Ended 6 March 31, 1998 and 1997 Notes to Consolidated Financial Statements (unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition 13 and Results of Operations PART II - OTHER INFORMATION 18 Item 1. Legal Proceedings 18 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 20
In this Report, unless otherwise indicated, all dollar amounts are expressed in Canadian dollars. 2 PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS All tabular amounts are in thousands of Canadian dollars, except as indicated. 3 Royal Oak Mines Inc. Consolidated Balance Sheets (unaudited - Cdn$ 000's)
March 31 December 31 1998 1997 (audited) ========== =========== ASSETS Current Assets Cash and cash equivalents $ 63 $ 568 Marketable securities 560 9,875 Receivables 14,294 30,923 Inventories (Note 4) 16,204 21,120 Prepaid expenses 4,523 3,967 ---------- ---------- Total Current Assets 35,644 66,453 Property, Plant and Equipment, net 758,695 730,314 Long-Term Investments 12,373 12,145 Reclamation and Other Deposits 14,360 14,332 Deferred Charges and Other Assets (Note 5) 21,469 20,142 ---------- ---------- TOTAL ASSETS $ 842,541 $ 843,386 ========== ========== LIABILITIES Current Liabilities Accounts payable $ 77,980 $ 123,586 Accrued payroll costs 3,210 2,599 Deferred revenue 16,066 20,085 Capital leases 4,446 4,531 Taxes payable 1,563 1,723 Long-term debt interest payable 4,579 10,326 Accrued unrealized loss on derivatives 18,258 21,327 Other current liabilities 14,387 9,135 ---------- ---------- Total Current Liabilities 140,489 193,312 Deferred Revenue 23,132 23,330 Other Liabilities (Note 6) 46,817 57,427 Long-Term Debt (Note 7) 310,895 250,338 Deferred Income Taxes 2,532 2,532 Minority Interest in Subsidiary Companies 38 69 ---------- ---------- TOTAL LIABILITIES 523,903 527,008 ---------- ---------- SHAREHOLDERS' EQUITY Capital Stock Common stock (Note 8) Authorized - unlimited Outstanding - 138,940,263 (Dec. 31, 1997 - 138,940,263) 379,040 379,040 Deficit (60,402) (62,662) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 318,638 316,378 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 842,541 $ 843,386 ========== ==========
The accompanying notes are an integral part of the Consolidated Financial Statements. 4 Royal Oak Mines Inc. Consolidated Statements of Income (Loss) (unaudited - Cdn$ 000's except per share amounts)
Three months ended March 31 --------------------------- 1998 1997 =========== ========== REVENUE $ 22,429 $ 47,974 ---------- ---------- EXPENSES Operating 18,231 42,978 Care and maintenance 1,337 74 Royalties and marketing 291 424 Administrative and corporate 2,246 2,652 Depreciation and amortization 4,004 5,553 Reclamation 584 1,130 Exploration and other 447 1,347 Provision for (Recovery of) loss on foreign currency and commodity contracts (7,894) 3,008 ---------- ---------- Total operating expenses 19,246 57,166 ---------- ---------- OPERATING INCOME (LOSS) 3,183 (9,192) OTHER INCOME (EXPENSE) Interest and other income (expense), net (Note 9) (8) 1,713 Interest expense (297) (118) Long-term debt interest (8,208) (6,344) Interest capitalized 8,208 4,420 Foreign currency translation loss on long-term debt (292) (2,538) ---------- ---------- INCOME (LOSS) BEFORE UNDERNOTED 2,586 (12,059) Income and mining taxes - current (420) (326) Income and mining taxes - deferred -- 4,221 Minority interest 31 36 Equity in income of associated companies 63 15 ---------- ---------- NET INCOME (LOSS) 2,260 (8,113) RETAINED EARNINGS (DEFICIT) - BEGINNING OF PERIOD (62,662) 72,553 ---------- ---------- RETAINED EARNINGS (DEFICIT) - END OF PERIOD $ (60,402) $ 64,440 ========== ========== EARNINGS (LOSS) PER SHARE $ 0.02 $ (0.06) ========== ========== Weighted average number of common shares outstanding (000's) 138,940 138,845 ========== ==========
The accompanying notes are an integral part of the Consolidated Financial Statements. 5 Royal Oak Mines Inc. Consolidated Statements of Cash Flow (unaudited - Cdn$ 000's)
Three months ended March 31 1998 1997 =========== =========== CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net income (loss) for the period $ 2,260 $ (8,113) Items not affecting cash: Depreciation and amortization 4,004 5,553 Amortization of deferred finance costs 425 239 Deferred income tax -- (4,221) Reclamation 584 1,130 Provision for (Recovery of) unrealized loss on foreign currency and commodity contracts (6,539) 2,518 Foreign currency translation on senior subordinated notes 292 2,538 Deferred charges and other (96) (132) ---------- ---------- Cash flow 930 (488) Net change in other operating items (Note 10) (36,197) (65,763) ---------- ---------- Net cash used in operating activities (35,267) (66,251) ---------- ---------- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES Issue of common shares -- 112 Capital lease obligation (474) (278) Issue of Senior Secured Debt 64,059 -- Issue costs of long-term debt (5,566) -- ---------- ---------- Net cash provided by (used in) financing activities 58,019 (166) ---------- ---------- CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES Proceeds from asset sales 4,267 -- Investment in other capital assets (36,446) (46,275) BC Government assistance -- 30,965 Investment in exploration and non-producing properties, net (274) (1,691) Change in other assets (119) (587) ---------- ---------- Net cash used in investing activities (32,572) (17,588) ---------- ---------- DECREASE IN CASH AND MARKETABLE SECURITIES DURING PERIOD (9,820) (84,005) CASH AND MARKETABLE SECURITIES AT BEGINNING OF PERIOD 10,443 198,356 ---------- ---------- CASH AND MARKETABLE SECURITIES AT END OF PERIOD $ 623 $ 114,351 ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest 14,010 13,317 Income taxes -- 40
The accompanying notes are an integral part of the Consolidated Financial Statements. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (tabular amounts in thousands of Canadian dollars unless otherwise stated) 1. GOING CONCERN These financial statements have been prepared on the basis of accounting principles applicable to a "going concern", which assume that the Company will continue in operation for at least one year and will be able to realize its assets and discharge its liabilities in the normal course of operations. Several conditions and events cast substantial doubt about the Company's ability to continue as a "going concern". The Company has experienced a liquidity problem, has a working capital deficiency as at March 31, 1998 and incurred a substantial loss in 1997. In addition, the Company has a substantial capital project underway, the construction of its Kemess Mine. Furthermore, substantial settlement payments may be required on the maturity of certain of the Company's commodity and currency contracts. In September 1997, the Company recognized that it would be necessary to raise additional funds to complete construction of, and start operations, at the Kemess Mine. The Company retained financial advisers and ultimately issued approximately $19.5 million and US$30.7 million of Senior Secured Debentures, closing in January, 1998. The closing of the financing took longer than management anticipated as a result of the requirement to obtain subordinated noteholders' approval. The delay occurred at a critical time in the construction schedule of the Kemess Mine and consequently, the Company was unable to meet certain supplier and contractor payment commitments, resulting in work stoppages, disputes and liens being filed. In February, management undertook a complete review of the Kemess project and revised the cost to complete forecast, determining the costs would exceed the budgeted amounts by approximately $40 million. In aggregate, the Company estimates it needs US$120 million of financing to complete construction of the Kemess Mine, retire the Senior Secured Debentures, settle outstanding accounts payable, and supplement working capital. The Company is pursuing other financing arrangements in order to raise the capital it needs for the purposes as described above. A securities purchase agreement has been signed with Trilon Financial Corporation for the placement of US$120 million Senior Secured Notes. However, closing is subject to completion of final documents and other conditions. If the above financing is concluded, the Company believes it will have sufficient financial resources to continue operations. The Company's future viability is dependent upon its ability to complete construction of the Kemess Mine, bring the Kemess Mine into an efficient operating state, maintain satisfactory credit relationships with its suppliers and achieve and maintain profitable operations. Successful operations in the future are also dependent upon various external factors, the most significant of which are the prices of the commodities it produces, gold and copper. These financial statements do not reflect adjustments that would be necessary if the Company were unable to continue as a "going concern". While management believes that the actions already taken or planned, as described above, will mitigate the adverse conditions and events which raise doubts about the validity of the "going concern" assumption used in preparing these financial statements, there can be no assurance that these actions will be successful. If the Company were unable to continue as a "going concern", then substantial adjustments would be necessary to the carrying values of assets and liabilities, the reported revenues and expenses, and the balance sheet classifications used. 2. 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 11. 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 months ended March 31, 1998, are not necessarily indicative of the results that may be expected for the full year ending December 31, 1998. For further information, see the Company's Consolidated Financial Statements, including the accounting policies and notes thereto, included in the Annual Report on Form 10-K for the year ended December 31, 1997. 7 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 8(b)). When outstanding convertible instruments materially dilute earnings per share, fully diluted earnings per share are disclosed. 3. PRESENTATION Certain amounts for 1997 have been reclassified to conform with the current year's presentation. 4. INVENTORIES
March 31 December 31 1998 1997 -------- ----------- Bullion in process $ 5,211 $ 6,751 Stores and operating supplies 10,993 14,369 -------- ---------- Inventories $ 16,204 $ 21,120 ======== ==========
5. DEFERRED CHARGES AND OTHER ASSETS
March 31 December 31 1998 1997 -------- ----------- Deferred finance costs on long-term debt $ 14,608 $ 9,041 Amortization of deferred finance costs (1,676) (1,251) Deferred foreign exchange loss on long-term foreign debt 7,155 10,658 Amortization of foreign exchange loss on long-term foreign debt (656) (364) Other assets 2,038 2,058 -------- ----------- $ 21,469 $ 20,142 ======== ===========
6. OTHER LIABILITIES
March 31 December 31 1998 1997 -------- ----------- Provision for loss on foreign currency contracts $ 1,708 $ 12,497 Accrued reclamation and provision for closure costs 25,251 24,682 Capital leases 19,446 19,835 Other 412 413 -------- ----------- $ 46,817 $ 57,427 ======== ===========
8 7. LONG-TERM DEBT
March 31 December 31 1998 1997 -------- ----------- Unsecured Long-Term Debt US$175 million 11% Senior Subordinated Series B Notes $247,905 $250,338 Secured Long-Term Debt US$30.7 million Senior Secured Debentures 43,490 -- $19.5 million Senior Secured Debentures 19,500 -- -------- ----------- $310,895 $250,338 ======== ===========
SENIOR SUBORDINATED NOTES The US$175 million Senior Subordinated Series B Notes (the "Series B Notes") issued during 1996 and due in the year 2006 are unsecured obligations of the Company. The Series B Notes are subordinate in right of payment to all existing and allowable future senior secured indebtedness of the Company, as stated by the terms of the Series B Note debt limits. Interest on the Series B Notes is 11% per annum payable on February 15 and August 15 of each year. The Company has the right to redeem the Series B Notes in whole or in part at any time on or after March 15, 2001 and can at its discretion redeem an amount of up to 35% of the aggregate principal amount of the Series B Notes from proceeds of certain public equity offerings prior to or on August 15, 1999. Redemption rates vary by reason of redemption and year of redemption with the call rate declining through time. All Series B Notes and related interest payments are denominated in U.S. dollars. Under the terms of the subordinated notes the Company must, in certain cases, meet certain financial and other tests in order to issue additional debt. SENIOR SECURED DEBENTURES In January 1998, the Company completed the sale of senior secured debentures (the "Senior Debentures") in the principal amounts of $19.5 million and US$30.7 million maturing on January 20, 2003. The Senior Debenture denominated in Canadian dollars bears interest, payable quarterly commencing June 30, 1998, at the Canadian prime rate plus 5% from December 31, 1997 to and including January 9, 2001 and at the Canadian prime rate plus 6.5% from January 10, 2001 to and including the maturity date, and the Senior Debentures denominated in U.S. dollars bear interest, payable quarterly commencing June 30, 1998, at the U.S. six-month LIBOR rate plus 5% from December 31, 1997 to and including January 9, 2001 and at the U.S. six-month LIBOR rate plus 6.5% from January 10, 2001 to and including the maturity date. The Senior Debentures are secured by liens against all present and after acquired property, undertaking and assets of the Company (except the Windy Craggy property) including, but not limited to, a security debenture, general security agreement and assignments of the Company's interests in all material mining claims, concessions and leases relating to the Kemess Mine. The Senior Debentures are redeemable, in whole or in part, at any time at the option of the Company in aggregate US$5.0 million amounts at 101% of such principal prepayment amount if prepaid prior to January 20, 2002 and thereafter at 100% of the principal prepayment amount and on a Change of Control of the Company (as defined), as may be required by the holders of the Senior Debentures, at 101% of the principal amount of the debentures plus interest and any other amounts outstanding thereunder. The Senior Debentures contain covenants which limit the amount of additional debt that may be assumed by the Company. On or about March 17, 1998, the Company notified the holders of the Senior Debentures that the Company was in default of certain covenants of the Senior Debentures in that the Company had exceeded the allowable amount of trade payables over 90 days. The Company is in technical default under covenants of the Senior Debentures, although it has not received any written demand notice from the holders of the Senior Debentures. In the event the Company is successful in obtaining additional financing, as described in Note 1, it intends to retire the Senior Debentures by paying them in full. 8. CAPITAL STOCK (a) Changes in capital 9
Number of shares Amount ----------- -------- Balance, December 31, 1996 140,770,079 $387,667 Issued for share purchase options 25,000 112 ----------- -------- Balance, March 31, 1997 issued and outstanding 140,795,079 387,779 Company shares held by Witteck Development Inc.(see note 8(b)) (1,924,816) (8,854) ----------- -------- Balance, March 31, 1997 for financial reporting purposes 138,870,263 $378,925 =========== ======== Balance, December 31, 1997 140,865,079 $387,894 ----------- -------- Balance, March 31, 1998 issued and outstanding 140,865,079 387,894 Company shares held by Witteck Development Inc. (see note 11(b)) (1,924,816) (8,854) ----------- -------- Balance, March 31, 1998 for financial Reporting purposes 138,940,263 $379,040 =========== ========
(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. 9. INTEREST AND OTHER INCOME (EXPENSE), NET
Three months ended March 31 --------------------------- 1998 1997 =========== =========== Interest income 154 1,977 Amortization of financing costs (425) (239) Foreign exchange gain (loss) 260 (252) Other, net 3 227 ----------- ----------- Interest and other income (expense), net (8) 1,713 =========== ===========
10. NET CHANGE IN OTHER OPERATING ITEMS
Three months ended March 31 --------------------------- 1998 1997 =========== =========== Cash provided by (used in): Receivables 16,629 (33,366) Inventories 4,916 (21,121) Prepaid expenses (556) (6,282) Accounts payable, accrued payroll and other current liabilities (52,809) 2,274
10 Deferred revenue (4,217) (1,184) Income and other taxes payable (160) 584 Long-term reclamation reclassified to current period -- (6,668) ----------- ----------- Net change in other operating items (36,197) (65,763) =========== ===========
11. 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 March 31 1998 1997 =========== =========== Net income (loss) in accordance with Canadian GAAP $2,260 $ (8,113) Adjustments Depreciation and amortization (4,229) (778) Foreign currency translation loss on long-term debt 4,471 -- ----------- ----------- Net income in accordance with U.S. GAAP 2,502 (8,891) =========== =========== Earnings (loss) per share in accordance with U.S. GAAP: Basic earnings (loss) $0.02 $ (0.07) Diluted earnings (loss) $0.02 $ (0.07)
The effects on the balance sheets of the Company at March 31, prepared in accordance with U.S. GAAP, are:
March 31 March 31 ---------- -------- 1998 1997 ========== ======== Increase (decrease): Property, plant and equipment $(6,432) $ 3,944 Prepaid expenses (pension asset) (1,175) $(552) Deferred charges (5,823) -- Deferred income taxes 19,377 $ 19,377 Retained earnings (32,807) $ (15,985)
During the year, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. This statement requires the reporting of comprehensive income in addition to net income from operations. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. The Company has no material comprehensive income. Under U.S. GAAP, depreciation and amortization are calculated on the unit-of- production method based upon proven and probable reserves, whereas under Canadian GAAP, total mineral inventory may be used in the calculations. Under U.S. GAAP, foreign exchange gains and losses arising from the translation of long-term foreign debt are recognized in income in the period when exchange rates change, whereas under Canadian GAAP, such foreign exchange gains and losses are deferred and amortized on a pro rata basis over the remaining life of the debt. 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 three months ended March 31, 1998, a difference 11 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 March 31, 1998. 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. The Company implemented SFAS No. 128, "Earnings per Share," effective for its December 31, 1997 financial statements. Accordingly, earnings per share data have been restated for all periods presented. This standard requires the presentation of both basic and diluted earnings per share amounts. Basic earnings per share is calculated by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share is computed similarly, but also gives effect to the impact convertible securities, such as common stock options and warrants, if dilutive, would have on net income and average common shares outstanding if converted at the beginning of the year. COMPUTATIONS OF EARNINGS PER COMMON SHARE
March 31 March 31 1998 1997 ========== =========== BASIC INCOME (LOSS) PER SHARE ACCORDING TO U.S. GAAP Net income (loss) in accordance with U.S. GAAP $ 2,502 $ (8,891) ========== =========== Weighted average number of shares outstanding (000's) 138,940 138,845 ========== =========== Basic income (loss) per share $ 0.02 $ (0.07) ========== =========== DILUTED INCOME (LOSS) PER SHARE ACCORDING TO U.S. GAAP Net income (loss) in accordance with U.S. GAAP $ 2,502 $ (8,891) ========== =========== Shares Weighted average number of shares outstanding (000's) 138,940 138,845 Assuming exercise of stock options reduced by the number of shares which could have been purchased with the proceeds from exercise of such options 99 -- ---------- ----------- Weighted average number of shares outstanding (000's), as adjusted 139,039 138,845 ========== =========== Diluted income (loss) per share $ 0.02 $ (0.07) ========== ===========
All options outstanding at March 1997 were considered antidilutive due to the net loss. 12. 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 12 adjustment based on changes in laws and regulations and as new information becomes available. 13. SHAREHOLDER RIGHTS PLAN On February 10, 1998, the Board of Directors adopted, subject to regulatory and shareholder approvals, a Shareholder Rights Plan (the "Rights Plan"), the terms of which are set forth in a Shareholder Rights Plan Agreement dated as of February 25, 1998 between the Company and Montreal Trust Company of Canada (the "Rights Plan Agreement"). Under the Rights Plan, a right to purchase one of the Company's common shares (the "Right") was issued for each outstanding common share to the Company's shareholders of record on February 25, 1998. The Rights expire in 2002 and initially are not separate from the Company's common shares nor are they represented by separate certificates. However, should a triggering event occur, as defined in the Rights Plan Agreement (including the acquisition by a single entity of 20% or more of the Company's common shares), a holder of a Right (other than the acquiror of 20% or more of the Company's common shares) becomes entitled to purchase one share of the Company's common shares for each Right at a 50% discount to the market price. Under the Rights Plan Agreement, purchases of common shares that are made pursuant to certain permitted bids, as defined in the Rights Plan Agreement, do not constitute a triggering event. Subject to certain terms and conditions specified in the Rights Plan Agreement, the Rights may be redeemed by the Company for a price of $0.0001 per Right. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. REVENUE Consolidated revenues were $22.4 million for the three months ended March 31, 1998 compared with $48.0 million for the same period in 1997. The decrease in revenue in the period this year resulted from lower gold production due to the closure of the Hope Brook and Colomac mines in the latter part of 1997 and a lower realized gold price. Revenue in the first quarter of 1998 included hedging gains of $3.2 million compared with $8.5 million in the same period of 1997. Gold production of 45,557 ounces in the first quarter of 1998 was 39,523 ounces less than the 85,080 ounces produced in the same period a year earlier mainly due to the closure of the Hope Brook and Colomac mines in September and December of 1997, respectively. Production of 45,557 ounces of gold from continuing operations at the Giant and Pamour/Nighthawk mines in the first quarter of 1998 was 5% less than the 47,999 ounces produced at these mines in the same period of last year. The average realized gold price in the first quarter of 1998 was US$345 per ounce, a premium of US$51 per ounce over the average spot price of US$294 per ounce and 16% lower than the average realized price of US$411 per ounce in the first quarter of 1997.
Three months ended March 31 1998 1997 ----------- ---------- Ore milled (tons) 433,488 1,262,578 Average mill feed grade (oz/ton) 0.132 0.077 Gold production (ounces) Northwest Territories - Giant Mine 22,390 22,848 - Colomac Mine - 29,880 Ontario Division - Pamour/Nighthawk 23,167 25,151 Newfoundland Division - Hope Brook Mine - 7,201 ----------- ---------- Total gold ounces produced 45,557 85,080 =========== ========== Average spot gold price (US$/oz) 294 351 Average realized price (US$/oz) 345 411 Average cash cost (US$/oz) 280 372
EXPENSES 13 REVIEW OF MINE OPERATIONS Operating results in the first quarter of 1998 were favorably impacted by closure of the high cost Hope Brook and Colomac mines in September and December of 1997, respectively. Both mines have been placed on care and maintenance. In the first quarter of 1998, operating expenses were $18.2 million compared with $43.0 million in the same period a year earlier. The significant reduction in expenses reflects lower gold production and a decrease in unit cash costs at the mine sites. In the first quarter this year, the average cash cost of US$280 per ounce was 25% lower than the US$372 per ounce for the same period in 1997 where costs were adversely affected by the high cost Hope Brook and Colomac operations. In the fourth quarter of last year, major cost cutting initiatives were implemented at the Giant and Pamour/Nighthawk mines which resulted in an average cash cost of US$280 per ounce at these continuing operations in the first quarter of 1998 compared with US$332 per ounce at these mines in the same period last year, a decrease of 16%. NORTHWEST TERRITORIES DIVISION GIANT MINE In the first quarter this year, the Giant Mine produced 22,390 ounces of gold (1997 - 22,848 ounces), a decrease of 2% from the year-ago period. Mill throughput of 94,044 tons (1997 - 95,342 tons) was down 1%. Mill head grade increased by 1% to 0.278 ounces per ton (opt) (1997 - 0.276 opt). Gold recovery decreased by 1% to 85.55% (1997 - 86.71%). The average cash cost of US$284 per ounce (1997 - US$330 per ounce) decreased by 14% from the level in the first quarter in the year-ago period and reflected the results of major cost cutting measures taken in the fourth quarter of 1997. COLOMAC MINE The Colomac Mine was closed in December 1997 for economic reasons and placed on care and maintenance. In the first quarter of 1997, the mine produced 29,880 ounces of gold from milling 733,240 tons of ore at a mill head grade of 0.046 opt and gold recovery of 86.80%. The cash cost in the period was US$413 per ounce. ONTARIO DIVISION PAMOUR/NIGHTHAWK MINES In the first quarter of 1998, the Pamour and Nighthawk mines produced 23,167 ounces of gold (1997 - 25,151 ounces), a decrease of 8% from the same period in 1997. Mill throughput was 339,444 tons (1997 - 331,646 tons), an increase of 2% from the year-ago quarter. Mill head grade of 0.092 opt (1997 - 0.088 opt) increased 5% from the period last year. Gold recovery of 74.10 % (1997 - 85.80 %) was down 14%. Technical studies are being carried out at the mine and mill to determine the reason for this significant fall in recovery. The average cash cost of US$276 per ounce (1997 - US$334 per ounce) decreased 17% from the same period a year ago. NEWFOUNDLAND DIVISION HOPE BROOK MINE The Hope Brook Mine was closed in September 1997 after depletion of ore reserves and placed on care and maintenance. In the first quarter of 1997, the mine produced 7,201 ounces of gold from mill throughput of 102,350 tons of ore grading 0.084 opt and a gold recovery of 83.85%. The cash cost of production was US$470 per ounce. The low production and high cost reflected suspension of milling operations in January and February for cost saving measures. Mining costs incurred during these two months were deferred and were charged to operating costs as the ore mined during the shutdown period was milled during the balance of the year. OTHER EXPENSES In the first quarter this year, the Company incurred total care and maintenance expenses of $1.3 million, of which $1.0 million was expended at the shut down Hope Brook and Colomac mines, compared with $0.1 million in the quarter ended March 31,1997. Royalties and marketing expenses were $0.3 million compared with $0.4 million in the first quarter of 1997 when gold production was higher than in the period this year. Administrative and corporate expenses of $2.2 million in the first quarter of 1998 were $0.5 million less than the $2.7 million reported in the same period last year. The decrease mainly reflected the employment of fewer personnel in the corporate headquarters. 14 Depreciation and amortization decreased from $5.6 million in the first quarter of 1997 to $4.0 million in the same period this year and reflected lower production volumes resulting from the closure of the Hope Brook and Colomac mines. For the same reason, reclamation costs in the first quarter this year decreased to $0.6 million from $1.1 million in the same period of 1997. The need to conserve cash to complete construction of the Kemess project during the period of low gold prices resulted in exploration and other expenditures being cut to $0.4 million in the first quarter of this year from $1.3 million in the year-ago quarter. The Company enters into foreign currency and commodity contracts to minimize exposure to adverse fluctuations in Canadian dollar exchange rates associated with U.S. dollar gold sales and commodity prices. In the first quarter of 1998, the Company made a recovery of $7.9 million compared with a provision for a loss of $3.0 million in the year-ago quarter. The recovery was attributed to the strengthening of the Canadian dollar and higher gold prices. The Canadian/U.S. currency exchange rate at March 31, 1998 was 1.4166 or 1% lower than the December 31, 1997 exchange rate of 1.4305. The spot price of gold at March 31, 1998 was US$301 per ounce, or 4% higher than the December 31, 1997 spot gold price of US$290 per ounce. Interest expense accrued on the Company's long-term debt was $8.2 million in the first quarter of 1998 compared with $6.3 million in the same period last year. Interest expense was, however, offset by interest capitalized on expenditures for long-term construction projects, primarily the Kemess project, of $8.2 million and $4.4 million in the two periods, respectively. The Company's Series B 11% Senior Subordinated Notes and US$30.7 million of the Senior Secured Debentures are denominated in U.S. dollars. Generally accepted accounting principles require the translation of these Notes and Debentures at the exchange rate in effect at the balance sheet date. This resulted in the Company recognizing a loss on translation of $0.3 million in the first quarter of this year compared with a loss on translation of $2.5 million in the same period last year. Mining and income taxes accrued in the first quarter of 1998 and 1997 were $0.4 and $0.3 million, respectively. In the first quarter of 1997, $4.2 million in deferred tax assets were recognized. LIQUIDITY AND CAPITAL RESOURCES A significant decline in gold prices occurred in 1997, from a high of US$366 per ounce at the beginning of the year to a low of US$283 per ounce in early December. The progressive decline in the gold price during 1997, which continued into the first quarter of 1998, adversely impacted the Company's operating cash flow and ultimately contributed to the closure of two of the Company's five operating mines in September (the Hope Brook Mine) and December (the Colomac Mine) of 1997. Capital expenditures for the ongoing construction of the Kemess South project also peaked in 1997, and by September the Company recognized that there was an impending liquidity problem and that significant additional cash would be required. These factors contributed to a severe depletion of cash and cash sources and resulted in a substantial increase in accounts payable to contractors and suppliers furnishing services and equipment for the Kemess South project. Commencing in 1997 and continuing through 1998, the Company has taken a number of actions to conserve its cash resources, including cost reductions, postponement of development projects, and other actions intended to improve cash flow at its active operations. As a result of the above-mentioned factors, the Company had a working capital deficiency of $126.9 million and $104.8 million as of December 31, 1997 and March 31, 1998, respectively, primarily due to accounts payable of $123.6 million and $78.0 million, respectively. Working capital was $240.5 million at year-end 1996, of which cash, cash equivalents, and marketable securities were $226.0 million. The reduction in working capital of $367.4 million between 1997 and 1996 reflects the use of cash for construction of the Kemess South project and reductions in gold inventory of $18.9 million and warehouse inventory of $21.8 million due to the closure of the Hope Brook Mine and the Colomac Mine. Working capital in 1996 reflects the net result of new debt and equity issuances during the year. The current ratio was 0.25:1 at March 31, 1998 compared to 4.31:1 as of December 31, 1996. The Company anticipates that working capital will begin increasing in 1998 after the Company concludes the startup phase of the Kemess South project and begins to produce positive cash flow from operations. See "Special Note Regarding Forward-Looking Statements." As of March 31,1998, the Company's cash, cash equivalents, and marketable securities were approximately $0.6 million. In September 1997, the Company recognized that it would be necessary to raise additional funds to allow for the completion and start-up of the Kemess South mine. With the assistance of one of the Company's investment bankers, numerous financial institutions were approached and, ultimately, the Company issued approximately $19.5 million and US$30.7 million in Senior Secured Debentures on January 27, 1998. Unfortunately, the protracted discussions with these lenders and their requirement that the Company obtain prior approval from the holders of the Company's Senior Subordinated Notes delayed the closing of the transaction by more than six weeks. This delay occurred at a critical time in the construction schedule for the Kemess South project and the Company was unable 15 to meet certain payment commitments it had made to its key contractors. A number of those contractors chose to stop work and would not return to the project on the same terms and conditions as had previously been in effect. The Company was concerned about the impact that this delay, interruption of work, and revised contract terms would have on both the scheduled start-up date and the total cost of the Kemess South project. The Company conducted a complete review and revised the cost-to-complete forecast for the Kemess South project in early February 1998. As a result of this review, it became apparent that the project cost would be overrun by approximately 10%, or $40 million, from the previously-estimated project cost of approximately $430 million. After the Company became aware that the January 1998 financing would not be sufficient to allow it to complete the Kemess South project, it retained investment bankers to advise the Company as to the best courses of action to be taken in seeking additional capital required to complete the Kemess South project. Some of the alternatives that were investigated and considered included the sale of other mining assets and properties, mergers with other mining companies, sale of royalties on the Kemess South project, issuance of additional equity, and refinancing of the existing Senior Secured Debentures. Due to depressed gold prices, offers or other expressions of potential interest that were received for the purchase of certain of the Company's key properties were, in the Company's opinion, too low. The Company therefore concluded that these potential sales would not be in the best interests of the Company and its shareholders. Similarly, no viable royalty sale or merger opportunities was identified, and it appeared that the equity capital markets had little or no interest in an offering of the size required to complete the Kemess South project, in part due to continuing low gold prices. After pursuing and considering these various alternatives, the Company identified a source of funds, and on April 17,1998 signed a securities purchase agreement with Trilon Financial Corporation to provide US$120 million in Senior Secured Notes. Proceeds of this financing will be used to complete construction and to commence production at the Kemess Mine, and to repay the existing Senior Secured Debentures. The Company is currently in the process of finalizing and documenting the terms under which the holders of the Series B Subordinated Notes will give consent to this financing. Successful closing of this financing is expected to resolve the current liquidity problem and allow the Company to meet its cash obligations for at least the remainder of 1998. OPERATING ACTIVITIES In the first quarter of 1998, cash flow before net changes in other operating items was $0.9 million compared with a cash deficiency of $0.5 million in the same period of 1997. Cash flow in the first quarter this year reflects income in the period resulting from improved operations at the Giant and Pamour/Nighthawk operations where significant reductions in unit cash costs were reported, as well as closure of the unprofitable Hope Brook and Colomac mines. Net cash used in operating activities was $35.3 million and $66.3 million, respectively, in the two periods. The net change in other operating items of $36.2 million and $65.8 million, respectively, mainly reflects changes in accounts payable on the Kemess project, changes in bullion and stores inventories relating to the closure of the Hope Brook and Colomac mines and the reduction in receivables following the receipt of Kemess pre-production assistance funds from the British Columbia Government. FINANCING ACTIVITIES Net cash provided by financing activities was $58.0 million in the period ended March 31, 1998 compared with net cash used in financing activities of $0.2 million in the same period of 1997. In the period this year, the Company received $58.6 million, net of issue costs, from the issuance of Senior Secured Debentures. In the second quarter of this year, the Company expects to receive proceeds from the US$120 million Senior Secured Notes, net of transaction costs. See "Special Note Regarding Forward-Looking Statements". INVESTING ACTIVITIES In the first quarter of 1998, the net cash used in investing activities was $32.6 million compared with $17.6 million in the same period a year earlier. The increase in cash invested mainly reflects increased expenditures on the Kemess project in the first quarter this year. Substantially all expenditures on the Company's other development projects was postponed from May of 1997 due to low gold prices and the need to conserve cash to complete construction of the Kemess project. Net investment in capital assets in the period this year was $36.4 million compared with $46.3 million in the period last year. In last year's first quarter, the B.C. government provided $31.0 million in pre- production funding to the Kemess project. In 1997, the provincial government fulfilled its obligation on pre-production funding of $154 million; the outstanding balance of $12 million is due to be paid to the Company in equal installments over the next 12 years. 16 In the first quarter of 1998, the Company increased its estimate of the capital cost of the Kemess project to $470 million from $430 million. The overrun in cost is mainly attributable to increases in costs associated with construction of the power line, tailings dam and tailings pipeline. The Company plans to commence production at its Kemess Mine in mid May. The Company anticipates that investments in capital assets for the next several quarters will be limited to sustaining capital at its operations and will therefore be much lower than in recent quarters. See "Special Note Regarding Forward-Looking Statements." OUTLOOK The statements in this outlook are based on current expectations. These statements are forward-looking and actual results may vary materially. See "Special Note Regarding Forward-Looking Statements." The spot gold price continues to trade in the range of US$290 to US$310 per ounce which limits the Company's ability to generate substantial cash flow from its Giant and Pamour/Nighthawk operations where average cash costs are being maintained in the US$280 to US$285 per ounce range. The Company believes that these costs can be maintained in the near term. The Company is optimistic regarding its outlook for increased production at a lower average cash cost over the next few years with the Kemess Mine in production. In 1998, the Company plans to produce a total of 363,000 ounces of gold at an estimated average cash cost of approximately US$208 to US$220 per ounce, net of copper credits at US$0.80 per pound. In 1999, when Kemess is expected to operate for a full year, production is forecast at 477,000 ounces of gold at an estimated average cash cost of US$180 to US$200 per ounce, net of copper credits at US$0.90 per pound. The Company currently does not have any gold production sold forward. 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, 1997, Part I:, Item 7, Risks and Uncertainties. 17 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS BUILDERS' LIENS AND CLAIMS The Company has received notice of and is in the process of responding to builders' liens filed against the Kemess South project and proceedings commenced in the Supreme Court of British Columbia to enforce such liens, arising out of work performed at the Kemess South project by contractors and subcontractors who have provided work and materials to the site. The stated amount of the asserted liens filed against the Kemess South project, not including the amounts owing to contractors who have not filed liens, was approximately $58.8 million as of May 13, 1998. These include a proceeding by Golden Hill Ventures Ltd. for $6.15 million plus holdback, commenced September 1997. On May 7, 1998 a prior arbitration ruling in favor of Tercon Contractors Ltd. in the amount of $6.4 million was reduced to judgement in the British Columbia Supreme Court. Of this amount, $3.5 million is to be paid from the Trilon financing and a payment plan for the remaining $2.9 million is being negotiated. On May 13, 1998 a writ of seizure and sale on the mining claims of the Kemess Mine was served. The Company is seeking a stay of execution of the court order. 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 January 8, 1998, regarding a press release from Royal Oak Mines Inc., announcing record date for 11% Senior Subordinated Note holder consent for senior secured financing. A report on Form 8-K was filed on January 8, 1998, regarding a press release from Royal Oak Mines Inc., announcing escrow closing on senior secured financing. A report on Form 8-K was filed on January 19, 1998, regarding a press release from Royal Oak Mines Inc., announcing finalization of arrangements to receive consents from the majority of the Senior Subordinated Note holders. A report on Form 8-K was filed on January 28, 1998, regarding a press release from Royal Oak Mines Inc., announcing withdrawing funds from senior secured financing. A report on Form 8-K was filed on February 25, 1998, regarding a press release from Royal Oak Mines Inc., announcing adoption of shareholders' rights plan. A report on Form 8-K was filed on March 11, 1998, regarding a press release from Royal Oak Mines Inc., announcing cost overrun on Kemess project. A report on Form 8-K was filed on March 17, 1998, regarding a press release from Royal Oak Mines Inc., announcing conference call. A report on Form 8-K was filed on March 17, 1998, regarding a press release from Royal Oak Mines Inc., announcing default of Senior Secured Debentures. A report on Form 8-K was filed on March 18, 1998, regarding a press release from Royal Oak Mines Inc., announcing summarization of conference call. A report on Form 8-K was filed on March 25, 1998, regarding a press release from Royal Oak Mines Inc., announcing obtaining US$120 million of financing and Kemess Mine to be completed. A report on Form 8-K was filed on March 30, 1998, regarding a press release from Royal Oak Mines Inc., 18 A report on Form 8-K was filed on March 30, 1998, regarding a press release from Royal Oak Mines Inc., announcing response to Tsay Keh Dene press release. A report on Form 8-K was filed on March 31, 1998, regarding a press release from Royal Oak Mines Inc., announcing 1997 results of operations. 19 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: May 15, 1998 By /s/ Margaret K. Witte ------------------------------ Margaret K. Witte President and Chief Executive Officer Date: May 15, 1998 By /s/ James H. Wood --------------------------- James H. Wood Chief Financial Officer 20 EXHIBIT INDEX
Exhibit Method of Filing - ------- ---------------- 27. Financial Data Schedule Filed herewith
21 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME 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 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 0.6997 63 560 14,294 0 16,204 35,644 850,328 91,633 842,541 140,489 310,895 0 0 379,040 (60,402) 842,541 22,429 22,429 18,231 24,894 (7,894) 0 297 2,586 420 2,260 0 0 0 2,260 0.02 0.02 USING US GAAP AND SFAS 128, BASIC AND DILUTED EPS ARE BOTH $0.02.
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